"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

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Tuesday, July 19, 2011

Gold stymied as sellers dig in

There are some very strange happenings in today's trading session with some very contradictory (or to use a favorite expression, 'counterintuitive') price movements in some of the major markets.

Let's start first with the bond market which for some bizarre reason ran up over a full point on the long end supposedly on the (news??) that was made when Obama said an agreement on the debt ceiling looked a bit better. The equity markets went beserk to the upside on the same news while gold and silver were trashed as the need for a safe haven supposedly was decreased but then why would the long bond soar to the upside if traders were throwing away safe haven trades and putting the risk trades back on? In other words, if the intensity to own gold as a safe haven against all of the ungoing turmoil and uncertainty was lessening for today, why would traders trip and drool all over themselves to lap up ever single long bond that they could get their hands on and drive long term rates even lower at the same time the entire commodity complex as indicated by the CCI was marching higher and equities were completely erasing yesterday's losses and then some for added good measure?

The article on gold in the Times worked its usual magic as the bullion banks seized on the news story about a debt ceiling agreement to eat through all of the bids coming into the gold market. That had the effect of stymiing the move higher in gold and induced the short term oriented day traders to ditch their longs once it was evident that the selling cap above the market was not going to give way as it had previously done. Other longs seeing the selling pressure began to dominate then bailed out and down the metal went.

This is the type of action I had expected PRIOR to taking out the $1600 level but not after the fact. Certainly I would not expect to see safe haven gold get knocked back while simultaneously witnessing some sort of inexplicable short squeeze in the ten year note and the long bond. One would have expected to see them going in the same general direction if any safe haven trade was coming off. There was some nervousness in the bond market about a potential downgrade to the US credit rating which would have had negative implications for that market but to see them tack on such a ridiculous gain on ideas that the debt ceiling was going to be extended is the perfect example of what has happened to our once halfway rational markets.

Let me see if I have gotten the message from the markets today correct - here it is:
Since we are now convinced that the US is going to extend the debt ceiling, plunging it further into debt, we can safely buy US Treasuries as our choice of a safe haven while we also simultaneously reject the safety of gold and opt for the safety of US promises to pay. But then again, we really do not need any safe haven the more we think about it so let's bid the price of nearly every commodity out there higher today, including crude oil and gasoline and reload the boat on equities.

I remember the old TV commercial from some years back where they used to show an egg with the words, "THIS IS YOUR BRAIN";  only to then switch to a picture of the egg after frying it up in the pan with these words, "THIS IS YOUR BRAIN ON DRUGS".  I think the hedge fund community collective brain must be heavy drug users since try as I can I do not see how some supposed agreement on the debt ceiling justifies a nearly one and one half point rally in the long bond.

The price action of so many of these markets seems so bizarre today that I am going to have to wait and see the price action tomorrow in order to see if some of these knee-jerk traders have  second thoughts about their panicked buying and selling today. Maybe we will note some regrets. If not, then there is some kind of shift in sentiment that I am currently at a loss to explain and will only be able to understand what that might be after a day or so of further developments.

One thing is for certain however - if the US long bond is going to embark on a strong rally based on some need for a safe haven from the mess in Euroland, then gold is not going to stay down very long as it will find very eager buyers on this setback in price. Either the safe havens will be moving higher together or they will both be moving lower together but we are not going to have a situation where we have one going one way and the other going in the opposite direction for very long. Just ain't gonna happen.

Back to gold however - we are seeing a battle being waged to hold the metal down below $1600, nearly exactly was what happened the first time it ran to $1500. This is normal. The short term chart indicates the reversal pattern that was forced by bullion bank selling leading to the liquidation from some of the weaker longs and the day trading crowd that had enough momentum behind it to take out some light support near the $1595 level. Price then dropped down towards $1580 where buyers surfaced.

We now want to see how it performs in Asia, particularly if it results in some drying up of the scrap sales that JBGJ reports from India. There should be very good technical support near the former all time high at $1578 or so if the market is going to find a floor. To kick off the next leg higher gold will now need to get back through $1600 for starters but also $1610, it's new all time high in Dollar terms.