"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


Monday, May 23, 2011

US Dollar now solidly above the 50 day moving average

The "risk aversion/slowing global growth" trades have resulted in a huge unwind of carry trades over the last month. This unwind is bringing upward pressure on the funding currencies of choice, not the least of which has been the US Dollar due to the ultra low interest rates here in the US.

This continued exodus from risk has pushed the US Dollar firmly above its 50 day moving average and put it into position to actually challenge its 100 day moving average, a critical technical level on the price charts. While there is not the least bit of fundamental support for strength in the US Dollar, these technical factors which are driving it cannot be ignored by traders/investors. How much longer the Dollar can benefit from being the "NOT the EURO" trade is unclear but it is coming quite close to the region marked on the chart which will give us a clue as to its direction over the coming summer months.

Note on the chart the two horizontal lines drawn that form a zone between 77.00 - 76.70. Note also that the downward sloping 100 day moving average line falls right into the middle of this zone.

If the Dollar rally is going to fail, it will fail near this zone. If it does not, then there exists a very good chance that the risk trade unwind will push the Dollar upwards toward the 200 day moving average and the region near 78.

What is most interesting however is how gold is responding to this bout of strength in the Dollar - it is not breaking lower but is moving steadily higher. I referenced this in my earlier comments from today where I spoke to the strength in both Euro priced and British Pound priced gold. What these charts are telling us and what this price action is crying is that gold is trading as a currency with its own virtues in a time in which there is a growing lack of confidence in the monetary authorities of both Euroland and the US, as well as other nations around the planet.

Keep in mind also that the summer time is generally not a season during which gold exhibits a great deal of strength on an historical basis. Should we see the kind of resilience continue in gold over the summer that we are currently seeing, I think it will be an early indicator that we are going to see a new record high price in the yellow metal sometime during the 3rd quarter of this year. Stay tuned on this one.

Ron Paul's commentary on the debt ceiling

I recently took quite a bit of flak from those supporters of Ron Paul who disputed the account published in the New York Sun that the Congressman from Texas had advocated selling off some of the nation's gold to pay for its debts.

I was then and still am opposed to that idea on several grounds not the least of which is the idea that there is insufficient gold, even at the current market value, to make a serious dent in the gargantuan $14 trillion + debt burden of the US. That then begs the question as to which class of debtors would get the option of being paid in gold, US citizens who own the debt either directly or indirectly through investments made in pension funds or mutual funds, etc., or foreign creditors such as China who hold a tremendous amount of our overall debt.

First of all, who would make such a decision? Secondly, no matter which group was chosen, the other group was going to be provoked into an angry response. Certainly if China were snubbed in favor of our own citizens, they being our banker, the fallout would not at all be pleasant. If China were paid in gold and our own citizens left to be paid in a depreciating fiat currency, the noise of protest and outrage here at home would be deafening.

The main issue I have with selling our gold to pay off our debt is that it smells too much to me like a scenario in which a drunken spendthrift has run his family into the debt house forcing the unfortunate souls to sell anything they have left of value to extricate themselves from their prison. In our case however it is a prison imposed by the reckless folly and stupidity of the political class of this nation.

I see a future for gold in a revised monetary system and I believe that the US would be much better served by retaining our nation's gold holdings intact (whatever we happen to have left of those holdings is anyone's guess) rather than selling off such a precious asset.

I would love to get further into this topic but that is not my intention at this time. In the interest of fairness and to give credit where credit is due, the honorable Congressman from Texas has issued a statement on his website detailing his strong opposition to extending the debt ceiling. Let me say that this is Ron Paul at his best and he has my complete support when he makes a statement of such nature.

I would much rather see statements of this kind, followed up with action by a majority of Republicans in Congress, that would enforce a fiscal restraint on our reckless and dangerous spending, rather than any talk of potential gold sales.

Hats off to the Congressman for this one. From Dr. Paul's comments below:

Stop Raising the Debt Ceiling
The federal government once again has reached the limit of its legal ability to borrow money, meaning it cannot issue new Treasury debt without action by Congress to increase the debt ceiling limit. 

Please be sure to read the entire set of comments by clicking here:


Gold strength in Euro and British Pound terms firming up US Dollar priced gold

The same concerns that are sending equity market bulls scurrying for cover, namely, European sovereign debt fears and  a growing sense that an overall slowdown in the global economy is coming, are sending gold higher in a display of resilience which undoubtedly has been causing a lot of angst among gold bears.

Take a look at the following charts to see the remarkable performance of the yellow metal.

Meanwhile, U S Dollar priced gold has clawed its way back towards heavy resistance near the $1520 level. If gold can take this out and hold above it for a few hours, it sets up a run towards $1530, which is the last barrier standing between it and $1550.

Initial support has moved up towards $1500 which is acting as a floor right now. One has to be tremendously impressed with the strength in gold coming in the face of a Dollar that has breached overhead chart resistance and a sharp move lower in the US equity markets. Additionally, the brainless hedge fund algorithms are busy throwing away anything looking remotely like a commodity today (no one is going to eat since the stock market is falling) which is not having any impact on gold whatsoever. It truly is functioning like a safe haven.

Also, while the equity market weakness is weighing on the mining shares, both the HUI and the XAU continue to hold above recent lows.