The Resource Super Profits tax

Like many contemporary political issues, everyone has a very strong opinion regarding the proposed Resource Profits Super Tax (RPST). But as it was with the proposed emissions trading scheme (ETS), very few of us have a comprehensive understanding of how exactly it works. Fewer still are able to appraise the situation from a perspective that does not relate specifically to their own self interest. But such is the nature of these things.

Rather than get lost in the detail of the proposed tax, let us instead evaluate the situation from a broader perspective. The first thing to appreciate is that the current tax regime for mining companies is in dire need of reform, something both sides of the debate acknowledge. A tax based on the principle of economic rent is one that most experts agree is not only fairer, but also encourages investment (in essence, economic rent is the level of profit in excess of the bare minimum required to make a given economic venture worthwhile). Here too both sides are for the most part on the same page.

Where opinions start to differ is with the detail. Essentially, the miners argue that the rate of tax that is levied is too high, and the level it kicks in is too low. The Government maintains that this is very reasonable and that the miners have just gotten used to paying very low taxes for too long. They also argue that the proposed system will provide significant benefit to those projects that turn out to be unprofitable, or not highly profitable.

As is often the case, both sides have some valid points, but both are guilty of exaggeration and spin. I tend to think that a rent based tax is a great idea, and that although the details may need some adjustment, it will be of great benefit to the mining sector over the long term. Especially so when the resource boom eventually and inevitably starts to wind down.

The point I want to discuss though is the broader issue with Sovereign debt. Australia is lucky enough to have escaped the worst of the GFC, and indeed we are the envy of the western world. But the fact remains that, like so many countries, we need to ensure that our debt levels remain reasonable and under control. If we don’t we will eventually end up like Greece, and of course no one wants that.

However, there are essentially only two ways to reduce budget deficits and Government debt: cut spending or raise taxes (or both). Neither is politically palatable, as we have seen with the reaction to the European austerity measures. But be that as it may, it is unavoidable.

The Government of course knows this, and knows it needs to act sooner rather than later. The Henry review seemingly provided an answer on a silver platter: tax the super profitable miners and avoid the angst of the general population. Well, obviously it hasn’t played out like that, but only because the Government has been very bad at explaining the issue, and the facts have been tainted by very powerful and well resourced interest groups.

People opposed to a higher tax regime for the miners must understand that if it doesn’t go ahead, the Government will need to raise money elsewhere, and that could well be in the form of higher personal tax. No one will be happy with that and it will be political suicide. Otherwise the cuts to Government spending will need to be far more aggressive. Again though, voters probably won’t appreciate significant cuts to hospitals, education, welfare, infrastructure and the like.

So let’s all take a step back and understand that although the RPST is far from perfect in its current form, it has the potential to reform the mining tax regime and raise significant funds in one stroke. The miners will always and should always do what they can to maximize returns for shareholders, so we can expect them to fight tooth and nail against this, but the fact is that they can afford to pay more tax and still remain very profitable. Even in its current form the RSPT will not decimate the Australian mining industry, despite claims to the contrary.

Let’s not forget too that what they are profiting from are the natural resources that are collectively owned by every Australian, and we need to extract a decent return for ourselves. One day this boom will be all over and we will ask ourselves who reaped the lion’s share of the benefit. Most likely it will be corporate interests, and indeed they are entitled to make a decent return from their hard work. But citizens should understand that the current regime means that the country itself is not getting anywhere near its fair share.

Somewhere between the two ends of the spectrum of this debate the truth lies. Rather than get hysterical over the extremes, let’s debate the issue in a calm and objective way. This issue is a big one and requires strenuous debate, but let us first establish the facts before we all go off half cocked.

Anglo-Australian mining giant Rio Tinto said Thursday it had secured its first-ever iron ore sale to India, a “ground-breaking” development it described as significant for its future.

Iron ore chief Sam Walsh said Rio had sold a 160,000 metric-ton shipment to Indian steelmaker Essar for delivery later this month.

“To me, this is a ground-breaking sale and I think it is a good signal for us and Western Australia– it is strategic for us,” Walsh told Dow Jones Newswires.

“This is only one shipment at this stage but this is very significant in terms of forging a relationship with Essar, and potentially opening doors.” “We have long believed that India is a long-term market of great potential, and this development should be seen in that context,” he added.

Walsh said the sale, which was made at international spot rates, was also significant for its plans to launch iron ore operations in Orissa state, where it has a 51 percent stake in a joint venture with state-owned Orissa Mining Corp.

“It is also potentially significant given our iron ore project in Orissa, which we expect will also be a source to supply the growing Indian market,” Walsh said.

He did not confirm reports that the shipment was part of a request from Essar for up to three million tons of iron ore.

The Indian steelmaker downplayed the move as a short-term arrangement to meet demand as it expanded production capacity.

“In order to … expeditiously ramp up the capacity, iron ore from international sources is being considered,” an Essar spokesman told AFP.

“This is in addition to iron ore supplies under contract with domestic suppliers.”

Essar’s production was more than halved when Maoist rebels blew up a mining pipeline supplying its pellet-making plant in the southern city of Vizag in May, Dow Jones said, citing mining officials.

ANZ senior commodities strategist Mark Pervan said more competitive prices and greater ore quality were likely to have led India, the world’s second-largest consumer of iron ore, to look to Australian producers.

But he was dubious about the longer-term implications of the sale, saying India was never going to compete with net importers such as China, Japan and Korea.

“India is a very big iron ore producer of its own and traditionally an iron ore exporter … and by default it should be supporting all of its own needs,” Pervan told AFP.

“It’s significant in that India is going to foster a very large steel industry and therefore demand a lot of iron ore. But it’s probably almost always going to be sourced from its domestic supply.”

The world’s second-largest producer of iron ore, Rio’s chief export market is fast-industrialising China, but emerging India is also expected to underpin a boom in demand for resources.

Australian officials have forecast a “decades-long” return to stellar growth fuelled by demand for commodities from developing nations.

The world’s largest miner BHP Billiton, which agreed this month to combine Western Australia iron ore operations with Rio, has said it expects global steel demand to double in 15 years.

India would partly underpin a 250 percent increase in seaborne iron ore demand by 2025, and was also expected to intensely consume energy and coking coal, BHP said.

Gold has hogged the spotlight for so long, that everyone seems to have forgotten how exciting uranium can be too.

Right now across the globe, there are nearly 350 nuclear plants that are either proposed, planned or already in construction. Let me put that in perspective for you…

The number of nuclear plants is set to increase by 80% if all these projects go ahead.

And whether you’re a climate change sceptic or believer, the Copenhagen climate conference starts next week, and both China and the US have already made pledges to reduce their emissions.

If that happens then nuclear power is sure to be a part of the solution in coming years. Therefore, uranium will slide right back into the limelight.

But the catch is that there is already a shortfall in uranium production. Existing mines currently only meet 70% of the world’s demand. The remaining 30% comes from the last place you’d expect.

Where?

Since 1993, the 30% shortfall has been bridged by cannibalising the warheads from the nuclear warhead arsenal of the former Soviet Union!

The “High Energy Uranium” agreement has been in place since 1993. It’s also known by the slightly catchier title of “the megaton-to-megawatts program”.

Over twenty thousand nuclear warheads have been recycled into power plant fuel in the program. Those former weapons of mass destruction have supplied about ten percent of US’ electricity over the last sixteen years.

The weapons-grade uranium in each warhead can yield 700 kilos of lower concentration, reactor-grade uranium.

But this unique arrangement is ending. Back in 1993, the program was designed to have a twenty-year lifespan, and Russia recently indicated that it would let this policy expire as planned in 2013.

We’re hoping it wants to keep the last ten thousand warheads for the 42 nuclear reactors it has in the pipeline, rather than for any less friendly plans!

When this secondary source runs out, there will be a gaping hole left in the market. And this will happen just as a many of these new reactors are due to come on line. This shortfall in supply, happening at the same time as a big increase in demand will cause a scramble to secure supply, and will lead to a big rise in uranium prices.

But it’s not enough to look for companies that can provide uranium. It is essential that they’ll produce enough volume on a regular basis to attract big players like the Chinese utilities.

China is increasing its fleet of nuclear reactors from eleven, to one-hundred-and-eighteen! This is where the big contracts will be signed, and money made.

Gerard Minack, the highly respected global strategist for Morgan Stanley believes this is “going to be the biggest turning point for the Australian energy market in twenty years.”

Fortunately, Australia has the world’s biggest proven uranium reserves, with 28% of the world’s total, and right now the heat is back on for the uranium sector.

The two important columns are the “Total assistance” and “Average cost of living impact.”

The “Total assistance” column details the increased benefits paid by the government to individuals to help cope with the increased costs of an ETS. In reality what this also equates to is the extra cost to the taxpayer - you.

And the “Average cost of living impact” column details the increased cost to the consumer.

Whichever way you look at it, it’s theft from the individual on a grand scale. Because remember, it’s not businesses that pay for this, it’s always the individual. You’ll pay for this through increased taxes plus increased prices.

While I’m on the subject, a quick update for you on our Climate Change education…

Based on what we’ve read so far on Climate Change, all roads lead back to the Intergovernmental Panel on Climate Change (IPCC). All other research is based on the findings of the IPCC. Therefore, if the IPCC have got it wrong, then all the other research its findings are based on is completely useless.

Which rather puts a hole in the argument about there being millions of scientists who have researched Climate Change and found it to be a problem.

Because they haven’t, they’ve merely created models based on inputs supplied by the IPCC, and then added in their own scenarios to spit out the results.

So, the IPCC reports are the next port of call on our Climate Change/Stable Climate education.

But you only have to look at the horse trading over the ETS between the crooks in government and the crooks aiding and abetting them in the Opposition.

We simply ask the following question: If Climate Change is so important that something must be done about it, why is the government allowing the biggest emitters of CO2 and pollutants to get off virtually scot free?

We can answer that question ourselves. It’s because the Climate Change argument is all about a massive tax grab and power grab. It’s got nothing to do with ’saving’ the environment.

Unfortunately, the ‘Stable Climate’ deniers can’t see this because they’ve taken a massive dose of ‘Climate Change Rohypnol.’ They’re drugged up to the eyeballs on Climate Change spin.

Unfortunately for them, after the drug wears off they’re likely to wake up in ten years to find they and their wallets have been severely violated. Trouble is, it won’t just be them that will have felt the pain, everyone will have.

But, as I say, that’s on the table for tomorrow. Today we’re looking at gold priced in Australian dollars. Although it’s not just gold, but silver that’s making some headway too.

One of the frequent comments I get from readers is that the price of gold in Australian dollars has actually fallen in the last few months even though the US dollar price has risen.

You can see that on the chart below:

The Aussie dollar gold price reached a peak of around $1,550 in February this year before sliding to below $1,150 in the space of six months.

You could reasonably argue that in Australian dollar terms the price of gold crashed this year.

The simple reason for the ‘crash’ is due to the ever decreasing value of the US dollar. As you can see on the chart below the Australian dollar has climbed from 63 cents in March to 93 cents today, a near 50% increase:

It has been this ‘crash’ in the price of US dollars that has caused the Aussie dollar price of gold to fall.

The point is whether now is a good time to buy gold? I mean, as Money Morning reader Peter wrote to us yesterday:

“How do we know that “GOLD” being a safe asset is not in a bubble?”

That’s a pretty good question. And of course we can’t be 100% certain that it isn’t in a bubble. Although I’m 99.99% (gold bugs will like that reference!) certain that it isn’t.

But let me put it this way, if someone asked me which would be the best asset class to buy and hold over the next 30 years, my answer would be precious metals.

Rather, share investors should be active with their portfolios taking advantage of high prices to sell and cheap prices to buy. It doesn’t mean you have to be a day trader, it just means taking more responsibility over your investments rather than letting the fund managers cream you.

And as for property, well, it goes without saying that property is in a monumental bubble caused by rampant government and central bank manipulation - invest in property at your peril!

As a long term buy, hold and ‘forget-about’ investment, gold - and silver - wins hands down.

That’s compared to paper or electronic money which isn’t rare, it is ‘perishable’ in that it can be erased by the click of a button, but it’s just as easy to produce more of it, also by the click of a button.

The one thing paper money has in common with gold is that it’s relatively easy to move it around. Although at today’s prices an ounce of gold would take up less space in your wallet than twelve $100 notes.

So arguably, gold is easier to move than paper money.

But that doesn’t really help to explain whether gold can keep going up or not.

If we look at a longer term view of the gold price, you can see that gold has had plenty of corrections over the last thirty-odd years:

In fact, following the last peak nearly thirty years ago, gold went into a long term bear market. That was until Alan Greenspan started the disastrous policy of keeping interest rates artificially low at 1% during the early 2000’s.

Since then - just as then UK chancellor of the exchequer Gordon Brown decided to sell half the UKs gold stock - gold has barely looked back.

In US dollar terms it was trading below USD$300 an ounce in 2000 (Gordon Brown’s selling price!), compared to USD$1,164 today.

In percentage terms that’s an increase of 288%.

If we were talking about the housing market or the stock market we’d quite rightly say that following such a gain it was a bubble waiting to be popped.

In that case how is it possible for gold to buck that?

Look, let me state for the record that we don’t consider our self to be a diehard gold bug. But even so, do you know what, you don’t have to be a gold bug to see that the case for gold is as compelling today at USD$1,164 an ounce as it was at USD$300 an ounce.

All you need to do is accept that gold has certain benefits when compared to paper or electronic money. Those are the benefits I highlighted above.

If you accept those benefits are valid then all you need to do is look at the policy actions of certain central banks to see how they are eroding and even destroying any remaining value there is in paper money.

Precious Investment

Precious metals have been strongly demanded during the last few months: gold prices jumped above $1,000, silver and palladium prices reached recently a new 12-month high.

What about platinum? Have a look at the chart: the medium-term bullish trend in place since last November may above soon. A correction is expected.

Indeed, 11 months of up-trend have driven platinum price to a technical resistance that is likely to prevent a further rise. The historical high price (point A on the chart) posted in early March 2008 at $2,308 was followed by several months of correction and consolidation. The real plunge started at mid-July last year. In just 3 months, platinum prices fell from $2,059 to $752 (point B, down 63%).

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A rebound was initiated in November. Some momentum built up and eventually generated a bullish trend. Two weeks ago, the price action failed to break above $1,350. This level corresponds to the 38.2% Fibonacci retracement of the decline occurred between extreme points A and B. It also corresponds to a previous intermediary support zone, where the price action had bounced back in August 2008 (point C). Previous supports often become new resistances. That’s why some profit-taking has been triggered at $1,350: it was a technical opportunity to reduce risk and lock in decent gains.

From $752 to $1,350, it means that platinum prices have already bounced by 79% since last November. According to several indicators (Relative Strength Index but also Chande Momentum Osicllator), an overbought configuration was obvious at mid-September. The upside is very limited and the risk is clearly downward. Yesterday the price closed at $1,300, but there is more to come before bull players will take the opportunity to re-enter long trades. Technically speaking, there is probably 15% more to correct before the price action reaches a support line.

This target at $1,100 corresponds to a previous support area where the price action bounced twice (points D and E) in May and July this year.

In parallel with the stock markets, the commodities rally has reached its peak as the CRB Index posted a recent high at 269.18 points during the first fortnight of August. Actually the commodities benchmark has already retraced slightly as its current price is 249.63. That’s 7.3% lower than the high of August.

On the weekly chart, we see that despite the rebound generated in last March, only a small part of the huge decline occurred last year has been retraced…

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The rebound is, in terms of percentage, not so impressive. Remember, the plunge last year drove the CRB index from a historical high at 473.97 in early July 2008 (point A on the chart) to a low at 200.16 (point B) in late February this year. This was a correction of 58% that pulled back the index to levels not seen since 2002.

We have plot, between these two extreme points of this bearish trend (between points A and B), the Fibonacci retracement ratios. They typically act as resistance levels for the rally in place. The first one (the 23.6% ratio) has been hit twice during the last 3 months. This level is set around 265 points. In June, the index climbed at 266.17 points and, after a correction in July, it rose back to 269.18 points last month. This was a second attempt to clear the Fibonacci resistance. But it failed another time as the momentum was losing is strength.

The weekly MACD has peaked and already curved downward. It is probable that the correction will continue until the index finds some good support on the downside. The daily MACD has already crossed below its moving average, confirming the bearish outlook on the near term…

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It has also posted a bearish divergence as it did not confirm the new high posted by the price action.

The target is therefore on the downside. It may be the level of 230 points (almost 15% lower than the current level) as this is where the index found some support in last July. It corresponds to a previous high (in March and April this year) that became a new low.

The first currency offers some of the most compelling long-term buying opportunities in the world right now with healthy balance sheets, wealthy benefactors, and a positive long-term growth story.

The second…well, let’s just say it’s a great shorting opportunity if nothing else.

In fact, the only thing these two currencies have in common is they’re both considered commodity plays.

Let’s start with the buying opportunity. To go there, let’s head to the land of Samba and Feijoada first. Yes we are in Brazil.

The Australian dollar has leapt 15% since the beginning of the year (indeed, that’s one reason why the Aussie is my favorite currency over the next six months). But while the Aussie has climbed 15%, the Brazilian real has shot up 22.5% year to date. It is running hotter than all currencies against the U.S. dollar.

You can attribute a lot of this to the world’s insatiable demand for Brazilian commodities – especially the ones China and India are gobbling up. China’s influence in Brazil has reached such an extent that you could be buying a Brazilian stock as a China play these days.

In fact, a Chinese company recently granted a $10 Billion loan to Petrobas (Brazil’s largest oil company) in exchange for first rights to the oil that Brazil will drill at its newfound reserves.

The Australian theme, (China buying up the world’s commodity reserves strategically) is alive and kicking in Brazil too. As I have said before, as China continues its strategic grab for world power, Brazil will remain relevant in the global economy.

I would like to continue this month with my new series on Iron Condor (IC) trading and share some of the insights I gained in trading Iron Condors on the Russell 2000 Index (RUT). I traded the RUT for most of 2008 and am certainly back in the saddle in 2009.

At the time of writing we are experiencing a sideways to slightly bullish market – perfect for this strategy! There is a lot more to take from this article than just ways to trade the IC because really it is just 2 short spreads (or credit spreads), sold far OTM with the view that they will erode in value and be able to be bought back cheaper than they were sold.

Given that credit spreads are part of other strategies we know (condors, butterflies or just single credit spreads), the trader should be able to incorporate some ideas from this article into other areas of their trading. Let’s revisit the period from December 2007 to September 2008, when the RUT was trading in a range.

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Let’s assume we are legging into the trade and are therefore placing our spread orders separately.

When we sell a spread, our broker will give us a quote (a bid/ask) on the actual spread. Single options have their own bid/ask spread, but strategies (spreads, butterflies, calendars etc) also have their own bid/ask spread. For example if we wanted to sell the 810/820 call spread on the RUT, and we pulled up this spread on the order screen, there would be a bid/ask quote for the spread. For example the bid may be 50 cents and the ask 60 cents and would look like 0.5 / 0.6. This means at the worst, we could sell this spread for 50 cents and at best we could get 60 cents.

We know that we are never going to get the best price otherwise there would be nothing in it for the market maker. But there is a way we could still get the 60 cents - or even more, which I will discuss later. But commonly on the RUT I am filled at the midpoint, which means the price right down the middle of the bid/ask. In this case that would be 55 cents. On some broker platforms when you bring up a quote for the spread, they default in quoting the mid-price for you. If I need to get out of a trade quickly, or I want to sell a spread quickly, I will take 5 cents off the price to increase my chances of getting filled. If the market is moving fast or volatility is very high (making bid/ask spreads wider), I may have to take 10 cents off the price.

Either way, I always try to get more for selling my spreads than just the mid-price. It doesn’t take much market movement for the option prices to move around and if the RUT moves enough intra-day then my spread price will move as well. So commonly in the example above, I will actually place a limit order to sell the spread for 60 cents. I won’t get filled straight away but if the market moves a little in the direction of the spread then that 60 cents may now become the mid-price of the spread, meaning I have a fair chance of being filled.

The catch here is that if the market moves in the other direction for the entire day, then I will never get filled and will probably wish I had taken the mid-price originally. Regardless of this, I think the strategy is worthwhile. 5 cents may not seem much, but that’s $5, and if you had 5 contracts, and then the same for the put side that’s $50 in total. Doing this at the exit of the spreads would mean another $50 in your pocket, or in this case, $100 so far. Now if you sold and bought back your spreads twice in the month, potentially that’s an additional $200 that you’re better off. Now we all know it’s not as black and white as that, but it’s amazing to see how fast those 5 cent’s all add up.

I hope that has given a new way to think about placing orders and getting filled. Happy trading, but please remember trading this strategy carries a great deal of risk, relative to the reward you can make. Please don’t go out and trade these if you don’t understand the strategy, risks, rewards, breakevens and both winning and losing adjustments like the back of your hand.

Let’s have a look today at a metal that recently cleared an important level and that should continue riding its bullish trend. I’m talking about lead. From the lows posted in December last year, lead price has more than doubled. It jumped from $880 (per tonne, point A on the chart) to a last closing price of $1,774.

The retracement on the upside from the lows of last December has been made quickly and without significant consolidation phases. The bullish trend in place is characterized by regular higher lows and higher highs. Both on daily and weekly basis, the current uptrend looks strong and durable.

Actually the price action crossed above two important levels in late May and early June. Those levels were technical resistances. The first level cleared was a previous low (point B, posted in early July 2008) that became then a new high twice (points C and D). It corresponds to a tight zone between $1,525 and $1,550.

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The second breakout occurred as the price action rose above the descending line that goes through points 1 and 2, two highs posted in October 2007 and March 2008. It could have been a major prevention of a further rally, but obviously the bulls hold firmly. As those two resistances did not trigger any correction, the price action jumped quickly in June until $1,796.50 (point E).

The pull-back move that followed tested the two resistance levels previously cleared and the price action found some support there. It’s a confirmation that the near future is likely to be on the upside. The indicators remain well oriented and also suggest a continuation of the bullish trend. The medium-term momentum indicator (180 days) has crossed above its 100 line and the MACD is on a positive configuration. The RSI does not show any overbought alert.

In this scenario, the objective now may be $1,950, which correspond to the 38.2% retracement ratio of the decline occurred between points 1 and A (extreme points of the bearish trend). Of course, on the other side, the support is the level of $1,550 points.

The global rebound generated in March on the stock and commodities markets seems to have exhausted and corrections are now expected. Especially for the assets that recently reached key resistance levels, such as the Palladium.

The price action since last year is clear. First, a peak posted in early March 2008 when the price of this precious metal reached jumped to $600 (point A on the chart). The following plunge drove the price back to $400 in a first time. There was a consolidation phase during 3 months (April to June 2008) between $400 and $500. The second wave of the decline started in July 2008, when the global risk aversion soared worldwide.

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In 4 months, between July and October 2008, the price collapsed by 65% and eventually found some support around $175. A quick bounce and a pull-back to $160 followed in November.

The medium-term bullish trend actually started in early December, and retraced 23.6% (the first Fibonacci ratio) of the plunge occurred between points A and B. This level was the first target for investors that succeeded to buy back Palladium on its lows. As other key indices or commodities and currencies, the Palladium posted a high around June 11 ($266 on June 10). The 6 months and a half of bullish trend were backed by a support line that may be tested soon.

This oblique ascending line (green line on the chart) starts from point B and goes through the higher lows of the price development during the first half of 2009. Each time the price found some support on this technical line and quickly bounced back (points C, D, E, F, G and H).

It may be different now as the bullish trend has obviously exhausted on the Fibonacci resistance. A further correction, therefore below the current support line, is possible.

Several momentum indicators have triggered negative signals as they detected bearish divergences. The CMO (Chande Momentum Oscillator) did not confirm the high of the price action last month and has been posting lower highs. The momentum has clearly weakened.

The price action should test the support line at around $235 soon (currently the price is $252). A break below this level would trigger a medium-term bearish signal.

Don’t Jump Into This Commodity Just Yet

As many other commodities, wheat prices have peaked in June. A bit earlier actually: at 677 US cents a bushel on June 1st, while stock indices and the CRB index posted a high on June11 or 12.

Over the long term, we can identify several technical patterns on the weekly chart. The current one is an uncertainty triangle built by the green ascending support line and by the red descending resistance line. Those two lines are the lower and upper limits of the trading range since last October. This trading range has been narrowing for the last 9 months. The price action found some support around 475 cents in last December (point A), but some new support higher, around 500 cents, a few months later (point B).

The recent resistance level has been around 675 cents (point C). It is set on a line that comes from August 2007. This line was actually the neckline of a “head-and-shoulders” pattern built by points D (head), E and F (right and left shoulders).

Once cleared, this neckline which was a support level has become a new resistance level. On a weekly basis, the current price action looks bearish. The Commodity Channel Index has just crossed its zero line, showing that there is no medium-term momentum. The 20-week Williams %R is also oriented downward: this oscillator had detected an overbought configuration in early June.

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On a daily chart, the Relative Strength Index confirmed this overbought configuration and the following bearish signal. The Money Flow Index indicates that the peak posted at 677 cents triggered some profit-taking as money has gone out of the Wheat futures during the whole month of June.

Because those indicators reach low values, a bottom on the price action may be possible. That’s why we expect a further correction of the price action towards the support line (the lower band of the triangle). The current target could be then the area around 530 cents. Then it would become an opportunity for a new bounce.

Last month, in our previous update on the CRB Index, we were mentioning that the rebound generated in late February/early March would have the 265 and 305 points as main targets.

The first target has actually been reached two weeks ago, and as expected a corrective move has been following. The rebound has driven the price from the low of 200.34 points (point B on the chart, posted on March 2) to the recent high of 266.17 (point C, posted on June 12). That was a 33% jump in 3 months and a half that failed to break above the first significant resistance line.

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This resistance line was the first Fibonacci retracement of the decline occurred last year, between points A and B. Most of the technical indicators were peaking to high values, and that’s why many traders found logical to sell back commodities as the CRB was approaching a resistance level.

From the recent high of 266.17 points, the price action has already corrected by 7.5%. The index is currently trading around 246 points. Is it a pause a bullish trend or could this correction send back the CRB index towards the low levels around 200 points?

With the current indicators, we reckon that the current bearish move is likely to remain a temporary technical correction. We expect a further correction in the near-term, but there are several supports that should back the price action and eventually constitute a basis for a continuation of the trend started in March.

The indicators are all bearish as they have been correcting from their peak points. The MACD curved downward and crossed below its moving average while the 30-day Commodity Channel Index (CCI) has plunged and crossed below its zero line. However, two intermediary supports at 245 points (the current level) and lower at 230 points may become opportunities to become “long” again. Those levels correspond to previous high points the may become the new lows.

The 10-day moving average is also still above the 40-day moving average (it had crossed above it in March 20, which was a medium-term bullish signal).

The area between 245 and 230 points will probably see a lot of buying interests, but a crossed below 230 points would be clearly a door opened towards the low of last March.

This is the ASX index (ASX:XGD) that includes producers of gold and related products. The last two weeks have been bearish: the price action has been correcting after it reached the previous high of 2009. As a result, a double-top technical pattern has been built and suggests now a further retracement towards 4,500 points. The closing price yesterday was 4,500 points.

After the large decline occurred last year, the XGD index found some support around 2,675 points (point a on the chart) in late October last year. It bounced back sharply to a high of 5,677 points (point B) in last February. This was a rise of 112% in just 4 months.

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Let’s consider this huge rise: a first retracement pulled back the price action to the 38.2% Fibonacci level in April (point C), at 4,500 points. From this point, the index rebounded to a recent high posted at 5,589 points in early June (point D). The immediate correction from the following day indicates that many traders took the opportunity of this double-top to take profits or even to go short there.

The index has already fallen by 9% in less than two weeks, and it is likely that the objective for the current bears is lower. Indeed, the double-top pattern is building an “M” on the chart, where the second leg of this “M” typically falls to the level of the first leg.

Here the first leg starts from point E to point B, whereas the second leg starts from point D and may end to the level of point E, therefore around 4,500 points. It’s 11.6% lower than the current levels.

The indicators also argue for such a move. The MACD has lost some momentum and has crossed below its moving average, confirming a bearish signal. The RSI well detected the shift in early June as it crossed below its 70 line. It means that the index was clearly overbought and that there was a real risk of trend reversal.

Asian markets closed broadly higher Wednesday, with oil and metals stocks leading the charge as commodity prices extended their rally, supported by wagers on global economic recovery and recent weakness in the U.S. dollar.

Japan’s Nikkei 225 finished 2.1% higher at a fresh eight-month high of 9991.49. Hong Kong’s Hang Seng Index added 4.0%, Australia’s S&P/ASX 200 closed 2.3% higher and South Korea’s Kospi Composite was up 3.1%. Taiwan shares closed up 0.8% and New Zealand’s NZX-50 rose 0.2%.

In Asia, “leading and coincidental indicators like PMI, industrial output, production output, consumer spending and consumer confidence have turned around and in some cases, have been on the up-climb in the past three consecutive months,” said Gabriel Yap, senior dealing director at DMG & Partners.

“Today, such phenomenon is reflected in commodities’ prices up-climb - particularly, oil, energy, copper and steel,” he said.

And traders in Asia took their cue from the buoyant commodities market, feeding a rally in resource stocks.

In Tokyo, oil developer Inpex closed up 3.5% and Japan Petroleum rose 4.3%, while Sumitomo Metal Mining was 6.9% higher.

In Sydney, Rio Tinto closed up 3.4% and BHP Billiton finished 3.3% higher, with the duo helped by Merrill Lynch raising its commodity price forecasts. Woodside gained 1.5%.

In China, Jiangxi Copper added 2.2% and Datong Coal Industry was up 0.6%.

Crude-oil prices climbed to a level not seen since late October of last year, with July crude tapping a high above $71 per barrel on Globex. Prices had climbed 2.8% in New York, helped by a weaker U.S. dollar and some expectations for a drop in U.S. oil inventories.

Right now, the dollar is a “huge driver for commodities in either direction, especially energy,” and given that, “the rally in oil prices is quite precarious right now,” said Kevin Kerr, president of Kerr Trading International.

July copper rallied 5% to finish at $2.366 a pound in New York, and was up at $2.381 on Globex. Prices for August gold were at $959.40 per ounce, up $4.70 from the New York close.

“Copper and rest of the base metals are riding high on sharp rise in investment demand and a weaker U.S. dollar,” said Chintan Karnani, an analyst at Insignia Consultants. He expects prices to sustain gains in the medium to long term, but a “10% to 15% correction cannot be ruled out as and when there is bearish news on global economy.”

In China, data from the National Bureau of Statistics showed that China’s consumer prices fell 1.4% in May from a year earlier, while producer prices for the month eased 7.2%.

But there was some gloomy news on the capital spending front in Japan: April core machinery orders fell 5.4% from the month before, against a 0.8% rise tipped in a Dow Jones poll of economists.

Still, Yumi Nishimura, an analyst at Daiwa Securities SMBC, said positive figures in the electronics and auto segments were offsetting the headline number, with orders from the auto sector up 10.5%, for the second-straight month of gains. Toyota shares rose 1%.

Kawasaki Heavy Industries jumped 15.7% to hit its highest level for 2009, after the Nikkei reported it and National Institute of Advanced Industrial Science and Technology had developed a nickel-hydrogen battery that recharged in less than 10 seconds.

Shipping shares were higher even as the Baltic Dry Index shed a further 3.5% Tuesday, with China Cosco up 8.5% in Hong Kong. In Japan, Nippon Yusen rose 4.4% with Mitsui O.S.K. up 5.5%. Credit Suisse lifted its stock ratings on the country’s three major shippers to outperform from neutral given an expected earnings recovery, saying “any short-term reduction in share prices is an investment opportunity.”

Retailing shares finished higher in Seoul after reassuring May sales data from Shinsegae, which gained 6.6%. Lotte Shopping climbed 7% with Hyundai Department Store adding 9.4%.

“Consumer sentiment has improved on the back of low interest rates and spending is expected to continue to pick up into the third quarter,” said C.G. Koo at Samsung Securities.

Taiwan shares found support from technology stocks, as TSMC Chairman Morris Chang forecast the global chip sector to return to 2008 levels in 2012. TSMC rose 3.7%.

Trading firm Li & Fung fell 4.1% in Hong Kong, after saying insolvent German retailer Arcandor owed it outstanding commissions totaling $5.4 million.

China’s Shanghai Composite Index closed up 1% and Philippine shares gained 1.4%. In afternoon trade, Singapore’s Straits Times Index was up 1.8% and India’s Sensex tacked on 2.6%.

In foreign exchange markets, the U.S. dollar was slightly higher against the yen after its Tuesday losses, at 97.60 yen from 97.32 yen late in New York. The euro was at $1.4090 from $1.4083, and at 137.47 yen, from 137.06 yen

Australia’s government on Saturday raced to reassure China that miner Rio Tinto’s decision to walk away from a US$19.5-billion investment by Beijing was not a political move.

Rio Tinto announced on Friday it was pulling out of the deal that had sparked political and shareholder opposition and would instead raise capital from existing shareholders and forge a joint venture with arch rival BHP Billiton Ltd.

‘It’s a commercial decision that has been taken by the companies,’ Australian Treasurer Wayne Swan told state radio on Saturday, adding that the move would not harm Chinese-Australian business ties.

‘Chinese investment is welcome in this country, I have made that clear with the Chinese, as has the prime minister,’ he added after Rio’s decision to scupper its agreement with Chinese state-owned aluminium miner Chinalco.

Rio Tinto’s announcement saved the government from having to make a politically sensitive decision on whether to grant regulatory approval to the deal, a decision that would have had to be made within the next week.

The landmark deal between Chinalco and the debt-laden Anglo-Australian firm would have marked the largest Chinese investment abroad and the largest foreign investment in Australia.

Mr Rudd held a hastily arranged meeting with Chinalco chairman Xiong Weiping late Friday night during which he also stressed that Rio Tinto’s decision was its own.

‘The prime minister explained that Australia welcomed foreign investment,’ a spokesman for Mr Rudd was quoted as telling The Sydney Morning Herald.

Asked whether the collapse of the Chinalco investment would anger the Chinese, Mr Rudd stressed that the decision was taken by Rio, not his government.

‘And I think it is very important that our friends in China recognise that fact,’ he said.

Rio shareholders and opposition politicians had spoken out against the Chinalco deal saying it risked allowing China - Australia’s main resources customer - to control the pricing of the minerals it buys.

Rio opted instead to walk away from the deal and form an iron ore joint venture in Australia’s mineral-rich Pilbara region with rival BHP and to raise capital through a US$15.2-billion rights issue