This is a remarkable chart and, with 20/20 hindsight, it appears clear natural gas was on its way up after breaking out of a trading range and violating the 20-day and 40-day averages. Yet, the age of electronic pictorials represents a trap. At first glimpse, one might assume the ride from the December breakout was smooth. One might easily have held the position as profits accrued. The true volatility is not properly represented by an arithmetic representation because the scale does not reflect daily exposure.

As I mentioned to one subscriber, "Natural gas has become untradable." This condition is, by no means, unique to energy contracts. Recently, stocks have taken on the characteristics of a ping-pong match.

Chartists who claim to have identified a "head and shoulders" formation feel vindicated as the cash Dow Jones Index failed to top 9000 resistance established last August. While not symmetrical, there is powerful evidence that I identified showing uncertainty would likely keep the Dow between 8000 support and 9000 resistance.

For some traders, this accurate revelation provides little comfort when considering the ramification a 1,000-point swing in the Dow Jones futures contract. If you could not afford to be in, there no sense fretting about lost opportunities. Obviously, investors want to know, "What's next?" If I knew with certainty, Bill Gates would be second fiddle in this year's upcoming edition of Fortune featuring the popular Fortune 500. On the other hand, I did predict the Dow Jones Index would challenge 7200 with success and warned that a new bust coupled with the threat of war with Iraq could drop the Index below 7,000. This is viewed as a critical potential since it would raise the evaporated wealth figure beyond $8 trillion by some aggressive estimates...assuming there were no counter balancing from a rising index. Consider the S&P 500.

For all intent and purpose, it is a clone of the Dow on a different scale. This means the malaise is broad based and a contradictory trend is not on the immediate horizon.

In the meantime, 10-year notes managed to pop above 115-15 resistance after my previously mentioned trading range opportunity. We were able to collect a handsome premium from notes ad bonds by selling the short strangles. Unfortunately, the ranges drifted higher. Still, it is the correct strategy for current conditions with the obvious exception of natural gas and stocks.

Whether you're a Fox News junky, CNN addict, CNBC devotee, or dedicated to conventional network news hours, the stories are the same. From conservative to liberal, the war is the focus.

By concentrating upon the latest bomb discovery or Blix proposal, the media has become a distraction rather than enhancement for those who truly want to know the eco-political situation facing the U.S. and global community. I am amused by our professed anger at the French, Russians, and Germans for their reluctance to support our military press for regime change. How much historical analysis goes into these programs relative to current political stance? I have seen very little.

For more than three decades, Saddam and his neighbors have provided oil to France and Germany. In fact, there are several documented deals between France and Iraq as well as support programs between France and Libya. Lest we forget, Israel destroyed a French-built nuclear reactor two decades ago to the outward dismay of the world community. Were it not for that attack and other disruptions in French-led or German designed weapons programs, we would face a very different and more formidable Middle East today.

For the U.S., the statistics speak for themselves. Liberals and/or anti-war advocates are simply wrong when claiming Bush is in it for the oil. To the contrary, providing Saddam relief from U.N. sanctions would drop the oil price and help our recovery. France, however, relies upon the trickle of Iraqi oil. Saddam's threat to use a scorched earth strategy could throw France into an energy quandary.

Examine tanker shipping schedules that are publicly available and you can glimpse at the Middle East oil traffic more realistically. The U.S. receives its bulk from South America, Mexico, domestically, and from Canada. The new "hippies" are absolutely correct in asserting that a U.S. preference for new 50mpg electro/gas hybrids could make us energy independent. OPEC would fade into a relic an U.S. oil companies would seek unrelated diversification to survive. Don't believe me? Do your own research on the Web!

Last week I discussed the possibility for a "war rally." The market is too concerned with the type of war to rally on the possibility. The new barometer is gold and the reaction should encourage paper investors that hard assets have lost momentum.

The chart seems true to form with a continuation flag that points top a test of 342 support. Thereafter, a bust below this level potentially returns gold to the extended trading range seen from June through December's breakout, These prices remain well above prior lows below $300. This means that gold producers who lifted hedges are still going to make additional profits and turn in more powerful 2003 performances.

It is unusual for gold to falter as interest rates decline because the "opportunity cost" of owning a non-interest bearing asset like metal is almost zero. In the past, gold and silver reacted favorable when interest rates declined in conjunction with stocks. What has changed is the lack of familiarity with old rules. You need to be fifty or more to intelligently recall the formation of our modern gold market, i.e., when it was legalized in the U.S. in 1975.

In comparison, we see the Dollar Index has declined in a manner reflective of gold's rise. This supports the theory that gold is a proxy for dollar purchasing parity. If this relationship holds, the rounded top is more indicative of a new decline in dollar parity and contradicts the more pessimistic picture panted by the April gold chart.

A new breach of 99 support points to a test in the 80 area. In turn, gold should rally to tease $400. This is based upon logic. Logic does not always prevail. In an instant, some event can change our stance and plunge us into military conflict or surprise us with a compromise.

February 27, 2003

Philip Gotthelf
Commodity Futures Forecast
P.O. Box 566, Closter, New Jersey
201-784-1235
www.commodex.com

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