Wednesday, April 20, 2011

Transfer of Wealth: /DX, GLD, /SI, RGLD

It's been going on for years... What I'm referring to is the greatest theft in the United States' history; The perpetual transfer of wealth from the lower & middle class to the upper class. The budget deficit is out of control, and we are on target to hit the Treasury's Debt ceiling within 3 days. Either the budget needs to be balanced or the debt ceiling needs to yet again be raised. Congress will have to vote on this in the weeks ahead.

Balancing the budget would require massive spending cuts across the board: Salary & wage cuts, layoffs, unemployment funds, medicare funds, etc... The obvious consequence here is an immediate haircut to GDP, causing corporate earnings to contract and compress the stock market prices. I highly doubt both the Dems and the GOP will want to take this route.

The more likely solution is have the debt ceiling raised and consequently increasing our interest costs, and flooding the system with more dollars with borrowed me. This is the more likely scenario, and has been apparent in recent months as inflation runs rampant with investment houses pouring dollars upon dollars into commodities like oil, corn, wheat, and our dearly beloved: Precious Metals.

Debasing the dollar decreases the buying power and instrinsic value of dollar denominated investments - The government's way of being able to more easily service their debt by printing dollars to pay interest on the debts we already owe to China, Japan, et al...

Because I doubt anybody on Capitol Hill would want to deal with an uprising due a stock market crash, I favor the latter solution over the former. For this reason, I'd like to point out the continued destruction of the dollar, as well as the resulting increase in prices of Gold & Silver. Want to participate in the greatest transfer of wealth in history? Then buy PM's on a pullback. I favor the miners (call me crazy) over the paper metal ETFs right now, despite my fairly large GLD call position.

/DX (Dollar Index Futures)
Note how /DX barely even bounced off the year lows, it fell right off the shelf without a noteworthy retrace and fell to new lows today. /DX also continues to obey some downward trendlines based off fibonacci fans.

Gold/GLD (GLD gold paper ETF)
Gold has continued to obey a clearly defined uptrend channel since October 2008, the metal and ETF have cleared multi-month resistance and broken to new highs. Any pullback to 140 could become support as the 140-level was strong resistance for months.


/SI Silver Futures
Silver is the crown jewel of the PM's currently. The  hot trade is silver. I was made aware of amazing silver streaming and mining companies like SLW, AG, EXK, and GPL earlier this year. I've been in and out of AGQ (leveraged silver ETF) several times since February, and the gettin's been good, in fact, it's been great. Silver has been on a meteoric rise, and if history is any indicator, we know that no parabolas end well. I am exercising extreme caution with very tight stops on my silver position. Now if only my miner positions would play catch-up to the metals... I suspect the lagging miners are a pair short trade, as funds long the metal they short miners as a hedge. This however will add fuel to the fire when the short squeeze occurs, and I'm confident it will. Hanging on for the ride on a trade and believing in a trade 100% is the toughest part. Risk management is key. Silver chart looks bullish, following the uptrend channel beautifully. RSI and MACD levels however are getting oversold, so a short term top and consolidation could be in the cards. A breather/pullback in silver would be healthy, otherwise we're looking at a blow-off top, which usually preceeds a sharp correction or collapse in the price. Pay attention to the volume, as it indicates panic buying.

Royal Gold: RGLD
I established a position in this miner on the breakout to new highs on volume. I purchased shares and the $60 calls. I don't have time to go into the fundamentals or build a bullish case at the moment but here's the chart for now. Notice the fibonacci fans, there seems to be some gravity and a relationship with the trendlines. I'd like to see a pullback to former resistance and to see it transform into support for a spring-loaded launch.

P.S. Never forget - Wall Street runs DC, not the other way around.

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