Expect a wild ride...
Overview of the price action in the foreign exchange market.
Overview of the dollar's outlook against the major currencies, without a preconceived notion that the US is in some kind of terminal decline.
Technical outlook for the several of the most actively traded currencies.
The recent strength of the euro and sterling seemed to evaporate, while the yen and dollar-bloc currencies recovered. Is this a major trend change or was it simply reflecting some position adjustment in a thin market?
It may appear to be safe for everyone to be on the same side of the boat, but the gunwale is awfully close to the water.
Selling both the rumor and the news turns out not to work... but we cannot yet say whether a trend change is definitely in the bag. However, considering how absolutely dismal sentiment on gold is, considering the many similarities to the 2008 'retest' that could be observed recently (back then, gold was also declared 'dead' by the mainstream) and given the fact that for a change, the gold market has not acted in the way that was widely expected, it continues to make sense to look for more signs of a trend change to emerge. Ideally declines should continue to be kept in check by support at $1275, while any rally that manages to exceed the $1350 level on a closing basis and confirmed by the gold stock indexes can probably be interpreted as a sign that the short to medium term trend has finally reversed for good.
As stocks press back towards all-time highs amid a US government shutdown, extreme weakness in earnings pre-announcements, slower-than-expected China growth, Europe's recovery in doubt, and a looming debt-ceiling debate in the US, we look at four 'big picture' charts of dismal divergences that suggest it's not different this time at all...
We can safely predict the inevitable budget-debt ceiling deal will spark yet another "the Status Quo is saved" rally in the stock market. But what happens after that?
The conventional wisdom of the moment is that a weakening global economy will push the cost of commodities such as oil down as demand stagnates. This makes perfect sense in terms of physical supply and demand, but this ignores the consequences of financial demand and capital flows. The total financial wealth sloshing around the world is approximately $160 trillion. If some relatively modest percentage of this money enters the commodity sector (and more specifically, oil) as a low-risk opportunity, this flow would drive the price of oil higher on its own, regardless of end-user demand and deflationary forces. If we grasp that financial demand is equivalent to end-user demand, we understand why oil could climb to $125/barrel or even higher despite a physical surplus.
Real, meaty analysis and ideas!
Here is a weekly over view of the currency market from a technical perspective. The divergence between the performance of the dollar against the euro-bloc, with the exception of sterling, and the other major currencies is noteworthy. In the analysis, I suggest a few opportnities for near-term contrarians. I fully appreciate that some readers eschew technical analysis and regulate it to the same space as numerology and witchcraft. Yet, even still, it is useful to recall Keynes' view that the markets are like a beauty contest and the trick is not to pick who one thinks is the most beautiful, but to pick who others will think most beautiful. Moreover, technicals allow one to quantify how much one is willing to lose in a way that fundamental macro-economic analysis doesn't. It is a tool then for risk management.
Technical indicators such as MACD, RSI and STO show that silver is slightly overbought short term.
However, silver can remain overbought in the short term as was seen in silver’s rally in 2011 when silver nearly doubled by surging from below $27/oz to nearly $50/oz in just 3 months - from January 27th 2011 to April 28th 2011.
What makes for a good investment is price. Price is everything. You need to receive value in excess of the price paid. An investment’s value is the amount of real cash its underlying assets can reasonably be expected to deliver to its shareholders in the future, discounted for its risk – period. The investment’s price will either be higher than its value (an uncompensated risk), the same as (neutral) or lower than its value (a compensated risk). But since value is an imprecise measurement, the best one can do is to build in a margin of safety by buying investments that are at deep discounts to a reasonable estimated value. Too many investors let an investment’s short-term price movements, or perceptions of short-term price movements drive their decisions. But since short-term price moves are unknowable, irrelevant and independent of investment merits, this is not worthy of any time spent analyzing. If short-term price moves were knowable, then a cadre of top-performing chartists and market technicians would have far greater net worths than Warren Buffett, Charlie Munger and the Saudi Royal Family. They would need only apply leverage to their process and repeat it a few times in order to accrue hundreds of billions of dollars. Question: How many market technicians occupy the Forbes 400? Answer: Zero. Why? Because successfully guessing future price moves based on charts, MACD indicators or tea leaves is not a repeatable process. Investors who do this generally have poor outcomes because they are pursuing answers to the wrong question.
The right question is: where is the value?
From early October of last year (Grand Plan and Global CB intervention) until the start of the LTRO program in Europe, Gold and Stocks (and Treasuries and the USD) all traded in sync with one another. Since the LTRO program, the equity market has generally been on its own in terms of belief. While growth hope, Europe's recovery, and the Bernanke Put (as well as a short-squeeze of epic proportions) were at play, it seems to us that the Fed's Twist program has been ignored by the money-printing crowd (since Twist was sterilized and did not expand the monetary base (excess reserves) - which gold reacts to; but did provide flow - helping stocks - as the Fed's DV01 increased; implicitly devaluing the currency even though Fed's efforts to dissuade have worked) while the ECB's LTRO provided a liquidity overhang that at-first-glance removed one short-term structural risk from US markets (the Europe contagion). Since we made clear that LTRO is in fact an encumbrance and not 'clean' debt monetization (which fits with gold not moving as much), equity markets in Europe have retraced all of those gains - leaving US still elevated. The last few days, gold and stocks have surged together as hope for LTRO3 (seemingly gone now) and Fed QE3/4 (not sterilized; with ES -7.75% from its highs?) has become imminent. However, Gold and stocks remain very far apart in the medium-term and Rick Bensignor sees trendline support and DeMark TD Setups providing an excellent risk-reward for a Short Stocks, Long Gold trade from here.