"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


Tuesday, June 14, 2011

Crude Oil mired in a sideways rut

Commodity complex action reflects trader/investor uncertainty

Gold and the summer doldrums

The summer months are TYPICALLY not a particularly strong period for both of the precious metals. A lot of traders in the West are taking vacations with their families as the kids are out of school. Then there is  the lack of the far East festivals during which large amounts of gold are generally purchased for gifts.

This summer will be very interesting however as the Fed ends its QE2 program in two weeks time. As we get nearer this date, many traders are going to be particularly interested in seeing the kind of economic data releases we are going to be getting from the feds. If the data continues to deteriorate and disappoint, there will be growing pressure on the Fed to "do something". I have already mentioned that there will also be pressure from some in political positions to get some sort of stimulus from the government (in some quarters the complaint is that the former programs were "too small"). I do not think that will happen however as the Republicans control the House of Representatives and they are in no mood to spend and further worsen the deficit. As you know, a growing battle over raising the federal debt ceiling is now fully engaged. The notion that the Republicans will allow any sort of additional stimulus-type deficit spending is wishful thinking on the part of some as those legislators who might be inclinded to vote for it, will find themselves being primaried by the Tea Party.

That means if anything is going to occur, it will be left up to the Federal Reserve. Do they act and kill the Dollar in the process or do they cross their fingers and hope and pray that the economic data improves? What happens if the S&P 500 takes out the critical 1250 level? Then what? Remember that the Obama administration now fully owns this economy and if the stock market tanks further and consumer confidence plunges even further while on its watch, kiss his election hopes goodbye. The entire Democratic party knows that their fortunes are tied directly to the well-being or lack thereof of the US economy. It was thanks in no small part to the plunge in the stock market in September 2008, that Mr. Obama found himself and his party with complete control of the federal government. Should the economy remain as pathetic as it currently is, their party will be the ones getting a good old-fashioned ass-whipping at the polls in 2012.

I have said all this to prime the way for the analysis of the gold market and the Dollar. Right now both markets are in sideways patterns waiting and watching and pouring over every single bit of economic news, no matter from what source, in an attempt to glean what the next move of the Fed will be. Today we got news that the Chinese economy did not slow as much as some had expected (funny how the Chinese naysayers continue getting it wrong over there). That set off a huge short covering squeeze in the broad US stock markets as bulls pushed the shorts out  on the idea that the global economy was not slowing quite as much as some were anticipating or fearing. Sales numbers were also not as bad as expected. When markets get lousy news that is not as lousy as they initially feared, they go up. That is what happened today.

That same news and stock market reaction pulled the rug out from under the long bond which had a huge down day losing over a point and a half. The thing with the bonds however is that the first bit of bad economic news once again, and back up they will go while the stock market goes right back down.

Market conditions like these are extremely dangerous to trade for all except a handful of day traders and players with expensive computer algorithms who think nothing of reversing yesterday's trade completely or even last hour's trade. TRend traders had best forget about it if they expect to pile on large positions. the only thing that will lead to is a dwindling trading account. Be smart - trade smaller and forget about the big score. Your number one priority is to stay alive and be there for the next trending move when that eventually does arrive.

As far as the gold market goes, the chart is self-explanatory - it is range bound having failed to take out $1550 on the top and it is now drifting lower to see where buying will be uncovered in decent size. We should get a bit of a better feel how this market is going to fare for the rest of the summer as we actually arrive closer to the end of this month. For now, do not read too much into a single day's price action. Half of these damn hedge funds have no idea what they are doing anyway. AS a matter of fact, I would venture that 2/3 of them don't.