"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, August 10, 2011

CME GROUP hikes margins for gold

Effective as of the close of trading, margin requirements for gold are being raised from $6,075 to $7,425 for new positions and from $4,500 to $5,500 for "current maintenance" margins. WE had expected this to actually come a bit sooner than it did on account of the extreme volatility and extent of the intraday price moves that have recently been taking place in gold. This is a normal occurence in bull markets which begin to see large moves in price and is designed to protect the integrity of the clearing houses and of the brokerage firms, which can set their own margins for their customers.

Apparently the announced hike has not impacted gold the least as it continues to trade above $1,800 at this hour and as of yet shows no sign of weakening.

Gold Open Interest readings indicate a panic among some of the Bears

Please see the following chart along with the notations I have placed in it for some insight into the distress currently being felt by the gold bears at the Comex. This is one of the reasons that the price of gold has been moving up so sharply - forced short covering is occuring as panic sets in on the part of the bears. Only the strongest shorts are going to be able to sustain their positions in this type of squeeze. We'll have to see how far this wave of short covering can take things before all or most of the weak-handed shorts have been run out of this market. Things could get a bit dicey for the longs after that.

Gold setting new record highs above $1800 in the Kangaroo Session

As trade moves into the Australian morning, gold has shot up above $1800 and has set a brand new all time high above $1,810 reaching to near $1818 as I write this. The market is accelerating higher as fear levels ramp up.

It would seem that any euphoria induced from the FOMC statement of yesterday has been long forgotten as fears of European bank solvency are now taking center stage in the minds of traders/investors. There are enough rumors floating around out there that denials from large bank officials are the order of the day.

Traders are fearing a type of meltdown similar to the 2008 credit crisis here in the US which was triggered when Lehman went down and a domino-like toppling of major firms commenced. Regardless of the reason, those who were trashing gold as a safe haven are now having to stutter and mutter their way back to the obvious. Not only is gold going on to make new lifetime highs in US Dollar terms, but also in Euro terms, and in other major currency terms as well. It is functioning as a currency of last resort.

I had to marvel at the comments coming from some of the guests on CNBC today who when asked by the anchors about where investors can find some sort of place in which to hide from the carnage were oblivious to the simple answer - gold. For Pete's sake, what kind of savvy does it take to at least speak the word (gold) when it is making one record high after another. I kept hearing the same thing from some - "Buy large cap stocks that are DEFENSIVE holdings" - oh sure - that means buy something that is going to lose me LESS money than some tech stock.

What about some seriously undervalued mining stocks to go along with gold bullion? After all, on a day in which the equity markets were bleeding red, the HUI and the XAU were noteworthy in their strong upside showing, in spite of the fact that such heavy volume down days have tended to drag them down in the past.

Note that since the bottom reached during the height of the credit crisis which erupted in the summer of 2008, that the HUI has outperformed the S&P 500 over this same 3 year period - and this comes on the heels of a ratio spread trade by the hedge funds who stupidly have insisted on using the miners as the short end of a spread trade instead of using them as the long leg of a broader equity market spread position as I have been advocating for some time now.

While it is certainly nice to see the mining shares divorce themselves from the broader stock market performance for another day, they are still lagging the gains in the metal itself and have a lot of catching up to do. All it will take for this sector to move sharply higher is for the first wave of short covering to begin among some of the hedge funds in earnest. The trigger could very well be acquisitions of some juniors by majors hungry for new properties that could go into production right away or a serious incursion of Chinese investment money into firms with excellent prospects.

Bernanke and company punishing Savers in their efforts to jam the equity markets higher

I want to make a quick point here as a type of follow up to my comments from yesterday regarding the Fed's intentions to run investors out of bonds and into equities in search of yield.

Think about the horrific effects that this stupidity is having on our senior citizens and those who are retired and attempting to live off of the interest on their life's savings. They have none!

What are they supposed to do? Hire some hot shot hedge fund manager to get them into the latest and hottest IPO?

Bernanke and his pals at the Fed are turning the entire nation into a generation of wild-eyed speculators all in an attempt to get a decent rate of return on their saved wealth.

Don't forget this segment of the population when you hear some double-talking politician or monetary authority flapping his mouth about how the Fed is trying to "help".

Punish savers and reward debtors - Welcome to America in the new millenium.

Central Banks losing in the Wars of Currency Interventions

It was just last week that we witnessed the Bank of Japan intervene into the Forex markets to derail the Yen's rally back towards the former intervention level. It had completely erased the losses that it suffered after the round of coordinated intervention by the BOJ, the ECB and the Fed back in March of this year. It was evident from their action that the Ministry of Finance was dealing with political pressures from industry leaders whose exports were suffering as a result of the surging yen and were complaining quite vocally about its levels. Out came the intervention gun by the BOJ and down went the Yen.

But look out! The Yen has come back once again and it has only taken it FOUR TRADING SESSIONS to erase all of the losses that the intervention had resulted in. Talk about a gigantic waste of resources by the Central Bank!

The problem is the sheer volumes of liquidity that are tied to carry trades using the Yen as the funding currency. Traders continue to unwind those trades and run from risk with the end result being a repurchasing of the Yen. That buying is overwhelming any efforts by the Japanese monetary authorities to rein in the Yen.

There is now an effort by the SNB (Swiss National Bank) to derail the Swiss Franc, which is also attempting to take the Franc lower as it has been the recipient of huge inflows tied to safe haven flows. I expect that they will meet with the same "success" as has the BOJ.

Based on what I am seeing, the Central Banks have now become victims of their own policies. They created this beast of liquidity in an attempt to preserve the status quo and now that it is surging back towards their own shores, they are powerless to stem its tide.