"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, April 27, 2012

US Q1 GDP grows 2.2% - Copper moves Higher?

This morning's big news item was the fact that US Q1 GDP growth came in at 2.2%, well under expectations of 2.6% growth predicted by analysts and well down from Q4 2011 growth of 3.0%. Under "normal" circumstances, such a number would have been expected to put downward pressure on the bellwether copper market. 'Twas not the case however as copper shot up on the news bursting through the 50 day moving average in the process. What gives? Simple - we are now in an environment in which the more bad news we get, the more optimistic traders are becoming that the next round of QE is coming right up.

That is what gold began sniffing out in yesterday's session and appears to be continuing today. We have been accustomed to seeing these rotten numbers generate the risk aversion trades, trades in which commodities in general are dumped and the Dollar is bid higher. We are now seeing a change in trader perceptions, which after all is what runs markets, in which the steady trickle of news showing a deteriorating growth pattern in the US is being met with increased expectations for QE sooner rather than later.

In other words, it is QE ON instead of RISK OFF.

As long as this perception continues, gold is going to move higher. The trick is just how bad do traders think the news has to get before it forces the hands of the Fed.

I think it should be noted here that we also have politics at play as far as the Fed is concerned. Governor Romney, the presumptive Republican nominee for President, has made it clear that he is not a big fan of Chairman Bernanke. Bernanke serves at the pleasure of the current President Obama. If Obama loses the upcoming election, Bernanke is OUT AND HE KNOWS IT. Now, maybe he no longer wants to play MASTER OF THE UNIVERSE, but methinks very few men are able to gladly relinquish such power. My guess is that he is going to make sure that if his boss goes down in flames at the next election, at least it will not be on Bernanke's account for not acting to keep the markets from sinking lower.

Bernanke has also kept the door open for additional QE but coyly suggests that the time is not just yet. In other words, he is keeping his options open but does not want to get too assertive about it precisely because of what we are now seeing occur in some of the commodity markets such as copper. If traders become CONVINCED (they are not there yet but leaning in that direction now more heavily) that Bernanke is going to pull the trigger on the next round of QE, they will bid the price of essential commodities higher so quickly that if you snooze you will miss it! The Fed Chairman is trying to keep that from happening, particularly with energy prices. He already has a problem with the grain markets, particularly soybeans; the last thing he needs is for crude oil to take off to the upside because the hedge funds go giddy on him.

REmember that the Fed's game has been to talk up the stock market but try to talk down the commodity markets. There are only TWO MARKETS that the Fed wants to see going up - EQUITIES AND BONDS. They want everything else going down, including the Dollar, if they can accomplish that.

This brings us back to gold - it continues to exhibit strength but has not yet cleared the single major hurdle preventing it from tearing higher, namely that stubborn $1680 level. It is creeping closer to this barrier but has not yet managed to test it. Perhaps that will come next week. We will see. One thing is for sure. All of the usual suspects who were so giddy and so presumptuous to declare the bull market in gold is over, are going to look like buffoons if Bernanke and company indeed pull the trigger and fire off another round of QE.

Besides, with China buying oil from Iran and paying for it in gold, as my pal Jim Sinclair has so brilliantly noted, the game has changed as the Western powers are being served notice. One wonders if they even get the message.