Paradigm Shift from Paper to Commodities

Honest Money Gold & Silver Report

by Douglas V. Gnazzo, Honey Money Report | March 10, 2008

Intro

Things are not looking too healthy in the financial markets. The Dow and the S&P got whacked for about a 3% loss on the week.

The Yen and the Swiss Franc are rising and the unwinding of the carry trades continues unabated. The U.S. markets are not alone to the downside, as the chart below shows.

As stated in last week�s report, the excess credit boom has led to unbridled asset inflation, which first started to correct in the real estate markets, and now is occurring in the stock markets, not only in the U.S., but around the world. More remains to come.

This is a bear market that has to do with credit and debt cycles � the unsound pillars of a paper fiat money system. A paradigm shift is taking place from paper goods into real goods � commodities, things that hurt when you drop them on your foot.

Stagflation is beginning to take hold. The sixty-four dollar question is: will it remain as is, or morph into a hybrid creature? Unfortunately, the latter is highly probable.

This report has repeatedly harped on the credit/derivative/subprime debt debacle long before it became a popular media term, including the repercussions that would come from the unwinding of the carry trades. The song remains the same � the key a bit different.

Stocks

Charts of the financial and banking sector often were featured on the front page of the market wrap for months on end. The question was asked over and over as to how the stock market could possibly be starting a new bull market when the financials were all making new lows?

The overall market has answered that question by falling in line down with the other sectors that started over the waterfall first. There is no longer any divergence or question � the long term direction is down.

Following are some charts that show the various U.S. stocks indices and there recent performance, as well as important support lines, some of which were broken this week, while others are being tested.

It appears that there is a bit more downside to this particular move before a rally occurs, but things are getting stretched to the downside. However, capitulation does not seem to have occurred just yet. Maybe, maybe not � next week should tell.

Keep an eye on the Japanese Yen and the Swiss France � if they rise, the market will continue down. If they fall � the markets will move up. The bond market has been the recipient of the blood letting in the street.

Bonds

The Fed's main concern is to protect the Treasury market. The
State obtains money in one of two ways: they collect taxes or they borrow it � via the Treasury market � the debt market.

If the stock market goes down the Fed sees it as up an event that the individual investor should worry about, but if the bond market goes down that is for the Fed to deal with, or loose their job.

The yield curve is getting steeper, short term rates are dropping faster than long term rates. The long bond yield was actually up for the week and has crossed above its upper trend line.

The next chart compares the short end to the medium and long term end of the yield curve � from 30 Day T-Bills to 30 Year T-Bonds.

It clearly shows the short end of the curve dropping far more than the long end. It hasn't been a contest � it’s been a slaughter � of huge proportions.

Commodities

There is always something going up in price. As stated earlier, a paradigm shift is taking place out of paper assets and into hard assets � commodities.

This will accelerate with the new sovereign funds popping up around the world, especially in China. China will buy stuff � stuff they need to live, as will India, the Middle East, Russia and other nations.

The chart below shows this shift taking place � out of one thing (paper) and into another (commodities).

In the short to medium term, commodities have become extended, so a correction would not be a surprise, in fact it would be healthy and constructive from a longer term point of view.

Bull markets are in effect until proven otherwise. As of now, commodities are in a bull market unless the long term trend changes.

Weakness is to be bought. Strength is to be sold. Fear is to be embraced, complacency shunned.

Gold

Gold was down $0.80 for the week to close at $974.20 for a -0.08% loss. Below is the daily chart.

RSI & histograms show negative divergence. MACD is starting to roll over. ROC is headed down, suggesting further downside action.

Silver

Silver was up .33 cents to close at $20.25 for a weekly gain of +1.68%. This was another multi-decade closing high (weekly).

The daily chart shows RSI coming down from far into overbought territory. MACD appears to be starting to roll over.

Histograms are receding down towards zero and ROC has turned down, hinting that further downside action is likely.

Hui

The Hui added 1.26 points for the week to close at 487.33 (+0.26%) for another weekly closing high, but off its daily closing high of 502.17 made on Thursday.

Below is the daily chart. Both RSI and the histograms are flashing negative divergences. Price has backed off its recent all-time highs and is testing horizontal support (blue line).

MACD appears to be rolling over. ROC has turned down, indicating that more weakness is probable. Caution is warranted.

Next up is the weekly chart of the Hui. At the bottom of the chart is the ROC indicator (rate of change).

In bull markets, when ROC drops below zero (after a correction) and then turns up through zero (supporting evidence that the correction is most likely over), such moves have been the start of strong rallies back up. The long term trend up resumes.

The red circles indicate the bottoms of corrections prior to such rallies. The blue circles show the oversold ROC readings coincident therewith.

The two have been connected by the vertical red lines to show the relation between the two.

Although hard buys � they have been the most profitable. Hard trades are usually the best trades; easy trades often turn quite quickly.

The point and figure chart of the Hui shows a double bottom breakdown occurring on Mar. 7, 2008, a short term bearish development.

A preliminary bearish price objective of 458 is given.

Next up is the P&F chart of the GDX Index. It has a bullish triangular breakout from Feb. 27, 2008 still in control.

The bullish price projection is 79. Currently the index is at 53.45, which gives a very strong price increase projection of around 50%.

This is in stark contrast to the Hui chart, although the Hui chart does not have a significant downside target at this time.

New Book Coming in 2008 - Honest Money

About the author: Douglas V. Gnazzo writes for numerous websites and his work appears both here and abroad. Just recently he was honored by being chosen as a Foundation Scholar for the Foundation for the Advancement of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

Contact Information

Douglas V. Gnazzo | Honest Money Gold & Silver Report, LLC
Canton Center, CT USA | Email | Website