"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, June 1, 2011

Gold - 4 Hour chart update and comments

Gold has met the initial upside target of $1,550 based on the breakout above $1,530. It is displaying this strength in the face of widespread commodity selling by the hedgies as they run from risk once again and unload long positions cross the entirety of the complex. Only the markets with the strongest fundamentals have been able to shrug off this huge algorithm-generated selling.

I am now looking for a solid close in gold ABOVE the $1,550 level to signal a run back towards the recent all time high near $1575. If gold fails to extend its gains above $1,550 it will set back some and dip towards $1,530 where it should encounter some decent sized buying, particularly if strength in both Euro-gold and British Pound-gold continues.

Risk trades are being yanked off in droves today but in spite of that, the Dollar, while higher, is not getting that much of a bid. That is most interesting and bears watching. This is the 4th consecutive close by the Dollar below the 50 day moving average, not particularly inspiring if you are a Dollar bull. A failure by the Dollar to extend its gains will be positive for the metals, gold in particular, which is trading as a hard currency against the paper currencies right now.

The ADP number has taken the wind out of the equity bulls' sails and has left the chart of the S&P looking quite ugly and very disconcerting for any future prospects regarding the US economy overall. It had managed to claw its way back above the 50 day moving average but completely broke down in today's session. It looks heavy and feels like it wants to go back down and retest 1300. If it fails there, it is going to get ugly in equityville.

The long bond bubble is beginning to form once again and it will take another round of QE to pop it. While the Fed loves the low interest rate environment being created by this mad rush into low yielding bonds, they do not love the ACCOMPANYING market behavior of the equities and many of the commodity markets because that is signaling deflation. What the Fed wants, and is NOT GOING TO GET, is a low interest rate environment accompanied by RISING stock prices and gradually rising commodity prices. They will not get that either. If they push in another round of stimulus, they are going to get a collapse in bond prices alongside a surge in equities and commodities. If they fail to stimulate, they are going to get their dreaded deflation bubble in bonds.

Markets are on their hands and knees begging for more QE

Take a look at the following two charts. These tell you all you need to know about the market's view towards Federal Reserve policy. As you know by now, the Fed is supposedly going to end QE2 at the end of this month. Ever since that announcement, coupled with continued disappointingly weak economic data, the yield on the Ten Year has fallen and the US equity markets have swooned.

There are TWO, not ONE, Achille's heals in this so-called economic recovery theme that had been making the rounds earlier in this year. The first is the lack of job growth; the second is the horrific numbers that keep coming out of the housing market.

I suspect that if the yield on the Ten Year keeps plummeting along with the equity markets, we are going to hear more and more talk about QE3.

Keep in mind that this Bernanke-led Fed fears DEFLATION more than anything. In the past Bernanke has deliberately led the markets to expect inflation based on the QE programs. They wanted that mindset to kill any talk of deflation. It did seem to work until the hedge funds, which do the bidding of their masters at the FEd, got too carried away and trained their guns on the energy markets and started to bid up the price of gasoline. That was a big, "No-No". Out came the Hawks at the Fed talking up the ending of QE2 and the need to raise rates at some point and down went the entire commodity complex along with gasoline prices.

However, the bond market is now signaling deflation once again and when that is coupled with stagnant wages, no job growth, a moribond housing market and overall economic weakness, the word dreaded most by Central Bankers, the "D" word, deflation, is now surfacing once again.

If this continues we are going to see QE3 sooner rather than later.