Carry Trades & The Art of Destruction

Honest Money Gold & Silver Report

by Douglas V. Gnazzo, Honey Money Report | March 3, 2008

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The Markets

Market intensity picked up as the week progressed. Friday the Dow was down more than 300 points for a -2.5% loss. For the week the Industrials closed down 114 points at 12,266.39 (-0.93%).

The Dow is sitting precariously above its horizontal support line that connects back to its 2007 low. A break below would suggest a new leg down was commencing. Volume has increased during the decline.

Carry Trades

The boom in world wide asset prices is a direct response to excess money and credit creation. The resulting brew has given birth to unprecedented debt levels that prostitute the future to enable consumption in the present. 

One of the ingredients used in this potion has been the Japanese yen. The yen has been borrowed at rates of one-half percent and then used to buy assets that provide a greater return or profit. 

This is known as the yen carry trade. The Swiss Franc has also played large in the game. These are but two of the pawns – there are more. 

Up next is a chart of the Japanese Yen compared to the S&P 500. The two sets of data points are almost mirror images of one other. When the yen goes up - the S&P goes down and vice versa. 

The yen has been borrowed at low rates in order to supply vast amounts of liquidity to world markets. When these carry trades are unwound or exited, the yen rises in value. 

This causes other traders to unwind even more carry trades and a vicious self-fulfilling cycle begins – one that feeds upon itself. 

Up next is a comparison of the yen to the US dollar. Notice that both currencies were going down until July 2007. The dollar kept on its downward course; the yen, however, began to rise and has been rising ever since.

The second chart shows the yen approaching a long term overhead resistance level. A break above would have major repercussions. 

Gold

Gold was up $27.20 to close at $975.00 for a +2.87% gain on the week – making a new all-time high in the process. Not bad for a barbarous relic – imagine if it were refined. 

Below is the weekly chart of the Gold Trust ETF (GLD). Price has made a new high and is within a well defined rising channel that goes back to August of 2007. 

RSI is in overbought territory and shows a negative divergence. Price made a higher high, while RSI made a lower high. 

The histograms at the bottom of the chart also show a negative divergence. Volume declined on the recent rally. 

Gold P&F

The point and figure chart for gold shows an ascending triple top breakout on Feb. 27, 2008.

A bullish price projection of 1125 is listed. Presently gold closed at 975.00

Silver

Silver was up $1.88 on the week to close at $19.92 for a +10.42% gain – not bad for a supposedly demonetized industrial metal. This was a new multi-decade high. 

Below is the weekly chart for the Silver Trust ETF (SLV). A well defined rising price channel is present with price testing the upper boundary. 

MACD, RSI and histograms are all overbought but show NO negative divergence as did GLD’s weekly chart. Volume increased on the rally – a positive and constructive sign. Silver is stronger than gold right now.

SLV P&F

The point and figure chart of SLV shows an ascending triple top breakout on Feb. 11, 2008. 

A bullish price projection of 222 is given. SLV closed the week out at 195.69.

Hui

The Hui added 21.34 points to close at 486.07 for a +4.59% gain. The index registered a new all time high. 

RSI has room to run further up if it wants, but it also shows a negative divergence. Price made a higher high, while RSI made a lower high. 

MACD has made a positive cross over. Histograms also show a negative divergence and have turned up into positive territory. 

Negative divergences do not preclude any certain outcome, but they will be resolved one way or the other. Overall, signals remain mixed. 

Hui P&F

The point and figure chart for the Hui gives a bullish price projection of 576, currently the index is at 486.

GDX

Market Vectors Gold Miners Index has a couple warning flags up. RSI has bounced off the 70 overbought level and has curled over.

There are several gaps left open on the recent rise. Gaps do not have to be filled – often times they are. 

GDX P&F

Xau

The monthly chart of the Xau shows a well defined rising channel. Price is nearing the top of the channel it has remained within since the start of the bull market.

RSI and histograms are flashing negative divergences, as price has made a higher high and they both have made lower highs.

XAU P&F

The Xau point and figure chart shows an ascending triple top breakout on February 27, 2008.

Stocks

Below is the daily chart of Eldorado Gold. On Monday of last week it was posted on the website as a new position. It was closed out on Friday for a weekly gain of 16%.

New Book Coming in 2008 - Honest Money

Copyright © 2008 Douglas V. Gnazzo
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About the author: Douglas V. Gnazzo writes for numerous websites and his work appears both here and abroad. Just recently he was honored by being chosen as a Foundation Scholar for the Foundation for the Advancement of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

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Douglas V. Gnazzo | Honest Money Gold & Silver Report, LLC
Canton Center, CT USA | Email | Website

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