Right off the bat let me say that I have been and still am, long-term bullish on the price of Gold.  What we have witnessed in the past few weeks is, in my opinion, a long-overdue correction in the price of Gold that has been kept artificially aloft, in part, by the loose monetary policy employed by the Fed.  No market ever moves in a straight line and Gold is no exception.  Periodic corrections, especially in a long-term bull market are expected and reflect the amount of money moving into and out of the market due to any number of factors.

Central Banks:

In the past four years we have seen virtually all of the central banks of the world consistently add to the amount of Gold they hold in reserve.  Traditionally, central banks will buy Gold when the economic outlook is positive and sell Gold reserves to increase cash during times of economic crisis.  This is no longer the case, with one notable exception.  Cyprus’s central bank recently sold some of its Gold to try to manage the small European nation’s financial woes.  Analysts point to that move as triggering the recent big sell-off.  More telling than Cyprus’s sale was the central banks of Russia and Turkey as well as the International Monetary Fund (IMF) adding to their Gold reserves last month.  There is no indication that any other central bank is looking to sell some of their reserve Gold at this time and I would actually look for reports of more central bank buying as Gold prices dip.  Monitoring the activities of the central banks of the world will give you a good idea of the long-term prospects for Gold.

Physical Gold:

The demand for physical Gold, the kind that comes in coins, bars, bricks and is worn as jewelry is still going strong.  China, India and the rest of Asia have demonstrated an almost unquenchable appetite for the yellow metal.  A while back I read a startling statistic:  There is more Gold owned and worn by the housewives of India than there is in Fort Knox.  All conspiracy theories aside, that is pretty impressive when you think about it.  Individual ownership of Gold is a huge component of this market on a global scale and it doesn’t seem to be abating.  That bodes well for the long-term value of Gold.

Gold as a Financial Instrument:

Gold has traditionally been considered an effective hedge against inflation, so in an inflationary, or anticipated inflationary environment, owning Gold was considered a good way to mitigate the loss of asset value due to inflation.  Over the past five years a funny thing has happened to how the financial industry views Gold.  Gold has become an almost “Jack of all Trades” in the financial world.  Central banks, financial institutions, hedge funds, multi-national corporations and individual investors have all touted and bought Gold as a hedge against inflation, DE-flation, currency risk, debt exposure and equities risk.  In nearly every case, the nature of Gold as a tangible hard asset and its universal recognition as holding value is cited as a good reason to make it part of the aforementioned groups’ financial strategy.  Gold has now become an integral part of a significant portion of the financial world.  That isn’t going to change any time soon.

Gold as a “Safe Haven?”

The term “Safe Haven” has long been a pet peeve of mine, and never more so, than when it is used to describe any commodity in general and Gold in particular.  In my opinion, Gold is not, nor ever should be, considered a “Safe Haven”.  Gold is a physical commodity and financial instrument.  It is traded on a global market and has historically demonstrated extreme volatility at times.  Any instrument that can double in price or have its value cut in half in a short period of time is not a “Safe Haven”.  That being said, Gold does serve a very real purpose and is a valuable financial tool.  Careful thought and vigilant risk management should be applied in determining the role Gold should play in any financial strategy.  Understanding the risks and actual value at risk (VAR) are crucial when buying Gold or any other asset-based instrument.  If you only listened to all of the Gold pitchmen on TV, you would think Gold only moved in one direction and it was the one “sure thing” in today’s world.  Sister Carlotta from my Catholic School days used to repeat that old trope about the only certain things were death and taxes with meeting God, understandably being thrown in.  With all due respect to Sister Carlotta, my more than 20 years of experience in the financial markets has taught me there is absolutely no such thing as a “sure thing” especially where Gold is involved.

The “Experts” Weigh In:

Goldman Sachs and George Soros have recently declared that the nearly fifteen year bull market in Gold has reached its end and we will see lower Gold prices from here on out.  Regardless of what you think of either of them, the reality is that both Goldman and Soros carry tremendous influence and are looked to by many in the financial world for guidance and direction.  In a lot of ways it is a sort of self-fulfilling prophesy: both know their words move markets, so if they put out a forecast, more than a few people and firms will act upon it, creating the very result predicted.  But this is also the beauty of the market: for every buyer there is a seller, nobody is ever right all the time and many “experts” put out forecasts based on their own position in the market.  (Full Disclosure: I do not hold any positions or financial interest in Gold or its related markets)

My Gold Forecast:

As I mentioned above, I am still long-term bullish on Gold.  No market ever moves in a straight line and corrections are a part of any healthy market.  That being said, over the next few months, owning Gold is not going to be for the faint of heart.  I anticipate volatile swings, both up and down before the market settles down and resumes its upward trend.  I am looking at the $1240 – $1260 area as a likely place for the market to find support and start to form a base.  It will be a long road for Gold to regain its all time highs, but I believe it will eventually get there.

There are a lot of factors that affect the price of Gold and all commodities.  Some are well known and are watched closely, while others will pop up from time to time and catch even the savviest financial professional by surprise.  That is one of the things that I find fascinating about the markets: sometimes the “experts” can be as wrong as anyone.

The high volume of natural gas being produced both off and on-shore, combined with a very mild winter has resulted in a record amount of natural gas in storage for this time of year.  (See NG Storage Chart)  Additionally, while this past summer was exceptionally dry, we did not have the severe heat waves across the US that normally drive natural gas prices higher due to high electricity usage (think AC).  The already high inventories will be driven to capacity levels prior to the winter season as the mild fall weather lowers natural gas demand and that means lower natty prices are on the way.

I expect the futures price for natural gas will remain range-bound for the foreseeable future.  On the low end there is very strong support at $2.409 and then at $2.170.  To the upside $2.860 will provide resistance and look for $3.285 to be the high water mark for any sustained rallies.  $2.170 to $2.850 will be the heart of the range, so look for prices to fluctuate between those levels over the next few months.  On a more technical note, the 100 and 200 day moving averages are crossing with the shorter 100-day moving above the 200-day.  This is almost universally accepted as a bullish signal, but in this case any pop to the upside as a result will be short lived.  Other technical indicators like the Slow Stochastics (see chart) or the Relative Strength Index are neutral to mildly bullish further reinforcing my view.

Source: Thomson Reuters EIKON

The bottom line is that natural gas prices will remain relatively flat with low volatility for the next 6 – 12 months.  Just like those 80s shoulder pads, gone are the days of the “Wild West” where natural gas was considered the “$100 table” of the commodities world.

There are a number of reasons for the change.  Growing economies in South and Central America are thirsty for gasoline and America’s refineries are happy to make and ship the refined product south.  In the past, refiners would shift their production focus to refining heating oil and storing gasoline in preparation for the following summer’s demand.  This year as Hurricane Isaac came ashore, refineries in its path shut down operations and a good chunk of the Gulf Coast refiners were right in Isaac’s path.  While there was no long-term damage to any of the refineries, the loss of operations will further tighten the US gasoline supply and put upward pressure on prices.  Let’s also not forget the northeast section of the US, where several refineries have shut their doors and one Pennsylvania refinery was purchased by Delta Airlines and will be focused on producing mostly jet fuel for its fleet of airplanes.  This additional loss of production isn’t going to help the price of gas at the pump.

Underlying all of this is the price of crude oil.  After a brief dip in the early summer, the price of a barrel of crude oil has steadily climbed due to a number of factors.  The persistent tensions between Iran and the EU and US over Iran’s nuclear ambitions has created a fear that hostilities can erupt between, Iran and Israel or Iran and the US and fear in the oil market always leads to higher prices.  To top it all off, last week Federal Reserve Chairman Ben Bernanke signaled that a new round of economic stimulus could be on the way.  When the Fed prints more money to juice the economy, the price of commodities almost always rises, so expect the price of oil to rise sharply once the Fed turns on the monetary faucet.

Source: Thomson Reuters EIKON

Gasoline is also a traded commodity and as such is subject to the technical pressures of the trading community.  First let’s take a look at the gaps in the market.  In the past two instances, once a gap was formed on the chart, the market moved to fill them and when it did, there was considerable follow through. (see chart)  We are currently on the lower edge of the most recent gap and markets hate gaps and will almost invariably move to fill them.  Look for the gap to be filled in the next week or two and then for higher prices to follow.  Several other technical indicators are pointing higher as well.  The Slow Stochastics have crossed and are coming out of oversold territory and the Relative Strength index has reversed sharply and indicating higher prices are on the way.

The bottom line is that conventional thinking in regards to gasoline prices no longer applies.  The market is making some fundamental changes and our expectations should change long with it.  Low winter gas prices at the pump may soon be history.

Source: Thomson Reuters EIKON

Gold bulls pushed the price to just over $1700/oz. in the wake of Bernanke’s comments and numerous articles touted the $1700 mark as being the key to getting to $2000/oz.  Not so fast.  While any significant increase in price is noteworthy, my analysis tells me something else. (Full disclosure: I have been calling for $2000/oz. gold in 2012 since early 2011 and I still stand by that call)  The key level and the only time to really get excited will be when gold gains and holds the $1800/oz. mark.  We still have $100 to go.

Let me explain why.  Taking a long-term look at the price of gold since 2008, we can see the start of the bull market in gold as defined by its long-term trend-line.  Along the move higher there are six distinct periods of consolidation (see weekly chart) with the sixth being, by far, the largest and longest.  The boundaries for this period are clearly defined as $1575.0 on the low end and $1800 on the high end.  Right now we are smack in the middle of the consolidation range and until we break out and settle above the $1800 level, the market will continue to gyrate within the range and trade sideways.  Also worth noting is what happened when gold broke below its long-term bull market trend-line back in May.  Many analysts thought this was the end of the bull market in gold and a bear market was soon to take hold.  So far that hasn’t been the case.  The protracted consolidation period and lack of follow through to the downside has actually strengthened gold’s long-term bull market prospects.  The firm lower boundary of $1575 has allowed gold to hold onto most of its value as the European, US and Asian economies have contracted.  With the outlook for improved economic conditions world wide getting dimmer on a daily basis, there will be a renewed enthusiasm for gold as the central banks of the world lead the way by adding to their yellow metal reserves.

Source: Thomson Reuters EIKON

Narrowing our focus to the price activity over the past several months we can see that while gold has broken above resistance at $1635.4 and stayed there, it might be running out of steam, at least for now.  (see daily chart) Some technical indicators are signaling that a pullback or consolidation could be coming in the near future.  The Slow Stochastics are narrowing and just pushing into over bought territory and the Relative Strength Index is already showing an overbought market and is starting to turn lower.  All of this tells me that new record-breaking highs will have to wait.  I would expect the 200 Day Moving Average and the now support level at $1635.4 to provide a good base that will serve as the launching pad when gold makes its move to $1800/oz.

The bottom line is this: there are too many factors keeping the price of gold high and driving it higher for a bear market to be plausible in the near future.  Gold has successfully transformed from a hedge against inflation to a substitute for all of the world’s currencies and a hedge against virtually all forms of financial risk.  As report after report of dire economic news drives all manner of investments lower, gold will be moving in the other direction.  I still stand by my prediction of $2000 gold this year … there’s just too much bad news to change my mind.

Source: Thomson Reuters EIKON

On the fundamental side, the loss of production and slow return of the Gulf oil rigs in the wake of Hurricane Isaac, will lower the supply picture for the next 30 days.  In addition, Federal Reserve Chairman Ben Bernanke has hinted that the Fed will embark on another round of quantitative easing (QE3).  In the simplest terms any QE action from the Fed will result in higher commodity prices with WTI right at the top of the list, so once it becomes clear that the Fed will take action, look for oil prices to react immediately by moving higher.  Let’s not forget Iran and its nuclear ambitions.  While much of the recent rhetoric has had a muted effect on the market, it’s still there and any indications that hostilities will increase will also boost the price of crude oil.

Shifting gears to the technical side of the equation, there are some very bullish factors in play.  Currently, the price of WTI is flirting with the 200-Day Moving Average.  Any settlement above the 200-Day MA will initiate a new wave of buying that will push the price toward the psychologically important $100 level.  For the past few weeks the key support level of $95.14 has also held, providing a base for the next push higher.  The Slow Stochastics are also painting a bullish picture and the RSI is constructive as well.  Both widely used technical indicators are pointing to a new rally on the way.

The first stop to the upside will be the aforementioned $100 mark.  A settlement above that line will open the door to the next resistance level of $103.35.  At that point I would expect the rally to run out of steam and consolidate back along the $100 area before making any further big moves.  The bottom line is that crude prices are moving higher.  The time to get long is when the 200 Day MA is gained and held.

Source: Thomson Reuters EIKON

This past winter proved to be one of the mildest on record.  At first that was good news for U.S. farmers and you and me – they were able to get fields plowed and planted early and all indications were for a big bumper-crop come harvest time.  But then the weather took a nasty turn for the worse.  Drought conditions have gripped most of the country for the past few months.  The forecasts for how much corn, wheat and soybean crops will be harvested have all plummeted resulting in higher prices for each on the futures market.  It seems pretty straightforward: fewer crops harvested means that prices for those crops move higher, it’s basic supply and demand.  According to some weather forecasters there is no drought relief on the horizon, so not only will prices stay high, there is a good chance for them to move even higher.

So people who eat a lot of corn, wheat and soybeans will suffer as a result?  Yes … but not just them, everybody who eats is going to pay more and that means all of us.  Corn is fed to cattle in order to fatten them up and make them taste good.  Higher corn prices mean higher meat prices, so even hamburger is going to be more expensive in the coming months.  And don’t forget about dairy.  Milk, cream, butter and cheese also comes from our bovine friends who also exist on a largely corn diet, so they will all be more expensive, as well.  Also, don’t forget about ethanol, that darling of the renewable energy crowd; it’s made from corn as well and accounts for an ever-increasing portion of the corn harvest.  The continued high demand from ethanol production will help keep corn prices inflated.

Source: Thomson Reuters EIKON

The price increases won’t be limited to just the grocery store.  The effects of the drought will cary all the way through the food chain.  Consider that staple of the American diet: Pizza.  Pizza dough is made from wheat flour … Ka-ching – more expensive.  The cheese we already covered … Ka-chng – more expensive.  The tomato sauce … well tomatoes are also subject to the drought, though to a less degree, so still … Ka-ching – to a lesser degree.  All this adds up to higher prices for pizza and most other foods.

As if the drought and high grain prices weren’t bad enough, anyone who has filled their tank at the gas station in the past few weeks has seen a sharp reversal in gas prices as well.  Just as prices were starting to approach the $3/gallon level, they are now pushing higher.  The culprit this time around is the recent heated rhetoric out of Iran.  On July 1^st, the EU sanctions against Iranian oil imports went into effect.  While at first there was little impact on the price of oil, recent comments and military activity in Iran have pushed prices higher.  Higher oil prices means higher gasoline prices.  This is like rubbing salt in a wound.  In addition to more cash out of your pocket to fill your tank, higher oil and gas prices are felt at the dinner table as well.

Source: Thomson Reuters EIKON

My brother in law runs a small family farm in Indiana where he raises chickens, pigs, a few head of cattle and plants corn and hay to feed the animals.  Recently we were discussing the drought and it’s impact on his crop yield.  He informed me that the price of nitrogen fertilizer (a by-product of oil) has risen dramatically every year for the past several years.  So now farmers have to pay more for fertilizer.   The fuel to run the tractors and combines is more expensive, the diesel that powers the trucks that transport both the raw and finished foodstuffs to market is also more expensive.  All of these increased costs will eventually be passed on to the consumer, taking an even bigger bite out of the family budget.

The bottom line here is that we can expect to see many of the foods we eat every day increase in price over the next 6 to 12 months.  For the average American household that means more of the family budget will go toward food and fuel.  In these tough economic times, that will present a real hardship for many people.  The weather can be fickle and it can be cruel and this summer it will be reaching into everyone’s pocket.

While oil and gas prices can be complicated and there is a danger in over-simplifying the various factors that determine price, the amount of crude oil that OPEC pumps onto the world market is a biggie.  My old employer, Reuters, asked me to shoot a video for them, explaining how the OPEC meeting next week could impact you and I and what we pay for our gas.  The key player to watch will be Saudi Arabia.  They are the largest producer of oil in OPEC and can the ability to pump more or less oil with relative ease and are a close US ally.  It’s a complicated relationship and sometimes the Saudis face a conflict between serving their own interest and those of the US.

Don’t Look to Saudis for Gas Price RElief

Currently, the threat of $4 gas has subsided … for now.  I believe the average price for a gallon of gas across the US will likely remain in the $3.20 – $3.70 range for the summer, but there are still geopolitical risks around the globe that could quickly put us above $4 and higher.

The first variable is Iran.  Iran presents the greatest geopolitical risk to oil prices.  The sanctions placed on Iran by the international community have already posed a difficulty for Iran to manage.  On July 1^st the bulk of the EU sanctions on Iran will go into effect, causing further strain on the Iranian economy.  This could further increase tensions between Iran and the west.  In response, Iran will likely keep the US and its allies coming to the bargaining table for talks.  It will also certainly seek to wrangle some concessions or easing of sanctions from the west as a reward for its willingness to have a dialogue.  These actions by Iran will buy it precious time and will allow it to keep its nuclear program running full tilt towards its goal of achieving a nuclear weapon.  By paying attention to how the US negotiates in this situation, Iran will know that the US has long rewarded these types of diplomatic overtures with inaction, decreased sanctions, or even rewards – think North Korea and Iraq under Saddam Hussein.  The US also has an incentive to keep Iran at the bargaining table; the Obama administration is very interested in keeping gasoline prices away from that $4 level.  It will want to keep things calm and the oil markets stable and moving lower.  A lower perceived risk of conflict with Iran will weigh on oil prices, pushing them lower.

The wild card here is Israel.  In the past Iran has vowed to wipe Israel off the map, so the Israelis are very concerned about Iran building a nuclear weapon.  Benjamin Netanyahu has publicly stated that Iran will not become a nuclear power on his watch.  If Israel chooses to take unilateral action against Iran’s nuclear program, there are a few things that are certain: it will act without warning and attempt to inflict maximum damage immediately and as a result oil prices will spike, most likely a 20 to 30 percent jump initially.  And remember, high oil prices = high gas prices, so the price at the pump will almost certainly move into the plus $4 a gallon range.

The ongoing conflict within Syria also bears a close look.  Right now the crisis is contained within Syria.  Any widening or spreading of the conflict throughout the region would cause concern in the oil markets.  However, as bad as the situation in Syria is, it is very unlikely the US or any other nation will intervene in the ongoing conflict.  Unless something dramatic happens to escalate the conflict beyond its current boundaries, oil prices will remain largely unaffected.

Lurking in the background of any discussion of oil prices is OPEC.  OPEC’s next meeting is a planned brief meeting scheduled for June 14^th.  Previous comments from OPEC have indicated that it is very comfortable with $100 a barrel price tag.  The key member of OPEC is Saudi Arabia.  The Saudi’s ability to ramp up production with their spare capacity has provided the world’s oil markets with a measure of comfort when faced with supply shortages as the result of lost production (Iraq, Libya, Nigeria, etc.) or sanctions (Iran).  With the recent decline in the price of oil into the high $80 range, speculation has increased that the Saudis will decrease production to support prices.  Unless oil drops below $75, I think it is highly unlikely we will see much reaction from Saudi Arabia or the rest of OPEC.  Currently all of the production levels within OPEC are voluntary and there is a long history of OPEC members serving their own interests and ignoring quota levels.  Keep in mind also that the Obama administration has been reportedly reaching out to the US’s oil producing allies to keep the oil flowing and prices moving lower.  Abundant oil supplies means lower gas prices for the US consumer and lower gas prices are an electoral plus for President Obama heading into November.

The bottom line here is that there are a lot of factors working to keep oil and gas prices stable and moving lower, bringing much welcome relief to the US consumer.  However the threat of a geopolitical event disrupting the status quo in the Middle East is still very real and will keep prices from falling too far.  All that is necessary is for one of aforementioned variables to erupt and oil and gas prices will spike higher immediately.  Remember, there is an old adage among energy traders … “Gas prices shoot up like a rocket but come down like a feather”.  Let’s hope the only rockets we see this summer are at the local 4th of July celebration.

I found the contrast startling.  On the one hand we have President Obama’s former chief economic advisor advocating for a reduction in our Strategic Petroleum Reserve, while China continues to increase their strategic oil reserves.

First let’s take a look at what the Strategic Petroleum Reserve (SPR) is and why we have it.  The SPR was created in 1975 in response to the Arab Oil Embargo of 1973-74.  As a result of the embargo, the US realized that it had become too dependent on foreign oil producers and decided to create its own stockpile of oil to ensure the flow of oil for domestic needs in the event of a significant supply disruption.  The result is the U.S. has currently just under 700 million barrels of oil stored in four sites along the Gulf of Mexico.

According the Energy Information Administration (EIA) the US consumes about 20 million barrels of oil per day so that 700 million barrels represents about 35 days of supply.  Domestically the US produces just over 5.5 million barrels of oil per day, which in the event of a supply disruption will stretch the SPR to just over 48 days of total domestic usage.  None of this takes into account the oil we import from Canada and Mexico, the US’s two main suppliers of oil.

China has a known history of stockpiling grains and other staples as insurance against drought or any type of supply disruption.  China will typically keep a year’s worth of corn, wheat, and soybeans in state owned warehouses to ensure its population will have access to these basics in the event of a calamity that might severely curtail their domestic food production.  Copper is another commodity the Chinese stockpile in bulk.  Copper is considered the bellwether of economic health and the Chinese economy has been experiencing rapid growth over the past several years.  China keeps vast stores of copper on hand to ensure that its manufacturing sector has access to a stable supply stream.  It only makes sense that China would now look to increase its reserves of its most important commodity, oil.

The recent tensions and oil export restrictions with Iran highlight China’s vulnerability to oil supply disruption.  China is a big purchaser of Iranian crude oil and is building and delivering a number of crude oil tankers to Iran this spring.  Not surprising, Iran is taking several steps to circumvent the sanctions being placed on it by the U.S. and world community.  I would not be surprised if a good portion of Iranian crude winds up in Chinese storage facilities in the coming months.

The bottom line here is that like it or not, the U.S. and world economies are still dependent on cheap, reliable fuel from oil and natural gas to fuel their economies.  It would be a grave mistake for the U.S. to ignore the realities of high oil prices and possible supply disruptions and reduce the amount of oil in the SPR as Mr. Goolsbee recommends.  In my opinion the Chinese economic model has some serious flaws, but stockpiling a crucial ingredient to the national economy makes sense.  Any reduction in the SPR for short-term price gains would be harmful in the long run, while increasing the amount of oil in the SPR is likely the right answer.  Oil is here to stay and the U.S. should take the appropriate steps to avoid another crisis like the 1973-74 Arab Oil Embargo.

The interesting part is that current world – wide supply is ample and the decrease in Iranian production is being countered by an increase in Saudi Arabian production.  India is still buying Iranian oil, and several other nations have received exemptions from the sanctions.  The single biggest issue facing buyers of Iranian oil is their ability to obtain the insurance on the cargoes of crude oil they are shipping.

Recent data releases by the EIA have shown crude oil supplies are ample and there is no supply shortage on the horizon.  As a result there should be significant downward pressure on price but there is a countervailing factor that trumps the rosy supply picture in the market – Geopolitical risk.  The risk that tensions with Iran will erupt either through Israeli, Iranian or US military action still haunts the market.  It would only require one hostile military act to set the world’s oil markets soaring to new all-time highs and everyone in the market knows it.

While the risk of possible military conflict with Iran, and its implications for oil traffic through the Straights of Hormuz persists, oil prices will remain stubbornly high.  That is bad news for oil bears, who have a strong case for lower prices, and consumers, who will bear the brunt of this risk in higher priced gasoline and other petroleum products.

The key level will be $103.35.  Once the market settled above that line it has remained in the $104 to $110 range.  If there is a significant breakdown, and it settles below $103.35, look for prices to move into the $95 – $100 range.  However, if the Iranian situation reaches a boiling point and shots are fired, we will see prices move immediately toward all time highs around the $150 mark.  If it comes to that $4 gas will seem like a quaint distant memory.

Source: Thomson Reuters EIKON