Inflation-proofing tips

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The strategy exploits the difference in yields between regular, or nominal, Treasuries and those that prevail for the Treasury's Inflation Protected Securities, or TIPS. The primary difference between these two kinds of Treasuries is that TIPS' yields are protected against changes in the inflation rate. So TIPS yields will stay more or less constant in the face of changes in expected inflation, while nominal yields will rise and fall.

Theoretically, at least, this means that the difference in the yields of these two kinds of Treasuries should give us straightforward insight into how bad bond traders expect inflation to become in the future. But that's theory. In practice today, that difference is skewed, and that is what gives traders an opportunity to turn a fairly assured profit."

And finally, the precious metals price projections for the second half of the year we promised you yesterday. We caution up-front that as we are not a commodity trading firm, we do not issue such opinion with any underlying buy or sell signal intent, and that a projection is not a soothsaying undertaking designed to prove anyone right or wrong or to motivate investors to act one way or another. So, if the numbers trouble you or not, save the analysis (and related e-mails) of their validity until the last trading day of the year is over, and all the results are in. In the interim, our expectations -as do yours- remain in the realm of opinions (to which, everyone is entitled).

As we all know, gold recorded a 4.39 gain on the month, a 10.8% gain year to date in 2008, and up to now, a 42.86% year/on/year to end of June. The average price in H1 2008 has been $910. The metal spent about half of the period averaging 890 (Jan, May, June) and the other three rising to 920 (Feb) 968 (Mar) and then falling back to 910 (Apr). A possible top has been put into place back in March.

Second half 2008 projections:

We believe that the widening trading range and added volatility will remain the principal features of the market, as we turn the corner into the second half. We raise our initial 2008 trading range projections only by a small margin (form a range of 640-940) to 730-1030 but see average price on a slow decline from the 910 area to the mid 800's or lower, as we approach the year's end. Barring surprise geopolitical developments (Iran, terror attack) or significant financial implosions (Citi, GM, US banks as a group) which could catapult the metal to new pinnacles for a brief shining moment, the outlook is still for USD recovery in the second half (possibly to 1.30 against the euro) and for a retreat in gold towards the $730 area it initially touched back in May 2006.

Other commodities (notably oil) may follow similar corrective paths as well, and may well take the lead in the commodity correction phase. The center of the turn will consist of USD policy (possible intervention) and a gradual abatement of the credit crisis and related growth issues for various economies. Inflation continues to present a challenge but central banks appear quite determined not to let the price spiral spring out of the containment bag. Election season volatility and markets jockeying for revised positions thereafter will be the standout features in Q4. We continue to see the sky as remaining in place, despite dire predictions from doomsday quarters.

Silver is at the mercy of individual investors at this time. The market has gone from deficit to surplus, and any significant exit by investors could only serve to augment the gap. Our projected trading range is 14.25 to 19.75 and for an average of $16.25 to become the convergence line in H2 2008. March has also probably seen a top in short-term silver prices. Photography usage is on the decline, mine production is on the rise, and the bright spots have been batteries and electronics and the aforementioned investment offtake. No shortage plagues the market, that is for certain.

Stay tuned for platinum group metals projections tomorrow.

Happy Trading.