Commodity buy time

Things seem to have clarified. The violent moves of a week ago have reached their extent, stabilised, begun to move back. I think that medium term bottoms are in for gold and silver, time to bet on them going up, this may be the last good chance.

Oil and gas are less certain. I expect natural gas to be a more positive trade over the next 6 months but there will be more money to be made on oil if you get the ups and downs right. Oil is about $70 now and really resists temporarily falling more than a $couple below that. I think there is almost no chance of oil (WTIC next month) dropping below $65 before hurricane season end, I expect moments of $85 and if anything untoward happens $95 or more are very likely. Buy oil at $70, chicken out at $65 if nervous, sell on fast peaks to $85 cos TPTB will be against you (there was sign of this at the Katrina peak).

US$ is failing its bounceback around the 86% USDX level. This is ominous. Several people I respect are saying there will be a significant uptrend in $ about now with 90% and 92% in view, it doesn't feel so to me. I think a lot has to go right for $ to hold at or above 85%; breaks to 82%, 80%, 78% beckon IMO. What happens on this is probably most critical in determining the general shape of what happens. TICS data was $ bad this week, will lurk as a nasty smell for a while, if next month TICS is as bad expect a significant $ downturn.

Stocks looked over a precipice, turned round and ran to the nearest Fed beer pub. I can still imagine brief new highs but they would be artificial. If you are going to gamble I would say be prepared for highs of about 11,800 on DJIA and 1325 on S&P500 but bet for the downside and sell HARD if they make those artificial highs ;)

Gold and silver look good up bets now. I think some of the softs do too, I would go for coffee and wheat. Buying oil below $70 (WTIC) looks a good move.

These forecasts are invalidated by a US$ move to 92% of its USDX index, gold to below $525, silver below $8. This is not investment advice, if you listen to me it's your choice / problem / fault. I can't help it if I am wrong, or right ;)

That was quick!

When I started writing my previous piece "Wither..." a mere week ago I did not expect things to move quite so fast as they have. Inflation paranoia seems to be in early pandemic mode and causing mild panic effects.

We got the US$ bounce; further gold, metal and some commodity price weakness; significant stock weakness - except in US where the weakness is still mild. Looking at the numbers...

The US$ index is approx 86.5%, 1.2550 vs Euro, 115 vs Yen. Could go a little higher before it must make a choice to bounce maybe 5% higher or drop back by perhaps 5%. As a betting man I would just go for the 5% higher, if only because the consequences of 5% lower now ripple quite scarily.

Gold and metals - no messing about, gold and silver jumped straight to the critical lows (gold to near $560, silver below $10 - almost touched $9.50). If these give way expect a further 10% to 20% fall. If you spot the bottom and invest near it you will profit handsomely, it might have happened today or could be as much as 3 months away (highly unlikely to be longer ahead). Copper is a risky trade, a significant economic slowdown could halve and more its price in weeks but it could equally add 10% in a day or two due to labour dispute or increased chinese growth.

Oil is almost on the sidelines for a change. A relief pull back due to Alberto - first Atlantic storm of the season - having no oil / gas impact, and adjustment due to minor $ bounce, explain the WTIC price drop to about $68.50. It would be below $60 if following the gold and metals pull back.

Stocks. They have gone down significantly - 10% and more from recent peaks - but probably have a long way further down to go. Check out what's happened to stock markets in mid-east and asia, not pretty; US, UK and european markets are actually holding up quite well. On US markets: S&P500 broke through and closed below several important technical levels today, closing at 1223 - it needs to claw back to close above 1235 this week else 1160 and possibly lower will soon be seen. DJIA action was very interesting today, the first time below 10,750 for almost 6 months, closing near the day's low after a 100 point decline in last 30 minutes. There has been that pattern of a late in day sell off into a mid afternoon mini-rally recently, is it traders taking advantage of intervention?

Where now?

Could be things will pause for a while - even weeks ?!! - before choosing, but slight rebounds on stocks and metals are a pre-requisite for that luxury. When events find themselves on the brink of a precipice they either pause, plunge on, or runaway, perhaps that will be decided tomorrow, Wednesday, when the CPI data emoerges.

I expect the next serious moves up for silver and gold to be 50% increases and more from current prices but there could be a further 10% to 20% fall before that. I'm no expert market timer so seek those out for spotting the turn. US Stocks are equally critically poised, if they can't manage a bounce and hold of about 0.5% this week they could lose 5% to 10% and it could happen in less than a handful of days. Oil is more dependent on weather, US demand destruction, Iran nonsense etc. My personal guess is things will get surprisingly boring for the next 1 to 2 weeks, then something will trigger a breakdown in the quiet, whereupon US$ goes down, gold etc go up, stocks go significantly down, all quite fast.

Wither now for the markets?

(These comments were written on 6th to 9th June 2006)

Things feel positioned such that large change could happen fast. The equilibrium is fragile. Geopolitics are mostly behaving for now so I will focus on the US markets.

These have been a bit odd with stocks, commodities, bonds, currencies, moving in somewhat counter-intuitive ways in recent months. One would normally expect gold to go up when the US$ goes down, etc, but such 'normal' relationships have been at best unreliable, at times perverse, lately. I have the feeling that the reliability is creeping back in to those normal market relationships, the next Fed interest rate decision at the end of June will be particularly important in setting the tone. Reality is that the Fed MUST increase rates then - now that the majority expectation is that - to do otherwise would be admission that the US economy is too weak to take it.

US$ - about a month back it rapidly lost around 5% of its (DX) index value and has been in a narrow range between 84% and 85% of that index since. The question here is will it bounce back to perhaps 87% before declining to near 80% or miss the bounce phase.

Gold - has it retraced enough to build its strength for the next bull phase (price increase)? From the recent $720 peak it's back to $620-ish. Pragmatically I'd say: if the US$ bounces then gold has scope for more downside ($600, $560) but if you plan to buy gold for the medium to long term now is probably a good time to commit half your money, it should hit $1400 within 2 years. Silver too, it's below $12 now, it won't get much cheaper, could get much more expensive ($40 to $100). There is scope for a further 10% downside correction in next month or so and 100%+ increase in both gold and silver within a couple of years, buying opportunities (that is, moments of low price) will be limited, this may be the best chance you see.

Oil - currently about $71, declines much below $70 seem unlikely - the current trading range seems to be $70 to $75, moves below $65 would be surprising in the rest of 2006, $85 is more likely since we are now into hurricane season, spikes to $95 or beyond are plausible this year.

Property - has only begun to fall in price, there is much more downside to come. Properties for sale are higher than for more than a decade, many areas have 6 months worth of sales in unsold properties. Prices have barely started to reflect this change in supply / demand, price reductions of 30% and more are probable in recently overheated property areas and markets.

Consumer spend - will contract significantly due to the above two paragraphs. The consequence is that the US economy will contract, quite sharply. This has begun and will accelerate over the next year.

Soft commodities (coffee, cocoa, wheat, corn, soybeans, etc) mostly haven't benefitted from the run up in price of the metals and energy commodities. With the centre of the USA being a mite parched, humans consuming more grains than they are producing, fertiliser and transportation prices climbing, I expect some significant increases in these. Food is going to get more expensive.

GDP - people are going to be very surprised when 2006 Q4 shows negative growth. They'll be a bit surprised when 2006 Q2 comes in at about 3% or less, rather concerned when 2006 Q3 is below 1.5%.

Inflation - is growing more than the market bozos expected, it will grow significantly more over the next 2 to 4 months due to the low rates in 2005 months dropping out of the calcs. Near the bottom right of this page:
http://inflationdata.com/inflation/Inflation_Rate/AnnualInflation.asp
you will see the individual month's data. Inflation over the 4 months so far reported in 2006 is at an annualized rate of over 7%, May and June 2005 had less than zero inflation overall, the inflation picture will be looking significantly worse once the May and June 2006 data is reported. Headline inflation will top 5% for the first time in well over a decade in the next 3 months.

A note on US govt inflation and GDP statistics: there could well be some sudden tweaking of these calculations in the near future. Because of the way the property element of inflation is calculated (using equivalent rent) it has the tendency to understate inflation when property prices are increasing and overstate it when they are decreasing. Since we are now in the latter state TPTB (the powers that be) might find it desirable to change the rules.

Interest rates - helicopter commander Ben Benanke must appear strong in the face of inflation (or the US$ will be toast and with it the US economy). Thus the Fed rate must continue to go up, probably at least twice more, to 5.50% or higher. Real US interest rates have, at long last, crept up a bit and sit above 5% now; fixed rate mortgages are above 6%; access to money is tightening. Even the current US interest rates will tip the US economy into recession soon enough.

Stocks - have held up well due to liquidity pumping, decent corporate profits and hot air. There are many 'defence forces' against a sharp drop in US stocks nowadays, the PPT (plunge protection team) being just one. It looks like reality is just beginning to percolate into this corner of Wall Street and that the happy gas of Fed liquidity has started to dissapate. A plunge is on the cards, we may have seen the first stages. The inevitable statistical spurt in inflation data and the almost inevitable further Fed rate hikes indicate a further 10% to 20% drop in stock price indices over the next 3 months - unless the floating and 'free Fed' money has nowhere better to go in which case we could even see new highs in the US stock indices, lol.

Next week - May's inflation data is due out, PPI on Tuesday 13th, CPI 14th June. If it's the least bit worse than expected (PPI core and CPI core +0.2%, headline CPI +0.5%) stocks will fall through some important support levels and probably keep going down. I don't expect the US$ to benefit much if that is the case, though, the Forex markets look to have priced in a rate hike at end of June. TICS data on Thursday is more likely to move the US$ up or down if outside the $65 to 85 billion range.

The US economic picture will be looking significantly worse in 3 months time, I will hazard guesses for 15th September 2006 (barring major geopolitical upsets):
US$ 83.5% trade weighted, Euro 1.31, Yen 108
Gold $680
Oil WTIC $82
Fed base rate 5.50%
Stocks DJIA 9,200 S&P500 1,090

Speaking of geopolitical upsets, now is the time my hunch that GW Bush has a nasty tumble becomes due. No obvious signs of it yet - except he seems to have been keeping a fairly low profile the last month or two, let's see what the next couple of weeks bring.