"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, October 2, 2013

Bonds and Gold back to Safe Havens Again?

I noted in yesterday's comments that neither US bonds or the gold market were acting like the typical safe haven trade that one would have normally expected to see during a time of crisis ( debt ceiling, government shutdown, etc.).

Gold was sold off on fears of a slowing economy as were the majority of commodities in yesterday's trading. Bonds were also dumped.

Today, we seem to have the exact opposite price action occurring - gold is up, the majority of commodity markets are in the green and the bond market was soaring earlier in the session. It is almost as if the big macro trade was back on today with the lower US Dollar spurring buying of commodities rather indiscriminately as was prone to happen during past episodes of that particular trade.

What I find almost bizarre is seeing report after report about analysts/investors worried about the current government shutdown being prolonged and a risk of a failure to get any sort of agreement to raise the debt ceiling which would result in either a credit downgrade of the US rating or default. such fears are preposterous in my view as the US takes in plenty of money to service its interest payments. However, think about this - the supposed fear is one of default or a credit downgrade and yet the lemmings cannot seem to stuff enough of these US government IOU's (bonds, notes, etc.) into their portfolio merely because the US stock market has been experiencing some weakness in today's session.

The analogy is obvious - let's say my next door neighbor is head over heels in debt and has been paying his bills by borrowing money from the folks in the neighborhood. He has enough of an income coming in that he can pay the interest that he has promised to pay to anyone willing to lend him money but one thing is for sure, he cannot pay back the principal. Now, he finds that his expenses continue to rise because he refuses to make any changes in his extravagant lifestyle so he announces with great fanfare that he is going to borrow more money from another set of neighbors promising to pay them back both principal and interest. Would any of you feel comfortable lending to this leech? Yet, that is exactly what is transpiring in the bond market today. The very items that investors are supposedly worried about being downgraded ( U S debt obligations) are being scooped up in droves by eager buyers.

I don't know whether to laugh at such lunacy or weep that so many can be so ignorant and oblivious to the staggering amounts of debt that the US government and its spendthrift politicians continue saddle the nation with.

Crowds go mad en masse and only come to their senses one by one, and slowly at that.

Gold seemed to get a bid today on the heels of the ADP jobs number. The private firm released a number that was LOWER than analysts had been expecting and this fed into the idea that the Fed would be forced to maintain the QE at full capacity.

Seriously, this sort of nonsense gets really old. The Fed will be doing QE until the cows come home without any structural changes to the US economy (getting rid of obamacare) and reform of regulations that are impeding companies from expanding and thus hiring. As stated here previously, if 4 rounds of QE has yet to produce any sort of runaway inflation why does anyone believe that a prolonging of the current program (QE4) is going to somehow be a catalyst for future inflation.

The truth is that gold is stuck in a broad sideways pattern in which dips get bought and rallies get sold. Until it shows me something on the price charts which indicates anything to the contrary, I expect this pattern to continue. For traders, that will mean rallies are selling opportunities while dips can be used to cover.

Crude oil has a big rally today for some reason - that which was cited was an EIA report showing a drawdown in stockpiles at Cushing as well as news from TransCanada which released news that the southern leg of the Keystone pipeline which it is constructing is 95% and should be open to move crude sometime after October. That was seized upon as a reason to buy crude oil futures, especially after the sharp fall in price the last few days as the thinking was this would help to further drawdown crude stockpiles at that all important hub.

It's funny how thinking shifts from day to day isn't it? Yesterday, government shutdown fears entailing furloughed workers and no salaries for many was viewed as a drag or negative factor for growth in the US economy. Today, it is no where to be seen! 

Personally, my view is that this is further evidence that the hedge fund computers have destroyed any integrity that might have been left in our financial markets. To see silver implode lower one day only to watch it shoot back up the next is beyond silly - it is a sign of a dysfunctional market system.

I have noted some levels on the gold chart below which are worth monitoring. Other than that, there really is not much worth saying about gold today. Until it gets a clear break out of this range trade, the market is going to bee-bop back and forth as it responds to the vagaries of shifting sentiment and economic news.

Lastly, surprise, surprise, the gold stocks, as evidenced by the HUI are higher today. Take a picture of that screen because no one is liable to believe you if you don't document this rare occurrence.