“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


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Thursday, April 18, 2013

Random Thoughts

Reports coming in from nearly all corners of the planet, but especially from Asia, continue to reveal massive buying of physical gold. Last evening, what was obviously a huge bear raid that occurred during the early Asian session, was repulsed by very large buying above the recent low.

That is very interesting and has my attention. In a sense, we seemed to have gotten our second test of the low, a test in which that low held once again. With the wild price swings being made in this market, it is hard to be too dogmatic, but the way this market is acting, based on the news of strong physical offtake down near the $1350 level, I am greatly tempted to say that a low is in.

Here is what I am currently seeing here. We certainly have the strong demand for physical - the big question I have is whether or not this is sufficient to take the market higher WITHOUT the strong investment demand from the hedge fund crowd that we have seen for so many years. Remember, that crowd is selling right now in the paper markets.

What spooked a lot of the gold analysts were those speculative outflows from the gold ETF, GLD. There was also large scale buying of put options there as well. As a side note, I asked then and continue to ask now, who has been buying all that gold that was being sold out of the GLD?

So once again we are back to witnessing the same battle that we have seen for over a decade now - the clash between the physical gold market buyers and the selling of the paper markets by the hedge funds.

How this might translate to price action is a market that stops moving lower but also one in which it cannot scoot higher either. There is an uneasy truce between bull and bear. Bears cannot break it down any further based on the amount of physical offtake but bulls need more recruits to their side from the hedge funds to have any upside fireworks occur. Thus we move in a broad range between the recent bottom and $1400 on the top.

Obviously, for gold to now recapture any bullish excitement, the handle of "13"needs to be replaced by the handle of "14" at a bare minimum. If that occurs, we will see some short covering begin among those who have sold down below $1350. They are counting on fresh selling into rallies to support their side of the argument and if they suspect that their allies might be wavering, fear of larger losses will send some of the packing.

It will all eventually come down to CONFIDENCE. When enough people around the globe, begin to lose confidence in their own currencies (and bond markets) and the policy of their respective Central Banks, the gig will be up. The large physical buying of gold is evidence enough that a growing number of people are increasingly concerned about the health of their domestic currencies.

When will the paper markets begin to reflect that again? The answer is unclear; but I am convinced it will happen. Keep in mind that the current monetary system as we know it, and I am talking about Bretton Woods, is not even a century old. As flawed as that was, at least there was some place for gold in that system. Since 1971 however, the entire system has been supported by nothing other than CONFIDENCE.

In effect, we are a little over a generation (40 Years) in an EXPERIMENT by Central Banks with a monetary system held together by nothing but sentiment! Think about that for a moment and let it sink in. This is why I believe these monetary masters are pulling out all the stops to somehow keep the public from any sort of nervousness, concern or panic. Yet, in spite of all that, we keep getting hot spots that continue to flare up.

This brings me back to the paper markets -


 In the SHORT term the paper market can be used to push prices all over the place, sometimes disconnected from reality, because of the vast sums of money that are involved due to the proliferation of hedge funds who borrow gazillions of the stuff for next to nothing and then stuff it into various markets around the globe.

 
This gargantuan sum of hot money, every bit of which has been given to us by the Federal Reserve and the Bank of Japan, is a rolling juggernaut that crushes whatever is on the other side of it. Whether it is exiting a market or entering a market, its appearance produces all manner of price distortions, both on the way up and on the way down.

 
Eventually, the fundamentals reassert themselves however. They have to or the paper market ceases to be of any value in the real world whatsoever. Remember, there are thousands of commercial entities that must rely on that paper market to hedge both long and short positions as part of their overall risk management programs. Wild swings in price, disconnected from reality, destroy hedges put in place by commercial entities because MARGIN requirements, though lower for bona fide hedgers, still must be met EVERY SINGLE DAY at the settlement process.

 
A hedge position can thus be blown to pieces by this sloshing wave of speculator  activity requiring large margin calls and causing financial duress for a commercial hedger. This defeats the very purpose for which they employ the futures markets in the first place, THE MITIGATION OF RISK. The last thing any entity engaged in the use, production, selling, purchasing, etc., of any commodity wants is to stay up nights losing sleep over fears of an obliterated hedge position.

 
If the paper markets become so volatile and so disorderly, eventually these commercials will begin to look for other mechanisms to offset risk other than the futures markets.  This will reduce the size and scope of the commercial participants in these markets leaving them more and more to the speculators. The problem with that is that this crowd, thanks to the algorithms, tends to move to the same side of the market, meaning that there will be fewer and fewer large traders to take the other side of their trades. Can you even remotely imagine what that will do to market volatility and to the eye-popping, stomach wrenching price swings??? It will for all practical purposes, render many of these markets untradeable.

 
I will go on record here and now stating the NUMBER ONE SOURCE OF MARKET INSTABILITY is the zero interest rate policies of the Western Central Banks, (and the Bank of Japan). It is these institutions which have created this gigantic pool of hot money and who continue to increase it month after month all the while producing a near zero interest rate environment in which it is impossible to obtain a decent rate of return on investment capital for most people. This tsunami of hot money crashing ashore and then receding back only to crash ashore again and recede back out again, repeat ad nauseaum, ad infinitum, is what has given rise to the insanity that we now daily witness in the paper markets.

 
Rather than having a calming or stabilizing influence on the markets, the “masterminds” behind it have re-defined the world volatility. This wall of money is so fickle, so unwed to any deep-seated conviction, that it is a beast, a truly out-of-control behemoth that can easily devour the entire financial global system.
 
Just watch the extent of the price moves in various markets and tell me that this is "normal" behavior. Those of us who have been doing this for a long time can tell you that we can recall periods of extreme volatility but those periods were more or less exceptions from the norm. They tended to be of rather short duration and burned out quickly. What we have nowadays is apparently now the NORM and periods of relative quiet are the exception!
 
The Central Banks, in an attempt to prop up their rotten Dagon, are fighting furiously again the results of excessive debt by vainly trying to encourage more of it! They are attempting to counter the forces of deflation by employing what they can to foster the forces of inflation. This is the war that is raging in the financial markets and is why this volatility will be with us until one side or the other vanquishes its opponent.

 
Thank you Mr. Central Banker. Job well done. Keep telling yourselves how successfully your policies are working.


11 comments:

  1. 40 Years.....of wandering in the wilderness.

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  2. you bring up an EXCELLENT point. I truly believe the ETFs are backed by the physical. It would be hard to keep such a conspiracy, well....a conspiracy...!!

    that said, it is MUCH easier to trade it with the punch of a key. think about it..?? buying or selling physical is a time-consuming and trust exercise, plus the security/safety issue...

    what I am saying is that it makes sense it will go lower and it makes sense it went too high...because it is too easy to transact...!!

    facilitation created it's own MONSTER...!! so again, where are the buyers...?? IF, they'll ONLY buy physical, as the gold bugz advocate, it makes sense it would keep going down, since paper/electronic trading is the main m o...!!

    so actually, the gold bugs CREATED the crash....not the other way around...'cause they put the fear of inflation/hyper-inflation in the air and the masses (and hedgies who ride momentum as their ONLY horse..!!) bid the paper version UP TOO HIGH...so, it gave false sense of the intrinsic value....in the MOST passionate way...it makes the AAPL acolytes PALE in comparrison....how many AAPL $1,000 folks do you run into NOW...??

    ReplyDelete
    Replies
    1. >gold bugs CREATED the crash

      are you kidding

      gold bugs are a mere pittance of everything in gold in this world. many are the little people trying to protect themselves from currency debasement and economic disaster brought on by their governments

      ETF's were created by the powers that be to draw people away from owning the actual physical gold. India is trying to get people away from physical gold. Whether the ETF's are really backed by gold , one has to read the prospectus and have trust in the people running the ETF operation. it seems like a murky area from everything i have read.



      are essentially another paper gold transaction when all is said and done.

      Delete
  3. 40 years wandering and still trying to find that middle ground or..."fairness" which they will attempt to accomplish until the death of capital markets. No peg like gold, or any asset that can be determined to have value and this is what we get...CHAOS

    ReplyDelete
  4. Dan,

    Kyle Bass saying the same as yourself at 1.5 minutes.....


    http://annual.cfainstitute.org/2012/12/07/kyle-bass-on-japans-debt-crisis-this-is-how-it-falls-apart/

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    Replies
    1. Foam Ranger;

      Absolutely right on target. The Bank of Japan is already planning on buying what amounts to 70% of the total government bond issues. that in itself is staggering because as far as I am concerned, they are already outrightly monetizing debt.From what I can see, the amount they are buying each month is our equivalent of $76 BILLION!
      During the height of Federal Reserve QE, I believe that they were taking 60% of all new US government debt issued.

      This impacts the very functioning of the bond market itself as the Bank of Japan in a sense has now become the bond market in Japan.

      What I think will eventually happen down the road, is that the authorities there will get exactly what they want - a weaker yen and a corresponding increase in inflation but it will not be orderly in my view. At some point confidence in their bond market will collapse as investors eye their massive debt to GDP ratio which will end up somewhere near 230-240% by the time this is over.

      If confidence in their bonds is lost, look out.... it will be unbelievably chaotic because of the sheer size of this market. It is one of the most liquid markets on the planet next to US Treasuries and is the reason we usually see the Yen move higher during safe haven rallies.

      Delete
  5. Stanley should divulge who he is working for.

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  6. As it was happening, I wondered aloud what you might have to say about last night's bear raid Dan. I also remembered what you said about not getting too excited about a V bottom, and that another test of the low would be healthy for the market moving forward. The last bear raid failed miserably but do you have any thoughts as to what might prompt another test of the recent low?

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    Replies
    1. Gil - I like the action with the failure of the bears to break it back down below this week's low on that second test. It does look like a bottom is in for now but with the wide swings in price, it is tough to make a definitive call until we at least see some specs interested in buying it. They seem more interested in selling the rallies while the physical market buyers are extremely excited about buying the dips. This clash between the paper and real markets will eventually resolve in favor of the physical but we have some big shorts at work here in the West who seemingly cannot sell enough of the stuff. I would like to see some further interest by the specs in the ETF to be frank....

      Let's see how it closes Friday....

      Dan

      Delete
  7. Excellent stuff Dan!!

    It would be Worth posting as it is on King World News, I think your analysis is excellent!

    Just one thing :

    "If that occurs, we will see some short covering begin among those who have sold down below $1350."

    I would have thought that the bottom was reach more because of long bulls capitulation and running to the exist, rather that because of sophisticated paper traders shorting so late into the move. Doesn't look like a trader to chase prices after they already dropped 150 $ in two days. So, I don't know if so many shorts are Under water now.

    Seems to me that during last months, the strategy of the Bears has been one of patience and consistency in defending résistances above, until discouraged tired bulls gave up trying to break through it. Then prices would go down once more towards a fragilized support, and bears would give the killing blow. After that, cascade of stop losses from the bulls, bears buying back at the next support level, you know the story.
    If the same strategy is used now (why think otherwise?), then bears will mark a pause at 1300-1350. They'll give their chance to bulls. They'll give them a bit of a hope.
    Let them come back. Let them leverage once more. Give them time to put their stop losses Under the obvious support level at 1320... and they'll gather and make a solid blockade somewhere above, from 1400 $ level, maybe 1450.
    If I'm correct, they'll never allow this resistance to be breached. The resistance formed would be a downward one.
    Anyway, as you wrote, let's see where it closes tonight on a weekly basis, and let's see further on where that overhead resistance will be.

    Last : asians are buying physical, US mints are selling crazy, but among the lemmings who bought on BV, GM, or GLD, and for who it is very easy to sell part of their physical position in one click of a mouse, I think this mini krach we had may have an effet to reduce their position during the next days, maybe weeks, weighing on the physical market as well. Hard to figure anything out now.

    The only thing I know is that all hell can break loose, as an investor of physical gold, I'm not selling one ounce of my gold.
    Short-term paper trading is a different story, more dynamic of course.

    ReplyDelete
  8. that sounds interesting:

    Global Finance in Transition conference to take place in Istanbul

    On May 7-8, 2013, Istanbul (Turkey) will host the Global Finance in Transition conference. The event is organized by the Central Bank of the Republic of Turkey jointly with the Reinventing Bretton Woods Committee and the Russian Ministry of Finance.

    http://en.g20russia.ru/news/20130415/781287568.html

    ReplyDelete