The Lure of Gold

Gold prices rose to $1,023.85 an ounce last week, which is the highest rise since March 2008; just shy of its record high of $1030,80 an ounce, according to Humeyra Pamuk in Globeinvestor.com on Monday, Sept 21, 2009. Selling pressure is starting to weigh on gold as speculators in Asia are selling over worries that the IMF is planning to sell gold and a firmer US$. There is speculation that China would buy gold sold by the IMF. In addition, an article written by Lawrence Williams in mine web refers to Paul Mylchreest’s Thunder Road Report, which suggests that the Chinese government is pushing the general public into buying gold and silver bullion, which could have a dramatic effect on the market. “On Monday, Market News International reported that China is considering buying gold being offered for sale but the International Monetary Fund, citing two unnamed government sources, but the report could not be confirmed and traders said it had little impact on the market.” So will gold go up?

When we look at XGD (Barclays iShares S&P/TSX Global gold exchange traded fund), which is made up of gold companies like Barrick, Kinross and GoldCorp, we can see that the gold index has been bouncing around the 50 and 100 day moving average with support at the 200 day moving average. There is also a long-term resistance line on XGD, which is around $22. It appears to be range bound at this point. Admittedly, XGD replicates the performance of gold companies, not the bullion itself so they will operate slightly differently than the price of gold, however, this does give us a sense of what the support and resistance parameters are.

According to Brooke Thackray’s research investors should be very careful because October has traditionally been a weak month for Gold. There are a lot of factors at play including speculators holding a net long position in U.S gold futures for the week ending Sept 15, however U.S gold futures for December delivery fell $8.20 an ounce at $1002.1 on the COMEX division of the New York Mercantile Exchange. If you are lured by the shine of gold, watch for a break in resistance above $1,000 and see what the FOMC does with rates. Is economic data improving or do they need more stimuli and how will the markets respond? The answer to these questions will drive the price of gold more that the speculation about China.

Our team hosts a “Friday Morning Coffee” discussion group on the first Friday of every month. We spend an hour exploring the markets and what are likely scenarios to play out in the future with an analyst and some coffee. Seating is limited so please call myself at 250-868-5525 to reserve your seat.

Writing recovery with BIC

According to Shawn McCarthy in his article in the Globe and Mail Saturday Sept 12, 2009, Brazil, India and China are all expected to post solid growth rates for 2009. “Russia remains the outlier in the group – its economy contracted by 10.9% annualized in the 2nd quarter, and is forecast to shrink by 7% on the year.” Hence, BIC is writing the recovery.

Taken from the Claymore website, the Claymore BRIC ETF (CBQ) seeks to provide long-term capital growth by replicating, net of expenses, the performance of BNY Mellon BRIC Select ADR index. The index tracks the performance of companies from Brazil, Russia, India and China which trade as American depository receipts (ADRs) and/or Global depository receipts (GDRs) on a U.S. stock exchange. The exposure to Brazil is 52.12%, China is 34.39%, India is 10.27% and Russia is 3.21%. The top sectors include Energy at 30.78%, Telecommunications at 17.78%, Materials at 15.39% and Financials at 17.34%.

The CBQ has posted over an 80% gain since the low in March and over 50% since the beginning of the year. In early March, the current price crossed the 50 and 100 day moving average and eventually crossed the 200-day moving average in early May. We aren’t getting any reading from relative strength or volume indicators, however moving average convergence divergence (MACD just turned positive. The current price has maintained its position above the 50, 100 and 200-day moving averages which is bullish.

Although this all looks positive for developed countries, a word of warning from Peter Hall, chief economist with Export Development Canada, “We’re not going to get a global recovery until we see Western consumers spending again.” Shawn McCarthy notes, “But with the exception of Brazil, most emerging economies remain heavily dependent on Massive stimulus programs for their resurgence and will eventually require reenergized consumers in developed countries to sustain their recoveries.” Canada is likely to benefit from rising prices for commodities like oil and materials. All said, bet on writing with BIC.

Dead Cat bounce or foot on the gas?

The price of the Claymore Natural Gas ETF has gone from a high of $20.67 down to $4.03 in the last year. This represents a drop of 81%. Last week there were signs of life. Is this a dead cat bounce or a sign of foot on the gas?

The Claymore Natural Gas Commodity ETF tracks the performance of the benchmark NGX Canadian Natural Gas Index, less fees and expenses. The ETF provides non-leveraged exposure to the Alberta natural gas market, by investing in physical natural gas forward contracts and is not directly involved in the exploration, operation, reserves, engineering and management risks associated with an investment in entities that explore for, produce and sell natural gas. The Claymore Natural Gas Commodity ETF (TSX: GAS) tracks Canadian natural gas prices in Canadian dollars.

Technically there are no signals other than a bounce off the bottom, which occurred last week. The slope looks more like a black diamond run on a ski hill. The current price has maintained it’s stance below the 50, 100 & 200 day moving averages occasionally bouncing off resistance levels at the 50 & 100 day moving averages. The volume of trading has been steadily increasing over the summer, spiking last week. The moving average convergence divergence (MACD) is also looking more positive.

From a seasonal perspective, Natural Gas tends to outperform from August to December based on research by Don Vialoux at http://www.timingthemarket.ca/. Typically, natural gas is used for furnaces and air conditioners in the winter and summer. A number of things can impact price including weather at this time. Most of the increase in price comes from distributors accumulating inventory for the winter months. Traders are also responsible for controlling the moves of natural gas both ways. Dennis Gartman points out that Natural gas is cheap from a historical perspective relative to oil. The ratio of prices between oil and natural gas is 28 to 1 vs. 12 to 1 just a few months ago. I would guess that now would be a good time to bet on natural gas moving off their lows.