How to play bulls and bears in Gold, Oil?

January 08, 2009

By Sean Brodrick
This market is so wild, so volatile, that I’m calling it the “Andy Warhol market” — everyone gets a turn to be right, but only for 15 minutes at a time!

And right now, there are massive forces lined up that could thrust stocks and commodities to the moon … and an equally formidable array of triggers that could send them tumbling lower. The stocks I’ll leave to others …

But let me show you the forces that are pushing around gold and oil. Plus I’ll give you four ways to play these wild swings.

Gold-ilocks and The 3 Bears
I’m generally bullish on gold, so it’s good to acknowledge the bearish forces as well. While total gold demand rose 18% in the third quarter, the fourth quarter was when the grizzlies really came to town …

Bear #1 —Jewelry demand under pressure
Jewelry demand represented two-thirds of global gold demand last year. So I’ve been watching to see how the world-wide recession. Most places haven’t reported fourth-quarter numbers yet. But the reports aren’t good out of Abu Dhabi. Gold jewelry sales in the most prosperous city in the United Arab Emirates fell by 40% from November to December.
We’ll have to see how other gold centers did. But there are also reports that many hard-pressed consumers are now selling their gold jewelry. If they’re selling, they’re not buying.

Bear #2 —India gold imports down
India is the world’s biggest consumer of gold. So it’s worrying that India’s gold imports tumbled 81% in December — hitting just 3 metric tonnes compared to 16 metric tonnes a year earlier. On the other hand, part of this is due to the deadly terror bombings in Mumbai. So we might see that the demand is just delayed.

Bear #3 —Gold is banging its head
Look at a weekly chart of gold and you can see that overhead resistance is hemming in the yellow metal. In the short-term, it looks like gold could retrace to lower support levels. But if it can break out, gold could easily run up to $940 and higher. There are also fundamental reasons to be bullish in the longer term …

Gold’s Three Bears Are Balanced by Three Bulls

Bull #1 —Gold mine supply peaked in 2001
Despite a seven-year bull market in gold, mine production has fallen to a 10-year low.

Bull #2 —Credit crunch increases pressure on supply. The global credit crunch is choking off financing for new projects just as the recession dampens demand for base metals. Freeport McMoRan Copper & Gold, Cameco, Newmont and Jaguar Mining are examples of miners that have delayed new projects or cut back existing operations.

Bull #3 —Money supply is exploding
This Monetary Base chart from the St. Louis Fed shows currency in circulation and in the Federal Reserve Banks.
The monetary base was increasing at 3-to-4% per year through September 2008. But then it kicked into overdrive and accelerated to a mind-blowing 990.9% annual rate for the three months ending December!

That can only be described as a monetary volcanic eruption. And averaged out, that’s an annual increase of 86%.
Inflationary? Heck, yeah!

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