A financial blog on investing in stocks, commodities and the gold bull market.
Friday, October 9, 2009
One of the ultimate truths is that liquidity eventually flows into undervalued assets. This is the reason the commodity bull market began in the first place.
In `99 and 2000 paper assets reached ridiculously extreme overvaluation compared to commodities. At that point a great secular change took place. Liquidity started to leak out of stocks and other paper assets and into severely depressed commodities.
That leak rarely ever unfolds in an even distribution between all commodities. Some outperform during the first phase and some under perform based on the current fundamentals at the time.
During this particular commodity bull the first phase was led by energy and base metals. The fundamentals were supporting these sectors as growth in emerging markets and generally strong economic growth world wide put heavy demand on energy markets that because of the preceding 20 year bear market were just not prepared to meet this increased demand.
Naturally prices rose.
Now we have completely different fundamentals driving the second phase of this commodity bull. Unfortunately oil is price sensitive. By that I mean that high prices lead to demand destruction. They also lead to economic destruction which only intensifies demand destruction.
I've noted many times in the past that every time oil has spiked 100% or more in less than a year it has led to a recession. That move to $147 last year was no exception.
This year we've already seen oil spike from $35 to over $70. I suspect this is already eating away at any economic recovery especially since we really haven't recovered.
Countries with high unemployment and depressed economic activity are really in no position to handle surging energy prices.
High oil prices are oils own worst enemy. I suspect oil is going to be on a rollercoaster for many years as its constantly cycled up and down by the forces of easy money and demand destruction.
Gold on the other hand is the perfect commodity to benefit from the current fundamentals. Gold and especially silver are not price sensitive. High prices do not cause demand destruction (well to some extent it does in the jewelry market). The reason is that these two metals have a monetary component. Through out most of history gold and silver have been considered money.
Who in their right mind is going to complain if their money increases in value? That just means they have more purchasing power. That's not a reason to sell, that's a reason to buy.
This stage of the commodity bull is going to be led by precious metals and probably later by agriculture (maybe a third phase).
I expect the gold:oil ratio to remain above the 14ish level for this phase of the commodity bull.
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.