One Giant Powder Keg… and the Fuse is Already Lit

By Nick Giambruno

Their mission was to capture, or more likely, kill. Dozens of renegade commandos in three Blackhawk helicopters swooped in on the holiday residence of the president. Immediately, they engaged in a fierce gun battle with the president’s bodyguards and killed a number of them. Tourists in a nearby five-star resort fled for their lives. Their idyllic vacations had turned into a war zone in the blink of an eye.

The president, however, was nowhere to be found. He had been tipped off about the plot and made it to the safety of his private jet. He had cheated death by mere minutes. The renegade soldiers got wind of the escape. They commandeered a couple of F16 fighter jets and sent them to the skies to shoot down the presidential jet. Aware the rebel F16s were hunting them, the president’s pilots were able to obfuscate the identity of their aircraft by altering the jet’s transponder signal.

The transponder is an electronic signal that shows an aircraft’s identity. It’s used by air traffic controllers to keep track of planes in the air. Somehow, the pilots of the presidential jet were able to set their transponder signal to make it appear as if they were instead a civilian passenger jet. The confused rebel fighter jets ran out of fuel and had to return to base before they figured out what happened.

The president had cheated death for the second time that day. This story sounds like something out of a Tom Clancy novel or a Hollywood blockbuster. But it’s not. It happened in real life earlier this summer. In Turkey.
The country is one giant powder keg and the fuse is already lit. When the next global crisis explodes, there’s a good chance Turkey will be involved somehow.

Turkey was founded from the ashes of the Ottoman Empire. It’s where Europe meets Asia. Today, it’s at the epicenter of many crises that are destabilizing the world the migrant disaster in Europe, the ongoing carnage in Iraq and Syria, the battle with ISIS, a conflict with the Kurds, and the new Cold War with Russia. It could soon also play a big role in the collapse of the world’s largest economy, the European Union (EU).

It’s hard to think of another place that has more tripwires for a global meltdown. In light of all these potential triggers as well as the recent failed military coup d’état that killed over 290 people, I thought it was time to take a closer look at Turkey. Doug Casey and I just returned from the crisis stricken country, the latest destination we visited with (literal) blood in the streets.

We put our boots on the ground in the same area where that hit squad of rebel soldiers nearly assassinated Recep Tayyip Erdogan, the Turkish president. (In addition to all of the crises listed above, the Turkish military had invaded northern Syria just before our arrival.)

Perhaps most importantly, Turkey is at the heart of the migrant crisis that is tearing Europe apart. The migrant crisis will be one of the main issues on the minds of Italians as they vote in the upcoming referendum, which could very well decide the fate of the EU and the euro currency. That’s why I’ve spent weeks on the ground in Italy, watching these events unfold.

The Financial Times commented on what would happen if the Italian referendum fails:

It would probably lead to the most violent economic shock in history, dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929 Wall Street crash.

Like with the Brexit vote, the migrant issue and by extension Turkey may determine the outcome of the Italian referendum on December 4, 2016.

Turkey Holds the Keys to the EU’s Future

Parroting U.S. concerns about democracy and human rights, the EU has also harshly criticized Turkey’s response to the failed coup. This hasn’t endeared them to the Turkish government. It’s actually incredibly stupid for the Europeans. And by stupid I mean exactly that an unwitting tendency toward self destruction. The Europeans fail to see the indirect and delayed consequences of their decision to antagonize the Turkish government.

That’s because the Turkish government holds the trump card on what is perhaps the most explosive political issue on the continent right now: the migrant crisis. Concerns about the unprecedented flow of migrants into Europe over the past couple of years played a key role in the Brexit vote. It’s also acting as a political accelerant to the rise of anti-EU parties all over Europe. It’s a simple relationship. The more migrants come to Europe, the more popular anti-EU political parties become, and the weaker the EU itself becomes.

This is where Turkey holds the keys to the future political landscape of Europe. Turkey is a major transit point migrants use on their way to Europe. The Turkish government doesn’t want the migrants to stay in Turkey, so they haven’t really had much of a reason to stop them from leaving for Europe. They even enjoyed the situation because it gave them negotiating leverage with Brussels. The Turks essentially said “give us what we want or we’ll open the floodgates.”

What the Turks want is lots of money and to join the Schengen visa free zone, which allows unfettered access to most of Europe. Brussels partially gave in to the blackmail. They started giving the Turks money to the tune of $6 billion and agreed to hold talks about getting visa-free access to the continent. In return, the Turks would cut off the flow of migrants.

For a while this arrangement worked. But after the attempted coup and then the purge of suspected putschists, the EU cried foul. They deemed the purges to be an erosion of democracy and the rule of law.
They basically told the Erdogan government it can forget about joining the Schengen zone.

Unsurprisingly, the Turkish government not so subtly warned that if the EU walks away from its part of the deal, so will it. Specifically, the Turkish government has threatened to open the migrant floodgates just in time for the Italian referendum and other key European elections. The Italian referendum could very well lead to the end of the euro and the EU itself, while triggering a global financial meltdown of historical proportions.

Turkey sending a new wave of migrants into Europe just before this key vote will help seal its fate.
There are potentially severe consequences in the currency and stock markets. That’s exactly why I recently spent weeks on the ground in Italy getting the scoop on this explosive story that almost nobody else is talking about.

New York Times best selling author Doug Casey and I just released an urgent video with all the details.
Our video reveals how a financial shock far greater than 2008 could strike America on December 4th, 2016. And how it could either wipe out a big part of your savings or be the fortune building opportunity of a lifetime. 

The video describes specific ways to profit as well as which stocks to avoid like radioactive waste. You can get a first look at this video by clicking here.

The article One Giant Powder Keg… and the Fuse is Already Lit was originally published at caseyresearch.com.

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Warning: This Could Be the Start of a Global Banking Crisis

By Justin Spittler

Europe’s banking system is collapsing. Over the past year, shares of Deutsche Bank (DB), Germany’s biggest bank, have plunged 56%. Swiss banking giant Credit Suisse (CS) is down 62% over the same period. Yesterday, both stocks hit record lows.

Dozens of other European bank stocks have also crashed. The Euro STOXX Banks, which tracks 48 of Europe’s largest banks, is down 48% over the past year. This is a major issue. That's because banks are the cornerstone of the financial system. They keep money flowing through the economy. If they’re struggling, it often means the economy is having major problems. Right now, European banks are flashing bright warning signs. That’s not just bad news for Europe—it’s also a serious threat to the rest of the world.

In today’s Dispatch, we’ll show you why Europe’s banking crisis could turn into a global banking crisis. You’ll also learn how to transform this threat into a chance to make big gains.

European banks are struggling to make money..…
Spanish banking giant BBVA’s (BBVA) profits fell 54% last quarter. First quarter profits at Deutsche Bank were down 58%. Swiss bank UBS’s (UBS) profits plunged 64%. European banks are hurting for a couple reasons. One, Europe is growing at the slowest pace in decades. Banks are making fewer loans as a result.

Two, negative interest rates are eating European banks alive. If you’ve been reading the Dispatch, you know negative rates are the latest radical government policy. They basically flip your bank account upside down. Instead of earning interest for keeping money in the bank, you pay the bank to hold your money.

Negative rates are clearly bad for savers. They’re also hurting Europe's biggest banks. That’s because these huge institutions have to pay their “bank,” the European Central Bank (ECB). Today, European banks pay £4 for every £1,000 they store at the ECB for a year. That might not sound like a lot. But it adds up quick when you manage trillions of euros like these banks do.

Last week, investors got another reason to avoid European banks..…
On Thursday, Great Britain voted to leave the European Union (EU), which it’s been in since 1973.
The “Brexit,” as the media is calling it, blindsided investors. As we explained yesterday, the market was expecting Great Britain to stay in EU. The unexpected outcome triggered a global stock market crash.

U.S. stocks had their worst day since August. Japanese stocks had their worst day in five years. European stocks had their biggest decline since the 2008 financial crisis. Friday’s global selloff erased $2.1 trillion in value from global stocks. It was the global stock market’s worst day in history. The panic didn’t die down much over the weekend. By the end of Monday, another $930 billion had disappeared from the global stock market.

European bank stocks were hit the hardest..…
Deutsche Bank plunged 22% between Friday and Monday. Credit Suisse fell 23%. UBS fell 20%. Barclays (BCS) and Royal Bank of Scotland (RBS) each plunged 37%. Both stocks are down more than 57% over the past year. These are gigantic moves in a matter of days. Remember, we’re not talking about small biotech stocks. These are some of the most important financial institutions on the planet.

Government officials are scrambling to contain the crisis..…
Today, the Bank of England (BoE) injected £3.1 billion into Britain’s banking system. It’s pledged to inject as much as £250 billion to stabilize its financial system. The BoE made its cash injection hours after the Bank of Japan (BOJ) pumped $1.5 billion into its banking system. As we'll show you in a second, we don't believe this will end well. That's because this excessive money printing (sometimes called "quantitative easing") doesn't stimulate the economy like governments intend it to.

Credit Suisse says other central banks could soon print more money too. Bloomberg Business reported on Friday:

“Market liquidity and overall liquidity in the U.K. is drying up as we speak in a very rapid way,” said John Woods, chief investment officer for Asia-Pacific at Credit Suisse Private Banking, told Bloomberg TV in Hong Kong. “It’s highly likely that we see monetary easing in a coordinated response” from central banks across the world, he said.

Great Britain is headed for a recession..…
A recession is when an economy shrinks two quarters in a row. Goldman Sachs (GS) says Britain could be in a recession by early 2017. But here’s the thing. We don’t think the BoE will let this happen. That’s because central bankers will do anything, including using reckless, unproven monetary policies, to avoid a recession these days.

Credit rating agency Standard & Poor’s agrees with us. Reuters reported today:

"Brexit is likely to represent a drag of about 1.2 percent of GDP for the UK in 2017," Jean-Michel Six, S&P's chief economist for Europe, the Middle East and Africa told a conference call for investors on Tuesday. "We have a significant slowdown but growth remains positive although obviously in a much more disappointing way. That is because we anticipate a very strong monetary response on the part of the Bank of England, in the form of additional quantitative easing, in the form of a further cut in interest rates," he added.

Bank of America (BAC) and Deutsche Bank also expect the BoE to fire up the printing press again. Bank of America says it could happen as soon as August.

QE won’t help Great Britain’s economy..…
As we told you above, QE doesn’t work. As regular readers know, the Federal Reserve pumped $3.5 trillion into the U.S financial system after the 2008 financial crisis. This massive money printing effort was supposed to juice the economy. But the U.S. is growing at its slowest pace since World War II. QE also failed to jumpstart Japan’s economy, which hasn’t grown in two decades. There’s no reason to think it will work this time.

If you’re nervous about the global financial system, we encourage you to take action today.…
The first thing you should do is own physical gold. Gold is real money. It’s held its value for thousands of years because it has a unique set of attributes: It’s easy to transport, easily divisible, and durable. You can take a gold coin anywhere in the world and folks will immediately recognize its value.

Unlike paper money, central bankers cannot create gold from nothing. It’s the ultimate antidote to crumbling paper currencies. That’s why the price of gold often soars when governments print money. This year, gold is up 24%. It’s trading at the highest price in two years. But it could go much higher as governments continue to run reckless monetary experiments.

If you want big profits from rising gold prices, own gold stocks..…
Dispatch readers know gold miners are leveraged to the price of gold. A small jump in the price of gold can cause gold stocks to surge. Gold’s 24% jump this year has caused GDX, a fund that tracks large gold stocks, to soar 96%. We believe this gold stock rally is just getting started. During the 2000 and 2003 gold bull market, the average gold stock gained 602%. The best ones soared 1,000% or more.

Nick Giambruno, editor of Crisis Investing, has recommended two gold stocks this year..…
He already closed out one of them for a quick double. It surged 103% in 14 months. Nick’s other gold stock is up 30% since March and is still dirt cheap at today's levels. Nick currently rates this stock a "Buy"…and says it could soon start paying a double digit dividend yield if gold keeps rising.

You can learn more about Nick’s gold stock by taking advantage of our special 60%-off sale for Crisis Investing. If you sign up today, you’ll be enrolled in a trial membership, which gives you 90 days risk-free to decide if the service is for you. But we encourage you to act soon. This special offer ends soon, and we likely won’t open this offer again for a long time.

You can learn more about this incredible offer by watching this video presentation. You’ll also learn about an even bigger threat to your wealth than Europe’s banking crisis. As you’ll see, almost no one is talking about this coming crisis. Yet, it could cause millions of Americans to lose their entire life savings. By the end of this video, you’ll know how to protect yourself. And just as importantly, you’ll know how to profit from this coming crisis. Click here to watch this free video.

Chart of the Day

U.S. bank stocks are also headed lower. Today’s chart shows the performance of the Financial Select Sector SPDR ETF (XLF) over the past year. XLF holds 94 major U.S. financial companies including behemoths JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC). You can see XLF is down 11% since last June. While that's not as severe as the near 50% drop in European banks over the same period, it's still a clear sign to stay away.

U.S. banks have many of the same problems as European banks. Like Europe, the U.S. economy is growing at the slowest pace in decades. And while the U.S. economy doesn’t have negative rates yet, Fed Chair Janet Yellen has said they aren’t “off the table” if the U.S. economy runs into trouble. The arrival of negative rates to the U.S. could tip bank stocks into a crisis, just like they have in Europe.

The article Warning: This Could Be the Start of a Global Banking Crisis was originally published at caseyresearch.com.

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Here's Why Gold Will Be Priceless in Three to Five Years

Over the next few years as debt, currencies and countries start to fall apart and individuals will be looking to place their money where it will hold its value and buying power during times of extreme uncertainty.

If you eliminate fiat currencies which are created out of this air and are nothing more than a credit we are left with precious metals and stones. As much as we have evolved over time, we could be valuing things like gold, silver, platinum, and precious stones more so than our currency.

Let’s face it, currencies are swinging in value 20-50% regularly and while most people do not realize it their buying power often is not as strong as it was. Would you rather hold a large portion of your capital in say the EURO which is falling like a rock in value costing you thousands of dollars a month, or would gold and silver which rises in value as your currency falls be a smarter decision?

Click Here to Read Chris Vermeulen's entire article and charts





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Week Ending Crude Oil, Gold and Coffee Markets Summary for Friday November 21st

Our trading partner Mike Seery brings us his weekly call on crude oil, gold and coffee. Could crude oil really be headed lower? If king dollar gets it's way it just might be headed much lower. Here's what Mike has to say about this and other futures commodity trades.

Crude oil futures are up 30 cents in the January contract trading higher for the 2nd consecutive trading session as a short term bottom may have been placed as China cut their interest rate today sending crude oil sharply higher in early trade trading as high as 77.82 a barrel before retracing while currently trading at 76.22 if you are still short this market I would place my stop above the 10 day high which in Monday’s trade will come down to 77.92 risking around 170 points or $1,700 per contract. The U.S dollar was sharply higher and that’s generally very bearish the commodity markets, however with China cutting their interest rate that combated the negativity coming out of the Euro currency causing short covering across the board as many of the commodities including energies, metals, and the grain sector were all higher today but continue to place your stop loss at that level and see what Monday’s trade brings. The fundamentals in oil still remain very bearish as Saudi Arabia has not cut production & the United States continues its torrid pace of production flooding the world market so even if you are stopped out on this trade sit on the sidelines and wait for another trend to develop as I’m not totally convinced that lower prices aren’t ahead in 2015. Crude oil futures are still trading slightly below their 20 but still far below their 100 day moving average telling you the trend is still to the downside and if the U.S dollar continues to move higher that eventually will put pressure on prices once again in my opinion but on a day to day basis anything can occur.
TREND: LOWER
CHART STRUCTURE: EXCELLENT

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As I talked about in yesterday’s blog I am telling investors to remain neutral as I do believe gold prices will remain choppy to lower for the rest of 2014 as prices rallied $9 to trade around $1,200 per ounce as extreme volatility has entered this market and I think today’s price action was very impressive due to the fact that the U.S dollar was up over 50 points which is generally very bearish precious metals, however China cut their interest rate pushing many commodities prices higher. Gold futures are trading above their 20 but below their 100 day moving average moving higher despite the fact that the ECB looks like they’re going to utilize more stimulus which is remarkable in my opinion as I do think if the U.S dollar continues to move higher eventually that will be very bearish gold prices so sit on the sidelines as you do not want to trade a choppy market. This market is extremely volatile with big up price swings and down swings so avoid and move on to a trendy market like the S&P 500. Volatility in gold is amazing lately with many days of a $30 – $50 trading range which is incredible going into the holiday season, however if you remember last year gold’s low was near December 31st and we opened up the next day around $20 higher and I think the same thing will happen because of the fact that stock sales which are losers are sold to offset winning trades come the month of December so I still look for another leg down but still would sit on the sidelines at the current time. TREND: NEUTRAL
CHART STRUCTURE: POOR

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Coffee futures in the March contract sold off around 600 for the trading week currently trading at 190.70 in New York with high volatility in the last week with several sharply higher and lower trading sessions as I am advising investors to stay away from this market as the trend is extremely choppy and difficult to trade successfully in my opinion. Coffee prices are trading right at their 20 & 100 day moving average telling you that the trend is neutral as this volatility will remain for months to come as weather in Brazil is very fickle on a week to week basis as drought concerns are still in the back of traders’ minds as the weather currently is positive for production. The chart structure in coffee presently is very poor as I like to trade markets with tight chart structure which allows you to place tighter stop losses lowering monetary risk in my opinion. TREND: MIXED
CHART STRUCTURE: POOR

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Mid Week Commodities Summary for Wednesday October 22nd - Crude Oil, Natural Gas, Gold, Silver, Coffee, Sugar, Euro, Dollar

Crude oil closed down $2.12 at $80.38 today. Prices closed near the session low and closed at a two plus year low close today. The bears have the solid near term technical advantage.

Natural gas closed down 5.1 cents at $3.749 today. Prices closed near the session low today and closed at a contract low close. The natural gas bears have the solid overall near term technical advantage.

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Gold futures closed down $7.20 an ounce at $1,244.50 today. Prices closed nearer the session low on profit taking after hitting a six-week high on Tuesday. Gold bears have the overall near-term technical advantage. However, a fledgling three-week-old uptrend is in place on the daily bar chart.

Silver futures closed down $0.379 at $17.17 today. Prices closed near the session low today. The silver bears have the firm overall near term technical advantage.

Todays top Dividend Plays....Stocks and ETFs

Coffee closed down 850 points at 191.10 cents today. Prices closed near the session low and hit another three week low today. It appears a market top is in place. The coffee bears have gained the near term technical advantage.

Sugar closed up 6 points at 16.50 cents today. Prices closed nearer the session low today. Sugar bears have the firm overall near-term technical advantage.

Oil Deflation, the Saudi’s Muslim Frankenstein, and the Colder War

The December Euro currency closed down 79 points at 1.2651 today. Prices closed nearer the session low again today. The Euro bears have the firm overall near-term technical advantage and are regaining downside momentum.

The U.S. dollar index closed up 0.436 at 85.840 today. Prices closed near the session high today. The greenback bulls have the overall near-term technical advantage and are regaining upside momentum.

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Are You Ready for Negative Interest Rate and Pay the Bank to Hold Your Money?

The six members of the European Central Bank (ECB) Executive Board and the 16 governors of the euro area central banks vote on where to set the rate. We watch interest rate changes closely as short term interest rates are the primary factor in currency valuation.
 

A higher than expected rate is positive for the EUR, while a lower than expected rate is negative for the EUR. Today (Thursday June 5th) we expected a rate cut. The cut was not as much as analysts expected which is bullish for the short term, but the rate is still declining and nearing zero, or even worse, negative territory.





A negative interest rate may sound crazy or impossible, but it's already happening in Denmark. Europe is already in a deflationary state and central banks are doing everything they can to bring about inflation by cutting rates and devaluing the euro. This will cause a ripple through multiple asset classes and will drastically alter the outcome of individuals worldwide. Just imagine if you had to pay a bank to hold your money and you do not earn any interest but rather pay interest.

People who have been saving their entire lives will get hit the hardest. Retired folks will stop earning money and start paying for all the money they hold held at banks. Individuals will go more into debt because money will be extremely cheap to borrow. Price of assets like equities, real estate, discretionary goods will rise because the cheap money everyone is borrowing will be used to buy more stuff. While all this happens everyone takes on more dept. It is a brutal spiral leading to increase debt levels, inflation and eventually bankruptcy.

If the euro dollar starts to decline at a quicker pace the U.S. dollar will likely rally. A strong dollar could affect the commodities market including gold, silver and the European stock markets. Todays rate cut led to a pop in the euro, but that is likely to be short lived. I hope this sheds some light on the markets and helps in your trading.

Chris Vermeulen

P.S. In the next few days members and myself will be looking to enter some trades based round this analysis. See Premium Trading Video & Newsletter

Sincerely,
Chris Vermeulen


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World Money Analyst: Europe....Cliff Ahead?

By Dirk Steinhoff
When Kevin Brekke, managing editor [of World Money Analyst], contacted me last week, I knew it was time again to survey the investment landscape. This month, I will focus on Europe and its decoupled financial and real economy markets.

Globally, the last two years were marked by booming stock exchanges of developed markets, disappointing bond markets, and devastation across the precious metals markets.

Since June 2012, the EURO STOXX 50 Index, Europe’s leading blue chip index for the Eurozone, has advanced by approximately 50% and outperformed even the S&P 500 and the MSCI World indices.

Over the last six months, European stock exchanges have seen a surprising change of leadership: The major stock market indices of the “weaker” countries, like Portugal, Spain, and Italy, have outperformed those considered stronger, like Germany. One of the top performers was a country that was and still remains in “bankruptcy” mode: Greece.

The question at this point is: Can these outstanding European stock market performances continue?

In our search for an answer, let’s start with a closer look at the economic conditions within the European Union (EU), where approximately 2/3 of total “exports” (internal and external) of the EU-28 are traded. And then let’s have a look at the economic setting of some major trading partners, such as the US and BRIC countries, which account for roughly 17% and 21%, respectively, of the external exports of the EU-28.
Although the EURO STOXX 50 Index has soared since June 2012, certain key measures of the underlying real economies paint a different picture.

To start, the GDP of the EU-28 is not really growing. In 2012, it contracted by 0.4% and grew by the smallest fraction of 0.1% in 2013. The GDP growth numbers for the countries in the euro area are even worse: -0.7% in 2012 and -0.4% in 2013. Whereas Germany’s GDP was up in 2013 by 0.5%, economic growth was down in Spain, Italy, and Greece by -1.2%, -1.8%, and -3.6%, respectively.

Real GDP Growth Rates 2002-2012
	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
EU	1.3	1.5	2.6	2.2	3.4	3.2	0.4	-4.5	2.0	1.6	-0.4
Germany	0.0	-0.4	1.2	0.7	3.7	3.3	1.1	-5.1	4.0	3.3	0.7
Spain	2.7	3.1	3.3	3.6	4.1	3.5	0.9	-3.8	-0.2	0.1	-1.6
France	0.9	0.9	2.5	1.8	2.5	2.3	-0.1	-3.1	1.7	2.0	0.0
Italy	0.5	0.0	1.7	0.9	2.2	1.7	-1.2	-5.5	1.7	0.5	-2.5
Portugal	0.8	-0.9	1.6	0.8	1.4	2.4	0.0	-2.9	1.9	-1.3	-3.2

The EU unemployment rate stood at 10.2% at the beginning of 2012 and stands at 12.1% today. That the European Union is anything but a homogenous body that moves in unison can be seen in the following chart:

Where Germany has a current unemployment rate of 5.2% and a youth (under 25) unemployment rate of 7.5%, the numbers for other countries are worrisome: Current unemployment in Spain is 26.7%, and 12.7% in Italy, with youth unemployment in Spain at an incredible 57.7%, and 41.6% in Italy. And don’t forget Greece, which is mired in a historically unparalleled economic depression where unemployment is 28% and youth unemployment is a shocking 61.4%. Keep in mind that all of these numbers are those officially released by bureaucratic agencies. The real numbers, as we know, would likely be even worse.

Recent EU industrial production numbers have shown some slight improvement. Nevertheless, industrial production has only managed to recover to its 2004 level, and remains way below its 2007 heights (see next graph).

Source: Eurostat

So let’s see: a shrinking GDP, high and rising unemployment, and stagnant production significantly below 2007 levels. Those are not the rosy ingredients of a booming economy (as indicated by the stock exchanges) but of one that is struggling.

Europe is not in growth mode.

This verdict is further supported by the export numbers for trade between EU countries, known as internal trade. In 2001, internal trade accounted for 67.9% of EU exports. Today, this share is down to 62.7%. In an attempt to compensate for sluggish European growth, EU companies had to develop other export markets, such as the US or the emerging markets.

Will these markets help rescue European companies?

Time to Taper Expectations

With regards to the U.S., two important developments are worth mentioning. The first key development, which will have severe consequences for the global economy, was brought to my attention by my friend Felix Zulauf, an internationally well-known investor and regular member of the Barron’s Roundtable for more than 20 years. Running ever-increasing deficits in its trade and current accounts for almost 30 years, the US thus provided an enormous amount of stimulus for foreign exporters. Since 2006, however, the US trade deficit has shrunk, with deteriorating trade data for many nations as a consequence.

The second key development is that the newly appointed head of the US Federal Reserve system, Janet Yellen, seems determined to continue the taper of its bond buying program. This fundamental shift in monetary policy could be questioned if the economic numbers for the US begin to show significant weakness. But in the meantime, the reduction of economic stimulus in the US should lead to a reduced appetite for European export goods.

The emerging markets had been seen, not too long ago, as the investment opportunity and alternative to the fiscal and debt crisis-stricken countries of the developed world. Today, on a nearly daily basis, you hear bad news about the situation and developments in the emerging countries: swaying stock markets, plunging currencies, company bankruptcies, corruption scandals, and even riots.

The emerging markets are dealing with the unintended consequences of the Quantitative Easing (including liquidity easing and credit easing) programs in the West. The increased liquidity spilled over into the emerging markets in the hunt for yield. This flow of capital into the emerging markets lowered capital costs, inflated asset prices like stocks and real estate, and boosted commodity prices. All that, and more, sparked the emerging markets boom.

Now, this process has reversed. The natural conclusion to exaggerated credit-driven growth, the tapering of QE programs, the shrinking US trade deficit, and lower commodity prices has been an outflow of capital from emerging markets, triggering lower asset prices and exchange rates. The attempt of some countries to defend their currencies by raising interest rates will only exert further pressure on their economies.

With weaker emerging market economies and currencies, there will be no big added demand for European exports. Revenues and profits for EU companies (measured in euros) will fall.

When Trends Collide

So, over the last two years we had opposing trends—booming European stock markets and weak underlying real economies. This conflicting mix was mainly fostered by easy money that drove down interest rates to historic low levels. Plowing money into stocks, despite the poor fundamentals, was the only solution for most investors.

At their current elevated levels European stock markets appear vulnerable, and it seems reasonable to doubt that we will see a continuation of booming stock markets. Of course, such a decoupling can continue for some time, but the longer it continues, the closer we will get to a correction of this anomaly. Either the real economy catches up to meet runaway stock prices, or stock prices come down to meet the poor economic reality. Or some combination of the two.

Because of the economic facts that I discussed above, in my view, we may be seeing just the beginning of a stronger correction in stock prices.

Dirk Steinhoff is chief investment officer of portfolio management (international clients) at the BFI Capital Group. Prior to joining BFI in 2007, Mr Steinhoff acted as an independent asset manager for over 15 years. He successfully founded and built two companies in the realm of infrastructure and real estate management. Mr Steinhoff holds a bachelor’s and master’s degree in civil engineering and business administration, magna cum laude, from the University of Technology in Berlin, Germany. 

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The article World Money Analyst: Europe: Cliff Ahead? was originally published at Mauldin Economics

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Hitch a Ride on This Supply Crunch

By Jeff Clark, Senior Precious Metals Analyst

Can you name a commodity that's currently in a supply deficit—in other words, production and scrap material can't keep up with demand? How about two?


If you find that difficult to answer, it's because there aren't very many.

When you do find one, you might be on to a good investment—after all, if demand persists for that commodity, there's only one way for the price to go.

At the end of 2012, the platinum market was in a supply deficit of 375,000 ounces. Much of it was chalked up to the sharp decline in output from South Africa, where about 750,000 ounces didn't make it out of the ground due to legal and illegal strikes, safety stoppages, and mine closures.

The palladium sector was worse: It ended the year with a huge supply deficit of 1.07 million ounces—this, after 2011, when it boasted a surplus of 1.19 million ounces. The huge reversal was due to record demand for auto catalysts and a huge swing in investment demand—going from net selling to net buying in just 12 months.

What's important to recognize as a potential investor is that the deficit for both metals isn't letting up, especially for platinum.

Since platinum supply is dwindling, let's take a closer look…...

Will the Supply Deficit Continue?

 

According to Johnson Matthey, the world's largest maker of catalysts to control car emissions, platinum supply will decline to 6.43 million ounces this year, largely due to lower Russian stockpile sales. But the company claims the decline will be made up by a 7.4% increase in recycling.

Ha. Projections on scrap supply are almost always wrong. Analysts said in early 2012 that supply from recycling would grow 10-12% that year—but it declined by 4%.

There are critical issues with scrap this year, too…

• Impala Platinum ("Implats") reported a 17% decline in output, not due to decrease in production but in scrap supply. Other companies have not reported this problem, but Implats is one of the biggest producers of the metal.

• Recycling of platinum jewelry in China and Japan is falling and is on pace to be 12.9% lower than last year.

• European auto sales are declining, so one would think demand would be the most impacted. However, this has major implications for supply, too: The average age of a car in Europe is eight years, with more than 30% over 10 years old. When a vehicle exceeds 10 years, the wear and tear on the catalyst is so significant that a substantial portion of the platinum has already been lost. So the jump in supply many are anticipating will be much less than expected.

Some of these declines are offset by scrap from auto catalysts in the US, but this obviously hasn't made up for all of it.

Demand Isn't Letting Up Either

 

Platinum demand is driven mostly by the automotive industry and jewelry, which account for 75% of world demand. What happens in these two sectors has a significant impact on the metal.

We'll let you draw your own conclusions from the data…...

The Cars

• Auto industry analysts forecast total monthly sales in the US last month will reach about 1.23 million for passenger cars and light trucks, up 12% from 1.09 million in October 2012.
• China, the world's largest auto market, saw a 21% rise in passenger car and light-truck sales in September to 1.59 million units, an eight-month high.
• PricewaterhouseCoopers forecasts that sales of automobiles and light trucks in China will have nearly doubled by 2019. This trend largely applies to other Asian countries too, becoming a constant source of demand for both platinum and palladium.

The Politicians

Both platinum and palladium will benefit from new regulations that take effect in 2014 in Europe and China:

• Europe's new "Euro 6" emission regulation will force diesel vehicles to have new catalysts going forward.
• China has already accepted tighter emission standards that will substantially push platinum demand in the country. It's worth mentioning that car markets in China and other emerging countries are at the "Euro 4" level, so they have some catching up to do before reaching US and European levels.

The Investors

NewPlat, a platinum exchange-traded fund, launched in South Africa on April 26 and has already seen an inflow of 600,000 ounces through the end of September. This unprecedented surge is expected to lift platinum investment demand by 68% to a record 765,000 ounces.

The Jewelers

Jewelry is the second-largest use for platinum, representing 35% of overall demand.

China dominates this market, and demand has doubled in the past five years. According to ETF Securities, China is well on its way to make up around 80% of total platinum jewelry sales in 2013—their report calls Chinese platinum demand "a new engine of growth."

Johnson Matthey expects the interest for platinum jewelry to soften in China this year. However, a recent article in Forbes suggests the opposite may be happening:

A good proxy for Chinese platinum jewelry demand is the volume of platinum futures traded on the Shanghai Gold Exchange. Average daily platinum volume on the exchange in 2013 is running near 45% above 2012 levels, recently reaching a new record high this year.

Another indicator of Chinese platinum jewelry demand is China platinum imports. The latest data on China platinum imports for September showed the highest level since March 2011 at 10,522 kilograms (or approximately 338,300 ounces).

And this from International Business Times…

Net platinum inflows into China hit their highest levels in two and a half years … China's net imports of platinum rose by 11%, to hit almost 70 metric tons for the first three quarters in 2013, higher than the 62 metric tons from the same period last year.

Overall, platinum demand is expected to be greater than ever before, reaching a record 8.42 million ounces this year. And this while supply continues to decline.

This supply/demand imbalance will likely continue for at least several years, perhaps a decade. Prices haven't moved all that much yet, but that doesn't mean they won't. Prices of commodities with a supply/demand imbalance can only stay subdued for so long before reality catches up. Either prices must rise or demand must fall.

The other metal to take advantage of right now is gold. While there's no supply crunch, the gold price is so low right now that it practically screams to back up the truck.

Learn in our free Special Report, the 2014 Gold Investor's Guide, when and where to buy gold bullion… the 3 best ways to invest in gold… and more. Get your free report now.


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Adam's Video Update: Gold and Crude Oil Prices Head South

Hello traders everywhere! Adam Hewison here, President of INO.com and Co-creator of MarketClub, with your mid day market update for Friday, the 12th of April.

Gold
Gold (XAUUSDO) continues to come under pressure and is going to close out the week on a negative note. It would appear as though nobody wants to hold gold anymore. The gold market is close to a key area of support around the $1,500 area. A close below that area today does not auger too well for this market. Rumors that Cyprus is selling gold to improve its bank balances is also adding downside pressure on an already depressed market. We will be checking in on gold today and analyzing just how far this market can go from here.

Watch Today's Video Update Here

Crude Oil
The crude oil market (CL.M13.E) flashed another negative Trade Triangle this morning is quickly entering a critical juncture were it needs to find support. At the moment, we are in choppy trading markets that are indicative of potential trend changes in the future. We will be jumping into the oil patch today and analyzing just what's going on with this market using our Trade Triangle technology.

The S&P 500 and the NASDAQ
The key thing in trading is not to fight the major trend, the odds favor letting the trend develop and then move with the trend. At the beginning of 2013, many analysts were thinking the fundamentals and debt load was too great for stocks to move higher. Since that time, we have seen double digit moves in the major indices.

Using our Trade Triangle technology, we were able to capture 95% of the move up and remain positive on the market. Providing that the Fed keeps pumping money into the system to the tune of $85 billion a month, will the market continue to move higher? On the other hand, markets have a tendency to over shoot both on the upside and downside. Technical analysis can help in deciphering when the market is changing course.

Bailout Nation
Once again, Cyprus is in the headlines over confusion with the state of the financial bailout and it has led to some sharp moves in European markets this Friday. The negative market action wiped out most of the positive reaction and the better-than-expected Euro-zone industrial production figures. The story on Cyprus has not yet been written and I still believe that Cyprus is the tip of the iceberg for Europe.

Watch Today's Video Update Here

Potential Chaos Ahead
North Korea - ticking down towards ...
Japan - Kuroda is the king risk
Europe - Portugal and Ireland - economic risk
The Fed - Hints QE is coming to an end
May 19th – Debt ceiling suspension expire

Have a great trading day,

Adam Hewison
President, INO.com
Co-Creator, MarketClub

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CME Crude Oil, Natural Gas and Gold Report for Friday July 13th

August crude oil prices established a higher high during the initial morning hours, helped by a rebound in risk taking sentiment in the wake of an as expected Chinese GDP report. While China's second quarter growth slowed to a pace not seen in three years, the reading appeared to inspire greater speculation for more economic stimulus. That is seen as a force bolstering the demand prospects for crude oil. The market also appears to be supported by reports of tighter North Sea supplies and greater US sanctions against Iran.

August natural gas prices traded in a tight overnight range as they consolidated yesterday's upside reversal action. This came after the market soldoff in reaction to yesterdays EIA storage data that showed a slightly larger than expected injection of 33 bcf. Total storage stands at 3,135 bcf or 19.7% above the 5 year average. Over the last four weeks natural gas storage has increased 191 bcf. Some traders viewed the EIA storage data as a positive because the weekly injection was about one third of the longer term average injection for this week of the year.

Gold traded nearly flat, but remained on course for a second consecutive week of losses as worries about the euro zone debt crisis and the absence of stimulus measures in the United States buoyed the dollar and its safe haven appeal. Spot gold was little changed at $1,570.14 an ounce, heading for a weekly decline of 0.8 percent.

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EconMatters: Crude Oil....A Perfect Bear Storm Despite the Euro Pop

Crude oil prices, along with world stocks, surged on Friday after euro zone leaders reached an accord on directly recapitalizing regional banks as well as measures to cut soaring borrowing costs in Italy and Spain. Brent crude jumped more than 7% in one day to close at $97.80 a barrel, while WTI also settled up 9.36% to $84.96 a barrel on NYMEX. However, for the quarter, spot Brent and U.S. oil futures still fell 20.4% and 17.5% respectively, their steepest quarterly percentage drops since the fourth quarter of 2008 post financial crisis. Looking ahead, we believe this little 'Euro pop' will soon fizz out weighted down by the reality of basic market fundamental factor.

First of all, the Euro accord bandaid does not fundamentally change what's causing the current crisis to begin with, high sovereign debt, out of control government spending, and insolvent regional banks. Add to this scenario is a slowing of European demand, parts of Europe are in a recession, and this not only affects less oil being consumed in Europe, but backs all the way up the supply chain from Ford automobiles being sold and needing to be manufactured, to Chinese factories needing to ratchet manufacturing cycles down to account for less demand out of Europe.


Macroeconomics aside, the oil inventory picture in the U.S. is also quite interesting these days, to say the least. For example, On 1/27/2012 there was 338,942 Million Barrels in US storage facilities, then on 2/24/2012 it started slowly rising to 344,868 Million, then Inventory builds started accelerating as on 3/23/2012 there were 353,390 Million on hand, then we jumped dramatically to 375,864 Million Barrels on 4/27/2012, with another sizable increase to 384,740 on 5/25/2012, and on 6/22/2012 the number stands at 387,166 Million Barrels in US Storage facilities, way above the five-year range. (See Chart Below)

Chart Source: EIA, June 27, 2012

This is taking place despite the domestic refinery run rate has increased from 85% in January to 92% in the week ending June 22 (See Chart Below). As of June 1, 2012, crude oil inventories held at Cushing, OK were 47.8 million barrels, the highest level on record, according to the U.S. Energy Dept. These are historically high numbers, but the magnitude of the rise over what is generally the stronger part of the US business cycle each year is the more compelling story.

Chart Data Source: EIA, as of June 22, 2012

With record refinery runs, we still cannot make a dent in the oil Inventories, which implies that there is a lot of oil in the market. In fact, if this trend continues, even just for the next three months, we are going to shatter previous storage records here in the US. At current rate, the inventory number could smash through the 400 Million Barrel level over the next quarter.


This does not bode well for the oil market when the slow part of the year comes around in August and September, where Gasoline demand drops off rather sharply, and is usually the slowest part of the year in terms of fuel usage, demand, and prices typically drop significantly each year. Technically, WTI could easily blow below $70/b with no major support till $60/b comes this August/September, and prices would remain challenged in the short to medium term.


What are the reasons for this glut of oil in the US? There are several, China has slowed manufacturing and exports, i.e., their economy has pulled back considerably. India is having all sorts of credit worthiness concerns, and is also growing at a slower rate. So in short, the emerging market economies are using less oil.


The demand picture in the U.S. is also quite dismal. EIA data show in the first quarter, total U.S. liquid fuels consumption fell 3.7% YoY due to high prices and record warm weather. For the second half of 2012, and 2013, EIA expects a YoY increase of only 1.2% and 0.6% respectively in liquid fuels consumption.


Furthermore, there are more domestic oil production mostly from unconventional shale plays, as there are more Capex drilling projects started during the beginning half of the year on high oil price. This has also pulled a lot more independents into drilling, and we are producing more oil each day than we actually consume or need. This has been one major contributing factor in these continuous inventory builds during the strong part of the usage cycle, as refineries are operating at record utilization levels since the recovery with the seasonal spring/summer driving season going from March with Spring Break through basically labor day, (some say July 4th is the peak of the Summer driving season).

Internationally, the Libyan oil is back on line, and other oil producing countries pumping more oil out of the ground compared to the last 5 years during this era of elevated oil prices. The Saudis are producing at the high end of their range as well. In a recent report, U.S. EIA noted that global company held oil inventories in the major industrialized nations will be sufficient to cover 57.7 days of demand at the end of 2012, the highest level in 15 years.

Basic economics plays a role in this story as well. Just ask this one question--Where are the high margin business opportunities over the last 5 years? It sure isn`t in the Banking Industry with deal-making and large scale private equity deals falling off a cliff. It hasn`t been in the real estate market either.

Market dynamics 101 stipulates that high oil prices leads to higher margins, which leads to more investment resources being directed to this sector which ultimately rebalances the market, and oil prices come back down. This is why there is often a boom and bust cycle that plays out in many investment sectors, and historically the energy and oil sectors have been the poster kids to this rule.

So essentially, five years of really high prices--higher than the actual fundamentals of the economy should dictate--have caused an artificial market scenario where longer-term demand was being stifled by currency concerns, inflation concerns, while commodity investment in general has served as a case of over investment in this area in relation to true, actual Global demand.

Throw in the fact that it seems everybody (governments as well as consumers) is in debt, nobody has any money, credit issues are becoming increasingly burdensome to deficit financing to artificially stimulate growth via the government intervention route, all these factors are forming a perfect storm for the oil market to face some major headwinds for the next 5 years.


Posted courtesy of our friends at EconMatters.Com

Crude oil appears to set a near term bottom

Crude oil for August delivery closed sharply higher on Friday gaining $7.27 to settle at $84.96 a barrel, above the 20 day moving average crossing at 82.52 confirming that a short term low has been posted. The high range close sets the stage for a steady to higher opening when Sunday's night session begins.

Stochastics and the RSI are oversold but are turning bullish signaling that sideways to higher prices are possible near term. If August renews this spring's decline, the 75% retracement level of the 2011-2012 rally crossing at 73.28 is the next downside target.

First resistance is the reaction high crossing at 87.32. Second resistance is the reaction high crossing at 92.52. First support is Thursday's low crossing at 77.28. Second support is the 75% retracement level of the 2011-2012 rally crossing at 73.28.

European leaders attending a two day summit agreed early Friday on a plan to use bailout funds to directly aid banks in Spain and Italy. The move in crude oil futures came as investors cheered the plan to help the euro zone's struggling banks.

The move, along with plans to bring Europe closer together, led to a surge in the euro, equities and commodities markets. The euro recently traded at $1.2684, up 1.9% from $1.2444 on Thursday. The Dow Jones Industrial Average recently traded 1.5% higher at 12,789.

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Rigzone: Crude Oil Falls As Euro Zone Woes Resurface

Crude futures fell Friday in tandem with a slumping euro as Standard & Poor's prepared to downgrade France's credit rating, adding new fears about Europe's economy.

The ratings service notified the French government and other European governments that it will lower their debt ratings, according to reports Friday, sending the euro to 16 month lows against the dollar and taking the wind out of riskier assets such as oil, stocks and other commodities.

The news of imminent downgrades renewed worries about a potential stumbling block for the global economy, and oil demand. Traders quickly switched gears to focus on Europe's credit crisis after a sell-off Thursday was sparked by potential delays to the E.U. embargo on Iranian oil.....Read the entire Rigzone article.

Rigzone: Crude Slides 2.1% On European Debt Worries

Crude oil futures fell 2.1% to near $98 a barrel Thursday, posting the biggest decline in three weeks on continued worries about Europe's sovereign debt.

Prices had posted early gains, approaching $102 a barrel, after a larger than expected drop in new claims for U.S. jobless benefits. The Labor Department said benefits filings in the week ended Dec. 3 fell by 23,000 and were at the lowest level in nine months. Economists had expected a 7,000 decline in the week.

But the weight of concerns, as European leaders begin a two day summit meeting, hit equities price and crude tumbled. Oil, like all global markets, has been gripped by concerns in recent months that the crisis in European could trigger a global economic slowdown.

Those concerns were especially evident in the heating oil futures market Thursday, traders said, as prices fell to their lowest level since Nov. 25 on fears of a potential slowdown in U.S. exports of related diesel fuel. Latest U.S. government data show that 42% of record high exports of distillate fuel (diesel/heating oil) in September were bound for Europe.....Read the entire article.


Gold’s 4th Wave Consolidation Nears Completion and Breakout

The Currency War Big Picture Analysis for Gold, Silver & Stocks

I think you will admit that we are in the middle of one major crazy financial mess. The part that makes things really crazy is that it’s not just in the United States anymore but rather serious global problem which if not handled properly could change the way we live our lives going forward or possibly even spark some type of war, hopefully things don’t get that crazy...... But I do know one thing. Fear is the most powerful force on the planet and people do some crazy things when they are backed into a corner.

Anyways, on a more positive tone…... today China decided to help provide more liquidity for the financial system along with the central banks. This news triggered a monster rally in overnight trading making the market gap up sharply at the opening bell. This news did hit the US dollar index hard sending it sharply lower but the question remains “Will today’s news be a one week hiccup in the market?” If Euroland starts printing money it will likely send the dollar higher and stocks lower for 6 -12 months.

Just today I was joking with Kerry Lutz of the Financial Survivor Network about how each country should just give each other country a second chance. Wipe the dept clean and start over knowing this time around exactly how each country truly operates at a financial level allowing everyone to avoid a repeat of this BS. Some countries will get off way better than others because they would get so much dept wiped clean. But isn’t it better than years of problems and possibly wars over food, gold, guns, oil and Canadian water? 

All joking aside, let’s take a look at the weekly long term charts.....…

Dollar Index Showing Possible Massive Rally If Euro Starts Printing Money:

I’m sure my off the cuff options/thoughts will cause a stir but I am fine with that. Everyone I talk to is thinking the dollar is about to fall off a cliff while I think it’s very possible that it does just the opposite. Either way I will be looking to benefit from which ever move unfolds.

Weekly Gold Chart:

Weekly Silver Chart:

Weekly SP500 Chart:

Long Term Thoughts:

I would first like to say that tonight’s report is out of my norm. Generally I do not focus on the big picture negative stuff and I like to avoid it for a few reasons...... One, it’s just downright depressing to talk and think about. And Second I don’t want to be labelled as one of those “The Sky Is Falling” kinds of guys.

So, that being said I think these charts above show a situation what is very possible to happen in the coming 6-12 months. Keep in mind that my focus is on short term time frames as it allows me to avoid and actually profit from major market moves while providing enough information for my followers to learn technical analysis and trade management. And the obvious idea of not looking too far into the future with a negative outlook.......

With headline risk changing the market direction on a weekly basis, this negative outlook could easily change in a couple months. I will recap on the big picture as things unfold in January/February.

Chris Vermeulen
The Gold and Oil Guy.com

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Dan Strumpf: Crude Oil Pauses As Europe Debt Questions Persist

Crude oil futures edged lower Friday, as traders paused amid uncertainty over the details of the European Union's rescue package for Greece. Light, sweet crude for December delivery settled 64 cents, or 0.7%, lower at $93.32 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange settled down $2.17, or 1.9%, to $109.91 a barrel.

Futures ended slightly lower as market participants reflected on the rescue package unveiled by European Union officials on Thursday. The package, aimed at staving off a disorderly default of Greece, sent crude futures soaring on Thursday. But questions persisted over how the EU will implement the plans and if they will be enough to solve the debt woes.

"The lack of details out of this European summit really questions the feasibility of this euro zone debt deal," said Peter Donovan, vice president at Vantage Trading, an oil options brokerage in New York.

Oil market participants were closely eyeing the negotiations over European sovereign debt because of fears that the debt crisis could spread to other countries in Europe or elsewhere. That could trigger a prolonged economic slump that would weigh heavily on crude oil demand.

Positive developments in Europe over the last month played a large role in the recent crude market rally. Even after Friday's decline.....Read Dan's entire post at Rigzone.



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The Euro Zone Wags The Gold and Silver Dog

If Greece defaults and the European situation begins to spin out of control where will money flow? It would not make sense for market participants to buy Euro’s during a default regardless of whether the default it structured or not. In fact, it is more likely that European central banks and businesses would be looking to either hedge their Euro exposure or convert their cash positions to another currency all together.

Some market pundits would argue that gold and silver would likely benefit and I would not necessarily argue with that logic. However, the physical gold and silver markets are not that large and depending on the breadth of the situation, vast sums of money would be looking for a home. The two most logical places for hot money to target in search of safety would be the U.S. Dollar and U.S. Treasury’s.

The U.S. Dollar and U.S. Treasury obligations are both large, liquid markets that could facilitate the kind of demand that would be fostered by an economic event taking place in the Eurozone. My contention is that the U.S. Dollar would rally sharply along with U.S. Treasury’s and risk assets would likely selloff as the flight to safety would be in full swing.

To illustrate the point that the U.S. Dollar will likely rally on a European crisis, the chart below illustrates the price performance of the Euro compared to the U.S. Dollar Index. The chart speaks for itself:



Clearly the chart above supports my thesis that if the Euro begins to falter, the U.S. Dollar Index will rally sharply. In the long run I am not bullish on the U.S. Dollar, however in the case of a major event coming out of the Eurozone the Dollar will be one of the prettiest assets, among the ugly fiat currencies.

The first leg of the rally in the U.S. Dollar occurred back in late August. I alerted members and we took a call ratio spread on UUP that produced an 81% return based on risk. I am starting to see a similar type of situation setting up that could be an early indication that the U.S. Dollar is setting up to rally sharply higher in the weeks ahead. The daily chart of the U.S. Dollar Index is shown below:



As can be seen from the chart above, the U.S. Dollar Index has tested the key support level where the rally that began in late August transpired. When an underlying asset has a huge breakout it is quite common to see price come back and test the key breakout level in following weeks or months. We are seeing that situation play out during intraday trade on Friday.

We are coming into one of the most important weeks of the year. Several cycle analysts are mentioning the importance of the October 26^th – 28^th time frame as a possible turning point. I am not a cycle expert, but what I do know is that we should know more about Europe’s situation during that time frame. It would not shock me to see the U.S. Dollar come under pressure and risk assets rally into the October 26th – 28^th time frame. However, as long as the U.S. Dollar Index can hold above the key breakout area the bulls will not be in complete control.

If I am right about the U.S. Dollar rallying higher, the impact the rally would have on gold and silver could be extreme. While I think gold would show relative strength during that type of economic scenario, I think both metals would be under pressure if the U.S. Dollar started to surge. In fact, if the Dollar really took off to the upside I think both gold and silver could potentially selloff sharply.

As I am keenly aware, anytime I write something negative about gold and silver my inbox fills up with hate mail. However, if my expectations play out there will be some short term pain in the metals, but the selloff may offer the last buying opportunity before gold goes into its final parabolic stage of this bull market. The weekly chart of gold below illustrates the key support levels that may get tested should the Dollar rally.

For quite some time silver has been showing relative weakness to gold. It is important to consider that should the U.S. Dollar rally, silver will likely underperform gold considerably. The weekly chart of silver is illustrated below with key support areas that may get tested should the Dollar rally:



Clearly there is a significant amount of uncertainty surrounding the future of the Eurozone and the Euro currency. While I do not know for sure when the situation in Europe will come to a head, I think the U.S. Dollar will be a great proxy for traders and investors to monitor regarding the ongoing European debacle.

If the Dollar breaks down below the key support level discussed above, gold and silver will likely start the next leg of the precious metals bull market. However, as long as the U.S. Dollar can hold that key level it is quite possible for gold and silver to probe below recent lows.

Both gold and silver have been rallying for quite some time, but the recent pullback is the most severe drawdown so far. It should not be that difficult to surmise that gold and silver may have more downside ahead of them as a function of working off the long term overbought conditions which occurred during the recent precious metals bull market.

Make no mistake, if the Dollar does rally in coming months risk assets will be under significant selling pressure. While the price action will be painful, those prepared and flush with cash will have an amazing buying opportunity in gold, silver, and the mining complex. Right now, risk remains excruciatingly high as the European bureaucrats wag the market’s dog.

Subscribers of OTS have pocketed more than 150% return in the past two months. If you’d like to stay ahead of the market using My Low Risk Option Strategies and Trades check out OTS at Options Trading Signals.com and take advantage of our free occasional trade ideas or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

JW Jones

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