London ’s leading index headed straight up at the open adding 69 points at the open to 6,156 following a good day on Wall St. yesterday.

The Dow put on 189 points to close above 13,000 for the first time since the start of the year – no doubt a significant closing level for technical analysts. The gain came as financial stocks made the running and in spite of ExxonMobil shedding 3.6%. Exxon is struggling to up production reports the FT as it falls victim to resource nationalism. African production fell 20% after it was forced to hand over more to host governments and its Venezuelan interests were nationalised.

Continues below …

FLEET STREET LETTER ALERT

3 “Gloom-Loving Stocks” for the Coming Recession

Dark clouds are gathering over the UK economy.

But for contrarian-minded investors, this spells opportunity.

The Fleet Street Letter has just been given permission to share three such money moves with you today.

You can read the full briefing here

Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. Customer Services: 0207 633 3600.

The bounce in US stocks reverberated around the time zones. The Nikkei was up over 2% to close above 14,000 and China’s leading index, the Shanghai Composite added almost 5% as it breaks out from a six month downtrend. European bourses are up across the board this morning.

So is it over? Or is this premature as the IHT suggests? Stock markets are forward looking by six months or so, so are presumable focused somewhere on the end of this year and the bulls see something better out there. But lest we get too carried away the world can look very different at street level. It was only on Monday that Warren Buffett was warning “ my general feeling is that the recession will be longer and deeper than most people think. This will not be short and shallow. I think consumers are feeling gas and food prices and not feeling they’ve got a lot of money for other things.”

Except perhaps for the one off “tax rebate” cheque sent to US taxpayers in the post this week. But some relief is coming too from a sector that of late has been a chronic thorn in the side of central bank inflation targets – the commodities market. Commodity prices have been falling of late across the board – energy, industrial and precious metals and agricultural commodities. The price of crude is down for a fourth day running with Brent Crude at $110 and West Texas light sweet crude a shade under $112. Lehman Bros said recently there was $20-30 of “hot money” in the crude price.

Why the pull back? It’s all about the dollar says commodity strategist, David Moore of Commonwealth Bank in Australia:

“The demand for investing in commodities as a hedge for U.S. dollar weakness has faded.”

Which gives us a clue as to the nature of the demand. There’s actual physical demand for commodities according to their use and then there’s more speculative investment demand. With the revival of interest in the sector, how much of the price is attributed to each? We don’t know but given the rapid rise in popularity of the commodity exchange-traded fund, we suspect the balance has tilted significantly in recent years towards the speculator.

That fading interest in hedging has helped the dollar claw itself back from a low point at 1.60 to the euro, to 1.54 now. When even central bankers are telling the market it’s not so bad, investors worries are starting to subside. Says Japanese fund manager Tetsu Emori:

“Worries about the financial market turmoil and even an economic slowdown seem to be softening, so that’s why people are selling gold.”

As such gold continues its slide south, at one point unwinding all the way to its $850 price at the start of the year. Just as the dollar stages something of a rally, the Gulf States may finally be coming to the conclusion that pegging to it is not after all such a good idea as dollar weakness adds to their domestic inflation problems. Something even Alan Greenspan actually advised them to do on a visit to the region. Kuwait has been the only one to drop its peg to date and has seen its currency appreciate almost 8% against the dollar since. Its Finance Minister Mustafa al-Shimali seems confident other Gulf Cooperation Council states will follow its lead – “some countries will do what we are doing.”

Here at home, the winds of political change look to have blown pretty hard yesterday. UK government worries about taking a pasting from the electorate in the local elections proved well founded. They did – their worst result for 40 years. With the Mayoral vote still pending, it could prove a very black day for New Labour. Still after 11 years in government you take some wear and tear, mistakes are made, support disintegrates, people get disillusioned or just fed up with the same old faces.

And it doesn’t help when the much touted UK economic miracle that has notched up 60 consecutive quarters of growth is looking a good deal less miraculous. The progressive puncturing of inflated house prices, aided and abetted by a mortgage famine is exposing gradually testing the debt-laden underbelly of once enthusiastic consumers. British bank HBOS announced house prices fell by 3.7% annualised over the year to April. It is the worst housing market performance since 1993 and comes on top of a controversial scrapping of the 10% starter tax rate. Who’s to blame? The government, of course. Much to the delight of the Tories for whom the ERM debacle is now but a fading memory.

Regards,

Rob Mackrill
The Daily Reckoning

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Silver is known as gold’s little sister. She’s worse than that. She’s errant, irascible, moody and unpredictable.

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Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. Customer Services: 0207 633 3600.

Silver is frustrating – but it’s still a great investment

If gold bugs are cranky and eccentric, silver bugs, of which I am one, are, well, positively loopy.

I am hugely bullish on the metal in the long-term.

People are finding more and more uses for silver. It’s highly conductive, which means it is being used more and more in electronics and computing. Its reflectivity sees it used in mirrors, optics and, though less so now, in photography.

It has germicidal and antibacterial qualities too, which see it used in medication, indeed throughout the medical industry and beyond – now in clothes, washing machines and fridges. There is even a new line of lavatory seat that has silver ions embedded to kill germs. There is talk of silver replacing platinum and palladium in catalytic converters. And, of course, its preciousness in these inflationary times mean it’s used as a store of wealth. (The French word ‘argent’ means both silver and money, ditto the Spanish ‘plata’).

With gold, platinum, copper, zinc, nickel, lead and you-name-it all having hit record highs in this bull market, silver is the only metal that hasn’t. It would have to triple from here to reach its 1980 high of $50. If you adjust that high for inflation, you have a target of $250. With silver currently at around $17, you’re looking a potential fifteen-bagger. David Bensimon, who uses complex mathematical formulae to develop price targets, is more bullish on silver than any commodity or index. He sees silver going somewhere between the sky and the moon. Look at this chart of silver adjusted for inflation and you see what’s possible. The problem is negotiating what goes on in between.

(If you cannot see this graph, click here: http://www.moneyweek.com/uploaded/images/MM30April.gif)

Of course, just because it went there before doesn’t mean it will again. And that 1980 high is a slightly illusory figure. There was a sudden, but massive supply squeeze as the Hunt brothers attempted to corner the market.

Why silver is widely shorted

Nevertheless, you see the potential – and many commentators believe the same supply squeeze could happen again. Rumours abound of manipulation in the silver futures exchanges and, on a proportional basis, more traders are reputedly short silver than any other commodity. It’s been noted that the short position sometimes amounts to more than above-ground supply.

But silver is a tiny market. When you get a sudden surge in demand, perhaps if silver hits the mainstream news as it does every so often, retail investors pile in, there is a temporary lack of physical supply, rumours abound of physical shortage, the shorts run and cover, and the price suddenly and dramatically spikes.

One reason, by the way, that silver is so shorted on the exchanges is that many mining companies produce silver as a bi-product of mining for other metals, particularly zinc and gold. Not being primary silver producers, companies tend to ‘lock’ in prices, which translates into a short by a futures trader.

Silver’s movements tend to occur later in gold’s run – and often signal that the end of the run is at hand. We saw dramatic underperformance by silver of gold from August to December. Then, in less than three months, silver went from about $13.70 to over $21 – a 55% move. Two weeks later and it had given over half that move back.

How far could silver fall?

So if you’re going to trade this metal, you need to be nimble, patient, thick-skinned and have nerves of, well, silver-plated steel. If you’re doing it via a spreadbet or a CFD, good luck to you. Alternatively, you could just buy a load of physical and leave sell orders in way above the market and let the price come to you, as it will one day.

For what it’s worth, I see strong support at $15 (and for gold at $850). I would be surprised to see silver go below $15, unless we get another one of those awful days when three banks implode and the world panics. But I would expect to see the $15 mark tested within the not too distant future. If it gets there, back up the truck. On the upside, there is now resistance at $21, but I have $25, $50 and even $100 as targets over the next few years.

If you think owning silver is frustrating, you should try owning silver stocks. Nevertheless there are some great silver juniors out there. First Majestic (CA:FR), a proper mining company – and not really a junior any more – is one of my favourites. It’s a buy down here below $4. If silver re-tests $15 over the next week or four, you should be able to pick it up even cheaper. Also look at Great Panther (CA:GPR), Excellon (CA:EXN), and Hochschild (LSE:HOC). They’re all looking cheap. Though that’s not to say they won’t get cheaper…

Editors Note: What Next for the Silver Price? by Dominic Frisby was originally published in Money Week April 30, 2008