Crude Over a Barrel

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Good Afternoon,

Gold prices were swept up in a generalized commodity liquidation wave today and gave way once again, dropping to very near the $910 level we alluded to in yesterday's articles. Sharply declining oil values (an over $5 loss in crude, to $136) kept fueling the selling which eventually brought bullion down to $911.90 before a rebound similar in nature to Monday's comeback too place late in the day. The US dollar however, was showing decent gains on the day, rising .31 to 73.02 on the index and to 1.566 against the euro. Commodities as a group softened substantially on Tuesday (led by oil and by corn) both on lessened demand for inflation hedging as well as on perceptions of a spreading economic slowdown around the globe. Helping crude oil towards somewhat saner levels were strong words from Iran's Mr. Ahmadinejad who (seemingly contradicting the Revolutionary Guards' Ali Shirazi) came out to opine that there "won't be any war in the future" [between Iran and Israel and/or the USA].

The leaders of the G-8 have voiced their "strong concern" about rising commodity prices, especially those of oil and food. In a statement released today, they said that commodity prices "pose a serious challenge to the world economy." They also said that they are determined to continuously take actions to ensure stability and growth of world economy. Let's see what that translates into where the rubber meets the road. The take-home finding here is that the G-8 leaders are in sync on the vilification on inflation as Public Enemy #1. This, even as Dr. Bernanke was offering extensions of TAF facilities to strapped lenders well into 2009 - if necessary.

Therefore, expectations that central banks might start acting accordingly are keeping interest rate watchers on extended work shifts. ``The mood of the country and the regulators is now to get people out of commodities,'' said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. ``People bought indiscriminately, and they're selling indiscriminately. When you prick a balloon, you get an explosion.'' While we are not yet sure that the situation has reached a level described by the first statement, we do agree with the second one, and we have been on record saying that one cannot take a pin to a bubble and expect it to slowly deflate in order to please everyone. While Mr. Bernanke's remarks gave hope to those who see interest rates not rising anytime soon, the words of a very hawkish Mr. Lacker put a cold towel on the issue as the Richmond Fed President today warned against waiting too long to raise interest rates in the face of receding economic growth risks.

New York's Tuesday trading session was (at last check) right back where it started, with bullion still registering a $5.00 loss to $921.00 Silver recovered by 3 cents quoted at $17.82 while platinum added to yesterday's losses dropping $25 to $1931 and palladium lost $6 at $438 per ounce. Stocks added about 120 points on the day, as Fannie and Freddie clawed their way back into the black, (while IndyMac sank so low as to be nearly de-listed). Action from the Fed in the mortgage sector is coming - as soon as next week. New lending rules, to be issued shortly, will spell 'restricted' for many an exotic mortgage and hyper-costly loans to people with feeble credit will not see the light of day.

As for the greenback, Marketwatch's Irwin Kellner feels that the foreign exchange value of the dollar is the critical component of soaring oil prices and that the two most effective ways of helping the current situation go away would be intervention (in the currency markets) and/or a hike (or series thereof) in dollar interest rates. Neither of them pleasant for some parts of the world or of the speculative crowd. Unless, of course, one is a gold speculator. At this time, some of them see nothing but bullish graffiti on the proverbial wall or worry. Which, is (in itself) something to worry about.

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In today's focus story, Marketwatch's Mark Hulbert is worried that the lack of worry among gold timing newsletters may yet have some of them suffer the same fate as the wise guy running ahead of the bulls this weekend in Pamplona, Spain. He is now a gutless runner. Literally. Mark reports:

"Almost all commodities fell markedly on Monday, and gold was no exception. Unfortunately for the gold market, contrarians would not be surprised to see more of the same. That's because sentiment among gold timers remains too frothy to support a significant rally.

Consider the latest readings from the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of Monday night, the HGNSI stood at 64.3%.

That's the highest level for this sentiment gauge since March, when gold bullion was above the $1000 level. At that time, the HGNSI rose to a marginally higher level of 65.4%. Over the six or so weeks following that reading in March, of course, gold bullion fell by more than $100 per ounce. To put this contrast another way: The average gold timer is, for all intents and purposes, just as bullish today as when an ounce of gold bullion was trading for more than $100 more. This suggests that the gold timers are more accurately described as being stubbornly bullish than as pessimistic.

Another indication that the gold timers are stubbornly bullish: The HGNSI remained steady on Monday, despite the turmoil in the gold market. This is not the kind of sentiment reaction we would be seeing if there were the kind of wall of worry that bull markets like to climb. The magnitude of the break in commodity prices early in Monday's session appeared to some to be more reminiscent of a bubble popping than normal day-to-day volatility. Does the sentiment picture support this suspicion?

I wish the HGNSI would allow for a clearer answer. As it is, it is unable to tell us whether or not we are even in a commodity price bubble and, if so, whether it has just popped. But what the HGNSI can tell us is that sentiment would not provide the gold market with a safety net if indeed it were to begin a bigger decline. The HGNSI's record high, according to the Hulbert Financial Digest, is 90%, or just 25 percentage points higher than where it stands now. That means that the majority of the in-and-out traders that affect the shorter term trends are already invested in the gold market; relatively few of them remain on the sidelines to propel the market higher by turning bullish in the future.

Another way of putting this: Risk in the gold market is at above-average levels right now.

The ideal scenario, from a contrarian point of view, would be for the gold timers to completely throw in the towel, becoming so fed up with the gold market's recent volatility and weakness that they refuse to bet on the next short-term rally. Ironically, that would be the rally most worth betting on, according to contrarian theory.

That's nowhere close to the kind of sentiment environment that exists now.

(Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.)

Gold held up to selling pressure in a reasonable manner on both Monday and today. The net longs suggest however that most buyers are already on board and that chasing the bandwagon does entail some risks to late entrants. Spectating the oil show may be a safer undertaking until more economic data comes into the equation. In the interim, let the jawboning continue. It still seems to be able to move markets (at least intra-day).

Happy Trading.