"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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In previous posts I had laid out what I believe has been happening across the financial markets this past week on the heels of the FOMC statement and Chairman Bernanke's comments.
In summary - the Fed, the ECB and the BOJ, have created an environment in which the word "RISK" had no meaning. Once upon a time, in a galaxy far, far away, investors looking to put rare, scarce and hard-earned capital to work weighed the costs of so doing against the potential yield or earnings that they could expect. All things considered, if the reward was sufficient, they would choose to allocate that capital.
That all died with the advent of Central Bank intervention into the marketplace. Hailed by many, who are too short-sighted in their thinking in my view, as necessary saviors and as a sort of cosmic fire hose used to extinguish various financially-related infernos, they gave the green light to hedge funds, institutional buyers and sovereign wealth funds to throw any caution or reservations they might have to the wind and jump into a host of markets with little regard as to what might happen when the spiked punch bowl would be withdrawn.
In a near zero interest rate environment, yield hungry investors were focused on only one thing - how much they could make. Ne'er a thought flit through their minds about how much they might lose. After all, who was going to lose a dime if the almighty Central Banks were there continuously pumping liquidity into the financial systems? When this sort of environment is created, history has already taught us what to expect - a proliferation of highly leveraged, one-way bets. As long as the general consensus of the market players is that the status quo will continue, the game proceeds according to expectations and the seas are smooth.
Let a few rogue pebbles be introduced into the serene pond; a few stray gusts of wind arise, and suddenly, the sleeping mariners are startled from their complacency. That is what occurred this week.
I find it particularly insightful to observe what has happened in the interest rate markets. I have said many times, that those markets are the most significant on the planet, far more so than the equity markets and even more so than the currency markets.
Look at this chart of the US long bond. Notice the continued plunge even in the face of a sell off across the equity markets. Typically we see the exact opposite occurring when equities sell off, namely, bonds rise as money flows into safe havens. In other words, if "RISK OFF" is the play, bonds rise when equities sink.
What we had this week was BONDS FALLING right alongside EQUITIES. This is something far more than "risk off". It is a shift in perceptions aggravated by an enormous unwinding of one way bets in the interest rate and equity markets. Remember, the drive higher in stocks has been the continued expectation of unlimited amounts of liquidity. Same goes for bonds in the sense that $45 billion of Treasuries were going to be bought each and every month by the Fed as part of QE4's $85 billion per month.
Large speculators had positioned themselves accordingly in these markets to take advantage of that continued liquidity. The slightest fear that it would slow or cease altogether has set off a chain of uninterrupted selling as those massive positions built up since the start of the new year are being violently unwound en masse. Selling fuels more selling as margin calls proliferate and losses compound due to that same leverage now working against its owners. One has to wonder if we are seeing the beginning of the Central Bank encouraged bubble bursting?
Selling of the nature that we are witnessing in these markets can continue longer than many expect because it is all about money flows, reducing risk, rethinking exposure, cutting losses, etc. It will continue until all of that repositioning has been accomplished. Then the dust will settle out and we can re-evaluate.
In watching these things for as long as I have been trading, I keep coming back to the same thesis - the SOLE CAUSE OF THE WILD, INCESSANT AND UNPREDICTABLE VOLATILITY IN TODAY'S FINANCIAL MARKETS IS EVERY BIT THE CONSTANT INTERFERENCE BY THE CENTRAL BANKS. They refuse to leave the markets alone and are thus distorting the signals that would otherwise be generated. Their actions move markets from one extreme to the other by herding speculative forces and directing them in whatever direction those policies are designed to drive them. In the process of so doing, they create the perfect environment for reckless leveraging which always ends in creating more havoc and chaos. You would have thought they might have learned something from all the crises faced since the year 2000. Apparently not. Humility is certainly not a virtue found roaming the halls of the buildings that house these Central Bankers.
Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap. This week we are deviating a bit from the usual format so that I can spend more time discussing some developments in the Commitment of Traders for gold. I think this will prove helpful to many of you in better understanding what has been occurring in the gold futures market.
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/6/22_KWN_Weekly_Metals_Wrap.html
Gold is putting in a "dead cat bounce" in today's session after setting a fresh low of $1268 in early Asian trading last evening. For those of you new to our trader's lexicon - even a dead cat will bounce if it is dropped to the ground from a high enough point.
Look at the volume on the bounce higher however - it is miniscule. There is simply no conviction among the bulls to come wading in feet first and buying with both fists. A market that plunges $100+ in a single day is not normally going to see an abrupt "bout face" unless there are some unusual fundamental occurrences that negate the horrendous technical damage done to the gold chart.
I do not know how to say it other than this - the gold chart stinks to high heaven right now. We are getting some short covering due to shorts booking some profits before the weekend after a nice week's work but other than a few bottom fishers, there is no strong interest in owning gold right now among the institutional crowd and certainly not among most of the large hedge funds. They are short and getting shorter.
Same goes for silver although it did manage to claw its way back above the $20 level; barely, if only for a brief period.
We will have to see if any of this short covering and bottom fishing can take the price of either metal high enough to reach some important technical chart resistance levels above the market to trigger some further buying. Frankly I would be surprised if it does.
I do think that the selling we have seen hit the entirety of the financial markets is a bit overdone as I am not expecting the Fed to pull the plug on their QE program as some seem to have read into the FOMC statement and Bernanke's comments. When markets are this highly leveraged, lopsidedly so, the carnage being inflicting on trading accounts and the subsequent margin calls always result in an amplification of price movement. The bulk of the crowd is all on one side of equities and that can be seen in the extent of the downside movement in the S&P for example.
It looks however as if we are getting some two-sided trade in the Emini S&P futures in today's session so maybe the worst of the reaction in stocks is over. Once the bleeding stems, traders will then have some time to actually think about and reflect more on the comments of the FOMC instead of just reacting to every price tick.
The close today in the S&P will be critical but perhaps the response of traders come Monday will be more telling. If we see the S&P moving higher again and getting back above Thursday's high early in the week, that will be a sign that the "buy the dip" crowd is back. If however the index falters, especially if it violates this week's low, that would portend a deeper retracement. Every bit of this depends on just exactly how the majority interpret the latest round of Fed-speak when it comes to their QE.
Sad isn't it that the once proud US financial market system, which actually traded fundamentals has been reduced to a quivering hulk of jelly begging sustenance from its masters as the Fed.
The US Dollar seems to be the King of the World again although from a technical chart perspective it is stuck in a broad trading range of some 4 full points on the USDX; 84.50 on the top and 80.50 on the bottom.
One look at the Gold Volatility Index is all we need to see to realize that the CME was hiking margins....
Initial margin for speculators is being raised from $7,040 per contract to $8,800. Maintenance levels are going to $8,000 from $6,400.
Obviously the computers there at CME Group are projecting a sharp increase in volatility....
Going back to last November's election, the S&P only remained below the 50 day moving average when there were TWO separate events that unnerved traders/investors. The first was the election of the current President which was greeted as a negative for business. The second was the drama surrounding the so-called, "fiscal cliff" drama unfolding in Washington D.C.
Once we moved past those two events, there has been only one day in which the S&P has CLOSED below the 50 day moving average. That occurred in April of this year and even then, it was only barely beneath this key level.
Today's shellacking, coming on the heels of a huge down day yesterday, has sent the index down quite significantly below the 50 day. As a matter of fact, it also fell below the former resistance level which had temporarily stymied its upward progress back in April before it gave way in May.
Tomorrow's close is therefore going to be significant.
That strong overhead bearish reversal pattern that formed in May has taken on new significance with this close below the 50 day moving average. We might just be seeing the shift from a "BUY the DIP" mentality to a "SELL the RALLY" mentality. If that is the case, it is going to manifest itself quite soon. We will then see overhead resistance levels capping rally efforts while support levels on the downside are broken as the market traces out a deeper move lower.
Based on what I am seeing in this chart, if this market cannot recapture 1620-1618 before the closing bell rings tomorrow, odds would favor a continuation of the move lower down into a congestion range that was in place back in March/April. I have noted that on the chart.
As you can see, the upper portion of that range happens to also coincide with the 38.2% Fibonacci Retracement level of this entire leg higher since late November of last year. My guess is that the market will hold this level if it does indeed get there. If not, well, that is another different story....
During times of market fear, (the rising VIX tells us that we are FINALLY seeing some of that among the equity crowd), the bond market tends to be a safe haven with flows coming out of stocks and into bonds. Right now, flows are coming out of stocks, bonds and commodities; basically out of everything except cash and the Swiss Franc!
We'll see how long that lasts before the "stocks are cheap, cheap, cheap" cry starts up again.
By request....
Note that this chart is based only on CLOSING prices for each month. I have included today's close as the price for June to give some sort of feel for where things currently stand.
The first major Fibonacci retracement level comes in near $1230 based on closing prices. I would look for a zone on either side of that of $10 for a target unless price can quickly recover and recapture $1300.
There are various estimates out there that are being tossed out but the general consensus for most gold producers is somewhere between $1200 - $1250 an ounce or so. Obviously, this is painting with a very broad brush as some producers have lower costs than others and some higher costs, but for a ballpark number, it is probably pretty good.
Some are speaking about production cutbacks if gold prices stay down near current levels or drop into that zone noted above. That is probably true but it all depends on the extent and duration of the lower gold price. If it dips down and pops up, production cuts will not occur. If gold looks as if it is going to linger down in that zone for any length of time, some of those cuts will undoubtedly occur.
The problem is that this is focusing on the supply side. The big issue in front of us is DEMAND. If supply falls off, it matters not one whit if demand is dropping at the same time. If supply falls off and demand increases, now that is an entirely different matter. What we are currently experiencing in gold is a fall off in demand, namely institutional demand as evidenced by the continued decline in the GLD holdings, not to mention the downdraft in Comex gold.
We will need to see some sort of stability in the price of gold before buyers will feel comfortable taking the plunge into mining shares again. When that does occur, there is going to be value found among those that are getting their financial houses in order, cutting costs and seeking to achieve value for shareholders.
Don't try to be a hero and catch a falling knife. Let the market tell you when it has stabilized. Underestimating the extent to which these hedge funds and their maulings of markets, both up and down, can destroy your trading capital is a serious mistake. The sums at their disposal are staggering and those who forget this need to be reminded as to how a grasshopper must feel when surrounded by a flock of hungry starlings.
Europe wasted no time in responding to the Fed's comments when trading commenced over there as an avalanche of selling swamped over the gold market crushing the metal below support levels that continued to give way in succession. As stated in yesterday's missive - institutions want no part of the metal right now as there are hardly any players who see the least signs of inflation on the horizon. Never mind that the costs of so many basic services and goods are rising - those are not caught in the government's numbers nor is the fact that consumer wages remain stagnant.
The economy may be improving in the minds of some but cash strapped consumers are finding their disposable income shrinking meaning that borrowing is going to have to increase if they hope to maintain their "quality of life". While the Fed wants inflation and is dreadfully terrified of deflation, they do not seem to be having much success at inducing the former yet most Americans all seem to realize that everything they depend upon for life is going up in price. Odd isn't it?
I am not sure whether the tail is wagging the dog or the dog is wagging the tail but one can see the interplay between what is going on in the equities and what is going on in the bonds. As the bonds sink, rising interest rates send worries down the spines of the equity crowd which is creating a sort of vicious feedback loop.
Keep in mind, according to my view, the entire US stock market rally has been nothing but a Fed-induced, artificially created bubble which has sent stocks to ridiculously high levels based on the anemic strength in the economy. If the sentiment, that one has to buy every dip in stocks, begins to come into question, then an awful lot of highly leveraged one way bets are going to begin coming unwound. When I see movements of this magnitude, I know some players, big players, are in trouble and are getting mauled.
About the only thing moving higher today is the US Dollar. There was some strength in the front month July hog contract but given this environment, one wonders how long that is going to last. Bellwether copper was kicked in its rear end and of course the readers of this site know all too well what has happened to gold, and especially to silver.
Silver is an inflation play, pure and simple. If there is no inflation in the minds of these big institutions, then there is no reason to own that metal and even more reason to short it. That is what they are doing having broken it down below a support level that I thought would prove a much tougher nut to crack that it did.
This is so eerily reminiscent of 2008 although this time around, the bonds also are proving to be no safe haven as they were back then. As a matter of fact, it looks as if CASH is the place that investors are running into for the moment.
The Australian Dollar, always a fairly reliable harbinger of the broader commodity complex, was pummeled today especially once the news that China's growth had slowed. Along that same line, the GSCI, or Goldman Sachs Commodity Index, was also beaten with an ugly stick.
We will have to see whether one or two days of this is enough to clear the air and bring some stability into these markets but with the excessive amount of margin debt and with extremely large trades going awry, anything is possible.
I will get some analysis and a chart up of gold later on today. Let's just say for now that losing support at $1300 was a big deal, a very big deal. Judging from the massacre occurring in the gold and silver mining shares, we are seeing a complete rout of even some of the long term bulls. The HUI looks like it is now poised to drop all the way to 200, pretty much back to where it was 5 years ago during the depth of the 2008 credit crisis.
Apparently the laws of economics have been discredited as it is entirely possible to create Trillions in paper currencies with no impact whatsoever. The monetary history books are all going to have to be re-written to reflect this.
