Featured Trades: (TIME TO GET ON THE (SPX) ROLLER COASTER), (SPY), (SPX)

3) Time to Get on the (SPX) Roller Coaster. I think yesterday's reaction to a rumored settlement on the debt ceiling was a great 'tell' on the short term direction of the financial markets. The S&P 500 popped 20 points, bonds roared by two points, and it was off to the races for commodities. However, gold took a $30 hickey.

To some extent, I am making a political call here. I think that there is a 100% chance that we get an agreement on the debt ceiling by the August 2 deadline because the republicans have unwisely, and some would say recklessly, painted themselves into a corner.

The debt ceiling is the responsibility of the House of Representatives, and using it as a weapon to achieve political gains has never been done before. Reagan did it, Clinton did it, and Bush did it big time. If they fail to take action and the US defaults, all President Obama has to do is suspend payment of Social Security checks and correctly blame it on them.

That would assure a big win for the democrats next year and return to them control of both houses of congress. There is no way the republicans are willing to risk even a remote chance of this. So deal they must, and very soon.

A final agreement could create a short term love fest for equities and take the (SPX) up to the old high of 1,370, and possibly to a new yearly high of 1,400.
This is not exactly a low risk trade. I am not predicating the onset of a whole new bull market here, just a swing up to the upper end of a narrow, tedious, and boring range.

You can expect some volatility as the rumors continue that a deal is on, then off, then on again. But we know that the final answer is 'on', so if you get any big dips, you might want to double down.

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1) There will be no QE3! Twice in the last week, rumors surfaced that Ben Bernanke was considering a third round of quantitative easing, first in the Fed minutes, and then in Wednesday's congressional testimony. The risk markets rallied furiously, and then quickly gave it all back.

If I have been asked one question more than any other this year, it is whether there will be a QE3. My answer remains the same: No, not on your life, not a snowball's chance in hell. My reasons are legion.

For a start, with the economy growing at a feeble, lethargic 2% rate, there is just enough growth to make QE3 unnecessary. All of the liquidity injected into the system by QE 1 & 2 is still there, but has yet to be used. It is the 'pushing on a string' theory with a turbocharger. That is why the Fed's balance sheet remains at a lofty $2.8 trillion. Bernanke has to wait for the existing liquidity to be put to work before he contemplates the creation of any more.

The political environment in Washington does not auger well for an additional measures to stimulate the economy. While Bernanke is thankfully independent of the congress and the president, he is not an idiot. In any case, there are a dozen additional tools the Fed can put to work to help the economy, which we will only hear about after the fact.

There are many more things that the administration can do as well. Witness the International Energy Agency's recent attempt to manipulate the price of oil down with its release of stockpiles. A mere $10 drop in crude is worth an entire tax cut in terms of its impact on the global economy. Expect many more of these to come.

I think at some point in the future we will see the son of quantitative easing. But not until we are plunging into the next recession in 2012 or 2013 at the latest. Then they will call it by another name. So QE3 is well and truly dead. Please stop asking the question.

What's Next Ben?

It didn't hurt that we are about to enter a period of traditional strength in the gold market, with the Indian wedding season only two months away. Actually, it wasn't much of a desert, maybe more of a Zen rock garden, as the barbarous relic was stuck in a tedious and tiresome $100 range before it resumed its recent ascent. The Chinese buying I predicted put a floor under the price much higher than traders anticipated, frustrating hoards of buyers lower down.

So now the question arises of what to do with your bounteous profits, and how much risk does the yellow metal present here. I get asked this question a dozen times a day, by some who have been long since the current move started more than a decade ago at $260, and others who stood on the sidelines and watched in awe as it went to the moon, kicking themselves all the way. Is it too late to get in?

They call the yellow metal the barbarous relic for a reason. Let's face it. We've had a great run. Gold has been one of the top performing assets by a long shot, soaring some 510% since 2002, while most other asset classes sucked. Investors did even better in the futures, leveraged ETF's like the (UGL), and gold mining shares or their out of the money calls.

Anyone considering a short here will be insane to do so, as you will be going against the long term trend. Obama has not suddenly turned into a paragon of fiscal rectitude, and Ben Bernanke still has the keys to the printing presses. The Fed has yet to even admit its role in the credit bubble of the last decade. Fiat paper currencies are still running a frenzied race to the bottom. Politicians of both parties see the only way to win elections is to inflate, and to debase the greenback.

Almost all short term money market alternatives globally are yielding close to zero, meaning that the opportunity cost of owning the gold is nil. It turns out that they aren't making gold any more. The output of gold has fallen by 12% annually for the past decade, compared to a doubling of production costs to over $500/ounce.

Reserves everywhere are playing out, and top producer Barrick Gold (ABX) isn't opening a new mine at 15,000 feet in the Andes because it likes the fresh air. The upcoming slugfest in Congress over the debt ceiling will almost certainly cause many investors to just throw up their hands in despair and start shopping for American gold eagles at Amazon.

Now that we have broken out to a new high, many traders think the yellow metal won't pause to catch its breath until we hit $1,600. I still think my long term target of $2,300 is a chip shot, but it might take three years to get there. There are higher predictions of $5,000, $10,000, and $50,000 based on ratios of gold to broadening definitions of monetary assets (see below).

Below are the downside support points on the charts, with my comments.

$1,521 -50 day moving average, probably holds, but a break signals a more serious pull back
$1,422 '? 200 day moving average held last time, should work again. Unlikely to get there, but the world is a big buyer if it does.
$1,050- The 2010 low, the old multiyear high, and the place where the Reserve Bank of India kicked off the current love fest with its surprise 200 tonne purchase in 2009 months ago. Unlikely to get there, but the world is a big buyer if it does. Bet the ranch here.
$680 '? The 2008 low- In your dreams. We aren't going to get a full blown flight to liquidity we saw in that dreadful year. Relegated to the history books for good.

Use any serious dips to accumulate low cost, growing, gold miners with decent valuations, which are enjoying escalating operating leverage the higher the barbaric relic runs. Some new names you might entertain are Royal Gold (RGLD), Agnico-Eagle Mines (AEM), and Great Basin Gold (GBG).

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(SPECIAL GOLD ISSUE)

Featured Trades: (GLD)

 

3) The Ultra Bull Argument for Gold. I am constantly barraged with emails from gold bugs who passionately argue that their beloved metal is trading at a tiny fraction of its true value, and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD). They claim the move in the yellow metal we are seeing is only the beginning of a 30 fold rise in prices similar to what we saw from 1972 to 1979, when it leapt from $32 to $950.

So when the chart below popped up in my in-box showing the gold backing of the US monetary base, I felt obligated to pass it on to you to illustrate one of the intellectual arguments these people are using. To match the 1936 peak, when the monetary base was collapsing, and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by eight times, or to $9,600 an ounce.

I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. It makes my own three year $2,300 prediction positively wimp-like by comparison. The seven year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg to unload my own krugerands in 1979, was triggered by a number of one off events that will never be repeated.

Some 40 years of demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked around 20%. Newly enriched sellers of oil had a strong historical affinity with gold. South Africa, the world's largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence my more subdued forecast. But then again, I could be wrong.

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