Market adjustment to parity

Gold ended just above the $800 levels on 14 August 2008 but the selling continued into Asian trade and we saw gold fell below the $800 psychological supports to the $790 regions. Gold could head towards the 790 and perhaps 770 supports very soon; and the key uptrend support around 750 as the next important level to look at.

Financial institutions are unwinding massive precious metals positions to rebalance their portfolio from credit derivatives losses in their books. With liquidations from large funds, freefall mode in precious metals are even squeezing out some long term investors. It seems like precious metals are trading close to or below their cost of production as of now.

At this juncture, the fundamentals that are driving the markets.

Firstly, the balance has clearly tilted. The markets are expecting inflation to moderate as commodity prices have declined sharply from their highs. Although this may not be reflected immediately with regards to CPI figures, the markets have already begun pricing in such as scenario in advance. A moderation in inflation could then give central bankers more leeway to focus on reviving a slowing economy and perhaps hold off any interest rate hikes in the near-term.

Secondly, we need to understand that the weakness in the markets have somewhat shifted to the Eurozone and other regions. When the credit crisis began, the focus was on the U.S. and the dollar began weakening as banks started announcing more and more writedowns. That pushed the dollar to new lows and propped other currencies to record highs, particularly the euro. But what we are experiencing now seemed to have turned around after the Eurozone began announcing that their economy has contracted in the second quarter of 2008 and as a result, the euro is now on a downward spiral and at risk of further sales.

The U.S. is certainly not out of the doldrums yet but the weakness in Eurozone and other regions have weighed on other currencies and thus propped the dollar higher. So, in relative terms, we are perhaps experiencing an adjustment to parity as other economies adjust lower on earlier U.S. weakness. Not that the U.S. has recovered.

Commitment Of Traders

The Commitment of Traders (COT) report is released weekly by the Commodity Futures Trading Commission (CFTC) in the US every Friday at 15:30 Eastern Time. The COT report shows how large speculators, commercials and small traders have placed their bets in the futures markets in terms of open interest information based on the previous Tuesday, and is an invaluable tool you can use to track the market sentiment in currencies, commodities and stock indices. The only limitation of the COT report is that it is three days late, but that doesn’t mean you can’t still use it as a sentiment tool.

There are three categories of traders in the report as defined by the CFTC.

* Non-Commercial (”Large Speculators”)

These large speculators are mainly hedge funds, banks etc who trade currency futures just for speculation.

* Commercial (”Hedgers, Exporters, Importers”)

These are people who use the futures contracts for hedging purposes, and these commercial participants are generally exporters and importers who may use the commodity or currency futures markets to take a position that will reduce the risk of financial loss in their assets due to a change in price.

* Non-Reportable (”Small Traders”)

They are small speculators like retail traders

Things to Note:

- In currency futures, the convention is to quote the foreign currency directly against the US dollar. For example, the Swiss franc is quoted versus the US dollar in futures, unlike the USD/CHF notation in the spot forex market.

- It is more important to note whether the large speculators are net long or short in specific commodities or currencies. Sometimes, moves can also be influenced by small traders closing their losing positions. Knowing whether large speculators have been net long or short a few days ago only indicates the positioning in retrospect. It is more useful to compare the latest net positioning with that from the past few weeks or months.

Gold in consolidation

Recent rising oil prices have benefit gold, which is often bought as a hedge against oil-led inflation. The metal usually moves in the opposite direction to the U.S. currency, for which it is often bought as an alternative investment.

A report by the industry-funded World Gold Council (14 August 2008), global gold jewellery demand was down 24 percent in the second quarter as high and volatile prices curbed buying.

What we have seen after 3 weeks of sell down, most speculative long positions have been washed out. Open interest remains at a low level of 377,539 for Gold. It is common to see relief buying after such a slide in Gold prices from its all time high of 1030. Looking ahead in technical perspective, the oversold condition might spur further upside for Gold in the coming weeks.

The previous support at 840 were broken last week may be retested as a resistance and in our view, we still hold that it might retake that level and maintain at that level until further interest appears.

-- Bullion Traders

US FTC new ruling on market manipulation

The U.S. Federal Trade Commission proposed new ruling that would levy heavy fines for anyone manipulating the petroleum markets to deter ``fraudulent or deceptive conduct,'' including false reporting or misleading announcements by refineries, pipelines or investment banks. Violators could face civil penalties of up to $1 million per violation per day.

It is comforting to understand that the Federal Trade Commission is committed to exercising its authority to determine whether crude oil, gasoline or petroleum distillates price increases at wholesale are a result of illegal market manipulation.

In today's out-of-control petroleum markets can't be explained by normal market fundamentals; with the new ruling with aggressive action by the Federal Trade Commission can resolve the energy price bubble seen recently.

Oil industry analysts have questioned whether traders have the power to raise prices and argue that speculation is a symptom, not a cause, of high oil prices, which are set on the world market.

Hyper Inflation of this Era

Zimbabwe have been experiencing a record 2.2 million percent inflation as of 22 July 2008. It has been ravaged by hyper inflation which shot up from 165,000 percent in February 2008 to 2.2 million in June 2008. It was reported that it have at least 80 percent of the population living below the poverty threshold and mass shortages of basic goods in shops.

Its central bank introduced a new multi-billion-dollar bank note in a bid to tackle rampant cash shortages. Below are the chronological of the introduction of the notes;

In January 2008, a 10-million-dollar note was issued,

In April 2008, 50-million-dollar note was issued,

In May 2008, notes for 100 million and 250 million dollars were issued,

Swiftly following are those of 5 billion, 25 billion and 50 billion notes issued,

16 May 2008, a new five hundred million dollar and 100-billion-dollar bank note issued.

Some independent economists however believe the official inflation figure is grossly understated, estimating it could be running between 10 million and 15 million percent.

231 million percent inflation and 80% unemployment rate in Zimbabwe.

Malaysia upcoming Budget 2009

Malaysia will be tabling its upcoming Budget 2009 on 29 August 2008, which has to contend with slowing global and local economies, inflationary pressures and domestic politics. The Budget 2009 is expected to be expansionary complement the “pro-growth” monetary policy.

It is expected to be focusing on:

1) lifting consumer spending and easing people’s cost of living and financial burden;
2) lowering business costs and promoting investments;
3) accelerating implementation of projects under 9MP and regional development corridors;and
4) improving economic efficiency and competitiveness as well as social infrastructure.

The low and middle income categories are expected to be the main target group and key beneficiaries of Budget 2009, with measures including personal income tax incentives, lower EPF contributions, expansion in social safety nets and further moves by the Government to contain inflation.

Businesses and investors can expect goodies that include extension of the corporate tax rate cuts, lowering/abolition of import duties on raw materials, removal/reduction in REITs’ withholding tax, as well as allocations and incentives for areas/industries like regional development corridors, “food securities” and alternative/efficient fuel-energy and related-technology.

The Government may also chip in via higher development spending to execute the 9th Malaysia Plan and regional development corridor plans. There are also expectation on more allocations for the “basics” like public transportation, security, human resource development, education, training, housing, rural infrastructure and amenities.

We believe the market do not expect the KLCI (13x forward PE multiple) to significantly react to the Budget Proposal,as in the recent years’ experiences. It have already factored in more moderate fiscal stimulus measures as well as moderate (10-15%) duty hikes for tobacco and brewery products.

Protection against fraud in currencies trading

The Commodity Futures Trading Commission, which regulates U.S. futures markets have formed a task force to investigate and prosecute fraud in the retail market for trading foreign currencies outside of commodity exchanges, a field that is riddled with unscrupulous operators. It will focus on fraud in the off-exchange retail foreign currency market, as well as to work with other federal and state regulators and criminal authorities.

The CFTC and state securities regulators have adviced the public to be cautious when trading foreign currencies especially outside of major exchanges such as the Chicago Mercantile Exchange which is at best very risky and at worst, fraudulent.

When an investor buys a foreign exchange contract, he or she buys the right to purchase an amount of foreign currency at a fixed price in dollars. Investors hope to profit from ups and downs in currency markets. But sharp swings in prices also can cause large losses, especially when an investor borrows money to make an investment and can wind up owing more than their initial investment was worth.

The fraudulent schemes often come in the form of unsolicited phone calls and efforts to convince an investor to quickly transfer cash.

Inflation around the world

Inflation is rampant around the world, in both rich and emerging countries, as increased prices for raw materials burn a hole in consumers' pockets. Here are the inflation situation around the world in brief as of 13 August 2008 .

US consumer price index 5%
Eurozone price increase 4.1%

Inflation in Europe are as follows;
France 3.6%
Britain 4.4% (highest in 16yr)
Italy 4.1% (highest in 12yr)
Spain 5.3% (highest in 11yr)
Germany 3.3% (highest since 1993)
Norway 4.3%
Denmark 4.0% (biggest since 1989)

Eastern Europe have highest rate for July since hyperinflation in 1996-97 as follows;
Czech Republic 6.7%
Romania 9.0%
Bulgaria 14.4%

In Asia, we have the following;
Japan 1.9% (as of June 08 CPI, it is 10 yrs high)
India 12%
China 6.3% (has been slowing for three months)
Singapore 7.5% (all time high)
Pakistan 24.3% (all time high)
Vietname 25%

Emerging countries are worst off as;
Egypt 23%
Thailand 27%

In our view, the recent decrease in oil prices could ease worldwide inflationary pressures but we think that the situation is not about to improve before the end of year 2008.

Gold slip, crude decline, US stock up

Gold ended sharply lower in overnight trade after we saw the 840 supports being taken out, triggering further technical sales to the 820s. Gold sales spilled over into the Asian hours as gold reached a low of just above the 803 as longs rushed to exit the gold trade.

The dollar extends its rally against a basket of currencies as the dollar rose to a 5.5 month high against the euro. Lower crude oil prices and weakening prospects in Europe and Asia Pacific provided a boost for the dollar as the economic slowdown which began in the U.S showed signs that is was spreading worldwide. A sustained dollar rally would hold bullish implications for stocks by attracting foreign investment in U.S. companies.

The dollar index, which measures the dollar against a basket of foreign currencies, has broken out of a trading range between 71 and 74.

In view of such build up, if this continues, gold could well slip further and dollar strengthing, thus making crude oil prices declined further, boosting U.S. stocks. We may be witnessing a double bottom for major indices.

The Vice of Investment

This was obtained from an experience Gold traders, thought it be a good idea to share it here.

Gold is appearing everywhere when the Gold Bull is running wild!

It’s common to take up an investment when a guru or when one read newspaper & see it on tv.

People tend to spend more time checking their car engine than checking their knowledge on financial products.

Any investments are potential 10-baggers and anytime is a good time to invest.

The vice of investment comes from within when the rouge trader disrespect risk & volatility.

Gold and Dollar at support and resistance respectively

Gold is approaching key supports above 850 and the risks of it being taken out is now higher after silver’s convincing movement below a similar support seen around the $16.00s. According to 5 August 2008, Commitment of Traders report, large speculators have reduced their net long positions by 18,591 to 163,728.

Massive positions in Gold were unwound by both large funds and commercials bringing open interest to a new low of 388,384 lots. Heavy stop losses are suspected to be working just below $850. If prices were to plunge through $850, panic selling and stops triggering may bring Gold to an attractive level for physical buyers

If you also look at the Spot US Dollar Index Chart, you'll noticed that Dollar is reaching for resistance line while the Gold charts are approaching support line

In the near term of next few weeks, we'll be witnessing if Gold/US will break their respective support and resistance. If that does occur, there could be a huge move of fund from commodities to the dollar.

Comments by the European Central Bank (ECB) about risks to economic growth in the second-quarter ’08 and diminishing expectations of an interest rate hike as commodity prices continue to ease led to a sharp sell-off in the currency markets as the dollar recorded on Friday its biggest one-day gain versus the euro in 7-1/2 years.

In our view, we don't think the gold support will be broken; and the dollar resistance will not be taken out. There may be a rebound in both case.

China shares violent sell-off week 4-8 Aug

In the week between 4-8 Aug 2008, there is a massive sell-off in China shares. (Note that China Olympic is on 8 Aug 2008.)

On the surface, the obvious explanation is the continuing fall in the oil price, which has triggered a drop in the price of other commodities and, thus, commodity stocks.

However, there are market rumours reporting that funds are choosing the most liquid stocks to sell, and commodity stocks are among the most liquid of the China stocks.

Is there something else that the market knows about the H-shares that we don't which triggers the massive sell-off?

Market grapevines says that the common one was that foreign funds wanted to show their lack of confidence in China's economic prospects after the Olympics and thus were selling heavily, particularly on the day of the official opening of the Games.

Rumours also attributed the recent heavy selling to the big financial institutions in the US as they are in serious need of cash to shore up their capital.

(The above are unconfirmed news as we are unable to further verify its accuracy.)

Size Up your Trade Position & Manage its Risk

This advice was obtained from an experience Gold traders, thought I share it here.

Every $1 move in Gold for 100oz is equivalent to USD100 gain or loss, if not, please stay far away from your PC mouse.

1. If you feel bearish, you short 100oz of Gold @ 930 and place a stop loss @ 960, your potential loss is USD3000 (960 – 930 x 100oz). Assuming your profit target is 900, your potential profit is USD3000 also. The risk/reward ratio is 1:1

2. If you feel bullish, you are willing to buy 1000oz instead of 100oz Gold @ 903, & your stop loss @ 900. Your potential loss is also USD3000 (903 – 900 x 1000oz). But assuming your profit target is 940, your potential gain is USD37,000. Your risk/reward ratio is 1:6

For both scenarios, you are risking the same amount of money, ie USD3000, but the reward is much higher for strategy number 2.

The difference is in sizing up your positions in strategy 2 but you have already pre-determined your potential loss.

That is why I always emphasis, please do not focus too much on entry techniques rather focus on your mindset, trading plan & risk management.

Managing your risk & position sizing is more important than any special indicators that you come across.

It is not the entry but your EXIT that book your profits. Take care of your downside & the upside will take of itself.

If your risk/reward ratio is always better than 1:2, in the long run you should be able to make significant profits as your trading system is having a positive expectancy.

And YES! The above strategies are only for illustration purposes, any trades taken are @ your own risk!

Manage your risk well and live strong, wish you every success in life.

How EURUSD volatility affecting companies

The EURUSD have been moving up and down in volatile market for weeks. Many business have been affected by the volatility and companies have to adapt to such changes in order to stay a float and remain competitive.

To give you an idea of how the dollar and its volatility affect a major semiconductor company listed in Europe, every 1 cent the euro goes up versus the US dollar reduces its quarterly profitability by EUR 2 Million.

This is reported as of 2 July 2007 by the company press talk.

Cramer: Stocks to Buy on Oil's Slide

The market must improve with a drop in oil prices, says Jim Cramer of TheStreet.com

We found that what this guy said do have some degree of credibility, so we post it here to share. Let us know your view too.

Cramer: Don't Buy Oil's Rally

"Futures prices will continue to fall" says Jim Cramer of TheStreet.com on 8 Aug 2008.

This guy have some good advise from time to time, worth watching but you need to do your homework first before hand.

Money market mutual funds scale new high

Total assets in money-market mutual funds reached a record of nearly $3.5 trillion the week ending 8 Aug 2008, as the flight to safety. It was reported $14.5 billion was added to money-market funds for the week by Tuesday 5th Aug 2008. According to the report, since the credit mess began it was seen inflows almost every week.

Investors shifted $5.3 billion in cash away from prime institutional funds into municipal-bond funds, which are considered safer.

Government funds do not hold commercial paper, which is a short-term debt instrument for corporations that is considered riskier because it is not backed by collateral.

Investors also moved some cash from taxable funds into non-taxable funds as yields reached near-parity. Taxable yields have been dropping since the US Federal Reserve began slashing its interest-rate target in September 2007, and are now close to that current 2% level as of 10 August 2008.

Our view is that, US Federal Reserve will not be cutting rates going forward, in fact we have a view that US may in near term raise interest rate to curb rising inflation.

Rise of dollar, put Gold under pressure..

Rise of the dollar is lead by European Central Bank and Bank of England left interest rates unchanged 7 Aug 2008, at 4.25 and 5 percent respectively, coinciding with the Federal Reserve’s move to leave interest rates unchanged at 2 percent on 6 Aug 2008. Similar to the Fed, the ECB did note that risks to inflation remains high due to the volatility in commodity prices and they will continue to monitor the situation very closely.

The NYBOT spot dollar index rallied to 74.544 from 74.244 while EUR/USD settled lower at 1.5324 from 1.5412.

South African gold output fell after state-owned power utility Eskom suffered a near collapse in the electricity grid in January, which led to a five-day country-wide mine shutdown. It supply 90 to 95 percent power to mines in the country, the world's biggest source of platinum and the second-ranked gold producer.

Spot gold ended 0.85 percent or $7.40 lower at $871.20 an ounce.

Crude oil futures for September delivery settled up $1.44 or 1.21 percent at $120.02 a barrel. We believe that oil price already peak at $147 in July 2008 and now it is coming down.

Take note that the dollar is very much stronger and the greenback has gained quite a bit against a basket of currencies. If this battering in currencies continues, gold will not be spared either and a continued rise in the dollar will certainly put pressure on gold.

“Deflation” contagion hit across Commodities, Energy, Equities and Forex, most index funds are pulling out resulting to a steep fall in commodities the market is witnessing. Long term Gold investors are staying at the sideline waiting for recovery signal.

USD is the only asset class benefiting at the moment, as it strengthens against most currency pairs with the EURO hitting a low of 1.5163.