(Un) Precious Metals
Research for Online Investors

by John Dalt

7/26/10

Gold is trading even with a bias down and silver is even with a bias trending up.  Together precious metals are treading water.  What does this mean?  We think investors and traders are trying to assess the likelihood of deflation in the near term.  This is opposed to the popular view for the last year that the U.S. would enter an inflationary period and blow the top off valuations in precious metals.

Here is the GLD etf for the last seven months.  What has changed in that time?  A realization that the U.S. economy is not bouncing back with vigor, the eurozone sovereign debt crisis is a long term problem, and concerns that China is tightening credit to fight a bubble in real estate.  These three economic truths are a millstone around the neck of the inflation argument.

After coming off the lows set sixteen months ago, the stock market climbed back 83% to its recent high on April 26.  While reported earnings were good in the first quarter, the results were widely seen as a result of cost cutting not expansion.  The second quarter earnings have been mixed with some good beats, but forecasts generally reflect a continued slog to increase sales.

We expected precious metals to come down off their highs when the market sold off four weeks ago.  This is natural, as some traders meet margin calls others sell simply because they still have profit in the trade.  Why did precious metals sell off when the market went up last week?  The FOMC minutes from ten days ago gave voice to the Fed’s concern the economy was in a ‘fragile’ condition.  Last week Ben Bernanke, Fed Chairman, told congress the Fed was willing to do whatever it took to keep the economy out of a double dip recession.

Helicopter Ben has printed money and it is sitting in bank vaults.  Unemployment has remained high, the U.S. economy is grinding along, consumers are paying off debt and business is reluctant to expand without confidence the economy is improving and additional production will be met with demand.

Our recommendation is watch the precious metals and if invested use tight stops.  We have been in a decline since June 26 setting lower highs and lower lows.  This does not bode well for the near future.  There is a possibility of a breakdown in gold and silver.

New home sales were up this morning in a release after the market opened.  This helped the market build on last week’s gains.  The Commerce Department said new home sales increased at an annual rate of 330,000 units in June.  This was after May’s terrible numbers.  May numbers were down because the homebuyer’s credit ended in April.  Builders and real estate agents worked to crowd sales into the program before it ended.

FedEx raised their earnings forecast; citing increased overnight and ground delivery activity.  Investors see this as indicative of an improving economy.

Tony Hayward CEO of BP is rumored to be leaving BP to take a job with TNK-BP, a BP joint venture in Russia.  This gives a new spin on sending someone to Siberia.  Hayward came under heavy criticism in the U.S. for the company’s response to the gulf spill.  The BP board of directors is meeting today in London.  BP announces earnings tomorrow.  The stock is up today in anticipation of an improving situation in the gulf, financial clarity of the balance sheet charges and a possible management shakeup.

What is the interesting thing about the whole episode?  News of Hayward’s departure did not come from the company.  The leak came from inside the White House, from a “high ranking official.”  It bothers me there is such a thing as a “high ranking official” in the government.  Looks like Obama is telling more than just GM, Chrysler, AIG, Citi, Fannie and Freddy how to do business.

There is speculation that Bob Dudley will replace Hayward as CEO.  Dudley is a native of Hattiesburg, Mississippi.  He joined the company in 1998 when Amoco merged with BP.  He lost out on the CEO job when Hayward won it three years ago.

To the mailbag:
You wrote that banks are investing into bond funds rather than loaning to business.  But where does the money go in corporate bond funds? Not into businesses?—paid up subscriber D.E.

John’s reply: Sorry about the inexact wording.  I was at our local bank Wednesday.  The President told me that loan demand is terrible; they have money in a revolving bond fund that owns treasuries with other banks.  This way they don't have to ladder into treasuries directly, they can move in and out of the fund if they need the money.  So they are not buying corporate bonds but U.S. Treasuries.

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.

MarketTodayHomePage

Back to Top