Tuesday, April 12, 2011

Why oil prices are likely to stay high

The article below comes courtesy of Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors.

A number of forces continued to push oil prices higher this week, reaching their highest levels in the U.S. since September 2008.

One factor fueling the run has been the continued decline of the U.S. dollar. You can see from the chart that oil and the dollar historically are negatively correlated. This means that a rise in oil prices generally coincides with a decline in the dollar, and vice versa. The U.S. dollar has seen a dramatic decline since the beginning of the year as oil prices have moved some 30 percent higher. This could be due to fact that roughly two-thirds of the U.S. trade deficit is related to oil imports.

Despite the run up, oil’s upward rate of change is still within its normal trading pattern over the past 60 trading days. Accordingly, this may imply that it isn’t a spike and we haven’t crossed into the extreme territory like we experienced in 2008 and 2009.

Conversely, oil prices are positively correlated with gold prices, which also saw a bounce this week. Looking back over the past one- and 10-year periods, oil and gold have roughly a 75 percent correlation. This means that three out of four times, when prices for one go up, prices for the other increase as well.

Another factor pushing prices higher is the seasonal strength that oil prices historically experience leading into the summer driving season. This chart shows the five-, 15- and 28-year patterns for oil prices. You can see that prices historically bottom in February before rising through the end of the summer.

Rising oil prices are also a result of what the Financial Times calls the “new geopolitics of oil.” The FT says three elements creating this new environment are becoming clear:

  1. Young populations with high unemployment rates and a skewed distribution of income are a volatile combination for the people in power.
  2. To placate these groups, oil-producing countries are increasing public expenditures.
  3. Governments are also to extend energy subsidies to shelter the country’s consumers from rising energy prices.

A Deutsche Bank chart plots the share of population under the age of 30 for selected North African and Middle Eastern countries against the unemployment rate of this group. You can see that large oil producers such as Saudi Arabia have a high level of unemployment among youth populations.

This is why King Abdullah of Saudi Arabia has announced a total of $125 billion worth (27 percent of the country’s GDP) on social programs for the public. For King Abdullah, this is the cost of keeping peace but has driven up the breakeven price for Saudi oil production to $88 per barrel, according to the FT.

Keeping these young populations happy and working is not only domestically important for these governments but for global oil markets as well. You can see from this chart that a significant portion of the world’s oil production comes from the Middle East.

With the unrest in Libya—a top-20 oil producer—essentially knocking out the country’s entire production, any further unrest in another country could threaten global supply. Upcoming elections in Nigeria have the potential to disrupt production for the world’s fifteenth-largest producer.

But it’s not just geopolitics that is threatening production. Natural decline rates from mature fields such as Mexico’s Cantarell oil field are starting to make a dent in global production. Reuters reported this morning that Norway, the world’s eleventh-largest oil producer, is experiencing a significant slowdown in production from the Oseberg oil field in the North Sea. Production is expected to be cut by 26 percent in May to only 118,000 barrels per day.

Meanwhile, oil demand has been picking up significantly in both emerging and developed markets. Oil demand in China and the U.S. has been rising since mid-2009, well before the uprisings began in the Middle East.

In China, a big driver has been growth in the Chinese automobile market. Auto sales increased 2.6 percent in February, and March data is expected to show another increase when the Chinese Auto Association releases March auto sales figures over the weekend.

The G7 economies have been in an up cycle since last year. In the U.S., employment rates and consumer spending have been steadily improving. Oil prices rising too fast remains a threat to this recovery but BCA Research estimates that oil prices need to rise above $120 per barrel before “significantly undermining consumer and business confidence.”

4 Ways to Profit From Silver's Explosive Growth: SLV, PSLV, AGQ, SIL

With silver at decades-long highs, an obvious question one has to consider is whether this is a bubble ready to burst, a continuation of a secular bull trend, or simply that this is another efficient market examplewhere prices do reflect the appropriate value based on all market information known at this time. Depending on the financial guru, you’ll get varying replies. So, rather than try to convince you one way or the other, I’ll just share a few ways to make money on silver if it continues its ascent and you can decide which opportunity is right for you:

  • SLV – iShares Silver Trust – Up 31% YTD – The obvious first-stop investment for silver exposure is this ETF based on the spot price of silver. What gives some investors pause is the notion that that fund custodian does not have physical custody of all the silver required to match the market cap of the ETF. While iShares is a reputable name and many professional money managers and hedge funds hold SLV long, there’s a market for physical silver as you’ll see next. In addition, SLV is taxed at higher rates than other silver investments below for reasons outlined here (precious metals tax rates). For that reason alone, some investors steer clear of SLV and focus on getting a lower tax rate on long-term capital gains through other means.
  • PSLV – Sprott Physical Silver Trust – Up 34% YTD – The Sprott physical silver trust plays on the emotions of investors that fear other ETFs couldn’t actually meet redemption amounts if there were a run on silver and want the capability to take physical custody of their share of holdings in the metal. As onerous and impractical as it may be to do so, the mere notion that such opportunity is afforded to investors, along with different tax treatment, has given this fund a decent premium over the net asset value of its holdings. Personally, I like to watch for the premium to spike and benefit from a low-risk, medium return pairs trade on both gold and silver. As outlined in more detail, the pairs trade is enacted when the premium spikes above the mean, you short PSLV and go long SLV. To date, the premium has always reverted to the mean.
  • AGQ – ProShares Ultra Silver 2X – Up 64% YTD - This 2X daily leveraged silver ETF has enjoyed an incredible run, up over 60% year-to-date. This tool is purely a method to exploit trends and near-term trades. While this one has actually roughly doubled the months-long return on the underlying silver proxy, that is rare in the world of leveraged ETFs. In fact, investors can often short leveraged ETFs as outlined in detail at SeekingAlpha by either shorting both sides of the trade and watching value decay, or even just shorting long-only ETFs since the general trend markets is to increase.
  • SIL – Global X Silver Miners – Up 15% YTD – This ETF is composed of companies who derive substantial revenues from silver mining. While many of them mine other base metals, precious metals, and even rare earth metals ETF does lend some diversification outside pure silver returns and includes the operational aspect of miners. SIL has not kept pace with SLV in returns YTD, but presumably, would also see a more muted decline should the silver bubble burst as well. Tax rates on this ETF would be at the normal equities rates since there’s no physical silver involved, just corporations that mine silver.

Technical Snapshot: Support for Bonds?

Let's start off the business week with a technical look at bonds from master technician Chris Kimble. I received the four-pack below from Chris after just reading a Zero Hedge report that PIMCO now has a short position on Treasuries.

Chris comments:

The 17-year channel in the 30-year bond remains in place in that yields remain above support in this inverted chart. At the same time multiple types of bond ETF's are on key support!

Support is support until broken. Yet this four-pack does reflect how vulnerable all types of bonds are to a support break.

If yield support at (1) in the four-pack is broken, a key long-term rate change will be at hand!

BNN: Top Picks

BNN speaks to Barry Schwartz, VP and portfolio manager, Baskin Financial Services FOCUS: North American Large Caps

Protect Your Portfolio Against Inflation And Deflation

Inflation and deflation are economic factors that investors must take into consideration when planning and managing their investments. Inflation is the term used to describe the rate at which prices for goods and services is rising. Deflation is the term used to describe a general decline in prices. Inflation and deflation are opposite sides of the same coin. When one trend is clearly in motion, the steps investors can take to protect their portfolios are clear. When inflation and deflation are both threatening at the same time, the proper steps to take are a bit more difficult to discern.

Inflation: What to Do
Over time, prices for everything from a loaf of bread to a new car tend to rise. When those increases become excessive, consumers and investors can face difficulties because their purchasing power will be falling rapidly.

A clear example of inflation can be seen in the United States in the early 1970s. The decade began with inflation in the mid-single digits. By 1974, it had risen to more than 12%. It peaked at more than 13% in 1979. With investors earning mid-single digit returns on stocks, and inflation coming in at double that number, making money in the market was a tough proposition.

When it comes to protecting your portfolio from the ravages of inflation, there are several popular strategies. First and foremost is the stock market. Rising prices tend to be good news for equities. For fixed-income investors seeking an income stream that keeps pace with rising prices, Treasury Inflation-Protected Securities are a common choice. These government-issued bonds come with a guarantee that their par value will rise with inflation, as measured by the Consumer Price Index, while their interest rate will remain fixed. Interest on TIPS is paid semiannually. TIPS can be purchased directly from the government through the Treasury Direct system in $100 increments with a minimum investment of $100 and are available with 5-, 10-, and 20-year maturities.

International bonds also provide a way to generate income. They provide diversification too, giving investors access to countries that may not be experiencing inflation. Gold is another popular inflation hedge, as it tends to retain or increase its value during inflationary periods. Other commodities can also fit in this bucket, as can real estate, since these investments tend to rise in value when inflation is on an upswing. On the commodities side, emerging-market countries often generate significant revenues from commodity exports, so adding stocks from these countries to your portfolio is another way to play the commodities card.

Deflation: What to Do
Deflation is a less common occurrence than inflation. It appears when a lower level of demand in the economy leads to an excessive drop in prices. Periods of high unemployment and economic depression often coincide with deflation.

Japan's lost decade - the period between 1991 and 2001 - highlights the ravages of deflation. It began with collapses in both the stock market and the real estate market. Economic collapse resulted in falling wages. Falling wages led to a decrease in demand, which led to lower prices. Lower prices led to the expectation that prices would continue to decline, so consumer held off on making purchases. Lack of demand caused prices to fall further and the downward spiral continued. Combine that with interest rates that hovered near zero and a depreciating yen, and it lead to economic expansion coming to a screeching halt.

When deflation is a threat, investors go defensive by favoring bonds. High-quality bonds tend to fare better than stocks during periods of deflation, which bodes well for the popularity of government-issued bonds. Foreign bonds are also an option.

On the stock side, companies that produce consumer goods that people must buy no matter what (think toilet paper, food, healthcare) tend to hold up better than other companies; these are referred to as defensive stocks. Dividend-paying stocks are another consideration in the equity space. Cash also becomes a more popular holding. Certificates of deposit and plain old savings accounts are often a fit in this category.

Just as in during inflationary periods, there are a variety of methods by which you can construct your portfolio. Building it security by security is always an option. Investing in mutual funds or exchange-traded funds provides a convenient strategy if you don't have the time, skills or patience to conduct security-level analysis.

Caught in the Middle?
Sometimes it's hard to tell whether inflation or deflation is the bigger threat. When you can't tell what to do, plan for both. A diversified portfolio that includes allocation to investments that fare well during inflations periods and investments that fare well during deflationary periods can provide a measure of protection regardless of what happens in the economy.

Diversification is the key when you don't have the desire to attempt to properly time the inflation/deflation cycle. Blue-chip companies tend to have the strength to weather deflation and also pay dividends, which help when inflation rises to the point where valuations stagnate.

Diversifying abroad is another strategy, as emerging markets are often exporters of in-demand commodities (a hedge against inflation) and not perfectly linked with the domestic economy (protection against deflation). High-quality bonds and TIPS are reasonable choices on the fixed-income side. With TIPs, you are guaranteed to at least get value of your original investment back.

Time horizon plays an important role too. If you have twenty years to invest, you probably have time weather a downturn of any variety. If you are close to retirement or living off of the income generated by your portfolio, you have not have the time to wait for a recovery and have little choice but to take immediate action to adjust your portfolio.

The Death of the American Dream

The Downfall of America is coming if America does not make drastic changes in the way it operates. Loss of financial power, the rise of Communist China, the enormous strain on America's finances and prestige due to two wars- all are accelerating the downfall of America. This is a frightening look at what could happen to our country if things don't change.the thing is that Americans' have become lazy. so they turn to the government. but the government can't do all of the work. we know that if your on thin ice that the best thing to do is lie down and make as much surface area as you can. but if you stand up all your weight is on a very small place. so you fall. it's the same thing. you can't put all the responsibilities of America on a small group. to much weight.the American people need to learn to be self reliant again and stop looking for handouts. Only when the people are strong can a nation be strong. ALL of America needs to take a part. not shrug it off.come on America. we can do it

Goldman Causes Selloff In Commodities: Closes Top 5 Trade Of 2011: Long Crude, Copper, Cotton And Platinum (CCCP)

Wondering what just took the carpet from under the commodity complex? Heeeeeere's Goldman.

We are closing our CCCP basket trade, first recommended on December 1, 2010, for a gain of roughly 25% against our 28% target. This recommendation was premised on our belief that Crude Oil, Copper, Cotton/Soybeans and Platinum remain the key structurally supply-constrained markets. On a 12-month horizon we believe the CCCP basket still has upside potential, but the unrest in the Middle-East and North Africa region, and the potential for further supply shocks pushed the basket up significantly in a short period and our Commodity Research team believes that in the near term the risk/reward no longer favours being long the basket and consequently, we are closing the recommendation with good potential gains. While crude oil, cotton and copper prices have substantially exceeded our targets, platinum and soybean prices have lagged.

In the near-term we see crude oil price risk as becoming more symmetric. While the potential for further contagion risk in the Middle east remains elevated, there are now nascent signs of oil demand destruction in the United States (see April 5 Energy Weekly), but also record speculative length in the oil market, elections in Nigeria and a potential cease-fire in Libya that has begun to offset some of the upside risk, leaving us more neutral at current levels. As the accompanying note from our Commodity team points out Copper and Platinum face headwinds too in the near-term while we see upside in Soybeans (See “Target in sight, closing CCCP trade”, April 11, 2011).

And some more:

Risk-reward no longer favours being long CCCP

Although we believe that on a 12-month horizon the CCCP basket still has upside potential, in the near term risk-reward no longer favours being long the basket and we are recommending closing the position for a 25% return versus a 28% target. While crude oil, cotton and copper prices have substantially exceeded our targets, platinum and soybean prices have lagged.

Near-term crude oil price risk is becoming more symmetric

Although potential contagion risk in the Middle East and North Africa (MENA) remains elevated and has pushed prices above $125/bbl, at these price levels the risks are becoming more symmetric, which shifts the risk/reward of being long oil. Not only are there now nascent signs of oil demand destruction in the United States (see April 5 Energy Weekly), but also record speculative length in the oil market, elections in Nigeria and a potential cease-fire in Libya that has begun to offset some of the upside risk owing to contagion, leaving price risk more neutral at current levels.

N-T upside in soybeans, but copper and platinum face headwinds

We still see significant upside in soybean prices, but believe that copper and platinum will face near-term headwinds as higher oil prices potentially translate into a negative demand shock for the metals and as these commodities are exposed to supply chain problems resulting from the earthquakes in Japan. This is particularly the case for platinum given its large exposure to global automobile production. Copper also remains vulnerable to slowing observed demand as high prices and tight credit motivate tight inventory management from key consumer China, which tempers the inventory draw we had expected and the risk of price spikes. As result, we are also closing our long copper and platinum trades, but even in these commodities the structural supply-side story remains intact, and we would look for new entry points to establish new longs.


The Sell-off in Paper Gold

Last week was enough to give anyone attempting to squint through the media haze a headache. Operation whack-a-mole, the desert dictator’s edition… scalpel versus axe budget bickering… ballot box bungling in a state Supreme Court election… we-didn’t-until-we-did need a bailout plea from our port-sipping friends… the truth was scuttled by a violent torpedo… and on and on.

It’s getting harder every day to tell the editorial from the funnies page. Where is that bottle of aspirin?

The week just past also delivered some attention-grabbing news of a different sort. Silver continued to shine, waving goodbye to the $30 handle as it broke through the $40 level. The once forgotten stepchild of the precious metals family continues to thrill investors, up 31% this year.

Gold was no slouch either, closing at an all-time nominal high on Friday and chugging ahead 5.8% so far in 2011.

Amidst the swirl of concerns about not-so-latent inflation pressures adding helium beneath the entire commodities complex, a development in the gold ETF GLD that has been underway and largely unnoticed caught my attention. Take a look at this chart:

As highlighted within the oval, the number of ounces held in trust at GLD peaked in July 2010 and has been in decline since, as the number of shares redeemed has exceeded those created. Concurrent with the exodus of 3+ million ounces from GLD’s holdings was the steady rise in the gold price.

It’s impossible to know for certain what the motivation behind those doing the selling might be. However, it seems reasonable to assume that a good chunk of it is due to profit taking.

I know, I know. Who in their right mind would be selling now?

To those of us in the pro-gold, hard-money camp, selling now is like canceling your homeowners insurance upon sighting flames lapping above the canyon rim.

But the run-up in gold and silver prices has, as expected, attracted a lot of newbies into our sector that do not understand, and probably don’t care about, the fundamentals behind gold ownership. This is a sector with momentum, and they intend to play it for short- or medium-term profit. I’d be surprised if many of them own physical gold.

This underscores an important psychological difference in perception between physical and paper gold. The permanence and security of physical gold renders its owner less likely to sell. Paper gold is ownership in abstracta to be traded online with a few mouse clicks. This is why we recommend that every investor have a good-sized chunk of their wealth in physical gold (and silver) in their possession and under their control.

The selling in GLD bolsters our warnings about a possible correction in gold. Although we are delighted to see our favorite metal surge ahead, the surging has taken the price a bit too far, too fast. We are long overdue for a breather. The odds of a correction are further raised as we head into summer, historically a seasonally weak period for gold.

Corrections are a regular part of any trend and should be anticipated, even welcomed. Not only will they shake out speculative excess, they give us great entry points as a set-up for the next leg higher in the trend. If you are new to our sector or looking to add to your holdings, be patient. If you are adding to your holdings now, be prepared to add more at lower prices.

That’s exactly what the smart money does.

The arrows on the chart show that the big decline in gold in 2008 was followed by heavy buying that saw GLD’s holdings rocket by 17 million ounces. There is no reason not to think the same would happen again if we get a decent retreat in gold this summer.

Our motto for the next few months: Be smart. Be patient. Be prepared.

Drop In Silver Attributed To $1 Million 37% Downside Bet On SLV

With everyone transfixed by the relentless move higher in silver, stories, myths and virtually anything is used a catalyst to explain any move lower in the precious metal. While earlier there already were two rumors that the COMEX would imminently hike gold and silver margins again (so for untrue) what is true, and what many are attributing the move in silver to, is what according to some is an outsized option bet that SLV will drop 37% by July. Bloomberg reports: "A trader’s almost $1 million bet that an exchange-traded fund tracking silver will plunge 37 percent by July was today’s biggest single options trade on U.S. exchanges as futures on the metal reached a 31-year high. The 100,000 options to buy 100 shares each of the iShares Silver Trust (SLV) at $25 by July changed hands at the ask price of about 10 cents and exceeded the open interest of 6,054 outstanding contracts before today, indicating that a buyer of a new bearish position initiated the transaction. The ETF rose to the highest intraday level since trading began five years ago, $40.33, before erasing gains. It fell 0.5 percent to $39.67 at 12:54 p.m. It hasn’t closed below $25 since November."

“It’s definitely a massive downside bet on silver,” said Henry Schwartz, president of Trade Alert LLC, a New York-based provider of options-market data and analytics. “It’s so far out of the money that the buyer is probably just looking for a moderate pullback because a $3 retracement to where it was in March could double the position to $2 million.”

Silver for May delivery in New York climbed as much as 3.4 percent to $41.975 an ounce, the highest level since January 1980, when futures reached a record $50.35. It last traded at $41.33. Silver, where half of global consumption is industrial, has been rising because it benefits from a rebounding global economy as well as demand for a haven, according to UBS AG.

Of course, such a simplistic analysis certainly ignores what are likely numerous other components to a trade that is almost certainly multi-handed. After all let's not forget that it was none other than Morgan Stanley on Friday explaining why there appears to be a sizable short-gamma position in the market, which is substantially higher than just a $1 mm notional exposure, and which if anything, is a far more potent driver in the price of silver. Furthermore, if a $1mm bet is sufficient bet to push the market in either direction, then it is safe to say that there is absolutely no liquidity in the PM market whatsoever.

We are confident much more will emerge in the story of who is betting what and how much on future silver moves before June 30 comes.

Lastly, anybody out there heard of... gasp... hedging?

Barron’s: Bond Data Show Interest Rates Poised to Rise

The chart pattern for 30-year Treasury bonds indicates interest rates may well be headed higher, according to Barron’s.

“The debate over the lasting effects of QE2, the second round of quantitative easing by the Federal Reserve, rages on,” Michael Kahn writes in the publication.

“Some argue that the lack of core inflation and the desire for the Fed to hold short-term rates low for the foreseeable future will keep longer rates in check. Others see a weak U.S. dollar and the flood of money into the system as catalysts for higher prices of necessities like food and energy.”

Treasury price charts give credence to the latter view, he says. The 30-year bond yield hit a 10-month high of 4.78 percent in February and then slipped back into what technical analysts call a trend channel for about two months.

Ben Bernanke (Getty photo)
But now rates are heading higher again, with the 30-year yield closing Friday at 4.64 percent.

The key point now is 4.85 percent, Kahn writes. “This level traces back several years and is an important ceiling.” So if that ceiling is breached, it could be off to the races for interest rates.

Others see rates rising too.

“The Fed’s acknowledging increasing inflation expectations,” Priya Misra, head bond strategist for Bank of America Merrill Lynch, tells Bloomberg. “That’s putting more pressure on yields. Momentum is going to be for higher rates."

Stock Market Valuations Forming Second Biggest Bubble in US History

Despite the terrible economic performance of the past ten years (both in terms of the markets and the general economy), equity valuations are now approaching the second largest bubble in United States history, surpassed only by the technology bubble. Both the cause and the potential ramifications of this development are astounding.

Exhibit one: The cyclically-adjusted price-to-earnings ratio, or CAPE.

This is not a “fad” valuation metric. CAPE dates back to 1871, offering 140 years worth of data, during which time the mean price-to-earnings ratio is 16. According to Yale University’s Dr. Robert Shiller, the market is now 41% overvalued according to this valuation metric. The only time the markets have been more overvalued was a few brief months in 1929 and the tech bubble.

Exhibit 2: The Q ratio, which measures total market value compared to its replacement cost.

The Q-ratio data in the chart below dates back to 1900. According to the data, the markets have now surpassed the 1929 peak valuation by over 8%. In United States History, only the tech bubble was bigger than what we are experiencing today.

Historically, bubbles turn a believable story and a trend into an overvaluation. In the 1700s during the South Sea Bubble, the mania driving the bubble was the seemingly endless wealth and prosperity of the New World. Railroading prospects induced a bubble in the late 1800s as America became connected from the east coast to the west coast. In the 1920s, a bubble formed on belief in the newly formed League of Nations (world peace), and more importantly, the society-changing impact of the automobile. A similar life-changing invention – the Internet – swept the attention of investors in the 1990s as the prospect of a virtual marketplace would forever globalize commerce. Every bubble has a story, whether it be tulips or inventions or some other craze.

What is the story today? The prospect of inflation? High unemployment?

Exhibit 3: The gap between projected 12-month earnings against the 10-year average. (Two notes: a. the chart from Bloomberg fails to insert the word ‘projected’; Robert Shiller references this chart in this Bloomberg article. b. the 10-year average is the cyclically adjusted price to earnings ratio).

Considering the power of mean reversion, the market is stretching this reversion greater than 2000 and 2007!

Another question. Could the growth in earnings have been artificially manufactured?

To quote Elizabeth Barrett Browning: “Let me count the ways.”

  1. The change in accounting rules for the financial sector by FASB has generated massive “false” account profits beginning in 2009.
  2. The extended (and then further extended) unemployment benefits have kept an artificially higher demand for consumer consumption. As a result, the US government has artificially subsidized corporate profits.
  3. The billions saved through “free loading” by homeowners who have defaulted on their mortgages yet maintained their residence, thus living without a mortgage payment.
  4. The artificially suppressed interest rates.

So, not only do we have a valuation bubble, but the earnings on which the projections are based are non-sustaining, and non-market driven. Brilliant. Again, I am left wondering how it is possible to find ourselves in the same overvaluation situation as a few years ago especially considering nothing has been resolved to actually fix the world’s economic system.

A parting thought: according to research conducted by the Duke University Medical Center, it would seem that even monkeys are even capable of learning from their mistakes. Why can’t we?

Trade of the Week: Buy Gold

Today's Trade of the Week is an element that is one of the most malleable and least reactive chemicals known to man. It's also used for practical and symbolic purposes.

It's highly sought after and its value continues to rise to new highs even after a multi-year bull market.

What is this element?
If you haven't guessed, it's gold.

Historically, it has been one of the most common forms of monetary exchange throughout human history. Its secondary place to paper currency did not come about until the 20th century.

And with gold rallying to record highs almost daily, it's seen increasingly as a way to protect oneself against worldwide currency inflation.

Inflationary worries were prominent news this trading week. China's central bank raised its interest rates -- for the fourth time since mid-October -- to head-off price increases running at nearly 5% a year. The European Central Bank also raised rates for the first time in nearly two years, in order to curtail rising food and energy costs.

In the United States, rising interest rates may be on the horizon as the Federal Reserve assesses the need to control recent spikes in commodity and energy prices. Several Fed governors have turned hawkish and stated rates may need to rise before 2011 is over.
Add inflationary worries to a weak U.S. dollar, intensifying geopolitical tensions and continued natural disasters that are wreaking economic havoc, and gold should continue to perform well.

A great way to play the gold rush without having to invest in volatile gold mining stocks is to purchase the metal through a gold bullion exchange-traded fund (ETF).

SPDR Gold Trust Shares (NYSE: GLD) is the largest physically-backed gold ETF.
Because the bullion is bought and held in a vault instead of invested through futures contracts, as a trader, this means you can in effect own physical gold without having to literally purchase and store it yourself.

The ETF has a reasonable expense ratio of 0.4% and currently has a total net asset value of about $56.4 billion. In the past year, GLD has returned 29%. By comparison, the S&P 500 has increased about half that, or 14.3%.

Technically, it appears GLD could continue to rise on strong momentum.

The fund is in a Major uptrend and surpassed an important resistance zone between $139.54 and $142 during the trading week of April 4.

The ETF hit the lower level of this resistance band several times in late 2010, but was not able to break it. Unable to maintain strength, GLD fell to a low of $127.80 in January 2011, testing the Major uptrend line, which intersected around this level. However, in mid-January 2011, the fund quickly bounced off $129.83 support and has been on the rise since.

An accelerated Intermediate-term uptrend line has now formed. This uptrend line, which intersects with resistance near $140, marks the formation of a second small ascending triangle pattern, bullishly formed off a larger ascending triangle, marked by the Major uptrend line and $129.83 support.

Since GLD has just bullishly broken out of this second ascending triangle, the trend is up.

According to the measuring principle -- calculated by adding the height of the triangle to the breakout level -- GLD could easily reach a target of $154.65 ($142.24 - $129.83 = $12.41; $12.41 + $142.24 = $154.65).

With no historical resistance in sight, the fund could easily soar higher. As a result, a target could potentially be double the triangle's height ($12.41 x 2 = $24.82; $24.82 + 142.24 = $167.06).

The indicators -- RSI, MACD, Stochastics and Williams %R -- are all bullish.

Since early 2011, RSI has been in an accelerated uptrend. At nearly 70 and rising, RSI is approaching, but has not yet hit, overbought levels.

MACD has given a buy signal, indicated by the black line crossing above the red line. The MACD histogram is now poking its head in positive territory.

Stochastics and Williams %R, both overbought/oversold indicators, show the fund is overbought, however, both remain on buy signals. Strong securities can become and stay overbought for long periods of time.

Given GLD's strong fundamentals, combined with the current threat of inflation, I plan to go long on GLD. I will enter the trade at the market's opening on Monday, April 11. My stop- loss is $129.82, just below important historical support from September 2010. My target is $167.06. The current risk-to-reward ratio is about 2:1.