Saturday, December 14, 2013

More Upside Ahead for Gold

It's about time for a gold rally.
After the bullish setup we saw two weeks ago, it was disappointing to see the precious metal decline and nearly take out support at $1,210 per ounce. That would have shifted the short-term view to bearish.
But it didn't happen.
Gold managed to hold above its support line. And it bounced back strongly – to the point where anyone who bought the metal on my recommendation last month is now showing a profit on the trade.
And there are even more gains ahead...
In November, we looked at a weekly chart of gold and the positive setup in the MACD indicator. Today, we're looking at the daily pattern. And it's bullish. Take a look...
daily gold price chart MACD

Gold has broken out to the upside of a bullish falling-wedge pattern. And it has done so with a positive cross on the MACD, a momentum indicator.  (more)
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Silver is a better long term investment than gold, David Morgan Interview

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Coffee...A Multi-year low is now in the Rear View

For the last five weeks a base has been building in March coffee futures just above the $1.05 level. Two significant developments this week we will see a settlement above the 20 day MA and with futures trading at their highest trade in seven weeks it appears we will get a  settlement above the down sloping trend line that had capped upside for the last seven months. Current trade has futures 3.50 cents below the 50 day MA (light blue line) which has not been penetrated in all of 2013. I expect that to play out in the coming weeks with my objective being the 38.2% Fibonacci level near $1.30 on this contract. The train is just leaving the station and I believe their is time to get on board. The seven year low that was reached in recent weeks may not been revisited for many years in my opinion.
The recent  appreciation has been accentuated by short covering and the idea that a near-term shortage of Robusta beans has the potential to drive up demand for Arabica. Growers in top Robusta producer Vietnam have been holding back their beans, waiting for higher prices...despite harvesting a bumper crop. That has lifted coffee prices on the Liffe to a near 3 1/2 month high. The gap between the two different blends narrowed last week to a five year low near 28 cents/lb. A rise in consumption is expected by 1.6% year over year in Arabica - the largest jump since 07-08'. Before getting too excited 14' is expected to be the third year of surplus production so Bulls should take their profits on a spike higher in the coming weeks.
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Combining Two Powerful Technical Tools

There are a wide range of technical indicators that traders and investors can use to determine the market’s trend and to pick stocks. I have found that the most effective combination of indicators use either different data or non-correlated data.

For example, if you were to use the MACD-His, RSI, and stochastics you are likely to get similar results from all three as all are based solely on price. In many of my columns I generally feature two key technical tools even though I do use others.

The first is the on-balance volume (which I discovered from Joe Granville’s book before I even had my first computer), which is my favorite volume tool and one that I have used confidently since the 1980’s. Looking at the monthly, weekly, and daily OBV analysis can give you a good idea whether a market is being accumulated or distributed.  (more)

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IBTimes Interview: sentiment, seasonality and risk management

I had the opportunity Tuesday night to sit down and chat with Jessica Menton over at International Business Times. She was particularly interested on how I approach sentiment, seasonality and risk management. She pointed out to me that technicians, in her opinion, focus more on what and when, rather than the why. So she had me explain that a bit. I think overall, we discussed some pretty important topics.
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Are Rare Earth About To Move Higher?

Senate Bill Sets Stage For Significant Upside In Moly Corp And US Rare Earths
The supply of rare earths has been dominated by China for the last several decades but it was not until the real boom of the hi-tech equipment that not only used rare earths but have no alternatives that this became a potential critical issue for all countries. Use of rare earths fall into multiple electronics categories ranging from your cell phone to the every growing popular electric cars. Almost every device that is used on a daily basis and in the military that over the last 10 years has become smaller, cheaper and more powerful relies on these materials. With the dominance of supply coming from China this has been an increasing worry for all countries and until recently not addressed by the US government in any way. That may be changing with the recent bill being introduced by Missouri Republican Sen. Roy Blunt who is floating a measure to promote the domestic production of rare earth elements as part of the ongoing Defense Department funding. There is no guarantee that this bill will ever become part of the final defense budget but it is a good indication that this potential problem with China restricting supplies is finally getting the attention it deserves as a potential risk to national security. This article will focus on two domestic rare earth suppliers. The first is Moly Corp (MCP) which has been in production for several years and seems to finally be on the cusp of achieving long term profitable production. The second is US Rare Earths (UREE) who is a start-up company with plans to be in production within 2 years that also holds the world’s largest supply of Thorium which as part of Senator Blunt’s bill is critical to future generation nuclear reactors.
US based Moly Corp that was founded in 2010 owns and operates the Mountain Pass rare earth facility in San Bernardino County, California. Over that time the companies stock has traded as high as $70 during the rare earth hey days to a low of around $4.5 which it is not far above at this time. While outright speculation in rare earths in early 2011 was the main driver for record highs the fundamental demand for the rare earth materials has only grown over that time and yet the company valuation is at a record low. A recent article written in November by Jason Bond, Molycorp Multi-Bagger Potential In 18 Months, did an excellent job of explaining exactly why Moly Corp is finally on the edge of living up to its potential. Its facilities are close to becoming profitable producing rare earths and that should only improve as rare earth prices increase as demand grows and supply is further restricted by China.

The second domestic rare earth company to be discussed is a developmental stage mining company called US Rare Earths.I first discussed this company in an article back in October entitled In Search Of U.S. Rare Earths Independence. Since that time the company has been very busy not only proving up resources, U.S. Rare Earths Locates One of the World’s Highest Critical Rare Earth Concentrations in its North Fork Properties, but raising money and adding to its already very distinguished board of directors with the addition of General Tommy Franks and former US senator and governor Bob Kerrey. What was not highlighted previously but is certainly worth noting with the recent Blunt bill is its deposit of Thorium. Thorium which has long been discussed as early as 2009 by industry expert Jack Lifton as a possible alternative for future nuclear plants, was first identified as a resource on these properties years ago when the company was originally named Thorium Energy. Much of this history can be found in an interview done back in 2009 entitled US Rare Earths, Inc.: A discussion with Ed Cowle and Jack Lifton. As pointed out in the interview the company did not change its name because of the lack of Thorium but only because the market was being slow to develop. It seems like that may be changing with many recent articles on the future use of Thorium. A quote from Jack Lifton during that interview is below:
“Now, in the original deposits that I looked at for US Rare Earths, there was very high thorium content, so high that the USGS refigured its chart of where the thorium is in the world, and putting that deposit in there caused the United States Geological Service to declare the Lemhi Pass region as the world’s principle resource of thorium, the largest deposit there is.”
While rare earths have certainly fallen on hard times in the investor community there are strong fundamentals with these resources to indicate that better times may be ahead. Certainly in the future the devices requiring them will only continue to grow in usage and therefore increase demand. The risk associated with relying on a foreign supplier has been known for years and at some point may become a much bigger issue. Whether the Blunt bill will ever become a part of the Defense budget is not known. If not that bill then another bill titled Critical Minerals Policy Act of 2013, was put forth by Senate Energy and Natural Resources Committee Chairman Ron Wyden (D-Oregon) and the Ranking Member of the committee, Lisa Murkowski (R-Alaska). This proposal also indicates a new focus in this area and might especially help US Rare Earths. One of the key provisions in the bill is the following:
Avoid duplication, prevent unnecessary delays in the administration of applicable laws and issuance of permits and authorizations necessary to explore for, develop and produce critical minerals, and to construct critical mineral manufacturing facilities in accordance with environmental and land management laws; Both of these stocks offer investors an avenue into investing in the rare earth space. Moly Corp is finally ready to profitably produce rare earths and US Rare Earths has both the assets and political connections to make it into production in the next several years.
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The Five Biggest Asset Bubbles in History

Between the stock market, bitcoin, and tech IPOs, today everyone seems in a race to spot the next biggest asset bubbles readying to pop.
The term "asset bubble" indicates that there is a marked, noticeable divergence between the market price of an asset and its fundamental value. In other words, something that people store value in - a coin, a house, a share of stock - is valued much, much higher than the thing itself could possibly be worth.
Bubbles usually end with crashes: double- or triple-digit percentage losses in the price of the inflated asset over a very short time.
Bubbles - called "manias" prior to the 18th century - have probably been around as long as people have wanted to get rich quickly.
The next biggest asset bubble to pop remains to be seen, but in order to break the top five, it has to be incredibly damaging.
Just take a look at the five biggest bubbles to ever exist, and the destruction they inflicted on the economy:

Five Biggest Asset Bubbles Ever

Asset Bubble #1: Tulipmania, 1636-1637.
The first asset bubble, the one everyone knows, started in the Netherlands, and the asset involved was the harmless, beautiful tulip. It's unclear exactly how this bubble got started, but it probably had to do with the novelty of the flower. The tulip had only just been introduced from the court of the Ottoman Sultan and was unique among European flowers, at the time, for its vibrant, unadulterated color. The tulip seems to have been a conspirator in its own bubble. The bulbs take nearly a decade to mature, and only last a few years thereafter. And then there was the "Tulip-breaking virus," which changes the coloration of tulips, resulting in vivid striations in the normally single-colored bloom. These infected bulbs were the focal point of the speculative bubble. According to Charles Mackay's Extraordinary Delusions and the Madness of Crowds, a single bulb of the coveted "Viceroy," with a pattern of imperial purple and white stripes, sold for between 3,000 and 4,100 guilders in 1636. The "Semper Augustus" - tulip growers often gave grandiose names to their rare bulbs - sold for 1,000 guilders in the 1620s and 5,500 guilders in 1637, according to The Economist. A skilled laborer, by contrast, might earn 150 guilders in a year. Economist Earl Thompson showed a 20-fold increase in the price of tulip bulbs between November 1636 and February 1637. In February 1637, though, buyers simply stopped showing up to routine auctions. Prices collapsed, falling 20-fold between February and May 1637. The bubble popped, but the Netherlands would continue to be a financial powerhouse well into the 18th century.

Asset Bubble #2: South Seas Bubble, 1720.
The South Seas Bubble - the first bubble actually called a "bubble" at the time - grew out of a government's inability to manage its money. When war broke out with Spain in 1718, the U.K. Parliament attempted to consolidate about 30 million pounds in debt (about $6 billion in 2013 dollars) through the South Seas Company, a joint-stock company organized to consolidate government debt and, occasionally, trade with South America. The company agreed to do so, giving existing creditors shares in the company in exchange for their debts from the government, receiving as dividends shares of a 5% interest payment Parliament would make to the company. New stock would be issued equal to the face value of the debt. Share price increases above that would go to the company for its profit and to pay a quarterly fee to the government. The scheme was put into place in 1720. The Company rewarded its friends in Parliament, offering them shares. But the company had no shares to offer, as the debts had not yet been converted. Instead, it simply promised the new shareholders the option to sell the nonexistent stock back to the company at any time at market price, pocketing the difference. The directors of the company set about inflating the share price, making wildly exaggerated claims about the value of trade with South America. In 1720, the price of South Seas Company stock went up 680% from 128 pounds to 1,000 pounds and fell to 150 pounds over the course of nine months. The only thing underneath the bubble was the exaggerated claims of the value of the South American trade made by the South Seas Company's directors. Isaac Newton, who lost around 20,000 pounds, is reported to have said of the bubble, "I can calculate the movement of the stars, but not the madness of men."

Asset Bubble #3: The Florida Land Boom - 1920-1926.
Florida is many things: beautiful, warm, populous. But it is not rich in stable, arable land for construction. Much of the state is a swamp, yet in the heady days of post-World War I America, it was the place to make a fortune in land. The boom swept down the east coast of Florida and up the west. Entrepreneurs and hustlers laid out plans for subdivisions, towns, and resorts to take advantage of the state's undeveloped coast and interior. Stories of people getting rich from Florida real estate flooded out of the state as people flooded in. According to Frederick Allen's 1931 book Only Yesterday, a plot in the center of Miami Beach bought for $800 in 1920 sold again in 1925 for $150,000. Land bought for $240,000 in 1911 sold in 1920 for $800,000 and was parceled up and sold in 1921 for $1.5 million. The vehicle for this asset inflation speculation was the "binder" - a piece of paper representing a plot shown on a blueprint, and bought for 10% down, with payments for the balance due beginning 30 days from the sale date. These binders changed hands with remarkable velocity - most people apparently bought them with the intention of turning around and selling them well before the first payments came due. Advertisements for real estate sales were so numerous that the Miami Daily News printed an issue 504 pages long. But the rapid growth put a massive strain on the state's resources. Railroads embargoed imperishable goods for fear that clogged rail lines would cause famine. Then, in January 1926, the schooner Prinz Valdemar sank in Miami harbor, completely blocking sea access for goods and people. This, in turn, halted Florida's land boom - new construction could not progress without materials, and new "investors" were not stepping off the boat. Further, people still holding "binders" were defaulting on the payments as they came due. In September 1926, a hurricane put the final kibosh on Florida's boom, wiping out developed property and killing some 400 people.

Asset Bubble #4: The Roaring 'Twenties - 1922-1929.
The stock market bubble and ensuing crash of the 1920s is the enduring benchmark for all asset bubbles, speculative manias, and general financial insanity since. It's also probably the second-best known on this list - only recently displaced by the subprime housing bubble of 2002-2007. This one kicked off with the end of World War I: Massive pent-up consumer demand drove purchases of radios, refrigerators, automobiles, and other consumer products. An expansion of consumer credit - buying on layaway and installment - increased demand for new products and helped improve corporate earnings, which helped support growing stock market prices. At the same time, the newly created Federal Reserve Bank and relaxed restrictions on margin trading helped fuel rising prices with easier credit for investors. Rising prices encouraged more people to get into the stock market, which drove up share prices. The most popular investments tended to center around new technology, like automobiles, radios, and airplanes. In 1928 alone, radio stocks rose 400%. The stock market reached the peak of this boom in September 1929, with the Dow Jones Industrial Average at 381.17, up 500% from 63 in 1921. Throughout September and October, the Dow would fall fitfully, with occasional, brief recoveries. Then on Black Monday - Oct. 28, 1929 - it fell 12.8% to 260, and fell another 11% the next day to 230.07. Between the peak in September, and the close on Oct. 29, 1929, the Dow lost 40% of its value. The '29 crash is considered the beginning of the Great Depression, and the Dow would not reach pre-crash levels until well after World War II.

Asset Bubble #5: The Housing/Subprime Bubble.
 It almost seems cruel to mark out the gory details of the most recent popped bubble, as the global financial system is still on shaky ground, six years after the bubble burst. Instead, here are the simple facts of the case. Between 1997 and 2006, the price of the average American home rose 124%. The ratio of median national home price to median household income expanded from about 3.0 for the two decades prior to 2001 to 4.6 in 2006. Prices peaked in 2006, and, according to the Case-Shiller index, fell 20% by 2008. At the same time, U.S. foreclosures tripled to 300,000 as borrowers were unable to refinance mortgages on properties whose value had fallen, but whose interest rate had increased. Meanwhile, mortgages themselves had been rolled up, monetized as mortgage-backed securities, and sold globally as investment grade instruments, because no one misses mortgage payments, ever. As the investments built around housing started to collapse along with home prices, the complex web of financial bets disintegrated with it, bursting the bubble and bringing the global economy to the brink of destruction.
Asset bubbles, like bad pennies and worse monetary policy, are always with us. They come and they go, leaving both wealth and destitution in their wake.Please share this article