Leibovit On Gold, Metals & T-Bonds
Mark Leibovit
May 24, 2009
GOLD and METALS - ACTION ALERT
Precious metals surged as the US Dollar fell again Friday (05/22/09) and a decline in both stocks and bonds drove speculators to the safety of gold. Gold gained 16.70 to 953.90. Silver rose 0.30 to 14.55, just shy of its February 23 high of 14.66. Platinum was up 4 to 1147. Industrial metals though got hit with copper down 0.055 to 2.0510.
Short-term resistance lies at 956-960 followed by 977-980 and then 1007. We are seeing pullback numbers in the XAU, HUI(e.g., 359.00) and individual issues which could precipitate a retracement either today or following the long holiday weekend.
The overall cyclical picture is quite bullish with the exception of possible weakness into summer. The problem is that too many expect weakness into the summer and contrary thinking suggests just the opposite could occur. Whether that pattern will be ignored this go around is anyone's guess. Surprises are to the upside and if we're mirroring the '1979' pattern, we could be looking at 12-18 months of explosive upside action ahead.
My intermediate target for Gold is 1200 and my big picture target is for 3000. We could go even higher, but if we think in terms of a 20-year up cycle, i.e., into 2020 there is plenty of time to see this unfold and I'm sure we're going to have to trade it (both long and short) along the way. With gold currently just above 900, it would be nice to see gold stay above 900 and make an assault at the 1000 level and the recent high of 1007.7 and the old high of 1037. My view is that 1000 will become the new FLOOR for Gold just as 1000 became the new FLOOR for the Dow Industrials when it broke through to the upside back in 1982.
We hold Gold as a safe-haven asset, a portfolio diversifier, to protest against inflation and deflation, and, most importantly, to protect against the debasement of our currency and all currencies (fiat money) will lead to their demise. This is why you own Gold. You also own Gold as the 'tea parties' in our country are a warning of more trouble ahead both in terms of a financial crisis but also in terms of impending social unrest. During the 1930s during deflation, gold shares were star performers as the cost of mining gold sank. Silver should outperform during an inflationary period, however.
Silver (spot) touched 14.66 on February 22 while the SLV (ETF) touched 14.45. Silver has now fallen to a low of 11.89. Next support is 1154-1189, 1061-1085 and 961-980. There are still unfulfilled potential into the 16.00-18.00 range on its way to new highs above 21.00.
Copper hit a recovery high of 2.234 on April 15. After that, the 'next' upside target for copper is 2.35+ followed by a potential target of 2.75. The bear market low at 1.26 was posted back on December 16. Copper stockpiling by a secretive Chinese state organization has helped trigger an impressive 35% for the red-metal this year.
BONDS - ACTION ALERT
Treasuries fell sharply yesterday, despite the stock market decline, after the Fed bought a smaller percentage of Treasury debt offered than in the past and announced more than $100 billion worth of new issuance headed to market. The long bond future dropped 2 8/64 to 120 21/64.
The Fed bought $7.398 billion in Treasurys on Thursday. Dealers submitted $45.694 billion in debt maturing from 2013 to 2016 to be bought, by far the most ever tendered for operations of any maturity range. The last time the Fed bought from this segment, on April 27, it purchased $7.025 billion, of about $23.4 billion offered.
The Treasury will auction $40 billion in 2-year notes, $35 billion in 5-year notes, and $26 billion in 7-year notes next week. The $101 billion was slightly less than what some economists had predicted, but serves as a reminder of the volume of debt in the pipeline.
With Treasuries down, yields are pushing up against the highs again. The 30-year yield is up to 4.313%, just shy of the May 8 high of 4.386%. The 10-year yield is up to 3.353%, just shy of its 3.387% high. I continue to be a long term bear on Treasuries in the face of record US budget deficits and an unprecedented monetary expansion that will likely lead to price inflation if and when the economy recovers.
The TED spread, one of the most popular barometers for the credit crunch among money managers, has fallen to July 2007 levels, a sign that one of the underlying triggers for the bear market has dissipated. The gap between the 3-month Treasury bill rate and 3-month Libor fell to 48 basis points Thursday, down from more than 450 basis points at the peak of credit panic in October and near its long-term average of about 50 basis points.
The trend here is clearly down, as I have been writing about for months. The Fed announcement of its buying Treasuries merely delayed the inevitable decline in Treasury bond prices, proving yet again that nobody, not even the world's most powerful government, can permanently affect the markets. If bonds mean to go down, they will go down! There are two old markets clichés that go together: "Don't fight the Fed" and "Don't fight the trend." In the short term, the Fed is king, as we saw when bonds shot higher on the Treasury purchase announcement. But in the long run, you want to trade with the trend instead of the Fed because the trend will always win.
Bonds broke to new lows on May 7 with the TLT (the long ETF for Treasury bonds) touching 94.33 accompanied by a Volume Reversal (tm). Again, I'm going to use my favorite expression - 'there is something rotten in Denmark'. Bernanke has told us the Fed is willing, ready and able to purchase $300 billion in bonds. That statement drove bonds to new highs back in December in a classic blow-off where TLT touched 123.15. The sell-off in the bonds is not only telling us that interest rates are going higher which will kill any economic recovery along with any hope the real estate will recover. Folks, is this bullish for the stock market? Those who are counting that 'generational lows' are behind us are making a giant leap of faith that higher interest rates will not interfere with the economy. That won't happen.
But, who is selling the bonds? And, if the Fed's buying cannot stabilize this market are our 'friends' in the Far East finally have had enough of our economic policies that they have decided to sell their bonds? Can the Fed just continue to run the printing press and buy up all the bonds the Far East is selling? Sure, it could, but any government that prints more and more money to buy up its own debt is setting up for a collapse of the currency and possibly the country as well. We all know the government has gone mad and, frankly, was crazy to begin with. Cooperating with financial institutions that 'threatened' fiscal Armageddon if they weren't bailed out was one of many signs the fox was watching the chicken house.
A declining bond market is the last thing this country (and the world) needs at this moment in time, but it was inevitable as spending and bailout money went over the top in terms of rational fiscal and monetary policy. Hold on to your gold and other tangible assets folks and use any contrived weakness to add to your positions. The party has even got started yet. Bonds chart:
While the Fed said it will buy $300 billion worth of Treasury bonds, that number is dwarfed by the $2.7 trillion and $4.2 trillion in bonds the Treasury expects to issue over the next two years. According to a Goldman Sachs estimate, the U.S. will need to borrow $3.25 trillion for the fiscal year ending Sept. 30.
Mark Leibovit
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