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Market Commentary From Monty Guild

Posted: Oct 01 2010     By: Monty Guild      Post Edited: October 1, 2010 at 10:11 am
Filed under: Guild Investment

MAJOR INVESTMENT OPPORTUNITY – LIQUIDITY FLOWING INTO ASIA AND WESTERN LATIN AMERICA
Last week, the Merrill Lynch economics team wrote a good paper about liquidity flowing into Asia.  Here is a summary of their conclusions: Liquidity will flow into the Asian region raising consumer spending, stock prices and currency values.
We agree with their conclusions, and here are a few of our own.  In the following countries: India, Indonesia, Malaysia, Thailand, Singapore, and China much new liquidity will enter.  It will be in the form of foreign direct investment and investment money moving into stocks and bonds.
With the exception of China, which is being singled out for a trade battle by the U.S. Congress, all of these countries will see their currencies rise.  Their economies will grow strongly as new capital flows to their growing markets from North America, Europe and other parts of Asia.  This new capital will increase employment, liquidity and put some pressure on inflation.  Most importantly, it will lead to increases in the stock market and real estate valuations in these countries.
The western portion of South America is in a similar position.  Chile, Peru and Colombia are in the enviable position of attracting capital historically destined for the more unstable or autocratic countries.
Free markets and the growing middle class in these capital-attracting countries are creating a very attractive environment for stock market and real estate appreciation.  As a result, all of the above countries in Asia and Latin America which have not been picked out by the U.S. Congress and administration for attack will prosper as money moves from the less free-market-oriented and low-return Europe and U.S. toward the more open and  higher return markets mentioned above.
India’s Sensex Index – last five years

Singapore’s Straits Times Index – last five years


Peru’s Indice General Stock Market Index – last five years


Chile’s IGPA Stock Market Index – last five years

FORMER MAJOR GOLD SELLERS ARE ABSENT FROM THE MARKET
Gold sales by central banks in Europe fell to a very low level in the twelve month period ending 9/30/2010.  The rate of sales was about 95% below the average of the last decade.
Interestingly, over the last 12 months several governments announced that they were open market buyers of gold.  These include Russia, China, Thailand, and India.
FOOD
We foresee higher prices in the long term.
Global agriculture product demand is rising much faster than the available supply of food and will continue to do so for the next decade.  Short-term drought or other supply circumstances aside, the inexorable demand curve rise, due to the consumption of more meats in the emerging world, will increase demand for food and prices on a longer-term basis.  This will lead to higher food prices and higher prices for the suppliers for equipment and other inputs to the farming industry.
THIS AIN’T YOUR GRANDFATHER’S WORLD TRADE SYSTEM
The U.S. labels China a currency manipulator.  Brazil announces that countries are trying to devalue their currencies competitively.  Is a new trade war brewing?
We have long believed that the potential for trade wars increases as economic distress grows in Europe and the U.S.  Clearly, Brazil is correct; politicians who do not understand the world trade system are currently trying to devalue their currencies.  They are reacting to pressure from the exporting companies in their nation and they may believe that this action will increase exports and discourage their citizens from importing goods from abroad.  These beliefs are based upon the naïve and unwise assumption that their domestic consumer will buy domestically manufactured goods.
Although this simplistic model might have been somewhat accurate 50 years ago, today it is sadly uninformed and unrealistic.  A global trade machine currently exists which uses components from many countries to make products produced in other countries which are then shipped to other countries, still, to be finished.  The products are then sold to a new group of countries for various purposes including re-export.
The antiquated and naïve view that a lower currency will improve employment in the home country is generally incorrect.
The lower currency will not necessarily create new jobs, and on the contrary, it may create destructive unintended consequences especially inflation as imported goods become more expensive.  Currently, perhaps a dozen countries are trying to devalue their currencies simultaneously.
When a nation threatens that they will “put a tariff on products from country X”, or “force country Y to revalue their currency upward”, or that they will devalue their own currency, we wonder if they have considered all the ramifications of such actions?
Trade wars are always a mistake.  Most observers understand the political posturing by the U.S. congress to their constituents.  They also see that those constituents may not be at all well-informed about how international trade is positive for U.S. growth and useful for employment in the U.S.  The politicians are making a political statement which is simplistic and which may create unintended consequences including:
1. lower economic growth world wide which feeds back to lower economic growth in the home country.
2. increased inflation as imported goods rise in price.
3. a move by citizens into other asset classes especially gold, other precious metals, commodities in general and common stocks and out of the home currency.  The citizens will buy these types of assets in order to protect themselves from the decline of their currency.  This forces up the price of commodities and further exacerbates inflation.
UNWISE BEHAVIOR
It is unwise behavior to attack China, which owns a huge percentage of U.S. debt, for its currency policies.  This is especially true since the U.S. will continue to float immense quantities of new debt to cover budget deficits in coming years, and an unintended consequence is that China decides to not buy more U.S. paper, or worse, sells their U.S. debt.
Should either of these probabilities occur, the result would be a further weakened dollar.  China could easily cause an increase in U.S. interest rates and put pressure on the U.S. Federal Reserve to undertake ever more quantitative easing.  In other words, the U.S. Federal Reserve will have to buy the bonds issued by the U.S. Treasury or other organs of the U.S. government.  This is printing money to pay bills, and historically it has proven to be an ineffective solution.
An increase in either quantitative easing and/or further declines in the value of the U.S. dollar could have a cascading effect.  Quite probably, it will cause the dollar to fall further, and create a spiral of dollar price declines.  As the dollar declines, gold and foreign currencies rise.  This is one reason why we remain bullish on gold and well-run foreign currencies.
SUMMARY AND INVESTMENT POSITIONS
1.  Continue to hold gold and gold shares and begin to trade more as gold reaches the $1500/ oz level.  Selling rallies and buying dips.  Gold will correct periodically but will move well above $1500/oz over the long-term.
2.  Continue to hold oil related shares and use weakness to buy more, especially high-yielding energy companies with oil reserves.
3.  Food related investments continue to be attractive and will rise for years.
4.  India, China, Indonesia, Malaysia, Singapore, Peru, Colombia, and Chile continue to be attractive.  Brazil may also be a good investment destination if the new president, to be elected on October 3, acts reasonably.  China and Brazil must be watched carefully; China because of attacks by the U.S. on China’s currency and trade position and Brazil to see how the new administration behaves.  It is possible that Canada and Australia will be relatively attractive and will sell many resources to the developing world.
5.  Continue to stay long the currencies of Canada, Brazil, Singapore, Thailand, Canada, and Australia versus the U.S. dollar.  The U.S. dollar index is making new lows on the charts and this bodes well for the currencies of the healthier, growing, better managed economies, gold and other hard assets.
6.  Short the Japanese Yen versus the U.S. dollar.
7.  Avoid or sell U.S. long-term bonds: corporate, government, or municipal.
Wishing you successful investing!
Thanks for listening.
Monty Guild and Tony Danaher
www.GuildInvestment.com



Jim Sinclair’s Commentary
The overwhelming majority of derivatives since 1991 are special performance contracts devoid of any standards. As such there is no market whatsoever for them. As conditions change the only way to keep from bankruptcy is to add more OTC derivatives to your chain to offset the new condition.
That means the OTC derivatives are by nature permanent agreements that can only grow.
That means we are in greater financial danger than we were in 2008.
That means QE to infinity or the end of Democracy.

Hourly Action In Gold From Trader Dan

Posted: Oct 01 2010     By: Dan Norcini      Post Edited: October 1, 2010 at 2:15 pm
Filed under: Trader Dan Norcini

Dear CIGAs,
Another day – another round of brutal Dollar selling. If it is unclear in anyone’s mind that the Fed is in the process of killing the Dollar in order to keep the “animal spirits” of investors from falling into a funk, let the price action of the Dollar convince you to put aside any such reservations. It has now crashed through another support level. First it was critical support near 80. That gave way easily. Then it appeared it might hold 79 for at least a little while after it popped yesterday on the approach towards that level. Today, that gave way like a rotten wooden plank taking it down near 78 before it got a bit of relief. Ominously, there does not appear to be much if anything standing in the way for a fall to 75, where if it takes that out as ignominiously as it has previous “floors”, it is heading to 72 and we are heading to a currency crisis.
As said the other day, ‘overbought’ and ‘oversold’ are relative terms and are meaningless when there is a fundamental driver behind a market’s rise or fall. In the case of the Dollar, once governor Dudley signaled his intent to see the Fed engage in another round of QE, the “oversold” status of the Dollar was rendered moot in today’s session. The reason – traders and investors world wide understand that the supply of dollars is going to be increasing at a faster rate than the demand for those dollars. The result is economics 101 – a drop in price.
As long as the market is convinced that the Fed is going to be engaging in another round of QE, the Dollar is going to fall, not only against the other currencies of the globe, but against the metals, which is why gold and silver prices are rising.
At this point, the only thing that I can see which would cause the Dollar to mount a SUSTAINED rally would be a definitive end to any Fed QE whatsoever. Barring that, the trend for the Dollar remains firmly lower.
That brings us to gold which continues to rise as the Dollar continues to fall. It set yet another all time high in today’s session with the bullion bank barrier at $1,315 giving way. Yesterday’s rebound from the session low indicated good levels of buying continue to surface on dips preventing the shorts from getting any downside traction. Their short covering combined with another influx of fresh money resulted in a surge to $1,322. If the previous pattern holds true, we can expect the bullion banks to retreat towards $1,330 and make yet another stand near that level. Downside support remains near $1,300.
Silver put in another fresh 30 year high today (see the chart) as it pushed through $22 and is holding above that level.
The HUI has recaptured the technically significant chart level of 510 but has yet to take out the last major hurdle standing in its path towards an upside acceleration, namely the 520 level. It has come within a whisker of taking that out in today’s session but fell back in its first real serious attempt at capturing that fortress. If the bulls can muster enough ammunition and conviction for another charge or even two, they should be able to dislodge the bears from behind their ramparts there. Once they do, the mining shares should see some impressive gains.
I think we have solved the mystery of the falling open interest in gold over the last few days. As suspected, it has been the October contract which is the culprit. The total number of contracts still open in there dropped a whopping 5,200 in yesterday’s trade meaning we have seen nearly 23,000 closed out of that month in the last three days time. It is now apparent that the shorts are terrified of delivery issues and are getting out. Because they are NOT ROLLING into the December, they have tipped their hand. This is a most welcome development. We have long stated here at the site that the only way to beat back the short sellers in this market is to force them to either come up with the gold to deliver or refuse to be stampeded and call their bluff. The longs look as if they are doing just that. The result, shorts are running to avoid having to “stand and deliver”.
A mere 1300 contracts left open in the October is miniscule for a month heading into the delivery process.
Crude oil continued its upward progress from yesterday and looks as if it wants to make a try at the recent swing high near $83. A sharp rise through that level would signal that the market is poised for a move up to $87. One of the silver linings in this recessionary contraction has been that energy prices have remained relatively tame by comparison to levels seen a couple of years ago. If crude continues its upward trek that is all going to come to a rather abrupt halt.
On the currency front, the Aussie made yet another new high and looks like it wants to make a run towards parity with the US dollar. It is rapidly approaching levels last seen prior to the onset of the credit crisis back in 2008. We did not see the Bank of Japan in the Forex markets last evening but it might have been a case that traders are still hesitant to take them on at current levels. The Yen backed away from the intervention ceiling on its own last evening although it has not moved significantly lower either. It appears stuck in a rut, with Dollar weakness propping it up but intervention fears capping its rise. Interestingly enough, the Yen is FALLING against the Euro which will help with Japanese exports into the euro zone perhaps alleviating somewhat the concerns of the Japanese business community, which were not especially helped after Japan zone data last evening confirms just how fragile the state of the Japanese economy remains.
Bonds are following the woes or welfare of the equity world this morning moving inversely to stocks as is more the norm for that market. QE thoughts are keeping a floor of support under that market for now.
Grains were spanked pretty hard today along cotton and the livestock markets resulting in some weakness in the overall commodity sector indices as reflected by the CCI (Continuous Commodity Index). Funds had built up some very significant long side exposure across the entire grain complex and with the violation of technical support levels on the chart, they are being flushed out. The catalyst was the USDA report from yesterday which turned the technical picture negative on the daily charts. Corn is flirting with limit down trade as I write this report. Quick, rush out and buy a box of corn flakes before the price goes back up!
Long term these grain prices will be supported but there are technical issues related to speculative positioning which are going to result in wide swings in price even as the macro trend points decidedly higher. A growing global population and a new found prosperity among the emerging economies of Asia and Latin America will keep the ag sector challenged to produce enough grains to feed a hungry world. As a long time trader of the grain markets watching the struggles of farmers who had in the past been plagued by low prices for their product amidst rising costs of production, it is encouraging to see that our farmers will do well in the years ahead. I do expect at some point in time however that the dubiousness of burning our corn crop in our gasoline tanks will be shelved in favor of more efficient bio sources. Corn demand will remain more than robust enough to keep our farmers prospering without government subsiding the ethanol industry.
Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini




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