"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


Wednesday, April 17, 2013

Federal Reserve's Bullard: Worried that Inflation is too Low

That is the headline on one of the Dow Jones newswire this AM.

Bullard is head of the St. Louis Federal Reserve Bank (that is the one with all those nifty databases by the way on economic statistics).

He made a comment about the Personal Consumption Expenditures Price Index or PCE as it is commonly referred to and noted that he was concerned about it "running very low."

I have to give credit to Mr. Bullard when he noted that the Fed is limited in its ability to impact the labor market. He said that is best left to labor market policies themselves.

Bullard appears to be uncomfortable with the Fed's  focus on the unemployment number as a target for its bond buying programs.

I bring this up this AM because Copper is breaking down and entering Bear market territory while Crude Oil and gasoline prices are also weak. We will want to keep an eye on that.

Grains are also mixed this morning with the exception of new crop corn that is up over planting delays ... completely unwarranted in my view... associated with the cooler than normal weather in the Midwest, and some strength in wheat. Market participants are constantly underestimating the ability of the US farmer to get a crop in the ground. They will plant in the dark if they have to.

Gold is showing strength at this juncture however as it appears the growing number of reports detailing extraordinary demand for the metal, particularly overseas in Asia, are perhaps making some bears a bit less aggressive this morning. Truth be told, I do not like to see markets pop like this without retesting the recent lows. Spiking bottoms make risk/reward decisions very difficult. Better to see the market move lower and see whether it uncovers more selling or more buying on the way back down. That is a much better signal.

The problem for gold today remains what it has been seemingly forever now; the gold shares are continuing to sink lower stretching that HUI-Gold ratio to nearly cosmic proportions. Something is going to need to give here fairly soon. Either these gold stocks are going to bottom or the price of gold is going to have to move lower yet.

When you are knocking on levels seen at the very inception of a generational bull market ( it began in 2001 - the ratio is at the exact same level now as it was then), something is amiss. Keep in mind that the ratio at that time was at a low because gold was coming out of a TWENTY YEAR BEAR MARKET that began back in 1980 after it peaked out near $850. Here we are after a decade plus BULL MARKET and already the ratio is down at the same level it was at the end of a TWO DECADE BEAR MARKET. That makes no sense to me whatsoever in just thinking about it.

I am not sure what the market is saying about some of these mining shares but one has to wonder if we are going to soon see some very big changes in that industry.

Incidentally, the US DOLLAR is on the receiving end of safe haven flows today with the Euro, the Pound and Swissie all sharply lower. The commodity currencies are also weak with the Yen coming well off its overnight lows as it too continues to get those safe haven flows for some bizarre reason that I will never be able to understand.

Silver is holding up better than I expected given the sharp down day in the Copper market but it seems to be getting some support from the resilience in gold this morning.


  1. I'm convinced that the miners suck, because of margin compression, as long as gold is correcting.

    IMO the old relations do no longer hold, because grades are falling and production costs are rising more than 10% per year. The world is running out of cheap gold.

    This market with all the clever algotrading and central bank intervention, still has not recognized that at these prices massive future gold shortages are developing.

    1. For the large miners, this seems to have some credence with many of them.

      Junior producer miners are still in a position to make money.

  2. The double digit cost increases are going to change. Miner's are clearly pulling back on investments and trying to reduce costs. Look at TTEK, which recently pre-announced negative in part due to reduced demand by Canadian mining companies. A decade of rising prices has incentivized management teams to spend aggressively without much accountability. Oil is down as well, which makes a big difference. I wonder if the trend in the miners changes if earnings come out showing improved cost structures. Probably not, but fun to hope.

  3. Hi Dan,

    1. There was in interesting post by Ben Davies on the Hinde Capital blog about miners, proposing that they should wind down production and wait for the next cycle of gold rather than give away gold or even worse start the masochistic process of hedging (didn't Goldman propose hedging as part of their short / forecast?)
    2. I'm wondering (and I am a total amateur / no financial services experience) if that the race to the bottom of the miner is brought on by a. more advanced algo trades than we had before and b. a nominally better capitalized hedge fund industry (unlike 2008 when they were all falling apart from CDOs), able to pound down with more strength?

    1. In regards to 2, I can say be careful with the generalized 'hedge fund' comment. Hedge fund is a broad term that encompasses a lot of money management. CDOs were primarily held by fixed income funds, usually highly levered themselves. Those unwound hard at the same time Wall St brokerages were sitting on warehoused loans in preparation for collateralization, compounding the problem. This has nothing to do with commodity or long/short hedge funds. There are macro funds and some overlap, but it is more on the margin.

      Overall, to your point, hedge funds are far better capitalized as banks just don't give as much leverage as they used to. I think the real reason behind the miner's failure is a mixture of terrible corporate governance, expense management, use of cash on top of an investor base that bought miners as a way to invest in gold. Mutual funds can't always buy GLD or SLV if they want to raise money, so instead they buy a miner. That is being puked out.

      Look at clean tech. Last year solar stocks were knocked down 90% due to many similar reasons. GDXJ is now down -75% from its peak in late 2010. I hope to God -90% isn't the goal, but with no sponsorship...

  4. Nice post and useful content keep it up

    Thanks for sharing
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  5. Dan - thanks for your sane voice in a sea of gold bugs.
    I have a question - my Stockcharts $HUI:$GOLD chart shows a low of 0.1326 in late 2000, an intermediate low of 0.2039 in late 2008, and last night's close was 0.187 which is some way off the 2000 low. Does your chart show the same values?

    1. Going Loco;

      Yes, in answer to your question. My data is very, very close to that. I show the 2000 low as .1330 and the 2008 low as .2040, close enough for dirt work as we say!


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