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Gold, S&Ps Dance to Our Tune

By Rick Ackerman Posted on April 3, 2009, 12:01 am EDT Last Updated April 3, 2009, 4:09 am EDT

Rick’s Picks subscribers were well prepared for the diabolical price action in gold yesterday, since a forecast sent out the night before caught both the high and low of June Gold’s $35 swing almost exactly. Comex futures were in a promising rally when we published an advisory just after midnight that warned of potential trouble precisely at 931.60 (a “Hidden Pivot” resistance). Gold in fact topped moments later at 931.80, then plummeted to 896.10 — just 80 cents from a bearish target we’d spotlighted in yet another midnight bulletin.  Price action in the E-Mini S&P proved equally felicitous, since we’d identified a rally target at 843.75 that came within 1.50 points of nailing the top of yesterday’s 37-point surge. That target also went out to subscribers in the wee hours on Thursday.

if-june-gold-cant-hold-small

So what are we forecasting now?  More of the same, actually. If Gold takes out yesterday’s bottom, it is likely to fall to at least 874.00 or to 856.00 if any lower. As for the S&P futures, currently trading for around 835, they look like a good bet to rally to at least 852, which would imply a 150-point surge in the Dow Industrials. The picture of strength is reinforced by the strong leadership of Goldman Sachs, a favorite bellwether of ours that looks all but certain to reach a Hidden Pivot target at 120.34.  With the stock trading in the $90s a while back, we advised purchasing some July 115-April 115 calendar spreads for $6, and the trade has worked out nicely. But with a further rally to $120 now in prospect, we advised adding some July 120-April 120 call spreads to the position for 9.80. This spread could widen to as much as 18.00 if Goldman shares are sitting just below 120 when the April options expire in two weeks.

Leveraging Google Target

In Google, a June 390-April 390 calendar spread looked tempting for $12 when we examined the stock during an impromptu webinar held for subscribers yesterday morning. We keyed on the 390 strike because we are anticipating a $25 rally that would push GOOG up to around $387.  Please be aware that option trading can be risky, and that any gains we have made trading puts and calls in the past do not guarantee that future option trades recommended in Rick’s Picks will be profitable. You should check with your broker to determine whether option trading is for you.

If you want to know more about the calendar-spread strategies we use to dramatically reduce the risk of holding puts and calls, click here for a detailed description; and here if you want an even more detailed article on the topic that we wrote for Stock, Futures & Options magazine.

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

  • Andy April 6, 2009, 9:17 am

    The “piddling” consumer inflation won’t be so piddling when a loaf of bread costs $100. As I noted it will START with consumer goods inflation. A loaf of bread at $100, or even $20 or $50 would be dire in terms of perception of the dollar’s value. It is then that the race to acquire real assets will start in earnest thus “spreading”. By the time hyperinflation spreads to real estate, the dollar will be so worthless (and getting more so by the hour) that nobody in their right mind would even consider measuring their net worth or “gains” in terms of it. I am sure nobody is speculating in real estate in Zimbabwean dollars anymore. We live in a society where not everybody possesses an equal amount of money. 20% of the population has a lot more money than the remaining 80% and it is the 20% that will be doing most of the bidding. The rest of the 80% unfortunately are at risk of perishing. Nobody said hyperinflation will make you rich.

    And it would be foolish to ignore the lessons of history where every – EVERY – fiat currency has died the hyperinflationary death. You may not like it, or may not be able to imagine it, but it’s just math. It is not a question of what Obama and Ben are willing to do or not. The matter is simply out of their hands now

    Another point I would like to add is that a lot more people would be defaulting than servicing their debt (an additional consequence of which is that the money borrowed by them is still in circulation). Hyperinflation will not arrive in time to bail out the underwater homeowners. Most of them will have defaulted and be homeless by then. Nobody “wins” in a hyperinflation. People are either rescued or not. The deflation analysis only works for a Gold based monetary regime, not a purely fiat one.

  • Andy April 5, 2009, 7:28 pm

    Rob is dead on. I think it has been so long since the world used real money that people in the dollar-deflation camp are simply confusing bits of paper with real money. Stuff is falling in dollar price terms right now because everything is being liquidated. Soon the trend will reverse – when enough productive enterprises have stopped production and there is a scarcity of goods needed for daily living. First essentials like food and oil will get bid up, and subsequently everything. At that point we will witness the beginning of hyperinflation. Deflation will still be happening, but in terms Gold (itself bid up to stratospheric heights), not the dollar. So at some level the deflationists are right, they are just using the wrong form of money.

    &&&&

    Can we stop talking about piddling consumer inflation — higher prices for laundry flakes, eggs, toilet paper, peanut butter and such — and get some comments on hyperinflation and whether it will come in time to bail out underwater home “owners”? And: Will it affect incomes besides those of CETA workers who, inflationists evidently presume, will be paid $200/hour?

    As for those who absolutely must talk about grocery store inflation — how a bar of Ivory soap will be, oh, $40 — could you speculate on how far this will go in a consumer-driven economy in which incomes are crashing, joblessness is soaring, and 100% of would-be savings going toward debt service? Thanks. RA

  • GlennK April 5, 2009, 2:43 pm

    Here’s an example of how bad it is out here , at least in the retail sector. My wife and I have been putting off buying a flat screen LCD TV as we watched the prices deflate month to month. I told her that we should wait till spring because prices should plunge even deeper given the present economic situation. We finally made our purchase this past week and prices did plunge even further on the model and size we had finally decided to buy. But, not only did prices plunge , the retailer was so desperate @ this juncture to sell anything they offered a 3 yr. no % loan to buy their products. We took the TV and the loan and went home. Now if you take the same $900 we spent for our TV and put it in an % bearing CD or whatever that adds another 100.00 + off the price of the TV. In the end we spent less then $800 for a TV that 1 yr. ago was selling for $1400.00! Scanning this Sunday’s sales I found the same kinds of deals spread across the paper for everything from electronics, autos, furniture, clothing, jewelry you name it. People are NOT buying and I don’t see this changing any time soon. Given that buying this stuff accounts for about 75% of our economy I’d say were already deep in a Deflationary Depression. As for the few areas that are still inflating I think even these areas ( health care and food and few others) can’t simply continue to defy the logic of economic gravity for very much longer. They’ll start to deflate as well as people change their eating habits ( they already have @ the restaurant level) and stop going to the Dr. ( unless it’s an emergency). All of this adds up to real trouble if it goes on very much longer.

    &&&&&&

    I was surprised to learn that flat-screen TVs have been one of the retail sector’s very few bright spots in the last six months. Along with fast food restaurants, they may be among the few things that even out-of-work Americans who have filed for bankrupcty will not give up. RA

  • Peter April 4, 2009, 10:46 am

    On reflection, it is incorrect to say the article at http://bullionmark.blogspot.com/ was “suggesting the ECB was ‘bailing out’ Deutsche Bank”, except in a glib sense. It is more accurate to quote from the article: “The size and timing of the delivery of Deutsche Bank’s COMEX obligation is suspicious, to say the least, when taken in conjunction with the size and timing of the ECB’s gold sale. It is circumstantial evidence that the gold used by Deutsche Bank to deliver and fulfill its COMEX obligations, came directly or indirectly, from the ECB.”

  • Peter April 4, 2009, 5:15 am

    The drop in Gold price might be related to the ECB’s sale of 35.5t last week on March 31st. For an intriguing article suggesting the ECB was bailing out Deutsche Bank, go to http://bullionmark.blogspot.com/ and while you’re at it, watch the “Population and Growth” video from the link at the bottom of the website – an outstanding presentation concerning the question: “Why do we need Growth”?

  • cameroni April 4, 2009, 12:12 am

    Yikes Rob!
    You are a little emotional on the subject of deflation/inflation. I hear you though. I get wound up myself some days and have my moments when I get upset with other peoples opinions. I would not call it stupid though. The debate is a good one. We need to hear all sides. It helps us keep our thinking sharp and stay prepared for the unexpected. Rick is right though, we are deflating right now with no end in sight. You name it, Cars, Boats, Homes and all our secure hard investments are declining in value. Fast too! And yet all that new currency being printed sure looks inflationary down the road. (Unless the powers that be can mop it up before any damage is done).

    The certainty of an inflationary spiral from the facts as we discuss them though seems inevitable. I think Rick posed an excellent question. How do all those stimulus dollars actually generate inflation at a time when asset values are crashing.? At a time when it is difficult to borrow and while most people are retreating into a savings mode. I am still puzzling over how inflation in consumption items will offset losses in big ticket assets like homes.

    The Israeli experience is of interest. After the 76 war huge amounts of capital poured into the country from overseas to rebuild and strengthen the country. It was almost the ruin of their financial system though. By 1980 inflation was simply out of control, into the thousands of percent. People were able to pay down mortgages in a year or two. Creditors were severely punished as too many dollars sought too few goods and the old “Lire” was destroyed. It was later replaced by the Shekel and then the New Shekel and eventually life returned to normal. The government was eventually able to bring sanity and stability back to the financial markets though. Fairly rapidly too. I think their experience may offer a model of how we can inflate (even hyper-inflate) and still survive, even strengthen our economy.

    There are parallels between what happened to Israel in the early 80’s and what is taking place in America today with reference to unsustainable debt levels, the drawing in of massive amounts of foreign capital in the form of loans and the need to maintain a very costly security and defense apparatus in the face of real threats. Liquidity was mopped up though after a brief and severe hyperinflation. and the country has really boomed despite the 80’s experience.

    As far as inflation goes in our current economy though it is my belief that oil will play a major role as the East, (China , Korea and the regional players) ramp up demand and energy prices begin to rise globally. No matter what is happening in our own economy then we will likely see inflation through energy costs which will make the suffering all the worse . A great many people cannot afford basic home payments as it is, never mind adding in higher food and transportation charges. So I am still an inflationist in the big picture but until the current deflation can be disproved I want to hear all the arguments. And there is nothing stupid about that.

    Cam

  • Ken April 3, 2009, 6:13 pm

    I hear ya Myke. I’m not saying it’s the right thing to do (print and give away money), but if the concern is how to get people spending, then this is just a thought on how to do it. I think it would be a terrible thing to do. That being said, your right. The spending would have to be for specific things. I think your list is a good start and just doing that would stimulate the economy (for a few weeks). : )

  • Rob April 3, 2009, 5:14 pm

    No, stupid deflationary talk is not a silly thing to say. I did explain exactly how the money gets into circulation: “In all cases the money was not ultimately borrowed, it was printed up to cover cash flow needs irrespective of debt.” It does not take borrowing by consumers. The Obama administration/government and Federal Reserve itself did go down the hyperinflationary path even more last week when they announced that it would monetize the treasury purchases and other asset purchases with money simply printed up. Inflation/deflation is defined as the relative expansion/contraction of the total money supply over GDP. So using your own logic, with 100T in asset values lost (translate shrinking GDP) and the monetization of the treasuries and such (i.e. printing up even more money into circulation), total money supply increased relative to GDP. Go look at the total M3 and it has never gone lower, it only moves higher. Even today it is expanding over 7% a year (Shadowstats.com). This is inflation defined and will result in general price rises sooner or later, especially in gold, oil and agricultural commodities. The money can get into the system merely by the government spending the money on public work, giving it away through welfare, bailouts, military spending, etc. That gets money that is simply printed up, into the system. It is that simple and exactly how all the inflationary scenarios of all the countries listed above happened. The U.S. treasury used to print the money up as dictated in the constitution, but now they pay the private banks (i.e. Federal Reserve) to print the money up using treasury bonds as the vehicle to achieve such. The FDIC bailing out everyone certainly would add money into depositors accounts as it would replace the money previously borrowed and spent that is still in the system and add an additional amount visa via the printing press, so total money in circulation goes even higher. Just because a bank goes broke because of falling asset values on their books, this does not mean the money is pulled out of the system. The money is on someone else’s books as a credit and is still in circulation. Hence forth, part that is part of the reason for an ever expanding M3 and the accompanying general rise in prices.

  • Myke April 3, 2009, 4:22 pm

    Excellent commentary here, especially by Carol. The ongoing argument of deflation vs. inflation is interesting to a point, but divisive.

    It should be obvious that inflation (as defined by increase in the money supply) necessarily follows deflation ( as defined by decrease in the money supply) as governments attempt to overcome the effects of deflation. Each brings on the other sooner or later, and there is no smooth transition; they are co-mingled at any given time.

    There are two tools available to governments to combat deflation. First, increase the money supply, to infinity if deemed useful. When/if that fails, resort to tyranny and suppression. Zimbabwe is your real-life experiment, available for all to see.

    And yes, Ken, a terminating debit card is an excellent way to get things going and breed an even greater entitlement mentality than is now present. So the seller of widgets would get paid by whom? And what would he receive as payment? Another debit card? And wouldn’t the debit card be conditional on the purchase of specific things? If I had one I would buy gold, food, tools and clothing with it.

  • Ken April 3, 2009, 2:03 pm

    Rather than directing money to the banks or even giving out checks to Americans, wouldn’t it work “better” to give everyone a debit card that has to be used within a certain time frame or it expires? People would have to spend it. Then we would get our much anticipated hyperinflation I think.

  • Carol April 3, 2009, 12:29 pm

    I claim no expertise whatsoever but I do know that Moody’s is a card-carrying capitalist organization and I share the following website with you regarding your assertion that public works projects are so much flushing of money down the toilet:

    http://www.economy.com/dismal/graphs/blog/mz_012208_1t.GIF

    One would have to be completely daft to not know that the American public – individual, corporate, government – is up to its gills in debt which means there is no further borrowing capacity. I believe the talking shills on CNBC and Bloomberg would call that “pushing on a string.” As labor statistics are a lagging indicator, buying/borrowing power is further diminished. That having been said, the link to Moody’s findinsg show that public works is second only to extended unemployment compensation benefits in in terms of providing the biggest bang for the buck. It is, however, better than extending unemployment compensation in that it offers work to the unemployed and the improved infrastructure that it leaves behind for forty or fifty years. Not a bad deal in my book. How many bridges need to fall down, how many roads left with gaping potholes need to be left to ruin one’s car’s suspension to figure this out? And if memory serves, the Tennessee Valley Authority shared the benefits of cheap electricity that took that particular part of American geography out of the darkness. Of course, it has its own public works blemish now with the toppling of the dam holding back the toxic sludge which overtook the area and threatens public health there. But of course, as long as it isn’t us suffering those effects, so what, right?

    I readily admit that I don’t have the chops to argue the inflation/deflation question you pose. But I think the anecdotal experience sited in the last few days showing that daily necessities have increased in price while durable goods and electronica have decreased in price shows that there is both inflation and deflation present. That, too, is a function of no further buying or borrowing power. One needs food, drugs, toilet paper, etc. every day. One does not need the newest iPod.

    The only other thing I know is that robber class on Wall Street and their paid-for K Street lobbyists and politicians in the White House and both major parties are taking from both pockets – once in downright robbery and the other in fobbing off their tax burden to the overburdened middle class or, worse, to the shortfall funded by foreign countries which will, in the end, enslave several generations of Americans who are being under-educated and lied to like the rest of us. Which leaves me to shrug my shoulders, fully admitting to ignorance about the inflation/deflation question but living in anger, frustration, worry and further in debt. Also unrepresented by anyone from either political party.

  • Rob April 3, 2009, 4:28 am

    As far as this issue about money needing to borrowed into existence in order to create inflation, that is largely an academic argument. Look at any of the inflationary scenarios of the past and you will see there is almost no “borrowing” going on, especially by “consumers”. Zimbabwe, Argentina, Russia, Weimar Germany, etc. In all cases the money was not ultimately borrowed, it was printed up to cover cash flow needs irrespective of debt. Once the money is created, by whatever means and paid out, it is forever in circulation, no matter what debts default. The total M3 (or equivalent) money supply amount only increases. So yes the current U.S. monetary policies will ultimately be inflationary, regardless of debt. All previous countries started their inflationary trends based on too much debt. Had the debt overwhelmed the inflation of the money supply, then you would have seen no price inflation and no problems. However this has never been the case. Ever. So this argument about deflation is totally wrong based on observable evidence and is little more than science fiction based on a “conceivable” idea of what could, maybe happen, yet never has. In all cases the debt went bad, yet the printed money, electronic or physical, was still floating around and ultimately caused price inflation. Just because a debt write off happens, that does not pull the credit out of circulation. Throw in FDIC insurance and such and it actually increases the inflation of the total money supply and the future associated price increases. So stop this stupid deflationary talk.

    &&&&

    Stupid deflationary talk? That’s a pretty silly thing for you to say, Rob, considering that perhaps $100 trillion in asset values have already been deflated out of existence, and considering that the real burden of debt is close to crushing the last breath from the global economy. Anyway, you can join the crowd in having failed to explain how all that alleged money will get into the system. You stupidly mentioned the FDIC, but if the FDIC bailed out the entire system it wouldn’t add one dime to what depositors believe is in their accounts. Finally, in none of the countries you have mentioned did hyperinflation simply “happen.” Rather, in each instance, the government willfully and deliberately hyperinflated. So far, Obama and his brain trust have shown no desire whatsoever to go down that path. In the meantime, mere fiscal stimulus will achieve almost the opposite, since, no matter how much you pour down the toilet of public works projects, it will only consume capital and destroy the wage base. As Fekete has noted, debt service is now consuming productive capital so that more borrowing/stimulating in itself has become deflationary. RA


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