Market Wrap: May 6, 2011

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GBR Market Wrap, May 6, 2011

In this Week’s Issue

Weekly Snapshot
• U.S. economy adds 244,000 jobs, unemployment rate ticks up to 9% in April (AP)
• Broad selloff in commodities drives bearish moves in oil and silver ETFs (WSJ)
• The Bank of England held interest rates at a record low of 0.5% (Reuters)
• ECB left its key refinancing rate at 1.25%, in line with expectations (WSJ)
• Mexico’s central bank bought 93.3 tons of gold worth $4.3 billion (Economist)
• Portugal has reached a deal with the EU and IMF for a €78B 3-year bailout (WSJ)
• U.S. becomes net exporter of fuel for the first time in nearly 20 years (FT)
• India raises key lending rate by 50bps to 7.25% to rein in inflation (FT)
• CME announced an 84% increase in silver margin requirements since April 25 (Bloomberg)
• Silver had its biggest one-day drop in three decades on Tuesday (AP)
• Investors reduced some of their exposure to equities move back into cash in April (Reuters)
• U.S. factory orders rise a better-than-expected 3% as business spending picks up (FT)
• Consumer price inflation in developed economies hit 2.7% in March (OECD)
• U.S. forces have killed Osama bin Laden; markets moved only for a few hours (FT)

Market Barometers

Stock Market Barometer 5-6-11
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FX & Commodity Barometer 5-6-11
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Bang! Bang! Maxwell’s Silver Hammer
The famous Beatles song came to mind as I reflected on this week’s market movements. It was all about commodities in another episode of trader’s nausea, but this time, led by some 30% price declines in silver. What led to the massive selloff will be the topic of endless panel discussions in the days and weeks to come. Take any one of the possible events below and you could have a good enough reason to produce significant price movements. The combination of these events however, not necessarily in this order and magnitude of impact, was a perfect recipe for broader turmoil in the commodities markets.

• Bottoming of U.S. Dollar?
• Bin Laden killed by U.S. forces?
• End of Quantitative Easing 2.0 in June?
• George Soros and other hedge funds exiting silver?
• Much  higher margin requirements for silver futures?
• Technical factors, profit taking after parabolic price rises?
• IPO of Glencore, the largest commodity trader – top of the market?

There may be several other factors you can include in this list. For me, it was a much more benign event that led me to pull the trigger on silver the week before. As I opened the Financial Times to start my daily morning briefing, a big glossy brochure popped out advertising silver as “the most indispensable and miraculous metal on Earth.” This was yet another one of those gold/silver “experts” whose ads have been mushrooming in the media. The brochure featured a shiny embossed replica of a one-ounce U.S. silver eagle along with a quote by an unnamed “leading silver analyst” who called silver: “The best financial asset you can own.”

Granted, your typical FT reader is usually not of the widow and orphan kind, but still…

What timing to tout investors toward a none-the-less speculative investment only to see that investment lose 30% of its value in a week.  How much worse it must feel if an average investor, scared by these ads into buying precious metals, losing almost one-third of the investment in five days.  While we cannot deny the fact that the U.S. Dollar has lost much of its luster, we must question the inherent (investment) value of precious metals as well. In particular, one should be wary of parabolic price increases as we discussed last week. To get a different perspective on silver and to appreciate why some exchanges dramatically increased margin requirements in recent weeks, please consider the chart below showing the recent history of actual dollar values of gold and silver futures contracts.  For some of the big names in the trading community, the recent rise was too much, too fast, and so they pulled out. Very curious to find out if more investors will take the foot off the pedal next week…

Gold+Silver Contract Values
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A Brief Technical Perspective On Silver
Silver was all the rage it seemed until last week. Technicians however, must have been somewhat concerned about the dramatic price changes, which seemed to occur rather fast even for traders of volatility-laden commodities. In a span of just a few days, silver fell through several technical support levels. On Thursday, it pierced through the closely watched 61.8% Fibonacci retracement area, indicating a trend reversal rather than just a pause in the underlying short-term trend.

Silver-Daily
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To get a better sense of the medium-term trend, please consider the weekly chart below.  The sudden rise and fall of silver is more obvious now in the context of the underlying trend channel.  Still bad news if you bought silver anywhere above $40 as it appears more likely that silver will return to the trend channel, possibly reaching an area closer to the $30 range.  Still, the silver bulls may take some comfort from the fact that the major underlying trend remains intact. This breakout may have just been a brief exaggeration in an otherwise upward trending major bull run.  Stay tuned to see how deep the rabbit hole goes.

Silver-weekly
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Recommended Video: Lines in the Sand
Please consider some interesting perspectives from Barry Ritholtz. Given what we saw in commodities markets this week, you may wish to review his “lines in the sand” on an S&P 500 chart.  Enjoy!

Good luck and good investing!


Clemens Kownatzki, MBA is an adjunct professor of financial risk management at the Graziadio School of Business and Management, as well as the founder and CEO of FX Investment Strategies, a Registered Investment Advisor. In addition to running his investment advisory firm, he is a contributing author at SeekingAlpha.com and BusinessInsider.com. He also publishes the popular investment blog www.fxinvestmentstrategies.com along with a weekly news-letter.

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Author of the article
Clemens Kownatzki, MBA
Clemens Kownatzki, MBA
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