Commodities and Resource Correction Is Not Over Yet

Friday, May 19, 2006
By Benjamin Train

The severe correction in the commodities market this week has been expected for the last several weeks. The severity of this correction is considerable. The depth of it is evident on any chart you may see for gold, silver, copper, zinc, and other metals. The overall Dow, NASDQ and S&P 500 correction shows possible further weakness ahead. Fund activities can have a big impact on market prices. London's leading share index suffered its worst weekly fall since 2002.

Potential instability in the World's foreign exchanges due to instability in political currency and the U.S. dollar, bode well for the long term precious metals and oil sectors. Oil comprises a huge portion of global trade. 86% of global oil trade is denominated in U.S.$ dollars, however that is also under siege, as the new Iran and Russian Oil Bourse and record U.S. trade deficits, create massive potential instability in the U.S. dollar ahead.

The constant struggle between bulls and bears results in trading cycles and technical signals that are trackable through charts of the commodity sector and indexes. The buy signal is marked at the conclusion of selling cycle.

One of Warren Buffett's more enduring phrases is; "they don't ring a bell at the top." referring to an equities market price in the trading cycle". Well, they don't do it at the bottom either.

Today, I witnessed considerable premature buying positions being taken in most all of the precious metal and commodity sectors. By the end of Friday's trading session many of the stocks that went up in early buying, declined before markets closed and in after hours trading.

I believe the early buys, where due to the positions abandoned by experienced traders seeing attractive re-entry prices, and eager new traders in the precious metal sectors. A lot of new money has been attracted to the resource sectors of metals and energy lately, due to record profits and resulting news and analysts advisories and commentary.

"As always, trade the signals and not the analysis. But when the analysis confirms the signals, we have a very high probability of a correction." Those words were crafted by commodities trader; Jackie Chan. I believe that they also apply to buying signals.

When I study charts, I see the bottom based on a series of sessions, high and low prices, and patterns developed from prior cycles. I also consider lunar cycles, seasons and additional market influences.

The Federal Reserve heavily intervened in support of the U.S. Dollar recently after seeing it fall to an 8 year low. That support, and the Fed's report on "inflation", has moved a number of investors to pull their investment dollars out of the market last week, causing a 500 point drop in the stock market.

By raising interest rates, the Fed is trying to stop the exit of foreign investors. By raising interest rates, higher interest rates are paid to investors of U.S. Treasury Bonds/T-Bills, notes and other U.S. assets.

Be assured, that the rest of the countries doing trade with the U.S., are under no illusion. The sheer volume of dollars being borrowed by the U.S., and printed to pay the bill for the U.S. trade deficit, has forced foreign investors to invest in a suspect currency. The dollar has been falling against a number of foreign currencies since the start of the year, but recently this trend has accelerated, pushing the dollar to a one year low against the Euro and an eight month low against the Yen.

Any further liquidation of U.S. assets, would pull the U.S.$ dollar down and cause a heavy outflow of foreign capital. The Fed has heavily intervened in U.S. and foreign exchanges, using tax payer dollars, to defend the exchange rate of the U.S.$dollar, but how much can they raise our U.S. interest rates before the U.S. economy fails? The impact of a steep fall in the dollar would be destabilizing for economies and markets around the world. Many countries set monetary policy relative to the dollar and as the main currency of global commerce, most commodities including oil are priced in dollars.

Please remember that "inflation" is caused by the Fed. The more money they print and distribute, the more inflation we have. The more inflation we have, the less the dollar is worth. This in turn, increases the price we pay for precious metals, fuel, real estate and a cup of coffee. Raising interest rates to stem inflation is an illusion and a bold-faced lie told to the American public.

Is the market ready to turn up in the commodities and resource sectors? We may be very close in some areas and far from close in others. I still see weakness in the weekly $INDU (Dow Jones Industrial Average) ahead. I think Petroleum/oil may pop first this coming week. Supply (vs) demand has a way of driving up prices. There was an explosion reported at the Valero St Charles Refinery (VLO) Saturday night, May 20th.

The National Commodity and Derivatives Exchange Limited (NCDEX) will launch futures contract of nickel cathode, aluminium and zinc ingots on the exchange starting May 22, while Copper futures fell sharply in New York and London Friday, largely on long liquidations that also occurred in other commodities.

Copper fell down 13% from a high the previous week. Observers cited several contributing factors for the copper weakness: recent declines in equities; worries about inflation and thus more U.S. rate hikes; a report of a global copper surplus in the first two months of the year; a rise in London Metal Exchange margins; a weekly increase in Shanghai Futures Exchange inventories. With the primary aluminium price near all time highs, Aluminium moved sharply lower the previous week at the LME as speculators decided the time had come to earn some profits.

It is always prudent to buy stocks closer to the 200 MACD than the 50 MA in the $XAU and $XOI sectors, however, trade the signals and enjoy a prosperous week ahead. And remember that "inflation" gold, silver and oil raise together.

Precious Metals, Base Metal and Oil rise together - Breaking Records

I am expecting a large movement in all three sectors, as Congress has been asked to raise our National Debt, the Dollars is at an 8 year low and Political conflicts are heating oil prices worldwide. As inflation raises, so do precious metals and oil. As this is only May 9th, 2006, I feel that I can safely say that my original economic outlook article posted here applies 100%.

Gold climbs above $700

Tue May 9, 2006 3:12 PM ET
By Atul Prakash and Zach Howard

LONDON/NEW YORK (Reuters) - Gold spiked up to a new 25-year high above $700 an ounce on Tuesday on dollar weakness, while platinum set a new record on strong industrial demand and fund buying.

Other precious metals also gained from the bullish environment in commodities, which saw copper setting a new record and aluminum surging to an 18-year peak.

"We have a combination of overlaying sets of momentum here. More and more of genuine investors have become convinced that some portion of their assets should be put into the sector," said Sean Corrigan, chief investment strategist at Diapason Commodities Management.

"Clearly, this is a very nervous market and we could suffer quite a serious shake out at any point," he added.

Spot gold broke through stiff resistance to reach $700.30 late in New York, before edging to $699.90/700.90 an ounce -- up 3.2 percent from Monday's close at $677.90/8.90.
It soared to an all-time high of $850 in 1980.

At the New York Mercantile Exchange, June delivery gold climbed 3.2 percent to settle at a 25-year high at $701.50 an ounce, a gain of $21.60 on the day.

The dollar fell to a new eight-month low against the yen, making gold cheaper for holders of other currencies. Investors tend to put their money into commodities after a drop in other financial markets.

"It's a bullish picture across the commodities sector. The market will continue to move higher. The upside is still open," a precious metals trader in London said.

Dealers said gold was also supported by political tensions over Iran's nuclear ambitions, inflation worries and talk about China's gold reserves.

Some Chinese economists urged Beijing to quadruple its gold reserves to 2,500 tonnes from 600 tonnes because the country's foreign exchange reserves had become the world's largest, an official industry newspaper reported on Tuesday.

"Gold will continue to be seen as a safe bet as international tension looks set to increase again while the dollar is set to remain under pressure," said James Moore, analyst at TheBullionDesk.com.

Moore said the break above $700 was likely to generate fresh momentum as investors and speculators build on their bullish positions and he felt that the metal's $850 all-time high was now a realistic target.

The market shrugged off news that gold reserves held by Eurosystem central banks fell by a net 916 mln euros in the week ended May 5 after three central banks sold bullion.

The sale was consistent with the Central Bank Gold Agreement of 2004.

PLATINUM LEAPS

Platinum prices reached a record at $1,235/1,240 in New York, versus $1,186/1,191 late on Monday. The metal has jumped 28 percent this year along with other precious metals.

The rise by platinum was driven by robust demand for the metal from industries such as automobiles, glass and chemicals, Wolfgang Wrzesniok-Rossbach, head of precious metals marketing at Germany's Heraeus, said.

"The market seems well supported. In the long run this is going to change, but for the time being it's not the moment to fight the bulls," he said.

Platinum's major industrial use is in autocatalysts, particularly in diesel vehicles, as it helps cleanse environmentally damaging fumes from engine exhausts.

"We believe that platinum has a more fundamental underpin than gold, silver or palladium," said John Reade, precious metals analyst at UBS Investment Bank.

"While there is undoubtedly investor and speculative long positions in platinum, the market remains in a fundamental deficit and should remain so for the foreseeable future," he said in a daily report.
Investors were betting on platinum ahead of London's Platinum Week, which ...

Read the entire article at Reuters:
http://today.reuters.com/news/newsarticle.aspx?type=businessNews&storyid=2006-05-09T191159Z_01_N09295039_RTRUKOC_0_US-MARKETS-GOLD-COMEX-PRICE.xml&src=rss

Investor Risk Management Notes

May 6, 2006
A wise investor is always looking for ways to avoid losses. Risk is part of investing. Prevention of losses is called "Risk Management". Due to the financial markets record highs and current volitity in both the precious metals and energies sectors, as well as, base metals, I strongly suggest that you read the risk management article posted below to help insulate your investments. The article is well written and covers basic technical information that every investor should consider.

Friday, May 05, 2006
by Fernando Gonzalez
Free-Market News Network Trading Specialists

Any trader who knows his salt will tell you that Risk Management is the single most important aspect in trading, regardless of style or technical strategy. Yet, most traders are really not able to define what "Risk Management" really is.

Let's pause for a moment, and think: can we define, in one brief sentence, what Risk Management is? "Loss control" would probably be the best broad definition, but to me this is a little more precise: In the business of trading the financial markets, Risk Management is the constant modulation of Risk Exposure to a constantly changing market. What is this exactly?

Most participants will relegate their entire Risk Management strategy to setting and adhering to "stop losses." But this falls far short of what Risk Management really is. To relegate the entire Risk Management strategy down to simple stop losses would be equivalent to saying "I am safe in my car because I have brakes." Needless to say, the "brakes" are only part of an entire system of managing risk in a constantly moving environment such as street traffic. In this sense, the markets are the same as the streets.

There are far more actions we can take to minimize risk besides the brakes: there is steering, controlling the throttle, the path you take, "your trip preparation," mapping your route, the times you drive, the amount of driving you do, not driving while "under the influence," there are so many factors that affect risk levels, that we cannot possibly reduce the entire risk control strategy down to "brakes," or in the case of trading, "stop losses."

So what do we mean by "modulation of Risk Exposure?" How we make and lose money is the end result of our interaction with the market. If we do not interact, we neither win nor lose. If we interact too much, we assume higher levels of risk that may be "more than we can handle."

Risk Management is the constant "adjustment" of our Risk Exposure based upon two primary factors: market conditions and, more importantly, our very own performance.

How do we modulate or "adjust" our Risk Exposure?
There are 3 primary ways of modulating exposure:

SIZE: How large or small our positions are, based on our account values. The more we expose our account, the "larger" the exposure.

FREQUENCY: How often we are in-and-out of the market. The more frequently we trade, the more we are exposed to the markets' motions over time, the more risk we assume. Also, commission costs become a factor that significantly affects risk levels as we increase frequency.

DURATION: The longer we are in each trade, the more opportunity the market has to travel, the higher our risks will be....

Read the entire article at Free-Market News Network:
http://www.freemarketnews.com/Analysis/46/4786/2006-05-05.asp?nid=4786&wid=46