"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Thursday, March 31, 2011

Monthly Gold Charts - March 2011

Gold scored an all time high record monthly close!

Gold has now pushed solidly past the 75% Fibonacci retracement level from the 1979 high to the 2001 low in inflation adjusted terms. Note - that this chart uses the government's CPI number which is utterly useless but at least can serve as a type of benchmark against which to compare the current gold price in real terms.

Silver - 8 hour chart update

Range trade until it clears $38 and holds the level.

June Gold - 8 Hour chart

I am posting this chart up to try to get a better read on the volume being done in the gold pit. There is a defect in the software that I am using which makes it a bit tough during the transition between contracts from active or front month to the next most active which then becomes integrated into the continuous contract price and volume.

As volume drops off in the April contract it shows up on the continuous contract but that same volume is increasing in the June as it gets ready to become the active month for charting purposes. June will shortly be the contract employed when we do volume analysis on the continous contract but for the immediate time I am having to use a separate chart for the June to catch its volume readings.

Note that the last few bars are showing the transition to it as the most active contract. I apologize for neglecting to catch that my comments on the recent gold chart were the same as yesterday when it comes to the volume. There was a drop off in volume as traders were winding down positions related to the end of the month/quarter but volume picked up to more normal levels yesterday in the June.

Note that strong volume is anything over 75,000 contracts on one of these bars. Decent volume is anthing above 62,000 or so. These are 8 hour bar readings and not the total for the day so keep that in the back of your mind as you review this.

As you can see, there was decent volume driving the move towards resistance but once it got there bulls lost interest in pressing it through that level and volume has now subsided. I want to see what kind of readings we get in the June tomorrow as the new month begins as well as next Monday when we get the advent of a new week to see whether hedge funds are going to come back in and recommit fresh money to the metals.

Gold now at top of its Trading Range

Please see the chart below for my notes on the technical posture of the market.

Gold is now trading at the exact top of what I believe is a new and higher consolidation range bounded by $1440 on the top and secured by $1410 on the bottom. Until it can push decisively past $1440 on good volume, the range is still in effect.

Trending indicators are generating buy signals but those must be confirmed b a push through $1440 that maintains that level.

Open interest continues declining but that is a function of the completion of the end of the month/quarter book squaring by funds and other large traders with clients. Tomorrow starts a fresh month.

We may need to see the price action Monday to get a more definitive idea of where things are headed next depending on the willingness of traders to place bets ahead of the weekend. Many tend to avoid that not knowing what the weekend break might bring so we will just have to wait and learn what happens and observe how traders react to the advent of April.

USDA Stuns Ag Sector

This morning, USDA released its most current estimate of corn inventories as o March 1 and took many in the ag markets by surprise. They reported a total of 6.52 billion bushels in storage, down from last year's number at this time of 7.694 billion and well below the average of analyst estimations at 6.70 billion.

With an increase in usage combined with these lower stocks, many are expecting USDA to now drop season-end supplies to a record low. Current projected ending levels are at a 15 year low, the equivalent of perhaps 18 days worth of corn needs.

Corn locked limit bid on the opening of pit session trade and has been stuck there ever since. As I write this, there is a pool of well over 278,000 orders to buy in the two front months alone!

The reason I mention this is because these extremely high corn prices are not shutting off demand and that means price will need to rise yet higher. Translation - get ready for a continuation of high meat and chicken prices for the remainder of the 2011 growing season not to mention the rise in prices associated with corn in all products employing it.

With gasoline prices shooting into new highs for the year along with a report that is pushing the price of corn, beans and wheat all higher, the beleaguered consumer is not going to get any respite from the surge in food and energy costs any time soon.

Gasoline Prices set Fresh 32 Month High

Wednesday, March 30, 2011

Silver - 8 hour chart update 10:15 PM CST

In Asian trading, silver is continuing to push higher building on its gains from the New York session in what appears to be further confirmation of the metal carving out a new consolidation zone at a higher level.

The top of this new zone is shy of $38 with the bottom down near $37 and slightly below there. Upside volume is picking up which is positive but until the market can strongly clear $38 and maintain that, the new leg higher is elusive.

Note that the indicator is moving into giving a buy signal

No Mercy for Chocolate Lovers

A new war in Libya, a Spring that delays coming and now the ultimate in distressing news, Hershey is raising chocolate prices. There needs to be a 5 minute break in the trading session sometime tomorrow for a moment of grief.
This from Dow Jones....

DJ MARKET TALK: Hershey Makes Not So Sweet Price Hike

Wed Mar 30 16:28:10 2011 EDT

 4:28 (Dow Jones) Hershey (HSY) is raising wholesale prices 9.7% in response
to cost pressure, including cocoa and sugar. It'll be interesting to see how
bitter the increase will be for retailers as they enter the prime Easter candy
season, though many of those orders have likely been placed. The price
increases go into effect today, but HSY doesn't expect a material impact to
finances this year, as it backs FY11 guidance. HSY says it will help with trade
promotions and in-store merchandising to keep candy sales growing.

(END) Dow Jones Newswires

Gold - 8 Hour chart update - general comments

Rollovers are continuing in gold with traders moving out of the April as it enters its delivery period and into the June. Some are also moving into August and December. Open interest continues to decline as end of the month and quarter pressures continue but the bulk of that should be over today.

How this market behaves Friday and Monday of next week will be a better indicator of what we can expect in the immediate near term. Trying to get too much of a read on a market that is being jostled by book squaring and low volume is generally not wise.

High oil inventories at Cushing were being blamed somewhat for gold's weakness today but I do not agree with that reasoning. Oil is still above $100, high inventories or not, and a mere blip lower in crude oil is not going to dissuade those who are focused on increasing price pressures throughout the economy. Besides, even though crude was weaker today, unleaded gasoline is higher and it is gasoline prices that more directly impact consumer perceptions of inflation anyway. 

The Dollar is experiencing two-way money flows today but for whatever the reason, it has been stopped dead in its tracks near 76.70 on the USDX chart. It has been drawing a bit of recent strength from the verbal intervention campaign being engaged by several FOMC governors who are talking hawkishly about ending QE. One went as far as saying that the last $100 billion of the scheduled $600 billion might not be necessary. That was enough to pull the rug out from under the bond market yesterday so it is hard to believe that we will see too much more of that sort of talk if the Fed wishes to keep bond speculators from blasting the long bond into the nether regions and sending rates higher in the process.

As stated many times here already: If they attempt to talk the Dollar up by sounding hawkish, they will send the long bond into the toilet. If they try to talk the long bond back up again by expressing reservations about the strength of the US recovery, they will send the Dollar into the toilet. Pick your poison is a good motto at this point.

HUI still in a Range Trade

Yen Gold knocking on the door of its all time High

Silver - 8 hour chart update

Before we get to the chart, the March contract has gone without much in the way of any fireworks. The remaining 41 contracts in that month are all accounted for in tomorrow's deliveries so that is it for any short squeeze in that month. To be honest, the market has performed admirably without any such event anyway.

We can now turn out attention to the May contract as the open interest in the thinly traded April is too small to be of any significance. May is trading at a 2 cent discount to the July so there is no backwardation in the front months' structure at this time.

Tuesday, March 29, 2011

Silver Deliveries picking up - Gold rollovers continue

As March draws to a close, deliveries in the March Silver contract are ramping up. A total of 290 deliveries were posted for tomorrow with Merrill Lynch the biggest issuer for customers while JP Morgan was second also issuing for both customers and their own accounts.

Barclays continues to gobble up the silver for its clients.

The total deliveries for the month of March has thus far been 1,707. Open interest remaining in the March contract is 330 contracts.

Notable is the fact that the March silver contract, which recently had been trading at a small premium to the May is now back to a discount of about a cent and a half. That pretty much means any fireworks related to the delivery process for the rest of March are over. These front month spreads have been extremely volatile but they have not moved in the direction that would indicate any short squeeze is forthcoming. Such an event would have been marked by a steady and continuous widening of any premium that March would have held over the May.

Rollovers continue in the gold pit with traders' move into the June being accompanied by a further reduction in open interest as longs hesitate to push the market higher as the end of the quarter draws near.

Both gold and silver are weakening as they head into the close of pit session trading. We'll see if they are able to garner any strength in the after market hours. The end of the month is currently is working against the bulls. It will be up to physical market buyers to keep a floor of buying support under the market until the speculators decide to return to the long side more aggressively.

Strength in the HUI might be the result of hedge fund unwinding of ratio spread trades due to the move higher in the broader US equity markets.

Dollar strength is the result of downgrades to Portugal and Greek debt which is weighing slightly on the Euro. Additionally the Yen is seeing a strong bout of selling pressure today. Even at that, the Dollar is only marginally higher.

The long bond is looking heavy today.

Gold - 8 Hour chart update

Silver - 8 hour chart update

Consumer Confidence Plunges - No Worries - We have the Fed

The Headline says it all - stocks shrug it off. Stocks shrug off Japan. Stocks shrug off unrest in MENA. Stocks shrug off the Housing Market woes. Stocks shrug off rising gasoline prices. Stocks shrug off the sun rising in the West and setting the East.

All you need to know is that the Fed keeps printing money.

Monday, March 28, 2011

Internal notes on Gold and Silver open interest and deliveries

Open interest in both gold and silver were down for Friday's session. Rollovers continue in gold with the specs moving out of the April and into the June. For all practical purposes, June is now the most active contract although volume in the April is still higher. That will end by Wednesday this week.

Some of the weakness in gold is still associated with these rollovers continuing as the inability of gold to continue pushing through $1440 last week has engendered some light long liquidation. Once we clear option expiration and the rollover activity, we will be able to get a better sense for where the market is heading next. For now it is still consolidating above $1410.

Silver too experienced some long liquidation on Friday with some of the longs ringing the cash register after it was unable to keep pushing through the $38 level.

Open interest remaining in the expiring March contract is now down to 388 contracts. Deliveries for tomorrow will be lead by Morgan for its own account. Barclays is the largest stopper once again for clients. As stated last week, Barclays has some clients who want to take delivery. Total deliveries for March thus far are 1,417.

March silver remains at a premium to the active May of about a half a cent but May is slipping some in relation to July and is now trading at a 2 cent discount to it. While the backwardation structure on the overall board is noteworthy it is not dynamic enough to keep the front 3 contract months in a full backwardation mode. That takes some of the bullishness out of it somewhat compared to what I would consider it were March and May both trading at a premium to the July. I will continue watching to see how these spreads behave as we near the end of the month.

The HUI is lower today falling further from the 580 level and establishing that as an important technical chart resistance level. It is well off its worst levels of the session however and should it be able to close the day near current levels (563) it would be somewhat of a moral victory of the bulls after the disappointment of last week's inability to clear 580.  The index is trading above all the major moving averages but the 10 day is below the 20 day which is not what one wants to see for a market that is in a bullish posture. The index will need to stabilize near its current level and hold here for the next few days to allow the shorter term 10 day moving average to make a bullish crossover of the 20 day. Downside support is near 549 - 546. I would not want to see the HUI below 538 for any length of time as that would move it back down to 520.

Silver - 8 hour chart update

Gold - 8 Hour chart update

Friday, March 25, 2011

The Seeming Unstoppable Rally in US Equities

One of the things that has really struck me has been the comments of many of the analysts and guests on the financial TV this past week in regards to the rally in US stocks.

The common refrain seems to be something along these lines:

"Well Joe, this market has had TWO BLACK SWAN Events thrown at it in two week's time and it simply will not stay down. Whenever you see a market that does not respond to bad news and actually begins to shrug off that news and moves higher, you JUST HAVE TO BUY IT".

It is always fun listening to some of these analysts scratch around for reasons to explain this stock market strength especially when some of these same people will point to the poor labor markets and broken housing market as reasons for concern. Some go as far as expressing great hesitation over further strength given the sharp rise in crude oil and related energy prices. They sluff that off however and will point to the global growth factor as reasons for the rally in the US equity markets with that overiding everything else.

The simple truth is that the world is awash in liquidity and this liquidity is finding its way into both stocks and commodities. It is so massive that it just overpowers anything that gets in its way. In such an environment most traders are simply afraid of being short. What happens as a result of this unwillingness to aggressively sell is that it takes less and less volume to move stock prices higher because sellers are scarcer and price must move high enough to entice sufficient offers into the market to accomodate all the orders to buy.

Take a look at the following chart which I have posted previously here at the site but which I think needs frequent reference to remind us how important this liquidity has become to maintaining the rally in US stocks.

Note the sharp expansion in the Fed's Balance sheet near the beginning of this year and note how it just keeps on rising. It is that measure of liquidity that swallowed up the selling due to unrest in MENA and the tragedy surrounding Japan.

The Fed may be floating a trial balloon by talking about an end to QE to gauge how stock markets will actually react to such an event  but one has to wonder how shutting off the liquidity spigot, based on this chart, is going to affect the high flying equity markets.

Gold - weekly chart analysis

Silver Musings

Silver actually put in a good showing for the week closing up $2.00 higher while setting a new 31 year high in the process. It was unable to maintain its footing above $38 for long but did hold support near the $37 level.
Moving into next week if it can stay above the $37.00 - $36.80 level, it should be able to consolidate and set itself up for a run towards $38 once again. If that support level does not hold, it will drift down first towards $36.50 and then toward $36.

I would prefer to see it stay above $36 as that had been a major barrier to the upside and should now serve as a major support level to the downside if the market is going to press on to new highs relatively soon.

Deliveries for the March contract are picking up as expected since we are running out of days in the month. A total of 236 were issued for Monday with JP Morgan being the big kid on the sell side once again. I should note that there are almost evenly split between issuing silver for clients as well as for their own account. Barclays is once again the big stopper along with Prudential coming in second. Both of those firms apparently have clients who want to own the physical metal.

There has been a total of 1,383 contracts issued and stopped this month with 632 contracts remaining open in the March. I should also note here that the March contract remains at a one cent premium to the May. That is noteworthy.

Long Bond a Casualty of Fedspeak

A very slight upward revision to 4th quarter GDP along with "hawkish" talk by select FOMC governors may be pushing the Dollar higher but it is not helping the US bond market on the long end of the curve.

It has dropped back within the former trading range or congestion zone that was once in place dating as far back to December of last year. You will recall that the long bond had broken out of this range to the downside in early February only to rise, Phoenix-like, from the flames by the surge in crude oil prices as unrest spread across MENA as well as events in Japan.

Since that time however, the bonds have been steadily moving lower. Keep in mind that Bill Gross of PIMCO, who sold his Treasuries because he felt yield was way too low, is undoubtedly being copied by many others. There are also many commentators and analysts rightly asking the question - "once the Fed supposedly stops buying all these Treasuries at the end of June, just who is going to step up and buy all of this US debt especially at these low yields".

While the Fed mouths may be talking up the Dollar and talking down Gold, they also are risking a rise in yields on the long end of the curve. No doubt this is not good news for the beleagured real estate market.

Federal Reserve Officials talking the Dollar up - Gold down on Cue

It is no secret to those attuned to market action that the US Dollar's technical chart picture is horrendous. It had broken through a critical support level near 77 on the USDX last week and had further descended down towards the tremendously important 75 level. No matter what appeared to be happening in the world, the US Dollar could not get much if any of a safe haven bounce.

Currency traders had been moving to the Swiss Franc as their choice of a safe haven. The Aussie has been making new highs and the Canadian Dollar has been very strong as well.

Now, it is also obvious that the US would dearly love to see the Dollar stay weak to help it deal with its massive debt load but the ugly truth is that the Dollar was on course for a major crisis if it violated the 75 level.

Enter the Fed officials today and yesterday. Apparently the strategy was to get several of the FOMC governors to hit the airwaves talking about ending the QE program. Since it is QE that has been partly responsible for Dollar weakness - along with the abysmal fiscal condition of the nation - something had to be done to prevent a Dollar crash. This is the reason we are getting a sudden rash of Fed officials looking for microphones and venues to talk about ending QE.

Result? Up goes the Dollar and down goes the precious metals market. Coincidence? I hardly think so. If you understand what I wrote earlier this week explaining the antagonism of Western Central Bankers against gold, then you can easily understand that its rise to a new all time high is testifying against the steady debauchment of the US currency by the Federal Reserve.

As a kicker, they also manage to further knock down the Japanese Yen saving themselves and the rest of their pals at the G7 from having to actually pay to undergo another round of currency intervention.

You have just witnessed a shrewdly hidden round of verbal intervention camoflauged as normal policy discussions.

China will be Buying all Dips in Gold

From Dow Jones

1028 GMT [Dow Jones] Comments from the People's Bank of China, saying gold
prices are likely to remain high in 2011, are the most positive made by the
central bank in a long time, says UBS analyst Edel Tully. "PBoC [also] talks
down the prospects of the dollar and euro. So on the face of it, they appear to
feel limited by the available 'value preservation' options," Tully says. Says
this marks an attitude shift in favor of gold as an alternative currency, and
"signifies the most visible upward shift in sentiment by the PBoC in quite some
time, and in turn, a bullish flag for elevated gold prices this year."

DJ China PBOC: See Risk Of "Competitive Devaluation" By Developed Countries

Fri Mar 25 04:41:20 2011 EDT

BEIJING (Dow Jones)--China's central bank said Friday it sees a risk of
"competitive devaluations" by developed countries with high unemployment rates,
as well as a risk that the euro-zone debt crisis will spread further this year.

  At the same time, there are still relatively large risks of inflation and
asset bubbles in emerging markets, the People's Bank of China's Shanghai
headquarters said in its annual report on international financial markets.

  The U.S. dollar is likely to trend weaker overall this year, although
continued euro-zone sovereign debt risks and "regional political risks" may
result in periodic strength for the U.S. unit, the PBOC said.

  The PBOC said it expects global commodity prices to remain high in 2011,
especially oil and grain prices.

  Gold prices are also likely to remain high, although the downside risk to
gold prices can't be ignored, the PBOC said.

  -By China Bureau, Dow Jones Newswires;

Please pass the Kool-Aid

Yes sir - there is absolutely NO CONNECTION whatsoever between rising prices, a soaring stock market and Quantitative Easing. It's all the weather, those nasty protests and unrest across MENA and the terrific housing and labor markets.

Oh, and one more thing - there is no inflation as a result of QE - it is just the fact that there are rising commodity prices???????

I don't know which is worse - the outright distortion and spin or the fact that these guys get paid a salary for vomiting out this sort of repulsive nonsense.

Keep in mind that it was Bernanke himself who when announcing the justification behind the second round of QE stated that it was necessary to produce inflation in the economy and fend off deflation.

DJ Fed's Lockhart: Bond-Buying Program Not Boosting Inflation
By Alan Zibel


  FORT MYERS, Fla. (Dow Jones)-- Federal Reserve Bank of Atlanta President
Dennis Lockhart said Friday that the Federal Reserve's $600 billion bond-buying
program has not resulted in rising prices.

  Projections of inflation directly stemming from the Fed program that's due to
wrap up in June, "really haven't materialized." Instead, he said higher costs
for food and energy in recent months have been the result of turmoil in the
Middle East and rising commodity prices.

Consumers' expectations of higher prices are rising in the short term, he

  "When you see your money clicking away at the pump, it makes an impression,"
Lockhart said in response to a question at a business conference at Florida
Gulf Coast University. Long-term inflation expectations remain stable, he said.

  The Fed is currently embarked upon a second round of asset purchases that was
announced in early November and is set to be complete in June.

Thursday, March 24, 2011

Silver update

Quick Thoughts on Today's Late Session action in the Metals

I happen to be a buff of the War Between the States (incorrectly termed the Civil War by many - A civil war is when two factions are fighting to gain control over one government - The South was not fighting to take over the Federal Government but to repel an invasion by the North). Anyway, one of the things that I learned from my studies of Robert E. Lee was that he was a brilliant strategist, not only in victory but also in defeat. His Army of Northern Virginia was numerically inferior to the Army of the Potomac but nonetheless he managed to pull off victory after victory against it during the early years of the War.

When he did face defeat, one of the tactics he employed was to mount a rear guard action. What that allowed was for the main body of his army to escape back to safer territory so that it could regroup for another engagement while a smaller contingent of that same army would engage the Federals and tie them up in that skirmish thus preventing it from pursuing and overcoming the fleeing Confederates and attacking them while they were in a weakened condition. This tactic, employed by many other wise generals throughout history, allowed Lee and the Confederacy to fight on far longer than many imagined would have been possible given the numerical advantage of the Union armies, not to mention equipment and other military hardware.

I believe what we saw today was a perfect example of a rear guard action by the perma bears at the Comex. They had been routed and driven out from behind their defensive lines that they had dug and had been able to defend for some time now. In the case of silver that defense had capped the metal below $36 for the last couple of weeks. In the case of gold, the cap near $1440 had held for three weeks or so.

Both silver and gold then mounted renewed assaults on the bear's trenches this week. Silver hit them yesterday and blew through in convincing fashion while gold charged their line today and routed them. In the process both markets mounted impressive technical breakouts of congestion zones and did it on very good volume. From a technical analysis standpoint, the breakout was impressive and served to bring in additional momentum buying which is what one could normally expect to see after any market, which has been working in a sideways trade, stages an impressive upside breakout. Momentum funds will always go with the breakout and so will all technicians in general.

We all then saw what happened - both markets were hit hard in an attempt to drive them back. In the case of gold, the attack was successful - it was driven back below its breakout point and into the upper edge of the recent congestion zone. In the case of silver, the bears tried but as soon as silver dipped back towards the breakout point just below $37, buyers stepped in and prevented it from falling back into the congestion zone.

This is a perfect example of a rear guard action by the perma bears which had been beaten and were retreating to safer or higher ground. They hope to buy themselves a bit of time to lick their recent wounds and regroup and attempt to fight another day.

The interesting thing to note about this is that these enemies of honest money are quite clever much like the old fox Bobby Lee. They time their counterattack or rear guard action to coincide with other factors that tend to increase the effectiveness of the attack.

It just so happens that this week is Rollover week in Gold. Over the last decade of this bull market in gold, rollover periods in the futures markets have been one of the favorite times for the bullion banks to stage a bear raid or a rear guard attack. What happens is that successful longs in the market either will roll forward their existing longs to what will become the next most active month, in our case the June contract, so as to avoid getting assigned for delivery when the current active month (April) enters is delivery period next week. Generally during these rollover periods, many of the bigger specs will decide to go ahead and book profits since the rollover coincides with the end of the month and also in this case, the end of the quarter. By booking profits at this point the funds who are managing client money can report excellent actual gains and thereby continue in the good graces of their clients who are most pleased when they receive their statements for the month and quarter. These same funds then tend to re-establish the original positions near the beginning of the following month but they do that in the near and most active contract, which will in our current example be the June contract.

This rollover and end of month book squaring thus is a period during which many speculators are actively selling and reducing their long side exposure somewhat. As thus, it is the PERFECT time for the bears to counterattack especially if they have any other factors on their side.

In the case of Silver they got just that with today's announcement by the CME that margin requirements for Silver were going up once again at the close of business tomorrow. The old margin to control a single silver contract was $11,138. AS of the close of business tomorrow, it will rise to $11,745. Maintenace margin thus rises from $8,250 to $8,700. In other words, the accounts of those holding silver contracts will need to be able to account for the hike in margin requirements. If not, they will be forced to pony up more money or sell out. When one considers that silver dropped over 100 points from its best levels of the day to its worst level, any new long that bought near the high and whose trading account size is rather small is going to be immediately stuck with a paper loss of nearly $5,000 per contract depending on what level he or she bought in if they are still holding those contracts. A paper loss of that size will immediately put the new long in a situation where they will have to have sufficient money in their account to deal with the maintenance amount and thus will either have to pony up additional cash by bank wires or will have to sell out.

This is the sort of condition that the perma bears love to look for when they stage a rear guard action and it magnifies the effectiveness of their counterattack.

How these markets react tomorrow and early next week will tell us how effective this rear guard action has been or will be. If both gold and silver stabilize above support levels and then work sideways and hold up well, it will indicate that the attempt to beat them back will be very short lived and another leg higher will be seen sooner rather than later. If they violate support levels, then it will take a bit longer for the bulls to regroup so as to mount another charge higher.

8 Hour Gold Update - 2:30 PM CDT

It is apparent that someone was not too happy with a brand new all time high in gold today. It was stuffed back into its box quite unceremoniously I might add.

One can tell from looking at the volume that all of the new longs that bought the breakout of the nearly month long congestion pattern have been handed an immediate paper loss thanks to the barrage of selling.

It will be up to the bulls to hold the line near $1420 or the technicians are going to have a field day trumpeting a false breakout which will engender some further long liquidation, especially because we are entering a rollover period - a favorite time for these bear raids to occur in the past.

If the bulls can hold $1420, they will be okay. If they fold here, the price is going to drop back lower into the former congestion zone and will more than likely test $1410 again.

Either way the price action is not encouraging. The HUI is not helping matters either as it too is puking. Silver also is now looking like the longs are bailing. It needs to hold $36.50 on any further downside move.

Silver Deliveries information - March now at a Premium to May

There were a total of 80 delivery intentions issued for tomorrow with the largest issuer being JP Morgan. I find it interesting that these intentions to deliver from Morgan are for the House and not for Customers. As has been the recent pattern, Barclays is the largest stopper and they are stopping for customers.

There are still 717 contracts open in the March contract.

Something does appear to have changed however - the March contract is now trading at a slight premium to the May. It is not much but it is at a premium. The spread now favors the March by one cent. This is the first time in some while that it has moved from a slight discount to a slight premium. I am going to keep a close eye on this especially with silver up more than 2% today.

Things are getting very interesting in here as we wind down towards the end of the delivery period for March.

Gold breaks free from its Congestion Zone

Yesterday it was Silver that broke out of its congestion zone and began a new leg higher. Today it is Gold which has finally managed to clear the top of the congestion zone that had marked its trading pattern over the last few weeks. Volume on the breakout is strong.

The breakout also set a brand new all time high for the yellow metal in the process.

We are going to be encountering rollover pressure as speculative longs begin moving out of the April contract prior to its delivery period next week and into the June contract.  Rollover periods are a very good time to gauge the strength of a move higher as it gives longs an excuse to either book profits or reinstate expiring long positions in the next active month contract. If the hedge funds in particular choose to simply rollover with a minimal amount of profit taking in the April, that will be quite positive for further gains in Gold as we move through the month of April.

Based on the extent of the congestion zone and the subsequent breakout, a technical price target for this move in gold is near $1490.

We should expect to see buying support under the market first at the breakout point naer $1440, followed by $1435 and then $1420. I would prefer not to see any move below $1420 of any duration if this leg is going to yield a strong advance higher.

Silver blows through $38

Wednesday, March 23, 2011

Why Central Banks of the West hate Gold

I wanted to post a very short set of comments to let some of the newer readers understand why many of us believe that there is a war being waged upon gold by the Central Banks of the West.

Let me start this off by quoting from none other than former Fed Chairman Alan Greenspan more than 40 years ago:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard

What the former Fed Chairman was then saying was that absent a gold standard or some device for restraining the unlimited creation of fiat money, there was nothing to restrain monetary officials from engaging in such activity that would ultimately set in motion a process of inflation, which is really just another name for the erosion of the purchasing power of a nation's currency by debasing it. Inflation was and is in essence, the transfer of wealth from one class to another.

Today we have the Fed engaging in the very process that Greenspan warned against back then. We also have the BOJ and the ECB effectively doing the same thing to an extent.

Unlike Silver, gold is the main metal that most analysts and commentators look to when attempting to decipher whether or not inflation is a serious problem. That means the reference point of gold has become a target for Central Banks which want the world to believe that they can create unlimited amounts of funny money with absolutely ZERO impact on inflation levels. In other words, that they can conjure up wealth and produce prosperity with the electronic equivalent of a printing press and produce no serious inflationary impact by so doing.

A rising gold debunks their hubristic assertions to the contrary for it stands as a silent witness testifying against them. This is the reason the yellow metal is despised by so many Central Banks. It mocks their policies and displays their folly for all the world to see. Central Bankers being the demigods that they are, will tolerate no rivals to their claims of economic omniscience. You see they have actually come to believe that it is their own wisdom and foresight which enables them to see through the fog that hinders and impedes our economic progress and that they are in a unique position to provide the rest of us with lasting prosperity. They attempt to do this by basically providing or withdrawing liquidity as they in their wisdom judge best and by the setting or manipulation of interest rates.

Those of us who believe that it is free market capitalism and the industry and efforts of mankind that produce wealth and prosperity would beg to differ but that is another story altogether. I would add that it is my opinion that the world would be better off without this plague of locusts that actually devour a nation's wealth but the fact is that they are here. 

While they are here gold will attempt to move in such a manner that is either blesses or curses their policies. Now we all would love to have our policies approved by the vote of the market but what about those times in which the market frowns on our course of action and refuses to smile upon it? Why this is but a simple matter - attack the messenger! If one can somehow manage to keep the price of gold under wrap so that it does not move sharply higher then one can attempt to make the claim that inflation is not a serious problem. The comments usually go something like this:

"Well Jerry, we are looking at the gold price and from what we can see, that while it is definitely higher, it is not soaring out of control. The market may be pricing in some gradual inflation but the action in the gold price is telling us that any fears of inflation getting out of control are definitely unwarranted. Besides, we all agree that some inflation is a good thing because the alternative is deflation and no one wants to see that".

Imagine Fed Chairman Ben Bernanke testifying before Congress saying that the current rise in prices of many goods is only "temporary" and "relatively modest" if the gold price were soaring beyond $1650 and higher! Do you think anyone would take anything that the Chairman said seriously? Copper can soar higher and most will not notice it. Even if it does, it is generally explained as a positive because we are told it is a sign of strong economic growth ahead. Crude oil and energy prices can rocket higher and that can be attributed to geopolitical unrest among oil producing nations. Food can rise sharply and everyone notices that but such things are often explained away by citing weather conditions, supply constraints, etc. but a rising gold price? How does one explain that away?

The only reason that gold has a sustained price rise is because of a lack of confidence in the monetary system. It does not rise sharply because of such things as jewelry demand or industrial demand - it rises when fear, distrust, doubt, suspicion and uncertainty over Central Bank policy reigns. It rises when REAL interest rates are negative and investors understand the insidious process of currency debauchment practiced by these monetary authorities is underway. It thus cries aloud and issues a warning to those who can hear it and what it shouts displeases many Central Bankers because they are among those who while they despise its message, are all too keenly able to hear that message.

Thus the messenger,the prophet, the oracle, must be silenced or at the very least, his message blunted, toned down, trivialized by whatever means possible. The mechanism employed to do just this is a subject for another time and place. Suffice it to say for now, without the efforts by the monetary officials of the West to discredit gold, it would be trading considerably higher. Even at that however, the ancient metal of kings refuses to go quietly and docilely into the night. It will yet have the final say.

Gold knocking on the door of an upside breakout

One can clearly see the great effort being applied to thwart the metal from breaking higher. In a freely traded market, it would have already done so. The US monetary authorities are clearly terrified over the implications of a new all time high in gold as it would be the clearest signal yet that their QE policies are highly inflationary.

Goldman and Morgan are going all out to prevent the plethora of headlines that would accompany such a significant development.


Silver update - 8 hour chart 12:30 CDT

HUI takes out overhead gap

The HUI is uncharacteristically strong this morning given the overall weak tone in the broader equity markets. It is a bit tricky reading too much into a market over one day's trading action but today at least, it appears some of those hedge fund ratio trades are being covered.

We'll have to keep an eye on this because there are two sectors that recently have both been looking very good on the charts - precious metals and the oil sector. Some of the oil stocks are weaker this morning but the last week or so they have been perking up. What we might be seeing is investor money moving into the mining shares and the energy sector as a play on future inflation. If that is the case, and I want to emphasize that I am uncertain on this as of yet, the hedge fund ratio trade will begin to be lifted as it will be counterproductive if the hedgies are going to go the inflation play route. That spread trade has been extremely profitable for them over the past couple of years so they are not going to jump out of it unless they are given a strong reason to do so. If they do go down this route, the most logical trade would be to spread off the miners and the energy shares against the broader market. Of course I have been saying this for some time and no one has bothered to listen which explains why I am not a hedge fund manager.

The HUI has managed to not only close the gap under 553 but plow through it in very convincing fashion. It now has a shot at moving toward the next resistance level just below 580.

Seeing it moving higher alongside of both gold and silver is encouraging for the friends of the metals. Let's see how it closes today.

Euro Gold responding to Portuguese and Irish Woes

Gold priced in terms of the Euro, or Euro-gold, is moving strongly higher this morning as investors on the Continent are becoming increasingly worried over developments in Portugal and Ireland. Talk is increasing that an EU bailout is very possibly in the cards for Portugal and that is drawing money into Gold over across the pond.

The weakness in the US Dollar has helped to keep a lid on Euro-gold as the Euro has been very strong over the past couple of weeks. That is changing today with the Euro being sold over fears as noted above. With gold moving higher in US Dollar terms and the Euro sinking, that is helping to move the price of Euro gold higher.

As noted on the price chart below, it is moving back above most of the major moving averages and very close to generating a buy signal. From a technician's standpoint, I would like to see it move through the 1040 level although a push through 1030 would certainly raise the alarm bell among some of the shorts.

Both Gold and Silver breach overhead resistance levels

To demonstrate just how fickle hedge fund sentiment has become, gold and silver are both the recipients of safe haven flows in today's session.

As you are aware, of late they have both been considered "risk trades". When risk was in, gold and silver were generally up. When risk was out, gold and silver were generally down. Of course that is a complete contradiction to their historical role as safe havens but that is how the hedgies have been treating them.

Over the course of the past week, gold has been basically trading in lockstep with the Nikkei as that has been a gauge of investor sentiment towards risk. Today the Nikkei is lower alongside of the S&P 500, but that now has gold going in the opposite direction, namely up.

Bonds are also higher today as is the US Dollar and even the Yen as once again the "risk aversion" trades are coming on. If that were not enough to totally baffle you, copper is moving higher on - guess what we are told - a general move TOWARDS risk! Confused? Join the crowd.

Some of this is due to the fact that crude oil is now trading above $105/bbl with  Brent trading near $116. That is creating all manner of worries for the equity side of things and shoving bonds higher on fears of a hit to the global economy. Yet, the precious metals markets are viewing the surge in price as inflationary and that is drawing buying into this sector. Heck, even the HUI is joining in on the precious metals rally for a change.

So let's put in into perspective - the US Dollar is higher, bonds are higher, equities are lower, risk is out but gold and silver are moving higher on safe haven plays and copper is moving higher as a risk trade. Yep - I think I have it figured out - for today. Tomorrow? Who knows?

Regardless, even with the Dollar moving higher, both gold and silver have breached overhead resistance levels on their respective price charts as the bulls performed just when they needed to in order to avoid a round of long side liquidation.

For gold, the breach of $1430 in very convincing fashion is significant. Unlike yesterday, when it took out the level but could not maintain its footing above it, the longs are driving hard this morning and have shoved back the bullion banks to $1440, a mere whisker away from the all time high.

In the case of silver, it has breached $36.50, the barrier that had checked it yesterday. It has now posted a fresh 30 year high in the process.

The key to both metals is whether they can maintain these gains going into the close of the session. If they do, they appear poised to run higher. STay tuned.

Tuesday, March 22, 2011

4 Hour Gold Chart - Update 5:00 PM CDT

Gold is currently is in a consolidation phase with a higher bias. The broad range that is containing it is $1435 on the topside and $1390 on the bottom.
It has moved from the bottom of the range to the top and is now at a point where it either needs to clear $1435 and press on towards $1445 or it will set back towards $1420. While it has pushed through what I consider to be an important technical resistance level, namely $1430, it cannot seem to hold its gain above this level for any length of time. This suggests that the bulls are hesitating to take on the selling cap at $1430 thrown in place by the bullion banks.

If you note, both the Percent R and the Stochastic Indicator, trading range indicators, are now either at their sell zones or are moving down and away from that zone. Bulls need to quickly push this market higher or they run the risk that some of their more fickle comrades will liquidate longs and wait for a lower level to re-enter on the long side again. A fast, strong push through $1435 will negate the negative signals from Percent R and Stochastics.

Should price move down away from today's resistance zone and find buying near $1420, we could see the range in gold tighten considerably.

Silver update - 4:30 PM CDT

Silver kept to its recent pattern of moving higher after the close of pit session trading adding another 10 -15 cents in the after hours trading but was unable to breach $36.50, the last line of defense being erected by the shorts to prevent a surge above $37.

Volume to the upside has been pretty good but not strong enough to dislodge the shorts from behind this castle.

Upside momentum is waning on this time frame chart as it is reflecting the inability of the bulls to breach $36.50. The Percent R, which is an indicator that is useful to gauge oversold and overbought zones for markets which are range trading or consolidating, which is what silver is currently doing, is now at the sell zone. That puts the burden upon the bulls to press through the sell side barrier and kick the market into a trending phase higher or some of the weaker longs will decide to book some profits and wait for another pullback before coming back in again.

If that should occur, we will want to see how the market handles any setback towards $36. If it can hold that level, it will embolden the longs to move back in very quickly and force some of the weaker shorts back out. If that level fails, there is support on the downside first near $35.50 and then near $35.

Gold and Nikkei both in holding pattern

Silver Deliveries - none reported today

There were no reported deliveries for silver scheduled tomorrow according to exchange data released this morning. There are still 875 contracts open in the March contract, a drop of 23 compared to yesterday. We are running out of days in the month of March so it will be interesting to see how this plays out.

The March contract still remains at a very slight discount to the active May (about half a cent) with the May at a 1.5 cent discount to the July. The structure of the front three silver contracts is one of a slight contango. It does not appear that a squeeze of the March is going to occur. Silver seems to be doing fine without it anyway.

The longer silver remains above the $36 mark, the better the chance of it breaking into another leg higher. It has one line that I can see standing between it and just that, namely $36.50.

The HUI weakness, (thanks to the hedge funds and their spread trades), is weighing  a bit on gold and taking some of the pressure off of the silver bears at the Comex. Any move higher by the HUI above 550 will embolden the bulls to try to take out $36.50.

Silver has been in a pattern of late which sees it GAIN strength after the close of pit session trading. Let's see if that pattern holds true today.

4 Hour Gold Chart

Silver attempting to push away from $36

The session is still young but the silver bulls finally appeared to have beaten back the defenders at $36 on good volume. Bears are attempting to stymie the move higher by digging in near $36.50. When the market dipped earlier and fell below $36, the selling dried up and the shorts were forced to cover.
That has emboldened the longs who are pushing and attempting to now take out the last refuge of the shorts here. A strong push through $36.50 sets the market up for a run towards $40 with initial resistance standing near $37.20 - $37.30.

If the market is going to break out it needs to hold $36 on any possible setback in price now that it has cleared that level.

Monday, March 21, 2011

Broad Dollar Index continues sinking

The Broad Dollar index is a much wider or "broader" representation of the plight of the US Dollar on the global markets as the basket from which the index is created is more representative of the globe than the smaller basket of currencies that comprise the USDX.

Even at that, it still shows a very similiar pattern to the USDX and is also now technically within striking distance of its 2008 low having broken downside support near 97.

It is highly unlikely that gold will not make a new lifetime high if this support level near 95 fails. I can easily see it above $1500 were this to occur.

I also believe that the US Dollar is at levels that are now necessitating it to be watched very closely by the US monetary authorities. In much the same manner as the Yen went flying to the upside, so too the Dollar could go crashing to the downside if the speculators decide to sit on it in earnest. While the Fed and the US officials WANT a lower Dollar, they do not want a Dollar crash. Sometimes it is easier to talk about such things than to actually accomplish it.

Should the Dollar carry trade increase in intensity, every hedge fund on the planet would be arrayed against the G7. That would be weird to say the least as the G7 monetary officials do not want the Yen any higher yet if they are not careful they may end up pushing the Dollar past the point of no return. What an awful stinking mess!

US Dollar update

As has been the pattern over the last view trading sessions, the US Dollar has become the whipping boy for the global forex trading crowd.

Today is was strength in the Euro which sent it lower. Talk is picking up that the next move in regards to interest rates by the ECB will be to raise them. That contrasts sharply with the situation around the US Dollar where rates will remain low for the immediate future.

Given this fact, it is difficult to make a case for the Dollar right now as it moves ever closer to a long term inflection point on the charts. It is sitting only a mere 40-45 points from this support level with the RSI not yet in oversold territory. That alone is rather foreboding.

Each blip higher in the Dollar has kept the RSI in a defined downtrend as indicated by the inability to break the downtrend line shown on that indicator.
Simply put, there is currently no strength in the Dollar. Keep in mind this is taking place against a backdrop where the Yen is being kept weak. Imagine where the Dollar would be had not the G7 intervention taken place?

I also happen to believe that is one of the reasons that made it easy for the G7 to agree to a round of coordinated intervention. It might have also been to help the Dollar also! Had the Yen not been taken down, the Dollar would have crashed through a major support level.

Still watching Silver Deliveries

There were only 2 deliveries posted against the March Silver contract  today bringing the total deliveries for the month to 980. I should note however this is the first day since the delivery process began that the March Silver contract did not see a reduction in open interest. Interestingly enough, it witnessed an increase of 5 contracts on Friday of last week. Apparently some guys are planning on taking some silver and decided that the market was going to move higher with the return of the risk trades. A total of 898 contracts remain open in the March.

The spread between the March, May and July contracts for all practical purposes is zero with the March and May trading even. I would watch out if March goes to a premium to the May contract as that would portend that there are issues related to the delivery process which are bullish for the market. Such a development would indicate that the longs are getting ready to squeeze the shorts.

This is getting interesting as the battle to contain the metal below $36 is heating up. The shorts had better hope that they can push the market away from $36 convincingly or they are in trouble.

HUI morning update 11:00 AM CDT

The mining shares are moving higher alongside both the broader equity markets this morning and the precious metals. The shares are reacting to what the market perceives as an improvement in the situation regarding the nuclear reactors in Japan.

If enough of the shares can maintain their early gains and do not fade, there is a chance that the HUI could push back into the resistance zone noted on the chart. Clearing this zone would set the index on a path towards 560, which is about midway between the recent peak near 580 and the drop down to 520. That is where the next battle would then be joined.

Failure to clear the resistance zone will see a setback towards 540 initially with additional support below that near 535 followed by 530.

4 Hour Gold Chart

Gold immediately gapped higher on its reopening for trade Sunday evening in Asia (Monday morning there). I am impressed by the fact that the gap was over and through the strong resistance level that had been blocking the market from moving higher last Friday. That level was near $1422 - $1424. Thus far it has not even gone back down to retest the gap breakout. While it is still early in the session, this is significant because it reveals that the buying is of a nature that it is not abating.

Resistance has formed at $1435 however. If gold can punch
through this level as the day wears on, it looks to me like it is going to make a run to the all time high just above $1440.

Volume is decent but I would like to see it a bit stronger to be honest. It suggest a bit of hesitancy to take it through $1435 at this stage.

Support now moves to the level just below the gap from last evening. That comes in near $1420 on the downside. Bulls will not want to see it fail there should it attempt a setback and retest of the gap.

Technical indicators are positive at this time. They are also reflecting the resistance at $1435 however.

4 Hour Silver Chart

Saturday, March 19, 2011

Trader Dan on King World News Weekly Metals Wrap

Click here to listen to my regular weekly radio interview with Eric King for the KWN Weekly Metals Wrap.


When Theory and Real Life Collide - thoughts on the Yen

In response to some private emails as well as a couple of comments from my recent articles on the Yen intervention, I thought it worthwhile to deal with what I believe is a clash between theory and the real world.

What I am referring to are articles written by two men, both of whom I greatly respect, who argue that the Yen should be permitted to rally instead of being undercut by a coordinated G7 intervention effort. The claim is that a strengthening Yen would be beneficial to the Japanese since they are going to require massive amounts of raw materials with which to rebuild their battered nation. This strength would outweigh any competitive advantage gained through a weakening of the Yen which would aid the heavily export-dependent Japanese economy or so they claim.

Let me first of all state that I believe that a nation's long term economic strength can only be maintained if it possesses a strong currency. The idea of deliberately short-circuiting one's own currency in an attempt to ramp up exports is harmful in the longer term as it tends to increase the price of all imported goods coming into that nation and as such is normally inflationary, all things being equal. That eventually works to undercut the quality of life in that nation and weakens it in the long run.

That being said, the real world functions not on theory but on practice. We do not yet live in a perfect world, where every nation lets its currency move to a natural rate of equilibrium. Instead of we have nations such as China which work to keep their currency artificially lower than would be the case where it left to float freely. We have the US engaging in Quantitative Easing so that it can weaken its own currency and thus perform an ipso facto default on the massive amount of debt it now owes. We have Brazil intervening in the currency markets regularly attemping to undercut the strength in the Real to aid them in retaining their share of the export markets. We have South Korea doing the same in regards to their Won, and thus the list goes on and on.

In such a fictitious world, one could make the argument that the Japanese Yen should be allowed to strengthen to aid Japan in its rebuilding efforts by making the cost of raw materials much cheaper. The reality however is that Japan must deal with the world as it now is, and not as we would like to see it. This is the reason that I must dismiss the idea that the Japanese should stand idly by and allow a massive unwinding of a leveraged carry trade take their currency to levels that would crush their export markets and render them unable to compete.

Let's begin therefore by admitting that I am complete agreement with those who claim that the Yen should be allowed to strengthen on this one condition - That the events of the last week had occured back in 2007 or 2008 when the Yen was at a significantly LOWER level on the crosses than it was this past week.

Please examine the long term chart of the Yen that I posted earlier here on my site (I am once again posting it here for your convenience). If you are to come away with only one point in this discussion, let it be this: THE JAPANESE YEN IS AT THE HIGHEST LEVEL AGAINST THE US DOLLAR IN MORE THAN 35 YEARS. It might be an even longer period; I simply do not have the chart data going back beyond the early 1970's.

My answer to those who insist that the Yen should be allowed to further strengthen, no matter what that will do to Japan's export-related industries, is that their argument has ALREADY taken effect. The YEN is not a weak currency under any method of looking at it when it is compared to the US Dollar. How could it be stated that the Japanese monetary authorities should let it rise even further and turn a blind eye to the actions of a runamok speculative short squeeze?

If you note the chart carefully, you can see that since the Yen carry trade began being unwound in mid 2008, the Yen has increased in value against the Dollar by nearly 40%! That is an astonishing rate of increase.

Now consider the following - The Dollar is still the world's reserve currency and as such most commodities are generally priced on the global market in terms of US Dollars. In effect that means if commodity prices had remained flat and gone nowhere in price since the fall of 2008, the Japanese would be able to purchase 40% more cotton, corn, copper, wheat, etc today for the same amount of Yen than they had been able to buy back in 2008. Here is exactly what those who are advocating for a stronger Yen are arguing. The problem however for Japan is that the same goods that the Japanese are attempting to sell to the US consumer market have now increased 40% if prices were to have remained at the same level that they were back in 2008. That puts the Japanese at a serious competitive disadvantage when dealing with other nations looking to sell their products to the US.

Consider also that while China has loosened its currency band to the point where the yuan has been able to strengthen some against the Dollar, it still maintains a sort of quasi-peg to the Dollar meaning that this gives Chinese manufacturers a decided advantage against Japanese exporters for US market share.

I realize that there are other nations and blocks out there such as the EU and the rising Latin American economies, but for the sake of simplicity I am only dealing with the China/Japan/US relation. Given this current level of the Yen therefore, and the loss of Japanese export competitiveness with China, I do not understand how some can assert that the Yen should be allowed to strengthen even further from current levels, especially given the fact that the Yen strength is not due to normal reasons but is instead the product of a speculative unwind of leveraged trades and in that case is abnormal.

Now let's take a look at a chart that many of you are now familiar with as I have been referring to it quite often over the last few years, namely the Continuous Commodity Index or CCI. Note the massive selloff in the CCI after it peaked in mid 2008 as the credit crisis erupted and the carry trade was unwound. That move towards risk aversion resulted in wholesale selling of commodities across the board.

As you can see the plunge in commodity prices did not stop until the Federal Reserve announced that it would soon commence a program known as Quantitative Easing. That had the immediate effect of launching a multi-year rally in commodity prices which took the index past the all time peak it had previously reached in the summer of 2008. As of the close of trading this Friday, March 18, the CCI is currently 7.8% higher than its peak of 2008. It is apparent that the Fed's efforts at staving off deflationary pressures has indeed been successful if you call a soaring of food prices and metal and energy prices "successful".

Now let's take a look at this same exact index although this time around let's view it through the prism of the Japanese Yen. In other words, we are going to adjust the chart to see the performance of the commodity sector when priced in terms of the Japanese Yen. Keep in mind that this speaks directly to the point of the fact that world commodity prices are quoted in terms of the US Dollar because it is the global reserve currency.

As you can see this chart looks vastly dissimiliar to the CCI chart above. While Dollar priced commodities are trading 7.8% higher than their peak level in 2008, Yen priced commodities are currently trading at a DISCOUNT of 18% to that same peak. In other words, because of the strength in the Yen, the Japanese economy has been somewhat inoculated from the soaring cost of commodities worldwide. They are actually buying commodities at a discount to what they were paying for them in 2008 even though the entire sector has been soaring into new highs ever since the Fed began its QE policies.

I point this out to say that the Yen is already trading at levels which are high enough to allow it purchase all the commodities it needs without having to suffer an inflationary impact on its own population. Furthering strengthening of the Yen would of course bring prices for commodities down even further if nothing else changed but any gains from that would be more than offset by a further weakening of the competitiveness of the Japanse exporters.

I would argue that the Japanese authorities could actually allow the Yen to weaken from its current levels without affecting them excessively when it comes to purchasing the raw materials and foods required for the rebuilding process. Many nations across the Pacific Rim are grappling with huge inflationary problems; Japan is not and that is mainly because its yen is already so overvalued.

What Japan is going to require more than anything right now is growth in its economy. If that segment of their economy which is so vital, namely their export related segment, is to remain competitive on the global markets, the Yen is too richly valued in my view to permit this. It will need to weaken to give their manufacturers a fighting chance agains the Dragon China and some of the other powerhouses of the region. There is plenty of room for the Yen to weaken and come down in value without feeding into the inflationary type spiral that one normally sees in a country whose currency is moving lower. If those who are advocating for a rising Yen had made this argument back in 2007 or even in early 2008, I would be squarely on their side. The fact that the Yen has risen 40% and higher since then makes their argument unconvincing especially in light of the current facts.

One last thing, a move by China to let the Yuan seeks its own level, free of any attempts to check its rise, would also work to help Japanese competitiveness not only with direct trade between those two nations but between Japan and the US. Such an event might make this entire discussion whether or not it was appropriate to intervene on the behalf of the surging Yen moot.

Friday, March 18, 2011

Long Term Japanese Yen Chart

The following chart is a very long term weekly chart of the Japanese Yen/US Dollar cross chart.

Please note that I am using the cross as it is traded at the CME's IMM exchange and not as it is typically quoted on the Forex boards where it is quoted inversely as USD/JY. I personally prefer looking at the cross in this manner because for me it is more intuitive in the sense that if I want to know whether or not the Yen is strenghtening I can look at this chart and see if it is headed higher.

When you see the level at which the Yen has been driven, you begin to understand why the BOJ is so concerned about its level and why the G7 agreed to undertake a coordinated intervention to knock it lower.

Note also the level at which the Yen was trading in mid 2008 when the carry trade began to unwind in earnest. Since that time the Yen has appreciated against the Dollar by nearly 40%!