TRADE Focus

05/21/2009

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The Trade Focus commentary was written Wednesday, May 20th and the market analysis section was written Thursday, May 21st.

We wanted to deviate a bit from how we usually approach our commentary section this week by talking about the gold market. It was not our intention to provide a broad and in depth analysis but rather more hypothesis and observation as to what may be taking place in the gold market. In the course of our consideration of it and how it has been trending and trading relative to other markets we discovered April 20 to be a date of significance. For one thing it was a Monday. But more importantly it marked a double bottom low in the gold and a secondary wave high in the US Dollar index. As steady as the trend in the gold has been the move in the dollar has been equally remarkable. It was what we had thought to be the steady and unabated climb of the gold that was worth discussion because it seemed to us that no matter what was happening in the stock indices, for example, that gold was on its own mission. Comparatively though, since April 20, the decline in the dollar has a value of approximately $7,000 per contract versus gold which from its April 20 low (basis the June contract) of 86560 to today's high of 94100 is a move of $7,540 per contract. Not that this is so amazing but it suggests that the move in gold is very likely a dollar play. A lack of confidence in the dollar may be shifting a corresponding flow of investment funds toward gold at least since the US Dollar Index peak of March 4. A common justification made for this is the fear of inflation. A look around the board shows that the rally in the stock market since the March lows brought with it most all other commodity prices. Also too is that rates are low in the U.S. and likely to stay that way for quite some time as the economy needs to be refunded so it can begin to grow again. Lower interest rates normally have an effect on the demand for dollars. Something that also caught our attention, though, was the focus CNBC gave one day this week to a few of the hedge funds that were reported to be buying gold. The story was how they had purchased large quantities of the gold ETF - GLD. It was of interest to us because there was a particular morning, Monday May 4, where the June Gold contract went from 89100 or so to 90800 right at the time of the New York stock market opening. Our gold broker on the floor told us it was the ETF that caused the spurt in the futures. We now see it must have been these hedge funds buying the ETF on that day's market open. One of the funds CNBC mentioned we were familiar with as noted for the tremendous gains made short the credit default swaps. So it seems to us to be more than just noteworthy. They are what we could consider as smart and big money interests. It may be that the lack of confidence in the dollar we spoke of above is reflected in this investment action on the part of these hedge funds. Uncertainty over the value of the dollar and then quite possibly uncertainty over what may be of value in US Stocks, particularly after the more 200 point move in the S&P 500 index and 2100 point move in the dollar. This idea of there being uncertainty and concern over the dollar may be seen in news this week that Brazil and China have agreed to consider conducting trade between them in their respective currencies, Yuan and Real, rather than to rely on the US Dollar as currency median. Another curious note is that following the reported massive gold ETF purchasing the morning of May 4, the S&P 500 posted its high to date on May 8. What we were moved to think was that gold as an investment choice due to the lack of confidence in the dollar has seen that same concern spilling over toward US securities markets as well. There is so much going on economically and politically that perhaps gold is seen by some of the "smart money" as the place to be invested. It will be interesting to see how this develops and if we hear and witness more large scale buying in the gold. It is not our intention with this discussion to promote or recommend the purchase of gold at this time and price. We simply found there have been interesting correlations taking place and worthy of making mention of them in our commentary. It is also a nice change of pace and goes along with something we have discussed in previous editions that we expect to continue to see market movement of size and significance presenting opportunities.

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