Commodity, Currency, Gold, and Equity Market Analysis by Dr. Christian Normann        Please note: the optimal screen resolution for this page is 1600 x 1200 (UXGA Info) or 1920 x 1080 (1080p Info).  If your screen resolution cannot be adjusted to at least 1600 pixels wide through your operating system display settings, you may need to scroll a bit to the right in order to see the most recent chart action.  We apologize for any inconvenience, but believe it is outweighed by the ability to clearly see - in a single chart - several years of market history and important long-term support/resistance levels (that can significantly affect traders in all time-frames). Please visit the About Normann Financial page for important information about risk management and position sizing.  We provide analysis to the best of our ability, but proper risk management is crucial.  Your trading and investment decisions are exclusively your own responsibility. Intra-Week Bernanke Alert and Commodities Comment Based on Closing Prices, Thursday March 19th 2009 Ben Bernanke Starts Losing His Mind - Steps up Quantitative Easing Effort (also known in non-technical terms as running the printing-press, creating money out of thin air, and generally killing the purchasing power of the currency - in this case, the U.S. Dollar; furthermore, it is feared that the virus infecting Bernanke's brain likely has spread to central bankers and politicians across Europe and Asia as well...and there is no known cure).                                                            (Don't miss the image at the bottom of the page showing Ben in action shortly after the Fed announcement) We stated on Tuesday that crude oil may be breaking out this week, and unless prices plunge by the Friday close, the odds that this is a genuine breakout will increase significantly.  As stated on Tuesday, we may or may not have seen the final bottom for oil and commodities, but at least a multi-month rally is looking more probable.  Such a rally may head up to test the $68-$80 range for Nymex crude oil, and an eventual break of $80 will likely mean that crude oil is back in a major bull market (but keep in mind that a break of $80 could be many months or even a few years away). It is as if the market knew ahead of time what Bernanke was going to say on Wednesday when crude oil and grains started to break out of what appears to be bottoming formations earlier in the week.  And what he said was basically that the Federal Reserve is about to print an additional $1.05 trillion (that is one million dollars multiplied by 1.05 million - or about $10,000 per U.S. household) in order to: 1. Buy up $300 billion of long-term U.S. Treasury Bonds in an attempt to keep long-term interest rates at artificially low levels. 2. Have those artificially low interest rates boost borrowing by consumers that are already overloaded with debt in an attempt at artificially re-inflating house prices and thereby boosting consumption. 3. Stand ready to buy up much of the unprecedented quantity of Treasury Bonds the federal government will issue over the next 2-3 years to fund its misguided bailout and stimulus packages. 4. Buy up another $750 billion in garbage securities to further bail out Wall Street firms so they don't suffer the consequences of the risk they willingly took. The problem with Bernanke's (lunatic) plan is that if he succeeds (and if he doesn't succeed now, he is almost guaranteed to try even harder down the road), the purchasing power of the U.S. Dollar is likely to be severely damaged over the next few years, resulting in surging energy and food prices, as well as a surging gold price - gold being a true hard currency that central banks cannot print in any (let alone unlimited) quantity.  (Should gold make a third try at the $1000-$1033.90 level and successfully break through, gold is likely to go much higher.) In other words, if Bernanke is 'successful', it will leave most people far worse off than if he and the government had managed to let this recession/depression run its normal course without interfering. The current financial and economic chaos was triggered in part because too many people, companies, as well as governments on the local, state, and federal level went too deep into debt, while hedge funds and financial firms borrowed extreme amounts of money compared with their capital base to speculate in the markets (some had only 2-3 cents for every dollar invested, so a mere 2-3 percent move in the wrong direction would wipe them out).  The financial bubble that built up over the past decades was aided and abetted by the government and the central bank almost every step of the way.  Every time there was a problem, Alan Greenspan would cut interest rates to help increase borrowing and drive debt levels to ever more unsustainable levels.  When the tech/dot-com bubble popped in 2000, Greenspan cut rates near zero and encouraged people to go take out variable-rate mortgages.  He was instrumental in driving the housing mania to unprecedented levels.  And central bankers around the world (happily, recklessly, and stupidly) followed his lead, dropping their respective countries' interest rates to the floor.  The result was the largest real estate and general financial market mania the world has ever seen (See, for example, the August 2006 Real Estate Comment). In addition, consider the Glass-Steagall Act of 1933 that prevented bank holding companies from owning other financial companies such as brokerage firms and hedge funds.  The purpose of several of the important provisions of the act was to limit excessive speculation to prevent major financial crisis'.  These provisions were repealed in 1999, based on claims (by both the banks themselves and several government leaders) that the financial industry could regulate itself and did not need government supervision.  The repeal allowed banks like Citigroup, Bank of America, JP Morgan Chase, etc. to create and speculate in financial instruments like mortgaged backed bonds and other collateralized debt obligations, and much of this activity was done off-balance-sheet in so-called Structured Investment Vehicles (SIVs).  The SIVs allowed the financial companies to keep questionable activities (reckless speculation) off their official books, while feeding through often entirely hypothetical profits (usually based on ridiculously over-optimistic assumptions) to their income statement, enabling banks and brokerage firms to report tremendous (largely fictional) profits which were in turn used to justify paying hundreds of billions of dollars in bonuses to incompetent and/or corrupt CEOs and upper-level management.  Now, the government and central bank are working overtime to print money in order to prevent the failure of these firms.  And in spite of some bonus money likely being paid back by a few high-level people at AIG, it is unlikely as much as five percent of the hundreds of billions in ill-gotten bonus money will ever be repaid.  The lesson the governments around the world seem intent on teaching the financial industry is that crime and deceit pays (indeed, that it pays extremely well), as long as you do it on a large enough scale.  To bail out the crooks and the incompetent, the government prints money, which will eventually result in damaging the purchasing power of the currency, clearly most significantly hurting ordinary people who rely on a normal salary/retirement income and savings to be able to handle their expenses.  Their incomes are not likely to increase at anywhere near the same rate as probable future price increases in food and energy.  So the government is looking out for the interests of the rich and powerful at the expense of the general population by covertly stealing the purchasing power of their future income and their savings, while increasing the debt burden to be carried by future generations (unless the end result is a complete collapse of the world monetary system, resulting in new currencies being introduced and old debts becoming void).  Obviously a drop in the purchasing power of the currency affects the value of the fortunes of multi-millionaires and billionaires, but even a 50 or 75 percent loss in the purchasing power of money is not likely to put much of a crimp in their lifestyles. Furthermore, much of the consumption growth of the past couple of decades was based on the easy flow of credit (debt), and the solution to too much debt cannot be more debt.  If the central banks and governments around the world would have let debts get defaulted on and written off - if they would have let people and companies go bankrupt so that the financial system and the economy could get a fresh start - then a recovery might already have begun.  By trying to prop up bankrupt banks and other financial firms, and attempting to stimulate the economy by having people take on more debt, the governments and central banks may end up causing horrific inflation a little way down the road, and prolong the misery for many years to come. Bernanke's solution may cause a tremendous loss in the purchasing power of the U.S. Dollar, and people's wages are not likely to keep up with the price increases likely to follow.  One can hope for the best (Bernanke's failure), but still prepare for the worst (Bernanke's success) by following energy, food, and gold prices, taking positions if they re-enter major uptrends.  That may be what is happening right now, and we will follow the developments in those markets carefully in the days and weeks to come. The U.S. Dollar has had an extremely sharp fall since Bernanke spoke yesterday, and it is now very important that the U.S. Dollar Index finds support no lower than in the 82-80 range (the importance of which has been repeatedly shown in our weekly updates).  The Dollar closed around 83 today.  (U.S. Dollar Index measures the U.S. Dollar against several major foreign currencies such as the Euro, Yen, Canadian Dollar, etc.)  However, it is not certain that the U.S. Dollar will fall sharply (or at all) against most other countries' fiat/paper currencies, as many other governments and central banks are pursuing policies that are similar (and in some cases even worse) than those of the U.S. government and central bank. That is why it is very important to keep track of the movements of commodity and precious metal prices, as the real things that people need to live (food, energy, cotton, etc.) along with gold and potentially also silver may well end up being the ultimate forms of money if what the future holds is relentless attempts by central banks and governments at propping up the staggering amount of debt and derivatives that exist worldwide through money-printing.  In other words, perhaps all paper currencies will lose purchasing power measured against real things.  We don't go by government statistics that exclude fuel and food from the reported inflation figures, but instead follow the charts and see what is happening with commodity and gold prices. It may be wise to keep in mind that gold used to back the value of the U.S. Dollar and (by extension, through currency pegs) other paper currencies, and that the main effect of the gold standard was to place a limit on the amount of money in circulation as $35 (or the foreign currency equivalent) could be exchanged for 1 ounce (about 28.35 grams) of gold.  Excessive money-printing would result in more demand to exchange paper money for gold, and continued money printing would run the risk of depleting gold reserves.  In other words, the Gold Standard was a monitor of excessive government spending and central bank money-printing.  This, of course, is why Nixon finally took the U.S. (and, as a result, the rest of the world) off the gold-standard) on August 15th 1971. Governments generally want to be free to spend as much money as they like on wars, subsidies to their friends in various industries, etc., and don't like the spending limitation of a Gold Standard, which - in the long run - restricts a government to spending only what it takes in through taxes.  Instead, governments like to tax less and print more, thereby indirectly stealing the value of the people's savings and salaries without most people realizing what is happening.  After the gold standard ended in 1971, gold rose about 2400 percent from $35 per ounce to $877 per ounce in January 1980.  This move clearly overshot to the upside, and resulted in a long decline in the gold price until it bottomed at $252.50 in 1999 and $255 in 2001.  Importantly, the gold price bottomed at a level over 7 times higher than where it has been in 1971 before the Gold Standard ended. Were gold prices to mimic the 1971-1980 rise and go to about 25 times the price at the $252.50 low, we could see gold move above $6000 per ounce.  Let's hope it doesn't come to that, but with people like Bernanke in charge, we would not dismiss the possibility of a collapse in the value of the U.S. Dollar and potentially also the Euro, Yen, and other currencies over the next few years. Which finally brings us to a potentially important development in commodities: The DBC commodity fund (below) that we mentioned in the crude oil update on Tuesday has significantly extended its breakout today (as has crude oil itself) on the largest volume ever recorded for the fund on an up day, and unless there is a major fall on Friday, it is likely the bottom is in (at least for now, though this could well mean the final low is in for commodities).  We would look to go long on any near-term pullback to around $20.00 with a stop loss order at $18.80. Below the DBC chart is a chart of DBA, a fund that that holds corn, wheat, soybean, and sugar futures, and is showing a likely breakout of its own.  Today it also saw the largest volume ever recorded for the fund on an up day.  DBB, a base metals fund (no chart shown) holding aluminum, copper, and zinc futures, also broke out today on the second largest volume day in the history of the fund.

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