"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 10, 2013

Gold Chart by Request

Here's a look at the latest after today's sharp selloff in gold. Note that the metal is approaching the support zone which has held it for some time now.

You can see that the former support zone between approximately $1592 - $1588 or so, turned into a resistance zone and attracted selling yesterday when gold failed to extend past it and back to $1600.

Central Bank buying out of Asia has been attracted to the metal on approaches to this lower support zone in time past. We will have to wait and see if that buying materializes again.

One thing I find quite ironic. Let me mention it and see if you do also. The Bank of Japan, has adopted the policy of its new Prime Minister whose stated goal when he ran for election was to deliberately produce a 2% inflation rate. That was for the express purpose of getting the Japanese economy out of the deflationary trap which has snared it for decades now. When you really examine that policy, all it essentially consists of is massive buying of all maturity ranges of Japanese government debt, along with some targeted buying of certain ETF's and some other financial assets. The scope and the size of this buying has various estimates that I have seen but it looks to be in the neighborhood of (US) $1.4 Trillion or so.

What is the methodology to induce inflation when we cut to the chase? Simple - drive the currency lower pushing the costs of imported goods higher while making Japanese goods much more competitive on the global market. Also, keep interest rates artificially at such extremely low levels that it spurs borrowing and thus consumption.

What has been the result for gold priced in terms of the Yen? Answer - it shot up to an all time high just yesterday.

Now turn your attention to the US here. What is the policy of the Federal Reserve? Buy enough government bonds to keep interest rates, both short and long term, artificially low in order to spur borrowing and thus consumption.

Somehow this is supposed to produce inflation in Japan without it being inflationary here. Okay - what is the difference? Well, the US Dollar is going higher and higher against a large basket of other majors. This is shortcircuiting the inflationary implications of a weaker currency and has thus far enabled the Fed to play the exact same game that the Bank of Japan is playing but without the same consequences.

Regardless, Gold in US Dollar terms keeps being sold by hedge funds while gold in Japanese Yen terms keeps rising.

I can note this divergence and apparent contradiction but quite frankly what irritates me to no end is to hear various talking heads, pundits and analysts, praising the Fed for its efforts and avoiding inflation in the process. Why praise them? The only thing preventing their policy (the exact same policy as Japan's) from knocking the Dollar into the same abyss as the Yen is the fact that the some of the other major currencies have stunk to high heaven.

With the US stock market moving higher alongside of the Dollar, foreign investors are chasing US stocks hoping to catch the move up and profit additionally from the Dollar appreciating against their own domestic currency - a DOUBLE BAGGER as we say. That is generating strong inflows of foreign currency to our shores creating yet another source of artificial demand for the Dollar.

I am not sure what will cause the US Dollar to reverse course but the US is at 100% Debt to GDP ratio with a growing federal budget and a looming entitlements crisis. We continue to read reports of various trade deals between China and some of its trading partners that call for direct exchange in their native currencies and so forth obviating the need for any US Dollar involvement whatsoever. The US fiscal house is in such serious disorder that it is screaming a warning at the top of its lungs and yet utter complacency prevails.

These things have a habit of continuing on merrily until one day they just don't. I do not know when that will be but I know it will be. Instead of giving this problem the serious attention it deserves, our leaders are instead fixated on homosexual marriage and gun snatching. Nero at least produced something constructive while Rome burned even if it was only a song on his fiddle. This current crop of leaders.....

Gold Knocked Back Down into Support

Another coordinated hit on the gold price in today's session. Goldman Sachs issues a "short gold" advisory on the same day that news breaks about Cypress having to sell gold to raise funds for its bailout requirement.

What is so perverse about all this is that I do not believe there is a thinking person on this planet that does not attribute this bubble rally in the US equity market to the Fed's massive doses of QE. Yet, when the FOMC minutes are released (that is another story all in itself as they were released yesterday) the stock market utterly ignores the comments from those on the FOMC who believe that the bond buying program can begin to be wind down later this year. Yet, those same comments, again, completely ignored by the equity markets, are supposed to be the catalyst for a huge smashing of the gold price. Come on already! Do they really believe that people are that damned stupid?

Show me one person who believes that were the Fed to pull the plug on the QE program that it would have NO EFFECT whatsoever on the equity markets and I will show you a talking rock! Yet somehow, miraculously, the stock market can completely ignore any talk of an early cessation of QE while gold is mauled! Yeah....

I suspect that Goldman needs to get long gold for what they see coming down the road and has to get the hedge funds and the public selling it so that they can take the other side of the trade for themselves.

I will send up a chart later on today as I am pressed for time right now but gold is back down into the zone that has attracted strong Central Bank buying previously.

Also, I should note here that silver held up fairly well today considering the mauling that gold received. It was only down 33 cents or so. Not bad given a $30 plunge in the price of the yellow metal....

The VIX is falling off the edge of the world into the abyss. There is no fear anywhere. Total and complete complacency rules.