"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, January 29, 2014

Gold Tug of War Continues

Today was the big day for another long awaited ( one month) release from the FOMC in regards to their Tapering campaign. There was a general line of thinking that the Fed might not be as aggressive in the tapering as previously anticipated due to the very weak payrolls number that came out not long ago but that was dispelled rather ignominiously when the Fed announced another $10 billion reduction in the bond buying program down to $65 billion/month. They are cutting the rate of Treasury purchases by $5 billion and the rate of Mortgage backed securities by $5 billion as well.

The unanimous vote was revealing as it shows an apparent determination on the part of the Fed to begin weaning the markets off of some of this funny money creation. Needless to say, the equity markets did not seem too happy about the news.

Then again, it is difficult to understand exactly what input the markets were reacting today given the continued fears/concerns over the emerging markets currency/credit issues. Yesterday a sharp surprise rate hike by Turkish officials seemed to bring a sigh of relief into the markets. Today, that quickly dissipated.

The VIX shot higher as the equity markets dropped lower and as it did, back on came the safe haven trades once again. The Yen was up sharply and the Swiss Franc rose also as investors decided to take some money out of stocks just in case things go from bad to worse. Once again, even with the news out of the FOMC, (which one would have expected to be Dollar positive), the US Dollar could not move higher. That had gold moving higher once again as we are seeing a relationship forming in which stocks move lower along with the Dollar as Gold moves higher.

I am not sure how much longer this precise link is going to endure in our fickle market of nowadays but it is keeping gold prices from otherwise breaking down at a time in which many commodity markets are continuing to see weakness. Natural gas was the big exception with prices cleaning out practically every single overhead buy stop on the planet today on huge volume. That sort of thing always catches my attention. Soybeans, corn and wheat however were pummeled today. Copper also moved lower.

Gold is basically caught in a tug of war between downward pressure originating from those selling the metal as the Fed begins to scale back the huge sums of liquidity it has been providing the markets and upward pressure from safe haven flows tied to the emerging markets crisis. In the former, gold acts more as a commodity; in the latter as a currency. Depending on which input the market is focusing on any given day, the metal moves accordingly. There is still no definable pattern.

Based on what I can see the next move in gold is completely dependent on how the emerging market situation is viewed. If it escalates, gold should stay firm. If it recedes somewhat from traders' minds, it will move lower.

The same exact thing is occurring in the interest rate markets. Today's FOMC statement and its hawkish tone should have brought selling into Treasuries taking interest rates HIGHER ( also supporting the US Dollar). Instead, the Treasury markets witnessed lower long term rates as deflation fears trumped hawkish FOMC notes.

Incidentally I have been monitoring some of the delivery process for gold. Thus far JP Morgan has been the big issuer or seller. That is in stark contrast to their buying or stopping last month. As we enter the February contract's delivery period, it will be interesting to see if this new pattern remains the same or if they move back to the heavy buy side stopping that we saw from them in December.

While the HUI has been higher today, it has still been unable to clear chart resistance near the 230 region. So far the index has not confirmed any upside breakout as of now. It has also bottomed out but cannot seem to get an upside trend going. Much the same thing is taking place with gold. Its technical chart pattern on the daily looks pretty good but it acts as if it is looking for some other shoe to drop somewhere before it really breaks out to the upside in a clear and unambiguous manner. As things stand, traders seem willing to sell rallies into overhead resistance and buy dips into downside support.

When this changes is unclear.

By the way, silver still is capped at $20 as it attracts large selling above that zone.