A Melman Minute
By: Leonard Melman
Long term readers will undoubtedly have noticed that
we have a certain affinity for charts and we would offer several reasons for
this. First, there is some real truth in the oft-quoted phrase that ‘a picture
is worth a thousand words.’ Next, several textbooks have been written regarding
the repetitive patterns that charts make and the claim has been made that these
patterns do have a predictive power. Third, and most important for our
analyses, charts reflect what markets participants have actually been doing
rather than simply what they are saying. We truly believe in the adage that
what a person does is much more important than what they say.
Having said that, we would note that several of the
charts which are important in our metals studies are now beginning to take on a
somewhat positive appearance. Below, please find some of the more important
ones.
Unlike several of the other base metals, copper has
shown good relative strength and lately has put in a clear patter of ‘rising
bottoms’ including (all prices US$) $2.40, $2.85 and, most recently, near
$3.60. Copper is now pressing toward the $4.00 area and a decisive break above
that level could be immensely bullish. (Ignore the recent ‘spike’ up to $4.40
as it reflects a charting error.)
The look of the long-term chart on silver appears
decidedly bullish to us and it places the recent correction into focus as simply
another correction within a long-term bull trend. During that correction,
silver never threatened the major support in the $14.50 area and with the price
now near $17.50, we believe a test of the previous high near $20.50 could be
close at hand.
Although it is not a metals chart per se, we regard
the performance of the ‘long bonds’ as one of the most critical measures of the
economic strength of America. If rates begin to rise sharply, which would be
reflected by falling quotes on the long bonds, then America is in trouble, and
our interpretation of this chart tells us the danger of such a bond breakdown
appears to be growing. The recent peak stopped short of the 2003 high and, in
addition, the most recent action in this chart has broken to the downside. We
now expect that the important support near 107 will be tested and, should that
fail to hold, a decline of substantial importance could take place in the coming
months and years, one which could induce an increasing level of financial panic
and, as history has taught us, rising panic has been an important ingredient of
past golden bull markets.
Speaking of charts, in yesterday’s MM we discussed
the Dow Jones Industrial Average and the importance of the 12,000 level. It did
not take long for the average to plunge downward through that number as the Dow
has traded as low as 11,875 this morning and, after about one hour of trading,
is down over 160 points. NASDAQ Composite and S&P 500 averages are down sharply
as well. The Dow is now threatening to break through the March 17 lows and,
unless that chart reverses to the upside quickly and with some vigor, the
general market’s future could look increasingly bleak - which, again by past
historic standards, could prove beneficial to the precious metals markets.
As we have noted several times, few components of
the entire market structure play as important a role as the petroleum complex.
We all know the price has been soaring powerfully during the past few years and
recently touched a high just below the $140 per barrel figure. While some blame
“speculators”, the reality is that supply and demand fundamentals have pointed
strongly toward higher prices as newly discovered petroleum finds have utterly
failed to keep up with depletion of present fields.
One of the possible hopes to make up for this
growing shortfall was through expansion of Canada’s oil sands, but those hopes
have now received a serious setback as several factors are now combining to
limit potential growth from that area. A recent study prepared by Claudia
Cataneo and published by the Financial Post includes a list of looming
difficulties for the industry and all of them appear to be limiting factors
regarding future oil sands development. These include climate change policy
impositions, regulatory and construction delays, higher Alberta royalties which
discourage investment and tightness in labor markets. We would also add howls
of anguish from the environmental community regarding eco-system damages caused
by tar sands development to that list as pressure from that group does have
substantial influence upon the governmental regulatory bureaucracies.
With worldwide crude oil demand expected to rise by
over one million barrels per day per year into the indefinite future, many
observers had been hoping that growth from Canadian sources could satisfy much
of that increasing demand, but latest estimates now show that growth from Canada
may average only about 170,000 - 200,000 barrels per day per year through 2020 -
far below what the world could use.
This potential slowdown of growth of supply from
Canada is yet another indication that high petroleum complex prices may remain
with us for years to come and could prove to be an important factor in rising
future published price inflation indexes which are watched so closely.
In other markets this morning, base metals are
generally higher, precious metals are strong, crude has recovered by over $3.00
per barrel from yesterday’s late selling and the U.S. Dollar has shown some
considerable weakness in currency markets.
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