Month: May 2011

Online media company Demand Media (DMD) posted first quarter earnings after the close of trading yesterday for its first quarter as a public company. The company lost $5.6 million, or $0.13 per share, compared to a loss of $4.1 million, or $0.94 per share, in last years first quarter.

Unless you have been hiding under a rock, you probably know that silver has had a major correction over the past week. The precious metal plummeted about 30% from a high of almost $50 an ounce to less than $35 yesterday. This six-day drop is one of the largest since 1983.

Silver has given back just about all of its gains for the past month and some traders are thinking it might be time to get long. But before you run and buy silver, there are a couple things to consider.

Forces That Move Silver

The U.S. Dollar

There are many theories on why this sell-off is happening. Obviously, any real strength or even support in the U.S. dollar will generally be bearish for precious metals like gold and silver. This is mostly because the U.S. holds the largest stockpiles of these metals and they are traded in U.S. dollars globally. Even though gold is more of a recognized currency, they both have sensitivity to changes in the U.S. dollar’s value.

The falling U.S. dollar has recently leveled out. That means we’ve seen a small correction in dollar-denominated commodities and metals overall. Earlier this week, the European and London central banks held their rates steady. The ECB also hinted that they may not raise their rates next month either. This is good news for the U.S. dollar.

The U.S. dollar traded higher late in the day yesterday and sent other dollar-sensitive commodities like oil and even stocks much lower on the day. Oil had its largest percentage drop in three years. If you don’t believe that the dollar is in control here, think again…

For now, it seems that the U.S. dollar will continue to be relatively weak. The rally seems more like a short-term bump rather than a long-term trend. Current Federal Reserve policy puts general downward pressure on the U.S. dollar.

Gold/Silver Ratio

Then there is the historical ratio between gold and silver. A good “average” ratio of gold to silver is about 55, according to many experts. That means 1 oz. of gold should buy 55 oz. of silver. The gold premium is because there is much more silver on this Earth than gold. Even though silver has industrial uses beyond gold, there is a global desire, respect and currency reserve with gold that silver just does not have.

If that ratio gets extremely high, like 100, that means that silver is cheap relative to gold and may be a good value. If the number is low, silver may be getting overly expensive.

On April 28, the gold-silver ratio was about 30, relatively low. Now the ratio is back up around 43, still low, but not extreme. I’d like to see that ratio above 48 if I were thinking of buying.

Using current gold prices of $1,494, that means a drop in silver prices to $31.12 an ounce. Remember, though, that ratios are a two-way street. That means gold prices can climb, too, putting the ratio closer to its “good average.”

(Sign up for Smart Investing Daily and let me and fellow editor Sara Nunnally simplify the market for you with our easy-to-understand articles.)

Technicals

Technical formations also play an important role in finding buy and sell points. Looking at iShares Silver Trust (SLV:NYSE), you can see the sharp sell-off on the right side of the chart. In my opinion, it seems that we are nearing a short-term bottom. The lower Bollinger band (gray area) was just broken yesterday, as prices dipped below the lowest level of the band. This is generally an indicator of an oversold condition just before a bounce.

I also would look to the 50% Fibonacci retracement line (dotted) of about $33 for support. (For more info on Fibonacci retracement lines, read this Smart Investing Daily article.) The danger here is the fact that we have broken below the 50-day moving average, which is not good for the bulls. To solidify a strong trend, I would like to see the price of SLV get above that 50-day moving average, at about $38.

You can’t simply view the charts in a vacuum. There are other things “manipulating” the market.

View Larger Chart

Margin Requirements

The manipulation here is the recent 500% jump in margin requirements for silver futures. When you buy a futures contract on silver (one futures contract is for 5,000 ounces of silver), you are required to put up a deposit called “margin.” That initial cost has risen tremendously as of late. They have also raised the amount of margin you have to pay once you are already in the trade and it starts to go against you.

If traders cannot meet the new margin requirements, they are forced to sell their contracts. This new rule will deter new buyers.

It’s like someone raising your rent from $1,000 to $5,000 in a month. Higher margin requirements can also make a sell-off worse, as contracts are sold to cover losing positions. These requirements affect everyone from individual traders to hedge funds. This is one of the main reasons why silver is making 10% moves daily.

Now in all fairness, the dollar cost of margin will rise as the price of silver rises, but the CME (COMEX) has increased the margin requirements abnormally in the past week and will raise them again Monday.

May traders are selling ahead of this hike.

ETFs

ETFs like the SLV hold actual silver and futures contracts. At present there are about 600 million ounces of silver held by ETFs. When traders begin to sell shares of an ETF like SLV, the ETF may sell silver futures to keep everything in balance. About 6 million ounces of silver have exited ETFs in the past week.

ETFs can also add to the domino effect, both long and short. But remember that stocks usually take the escalator up and the elevator down!

Once the hype settles down and the CME completes its margin increase on Monday, we should see silver prices stabilize. From my perspective, I see $33 as a level I may cautiously begin to buy. If silver breaks below that level, I think support will be around $29 until the Fed decides it’s time to cool inflation.

I am sure that Ben B. was feeling quite happy with the corrections in gold, oil and silver this week. Perhaps Americans will feel some reprieve as well…

Editor’s Note: Silver ETFs may be taking a big hit with these margin increases, but they’re not the only way to play silver right now. Michael Robinson, editor of 180 Trader, has been riding the silver bull, and this most recent drop might give his subscribers another great opportunity. For more information on silver and the companies Michael’s been recommending, check out 180 Trader.

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By CountingPips.com

Today’s US government nonfarm payrolls employment data came in better than expected with a gain of 244,000 jobs for April while the unemployment rate edged just higher to 9.0 percent. The April data marked the third straight month hiring has topped 200,000 and follows revised gains of 221,000 jobs in March and 235,000 jobs in February.

Market forecasters and economists were expecting the nonfarm payroll report to show a gain of approximately 185,000 jobs and the unemployment rate to remain at 8.8 percent for the month.

The unemployment rate, at 9.0 percent, rose from 8.8 percent in March as more people joined the search for new jobs.

Private companies created 268,000 jobs in April as the service sector added 224,000 jobs and the goods producing sector increased by 44,000 jobs. Government hiring decreased by 24,000 workers for the month.

Within the service sector, retail hiring led the way in job creation with an increase of 57,000 workers while professional and business services hiring added 51,000 jobs in April. Education & health services jobs increased by 49,000 workers and leisure & hospitality saw 46,000 workers added to the payrolls for the month.

In the goods producing sector, manufacturing jobs rose by 29,000 workers while mining jobs rose by 11,000. Construction hiring was higher by 5,000 jobs in April.

Forex: US dollar mixed as Stocks rise

The US dollar has had mixed results against the other major currencies in the forex markets today following the monthly government jobs report. The dollar has gained ground on the day versus the euro, Japanese yen and the Swiss franc while losing ground against the New Zealand dollar, Australian dollar, Canadian dollar and the British pound sterling.

The US stock markets, meanwhile, have been on the rise in morning trading today with the Dow Jones industrial average increasing by over 140 points while the NASDAQ has been higher by over 25 points and the S&P 500 has increased by over 12 points at time of writing.

In commodities, oil has edged lower slightly by $0.25 to the $99.55 level while gold futures have been higher by $13.90 at the $1,494.80 level so far today.

Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.

Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.

This is economic data released after the month ends, first Friday of next month. Job creation is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity of the country; 

Last month job gains occurred in professional and business services, health care, and mining. In manufacturing sector, Employment continued growth. The U.S. Bureau of Labor Statistics will release today. Nonfarm payroll employment increased by 216,000 in March-2011, and the unemployment Rate was changed at 8.8%. The number of unemployed persons (13.5 million) and the unemployment rate (8.8%) changed in March. In March month, employment in the service-providing sector continued to expand, by a gain of (78,000) in professional and business services. Most of the gain occurred in temporary help services (29,000) and in professional and technical services (35,000), health care employment (37,000), over the last 12 months, health care has added 283,000 jobs, or an average of 24,000 jobs per month. Employment in leisure and hospitality rose by 37,000 over the month, with more than 2/3 of the increase in food services and drinking places (27,000). 

More …

EUR/USD

For more please visit ForexTradingEVO.com

USDJPY remains in downtrend from 82.76, the bounce from 79.58 is treated as consolidation of downtrend. Resistance is at the downtrend line on 4-hour chart, as long as the trend line resistance holds, downtrend could be expected to continue, and next target would be at 79.00 area. On the other side, a clear break above the trend line resistance will indicate that a cycle bottom has been formed at 79.58 on 4-hour chart, and the downtrend from 82.76 has completed, then further rally could be seen to 81.50 zone.

Written by ForexCycle.com

The euro is in a free fall versus the dollar following a speech by ECB President that was absent of the typical wording to prepare markets for an interest rate hike. The pause in ECB tightening fed into risk aversion as commodities continued their decline in-line with US dollar gains. Today’s sharp move lower across asset classes signals a change to the risk-off mode.

The EUR/USD shed more than 3 cents today as the pair was in a tailspin, triggered after the ECB press conference that failed to produce live up to traders’ interest rate expectations. The pair fell to a low of 1.4509 from 1.4840, taking out a plethora of stops on the way. The euro was also down sharply in the crosses with the EUR/GBP down at 0.8870 from 0.8996, and the EUR/JPY was lower at 116.53 from 119.63.

Trichet’s speech had the effect of reversing the overbought euro but also the commodities bubble. Crude oil prices collapsed below $100 for the first time since mid-March. Gold and silver also continued their declines that began earlier this week with spot gold falling to $1,472 and spot silver dropping to $35.35 from $39.24. Spot silver is down this week by almost 26%. The S&P 500 is down by 1.00%.

While it may be premature to call this a turn in the market, the sharp move across asset classes signals a change to the risk-off mode. The risk aversion could carry over into tomorrow’s trading with the release of the monthly jobs report. Traders should keep one eye on global equities as a rally in the bourses may bring about a renewed bout of euro buying. However, a weak jobs report may feed into further USD buying and the EUR/USD decline could continue. A drop to the 1.4280 support level would still keep the pair’s bullish trend intact, perhaps inducing buyers at better levels to enter.

A big hubbub has been made regarding the past two weeks. Last week it was interest rate differentials and the sharp decline of the US dollar. This week it is the death of Osama bin Laden, the Royal Wedding in Britain, and Golden Week in Japan (not to mention the celebration of Cinco de Mayo by the Spanish-speaking world is today). But have you forgotten the most impactful data release of each new month?

This week is the long-awaited Non-Farm Employment Change (Non-Farm Payrolls, or NFP) release from the US Department of Labor’s Bureau of Labor Statistics. This data release is perhaps the most important figure published by the US economy. More so than interest rate decisions. More so than inflationary figures. More so than industrial readings.

Non-Farm Payrolls is the primary gauge of the US employment sector. It carries the heaviest impact on the forex market since it is a direct line into the lifeblood of the American economy: jobs.

Yesterday’s NFP estimate by Automatic Data Processing Inc. (ADP) revealed a below-forecasted figure of only 179K jobs being added by the private sector. Tomorrow’s NFP report will factor in the same information but include jobs data from the public sector as well. It is a leading indicator of economic health and should never be disregarded, especially in these times of economic uncertainty.

Today’s rate statements out of Britain and the euro zone left many investors unsure about the timing of future rate decisions. The result has been a broad sell-off in the euro and British pound in exchange for safer assets like the US dollar and Japanese yen. Should tomorrow’s NFP data come below forecasts, this shift into safe haven investments may pick up steam, further boosting the USD and JPY. Don’t miss out on tomorrow’s NFP data release, it should be a doozy.