"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, February 13, 2013

Wall Street Journal's Richard Barley on the Swiss National Bank

The Wall Street Journal's Richard Barley has written an excellent short piece on the predicament facing the Swiss National Bank that really hits the problem of this nonsensical ZERO INTEREST RATE policies being followed by many of the WEstern Central Banks.

The piece is by subscription only ( I am including the link if you wish to subscribe- Dow Jones subscribers have access to this in their wire feeds).


He entitles his piece: "SNB's Zero-Rate Wonderland"
Let me summarize his great analysis:

1.) The Swiss National Bank cannot raise interest rates for fear of derailing their economy

2.) The zero interest rate environment is producing a bubble in real estate prices. UBS, has constructed a Swiss Real Estate Bubble Index to measure the rise in housing prices. It is a Price-to-Income ratio that has risen to size times at the end of 2012 from four in 2000.

3.) Inflation in 2012 was a negative 0.7%.  Growth is sluggish. The SNB cannot raise interest rates because it would send speculative money flows into the Swiss Franc causing the currency to rise in value hurting Swiss exports and slowing any incipient signs of growth.

4.) This would force even more intervention in the Forex markets by the SNB to sell the Franc in their attempt to devalue it.

5.) The SNB is attempting to slow down housing loans by requiring a capital buffer for banks

6.) The Fear is that this will work to curtail loans to small and mid size businesses and enterprises

7.) The SNB has a balance sheet that is ballooning.

This well thought out and solid piece encapsulates not only the problems faced by the Swiss National Bank but the reality is that the other Western Central Banks practicing the same policies are in the exact same predicament. Here in the US, the Fed is attempting to reflate the housing market which imploded when the bubble IT CREATED in that sector burst. The problem for the Fed is that while it attempts to reflate various bubbles it has presided over, it merely creates a new one someone else. CAse in point - the US equity markets which in my opinion are in the beginning phase of yet another speculative bubble.

The exit that the Fed will attempt at some point in the future should be interesting to say the least.

Gold Chart and Comments

Gold continues to work lower as it moves ever closer to a region that has heretofore provided substantial buying support. Bears are attempting to take it down through this support region in the hope of picking off the rather large contingent of sell stops sitting just under the market.

It should be noted that they have strategically used the Chinese Lunar New Year holiday week to press their case. Without that strong physical offtake, speculators on the Comex have lost an important ally. It will be interesting to see what happens next week when that period in China is finished.

By then however, it may be too late for the bulls. This market looks heavy to me. Note that on the technical chart, one of the indicators that I still use ( it is dated but still a very good tool) shows that the ADX of the Directional Movement Indicator is beginning to turn up from a very low level. A rising ADX (the dark line) is a sign that a market is in a TRENDING PHASE. So far, gold has been in a sideways consolidation pattern or range trade. That is evident from both the price action which has been confined between $1695-$1700 on the top and $1640 or so on the bottom. Along with that, the ADX has been falling which is indicative of a market in such a pattern.

The danger for the bulls is if the support level gets taken out, the indicator is going to move higher indicating the possibility of a trending move lower. I am not sure how much downside gold would have under such circumstances but it is easy to envision it moving down to test psychological support near $1600 for starters.

Central Bank buying will no doubt arise should this occur but it will need to be large enough to offset the lack of speculative buying and the fresh shorting that will come from momentum based traders who want to chase the price lower.

Negative DMI has not yet taken out its previous peak but if we do get that support breach, it will. That will bring in more selling.

The problem for gold right now remains the same - the Central Bank money printing bonanza has convinced the majority of speculators that the worst is behind us and that the equity markets are the place to chase yield. Money flows are therefore leaving the safe havens (bonds included) and entering the equity arena. Until that substantially changes, gold is going to be looking for sponsors.

The onus is on the bulls to perform here and now.

HUI / Gold Ratio Chart

By request...