Silver Slumps As Risk Broadly Recovers

Tuesday, March 13th, 2012

Global risk markets and US equity futures were drifting lower together (post China trade deficit data) into this morning’s confusion in Europe but around 430ET, equities pushed higher, Treasuries rallied rapidly as we approached the US day session open and broadly speaking risk was off (in everything except stocks). Commodities dropped notably with Oil and Silver losing over 1.5% from Friday’s close before heading into the US open. The across-the-board weakness in credit and our broad risk asset proxy (CONTEXT) reversed, as if by magic, as the day-session open in the US dawned and led generally by Treasuries, which staged a 4-5bps sell-off from overnight low yields (with 2s10s30s notably rising on 30Y outperformance and 10Y underperformance), we leaked back to unchanged in ES (the e-mini S&P 500 futures contract) having traded in a very narrow range all day on low volumes (across MAR and JUN). VIX made headlines for its low levels but the steepness of the term structure should be a much bigger concern. AUD weakness spurred much of the early risk-off but accelerated stringer into the US close to maintain equities as close to green as possible. A very noisy day given very little news/event risk and the general confusion in European sovereign markets which all leaked wider. Credit and the vol term structure remain notable canaries as it appears EURJPY has become carry trade-of-the-day once again.

Credit and equity resynced into risk-on from the start of the US day session but credit (especially HY) remains notable underperformer post Greece…

It is worth perhaps noting that HYG ended very marginally in the red while SPY very marginally in the green and 4 of the 5 times this has occurred this year, SPY has underperformed the following day (and we note HYG pulled rapidly up to its VWAP at the close – suggesting some selling pressure).

Commodities showed some further divergence as Silver lost its luster today relative to the other metals (and WTI)…

Broadly speaking though the underperformance of Oil and AUDJPY kept CONTEXT weaker while the recovery in EURJPY and sell-off in Treasuries (and 2s10s30s) is what kept the spirit alive in stocks – even though volumes were abysmal…

Tags: Canaries, China Trade Deficit, Commodities, Divergence, Futures Contract, Global Risk, Little News, Luster, Metals, News Event, Outperformance, Risk Markets, Slumps, Stringer, Term Structure, Treasuries, Vix, Vwap, Wti
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Some Observations On Recent Gold (And Silver) Volatility

Wednesday, March 7th, 2012

Submitted by Jeff Clark of Casey Research

The Face of Volatility

On February 29, gold dropped 4.8% and silver 6.2% (based on London fix prices). That’s quite the fall for one day. We’ve seen prices that have risen that much, too. But as I’m about to show, these ain’t nothin’, baby.

Based on our experience, we’ve been saying for some time that volatility will increase as the markets fight their way to the mania phase of this cycle – and that once there, the gyrations will jump even higher. This call doesn’t exactly require one to go out on a limb; it makes sense since more investors will be crowding in – and volatility was high in the 1979-’80 mania.

First, let’s put last Wednesday’s big plunge in perspective. Here’s a picture of the daily changes in the gold price since 2003, based on London fix prices. (This chart is very busy, but I want to show the bulk of the bull market in one visual.)

(Click on image to enlarge)

A 4.8% decline is one of gold’s bigger one-day movements over the past nine-plus years. But as you can see, there have been a number of days where gold rose or fell more than 5%. And it exceeded 6% on five occasions.

Here are the data for silver.

(Click on image to enlarge)

Last Wednesday’s decline of 6.2% was one of the metal’s bigger one-day movements. However, it’s exceeded 10% on 14 occasions, 15% three times, and rose an incredible 20.06% on September 18, 2008.

You might think this kind of volatility is high – and it’s true. Worse – or better, depending on how you see things – the volatility in the underlying commodity is magnified in the related company stocks. This is why Doug Casey calls mining stocks, especially the juniors, “the most volatile stocks on earth.” But the thing is, metals volatility has been higher in the past, particularly during a mania.

Here’s what I mean.

The following chart documents gold’s daily price changes from 1976 through the end of 1980. Take a look at the jump in volatility in 1979-’80.

(Click on image to enlarge)

Volatility became the norm in 1979 and especially 1980. Fluctuations of 4% or more were not uncommon.

Here’s the same chart for silver. The metal’s volatility during the 1979-’80 period became extreme.

(Click on image to enlarge)

Daily price movements of 6% or more didn’t occur once prior to 1979 – but then they became commonplace.

I wanted to take a closer look at the biggest price fluctuations during this period, so I ferreted out the largest days of volatility for each metal. For gold, I selected daily movements of greater than 5%.

(Click on image to enlarge)

During this five-year period, gold saw fluctuations greater than 5% on 38 days (19 up, 19 down). Not surprisingly, more “up” days occurred leading up to gold’s peak of January 21, 1980, and more down days came after it.

And yes, gold rose an incredible 13.3% on January 3, 1980. As it turned out, that biggest one-day rise was only 18 calendar days away from the very peak of the market. And the biggest decline of 13.2% on January 22, 1980 was the signal that the top was in.

For silver, I used one-day movements of 10% or more, all of which occurred in 1979 and 1980.

(Click on image to enlarge)

The silver price had fluctuations of 10% or more on 34 days (17 up, 17 down). They occurred over a period of only 15 months, an average of more than two per month.

And yes, silver really did rise a whopping 36.5% on September 18, 1979.

So while last Wednesday’s price movements for gold and silver were big, we simply haven’t seen this kind of volatility in our current bull market.

Now let’s have some fun. Let’s say we match the most volatile days from 1979-’80 at some point before the current bull market is over. If we use gold’s biggest up day (13.3%) and biggest down day (13.2%), here’s what would happen to prices from various levels. Remember, these are one-day gains and retreats:

Imagine gold jumping from $1,800 to $2,039.40 in one day!

However, unless you think $1,800 is the level from which the mania starts, it’s more likely we’d see a 13.3% advance (or something similar) from a higher starting point. We’d thus probably see gold jumping to $5,665 from $5,000, for example. And further, that would probably signal we’re near the top.

Keep in mind that volatility worked both ways during the mania, so dropping from $4,000 to $3,472 or something similar is likely to occur as well.

Here’s the same table for silver, with its biggest up day of 36.5% and down day of 18.5%.

Can you imagine silver starting the day at $80 and hitting $109.20 before you go to bed that night? Something like that will probably happen at least once before this bull market is over. As with gold, though, that kind of movement is more likely to take place from a higher level, such as $100 or $125 (or higher?). And a fall like $100 to $81.50 will probably be part of the trend as well.

There are some definite conclusions we can draw from the historical picture:

• First, if history repeats, or even rhymes, our biggest days of volatility are ahead. And they will be normal.
• Second, big price fluctuations will be common as we enter the mania and approach the peak. In fact, when large daily movements become the norm, the historical record suggests we will be nearing the end of the cycle.
• Third, since current volatility has thus far been lower than what was experienced during the final phase of the 1970s bull market, we are not in a bubble, nor yet in the mania phase, and nowhere near the top. Remember that the next time you hear some nincompoop spew bubble talk on CNBC.

What can an investor do with this information? Prepare yourself for bigger daily swings – in both directions. And buying on those outsized drops is probably a good strategy…

Because we now know what volatility looks like.

Tags: Chart Documents, Commodity, Company Stocks, Decline, Doug Casey, Gold And Silver, Gold Price, Gold Rose, Gyrations, Juniors, Metals, Occasions, Perspective, Plunge, Price Changes, Related Company, September 18, Three Times, Volatile Stocks, Volatility
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Bespoke’s Commodity Snapshot (02/09)

Friday, February 10th, 2012

Many commodities have had nice runs recently, and below we provide our updated trading range charts for ten of them. In each chart, the green shading represents between two standard deviations above and below the commodity’s 50-day moving average. Moves to the top of or above the green zone are considered overbought, while moves to the bottom or below the green zone are considered oversold.

As shown, the metals have made the biggest move recently, and all four of the metals highlighted below are currently at or well into overbought territory. Oil is just about in the middle of its trading range, which has been tightening a lot recently due to the sideways trading pattern it has been in since last November.

After bouncing slightly a couple of weeks ago, natural gas has resumed its downtrend.

Subscribe to Bespoke Premium and gain access to the top earnings season analysis around.

Tags: Commodities, Commodity, Earnings Season, Green Zone, Last November, Metals, Natural Gas, Range Charts, Shading, Snapshot, Standard Deviations
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Squeeze continues, but don’t get carried away…..

Tuesday, September 27th, 2011

by The Trader, trader.se

Markets are moving very fast. Yesterday European morning we wrote of big squeeze set ups, in both metals and equities (mainly European equities). We have had a brutal squeeze to the upside since then (Squeeze Sign, Chartology). With everything having surged, even beyond our scenario, in a very fast move, we would be taking some chips off the table. Things haven’t changed fundamentally, but the extreme bearishness among inbvestors, had to create this move to the upside. We still believe the squeeze will continue, but at a “cooler” pace. With Roubini screaming Europe to go bust on a daily basis, and Barton Biggs dreaming of a ultrashort position at the bottom, we had the very much anticipated bounce. Now we need to wait for the pundits to become bullish and dreaming of being ultralong, before we start shorting the markets, once again.

SPX short term chart, soon to hit the first resistance levels.

Stoxx vs SPX 3 day chart below. For the brave, buy SPX vs short Stoxx set up coming up on a short term basis only though (not currency adjusted).

Silver has had a tremendous 24 hours….

Tags: Bounce, Bust, Chips, Daily Basis, Europe, European Equities, Extreme Bearishness, Metals, Pace, Pundits, Resistance Levels, Set Ups, Spx, Squeeze, Stoxx, Term Basis, Ups
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Commodity Snapshot 9/22/2010 (Bespoke)

Wednesday, September 22nd, 2010

Tags: Commodities, Commodity, Corn, Gold, Green Zone, Metals, Natural Gas, oil, Orange Juice, Platinum, Pullbacks, Range Charts, Record Highs, Shading, Silver, Snapshot, Standard Deviations
Posted in Energy & Natural Resources, Gold, Markets, Oil and Gas, Silver | Comments Off

Mobius: Comments on Brazil, India, and Emerging Markets

Wednesday, July 21st, 2010

This article is a guest contribution from Mark Mobius, Vice-chairman, Franklin Templeton Investments.

Here are my responses to recent questions from readers.

Can you comment on Brazil? Where do you see Brazil 10 years from now?

-          James, United States

Brazil is a key producer and exporter of commodities. Strong commodity prices associated with a solid domestic demand for goods and services have been key drivers of its economic growth. Hence, it is likely to benefit from rising global demand, including demand from China, for energy, metals and other commodities.

Brazil is also a country with a large, growing consumer base. Brazil’s economy is diversified and largely domestically driven, with exports accounting for less than a quarter of GDP. This domestic strength is one of the reasons for the Brazilian economy’s relatively faster recovery compared to most other globally-exposed economies. Its big consumer market creates opportunities for a wide range of firms, including financial services providers, health care firms, cosmetics companies and beverage manufacturers. In addition, Brazil will be hosting the FIFA World Cup in 2014 and the Olympics in 2016, hence, it is expected to invest significantly in infrastructure that should help drive economic growth in the coming years as well as improve the basis for stronger sustainable growth in the long-term.

We expect Brazil to continue its development by increasingly investing in improving its infrastructure, as supported by its large oil exploration campaign and the other reasons cited above. Capital should continue to be attracted to the country on the back of these strong drivers and Brazil should remain in a sound financial position.

Are you investing right now in India? What level of corrections are you expecting? Given a 2-year view, can I invest at these levels?

-          Steven, India

We cannot disclose what we are actively buying and selling, nor do we try and make specific predictions on the market levels or individual stocks.

However, India does offer an exciting opportunity for investments given the strong growth rates, nascence of many new businesses and the quality of entrepreneurs. Moreover, India’s huge consumer market is another important factor, which should support the market’s recovery in the future.

Over the long term, the growth rate of India may offer a good platform for Indian companies to deliver strong results. India has one of the largest populations in the world and thus represents a huge consumer market. Moreover, with half of India’s people under the age of 25, they should be able to support their aging sector. This means that India will continue to have both a strong labor force and a large consumer base.

In addition to strengthening consumer spending, India benefits from the availability of skilled manpower and excellent managerial talent, which provides it with an edge in the service sectors. Infrastructure development is another area that could also contribute to the recovery of the economy. India’s relatively strong fundamental characteristics and the accumulation of foreign exchange reserves also puts the country in a much stronger position to weather external shocks.

1) What are the factors needed to become a great fund manager during such volatile equity markets?

2)   What do I have to do to specialize in emerging markets investing?

- Stewart, Korea

1)       Discipline, humility, the love of study and the willingness to work hard are some of the key factors, which I’ve shared in an earlier post on personal qualities of a good investor.

Discipline is necessary for one to take a long-term view and be patient.  You have to stay tough when all those around you are losing their cool. Then you must be humble and be ready to admit your mistakes, which I believe is an indication that you are capable of change.  In addition to the attributes mentioned above, we look for people who can work well as a group, given the team approach is an integral part of our investment culture at Templeton.

2)       Investing in emerging markets can be viewed as a combination of art, science and skill.  Art is necessary to be creative.  Science is required to examine the facts and interpret them objectively.  Skills are needed to understand the correct time to buy and the correct time to sell.

Copyright (c) Franklin Templeton Investments

Tags: Beverage Manufacturers, Brazil, Brazil Economy, Brazil S Economy, Brazilian Economy, Commodities, Commodity Prices, Economic Growth, Emerging Markets, Fifa World Cup, Financial Services Providers, Franklin Templeton Investments, GDP, Global Demand, India, Mark Mobius, Metals, oil, Oil Exploration, Sound Financial Position, Sustainable Growth, Vice Chairman, World Cup In 2014
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Long-Term Bond Yields: Where Are You Going?

Thursday, June 3rd, 2010

The yield on the 10-year US government bond dropped from a high of 3.96% to a recent low of 3.13%. The key question for investors is: Will US long bond yields continue down or consolidate and move higher? In order to cast some light on this issue, I have analyzed a few key graphs and historical relationships, as reported below.

Sources: I-Net Bridge, Plexus Asset Management.

The first question to be answered is whether the sudden drop in the yield on the 10-year Note was a flight to security due to the current debt crisis in the European Union that began in Greece and subsequently spread to Portugal and Spain. The GDP-weighted spread between the so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) has had an inverse relationship with the yield on the US 10-year Note since the liquidity crisis unfolded in 2008, with the US yield rising when the GDP-weighted PIIGS’ bond yield spread falls and vice versa.

Sources: I-Net Bridge, Plexus Asset Management.

The yield spread between PIIGS bonds and US bonds has a close relationship with the yield spread between emerging-market bonds and US Treasuries. It can therefore be argued that bonds in the PIIGS countries are essentially emerging-market bonds with similar risk attributes.

Tags: Advent, Asset Management, Bond Yield, Bond Yields, China, Debt Crisis, Economist, Emerging Market Bonds, Emerging Markets, GDP, Government Bond, Graphs, Inverse Relationship, Investing In Emerging Markets, Investment Risk, Liquidity Crisis, Metals, Mirror Image, Price Index, Term Bond, Treasuries, Yield Spread
Posted in Bonds, Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Tracking China’s Deals

Thursday, April 29th, 2010

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This article is guest contribution by Frank Holmes, U.S. Global Investors.

While the rest of the world suffered through its worst financial crisis in a half century, China went shopping. Since 2005, China has made 185 deals worth $100 million or more, totaling more than $222 billion.

The largest of these deals was the $12.8 billion joint venture between Chalco and Alcoa made to purchase 12 percent of Rio Tinto back in 2008. This deal was struck in Australia which has been China’s most popular destination both in terms of quantity and dollar amount.

Indicative of the large future the Chinese government has in store for its country, the most popular sectors for these deals have been metals and energy, respectively.

Forbes just published an interesting interactive map based on data from the Heritage Foundation detailing these transactions.

click for larger image

As you view the presentation, pay special attention to how the pace picks up. By the second half of 2009, China is averaging more than seven $100 million deals a month.

You can check out the full interactive version at Forbes.com

Tags: Alcoa, Chalco, China, Chinese Government, Financial Crisis, Forbes, Frank Holmes, Heritage Foundation, Interactive Map, Interactive Version, Joint Venture, Metals, Pace, Rest Of The World, Rio Tinto, Second Half, Sectors, Shopping, Tracking Email, U S Global Investors
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Gold and Silver for the Time Being

Wednesday, February 24th, 2010

Adam Hewison, CEO, MarketClub, is back with two new educational videos about Gold and Silver. Hewison, a seasoned trader and source of sound market guidance shares his near term views on the two very different metals.

Title: Five Reasons Why Gold Will Not…

Gold has made some exciting moves recently, but what can we expect in the future? In today’s video, I point out five reasons that I do not expect gold to make a new high just yet.

If the current cycle persists, there will be some interesting trades to be had in this market and a possible new high before summer.

Title: Looking At Silver for All the Wrong Reasons

Late in 2009 a lot of folks began asking us about buying silver instead of gold. At the time, we stated exactly how we felt, in that, why would you try to buy something that is not in the same league as gold? The two markets are completely different and are driven by a different set of emotions and fundamentals.

This is the first video that I’ve done on silver in quite some time, but I think it’s an important one for you to see.

One of the standout features that I noticed was the fact that when gold was making new all-time highs in early December, silver failed to take out the March 2008 high. I consider this to be a negative.

In this short video you will very quickly see how we feel about silver and how you can benefit from looking at this market from a different perspective.

Tags: All Time Highs, Buying Gold, Ceo, Current, Different Perspective, Driven, Educational Videos, Emotions, Gold, Gold And Silver, Gold Silver, Market Guidance, Marketclub, Metals, New Videos, Quite Some Time, Silver, Standout Features, Trades
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Will Emerging Market Outperformance Last?

Tuesday, November 24th, 2009

The MSCI Emerging Markets Index has notched up a massive 72.3% gain for the year to date, and an even more impressive 101.4% since the March 9 lows. Although emerging markets were the clear leaders during the initial months of the recovery, the MSCI World Index has subsequently done some catching up but still lags with gains of 26.7% and 69.3% for the two measurement periods.

The chart below shows the performance of the MSCI Emerging Markets Index relative to the Dow Jones World Index. Needless to say, an upwardly sloping line means outperformance by developing stock markets.

Source: StockCharts.com

Should emerging markets be renamed “emerged” markets? Let’s consider two graphs to gain a better understanding of one of the key drivers of emerging stock markets.

As shown below, the Emerging Markets Index is primarily driven by commodity prices and in particular by metal prices as measured by the Economist Metals Price Index. Considering the historical relationship, emerging-market equities seem to be fairly priced given the level of metal prices.

Source: Plexus Asset Management (based on data from I-Net Bridge).

All other things being equal, the outlook for emerging markets, or at least the resource-related ones, appears positive given the favorable prospects for metal prices on the back of improving global industrial production and stronger global economic growth.

What is important is that the ratio of the Emerging Markets Index and World Index is also driven by commodity prices and specifically metal prices. As shown below, the relative risk of investing in emerging-market equities has increased as the ratio has outrun metal prices.

Source: Plexus Asset Management (based on data from I-Net Bridge).

Longer term I have little doubt that emerging markets will outperform their mature peers. However, over the next few months metal prices would need to rise quite substantially to ensure further outperformance by the Emerging Markets Index. At best, I would expect emerging markets to maintain the current relative levels against the MSCI Global Index should metal prices move sideways.

Tags: Commodities, Commodity Prices, Dow Jones, Economist, Emerging Market, Emerging Markets, Emerging Stock Markets, Favorable Prospects, Global Economic Growth, Graphs, Lows, Measurement, Metals, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Peers, Plexus Asset Management, Price Index, Relative Risk, Stockcharts, Year To Date
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