"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, June 15, 2012

"Heads - I Win; Tails - You Lose"

That's the attitude that gold bulls have apparently adopted heading into this weekend's crucial Greece vote. Whereas yesterday seemed to be a day of caution among traders, today seems to have morphed into a day of expectations of the punch bowl, complete with accompanying hard liquor, being filled to capacity by the Central Banks of the West.

If the Greece vote turns out to be one which threatens the stability of the Euro and sends shock waves through the foreign exchange markets, traders are convinced that a large bouquet of liquidity is coming their way early next week. If the Greece vote turns out to be one in which the party favoring the austerity measures imposed upon the country, then the market will give a collective sigh and the RISK ON trades will be back in vogue - at least until Spain or Italy go kaput.

Either way, we seem to have generated buying in the gold market. Not that I am complaining, being a friend of gold, but I must honestly admit, the entire scenario seems repugnant to me in just stepping back and observing what our economic system, not only nationally, but globally, has degenerated into.

I know the drug addict comparison is old and worn out by now, but it sure as hell seems to me to be the best description of today's financial markets. The problem for the druggie is not that he or she is showing withdrawal symptoms - that is the evidence of an addiction. Their body has grown so accustomed to the presence of this substance that it can no longer functionally normally without it. In other words, the withdrawal symptoms, the shakings, the convulsions, the pain, the distress, are merely the outward evidence of an internal problem - addiction.

So it is in the case of today's financial markets - the symptoms of distress may perhaps be ameliorated by the infusion of additional liquidity - but those are merely the symptoms of an internal problem. That problem is EXCESSIVE DEBT.

For far too long many of the governments of the Euro Zone have lived way beyond their means, spending money with reckless abandon, borrowing more and more, spending more and more, until they have now reached the point at which, just like the addict, more of the drug will eventually kill them. Yet that is EXACTLY what the financial markets want - more of the drug - in essence absolving them of the consequences of their stupidity for spending money they never had in the first place.

Consider the folly of this - the worse the economic news becomes, not only in the Euro Zone, but also here in the US, the better the equity markets perform. Is that not madness? What unbiased observer in the future reading about this insanity will not shake his or her head in astonishment as they marvel that otherwise clear-headed human beings could have been conditioned to behave in such a manner?

Our financial markets are supposed to be a means of allocating precious capital towards segments or industries where goods or services that better our lives can be produced. Instead, they seem to have taken on a life of their own with the roles reversed - in essence the slave has become the master. No attempt can be judged to be incorrect or misquided as long as it serves to resuscitate the price of equities in general. Credit markets must not be allowed to lock up, equity prices must not be allowed to fall sharply, large banks must not be permitted to pay the price for their poor investment decisions - nope - the show must go on, even if in the process we are making fools out of ourselves and deluding ourselves into thinking that Central Banks are the ENGINES of PROSPERITY instead of entrepreneurs and risk takers.

Enough of this display of contempt for now - back to the gold price action - Gold has moved higher on hopes of this aforementioned liquidity coming soon next week. It has pushed through the top of the resistance zone between $1620 - $1630 and is attempting to power past the bullion bank capping efforts at today's high of $1635. Clearing this level will set the market on a path to $1650.

Notice the following 8 hour chart where you can see that it is flirting with the downtrend line formed within the recent congestion zone as well as having moved into the bottom of that zone which was carved out by a top between $1680-$1700 and a bottom near $1625.

If the liquidity punch bowl does indeed come next week in a BIG WAY, look for gold to move initially to $1650 and then, if it can best that level, on to $1680 for a test of that region.

Downside support remains near and just above the $1600 mark.