Is the Link between Gold and the U.S. Dollar in Question? Here's our Technical Setup

The $1800 per ounce level continues to be a major technical resistance area for gold. After hovering near $1800 recently, gold moved sharply away from that level last week to close at $1735 an ounce.

Despite that, more fund managers and analysts continue to point to a bright long term future for gold prices. John Hathaway of the Tocqueville Gold Fund says gold will reach new highs within a year. He based his forecast, like many others, on the fact that negative real interest rates look likely to persist as Ben Bernanke and the Federal Reserve continue to print money.

Believe it or not, some mainstream analysts are also touting gold’s potential. Merrill Lynch analysts point to the correlation (discussed in a previous article) between the price of gold and the expansion of the Federal Reserve’s balance sheet since the start of QE1 in early 2009.

Based on the current path of the Fed’s balance sheet expansion, Merrill Lynch came up with two longer term targets for the price of gold. They project gold to hit $2,000 an ounce next summer and to hit $2,400 an ounce by the end of 2014.

Another way to look at gold and the Fed is the so called gold coverage ratio. That is the amount of gold on deposit at the Federal Reserve versus the total money supply. According to Guggenheim Partners, the gold coverage ratio is at an all time low of 17%. The historical average is about 40%, meaning that gold would to more than double to reach the average.

Looking at the Fed’s balance sheet is a new and interesting way to look at and forecast gold prices. In the past, the conventional wisdom was that gold was merely an anti-dollar play: U.S. dollar down, gold up and vice versa. But that seems to be changing....

Reuters had some interesting data. The value of the U.S. dollar net short position fell to $6.43 billion for the week ended October 9. This is substantially down from the previous week’s net short position of $16.3 billion. At the same time, the “managed money” net long gold position in gold futures rose to its highest level since August 2011. That was the time when gold hit its record high of $1,920 an ounce.

So much for conventional wisdom. Both currency and gold traders are seeing this long-term relationship between gold and the U.S. dollar breaking down into a “new normal” of direct central bank intervention into financial markets. Gold seems increasingly to be turning into more of a safe haven play than an anti dollar one. It seems that more investors are worried about all fiat currencies that are burdened by huge debt loads.


The Technical Take.....

Below is a daily chart of gold futures. Looking at the price levels and analysis you can see that a bounce or bottom could form at any time now. Price of gold has pulled back in a mini five wave correction touching both our first Fibonacci retracement level of 38% and the 50 day simple moving average. This is the type of pullback that longer term investors like to add to their long gold position. While gold does have the potential to fall all the way down to $1625, in the long run it should continue to rise for the long term investor.

From a trader point of view, it may be worth a stab to get long gold with a very tight stop, but until we see a real panic selling day in gold where volume is high I don’t think the final bottom is in yet.




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Chris Vermeulen

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Crude Oil, Natural Gas and Gold Weekly Technical Outlook for Saturday Oct. 20th

It's our favorite part of the weekend, let's check in with the staff at Oil N'Gold.com and get their call on crude oil, natural gas and gold.....

Crude oil stayed in range above 87.70 last week and outlook remains unchanged. The fall from 100.42 is still in favor to continue for 61.8% retracement of 77.28 to 100.42 at 86.12 and possibly below. Though, in that case, we'd expect strong support ahead of 77.28 to contain downside. Meanwhile, break of 93.66 will flip bias to the upside for a test on 100.42 resistance.

In the bigger picture, current development suggests that price actions from 114.83 are a triangle consolidation pattern. Fall from 100.42 is likely the fifth and the last leg of such consolidation. Having said that, downside should be contained above 77.28 and bring an upside breakout eventually. Break of 110.55 will strongly suggest that whole rebound from 33.29 has resumed for above 114.83.

In the long term picture, crude oil is in a long term consolidation pattern from 147.27, with first wave completed at 33.2. The corrective structure of the rise from 33.2 indicates that it's second wave of the consolidation pattern. While it could make another high above 114.83, we'd anticipate strong resistance ahead of 147.24 to bring reversal for the third leg of the consolidation pattern.

Nymex Crude Oil Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

Natural gas edged higher to 3.647 last week but upside momentum is not too convincing for the moment. Nonetheless, near term outlook stays bullish as long as 3.398 support holds. Current rally is still expected to continue to medium term channel resistance next (now at around 3.92). However, break of 3.398 will indicate that a short term top is at least formed and will turn near term outlook bearish for at least a deep pull back.

In the bigger picture, recent developments argued that medium term decline from 6.108 is completed at 1.902 already. It's bit early to confirm but bullish convergence condition in weekly MACD suggests that the down trend from 13.694 (2008 high) is possibly over too. Sustained break of the channel resistance (now at around 3.92) will set the stage for a test on 4.983 key resistance next. Meanwhile, break of 2.575 support will argue that the rebound from 1.902 is over and the medium larger down trend is still in progress for a new low.

In the longer term picture, decisive break of 3.255 resistance will be an important signal of long term bottoming reversal and could at least give a push to 4.983/6.108 resistance zone.

Nymex Natural Gas Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

Gold's fall from 1798.1 extended further last week and breached 1720 support. The development argues that rebound from 1526.7 has completed at 1798.1 already. Deeper decline would now be seen to 38.2% retracement of 1526.7 to 1798.1 at 1694.4 and below. On the upside above 1755 resistance is needed to signal short term bottoming. Otherwise, outlook will now stay mildly bearish in near term.

In the bigger picture, price actions from 1923.7 high are viewed as a medium term consolidation pattern. There is no indication that such consolidation is finished, and more range trading could be seen. In any case, downside of any falling leg should be contained by 1478.3/1577.4 support zone and bring rebound. Meanwhile, break of 1792.7/1804.4 resistance zone will argue that the long term uptrend is possibly resuming for a new high above 1923.7.

In the long term picture, with 1478.3 support intact, there is no change in the long term bullish outlook in gold. While some more medium term consolidation cannot be ruled out, we'd anticipate an eventual break of 2000 psychological level in the long run

Comex Gold Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

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Crude Oil, Natural Gas and Gold Week Ending Market Commentary

Crude oil closed lower on Friday as weak earnings spur ideas of weakening energy demand. The low range close sets the stage for a steady to lower opening when Monday's night session begins. Stochastics and the RSI are turning neutral to bearish signaling that sideways to lower prices are possible near term. If November renews the decline off September's high, the 62% retracement level of the June-September rally crossing at 87.19 is the next downside target. Multiple closes above last Wednesday's high crossing at 93.66 are needed to renew this month's rally. First resistance is last Wednesday's high crossing at 93.66. Second resistance is September's high crossing at 100.73. First support is the 62% retracement level of the June-September rally crossing at 87.19. Second support is the 75% retracement level of the June-September rally crossing at 84.29.

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Natural gas closed higher on Friday. The mid-range close sets the stage for a steady to higher opening on Monday. Stochastics and the RSI are diverging but turning neutral to bullish signaling that sideways to higher prices are possible near term. If November renews the rally off August's low, the 50% retracement level of the 2011-2012 decline crossing at 3.965 is the next upside target. Closes below the 20 day moving average crossing at 3.415 would confirm that a short term top has been posted. First resistance is today's high crossing at 3.647. Second resistance is the 50% retracement level of the 2011-2012 decline crossing at 3.965. First support is the 20 day moving average crossing at 3.415. Second support is the reaction low crossing at 3.327.

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Gold closed lower on Friday as it renewed this month's decline. The low range close sets the stage for a steady to lower opening when Friday's night session begins trading. Stochastics and the RSI are neutral to bearish signaling that sideways to lower prices are possible near term. If December extends this month's decline, the 38% retracement level of the May-October rally crossing at 1698.00 is the next downside target. Closes above the 20 day moving average crossing at 1764.70 are needed to confirm that a short term low has been posted. First resistance is the 20 day moving average crossing at 1764.70. Second resistance is this month's high crossing at 1798.10. First support is today's low crossing at 1716.00. Second support is the 38% retracement level of the May-October rally crossing at 1698.00.

Check out Gold Is Not Back In Favor Yet.....

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Gold Is Not Back In Favor Yet.....

Despite the decline this past week, gold seems to be regaining favor with global investors, as just a week earlier it had been flirting with the $1,800 an ounce mark. Quite a change from the sentiment in early summer when some investors were questioning whether the yellow metal’s decade long bull run was coming to a close.

The rebound in investor sentiment toward gold, of course, coincided with the launching of open ended QE3 (or QE infinity) by the Federal Reserve. Since then gold has “barely paused for breath. It has, as discussed previously, touched all time highs in terms of euros or Swiss francs.

QE3 certainly seemed to worry some investors. These people moving into gold are concerned about things such as competitive devaluations and the debasement of currencies in an attempt to pay back enormous debt loads with a cheaper currency. This road – currency debasement – eventually leads to inflation most believe.

So it is really is not surprising that, according to UBS, investors in exchange traded funds raised their holdings by 158 tons since the beginning of August to a record 2,681 tons of bullion recently.

Many of the world’s best investors are in agreement with the average person putting his or her money into gold. The list of names is impressive: George Soros, John Paulson, Ray Dalio and Bill Gross.

Ray Dalio, founder and chief investment officer of Bridgewater Associates, the world’s largest macro hedge fund, told CNBC viewers recently: “Gold should be part of everybody’s portfolio. We have a situation now when you have too much debt. Too much debt leads to the printing of money to make it easier to service. All of those things mean that some portion [of a portfolio] should be in gold.”

Dalio’s conclusion? “Only gold and real assets would survive.”

All of this positive macro news about gold has managed to influence the gold chart too. According to asset manager Blackrock, “the gold chart has turned decidedly bullish.” Blackrock was speaking about the so called “golden cross”. That occurs when the 50 day moving average moves above the 200 day moving average.

Blackrock noted that the last time gold’s chart looked so good was shortly after the Federal Reserve announced QE1, the first round of money printing. It said that if gold does the same thing it did back then, the price of the precious metal will hit $2,400 an ounce by next summer. Of course, macro factors like Chinese and Indian demand for physical gold will play a major role in whether we reach those lofty levels.

While I am bullish on gold longer term the chart patterns, volume and sentiment for both gold and silver are overwhelmingly bearish looking for the next couple weeks. A sharp pullback is likely to unfold before they take another run at resistance and breakout to new highs.

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Kinder Morgan Beats on Earnings, Increases Dividend

Kinder Morgan Energy Partners (KMP) today increased its quarterly cash distribution per common unit to $1.26 ($5.04 annualized) payable on Nov. 14, 2012, to unitholders of record as of Oct. 31, 2012. This represents a 9 percent increase over the third quarter 2011 cash distribution per unit of $1.16 ($4.64 annualized) and is up from $1.23 per unit ($4.92 annualized) for the second quarter of 2012. KMP has increased the distribution 45 times since current management took over in February 1997.

Chairman and CEO Richard D. Kinder said, “KMP had a strong third quarter with all five of our business segments reporting better results than in the third quarter of 2011. In total, KMP produced $1.14 billion in segment earnings before DD&A and certain items, a 21 percent increase over $0.94 billion for the same period a year ago. Third quarter highlights included contributions from the dropdowns of 100 percent of Tennessee Gas Pipeline (TGP) and 50 percent of El Paso Natural Gas (EPNG), record export coal volumes in our Terminals business, strong oil production at SACROC in our CO2 segment and increased natural gas demand for electric power generation on the TGP system. Looking ahead, we see significant growth opportunities across all of our business segments, and we remain very excited about the additional prospects that we expect KMP to realize from Kinder Morgan, Inc.’s acquisition of El Paso Corporation, which closed in the second quarter. With our large footprint of assets in North America, KMP is well positioned for future growth.”

KMP reported third quarter distributable cash flow before certain items of $455 million, up 15 percent from $394 million for the comparable period in 2011. Distributable cash flow per unit before certain items was $1.28 compared to $1.19 for the third quarter last year. Third quarter net income before certain items was $574 million compared to $451 million for the same period in 2011. Including certain items, net income was $383 million compared to $216 million for the third quarter last year. Certain items for the third quarter totaled a net loss of $191 million versus a net loss of $235 million for the same period last year.

For the first nine months of the year, distributable cash flow before certain items was $1.29 billion, up 17 percent from $1.10 billion for the comparable period in 2011. Distributable cash flow per unit before certain items was $3.72 compared to $3.40 for the same period last year. Net income before certain items was $1.58 billion compared to $1.27 billion for the first three quarters of 2011. Including certain items, net income was $737 million versus $789 million for the same period last year.

Certain items for the first nine months of the year totaled a net loss of $838 million versus a net loss of $479 million for the comparable period in 2011. The loss, due to certain items for the first three quarters, was primarily attributable to the re-measurement of discontinued operations to fair value related to the KMP assets to be divested in order to obtain Federal Trade Commission approval for Kinder Morgan, Inc.’s acquisition of El Paso.

Read the entire KMP report

Kinder Morgan, Inc. (NYSE: KMI) today reported third quarter cash available to pay dividends of $362 million, up 93 percent from $188 million for the comparable 2011 period. Through the first nine months, KMI reported cash available to pay dividends of $972 million compared to $623 million for the same period in 2011. The company now expects to generate cash available to pay dividends of more than $1.325 billion for the year, significantly ahead of its published annual budget. The increase is attributable to the El Paso Corporation acquisition which closed in late May.

Check out the entire KMI report

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Halliburton Announces 3rd Quarter Earnings

Halliburton (HAL) announced today that income from continuing operations for the third quarter of 2012 was $625 million, or $0.67 per diluted share, excluding a $30 million after tax ($0.03 per diluted share) acquisition related charge and a $13 million after tax ($0.01 per diluted share) gain from the settlement of a patent infringement case.

Reported income from continuing operations for the third quarter of 2012 was $608 million, or $0.65 per diluted share. This compares to income from continuing operations for the second quarter of 2012 of $745 million, or $0.80 per diluted share.

Halliburton’s consolidated revenue in the third quarter of 2012 was $7.1 billion, compared to $7.2 billion in the second quarter of 2012. Consolidated operating income was $954 million in the third quarter of 2012, compared to $1.2 billion in the second quarter of 2012. Lower activity and higher costs in the United States land market drove these declines.

“I am pleased with the strengthening of our market position in key international geographies and in product lines where we envision strong growth in the coming years,” commented Dave Lesar, chairman, president and chief executive officer.

“We believe our international strategy is playing out as planned, as evidenced by our third quarter record revenue for both the Latin America and the Middle East/Asia regions. From a global perspective, our Drilling & Evaluation division posted record revenue for the quarter. We also achieved third quarter record revenue in four of our product service lines... Boots & Coots, Wireline and Perforating, Consulting and Project Management, and Baroid, which also had a record quarter for operating income.

Read the entire earnings report


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ExxonMobil Canada Acquires Celtic Exploration Including Liquids Rich Montney Shale Acreage

ExxonMobil Canada today announced an agreement with Celtic Exploration under which an ExxonMobil Canada affiliate will acquire Celtic.

Under the terms of the agreement, ExxonMobil Canada will acquire 545,000 net acres in the liquids rich Montney shale, 104,000 net acres in the Duvernay shale and additional acreage in other areas of Alberta.

Current production of the acreage to be acquired is 72 million cubic feet per day of natural gas and 4,000 barrels per day of crude, condensate and natural gas liquids. The assets were estimated by Calgary based Celtic Exploration at December 31, 2011 to include an estimated 128 million oil equivalent barrels of proved plus probable reserves, of which 24 percent are crude, condensate and natural gas liquids and 76 percent natural gas.

Approximately 60 employees at Celtic Exploration will be given the opportunity to transition to ExxonMobil employment.

Shareholders of Celtic Exploration will receive C$24.50 per share and half a share of a newly established company which will hold assets not included in the agreement with ExxonMobil Canada. These assets include acreage in the Inga area in British Columbia, the Grande Cache area in Alberta and interests in oil and gas properties located in Karr, Alberta.

The agreement is subject to approval by Celtic Exploration’s shareholders and Canadian regulatory authorities.

“This acquisition will add significant liquids-rich resources to our existing North American unconventional portfolio,” said Andrew Barry, president of ExxonMobil Canada. “Our financial and technical strength will enable us to maximize resource value by leveraging the experience of ExxonMobil subsidiary XTO Energy, a leading U.S. oil and natural gas producer which has expertise in developing tight gas, shale oil and gas and coal bed methane.”

ExxonMobil Canada, a subsidiary of Exxon Mobil Corporation (NYSE:XOM), has a long history in Canada that dates back to the 1940s. The company is a leader in the Atlantic Canada offshore, where it operates the Sable project in Nova Scotia, is lead owner of the Hibernia project in Newfoundland and Labrador, where it is developing the Hebron project. ExxonMobil Canada has additional assets in Western and Northern Canada.

ExxonMobil’s Canadian affiliate, Imperial Oil Limited, is not a party to the transaction, but may elect to participate at a later date through its existing agreement with ExxonMobil Canada that provides for up to equal participation in new Canadian upstream opportunities. Imperial Oil Limited has advised that it is currently evaluating this opportunity.

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Stephen Schork: Consumer Inelasticity at the Pump Wanes

Equity markets in the U.S. got a boost yesterday morning after the U.S. Commerce Department showed a large 1.1% jump in advanced retail sales for the month of September. A survey conducted by Bloomberg showed a consensus forecast 0.8% rise.

However, similar to what we saw back with the July report, it seems that the Commerce Department factored in a heavy (843 bp) upward bias in its headline figure for September. Had the Commerce not adjusted last month’s figure, then sales would have come in close to market expectations of 0.8% growth; which btw, is a healthy number.

The adjustment amounted to a $22.2 billion boost to September retail sales to $412.9 billion.

The upward dollar adjustment was 1.8× greater than last year’s figure and 1.5× greater than the 2006-2010 average. Moreover, it was the largest, by far, such adjustment of past 20 Septembers.

Retail sales data is adjusted by Commerce to account for seasonal, business day and holiday differences. To this effect, this year’s Labor Day holiday fell on the first business day of the month, i.e. September 03rd.

Given when this year’s holiday fell, there were only 19 business days this September; as opposed to 21 business days for September 2011.

As such, the Commerce Department’s statistical hocus pocus is designed (in theory) to adjust for the loss of 2 business days this September.

Bottom line, like all models, forecasts are only as good as the assumptions programed into them. Therefore, we will take the adjusted 1.1% growth in September sales as a positive for the economy. After all, the stock market loved this report… and those guys are never wrong.

Yet, just keep in mind that Commerce’s seasonal factor will subtract 423 bps from October retail sales… and, that is even before we can talk about the 5.4% spiked in California’s retail gasoline prices this month.

While we are on the subject of retail sales and gasoline, according to yesterday’s report, gasoline station receipts (unadjusted) tumbled in September as consumers turned a blind eye to the cost of whatever Apple is selling, but balked as retail gasoline climbed above $3.80 on the national average.

Receipts fell to $46.56 billion, down from $49.49 billion in August. In comparative terms, retail gasoline averaged around $3.722 per gallon in August and then climbed to $3.849 in September. In other words, a $0.127 per gallon rise in price generated a $2.92 billion drop in receipts.

If that seems counterintuitive to you, don’t fret, you are correct.

September’s receipts decoupled from the polynomial regression for this timestep, i.e. receipts were out of line with historical norms given the cost per gallon.

How much longer can NYMEX gasoline (RBOB) futures maintain these lofty levels if motorists are unwilling (or unable) to pony up when gas at the pump moves above $3.60?

Thus, we are left to surmise that in spite of strong consumer spending elsewhere in the economy, consumers pulled back at the pump.

As illustrated in today’s issue of The Schork Report we see that this event has clearly taken hold. As the real cost of gasoline rises above $3.60 per gallon, consumers respond by driving fewer miles. Therefore, fewer miles and $115/b Brent crude oil means fewer dollars on the bottom line for refiners and marketers.

This story has been provided compliments of CME Group. To request today’s FULL research note, email Subscriptions@SchorkReport.com or register for a complimentary trial here, placing CME in the source code field.


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Murphy Oil Making Big Dividend and Buy Back News

Murphy Oil Corporation (ticker MUR) is up +7.3% premarket after announcing it will spin off its U.S. downstream business into an independent company.

MUR also authorizes a $2.50 per share special dividend and $1 billion share buyback program, and says it’s still working to divest its U.K. downstream operations and continuing to review options with respect to "selected assets."

Murphy Oil's move to spin off its U.S. fuel making and distribution business into a new company could unlock up $5 per share in trapped enterprise value, Simmons analysts say, and "could be a sign for more aggressive moves to continue to improve the valuation in shares".

Here is today's video on the stock market and commodities talking about a possible 6-12 week pullback in stocks

Natural Gas Prices Extend Rally Amid Cooler Weather

Benchmark U.S. natural gas prices rose for the third week in a row, extending a rally to reach the highest levels since December as cooler weather boosted heating demand, the Energy Information Administration said.

Henry Hub gas as of October 10 was $3.26 per million British thermal units, up 5 cents from a week earlier. In midday NYMEX futures trading October 12, November gas fell 0.7 cent to $3.597, up 5.9%, from the end of last week. Futures earlier hit $3.638, the highest price for a nearby contract since early December.

During the week ended October 10, overall U.S. gas demand rose 6% from the previous week, led by a surge of 44% in residential and commercial use.

Working natural gas in underground storage increased to 3.725 trillion cubic feet as of October 5, an implied net injection of 72 billion cubic feet from the previous week and 6.8% over year ago levels.

Read the full report