"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


Friday, January 20, 2012

Ten Year Note Interest Rate Rising

The Ten Year Note Interest Rate has been trading in a range between 1.80 and 2.10 or so for the better part of the last three months. Rates would move higher on improving economic data coming out of the US or China but then retreat on any sour news particularly coming out of Europe.

This week saw rates drop on Monday and stay stagnant on Tuesday but for the remainder of the week, they were on a tear higher. This is attributable to changing sentiment in regards to the global economy, especially in relation to fears surrounding the European debt situation. When traders saw French and Spanish debt finding buyers, they dismissed contagion fears and rapidly shifted from risk aversion trades to risk trades. In other words, they dismissed Deflation concerns and began leaning towards Inflation concerns in association with the tremendous amounts of Central Bank liquidity being supplied to deal with these issues.

Note this chart carefully for it is, in my opinion, a roadmap as to where Silver is headed in particular and to a lesser extent, gold.  There is the POTENTIAL, (please note the emphasis) for rates to have bottomed. If that is indeed the case, then we are going to see strong rallies in Silver and in gold as the inflation trade (RISK ON) will be back in vogue. I would want to see this chart get a WEEKLY CLOSE above 2.25% to feel that we are now leaving the period of low interest rates behind us. Keep in mind that we could still see eruptions out of Europe at any time and that is going to keep traders on edge a bit but if the investing/trading community becomes convinced that we are now past the debt meltdown stage and will be dealing with INFLATION next, then this chart is going to show it.

Certainly, if we get that weekly close above 2.25%, then precious metals should begin to react accordingly as risk capital, that has been on the sidelines begins coming back into both the gold and silver markets.

As always, time will tell. We do not need to be soothsayers or attempt to divine patterns in those silly wave charts to realize that a changing interest rate environment will signal the onset of a new period of investment factors that will have to be adjusted to.

Silver on Track to Challenge $32.50

ON Wednesday of this week, silver finally managed to get a CLOSE above strong chart resistance at the $30 level. The next day, while it was unable to advance much, it refused to back down below that resistance level and eked out another close above $30. Two consecutive closes above a strong chart resistance level and the bears had no choice but to begin running. Fresh money is now chasing them out as it appears that the hedge funds are beginning to move back into the grey metal after having fallen out of love with it in December of last year.

The technical chart picture is much improved with all momentum indicators now in a bullish mode on the daily chart as price is trading ABOVE the 50 day moving average in today's session. The 20 day moving average is now turning higher indicating the short term trend has flipped up. The 50 day should prove to be some support if we get some retracements lower.

A strong finish to the session today will set this market firmly on track for a test next week of another band of formidable chart resistance centered near the $32.50 region.

Note that the short term downtrend line drawn off the August 2011 peak was broken last week but that horizontal resistance at $30 had not as of yet fallen until it was bettered this week.

If the bulls can take out $32.50 next week, they should have relatively clear sailing all the way to $35 which is where one helluva battle royale is going to be waged by the perma bears. If that group fails to stem the advance, this market has a real shot at launching an upside trending move.

It should be noted that the move higher in silver is being accompanied by a sharp move LOWER in the bonds. Bonds are breaking down on their price chart indicating the LACK OF RISK AVERSION trades at the current moment. Keep in mind what I have repeatedly said - Silver will outperform gold in an environment in which RISK is IN. That is what the movement in the bond market is suggesting.

Only a sharp reversal to the upside in the bond market would derail the move higher in silver as it would be accompanied by a downside move in equities and a move higher in the US Dollar once again. Such an event would signal that investment funds would be back to shunning risk with money flowing back out into cash and cash equivalents and away from "risk assets".