Remember at the last FOMC statement when the Fed announced that short term interest rates were going nowhere for the next two years? They then went on to say that there is only so much a Central Bank can do and if the economy is going to grow, it is going to require policy changes that reduce structural impediments to growth. That was a not so subtle dig at the current clueless occupants of the Executive Branch to get off their Marxist redistribution wagon and start putting forth some business friendly policies (not to mention spending us all into the toilet). Well guess what? After today's jobs number, the markets have given up waiting for anything coming from that quarter and are now practically begging the Fed to save them.
This is being evidenced by the fact that the long bond is rallying as traders now are fully expecting the Fed to roll the proceeds from maturing short term Treasuries into longer term Treasuries. In other words, exchanging short term debt holdings for long term ones with the idea that the Fed will now engage completely in focusing on keeping those long term rates low for an extended period of time as well. My thinking is that were it not for this thinking, the equity market would have utterly imploded today.
What has been occurring is that the more bad news we get, the more stocks refuse to break down, in some instances actually rallying in the hope, wish, prayer, etc, that the Fed will be FORCED to act. Personally I find this sort of activity repugnant. The greatest nation on the face of the Earth, its entire economic hopes are now hanging on whether or not a group of monetary authorities are going to buy US government debt. Am I the only one out there who shakes my head in dismay and disgust at what we have all been reduced to? Instead of being able to witness the unleashing of American ingenuity, drive, ambition, know how and hard work, we sit around and buy stocks because we think the dispensers of slips of paper known as Federal Reserve officials will inject us easy money addicts with more of the same worthlessly ineffective stimulus? This is America early in the 21th century! Sigh....
Anyway, gold is reacting to this nonsense as it rightfully could be expected to do - it is moving sharply higher because it instinctively realizes that the only "solutions" going to be offered for the current economic disease is going to be additional currency debasement. Whether it is Europe, the US, Japan or even Switzerland, all are going down the debasement path. That is why gold is either making new all time highs in terms of these various major currencies, or just shy of those record high levels.
Silver too is now catching a safe haven bid as many investors are viewing it as undervalued in relation to gold and as offering the potential for better gains on a percentage basis than Ol' Yeller.
I will kick some of this around on today's Weekly Metals Wrap with Eric King over at King World News but wanted to note that those who keep insisting that gold is in some sort of bubble are utterly clueless as to what is driving this market higher. It is going up because a steadily growing number of investors are wising up to the game that is being played by the monetary authorities at the expense of the wealth that they have spend a lifetime accruing by the sweat of their brow and the labor of their hands. As more and more of these investors and average folks learn the role of gold in protecting that wealth from the depradations of Central Banks and spendthrift politicians, gold demand (and silver demand) is going to grow.
It basically comes down to this - whom or what do you trust more - monetary authorities and Central Bankers who have a distinct bias towards problem solving in the most painless manner possible or gold, which cannot be conjured into existence and which has stood the test of time and history. The market always votes with its feet and the voting is obvious.
The only additional comment I might want to make in regards to the ignorance of those who insist that gold is in a bubble, is that they obviously have incredible confidence in Central Bankers and politicians to fix all that ails us - also noting that it is this very same group of people who are the most responsible for creating the current miserable economic climate in the first place.
Note that the HUI has smashed, and I do mean "smashed" through overhead resistance near 610 and is charging higher. I mentioned not that long ago that the hedge funds who were employing this damned ratio trade had overstayed their welcome and that the first one to cover those mining share shorts and get out would be the only one which would make money on that crowded trade. That is now the case as the shorts are now in serious, serious trouble with all of them looking to buy and very few looking to sell.
We'll see how these indices close the session out today but I do find it very telling that the mining sector shattered upside chart resistance on a day in which the broader stock markets are cratering.
One more thing in reference to the mining shares - how many times in the last two months have we urged the hedge fund managers to get out of that overcrowded and worn out long gold/short mining share ratio trade and to instead institute a ratio trade employing a long mining shares/short broader equities trade mainly because of the severe undervaluation of the mining shares? Just look at the following ratio chart to see how successful this recommended trade would have been instead of trying to squeeze the very last nickel out of their former strategic trade.
Note that a rising line indicates the mining shares in general are OUTPERFORMING the broader US equity markets and have been doing so since June of this year.
Hi Dan, thanks for your commentary. I regards to the mining shares and the ratio trade players, the gut feeling I get when I try to understand this thing is that the people who are employing this tactic have been led there by a deep pocket " pipied piper" whose has no profit motive but one of suppressing bullish sentiments.
ReplyDeletePrice is truth. Gold has broke to the upside from its recent, brief consolidation and the chart is bullish. Mr Bernanke is likely to get his consensus to ease further and markets will quickly discount this like G&S is doing today. Expect today’s USD strength (even against the commodity currencies) and Dow weakness to be as short-lived as the stimulus punch bowl arrives, never mind things will ultimately end worse for it.
ReplyDeleteThe remaining major issue is whether Europe will also engage in a massive QE to bail out the insolvent EU members and banks, in defiance of the preference of most Germans, the Bundesbank and the (probable) German court ruling next week. If the German people get their way, they will no longer subsidize the “club med” member states, but if instead the bankers get their way, Europe will likely follow America down the path of QE and currency destruction. The latter outcome seems possible because, sadly, the bankers may have more influence with the politicians the German people do. BIg QE in both US and Europe will bring cheer to gold bulls but it is actually a sad state of affairs. Next this madness could spread to Asia (ex. Japan which already has caught the QE flu).
If you cant beat them, join them. So buy gold even above 1850, sigh. Still say that silver is the better buy. Good luck!
Thank you Dan.
ReplyDeleteThank you Dan! As always you are spot-on! My sense of it, however, is the administration and FED is caught in irons (as a sailor would say). They must create new money to circulate among the bottom 60-percent of wage earners...fast, and lots of it. That means more debt under our chosen system of monetization!
ReplyDeleteThose in power can't get this nation anywhere by dinking around with federal debt, or extending bond terms, or writing down residential loan balances, it’s too late for that sort of tweaking. Almost every nickel taken from entitlements is a nickel not getting spent on creature comforts. We don’t need too many people with growling bellies or shaking in the winter’s cold. Besides, the federal debt is nothing compared to total credit debt, which is approaching 400% of GDP! Likely the interest by itself on the total credit debt equals the GDP.
Plain and simple, we need new money needs to circulate, which can only postpone the time when the FED's 100-year run is over. Oh yeah, he dollar is a lost cause. A new global currency is in the works...probably backed by gold.
Thank you again, Dan! Even though I add my 2-cents now and again, you are still #1 with me, and a must read! Have a great Labor Day!
^
ReplyDeleteThere is no liquidity problem in the US - look at M2. Far too many dollars have been put into circulation already. If/when money velocity increases and/or trillions of dollars offshore flood into the US to buy things, US inflation will skyrocket!
QE2 did not help the middle or lower class wage earners. In fact it hurt them because the cost of fuel and food soared (which the US BLS does not count as core because who needs fuel or food?!!). QE2 and ZIRP has mainly benefited commodity & stock investors, and especially the big banks that were able to borrow huge amounts from the Fed for almost nothing then profit by profitable carry trades or "investments" instead of lending the money to consumers/business as the Fed intended. As if QE3 will be a different outcome, not!
So far the biggest distribution has gone to Wall Street bankers. If you're talking about the housing/mortgage mess being "Marxist distribution" it started way before this Administration
ReplyDeleteI am no fan of this Administration, but 75% of the deficits come from Bush's unfunded wars, tax cuts for a certain group, not to mention Bernanke was installed by Bush.
Right now, the "distribution" sure isn't going to the bottom...and it won't go there if the Republicans take office. They seem intent to do their own further take down of the economy.
I'm sort of surprised by your going down this road at this point.
insight has the scatalogical edge in analysis
ReplyDeletebe sure to wash your hands before consuming any more good nutrition
and next time, use a stick when stirring shit
I find we are slipping into the "chicken and egg" argument. True, the first problem did not start with the Bush's. It was started long ago in 1971, when we went of the Gold standard that kept politicians and the Fed HONEST. That was the beggining of the end. The problem is not ready to burst. It has compounded like interest unpaid for years. The USA sits like Rome, ready to fall for its spending problems. Gold will be the ultimate bubble as it is the time tested safe haven against politicians and the Federal Reserve. There is only one thing worse than the Big Banks, that is Government that is dishonest. In this light we have had both teaming up on the unsuspecting citizens. It is sad, but, like Dan, I believe the current problems are snowballing and instead of being honest and attempting to cool the "devaluing of the dollar" we are being double teamed and the Great Society will fall hard.
ReplyDeletedouble teamed? perhaps, at least ostensibly
ReplyDeletesome see it more as two sides of the same coin (pun intended)
they may well be one and the same, now THAT! is food fit for the Donner Party