The path of Gold

Gold may rise for a fourth straight week on speculation that a slowing U.S. economy will erode the value of the dollar, increasing the appeal of the precious metal as an alternative investment.

Several investors and analysts advise buying gold, which rose 0.8% last week to $601 an ounce in New York.

The metal has rebounded after a 4.7% drop in September that was the 2nd-biggest monthly decline in 2 years, and the dollar has fallen for 2 consecutive weeks against the world's major currencies.
U.S. economic growth slowed in the 3rd quarter to the slowest pace since 2003 as the housing market slumped and the trade deficit widened.

Bullion will probably end this year at $580 an ounce and next year at $550 an ounce.

Indian Rupee goes back on track

Indian currency has rebounded after touching a 3-year low on July 19. The rally was fueled by equity purchases by global investors as the benchmark stock index rose almost 45% in the past four months, reaching a record on Oct. 16.

Overseas investors who sold billions in stocks in May, the most ever, have returned to buy more than $1 billion each month in August and September. Purchases are set to exceed the billion in October as well, based on data provided by market regulator Securities & Exchange Board of India.

Investors are benefiting from rising corporate earnings as growth in Asia's fourth-biggest economy expanded at an average rate of 8% in the last 3 financial years through March 31. It may grow 8.2% this financial year.

Growth, Inflation

The recent rise in the index is backed by fundamentals such as better earnings reported by companies. The growth momentum again is another reason why the rupee should get stronger.

The rupee's 3.5% advance in the past three months trails only the New Zealand dollar among several Asia-Pacific currencies.

India's growth rate, second to China's among the world's major economies, also threatens to stoke inflation. Wholesale prices rose 5.26% in the week ended Oct. 14, the most since mid-June, the Ministry of Commerce and Industry said on Oct. 27.

A 23% decline in crude oil prices from their all- time high of $78.4 a barrel touched on July 14 also helped the rupee sustain gains. Higher costs hurt India which depends on imports for 3/4 of the crude it needs.

Fed may enter a period of unchanged rates

The Federal Reserve, after an unbroken two-year stretch of raising interest rates, may now be entering a prolonged period where the central bank keeps rates unchanged.
It could be next June or later before the Fed makes any change in interest rates because of the opposing forces buffeting the economy at present.

Analysts hold that view because they think inflation is likely to linger at levels that will keep the Fed from cutting rates and economic growth will be too slow to think about raising rates.

The central bank, in announcing Wednesday that it was keeping the federal funds rate unchanged for a third straight meeting at 5.25%, cited the twin dangers it is confronting.

The Fed statement said core inflation, which excludes energy and food, remained at "elevated" levels even as overall economic growth has been slowing, reflecting in part the slowdown in housing.

Wall Street had widely expected the Fed to stand pat on interest rates, a decision that affects millions of borrowers whose credit card, home equity lines and other loans are tied to the prime rate set by banks and other private lenders in response to Fed policy. The prime will remain at 8.25%, where it has been since June, the last time the Fed raised rates.
Analysts saw the Fed's brief statement Wednesday as confirmation of their belief that the central bank is through raising rates but at the same time is in no hurry to start cutting rates.

The Fed is telling us that there will be no change in monetary policy for the foreseeable future, but on the other hand, the Fed knows if you were to raise rates now you could turn what is a reasonably orderly decline in housing into a rout and threaten pushing the economy over into a recession.

My believe is that by the middle of next year, the sub-par growth should have helped to lower core inflation enough that the Fed will feel comfortable in beginning to cut rates, setting the stage for stronger growth in 2008.

Economists believe that while the Fed keeps short-term rates unchanged, long-term rates will probably move higher as financial markets realize their expectations for quicker Fed rate cuts will not be realized.

Of course, if a sudden spike in energy prices rekindles inflation, the Fed might feel the need to boost rates further. Or if the weakness in housing threatens an economy-wide recession, the Fed might ride to the rescue with faster rate cuts.

Bulls bask, but bears and bugs regrouping

Don R Hays of the respected Hays Advisory institutional service was his superbullish self Wednesday, and that's before the Dow Jones Industrial Average made a third successive record high close as the Fed again declined to tighten.

Hays wrote:

"NEVER, NEVER, NEVER in my 37-year career have the secular signs been more exciting than they are today. Let me say that again. This is not a flamboyant statement ... We believe the stock market's rally will prove in time to have known the Fed despite their Open Mouth Committee statements was opening the spigot. Over the last two months the growth rate of MZM and M2 (money supply measures) is 7.4% and 6.9% respectively, and that is very, very good news IF it continues. We believe it will..."

Hays even interprets that fact that the stock market is overbought according to some indicators as bullish:

"In truth, this is bad news ... or good news. In strong bull markets an overbought condition that reaches very overbought levels is a very good sign of buying power ... if confirmed by psychology readings showing the buying power coming from the smart side of the aisle."

Hays argues this is now the case. This is his asset allocation:

"We are 90% bullish and have 10% cash, just in case the market gives us that more acceptable and easier time to buy new stock positions on a pull-back."

In contrast, I've recently begun checking with a radical gold bug site www.Lemetropolecafe.com.

Proprietor Bill Murphy was totally unimpressed with the stock market, which he believes is being groomed prior to the Nov. 7 federal election:

"This joke of a U.S. stock market goes on and on. For most of the day the Dow was down, while the S&P and DOG (Murphy's nickname for the Nasdaq) were slightly higher. After the Fed announcement, the Dow rallied above unchanged, sunk back down to near its lows once again, and then made its usual late charge to end up on the day to give us another all-time high, following President Bush's press conference this morning."

But, Murphy believes, gold is beginning to struggle free of what he claims are its manipulators, whom he calls the "Gold Cartel":

"The Amex Gold Bugs Index is leading the way up. It broke out today, decisively. It made new recent highs by a wide margin, breaking out of a well formed base, while both gold and silver are well off recent highs. This makes sense. The Gold Cartel have moved the shares down ahead of the election. They want out (of their short positions), or want IN (to long positions) because they know what is coming in the months ahead.

Gold is moving irregularly higher. The move up should continue into the elections on November 7. However, super excitement will not be allowed until the elections are over ... While The Gold Cartel gradually covers, the specs remains VERY short from a historical perspective ... which gives us a shot at a spectacular, short-covering squeeze in the weeks and months ahead."

Murphy also thinks there's evidence holding gold down is getting more difficult:

"Volatility in the prices of both gold and silver is present almost on a daily basis, both up and down. This tells me the price manipulators are stretching to find enough physical to keep the prices down these days."

Interestingly, Dow Theory Letters' Richard Russell (who thinks the stock market is "severely overbought, but evidently deciding to stay that way") also wrote Wednesday night: "It looks to be as though the whole raw materials, commodities, oil, gold, silver, base metals area has finally bottomed and may now be making up for lost time on the upside. Sel Sector:Matrls SPDR , Dow Jones Real Estate Index Exchange Traded Fund, United States Oil Fund for those who want to play the change."

Indian companies aiming higher

Indian companies have benefited from the country's economic growth, which the government predicts will reach 8% for the fourth year. Prime Minister Manmohan Singh on Oct. 12 predicted the economy will expand 8.5% in the fiscal year ending March 31, faster than the central bank's estimate of as much as 8%.

Economic growth has boosted stocks, attracting capital into the equity market. The Bombay Stock Exchange's Sensitive Index, which rose to a record 12,994 points Oct. 17, is headed for the fifth year of gains. The Sensex has advanced 35% in 2006.

Global funds bought an average $151 million a day of equities in the week to Oct. 18, compared with $45 million the previous week, stock-exchange data showed. They invested an average $42 million in stocks a day in the three months ended Sept. 30, compared with average daily sales of $22 million in the previous quarter.

The rupee's advance was curbed by concern a move by Tata Steel Ltd., the nation's second-biggest steelmaker, to buy the U.K.'s Corus Group Plc will cause an outflow of foreign exchange from the country.

The rupee has fallen off highs after the news about Tata Steel's acquisition plan came in. The market is concerned about outflows and those who were short on dollars have been covering those positions.

Tata today said it agreed to buy Corus for 4.3 billion pounds ($8 billion), the biggest overseas acquisition by an Indian company. The Indian steelmaker said it will pay Corus shareholders 1.84 billion pounds in cash. The rupee also fell on speculation importers bought dollars, taking advantage of the local currency's gains.

The ten trading commandments

Many do think the easiest way to make money was to stand near the cash register, and they may be right... it can be the best way to built a way of living that could take a lifetime to achieve.

A good way to start practicing can be as a game, but always keeping in mind that in the end, certain rules will allow you to stay in the game.

1. Respect the price action but never defer to it. The action (or "eyes") is a valuable tool when trading but if you defer to the flickering ticks, stocks would be "better" up and "worse" down and that's a losing proposition. This is a particularly pertinent point as headlines of new highs serve as sexy sirens for those on the sidelines.
2. Discipline trumps conviction. No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and, above all, never believe that you're smarter than the market.
3. Opportunities are made up easier than losses. It's not necessary to play every move, it's only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.
4. Emotion is the enemy when trading. Emotional decisions always have a way of coming back to haunt you. If you're personally attached to a position, your decision making process will be flawed. It's that simple.
5. Zig when others zag. Sell hope, buy despair and take the other side of emotional disconnects in the context of controlled risk. If you can't find the sheep in the herd, chances are that you're it.
6. Adapt your style to the market. At various junctures, different investment approaches are warranted and applying the right methodology is half the battle. Identify your time horizon and employ a risk profile that allows the market to work for you.
7. Maximize your reward relative to your risk If you're patient and pick your spots, edges will emerge that provide an advantageous risk/reward. Proactive patience is a virtue.
8. Perception is reality in the marketplace. Identifying the prevalent psychology is a necessary process when trading. It's not "what is", it's what's perceived to be that dictates supply and demand.
9. When unsure, trade "in between". Your risk profile should always be an extension of your thought process. If you're unsure, trade smaller, or paper trade, until your identify your comfort zone. Trading "feel" is cyclical and any professional worth his or her salt must endure slumps.
10. Don't let your bad trades turn into investments. Rationalization has no place in trading. If you put a position on for a catalyst and it passes, take the risk off win or lose.

Investors Return: India is back on track

Stocks are climbing as investors pour funds back into the local market, betting companies such as Reliance Communications Ltd. and Grasim Industries Ltd. will benefit from accelerating economic growth. Stock sales by offshore investors in May triggered a monthlong slide in the market that wiped $259 billion off the value of the country's listed companies.

Indian stocks dropped after investors sold shares on concern higher interest rates would stifle economic growth and oil prices at records would add to corporate energy costs and crimp consumer spending.
Those concerns were allayed after the U.S. Federal Reserve ended a two-year streak of interest-rate increases and oil prices dropped 20% from record highs set in July.

Overseas investors are looking to benefit from India's relatively rapid growth. Last year they ploughed a record $10.7 billion into the local market and this year's net purchases total $5.37 billion. Since June 14, they've bought local shares worth $2.77 billion, surpassing the amount they sold during the rout. Corporate earnings are expected to grow at between 15% and 20% so we can expect similar returns for the stock market.

"India is a great long-term story, it's a story about strong domestic demand. Corporate earnings are expected to grow at between 15% and 20% so we can expect similar returns for the stock market."

India's Prime Minister Manmohan Singh

Growth Forecast

Singh yesterday (Thursday 12th) raised the government's forecast for growth in Asia's fourth-largest economy to 8.5%, following expansion of more than 8% annually since 2003.
India's $775 billion economy grew 8.9% from a year earlier in the three months ended June 30, a pace of expansion second only to China among the world's 20 biggest economies. The U.S., the world's largest economy, grew 3.5% and Japan, Asia's biggest, reported a 2.5% rate.

"The process of growth under way in India is now much more sustainable than ever before. We are aware that to sustain the growth momentum, we need to do much more in infrastructure."

India's Prime Minister Manmohan Singh

Nine out of 11 indexes on the Bombay Stock Exchange rose today, with technology, banking and consumer companies leading the advance. The stock market recovery is spurring companies to sell shares.

Local investors are contributing to the market's gains as well. Domestic funds remained buyers of stock during the slump, purchasing shares worth $1.12 billion from May 10 to June 14. Since the low in June they bought $1.78 billion worth of stock.

OPEC's big gamble

The cartel is set to cut 1 million barrels of production but that may actually force prices lower in the long run.

If OPEC follows through on the talk that it will cut oil production by a million barrels a day, it will send a clear signal that the cartel feels the world can handle $60 oil.
But it could also undermine prices in the long run, energy experts said, by encouraging more conservation and investment in alternative energy.

Furthermore, the cut by OPEC could actually come back and haunt the cartel later since it gives the world more of a cushion against further output disruptions in the future.

Initially, news of the planned cut last week sent prices rising back above $60 a barrel. But prices have fallen back since then, to about $58 Wednesday, as OPEC ministers bicker over exactly which nations should cut how much, and when they will do it.

Most analysts believe a cut is coming soon, and Qatar's oil minister said that "there is no objection" and that it could happen within the next two or three days.
Analysts had long predicted OPEC would cut production if crude oil sank into the $50s, especially since autumn is typically a season of low demand. The decline has come as economic growth has slowed and supplies swelled to levels above or well above average for this time of year.
Analysts said the biggest reason OPEC, which currently supplies better than a third of the world's 84 million-barrel-a-day habit, will likely cut production is because it can.
The global economy has continued to grow despite oil's record run. And demand, while slowing, continues to rise.
They are all enjoying the largesse of higher prices, and they see the global economy can handle it so far."

But for OPEC there are dangers to this strategy.

First, by keeping prices in the $60 range, OPEC is encouraging oil production in other, more expensive places, thus continuing to add to supply.
Second, higher prices encourage conservation and the development of alternative fuels, like ethanol or fuel cells, which could ultimately reduce demand for oil and drive prices lower.
And lastly, by taking 1 million barrels a day offline, OPEC is essentially adding that amount of oil back into a "reserve" that could be tapped in case of a supply disruption.

It was this fear of a supply disruption at a time when oil production was barely able to keep up with demand that is partly responsible for the jump in oil prices over the past four years: Crude prices have tripled since 2002.

"Potentially, it will take away some of the fears. This is taking a significant production cushion and putting it just offstage."

John Kilduff, energy analyst at Fimat in New York.

Not everyone agrees with that view.

While OPEC will no longer be pumping at full capacity, there is still little room between what the world consumes and what it is able to produce.

"We still have that fundamental issue, If we had a supply disruption it would really tighten up the markets in a hurry."

Brian Hicks, co-manager of the Global Resources Fund at U.S. Global Investors.

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An oil boom? Not in India

High crude prices may be fattening profits at oil companies around the world, but in India state-controlled refiners and retailers are losing money hand over fist. In the fiscal year that ended in March 2006, those companies lost a combined $8.6 billion. The estimates say they will lose another $12 billion to $20 billion this year.
The reason: government price controls on gasoline, diesel and cooking fuels.

"Today we are selling gasoline at 8 cents a liter below cost, diesel at 17 cents a liter below cost and kerosene at 39 cents a liter below cost, to retail customers." N. Srikumar, a spokesman for Indian Oil, the country's largest refiner, which reported its first quarterly loss, on revenues of $41 billion, last year.

Bharat Petroleum, also posted its first loss, of $145 million, in the quarter ended in June. Hindustan Petroleum had a loss for the quarter of $130 million.

"Kerosene used by poor families in India for cooking and lighting is sold at less than the price of packaged drinking water." Says Sudhir Joshi, finance director at Bharat Petroleum

Murli Deora, India's Minister of Petroleum and Natural Gas, acknowledges that the international price for kerosene, widely used for cooking in India, has increased by 254% since 2002 without any increase in cost to individual consumers. But he defends the government's price-control policy.

"The citizens of the country, have limited capacity to bear high price increases, particularly in the case of lifeline fuels like kerosene. The government is making every effort to see that the impact on our consumers is minimal." Sudhir Joshi, finance director at Bharat Petroleum

"The government's petroleum-pricing policy is creating problems in realizing the sector's huge potential." Paras Adenwala, chief investment officer at ING Investment Management in Mumbai

Shareholders are feeling the pain, the stock price of Bharat has fallen by more than 15% since May, while Indian Oil has dropped 7% and Hindustan Petroleum 11% in the same period. All those stocks have been underperforming India's benchmark indexes for two years, although they make up the largest single chunk, by way of value, of public-sector companies traded on the country's bourses.

To help offset the burden placed on the oil sector, the government will issue bonds worth $6 billion. It has also directed state-controlled exploration companies to sell crude oil and gas to state-owned marketing companies at discounted prices, a move that will cause the exploration majors to lose approximately $5.2 billion this year, according to Iyer. The government has also cut some taxes and allowed a small increase in the price of auto fuel in June.
The rest of the loss will have to be borne by oil marketers, who are borrowing record amounts. Indian Oil's borrowings rose by 52% last year, to $5.7 billion.

"Over the longer term, if the market and prices are freed, then everything will get normalized. Right now we can't put the average Indian to inconvenience for our commercial gain, and yet we need to earn a surplus to invest for the future."Indian Oil's Srikumar

Private-sector refiners and marketers, have found a way out of the dilemma. Rather than sell auto and cooking fuels below cost in India, the companies have taken to exporting a large part of their output. Their exports for the quarter ended in June rose more than 85% over the previous year, to $2.9 billion, helping boost net profit by 10%, to $553 million.
State-owned companies don't dare export - or complain too loudly. Earlier this year Subir Raha, the outspoken chairman of Oil & Natural Gas Corp., was shown the door after publicly demanding that the government pay the company prevailing international prices for the crude oil it produces.

All down with the buck

Global leaders must find a way to unravel lop-sided trade and investment flows or risk a slump in the U.S. dollar that would create havoc for the world economy.

An international agreement along the lines of the 1985 Plaza Accord "on a bigger scale" is needed to unwind the imbalances that have resulted in the U.S. current account deficit swelling to a record $805 billion and surpluses in China, the rest of Asia and Europe.

A disorderly unwinding would play havoc not only with the U.S. but with the world economy. What the world needs right now is something like the Plaza Accord but on a bigger scale.

A slump in the dollar could prompt U.S. policy makers to raise U.S. interest rates, causing a decline in house prices to accelerate and curbing consumption among the heavily-indebted consumers who represent 70% of the world's biggest economy. A subsequent slide in corporate investment would have a "chilling" effect on the global economy.

The 1985 Plaza Accord precipitated an appreciation in the yen that eventually led to an asset bubble in Japan that burst in the early 1990s, leading to a 15-year period of lackluster growth during which the world's 2nd-largest economy had 3 recessions.

Japan took most of the brunt of the Plaza Accord, obviously any such agreement needs to be a lot more sophisticated than that.

Countries including China, Brazil, Mexico, India, Saudi Arabia, some of the wolrd biggest economies, should join the group of countries to come to an agreement, which currently has the countries members of the G-8 as participants.