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March 21, 2008

Honest Money Gold and Silver Report: Market Wrap
by Douglas V. Gnazzo

Market Wrap

Week Ending 3/20/08

Stuff - Lots of It

A lot of stuff happened this week, so this report will be longer than usual, more like the reports of old - perhaps longer. So get your reading glasses on, make a pot of coffee, send the kids to the neighbor's, and get ready to look at a whole lot of charts.

The Fed

First let's talk about the Fed and the hostile takeover or perhaps one should say take-away of Bear Stearns.

We have often mentioned that one of the "warning" signs to watch were POMO's - permanent open market operations, as the Fed doesn't do them often; most of their market operations are call REPO's, loans that get paid right back, usually over-night.

POMO's are said to be about 10 times as powerful (thanks to fractional reserve lending policies). In the last week the Fed performed approximately $33 billion of POMO's - quite a little party they threw.

Altogether the REPO Poll is a little over $272 billion dollars. The following link will bring you to the New York Fed. Follow the links to and read to your hearts content: Permanent.

TEXT OF FOMC STATEMENT, MARCH 18:

"Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling out of energy and other commodity prices and an easing of pressures on resource utilization.

Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully. Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability."

From reading the Fed communiqué one gets the feeling they are a bit concerned with things in paper fiat land - maybe they should try gold - it's a hell of a lot more sound than the paper junk they use, to wit: inflation, lack of liquidity, risks to economic activity, sustainable economic growth and price stability.

And in case any more encouragement is needed, Kansas City Fed President Thomas Hoenig had the follows calming words to add to the mix:

"In the current situation, monetary stimulus is facing significant headwinds ... In these circumstances; a central bank may have to ease policy more in order to achieve its desired effect.... There may be a buildup of inflation pressures if monetary policy remains too easy for too long ... Historically it has been more difficult to remove policy accommodation in a timely fashion, which may have consequences for a central bank's longer-term inflation objective."

So what are these guys so up-tight about - smile and be happy, like Uncle Al always was. Come hell or high water, through thick and thin - he remained undaunted or uncaring, whichever his really was.

Perhaps the new guys aren't toughened under fire just yet, battled-scarred with their red badges of courage and all. Then again, there was talk of financial implosion, whatever that is - sounds like what my turkey did in the oven last Thanksgiving to the delight of all, especially the kids.

But, to be fair, the fiasco with Bear Stearns was a bit trying. It's not every day that one of the primary government bond dealers needs to be kept solvent or liquid or above water or whatever they care to refer to it as.

So, the Fed with cohorts and Morgan in tow - or perhaps it was the other way around - meant last weekend to forge a deal Hephaestus would have been envious of.

The smithies got busy hammering away, and lo and behold they forged out a price tag of $2 per share for Bear Stearns - not the parking lot mind you - the entire company: lock, stock, and barrel. Quite a piece of work they wrought forth.

The only question that remains is: if "the system" or "financial markets" as Secretary Paulson refers to them as, was subject to going under because of one company, namely Bear Stearns - what kind of "system" do we have? One that is so frail that one company can take the whole edifice down?

If that is the case it sounds like perhaps the system needs some fixing. Maybe that's the stuff Ron Paul is always talking about - debt versus real money, following the Constitution and all. Just a thought - hell you can't do much worse than the guys running things now are - can you?

I mean, we used to be the world's largest creditor nation, now we are the world's largest debtor nation - that must be some kind of world record worthy of distinction, if not infamy.

How many of us can put that on our resume and still get a job, especially one that pays seven figures? But maybe that's just due to inflation and that everything is so out of sight price-wise - look at what we pay buffoons in the circus.

Before moving on I must say - I hope all the shoes have dropped, or it could get a bit messy, but heck, there's probably a lot more of those POMO's to fill in the gaps.

Who pays for those things anyways? That's right - you and me and all of us - lucky us. We get to pay for everything. Smile - be happy - JP is; but they got to go collecting like all good collectivists do - when times get hard.

Stocks

How did the stock market handle the lovely news - fine if you were on the sidelines, or somehow got lucky to get into the right trade and out the same day.

When the smoke cleared the market ended up a bit over 2% for the week. But that was only half the fun. The other half was getting there, with intra-day dips as large or larger - in both directions, one after another.

Kinda like taking a walk through the valley of death; or central park at midnight. Perhaps now we can add Wall Street to the list of tourist attractions that get the blood running - in the streets.

The first chart is the daily S&P 500, which closed at 1329.51 up 31.09 points for a 2.39% gain.

Positive divergences abound in RSI, MACD, and the histograms have turned up into positive territory with a positive MACD cross over; all indicating that more may be forthcoming.

ROC has not yet gone positive - but it's close. Could this be a benefactor of where some of those POMO's?

Things are looking pretty good in stock market-land. Does this mean the bear market is over - hardly? It will resume once the rally runs its course. How long is the course - got me.

Could be a few weeks, probably to the at least the first Fib retracement level shown above; but then again - you never know when another shoe might drop - or not.

Let's take a peek below the surface and see if anything is murmuring down under.

Below is a daily chart of the NYSE Composite Index. First, notice the chart moves from the upper left hand corner to the bottom right hand corner - that is a bearish signature.

Second, notice that little blue circle - I call that a dead man's cross, it's when the 50 ma crosses below the 200 ma (it should be the other way around if the asset is healthy). Also, both are headed down.

At the bottom of the chart are the advance/decline figures, the up and down readings, and new highs and new lows. Notice the last are still negative, signifying underlying weakness.

Commodities

Remember watching Custer's last stand on television when we were kids - well last week looked like commodities last stand, but appearances can be deceiving, at least some times.

The daily chart above does not look too healthy at the moment. A very big drop from recent all-time highs has just taken place; not one that was unexpected, but the quickness and violence was a bit dramatic to say the least.

Nonetheless, markets are like that. Usually the best thing to do at such times is to be on the sidelines watching, as to run with the rogue elephants can be a bit precarious, similar to running with the bulls in Spain when everyone has imbibed a few too many libations. It is best to stand aside, unless one enjoys such trysts.

The 50 ma is being tested as this goes to print. A negative MACD cross over has occurred, as well as a sharp fall from grace. Histograms are abysmal, as is ROC, as are the stochastic readings - hell the whole chart is abysmal - well almost.

Lo and behold positive divergences are popping up all. What does it mean - good question. Recently, we saw the gold charts showing negative divergences for weeks and it mattered not, until this week that is. Then it mattered - big time.

For every season there is a time, well you know how that goes. Anyways, back to more secular affairs. The positive divergences may come into play or not - perhaps sooner or later.

I suggest it is a bit early just yet, but things are getting a bit stretched to the downside for the short term, but once again markets are like that and can remain like that - or not.

Whether we can remain liquid through the travails is what is important; if not - stand aside until the fury subsides.

Oil

Oil got whacked for the week, knocked well off its recent all-time new highs; my how the mighty do fall. The daily chart below shows the United States Oil Fund well within its rising price channel, at least as of now.

Support is shown by the yellow horizontal band. The red arrow points to the blue line that is the bottom support line of the channel. The correction could go on for weeks - with snaps back up and down.

Industrial metals had a lovely week as well. They are testing their 50 & 200 ma, and horizontal resistance turned support that may become resistance again any day now.

Note, however, the 50 ma is putting in a positive cross over the 200 ma. Could the bull market in commodities be over? Sure it could, which means deflation would be in the air.

How deflation can be in the air with central banks running wild creating more credit and money is beyond me, but then again most things are. I leave it to those much wiser to discern, although stagflation sounds right to me, at least for the time being.

Bonds

Bonds have been loving the massacre in commodities and what until this past week had been a swoon in the stock market, as money has been flowing into bonds like the spigot had burst, which was and is kinda the main intent of the head plumbers.

As far as the Fed is concerned, all the markets can go to hell in a hand basket - as long as the Treasury bond market keeps afloat, as that is the only means the government has to collect money, aside from taxes, which they prefer not to raise, lest the people see what they are doing. This way things remain unseen, or at least not as noticeable.

The chart below shows the weekly chart of the 10-Year Treasury Note Price (not yield or interest rate which moves inversely to the price).

Overlaid is the price of gold. How fascinating that as interest rates fall and bond prices go up - that gold has been going up as well.

Currencies

As repeated here ad nauseam, when the Japanese Yen goes up the yen carry trades unwind and stocks go down. This week stocks went up, so let's look at what the yen did, as it should have gone down, which it did.

Well that looks about right. The yellow horizontal band shows broken resistance that now becomes support. The next chart shows the dollar. Patience will be rewarded when the long term trend returns.

Last up for the currencies is the euro. The euro took a big hit this week as the chart shows. RSI was way overbought and is correcting.

MACD is rolling over and looks to be setting up for a negative cross over. Histograms are receding back to zero.

ROC is dropping like a hot knife through butter, and the red horizontal line indicates broken resistance turned support. Notice the 50 ma intersects therewith.

Gold

Gold lost $25.68 to close at $920.00 for a weekly loss of -2.68%. It was gold's lowest weekly close in five weeks.

Such was not unexpected, as I have warned of negative divergences for weeks now, which until this week had not played out. Now they have.

Charts look most bullish just before they turn bearish. Likewise, charts look most bearish just before they turn bullish.

This is why a contrarian perspective serves its holder well. When the crowd gets wise the wise get out and vice versa.

The daily chart of GLD shows its first support line being breached and its lower trend line being tested.

The blue horizontal line indicates significant support. Volume has increased on the decline, although slowing up a bit.

Next up is the daily gold chart. It indicates the ravage done this week; however, not all is completely negative.

Price has broken well below its bottom trend line (blue). It has also broken below the first horizontal support line (red).

Gold's 50 ma has been broken through and its 65 ema is being tested. MACD has put in a negative cross over. Histograms have gone negative. ROC has dived in negative territory.

However, RSI, histograms, and ROC are all showing positive divergences. This doesn't mean that gold is going to immediately turn up.

As we saw with the last several week's of negative divergences, they took time to play out, but play out they did. Patience is required. The lower red horizontal line is major support.

Next is the point & figure chart for gold. It has completely changed from last week's bullish reading to a bearish price objective of $770.00.

We suggest looking either at last week's report to see the bullish point & figure chart in place at the time. Things can change quite quickly, as is self-evident.

All charts and all analysis must be taken with a dose of salt - regardless of who issues them. Many point & figure charts last week showed bullish triple top breakouts - this week they show the opposite. Caveat Emptor.

Silver

Silver fell 3.81 for the week to close at 16.65 for a weekly loss of -18.42% (ouch)!

The daily chart below shows it breaking below its first bottom trend line and about to test its second. It has broken well below its 50 ma.

I

Next up is the point and figure chart for silver. Unlike gold, its still shows a bullish price objective of $25.50. This could change very quickly, however. A high pole warning was issued on Thursday.

Hui

The Hui lost 75.34 points to close at 439.05 for a weekly loss of -14.73%. It was the lowest weekly close in 5 weeks.

Price has broken below its first horizontal support line (red), its rising trend line (blue); and is fast approaching the yellow band of significant support, which may or may not hold.

RSI, histograms, and ROC have all fallen hard, but show positive divergences, which will take time to play out. MACD has a negative cross.

Next up is the point and figure chart for the Hui. As the gold p&f chart shows, the Hui also has a long tail down which has turned the price objective negative - down to 338.00.

We suggest going back and looking at last week's report to see the complete turn around in this chart. Caveat Emptor. Most of the p&f charts of the precious metals have changed 180 degrees since last week.

Gold/Xau

Next up is the gold/xau ratio monthly chart, going back to the beginning of the bull market. Since the bull market officially started there has only been one higher ratio registered.

The horizontal lines line up with the highs in the ratio and the coincident lows at the bottom of the chart with the Xau. They all represented good buying opportunities - doesn't mean it will repeat.

One of the members on my website asked about the length of bull moves versus corrections, and if the latest quick and violent downdraft in the gold market was indicative of a bull market or a bear market.

Perhaps this chart may provide some clues.

The next chart shows the performance of the Hui to the S&P 500.

Since late 2007 the Hui far out performed the S&P. Things appear to have changed. The bottom trend line has been broken.

Invitation

The latest full-length version of the current week's market wrap is available only at our web site, including this week's stock chart watch list and any buys or sells executed this week that are on the website.

There is a ton more charts. Stop by and check it out. Most major markets are included with the emphasis on the precious metal markets.

There is a lot of information on gold and silver, not only from an investment point of view, but also from its position as being the mandated monetary system of our Constitution - Silver and Gold Coin as in Honest Weights and Measures.

On the main homepage are papers and articles by some of the best out there to be had. There are audio and videos on banking, the Constitution, and cutting edge news. Many articles are archived and others are linked.

Live time quotes on gold and silver and precious metal stocks are available, including charts for most world currencies and futures.

Links to the World Bank, Central Banks, the International Monetary Fund, the United Nations, the Bank for International Settlements, and many other similar and different sources are available.

There is also a live bulletin board where you can discuss the markets with people from around the world and many other resources.

Good luck. Good trading. Good health, and that's a wrap.

Come visit our new website: Honest Money Gold & Silver Report
New Book Coming in 2008 - Honest Money

Douglas V. Gnazzo
Honest Money Gold & Silver Report

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

Douglas V. Gnazzo © 2005 - 2008
All Rights Reserved Without Prejudice

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