A Melman Minute — June 22, 2011
| By | Leonard Melman |
|---|---|
| Date | June 22, 2011 |
In an important move which appears to have caught many observers by surprise, gold appears to be moving higher once again and now stands on the brink of an important technical breakout. As can be seen on the chart, gold has traded this morning as high as $1,559 or within only $18 of its historic high. A breakout above that level will complete a rising right-angle triangle chart pattern, one which historically has had positive implications.
As can be seen on the one-year chart of gold, the recent rise has now exceeded the earlier recovery peak near $1,550 and only the late April high of $1,577 remains to be surpassed. It is also clear that the intermediate bullish trend remains intact.
The strong move in gold is somewhat surprising when compared to charts of other metals such as silver, platinum, palladium and copper all of which remain substantially below their market peaks. Among the major trading metals, only gold has performed this well.
In our opinion, golds relatively superior performance is based on the realization that the two major forces which have led to enormous fiat money creation, primarily by the US government, are still intact. We believe these two forces are the maintenance of artificially low interest rates and a vast array of stimulative actions, particularly including QE1 and QE2.
And so, we believe it is important to filter the parade of background news through the lens of whether these two forces will remain in effect - or even accelerate into the future.
Clearly, the state of the US economy is of great importance and news released this morning by the National Association of Realtors (NAR) is hardly encouraging as they reported that sales of existing homes fell another 3.8% in May and the median existing-home sales price for May was $166,500, down by 4.6% from May 2010.
The report specifically pointed to the inability of people to sell their present homes in order to buy larger ones as a major factor in the sales decrease. During the halcyon years from 2000 through 2006, the ability to sell one price-level home, gain a significant profit and leverage into a higher-priced home was a major factor in the explosive bull market which took place.
At present, with millions of homes under water, or selling at prices far below existing mortgages, huge numbers of potential upward traders simply do not have the ability to make such transactions. This has the effect of severely limiting the potential number of purchasers of higher priced homes and they suffered through the heaviest relative declines in the NER report, falling by a whopping 19% while sales of homes priced under $100,000 were actually up by 6.7%.
Stan Humphries, chief economist for Zillow.com stated the situation quite clearly in an interview with the Wall Street Journal, noting, ...What negative equity has done to the market is to gum up the conveyor belt that has worked pretty well. People cant move up a rung because they cant get out, or they dont want to.
In any case, the real estate market remains slow and we consider this to be a significant negative for the American economy, which we believe raises the likelihood that the government will continue to push for economic stimulation of one sort or another for some time into the future.
On another front, debate continues to move forward on how to resolve the advancing crisis regarding the National Debt Limit which currently stands at $14.294 trillion, far below the present debt figure of $14.351 trillion. Thanks to some smoke and mirrors accounting by the U.S. Treasury, they have been able to postpone a day of reckoning until August 2, the new hard deadline before which a resolution expanding the debt ceiling must be passed. Of course, Congress could opt to refuse to extend the limit, in which case the government theoretically could only spend what came in as current income, but that would involve shutting down huge portions of the federal government and no politicians wants to be involved in the chaos which might ensue.
Therefore, we believe there appear to be two choices for a resolution to the debt limit problem. One is to simply temporize by creating a new limit a few hundred billion dollars above the old one to give some breathing room for further debate - while the Administrations preferred solution would be to expand the debt limit by more than two trillion dollars which would carry the Treasury through and beyond the 2012 Presidential elections.
In any case, there is no real answer in sight, just game-paying of a critical nature and it is our opinion that gold is reacting positively to this reality.
As of 10:00 AM PDT, gold continues to rally and is currently trading near $1,556 while silver is up about 30 cents to near $36.80 per ounce. Base metals are up moderately while mining share indexes have been putting in an outstanding performance over the past two sessions, up by about 6% from their recent lows (see short-term chart on XAU). Financial markets in Canada are mixed with the TSX Index ahead by about 60 points while the Dow Industrials are close to unchanged.
In other markets, the US Dollar is trading within a relatively narrow range, long term interest rates are slightly lower and the price of Crude Oil is rallying, back up to near the $95 per barrel mark.