Gold & Currency Outlook 090406

Dear Friends,

Gold has been a favorite play amongst retail investors who have been advised by private bankers based on the "Flight to Safety" story. In my opinion, the Gold Market is a bubble whose fate depends very much on whether the Hyper Inflation argument will hold water. This explains its high volatility in the past one year.

From the Weekly Chart we can see that Gold fell from a Historical High of US$ 1033.9 per ounce, to a Low of 681, in a classic EWT (Elliot Wave Theory) 5 Wave Motive Structure, which suggested that it was in a Primary Downtrend.

Chart Courtesy of StockCharts.Com

However, in light of the excessive printing of money by the US Government and the proposed mammoth Budget Deficits, Gold has risen from the grave with a fresh air of breath. In one major upswing, Gold rose from 681 to 1007.7, before experiencing the current correction.

It should be noted that the Weekly Stochastics was at Gross Overbought, and have crossed over to the downside.

Based on my Forecasting Model, Gold should drop to 825 +/- 20, and this current downturn is expected to last till some time in June 2009, barring any sensational new activity plans from the US Government.

This is assuming that the current downturn is a normal Trend Correction Wave in a Primary Uptrend which started in November 2008 from the low of 681. However, it is possible that this Downturn may not be a normal correction, and may actually be the start of a Primary Downtrend, as some fund managers have argued on CNBC, although they are still a minority view today.

The argument has some valid points and should not be simply dismissed. As at today, the retail investors have been pouring money into the Gold market for some time, so what happens when the flow of funds trickle to a stop? That's how markets make a Top, i.e. it reaches a point where there is no more money left that is willing to chase prices higher.

Usually, Retail Investors are the last to buy, and the ones left holding the baby, when the musical chair game stops.

Consider this argument in light of the recent call for IMF to sell down its Gold shareholdings to fund its operations to help countries that are currently in financial trouble, and we have an ever growing wave of higher and higher probability of a market downturn.

I do admit to a contradiction in my analysis. On the one hand, I am very concerned about the excessive printing of money by the US Government. This has been mentioned in many of my blog articles, the most recent being the article on 19 March 2009, entitled US Government Continues to Print Even More Money!" and the most detailed being The Inevitability of A US Dollar Devaluation Crisis published on 9th February 2009.

On the other hand, I am not a firm believer in the Gold Uptrend, and the "Flight to Safety" argument. Why?

This is because of what George Soros calls the Reflexivity Theory. The market has already acted on the "Flight to Safety" story. In my opinion, to act now, on this story, is to court the ever increasing risk of a potential bursting of the bubble.

If anything, I would put my money on Silver and Plantation & Mining Stocks or ETFs (Exchange Traded Funds) as the appropriate hedge, should the Hyper Inflation and US Dollar Devaluation Crisis risks increase to a level that is considered dangerous.

However, before we dismiss the Gold Hyper Inflation Hedge argument, let's consider the risks associated with the US Dollar from a Technical Analysis perspective of the US Dollar Index.

A review of the Weekly US Dollar Index Chart reveals increasing Probability of a US Dollar downturn against the major world currencies. The USD Index had breached the previous high of 88.46, but had not made convincing progress as it turned down at 89.62. Usually, this phenomenon is a signal of a potential Market Top, and the Index fell by 7.8% in the two weeks immediately after making the new High.

Chart Courtesy of StockCharts.Com


The Index has made a comeback in the last two weeks, having made a Pivot Low at 82.63, but the Weekly MACD is showing a Divergence, and is still trending down, and so is the Weekly Stochastics, which has fallen from the Gross Overbought Zone.

Currently, the Index is supported by the SMA200 (Simple Moving Average for 200 Weeks, i.e. almost 4 years) at 82.9. Should this level be broken, then we can expect the US Dollar to face further devaluation pressures.

Nevertheless, a review of the Daily USD Index Chart shows the Index in the process of attempting to rise, with the Daily Stochastics rising, and the Daily MACD about to turn up. However, the upturn is not strong, suggesting a lack of conviction in the market for continued strength in the US Dollar.

Chart Courtesy of StockCharts.Com

The USD Index is at a critical phase. If the present attempt to rise above the latest High of 89.62 fails, then, it is possible to see a major downturn in the US Dollar in the Medium Term.

What is interesting is that despite the claims of a potential disintegration of the European Union and thus, the dissolution of the Euro, the Euro Index is starting to show signs of life, of a potential strengthening. Both the Weekly MACD and Stochastics are now trending up, and the Euro Index has broken above its SMA200.

Chart Courtesy of StockCharts.Com

Based on the Charts, it would seem that the risk of Hyper Inflation is still sufficiently low for us to act today, although this risk seems to be on the rise. Nevertheless, the Probability has increased that the US Dollar will weaken against other major world currencies in the next few months.

In conclusion, the Probability is increasing that in the Medium Term, (3 Weeks to 3 Months) the US Dollar will weaken against the Euro, while Gold is expected to fall to 825 +/- 20.

Please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

© Copyright 2009 of Praesciens.Blogspot.Com.

Intuition Speaks Today -The Loonie as the Potential Winning Market Strategy?

Dear Friends,

Usually I pride myself in doing a lot of research for scientific evidence before forming conclusions. However, as the saying goes, "Rationality has an older sister; her name is Intuition."

I must admit that I haven't been trading this month, and it is because of my intuition. I don't take a trade based on intuition, but I do stop myself from taking trades if my intuition tells me otherwise.

Which is Better? Rational Analysis or Intuition?

The scientists overemphasizes the importance of Rationality and Scientific Evidence, while most people tend to go with Intuition, without looking for scientific evidence. Neither is correct.

The correct thing to do is to conduct scientific research, and rationally analyze the issues. Then, Intuition will synthesize the various factors into a holistic picture, and voila, foresight happens.

There are times when waiting for scientific evidence will be too late. What is the point of realizing today that this is a Bear Market? We want to be able to foresee such an event long before it happened, i.e. say, 1.5 years ago.

But at that time, when I was screaming bloody murder, some people thought I was an alarmist, a pessimist, or worse, a neurotic. Today, there is blood on the streets, and it is a very sad thing.

It's the same as the Poseidon adventure where most people stayed in the Ballroom and drowned, while a few decided to climb up.

BUT, the few adventurers could easily have made a wrong turn and drowned as well. That is the reality of life.

I remember the time when I first wrote the email that said, "This is the last train to London, get out of the stock market now." That was in July or August 2007.

But back then, there were no scientific evidence to back up the argument. Even the consumer spending statistics were still holding up, and the talk then was that the Sub-Prime issue would be resolved, and the crisis will be contained.

So, with hindsight, we know that Rational Analysis is useless for events that are about to happen, because Rational Analysis is based on scientific evidence of events that have happened.

So then, if if Intuition is not based on scientific evidence, what is it based on?

The correct answer is that Intuition must always be supported by Rational Analysis. Intuition that is not supported by Rational Analysis is a wild guess; a wild gamble, no more.

Systems Thinking (Cause & Effect) Modeling as the Mother of Intuition

But, the Scientific Evidence and Rational Analysis is not a direct evidence, for no direct evidence will exist as things have not happened, or is not reported to have happened yet.

In this case, we can only use a Systems Thinking Model of the World, which is actually, a Cause & Effect Model based on identifying the Key Driving Forces, and understanding their relationships and potential range of outcomes, and how they impact each other.

Why is this Important?

I have invested time to explain the relationship between Rationality & Intuition because most people tend to act on their own intuition, but hardly ever trusts another person's Intuition. Human Behavior is such that trusting a person's Rational Analysis with all the supporting scientific evidence is already hard enough, what more, for another to trust a person's intuition.

Also, very few people know how to train and develop good intuition, and thus, can't differentiate or evaluate good intuition from bad intuition.

These are the types of things which I feel should be taught in schools and universities, because the knowledge here is the key to uncommon wisdom, but alas, this will not be the case, for a long, long time. Try convincing any professor to accept Intuition as an Equal Subject to Rational Analysis, and you have a big challenge on your hands.

Anyway, my experience is such that Intuition is very important, especially Good Intuition developed from Systems Modeling as informed by Scientific Evidence and Rational Analysis.

Ok, now that I've got the issue of Rationality & Intuition out of the way, let's get down to serious business of making money.

Market Anomalies I Don't Understand

Supported by Rational Analysis, my Intuition identifies the following Market Anomalies (Inconsistencies): -

• US Dollar should be weak, not at its strongest for the last few years, as it is now. Why? Because the US Government is printing money, even much more than ever.
• Oil Price should not be so low; not so fast, anyway. Crude Oil went below US$50 per barrel today.
• Gold should not be so high at US$750 per ounce, which does not seem to match with the price falls in other commodities, especially Oil.
  

Yet, the Price Movements continue to suggest Gold in a sideways movement, with increasing potential to go higher. From Rational Analysis, Oil is expected to rebound, and yet, it keeps dropping in price.

The US Dollar strengthening momentum seems to have abated somewhat, i.e. it is now see-sawing in more or less a sideways motion, with a slight strengthening bias, when it should be weakening.

Why?

The Price movements as depicted on the Technical Charts is not telling me the same story as my Intuition. Why?

I don't know. But, from many years of good experience, I trust my intuition, which is why I stay away from the markets. I haven't lost a single cent, but neither have I made any. But considering the world lost a few trillion US dollars in this month alone, I think I can live with my not making any money, and having lost none.

But defensive play does not buy the milk powder. So, what are we to do?

The Potential Winning Market Strategy - The Loonie?

My Intuition has been right more often than wrong in pointing me to the winning market strategy. If my Intuition is correct, Oil must strengthen once more, and the US$ should weaken at the same time.

From a forex perspective, one of the purest Oil play is the Canadian Dollar / Yen (CADJPY) Forex trade. For years, when the Oil Price was climbing rapidly, the Loonie (Canadian Dollar) strengthened against the Yen. However, when Oil Price fell, so did the Loonie against the Yen.

If the strengthening of the Oil Price may precipitate the weakening of the US$, then we need to also watch the USDCAD (US Canadian Dollar) Forex Rate.

Thus, my intuition points me toward the strengthening of the Canadian Dollar against both the US$ and the Yen.

Again, I reiterate that this is based on Intuition, not Technical Analysis nor Rational Analysis, so we need to wait for the Technicals to provide the right confirmational signals before trades are taken.

US$ Relationship with the Yen

But how will the US$ behave with regard to the Yen? CNBC has not been focusing its attention on the consistent and persistent weakening of the US$ against the Yen in recent weeks. The US$ weakened below 100 a few weeks ago, and is now at 94.5 Yen to the Dollar, which is a very strong Yen.

As a matter of reference, the USDJPY exchange rate was around 145 Yen to the US$ in 1997, during the Asian Currency crisis.

The key question is "What will happen if the Yen breaks below 90 to the US$? Sooner or later, US consumers are going to feel the inflationary effect of a strong Yen, especially once the deflationary effect of a weakened but stable Oil price wears off.

It should be noted that the Yen is also sometimes seen as the proxy of the Chinese Renminbi, which is not freely traded on forex markets.

Righfully, the Yen should not be strengthening because the Japanese Economy is also in deep trouble. However, the answer for the strengthening of both the US$ and Yen have been noted in my previous blogs, i.e. the Unwinding of Carry Trade, where the interest rate differential between the Japanese BOJ (Bank of Japan) rate and the Federal Reserve FOMC rate is now less than 1%, when it used to be 4% to 5%.

Will the Yen continue to strengthen? I don't know. Based on observations of more than a decade, the BOJ has always worked very closely with the Federal Reserve, and any strengthening or weakening of the USDJPY has always been based on what both authorities agree upon more than anything else.

So, what do the Fed and BOJ want in the future, assuming they will still be in control of the USDJPY forex market?

I think the Fed is testing the market whereby, it is encouraging US exports while deterring imports with a weaker US$ to the Yen. When it reaches a point where it starts to hurt the US consumers, or the BOJ feels that it is too painful for Japanese exporters, the Yen strength trend will reverse, again, in a managed, well behaved manner.

CONCLUSION

In conclusion, it is not possible to form a reliable opinion of the future direction of the USDJPY, which is why we will need to let the Price Charts tell us which trade to take, i.e. USDCAD or CADJPY, or both, in the future.

If my intuition is correct, and this current weakening of the Canadian Dollar is reversed, it will be the start of a new Uptrend for the Loonie. To catch the start of a new Uptrend and ride it all the way to the top is every trader's dream.

So, I would watch the Loonie very carefully. Hopefully, the LOONIE will make us a lot of MONEY. Haha.

I would reiterate that this market strategy is only based on my intuition, not Technicals. Wait for confirmational technical signals before taking the trade.

Please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

© Copyright 2008 of Praesciens.Blogspot.Com.

World Markets Outlook 081117

Dear Friends,

The World Financial Markets influence one another to a certain extent. Today, We make an effort to compare the Oil, Gold, US Dollar Index, and the Dow (DJIA) Stock Market Index in the hope of developing some strategic foresight on the future direction of these markets as they relate to each other.

Charts Courtesy of StockCharts.Com

The key to our analysis is Oil. If Oil Price goes down further, this would ease inflationary pressures even more, and thus, there would hopefully, be a little more left over for cash strapped consumers to spend, to sustain their cost of living.

On the other hand, if Oil Price starts to climb back to US$100, then, both the consumers and businesses would be badly hit once more, especially so today, when unemployment is rising rapidly.

A High Oil Price does not augur well for the US and World Economy.

Oil ($WTIC) Price has fallen by US$90.30 or 61% from the historical peak of US$147.90 per barrel, to US$57.60 as at 14 November 2008.

If you take a look at the $WTIC Oil Daily Chart, don't you feel like kicking yourself hard, for not taking advantage of such a well behaved, Strong Downtrend, that just keeps going down, down and down?

There were only two minor rallies, i.e. once in mid August 2008, and another stronger rally in mid to late September 2008. THIS is the type of market we want to trade and make money in. Unfortunately, I have yet to get access to trading Oil CFDs, and I don't like to trade Oil Futures because there is an expiry date.

What is our Market Outlook for Oil ($WTIC)? The Stochastics is showing that Oil is at Gross Oversold Level.

So what? If you look more closely, Oil has been in Gross Oversold Territory on the Slow Stochastics Indicator for more than a month now!!! The Stochastics Indicator is not very useful in a Trending Market, unless you know how to interpret it beyond what is taught in the Technical Analysis books.

Howver, there is an Indicator that is useful, i.e. the MACD (pronounced Mac D), because in this situation, it has been showing a bullish divergence against the Oil Price. Whilst Oil Price is still trending down, the MACD has crossed over and started trending upwards. This is a sign of accumulation by Market Bulls.

It is important to note that we cannot take a Long Trade just because there is a MACD Bullish Divergence. Why? Because the Price is still going down, despite the Divergence, and thus, we need a Trigger Signal to tell us that NOW, is the right time to buy.

To convert this Potential Opportunity into a trade, we need the Oil Price to form some kind of pattern that will give us such a Trigger Signal. The latest Pivot Low is US$55.50, and if this Support Level can hold, while the Oil Price consolidates sideways in a narrow range for a while, or if it forms a W Pattern, then we will eventually have a Trigger Candle.

Charts Courtesy of StockCharts.Com

At present, if we just jump in the trade, we don't know if Price will hold above US$55.50.

It should be noted that any Uptrend is expected to be merely a Medium Term Secondary Wave Correction, in a Long Term Primary Wave Downtrend. So, please be careful with any Long Position you may want to enter.

The Oil Market is already in a Long Term (3 Months to a Year) Downtrend, which is due for a Medium Term (3 Weeks to 3 Months) Uptrend Correction.

If Oil is about to rebound, perhaps we may gather some market intelligence from the Gold Market. Why? Because Oil is THE Cause for High Inflation, and Gold is a Popular Hedge against High Inflation.

However, based on the Daily Chart, the Gold Market seems to be in a Medium Term Sideways Consolidation Price Pattern Formation (SCPF) Mode, amidst a Long Term Primary Downtrend Wave.

Gold tends to have an inverse relationship to US$. When US$ strengthens, Gold tend to weaken, whilst when US$ weakens, Gold strengthens. This is not the case all the time, but sometimes, especially when the "Flight to Safety" story is being propagated, then this relationship holds true, for a while.

Charts Courtesy of StockCharts.Com

In this case, the US$ Index seem to be suggesting a higher probability that the US$ is now toppish, and thus due for a Medium Term Secondary Wave Downtrend Correction, although the Primary Wave is in an Uptrend.

Both the MACD and Slow Stochastics are showing Bearish Divergences, with the Slow Stochastics coming down from an Gross Overbought situation.

Thus, US Dollar seems toppish and due for a Medium Term Downtrend Correction Wave, which is fairly consistent with the Oil Medium Term Outlook which is facing increasing probability of a Medium Term Uptrend Correction Wave.

When Oil Price goes up, US Dollar Index tend to go down.

Occasionally, the US$ strengthens before the Dow moves up. This has been due to the sell down by Global Mutual Funds / Hedge Funds on the Global Markets, so that they can adjust their portfolio allocation, and raise the necessary cash. They then remit the cash into US to be invested in the US Stock Market.

Charts Courtesy of StockCharts.Com

The remittance of the cash funds into the US causes a short term demand for US$, which causes US$ to appreciate a week or two before the US stock market moves up, due to the cash inflows.

However, this does not seem to be the present situation observed.

On the other hand, there are times when there is not much of a correlation, when the strength or weakness in either market is not the major cause or effect on the other.

In reviewing the Dow (DJIA) Daily Chart, we would maintain our Long Term Primary Downtrend Outlook, and a Short Term Sideways Consolidation Price Formation Outlook. The Medium Term Outlook is unclear for this market, and if anything, is starting to yield a slightly bearish feeling, as hopes of a "Climb Back to Health" scenario fades with each passing day, as the pattern gets nearer and nearer to the SMA50 (Red Line), which currently stands at 9758.

CONCLUSION

Oil Market Outlook

Long Term: Primary Downtrend, i.e. Bearish
Medium Term: Higher Probability of a Secondary Uptrend Wave Correction

Gold Market Outlook

Long Term: Primary Downtrend, i.e. Bearish
Medium Term: Sideways Consolidation Price Formation (SCPF)

US Dollar Index

Long Term: Primary Uptrend, i.e. Bullish
Medium Term: Probability of a Secondary Wave Downtrend Correction is increasing.

Dow (DJIA) US Stock Market

Long Term: Primary Downtrend, i.e. Bearish
Medium Term: Unclear with Hopes of a "Climb Back to Health" Uptrend Scenario fading.
Short Term: Sideways Consolidation Price Formation (SCPF)

Lastly, please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

© Copyright 2008 of Praesciens.Blogspot.Com

CNBC - Jim Rogers: Inflation Down the Road

Dear Friends,

I respect Commodities King, Jim Rogers very much. This video is worth watching, if anything, it is by far, the most confrontational interview he has had with CNBC.

Mr. Rogers looked quite exasperated by the fact that CNBC commentators don't seem to understand his viewpoint on Inflation, and the error in bailing out the banks.

Investing in Commodities

In my opinion, despite my deep respect for Mr. Rogers' opinion, investing in commodities is wrong, at least for the foreseeable future of 2 years, from a fundamental perspective. Why? Because there is no way to forecast demand which is decreasing rapidly, in a fast deepening recession.

In such a situation, commodities are goods that are not differentiated, and tend to be the worst hit goods in terms of price falls. Don't get me wrong. I do agree that due to the arguments of Peak Oil, and inelasticity of demand (to a certain extent only, because even consumption of oil is dropping), the longer term demand for oil will cause price to rise. However, that is in the longer term, when the world economy picks up again, and thus, I believe that Mr. Rogers is way too ahead of this demand curve this time.

Having said that, I do agree with Mr. Rogers that the end of the downturn, from a Secondary Medium Term Wave perspective, which he calls a Selling Climax, should be about here. Oil at US$63 is too low, too soon. There should at least be a Secondary Uptrend Correction to the Primary Downtrend Wave. Thus, don't be surprised to see Oil Price rise in the Medium Term, more from a technically oversold position than from fundamentals.

What's the difference? A rise from fundamentals is a trend that is consistent with the Primary Trend, i.e. the Long Term Trend. However, technically, the Long Term Trend is a Downtrend today, and thus, Oil is already in a Primary Bear Market. Any rise in Oil Price from here, is a Technical Correction of the Secondary Medium Term Wave, which will most likely, go near the Price at SMA200 which currently stands around US$110 per barrel, but will not likely breach it, before resuming its Primary Downtrend.

The Medium Term Correction Wave will be a result of overreaction in the market, and thus, Price will reverse and start to move back towards the fundamental consensus of US$110. If you remember, it was only "yesterday" (more like a month or two ago), that "investors" (if you can invest in a commodity), were of the general opinion that Oil at US$90 was a good buy.

However, due to the distress selling by Commodities Hedge Funds, the picture has been severely distorted.

From the angle of the Law of Mean Reversion to the SMA200, i.e. the fact that Oil is technically grossly oversold, a Medium Term Long Position Trading Strategy is not wrong, and in fact, is possibly the sane and right thing to do.

Thus, whilst I disagree with Mr. Rogers on the 2 Year Outlook i.e. I am bearish from a two years' perspective as opposed to his bullishness, I am bullish in the Medium Term of the next 3 weeks to 3 months.

I am not so bullish on the rest of the commodities, not even Gold. Although the Medium Term Correction Wave may be forthcoming as well, as Gold tend to rise with Oil, my opinion is that it should not move as strongly as Oil. This is because Gold is only valuable in two situations, i.e. "Flight to Safety" in times of abnormal crisis, and "Hedge Against High Inflation", which was the case for the last few years, but no longer the case in the foreseeable future of next two years. Gold will fall further from US$700 to even US$600 in the longer term.

Inflation as a Future Economic Problem

As for Inflation as a future economic problem, I have already discussed this issue in my blog entitled Inflationary Holocaust - The Problem of Printing Too Much Money. Such a situation may, or may not arise - no one knows. We have to prepare for such an eventuality, but let's not cry wolf too fast.

Of course, by the time we see it coming, it will be too late to do anything but damage control, which is probably why Mr. Rogers is so passionate about this issue, which is not understood by the rest of the world.

My opinion is that the Federal Reserve has to watch their economic action steps very carefully. The idea of economic stimulus / infrastructure spending is to spend very wisely for job creation, and not spend, for the sake of buying GDP numbers, but not at the benefit of the average man on the street.

This was why I don't agree with economic stimulus packages that merely return money to tax payers. It is the 2nd most costly form of Government Spending, that is ineffective. Of course, the most costly form of Government Spending is to build a white elephant monument at huge expense at no benefit to anyone but a few contractors.

Bailing Out of Banks

Lastly, on the issue on the "Bailing Out of Banks". Mr. Rogers is proposing that there is a difference between what Mr. Bernanke, the Federal Reserve Chairman is doing, i.e. Bank Bailouts, and what was needed in 1929 Great Depression Era. He explained that Mr. Milton Friedman, the Nobel Prize Winner in Economics, had showed that one of the biggest issues that aggravated the Great Depression was the lack of and withholding of liquidity by the Federal Reserve then.

Mr. Rogers is making a case that the provision of liquidity is not the same as bailing out of banks. This is a very interesting proposal, and I must admit that I had always thought them to be the same, as was the view of the rest of the world economists.

If I understand correctly, the proposal of Mr. Rogers is to let the banks with toxic assets fail. Why put in good money (taxpayers' money that has not even been paid by taxpayers) to buy toxic assets? Instead, the US Government should focus on providing liquidity to banks that are well managed and will not fail due to toxic assets.

I agree that this proposal would certainly limit the amount of money to be printed to a much lesser extent, and thus, burden the Government and taxpayers, a lot less. From this perspective, this proposal is desirable to bailing out banks with huge losses. The argument that the Government MAY come out of the banking and economic crisis with a profit is irrelevant.

When has it been the objective of any Government to use taxpayers' money, which has not even been paid yet, to speculate in toxic assets in the hope of making money?

However, Mr. Rogers' proposal does not solve the problem of consequences of bank collapses, and with it, the evaporation of the lifetime savings of many normal, conservative people. Without confidence in the banking system, there would be many "runs" on banks, both the bad ones who should fail, as well as good ones, merely the victim of circumstances or wild rumors.

In my opinion, there is a need for US Government to recapitalize the banks, but not pay for toxic assets. In this proposal, the idea would be to let the banks fail, and then come in and put new capital at the discounted valuation. In this case, taxpayers would be owning a "clean" bank at asset value net of all the needed provisions for losses.

However, such a proposal also has a flaw in that it still does not deal properly with the shortfall in amounts due to depositors. Here, the Government has to make good whatever monies that is guaranteed by FDIC. For the amounts exceeding the guarantee, the Government will have to consider the amount exposed, and then decide when more information is at hand. What is important is not to buy toxic assets at a price higher than necessary, and bail out existing shareholders for their loss.

In any case, the discussion is academic since the Bank Bailout Plans have been rolled out. Or is it? I think the bailout is not set in stone, and if Mr. Obama wins, he may actually push against such a plan after he has access to more information, like how much it will REALLY cost in total? The figures might be so staggering that he may decide against the bailouts. I don't know. I'm speculating.

It is not possible for us to know exactly what is going to happen. It is our job to consider the various scenarios and cater for them in our decision making process.

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

Gold Outlook 081015 - "Flight to Safety" Fallacy & Potential Trending to Upper Half of Trading Range

Dear Friends,

I actually wrote this article in the Comments Reply, but it would seem more applicable to publish it as a main article here.

Fundamentally speaking, Gold should be bearish in the longer term, as I believe that the "Flight to Safety" Marketing Story is a fallacy, and will run out of bullish steam eventually.

In a severe recession where there is significant Asset Deflation, commodities prices will suffer, and I don't believe that Gold is the exception. Gold did not perform well in the Great Depression and neither was it able to maintain this current level, during the 1970s.

I did a study on the 1970s Stagflation Situation a few months back and Oil and Gold prices tanked after it had caused a severe recession. So, I believe that my Asset Deflation Hypothesis will be the Market Truth in the longer term.

There is one situation though where the "Flight to Safety" Scenario must be taken seriously. If we see the US$ under severe attack and devaluing rapidly, then Gold will once again, put on a shine, at least until the attack is over.

No one in the world understands the implications of the US Government printing so much money to put into all kinds of rescue operations. Conventional Theory has it that printing money will bring about Hyper Inflation, and this has been the case with a number of the Least Developed Countries (LDC) like Zimbabwe. This is also what Jim Rogers is talking about when he criticizes the US Government, and continues to propose that commodities (possibly Oil - my guess as he did not specify) is the hedge.

I am taking this idea one level deeper. The problem is that the rest of the world is also printing money, i.e. namely the EU. If the whole world prints money, the implication may be different from a case of one country printing money.

Why? Because exchange rate is relative. I must admit that I don't have the answer to this scenario as at today. I am still brainstorming the various implications.

I continue to maintain my current Outlook for the Short Term, i.e. of the next few days to 3 weeks. I am not convinced that the bullish sentiment will just fizzle out with one large intra-day fall on last Friday.

Thus, I am more inclined to think that the US$840 to US$900 trading range with occasional unsustainable breaches stated in the Outlook for 081013, is the most likely scenario in the short term.

One thing to watch out for. As the stock market has been rising rapidly, rightfully or wrongfully, confidence is being restored. Thus, Gold has been performing in the US$830 to US$865 range yesterday and today. This is on the lower half of my expected trading range.

The important question is, "What will happen to the Gold price should the stock market start to weaken tomorrow? My belief is that Gold will start to move upwards into the upper half of the expected trading range then.

And I think that tonight might be the last night that the Dow will experience a large upward movement. In fact, I expect some profit taking correction to set in either by the later part of tonight, or by tomorrow.

So, if you are looking for intra-day bullishness in Gold, it will probably start from tomorrow, albeit a calmer, less volatile short term uptrend of a few days, into the upper half of the expected trading range band. In my opinion, this is the most likely scenario of the Inter-Market situation between Gold and Dow.

Best wishes

Ooi
© Copyright of Praesciens.blogspot.com, 2008

Gold Technical Outlook 081013 - A Calmer, Progressively Narrower Trading Range

Dear Friends,

Gold traded in the extremely wide trading range of between US$930 to US$830 throughout last Friday, 10th October 2008, with most of the candle's body bounded between the SMA200 Resistance Level and the SMA50 Support Level. There are ways to trade such a Short Term Outside Day Price Pattern, and whilst I have studied the ideas of Larry Williams on this type of trade, I do not specialize in such trading strategy, and am in no position to provide much guidance on the matter.

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In such a situation, I prefer to stay away, and wait for the highly excitable market to calm down and stabilize into a more well behaved trend. I continue to maintain my Medium Term Outlook that the Gold Price will trade sideways within this trading range, but with two important but slight changes.

Firstly, I see the wide trading range narrowing into the boundaries of the SMA50 Support Level and the SMA200 Resistance Level, and thus, Gold Price will consolidate and stabilize between US$840 and US$900, with occasional, unsustainable breaches of these boundaries, from the triggering of stop losses and indiscretions by inexperienced traders and investors.

Fundamentally, I still believe that the "Flight to Safety" Hypothesis is weakening. The stock markets should be stabilizing in the near future, having undergone a significant crash over the past week. Once the stock markets of the world consolidates and stabilizes, this Hypothesis will be put to a severe test, and my personal opinion is that it will not hold water. If I am right, the general layman investor will be caught once again; this time with a severe downturn in the Gold Price.

I have been hearing too many general layman talking about investing in Gold in the last one week. I think that this is due to the marketing promotion of Gold by private bankers / commodities unit trusts to the public in the last few weeks. And if you believe in the Contrarian Theory, the general public always loses in the longer term, whilst the Smart Money (Who I wonder?) makes money from them. I think Gold is a musical chair game and the small bubble will burst eventually, once the "Flight to Safety" marketing story loses its buzz. This is my biased Global Macro Fundamental View of the situation.

This leads us to the 2nd Change in Opinion, i.e. that Gold will trade with slightly less bullishness than in the past one week. I took some small Day Trading Short Positions in Gold during the week, and was under pressure from its bullish strength for 24 hours. I managed to get out of the trade with a 1% increase in the ROI (Return on Investment) of my Portfolio Capital, but I did have many uncomfortable moments. I shorted again the next day with a shorter timeframe in mind, and was more successful then (both trades were winners), but made less money from an absolute return point of view. Luckily for me, I managed to get out with a profit before the Gold Price skyrocketed up. I then decided that the public bullish sentiment was too strong, and I was playing with fire, and thus, stayed away from Shorting Gold since.

It is regretable that I did not have a Short Position when the Gold Price bungy dived down by US$60 in two hours on Friday, but there was no way that I could have developed the necessary Foresight of such a crash. It is my belief that we can develop Strategic Foresight over the longer term, but in the Short Term, random events, i.e. market noise prevails.

As I said, I look forward to trading the more well behaved trends, like the one on the chart from July 14th to September 15th, rather than the wildly volatile, sideways gyrations we see for the period between September 22nd till today.

With the Price Crash of US$60 in one night (for Asia) or one afternoon (for US), I believe a number of investors are spooked to a certain extent. Thus, the bullish sentiment will weaken with time.

In conclusion, I expect Gold to trade in a calmer, progressively narrower trading range of between US$840 to US$900 per ounce in the near future. In this regard, I would continue to attempt to Short Gold as it nears its Resistance Level of US$900, while I would not take a Short Trade on any breaches of its Support Level of US$830, as I believe such breaches are false breakdowns in support level in the Short Term, due to the strength of the existing bullish sentiment.

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

Gold Market Outlook 081008 - Extremely Wide Trading Range

Dear Friends,

The charts presented here are reproduced at the courtesy and copyright of Stockcharts.Com. Please visit the website http://stockcharts.com if you wish to check out any charts yourself. Jon Murphy is one of top technical analysis guru in the world.

This is the Gold Market Daily Chart . This Chart provides us with a strategic bird's eyeview of what has happened in the last two years.

Gold has had a fantastic bull run to a historical high of US$1033.90 per ounce. It then went into a steep decline from February to May 2008. After this decline, it managed to scale to another high of US$988.60 which is significant because it was lower than the historical high. This was followed by a crash below its SMA200 to a low of US$739.80.

Since then, i.e. from September 2008, it has been making a gallant attempt to resume its uptrend. Critical to Gold Market convincing investors that its long term uptrend has not ended is the need for its price to maintain above its SMA200. Right now, the battle between the bulls and the bears continue with no clear winner.

The Chart below is the same Daily Chart, but zoomed in with more details as it is only showing one year of data. The critical Resistance Level is at US$926. There have been numerous attempts to breach this Resistance Zone, but so far, the price has not been able to even maintain a daily close near this level.

Chart produced courtesy and copyright of Stockcharts.Com. Please visit their website at http://stockcharts.com.

We can see this happening again for the 8th October 2008 close where price climbed above US$920, only to fall back quite sharply once more.

The close is the top of the candle's body if it is a white candle, while it is the bottom of the body if it is a red candle.

The good news for the bulls is that Price did close above the SMA200 (Price for SMA200 is about US$900), which is an important phenomenon.

If it can maintain such a close above the SMA200 for the next few days, it is likely that the bulls will win in the short term.

The Key Support Level is at US$820, with a reasonable first line defense at US$830. I continue to believe that Gold will thread water sideways in pattern formation mode, in this wide trading range for the Short Term, i.e. in the next 1 to 2 more weeks.

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008