"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


Wednesday, August 22, 2012

Silver Breakout Leads to Gold Breakout

Gold put in a very strong showing in today's session the instant the FOMC press release hit the market. All that was necessary was the fact that a few words were changed from "some" to "many" and to "fairly soon". Once traders saw those words, it was off to the races and no looking back.

Traders interpretted this change of wording as evidence that the committee was now largely leaning to a new round of bond buying should future economic data releases confirm the slowdown in growth.

We have noted for some time that Silver would underperform gold during a time in which deflationary or slowing global growth fears are dominant. The exact converse is true when traders begin shifting towards inflationary expectations. Silver leads and then gold follows.

Two days ago silver broke out of its recent congestion pattern as it surged through the $28 level. Gold moved higher that day also pushing through the top of its congestion pattern also as the surge in the grains, combined with higher crude oil, gasoline and heating oil prices had traders concerned that the heretofore rather benign inflationary environment was about to change and change in a big way.

Note on the chart below that gold is now firmly out of the "newest congestion zone" which had been bounded by roughly the $1630 level on the top and is working back into a former congestion zone which top is in a broader range between $1700-$1680.

Short covering by that segment of the hedge fund community which had been playing gold from the short side kicked into high gear once $1630 was taken out and continued today immediately upon the release of the FOMC statement. Fresh buying also came in as momentum based funds now have both metals on their radar screens.

We should now see dip buying surface on any retreats in price as the algorithms are now in the buy mode. Only a drop back below $1610-$1600 would derail this nascent move higher.

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