“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"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






Tuesday, February 26, 2013

Bernanke Attempts to Soothe Markets; Euro Fears Rise

In his testimony before the Senate this morning, Chairman Bernanke did his level best to assure the markets that the Fed was not about to upset the apple cart anytime soon. Even before he actually began his testimony, the transcript of his speech had been released and that was enough to send market prices all over the place.

I have seen some volatile markets in my day, but the last two days worth of price swings have pretty much been as high or higher than anything I have ever witnessed, particulary in the foreign exchange markets. To see the swings in the Yen, one would think that a Central Bank intervention had taken place. Four point handles in one day -YIkes!

What is happening is that risk trades are being unwound and just as we have previously witnessed during any unwind period, markets that were one way bets, now are seeing huge swings in the opposite directions as hedge fund computer buying and selling is on full display.

I can tell you that the Yen, which nearly everyone on the planet had been short, no matter what cross was being used, has seen a massive, and I do mean MASSIVE short squeeze, much to the consternation of the Japanese monetary authorities i might add. Watching their currency once again become the destination of safe haven plays has got to be downright infuriating to policy makers over there, who have made no small secret that a lower yen plays a major role in their strategy of defeating the DEFLATION giant that has had its heavy hand on their economy for what seems like an aeon. If the Yen keeps rallying, look for them to make their displeasure known VERY VOCALLY. The new ABE government is not going to tolerate a strong yen, period!

If you are trying to trade some of these markets, either be content to snatch a few small profits if they come your way, or just get to the sidelines and let the dust settle from all this madness. "TRADE SMALL IF AT ALL",  is my motto right now.

I want to add here that Italian CDS's are moving sharply higher today, surpassing even those of Spain for the first time since December 2011. Clearly, the market is becoming increasingly concerned about the developments in that nation since the election returns have become clarified. Trades/investors fear gridlock in the new government as a result of the lack of a clear majority and this is being viewed as negative to the Euro currency. As a result, the one way long bet on the Euro associated with the return of the risk trades, is now being unwound. This is causing some strange price movements in many of the crosses which are not supported fundamentally for the time being.

This brings us to gold. It is seeing some strong safe haven flows today along with the bonds and the yen. Bernanke's comments were pretty much anticipated to be gold friendly and he did not disappoint. It was interesting watching the initial reaction to those comments however. Gold at first seemed to be unimpressed as it moved down off its best levels ahead of his speech and actually went negative for a while. Then it seemed to catch a new wind and ran back up to the $1600 level from which it had initially been repelled earlier in the session. This time however it appeared that some big bids were able to take it through $1600 and off went the buy stops. The market hesitated again near and just below the $1610 level before finally blasting through it as well. This time the momentum from nervous shorts was enough to take the price towards $1620 before it finally ran out of steam and stabilized.

Near term, the ability to recover its "16" handle and hold on to that has got to make the bears disappointed. What needs to be seen however is whether or not the physical market will be willing to chase prices at these higher levels or whether that demand will drop off. It was certainly amazingly strong below $1580 as evidenced by the premiums quoted by John Brimelow's Gold jottings.

So much depends on the market's view toward risk once again. the Central Bankers had to have been quite pleased with their handiwork as they had managed to herd the entire global hedge fund community into leveraging up those RISK TRADES and making one way bets in favor of equities and pretty much out of favor of safe havens. The fact that the US bond market would not break down significantly in the face of this "All's Clear" mentality certainly has to be taken into account however. While one safe haven - gold - was being jettisoned, the bond market was tracking sideways. Yesterday and today that market moved higher with the result that interest rates dropped lower once more.

We will want to closely monitor this relationship between the US bond market and the US equity markets to see what kind of clues we can glean to as where market participants are positioning themselves as they look ahead.

The day is not yet over but while the S&P 500 is in positive territory, it is certainly down off its best levels of the day as I type these comments. If this index closes into negative territory at the end of today's session, LOOK OUT, is all that I can say. What major elixir will Ben have to provide it at this point seeing that he has already administered his potion this morning.

Let's see how things settle out today. Trying to draw too many conclusions before the day's trading is over is not the course of wisdom on a day like this one.

Lastly, to see how risk aversion is back in vogue as concerns the Eurozone, Gold priced in both Euro and British Pound terms is quite strong today and is moving smartly higher. It's biggest gains is in terms of the Euro which has suddenly seemed to have fallen out of favor with the leveraged crowd.

In US Dollar terms, gold has given a short term buy signal on the charts. There is heavy resistance lurking ahead of it beginning at today's high near $1620 and extending to $1630. If there is enough buying in the physical market overnight, there is a chance that another bunch of buy stops sitting just above $1625 could be vulnerable.

I am including a chart of the metal to show the dip in the ADX which indicates that the near term downtrend in the market has been broken. If gold can climb back above $1640, it will have pulled off quite a feat, especially seeing that Goldman Sachs just lowered their 2013 price estimate for the metal.


Quite frankly I do not like trading spike bottoms because the risk/reward on the trade can oftentimes be rather discomforting. I much prefer and will prefer in gold, were it to retest the $1600 level to at least see if it can hold that. Markets that show huge losses, followed by huge gains, can suddenly and abruptly turn right back around and  show huge losses again. That is the nature of those beasts. More well behaved, or if you will, more orderly markets, are much more to my liking as a trader. My gunslinging days are over as the highs are too often followed by periods of excessive lows and depression. Give me a market that tips its hand a bit more clearly and allows one to at least leave the screen for a few minutes.

The HUI has managed to fill the first and lowest downside gap on its price chart. This index has dropped so sharply and is so oversold that it is well beyond due for a bounce. Let's see how high it can carry. Anything that stops short of 390 is going to be a disappointment. If it is going to give us any protracted strenght, that is the least it will need to clear.

4 comments:

  1. Hours of research on the miners and how they USED to leverage to the price of gold. Now it only works one way...ON THE WAY DOWN. I understand the ETF's and it is obvious now that they were created to STEAL the miners thunder. Hedge funds must love destroying value, jobs for the hardworking people to extract the shiny metal. Dan, I truly believe there is something very fishy going on. A stink fish somewhere. I understand the dilution issue, rising costs on energy, and the argument of capitalization. But what a stinky response to the reversal today. It is getting near time to capitulate and never come back. Sad for these types of companies..but the price of gold certainly will go up as the hedgies destroy the manufacturers.

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  2. Lee Adler (wallstreetexamer.com) tracks liquidity conditions--especially the interplay of the Fed and Treasury--and their impacts on markets. He points out that there were unusual factors in late Feb that decreased available liquidity. Those are over as of the end of this week, and then the markets are going to be awash in liquidity thanks to the Fed's printing. It's hard to picture either the stock or bond markets crashing as long as $85 billion/month is being printed and handed to the primary dealers.

    Lee believes this will come to an end once the impact on the commodity markets forces the Fed to cut back later this year. I'm not sure what will happen at that point, since a decision to cut back would likely crater the market and economy, while a decision not to would put us on a Weimar path.

    Given the distorting effects of the Fed helicopter drops on the primary dealers, I'm not sure one can read too much into "the fact that the US bond market would not break down significantly in the face of this "All's Clear" mentality". I'd love to hear your thoughts on this. Thanks for your excellent posts.

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  3. Just as Bernanke is speaking today and is saying QE is not going to end, out comes Goldman with a lowered price target for gold of $1600 for 2013 and $1550 into 2014. So according to Goldman, Gold topped out for the year today and is going lower next year. Problem is the sheeple believe these MSM guys so no reason to buy gold shares. White Wolf is right there is a stink fish out there keeping people away from gold and shares.

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  4. An interesting graph in the following article:
    Managed money short positions vs gold price shows that in the last 5 years high level of short positions were always followed with a rally (except maybe in the first instance).
    Today is the highest ever short positions as Dan already mentioned it somewhere:

    http://www.gotgoldreport.com/2013/02/market-tremors-continue-as-funds-flow-back-into-gold-.html

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