"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, January 3, 2013

Fund Money Flows Continue Wreaking Havoc

In yesterday's post I mentioned to not put too much into a single day's price action as hedge funds are allocating money into various markets and yanking it out of others to start off the New Year.

The result so far has seen gold giving back all of its gains from yesterday, plus some, with silver surrendering nearly all of its gains as I write this. Silver looked shaky to me yesterday given the fact that the other base metals were so strong. In that environment, it should not have faded 50 cents off its best level of the session.

Even copper is surrendering some of its sharp increase from yesterday along with palladium, which is getting smacked. Platinum however is going the other way and that is up.

Don't forget that we are now in an age in which the word "SUBTLE" is unknown amongst the giant hedge funds.

They come crashing into and flying out of markets in the blink of an eye (check that - faster than that thanks to their algos) with very little regard if any to the disturbances that their buying and selling create in the markets in which they decide to play. This positioning is going to continue into tomorrow but maybe by the time the dust settles on the trading floors at the close we will have a better indication as to what to expect the start of the first FULL week of trading next Sunday evening/Monday morning.

Part of the weakness in gold and silver today is coming from two fronts - the first of which is the lowering of projected gold prices for 2013 and 2014 by analysts at some of the major investment banks. The chatter on that front is that the economy is improving enough to reduce the FEAR FACTOR that has supported gold prices. With that removed, returns on stocks look promising to many hedge fund managers and that has them looking more at equities and the base metals rather than the precious metals. Apparently the minutes from the latest FOMC meeting, in which there was some debate among the various governors about the duration of the QE3 and QE4 programs has gotten some looking for a cessation of the easy money policies of the Fed sooner than the market was expecting.

I do not buy into that notion since the only thing propping up the economy has been easy money policies but as said before, everything nowadays in these markets is ultra short term thinking. I have jokingly told some friends that a LONG TERM TRADE in these new normal is 60 minutes!

The other reason is the inability of the gold shares to sustain any sort of upward momentum. Yesterday, the HUI gapped above resistance at 450- 452 but then immediately began to attract selling. Today, that selling has intensified as the index has been steadily sinking lower since the start of the session.

I am going to refrain from too much on the technical analysis front today for the above-mentioned reasons but let's just say for now that the $1700 level is now become reinforced as a formidable overhead resistance level that MUST be breached for a trend to begin in gold. Prior to that however, gold must clear and STAY ABOVE $1680 if it is going to go anywhere in US Dollar terms.

Gold in Euro terms and in Yen terms looks significantly better right now than it does in US Dollar terms.

The Dollar is experiencing a sharp rally higher today and that is bringing general selling pressure across the commodity sector but oddly enough, if this were a RISK OFF trade, the bonds would be moving sharply higher - they are not! Iinstead they just fell apart as I wrote this.

I am watching the price action in the long bond with EXTREME INTEREST right now as it is right on the verge of a major breakdown. As of now, I am not clear what message this is sending but I find it ironic that long term rates on Treasuries are moving higher today after all the backslapping and self-congratulations we witnessed among the political class yesterday after their "triumph" of avoiding the fiscal cliff, for two months. Maybe, just maybe, the larger market is getting sick and tired of the dysfunctional government in the US and their inability to GET SPENDING UNDER CONTROL in a serious, adult-like fashion. Could it be the markets are sending a message to "GET YOUR HOUSE IN ORDER OR ELSE"?

Again, I am not sure but if these bonds do break down, all bets are off as to the US economy in the months ahead. The last thing that policy makers or the economy wants to see at this juncture is higher long term interest rates.

By the way, as I am finishing this commentary up, the FOMC minutes suggesting that the bond buying program, especially QE4, might end sooner than the end of the year, just wiped out the floor of support under this market. If the FEd is not going to buy these worthless IOU's in the quantity that it first announced for that duration that it also announced, then one has to wonder who in their right mind would want to hold them given the fact that interest rates are just too damn low on them. Rates will have to rise if the Fed no longer sucks up $40 billion a month of these things.

That Dollar rally is probably coming as a bit of relief to the currency with traders thinking that those same FOMC minutes are supportive to the currency, given the thinking that the Fed might not be proceeding to debauch the currency at the same rate as previously expected.

Let's see what tomorrow brings...and how long any of this lasts. It could all be forgotten by the time New York opens tomorrow morning for all that any of us know.

I am reminded of that famous scene in the Original "Planet of the Apes" in which Charlton Heston, cries out, "IT'S A MADHOUSE, A MADHOUSE". He must have been talking about today's financial markets.

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