A Melman Minute
| By | Leonard Melman |
|---|
During the past two weeks, gold has given optimists a sense of relief by rallying from a recent low just above $1,180 to near the point of previous break down, $1,240 before settling in at $1,235 as this is written. At first glance, this rally is little different from the numerous counter-trend rallies which have taken place during the past 40 months and which have inevitably been followed by selling waves. However, the background relating to gold and silver may be undergoing an important change.
Throughout those 40 months, gold was fighting a relentless powerhouse rally in the general securities markets and, as we have frequently noted, strong securities markets generally make for weak precious metals markets. Lately, when we look at important securities index charts such as the two-year chart of the S&P 500 Index, that may indeed be changing and perhaps in an important way.
Please note that the S&P 500 Index has now declined from roughly 2,020 down to below 1,860, a drop of some 160 points or about 8%, the largest percentage decline during the past two years. Of great importance, the index has been declining rapidly despite an array of positive economic news which has been released during the past few months.
In our opinion, this sharp decline could represent a growing perception that there are immensely serious economic problems which continue to exist and which could soon erupt into major difficulties for which the central banks of the world have no reserve 'ammunition' to bring into the battle.
Clearly, something is brewing out there - and I don't mean coffee or tea!
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Obviously, there are still serious problems for the precious metals before an all-out resumption of the golden bull can take place and we believe commodity prices may be a particularly important 'key' indicator. On that score, present action across the world of commodity trading could hardly be worse as we are seeing dramatic declines in precious metals, some base metals, all grains and, of particular importance, a sudden and drastic decline in the petroleum complex including Crude, Heating Oil and Gasoline.
Given that the Canadian economy is highly dependent upon resource development, it should come as no surprise that the C$ has been in rapid decline and now stands at the lowest level in five years, barely 88 cents to the US Dollar.
Given its dependence upon natural resource pricing, it should come as no real surprise that when we look at the 25-year chart, the importance of the C$ in our precious metals analysis becomes clear. Please note the almost eerie time similarity between major moves in gold and silver compared with the timing of major moves in the C$.
First we note a general decline from 1990 through 2002, a period during which gold and silver also performed poorly. Next we saw a striking rally from 2002 through 2008, a period during which gold and silver rallied significantly. Then we saw a sudden and sharp selling wave take place in the C$ and gold into mid-2008, followed by another powerhouse rally which carried both charts to new highs in 2011. Since then, both charts have gone into decline, with the C$ now touching the lowest quote since early 2009.
Clearly, action in the C$ has been a useful indicator of precious metals directional moves and, therefore, we will continue to closely monitor this currency.
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As noted, the price of the petroleum complex has been weak for some time, but what has happened during the past week has caught many observers completely by surprise as the quote on items such as Crude Oil and Unleaded Gasoline has suddenly gone into virtual collapse, as evidenced by the daily (six months) chart of Crude Oil which has lost a stunning nine percent of its value in the past five trading sessions.
While consumers may be pleased by these price declines, there are several governments such as major oil producing states in the USA and provinces in Canada which must suddenly face the reality of steeply declining revenues from the petroleum sector - and, in many cases, those revenues constitute a major portion of overall receipts. Clearly, this threatens to curtail government spending or induce a heavy increase in the provincial or state debt burdens.
Like the C$, we regard action in the petroleum markets to be an important indicator of performance in the precious metals.
In addition, we also note an almost panicky move into United States Treasury bonds and plan to discuss that indicator on Friday.
EARLY WEDNESDAY DATA as of 7:30 AM PDT
(NOTE: Markets have been gyrating wildly since trading opened, therefore these quotes must be regarded as simply representative of action at one specific time.)
Dow Industrials, 16,117, - 168
TSX Index, 13,900, -135
Gold, $1,237, + $6
Silver, $17.49, + $0.10
Base metals, (average), - 1.5%
Mining share indexes (avg.), + 0.5%
US Dollar Index, 85.37, - 57 basis points
TYX Index (30-year bond rates), 2.818%, - 139 basis points
Crude Oil - $82.31, + $0.47