Are Silver & Copper Prices Predicting a Global Recession?

Chris Vermeulen & JW Jones –

Silver and copper have recently been going through their own private bear markets. Since the open on September 1st, silver futures have sold off by more than 25%. During the same time frame, copper futures sold off by around 24%. Both metals are extremely oversold, but lower prices are still possible.

Are the bear markets in copper and silver an attempt to warn market participants that slower economic condition are ahead? Are equities going to take a huge hit on slower future growth?

The notion that lower copper prices will precede a stock market selloff is generally an unfounded allegation. Recently Jason Goepfert of produced the follow table illustrating the returns of the S&P 500 immediately following a bear market in copper over the past 25 years:

The chart above is additional proof that a massive selloff in copper does not necessarily have a major impact on the returns for the S&P 500. However, I would remind readers that volatility in commodities generally precedes volatility in equities.

Precious metals may be getting close to a possible intermediate term bottom. Silver and copper futures are extremely oversold based on a variety of indicators. However, the key to future price action likely will revolve around the price action in the U.S. Dollar Index.

The U.S. Dollar Index has been ripping higher throughout most of September. The rally in the Dollar is placing pressure on risk assets such as equities, precious metals, and oil. The daily chart of the U.S. Dollar Index is shown below:

So far the U.S. Dollar Index has been held back by the $79 price level which has been acting as resistance, but if prices can breakout above recent highs it would not be shocking to see the U.S. Dollar Index test the 80 – 82 price range in the near future. A breakout would likely put additional pressure on silver and copper prices. The two charts below illustrate the recent correlation between silver and copper prices and price action in the U.S. Dollar Index:

Silver : Dollar Correlation

Copper : Dollar Correlation

Additionally the S&P 500 could break below the August lows and oil could follow suit if the Dollar continues to work higher above recent resistance. If October turns out to be an ugly month for risk assets as pundits have predicted, then the U.S. Dollar will likely perform relatively well in the intermediate future.

Clearly there is political risk coming from Europe which could alter price action in risk assets in a variety of ways. Financial markets are volatile across the board and large intraday price swings are becoming common place.

In many cases the headlines will have more impact than the fundamentals or the technicals in this type of trading environment. However, the longer term support and resistance levels should hold sway even during times of exacerbated volatility. The weekly charts of silver and copper futures are shown below:


Silver Weekly Chart



Copper Weekly Chart


Clearly the price action in silver and copper in late August and throughout September has been ugly. Both metals are oversold in nearly every time frame, however if the Dollar continues to strengthen we could see deeper declines in both silver and copper prices as illustrated in the charts above.

Currently fundamentals and technical analysis cannot be relied upon solely when making trading decisions. However, the longer term support and resistance levels derived from the charts above give informed traders areas that offer solid risk / reward exits for profit taking and entries for those looking to get long silver and copper.

Trading Conclusion:

The data provided above regarding equity returns after a bear market in copper are sufficient enough to state that lower copper prices do not necessarily project lower domestic equity prices in the United States. With that said, the correlation between the price of copper and the IShares FTSE China 25 Index Fund (FXI) is irrefutable. Lower prices recently in copper are directly correlated in the price action of the FXI China Index fund as shown below:

FXI China Index Fund : Copper

The recent price action in the FXI China Index fund is ugly to say the least. As shown above, if the U.S. Dollar continues to strengthen copper, silver, and the FXI will likely continue to trade lower. Clearly the recent price action in Chinese markets is concerning for domestic equity investors, but an economic statement released earlier today is an ominous signal in the immediate future for U.S. equity investors.

On Friday the ECRI (Economic Cycle Research Institute) came out with a statement that the U.S. economy is headed for a new recession that the U.S. federal government cannot prevent. Data is starting to show signs that a new recession is not only possible, but quite likely in the near future. One of the key underlying assets to monitor for future clues about price action in risk assets is the U.S. Dollar. In coming weeks and months, I will be monitoring the U.S. Dollar closely. I think it would be wise if you did as well. Headline risk is increasingly high!

Subscribers of OTS have pocketed more than 150% return in the past two months. If you’d like to stay ahead of the market using My Low Risk Option Strategies and Trades check out OTS at and take advantage of our free occasional trade ideas or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

NFC Technology Picking Up Steam: What Investors Need to Know

NFC Technology Picking Up Steam: What Investors Need to Know

by Justin Dove, Investment U Research
Friday, September 30, 2011

Two recent events have likely ushered the dawn of NFC smartphone technology in the mainstream marketplace.

  • Isis announced this week that a handful of major handset manufacturers are already showing support for its NFC platform. (Isis is a joint mobile payment venture between AT&T (NYSE: T), Verizon (NYSE: VZ) and T-Mobile.)

While Isis most likely won’t come online until 2012, it should offer some competition to Google, which is likely to use its recent acquisition of Motorola Mobility to help further push its NFC agenda.

While these companies duke it out over who controls the NFC payment market, the semiconductor companies producing the chips used in the devices will most likely be the ultimate winners.

NXP’s Weakness

For more than a year, NXP Semiconductors (Nasdaq: NXPI) was touted as the best way to play NFC-payment technology. Being chosen for Google Wallet was a large reason for that.

NXP is possibly still a decent investment at this stage, especially since its stock is battered and is currently at less than half its 52-week high of $35.32. But looking at the future of NFC, NXP has an inherent weakness…

It doesn’t manufacture baseband processors for smartphones. Although current NFC-capable models and those in the near future use NFC controllers, it probably won’t last very long.

These controllers cost roughly $5 per phone. If NFC is widely adopted, it’ll be much cheaper – according to some, about $.50 per phone – to combine the NFC capability into the baseband processor, much like GPS, Bluetooth and WiFi are now.

Innovision’s Vision

In early June of 2010, Innovision announced that it created a way to greatly lower the cost of implementing NFC. Essentially, its Gem NFC IP allows baseband processor manufacturers to combine the NFC capabilities into their “combo chips” with the other features like GPS, Bluetooth and WiFi.

Former Innovision CEO David Wollen told the NFCTimes that the company believed NFC models starting in 2012 or 2013 would no longer put standalone NFC chips inside devices, but instead would opt for “combo chips” supporting the various wireless technologies. It would eventually reduce the cost of embedding an NFC modem in a handset to well below U.S.$0.50, he said.

Just over a week after the announcement, baseband manufacturer Broadcom (Nasdaq: BRCM) purchased Innovision for 47.5 million.

Broadcom will certainly have competition from other baseband manufacturers, such as:

  • STMicroelectronics (NYSE: STM)
  • LM Ericsson (Nasdaq: ERIC)
  • Qualcomm (Nasdaq: QCOM)
  • Marvell Technology Group (Nasdaq: MRVL)

But the acquisition of Innovision is already reaping benefits as Broadcom officially entered the NFC chip market and already has a head start on the competition.

Broadcom’s New Line of NFC Chips

On Monday, Broadcom announced the release of the BCM2079x family of NFC chips. Broadcom claims that the chipset “slashes power consumption by more than 90 percent, uses 40 percent fewer components and has a 40 percent smaller board area, making it the smallest and most power efficient NFC solution on the market.”

“Broadcom is committed to making NFC as ubiquitous as Bluetooth and WiFi are today,” Broadcom Vice President and General Manager Craig Ochikubo said.

While this chip doesn’t quite reach the vision of the complete “combo chip,” it’s a large first step in that direction.

The Bottom Line

NXP may still have a solid future due to the possible royalties it’ll receive from patents and licenses. It may even look to acquire or launch a baseband business to keep up with companies such as Broadcom and Qualcomm. But for those bullish on NFC and looking for a leader, it’s more likely to be Broadcom, or one of the other baseband manufacturers.

In reaction to the Innovision acquisition last June, Ochikubo told the NFCTimes, “We really feel its perfect timing right now, given increased interest from handset makers and carriers and the maturity of the NFC market.”

And with the recent confluence of Google Wallet and the Isis news with Broadcom’s latest release, it looks like Broadcom may truly be right on time.

Good investing,

Justin Dove

Article by Investment U

Parpart, Cheung on Global Markets, Investment Strategy

Sept. 30 (Bloomberg) — Uwe Parpart, head of research at Reorient Financial Markets Ltd., and Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong, talk about the global economy, financial markets, and their investment strategies. They speak with Rishaad Salamat, John Dawson, and Zeb Eckert on Bloomberg Television’s “Asia Edge.” (Source: Bloomberg)

Bakken Natural Gas Flaring: A Giant Step Backward or an Opportunity in Disguise?

Bakken Natural Gas Flaring: A Giant Step Backward or an Opportunity in Disguise?

by David Fessler, Investment U Senior Analyst
Friday, September 30, 2011

In North Dakota, the Bakken oil shale field has created tens of thousands of jobs, a resulting housing shortage-driven boom, the lowest state unemployment in the country and sorely needed tax revenue.

But it also created something else, a problem that has nothing to do with oil. It’s all due to a process known as natural gas flaring. (See the typical flare picture below.)

Natural Gas Flaring

Most of the oil wells also produce natural gas. When the mixture comes to the surface, the oil is pumped to the surface and stored in tanks.

The natural gas is separated from the oil. Most of the natural gas is sent through pipelines to processing plants. Some Bakken producers simply send it up a vertical pipe with an igniter at the end and burn it…

The Problems With Natural Gas Flaring

While natural gas flaring is bad for the environment, simply venting the raw gas without burning it is even worse. Natural gas is made up largely of methane, and that’s far more onerous than carbon dioxide.

How much of it gets burned? According to a recent article in The New York Times, about 100 million cubic feet per day (Mcf/d). That’s enough energy to heat 500,000 homes.

It can’t directly generate electricity, since it hasn’t been processed or cleaned of impurities, as is normally done. (If you missed it, I recently wrote an article about natural gas processing.)

Burning that much natural gas spews about two million tons of carbon dioxide into the atmosphere annually. According to the Times, that’s as much as 384,000 cars, or one moderately sized coal plant, throw off.

The 100 Mcf/d flared equates to 30 percent of the natural gas produced in the Bakken. No domestic field in the United States flares anywhere near that much. Established oil and gas fields already have a network of pipelines to gather and process both the oil and gas.

Not so in the Bakken. Its rapid development has led to a similarly rapid rise in flaring, as pipelines and processing plants have lagged behind.

Incredibly, in the United States, there are few state regulations (and no federal regulations) that limit or prohibit the practice of flaring.

North Dakota is on Top of the Flaring Problem

After reading the Times article, which called North Dakota’s flaring “a step backward for a domestic energy industry,” I decided to do some investigation of my own.

I spoke with Justin J. Kringstad, the Director of the Pipeline Authority for the Oil and Gas Division of North Dakota’s Department of Mineral Resources. It turns out that North Dakota isn’t just turning a blind eye to the flaring problem…

“We already have 16 natural gas processing plants in the state. They have a combined capacity to process nearly 800 million cubic feet per day (Mcf/d) of raw gas.

“That represents a tripling of gas processing capacity in just the last five years. By the end of 2012, gas processing and transport capability will rise to just over 1.1 billion cubic feet per day.”

Impressive, especially for an area that wasn’t even producing much oil five years ago. Kringstad said the level of investment in natural gas processing and gas transportation systems over the next two years would be roughly $3 billion.

Some Oil Companies See a No-Brainer Natural Gas Value Play

As natural gas becomes more popular as a transportation fuel, its price will begin to increase. One of the companies banking on that is Hess Corporation (NYSE: HES). It’s more than doubling its natural gas processing capacity at its Tioga facility from 120 Mcf/d to 250 Mcf/d by the end of next year.

Whiting Petroleum Corporation (NYSE: WLL) doesn’t believe natural gas prices will remain this low for much longer, either. In addition to Hess’ efforts, it and others are making significant investments over the next several years to build plants and pipeline networks to gather and clean the gas and sell it in Midwest markets.

Whiting says the gas from the Bakken contains large amounts of propane and butane, valuable gases that can only be had by processing raw natural gas and separating them from the methane.

Whiting has reduced flaring to 20 percent of all of its wells, from 80 percent when it first started drilling in 2007. Its goal is to further reduce flaring as it brings more processing capacity online. Eventually, it wants to capture all the natural gas it produces.

Environmentalists are anxious for the additional processing capacity. The 5,000 wells already in place are expected to increase to nearly 50,000 in the next 20 years. It would be a shame to waste all that gas while having to import crude oil.

Both Whiting and Hess’s shares have been hammered down to very low levels, as they have had their share of weather-related problems. Both expect to ramp back up to higher levels of production next year. They’ll both benefit even more as natural gas prices continue to firm. So will their shareholders.

Good investing,

David Fessler

Article by Investment U

UBS’s Tay Says Euro `Best Positioned’ for Next Year

Sept. 30 (Bloomberg) — Kelvin Tay, chief investment strategist at UBS Wealth Management, discusses his recommendation for the euro. Tay, who speaks from Singapore with Linzie Janis on Bloomberg Television’s “First Look,” also talks about the U.S. economy, Greece’s debt crisis and investment strategy. (Source: Bloomberg)

Gold Ends Sept. 16% Below Peak as “Unthinkable Money Printing” Urged to Avoid “Lost Decade”

London Gold Market Report
from Adrian Ash
Fri, 30 Sept 2011

WHOLESALE gold prices drifted lower in London after rising in Asia on Friday morning, set for their biggest monthly drop against the Dollar since the Lehmans’ crash of Oct. 2008 but finishing the third-quarter of 2011 more than 13% higher.

US equities and crude oil prices have lost 12.5% since end-June. Copper has fallen over 25% and the silver price has lost 13.1%.

New data this morning showed sharper-than-expected falls in French consumer spending and German retail sales.

US consumer confidence and manufacturing reports were due later on Friday.

“The [gold and silver] market suddenly seems quiet in this timezone,” said a Hong Kong dealer in a note this morning, noting “much lower” trading volume ahead of China’s ‘Golden Week’ holidays, which start on Saturday.

The China Daily cites one research forecast of 2.2 million people taking a foreign holiday next week, set to spend some $2.1 billion overseas.

“We don’t think the October National Day holidays in China will push down gold prices much,” a Hong Kong investor is quoted by the Platts news & data agency, “because we see strong investor demand in other areas of the world.”

Friday lunchtime in London saw spot gold prices in the wholesale market slip back below $1620 per ounce – a new all-time high when first reached in late July, but almost 16% below the new record high of Sept. 6th.

The US Dollar rose again versus both the Euro and Sterling today, while major government debt prices also pushed higher, nudging 30-year US interest rates back down below 3.00%.

Global stock markets meantime ended their worst 3-month fall since late 2008 by falling more than 1% in Asia and losing over 2% in Europe.

“We now expect the Euro area to slide into recession in the fourth quarter of this year,” writes J.P.Morgan economist David Mackie in a new report.

“The rout over the last couple of months in European equities may have been a lot worse than the US,” says Albert Edwards at Société Générale, “but it has merely taken us back to the forward [price/earnings ratio] seen at the market’s nadir in March 2009.

“Add in the recessionary impact on profits which have already begun to decline and European equity prices might fall a lot further yet.”

“[It’s] time to think the unthinkable and start printing again,” says the Financial Times’ economics columnist Martin Wolf.

“The alternative is likely to be a lost decade. The waste is more than unnecessary; it is cruel.”

Following yesterday’s approval by the Berlin parliament of a 70% rise in Germany’s cash guarantees to the European Financial Stability Facility (EFSF), “Eurozone finance ministers are expected to come up with new plans to ease the debt crisis, and the [European Central Bank] may lend a hand when it meets next Thursday” by cutting interest rates, says Steve Barrow at Standard Bank.

“We’d envisage the possibility of a sharp rally but…the effect [will] fizzle out pretty quickly.”

Looking back to this month’s US monetary policy change, “The Fed’s Operation Twist was largely priced into the fixed income market through a sharp fall in long-term yields between end-July and mid-September,” says the latest precious-metals analysis from Nic Brown and the team at French investment bank and bullion dealers Natixis.

“During [that] time, gold prices rallied by more than $240 per ounce. Hence there was little further benefit to be derived from this support,” leaving gold to fall sharply after Fed chairman Bernanke confirmed his plan to sell $400 billion of short-term US government debt in exchange for longer-dated Treasury bonds.

However, “with the very real prospect of a messy Greek default over the coming weeks or months, we are hesitant to suggest that the gold price rally is finished just yet,” Natixis concludes.

Adrian Ash

Gold price chart, no delay | Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Facing Facts: Greek Default Inevitable

Publically, Eurozone officials continue to pledge their full support for Greece and refuse to acknowledge the possibility that Greece may never be in a position to repay its debt obligations. Private conversations, however, likely take on a much different tone.

The markets certainly have little faith in Greece’s ability to survive as a solvent entity. The current yield on 2-year Greek bonds is rapidly approaching 50 percent which is hardly a vote of confidence. For many, the focus at this point should simply be to shelter the remaining Eurozone members from a similar fate.

In order to convince Eurozone officials to come to Greece’s rescue in the first place, the Greek government agreed to implement a wide rage of “austerity” measures to address the country’s chronic deficit habit. Comprehensive spending cuts and the introduction of new taxes and revenue-generating schemes are part of the plan to close the budget gap.

Naturally, the government’s deficit fighting plans have not been well received by the citizens of Greece. Athens has been the scene of mass protests bordering on all-out rioting and while it was never very likely the government would meet its austerity targets, public opposition has all but ensured the goals will remain unfulfilled.

What is lost in the rhetoric is the fact that the next emergency payment of 8 billion euros is due within days but payment is contingent on meeting the austerity targets. If the payment is suspended, Greece will effectively run out of money by the middle of the month and will not be able to meet its next round of debt payments.

Few expect the money to be withheld but this constant threat of insolvency is simply not tenable; worse still, it is highly destructive to global markets. Harvard Economist Martin Feldstein went on record earlier this week to state the case for allowing Greece to default.

“The only way out is for Greece to default on its sovereign debt”, Feldstein wrote in an article published Wednesday. “When it does, it must write down the principle value of that debt by at least 50 percent.”

In other words, if a default is indeed unavoidable, let’s get it over with and do what we can to minimize the ill effects.

This means protecting European banks from the massive losses these institutions would face in the event of a Greek debt write-down. Forcing the financial system to take the brunt of the default could trigger further Eurozone insolvencies as credit availability would plummet. For countries including Spain and Italy, there is still a great need for access to stable and affordable credit as both struggle to address their own deficit issues.

By putting an end to the hostage scenario global markets have been subjected to for well over a year now, we can start to heal infected balance sheets and restore investor confidence. Few believe Greece can avoid a default so let’s face the fact and concentrate on minimizing collateral damage.

Scott Boyd is a currency analyst and a regular contributor to the OANDA MarketPulse FX blog

How Have European Dividend Achievers Held Up?

By The Sizemore Letter

Wise? Yes. But could he manage a stock portfolio?

As the wise King Solomon noted 3,000 years ago, “to everything there is a season.”  Solomon had no knowledge of the stock market, of course, but his words can certainly be applied.

There is a time to be invested in growth stocks—such as the 1990s—and a time to be invested in value—such as the mid-2000s.  And as recent experience has shown, there is a time to be out of the market altogether.

So what “season” might we be in today?  If the last two months of volatility are any indication, a rough one.

For the past year, I’ve been advocating a high-dividend strategy, though this was more by process of elimination than anything else.  Consider:

  1. Bonds, by and large, do not yield enough to warrant serious consideration.  Why risk capital loss for a puny 2.0% yield?   You’d be better off keeping your funds liquid, in cash.  But…
  2. Cash pays virtually zero.  Even if inflation remains benign—and the history of credit bubbles and busts suggest it will—you’re likely going to see a negative real return on your cash for the rest of this decade.
  3. Stocks, though cheap, can get a lot cheaper.   While I am not a bear by any stretch, investors should have reasonable assumptions about market returns.  Stocks may go much higher from current levels, but given the ongoing fallout from the U.S. mortgage crisis and the never-ending sovereign debt drama coming out of Europe, it promises to be a rough ride.
  4. Gold ($GLD) is exhibiting all of the signs of a bubble, and that bubble may already be in the process of deflating (see “Is it Time to Call the Top?”).  But even if gold enjoys another leg up, do you want to bet your financial future on an asset whose value is determined purely by the whims of speculators?  Remember, gold has no intrinsic value.  It has no earnings, and it pays no income.  It’s worth only what the market says it’s worth today, and the market can be a rather fickle mistress.
  5. Oil and gas Master Limited Partnerships ($AMJ) and subsectors of the REIT universe that are less economically sensitive—such as apartments , self-storage, or senior living facilities—are priced reasonably and generally pay out a healthy amount of cash distributions.  But you can’t put your entire net worth into pipelines and REITs.  Both are highly sensitive to interest rate movements and to changes in the tax code.  As investors in the Canadian royalty trust sector learned a few years ago, changes in the tax code can absolutely wreck a portfolio.  Most financial planners would not advocate putting more than 10-15% in each, and I am inclined to agree.

So, for lack of anywhere else to go, I come back to high-dividend equities.  The case here is pretty straightforward.  Stocks that pay a dividend guarantee you at least a modest realized return, even if the share price goes nowhere.  And most importantly, healthy companies raise their dividends over time, and not always by a trivial amount.  Microsoft ($MSFT) , for example, raised its dividend by a full 25% this quarter.

The other case for dividends is more philosophical.  When a company raises its dividend, it sends a very important message that management is confident about the company’s future and that it takes its obligation to reward shareholders seriously.   And if a company is able to raise its dividend during crisis years like 2008—when plenty of companies had to slash their dividends to preserve cash—you know they can survive Armageddon.

With that said, let’s take a look at how the PowerShares International Dividend Achiever ETF (NYSE: $PID) held up during the recent spate of volatility emanating from Europe.  This ETF is composed of non-U.S. (mostly European) companies that have raised their dividend for a minimum of five consecutive years—years that include the annus horribilis of 2008.  For comparative purposes, I graphed Dividend Achiever ETF against the larger iShares MSCI EAFE ETF (NYSE: $EFA), which is also primarily composed of European stocks.

Figure 1: PID vs. EFA

Not shockingly, the Dividend Achiever ETF took less of a beating over the past three months.  It did, however, still manage to lose 10%.

What are we as investors to take away from this?

To start, during a short-term panic or a liquidity crisis, all stocks fall.  So, if you need access to your funds in the near future the same rules as always apply: don’t put funds into the market that you need in the immediate future for basic necessities.  And if you believe that stocks in general are wildly overpriced or at particular risk of a major correction (or if there are simply better investment options out there), then by all means, stay out.

But if you believe, as I do, that the market will move mostly sideways over the next several years (with random and hard-to-predict mini-booms and mini-busts scattered throughout), then a dividend growth strategy is the way to go.  Investors in or near retirement can use the dividends to meet current living expenses.  And investors investing for long-term growth can reinvest the dividend and put the magic of compounding to work.

In an environment in which returns can be hard to come by, take the dividend check in the mail.