For starters, the GDP forecast from Jan Hatzius raised expected 2011 GDP to 2.7% growth from about 2.0% growth. More importantly, it lifted its 2012 target to 3.6% growth for the year.  The firm noted that this is a shift in the growth outlook that had been in place for about 5 years.

The forecast for gold by Goldman Sachs noted a level of $1,690.00 per ounce as the next target for 2011 and peaking at $1,750.00 per ounce.  On oil, Goldman Sachs sees an average oil price of $100 per barrel in 2011 and it sees an average price of $110 per barrel in 2012.

As far as how this compares to gold and oil, oil this morning is $1,389.20 per ounce (down less than 0.2%) and NYMEX Crude Oil is trading at $86.33 (down almost 0.5%).   Calculating the implied price for the SPDR gold ETF would be $167 to $168 in 2011 and about $172 to $174 in 2012.

The US Oil ETF (USO) is harder to calculate because it has erosion and roll dates to account for.  If we were forced to imply some forward prices on the USO based upon GoldmaN Sachs’ new targets, that would come to a range of $41 to $42 in 2011 and $45 to $48 in 2012.

Again, those are subjective targets on both gold and oil and the tracking price often falls out of line in fast markets on both fund products.  Calculating the prices for ETF and ETN products like OIH, DIG, GDX, DGP, and others is very difficult because of the equity components and relative assumptions that have to be included.  In theory, those prices should all be higher than today as well if Goldman Sachs is accurate on these higher forecasts for GDP, oil, and gold.

Keep in mind that this is just one firm’s forecast, even if it is the might Goldman Sachs.  Many economists and many industry insiders have different objectives.  Some are higher, some are lower.

So far the GLD is up only marginally at $135.60 and teh USO is down about 0.5% at $37.05.

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JON C. OGG

This is certainly not the first such notice, but what we have been watching is what appears to be the formation of a head and shoulders chart pattern.  Our problem here is that you never know if it is real until it is confirmed.  This marks the fourth such time we have seen a pattern start as a head and shoulders, but each has only been a pause where traders and investors shook the sellers out of gold.   A chart analysis from our affiliate at INO this morning shows that gold bugs may be coming back in after today’s move.  Longer-term charts are still looking up, but Adam Hewison of INO has a short audio-video showing that near-term charts are sideways to even down, but longer-term the charts are still indicated for strength.

Where this is confusing is that many of the same fundamentals are in place for gold.  Forget the jewelry and industry angles.  This is as an investment class and as the new currency.  The looming trouble in the European Union is to blame for the latest infighting on the price of gold because the dollar is no longer in free-fall.  Still, we are beginning to see the cracks in the foundation of debt instruments and it is hard assets that will be sought if currencies continue to be diluted and diluted.  We noted in mid-November that the correlation trade was showing cracks, indicating that stocks and bonds, and commodities and currencies might not just all react to each other as we had seen for months and months.

Maybe the currency effect is more of a decade long event without a single catalyst and with an overnight reaction.  Still, demand is high and mining gold is much different than the old prospecting days of looking for gold in rivers and looking for shallow-dirt gold veins in hills and mountains.  Some is taken by strip mining and treating to extract gold  particles and other mining is deep in the earth.

The fundamentals still seem high for gold.  We even went as far to give gold an honorable mention in our recent piece of ETFs For Futurists looking to capture secular trends.  The chart is still unfinished business.

The next week is likely to be a very pivotal week for gold.  It could set the tone for a serious pullback or a real continued rally.  The gold bugs will be watching, and the speculators… well, they’ll be speculating.

1:25 PM EST Update: Unusual Options Alerts in long-dated GLD LEAPS

JON C.  OGG

The move is an interesting one in theory, but if an individual were to pursue this strategy he or she would be laughed out of the park.  The move is rather simple: print up new cash and use the money to buy up shorter-term and intermediate-term Treasuries to keep rates low.  In short, dilute the currency and keep an artificial environment going with interest rates extremely low to near-zero to fight deflation.  The big issue is that printing money is inflationary while buying up Treasuries increases Uncle Sam’s balance sheet with securities that either mature or which will have to be sold (or used as collateral) down the road.

Is this currency manipulation?  The U.S. has been after China to loosen the peg on yuan against the dollar.  So far, China has committed only to a gradual devaluation of the currency into wider free-exchange bands.  That may take too long, and this move to print money to buy up assets may force China to unload currency in that peg.  Even if China holds on to its dollar horde, the impact may be the same.  Where this becomes a conundrum is that China would likely unload Treasury securities along the way and it would likely buy even fewer Treasuries as a percentage of its Central Bank assets ahead.  That would imply that China could keep selling and large portions of the money freshly printed just went to buy up the debt held by China.

The FOMC wants inflation a bit closer to its 2% implied target, far higher than what has been seen.  With the FOMC keeping short-term rates low at near-zero and with the Treasury increasing its balance sheet by buying Treasuries, this forces investors into risk-based assets.  If you can magically get inflation to 2% and short-term and intermediate-term Treasury rates are so low, what does that do to real returns on an inflation-adjusted basis?  Yep, negative real rates of return.

We already saw a TIPS inflation-adjusted security trade at a negative rate of return as investors seek safety yet get upside yield moves down the road if rates rise. As of today, The 5-year T-Note yields a whopping 1.18% and you have to go out to the 10-year T-Note to reach a yield of 2.58%.  That puts investors needing to invest about 7 to 9 years out the maturity schedule just to reach break-even on their real returns. If you consider Federal Income Tax, then investors have to go further than the 10-Year maturity just to reach a real after-tax zero-rate of return.

The move in the ETFs points more to the direction of where investor bets are heading more than it does address the issue over whether the U.S. is a currency manipulator. SPDR Gold Shares (NYSE: GLD) hit a 52-week and all-time high at $139.15, implying that above-$1,400 per ounce mark after fees.  The PowerShares DB Gold Double Long ETN (NYSE: DGP) also hit all-time highs of $43.23 earlier this morning and its gains are nearing a double from the lows of the last year.  A bet against long-dated Treasury maturities has been seen as a winner via the ProShares UltraShort 20+ Year Treasury (NYSE: TBT), which is an ETN that is double-short the 20+ Year Treasury index.  As longer yields are rising, it rose above $36.00 on Tuesday for the first time since August.

The last is the impact on the Direxion Daily Financial Bull 3X Shares (NYSE: FAS), with 300% of the intraday moves of the banks and financials in the Russell 2000.  Shares are still well above the QE2 announcement as a measure on the steepness of the yield curve, but the underlying shares in the index have not at all lived up to the broader market performance of late.

JON C. OGG

The SPDR Gold Trust (NYSE: GLD) is king of gold ETFs with millions of shares traded each day and with assets above $55 billion; its shares this morning are up 2.3% at $134.68.   The leveraged ETF is really moving: PowerShares DB Gold Double Long ETN (NYSE: DGP) is an exchange-traded note rather than a true asset trust with physical gold, but it is up 4.75% at $40.53.

Oil is higher again this morning and back above the $86.00 per barrel mark.  The three biggies here are the United States Oil (NYSE: USO) as the crude oil ETF, Oil Services HOLDRs (NYSE: OIH) as the oil and gas service companies ETF, and the ProShares Ultra Oil & Gas (NYSE: DIG) as the oil and gas drillers.  USO is up 1.5% at $37.29; OIH is up 2.2% at $124.80; and DIG is up almost 3% at $37.08.

Two days ago, the on-the-run 30-Year Treasury Bond had a yield of 3.93%.  After QE2′s announcement showed a table indicating long-bonds were barely a target of the FOMC, the yield rocketed up to 4.06%.  While that yield is a tad lower this morning from bond prices ticking up marginally, the ProShares UltraShort 20+ Year Treasury (NYSE: TBT) rose almost 4% yesterday to $34.66 because it is the double-short ETF against the Barclays Capital 20+ Year U.S. Treasury Bond Index.  Due to the bonds recovering marginally, its price is $34.46 this morning after the open.

What does very low yields on bonds mean with higher inflation?  The FOMC seems to have a 2% inflation target… You have to go out to the 10-Year T-Note to get above the 2.00% yield levels now.  The 5-Year T-Note yields barely 1%.  That means that all short-term and intermediate term Treasuries are trading at negative yields on a real return basis if you adjust for inflation.  Nice.

The economy is still holding up, and the fears of deflation seem overblown after commodities have risen as the dollar has weakened.  There is “the chicken versus the egg” argument over which came of course because the commodities rose and the dollar weakened in anticipation of QE2 effects.  Our take on manufactured inflation, “Be careful what you wish for…”

JON C. OGG

Some of the key ETFs we see having longer-term pricing issues after QE2 are some of the main go-to ETFs for traders, but some of our ETFs are inverse and leveraged as well due to the volatility that is sought by traders.  Some of the ETF and ETN products were are tracking are Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and Direxion Daily Financial Bear 3X Shares (NYSE: FAZ); SPDR Gold Trust (NYSE: GLD) and the PowerShares DB Gold Double Long ETN (NYSE: DGP); CurrencyShares Swiss Franc Trust (NYSE: FXF), WisdomTree Dreyfus Chinese Yuan (NYSE: CYB), and PowerShares DB US Dollar Index Bullish (NYSE: UUP); then there is the iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) and the ProShares UltraShort 20+ Year Treasury (NYSE: TBT).

Financial Stock ETF Winners, Hopefully… and Maybe Housing

Banks and financials have been under pressure due to mortgage put-back fears on mortgage fraud and foreclosure woes.  If any sector could be helped by QE2 and lower rates, it would be banks and financial stocks.  Despite that they are earning very low interest, they also have to pay almost no interest as well.  The triple-leverage funds from Direxion are perhaps the most liquid and most volatile of all in the sector.  There is the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) that move at triple the intraday moves of the Russell 1000 Financial Services Index.  The bullish shares trade close to 35 million shares a day and the bearish shares trade close to 45 million shares a day.  There is deemed a greater risk of tracking error on these due to the volatility, futures contracts, and more, but these are very volatile and very actively traded ETF products.

SPDR S&P Homebuilders (NYSE: XHB) stands to win if housing wins from QE2.  If the foreclosures can be cleared out and if the borrowing rates will stay down at historic lows, then perhaps more consumers will be able to afford houses in 2011 and 2012.  Whether they buy used homes and foreclosed homes is one thing, but many still want that new home that is all theirs and comes with no baggage.  This ETF is full of homebuilding stocks and is meant to track the S&P Homebuilders Select Industry Index, which represents the homebuilding sector inside the larger S&P TMI.

QE2… A Bet Against Currencies or the Dollar

It seems that many developed nations are trying to devalue their currency simultaneously even if the dollar is not in favor.  The only safe bet for a country that might try to hold the line is Switzerland for their Swiss Franc, and the Swiss Franc can be traded via the CurrencyShares Swiss Franc Trust (NYSE: FXF).

Another exception is potentially the Chinese Yuan depending upon how the newly elected Congress decides what tone they will use against China.  Almost all investors agree that if China were to de-peg then the Chinese Yuan would rise appreciably against the US Dollar.  China’s reserves are higher and its economic fundamentals are among the best globally.  The two direct beneficiary ETF/ETN products here that will win if China is forced to de-peg the Yuan from the Dollar are WisdomTree Dreyfus Chinese Yuan (NYSE: CYB).

If you think that US Dollar’s decline will not go on and on endlessly, then there is the PowerShares DB US Dollar Index Bullish (NYSE: UUP).  This ETN tracks the Deutsche Bank Long US Dollar Futures index, which is comprised of long futures contracts rather than being comprised of raw currencies.  This is against a basket of currencies, and it is less volatile than many other direct single currency.

The FOMC can no longer lower rates on the short-end.  The other side of the coin is that it can promise to keep rates low indefinitely.  Quantitative easing is accomplished by Uncle Sam expanding its balance sheet by buying up debt on the long-end of the yield curve and keeping rates at near-zero on the short-end.  The new verdict seems to be a few hundred billion rather than $1 trillion that will be purchased in Treasury and other debt instruments in the coming weeks.  Some would like to see more, others would prefer no QE2.

The consensus is no longer for a double-dip recession, but growth estimates for what lies ahead remain muted or have come down of late.  It seems that the current inflation is too low for the Fed targets but the recent trends in commodities may be taking care of much of the lack of inflation.  Extremely slow growth is not enough despite a recovery, and the hope is that more jobs will ultimately be created.

The FOMC wants inflation higher, yet it wants rates to stay very low.  These notions fly directly against each other in the long-term, and Ben Bernanke did not exactly get the name Helicopter Ben out of the blue.  It seems that our government is about to turn on the printing presses so it can buy debt.  Yep, devalue your currency but artificially keep the rates lower by buying the debt up.  It almost sounds like tech companies with stock options and non-GAAP earnings.

The rule is and has always been, “Don’t Fight the Fed.”  We can complain about the reckless nature of QE2 and the shackles it may put on the next two or three generations or we can generate trading strategies.

Gold in them thar hills…

When it comes to gold, the SPDR Gold Trust (NYSE: GLD) is king with millions of shares traded each day and with assets above $50 billion.  But what about leveraged ETF or ETN products?  If inflation is going to be manufactured and if gold keeps rising as world central banks race to devalue their currencies, then the PowerShares DB Gold Double Long ETN (NYSE: DGP) is your answer.  Keep in mind that this is an exchange-traded note rather than a true asset trust with physical gold.  The “DGP” gives double the performance of gold.

What about betting for or against currencies?

If everyone is devaluing at the same time, then about the only safe bet for a country that might try to hold the line is Switzerland for their Swiss Franc.  The Swiss Franc can be bought either directly or it can be bought via the CurrencyShares Swiss Franc Trust (NYSE: FXF).

The other exception is potentially the Chinese Yuan if the U.S. Congressional move to try to wrangle China from such a tight currency peg.  If China were to de-peg, we have yet to find a real investor who says that China’s Yuan would actually fall against the US Dollar as China’s reserves and fundamentals are among the best globally.  There are two direct beneficiary ETF/ETN products here that will win if China is forced to appreciate the Yuan: WisdomTree Dreyfus Chinese Yuan (NYSE: CYB) and the Market Vectors Chinese Renminbi/USD ETN (NYSE: CNY), although the latter is far less liquid in volume.

Do you not believe that the dollar drop will continue endlessly?  As most financial events peak, markets do usually attempt to discount the news and try to at least work toward the efficient market theory where markets price in almost all available information and discount the rest of the news (so what if it doesn’t work).  If you believe that the Greenback will actually rally soon if and/or when QE2 finally launches, then there is the PowerShares DB US Dollar Index Bullish (NYSE: UUP).  In short, this is the ETN that tracks the Deutsche Bank Long US Dollar Futures index, but be advised that the index is comprised of long futures contracts  rather than of raw currency.  It is also nearly impossible to forget the one rule if you are a US investor: You are already long the US dollar.

Over the past few months there has been tremendous force behind the decline of the dollar.  The United States has taken on Japan’s pre-crisis role of carry trade funds.  With U.S. short-term rates close to zero, investors have borrowed in dollars and then selling them to invest in higher yielding currencies.  Officials at the Fed have stated that the watching jobs data to signal when it is safe to raise interest rates.  Today’s job data appears to have spooked carry trade participants, making them believe that time will come sooner rather than later.  The dollar’s rise have prompted a near 5% decline in the price of gold, which has moved inversely with the dollar.

This movement in the currency dollar (and the related movement in gold) is probably overdone.  While positive news from the job market makes a rate hike more probable, it will not be happening any time soon.  There is no reason to believe that November’s job improvement is the start of a trend.  Furthermore, inflation data is hardly weighing on Fed officials.  In the meanwhile, short-term interest rates at still near zero and investors still see plenty of yield overseas.  As the effects of this most recent job report wear off, the dollars is likely to resume is march downwards.

Garrett W. McIntyre

So where this gets funny is that you could see gold go to BOTH $1,200.00 and $800.00.  We aren’t able to give you a crystal ball reading, so we are not cheerleaders and we certainly have no pom-poms waving.  But we are human and we understand that everyone, truly everyone, is affected by the state of the global economy right now.  Some market pundits are calling for gold to go to $1,500 and some have even dangled the $2,000 gold carrot for you.  We were sharply criticized for forecasting last year that unemployment could be 8.5% by summer 2009.  It turns out that this may now just be a mere speed bump.  The FOMC minutes showed a forecast of 9% unemployment by the end of the year, and Jamie Dimon said that the coming government stress tests might include how well the banks can hold up if unemployment reached 10% to 11%.

Why do we note unemployment?  Simple.  More job losses adds further and further to the panic.  More panic is only adding to the price of gold.  Gold is often thought of as the perfect inflation hedge.  Just over three months ago in October and November, an ounce of gold was trading between $710.00 and $750.00.  Just less than a year ago gold was at the same $1,000.00 mark.  But the differences of time and the reasons for the pricing was for entirely different reasons.  A year ago you had a daily game of how oil was going.  You had some saying that real inflation was running at levels that might be close to 10%.  By November you had all the calls and scares of deflationary pressure.  And that had gold on its backside at levels that many thought gold might be heading much farther south.

There is no real inflation today.  Even if the Obama stimulus package ends up reaching $2 Trillion in theoretical printed dollars from what the TARP of 2008 started out with and what the new package will ultimately cost with bank and industry bailouts over the next two years, the CIA world fact book estimates the US 2008 GDP at $14.3 trillion.  Smooth out the $2 trillion over 2008 to 2010 and you do have a lot of funny money, but spread over 3 years or more and you don’t have hyper-inflation.   Industry is on its backside.  The jewelry business is on its backside.  The consumer is so far on its backside that yoga poses are in order.  Every industry that uses gold is on its backside.  And almost none of the major central banks have gold as the basis of their currencies.  So you have no actual hard demand for the shiny yellow stuff.  Not today any how.  The demand for gold is for gold coins, a massive flurry of bullion buying by ETF’s (and investors), and the institutions and traders buying the hell out of it.  The reason is simple… pure fear.

Gold may be a perfect hedge against inflation.  But what you are witnessing today is that gold is also a pure hedge against fear.  There is fear of nationalizing some of the major banks.  There is a fear that the DJIA could go to 6,000 and the S&P 500 could go to under 700.00.  There is a fear that unemployment will hit double-digit levels.  And there is a fear that our massive and nasty recession is going to be the modern day version of the 1930′s.  These are currently all real fears, and this has not yet happened.  A year ago the DJIA was north of 12,000 and the S&P 500 was north of 1,300.00.  The closing levels yesterday were 7,365.67 on the DJIA and the S&P 500 closed at 770.05.

Yesteryear’s $1,000.00 gold was inflation related trading.  Today’s $1,000.00 gold is the hedge of fear.    Again, we are merely saying that this $1,000.00 mark is an inflection point.  The cases for $800.00 or $1,200.00 are equally as easy to make.  OK, so you got the history lesson and you have the most basic explanation for why gold is where it is.

But there is another issue affecting the price of gold today.  Exchange traded funds and exchange traded notes.  Investors and traders are buying the hell out of these.  These ETF’s and ETN’s have to in turn go into the spot market and futures markets and buy the shiny yellow stuff.  We have seen some figures showing that there could be as much as $100.00 or $200.00 extra in the price of gold because of the ETF’s and ETN’s buying it up.  That number is probably impossible to give with any certainty, and you have to always use the notion that things are worth what the market is willing to pay for them.  So whether gold is overvalued or undervalued, the value IS almost $1,000.00 today.  This is also happening at a time when the banks and hedge funds that would have been buying can only do it with minimal leverage rather than the massive leverage used just a year ago.

These are the major gold ETF’s and ETN’s we track.  There are other instruments of course.  These just happen to be the ones we track.

SPDR Gold Shares (NYSE: GLD) is the mother load of all gold ETF’s.  It tracks the performance of the price of gold bullion, less the trust expenses of course.  It holds gold and is expected to issue baskets in exchange for deposits of gold.  For fair measure, you can usually take the ratio at one-tenth to see where the price of spot gold happens to be.  There are then the trust fees and the discrepancy of time and whichever direction the wind blows that factor in on its actual pricing.  This closed at $97.80 Friday vs. $993.20 in spot gold.  Again, not a perfect 1:10 ratio, but close enough.  There are also large discrepancies in the actual market cap: Yahoo Finance shows $24.93 billion as this ETF market cap, and Google Finance shows $27.47 billion.  The SPDR site itself shows a market cap of $24.891 billion.  This one is massive regardless.  To show how much of a bogey it is, it trades over 16 million shares on an average day, but it traded over 43 million shares Friday and on February 11 it traded some 55 million shares.  On two different days in September its volume was north of 60 million shares.

Then there is the schizophrenic gold ETF that is supposed to employ TWO-TIMES leverage on gold.  The Ultra Gold ProShares (NYSE: UGL) seeks to replicate, net of expenses, twice the performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London.   The difference here between this is that it has to use “financial instruments”… swap agreements, forward contracts, and futures and options contracts.  So besides the fact that it aims for twice the performance, it has an extra measure of added volatility in its trading.  ProShares lists its net asset value premium and discount as having been roughly -2.0% to as high as +6.0%.  It noted Friday’s level was a premium of $0.44. It trades over 200,000 shares per day, but it traded over 664,000 yesterday and it saw some 882,600 shares trade hands on FEB 17.  As gold is on highs, this one is too.

There are also two ETN’s which essentially offset each other.  PowerShares employs more DOUBLE-LEVERAGE ETN’s.  The PowerShares DB Gold Double Short ETN (NYSE: DZZ) and the PowerShares DB Gold Double Long ETN (NYSE: DGP) are the leveraged instruments.  The PowerShares DB Gold Short ETN (NYSE: DGZ) is just the inverse, just… The average volume on these can be lower as well.  “DZZ” traded over 1.6 million shares Friday, more than double its normal volume. “DGP” traded over 4.2 million shares Friday, almost twice its normal volume.  DGZ traded over 38,000 shares Friday, about 150% of normal volume.

One gold ETF that is not keeping up with the shiny yellow stuff is the Market Vectors Gold Miners ETF (NYSE: GDX).  While it closed up almost 4% at $37.03 Friday, its 52-week trading range is $15.83 to $56.87.  This one tracks the Gold Miners Index in proportion to the company weighting in the index, so it invests in the common stocks of global gold miners which are not all US-based companies.  Our most recent data shows that Barrick Gold, Goldcorp, and Newmont account for almost 35% of the entire ETF.  Its 25 top holdings also account for about 97.8% of the entire ETF.  It trades an average of over 8.5 million shares, and it saw over 19.5 million shares trade hands Friday.

We are not going to give trade set-ups here for how you can bet on $1,200.00 or $800.00 gold.  That will either be done tomorrow or in our newsletters.  And early this week we’ll show you how and why many of the more speculative gold stocks have not been tracking the price of the shiny yellow stuff.

JON C. OGG
February 21, 2009

The ETN’s listed by Deutsche Bank will now trade on NYSE Arca under the following ticker symbols:

• DB Gold Double Short ETN (NYSE: DZZ)
• DB Gold Double Long ETN (NYSE: DGP)
• DB Gold Short ETN (NYSE: DGZ)

Prior to this, the normal gold ETF from the Deutsche Bank index was PowerShares DB Gold (AMEX: DGL).

Investors will now have more select exchange traded vehicles outside of the streetTRACKS Gold Shares (NYSE: GLD) ETN that tracks the raw price of gold on a 1:10 price ratio, and outside of the ETF called the Van Eck’s Market Vectors Gold Miners ETF (AMEX: GDX) that tracks some of the major gold mining stocks rather than the commodity.   

"Thar’s gold ETN’s in them thar hills."

Jon C. Ogg
February 28, 2008