Market Musings

The last two weeks have been very tumultuous for the markets. Global equity markets crashed while gold was making all time high each day. The kind of buying we have seen in gold is unprecedented where it had moved up 150 USD in 7- 10 trading days. I have been getting a lot queries on Gold therefore today in this post I am outlining my near term and long term view on commodities and select Equity indices. 

GOLD:-

Let us first look at the near term view of gold. The current rally in gold started in 2001 form the low of 250 USD an ounce and today high was 1751 USD an ounce. If you look at the chart you can see that Gold had already hit the upper end of the channel. I think gold will not violate or close above this channel in near term and there is a very high probability that there will be some correction in gold form this level. 

In case Gold breaks above this level and sustains for three months above this channel than it will indicate another massive rally in the price of gold which I think is very improbable. 

Let's look at the long term chart of gold. If we look at the channels we can see that Gold is facing stiff resistance at 1900 -2000 levels, I am 90% sure that Gold price will not move above 2000 USD in near term. From there I expect a good correction in the price of gold and if gold should correct from there it can fall up to 1400 USD from there.  I think that would be the best time to stock buy Gold and you should have at least 30% of your portfolio into gold. 

We all knows that 1970 was the decade of stagflation. It is surprising to see what happens to the commodity prices during the period of stagflation. Gold went up form 35 USD to 800 USD an ounce in one decade. Silver, Crude and other commodities also exploded. I think the coming decade will be similar to 1970 at best and to 1930 at worst.  I think there is higher probability of this decade shaping up like 1970 due governments adoption of quantitative easing and money printing as a solution for global debt problem. Government will reduce the real value of debt by causing inflation and commodities will be benefited by this trend. Equities are also a good hedge for inflation but they are not as perfect hedge as gold is. 

Now if we look at this long term chart of gold and assume that the intensity of the coming up move in gold will be similar to the intensity of the up move in gold in 1970 the target for gold comes at 5000 USD an ounce. 

This is the second chart which reiterates the above view. We can see that gold is moving in a channel and the upper end of the channel is around 4800 -5000 USD an ounce therefore I expect Gold to go up to this level before the end of this decade may be in next 4- 5 years. 

I am also expecting a healthy correction in gold before it moves up above 2000 USD an ounce. I think if Gold corrects up to 1200 -1400 USD it should be once in decade trade and everyone should get long on gold. 

SILVER

Let us look at the long term chart for silver. There is a point of view that gold price was fixed at 35 USD an ounce before 1971 and in 1971 it was de-pegged therefore the up move in gold was also because of market determine a realistic value of gold. Silver was not pegged commodity yet silver moved up form 1.00 USD an ounce to 50 USD an ounce. If the move of similar intensity were to happen today silver will reach an high of 160 USD an ounce form current 40 USD levels.  

Similarly if we draw a channel in silver we can see that the long term target for silver is around 160 -200 USD an ounce. 

I still expect that there will be a good correction in prices of both precious metals. But looking at the uncertainty in global world it is very difficult to rationalize the coming moves. On one hand we have huge European sovereign debt crisis which is transforming itself into a European banking crisis. Most of the European banks are highly leveraged to the ratio of 1: 40 or 1:25 times and their balance sheet are invested in highly toxic waste. On the top of that they hold huge quantity of sovereign debt which is increasingly becoming illiquid and risky. Due to the widening of the sovereign debt yield, the banks will be forced to take on massive losses which will wipe of their capital base. Therefore more or less the banks are insolvent and will require massive capitalization may be to the tune of 300 billion Euro. We have seen in 2008 what happens when banking system fails. Therefore I am sure that EU will do anything to prevent a collapse in its banking system. That will mean printing 2 trillion Euros. Therefore if the government  (US, Europe, China and other countries all included) dont give any rest to their printing press the price of all commodities will go through the roof. 

On the other hand we think that US dollar will strengthen against other currencies due to the fact that other currencies and specially the euro will prove to be more riskier bet. Moreover the amount of quantitative easing done by other other central banks will be much higher then the amount of quantitative easing done by US Fed. Therefore strengthening of USD should result into correction in commodity prices which are priced in USD. Moreover we also think that global sovereign interest rates may rise due to the rise in risk premium therefore the cost of money will go up and this should result into a collapse in commodity prices. I think this will happen when Gold and Silver would have achieved their upside targets. 

CRUDE OIL 

If we look at the near term chart of crude oil it had already broken a head and shoulder pattern and the current target for Nymex crude is around 70 USD. At that price it will form another head and shoulder pattern with neck line at around 70 USD.  If we assume that it forms a complete pattern and breaks down form the neck line it will move down to 30 -40 USD. 

The rally in crude oil also started in 2000. We can see that the channel in which the crude was trading will be broken if crude closes below 70 USD for three consecutive months. If the channel is broken the next support for crude will be at around 35 - 40 USD levels. 

My take is that crude will only collapse to this level when we have negative global GDP growth rate. and looking at the current circumstance I think global GDP will grow at a very low rate or it may even de -grow form these levels. Therefore crude chart is indicating that there can be a double dip recession on cards. 

NIFTY

Let us look at this weekly chart of Nifty. We can see that Nifty have broken a Head and shoulder pattern which indicates distribution which was going since September 2009. The target for this pattern is around 4500 on index. Nifty have already corrected form 5700 to 4950 without any pull backs. Therefore I expect that we will see sharp pull back in the index and any pull back form there will be a selling opportunity for trader and investors. 

Even if we look at retracements nifty should complete 50% retracement of the entire up move which tarted form 2600 and went up to 6300.  So as per 50% retracements Nifty should fall up to 4450 which again coincides with the target for the break down of head and shoulder pattern. 

Having said that I have down side view on market I want reiterate that there shall and will be sharp pull backs form here. But every pull back should be an exit opportunity for the investor. In our term we call it a sucker rally which will suck investor and traders. 

S&P 500 

Let us look at the current chart of S&P 500. Reader must be aware that on 16th June 2011, I gave a call that S&P is on the verge of a breakdown. Today in less than 2 months S&P have cracked by 20%. S&P had yesterday hit a low of 1120 which is near to my second target of 1100. 

There may be sharp pull backs form here but every pull back will be a selling opportunity for investors and traders. Ultimately I think that S&P will complete its 50% retracement and will reach 1015 levels. AT 1015 we can see that S&P will be forming a head and shoulder pattern as indicated in the chart. If we assume that the neckline is broken and the pattern breaks down than the target for  S&P will be 700.

Now lets us look at this long term chart for S&P from the chart we can see that S&P have been correcting since last 11 years.If we look carefully we can identify that S&P is is making a head and shoulder pattern which is a huge distribution pattern. If  this pattern fructifies and S&P 500 breaks 700 levels than only god saves the world.  

One of the aspect of money printing aka Quantitative easing is that it funnels money into speculative trades which boosts asset prices. Therefore what ever views I have presented here are all subject to what the government choose to do form here. If the government keeps printing money than nominal prices of assets will go up but real return will be zero or negative. 

For example if we look at Nifty priced in Gold. Every unit of Nifty could buy 8 unit of gold in 2007 while today every unit of Nifty can buy only 3 units of gold . So even if the market goes up nominal term the real returns have been negative since 2008 and I expect this trend will continue if Quantitative easing continues.   

Similarly in the given chart we can see Nifty adjusted for Consumer price inflation. We can see that Nifty was equal to 18 units of consumption basket in 2007 while today its worth only 10 units of consumption basket. Therefore the Nifty is still down by almost 44% in real terms while in nominal terms nifty is only down by 20% form the peak of 6300.We all know that actual consumer price inflation is India is much higher than what is reported by the government department 

It have been very interesting off late to watch CNBC and listen to all market gurus giving different reason for the crash.  Whatever understanding I have about the US financial markets, I think that this crash is very similar to the crash which happened in June 2010 was created to force the government to come out with QE II.

Its not that the government dont want to bring QE III. Today it doesn't matter whether the president of US is a Democrat or Republican its run by the bankers for the bankers. The government is all the more eager to dole out another trillion dollar to aid these bankers make million and billion dollar bonuses but it also have to make the proposal for Quantitative easing palatable to the public. 

When the market crashes, public sentiment becomes more conducive to massive monetary easing and therefore these crashes are the created or engineered by vested interest. I dont know whether my readers will agree with me or not but I will request them to read this book " Too Big to Fail' or watch these movies "The Inside Job and Too Big to fail" to cultivate some understanding of how the bankers are governing the US Government.