August Stock Talk I

Gold and silver remain choppy amid a back and forth U.S. dollar and a somewhat supported oil market.  Gold has three dynamics at the moment:

1)      Inverse U.S. dollar correlation - gold is priced in U.S. dollars on a global scale.  The cheaper the dollar the stronger foreign currency is to buy gold at what they perceive are discounted levels.  However, if the dollar rallies this has the opposite effect and foreign buyers are stuck paying inflated prices.  The single biggest reason that gold will fail from these levels is the dollar's strength over the next 6-12 months.

2)      Oil inflation- inflated oil prices, or commodity prices in general, create a much higher annual inflation rate (9% sound about right?) than what the Federal government wants us to think.  Gold is the world's inflation gauge so it would seem that as goes inflation, gold will follow.  However, when prices in gold far exceed the annual inflation rate (by anyone's calculation) over the past 5 years or so, then it would seem that there is less of a true correlation and more of an exposure to the downside for the potential of a declining inflation rate in the months and years ahead.

3)      Flight to quality - the reeling stock market is getting beat up on what many would argue is a complete economic meltdown - the perfect storm of inflation, bank failures and collapsing real estate market.  When the normal source for investment disappears and investors become concerned over how to make a return on their money they turn to bonds and gold.  However, this resilient market is not a screaming sell anymore.  It is clear the Fed will take excessive and unlimited measures to support the financial markets, despite its long term negative affect. 

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

The mortgage troubles have been exacerbated by an economy that is still struggling. Reports last week showed another drop in home prices, slower-than-expected economic growth and a huge loss at General Motors. On Friday, the Labor Department reported that the unemployment rate in July climbed to a four-year high.

While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said.

Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are “alt-A” loans, many of which were made to people with good credit scores without proof of their income or assets.