Last week, I finished the letter saying that we would see precious metals climb to new highs. This past week, gold climbed to an all time high of US$1,474.10 and silver hit US$40.73. So before we begin this week's Letter, I'd like to know what you think. Are you a gold bull, or a gold bear?
The US government shutdown has been averted. After the media frenzy last week about the potential shutdown of the US government, it turns out everything is back on track. At least for now.
The short-term spending bill was passed overnight by both houses of the US Congress and keeps the government operating until next Friday. The agreement calls for $39 billion in spending cuts, with an additional $500 billion in cuts over the next decade - a big jump from the overzealous spending of the current US regime but still far from anything that would affect the markets.
Of course, I don't think anyone with a clue really expected the government to shut down.
Once again, the media has stirred up a story and made it worse than it really was. They had citizens rushing to the passport offices causing insane lineups just to get their passports in case of a possible shut down. Better safe than sorry, I guess. It's like I mentioned in the last letter about not always believing everything you read...
The potential shut down of the US Government caused the Dollar to fall after a slight run earlier in the week. With the shutdown temporarily averted and
along with some other factors including Bernanke's recent comments on inflation earlier in the week, there could be a short term break in precious metal prices and potentially a short-lived dead cat bounce in the US dollar.
Precious Metals
Last week in my closing sentence (see Secrets Revealed), I said:
"The recent release of the discount window bailout by the Fed has given the world another reason to be cautious of the world's banking systems. It gives the world another reason to question fiat and digital currencies while putting more faith into gold and silver. I expect both gold and silver to climb next week."
Gold and Silver both broke through new current highs last week, with gold climbing to an all time high of US$1,474.10 and silver hitting US$40.73. This helped the commodities-weighted TSX climb for the fourth straight week. If gold can hold above $1470 next week, a new high of $1500 would be the next near term target. Keep in mind that gold prices are still no where near the inflation-adjusted price of $2500.
But the gold bull run could either be put on hold, or rally harder later on this month. More on this subject a later.
As far as junior gold stocks, Minco Gold (TSX: MMM)(AMEX: MGH) climbed to CDN$2.48 and US$2.56. The Price of Minco Gold in our orginal report (see The Hidden Producer) was CDN$2.14.Kiska Metals (TSX-V: KSK) also rose on the week to close at CDN$0.98. We're down overall on Kiska but with the pullback, I took another opportunity this week and bought more shares at CDN $0.92.
Oil and Gas
Oil broke the $110 mark as I predicted in a recent letter, The Controversy. It settled at US$112.79 a barrel to close the week. I liked Suncor in last week's letter and it is up 2.48% on the week. I still like it.
While this run is currently dependant on Libya and the Middle East, the overall long-term outlook remains bullish. Before the war kicked off in March, Libya was the world's 17th largest oil exporter. Since then, its production has plummeted by a whopping 80 percent. Even if Libya settles, their production levels may never return back to normal.
Two-thirds of Libya's oil fields were operated by independent companies, who have since fled the country. If the war ended now and production from the fields operated by the national oil company resumed, the country's oil output would still be less than 30 percent of pre-crisis levels.
Of all of the major disruptions in Iran, Iraq, Venezuela, and Kuwait in the last 30 years, Kuwait is the only country to bounce back to pre-disruption levels. Libya may not be so lucky.
Now that oil has cracked the $110 mark, a move to $115 and $120 is likely. It's simple trading patterns. Once oil cracks the $110 mark, it would easily move past to $111 or $112, as it has already done. If it hits past $115, you'll see $116 before a retreat. If it rages on to $120, it would easily climb past $121. So on and so forth. Of course, patterns do not always repeat so use caution.
The April Fool
We're finally beginning to see some real job growth in the US and the return of some real consumer confidence. But while the economy and markets have done well, rising prices such as oil and other commodities are beginning to take its toll and the fear of inflation is finally becoming apparent - although not as apparent as it should be. This is a topic that the media has to take more seriously.
Inflation, as mentioned in a previous letter (see The Controversy), will also give the stock market a sense of growth as earnings and projections grow. But in the end it's all relative to climbing prices. Revenues increase, but so do the cost of goods sold etc.
Sooner rather than later, Bernanke will have to tighten up the monetary policy and interest rates will rise. Let's not kid ourselves. The stock market rally since last August has been fuelled by reckless government spending (QE1, QE2) and insanely low interest rates. While it has helped the US economy rebound, it is a pleasure that can't last. Eventually, the Fed will have to cut their spending. If they don't, we'll see gold at $2000, and silver easily above $50.
While I believe the year will end in green territory, it doesn't mean we're not going to see another pullback. The rest of April will be shaky and summer more or less the same. We're climbing, but the volume typical of a bull market isn't there. While historically this is a death trap, we are in a completely different era where high frequency traders are the marginal providers of volume on a daily basis. These traders eat volatile moves for breakfast and what appears to be a calm market means they're starving for some action. Right now, there's not a lot of action.
If you play options or like to hedge your bets, now would be a good time to pick up some cheap options and hedge by adding some short positions. Especially with April 27, 2011 coming around the corner.
Look Out Below
For the first time ever, Federal Reserve Chairman Ben Bernanke will hold the first ever press briefing following a monetary policy decision by the central bank.
April 27 will be the first of a series of 4 press briefings per year that will allow a question and answer period. This could lead to a major swing in both directions for the market.
While these new press briefings give Bernanke an opportunity to clarify any market misinterpretation of the policy statement, it also opens the door to misinterpretation of what he says.
Bernanke's statements have a major impact on the markets. Earlier in the week, the Dollar rallied simply because he told us that "inflation must be watched extremely closely." Imagine the consequences of an open press briefing.
In his August 27, 2010 speech at the Fed's Economic Symposium in Jackson Hole, Wyoming, Bernanke signalled the possibility of QE2 (Quantitative Easing 2):
"I believe that additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions,"- Ben Bernanke, Fed Chairman
A couple of months later in November, the central bank announced plans to purchase $600 billion in long-term Treasury securities by the end of June 2011.
The S&P 500 is up more than 25 percent since Bernanke's speech at Jackson Hole. The easy money from QE2 inflated asset prices and pushed investors to take more risk. Aside from the predicted pullback, we're looking pretty good.
But come April 27, this could change.
Bernanke will undoubtedly use cryptic language to answer questions. If he hints at the possibility of QE3, look for the markets to roar. If he hints that QE2 is officially over, look for a strong pullback in the near term and sideways trading for the coming months. If Bernanke hints at rate hike or make comments on the dangers of inflation, look for precious metals to pullback in the near term and the Dollar to strengthen.
In the last 12 months, only 50 stocks in the S&P 500 are down more than 5 percent. While our rally may not be completely as a result of the Fed's buying, we will trend sharply lower if Bernanke hints of the end of QE - especially with the low volume in our markets.
Let's hope the April Fool does a good job.
From the Federal Reserve:
"Chairman Ben S. Bernanke will hold press briefings four times per year to present the Federal Open Market Committee's current economic projections and to provide additional context for the FOMC's policy decisions.
In 2011, the Chairman's press briefings will be heldat 2:15 p.m. following FOMC decisions scheduledon April 27, June 22 and November 2. The briefings will be broadcast live on the Federal Reserve's website. For these meetings, the FOMC statement is expected to be released at around 12:30 p.m., one hour and forty-five minutes earlier than for other FOMC meetings.
The introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve's monetary policy communication. The Federal Reserve will continue to review its communications practices in the interest of ensuring accountability and increasing public understanding." - Federal Reserve Board
The markets will be on edge from now until these briefings. Be prepared for volatility in the coming weeks. A look into the VIX Short Term Futures may not be a bad idea.