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This market is so wild, so volatile, that I’m calling it the “Andy Warhol market” — everyone gets a turn to be right, but only for 15 minutes at a time!
And right now, there are massive forces lined up that could thrust stocks and commodities to the moon … and an equally formidable array of triggers that could send them tumbling lower.
The stocks I’ll leave to others …
But let me show you the forces that are pushing around gold and oil. Plus I’ll give you four ways to play these wild swings.
Gold-ilocks and The 3 Bears
I’m generally bullish on gold, so it’s good to acknowledge the bearish forces as well. While total gold demand rose 18% in the third quarter, the fourth quarter was when the grizzlies really came to town …
Bear #1 —
Jewelry demand
under pressure
Jewelry demand represented two-thirds of global gold demand last year. So I’ve been watching to see how the world-wide recession is affecting jewelry sales.
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Most places haven’t reported fourth-quarter numbers yet. But the reports aren’t good out of Abu Dhabi. Gold jewelry sales in the most prosperous city in the United Arab Emirates fell by 40% from November to December.
We’ll have to see how other gold centers did. But there are also reports that many hard-pressed consumers are now selling their gold jewelry. If they’re selling, they’re not buying.
Bear #2 —
India gold imports down
India is the world’s biggest consumer of gold. So it’s worrying that India’s gold imports tumbled 81% in December — hitting just 3 metric tonnes compared to 16 metric tonnes a year earlier.
On the other hand, part of this is due to the deadly terror bombings in Mumbai. So we might see that the demand is just delayed.
Bear #3 —
Gold is banging
its head
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Look at a weekly chart of gold and you can see that overhead resistance is hemming in the yellow metal.
In the short-term, it looks like gold could retrace to lower support levels.
But if it can break out, gold could easily run up to $940 and higher.
There are also fundamental reasons to be bullish in the longer term …
Gold’s Three Bears Are
Balanced by Three Bulls
Bull #1 —
Gold mine supply
peaked in 2001
Despite a seven-year bull market in gold, mine production has fallen to a 10-year low.
Bull #2 —
Credit crunch increases
pressure on supply
The global credit crunch is choking off financing for new projects just as the recession dampens demand for base metals. Freeport McMoRan Copper & Gold, Cameco, Newmont and Jaguar Mining are examples of miners that have delayed new projects or cut back existing operations.
Bull #3 —
Money supply is exploding
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This Monetary Base chart from the St. Louis Fed shows currency in circulation and in the Federal Reserve Banks.
The monetary base was increasing at 3-to-4% per year through September 2008.
But then it kicked into overdrive and accelerated to a mind-blowing 990.9% annual rate for the three months ending December!
That can only be described as a monetary volcanic eruption. And averaged out, that’s an annual increase of 86%.
Inflationary? Heck, yeah!
Broader measures of the money supply are also ramping up, though not at the same breakneck pace.
The St Louis Fed’s Money of Zero Maturity, or MZM (which tallies up currency, checking, savings and money market accounts but not certificates of deposit), has risen at an annual rate of 16.6% in the last two months or 10.1% year over year. While some of this money will go to “money heaven”, that is, be used to unwind leveraged debts, this amount of money sloshing around in the system is bound to be inflationary over the longer-term.
Inflation eats away at the value of the U.S. dollar. As the dollar goes down, the value of gold and other commodities priced in dollars tends to go up. That’s what I call “the seesaw of pain.”
Gold is just one example of this mixed-up market.
Let Me Also Show You the Bearish
AND Bullish Case for Oil
Bear #1 —
Supply is up
There is a surplus of oil on the market — such a big surplus that one estimate says at least 25 tankers holding 2 million barrels of oil apiece (50 million total) have been turned into floating long-term storage containers.
Oil companies are doing this because of “contango” — the price for later months on the NYMEX is much higher than the near-term months. So, the oil companies hold that oil and sell it in future months.
But it’s not just supertanker storage. Oil inventories at Cushing, Oklahoma, which holds about 10% of the U.S. oil supply in storage, are at the highest levels since 2004.
All that oil will have to be sold into the market eventually, which could keep prices from rising.
Bear #2 —
Demand is down
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The U.S. uses about 19.6 million barrels of oil a day. And while that sounds like a lot, that’s about 833,000 barrels per day LESS than we used a year ago.
With this kind of supply/demand dynamic, you might think oil would be on its way to $25, and in a hurry, too.
But in the past couple weeks, we’ve seen oil prices rally off their lows to hit a one-month high on Monday.
So what’s going on?
The market is paying attention to
short-term bullish forces including …
Bull # 1—
OPEC cuts are taking hold
The Organization of Petroleum Exporting Countries’ latest output cut of 2.2 million barrels a day — its biggest ever — started being enforced last week.
Bull #2 —
Geopolitical woes stir the pot
Russia is threatening to cut off gas supplies for the Ukraine, the civil war in oil-rich Nigeria seems to be heating up, and the latest cycle of violence in the Middle East is making everyone nervous.
Bull #3 —
The U.S. is adding to the
Strategic Petroleum Reserve
The Energy Department plans to add 12 million barrels of oil to the SPR in the next couple months and 25 million barrels over the course of the year. It should result in topping off the reserve at its 727 million barrel capacity.
Bull #4 —
China is accelerating
its own SPR
China has strategic storage for 102 million barrels of crude oil. And it recently completed construction of four oil-reserve bases — together representing the first phase of its strategic oil-reserve plan. What’s more, the Chinese are pushing ahead with the construction of the second phase, which could store an additional 170 million barrels.
According to The Wall Street Journal, China has added about 25 million barrels of crude to its reserves since August, and should add another 19 million barrels in the next few months.
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| Can bullish forces overcome 25 tankers with 50 million barrels of crude aboard? |
It’s hard to see how even these four bullish forces could overcome 50 million barrels of oil floating at sea … but you can’t argue with the price action.
If oil continues to rally we could see it rise to $55 … $62 … even $73 a barrel.
So who will win — the bears or the bulls? Or in this crazy market … is the answer “both”?
Here Are Four Ways to Play the Ups
AND Downs of This Market …
Pick #1 —
GLD
Nothing says “gold in my portfolio” like the SPDR Gold Shares (GLD). The world’s largest gold-backed exchange-traded fund saw its bullion holdings hit a record high of 780 metric tonnes at the end of December.
Pick #2 —
USO
The United States Oil Fund (USO) aims to track the spot price of oil. If crude continues to rally, USO will go along for the ride.
Now, a pick for lower gold …
I’m watching the weekly resistance on the gold chart pretty closely. If gold fails to breach that overhead resistance, it could tumble down to $750 before finding its footing again. And a rule for both commodities and stocks is they go down even faster than they go up.
So that brings me to my third pick, which is good if gold fails at its overhead resistance and goes lower …
Pick #3 —
PowerShares DB Gold Double Short ETN (DZZ)
This exchange-traded note targets twice the INVERSE of the daily movement in an index that tracks gold. In other words, if gold goes down, this ETF should go up twice as much.
And if crude oil goes lower …
Pick #4 —
PowerShares DB Crude Oil Double Short ETN (DTO)
Just as the DZZ should rally when gold goes lower, the DTO should rally twice as hard if crude oil tumbles again.
The things I’ve covered here are just a small slice of the massive economic forces that are rip-sawing the global economy right now.
These can be scary times in the market. And if you want to sit in cash, I wouldn’t blame you.
But you also have to remember that you can often make the most money when other investors are the most frightened. And there’s no reason you can’t play both sides of the trend, either!
Yours for trading profits,
Sean
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