"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


Tuesday, December 18, 2012

Euro Yen Cross - Redux

It has been several years since I last posted a chart of the Euro-Yen currency cross. Quite frankly, there has been no reason to monitor it in my opinion, not with the ongoing crisis that had engulfed the Euro Zone through most of this now fading year. However, with the strong move lower in the Yen of late, I have been examining this cross once again to see if it can provide us with any signals of upcoming events.

You will note its collapse back in 2008 - this was the year in which the big Japanese Yen Carry Trade was unwound as nearly every hedge fund on the planet was taking part in tthat particular trade. When it was time to unwind it during the panic, there was literally no one on the other side of all those trades involving the Carrry.

During that Carry trade season, as this currency cross moved higher, the price of commodities in general tended to track right along with it. Gold in particular was strongly influenced by this cross. As it moved higher, indicating the presence of a strong appetite for RISK, gold moved right along with it to the upside.

If, and this is a big IF, we begin to see this appetite return ( and remember, it first occured because hedge funds were looking for a way to obtain yield in a strongly low interest rate environment - Sounds familiar doesn't it?), then this cross should continue to move to the upside.

The chart shows a picture of a market that looks as if it is very close to ending the 4 year downtrend. If this cross can end this month of December above the 25% Fibonacci Retracement level shown on the chart, then I think we can begin to say with a great deal more confidence that the risk trades are going to return in a much larger way in 2013. I would be about 99% convinced of that if the cross does indeed move up past the 38.2% retracement level.

If this move is for real, and this cross continues higher, it should indicate that any deflation fears are behind the market and that the Central Banks have won their war against it ( at least for the time being). The cost of that victory however will be a repeat of what we saw leading up to the credit crisis of 2008 - namely, soaring commodity prices driven higher by huge speculative inflows from cash rich hedge funds chasing yield. Who among us can forget $150 crude oil back then?

Either way, gold will benefit strongly, and silver will as well, if this is becomes the trade of 2013.
Time will tell. As I like to say, The Central Banks had better be careful of what they wish for - they are liable to get it and more!

Safe Havens Jettisoned

Apparently we now live in world in which lawmakers squabbling over how to avert tripping over an anthill instead of plunging down into the abyss gives reason to buy stocks while selling nearly anything that appears to be a safe haven.

I find it ironic to say the least that the market analysts continue to be so fixated on the non-sensically named, 'fiscal cliff', when the country is on track to have a national debt of over $20TRILLION by the end of the next 4 years and how many more trillions in unfunded liabilities. Economic growth is so anemic that the Fed will be conjuring the sum of $1.02TRILLION into existence over the course of the next year in order to buy mortgage backed securities and US Treasury obligations with the sole purpose of keeping interest rates ultra low so as to encourage additional debt. Yet everything is okay now because Obama and Boehner are talking and moving closer.

Oh well, it is what it is and there is not much sense in even looking at things in bewilderment anymore. The new era of "PRINT YOUR WAY TO PROSPERITY" apparently is now fully entrenched in this generation.

Just look at the following chart of lumber - this market is forecasting a big recovery in the housing market. Ultra low interest rates are apparently predicted to have their intended effect.

Here is the point in this; one cannot be successful as a trader by arguing with the markets. As I have said many times on these pages and elsewhere - they are going to do what they want to do no matter what you or I or anyone else thinks.

The problem that many of us who are long term gold bulls have is precisely that - we are "LONG TERM" thinkers. In the meantime, our markets today have become completely short-sighted forums. Hedge fund algorithms respond to short term signals and then take over. Remember, there is little thinking involved at this point in the markets - they are governed by computer algorithms and those things will either buy or sell based on the short term signals that they get. Get on the wrong side of them and your trading career will be a short lived one. Instead, learn to either get out of the way if a support or resistance level is taken out or be prepared to weather the storm that will then follow.

Take a look at the bond market. Here is the long bond chart. Notice how this safe haven has been thrown out in favor of equities as money flows out of bonds and back in stocks based on the assumption that the fiscal cliff deal, combined with the Fed's easy money policy, and other decent news from abroad has traders currently expecting a recovering economy. Thus, no need for safe havens and back into equities for gains.

This is precisely what the Fed intended when it announced its plans - it wants the stock markets moving higher to boost consumer confidence so that the consumer will take on new debt. Also, businesses love a stock market moving higher as it inflates the price of their shares.

The breakdown in the bond market has sent the price moving down towards the bottom of a 5 month or so trading range. It is interesting to say the least to see this move lower in bonds, particularly with the announced $40billion/month purchasing program, QE4, being just recently announced. That program however is not targeting bonds of this duration however. Still, if longer term rates continue to rise it is going to work crosswise to the Fed's purpose of deliberately pushing rates lower to not only spur more consumer spending but also to keep the US government's borrowing costs obscenely low.

Take a look at the Japanese Yen - another favorite SAFE HAVEN which has obviously severely fallen out of favor. Most of this is due to the new political situation in Japan in which traders expect a strongly negative Yen policy to be FORCEFULLY advocated by the new governing powers. Still, that in itself does not completely explain the weakness in the Yen. Just like the bonds are being discarded in favor of equities, the Yen is being discarded in favor of currencies with a closer relation to risk assets.

As you can see, the Yen is probing into a region of strong chart support. If it cannot muster much of a bounce from this region, chances are that we have seen a major long term top in the value of Yen against the US Dollar. We might even see the start up of the YEN CARRY TRADE in a large way just like we did prior to its collapse in the summer of 2008. One does not see the Yen Carry trade come into being during a period in which market participants are concerned about DEFLATION.

That is why this currency has my attention. Right now it is signaling that there is a move towards risk assets underway. so far this move has consisted almost entirely of equities. But if history is any guide and we see the risk appetite get whetted, look for the commodity complex to follow as money flows will move into the sector in a much larger way to start off the new year. We will see any evidence of this in the charts.

So far we are seeing it in the Lumber market, Cotton market, and the Copper market. We are also seeing it in the Livestock markets. The grains have not experienced it due to the expectations of a very large corn and bean crop out of South America but if these hedge fund computers go beserk in January, at some point we will see some of that money make its way into the grains.

We will keep a close eye on the CCI ( Continuous Commodity Index ) as a forewarner of such an occurence. Today it is sinking lower but if this risk appetite is real, it will find support sooner rather than later. In this sort of environment, it will be tough to be short of anything that looks like a commodity.

We will just have to wait and see what the New Year brings us and then deal with it accordingly.

As for gold, well, what more can be said than it failed to attract the usual strong buyers that have formerly been coming in between $1690 - $1680. They stepped back and as a result, there was an enormous air pocket below the market without any bids of size. Down went the market with locals pushing it along further until they found the sell stops which they did in a big way.

Volume today has been absolutely enormous, especially during a time period in which liquidity begins drying up and volume normally shrinks. That environment allowed the bears to finally reach those downside stops that they have been salivating after. The question now becomes whether or not Asia comes in this evening and begins scooping up gold.

If we truly are seeing a shift towards inflation concerns ( bond market breakdown) gold will stabilize sooner rather than later. I am still watching the HUI for any hint of this but so far, at least in today's session, nothing doing.

Gold has attracted some buying here later in the afternoon and is bouncing off its 200 day moving average. That level seems to be a pretty good support region as it also happens to coincide with the 50% Fibonacci Retracement level from the October top near $1800 and the May low near $1530. Bulls will not want to see this level violated without a quick, intraday recovery occuring as it would mean the market will likely drop to $1640 before any serious buying would emerge.

Even with all this flight away from safe havens today, it does seem to me like this downside move in gold has been overdone a bit.