Market Wrap
Week Ending 2/16/07
Economy
The Commerce Department reported that housing starts declined a hefty 14.3%, falling to a yearly rate of 1.4 million units from December's 1.6 million units. It also said that building permits were down 2.8%.
Construction in the West fell 28.5%. The decline in the West from December was the biggest since January 1979.
The Labor Department reported producer prices fell 0.6% last month, supposedly due to a decline in energy costs. Excluding fuel and food, wholesale prices, or what is called the core rate, gained 0.2% for a second month in a row.
Prices for raw materials fell 6.3%, following on the heels of a 2.8% gain the month before. Capital equipment rose 0.2% in January following a 0.1% gain previously.
The Reuters/University of Michigan index of consumer confidence fell to 93.3 from January's 96.9 reading.
The Business Council issued a statement saying that thirty-two percent of CEO's polled from the list of Fortune 500 companies reported that business conditions have deteriorated over the past six months. Twenty percent said that business had improved.
Europe recorded its first trade deficit for a full year since 2000, supposedly due to rising energy costs and worsening trade deficits with China, Russia and Japan.
The European Union's statistics office in Luxembourg reported a euro-area trade deficit of 8.2 billion euros ($10.8 billion) for 2006, this following a 16.2 billion-euro surplus the prior year.
Gold & Silver Stocks
For the week the HUI Gold Index gained 7.03 points to close at 347.09 (+2.07%). This was the highest weekly close since December 1, 2006.
The chart below shows the HUI bumping against its upper trend line, as well as significant resistance at the 350-353 level.
The weekly chart of the Xau Gold & Silver Stock Index shows it too bumping up against its upper trend line with significant resistance right around the 150 - 156 level. It appears that it will take some effort to break above the overhead supply that has accumulated over several months time.
Beneath the XAU chart is the monthly chart of the HUI, which shows a negative MACD Cross and declining histogram levels. Both of these indicators need to be turned around and up, which will take some good buying demand to accomplish.
The gold bull is still alive, however, it needs to burn off the overhead supply that still exists, while transferring stocks from weak hands to strong hands. It is a bull until it isn't, and as of now it is.
Gold
Gold closed the week out at $672.80 up 0.50 cents or (+0.07%). This was the highest weekly close since May 12, 2006. Gold has broken above its upper trend line as well as above significant resistance at the $655 area.
RSI readings are heading towards overbought, and the histograms are shrinking back towards zero.
Prices are also bouncing off the upper Bollinger Bands, hinting that gold may be extended and in need of a consolidation.
Once again, however, gold is in a bull market until such time that it isn't. As further evidence we note the several charts that follow that price gold in the yen, euro, rand, and Canadian dollar.
Gold is going up against all major world currencies, not just the dollar. This is not a dollar-centric gold bull - this is a paper fiat junk-centric gold bull.
When gold is going up versus all currencies it shows the golden bull to be the real deal with much more yet to come.
Next up is the chart of the Gold Trust Shares (GLD). It too is bumping up against significant overhead resistance, and just fell short of breaking out above.
Any further gains this coming week will place it above the 66.42 resistance level of the July high, which will then turn from resistance to support. RSI is approaching overbought and the histograms are shrinking back towards zero: indicating some consolidation may be in store.
Below is a long-term chart of gold going back to 1975. It shows the resistance at $700 and the support at $500.00.
In November of 2005, we wrote about the significance of the $500 level as SUPPORT, not as resistance that had just been broken above, as gold was on its way for what all were heralding as stage two of the golden bull.
We said stage two wouldn't be here until $500 became support that held during an intermediate term correction - such as the one we are presently still experiencing. And lo and behold: here we are.
Not only do we see the long-term support and resistance levels on the chart below, we also see a long term cup and handle formation taking form. If and when $700 is breached and closed above on a sustained weekly basis - a powerful bull move will be in progress.
Silver
Silver closed the week out at $13.99 up 0.07 cents. This was silver's highest weekly close since December 1, 2006.
Below is the chart of SLV - the silver shares trust. It has just broke above its upper trend line and needs to now close above its December high.
The second chart below is the monthly silver chart. It shows the long-term trend, which has been up and quite spectacularly so. The most recent right hand portion of the charts shows the very strong rise that silver has had. It also shows how steep the rise has been.
A couple of the indicators are warning of overbought levels, and the histograms are shrinking back towards zero, once again - indicating that a near term consolidation may be in order.
The monthly chart also shows a bullish long term cup with a handle formation developing, which, just as with gold's, will be a powerful bull move if and when it breaks to the upside.
Summary
First, a few observations and comments are in order. The G7 meeting was last weekend. Many of the world leaders were in attendance. Various global issues were discussed.
We have linked the official G7 website to our website, and you can now access most of the speeches and presentations that were given. Very fascinating and enlightening stuff - check it out - you may be surprised at what you read.
Last week we mentioned the surfacing problems in the sub-prime mortgage market. So far the toxic waste has been contained. The operative words being: so far. We came across the following in our meanderings, and thought you might find it interesting.
The latest fad in paper fiat land is a derivatives index used to bet on bonds backed by the riskiest (sub-sub-prime) mortgages. It just fell for the fourth straight week, as more and more lenders report losing money. Hmm. This is not as simple of an investment hedge as it seems. Perhaps next week we will have time to elaborate.
Everyone and their mother and grandmother are out to crucify the Yuan, especially the two out spoken senatorial representatives of We The People. What do they propose - tariffs to force China to cooperate or else. Almost sounds like extortion doesn't it? Do as we say - or else.
The China Foreign Exchange Trade System reports that the Yuan has risen 6.7% from the fixed exchange rate of 8.30 that ended on July 21, 2005. Then the Beijing-based People's Bank of China issued a statement that lenders must put aside 10% of deposits starting from Feb. 25 - up from the previous 9.5%.
This is the fifth increase in eight months. Raising the reserve requirements in this manner is a much stronger and more effective manner of monetary policy then simply raising interest rates. You can't say they are not trying. Next there will be cries that China should pay fund our debt for us - guess what - they already are.
Stocks can't be kept down - we choose, however, to remain out on the sidelines, except for precious metals, oil, and gas stocks. Keep an eye on the Nasdaq 100, as it goes the broader market will follow.
It appears that a near term consolidation is in order in the precious metal's arena. Both bonds and the dollar cannot rise together - it is one or the other. Either way there will be payment extracted.
The liquidity machine known as central banks are pumping credit into the system as fast as they can. The world is awash in paper fiat debt-money: all of which is junk, some just worse then others.
A game of global currency devaluation is the featured play on the street. Look for it coming to a theatre near you: and then get the hell out of the way. How? Buy Gold and Silver.
Everyone cries about how the commodity markets have been hit, everyone that is except those who look at the CCI Index (equal weighting) we showed in the commodity section, which tells the real story about commodities: which is just fine and dandy thank you.
The precious metal stocks appear to be in a consolidation phase, as overbought levels and overhead supply are worked off. We then look for prices of around 370-400 on the HUI.
Obviously there will be those individual gold and silver stocks that perform better, and those that perform worse. Our gold stock portfolio reflects are views by putting our money where are mouth is. As they say - talk is cheap. It's the walk that counts.
It does not appear, at least as of now - that new highs will be made on the next initial move up - but one never knows. What will be important is at what level support holds on any corrective price action.
We booked some nice profits earlier this week, and will be looking to re-deploy the troops on any pullbacks. The gold stock portfolio has been updated to reflect the booking of profits.
Towards this end we hasten to add that the South African Rand is the third worst performer of the 71 major currencies, having lost 2.7% this year.
This will weigh in positively on the scales of the South African Gold Miner's bottom profit line in the quarters to come, especially if the price of gold continues to rise. The currency play coupled with the gold play is a tough act to follow. Harmony and Gold Fields come to mind.
Lastly, we suggest you check out our recent weekly article on The Brave New World Economy. Discussed within it are some economic issues rarely discussed in the public domain, especially in regards to the gross domestic product (GDP) not quite being what it is made up to be.
Is the GDP a measure of wealth, or is it a measure of CONSUMPTION - of SPENDING? What matters the most is: where is the money coming from to continue spending and consumption?
Is it coming from rising incomes? Is it coming from increased savings? Or is it coming from increased DEBT levels? Then how can this possibly be a measure of economic health? It is a measure of debt servitude - not wealth. Think about it - then vote accordingly.
Invitation
Stop by our website and check out the complete market wrap, which covers most major markets. There is also 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 Coins, as in Honest Weights and Measures.
There is also a live bulletin board where you can discuss the markets from people around the world and many other resources too numerous to list. Drop by and check it out. Good luck. Good trading. Good health. And that's a wrap.
Come visit our new website: Honest Money Gold & Silver Report
And read the Open Letter to Congress
