"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, July 12, 2011

Gold breaks out; ready to take on its all time high

Judging from the price action in gold, it seems as if all three factors that are currently driving this market are gelling together into one powerful inducement to buy the yellow metal. As discussed in my recent radio interview over at King World News on the Weekly Metals Wrap, sovereign debt fears originating out of Europe, inflation fears in China and elsewhere in that region of the globe, and a continuation of the extremely loose monetary policy currently in place by the Fed are producing a toxic mix for the bears in the gold pit as buying momentum is driving them back as bidders are overwhelming their offers.

Gold was strong all evening last night with buyers eager to snap it up below $1550. That was a good technical signal that dip buyers were coming in and that long side liquidation was not going to be a problem this time around. As the market moved into the early part of the New York trading session, it held well even as sellers were making an appearance near the $1555 level. Once the minutes from the Fed's recent meeting were released, it was Katie bar the door as traders rightly interpreted those minutes to read the strong possibility that additional monetary stimulus in the form of another round of QE will certainly be forthcoming should the economy remain stuck in its current moribond condition. My pal Jim Sinclair has been saying this for quite some time now and I have been echoing the same - namely - the hawks on the FOMC have gone into hiberation and the doves are currently in the ascendancy. Unless we get some real humdingers of economic reports coming our way, chances are very good that a few more stinkers of a job reports are going to get the QE guns a blazin' again. This goes back to the third of the points I raised at the beginning of these comments - Fed monetary policy is not going to turn tight any time soon and such an environment is strongly bullish to gold.

Gold now is in position to challenge its all time high. It is difficult to see how it will not best that level if conditions in Euro land continue to deteriorate. Downside support lies first near $1550 on followed by $1530.

Regardless, once these minutes began circulating around the wire services, the gold market saw a strong influx of fund buying that drove the metal right through overhead resistance centered near the $1560 level and shoved it to within a few dollars of its recent all time high. I also noted that the US Dollar, which had been very strong coming into New York and looking as if it was finally going to get a strong close over the stubborn chart resistance near 76.50 on the USDX chart, simply fell apart and sank well off its best levels of the session, once again failing to close above that critical level. That Dollar weakness then saw another round of commodity buying by the hedgies in general which benefitted silver, although it moved into the plus column once gold took out $1560.

My read on all this price action was the speculative side of the market was already looking ahead for more QE and was loading up on the long commodities/short dollar trade once again. In other words, risk was back in even in spite of the fact that many investors and traders are extremely worried about what is transpiring in Europe.

Where we stand now is very simple - gold once again scored brand new all time highs when priced in both terms of the Euro and of the British Pound - and is within easy striking distance of its all time high in US Dollar terms. This is signaling the lack of confidence in the respective monetary authorities of those nations and in their political leaders to take the necessary steps to actually get to the root of the structural problems that have led to their terrible fiscal condition.

I might make mention here of the Japanese Yen. Remember that big, coordination intervention by the ECB, the BOJ and the Fed to knock the stuffing out of the Yen after the tragic earthquake and tsunami hit struck? The Yen is within 3 1/2 points from its strongest level, or the high point, from which it rapidly descended when the Yen selling spree by these Central banks began. In hindsight, we can now see how even coordinated intervention cannot completely reverse a currency's trend if speculative money wants to keep coming in and buying up that currency. The Yen rally is tied to more risk aversion trades as the carry trades using that particular currency get unwound driving it higher in the process. There is also a type of trade which takes the Yen as a type of proxy for the entire Pacific reason, and just bids it up as trading the Yuan is not nearly as liquid as the Yen or even the Korean Won for that matter.

The mining shares withstood all of the selling pressure originating from the weakness in the broad equity markets today as traders were drawn to them on account of the strength in gold and the later-session climb in the silver market. After moving lower yesterday and furthering distorting the HUI/Gold and XAU/Gold ratios, the shares appeared to be undervalued against bullion.