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FYI...
JW
-----Original Message-----
From: James Smith [mailto:JSmith@xxxxxxxxxxxxxxxxx]
Sent: Friday, April 07, 2000 8:58 PM
Subject: GOLD: Where's the follow-thru?
Gold rallied last Tuesday but has since given back
much of its gains...and the XAU (gold/silver index)
seems to be in trouble. It clearly closed below key
support at 56.44 today, which leaves it vulnerable to
a selloff down to 48.67 or lower.
If investors are seriously interested in gold as a
hedge against stock market volatility, why the heck
are they selling their gold stocks and why can't gold
hold onto its gains?
In the January BOE auction, gold went for $298.50 with
a "Bid to Sale" of 4.3 to 1. In the March 21st BOE auction,
gold sold for $285.25 with a "bid to sale" of 3.0 to 1.
In the March auction Gold sold for less than it did in the
January auction, and yet, interest was also less as
expressed
by the bid to sale. By contrast, in the September auction
gold sold for 255.75 with bid to sale of 8.0 to 1. It
would
appear that true interest in gold only materializes at much
lower levels. Not a sign of an emerging bull market to
say the least.
Given the volatility in the stock markets of late, you might
expect there to be more interest in the May 16th auction,
but the proof is in the pudding...or rather in the "bid to
sale"
figures. If gold begins to plunge around the same time
as the stock market, will there really be a pick-up in
demand
for gold? Or will margin calls cause investors to
liquidate
gold stocks as well as tech stocks? In the panic selling
of August 1998, gold, gold stocks, and the S&P all went
down together.
BOE auctions have been only 25 tons every 8 weeks
and even this small amount has not met with eager buyers.
There is still a lot of risk to owning gold. Only a monthly
close above 334.7 will confirm that the secular
low is in. This year's 8 year cycle could very well produce
New Lows for Gold below $252...possibly as low as
195-215 area.
Are the Swiss really committed to selling 1300 tons?
The Swiss National Bank is supposed to begin selling
gold in April.....that's right, this month! Granted they
aren't
going to sell it all in one go, but no matter how much they
sell, it could easily depress the market.
Remember the first two BOE auctions in July and Sept last
year. The market may treat Swiss selling as a shock even
though people know its coming. Its one thing to talk about
selling 1300 tons, its another thing entirely to start doing
it.
Perhaps this might explain why the Gold/Silver index is
breaking below key support. Smart money may be
getting out of gold stocks before the deluge.
THE US ECONOMY REFUSES TO SLOW DOWN
AND HOW THIS RELATES TO GOLD
The FED will continue to raise rates 1/4 pt each time
until the economy slows......which is nowhere in sight.
The ECB cannot afford to continue raising
rates in lock-step with the FED. The European
economy has a much higher percentage of old
economy stocks (that are more vulnerable to
higher rates) than the US economy has.
How convenient if the Swiss were to unload enough
gold to depress the price of gold, painting a
picture of "deflation,"& lessoning need for all
Central Banks to raise rates. "Painting a picture"
of "deflation" may become even more
important once OIL starts its next leg up. For
now oil is likely to continue down, but a bottom
for oil may very well come here in April. Moving
closer to the Summer Driving Season, Inventories
are still very close to Record Lows.
What happens when you give a loaded gun to a
monkey?
You have what the financial markets call "Event
Risk." Maintaining record low inventories going into
the summer driving season is a bit like giving a loaded
gun to a monkey. Hey...maybe nothing will happen.
With oil prices recently above $30, most oil companies
were not willing to replenish their stocks because, like
most of the public in general, they felt that oil could not
stay above $30....so why stock up while prices are high.
They may now try to make up for lost time, but the question
remains whether they will be able to stock enough oil to
meet the needs of the summer driving season and the
potential for "event risk" (e.g. refineries suddenly
shutting
down for repairs, Saddam doing his normal thing, or
quite simply demand for oil being stronger than projected).
BONDS
The 30 year bond continues to rally and as the price moves
higher the yield moves ever lower. It is now yielding just
over 5.70% . Sure yields have been as low as 4.84% but
does any rational investor believe bonds are going back
to that yield? The only reason bonds rallied so much in
1998 (with bonds yielding only 4.84% when bonds peaked
in price), is because the FED eased 3 times in quick
succession
to supply liquidity to the system which had just been
jeopardized
by the LongTerm Capital Ponzi Scheme.
You remember, LongTerm Capital took $5 billion raised from
its clients, and leveraged it up to over a $1 trillion and
became a
"moral hazard" by virtue of the key financial clients
(mostly Wall
Street firms & Major European Houses) it put
at risk. Greenspan bailed them out by lowering rates but
in
reflecting on the events of 1998 in a recent speech,
he did not refer to LongTerm Capital as the reason for
lowering rates.
He prefers to highlight the Russian Debt Default which came
just before LongTerm Capital as the reason for
lowering rates at that time. No mention of LongTerm Capital
at all. I wonder why that is??? Maybe he forgot.
Now that the Oil companies have given that the monkey
a gun with bullets in every chamber, (record
low inventories on oil) whaddya s'pose will happen to
bonds if the gun goes off. What will happen to stocks?
Hey, maybe its just a coincidence that bonds have rallied
strongly into the month of April....the same month that our
system shows "Directional Change" for bonds. Maybe its
just a coincidence that Nymex Crude is selling off strongly
here in April, forming a Higher Low with a "Turning Point"
and "Directional Change"indicated for the month of May.
Maybe its also a concidence that the DOW and the S&P
are about to move into Blowoff rallies into the end of
April/early May with both markets due for Major Turning
Points in May.
New Highs for the DOW next week will confirm the New
Highs in the S&P and signal an acceleration of what
should properly be called a "blowoff rally." The DOW
could add 1000 points, possibly 2000 points in just
a few weeks time. But we still have to see the DOW
make New Highs to confirm the blowoff rally will
even happen.
NOTE: All rallies are not equal. You might think it
makes sense to buy stocks if the DOW makes New Highs
next week, but you will have to be very nimble. Along
with the fast move up will come higher volatility.
Personally, even though I know that stocks will rally
strongly if the DOW makes Closing New Highs, I would not
be an eager buyer. Risk is increasing.
The broker's lame excuse for putting clients into stocks
at the peak of a market is, "You can't time the market!"
Perhaps it is more accurate to say that a broker has no
interest in timing the markets because it would depress
his commissions.
The next time someone says, "You can't time the markets!",
ask them what they do for a living.
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