Stock Market Rally nothing but Rampant Paper Asset Inflation

Well, the Fed wants the stock market higher in time for the election (it seems Mr. Bernanke wants to retain his position as head of the Fed) and they got it.

Take a look at the following charts of both the Dow and the S&P 500, each of which is setting at more than 4 1/2 year highs based on what???

Impressive rally isn't it considering it has all been orchestrated by Fed QE programs. The problem is revealed however when viewing the following charts.

Thirteen years ago, it took a bit more than 42 ounces of gold to buy the DOW. In the year 2007, when the DOW made a brand new all time high in nominal terms, it took half the amount of gold to buy that same Dow, namely a bit more than 20 ounces. Today, as the DOW is once again flirting with moving back towards the all time high in 2007, it takes an astonishing LESS THAN 8 OUNCES of GOLD to buy that same DOW!

Are you getting the point of all this? All that the elitist monetary masters are creating in their alchemy laboratories is a RAMPANT case of paper asset inflation of the stock market. Stocks are losing value against gold and have been so doing since 1999. The more QE the Fed wants to spit out, the further this ratio is going to collapse until at some point it will probably end up with 3-4 ounces of gold being able to purchase the DOW.

Another way of stating this is: Do not be hoodwinked by the claptrap coming from the mouth of the monetary elites at the FOMC that inflation is tame and that expectations are subdued. We are witnessing one of the single greatest instances of inflation in the stock market in our domestic history!

Which One would You Want to Own???

Now that the Fed has made it abundantly clear that they intend to further debauch the US Dollar so as to keep Wall Street happy, watch for gold to once again begin outperforming against US Treasuries. Notice that each previous round of QE, has sent the yellow metal higher against the price of the long bond as the latter appropriately responds to an increase in inflation expectations by such activity.

Compared to previous QE's, this round is relatively modest by comparison as a $40 billion per month price tag still is less than $500 billion annually. Still, there is Operation Twist occuring alongside of this. Either way, I would expect the pattern to resume in favor of gold now that the deed is history.

The Fed and the ECB determine to Destroy the Middle Class

While Wall Street cheers the actions by the Fed to further enlarge its already bloated Balance Sheet, those of us who live on Main Street should get accustomed to further increases in our food and energy costs. What I find rather perverse, is the statement by the FOMC that "longer term inflation expectations remain stable". Yeah, maybe on the salaries and wages front but sure as hell not on the raw materials front.

Take a look at where hedge fund money is now flowing - right back into the hard or tangible assets category again. Get used to higher gasoline and heating oil prices and brace yourself for the food sticker shock you are going to experience in the weeks and months ahead.

I do not know whether to laugh at such utter stupidity or to weep for my nation's future. After the Fed has already conjured into existence the piddly sum of $2.5 Trillion for QE 1 and QE2, we now get another $40 billion/month of agency debt purchases for as far as the eye can see. A lot of good the first $2.5 Trillion did. this latest one will do the same - nothing as far as curing what the real problem is in the US economy.

This is supposed to keep long term interests rate low to encourage home mortgage borrowing. Right, I am sure all those folks who were holding their breath waiting for the yield on the Ten Year to drop further from the 1.4% level it was trading at six weeks ago before taking out that mortgage. Guess what, thanks to all this money creation from the both the Fed and the ECB, the bond market is now shifting away from the deflationary scenario towards one of inflation, regardless of the Bullsh*t in the FOMC about inflation expectations remaining subdued. The yield on the Ten Year is now 1.8% AFTER all this FOMC nonsense. NIce work guys! Maybe you can do yet another round and drive the Ten year over 2% for us.

It also looks as if the long bond might be breaking down the technical charts also. That tells us that LONG TERM INFLATION EXPECTATIONS ARE INCREASING. the exact opposite of what these serial liars told us this morning.

Make no mistake about it, the bond markets and the commodity markets are signaling inflation. Pay no attentiont to the worthless claptrap being spouted by these monetary buffoons. The real picture is in the price charts which are always forward looking.

by the way, the rally in the stock market, which is now sitting at higher levels than when the current inept-in-chief took over, is a perfect picture of what happens when inflation hits the paper asset category.

By the way, in case anyone did not notice, I am particularly incensed to see this QE nonsense. I am disgusted at what the long term impact is going to be on my children and their future. so, today, you all who are reading this, get to read a written rant instead of an audible one!

Are Commodities coming Back in Vogue?

The following chart of the Continuous Commodity Index ( CCI ) shows a sector that apparently is catching the attention of the hedge fund community once again as risk trades come back into favor courtesy of what seems to be another wave of money printing/bond buying about to launch.

Notice that the price rally from the late spring low down near 503 first cleared the 25% Fibonacci Retracement level off the drop from the 2011 peak near 692. Instead of falling back through that level and making another fresh leg lower, the market bounced right off that same 25% retracement level and then spiked higher taking out the 38.2% retracement level where it now sits.

It has also broken the downtrend whether that be the shorter term one drawn off the August 2011 high or the longer term one drawn off the 692 peak.

What this tells us is that investor sentiment has now firmly shifted away from the deflationary viewpoint and is moving more firmly towards anticipating an inflationary period from all this Central Bank monetary activity. Also aiding the case is the newly announced round of government works projects in China which will keep building material prices from falling any further as China's appetite can be voracious.

Whether any of this is enough to fix what ails the global economy is uncertain ( I view it as accomplishing nothing in the long term but serving only as a bandaid which will have a short term impact) but one thing that is certain is speculators' responses to all this.

This is the reason that silver in particular is moving higher. It will always outperform gold during episodes in which inflation fears dominate as opposed to periods of deflationary fears. Note the recent strong performance of the copper chart, aka, Dr. Copper, as it has broken out of a four month long consolidation period after being unable to take out the $3.50 level. COT reports detail the influx of fresh speculative money flows into the red metal. This is also a good sign for silver which as a general rule of thumb, seems to have a tendency to move in a similar direction as copper.

Incidentally, I want to again refer you to a previous post below detailing the hedge fund long and short positions in both gold and silver. A simple question - does the long position of the hedge funds long anywhere near the previous peaks shown on that chart? The answer is "NO", it does not.

http://traderdannorcini.blogspot.com/2012/09/commitments-of-traders-reports.html
I want to repeat what I have been saying and writing about this gold and silver market for the last 8 years or so that I have been writing publicly about this topic - speculative money is what drives the markets. Commercial activity does not. As long as speculators are buying, prices will rise regardless of what the commercials are doing. Only when that buying abates and upward momentum stalls out, will a market reverse course. IF the fundamentals remain strong however, the dips in price will attract new buying once the initial wave of long liquidation from the day traders and other shorter-term oriented traders is finished.

Beware of those who tell you that prices cannot rise further because there is "X" amount of speculators in a market. Who is to say that these same speculators cannot buy more? How high can prices rise before upward momentum stalls out? Anyone who claims that they can predict such things is more full of crap than a Christmas goose. The markets will tell you when they are turning; ignore everyone else and I mean everyone and listen only to the voice of the market. After all, it is the only accurate voice out there when all is said and done.

Trader Dan on King World News Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Markets and Metals Wrap.

http://tinyurl.com/9g6njpn

 

Click on this link to take you to the King World News audio transcript of some portions of the radio interview in addition to seeing the HUI to Gold comparison charts I have presented there.

http://tinyurl.com/8ozmrpt

Commitments of Traders Reports

Following are some charts detailing the positioning of the hedge funds in both the silver and in the gold markets.

Note the build in the longs and the reduction in the shorts as those funds who gambled on a breakdown in the price of the metals and sold them down near their support levels, were caught flat-footed and forced to cover.

The first chart is that of Silver:

The following chart is of Gold. Note that since May of this year, when gold was trading below the $1550 level, and when hedge fund short positions were at a maximum, those hedge funds playing gold from the short anticipating a breakdown in the price, were forced out and have been covering ever since. Meanwhile, new longs are coming into the market in a big way putting further pressure on the short camp.

ECB Sterilization Details Sketchy

One of the big selling points by Draghi and those favoring the ECB bond buying program, to assuage investor fears of its inflationary impact, was that the purchases would be offset or sterilized so as to provide for "price stability". I suspect that this was emphasized to deal with the strong German opposition to the plan as the German experience with hyperinflation during the Weimar republic has deep roots in the German national psyche.

The question that myself and others have, is exactly how this sterilization is supposed to proceed. What will the ECB buy in order to reduce the amount of money in circulation in those nations that ask for the "bailout mechanism"?

Remember, any of those troubled nations' bonds that get purchased by the ECB mechanism will be sitting on the balance sheet of the ECB in exchange for Euros. One assumes that the nations will of course spend these Euros to meet their various obligations, whether those be pensions, salaries, infrastructure, medical, etc. That means this money can reasonably be expected to go into circulation. So what exactly does the ECB then do to extract a corresponding amount of money out of circulation so as to render its bond buys neutral?

I for one am most anxious to see the details as I do not believe for one moment that in practice this is what is going to happen. This for certain is going to be an interesting laboratory experiment.

It also seems to me that gold is not buying into any sterilization talk. It would not be sitting at a mere 14-16 Euros off its all time high if it did!

"And She'll Have Fun, Fun, Fun, 'til the Bankers take the Punch Bowl Away

Pardon an old Beach Boys fan for taking Liberties with one of their classic song's titles but this popped into my mind today watching the market response to the ECB's bond buying announcement.

US economy in the toilet? No problem - new 52 week high in the S&P 500. While you are at it, give that 'ol Japanese Yen the Whack-A-Mole treatment. Time for that carry trade again. RISK ON! Damn the Torpedos, Full Speed Ahead!

I really think that some creative genius should make a spoof of the Star Trek, the Next Generation series, involving Draghi and Bernanke as a combination of the Borq Queen pronouncing those fear-inspiring words, "RESISTANCE IS FUTILE!" At least for today, the markets have been absorbed into the Borq Collective and are now assimilated. All sense of individualism has been annihilated leaving only the will of the hive supreme.

Once again the Central Bankers of the West have unleashed another torrent of hot money flows right smack dab into the commodity sector guaranteeing that higher energy prices are here to stay. Did anyone check out what happened to gasoline, heating oil and crude oil today? WTI is now less than $3.00 from the $100/bbl level while gasoline is back over the $3.00/gallon level wholesale. Keep in mind that this is well after the end of the traditional "Driving Season". Anyone expecting or hoping for a bit of relief at the gasoline pump should get disabused of that notion.

Gold and Silver of course wasted no time in promptly blowing right through overhead resistance levels on the chart as the metals are now functioning exactly as they should function whenever a set of Central Bankers decide to further debauch their currencies. Take a look at gold priced in terms of the euro, or Euro-Gold. It moved within 14 euros of its all time high. The ECB's actions are certainly not being lost on European based buyers of the metal. They know damn well what this idiocy is going to precipitate.

Incidentally, Euro Silver has broken its downtrend and looks as if it wants to make a run towards the 28 Euro level. I would venture to say that if it breaks through that barrier, we will see $40 Silver here in the US.

Moving back to the US-centric view, one thing that I am watching that in my mind is even more significant that gold clearing the psychologically-important $1700 level is the fact that this occurred as the HUI has managed, FINALLY, to clear that huge overhead resistance level of 460. This level has held the miners in check since April of this year as any and all attempts to better, up to now, have failed. If the HUI can hold onto its gains into the end of the week, we should see it run to 480 whilst many of the miners reflect breakout patterns on their individual stock charts. A push through 480 sets it up for a run above 500 to 510 or so.

It is always more constructive to see BOTH the mining shares and the bullion markets taking out overhead resistance levels at the same time on their price charts. One has to be a bit more careful when bullion is moving higher while the shares are languishing.

By the way, some of today's market chatter is that the stronger ADP private employment data, combined with the action by the ECB, will make it much easier for Bernanke and company to say "NO" to another round of QE3 right away over here. That is where some of the profit taking in gold and silver is coming from. Let's watch and see how things settle out by the end of the day.