Thursday, June 2, 2011

Gold and Silver Form Promising Bullish Divergences

Bull markets do not move in a straight line, nor do the price of gold and silver.  Their price advances, and then retreats to ‘correct’ the previous advance. For the past four weeks, gold and silver have been going through one of these periodic price corrections.   
During these corrections, underlying support is tested.  If support holds, precious metal prices eventually climb higher, putting in the rear-view mirror the prices reached during the test of support as well as the correction itself.
This pattern of ebb-and-flow has recurred time and again over the past ten years, during which time both gold and silver have achieved spectacular price appreciation.  Some corrections have been long and deep, like the one that occurred after the Lehman Brothers collapse.  Others though have been short and shallow.  But they all have one common characteristic. 
The depth and length of a correction cannot be predicted.  All we market participants can do is let the correction run its course, while continuing to accumulate the precious metals as part of our ongoing accumulation plan to cost-average our purchases.
Although the severity of a correction cannot be predicted, there are clues that sometimes give an indication that a correction is ending.  One of these is called a “bullish divergence”.  Importantly, gold and silver have formed promising bullish divergences.
To explain this point, gold and silver prices normally move in synch.  Both advance, or both decline.  What is of interest is when one metal moves in one direction to achieve a new price, while the other metal does not confirm.  So for example, if gold makes a new high and silver does not confirm with its own new high, a bearish divergence has formed, signaling that a price advance may be ending and a correction may be starting. 
Conversely, when one metal makes a new correction low and the other one does not confirm, a bullish divergence has formed.  It is an indication that a correction is ending. 
The bullish divergences gold and silver have formed over the past four weeks can be seen by comparing the following two charts, which present the daily high, low and closing price of gold and silver over the past several months.  The dotted horizontal line marks Friday’s closing price.
Several observations can be made about the above charts:
1) From their late January low, both metals moved higher together more or less in synch.
2) Both gold and silver began their correction on the same day.  In the initial drop, gold made its low on May 5th, but silver kept falling and made its initial low one day later on May 6th.  It was a small bullish divergence because gold did not confirm the new low in silver, and both metals subsequently bounced higher.
3) The precious metals then re-tested their previous low.  Silver fell to a new low in the setback on May 12th, but gold did not confirm.  This was a second bullish divergence, and more meaningful than the first one a few days earlier for the simple reason that gold’s initial low price was still holding firm and had not been broken.
4) Then the precious metals again re-tested their lows a few days later.  On May 17th gold broke below its May 12th low but not the low of May 5th, which has held throughout the correction.  Silver broke below its May 6th low, but not the low reached on May 12th.  It was the third bullish divergence, and this testing and re-testing of support in effect indicated that support at those price levels was solid.  Both gold and silver again bounced higher, and their price rally continues as I write.
So gold and silver have formed what promise to be important bullish divergences signaling that the correction may have run its course.  Here’s another way to look at what has happened.  The selling in a precious metals correction can be compared to a prize-fighter at the end of a tiring bout.  He is punched-out, and can hardly fight anymore.  A divergence says the same thing.  In effect, the downside momentum has ended because the sellers no longer have any ‘punch’ left.
There is one other item worth noting in the above charts, and it too is bullish.  Look at the depth of the correction in silver compared to that of gold.  Silver retraced more than half its gain from the January low, but gold hardly retraced any.  What’s more, gold is now just a chip-shot away from making a new record high.  This relative performance is itself an important bullish divergence.
So taking it all together, there are clear signals that the correction in the precious has ended.  In other words, the low in gold and silver reached earlier this month marks the bottom of the correction.   There may be more testing of support around $1500 and $35, which would not be unusual.  There may even be more bullish divergences.  But look favorably at the bullish divergences already formed because they in essence are saying that the correction may be ending, and more to the point, that the long-term bull market in the precious metals remains intact.
Lastly, the eagle-eyes among you may have noticed the bearish divergence on the above charts.  Gold made a new high on Friday, April 29th, but silver did not confirm.  A nasty correction began the following week.
In summary, spotting divergences is a worthwhile endeavor.  Like everything else when it comes to markets, divergences are not foolproof.  But they are a useful analytical technique that everyone can use to help keep their eye on price trends in a bull market.

Schiff Report: Markets Swoon on Double Dip Fears

Strategic Put Selling - Investment Ideas

One of my favorite strategies for making money off of your favorites stocks is the short or "naked" put, sometimes called "cash-secured" by brokers because they will require a certain percentage of your account capital to be used as margin to cover the potential event of assignment. When you sell a naked put, you are obligated to buy 100 shares of the underlying at the strike price if the stock falls below it come options expiration.
Yesterday I suggested investors should be looking for such opportunities as we enter the summer doldrums and a seasonally-weak period for the market. I named Suncor (SU), Eaton (ETN), and Freeport McMoRan (FCX) as possible candidates in three different cyclical sectors. These are all Zacks #3 Rank or higher stocks and if you are interested in buying them on a pullback, selling a cash-secured put is one great way to do that.
For instance, let's say that you like Freeport and would consider buying it near chart support at $48. If you sold the July 48 put for $2.00, you would be obligated to buy the stock at $48 if shares fall below that strike price before July expiration and you are assigned. But in this case, since you received a $2 premium as a credit for selling the put, your effective buy price for the stock becomes $46.
What if FCX ends above $48 at expiration? You keep the entire option credit, less commissions of course. That's how you generate income on stocks you wouldn't mind buying anyway. You can roughly calculate your rate of return here by using $4,600 as a conservative margin estimate. With 44 days until July expiration, that would give you about a 4.3% return in just over six weeks. Not bad for a stock you wanted to buy "at a discount" anyway.
I say "at a discount" because with FCX currently trading around $49.50 as I write, this strategy allowed you to pinpoint the below-market price you wanted to buy the shares for. What's more, you have several combinations of strike and expiration to custom tailor the strategy to your risk-reward preferences. You could go out to January options and down to the 45 strike, which you might be able to sell for $5 if the stock drops another dollar or so. That would give you an effective buy price for the shares near $40.
In this case, you have taken on more time risk, but you also received a bigger up front option premium for that risk. That's the nature of selling puts, so consider yourself in the insurance business when you do so. You are providing liquidity and insurance to those currently hedging their FCX positions. For full details on the obligations and risks of selling puts, be sure to talk to your broker and ask them for educational resources like the PDF booklet "Characteristics and Risks of Standardized Options," published by The Options Clearing Corporation.
The main thing to keep in mind is to treat the short put strategy as an investment in the stock. Think and act as if you plan to buy the stock at the strike price, less the credit received, and you will have the right frame of mind because the strategy carries all the risks of being long stock. And a great time to implement the strategy is when the market is in a fear-driven move where the prices of options are rising to do a spike in implied volatility, much the way the VIX rises during sell-offs.
I'll revisit this strategy many times over the coming months as I expect a sideways-to-lower environment for stocks. We should get some good opportunities to either generate income on our favorite names or simply buy them "on sale." That's using puts strategically to increase your returns and target pre-determined entry points with an overall more efficient use of trading capital. And, when used on high quality stocks from the Zacks Rank stock rating system, that's smart investing when the rest of the world is running for cover.
Kevin Cook is a Senior Stock Strategist for 

Peter Schiff: After The Dollar: What Comes Next?


My readers are familiar with my forecast that the US dollar is in terminal decline. America is tragically bankrupt, unable to pay its lenders without printing the dollars to do so, and enmeshed in an economic depression. The clock is ticking until the dollar faces a crisis of confidence like every other bubble before it. The key difference between this collapse and, say, the bursting of the housing bubble is that the US dollar is the backbone of the global economy. Its conflagration will leave a vacuum that needs to be filled.

Mainstream commentators often discuss three main contenders for the role: the euro, the yen, or China's RMB (known colloquially as the "yuan"). These other currencies, however, each suffer from a critical flaw that makes them unready to carry the reserve currency role in time for the dollar's collapse. When it comes to fiat alternatives, it appears the world would be going out of the frying pan and into the fire.


The euro is a ten-year-old experiment in uniting divergent political, economic, and cultural interests under one monolithic fiat currency held in the hands of one very powerful central bank.

If managed correctly, such a currency could serve to keep its member-governments honest - but that is not the world in which we live. Instead, the fiscally irresponsible members are discussing ditching the currency at the first sign of trouble. That is, they'd rather have their own national currencies to inflate in order to cover over their burdensome public debts. So, in order to keep the euro together, creditor states have been strong-armed into bailouts of the debtors - even though such measures violate the compact that created the common currency.

And, of course, Greece isn't the only problem. Ireland and Portugal are vying for second-worst debt crisis in Europe. Spain, representing over 12% of eurozone GDP, saw sovereign yields jump from 4.1% at the beginning of 2010 to 6.6% by the end of the year. Yields on most other eurozone countries have been rising as well - a clear indication that the eurozone is an increasingly risky bet.

While a euro secession by the PIGS could actually leave a stronger currency region at the end, it would be a traumatic event. That prospect is undermining confidence in the euro at just the time when the world is considering where to go next.

Perhaps a mature currency that didn't falter so easily amidst the recent global financial crisis would be a good contender for the world's reserve. The euro, by contrast, is both young and in serious trouble. If less than two-dozen nations are too immense a burden for the euro to shoulder, should we expect better results when it's stretched across two hundred?

The investment community is slowly coming around to my long-held excitement about the miraculous growth of China. This is no frenzy. In fact, if anything, I think many are still too skittish when it comes to this market. Yet, those that are jumping on the bandwagon are now proclaiming the Chinese yuan as the logical successor to the dying dollar. But while China is becoming an immense economic force, the yuan itself is hobbled by the country's communist past.

Foremost, China enforces stern capital controls on the yuan. A reserve currency must be freely and easily exchangeable with other currencies. Even within China's borders, one cannot exchange large amounts of yuan for dollars or any other currency.

China is slowly undertaking reforms to relieve these controls, but remember they were not put there arbitrarily. The controls allow China to suppress the value of the yuan, thereby maintaining artificially high exports, among other consequences. If China allowed the yuan to trade freely, it would lose the power it maintains over its money - and by extension, its people.

Let's remember that all fiat currencies are routinely manipulated and inflated. The People's Bank of China has reported M2 growth of over 140% in the past five years - almost entirely to maintain a stable exchange rate with a depreciating dollar. Given rampant inflation, combined with exchange restrictions and a serious lack of transparency, the yuan is simply not ready for primetime.

The Japanese yen is the third amigo at the international fiat fiesta. While it doesn't suffer the structural risks of the euro, the yen is subsisting in an environment of massive sovereign debt. Japan's debt-to-GDP ratio is the highest of any developed country at 225%, meaning there is a perpetual impetus to print more yen to pay it back. The yen must endure this debt-noose, making it a poor alternative to the USD, which suffers the very same problem.

While I believe Japan is in a much better position because it generally maintains a net trade surplus and because most of their debt is held domestically, it's still not a stable unit with which to conduct world trade.

Perhaps more importantly, with a world seeking yen reserves, the price of yen would increase drastically. This is politically unpalatable in Japan, where the export lobby is constantly trying to push the yen down to boost their sales overseas.

These two factors combine in such a way as to make the yen a plainly infeasible reserve currency. The appreciation in yen value would simultaneously make Japan's debt problems worse and cause its export industry to suffer greatly, meaning that Japan probably doesn't want this role any more than we want her to have it.

As an aside, if you type "yen as reserve currency" into Google, it will ask, "Did you mean: yuan as reserve currency?" I guess even the world's smartest search engine doubts the yen could fill that role.


As J.P. Morgan famously said to Congress in 1913, "gold is money and nothing else." Morgan meant that gold was unmatched in its effectiveness as a store of value and medium of exchange.

Given that his namesake bank started accepting physical gold bullion this past February as counterparty collateral, why should the trend of a widespread return to gold be considered only a remote possibility? On the contrary, it should be expected - if for no other reason than every other currency is fundamentally dismal.

Markets are powerful things, and require a reliable medium of exchange. The call for sound money is not just philosophical; it is derived from the market itself. Throughout human history, merchants have always turned to pure gold and silver over every pretender. This is not the first experiment in a paper money system, nor is it the first widespread debasement of money. In fact, the lessons of history were impressed upon our well-read Founding Fathers to the point that they included the following clear language in the Constitution: "No state shall... make any Thing but gold and silver Coin a Tender in Payment of Debts."

While it has always been possible that another fiat currency would rise up to take the dollar's place, and thereby keep this irrational experiment in valueless money going awhile longer, the particular circumstances that abound today make it seem less and less likely to me. Instead, I'm seeing signs that the world is moving back to gold at a breakneck speed.

This is a return to normal and has many positive implications for the global economy. It's certainly a trend we can all welcome, and profit from.

By: Peter Schiff

The Vancouver Real Estate Market Rollercoaster

It is one thing to watch squiggly lines, or pretty, but largely meaningless bubble charts explaining a snapshot phenomenon or one transpiring over time. It is something else to actually be in a rollercoaster which recreates the experience of the Vancouver real estate market. Which is why the following animation from Vancouver Condo Info is rather cool. "This is a roller coaster simulation of the last 35 years of the Vancouver Real Estate market. The actual graph you're riding is the inflation adjusted value of a house in Vancouver BC based on data collected by Royal LePage and calculated by the UBC Centre for Urban Economics and Real Estate. Some of the peaks and troughs have been rounded to keep the train from flying off the tracks, but other than that slight modification it is a precise scale model of the red line on this graph: When the housing bubble of the early eighties popped in this city some house prices dropped by 50% over the next couple of years and didn't reach their inflation adjusted real price again for 25 years. What would a real estate market bust look like these days?"

Vancouver RE market rollercoaster from Vancouver Condo Info on Vimeo.

And for those who would like to try their skill at converting charts, such as for example the Fed's balance sheet (warning: it will be a boring ride), or the S&P in the last decade, or for a true free fall, CNBC's Nielsen ratings, can do so using NoLimits Roller Coaster Simulation here.

5 Commodity Stocks You Need To Know: AGRO, CCC, FBR, HAP, PICO

With a variety of asset classes becoming ever more correlated, investors have been looking towards alternative means of diversification. Moving beyond just stocks and bonds, portfolios have become sophisticated with new positions in a variety of unconventional plays. Commodities have become a more increasingly important piece of asset allocation. Funds such as the Market Vectors RVE Hard Assets Producers ETF (NYSE:HAP) have become popular with investors trying to access the sector. Nevertheless, given the popularity explosion of the commodities sector, correlations between stocks and commodities are becoming ever closer.

However, several natural resource alternatives that are often overlooked by retail investors can provide low correlations to traditional holdings. These "roads less traveled" and overlooked sectors may be the best ways to find uncorrelated assets in the commodities patch.
Living Off the LandWhen investors generally think of commodities, hard assets like gold, oil and corn come to mind. However, the trio of farmland, water and timber may be one of best ways to play the commodity space. Many of the same themes work for the trio as the overall commodities space. Exploding populations worldwide have added increased pressure on the planet's natural resources. This insatiable demand for hard assets is touching all aspects of modern living. Metalsand other materials are needed to build infrastructure. Vast amounts of energy resources are needed to provide electricity and to power transportation. Soft commodities, such as corn and wheat, are needed to meet the world's growing middle class demand for meat and other foods.
Accounting for more than 14% of the world's economic output, commodities form the basis for all goods and services. By investing in farmland, water rights and timber, portfolios can still benefit from these trends without many of the volatility problems associated with commodities. In addition, their long term nature is perfect for retirement portfolios and produce truly uncorrelated results.
Farmland PlaysAccording to a recent study by Kansas State University, U.S. farmland since the 1950s produced an average annual return of 11.5%, when including crop yield and land appreciation. This compares to a 12% annualized total return for the broad stock market. Yet, the farmland investment produced less than half of the volatility of stocks. With rising global populations requiring more food to sustain themselves, investing in farmland could be a slam dunk. Only about 7% of the Earth's surface is suitable for cultivation, and according to the Food and Agriculture Organization (FAO) of the United Nations, arable land per capita worldwide has fallen from 1.2 acres in 1960 to just 0.55 acres today.
The dire need for food has already led many countries and investment firms to take action. China has recently spent about $5 billion in Africa to purchase fertile plots. Similarly, many investment banks have created farmland funds for land purchase. Both Cresud(Nasdaq:CRESY) and newly IPO'd Adecoagro (Nasdaq:AGRO) allow regular retail investors to add the asset class to a portfolio. Each owns a variety of farmland and farm operations in fertile South America, and will benefit from the worlds need for more food.
Water Investment Investing in Blue Gold usually means buying industrial companies like Calgon Carbon(NYSE:CCC) or utilities like American Water Works (NYSE:AWK), not the physical water. PICO Holdings (Nasdaq:PICO), through its wholly-owned subsidiary Vidler Water, owns water rights in the states of Nevada, Arizona, Idaho, Colorado and New Mexico. The company generates revenue by selling its water resources to real estate developers, municipalities and industrial users.
Your Own TMOTimber currently shows a correlation of -0.01 to large cap stocks, -0.36 to long term bonds and only a 0.12 correlation to standard commercial property. Investments in timber have also produced nearly 7% annualized returns over the past 10 years. For investors looking for a broad-based play on timberland, there are two ETFs in the sector. TheClaymore/Beacon Global Timber Index (NYSE:CUT) and the iShares S&P Global Timber & Forestry (Nasdaq:WOOD) offer a diversified way to play the entire timber spectrum. Investors still might want to consider CUT over WOOD, due to its increased weighting in international stocks, including Fibria Celulose (NYSE:FBR).
The Bottom Line As investors crave new levels of diversification, the ignored commodity trio of farmland, water rights and timber could be what investors are looking for. Their uncorrelated and long-term attributes make them perfect for retirement portfolios. The previous stocks and ETFsare perfect ways to add these hard to access asset classes to a portfolio.

McAlvany Weekly Commentary

Numb and Number: The Dangerous Non-reaction to the Current Crises

A Look At This Weeks Show: 
-The deadliest combination: higher inflation and shrinking growth.
-Ouch! California’s state pension plan has to sell a $400 million dollar property for 32.5 million.
-European bonds on “perpetual hold”? – Could a default be avoided by disallowing the redemption of bonds?

The Quick Overhead Reference Price to Watch in Crude Oil

What key reference price levels should we be watching in crude oil at the moment?
Let’s take a look:
A quick look at the chart above shows us two levels of confluence at the $103 overhead level – perhaps more appropriately $103.75 or $104 for a nice clean round number.
Why is that level significant to traders?
First, it’s just above the falling 50 day EMA at $102.75, which is where price closed on Tuesday the 31st.
Second, it’s the 38.2% Fibonacci Reference Level/Line as drawn from the January low to the May high.  Price is challenging this level from the underside after successfully rallying off the 61.8% retracement level at $96.75.
Finally, you can also see that this level was a “Polarity Line” from February and March as price both found support and resistance near the $103.50 level.
As of the morning session, Oil was failing to break above this key level and is falling lower as June begins, which further locks this level as a key barrier point or reference level to watch.
Per “IF/THEN” logic…
IF buyers push oil prices above the $104 confluence reference level, THEN we could expect an “all clear” which would call for a continued price rally to $110 or beyond.
And then “IF sellers hold the $103.50 resistance, THEN we can expect a retest of the $97.00 reference level on a downswing here.”
Those are short-term parameters, and if we draw out the IF/THEN logic further, a breakdown under the 61.8% Fibonacci Line and May swing lows at the $96.00 level would forecast a harsher breakdown  to $92.50 or $90.00.
As is, these are the current short-term reference levels for the daily structure of crude oil.
Corey Rosenbloom, CMT

Idea of the Day: Buy Goldman Sachs GS

Fellow Masters, the almighty Goldman Sachs Group (NYSE:GS) is now trading at $137 a share. Goldman is just 5.5% away from its 52-week low.  If there's one company we never bet against, its Goldman.
You don't need a history lesson on how well run and how often GS wins in corporate America.  Should this stock keep falling and hit a new 12 month low -- its a sell the house and buy Goldman kind of move.
Goldman Sachs Group Inc (GS) shares have traded between $129.50 and $175.34 over the past 12 months.  Goldman Sachs shares are now trading with a P/E Ratio of 15.5 and EPS of 9.11.  GS shares one of the biggest losers today, down -2.58% or $-3.64 and trading just over $137.
Forget what we think, just listen to this lovefest rating from JPMorgan (JPM) that was released yesterday.  They believe Goldman shares could recover 28% in the next 12 months.  Would you dare bet they don't?
( A JPMorgan analyst upgraded Goldman Sachs on Tuesday, saying there is a good opportunity to buy the stock as themarket overreacts to negative press.
Goldman Sachs has been under the watchful eye of lawmakers, regulators and law enforcement since reaping billions of dollars from bets that the housing market would collapse.
One of Goldman's alleged strategies was to create and market mortgage bonds to investors who believed the sector would stay strong. The bank bet against the same bonds, stemming its losses or generating profits on the trades. Critics say that's a conflict of interest.
The mortgage deals drew fire from the Securities and Exchange Commission, which brought civil fraud charges that Goldman settled in July 2010 for $550 million. It admitted to misleading clients with flawed marketing materials, but did not admit or deny wrongdoing in the civil case.
The deals came up again last month in a report on the financial crisis from the Senate's Permanent Subcommittee on Investigations. The report said that Goldman marketed four sets of the bonds to banks and other investors without telling them that the securities were very risky. It said Goldman secretly bet against the investors' positions and deceived the investors about its own positions to shift risk from its own balance sheet to theirs.
And earlier this month Goldman disclosed that it faces a possible civil fraud complaint from the Commodity Futures Trading Commission for still other alleged violations.
Kian Abouhossein of JPMorgan said in a client note that the negative press has helped to deflate Goldman's stock price, presenting a buying opportunity.
The analyst also indicated that investors should not put too much stock in speculation about potential management changes, as Abouhossein believes Goldman is one of the investment bank "machines with a deep talent pool not dependent on a few."
The analyst raised the New York company's rating to "Overweight" from "Neutral" and kept a $175 price target.