US Dollar Continues Holding Chart Support

The USDX continues to show very substantial buying down near the 79 level. For nearly 5 months now, every time the index has moved down towards that region, buyers have come in and bid it back up.

It should be noted that this index has had difficulty maintaining its footing much above the 81 level for any length of time so effectively, it remains rangebound until proven otherwise.

If it were to manage a solid weekly close above the 81.50 level, it would probably make a run towards 83.50.

I want to continue to monitor this chart, especially in relation to the price of gold. So far the rising Dollar has not negatively impacted the price of gold as it has bounced off the $1660 level in spite of the US Dollar move higher off of its support level. We might need to see the Dollar break down however before gold can take out that very formidable resistance level above $1695 and extending to $1700. It seems that the stall in the US equity market move higher has generated a bit of safe haven buying in the metal for the immediate time being.

Right now, gold remains stuck in a sideways range until proven otherwise.

Trader Dan on King World News 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://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/2/2_KWN_Weekly_Metals_Wrap.html

Modern Day Alchemists

Those of you who have been regular readers of this site have seen me use this phrase to describe the Western Central Bankers. I wish to explain this a bit further so you can understand my take on this modern phenomenon.

Back during the Medieval Period, a craft developed which attempted to find a method whereby common, ordinary and PLENTIFUL materials, could be transmuted into something rare, precious and accordingly, valuable. Through various experiments, they took lead, iron and other metals and tried to create a foolproof method for generating untold sums of wealth and thereby prosperity.

We all know that such attempts ended in disappointment/failure but at least we did enhance somewhat our understanding of chemistry and some other earth sciences a bit in the process.

Fast forward to today - what we are witnessing in the Central Bank actions of this last decade is unprecedented as far as its scope but not in its goal when we clear away all the fog and obfuscations involved. The goal of these modern day alchemists remains EXACTLY the SAME as that of the quacks of the Medieval period, namely, the transmutation of common, ordinary and plentiful materials into something of value which will herald in a new era of lasting prosperity.

What I am referring to goes by various names, Quantitative Easing, Bond Buying Programs, Inflation Targeting, etc. but in its essence it is identical. It is no less than the attempt by Central Banks to turn paper into something of value. In this case it is even worse, because it takes DEBT and somehow cosmically turns that into VALUE by declaring it an asset. I cannot think of anything more opposed to sound logic and economic common sense and yet this is where we are at today.

Think about what these hucksters have foisted upon this generation - As the governments of the West sinking deeper and deeper into a debt abyss, these Central Banks "buy" this debt (government IOU's from technically insolvent nations) by the creation of electronic digits in a computer which they then credit to a primary dealer (large bank). This large bank then declares this an asset against which it may generate loans and thus the new "credit" makes its way down through the economy ending up, supposedy, in creating more spending (more debt) which in turn is supposed to stimulate demand for all manner of products and services.

Along the line, the size of the debt burden gets bigger and bigger and bigger, while the citizens are told not to concern themselves with such things. "Don't worry" we are told, "The Fed can continue to enlarge its balance sheet and accomodate as much liquidity as is needed to deal with matters."

MEanwhile, here in the US, the federal debt is now firmly over 100% DEBT to GDP. The last time that this happened in this nation was back during WWII, when the nation was forced to deficit spend in order to ramp up for that conflict. However, and this is key, the DEBT/GDP ratio did not stay there long as the path for that ratio was one of decline. Today however, and this is what is absolutely terrifying, the trajectory for the US debt is not one of decline. Quite the contrary, it is one of a PARABOLIC INCREASE.  We only have to look 4 years out the curve to see that the nation's deficit will increase by a minimum of $4 TRILLION taking the total well over $20 TRILLION. Heaven only knows where we will be in a decade!

Yet, this CERTAIN DEVELOPMENT seems to have been completely and utterly relegated to the back corner of some faraway room when it comes to the current wave of euphoria, and I might add, downright GIDDINESS, that has infected the chattering financial class and the majority of the wildly bullish analysts now urging continued buying of stocks by investors worldwide. Shortsightedly, they point to corporate profits, low interest rates and continued intervention by the Federal Reserve to make their point that equities are the GO TO investment that the public needs to buy right now, because "they are still cheap". It is as if an intoxicating brew or opiate has been poured out from on high upon the generation who are declaring with absolute confidence that the "worst is over".

Case in point is Japan, which has a DEBT to GDP ratio of over 200% and is climbing. As a matter of fact, the new government there ran on a platform that it would force the Bank of Japan to target an inflation rate of 2%. In other words, buy as much debt, print as much yen, etc. as is needed to FORCE inflation to move to a 2% rate. Take one look at what this has done to the value of the Yen, but particularly to the value of the Yen compared to Gold. It has plunged 16% against the value of the US Dollar in 5 months.

It has fallen a whopping 80% against the value of an ounce of gold in 12 years time.

The same thing is happening to the Yen in relation to the Euro, against which is continues to also plummet.

If you think that the grand experiment is not going to impact the average Japanese citizen, take a look at the following chart of Brent Crude oil when priced in terms of the Yen. Notice the rocket shot higher that has occured since the currency began strongly devaluing. Crude oil prices in Japan are certainly experiencing that "benign" inflationary impact. Since Japan imports the vast bulk of its crude oil, its devaluation of the yen, caused by massive yen printing/creation, is going to hit the average Japanese citizen quite harshly.

Of course, the authorities there are banking on the fact that they expect the Nikkei to continue rising sharply also thereby muting the impact from the higher cost of living that is coming to their shores. They are also expecting the sales of Japanese made electronics/automobiles,equipment, etc. to increase globally due to this competitive devaluation with the hope that this will spur additional growth in the domestic economy; more jobs and thus more spending.

In other words, it has become a vicious circle with the nation continuing to press its currency lower in order to ward off the impact from years of overleveraging and excessive debt.

The point in this however is that the purchasing power of the Japanese citizen is going to fall as their currency devalues.

Another chart is the Brent Crude in Dollar terms just to provide a gauge to see that while crude has been rising even in Dollar terms, the rise in not nearly as pronounced as it is in Yen terms. 

That brings us fact to our initial point. What the Western Central Banks have all opted to do is basically the same as the Japanese although the Japanese, to their credit, are far more open and honest about what they are attempting. 

This is the reason that heretofore the GRAND EXPERIMENT of the MODERN DAY ALCHEMISTS has not yet ended in apparent failure. In a world in which only one nation was engaged in this massive bond buying/liquidity injection/money creation attempt, that nation would see its currency collapse in value against the other major global currencies, thereby impacting its average citizen (the middle class and especially the poor) as their standard of living inexorably declines, much to their bewilderment and loss to explain. Rampant inflation would be seen even in the midst of a soaring stock market as the inflation manifests itself FIRST in that sector.

Were the Fed the only Central Bank engaged in this madness, the Dollar would have already gone the path of the Yen and begun its INEVITABLE and UNAVOIDABLE devaluation. Both the Yen and the British Pound however are beating the Dollar to the devaluation punch.

Even at that, the US Dollar is still barely holding its own right now. Look the monthly chart and see how the Dollar is beginning to sink. Again, were it not for the weakness in the Yen and the British Pound, the Dollar would be the "sick man" of the global economy based on the sheer size of this Federal Reserve alchemy.

Take one good hard, long look at the long term chart of the US Dollar and tell me if that inspires the least bit of confidence that any of this will end well for the average middle class and poor US citizen. Japan will be our example of what to expect. That is why gold will ultimately prove to be the best defense against what I now call the DEPRADATIONS of the Federal Reserve. Their alchemy will ruin the Dollar as surely as that of the Japanese monetary authorities is ruining and will ruin the Yen.

So, the party can continue and will continue for a while longer with the revelers enjoying their euphoria but the Republic is in grave danger, which though out of sight and out of mind for the immediate time being, continues to fester until such time as it erupts into full sight. Then and only then will this generation come to their senses and realize the utter folly of their faith in these modern day Alchemists and their effervescent promise of permanent prosperity with no pain and no consequences from that age old enemy called DEBT.

No more RECESSIONS

No more DEPRESSIONS

No more BEAR MARKETS in STOCKS

No more FALLOUT from EXCESSIVE DEBT

No more FALLING HOUSING PRICES

Umlimited MONEY CREATION with NO NEGATIVE CONSEQUENCES

Yes, we can now have it all, courtesy of our monetary masters and their brave new world of modern day alchemy.

Blue skies, nothing but blue skies ahead. or to steal a partial quote from Dickens; "IT WAS THE BEST OF TIMES..."

Behold what a paradise Central Bankers have given to us all! Let us be the first to salute them for what they provide to us.... Hail Caesar....

Just keep that bread and those circuses coming to amuse and entertain us. Meanwhile, enjoy the stock market rally while it lasts.

It's All About Money Flows Folks

I continue to hear from many readers about the unprecedented rally in the US equity markets that as of today has taken the Dow to within less than 200 points of its all time high and the S&P 500 to 5 year highs in spite of what nearly everyone I have spoken with believe is a lackluster economy.

It is the result of money flows - think about the enormous sums of liquidity that have been created by the actions of the Federal Reserve (not to mention the ECB and the BOJ). Then think about the abysmally low interest rate environment that this CB intervention has forced upon the economy. Then think about all that money looking to find a home where it can obtain YIELD.

What does that leave? Answer - equities.... Commodities (other than some select ones) are still concerned that the rate of economic growth (while improving globally) is certainly not leaping but is rather muddling along in the right direction. While that is all well and good, it is not enough to generate robust demand across the entirety of the commodity sector. Commodities in that sense have become a "stock picker's Market". In other words, traders/investors, rather than just blindly rushing pell mell into the entirety of the commodity sector, are being very selective as to which particular commodities or category of commodities that they want exposure to.

Gold is struggling in this environment because government inflation figures (which no one believes) are still very tame. Throw in the fact that the talk in the halls of economic power is that the worst ( the US credit crisis, the European sovereign debt crisis, Chinese slowdown fears, BOJ deflation fears, etc.) is behind us, and that is denting safe haven buying in gold as well as safe haven buying in the bond market.

As a matter of fact, bonds are increasingly being seen as a suckers's bet and that has the hot money leaving low interest rate paying bonds and flowing into equities to take advantage of double digit gains.

I have no idea where this will lead us but as long as the current sentiment is so lopsidedly wildlish bullish, equities will work higher and gold will remain rangebound. With the "worst is behind us" talk increasing, it will take a genuine return to fears of inflation emerging to get the gold market excited again.

Right now gold is completely focused on the extent and duration of the Fed's QE policy. You might have noticed that when the initial jobs number hit the wire this AM, it was considered very weak and thus got the gold bulls revved up on the idea that it would keep the Fed in the QE game for the rest of 2013 at a bare minimum. Then, not longer after that, the ISM's Manufacturing Index reading came in at a much higher than expected 53.1 versus 50.2 in December. The number was so much stronger than expected, that it immediately sent shivers down the backs of the gold market rekindling fears of a sooner-than-just-expected ending to the QE4 program. Gold surrendered half its gains in the matter of a few minutes.

That is where we are currently.

Keep in mind that all of what we are seeing has been accomplished by MONEY PRINTING IN UNPRECEDENTED amounts. Apparently, everything that we have ever learned about economics and currency creation out of thin air is wrong. Permanent prosperity can indeed be created out of thin air; recessions/depressions are obsolete and will never occur again; ever-increasing amounts of debt have no impact. The Central Bank ALCHEMISTS have won.... FOR NOW....

Silver - Nothing Doin' Yet

Yesterday silver looked as if it was setting up to make another test run at stubborn overhead resistance near the $32.50 level, the top of its recent trading range. Today - well, to put it bluntly, "nothin' doin'".

The ferocity of the retreat away from yesterday's high is a bit surprising to me given the big push higher yesterday. A couple of things - end of the month positioning is being seen in quite a bit of the markets that I regularly trade today and that is causing some pretty wild swings in price.

Secondly, the continued meltdown in the mining sector shares (HUI and XAU) is completely undermining strength in the metals over at the Comex. Any time would-be bulls get ready to make their move into the metals, they take one look at the HUI or the XAU and then go back to sleep. There is no reason to chase precious metal prices higher as long as the mining shares continue to reek.

The HUI is on track for its worst monthly close in THREE YEARS. What it will take to generate any buying of sufficient size to reverse the downtrend is unclear. Value-based buyers are present but are being overwhelmed by the non-stop selling hitting the sector. I get the sense from the price action that the shares are on the receiving end of a position among several larger players that has gone seriously awry. They are being forced out kicking and screaming but also bleeding profusely. When you continue to stretch a valuation of the HUI to gold to levels last seen more than FIVE YEARS AGO, someone is in trouble. When the overstretched rubber band finally does snap back, it will be quite fierce but as to when that might occur, I am unclear.

For now, there is still no sign of any definitive bottom in the mining sector.

For that to occur, the Comex metals are going to have to be able to cast off the share-related drag on their price and clear the top of their respective trading ranges. That has not yet been able to occur.

As you can see on the price chart below, the RSI failed, once again, to take push past the 60 level. That means the sideways range trade remains in effect.

Yesterday the market pushed strongly through the 50 day moving average; today it plunged right back down below it. It does remain at this point above the 200 day moving average; a slightly friendly development unless proven otherwise.

I am not sure what it will take to push these metals higher. Yesterday there was a rash of shortcovering and some fresh buying based on the lousy Q4 GDP number that had traders convinced that any talk of premature ending of QE4 was nonsense. Today, there was some second guessing that even with the higher unemployment claims number. Some are looking past today's numbers towards the payrolls number and are expecting to see some decent numbers. If the number comes in higher than expected, I would guess the metals will see further pressure on the idea that the Fed will cut short the QE program in spite of the backward looking GDP number. Remember, markets look forward not backward.

If the number comes in as expected or below consensus expectations, I think we can look for the metals to breathe a sign of relief as it will reinforce the idea that while the economy might be recovering somewhat, it is still not able to stand on its own two feet without continued easy money policies.

That means, we wait and see what the morrow brings. Sentiment in the shares is rotten; absolutely rotten but it can still get worse. Some keep pointing to this fact as proof that a turnaround is near. They might be right. The problem is you will need more than lousy sentiment to start a sustained rally - you need bullish enthusiasm. Haven't seen any sign of that yet.

Euro Yen Cross Continues Streaking Higher

Remember our old friend, the Euro-Yen cross from its hey day back prior to the credit crisis of 2008? We used this cross as a gauge of risk sentiment particularly during the massive Yen carry trade of that time frame. The cross came under tremendous pressure when that carry trade was unwound and the investing world was rushing into safe havens and out of speculative positions.

When the Euro was the subject of "the Euro is finished" talk during the height of the European sovereign debt crisis, this cross was hit particularly hard. However, once the ECB got into the act and the Europeans put together their bond buying program, the Euro began a steady recovery against the Yen. Thus far we are not hearing any significant chorus of monetary officials/political leaders out of the Euro Zone making noises about the strength of the Euro. That is why money keeps flowing into the Euro.

I think it is no insignificant matter than the recent rally in the US equity markets  which has seen the S&P move to a FIVE YEAR HIGH just so happens to parallel the rise in this cross. That cross has been and still remains one of the more accurate measures of risk sentiment that we have, along with the bond market of course.

Take a look at the recent action of the cross as it confirmed a bottom in November last year and the subsequent action in the S&P 500 which also rallied off a short term swing low that same month. With the exception of the selling pressure in the last few days of 2012 (based no doubt on tax related selling), the two have been moving in lockstep.

Clearly, speculative fever has been revived in regards to stocks based on this cross. The question now becomes, will the commodity sector be next? That is why as long as this cross continues higher, I am going to be very closely watching the price action of the Continuous Commodity Index or CCI. So far that index has not been following the cross higher as it actually went in the OPPOSITE direction of the cross during the month of November. However, it is beginning to show signs of paralleling the cross. If this connection, which was in exact lockstep leading up to the peak in commodities back in 2008 becomes re-established, watch for the precious metals, in particular, silver, to start more of a sustained trend higher. Let's pay close attention to this as well...

Gasoline Prices on the Rise

A mere two months ago, consumers were enjoying some of the lowest gasoline prices seen since early last summer. Call me a conspiracy nut but I no longer believe in coincidences seeing that these lower gasoline prices just so happened to strangely correspond to the lead up into the past election day.

Now that this is behind us, gasoline has been on a tear higher, along with crude oil I might add. You no doubt have noticed the increase at the pump already. Rising energy prices are something that cannot be long overlooked by those scanning the horizon for signs of inflationary pressures. I mentioned yesterday that heretofore, gold has ignored the strength in crude and the rise in distillates. That may be getting harder for it to do if this strength continues.

Remember, at some point, because of the pervasive impact of higher fuel/energy costs on nearly all segments of our economy, the price of transported goods must rise to reflect the higher costs for producers/manufacturers/distributors. When it does, the impact on the CPI should be seen. What is lagging right now is FOOD costs. You will recall that we have seen episodes in the recent past where both FOOD and ENERGY prices were rising in tandem. That occurence cannot be ignored.

For now, energy is taking the lead. We'll keep a close eye on this to see if unleaded gasoline can run as high as the $3.20 level or not.

Perhaps the stubborn refusal of energy prices to break lower is one of the factors contributing to the continued weakness in the bond markets...

The Punch Bowl Runneth Over

Fear not ye despairing lads and lassies. Surely thou wert fearful that said supply of spirits to enliven yonder punch bowl wert in peril of being dried up. Hark - the sum of all economic activity in the realm didst verily sink a fortnight plus ago. This turn of events must surely bring forth the purveyors of joy and bliss to aid thee.

Okay - I got a bit carried away - the big news, and I do mean "BIG" news this morning that has gotten the commodity sector excited and is in the process of pushing the US Dollar lower, is the fact that 4th quarter 2012 GDP actually managed to SHRINK! Yes, you got that right - it shrank! As a matter of fact, the reading was the worst since Q2 2009! Remember that we were back in an official recession during that time frame.

Ironically, and this to me is a big deal, government spending decreased and that is perhaps one of the biggest reasons for the reduction in growth. I have mentioned previously on this site that government spending was a large factor behind recent improvements in the rate of growth in this nation and that were it subtraced from the numbers, we would be showing very little in the way of actual growth. Lo and behold, I did not expect the growth rate to actually shrink were it removed from the equation.

Here is the ironic part - the US MUST REDUCE SPENDING as it is headed down a road that will certainly lead to economic ruin. When government debt is 100% of GDP it is unsustainable. Any who doubt need merely look across the Atlantic Ocean to Greece, Spain, Italy, Portugal, etc. Heck, even one of the French officials made the slip of the tongue in admitting the obvious, namely that France was bankrupt! While the US DEbt/GDP ratio is not yet at levels seen in the PIGS, it is most surely headed in that direction.

So guess what, if the US government attemps to rein in spending, economic growth will contract because this deficit spending by government is contributing to a large portion of the "growth" in this economy. But keep in mind, that government does not actually create wealth - it merely takes it from one sector of the economy with one hand and redistributes it to another sector with the other hand. To the extent that it adds "growth" to an economy, it is BORROWING FUTURE GROWTH INTO THE PRESENT when it deficit spends. Borrowed money must eventually be paid back and when it is in a debt-based economy. growth shrinks.


That brings us squarely back to the Fed - before this morning's GDP number was released, the world of investors were waiting with bated breath for the oracles to come forth from Delphi and issue their prophetic insight into the state of the US economy. Another duller way of saying this is that the conclusion of the FOMC meeting is today and the market was waiting for what statements would come out of that. Prior to today's GDP report, there were genuine fears of a curtailment in the QE4 program coming sooner rather than later. Today's GDP number should put those fears to rest.

This is what has gotten both gold and silver in such a tizzy this AM. Hedge fund shorts in silver in particular, that were put on below $31 are now being forced out. Same goes for gold shorts by hedge funds that were put on below $1660, those too are being covered. The reason? Traders are now revising their views of any premature end to QE4; based on today's contraction, it ain't gonna happen anytime soon.

I am going to wait until later in the day to see how the pit session closes and in particular, how the S&P 500 REACTS  before doing any charrting as I want to see those before making any conclusions as to near term technicals.

One thing I do want to point out however is that in spite of the pitiful GDP numbers, the bond market is FALLING. This is to me, perhaps, the most important price action of today's session. One would have expected slowing growth to rev up bond buying; it is not. The opposite is what is happening. The yield on the Ten Year note is now OVER 2.0% as I type these comments. We will have to monitor this extremely closely. Something big might just be afoot!