"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


Thursday, July 14, 2011

Bernanke trying to walk back expectations for QE3

The past couple of days have seen the commodity markets wake up as hedge fund money flows have poured back into the sector with that community rightly interpreting the recent FOMC comments as signaling that another round of QE (this time QE3) was soon to be on the way.
We have been led to think that any further sluggishness on the part of the US economy to gain its traction was going to be met with further monetary accomodation.

The problem for the Fed however was that the hedgies had the temerity to shove the energy markets higher and ended up pushing crude oil to within striking distance of the $100/bbl mark. They also pushed gold into a new all time high in Dollar terms; something which caused Chairman Ben to make a total buffoon out of himself as Ron Paul's intense cross-examination yesterday resulted in what will soon become the infamous, "Gold is NOT MONEY" statement to somehow excape the confines of his lips.

The hedgies should have known that was a big NO-NO. Thus instead of "ENTER THE DRAGON" starring Bruce Lee we get "ENTER THE DRAGON" starring Ben Bernanke who proceeded today to administer a nice snap kick to the current market psychology as he basically walked back traders' expectations on QE3. His comments derailed the rally in stocks and send money flowing OUT OF the energy markets and some of the food markets. It also led to both gold and silver coming off their best levels of the trading session.

I have said it before and will say it again - the Fed wants to have their cake and to eat it too. They want the hedge funds to bid the price of equities into the stratosphere. Their plan is actually very simple - once the stock market moves higher, 401K's and other pension and retirement plans will be showing nice gains on the year. The public will then be able to say: "My house value stinks, my job stinks, my wages stink, gasoline prices stink, Corn flake prices stink, but at least my 401K has made me some money. I will henceforth proceed to begin spending money and buying more STUFF". That of course will be reflected in a boost in consumer confidence numbers, increases in retail sales and increases in corporate profits who will then happily turn on the jobs spigot and begin hiring gobs of people. The other piece of that cake however is that the hedgies are not playing ball. They are not going to tell Uncle Ben that; "We will buy equities but will leave those nasty commodities alone and will of course not buy crude oil, gasoline, corn or anything else" that might actually impact the inflation numbers and tie up what is left of consumer disposable income.

So what happens? They come in and bid up the price of energy and food and Ben has to go and deal with that brush fire and attempt to stamp it out while at the same time not stamping too hard lest he stamp on the stock market rally and send the equity markets in the wrong direction. Like I said, they are attempting to play the hedge funds like a finely tuned fiddle and get their lemmings to behave properly which means leave commodities alone and only buy stocks.

Once the comments became more widely circulated, gold has encountered selling pressure just above the $1590 level which is keeping it from making a push at $1600 and testing that nice even round number. Bernanke sowed just enough uncertainty now that he has produced enough hesitation on the part of the bulls that they are unwilling to push hard enough to take it through $1590 and hold it above that level. We do have a lot of new buyers at these higher levels so we will have to see if this thing can quickly push up towards $1600 or the short term guys will dump some longs and temporarily stymie some of the strong upward action. Medium term and longer term oriented guys will be looking for another buy-in point a bit lower should that occur and we will be able to catch that on the charts.
The break into new all time highs across three major currencies, the Dollar, the Euro and the British Pound, is ample proof that the market is attracting a great deal of buying. Those factors responsible for this remain firmly in place and while the INTENSITY of fear or distrust in the respective monetary authorities may ebb and flow somewhat, the root causes are not going anywhere.

What we will need to take it up past $1600 is some more food for the bull that is of a fresh nature. We have the three factors I mentioned the other day that are driving gold but those are all currently baked into the market so we need something from another source or a development from another front to give the bulls reason for another strong push higher. Italy supposedly has agreed to some sort of austerity package so that has temporarily taken some of the immediate concerns related to a further sovereign debt issue eruption off the table somewhat. Remember however that these problems are deep-rooted, structural in nature (too much government spending and too slow growth) and are not easily solved because of the social implications. For the time being however the urgency to push gold strongly higher has abated due to that development especially when it came in conjunction with Bernanke's attempt to damped down QE3 expectations.

There should be some light chart support near the former all time high of $1578 with better support down near the previous breakout level at $1560 followed by our old friend at $1550. For the bulls to extend the gains and set the market up for a run to put a handle of "16" in front of the metal they now need to clear today's peak and new all time high at $1595.

Incidentally, the US Dollar continues its Yo-Yo like action as it once again fell BELOW the 50 day moving average but has since recovered (after the Fed chairman's comments) that level. It failed to hold 76.50 on the top and went down to test the bottom of the recent range but this time attracted buyers up a tad higher than previous trips to the downside. The level near 75 seems to have held for now. Bears need to take this out with authority to run it down to 74.50.

Silver ran into some selling pressure due to the reasons impacting gold today. Technically it has managed to clear two significant resistance levels on the price chart. The first was near the $37 level and the second was a bit shy of $38. It needed to push through $38.75 - $39.00 in order to set up a test of the $40 level but has been unable to hold its gains and keep its footing above the latter level. Bulls will need to assert themselves here.