Monday, October 29, 2007

Beware of Speculative "Sure Things"

You would be hard-pressed to find an analyst or pundit who isn't bullish on gold and oil and bearish on the U.S. dollar. The agreement is virtually universal: the dollar is doomed, and gold and oil are rocketing up with no end in sight.

My contrarian instincts suggest the universality of these views dooms them to be almost certainly wrong. The NASDAQ would never drop below 4,000 (2001 pundits), the Dow Jones Industrials were heading to 100,000 (2000 pundits) and oil would remain cheap for a decade (1999 pundits). In every case the "standard model" of the financial/ mainstream analysts was exactly opposite of what eventually transpired.

But rather than argue, let's look at some charts, courtesy of frequent contributor Harun I. Let's start with oil, which just hit a key Fibonacci level at $92/barrel:

There are three large charts today; please view them at .

Next, here is gold, which also sports some divergences which suggest the euphoric speculation might be getting a tad overdone:

The much-maligned dollar, meanwhile, has declined to a key Fibonacci level, suggesting it might rear up out of its torpor and maul the complacent dollar Bears:

We should recall here that oil derivatives and futures contracts far exceed physical oil. Which is just a polite way of saying that rampant speculation can power oil higher independent of actual inventories and supply/demand. The same is of course true of gold; speculation in gold-based instruments can be independent of physical demand for gold.

In times of euphoric bullishness, the "solid fundamentals" are always touted ad nauseum. Yet when the price plummets, the fundamentals remain more or less in place. Were the fundamentals of the petroleum business horrible on August 16 when oil dipped to $67/barrel? No. Are they now 37% better, a mere 10 weeks later, now that the price has risen $25 to $92/barrel? No.

Will the dollar be debased to 27? If Fed Chairman Bernanke drops interest rates back to 1%, perhaps it will. But in the meantime, we should be alert to the old nostrum that nothing goes up or down in a straight line. The buck has dropped in a nearly straight line, and gold and oil have skyrocketed in nearly uninterrupted moves up.

Call me contrarian (or worse), but the charts suggest to me that big reversals are coming due this week. Maybe they will be brief interruptions in a trend; nonetheless, being on the same side as 99.99% of all the pundits, analysts and experts usually buys a one-way ticket to stunning (and entirely unexpected) losses.

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