Commodity
Futures Forecast
Weekly
Report
From the desk
of Philip Gotthelf
December 22, 2003
Metals
Just when they
thought it was over, gold continued its trek higher after breaking
out above the elusive $400/oz. mark. Monday's test of 40200 in
February gold shook the market's confidence since it touched
below the 10-day moving average. However, 40200 represented support
and the definition of support is the level that is supposed to
hold when challenged.
I am a bit
nervous about the change in technical pattern. We see a series
of downward sloping consolidations or "flags" that
led gold higher from the huge October correction. These are continuation
flags as opposed to an upward sloping consolidation that can
become a reversal formation.
Notice the
current breakout above 41200 suggests a possible exhaustion.
Caution is in order. A bust below 40750 can easily bring another
40200 test and I believe traders might become discouraged and
bail on longs. Some believe profit-taking is a disincentive,
but commodities are marked to market at year-end whether liquidated
or not. So, it is more likely an incentive to take year-end profits
rather than risk sacrifice on a paper gain that will be taxed
for 2003.
Don't get me
wrong. I still favor gold. Yet, there is increasing exposure
for longs and a pull-back is likely to be powerful... recall
the October plunge! For longer-term thinkers, a correction is
a good thing. If profits are lifted from the table this month
and the market corrects in January, it is a buying opportunity...
I think. Don't forget that hedge pressures have been relieved
by policy changes among virtually all significant producers.
Gold companies are reaping the rewards of strength with naked
inventories.
As mentioned
for the benefit of equity traders, the business of gold couldn't
be better. It costs less to mine, less to finance, and the price
is up more than 70% from the bottom. If it was profitable at
$250/oz., think of what it delivers to the bottom line at $400-plus!
Silver is following
gold with equal success. There are the same downward consolidations,
but silver exhibits more intra-day volatility. Bear in mind that
silver is not the highly liquid market we enjoyed in the late
1970's and early 1980's. It has lost open interest to other markets
as the scope of futures has expanded.
Silver has
the same suspicious formation with an upward bias. A bust below
55750 support can quickly descend below 54000. Still, the white
metal is firmly entrenched above 52500 support... if only because
of dollar parity.
My disappointment
is not having stayed with out long copper position. The "roaring
economy" is generally led by advancing base metals like
copper. I was severely discouraged by November's lack of strength
and was hesitant to take up the technically indicated short side.
The result was being sidelined and we missed the impressive December
recovery.
Recent action
suggests a continuation of the breakout from the symmetrical
triangle formed last week. The projected objective is approximately
10340. Some chartists insist that the triangle took away any
doubt and the bulls are firmly in control. For the more conservative,
look back upon the crash of November 12-21. That is not a pleasant
prospect for latecomers to this bull move.
Copper formed
an enormous base and "deserves" to achieve $1-plus
values. If the economy is booming as indicated, copper can easily
maintain this lofty level. However, I have a problem when copper
tops a buck because today's production costs are much lower than
textbook descriptions. I have mentioned efficiencies associated
with electro-whining/solvent extraction. The cost associated
with modern extraction technologies for low-grade ores have dropped
below 60¢ a pound. So, when copper is above $1, there is
a big incentive to mine more and sell more.
As a reminder,
boosts in copper inevitably produce more silver, gold, platinum,
and palladium. Silver, however, is the primary precious metal
by-product of copper. This is a major reason why silver could
become defensive as copper prices rise and motivate increasing
production.
Large producers
like Peru and Chile need cash to meet monetary targets. Copper
is a good source of foreign exchange. As with any cycle, good
times lead to expansion until capacity overreaches demand. It
is early in the "recovery" to expect the cycle to turn.
Still, this characteristic of metals must be in the back of every
trader's mind!
Retail Profits Flu
Away
Black Friday
kicks off the U.S. retail season. This traditional "day
after" Thanksgiving heralds in the first official "sale"
as consumers are inspired to take to the malls with promises
of huge savings. This year was not... I repeat... was not a disappointment.
In fact, everything was on track for a breakout above last year's
holiday performance.
However, retailers
have recently been reporting a drop in consumerism without explanation.
At the same time, there has been a slight pop in electronic and
catalog buying. What's the clue? Perhaps it's the flu!
The financial
media has failed to make the connection, or I simply missed some
reporter who shares my conclusion that the disease has reached
sufficient proportions to stymie retail store attendance. Not
only are the sick staying home, but newsreels have warned that
excessive contact (like going shopping) increases the risk of
infection. While thousands die from the flu every year, this
year, the death rate has been particularly emphasized. Yes, fatalities
are elevated, but not to the extent of calling for a moratorium
on store shopping.
Declines range
from furniture to PCs to Wal-Mart and Target! The hint is that
the declines are not sector oriented. This is to say that particular
categories are not isolated. It is retail as a whole. Thus, the
conclusion that some generalized disincentive exists gains validity.
We cannot conclude
that consumer confidence is down when, in fact, it has been steadily
rising. My former concern that tightened credit might impinge
upon consumerism has been refuted by the credit card statistics.
That cash is appropriately expanding despite earlier signs that
banks were cracking down on bad debt.
Amazingly,
the flu could be the economic determinant moving into first quarter,
2004. This would not be the first time this nasty bug put a crimp
on progress. Historians have debated the causes and results of
World War I, but there is a consensus that the Spanish Flu pandemic
was largely responsible for decimating armies and forcing a truce.
Of course, that episode took more victims than any other plague
in recorded history. Hopefully, we do not face the same threat
in today's new strand of virus.
I bring this
seemingly unrelated topic up because it is relevant to the last
quarter 2003 performance and its subsequent influence on 2004.
According to the Department of Labor, the economy is roaring.
New jobs creation is accelerating, manufacturing has surged with
the most significant gain since the end of the Clinton Administration.
The high tech sectors are rapidly recovering and the Dow has
bumped up above the notorious 10,000 mark. Even inflation is
allegedly low with the smallest gain in 38 years.
If consumers
are the driving force of the U.S. economy, the flu may be the
brakes! All eyes focus on the post Christmas retail figures because
they set the tone for the rest of the year. Poor sales could
reverse equity market progress and plunge us back into a corrective
pattern. In turn, the timing will likely coincide with the infamous
"January Effect." This theory states that January establishes
the trend for the year.
Certainly,
nothing within the Dow Industrials' performance hints that 2004
will open with disappointment. The breakout above 9900 resistance
paved the way for Dow 10,000 and the momentum has been carried
forward. The massive recovery from the March bottom is indicative
of a secular reversal. With very few glitches, the average has
maintained above the 40-day average. More importantly, the 52-week
average is well below the current trendline and is considered
more significant for measuring prospective equity performance.
In contrast
to the Dow, high tech exhibits a deceleration or rounded top
with potential penetration of the same secular trendline. Support
is apparent at 1370 which also represents the "pivot"
for the topping formation if we fail to see a breakout above
1450 resistance.
We see that
the "traditional market" takes favor over high tech
regardless of media reports and interpretation.
As an aside,
a subscriber asked me whether I had a grudge against the "media"
because I bring up their lack of coverage so frequently. The
answer is "no." My reference to the media is not intended
as derogatory or critical. The purpose of purchasing a high-priced
newsletter is to receive insights that go beyond those generally
available from the "media." In a sense, I am part of
the media, too!
An advantage
newsletters have over newspapers and broadcast is the ability
to digest. You cannot help admiring reporters who present live
features as events unfold. However, blow-by-blow descriptions
do not provide historical perspective or correlated analysis.
It was months after the initial stock market dive from March
of 2000 when analysts picked up on capital gains taxes as a possible
catalyst. Indeed, investors had switched from venerable Dow issues
to "hot" internet stocks in 1999's last quarter without
fully appreciating the tax consequences for the following April
15. To pay the tax, portfolios needed to be trimmed in March.
Was that the cause of the initial break?
In truth, I
have missed the mark in equities by neglecting to include long
index positions on the Forecast bulletin. It is not simply because
I was skeptical of the recovery. I believe the exposure is generally
too high for average investors and there is better risk/reward
potential in the less dramatic commodities.
That said,
we face a very interesting and dynamic January. If the flu is
having an impact upon retail, we will see an unfortunate shift
in the buying season. Post-season sales will be larger than usual,
although less profitable. Analysts may be confused by the virus'
intervention in an otherwise stellar consumer recovery. In turn,
the first quarter of 2004 may be a fooler.
December 19,
2003
Philip Gotthelf
Commodity Futures Forecast
P.O. Box 566, Closter, New Jersey
201-784-1235
www.commodex.com
321gold Inc
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