"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


Saturday, November 10, 2012

So Where's the QE3??? (Updated)

As you all know by now, the Federal Reserve boldly announced plans "to boldly go where no man has gone before" and purchase each and every month, the tidy sum of $40 BILLION in US Mortgage Backed Securities (MBS ) to "aid the recovery". This was supposed to begin in September of this year and continue on out as far as the eye can see, into infinity, as my friend Jim Sinclair has stated, or until economic conditions warrant a cessation of the program.

Here is the problem however. I have been closely monitoring the balance sheet of the Fed each and every week and I simply do not see it! Take a look at the following chart I have constructed of the overall balance sheet but detailing also the sum of mortgage backed securities contained therein.

Can you see how both lines have basically flatlined since the cessation of QE2 last year? Does anyone out there see a climbing MBS line on this chart especially to the tune of $40 billion higher each month? I sure don't!

Here's a closer look at just the Mortgage Backed Securities listed on their Balance Sheet. Does anyone looking at this see any sort of SUSTAINED move upward on this graph as of yet?

By now we should have seen at the very least a jump of $40 billion for the month of October. We did get some buying seeing a jump from 835,000 to 868,069 ( a rise of $33.1 billion - less than $40 billion) but then we fell right back again. Obviously the Fed is selling some of these assets as they have been doing for some time now but in my mind, this defeats the entire reason behind an addtional stimulus effort involving $40 billion in new purchases each and every month. It may be that if this is the trend (purchase new MBS's and add to the balance sheet while selling some existing MBS's and remove those from the balance sheet) that the actual QE3 effort is going to fall short of an increase of $40 billion each and every month.

Here are the big questions which I hope someone out there who is more versed in these things than I am can answer - Where's the QE3 going? What is the Fed buying or are they even buying anything? If they are not buying, why not? If they are buying, why is the size of their balance sheet not increasing by at least the tune of $40 billion each month? How many existing MBS's already on their balance sheet prior to the onset of QE3 are they planning on selling?

Gold Chart and Comments

I am posting a weekly gold chart to provide a longer term perspective on the metal's prospects so as to eliminate some of wild swings in price associated with both pre-election sentiment as well as post election sentiment.

First notice that the range trade is still solidly in place with $1800 capping the top and $1530-$1550 supporting the bottom.

Note that while gold broke the downtrend pattern in late summer this year when it pushed through 1680, it still remains within that broad sideways pattern.

This week produced what is known in technical analysis jargon as a "bullish outside reversal pattern". It occurs whenever a market makes a new LOWER low price and then reverses higher to make a high ABOVE THE HIGH OF THE PREVIOUS BAR and then closes above that previous high. That is normally a sign that the selling has exhausted itself, being overdone, and that valued based buyers believed prices were too low and thus, rushed in to scoop up a bargain.

This particular pattern has more validity to it when it occurs after a period of prolonged selling. It also is reinforced when the low price reaches into a region on the price chart that has in the past, formed a technical support level.

Take a look at the first reversal pattern that formed on the chart back in late May of this year. Notice that it reached down into a previous support level near $1535 and then shot sharply higher moving some $100 points off the low. That was a sign that the sellers had exhausted their ammunition and that the bulls had now seized control of the market. The market rested a bit before it then powered on to test the $1800 level. A very impressive rally indeed!

This week's pattern comes after a 4 week interval in which the market ground steadily lower after having failed to once again best the critical $1800 level. With the low on this pattern coming in very near to the exact center of the broad sideways range, the pattern needs to be respected because it would seem to indicate that the "VALUE REGION" for gold has now been set at a much higher level than the previous value level down near $1535-$1550. In other words, the big physical market buyers apparently believe or have at least grown accustomed or acclimated to a gold price just below $1700 as cheap.

If this is indeed the case, and we will certainly know this if price were to subsequently retreat for any reason and uncover enough solid buying above the $1700 so that the price were to not dip below that level and hold firm, then gold looks set to make yet another run to try that stubborn $1800 level.

The onus is on the bears to overwhelm the buyers down near $1700 if they are to invalidate this pattern. The bulls on the other hand will need to attract sufficient momentum based buying (hedge funds) to this time take prices up to and then through $1800. If they fail once again to better $1800, back down the market will go although my guess is that based on this new chart pattern, it will not dip below $1700 should that occur but will much more likely attract new buying closer to the HIGH of this week's reversal pattern near $1740.

Stay tuned - the one impediment to a march higher in gold right now seems to be the mediocre performance of the mining shares as evidenced by the HUI. It is always much more constructive to the upward progress of the yellow metal to see the bullish engine firing on all cylinders and that means that we need to see the HUI back above 500 but particularly ABOVE the high of that most recent BIG DOWN WEEK.

A lot depends on what the broader stock market is going to do as far as the mining sector goes. Take a look at the last chart of the S&P 500. It has collapsed as a result of the Obama election as business knows full well what is coming their way. The interesting thing to note is that the THREE DAY POST ELECTION collapse has taken the index back exactly to the halfway retracement point of its rally since June of this year. It did temporarily run out of sellers on Friday and mananged to bounce off of that level as shorts booked profits. If the market can stabilize above this level early next week and move back above 1400, the bulls will have managed to avoid a major rout. If however, this week;s low gives way, look for the index to drop all the way down towards 1350-1344 before finding any buyers of size.

Trader Dan interviewed on the King World News Markets and Metals Wrap

Please click on the following link to my regular weekly radio interview with Eric King on the KWN Markets and Metals Wrap.