"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, August 14, 2012

Retail Sales Number Derails QE Expectations

This morning's Retail Sales number came in above expectations giving those expecting a Fed move on the QE front at the upcoming Jackson Hole summit reason for pause. The number caught a lot of folks off guard and while it was not spectacular, it was not in the "the consumer is not spending money" category. The market interpretted it as another reason for the Fed NOT TO ACT.

Gold, which had been moving higher in its recent consolidation range until yesterday, immediately fell back on the data as the further squashing of another round of bond buying in early September seems even more remote at this point.

Still it did attract value based buying just above the $1590 level and is currently back above the psychologically significant $1600 level. Whether it can stay there without strong expectations of a forthcoming QE is unclear however.

It does seem as if stubborn strength in crude oil, particularly in Brent, is keeping selling from becoming too aggressive in gold especially with the bonds moving lower and interest rates moving up again. The CCI and the CRB are both higher today which helps feed into more of an inflation scenario rather than the deflationary psyche which has gripped these markets for so long. Additionally, an article in a prestigious European based newspaper dealing with a potential breakup of the Euro has kept a decent floor under the gold price.

A quick explanation for those who seem unclear about my comments from yesterday regarding hedge fund money flows. I mentioned that gold needs a spark to break it out of this range to the upside; one which will bring in speculative flows from the hedgies on the long side of the market to send it forth on a trending move higher. Let me remind those who are unclear on this - hedge fund money flows dominate our financial markets today, whether we like it or not. If they are not committing to a market in size on the long side, it is not going to be able to sustain a trending move higher. Most of that crowd are momentum players meaning that they need to find a market that is moving and has some momentum to it, whether that is up or down, in order to make any money off of their algorithms. For the most part, the hedge fund crowd is mindless relying on its computers to do their thinking for them. When markets range trade, they lose interest because these systems generally do not perform well in sideways markets. Locals and other large traders love these conditions on the other hand.

What is supporting gold on the downside is not hedge fund money but rather value based buying originating out of Asia and from other large entities which actually study fundamentals and make buying or selling decisions based upon that analysis. We curse the hedge funds when they are liquidating longs or establishing new short positions in gold or in silver but keep in mind, it is these same clumsy trading clods that also drive these metals higher when their computers flip over to the buy side. Love 'em or hate 'em, they are a force to be reckoned with; any analysis of the markets that disregards their impact is not worth the paper it is written on.


  1. RE Hedge funds: Thank you for the explanation.

  2. From a cycles stand point, gold's recovery from the lows was encouraging. Charts here:


  3. Dan,

    Appreciate as ever the sober analysis. Range trade has made passing the time profitable while keeping the overall long miner & metal positions intact.

    The ever narrowing range, however, is nerve-wracking. As much as I major Asian physical buying and resumption of the larger trend would mean a breakout up, the opposite would be less than fun. As well, I'd expect no less than an initial false breakout to the downside to knock out some stops / wipe some investors out, before moving upward.

  4. Hi Dan, I read an interesting article on Kingworld recently that said gold made it to $1000 pre 2008 before there was any QE programs at all. Very good point I thought!

    The media seems to have successfully conditioned the masses that without QE gold will go nowhere. They forget about ever increasing paper currency debt as a driver.

    What drove gold to $1000 pre 2008, nearly 2/3 of its gains to date? Would it apply now too?

    Can you perhaps comment on this?


  5. Wouldn't short covering also move this market higher. One would think that there would be numerous players on the short side after the move from the highs to this consolidation range. Stops would be set a bit above the breakout point on a technical standpoint and that might create the momentum needed to entice additional players should that line be breeched. In addition to the hedgies wanting to participate in the new trend higher additional players may jump on board depending on the reason for the move. QE in my humble opinion has been ongoing whether the media admits it or not. Because of this there is an underlying bid in the metals I believe. Just because they don't broadcast it doesn't mean that it is not happening.

  6. Ratio Traders are killing it again. Everyone is now terrified of the 3 most powerful Fed policy tools available:


    Now that the Central Banks are making noises about food inflation, I expect the jawboning to commence any day now, that is why gold is selling off and GDX is once again getting gangtacked by the "Ratio Traders".


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