A Melman Minute
By: Leonard Melman
All our markets are back in action after the
Memorial Day long weekend hiatus in America and a national holiday in the U.K.
and the two most noteworthy moves are both to the negative, in gold and crude
oil. After about one-half hour trading, the yellow metal has retreated about
$15.00 (all quotes US$) to the $907 area while crude is down about $3.00 per
barrel to the $130.00 zone. Financial markets are mostly trading near
unchanged.
One of the developments on important charts which we
follow is that several of them have entered trading ranges and we continue to
believe that the direction that they break out of these ranges could have
considerable significance.
As can be seen, TYX, which measures the interest
rates on 30-year U.S. government bonds, formed a base near 4.1% and has been
moving higher since. However, trading during the past few weeks has been
occurring within a relatively narrow range from about 4.45 to 4.7. The general
appearance of the chart would indicate a breakout to the upside for "long" rates
and, if that occurs, it could present enormous problems for the U.S. and world
economies.
Gold's Exchange Traded Fund (Symbol: GLD) has
likewise spent several weeks trading in a range from about 83 near its low to 93
as the high and has now dropped to just under the 90 level. One of the clear
influences on gold has been the price of crude oil and this morning's drop can
be attributed, at least in part, to oil's early morning decline. We believe
that a breakout in GLD shares above 93 could signal the beginning of a strong,
sustainable move to higher levels.
The main alternative currency (other than gold)
besides the U.S. Dollar for major international traders is the Eurocurrency, or
"Euro" as it is more commonly called. For two months, the Euro has traded in a
range between $1.53 and $1.60 and has made four decisive moves within that
trading range. Given the apparent strength of resistance at the $1.60 level, it
is our opinion that a decisive break above that level by the Euro could put
immense pressure on the U.S. government's financial authorities to truly begin
to defend the dollar by some form of tighter money policies. However, that
would immediately serve to put upward pressure on interest rates and, therefore,
it would not be unexpected that if the Euro broke to the upside, the TYX would
follow with a decisive breakout to the upside of its own.
We cannot help but think that financial markets
would not like a situation where the U.S. Dollar was falling and interest rates
were simultaneously rising. These charts, therefore, bear close watching over
the coming weeks and months.
One of our most important considerations at TMR is
to attempt to look at both sides of important issues and one of the most
dramatic in recent weeks has been the price of crude oil that just peaked near
$135.00. We have been documenting fundamental information which has supported
those price increases and what follows is a strong differing opinion from one of
the world's most famous financial figures, George Soros.
In an interview just published by London's "The
Daily Telegraph" newspaper, Soros indicated he believed that the oil price
increase was truly a classic "bubble." His interpretation is that the crude oil
price, "had been significantly affected by speculation."
Commenting on the appearance of the price chart, he
noted, "The price has this parabolic shape which is characteristic of bubbles."
He also indicted that the recent rises in the prices
of oil and food would exacerbate coming economic weakness and both the U.S. and
U.K. were facing a high probability of recession, and when that recession hit,
"...after which prices could fall dramatically." In fact, he believed that the
economic circumstances of Britain in particular were particularly dire, noting,
"...Britain is facing its worst economic storm in living memory, dwarfing those
of the 1970s and early 1990s, with a housing slump and serious recession." Such
economic conditions are what he indicates will dry up demand for crude, causing
prices to fall.
Our own opinion is that he may very well be correct
about the onrushing difficulties for Britain and the USA, but we also believe
that rapidly escalating demand from China, India, Brazil and Russia - among
others - combined with powerful forces indicative of supply difficulties - will
continue to be important factors driving the price of crude to higher levels.
However, we would add this cautionary note. No
market it immune to periodic corrections, even inside the most powerful
long-term bull markets, and oil is no exception. Staggering profits have
accumulated on the "long" side of commodity trading accounts and many of those
traders are likely to book their profits by selling positions, causing oil
futures to fall backward. However, as we have pointed out several times, the
long-term chart of crude oil appears to be immensely bullish, having the
appearance over a ten year period of an accelerating upward momentum.
We're off to the mines this morning to visit the
Merit operation near Greenwood, B.C. It is always a pleasure to visit with and
learn from those who are on the front lines of mining exploration, development
and production.
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