Why Silver Could Drop Below $30/ozt

A close look at where silver is currently positioned at this stage of its developing long-term bubble, and what can be expected short-term in its price using Bump-and-Run and Dead-cat Bounce pattern analyses, suggests that silver is on its way to returning to its long-term mean.

Where is Silver Positioned in This Bubble?

As shown below, it might be interesting to compare the silver chart with this graph of “Main Stages in a Bubble” by Dr. Jean-Paul Rodrigue.  It shows that, after a brief “return to normal”, silver is now moving into the “fear” area of the Blow off Phase as it “returns to the mean.”

What is the Bump-and-Run Pattern Saying about the Short-term Price for Silver?

A  Bump-and-Run pattern typically occurs when excessive speculation drives prices up steeply.  According to Thomas Bulkowski, this pattern consists of three main phases:  

1. A lead-in phase in which a lead-in trend line connecting the lows has a slope angle of about 30 degrees.  Prices move in an orderly manner and the range of price oscillation defines the lead-in height between the lead-in trend line and the warning line which is parallel to the lead-in trend line.
   
2. A bump phase where, after prices cross above the warning line, excessive speculation kicks in and the bump phase starts with fast rising prices following a sharp trend line slope with 45 degrees or more until prices reach a bump height with at least twice the lead-in height.  Once the second parallel line gets crossed over, it serves as a sell line.
   
3. A run phase in which prices break support from the lead-in trend line and plunge lower in a downhill run.

As shown in the chart as of 6/28/2011 below, silver has been developing an intermediate-term Bump-and-Run pattern since last September.  It only recently broke support from the lead-in trend line and entered into the Run phase to plunge lower in a downhill run last week.

The next downside price target is projected at around $29/ozt. by the target line which is parallel to the lead-in trend line and is distant from the lead-in trend line with the same lead-in height.

What is the Dead-Cat Bounce Pattern Saying about the Short-term Price for Silver?

In addition to being in the run phase of the Bump and Run pattern silver is in a Dead-Cat Bounce pattern. A Dead-Cat Bounce pattern has three major phases:

• An initial plunge phase during which a sharp decline of 25% to 45% is experienced over several days.
  
• A bounce phase during which there is a short-term recovery of between 15% and 35% in 1-5 weeks.
  
• A post-bounce decline phase during which there is a slow decline over a 2-10 week period to a low somewhere between 15% and 45% below the bounce top.

What’s Next for Silver?

Silver experienced:

• the initial plunge phase in early May with a decline of 31% (i.e. from $48.42 to $33.53) and
  
• the bounce phase at the end of May going up 15% (i.e. from $33.53 to $38.48).

The post-bounce decline phase has been ongoing since the early part of June and has the potential to drop 15% to 30%. A 25% drop would, incidentally, bring the price of silver down to $29/ozt. which would be in keeping with the abovementioned Run phase of the Bump and Run pattern.

Conclusion

The above chart patterns suggest that silver could drop below $30 per troy ounce soon on its return to its long term mean. It is the time to re-check fundamentals, reality, and risk for silver when Fed’s QE2 ends.

If you found the above article of interest, you may wish to read my Market Weekly Update on gold, silver, the U.S. dollar and the S&P 500 by going here.

Dr. Nu Yu

Get ready for gold @ $2,000 by year-end, say analysts

Gold prices continued their northbound journey, making five lifetime highs in as many sessions today as spot gold prices reached $1508.66 an ounce this morning, and are still trading at near $1507/oz levels.

Renewed interest in precious metals over the past few weeks has seen the spot price of silver surge close to a quarter (22.6 per cent) in the past 30 days, and the white metal is now trading at $46/oz, another 31-year high and close to its lifetime high of $50/oz.

The price of gold, on the other hand, has increased modestly as compared with silver, up less than 5 per cent in the past 30 days. Silver is now up 146 per cent in a year while gold prices are up 30.5 per cent. In line with the global trend, gold prices in the UAE surged to another lifetime high of Dh181 per gram for 24-carat gold, while a silver kilobar is now available for Dh5,545.

Many analysts had put $1,500 or thereabouts as the 2011 target for gold, which has seen the price roar past that benchmark in the past two sessions. So what’s the next target? Analysts at Capital Economics continue to maintain that gold prices will reach $1,600 an ounce by the end of the year and will climb to $2,000 an ounce by the end of 2012.

Inflation fears, low interest rates, and gold’s safe haven status have been reinforced in the recent past by events such as the Euro Zone’s fiscal crisis, Japan’s earthquake, and political unrest in North Africa. Moreover, the new uncertainty regarding a US debt downgrade by ratings agency Standard & Poors is making erstwhile believers in US Treasury as the ultimate safe haven now flock to precious metals.

According to traders, there’s been significant call buying between the $1,800 and $1,900 region for August and October contracts, which suggests that market makers and movers are bullish that gold prices will go beyond those within the next six months.

As Afshin Nabavi, head of trading at MKS Finance, told Kitco: “Once we break $1,505-06, it looks like we may see a rally up toward the [$15]20-ish area. It looks like it is going to go higher. For me, $1,500 is support right now. Longer term, as long as the situation we’ve living in doesn’t change politically or economically, I think there is only one way – up for gold. Then $1,600, $1,700 or even $2,000 at this point in time doesn’t look too far-fetched.”

Daniel Pavilonis, senior market strategist, Lind-Waldock, added: “I think this thing will keep going higher. The dollar (index) is breaking down. I think it’s going to go down to 70, and gold will keep on going. If any kind of [deteriorating] situation happens here in the US, there is going to be flight to quality into the metals…I think silver is going up to $50. So I think gold is going much higher also. We could see $2,000 gold by the end of the year.

“We’re starting to see inflation now. Because of all of the structural financial damage to currencies across the board, including the US, people are moving away from the US dollar and buying gold. I think more central banks are buying gold now…plus you have all those funds that are buy-side in gold and silver. –Source: Emirates247.com

Cracks Beneath: China, Greece, US and Derivatives

Greece has a population of just over 11 million people. Compare that to the New York City metropolitan area population estimated at 18.9 million. It may seem strange that Greece’s travails might greatly affect the global economy, but the potential repercussions from a Greek default become more significant when considering leverage and derivatives. 

CNNMoney noted that data from the International Monetary Fund (IMF) show that German banks are heavily leveraged, holding 32 Euros of loans for every Euro of capital they have on hand. Other banks are leveraged to the hilt as well. Belgian banks are leveraged 30-1, and French banks are leveraged 26-1. Lehman’s leverage at the time of its collapse was 31-1.

U.S. Banks are paragons of sanity by comparison, with an average leverage of only 13-1.  France and Germany are the countries most exposed to Greek debt through bank and private lending and government debt exposure (Charts at Right & Below).
 

Derivatives present another potential minefield. As Louise Story wrote in the NY Times (Chart Below Added by EconMatters), 

“It’s the $616 billion question: Does the euro crisis have a hidden A.I.G.? No one seems to be sure, in large part because the world of derivatives is so murky. But the possibility that some company out there may have insured billions of dollars of European debt has added a new tension to the sovereign default debate..."  

Chart Source: NYTime.com



"The looming uncertainties are whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default.”

Michael Hudson explored the differences between what happened to Iceland and its debt crisis, and what is currently happening in Greece.

“The bankers are trying to get a windfall by using the debt hammer to achieve what warfare did in times past. They are demanding privatization of public assets (on credit, with tax deductibility for interest so as to leave more cash flow to pay the bankers). This transfer of land, public utilities and interest as financial booty and tribute to creditor economies is what makes financial austerity like war in its effect...

“One must conclude that the EU’s new central planners.... are acting as class warriors by demanding that all losses are to be suffered by economies imposing debt deflation and permitting creditors to grab assets – as if this won’t make the problem worse. This ECB hard line is backed by U.S. Treasury Secretary Geithner, evidently so that U.S. institutions not lose their bets on derivative plays they have written up..."

In an interesting article, Brian Edmonds wonders whether the U.S. is too big to fail, linking the debt crisis in Greek to U.S. Money market funds holding large quantities of European debt.

“If Greece defaults, who will be holding the bag?... Recent publications have pointed, as one example, to the exposure of big U.S. money market funds that hold large amounts of short-term European bank debt.

“The biggest way that the risk of default is mitigated is through credit default swaps.... Sovereign debt swaps are the gorillas in the PIIGS room, but no one really knows if they are just 800-pound gorillas (large but manageable) or King Kongs (think AIG)....Only if, or when, Greece defaults will we know who ultimately has sold insurance against that default.”

China has now become Europe's de facto IMF and World Bank.  On Thursday, June 23, Qu Xing, director of the China Institute of International Studies, a Foreign Ministry think tank, told reporters that China doesn’t want to see debt restructuring in the Eurozone and is working with the IMF and countries involved with the debt crisis to avoid it.

China has so far sunk about $50 billion in bad money, and Wen Jiabao is now in the market for Hungarian bonds.  Speaking at a press conference during a visit to Hungary, Premier Wen Jiabao said,

“China is a long-term investor in Europe’s sovereign debt market. In recent years we have increased by a quite big margin holdings of Euro bonds. In the future, as we have done in the past, we will support Europe and the Euro.” 

Sunday, on a tour of the Chinese-owned Longbridge MG Motor factory in Birmingham, Premier Wen told BBC it will lend to European countries, and also has plans to stimulate domestic demand and reduce its foreign trade surplus.  Bailing out Europe is probably more of a priority for China than for the IMF.

We will see how China is going to juggle rescuing debt ridden Europe, battling rampant inflation, and the CNY10.7 trillion ($1.65 trillion) debt amassed by China's local goverments.

Meanwhile, the U.S. Dollar bounced off of a high of 76.3 on Friday, June 24, and settled at 76.1, reminding us that our levels are more like trampolines than like walls. We currently believe the Dollar is apt to go down this week, which should be bullish for the markets.

However, we are cashy and cautious again. Based on the premise that oil may be strong into the July 4 weekend, and the dollar may be weak, Phil Davis suggested a trade idea for going long USO:

This week $35/36 bull call spread is $0.61 and you can sell July $34 puts for $0.48 so that is a net $0.13 on the $1 spread. If USO makes it to $36 and holds it to next Friday, this can turn $650 cash into $5,000 (USO is now $35.83 with oil at $91.11).

Part 1: The Banking System: A Criminal Syndicate?

Elliott, writer of PSW's Stock World Weekly, and I recently began a series of interviews with Lee Adler, chief editor and market analyst at the Wall Street Examiner. (The interview was on May 11, 2011.) 

Part I - The Banking System: A Criminal Syndicate?

Ilene: Lee, I've gathered from reading your material lately that you think it's time to be out of speculative trades, such as oil, now?

Lee: Yes, the Fed is serious about stopping speculation, and they are not waiting till the end of QE2. Bernanke wants to break the back of this thing. So if you want to trade the long side now, you’re playing with fire. The powers that be have put out the message that they won’t keep tolerating speculation in the oil and commodities markets. 

Ilene: Because of the inflation that Bernanke denies exists?

Lee: Yes, the inflation is disastrous. They’ve known all along that inflation is real. You know it when you’ve got this situation in Libya with people getting killed. It started with food riots in Tunisia, but then it morphed into something else. People are starving all over the world because of these commodity prices, and the idea that it is not affecting Americans is crap because 80% of the people are affected by gas prices at these levels. 

They have to cut back on other spending, and the top 10% can’t carry the ball. If you’re spending an extra $100 - $200 to fill up your car and put groceries on the table, that affects your ability to service your debts, and that affects the banking system. This inability to pay back loans is showing up in mortgage delinquencies and credits card delinquencies.

Ilene: You also have written that the Dollar and commodities have an inverse relationship, why is that?

Lee: Because commodities, such as oil, are traded in Dollars. Commodities are basically a cash substitute at this point. The players don’t want to hold Dollars because the Fed is trashing the Dollar. If you’re a trader outside the U.S., and your native currency is the yen, for example, and you want to buy oil or gold futures, you need to sell Dollars in exchange for the gold or oil futures contracts you’re buying. So your action of buying the commodities in Dollars is in effect creating a short position in the Dollar. 

So if commodities collapse and you’re forced to sell your positions, you’ll reverse that short position in the Dollar - trading the commodities back for Dollars. That creates demand for the Dollar. That’s why commodities and the Dollar definitely do have an inverse relationship. 

With the margin increases that were implemented in the last month or so, the Fed is beginning to reverse the commodities price run up. This is the precursor to the end of QE2. The Fed is sending warning shots across the bow. 

After the Jan 26 FOMC meeting, banks’ reserves began to skyrocket. Why did bank reserves suddenly skyrocket? There’s no overt reason. Something was going on behind the scenes. I think banks and Primary Dealers (PDs) got the back channel message that it’s time to start building reserves because they’re really going to end QE in June - they really, really are. I give it six weeks to two months since the whole thing collapses and they have to start printing money again. 

Ilene: Why do commodities and the Dollar have a more persistent relationship than the Dollar and the stock market, for which there is an inverse relationship now, but this is not always the case?

Lee: The Dollar/stock market inverse relationship is a correlation due to a common cause - essentially the actions of the Fed. It’s not a cause and effect relationship.

Elliott: Will the Fed defend the Dollar?

Lee: They are starting to, but not officially. They’re doing it behind the scenes. That’s my theory. I’m a tinfoil hat guy.... I didn’t start out this way. I arrived at my tinfoil hat after paying careful attention to the data for 8 or 9 years. After a while I realized it’s kabuki theater. 

Elliott: As you say it is kabuki theater, and as Phil says, we don’t care if the markets are rigged, we just need to know HOW the market is rigged so we can place our bets correctly.

Lee: Exactly. All you need to know is what the Fed is doing. That’s my bread and butter. I watch what the Fed is doing every day. I’m so familiar with the data that stuff jumps out and screams at me. The margin increases were not an accident. They were completely out of character, and they followed Bernanke’s press conference where he claimed he couldn’t stop speculation. He’s so manipulative. He says one thing and does another. 

Elliott: But being Chairman of the Fed, doesn't he have to lie? If he came out and said exactly what he’s planning to do, wouldn’t everyone and his dog get on the right side of the trade?

Lee: That’s what he does though - he lies, but in his backchannel way. He tells the favored groups exactly what he’s going to do. You have to read between the lines. The meeting minutes are pure propaganda. That is how they send coded messages to the market. 

In the last meeting minutes, or maybe the one before, the Fed said that wage increases were to be eradicated. I went ballistic when I saw that. 

Elliott: Especially because they create all this inflation, and it trickles it’s way down. This is trickle down inflation. It’s gotten to the point where the people trying to make a living and ultimately buy things are being told that although prices are going up, we can’t allow you to earn anymore money... 

Lee: It’s a moral outrage and a terrible policy. But that's what they want. Their purpose is to keep the bankers in business. The Fed serves the banking system. That’s why it’s there, to make sure the banking system is profitable. 

Ilene: So they are accomplishing their goal.

Lee: For the time being. In the end they cannot fulfill their purpose because the banking system is dead. This is Frankenstein’s monster. This is another one of Bernanke’s economic science experiments, Dr. Bernankenstein. And the result of his policies is bernankicide - the financial genocide of the elderly in America. 

Elliott: Then if Dr. Bernanke is Dr. Frankenstein, then what exactly is his monster? 
Ilene: The banking system?

Lee: Yes, it’s got these screws coming out of its head, and stitches across its forehead. It’s the walking dead. The banks don’t make any money, the only way they appear to make money is by lying about it.

Ilene: But the people running the banks make money.

Lee: It’s a criminal syndicate for god's sake.

part 2: U.S. Economy: A Slow Implosion of Fed's Experiment?

Elliott, writer of PSW's Stock World Weekly, and I recently began a series of interviews with Lee Adler, chief editor and market analyst at the Wall Street Examiner. (The interview was on May 11, 2011.) 

This is Part II of the Interview, (Part I -  The Banking System: A Criminal Syndicate?)  

Part II - U.S. Economy: A Slow Implosion of Fed's Experiment? 

Elliott: How should we invest in this environment - when we take into account the Fed’s huge interference in the markets?

Lee: Think like a criminal. Look, it’s a matter of knowing what the Fed’s next move is going to be, and knowing the investment implications. You have to stay with the trend until the Fed sends signals that it is going to reverse. We’re at that inflection point. 

The issue is how much front running will there be? You definitely have to be out of your longs by now. When support fails after having succeeded, succeeded, succeeded, and every other previous retracement has held, then suddenly one doesn’t, it’s a huge signal. 

Ilene: If the Fed wants oil and metal to go down, and the dollar to go up, is that saying it wants the stock market to go down as collateral damage? If pattern continues, the stock market will go down with the commodities.

Lee: No, the stock market is the center. Bernanke came out in November, the day they announced QE2, and did an Op-ed in the Washington Post saying exactly what he expected. He’s going to manipulate the stock market higher, and that’s going to create economic confidence and everyone’s going to be happy. His goal was to manipulate the stock market. 

The collateral damage, the stupidity of their policy, was that they didn’t take into account the inflationary effects on commodities. They kept denying it. And Bernanke kept saying over and over, well, look the stock market is going up, QE2’s having the desired effect. He was willing to take credit for the stock market going up, but he refused to take responsibility for the same exact move in commodities. It’s the same, they move together. 

It’s just that one was an intended consequence (stocks going higher), and the other (inflation in commodities) was the unintended consequence. They took credit for the intended consequences, but wouldn’t take responsibility for the unintended consequences.

Ilene: What in the Fed’s creation gives it the power to manipulate the stock market? That wasn’t one of its dual mandates (maximum employment and price stability). Isn’t that beyond its scope?

Lee: Of course, but QE2 was a direct manipulation of the stock market.

Ilene: So the Fed knew the money they gave to the Primary Dealers would end up in the stock market. Do they have an agreement with Goldman Sachs, like “hey we’re going to print you this money and we want you to buy stocks?”

Lee: Look, Brian Sack, the head trader for the Fed, sits down with the Primary Dealer traders every morning before the NY markets open, and they have a conference call. Every morning. The Fed makes no secret of this, it’s all on the NY Fed website, the “Fed points.” They describe the whole thing. They discuss the dealers’ “positions and what their financing needs are”, but that’s code. The Fed decides what it wants, and the PDs execute the Fed’s wishes. 

So while government securities are usually the Fed’s focus, the dealers can trade whatever they want. Bernanke made it absolutely clear that stocks were his focus in that November 4 editorial in the Washington post.

Ilene: Even though manipulating stocks is not a legitimate focus of the Fed?

Lee: That’s what they get away with. The mainstream views pushing stocks higher as a legitimate policy. People want the stock market higher. But they don’t want to see oil prices over $100 a barrel, and gas prices over $4 a gallon, they don’t want that.

The Fed does not control what the dealers do with the money, they can only make their wishes clear. The Fed can make it difficult for the dealers , and now they are, because they finally got fed up with the commodity speculation. But the Fed does not control what Goldman Sachs does completely. In fact, it might be the other way around. There’s clearly collusion, it’s no secret.

Ilene: Why doesn’t anyone do anything to stop this?

Lee: Well, most of the FOMC members want stock prices higher. They believe the trickle down theory. They want to inflate, so it costs less to service our debt. But the kind of inflation we have is devastating. It impoverishes the middle class and makes the middle class unable to pay its debts to the banking system, which is a time bomb in itself.

The banks are not increasing their loss reserves at all. They’re shrinking their reserves so they can show profits when they should be going in the other direction because the ability of the public to service the debt is decreasing.

The Fed gets into these post-hoc crisis management modes where they will make another huge blunder. QE2 was a massive blunder. It did not achieve its desired goal. It got stock prices up but it didn’t get the economy turned around, and it made inflation much worse. 

They [messed] up and the blunder will only be recognized after the fact. Mainstream media won’t get it until after the stock market collapses. By then it’s too late. But the blunder won’t be manifest till stock prices collapse, and then everyone will recognize what a damn idiot Bernanke is.

And now they’re going to sacrifice the stock market, because another problem is that they can’t afford to allow long-term bond yields to go up. The government can’t afford higher interest rates. They will sacrifice the stock market at the alter of the Treasury market. They will do whatever they can to support Treasury prices at high levels. 

That means they’ll force the liquidation of stocks, and once the wave of liquidation hits the stock market, the knee jerk reaction is for the money to flow towards Treasuries. Someday that’s not going to work, and I think that day may be coming pretty soon.

Ilene: What do you think about Bill Gross shorting Treasuries, is that going to work out for him?

Lee: William the Gross. Watch what he does, not what he says. The guy is a world class card player. For any public pronouncement he makes, generally, you have to consider the opposite. Think like a criminal. He’s the Godfather. When Gross comes on TV, I hear the Godfather music playing in the background.  

His track record of public pronouncements isn’t very good, yet he consistently makes more money than anyone else trading the bond market, so obviously you can’t be wrong all the time and make money all the time. 

Ilene: So he’s front running?

Lee: If he’s making a pronouncement on CNBC, he probably has another reason for saying what’s he’s saying other than what it appears to be. He’s got a direct pipeline to the Fed. The Fed sends these coded messages. It’s not that hard to figure out by watching the data. The massive spike in bank reserve deposits at the Fed, starting right after the January Fed meeting, means something is happening there.

Ilene: You’ve concluded this game is going to stop in June?

Lee: Well, I always figured it would because commodity prices were getting out of control. The more Bernanke denied it, the more troubling it seemed he knew it was. It’s the old “[he] doth protest too much, methinks.” Every time Bernanke claimed the inflation was transitory, the more clear it became that he knew it was a serious problem. But they didn’t do anything about till recently.

Ilene: So what is going to happen with the stock market? Will it sell off as QE ends? At what point will the Fed start a QE3 to stop the stock market from dropping - would it let stocks drop 10%, 20%...?

Lee: Oh yeah. The Fed’s job one is to preserve the Treasury market. With this enormous mountain of debt which the government is on the hook for, they can’t afford to pay 5% interest, or even 4%. They can’t afford any increase in Treasury yields. 

So, if necessary, they’re going to force a liquidation of stocks and spark a “flight to safety” panic again, as they did in 2008. Then, they needed to get the yields down, and they were also thinking it would help the housing market.

Ilene: But it didn’t really get to the housing market.

Lee: The problem in the housing market had nothing to do with mortgage rates but they didn’t understand that. It’s amazing how when you put all these smart people together how stupid they can be. It’s the problem with group think. When the FOMC gets together, it’s like having all these geniuses in the room coming up with idiotic decisions. They all have the same motivation - to become the next Fed Chairman. 

The way to do that is to comply with the mad scientist running the show. Bernanke’s whole life has been an ongoing doctoral dissertation in which he tries one experiment after another, based on the [what] he wrote when working on his PhD. 

The problem we’re experiencing now is that the system is imploding. It’s a slow motion implosion. 

Elliott: When QE2 ends in June, will the pain of that ending be extreme enough cause the Fed to resume some form of QE3?

Lee: Yep. I don’t think it will take long. We’re in bad shape, as bad as Greece. The only way we can pay our bills is if other countries and investors continue to lend us $100 Billion every month, and that could jump to $150 Billion a month in the summer. So we can’t pay our bills unless people lend us more money. That’s not paying bills. That’s creating a bigger problem.

Gold price likely to rise 15% in next six months

With gold prices hovering around the $1500-per-ounce-mark, experts believe that a surge in prices in the next six months is likely, with prices reckoned to increase by about 15 per cent to reach $1700/oz by the end of the year.

Despite the fact that the price of the yellow metal has gone up by just 5.5 per cent since the beginning of this year, M.R. Raghu, Senior Vice-President-Research at Kuwait Financial Centre (Markaz), believes that “gold will have another good year in 2011.”
“In my assessment, it is likely to end at $1700 per ounce levels, implying a 20 per cent increase for 2011. It did about 30 per cent for 2010,” he told Emirates 24|7.

With a lacklustre economic recovery in the US and concerns over uncertainty in the European debt markets giving support, gold prices are likely to break previous records, say analysts. The precious metal has immensely gained in popularity as a safe haven investment, and is expected to continue its upward trajectory.

Experts at Standard Bank too are believers in the gold story, and see prices moving up. “We believe gold will continue to push higher in 2011. Our core view on gold is driven not only by our observations in the physical market but also by continued growth in global liquidity, driven not so much by the Fed anymore, but increasingly by government borrowing,” said Walter de Wet, a commodity analyst at the bank.

Experts maintain that the performance of the yellow metal is less volatile as compared to other commodities, giving it more scope to appreciate.
“Unlike silver or oil, gold has a risk-controlled performance so far with low volatility as it has a wider audience (retail, institutional, hedge funds and government treasury). As articulated before, gold will continue its march so long as US economic recovery is hazy, Europe is in doldrums and the inflation monster in Asia is uncontained,” explains Ragu.

In its first quarter report of 2011, The World Gold Council said that gold demand grew 11 per cent compared with the first quarter of 2010, as the average gold price for the quarter rose 25 per cent year-on-year. It’s an as-expected quarter, said the council. – source: Emirates 24|7

No “Double Dip”, But Gold Seen Rising as US Debt Woes Persist

A stagnant economy doesn’t mean the US is recession bound, but high debt means gold and commodity futures are likely to trend higher in the fourth quarter.

No one is going to say the US economy is humming along, yet the good news for US companies is that emerging markets are helping keep many of them profitable. And while real estate and jobs data remain a fundamental drag on investor sentiment, other indicators show the US economy is at least on track to grow at the anemic forecasted 2.5% this year.

“We believe there will not be a double dip recession in the United States because almost every indicator, except housing, is showing the economy is still growing—just very slowly,” says Paul Dietrich, chairman at co-chief investment officer at Foxhall Capital.

The US stock market is now more indicative of global revenues and earnings and not just from the US. About 50% of the revenues and profits of all the S&P 500 companies come from Asia and other emerging markets, all growing over 5% year-to-date. Most major companies are still beating earnings and profit estimates and that is the best sign of all for a long-term rising stock market, Dietrich said in press release Monday.

Dietrich’s crystal ball might be right about a double dip, but that doesn’t remove the systematic risks the market’s been hit with over the last two months.

See: The Case for a Second Recession

Uncertainty over the US economy and the outcome over raising the $14.26 trillion debt ceiling remain high. “There are a lot of clouds in the market currently (including) European sovereign debt, the US debt ceiling and deficit reduction discussion, banking regulations, and emerging market (monetary) tightening,” says Dimitre Genov, fund manager of the Artio Global Equity fund (JGIEX). The deficit debate has been driven by politics, with Republicans looking to cut Democrat-favorite programs, like funding to Medicare and even National Public Radio, and Democrats threatening default if the Republicans do not raise the debt ceiling, currently at $14.26 trillion. That ceiling was broken through in April.

From a market perspective, “It is very difficult to handicap how all this will play out and the respective impact on the markets. Fundamentally and technically speaking the market looks attractive,” says Genov, with valuation of S&P 500 shares currently at 12.8x 2011 price to earnings.

Growth investors will be focused on Asia and emerging market stocks. Income investors, will be turning to investment grade local currency debt in countries like Brazil.

“We expect Asia and emerging markets to start to take off later this year as their central banks stop raising interest rates. We believe the US stock market will end the year up with good gains in the last quarter, not because of the US economy, but because of sales and revenue coming from Asia and emerging markets to American companies,” says Dietrich.

Dietrich, a former Republican congressman, says he is not betting on any meaningful spending cuts within the next 12 months, especially during an election year. With the US debt bubble still firmly in place, Dietrich says investors should expect oil, commodities, gold and precious metal prices to rise again later this fall after taking a breather over the summer.