Monday, January 31, 2011

Reading Between The Headlines

If the financial news media isn't blaming the weather for the markets gyrations, they're blaming something else. The financial news media does little to report market making news accurately. It's sole focus and purpose is to make "excuses" for "what happened in the markets today".

This past Friday for instance, the US stock markets were getting beat down substantially for the first time in months. The US Government doesn't want to see the markets going down. This upsets US investors, and fractures their fragile confidence in the economy. There must be a "reason" why the markets were getting beat down. Hey, let's blame the "civil unrest" in Egypt!

And so it began. A day of financial news headlines like the following:

Worries over Egypt, Suez Canal leave stocks reeling
NEW YORK — Fears over unrest in Egypt sent U.S. stocks reeling Friday to their biggest one-day decline in months and put an end to the market's eight-week win streak, as investors sought safety while oil prices surged.

One by one, stories and headlines appeared all day blaming the fall in stocks on Egypt, half a world away. Not once was a surge higher in the US Dollar mentioned as a cause for the abrupt fall in the equity markets.

Today began with more worrisome headlines about Egypt as the US equity markets opened the week expecting the worst. Remarkably, the US equity markets rose today in spite of the continued civil unrest in Egypt. Not once was a substantial drop in the value of the US Dollar mentioned as a cause for the reversal in the equity markets today.

Instead we get a "surge in Oil prices" blamed on the civil unrest in Egypt:

Oil Surges to Two-Year High on Egypt Unrest
An important oil price benchmark topped $100 per barrel on Monday for the first time since 2008, as investors kept an anxious eye on Egypt and worried about unrest there disrupting the flow of oil from the Middle East.

Read the entire story, not one mention of a fall in the value of the US Dollar today. Instead the story is full of fabricated reasons for the rise in the price of Oil over the past year. The validity of each questionable, when last years fall in the value of the US Dollar is considered.

Oil is up because the Dollar is down...and that is the TRUTH.

Another TRUTH is that the civil unrest cited in pro-Western lead Egypt, Tunisia, and Yemen can all be laid at the feet of the US Federal Reserve, the central bank that is flooding the World with Dollars resulting in a 25% global increase in food prices last year. All of the problems encircling the globe today can be laid at the feet of the US Federal Reserve and the US Dollar.
Morocco, Algeria, Libya, and Jordan are all facing similar protests sparked by difficult economic times. Emerging economies in the Middle East are having to deal with massive unemployment and soaring costs...all the result of US Dollar hegemony.

Oddly enough, Gold and Silver were stopped in their tracks today in London and New York, despite a falling Dollar real surprise there. Silver was stopped dead at it's 20 day moving average both in London and New York when it reached 28.40 twice today. It is safe to surmise then that a close above 28.40 will give Silver's momentum back to the bulls.

Gold ran once again into not-for-profit selling at it's downtrend line extending off the early January high of $1424. Gold must close above $1347 to move momentum back to the bulls. a move through Gold's 20 day moving average at $1355 should send the bears towards the exits.

This Saturday a most informative, and revealing essay regarding physical gold and the Gold ETF GLD was posted on the FOFOA web site. I highly recommend reading this essay in it's entirety.

Who is Draining GLD?[MUST READ]
...since December 21st alone, 2.2M ounces have been sold from the ETF, basically a bit more than an entire quarter of production from Barrick gold (the world's largest producer). The normal run rate of global recycling plus mine production is approximately 2.95M ounces per month. So in the same period, assuming GLD was the only source of outflow, total global absorbed gold supply was 5.15M ounces. If outflows continued at the current rate, the GLD ETF (the largest investor depository of gold by far) would have no gold in 18 months.

Supply increased 75% in the short term to see price only fall 4.5%.

Someone else is doing the buying, clearly.

2.2M ounces is more than 68 tonnes... since December 21! Who is taking this stuff?

Now here's a bloodhound that might be on to a scent worth following. Lance Lewis, in his subscriber newsletter, follows what he calls "the GLD puke indicator" which tracks GLD physical gold regurgitations [emphasis mine]:

Just in case anyone missed it in last night’s letter, our GLD puke indicator that has nearly a flawless record at marking lows in gold triggered a buy signal yesterday after the ETF spit up 31 tonnes (and some blood) to trigger a 2.48% decline in its bullion holdings.

As we’ve noted before, one-day declines in the holdings of this ETF of over 1% have tended to be capitulatory in nature and have typically occurred near important lows in the gold price during gold’s secular bull market.

Consider that since the GLD ETF’s creation back in 2004, it has seen 1%+ one-day declines in its bullion holdings only 41 other times. When one goes back and looks at where these declines in bullion holdings have occurred, virtually all of them occurred “at” or were “clustered at” important lows in the gold price.

The pattern you see emerge after today’s 1%+ puke, just as on those prior occasions, is that these “pukes” of bullion by the GLD ETF have always tended to occur at or very close to important lows in the gold price, and declines of over 2% have only occurred at MAJOR lows, such as the two major lows that were hit in 2008.

Note that one of those lows on September 9, 2008, which is the closest in size to today’s puke, also occurred just one day before a 5-day short squeeze/meltup of 30 percent in the gold price that kicked off on September 12, 2008. Perhaps the remaining shorts in the gold market will now pay a similar price for betting against a bull market?

Perhaps history will repeat and perhaps it won’t with respect to such a short squeeze, but given this indicator’s near flawless record at marking lows in gold, it's not to be ignored.

Gold’s Biggest Gain in 12 Weeks Is ‘Capitulation’ End
By Pham-Duy Nguyen and Yi Tian
The “capitulation” in gold that drove the metal to its worst January in 14 years may be ending as escalating violence in northern Africa spurs demand for a haven and after a key technical indicator held.

Gold’s rebound from the 150-day moving average of about $1,306 is a sign that prices are poised to rally, said David Hightower, the president of the research firm based in Chicago. The metal may climb to $1,630 by the end of June, he said.

150-Day Moving Average

Prices rebounded from the 150-day moving average three other times in the past year, data compiled by Bloomberg show. The last time gold traded near the average was in late July. Since Aug. 1, prices have advanced 13 percent. They touched a record $1,432.50 on Dec. 7. The metal has not fallen below the average since January 2009.

“People take these longer moving averages as a key measure of confidence,” said Hightower, who correctly forecast that gold would rally above $1,400 last year. “Gold has respected the 150-day average in the past. By repelling from that level, it suggests that gold has value, and that the bull camp was not scared and forced out of their positions.”

The metal’s decline this month is “a healthy break,” Hightower said. “Gold has cleaned up its act and washed out the weak hands.”

This month’s decline in prices has precedents in the decade-long bull market. Futures slumped about 8.5 percent in the five weeks to July 28 and almost 15 percent in a two-month stretch that ended in February 2010. There was also a 34 percent retreat from March 2008 to October of that year. Prices have more than doubled since then.

“The short-term negative sentiment in gold will be dramatically curtailed,” said Jon Spall, a product manager for precious metals at Barclays Capital in London, who expects the commodity to reach $1,700 this year.

Despite correction, gold can still reach new highs this year
By Jeffrey Nichols

To understand where gold prices are headed this year, it is important to recognize that most of the selling in recent weeks has come from U.S. and European short-term institutional traders and speculators - banks, trading firms, commodity funds, and hedge funds - operating mostly in derivative markets, some simply taking profits, others betting on the downward momentum of the market, and many reacting to the reversal of "safe-haven" funds that late last year sought security in U.S. dollar assets and gold.

These players have no long-term view of gold and certainly no allegiance to the metal as an inflation hedge, store of value, portfolio diversifier, insurance policy, and traditional savings medium. They simply sense a profitable trading opportunity. Today gold is in their sights. Tomorrow, it may be petroleum, cocoa, rice, steel or long-term U.S. Treasuries. And, one day they will be buying gold again.


In contrast, strong physical demand not only continues but may very well have picked up as lower price levels attracted bargain hunters. Much of the buying has come from Asian markets - China, India, and other countries where gold has great cultural appeal as a store of value, savings medium, and harbinger of good luck and prosperity to those who hold it.

Big premiums (over New York and London prices) on gold bars in Hong Kong, Mumbai, and other gold-trading centers across the region indicate a shortage of physical metal as refiners struggle to meet strong demand for the various bar sizes popular in the Asian markets.

It is also likely that some central banks are taking advantage of the current price decline, quietly adding to their gold reserves or accelerating their purchases. Likely buyers include the People's Bank of China, the Bank of Russia, and possibly one or more of the reserve-rich oil-exporting countries.

In fact, all of the central banks that have bought gold in recent years today remain significantly underweighted in gold. All still hold the lion's share of their official reserves in U.S. dollar securities . . . and all have an incentive to buy gold on major price declines.


Significantly, this dichotomy between buyers and sellers means that gold is moving into very strong hands and much of this metal is unlikely to come back to the market anytime soon.

Buyers in Asia are mostly long-term holders, often for a lifetime. Similarly, many of the retail and wealthy buyers of bullion coins and small bars in America and Europe are motivated more by fear than by greed and are likely to retain their physical gold holdings for years to come.

As a result, when the current wave of selling abates, gold will have the potential for a swift and sizable recovery - all the more so if these same players view the metal as an attractive vehicle for trading and speculation on the long side of the market.

Physical Demand Remains Robust
by Peter Grant
Jan. 27th (USAGOLD) — Despite the recent corrective retreat in the precious metals, demand for physical metal remains robust. The World Gold Council’s latest Gold Investment Digest notes strong and broad-based demand in Q4-10 and throughout 2010. The US Mint has already sold more than 4.7 million 2011-dated silver Eagle bullion coins in January, the highest one-month total ever.

The WGC report begins with this overview:

The gold price rose for the tenth consecutive year driven by a recovery in key sectors of demand and continued global economic uncertainty. Not only was gold’s performance strong, but its volatility remained low, providing a foundation for a well diversified portfolio.

That sums things up nicely, but here are a few other important points:

Gold rose for the 10th straight year, with a final London afternoon fixing price in 2010 of $1,405.50 an ounce, up 29% from the prior year.

This was the second-largest percentage increase of the decade-long bull run, behind 32% in 2007.

Gold’s volatility of 16% on an annualized basis was in line with its historical 20-year average.

Investors bought 361 tonnes of gold in 2010 via ETFs, bringing total holdings to a new high of 2,167.

Investors bought 1.2 million ounces (38.0 tonnes) worth of American Eagle bullion coins, according to the US Mint, just shy of the record 1.4 million ounces (44.3 tonnes) sold during 2009.

Despite higher prices, global jewellery demand totalled 1,468.2 tonnes during the first nine months of 2010, increasing 18% from the same period during 2009.

Investment activity in China remained high. Physical delivery at the Shanghai Gold Exchange totalled 836.7 tonnes in 2010, with 236.6 tonnes delivered during Q4.

In China, physical delivery as a percentage of trading volume had increased to 33% by the fourth quarter, as Chinese investors sought to get hold of gold bullion.

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