Reeling, Tripping, Stumbling, Falling and Looming

Runaway train never going back
Wrong way on a one way track
Seems like I should be getting somewhere
Somehow I'm neither here nor there
                – Soul Asylum

Editors Note: we have opened up Trending Markets for viewing by Gold Forecast subscribers today

Well, maybe “never” is too strong a word. But conditions are going to be unsettled for some time in world markets, making for very good prospects for safe haven investors.

That includes those interested in gold and (conditionally) silver. It also includes the face prices of bonds, which are going up but are seeing, naturally, lower yields. Those yields already are painfully low, especially in Germany and Japan; it looks as if U.S. Treasury yields are headed in the same basement direction.

Although off its highs for the day, gold is still holding on to a robust gain of about $6.50 per ounce as we head toward 4 o’clock on the East Coast. Silver, however, took a bit of a bath, despite the help it received from a weaker U.S. dollar. Silver is in the throes of an oversupply trough and a soft industrial demand cycle. (See China below.) It is off almost 2% on the day.

West Texas Intermediate crude seems hell bent on forcing the $40 floor. It briefly did dip into the 39’s today for the first time since 2009 before recovering to $40.30 (at 3:45 PM in New York). Moreover at eight weeks, U.S. crude is in the midst of its longest losing streak since 1986.

There are two major factors driving this activity right now as everyone knows except for a hermit or two living on the high peaks of the Himalayas.

Activity in China's factory sector shrank at its fastest pace in 6-1/2 years in the August data catch. Domestic and export demand dwindled, adding to worries about lower consumption of crude by the world’s second-biggest oil user.

Baker Hughes also said that U.S. weekly rig counts rose for the fifth straight week, increasing by 2 to 674. Last year, U.S. oilrigs totaled 1,564 at this time. The reaction to the rise in rig count in the market is odd since clearly we have lost about 60% of rigs in the last year. It’s a bit of good news for U.S. crude producers, but does not make an occasion for the all-out happy dance.

Worldwide equities markets are free falling with Shanghai leading the way. The Chinese indices are being stung left and right. We believe they are paying the price for lack of transparency; foolhardy “infrastructure” investments that have turned out to be nothing but speculative schemes; and a lack of flexibility that almost always typifies a centrally planned economy.

We feel that U.S. equities will not recover fully until the price of oil bounces back. That may not happen until rebalancing and reassessment take place at the end of Q3 – essentially a new consumption-pattern season.

The Saudis are now officially walking a fine line in our book. They better hope no one gets mad at them and shuts off their export capability. The ocean is mighty big.

Look for safe havens to keep their banners flying and attracting more money. However, do be careful that the U.S. dollar is not oversold and will swoop back into the picture and swallow up some capital.

Some investors and traders will also buy back into equities when they think the “correction” in stocks is over. That money will come from havens and the sidelines.

Wishing you as always, good trading,