Friday, November 24, 2006

11/24/06 Morning Market Comment

While the collective American waistline expanded yesterday, blood flowed in the streets of Baghdad as the civil war in Iraq deepened. The worst sectarian violence to date in the Iraq war happened ahead of a scheduled three way weekend summit in Teheran between the Presidents of Iraq, Syria and Iran to discuss the security situation in Iraq and its regional implications. No doubt, the Sunni insurgents and foreign Jihadists are throwing everything they have at further destabilization ahead of the meeting; and no doubt the violence will continue.

The dollar, in the meantime, continued to fall against the Yen and Euro on concerns the U.S. economy is slowing. The dollar woes gained a head of steam earlier this week following a larger than expected rise in jobless claims. Indeed, the dollar index (DXY) chart is looking very ugly:

The Euro surged to $1.30 for the first time since April 2005. There is also speculation that the ECB will continue to lift interest rates next year; that narrows the differential between the Euro and the buck, making the Euro look more appealing. The premium on U.S. government bond yields has also narrowed to the lowest level in about a 1-1/2 years further attracting investors into Euroland assets.

Quite frankly, the dollar's slide over the last week has almost been 'disorderly' and it's spooking the stock market. The only hope for the bulls is that thin holiday trading has exacerbated the dollar's decline and that there will be a rebound attempt in earnest when normal trading resumes next week. As the bloody debacle in Iraq gets worse and the dollar slides, the stock market is poised to break the positive Thanksgiving week tradition and not only open lower this morning, but potentially end lower for the week if it doesn't bounce off of this morning's lows.

Last night we picked up a position in the 100 oz. CBOT December gold contract (ZGZ6) in response to the recent dollar breakdown (a weaker dollar can spur inflation since it makes overseas goods more expensive). Each 10-cent move in gold translates into a $10 move in each contract's value, so we're sitting on a substantial gain with a $10 rise in the price of the metal this morning. $640 on the chart beckons again, but it will be a tough resistance area. The intraday technicals will need to be looked at carefully today to determine if I let the position ride through the weekend, or if I sell before the end of the day today to lock in gains. This may be the day we break $640, but then $645 stands as a roadblock. Stay tuned.

Demand for the metal by way of the streetTRACKS gold ETF (GLD) has been so strong that the streetTracks gold holding has vaulted past 418 tons! We realize that buyers of streetTracks have been well supplied lately by Central Bank gold selling, but with a declining dollar, our confidence is growing that gold will make a run back toward the $680 level over the course of the next three months as the picture sours further for the buck.

One other gold note: CBOT electronic gold is trading today while COMEX is closed... that's a first and isn't it ironic that this first is happening on a day $10 up day for gold.

While we very much like the chart condition of Google (GOOG), if we get stopped out at $500 in a weak stock market today, so be it. We can always come back another day to pick up the GOOG Dec510 calls. GOOG is down over $3 bucks in the early going.

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