2009

February 15, 2009 · Posted in Weekly Posts · Comment

This past week saw gold continue its rise, bonds retreat and then rally back, and a lot of key announcements on the economic front.

For this week’s recap we will look in turn at gold and gold stocks, US Treasury bonds, and the US dollar.

Gold and Gold Stocks:

Gold rose strongly this week after retreating last week as it consolidated around the $900 an ounce level. The Financial Times ran an article stating that dealers are seeing record demand for physical gold bullion and gold coins worldwide, except for India which is remaining oddly quiet. The demand is seen largely coming from the wealthy. The Financial Times further stated Saturday that flows into gold exchange traded funds this week reached a record 3.54 million ounces equal to 5% of the global gold mine output. What is most astonishing though, and what should give pause to everyone is a quote Thursday from Bini Smahgi a Board Member of the ECB “There is a risk that the mistrust that there is today in financial markets, in the banking system, is transformed into mistrust in states. That could hobble the ability of some countries to issue debt, which would be a “financial crisis of the state.” He was speaking in regards to the massive debt issuance’s that are coming to market this year across the world. What is surprising though is that he is directly connecting the large increase in debt with loss of faith in the state and by immediate extension with the fiat currencies issued by the states. We expect we will hear more talk of this in the weeks and months ahead.

Looking at the 5 year spot gold chart below we see that gold, after selling off in the fall when funds were liquidating indiscriminately, has rise back up to near its all time highs. The expectation by many is that it will break through them and set new highs in the weeks ahead.

5 Year Spot Gold Price Chart

Looking at CEF, which we own, and GLD, we similar behavior as expected:

CEF: Central Fund of Canada

GLD ETF

Note that the 50 day moving average, the Blue line, on GLD has crossed above the Red 200 day moving average line. This is considered by technical traders to be very bullish. The CEF chart is not quite there but CEF is not a pure gold play but rather a mixed gold-silver play in about an 80/20 proportion. What both charts do tell us is that by all indications we are moving higher.

Now let’s examine the Tocqueville Gold Fund followed by Newmont Mining and Barrick Gold:

Tocqueville Gold Fund

Newmont Mining

Barrick Gold

We see the 50 day moving average of the mining stocks about to cross over their 200 day moving averages which is very bullish. The two mining companies shown here both show price consolidation above their 50 day moving average line. TGLDX, appears to be in catch up mode but it too is rapidly coming up on a cross over point.

What all this means is that we have strong gold market physical buying, increasing concern with fiat currencies now being articulated by senior government officials, commodity and mining charts all of which mutually confirm a bullish interpretation of gold and gold mining stocks and indeed point to an imminent next leg up - likely to new highs. How high do we expect the next increase in gold to take us? We don’t know. Frankly, price targets have never made much sense to us. Rather, we believe that we should continue to monitor the news, and look at the price of spot gold, gold ETFs, and gold mining stocks for confirmation of trend, indications of any divergences and evidence of any impending correction.

US Treasury Bonds:

We discussed the factors that conspired to drive Treasury yields down the first half of the week in an earlier post. Friday saw rates run back up recovering much of their previous move as the dealers who participated so well in the Treasury auction this week found the task of unloading the bonds to their clients somewhat daunting. That is, their clients were not inclined to buy bonds at the lower rates. The market also received a number of signals from he Chinese about the likelihood of future bond sales. We discuss this at length in our new Members Only Post China: Part 2 - Bonds, Dollars, and Inflation”. We urge everyone to read this as the market does not seem to have heard what China was saying this week.

We added to each of PST and TBT early in the week on weakness and were rewarded as seen from the following charts:

PST: 7-10 Year Treasury Bond Leveraged Short ETF

TBT: 20 Year Treasury Bond Leveraged Short ETF

Earlier in the week we stated that we were looking for both products to remain above key support levels - they did. If they can hold those levels this week then we will have put in an important bottom in this region. We expect to see bond rates continue to move up. The fact that the Fed is expanding significantly its program to address the mortgage lending market makes it less likely that they will intervene directly in treasuries. We are also seeing analysts begin to question what a Fed intervention would do to the bond market and come to conclusions in-line with ours as discussed in the Members Only Post: “The Fed and The Bond Market - Will Intervention be Effective?”

We do want to re-emphasize a point we made on Thursday:

>Murdock Global Insight believes that foreign participation in the auction was a gesture of goodwill to lay the groundwork for a dialogue between China and the US on the state of our fiscal position and the stability of the dollar. China stated this week that they were looking for assurances that their large holdings of US Treasuries would not suffer a precipitous drop in value due to our dollar falling. At the same time the ECB raised the concern that investors would lose confidence in government debt. So at the same time that they are buying Treasuries and ensuring that the auction went well, the Chinese are telling us “look, your fiscal policies are going to ruin you. We want to buy your bonds but we can’t increase our buying to support your problem and we can’t take the risk of losing our investment if you devalue”. This should be taken as a good trading partner expressing their concern rather than as a threat. Our economies are linked and reliant on each other.<

US Dollar:

Looking at the chart below of UDN, the US Dollar Bearish ETF:

US Dollar Bearish Fund

We see clear evidence of support in the 24.75 area that has been tested three times and has held. This makes us optimistic that we will finally see the US dollar begin to weaken as we have been expecting. the next two to three weeks should start to tell us with some certainty if we are going to see dollar weakness begin to develop.

Coming Up:

We have published two new Members Only Posts China: Part 1 dealing with how to time the entry point into the Chinese equity market and China: Part 2 dealing with the interaction between China and the US in the areas of bonds, the dollar and inflation.

We will publish an additional new Members Only post this week - but the topic has not been determined.

We recommend the following posts as especially relevant at the moment:

China: Part 2 - Bonds, Dollars, and Inflation”.

“The Fed and The Bond Market - Will Intervention be Effective?”

“The Coming Bond Debacle”

Fundamental Trends

“How a Reserve Currency Collapses”.

“Gold - Reluctantly”

“Why is the Dollar Going Up (and When Will it Stop)”

To view previous Members Only posts simply follow the instructions under the “Become a Member” tab and select the “One Month Free Membership” when you get to the Products page. You must complete the checkout process in order for the Membership to complete. Registration is not sufficient. You are under no obligation to continue beyond the One Month Free Trial and your e-mail and address will not be shared with third parties.

We are entering a critical period of time in the bond and dollar markets staying plugged into what is happening and the likely ramifications is especially important now - stay informed with Murdock Global Insight.

We hold the following positions as of 02/13/2009.
Short Treasury Bonds through PST and TBT*
Long gold and silver bullion through CEF
Long gold mining stocks through TGLDX
Long Agricultural commodities through RJA
Short US dollar through UDN**
Long Australian dollar through FXA**

*ProShares leveraged short ETF. Investors need to understand thoroughly the risks associated with these leveraged products in light of their personal investment needs and risk tolerance. They may not be suitable for all investors.

** Position is currently in loss but we are sticking with it as we believe the fundamentals will drive the dollar substantially lower.