"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, June 19, 2013

Bernanke Speaks; Gold Clocked

The caption says it all - once the FOMC statement was released, followed by some comments from Fed Chairman Bernanke, that was all she wrote for gold. Down, down and down it went as the Dollar went up, up and up.

What the market is currently thinking is that if there is any nation where interest rates are going to rise, it will be in the US before it is anywhere else on the planet.

You combine that with equity markets that promise attractive gains, and large sums of money are moving out of their respective currencies and exchanging into US Dollars with which to buy US equities.

As the Dollar moves higher, gold is moving lower.

The problem for gold continues to be the same; investors do not see any signs of inflation, in spite of the Trillions of Dollars that have been conjured into existence, and hence need no inflation hedge. That, plus the fact that while there was turmoil across the world financial markets in the recent past, that seems to have come and gone as far as many are concerned. Where once the theme was "RETURN OF CAPITAL", now we are back to "RETURN ON CAPITAL".

In other words, since investor fears are basically gone for now, and since gold throws off no yield, and since they see no signs of inflation, they are dumping gold or shorting it.

Take a  look at the following chart of the GLD, the large gold ETF. Look at how there continues to be a drawdown in gold. Investors are selling out and moving the money elsewhere. For the first time in a very long time, the tonnage has fallen below the 1000 level. That is significant.

Now there is another issue to deal with and this is a technical one. I mentioned that there were a large number of sell stops building down below the $1365-$1360 level. The bears finally got to them in a big way today. In the process, they have really inflicted some damage to this chart.

The weekly gold chart is getting quite ugly to be honest. If gold does not quickly get back above that $1365 level before Friday's close, I am afraid that support is not going to hold down near $1320 and this market is going to reach psychological round number support at the $1300 level. If $1300 gives way, we are going to see a test of $1250.

Notice that gold is trading firmly under its 200 week moving average. The 50 week is moving lower and while the 200 day is still ascending, its slope is leveling off. Markets that are trading below their 200 day moving average are not bullish.

I have mentioned to the readers to ignore all that claptrap about hedge fund short positions, about big bank long positions, taking a contrarian position, etc,. and the rest of that useless COT analysis that so many novices keep touting. It means nothing - all that matters right now is money flows and they are leaving the gold market for the time being.

Something needs to occur to change speculative sentiment in gold. What that is right now is unclear. Even on the weekly chart, gold is firmly entrenched in a bear market having now fallen well off the 20% level from its peak at $1900. As a matter of fact, it is fully 30% off the peak.

At this point for the market to have any consolation for the bulls and to give a hint of a reversal, it is going to have to hold near that all-important 50% Fibonacci retracement level from the 2008 bottom noted on the chart. That is just above $1300. This is why that level must hold.

People keep talking about capitulation in gold. If gold breaks through $1300, you will see what capitulation looks like. I have said it once and will say it again; most of those who bought gold shares back in 2008 believing that they would provide some good protection against the wave of money printing that was going to be unleashed, are cursing the day they ever dropped one dime of their investment capital into those things. Maybe some day they will go somewhere; most of us will be dead and gone by then so hopefully our kids can earn something from them.

With the gold shares descending into the abyss, there is simply no evidence of speculative interest in anything gold or silver right now. Yes, physical demand is strong but it is not strong enough to take prices higher in the face of strong short selling in the paper markets and the continued exodus from GLD.

For now, the Central Bankers remain the Masters of the Universe. Thus far they have not been knocked off of their perches.

Incidentally, the one thing that threatens these demi-gods is the rise in the long end of the yield curve. Bonds are breaking down and yield on the Ten Year hit a 14 month high today! It has reached a level that has turned it back lower over that same period. If it continues rising, we will watch to see what if any impact is might have on the all important real estate market.

It still remains to be seen how in the world the Fed is going to ever be able to exit this QE business and reduce the size of its balance sheet. I suppose they could hold the paper they have until judgment day for all that most of the investment world cares. After all, the problem will be for another generation, is the thinking of our self-centered era.