Date: Wed Apr 13 2005 13:52
trotsky (P. Yorkie@oil, oil stocks) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
remember when i told you in early March that it wasn't a good time to be smug about the XOI?
this is even more true today. as Mr. Gartman correctly notes, the huge contango that has suddenly developed in the WTI futures market means exactly the opposite thing of what the government's energy agencies assume it to mean ( i note the IAE and other organizations like it published their first bullish crude oil forecasts in YEARS right at the top - and the structure of the futures markets informed their reasoning, just as it informed their reasoning when they called for lower oil prices all the way UP ) .
as long as the market remained in backwardation, one thing was assured - there was near term tightness of supplies. the contango indicates the opposite - and just as the backwardation proved to be extremely bullish, the contango is anything but.
why should oil prices decline when everybody just 'knows' they can only go higher? the answer is that the entire 'reflation' episode will be aborted as soon as the US consumer loses his appetite to consume by means of incurring additional debt.the backstop for the debt increase has been the housing bubble - but central banks have removed a lot of liquidity in recent months, and the Fed has been especially noteworthy in this regard ( money supply growth rates have slowed down considerably ) .
once the indiscriminate consumption ends, a plethora of malinvestments will be revealed - in China especially. in short, there's a significant connection between the investment boom in China and the real estate and consumption bubble in the US. the oil market could be faced with losing its most important demand growth driver. it won't take much - if demand at the margin is anything less than exorbitant, the market will have to deal with the fact that inventories have risen strongly in recent months.
this won't necessarily invalidate the long term bull market thesis, which appears sound to me. but a cyclical bear could lead to a very sizeable correction in XOI component shares ( which incidentally now sport some of the lowest put/call open interest readings in ages ) .
Date: Wed Apr 13 2005 13:34
trotsky (@pm stocks) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
i recently averred that i thought a playable low was close at hand - many indications spoke in favor of this scenario ( it may still happen actually ) . but this most recent lo-vo/slo-mo ( low volume, slow motion ) slide of the gold sector suggests a reassessment is necessary, unless it's reversed quickly and convincingly.
something is not right - i don't know what it is, but i'm wondering if there's not some sort of capitulation coming. lately the gold stocks are down even on relatively strong up days for the PoG. this has NEVER portended anything good for the sector.
yesterday the XAU produced a daily candle that suggested reversal possibilities. but it has not been confirmed. when the market fails to follow through in this manner, it's also seldom a good sign. the most likely explanation is that a big correction in the PoG is imminent.
now, if the XAU turned around right here and were to close up by 2 points or more, then the 'disinterest bottom' scenario would certainly be back in play. but the longer this doesn't happen, especially with the sector weakening while the PoG creeps up , the more likely the capitulation scenario becomes. note also, we're at or close to LT up trend lines. per definition, those better not get broken.
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