GOLDReport
July 3, 2008
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Crude Oil, The New Currency...a way to store value?
I have not yet read about this and am simply floating this idea on my own, but the way that Crude Oil is trading has me thinking that at least temporarily, Crude Oil is for all purposes the new "currency", the new "Gold" if you will. This could explain its relentless rally. No, you won't be taking barrels of Crude Oil to your grocery store to pay for groceries, but you don't with Gold either. Crude Oil is certainly not as portable as gold. However, for the time being it seems evident to me that it has in many ways replaced Gold as "a place to store value".
The marketplace and governments around the world have been trying to figure out why Crude Oil prices continue to rally. Task forces have been created.
Everyone is getting blamed. The CFTC has been ordered to look into who is driving energy prices higher, yet even this edict by the House of Representatives has not stopped prices from moving up to all time highs.
If you listen to the news media you have to come away with the impression that fewer and fewer people are driving cars due to high price of gasoline. In fact AAA is predicting 500,000 fewer drivers will hit the road this 4th of July Holiday. The problem with all this is that we continue to look at ourselves, not the new emerging giants, China and India. Car sales in China alone are running at 21,000 new cars a day, yes a day. How much "new" fuel does that take off the market? Remember, the vast majority of these car sales are most likely going into new driver's hands, not replacement of cars.
I bring this all up because this morning I woke up much earlier than normal and watched CNBC Worldwide Exchange as I worked out. It was there that I heard this statistic, which literally jolted me awake. 21,000 new cars a day being sold certainly has to overwhelm the US's 2.5% decline in gasoline demand that market analysts keep talking about, not taking into account new car sales in India. Its apparent to me that what is being missed by many is that the drop in driving in America and Europe is being replaced by new Asian drivers. The difference is probably a net number in favor of gasoline consumption.
Can you imagine all those new drivers on the same roads without insurance?
My point is this. Oil and it's by products are now part of a very serious demand driven market. OPEC tells us that the market is well supplied or in fact oversupplied. Yet prices continue to move higher, which is part of what a demand driven market does. It absorbs supply and forces price rationing, which explains the move to new all time highs.
Add to this the declining value of the US Dollar, the key currency that Oil is priced in and you add another reason for Crude's rally. As the Dollar falls in terms of other currencies, those currencies rally in value against the Dollar the "value: of a barrel of Crude becomes worth more, but costs less in Dollar terms. With most world equity markets in a Bear Market and "fast money" looking for a place to be parked, it seems to me that Crude Oil fits the bill and apparently better for the time being than precious metals.
I don't have statistical facts to prove my point, but given that those with access to statistics haven't been able to figure out why Crude Oil continues to run up makes me want to throw in my two-cents.
The Gold Seasonal Story
For weeks on end I have been displaying a Seasonal Gold, provided to us by the good folks of Moore Research Center...www.mrci.com
Let's look at a Seasonal Chart of Gold.
What's important to me is that Gold's weakest time of year is past, at least on a historical basis. Unless Crude Oil suddenly falls apart, Gold on its own has reason enough over the next 3-5 months to rally, at least from a momentum point of view according the above Seasonal Chart of Gold.
December Gold
Lets start out by looking at a Daily Chart of December Gold Futures
Now that the ECB has raised their interest rates by a 1/4 point, the pressure of guessing what the ECB is removed. Gold's initial reaction is a price break because the US Dollar rallied and Crude Oil lost its bid. At least as of this writing.
Will this price correction last very long? I don't think so. Rather, I see Gold dropping because the Dollar is getting a "relief" rally after the today's ECB Announcement. Crude Oil is in its own world and as long as prices in Crude don't collapse, Gold should be able to handle normal corrections in Crude and eventually begin to be pulled up by Crude price increases.
What's important on the above chart is this. Prices have run up to the Bollinger Band Top, a resistance price where the market should have and has encountered resistance. The theory of Bollinger Bands is that prices will trade within the Bands 95% of the time. This means that 5% they won't. Eventually prices correct and when they do while in an uptrend, prices fall back into the Bollinger Bands. That is what is now taking place.
Support is at the 18-Day Moving Average of Closes, currently 911.5. Using the current chart formation, it would take a move back under 884.8 to negate the current uptrend.
Stochastics are embedding at this time, which is another Bullish factor and has me believing that today's break is a trap of sorts to catch Bears that think a top is in place.
It takes three days of both the "K" and "D" lines, the red and yellow lines staying over an 80 reading for Stochastics to become embedded. Once embedded the market technically speaking takes on the role of becoming super Bullish. This ends once the "K" line closes back under 80. Today Stochastics became formally embedded.
Conclusion and Recommendation
Last week I published the price matrix below and recommended the purchase of either, but not both of the following Bull Call Spreads in December Gold.
"The 1000-1025 Call Spread for a cost of $550 or the December Gold 950/1000 Call Spread for a cost $1500."
Mid-Week or so in my Twice Daily Market Report I said to by the 1000-1025 Call Spread at 6.30 instead of 5.50. This was accomplished.
We have not yet been filled in the 950-1000 December Gold Call Spread and for purposes of this report, cancel that order and simply hold onto or get into the 1000-1025 December Gold Call Spread.
This spread has until the end of November. If the seasonals take hold and if Crude continues to move higher, the gains could be very substantial. If not the risk is limited to the cost of the spread plus fees. In addition you have flexibility as you can get out at any time prior to expiration for whatever the spread is worth. Last night it closed at 7.00.
Here is a matrix of Gold Spread make up by one of my company's broker's, Mark Pasek, who can be reached at 1-800-284-1065
I like the 1000/1025 Call Spread for a cost of $550. If you use a Broker at IECo your "All in Cost" which means commissions, exchange, NFA and other fees is $660. If you make your own decision and don't use a broker, you costs will be lower.
In addition I like the 950/1000 Call Spread for a cost $1500 and an all in cost of $1610.
Both of these strategies require Gold to be higher in late November, as December Gold Options expire on November 20, 2008. There are 147 days left until expiration.
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Silver
Silver hasn't received a lot of attention from me recently. It's not that I've abandoned it. Rather, given its $2.00 run up in but a matter of two weeks, I've been left admiring its performance.
Let's look at Silver.
I've labeled the $2.00 run in prices with a double headed red arrow.
It's very hard to simply step in given that until today's small price break, there has been no correction to buy into.
I believe a major low has been made and am now looking to buy into Silver Calls either outright or via Bull Call Spreads.
Let's look at the Seasonal Silver Chart to see what it offers.
Unlike Gold, historically speaking silver bottoms once in June and again in late August. After that it's sayonara.
I am fearful of buying this high in silver because of its seasonality. Should a large price break occur, I intend on issuing a Buy Signal.
Stay tuned.
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