"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, December 20, 2012

Macro Trade Day

If you look at the following Continuous Commodity Index chart ( CCI ), you will see that it is sharply lower today. Even LUMBER, which has been on a tear higher is moving lower today. There are very few commodities that are not in the red today.

For whatever reason, hedge fund longs are dumping commodities across the board. I find that rather interesting to say the least, especially with another $1.02 TRILLION in QE coming our way next year. Some are blaming the sell off in gold and silver on the stronger-than-expeced GDP number this morning, but once you get through the headline number, you realize that the feds used a highly dubious inflation number for their "deflator". The chatter on this number was that it "was so much better than expected that it casts doubt about the longevity of the Fed's QE program". Try to stop laughing here.

Out of that 3.09% growth rate for the third quarter government expenditures were responsible for 0.75% of that number. In other words, nearly a quarter of the stated growth number is due to government spending.

Hidden deeper within the report is the fact that personal savings shrank during the quarter as did household per-capita disposable income. What this usually translates to is that consumer spending increases are not coming from rising incomes but rather from either a drawdown in their savings or from increased cash flow due to home mortgage refinancing. My guess ( and perhaps some enterprising reader can run the data to check ) is that consumers are ramping up those credit card balances once again.

Either way, the idea that the Fed is going to suddenly begin thinking seriously of drawing down its balance sheet sooner than expected based on this data is whimsical to say the least. Besides, my view of the QE programs is that it is designed FIRSTLY to keep US government borrowing costs lower and then SECONDLY to keep the big banks happy with very little daylight between item FIRST and item SECOND. If you think the US government's fiscal condition is now a mess, wait 'til you see what happens to it if interest rates start moving higher and the cost of servicing that mountain of debt comes back to bite them ( and us).

Now, if you want to hear another view as to why gold and silver are going down - hold onto yoru hat here: Traders fear that the breakdown in the "fiscal cliff" talks will result in the automatic spending cuts kicking in next year and reducing GOVERNMENT EXPENDITURES while tax rates rise thereby throwing the country into recession and reducing industrial demand for silver and putting pressure on gold in a deflationary environment.

Hmmm - back when I took logic in school I learned what I thought the real world actually believed - that two mutually incompatible things cannot both be true. "A" and "Not "A". But surprise, that is not how the financial world apparently operates. You see - economic growth is proceeding at a much faster rate that we were thinking giving us hope for a continued improvement in the US economy of such magnitude that the Fed is going to discontinue QE sooner than expected.  TRUE

The fiscal cliff talks are not proceeding well meaning we are going to get severe spending cuts meaning government expenditures will not be there to support the GDP numbers and economy meaning that the growth rate is going to slow and thus the economy will slow with it. ALSO TRUE.

Yep - there you have it. The economy is growing well; the economy is not going to grow well. If you can make any sense of this lunacy, please clue me in because I cannot wrap my pitiful brain around this no matter how hard I pretend to be a hamster on a wheel.

Let's move over to gold however. The bears had been greedily eyeing that 200 day moving average for downside sell stops. Strong physical market buying had stymied them however. Today, that buying dried up long enough to allow them to reach those stops and down she went. Volume is pretty heavy meaning a sizeable flush is occuring with a big transfer out of weak hands into strong hands taking place.

Some have questioned why Central Bank buying is not showing up. Rest assured; it is!

Here is a look at the chart around midday today. Note that 200 day moving average and how the market accelerated to the downside once that was taken out. By the way, there was a rash of put options that were bought earlier this week so someone made a lot of money in a very short period of time.

Gold has now reached the next level of chart support shown here. That comes in between 1640 - 1630, an area denoted by horizontal support drawn off early highs as well as the intersection of two different Fibonacci retracement levels. So far this region is holding the metal. If it fails for any reason, we will more than likely see gold down at $1600 - $1590 very quickly. For this market to have bottomed, we will need to see it move back above that same 200 day moving average and hold above that level. This moving average tends to attract buying or selling based on the algorithms of the funds so there will be a tendency for funds to try to sell against this level. If that selling is absorbed, one can feel very confident that the market has bottomed.  so far we are still looking to try to confirm a support level but the jury is still out on that as of now.

The HUI is providing ZERO help at this time. As you can see on its chart, there is not much in the way of chart support under this market. It might, MIGHT, be able to bounce off that former downsloping trendline that held it in check but if that fails to stem this collapse, then it is going back to 400 or even 390.


  1. Dan,
    Thank you again for helping us understand what is going on.

    I still do have a question (the same one I have been asking in different ways with NO response from anyone): Why don't we take the manipulators to court? The Libor's manipulators are being charged but it looks as no one is doing anything about the gold manipulation.

    Any answer?

    1. Hubert;

      It would have to be proven beyond a reasonable doubt that the Fed was using the big banks as their proxy. That would be tough enough to do.

      Then on the other hand you might end up with these guys claiming to be agents of the US government and therefore out of the reach of litigation.

      Remember what Barrick did back when it was being sued by Blanchard?

    2. Dan,
      Thank you for your reply.

      For me, if I were going to sue someone it would be the banks NOT the FED. Go after the weakest links.

      I know banks are not weak and are paying billions in penalties following successful litigations against them and are getting these lost billions back from the FED.

      However I heard your message. Thnk you again.

  2. Hi Dan,

    Thanks as always for your take on the day's events. Could you please provide some support levels for silver in addition the gold chart you provided? It doesn't have to be a chart, I just need to know where we stand in silver as this is my main interest. Thanks!

  3. What do you make of the idea that Paulson is having to liquidate positions due to Morgan Stanley dumping their funds? You noted the raft of put options bought recently and I was thinking earlier I wonder if Paulson bought a bunch of puts prior to dumping so he could get out fast and make up the losses on the puts. Too ridiculous?

    Confounding to say the least.

  4. "Either way, the idea that the Fed is going to suddenly begin thinking seriously of drawing down its balance sheet sooner than expected based on this data is whimsical to say the least."

    No it isn't

  5. Unknown,

    It's pretty obvious the headline unemployment numbers are a sham for public consumption only. Do you really believe that's the Fed's "go to" number when figuring out what to do in response to unemployment?

    From the statement:
    "...the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."

    "...and currently anticipates that this exceptionally low range of the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent..."

    "In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions..."

    Further, "When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment..."

    Guessing about the future unemployment rate is one sort of folly. Taking such a figure and sticking it into a 6th grade math formula to determine the outcome of central bank policy is stupidity.

    I don't believe for one second that there is any rational, fundamental-based analysis causing this sell off. I believe the Paulson liquidation story before that. At the very least I think the large number of put options that Dan mentioned in his piece are evidence that the actor performing the liquidation is the same who hedged with the puts in order to come out clean after they get done playing wrecking ball.

    1. flaunt, look at the guy's charts. His model has predicted the unemployment rate pretty darn well. Also, the guy is hardly dabbling in 6th grade math. He's a physicist. You can check out his website here.

      As for the FOMC, they may indeed leave rates at or near zero for a bit after the unemployment rate reaches 6.5%, but that will clearly be a signal they do not expect it to remain at zero for much longer afterwards.

    2. Consider the very likely possibility that the Fed is actually engaged primarily in a currency war, with "full employment" being mainly a cover story. Also consider the fact that the CPI calculation is extremely distorted to under-report real life costs of living and there are moves afoot to distort it even more. Factor in the language in the FOMC statement about examining "other factors" in the labor market.

      I think the reasonable and conservative conclusion is that the Fed will be engaged in QE and maintain extremely low rates at least throughout the year of 2013.

  6. Unknown,

    What happens when rates rise as you predict they will? How much more borrowing does the government. Have to do to cover the higher interest payments on the govt debt?

    It's simple math.

    Rates rise means game over.

    1. If interest rates rise, it will be because the economy is doing better. If the economy is doing better, the government will collect more money from tax revenue, as always happens when the the economy does better. This will negate whatever additional money the government has to pay out via higher interest rates, and possibly even be a net positive, depending on how *much* stronger the economy gets.

      Remember, Greenspan raised interest rates in the mid-90's. We were running a deficit before that, but it wasn't long afterwards when we started running a surplus, because the economy got much stronger.

      Finally, as recently as the spring of 2010, the yield on the 10-year got almost up to 4% (it's less than 2% now). No reason it can't get that high again.

  7. Dan wrote, "My guess ( and perhaps some enterprising reader can run the data to check ) is that consumers are ramping up those credit card balances once again."

    Dan, as of November 30, personal income was up 4.14% yoy; as of October 31 (November not available yet), seasonally adjusted personal credit outstanding was up 6.01% yoy. Revolving was +1.05%, nonrevolving was +8.41%. Total consumer credit outstanding as a % of disposable personal income is back up to ~23% (it was ~21.5% at the beginning of the year). So much for the "great deleveraging"...

    1. Power Corrupts - thanks so much for running down those stats. Those are most revealing. Looks like the Fed is getting the "animal spirits" revived again. More liquor in the punch bowl should do the trick - so much for being the responsible adults!


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