A Melman Minute
| By | Leonard Melman |
|---|
It has been almost amusing to listen to commentary from many financial channels and even 'conventional' newscasters. If you listen to their tone, you might expect that the financial markets have been putting on a strong performance of late. After all, day after day we have been hearing material such as "…the Dow recovered from its worst levels of the day…" or, "...the Dow rallied sharply into the close…" or, "…buyers showed up after early selling…"
But this type of commentary illustrates why I love charting and why I believe charts offer the best method of objective analysis. Charts - and other forms of technical analysis - simply show what has actually taken place, without slants or biases. And the Dow two-year chart tells us an interesting story which is that the Dow Industrials, despite all the commentators' blather, has undergone a severe decline during the past few weeks, the worst on an absolute basis during the past two years.
Given our primary interest in the precious metals and our oft-stated belief that gold and silver move counter to important general stock trends, it is vital that we have a clear understanding of those trends and that is particularly true within this present time frame.
Ever since their peaks during mid-2011, gold and silver have attempted to initiate a new and powerful resumption of the historic bull market which began in 2001-03 but all those efforts have been futile in the face of one of the most powerful Dow and S&P 500 surges on record which has lasted from early 2009 through the present time. If the recent decline in the Dow of approximately 1,450 points in just five weeks turns out to be an indication of a genuine securities reversal - then it could quite conceivably open the door to important precious metals rallies which could then reverse the downward forces of the past couple 40 months.
Speaking of gold, it has indeed rallied somewhat from the short-term oversold conditions of two weeks ago, but so far the rally has merely recovered back to the point of breakdown near $1,240 and could easily be nothing but a snap-back rally within a bear move.
The real test will be to determine if gold can continue moving above previous support levels and finally, break out into a strong recovery back toward the year-long trading range upper limit of $1,430.
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Every so often, we may glean some useful information by comparing action in two markets which, by historic standards, should move somewhat in tandem but which are now giving conflicting signals. Two such markets are action within the 30-year Treasury Bond Rate Index (TYX) and the price of lumber. One would normally expect that as long-term bond rates declined, taking long-term mortgage rates down with that move, the lumber market would move strongly ahead since low mortgage rates are a vital component of a robust retail housing market, but that has not been the case of late.
Please note that the lumber market has suddenly encountered some serious selling at the very moment long-term bond rates have gone into an almost relentless period of decline, plunging in just one month from 3.39% to just 2.95% - a significant move within major interest rate markets.
One possible explanation we would suggest is that interest rates are plunging because demand for money by industrial corporations is dropping in many parts of the world thanks to declining levels of economic activity, causing a flow of funds out of those countries and into the one apparent remaining island of economic stability, the USA. In that case, the decline in rates would actually be suggestive of economic troubles and now the kind of prosperity which would drive new and exciting demand for additional housing construction.
Carrying that trains of thought further, if that is so, then what we may be truly observing is the old theoretic comment that activities of central banks designed to increase loan activity have merely been representative of the old adage of "pushing on a string", meaning there has been no substantial boost in sound economic activity as the result.
Finally, is that is so, then we may very well at last see the kind of desperate money creation on an expanding scale which - combined with presumably declining general securities markets - will provide the background for a genuine, powerful and long-lasting reversal in the precious metals to the upside.
Lots of possibilities abound - and we will rely upon our various charts to provide what I hope will be sound interpretations going forward.
(PERSONAL NOTE: I am personally pleased to have an opportunity to visit my son who resides along the beautiful Central California Coast for a few days of hiking, beachcombing and general laid-back enjoyment. As a result of this trip I will be totally out of touch on Monday, October 20 and again on Monday, October 27 and will be unable to publish an MM for those dates. I anticipate no further rescheduling of MMs for the rest of the year.)
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General financial markets have opened sharply higher this morning, but it is far too early yet to determine if this buying will put an end to the severe declines noted above or if they are simply a bit of relief from a short-term deeply oversold condition.
EARLY FRIDAY DATA as of 7:10 AM PDT
Dow Industrials, 16,285, + 167
TSX Index, 14, 189, + 136
Gold, $1,234, - $7
Silver, $17.33, - $0.10
Base metals, (average), + 2.0%
Mining share indexes (avg.), - 0.4%
US Dollar Index, 85.21, + 17 basis points
TYX Index (30-year bond rates), 2.971%, + 35 basis points
Crude Oil - $83.22, + $0.52