"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


Friday, July 19, 2013

Ten Year Treasury Note back below 2.5%

My thesis is that the recent sharp spike higher in interest rates on the longer end of the yield curve sent shock waves and convulsions into the hallways of the Federal Reserve's headquarters. This is why I maintain that Chairman Bernanke's abrupt reversal and subsequent contradiction of his June comments concerning tapering of the bond buying program was so forthcoming.

The Fed watched in horror as the bond vigilantes did their thing and took interest rates higher. Concerns began arising that the higher yields were already pushing prospective home buyers out of qualifying for certain properties and were reducing downward the size and price of the homes that they were able to quality for.

Enter the Chairman and VOILA!.... presto, change-o, down comes the yield on the Ten Year to back below the 2.5% level. It is going to be entertaining to say the least to see how this all important indicator behaves as we move deeper into the latter part of this year.

My guess is that if it gets too disobedient and begins to climb too sharply once again, we will see more backtracking from the respective Fed governors about the pace of the tapering....

Gold Showing some Resiliency

Wednesday's rejection of gold from the $1300 level emboldened sellers who drove the market down towards the chart support zone of $1270-$1260. Buyers surfaced first in Asia that evening followed by more in both the European and New York sessions on Thursday. Today, Friday, more buying was seen which enabled the market to move back up towards the top of this constricting range in which gold is currently working.

The top of the range is $1300. Gold is just a few dollars away from testing that once again and may very well do it on Sunday evening/Monday. We will have to see.

I am of the opinion that it will take a convincing push PAST $1300 which remains above that level to bring in some fresh speculative inflows into the metal, flows which have heretofore been lacking.

Based on this week's COT report, the predominant factor in the recent advance has been short covering on the part of the giant hedge funds. What that same report reveals however is that there is hardly any NEW BUYING from fresh longs occurring in that camp. Gold must have that in order to generate more upside potential.

On the KWN Markets and Metals Wrap this week, I discussed what I believe is the re-emergence of hedging activity by the miners. Their activity is showing up in the Producer category. I think it important to note that for nearly a decade now, we have not had to deal with any significant amount of hedging coming from the mining community. That appears to be now changing as per one of my previous posts.

From an investor/trader perspective, this is significant in the sense that it brings a fresh new source of selling into the paper gold futures market which we have been able to dismiss for nearly 10 years.

The focus has been primarily on the bullion banks as the ones supplying the bulk of the sell paper throughout the past decade. I believe that they will still be a force to deal with SHOULD GOLD BEGIN TO RALLY but selling from the miners will also have to be absorbed by the hedge funds or any other speculators who will be playing gold from the long side when the technicals shift in that direction for good.

Back to the short covering featured this past week - all major reversals do start with short covering but they must see the infusion of new longs to sustain any upward price movement. Short covering is more closely akin to a bottle rocket - fast, noisy, lots of excitement, but when it fizzles out, back down to earth it comes. What is required to keep anything aloft for long is FORCE. In the futures market that force is supplied by FRESH BUYING.

That remains to be seen as to whether we are going to get it. If we do, we can more definitively say that a lasting bottom is in. I remain hesitant to go that far until the market proves that it can at least put and maintain a "13" handle in front of the gold price.

One thing that is also constructive is that the beleaguered mining sector, as evidenced by the HUI, is also showing some moxie. The index failed to close through the gap this week after pushing into it whereupon it promptly retreated and moved lower. Today, it showed some amazing strength and worked higher this time closing into the gap once again. The key for the index remains working past the gap and that means pushing through 245 and doing it with some gusto.

If that occurs, particularly if it can manage to do this two successive days, then you will see more short covering occur in the respective shares that comprise the index and some new money also flowing in. There are a number of people who believe the gold shares are seriously undervalued but are quite hesitant, understandably so, to commit capital in size into the sector for fear of getting burned. A technical signal is therefore needed to convince them to come back into the water in a larger way.

Will we get that next week? Stay tuned.... There is a big election this coming weekend in Japan that might have an impact on the Yen and therefore the price of gold depending on its outcome. That could be the dominant factor in early Asian trade Sunday evening over here. Quite frankly, Japan is a mess with a national debt that exceeds twice the size of the entire domestic economy over a TWO YEAR PERIOD! At some point the sheer size of the debt begins to crush everything in its path. Forget about Godzilla! Their debt is the only Godzilla they should be fearing!

Then again, one wonders if that is exactly where we are ultimately heading ourselves over here in the US....