"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, February 9, 2011

Today's Gold Chart and Commentary

Corn prices responded to the USDA’s supply/demand reports reaching a fresh 31 month high above the $7.00 level as they further reduced US ending stocks down to 675 million bushels from last month’s estimate of 745 million bushels. Part of the reason for the reduction in corn stocks was a 50 million bushel increase for Ethanol use. Yes, indeed, the government sponsored boondoggle continues running at warp speed. Nothing like burning in our gas tanks the main food source for livestock production and an irreplaceable human food, not to mention the pathetic fact that the taxpayers are being forced to facilitate this idiocy thanks to the government subsidy of $0.45 for every gallon of the stuff blended.

Wheat also was pulled higher trading on its own set of bullish fundamental and coming within 7 cents of reaching $9.00. Soybeans also went along for the ride as they pushed past $14.50 /bushel. Both markets set fresh 30 month highs.

Gasoline is quietly sneaking higher trading above $2.50/gallon at the wholesale level and trying to push into a fresh 29 month high. Weakness in crude is preventing it from pushing through this level for the time being.

Most of this seemed lost on gold today as it was almost as exciting as watching paint drying as it was watching the price action. It seemed that the metal did not really hear anything new from Fed Chairman Bernanke and thus did not know exactly what it wanted to do. Volume was practically non-existent compared to recent days with the price action indicative of a market pausing to digest its recent gains.

The improvement in its short term technical pattern continues with the 10 day moving average continuing its rise and moving closer to putting in a bullish crossover of the 20 day. Momentum is now positive as well. The key for the bulls will be to push price through both the 40 and 50 day moving averages which come in very near to an important horizontal resistance level  noted on the chart.

This region, centered around the $1370 level, had been acting as a good floor of support on several approaches by the market back in December of last year and again in January before it was finally breached convincingly in the middle of last month. The market has climbed right back up to that level which is now, according to what we term the “polarity principle”, acting as overhead resistance. Clearing this level therefore will be the key to the immediate fortunes of the metal for should it be able to muster enough force to take it out and hold those gains, a signal will be given that the bulls are regaining control of the market.

Pressure on the metal was supplied by the weakness in the HUI, which comes as no real surprise. It seems to have run into selling near the 50 day moving average. We’ll watch to see at what level it can attract some additional buying. Should it be unable to hold near the 526 level, a logical spot for it to garner some attention from buyers would be near the 521 – 520 level if it is going to stay on a good technical foundation.

Silver could not extend its gains from yesterday but more importantly has thus far been able to hold its gains above the $30 level. The longer it holds above $30, the better the chance the metal has to run on up to test the recent high and extend its rally. It has hit some selling resistance almost exactly at the $30.50 level and that will be the first thing we need to watch to see if it going to be able to make a run back above $31. First level of downside support lies near yesterday's low at $29.00.

Bonds were miraculously rescued after an abysmal auction yesterday by a surge in demand at the 10 year auction of today. Apparently the Central Banks of the world had a huge change of heart and were busy tripping over themselves to acquire more of our 10 year debt based on the percentage of indirect bidders who were active. I sincerely doubt this however and view it more as a matter of expediency.

Falling bond prices do not exactly help make Central Banks feel wealthier seeing that the bulk of most of their reserves are in these paper IOU's. When you look at the size of the trade deficits the US is running, especially with its larger trading partners, they have little choice but to continue recycling those Dollars back into Treasuries. Why? - because of the sheer size and depth of the US Treasuries market. The kinds of sums involved are so vast that there are very few markets, if any, that can provide the kind of liquidity necessary to absorb their buying. The Euro zone is the closest rival but Europe has its own share of problems as we all well know. Australian bonds are throwing off good yields but its market would be swamped if it was the main choice of other Central Banks around the globe. And Japan - oh well... don't forget that nation has the 2nd highest level of overall total debt to GDP than any other nation on the planet with the exception of Zimbabwe.

Instead of including the Central Banks in the "indirect bidders" category, I propose a new category termed, "CAPTIVE BIDDERS".

Oh, and don't forget, all those Dollars that many of these foreign Central Banks have acquired with their constant Foreign exchange interventions to prop up the Dollar at the expense of their own domestic currency to keep it weak so as to not lose export market share, they have to do something with those as well. So its back into Treasuries they go.

the more one looks at this setup, the more one realizes what a terrific deal it is for the US and why we can seemingly print money with reckless abandon, run wild deficits, swamp the nation with unpayble debt obligations and still manage to somehow peddle all of our debt to the rest of the globe. No wonder some are ticked off at us.

A short side note to all of this is that it is also a reason why gold will stay well supported on dips in price. It remains an increasingly viable option for Central Banks looking for somewhere to place a portion of their reserves or surplus trade dollars. As small a market it is by comparison to the Treasury market, it is easy to understand how much gold can be acquired and why when they do buy, it is difficult to disguise their actions or cover their tracks without greatly affecting the price.

We’ll have to see what kind of legs today’s move higher will end up having. If it turns out to be a one day wonder, that will not bode well for future bond prices.

The weekly bond chart’s breakdown last week must have seriously unnerved the central planners at the Fed as it has rolled over. That puts the market on a “sell the rally” footing. The battle appears to have been joined.

Equities moved lower today in what must obviously have been a malfunction at the exchange in the ticker display. I suspect that some clever hacker probably got into the source code that controls the display and mischievously rewrote the color line to display red instead of green. I am sure they will get that fixed by tomorrow as this sort of thing is simply unacceptable.


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