Gold Brushes Off Oil

Take the energy story away, and the copper story away, and one might suspect we have witnessed a sleepy precious metals market this autumn and winter. Gold did lose its momentum seen from the autumn high just over $650. Silver did lose its momentum seen from the autumn high just over $14. The strong gold season did not arrive, to the surprise of some analysts. We expected interruption to the cycle and some prolonged lethargy, and saw exactly that in the Hat Trick Letter. During all this broader commodity mayhem and carnage, gold fell toward $615 to $620, and silver fell toward $12, each in US$ terms and ounces. But neither gold nor silver suffered ANY TECHNICAL DAMAGE whatsoever. Gold and silver appear untouched, ripe for the next upward move in price. To me the conclusion is unmistakable after the assault on commodities and energy in particular, that …..

Ditto for silver. In fact, gold has found support off its 20-week moving average, and silver has maintained its uptrend in its shiny chart in an even stronger fashion than its big brother in its lustrous chart.

Throughout the entire crush of the energy complex price structure, gold has held up very well, seemingly unaffected by the blood letting. Silver has behaved with even more resilience. Let's review the facts on this commodity downturn over the last several months. Crude topped at $78 at the time of the war in Lebanon last July, pushed below $60 rather suddenly last autumn in an unvarnished election grab attempt, held steady for two months at the important $57 support line, fell as part of a USDollar recovery program in early January, saw a few repulsed prints under $50, and finally has benefited from short covering and bargain hunters after a "49" handle seemed out of whack. A global energy war, chronic oil depletion, and a rash of socialists (see Chavez in Venezuela and Morales in Bolivia) and autocrats (see Putin in Russia) playing hard ball with national energy treasures seem wholly incompatible with a sustained energy market decline, global economic slowdown or not.

Late last summer a coordinated energy initiative seemed to be triggered after Goldman Sachs reduced by 6% the gasoline component to its managed commodity index. Over $100 billion in fund positions had to adapt, thus sell. Other agenda items seemed in place, which assisted the initiative to bring down energy prices for the benefit of the USEconomy. See the CFTC pressures on hedge funds, and maybe even US Military oil and diesel sales after conflict subsided in Lebanon. The rub comes with pain to some big Wall Street firms who serve as both creditors and partners to hedge funds. The financial markets are discounting an ABSENCE of war when war seems to be a fixture, not to go away. Throughout the entire crush of the energy complex price structure, gold and silver brushed off the onslaught and quietly have resumed their bull market march.

Natural gas has also been pushed to the $6 mark, but has since rebounded with the recent arrival of winter (however brief that might be). The chatter from Wall Street includes stories of $30 oil and $40 oil, which seems entirely unreasonable short of a severe global recession. Such a worldwide downturn would do great harm to the USDollar, probably more so than other major currencys, since the USEconomy is more dependent upon asset bubbles for sustenance, for household spending, and for bond speculation. Thus, a global recession would punish the USDollar and inversely lift the crude oil price. With all the focus upon the warm winter weather, one would think the energy trading pits had acted upon a repeal of winter itself. And then there is copper. It has careened from the $3 mark down toward the mid-$2 range. Bear in mind that the move in copper from $3.20 to $2.50 might represent a nice clean 62% Fibonacci retracement toward the $2.20 support line showing itself.

USFED STILL ASLEEP AT THE WHEEL
The infection from the highly publicized selloff in oil and copper has not extended to precious metals, whose advocates are expressing needless pain, depression, and somber tones for no reason. The only casualty for golden interests is the expected US Federal Reserve interest rate cut, which now looks like it might come in the 2H2007 time frame. The milder weather and lower energy costs have conspired to buffet the economic statistics, enough to puff up housing statistics in November, enough to offer households a small rebate, all sufficient to ward off panicky USFed rate cuts. Today, Beazer Homes stuck a hot poker in the heart of the dimwitted optimists who believe the housing market has stabilized. Their spokesman said "We have yet to see any meaningful evidence of a sustained recovery in the housing market." To back that statement up, they reported new orders were down 55% from a year ago, and their cancellations are running at a horrendous 43% rate. People might sign contracts based on hearing the media news, and cancel those same contracts on a contrast with reality checks. The December existing housing sales came in at minus 0.8%, the largest decline in 24 years dating back to 1982. The official data contained a contradiction which went overlooked by the shallow voices on CNBC. The data claims that inventory levels fell by 7.9% at the same time that sales fell in a big way. Well, perhaps the inventory levels do not factor in the cancellations. Bear in mind that three large home builders in recent weeks announced a collective $1.2 billion in land option losses. The pain has nowhere nearly ended for housing.

Homeowners might be in a depression, only to surrender the notion of selling their properties for any reasonable price in any reasonable time frame. The overall housing bust in progress will eventually dawn upon the US Federal Reserve. The unknown factor is when. They remain sharply divided in their objective, whether to defend the USDollar with steady or higher interest rates, of whether to defend the USEconomy with its two-ton millstone of housing around its neck. The divergent motives might lead the world to deal with two separate USDollars, all in time. By 2010, the world might be served by three major currencys, the euro in Europe, the Amero in the Americas, and a pan-Asian currency for the powerful East. My vote for their Asian Currency Unit (ACU) is the Azio.

The Fed Funds futures market has lost its entire consensus for any rate cut at all. My take is the USFed wants more demand destruction, more commodity selloff, and some measure of additional housing balance. They play a risky game, since housing is destined to continue a dangerous and deep correction, doing serious harm to the overall USEconomy, denial or not.The unstated and unrecognized problems are 1) the ripple effects, momentum, and feedback loops inherent to the housing market, 2) the crystal clear home equity umbilical cord to the overall USEconomic consumption & spending, and 3) the time bomb sitting in banks in the form of non-performing mortgage portfolios and mortgage bonds. Denials hinted by the USFed Chairman and attendant Governors, along with denials repeated without equivocation by Wall Street promoters, loudly proclaim their compromised motives and possibly hidden agenda.

PRECIOUS METAL RESILIENCE
As a preface, see the component makeup of the CRB index itself. A comparison is made here of precious metals versus the commodities. The CRB index is more heavily weighted for industrial and basic items like cotton and foodstuffs, than people are aware. Given that gold and silver are members of the CRB index, the rise in the ratio of precious metals to the CRB is even more impressive.

The gold community has shown uncharacteristic low spirits lately. A quick review of gold reveals tremendous strength and support, despite the hue and cry of some of its ardent followers, and despite the negative drumbeat by media spinners and mouthpieces and cheerleaders. To me, the response should be "Is that all you got to hit gold & silver with?" and "With all the hand wringing & groaning, you would think precious metals were selling off!" and "Take your best shot, was that it!?" Gold & silver are actually untouched, unscathed, unaffected as the energy decline ends with a bounce off the bottoms here. Furthermore, gold & silver are untouched, unscathed, unaffected as the crippled USDollar technical bounce is coming to an end. One should never confuse a technical bounce for newfound vitality. Sentiment for gold is miserable, yet the chart looks remarkably bullish. That divergence accentuates the bullish message which needs a billboard. The gold chart looks great in other currencys too. The silver chart looks tremendously powerful.

Behold gold! Check it out its strength relative to the broad Commodity Research Bureau index in a ratio analysis. Note the powerful uptrend in the MACD (moving average convergence divergence) series. During the energy correction in the last autumn months, the ratio gained newfound momentum seen in the upper cyclic chart. GOLD LEADS THE COMMODITIES NOWADAYS, WITHOUT QUESTION. Observe the rising 20-wk and the 60-wk moving averages which seem unrelenting in a new established trend. The ratio has witnessed a breakout in the new year, made evident by gold holding while energy and copper fell. Possibly, gold not only smells the upcoming easing cycle by the USFed on interest rates, but also sniffs some banking problems extending from the housing downturn. That topic was discussed last week in an article.

Like with the chart shown a few weeks ago for the ratio of the EURO currency to the YEN currency in "The Euro-Yen Crossfire" from mid-December, the origin of the new trend can be traced to the historic dual events of 2005, a watershed. When King Fadh died as monarch to the Saudi Kingdom, his successor King Abdullah saw fit to shift emphasis from the US$-based securities to Euro-based securities in bond reserves management. When the Chinese Govt officials ended the yuan peg tightly linked to the USDollar, they unleashed buying of Euro Bonds and gold, as well as other instruments like British gilt bonds. Since those two events 18 months ago, the euro has risen relative to the Japanese yen, and gold (silver too) has risen relative to most commodities.

Behold silver! Check it out its strength relative to the broad CRB index. Note the powerful uptrend in the MACD (moving average convergence divergence) series. During the energy correction in the last autumn months, the ratio gained newfound momentum seen in the upper cyclic chart. SILVER ALSO LEADS THE COMMODITIES NOWADAYS, like Robin is to Batman. Regard the rising 20-wk and the 60-wk moving averages which seem unrelenting in a new established trend. The ratio has witnessed a breakout in the new year, marred by a huge silver springtime selloff, but an equally rapid silver recovery. The silver ratio to the CRB has seen a stairstep in its powerful rise. The bullish triangle is crystal clear, the top being set during the May and August peaks for the ratio. A breakout occurred in November, with pullback, then resumption once again.

THE FIBONACCI STEPS
The gold/CRB ratio and the silver/CRB ratio might each level off soon. Expect a rebound in the energy complex, perhaps in copper also. It looks to this chronically suspicious observer as though Goldman Sachs and some buddies are going long in their investments privately here, but talking short publicly. Sometimes things never change. Didn't Wall Street houses talk long when oil peaked last autumn and in spring 2005 precisely at tops? Now the bottom is in for energy prices, in my view. With oil having touched the bowels of a 49 handle, with copper having touched the Fibonacci 62% retracement mark, bells rang for savvy traders.

The Fibonacci sequence is intriguing. The series of numbers starts with 0 and 1, then continues as the next number becomes the sum of the previous pair. It goes 0, 1, 1, 2, 3, 5, 8, 13, 21, etc. The ratio of succeeding numbers converges to the golden ratio often used in architectural design for length versus height. It explains population growth of rabbits in an uninhibited environment. For those with curiosity, the golden ratio f equals 1.618034 to six decimal digits, best denoted as (half of the sum 1 plus the square root of 5). It displays a unique characteristic inherent to the sequence. Its reciprocal (1/f) has all the same decimal digits, whose stem is zero instead of one. That is, 1/f equals 0.618034, again to six digits. The golden ratio is solved by basic difference equations, and is nifty as all getout for anybody who managed to survive high school mathematics. That sadly excludes the majority of the US public, but includes the great majority of the Asian public. One can cite any Fibonacci number far down the list using a formula solution, when its ranked location in the sequence is known. The technical analysts in trading firms have all kinds of approaches which employ ratios, square roots of this or that, and make it needlessly complicated. My approach is simple, which is to use the 61.8% key percentage in the golden ratio itself, or simply approximate it using the 5/8-ths fraction. The converse is to observe 3/8-ths fractional moves also. Corrections often involve a return of half, 3/8, or 5/8 of gains or losses.

CHANGE IN THE WIND AMONG TITANS
Some news hit the wires today. The investing arms of Goldman Sachs and Morgan Stanley are quietly collaborating on a very big private equity venture for the oil & gas assets of utility company Dominion Resources. The deal could be as large as $15 billion, the Wall Street Journal reported. The collaboration of the two leading securities firms is a reminder of how private equity has changed Wall Street. My view is the Dominion deal, the day after a State of the Union message, signals and confirms the bottom for energy prices. These firms must see the broad conflicts and feverish scramble to secure key energy deposits in frontier lands. They see opportunity. Last month, General Electric was involved in a $1.9 billion acquisition of Vetco Gray, an oil & gas equipment supplier. Also, Forest Oil announced a $1.5 billion for Houston Exploration, an independent oil & gas producer.

In the case of the Dominion deal, both Goldman Sachs and Morgan Stanley are part of a large consortium of private equity participants that includes Madison Dearborn Partners, Warburg Pincus, First Reserve, the Carlyle Group and its affiliate Riverstone Holdings. A second group composed of Blackstone Group, Texas Pacific Group, and Kohlberg Kravis Roberts is exploring its own offer, according the familiar parties.

With Treasury Secy Paulson still having influence at arm's length within Goldman Sachs, one must conclude after the State of the Union address that the USGovt financial titans are aligning with energy as of now, and not against it. The President is still closely aligned with fellow advocates from the oil industry, who possess major sway. The State of the Union message, delivered by the President, to me marked a clear point in time for the end of the energy decline. Energy security has and will continue to revolve uniformly around oil, and to be the primary emphasis in policy, in funding, and in military directives. Many of the current leaders outside of banking offices come from the oil industry. Both governments from Russia and the United States are comprised of energy titans, and maybe that is to be a constant on the political landscape for some time. The public was told of stated goals of the 20% reduction in gasoline consumption and 75% reduction in the Middle East oil consumption. These goals have been mentioned before. Credibility is not a certainty among listeners. Today some opinions from the Chicago trading pits were clearly incredulous, perhaps unrealistic.

The energy market is ripe for a rebound since the US Military, Putin, Chavez, Nigerian Islamic rebels, China, and OPEC wish it to be so. The presence, birth, and rise of the Shanghai Coop Organization (SCO) punctuates the importance of Western lost dominance in the oil industry, and the motive for redoubled military effort to secure that oil. Russia, West Africa, and SCO now command most new deposits, discoveries, development, and imminent output. The oil world no longer operates within the United States sphere of power and influence. Its epicenter of policy has gravitated toward Moscow, Riyadh, and the shadowy region known either as the former Soviet Republics or as "Chaos-stan" in realistic terms.

VANCOUVER SHOW
The Vancouver Gold Conference was yet another hit, well managed and organized by the Cambridge House. Joe Martin and his intrepid responsive competent friendly staff did it again. It was great to see some subscribers, several friends, fellow analysts and writers, certain investor relation contacts, and to learn some things. The highlight for me was seeing John Embry of Sprott Asset Mgmt, whom I have only heard about but not met personally or heard speak. He pointed out that a $600 gold price is not remotely sufficient to meet demand or to encourage viable output. He believes central banks are dissuaded from selling gold bullion at this price though, and that between one third and one half of gold accounting is tied to leased inventory. He believes gold truly haunts central bankers because gold is used as a hedge against monetary inflation and international crises. He regard the current gold price as a very big buying opportunity. Against a backdrop of gold strength relative to other commodities in retreat, one should be highly encouraged by the current investment climate for both gold and silver.

THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors atwww.GoldenJackass.com. For personal questions about subscriptions, contact him at [email protected]