Monday, August 11, 2008

Stocks Gain on Oil Slowdown, but Metals Drop is Troubling

The price of crude is just about the only element pushing the stock market at this juncture. Having fallen more than $30 per barrel since early July, oil, the energy fuel that drives the world economy, is better when it is cheaper, both for businesses and consumers.

So, banks may fail and consumer spending may sink into the deep blue, but every time crude drops a buck on the futures market, everyone gets a spate of relief and the feeling that all is well.

Dow 11,782.35 +48.03; NASDAQ 2,439.95 +25.85; S&P 500 1,305.31 +9.00; NYSE Composite 8,492.94 +32.62

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As I've been reporting of late, this is not necessarily good news, as other commodities are falling in price along with Texas tea, notably, gold and silver. The precious metals, as they are known, have been in total liquidation mode, as positions are being unwound with head-spinning rapidity.

Monday was no exception. Oil fell 75 cents to $114.45, but gold was off by a huge $36.50, to $828.30, while silver lost an impressive 71 cents, dropping to $14.62. Both gold and silver crashed through support levels established earlier this year.

Note: closing prices are based on NY spot prices at 2:30 pm Eastern time. As of this writing, at 9:00 pm Eastern, Gold has fallen even further, down to $803 in Sydney and Hong Kong.

Crashing prices in any market is not a good sign for economies in general terms. Ideally, prices should exhibit some degree of stability - it is what all economists strive to achieve. When the metals prices erode as quickly as they have been, it is a sign of serious liquidity problems on a global basis. In a market absent of credit - as our global economy has become - often precious metal caches are liquidated in order to raise cash.

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The sharp recent declines in gold and silver can only be seen in the most distressing light. We are on the verge of a global economic meltdown as the commodity bubble is now bursting.

To illustrate, gold soared past the $700 mark in September of 2007. Within 6 months, it had hit $1000. On July 15, after a decline down to around $850, gold sparked back to $980 on July 15. Noting tomorrow's early price, in less than a month, gold has lost nearly $150, or 15% of its value.

For stocks, it was a bullish session. Advancing issues outperformed decliners, 4114-2158. At last, new highs exceeded new lows, 204-191.

Where the unwinding in the commodity markets is going to land stocks is, for now, unknown. Presently, it's seen as a good sign - easing of prices. However, if allowed to continue unabated, these are the same conditions that led to Japan's lost decade of the 1990s, and, of course, the worldwide Great Depression of the 1930s.

NYSE Volume 1,263,452,000
NASDAQ Volume 2,302,385,000

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