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Stocks Tumble, Record Oil Price, Gold in Lock-down

Stock index futures were pounded lower in pre-market trading when the Commerce Department announced U.S. July Durable Goods Orders fell a whopping 4.9%, following consensus expectations for a decline of 1.5%. The dollar moved lower with the announcement Treasuries caught a bid to move interest rates lower with the weak economic news. When stocks opened for trading, the Dow Industrials fell 35 points in the first ten minutes, but the sell-off sure didn’t last long. Within an hour the Dow turned positive and the NASDAQ posted double-digit gains.

Similarly, when the weak durable goods numbers came out, gold popped higher by two dollars and silver was up a few pennies, while the dollar began to sink. Gold was given the “brick wall treatment” with the spot price threatening to break above the $440 mark. Have a look at the Kitco 24-hour chart to see the five dollar take-down in gold.

Also, note the spot price has made five attempts in the last three days to break through the $440 level, but was met every time with aggressive selling (not the kind of selling that maximizes profits…just pure dumping!). It certainly appears the commercial traders have the upper hand in gold as they expand their short positions. The commercial short positions and increased selling in gold will act as a temporary anchor for silver. According to silver analyst, Ted Butler, the COT’s are favorable for an upside move in silver with the commercials reducing their short positions and putting on new longs. I agree with Mr. Butler that we will probably see a nasty shake-out of the weak longs before the silver price moves notably higher.

I’ll return to gold and silver along with natural gas in a minute, but a few more comments on today’s market action first. I said earlier the markets made a quick turn-around within the first hour of trading, but it can be attributed to the announcement by the Commerce Department saying new home sales hit yet another record of 1.41 million units annualized, following consensus expectations for a decline to 1.33 million units. The inventories of new homes on the market increased 1.8% in July to a record 460,000 units, but also note the median price declined by 4% to $203,800 as builders have shifted to making lower cost homes. This is the lowest median sales price for new homes since December 2003. It appears the demand at the higher end of the housing market has been satisfied with enough supply and builders are shifting to saturate the lower end of the market.

Also on the housing front, the Mortgage Bankers Association said its applications index fell 0.7% with the purchase index falling 2.2% and the re-finance index gaining 1.2%. The 30-year fixed mortgage rate dropped one basis point to 5.78% and the average one-year ARM also dropped one basis point to 4.84%. It is noteworthy to see the share of ARMS dropped to 28% after reaching a high of 37% back in March. The “measured” rate increases by the Fed are working to push ARMS higher with little effect on longer-term rates. There is now less incentive to take on the more risky variable rate mortgages, and I believe that was one of the desires of the Federal Reserve. Higher rates for ARMS should help to cool some of the red-hot speculative areas such as California, Nevada and Florida.

Low cost financing has been the big driver for real estate these days. According to Moody’s Investor Service, interest only loans made up all or part of 65% of the commercial real estate market. Just two years ago interest only loans accounted for 7% of the loans in the commercial sector. Creative financing has clearly kept a strong bid in real estate prices.

Back to the Precious Metals and Stock Prices

Ever since the stock market blow-off of 1999-2000, I’ve been monitoring the change in leadership from “paper assets” (stocks and bonds), to tangible assets such as gold, silver, copper, oil and natural gas, among others. It appears to me the markets are being aggressively managed by the Fed and Treasury via the Working Group on Financial Markets. Bill Buckler of the Privateer out of Australia has long maintained the notion that Dow 10,000 is a matter of national security for the USA. I would add to Mr. Buckler’s premise by saying it is also a matter of national security to keep a bid in U.S. Treasury debt, as the U.S. Treasury will have to continue re-financing the quarterly debts as they come due. Please have a look at the following chart of the Dow/Gold relationship to see how tightly our authorities have clamped down on the ongoing change in leadership form paper to tangibles.

The Dow/Gold Ratio hit a high of 44 (44 ounces of gold buys the Dow) back in 1999, and has dropped to roughly 24 today. Once the bleeding stopped for paper assets back in the beginning of 2003, we have gone nowhere but sideways. I call this trading range for the Dow/Gold Ratio, “LOCKDOWN” for the Precious Metals Sector. Governments around the globe have attempted to “fix” the price of gold throughout history, and have FAILED every single time. The most recent experience was the London Gold Pool back in the late Sixties. They will fail again; the only question is “when”?

Back on May 25^th I posted these two “opportunity” charts:

Now let’s see what they have done to date:

WOW, you can clearly see the price of natural gas has gone ballistic since my posting, but silver remains in lock-down. By the very nature of precious metals, they compete with paper money, especially as a store of value. A higher gold price means the dollar is losing credibility….can’t let that happen…..again, it’s a matter of national security. As Bill Buckler has said for many years, “Gold is a political metal.” In the old days, the price managers kept gold at specific price levels OVERTLY for all the markets to see, but now it is all done covertly, primarily by way of the commercial bullion banks, with the paper traders on the COMEX setting the price. As gold and silver supplies continue to shrink relative to demand, it will be fun to watch the metals break free from their shackles. Dave Morgan of www.silver-investor.com believes they could possibly continue their charade in silver for maybe another year or two, but also believes the price could take-off at any time. As I said, the only big question for me is timing on when silver will take off, just as natural gas has found a price that confirms the basic fundamentals proving a lack of supply relative to demand.

Another item that I found to be quite bullish for silver over the coming months is Ted Butler’s observation that, “It seems the gross long category has grown much larger than in the recent past, by some 15,000+ contracts, to around 35,000 contracts, over the past few months....the commercial category is more likely to take delivery than the than the non-commercial or small trader categories, in quantities that could impact the market.” (For Mr. Butler’s complete commentary, here’s the link.) I would love to see industrial users of silver panic to secure supplies!!! What in the world would the Silver Users Association have to say about that one?!!!! If you don’t think there is a “Silver Users Association,” then have a read of this right off their website:

“The Silver Users Association is a non-profit organization that was established in 1947 to represent the interests of companies that make, sell and distribute products and services in which silver is an essential component.”

“The Association’s members employ more than 200,000 workers and process 80% of all silver used in the United States. Members include representatives from photographic, electronic, silverware, mirror and jewelry industries, producers of semi-fabricated and industrial products, and trading and service organizations responding to member needs.”

Have you ever heard of an Oil Users Association or a Lumber Users Association? Wouldn’t the home builders love to join hands to pressure the lumber producers of the world into lower prices? In this case I believe it was the Silver Users Association that conned (lobbied) the U.S. government into dis-hoarding their two-billion ounces of silver over the last two decades that used to be held as our strategic silver reserve. The U.S. Mint now has to buy silver on the open market if they wish to continue profiting from the sale of Silver Eagle coins. The plot continues to thicken, and I plan to profit from the artificially low price of silver today!

Checking back in on the markets, I see the broad stock indexes taking a serious nose-dive as we move through the afternoon….in the end, water seeks its own level…based on a slowing economy, high energy prices (new record high close for oil today at $67.32), and rising interest rates, stocks SHOULD be going down. The dollar is still down for the day, but it would have been worse, except it looks like the $USD got some help from the Bank of Japan, with the yen lower versus the dollar today. For now it looks like Japan is still in the dollar camp as they defend their currency from appreciating versus the dollar. Japan doesn’t want to lose any more “export competitiveness” with China, therefore they continue to sell yen for dollars.

Frankly, all the fiat currencies of the world are subject to competitive devaluations and will not work well as a store of value. If you want to preserve your wealth as fiat currencies lose value, go out and buy some gold and silver bullion. Throughout history, nothing has held its purchasing power like gold and silver. If you want to try a little exercise with some friends, go to a coin shop and buy three ounces of silver. Put a twenty-dollar bill in one hand and the three ounces of silver in the other, and ask your friend which they would prefer to have. When I bought most of my silver, I could hold four ounces in one hand with the twenty in the other. I will be smiling when the $20 bill only equals two ounces of silver in the other hand.

Have a Great Evening!

Mike Hartman

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