"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


Friday, December 13, 2013

Producer Price Index - Weak Inflation - Gold Rises?

This morning we were treated to the Producer Price Index numbers - the headline number was -0.1%. The market consensus ahead of the report was for the reading to come in unchanged. When Food and Energy were stripped out, the reading was +0.1%. Right in line with the consensus.

Obviously prices at the wholesale level were generally LOWER indicating the continued lack of an inflationary impact from the Fed's money creation schemes. Upon the news gold moved higher! The proper response from most traders would have been expected to be "DUH?"

Yes, in the absence of any inflation pressures gold moves higher. This is where the money printing policies of the Fed have brought us - to the La-La Land of Unreality.

The reason that gold moved higher instead of falling lower was because Traders believe that the Fed may now look at this data and actually come away more concerned about DEFLATION during next week's FOMC meeting. Just yesterday there was near Terror that they were going to go the opposite way and actually announce the beginning of a taper next week! That is what brought so much pressure into the S&P 500 as well.

Do you see why I find this constant interference by the monetary authorities so distasteful and yes, even repulsive? They have completely turned everything on its head. The stock market rallies on horrible news because it ensures more QE bond buying. It sinks on good news. UP is DOWN; BLACK is WHITE; and IN is OUT in this brave new world. The entire thing has become so convoluted as to be farcical.

I seem to vaguely recall a period a long, long time ago, in a galaxy far, far away when stock prices rose during periods of strong economic expansion. Of course I am exaggerating things here but the point I wanted to make was that today's markets are so sensitive to whatever the Fed may or may not do, that they are moving more often in a contrary manner to sound reason.

By the way, I cannot help but ridicule the "FLASH CRASHERS" once again. Yes, they were back out in full force yesterday giving us the painful details of the carpet bombing of gold once again during its hard move lower yesterday. Not a peep out of them about the REVERSE FLASH CRASH of Tuesday ( you see, that is not unusual but is what gold SHOULD BE DOING all the time) , but that is par for the course with these people. Never let a good down day in gold go to waste when promoting their "gold is constantly under attack by nefarious forces" dogma.

As stated many times here, ad nauseam, ad infinitum, gold is in an intermediate bear trend. The feds do not have to fight the price of gold when it is already sinking due to hedge fund selling.

The actual truth is that what happened yesterday in gold was exactly what happened in the broad equity markets. A wave of near terror/panic hit the markets that for some reason the Fed was most certainly going to announce, NEXT WEEK, the start of tapering.

Today, the PPI number totally erased that fear.

Along that line, gasoline futures just notched a ONE MONTH LOW (let's hear some cheers for that) in today's session. Wheat futures hit a FOUR MONTH LOW. Sugar hit a FIVE MONTH LOW. I could go on but I think the reader will get the point.

With falling prices, we see gold moving higher not because of any imminent threat of inflation but rather because today's thinking ( for this session) is that the real fear that the monetary authorities will have as they meet next week will be cutting back on the bond buying programs TOO SOON and feeding the DEFLATION BOOGIE MAN. And one wonders how we traders can keep our sanity with this sort of flip-flopping back and forth in the markets nearly every single day. Just remember the name of yesterday's missve that I posted up yesterday - "Is it a See-Saw or a Yo-Yo?"

As strange as it may sound to some, I can actually see a point which, and here is a major caveat, IF THE PRICE OF COMMODITIES IN GENERAL CONTINUES TO SINK, and chatter about deflation concerns were to surface ( Note - I am not saying that is going to happen but merely suggesting a possible development) that the Fed would actually LIKE TO SEE THE GOLD PRICE MOVE HIGHER. Not in a large way so as to denote a loss of confidence in the Dollar but rather just enough to dispel any notion that gold is sniffing out a wave of deflation.

Remember, Central Bankers love inflation in the sense that they think they have the tools to control that. What they really fear, and we have been made aware of that by their continued QE programs, is DEFLATION. As a consumer I love deflation because it means I get more for my money. The down side to this however is that a slowing economy indicated by EXCESSIVELY low prices ( in the minds of the central planners) means a sluggish job market and slack/stagnant/falling wages. A gold price that were to sink too low, along with a sharp move lower in some key forward-looking commodities such as crude oil and wheat/beans/corn might convince the monetary authorities to actually ramp up QE in order to induce buying in gold and some other key commodities.

Of course this is all speculation on my part as the odds of this occurring seem rather remote at this point but it just goes to show how fickle the sentiment in the markets has become and how quickly and easily it can shift back and forth based on one piece of economic data or another. While the Fed may downplay the fact, rest assured that they are well aware of the gold price and what it may or may not be doing. This I do know, gold at $1900 was a disaster as far as they were concerned.

This being said, I do not believe that the Fed OBSESSES over the gold price as some apparently believe. They monitor it closely. That is a far cry from spending nearly every waking hour wondering where it is going and what it is doing as far too many in the gold community sometimes seem to give the impression that they do.

Take a look at the chart below and you will see how low the volume is in today's trading session. This is what I have been speaking to when I stated that we are entering the Silly Season when shrinking liquidity will often allow for large swings in price produced by rather small orders compared to the norm. That being said, a new support level has formed at a higher price than the recent double bottom at $1210. This new zone centers around the $1220 level. This is constructive from a technical analysis perspective. Still, until the bulls can push price past the resistance zone noted on the chart ( near $1260 - $1265) volume should remain muted. The flip side to this is if the bears were able to take price down below $1220 at first, but more importantly $1210. That would cause an enormous spike in volume. We will wait to see which side blinks first as there is an uneasy truce in the market right now.

Yesterday I mentioned Barrick Gold as a key bellwether stock to watch for clues/signal to the overall sector. Barrick gapped higher on Tuesday of this week, then fell yesterday and completely closed the gap early in the session but roared back before the close and managed to close higher. That is pretty impressive performance given the fact that gold was hit with an ugly stick yesterday. Today this key stock is actually trading higher and although it has not, as of yet, managed to eclipse Tuesday's high, odds are growing that the stock has finally bottomed. Again this does not mean it is now off to the races, but perhaps, perhaps, we have seen an end to the mauling of the gold shares. That no doubt would be most welcome to those who have sat through the entire retracement of the last few years.

When you are losing money nearly every single week and you look and see that while you are not making any money you are at least no longer bleeding, it lifts one's spirit and provides some encouragement and hope that the worst is over. We will see. Technically there remains a great deal of chart work that the gold shares in general have to do in order to convince a wider audience that they are now at levels commensurate with value. Maybe we are finally there. Time will tell but let's certainly keep an eye on this particular stock. I suspect that its fortunes will quite accurately give us a solid clue as to the metal's.


  1. I'm watching DBA, still getting crushed to new lows. I believe grains and food are the least manipulated markets, so as long as the vicious downtrend continues here and crude oil cannot get a bid, I see no end in sight for deflation.

    Now we can clearly see how and why the consumer discretionary ETF such as XLY is less than a dollar off world record, all-time highs.

    Because the Bernanke/Yellen "Money Bomb" has created the biggest consumer spending boom and margin expansion in stock market history.

    Anyone who stayed in the system and avoided getting suckered into "End of the World" and "Get Out" seminars have seen their wealth increase steadily the last few years with hardly any interruption.

  2. Dan

    You could very well be right on about the Fed not wanting to see gold get too low.
    We know that there are only two ways out of the massive debt (as far as I know) default or inflate your way out. I think we can assume that default is not the way they want to go.
    We also know one very important concept...Government cannot tax deflation.
    I know you do not believe any manipulation is going on but I also believe Jim Sinclair when he states that at some point the price of Gold will be manipulated to the upside....by that time however very few of us will be on board to enjoy the ride.

    1. Dean,
      Your last comment is what I have been concerned about as of late. The idea that gold has a long road ahead before it expresses itself as we expected it to with all the QE is what Sinclair has chosen to ignore. We now have losses due to the gold but mostly gold shares (at least I do) and as we wait our future life expenses will force us to sell. Unless of course gold rallies in the next year or so, based on what I see that is very much in question. It could be several years. Of course I hope not.

  3. I don't see a taper coming next week regardless of numbers. Wouldn't make sense it being end of the year and a fresh chairman coming in Janauary. Why would Ben take the chance of a sharp market pull back and ruin his lagacy as the greatest chairman in history navigating through the worst financial crisis since the Great Depression.
    No taper will likely make gold pop, but then its a sharp decline going into January.

  4. This comment has been removed by the author.

  5. Hi Dan,

    Thanks for sharing your blog - always an engaging and thoughtful read.

    What are you thoughts (if any) regarding this probe?


    Thanks Mr Sunshine

    1. Unknown;

      I have known Bill and Chris over at GATA for some time now. I consider both to be friends and am especially fond of Bill as we have had some fun times together during some of their attended events.

      I have mentioned that I have no doubts that the feds are most interested in keeping the price of gold under wraps. My big contention however is that this occurs during times when the price is rising and is signaling any sort of loss of confidence in the US Dollar, and thus by referral, to the US monetary authorities.

      I have written pieces in the past detailing my views about that as some of the older writings are still out there in circulation. They were written during the time gold was in a bull market.

      Right now however, gold is in a bear market and thus the day to day swings in price, especially on down days, are NOT being orchestrated by the bullion banks but rather by hedge funds. The bullion banks are buying gold. That is easily proved by looking at the Commitment of traders reports and the daily deliveries. I have detailed both of these things recently.

      Where I have a problem with SOME, not ALL of the gold manipulation guys is them blaming nearly every single down day on the bullion banks as if it is part of the ongoing price manipulation scheme. It is hedge fund selling that knocks gold lower as that category of traders is currently building short positions while liquidating long positions.

      I think GATA has done the gold world a great service by exposing, painstakingly I might add, the hatred of the Central Planners for gold. I think it is a shame however that too many seem to be fixated with this to the point that they cannot recognize a change in the trend from one of bullishness to one of bearishness. They have been long and wrong about gold for two years now. That is what the real shame is.

      Now, if and when the trend in gold reverses to one of a bull trend instead of the current bear trend, I fully expect to see the bullion banks eventually moving back towards the short side as the hedge funds move back into the long side. That was the norm for ten years in this market and will be again at some point.

    2. Thanks for your prompt reply. I find your site really educational. I too think some the people constantly screaming manipulation do gold a huge disservice by getting us all lumped into the conspiracy camp. I hold physical (which I am comfortable with) and am very underwater with mining stocks, however I am going to add to my mining portfolio soon when I am convinced that we have a turn around (not yet).

      Have a great weekend!

  6. Dan,
    Why do you think JPM is the stopper for gold the last few months? What do you think their strategy could be? They are usually significant shorts in the metals market.

    1. Concord;

      Hard to say since I am not privy to their plans but they are probably thinking more long term on this and are acquiring physical gold as we, and they, all wait for the eventual fallout from all this nearly unlimited money creation. They also might have buyers that they plan on selling the gold to in the future and are acquiring it now. Who really knows? The best that those of us who are sort of on the outside looking in is to attempt to gauge when the sentiment of the LARGER INVESTING COMMUNITY here in the West will turn in regards to the metal and then position ourselves accordingly.

      Trying to pick an exact top or an exact bottom in a market is really not trading in my view. It is gambling. Those who argue that the average Joe Blow should buy gold merely because JP Morgan is buying it are missing the point if they are attempting to make money through trading.

      One buys gold for insurance purposes. Insurance is something you are always glad you have when you need it but generally speaking, it does not MAKE YOU MONEY. That is the thing about gold. When you lock up ALL OF YOUR MONEY in the metal and things metal as too many have done, you need the house to burn down in order to collect on the insurance policy. I for one am not eager to see the house burn down although I am a realist and try to prepare for such events.

  7. JPM is not stopping gold.

    Gold is being crushed because speculators are dumping GLD in order to raise money to buy U.S. stocks in the "Glam" sectors, such as social media.

    Names like Twitter that has already launched to new highs at $58 after Zero Hedge poo-poohed that stock for "entering a bear market" shortly after its IPO.

    Or look at the staggering, eye-popping gains in Priceline and Amazon the last 5 years.

    It is really that simple. Sell the losers and buy the winners.

  8. The big money is made selling winners and buying losers, remember the DOW March 2009 it was less than five years ago. Buy low sell high and long term you're in the money. Gold stocks were winners in 2011 now they are losers Buy now it's counter intuitive but remember the DOW 2009 losers no one wanted them!

  9. Rlm...actually Mark is right on this one. Peter Lynch (one up on wall street), James Dines, and many many others advocate tossing aside your losers and doubling up on your winners. It is a fallacy that retail investors often fall for - sell your winners and average in on your losers.

    1. John; Dines is the biggest, most arrogant clown that ever soiled Belvedere; sparks and that is all


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