You read a lot recently about "double dip" and it does not refer to two scoops of ice cream, or to the Jerry Seinfeld episode when George takes a large tortilla chip, dips it into a bowl of dip, bites into it and dips it into the bowl again, much to the utter disgust of the person standing next to him.
Yes, the financial meltdown has brought all kinds of new words into our lexicon.
The double dipping you have been reading about refers to recession -- a double-dip recession, with a W shape on the chart. It is a recession followed by a short-lived recovery, followed by another recession.
We are half way into the year and it is a good time to ask ourselves if we are in fact facing another "double-dip" recession? And if so, what are the implications for precious metals?
There is certainly enough fear and angst on the subject if you read the financial pages. The word "fear" led the front-page headlines of The Wall Street Journal at least twice last week.
The London Financial Times reported this week that optimism among finance directors of the UK's largest companies about their business's prospects has dropped to a 12-month low.
Some of the world's leading hedge fund managers are positioning their funds for a double dip recession, saying there has been a dramatic shift in the macro-economic environment over the last month.
Legendary investor George Soros recently told a banking conference in Vienna that the risk of a double-dip recession due to current European public finances woes can't be ruled out, as credit problems are forcing European countries to accelerate fiscal consolidation.
And then there is Robert Prechter of Elliot Wave International, who in a recent New York Times piece said we're headed for an even bigger crash than that of 2008 and 2009. He says the Dow could fall as low as 1,000 in the biggest bear market in 300 years. Here is his advice to investors:
I'm saying: ‘Winter is coming. Buy a coat.' Other people are advising people to stay naked. If I'm wrong, you're not hurt. If they're wrong, you're dead.
Double Dip of Dismal News
It is understandable when you consider that stocks registered their worst quarter since the financial meltdown in the fourth quarter of 2008. The economy is weak and this is after trillions of dollars have already been pumped into it. Hiring is weak, consumers have lost confidence, stimulus dollars are running out and debt is spreading across Europe. Commercial real estate is in trouble and no new buyers are coming into the housing market. Banks are still reluctant to lend and businesses are loath to expand. Automakers say they see no sign of recovery. Ten-year US Treasury notes are selling at the lowest yields in 14 months.
That's a lot of bad news to take it. But there's more.
Consider that Bush tax cuts are set to expire on January 1, 2011. Bush cut taxes in 2001 and again in 2003 in the face of a weak economy. Unless something changes, America is going to enact the largest tax increase in US history that will be matched by equally large tax increases and spending cuts by state and local jurisdictions. Unless Congress acts to make those cuts permanent, massive tax spikes will hit hard and could tip the U.S. back into recession. Research has shown that tax cuts or tax increases have as much as a 3-times multiplier effect on the economy. If you cut taxes by 1% of GDP then you get as much as a 3% boost in the economy. The reverse is also true.
Another New Term-"Option ARMs"
Here is another new term for us to learn-"Option ARMS." These are Adjustable Rate Mortgages and are considered one of the riskiest kinds of loans made during the housing boom; they have left many borrowers owing much more than their homes are worth.
ARMs generally permit borrowers to lower their initial down payments if they are willing to assume the risk of interest rate changes. Many ARMs have "teaser periods" when the ARM bears an interest rate substantially below the fully indexed rate.
Billions in Option ARM resets are scheduled to take place in 2010, which might make the subprime crisis look like a cakewalk. These are the loans that made it easy for consumers to buy houses they couldn't afford. About $750 billion-worth of Option ARMs were issued between 2004 and 2007 and they will all begin resetting shortly.
Does the government have the money to bail out the next batch of banks that will fail as a result of these Option ARMs? We should brace ourselves for more bank failures, job losses, foreclosures, delinquencies, and economic adversity.
To make matters even more unsettling, let's not forget that the world's governments met recently in Canada and pledged to reduce their countercyclical spending. If they follow through, it could result in the private sector and the public sector de-leveraging at the same time, which means another crisis. When governments begin to tighten at the same time that the private sector is tightening, the effect could push the world into a sharper, deeper recession. On the face of it, cutting back on spending seems like the prudent thing to do. But the move may not be enough to reduce sovereign debt levels, but still might have enough kick in it to tip several national economies into depression.
Having frittered away trillions in bailouts and confidence-building exercises, it will be nearly impossible for those same maneuvers to work again if the economy turns lower and defaults pick up again.
The likely scenario is that there will be wave of bankruptcies at first with inflation to follow.
Fascinating Crossroad in Modern Financial History
Albert D. Friedberg, of Friedberg Mercantile in Toronto, is one of the most respected hedge fund managers in Canada. In a private quarterly report he just sent to his investors Friedberg said: "In my view, we stand at a fascinating crossroad in modern financial history."
We would like to quote directly from his newsletter:
Massive quantitative easing for the past 18 months, at least in the U.S. and the U.K., has not led to an explosion of money as one would have expected. In effect, the money multiplies has shrunk dramatically; banks have build up record excess reserves and the asset side of their balance sheets has experienced a slight shrinkage, as loans have declined at a precipitous rate and Treasury holdings have only partially offset this decline. Clearly, banks are nervous about extending new credit...
If banks continue to hang on to their excess reserves, money supply will begin to drop in accelerated form and bring down with it asset prices and the economy. As it is, MZM (money of zero maturity, a proxy for transaction type money) has contracted at an annual rate of 6.9% over the past 13 weeks, while broader money (M2) has contracted at a 0.4% rate over the same span. The money contraction is puzzling in that they have occurred during a time when the Fed has made every conceivable effort to expand money to avoid the consequences of the 1930s. Recall that monetarists like Milton Friedman charged that the 30% contraction of money during the 30s was the principal cause of the depression. At the same time, fiscal profligacy in the U.S., Europe and Japan, is forcing the Treasuries of these countries to retrench in a massive way, implying rising taxes and a freeze on spending for years to come. The monetary drama in play at this time puts the continuation of the upswing in doubt.
The U.S. U.K., Eurozone and Japan are delicately poised between two very serious dangers; a once in a generation deflation and an accelerating inflation rate. Either a lack of oxygen or too much of it will kill the patient. The deflationary, the more likely scenario, would be deadly almost right way. The inflationary scenario on the other hand, on the other hand, would take a huge toll on the developed economies, but it would be likely to take some time.
Friedberg, a prudent investor, says he placed a modest amount of chips on the deflation table and fair sized short positions in stock indices. A gold bull, he also placed a "fair sized" long position in gold, which he says is becoming a safer international asset by the day.
We obviously agree that going long the gold market is the right move for investors to prepare themselves for the coming storm. Remember that the first goal always is not to lose money while waiting for the next opportunity train to leave the station. Gold is the ultimate money. We wrote in last week's Premium Update that there is only one reason not to invest in gold. You should not invest in gold or silver if you believe that Somewhere Over the Rainbow skies are blue, sovereign debt problems will disappear and economic recovery is just around the corner.
To see how the price of gold will do in the upcoming weeks let's begin this week's technical part with the analysis of the currency indices. We will start with the euro chart (charts courtesy by http://stockcharts.com.)
Euro and USD Indices
This week's long-term Euro Index chart shows us that the bottom does indeed appear to be in. Notice the move slightly below the thick blue support line. This is also close to the 50% retracement level of the 2000 - 2008 rally. Basically this means that the Euro Index has declined an amount equal to ½ of what it rose between 2002 and 2008. The RSI is at the previous below-30 levels is consistent with past bottoms.
This is a bullish development long-term for the euro. Of course, it is consequently bearish news for the USD Index as well as for gold and silver (to some extent). The recent rally in the precious metals has been driven by the demand of European investors who sought to protect themselves from the problems of the euro. With trust being regained in the euro, gold will appeal less than it has in previous weeks.
Our short-term chart shows price movement close to the declining resistance level created by the upper border of the current trading channel. In addition, note that the RSI is moving closer to 70 each day. This is likely to at least pause a rally for a few days/weeks.
The impact on precious metals is a possible reversal of the recent decline. At least there will likely be some positive effect seen here. This will provide us a good opportunity to estimate the strength of the precious metals markets. It is important to monitor precious metals to see how they respond to this consolidation. If prices decline this will be bearish news; however, if gold, silver and mining stock values increase, this will be bullish sentiment for the short-term.
This week's long-term USD Index chart is once again a reflection of recent developments with the euro. We are presently at a long-term support level above, which may hint towards a buy signal; it's possible that we could see a rather quick bounce back above the support level, which would be a bullish development.
On the other hand, the USD might move lower, below the 84 level (thus breaking below the rising support line) and then consolidate. This would verify the downward move below the support level.
Based on analysis of information available today, it seems more probable that we will see a consolidation followed by lower prices. This is mainly based upon the situation previous discussed in the long-term Euro Index chart. It is critically important to monitor the performance of gold and silver in the coming weeks. Should new information develop, we will utilize our Market Alert capabilities to keep our Subscribers current on all implications.
The week's short-term USD Index chart shows a move, which is close to our next turning point. We are presently near the lower border of the declining trading channel or support level and in a week or so we will likely see a local bottom or top.
Based on development in the Euro Index and other signals on the USD side, a local bottom appears to be more probable. It is likely that we will then see a slight turn upwards perhaps back to the 84 level. A move above 85 seems unlikely based on today's signals, but if it materialized, it would be a clearly bullish development.
It must be stressed that overall the signals are lacking clarity at this time. Additional information is needed in order to make any decisive calls with respect to entering or exiting speculative markets. As indicated in our Market Alert issued earlier this week:
At this very moment there are no clear "sell or short stocks" signals...we need to have very convincing signals that the market is going lower before we decide to drop long-term gold and silver investments. This is not the case at this point, even though the week closed below the 2009 high.
Summing up, the long anticipated end to the euro's decline appears to have come to fruition. This in turn will likely spell an end to the USD Index rally. The impact will probably be felt across all precious metals because of the fact that the previous rally was to a large extent driven by the European demand. Gold and silver's strength and resilience will be tested quite soon.
Since these developments are truly not a replication of the recent past and since world market conditions have changed so drastically in past decade, we hesitate to draw any conclusions at this time. As we briefly discussed several weeks ago, the world markets are so intertwined and emerging economies are influencing these markets and each other in ways unheard of even five years ago. It is critical that the situation be watched closely and conclusive signals be analyzed immediately in order to maintain a solid advising position. All in all, it can be said that we are presently awaiting the next major development in order to determine its impact on precious metals. This will then dictate our corresponding messages to Subscribers.
General Stock Market
A look at this week's long-term chart for the general stock market shows that the head-and-shoulders pattern, which was developing over the past two weeks has not been completed. Since this pattern is very bearish we may call this good news. The breakdown below the lower level of the trading channel was not confirmed. For this reason we did not issue any sell/short stocks to our Subscribers. We chose instead to wait for final confirmation but this is something that never came.
A slight rally has been seen in the past couple of days. This further shows that our decision to not react because of possible market changes was indeed correct. It is important to note, however, that a two-day rally after a severe decline may simply be a correction and not a true contra-trend move. Furthermore, volume levels have been low on recent upward moves in price, especially compared to levels seen during the recent decline. We see no signals indicating a continuation of this rally and therefore choose to use the word cloudy to describe our view of the near-term direction of the general stock market.
On the short-term chart, we clearly see that the next resistance level to be encountered is around 110 or so. Once again, we must say the situation is unclear as there are no sharp buy or sell signals for the general stock market at this time. The RSI confirms that the bottom is in.
Precious metals did not follow the market with their own rally. This could be bearish news for the precious metals sectors but we must wait for additional development within the general stock market before recommending any actions with respect to precious metals investments. Since we are unwilling at this time to make any calls, we will apply the "when in doubt, stay out" rule. A Market A,lert will be issued immediately should developments warrant this prior to our next update.
Summing up, the general stock market's bearish head and shoulders pattern does not appear to be under development any longer. The recent moves upward although not strong might have ended the very bearish period, which we've discussed in recent updates. It is important to note that the market can still go either way in the near term and the direction it eventually takes will likely have direct implications on gold, silver and mining stocks. It will be then when we will be able to better estimate the next move on the precious metals market. At this time, there is nothing further to advise as we await additional developments.
Correlations
The correlation matrix is the tool of choice for providing the numbers behind what we have discussed in earlier sections of this update. The relationship between the precious metals sector and USD / S&P has been quite weak over the past 30 days. In the short-term, neither has directly influenced gold, silver and mining stocks. W will refrain from additional comments here as we continue to monitor the situation and especially the precious metals markets for weakness or strength. We will report to our Subscribers as the situation warrants.
Gold
This week we can see that gold has broken below the rising support level on the long-term chart. This breakdown has been confirmed by both high volume levels and several consecutive days of closing below the support level. This is a medium-term bearish sign.
Frequent patterns are noticed with gold prices as once a top is reached, the decline is usually followed by a slight correction. Should this be the case here (and it is likely) but the shape and range of this correction is hard to estimate, and consequently we do not thing that it is a good idea to trade it. However, we do think that this correction will provide us with information about the next move, and probably about the next major bottom.
The short-term chart provides us with more timing details.
The short-term chart clearly shows that we are close to a local bottom today. With gold being very close to the Fibonacci 38.2% retracement level of the previous Feb - June upswing and RSI close to the 40 level, it seems that points made earlier are confirmed. The short-term bounce is probable not only because of the rapidness of the decline and the fact that we didn't see any correction yet, but also because of gold reaching a support level.
The medium-term trend appears to be down but it is our belief that reacting to this type of trend speculation is risky. We have seen no confirmation or validation from other markets as indicated by this week's correlation matrix. The signals are simply not clear enough at this time for us to suggest entering a speculative trade at this point. Of course our Subscribers will make their best decisions individually and we will continue to provide our analysis and guidance whenever possible.
Frequently in the past updates and also earlier in this report we have discussed confirming and not confirming sell signals for long-term holdings. So that you better understand two of the signals that we are currently looking for, we have decided to include an explanation in the form of the 2-year-old chart of gold. More specifically, we will attempt to identify the signs, which were visible during gold's rally in 2008 just before its severe plunge.
Several important signals are clearly seen above. First, please note that gold's rally was being driven by the USD Index. Gold moved in the opposite direction and therefore had a very positive performance during the first half of the year as the USD Index was in a steady downtrend. Notice that in late July, a small move up in the USD Index caused gold to decline sharply and with very high volume levels. This is one of the risks involved when highly correlated with another index or market, and its something natural. What was not natural at that time was the size of the reaction - the dollar moved up only slightly and gold plunged about $40. This was an early warning.
A second important signal is seen when volume levels are scrutinized along with higher prices. As we have frequently alluded to in the past, when price declines are accompanied by high volume and price increases seen with accompanying low volume levels, this is a very bearish signal. This was clearly the case prior to the second half 2008 severe decline.
Summing up, the gold market today is showing some early warning signs about what may be to come. It is important to note however, that none of these signs have been confirmed. It is therefore necessary to monitor the situation going forward as important developments can arise on any day.
It is unclear at this time whether short-term, slightly bullish signals are valid or simply a product of short-term bias. We are not recommending any moves in or out of the market presently. Although it may indeed become a bearish situation soon, we are lacking sufficient evidence as of now to support and specific moves.
Points made in this section are valid regardless of your location (in the previous updates we've sometimes differentiated between implications for U.S. Investors and non-U.S. Investors.)
Silver
In this week's update, we have included two very long-term charts for silver. These have been featured in updates several months ago when we discussed long-term targets for silver and gold.
Just like it was the case back then, it seems that silver prices would need to correct previous upswings twice before moving to new highs. Please note that once a new high is reached after a rally, there is a typical correction and then a move close to the previous high that does not take silver higher. It seems that this is what we have just seen.
Once this second trial fails, price corrects once again - at least 50% of the preceding upswing (as marked on the chart above) before moving much higher.
This means that if we have seen the second top for silver now (which is likely the case) then silver might need to move down to $14 - $15 level before it ignites a rally that takes it to new highs. This could correspond to gold once again moving to $1,000 or so.
We realize that this is very discouraging news to silver and gold investors but it is our obligation to report what our analysis determines. Gold and mining stocks may also go substantially lower but confirmation from other techniques or signals is needed before validating this as a probability.
The upper section in this first chart for silver provides conclusive calls long-term. The Trix indicator normally does not imply a final bottom until a downward move has been followed by a correction and then an addition decline. This would be near the zero level for the Trix indicator. Above we see that we are beginning the second part of a corrective phase. This precedes our next rally and we expect to see a zero eventually. This would correspond to a final bottom possibly along with a possible decline to the $14 - $15 level.
This discussion has not been provided to scare you out of the precious metal sector. We do wish however to emphasize that the situation is quite serious. It is most important now to monitor all developments daily and react accordingly. Sunshine Profits has the tools and the expertise to keep our Subscribers informed. This is always our first priority.
Having said that, let's take a look on the bright side of the chart, which features the next major upside target at $31.
The analysis of turning points (black vertical lines) indicates the next significant top for silver could be formed at the end of 2011. It is important to remember that any rally may be preceded by significant price declines. The Fibonacci retracement level indicates a decline to perhaps $15 before a move upward. This is about $3 below what we are today. At this time we are not recommending that our Subscribers exit the precious metals market, at least not yet, as we're waiting for additional confirmations.
The above chart indicates that we might be close to a local bottom, as the price of silver is right at the 200-day moving average. The Stochastic Indicator points towards the bottom possibly being in. The RSI however does not confirm this. So what does all this mean? The signals are presently mixed and unclear and we do not feel this benefits entering with speculative capital at this time.
This final chart for silver points to the bottom being in and a technical turning point also at hand. The Stochastic Indicator also identifies the bottom and a probable move upwards to follow.
Summing up, even though precious metals will likely move upwards slightly in the coming days, this may be the beginning of a bigger downswing in silver, gold and mining stocks. We caution that these moves higher may only be temporary, as they are driven to a great extent by possibility of a consolidation in the Euro Index.
Precious Metals Stocks
This week long-term HUI Gold Bugs Index does give some slightly bullish indications. The 200-day moving average has been approached and the RSI level is close to where local bottoms have been seen in the past. These two factors alone should not cause any great excitement but they are traditionally bullish signals and should be viewed as such.
This week GDX ETF, which is a proxy for precious metals stocks, shows significant short-term bullish signs. The Fibonacci 61.8% retracement level is an important support level, which is close to Thursday's closing price. The rising monthly support line and the RSI consistent with local bottoms are additional bullish factors.
The implications here for precious metals stocks' Traders are relatively more bullish than what we said about gold and silver. This chart clearly confirms what our prior analysis has concluded although to a slightly more bullish extent. The bottom line is if one is willing to trade in the precious metals market (which we don't advocate) the mining stocks appear to be the best speculative vehicle at this moment.
Summing up, whereas gold was favored previously, the situation has changed significantly. With the head and shoulders pattern not being confirmed and the short-term HUI Index showing a resistance level greater than its price, even a slight bounce in gold and silver prices accompanied by higher values of main stock indices would benefit mining stocks. Additionally, please note that the mining stocks are characterized by much higher short-term volatility than gold or silver (taking into account weekly rallies precious metals stocks outperform metals.) Experienced traders only should ponder entering speculative trades into mining stocks at this time; this is not recommended for most Investors/Traders.
SP Gold Bottom Indicator
The SP Gold Bottom Indicator chart is particularly useful for identifying long-term buy signals. In the lower section above, the buy signal is indicated when we see a move below the dashed line (you might want to click on the chart to expand it.) Generally, that what we've seen should make one buy more gold, but this time the situation suggests caution.
Right now we are at the end of a rally which saw gold move from 700 to above 1200. As we look for similar situations from the past we notice a similar buy signal right after the 2008 top. By buying at that time one did not buy at the exact top, but it was close to the final bottom, which came months later.
Taking other factors into consideration, it does not appear that we are presently at an extremely bullish point as in the past. It appears that additional signals would likely be needed for us to state that we are likely to see gold moving immediately higher. It is unclear whether the danger of a sell-off is truly low or even possibly high. The odds slightly favor a bigger move lower after a relatively small move higher. Should our view on this issue change, we will certainly inform our Subscribers in and regular update or immediate Market Alert.
Summary
Patience is the key word for this week's update. It seems that additional signals and confirmations of moves and trends are much needed in every market at this time. Investing in precious metals could become quite dangerous and significant declines are possible in the coming months. However, this does not have to be the case. It is imperative at this time to monitor all over markets for signals, which could influence future trends in the precious metals market.
We are likely to see a short-term bounce quite soon. How precious metals perform may provide clear signals, either positive or negative, into the true direction the market will take. As always we well report back to you whenever we have information worthy of mentioning.
This completes this week's Premium Update.
Thank you for using the Premium Service. Have a great weekend and profitable week!
Sincerely,
Przemyslaw Radomski
