Rick Ackerman's 'Golden Pivots'
"Six hours ahead of its time…"
Hi-Ho, Silver, Awaaayyyy!
TRADING NOTES: Several silver stocks debut in the newsletter today, and although I'm not sure which will be keepers, I plan to add at least one or two to the core list. In percentage terms silver has outperformed gold in the last few months, rallying spectacularly since early November. During that time, with gold futures rising about 13 percent, the March silver futures contract surged from around 5.00/oz to a multiyear high on Tuesday of 6.47 -- a gain of nearly 30 percent. This impressive burst helped trigger a commensurately explosive move in (among others) Coeur d'Alene [CDE], a miner with significant silver interests that has appeared in my short list before. The other silver stocks that I've added below are in the throes of equally impressive rallies: SRLM, which shot up from 6.65 to 13.20 since Christmas; Pan American Silver [PAAS], which rose 36% during the same period, to a recent high of 16.44; and Silver Standard Resources, whose two-week gains approached 40%.
I'm convinced that both silver and gold will far outperform nearly all other investibles over the next few years. I should confess that my last experience holding silver for speculation (in the 1980s) was chastening, although, unlike Bunkie Hunt, I didn't have to sell my Rolex at the bottom. But I did haul two bags of junk silver back to the San Francisco dealer who'd sold them to me a few years earlier for more than three times the price he paid to get them back. I was hard-pressed to raise cash at the time, so the Krugerrands, too, came out of the safe deposit box, and a few weeks later I parted with a cherry Alfa Romeo and ten-year-old whole-life policy. That was low ebb for me financially, but I somehow managed to hold onto some beautiful St. Gaudens gold pieces, a few platinum commemoratives and some rare silver coins. They are in safekeeping for my two sons, who might otherwise trade them away for a few M-rated Playstation titles, a Zippo lighter, or an afternoon at Dave & Buster's.
Are Non-Gold bugs Insane!?
My boys have neither knowledge nor fear of the dollar's steady decline, a phenomenon which is beginning to call into question the very sanity of the tens of millions of investors who yet remain more or less oblivious to bullion's urgent appeal. Surely not among them are the Chinese, Japanese, Indians, Russians and Arabs, all of whom have especially good reasons to worry about the health of the dollar. Meanwhile, it should be clear to everyone by now that there is sufficient buying interest globally to prevent the price of gold or silver from correcting much or for long. Sometime in 2006 or '07, when the POG is in the manic stage of its rise to who-knows-how-high, pullbacks of $100 in a single day will not be that unusual. But for the time being, corrections will remain just shallow enough to leave would-be buyers who are unwilling to pay up empty-handed.
Concerning the greenback, the bad news is that the Dollar Index, now at 86, looks like it will fall to at least 81 (a hidden pivot) before it can gain traction. That would represent a 33% decline from the 120 peak registered in early 2002. The even worse news is that 81 is extremely unlikely to be a bear market bottom. My reasoning is that, somewhere not too far down the road, the oil producing nations are going to jettison the petrodollar standard. After all, why should they continue to accept payment in a currency whose value is plummeting? When the announcement comes, as it almost surely will, you do not want to be long dollar assets or short gold.
A Savvy Take on Dollar
For now, though, you could be pardoned for wondering what is preventing the dollar from wholesale collapse. The following, a chat-group snippet sent to me by my Denver bond-whiz friend Dave K., hits it right on the nose, I think:
"This should give us some rough idea of why the US markets are holding up so well. Japan is flooding the Fed's custodial accounts with liquidity, and the NY Fed in turn is applying the money to the marketplace as Bernanke had said they would do in his speech of January 3, Conducting Monetary Policy at Very Low Short-Term Interest Rates."
Given these risks, policy makers are well advised to act preemptively and aggressively to avoid facing the complications raised by the zero lower bound.
"The money does not show up in the M's because it is applied directly to debt instruments and is showing up as financial asset inflation. You would think this would eventually show up in the economy, but the 'stimulus' does not seem to be flowing into the productive sectors of the economy with the normal multipliers. As to why, this I can only surmise, but I suspect only a portion of it does, and it is not enough to offset the precipitous decrease in mortgage refinancing activity."
No Perfect Substitutes
In simple terms, if the liquidity or risk characteristics of securities differ, so that investors do not treat all securities as perfect substitutes, then changes in relative demands by a large purchaser have the potential to alter relative security prices. (The same logic might lead the central bank to consider purchasing assets other than Treasury securities, such as corporate bonds or stocks or foreign government bonds. The Federal Reserve is currently authorized to purchase some foreign government bonds but not most private-sector assets, such as corporate bonds or stocks.)
"I wonder if it is only being applied to Treasuries. Does the Fed feel limited in what it buys when it is acting for another Central Bank and for their 'custodial accounts?' Given the aggressive expansion of the Fed's charter which we have seen in the Greenspan chairmanship I can easily imagine that they would not, since they are only acting on the behalf of another organization which is not covered by the Federal Reserve Act, and not for their own accounts. It is similar to the mechanism by which Robert Rubin justified the use of the ESF to bail out Mexico in the 1990's. We have seen enough comments and paper trail to be less skeptical perhaps than we might have in other days.
"The last sentence in this article intrigues me. '...the ministry has arranged a repo deal with the Bank of Japan in which it can get funds by selling foreign bonds to the central bank, buying the paper back at a later date.' I wonder if the US Treasury can sell its wares to the Japanese Ministry of Finance, which in turn repos them to the BOJ, and then places the money into its custodial account at the Fed for market intervention in dollar assets? That truly would be a 'money printing' machine."
***
[The + symbol means we have an open position, while $ means there is actionable advice.]
MARCH DOW MINI (10517): The futures surpassed an important hidden-pivot resistance at 10522 yesterday, though only by six points. That is nonetheless sufficient to tip me bullish as the day begins, but any longs held on your initiative should be tied to tight stops until 10522 has been exceeded on a closing basis for two consecutive days. That would imply further upside, to a minimum 10808. Alternatively, as noted here earlier, it would take a precipitous decline to beneath the 9451 low made on October 19 to create a major bearish "impulse leg" with the potential to kill the now 15-month-old secular-bear correction.
$ MARCH S&P MINI (1107.50): Yesterday's intraday peak was almost precisely coincident with a hidden pivot at 1126.60, so I'll be neutral on this vehicle at the opening bell. If it heads higher, though, the first place to look for resistance is a hidden pivot at 1129.00 and the second is at 1134.75. The higher number is the better place to attempt shorting, but if you do, use an initial stop-loss at 1135.25 (!). You'll be on your own thereafter.
MARCH BONDS (109^27): The bonds have been trading in a 5-point range for four months, so there's no telling exactly when they will exit that range. My bias is bearish, however, since they breached a support at 107^11 that was noted here on Monday. If the futures do head lower, closing beneath 107^11, I'd infer they're on their way down to at least 102^19, an important hidden pivot. Any further slippage would grease the skids to as low as - better sit down for this - 94^12!
$ FEB COMEX GOLD (422.30): There's a mango-ripe hidden pivot at 418.60 where we can attempt to bottom fish with a tiny stop-loss. Bid 418.70 for a single contract, stop 417.90. Make the order good until the final hour, and use a 1.30-point trailing stop if the expected bounce carries above 422.00. Target: 429.40.
MARCH NQ Mini (1517.00): A two-day rally has carried the futures a tad higher than the 1512.50 peak we'd anticipated, strongly implying there is further upside to come. I have no precise target to offer you today, only a minor pivot at 1521.50 that would be easily breached if there's any buying interest whatsoever on the opening bell.
HUI (242.37): Not much to offer you today - only a dicey hidden-pivot support at 239.01 whose value to us in any case would be diminished by its close proximity to the whole number 239.00.
***
+ GG (15.79): The 15.54 bid I advised for 200 shares was intended as a day order, but because I didn't specify it we'll add the shares to our position. We now hold 600 shares with an average cost of 10.59. Do nothing further for now. My target over the next 5-7 weeks is 20.34, a hidden pivot discernible on the very long-term charts.
+ HL (8.48): We hold sixteen June 7.50 calls with a cost basis of 1.60. The Jan 10 calls that we've been trying to short against them barely blipped on the last rally (which peaked 11 cents beneath my target), so we'll put the strategy aside for now and work on shorting some February premium during the next rally cycle.
$ + RANGY (16.40): We hold 600 shares with a cost basis of $11. A targeting change is necessary, as follows: If and when the stock closes above a hidden pivot at 17.76, it'll become an odds-on bet to reach a minimum 19.90 before exhausting the minor bullish cycle. We'll prepare by offering 200 shares at 17.73, g-t-c.
+ RGLD (20.25): No change. We hold 300 shares with a cost basis of $8.84 per. The stock has been rangebound between 20 and 22 for a while, but a breakout will put it on course to reach a minimum 24.65. We can be confident the move is under way when Royal closes above a hidden pivot at 22.02 for two consecutive days, or when it trades above 22.37 intraday.
$ + DROOY (3.63): We hold 200 shares for 2.54. I've projected a minimum 6.89 for the booster stage of DROOY's still-adolescent bull market, but more immediately we will want to catch a ride to 4.34, a lesser hidden pivot. The trigger price is 3.72, so let's bid there in the first hour with a 3.73 buy-stop limit.
+ PMU (1.19) No change. We hold 400 shares for an average 1.16. The pullback from early December's spiky high at 1.85 has been nasty, but keep in mind that the next big rally cycle is going to take us up to at least 2.44, a hidden pivot. We should assume the move is under way when the stock closes above 1.70, or prints higher than 1.76 intraday.
$ + WHT (3.00): We hold 200 shares for 2.81. There's a hidden-pivot support at 2.89, so let's bid 2.90 once again, day order, for 200 more shares in case the stock pulls back. I expect the next big surge to reach a minimum 3.75. The rally to that target has already been affirmed by Wheaton's recent upward penetration of a lesser hidden-pivot resistance at 3.08.
VGZ (4.69): Vista has moved away from our stingy bid, so let's cancel it until the stock creates a new price pattern that will give us another low-risk entry spot. My big-picture analysis was given earlier as follows: The stock's failure in January to exceed the September 2002 high at 6.20 put it on the slow track to recovery. A sign that such a recovery is under way was Vista's recent, bullish "impulse leg" culminating in a 5.27 peak. The rally leg exceeded two prior tops, including the one at 4.99 made in early February. This changed the intermediate trend to bullish, although Vista would still need to hit 6.21 to swing the long-term indicators into synchronously bullish gear.
$ SSRI (12.15): The fact that Silver Standard Resources did not even pause at 12.54, a tough-looking hidden pivot, implies that it is bound for a minimum 15.79 in this rally cycle. We hold no official position because the stock is new to the list, but if you've got one of your own, I'd suggest scaling out 50-60 percent of it between 13.25 and 15.79.
SRLM (12.40): Like Silver Standard Resources, SLRM blew past a formidable hidden pivot (at 12.72) with such ease that we must presume that still higher prices lie ahead. If correct, my minimum projection is 14.50. If you hold a long position, plan on scaling out 50-70 percent of it between around 13.50 and the target.
PAAS (14.54): The highest hidden-pivot target I could have projected for this stock a week ago would have been 16.02, but since it's already been as high as 16.44, there must be bullish forces at work that I am not able to discernible on the long-term charts. However, using a hidden pivot that comes from a somewhat nebulous low made back in 2001, I am able to project a possible second-wind rally to as high as 17.52. Clearly, any success we will have in trading this stock would have to come from patterns evident on the intraday charts. Stay tuned.
CDE (5.90): Coeur d'Alene topped just 3 cents beneath the 6.86 rally target I'd furnished, making it possible for anyone with a position held on his or her initiative to exit in timely fashion. As implied here earlier, if the stock gets above 6.86, it will likely be bound for a minimum 7.17. As a practical matter this target is not safely tradable based on day-in-advance advice.
***
Rick Ackerman's Golden Pivots is published on weekdays, 180 times (or so) a year. It is currently available without charge at www.321gold.com, www.goldseek.com and, sometimes, at www.kitco.com and www.gold-eagle.com. Since the letter is free, you are encouraged to reproduce and redistribute it in any damned way you please. All information was gathered from sources believed to be reliable, but no guarantee as to its accuracy is made. The risk of loss in futures, stocks or options can be substantial; therefore only genuine risk funds should be used for trading. Futures, stocks and options may not be a suitable investment for all individuals, and individuals should therefore carefully consider their financial condition in deciding whether to trade. Commodity option traders should be aware that the assignment of a short position will result in a futures position. Past profits are not indicative of future profits.
8 January 2004
Email this Article to a Friend 
Printer Friendly Version