You Gotta Know when to Hold ‘EM
Joseph Story, Commentaries on the Constitution, 1833
"The God who gave us life gave us liberty at the same time; the hand of force may destroy, but cannot disjoin them." --Thomas Jefferson, Rights of British America, 1774
HOW NOW DOW?
"You got to know when to Walk Away."
I have never started with this section before, but "this time it's different." The markets are now more over bought than I can remember. Sentiment is also more bullish than I can remember (a very bearish sign) and just about all technicals and fundamentals are all super bearish. By all rights, we should be in that ultra BULL TRAP that I have been looking for, BUT NOT YET. There is just TOO MUCH MONEY being created around the world and the levels of propaganda spewing forth are putting Hitler's propaganda machine to shame. So it is hard for even me to believe that I am medium term bullish. The market is so technically weak that I am expecting a selloff to begin at any time now. But it will not be THE Selloff that I/we have been expecting. It will only be large enough (5% to 8%) to correct the market's over exuberance, neutralize all the SELL SIGNAL indicators and dramatically increase bearishness, setting the stage for that final explosion to DOW 14,200, which would then definitely set the trigger for the BIGGEST BULL TRAP IN HISTORY. You can play this market to the short side but remember, if you do, use Puts and 10% TRAILING STOPS. Or you can Walk Away; stick to buying gold, silver and their stocks on weakness and wait.
BACK TO THE REAL WORD
The first quarter has been off to the best sustained start ever and yet worldwide, economic health and prospects remains suspect, to put it mildly. European woes not only remain, but are getting worse in the face of a barrage of optimistic propaganda hitting us from all sides. The media, the world's Wall Streets and the political class seems to be united for the first time in history. And yet the woes of each country from the mighty China to the hapless PIIGS of Europe and all the way to the once invincible USA seems to unite them and what makes it astonishing is that their remedies are all speaking with the same voice: INFLATE. The world has finally become united under the SOCIALIST banner.
IS IT NOW TOO LATE to avert the inevitable crash that always follows a BURSTING INFLATIONARY BUBBLE. And to make matters worse, every other bubble pales in comparison to this one AND it is still growing at an expanding rate. Hopeful numbers (fabricated or not) coming out from all corners of the world will not be able to stop the economic decay that will eventually accelerate enough to overshadow any signs of hope. In their minds, in order to avoid an outright economic collapse, the governments of the world (in particular the US & Europe), will once again see no other way except to initiate massive amounts of Quantitative Easing (QE) to solve their problems.
So far, that one paragraph has summed up everything that has happened since the New Year. If all that was not enough, high-frequency traders have caused commodity futures prices as well as stock prices to disconnect from market fundamentals of supply and demand.
While those involved in high frequency trading (HFT) claim that it brings more liquidity and price discovery, it hasn't. As a matter of fact, it's forced retail investors out of the picture due to the volatility it has created.
The United Nations Conference on Trade and Development just published a report that has concluded that HFT's impact on commodity prices has clearly taken away from the fundamentals of supply and demand. Yet there is no sign of an end or even any rational modification to HIGH FREQUENCY TRADING RULES AND REGULATIONS. Let the public be damned: When there is easy profit to be had.
THE MARKET SURPRISES
The major indices reached multi-year highs with the Dow breaking solidly through the 13,000-point barrier, the S&P 500 edging over 1,400, and the NASDAQ Composite plowing past 3,000 all in the same week. The market is now up over 30% from its October 2011 bottoms, reaching 4-year highs. It now has its sights set on the all time high of DJII 14,200, which not if but when achieved will trigger the BUGGEST BULL TRAP of all time and all markets.
THE BIGGEST BEAR TRAPS IN HISTORY
Back in 2008, when the GREAT BEAR Market had barely just begun, I had speculated then, that after this significant 1st stage was completed, the market would rally back and break through to new all time highs (past DJII 14,200) setting off THE BIGGEST BULL TRAP in history with an eventual downside target of 1000.
After being 100% right for 2.5 solid years, I got caught up with the day to day minutia of stats and figures and completely ignored what I had originally expected would happen: A FALSE BREAK OUT TO NEW ALL TIME HIGHS. Well, after a year of trying to tell the market what it must do and having all the facts to back me up, I completely ignored the most important fact of all: The market "Will do whatever it has to do to make the great majority wrong."
IS IT TIME TO TURN BULLISH?
I probably should, but I can't bring myself to do that. WARNING: Should I turn bullish sometime after anything more than an tradable downside correction, that will be the surest sign that the time has finally come to go all out short (LOL).
THE GREAT BOND MARKET BUBBLE
The recent sell off in the bond market may mean that we are most probably at or near the end of the Biggest Bubble (PONZI SCHEME) of all time; the 30-year bond rally. But I don't think that it's ready to break just yet, even though I have been calling for its demise for over a year. Once again, I overrated the world's most prominent economists. I forgot that they are all Socialists who all think that they can make their own laws; and for a time they can, no matter how irrational I think they are. After all, who in their right mind would invest money for 30 years at 2 1/2% a year with stated inflation at 2.5% and real inflation is pushing 10% + ? But once again, one must look at the facts as they are not as they ought to or would like them to be.
Although rates are now bouncing up from historic lows, we will most likely be facing a massive resumption of QE3 or some other acronym that will drive rates back down even if the FED has to buy all new issues of Treasuries that the Treasury must sell in order for the Government to be able to pay its bills.
After all, the Fed and the governments believe that the only thing that can stimulate the economy is easy money, which means lower rates.
The following is an example of the single-minded, bullish propaganda coming out of Washington, so be careful not to get trapped:
"U.S. gross domestic product (GDP) expanded an average 2.4 percent per quarter in the 2 1/2 years since the Recession ended in 2009. While that means the world's largest economy hasn't had a smaller post-recession recovery rate since at least the 1940s, it also means there is room to climb higher when compared to past events. In the 2003 bull market, GDP rose 2.7 percent on average, before the S&P 500 surged 102 percent. In the 1982 rally, the rate was 5.7 percent (on massive tax cuts and under 4.5% unemployment) with equities more than tripling during that cycle."
The fact is that we now have $4/gal gas, soon to be $5, higher and rising taxes, the lowest labor participation rate since the 1940's, a real inflation rate above 10% and a real estate market that has lost over $15 trillion and is still falling. I could go on, but I have listed it all before and there is no point in doing so. The propaganda does not pass the smell test.
LOW AND SHRINKING VOLUME: Does volume always precede price?
One of the biggest concerns scaring professional and public investors alike is the low and shrinking volume of trading (remember the old adage; volume always precedes price). Trading at the New York Stock Exchange declined to the lowest level since 1999 last month, with the average volume over the 50 days ending January 25 slowing to 838.4 million shares. The value of stocks changing hands dropped to $24.9 billion, a 50-day average not seen since at least 2005.
SO WHAT HAS BEEN PUSHING THE MARKET HIGHER?
Right now, the markets are moving primarily because of easy money and lots of it. The world continues to print more money - whether it's a direct infusion of liquidity, operation twist or giving banks money at negative real interest rates. And Bernanke just told us last week and repeated today that interest rates will remain at current low levels until late 2014 and that Operation Twist will continue. That means free money for at least another two years. While he suggests that there is no QE for now, he surely did not say there won't be another one coming. The Fed will continue to play a major role this year.
There is so much newly printed Fiat money flooding into the world and the stock markets, which love that type of liquidity; until of course the INEVITABLE Bubble bursts. Meanwhile, world money supply has soared dramatically over the past two years. Eventually, the piper will need to be paid. In the meantime, this liquidity has been built on a foundation of depreciating currency. (The markets denominated in real money are nowhere near today's stated highs.)
The IMF just said Greece will need more money - even though it just got hundreds of billions recently: Brazil has promised to keep interest rates low for at least another year. Every week, I stress that free money will continue to pour in from all around the world. That includes China that is finally being forced to come to grips with the NATURAL LAWS OF ECONOMICS just as I predicted she would over a year ago.
But do you know how bad this situation really is? We are back in a situation similar to what the Real Estate market was in 2006/07. We must continue to increase the money supply in order to keep the markets(bonds and Stocks) afloat. To exacerbate the situation, in order to make money at rates of 1%, we must leverage investments in order to get a decent return; enough to make the pension and Insurance industries minimums required projections. (Watch out that you don't get caught when the bubble bursts as nature's laws state that it is inevitable).
THE WORLD'S BEST AND WORST EXAMPLE
It took the U.S., the world's largest debtor nation, more than 200 years for its own debt to reach $1 trillion. In the past four years alone, this debt has soared by over $5 trillion to reach a grand total of $15.5 trillion. The U.S. is currently running deficits approaching $2 trillion per year, which means this number will only keep growing. The U.S. has no way to pay this debt off - not without making major cuts that would lead to DEPRESSION and revolt. When you consider that millions of baby boomers are now the fastest growing and largest segment of our economy: Are reaching retirement age and will be drawing on Social Security, the debt levels will continue to grow even faster than they have in the past four years.
If you look at U.S. total debt, the U.S. is now at about a 400% debt to GDP ratio. Morgan Stanley says there's "no historical precedent" for an economy that goes over 250% of its debt to GDP ratio without a crisis and huge galloping inflation.
So when will it become time to pay the piper? When will this all come crumbling down? I don't know. For now, politicians will continue to do what they're doing. They'll continue to patch things up by printing more money to pay for expenses, including paying the interest on their loans. They'll continue to sell their debt to any nation that can afford and is stupid enough to buy it. But mostly they will be monetizing their own Debt.
Most people think that China is the number one holder of U.S. debt and Japan number two. Those people are wrong. The number one spot belongs to the FED - by more than half a trillion dollars and growing daily. In the long run, all of this money printing and cheap money will devalue the dollar against all other currencies - BUT especially against the purchasing power of gold.
While gold and silver have recently experienced a selloff, It undoubtly represents the last and best GOLD buying opportunities. In the big scheme of things; I am sticking with my prediction that gold will be above $2500 and silver above $50 before the year is over.
People can only bury their heads in the sand for so long before they get KICKED IN THE ASS. Take every opportunity that comes up to protect your wealth.
"YOU GOT TO KNOW WHEN TO HOLD THEM"
STEEP FALL IN GOLD PRICES TRIGGER HEAVY BUYING BY CENTRAL BANKS (read Asian Banks, especially China and all other Central Banks whose countries have balance of payment surpluses.) Gold is ready to set a new record high this year based initially on central bank buying: But once retail buying comes in as new highs are reached, watch out above.
The flight to safe haven gold has slowed in recent months due to the perception that the worst of the Euro zone debt crisis is over and that the US economy is recovering. But that is all not much more than wishful thinking; Greece the smallest of the PIIGS and their problems are still far from over - in fact they are just beginning. Which of the PIIGS will succumb next? And instead of speculating if QE3 will be resumed, consider that the US still cannot pay its bills without continuing to print money on a daily basis and must continue to support the Bond Market through what they are calling TWIST to avoid a Bond Market crash, which that too must come sooner than anyone now expects.
Weak speculative hands have been washed out of the gold and Silver stocks and many smaller retail investors have also sold bullion recently due to the widespread concern that gold is overvalued and in a bubble: But that is what should have been expected as weak hands are always pushed out before the big explosion takes place for gold or anything else.
Jewelers in India are protesting the tax hike on gold imports and plan to keep their shops closed for two more days. This is India's first nationwide strike in seven years and shows how important the gold industry is in India. The excise duty hike is expected to lead to less demand for the time being; however Indian demand will again prove to be robust despite tax and price increases. After all, gold is still a Superior GOOD (defined as a good whose demand rises as its price rises.)
SPDR Gold Trust, the world's largest gold-backed ETF, said its gold holdings remained unchanged at 1,293.268 metric tons for the 5th straight session despite the drop in prices last month. "Gold will have a 'sharp' rally as the US boosts monetary stimulus because of a faltering economy in the coming months" Societe Generale, reported by Bloomberg.
Data on U.S. GDP revised for the first and second quarters should "surprise dramatically to the downside," Meanwhile, ANZ has said that central bank gold buying may lead to at least nominal gold record price in 2012. "Retail investors will continue to seek protection from the longer-term bearish outlook for the dollar and insulate themselves from the risks posed by falling negative real interest rates and the continuing Real Estate crisis in Europe and spreading around the world including China,"
(Bloomberg) -- Silver to Outperform gold for most of 2nd half.
An improving economic outlook means silver may outperform gold for most of the second half of this year and in 2013: BNP Paribas SA said today in an e-mailed report. The bank maintained its gold forecasts for this year and next, and reduced its 2013 estimate for silver to $51 an ounce. It raised its 2012 platinum forecast to $1,840 an ounce and cut its palladium estimate for this year to $825 an ounce.
THE BERNANKE FACTOR
The metals fell after Chairman Bernanke, announced a positive outlook on the U.S. economy. But the Fed also reaffirmed it would hold interest rates near zero through 2014, but failed to clearly mention any more means of stimulus.
"This temporary manipulated drop in price, should once again be treated as a GOLDEN opportunity to buy, or if you already own some but feel you don't own enough, to accumulate," said Money Morning commodities and mining expert Peter Krauth. "These two precious metals remain in a secular bull market and should be integral to every investor's portfolio."
THE BERNANKE EFFECT ON GOLD & SILVER PRICES
After the Fed announcement, gold for April delivery fell $51.30 or 3%, to finish at $1,642.90 an ounce. May silver slumped $1.40 or 4.2%, to $32.18 an ounce. The same price action happened February 29 when Bernanke told Congress that he expects U.S. economic growth this year to match or outpace the second half of 2011. That day, spot gold plummeted $77.10 or 4.3% an ounce. Silver for March delivery took a similar tumble, sliding 6.9% to $34.58 an ounce. But instead of precipitating a prolonged selloff Gold and Silver probably just set their bottom.
As Once again The Fed appears to be taking advantage of the little guys causing inflation-hedging investors to retreat from metals and giving the bigger more savvy investors an opportunity to buy cheap. But there are still plenty of investors who have continued to bet on a bullish metals market as $2.2 billion has poured into the SPDR Gold Trust ETF (NYSE: GLD)
HAVE YOU ALL NOT NOTICED THAT BOTH SOROS AND PAULSON HAVE RE-ESTABLISHED THEIR HUGE GOLD POSITIONS? Paulson's holdings in GLD make his firm the biggest stakeholder in this ETF, with a position currently valued at $2.9 billion. And recent filings showed that another legendary hedge-fund investor, George Soros, has recently doubled his stake in GLD to 85,450 shares.
"None of the super Bullish Fundamentals supporting gold have disappeared. Instead, they've only become stronger and even more entrenched and enticeing" Gold finished its 11th straight year of gains in 2011, and should keep going in 2012 and all the way to 2017.
1) Optimism/pessimism---when Greece was all over the news and the news was gloomy, government bonds were soaring. Pessimism was rampant and the DJII was falling. Now that the DJII is up, optimism is in the air and the news is that the markets will keep rising, the economy is getting stronger and government bonds are recovering. We are now told that Greece was a non event: AMAZING HOW the PSYCHOLOGY HAS reversed so quickly? But that is only sentiment NOT FACT
2) We all know that the BEST time for shorting is when optimism is very high and there is a clear right shoulder of a head and shoulders pattern AND the 50 day moving average is starting to turn down.
BUT, WHAT ABOUT A HEAD AND SHOULDERS BOTTOM ??? WHEN WOULD BE THE RIGHT TIME TO BUY ??? The opposite of the top would be when there is an upside down H & S BOTTOM PATTERN with A RIGHT SHOULDER complete AND THE 50 DAY AVERAGE IS RISING. Look at the charts of gold, silver, SLW, CDE, AXU etc. - all are doing that very thing. as the news about gold/silver is as bearish as the DJII was last November when it was making a similar pattern? Last November, the stochastics on the DJII were about as oversold as they are for gold/silver and the PM stocks are now: SO, IS THE 'BIG" TEST TIME NEARBY? WILL THE GOLD/SILVER STOCKS completion of their RIGHT SHOLDER in conjunction with a rising 50 day average be the sign that marks the beginning of the PM's UPSIDE EXPLOSION? I could go on; there is more a lot more, but if you are not convinced by now then there is nothing more for me to say: Read my last few submissions.
MY SELECTION OF BUYS WILL be sent to all paid-up subscribers NEXT WEEK
GOOD LUCK AND GOD BLESS
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Aubie Baltin CFA, CTA, CFP, PhD.
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