"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


Monday, July 16, 2012

Same Play - Second Act

Nothing has changed in the complexion of the gold market for nearly two months now. It is rangebound in a consolidation pattern. What this means is quite simple - all predictions of gold either collapsing or soaring are just that - predictions - the truth is until this market breaks out of its trading pattern, no one knows with 100% certainty exactly where it it is going or what it is going to do next.

The best traders never hurry a market nor do they curse it because it does not act like they want it to do - they just accept it for what it is currently doing and watch for an opportunity to act.

Having said that, most floor locals are enjoying this range trade - they put their kids through college in these kinds of markets since they are able to sell at the top of the range as they watch the order flow and buy it all back near the bottom of the trading range, again, as they watch the order flow. In the event the market deviates from its pattern trade, they will go with the breakout and see how far it can run before the momentum ebbs.

Most novice traders will buy near the top of the range, expecting a breakout, only to watch the market reverse on them and stop them out with a nice fat loss. They will also sell near the bottom of the range as all the bearish analysts and prognosticators surface, only to watch the market snare them in a bear trap and snatch their money away from them.

To be successful, one has to recognize the pattern a market is in and respect it.

I obviously have a long term bullish bias towards this metal due to what I know is happening in the currency markets and the actions of the Central Banks and other monetary authorities. I do also know however that until the MAJORITY OF TRADERS become convinced that the next real thing to FEAR is INFLATION, gold is going to have trouble maintaining any rallies.

As I have stated here many times over the last two months - the current mindset of most traders is one of fearing a global slowdown or deflationary pressures. The only thing that snaps them out of that is anticipation of further Central Bank activity along the monetary stimulus front.

Another way of saying this is that the ONLY THING PREVENTING AN OUTRIGHT WAVE OF SELLING PRESSURE ACROSS THE RISK ASSET SECTOR IS HOPE FOR FURTHER CENTRAL BANK LIQUIDITY PROVIDING MEASURES. Whenever the market thinks that the economic data is rotten enough to pressure the Fed into acting on the monetary front, they will bid up both equities and commodities in general. Whenever the opposite is true, and the market is depressed as it loses hope for any immediate or forthcoming stimulus, down goes the equity markets and the commodity markets, in general. (As stated before, the fundamentals in some markets are so strong, as is the case with the grains, that they can defy the general RISK OFF Trade).

Until we get some sort of resolution to this stalemate, the odds favor a continuation of the current trading pattern. As usual, we will be closely monitoring price action to see if we can spot any potential shift in this current sentiment.


  1. Does not matter how much money gets printed if there is no money VELOCITY happening (which there is not).

    That has been the ERROR of the gold bulls when consumers froze up again last autumn and this spring - separated by that brief period of misguided optimism in the winter.

    With grain and food prices set to soar for consumers, and retail buying/confidence plummeting, money velocity will stay stuck in low gear, or possibly even downshift.

    Gold more likely to break lower than higher from consolidation. Silver almost certain to plummet.

    Just my opinion, I could be wrong.

  2. <<Does not matter how much money gets printed

    Not sure I agree with this if you look at the effect of QE1 & 2 on the price of gold. Price has rocketed despite a lot of the cash laying fallow.

    I think money printing (fear of inflation) and inflation itself will drive gold to new all time highs as Dan says.

    This food price inflation should therefore help drive gold up out of its current range. I'm personally not expecting any more actual Fed printing till much later in the year.

    Also the debt ceiling debate should give us some more upward momentum. The US will need to raise it once more before the year is out, check out the following graph:


  3. Hats of to Dan for this cold blooded, objective, sensible analysis.
    Hats of to the Fed, too, which will achieve its objective of keeping the S&P in levitation, without even having to launch QE3. For by the mere thought that QE3 may happen, investors keep bullish on the stocks! :)

    If stock markets plummet, there is an interesting post on zerohedge, which states that SP 500 would have to reach at least 1200 before the Fed can "come to the rescue" with a new round of QE.
    As long as we are not deep down back into deflation mode or markets plumetting, Fed has no need to hurry to activate the printing press...

  4. By the way, Dan, as I read that 61% of 2011 US T Bonds were bought by the Fed...and with current 10 years rates so low, seeming to indicate a rush towards these bonds, do you have any idea who is buying these?
    Investors and banks rushing out of the euro and looking for the dollar "safe haven"? If so, I'll sit back and watch the boomerang effect on gold when they realize that the dollar is no longer a safe haven, too.

  5. Seconding Henri's comment--that's for the clear eyed analysis.

    Will remark on 2 things: First the utter complacency of the market (S&P/DOW), where we NEVER see a down day exceeding .3%, run ups in the last 10 min of trading to ameliorate losses, and a VXX that has flat lined. This when commodity based issues regularly have 4+% swings (not XOM mind you). Scary in the face of this recession / deteriorating data.

    Second, CALPERS earned 1% for 12 months ending June 30th. Target return 7.5%. The nation's pension funds cannot abide that. That potential disaster begs some sort of inflationary policy...


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