Silver and Oil
Research for Online Investors

by John Dalt

8/20/09

Today we are gaining a new appreciation for those who have a slow internet connection.  Lightning struck our broadband last night.  We are working today on air cards.  They work very well, as I use the service when traveling.  Our office does not have a very strong signal.  Quite a challenge.

The market wants to continue the rally that sprang to life yesterday. This can only be interpreted as looking for an excuse to rally. Crude oil looked to be in oversupply, and with questions about the strength of the economic recovery, was teetering on dropping.

Eight million barrels of imported oil didn’t show up in port last week.  Oil, gasoline and distillates inventory in total dropped 11.2 million barrels! The market caught the fever from the commodity trading pits, and we were off to the races. Does this make sense? No, higher crude oil prices suck money out of the economy faster than even Oh! Bama and congress can. Higher gasoline prices take money from every consumer's pocket.

We wrote “get long oil, the trade is on.” But, later in the article, caution was urged as next week’s inventory may show the missing barrels reappearing. It seems the government is always revising employment, inflation, and GDP numbers. The initial reports always seem better for public consumption than the revision that comes out later.

Today, traders must have come to the same realization as crude trended lower. Another reason for caution, today was the last trading day for NY Light Crude and tomorrow is options expiration, funny things can happen. For a small fee (less than four cents per barrel) a tanker can be delayed for a day. If I had large positions that needed a little juice in the market, the cost of keeping tankers out a few days would be tempting.

As soon as we think we understand the movements and motivations of the market, we are thrown a curve, and have to reassess our suppositions.  Where do we go from here?

It will not surprise me to see oil prices soften through next Tuesday. Then, we roll the dice on the new inventory report!  Rather than being long, shorting the USO may be the best play, with a stop loss!

George Kengott at First National Bullion sent a note about silver today. George tells me the Chinese government is encouraging citizens to buy silver. Chinese citizens were barred from owning precious metals before. George makes the point that the total silver traded and consumed last year amounts to less than one-third of the Chinese capital available. He finishes his message with “Don’t wait to buy Gold and Silver, buy Gold and Silver and wait.” That is a nice twist on words, and tells the whole story.

Gold and silver have pulled back in the last two weeks.  Many reasons can be given, such as a stronger dollar, weak economic recovery, and moving in tandem with the equity market.  The chart below shows the relationship of GLD to SLV.  The ratio currently sits at 6.7  It takes 6.7 shares of SLV to buy one share of GLD.  The chart shows the last three years with a 700 day simple moving average.  The historical ratio seems to be more in the 5.3 range.

Do you think gold is going to get cheaper, or will silver increase in price to bring the ratio back to its norm?  SLV would have to increase 27% to $17.40 per share to bring the ratio back to 5.3, at today's GLD closing price.  We are playing silver in SwingTrader, and own a great miner in the Long-Term Portfolio. I would encourage you to get some silver.

My youngest daughter and I have a funeral to attend this afternoon. Her friend’s grandfather, a friend of mine. Watch your health, our days are numbered….

One other point about funerals, why do they last so long?  I am all for reverence, and attend church every Sunday.  I don’t think you can “talk ‘em in”, but some ministers cannot resist a full church.

Let me get this straight. Obama's health care plan will be
written by a committee whose head says he doesn't understand it, passed by a Congress that hasn't read it, signed by a president who smokes, funded by a treasury secretary who did not pay his taxes, overseen by a surgeon general who is obese, and financed by a country that is nearly broke. What possibly could go wrong?---Paid up subscriber---T. W.

Nothing that we can think of.  Oh, boy.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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