"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


Monday, January 13, 2014

Stocks Drop on Goldman Note - Safe Haven Plays come on

Goldman was the catalyst for a near seismic wave that struck the US equity markets in today's session. Their analysts felt stocks were overpriced and that earnings were going to have to be quite strong to push stocks signficatnly higher based on my reading of their notes. Surprise... sounds like maybe some are waking up to smell the coffee.

My comments have to do however more with the reaction of some of the other various markets, rather than the equities. Stocks needed a significant correction but no one was sure from what level it would come or at what point. Well, we got a decent correction today. If it turns around and goes right back up tomorrow, who knows? What struck me about the safe haven trades that went right back on, in typical knee-jerk fashion, was the US Dollar was left out of the party.

We had bonds moving higher today with interest rates on the Ten Year dropping down to 2.827. That is no surprise given the steep fall in the equity world. What we usually see happening on a day like this did not occur today. What I mean by that is that while the Japanese Yen moved sharply higher ( I will never understand why the Yen can remotely be considered a safe haven currency), the US Dollar did not rise but fell instead! That is rather remarkable when one is used to seeing the Dollar benefitting from any sort of risk aversion/save haven trade.

I am not sure what that might mean but it is only a one day affair at this point so I do not want to read too much into it.

Gold seemed to experience another one of those "melt up's" as I have dubbed them with some safe haven buying coming into the market, especially as the US Dollar weakened but also somewhat in response to news of Goldcorp's unsolicited takeover attempt of another mining outfit. Some are thinking that the gold shares, which have been beaten with the proverbial ugly stick, might have been mangled severely enough that the long-anticipated consolidation/ acquisition phase is now at hand in the sector. That would tend to benefit some likely takeover candidates which generally lifted the sector higher even while some of the majors were weaker, notably GG, which was down over 1% at one point today.

The news tended to lift some of the pall that has been hanging over the sector. Of course it did not hurt any to see a near 1.4% plunge in the S&P 500 as part of a safe haven bid.

I have mixed emotions about this stock market fall today. If it is coming on expectations that while the US economy might be improving it is not going to be growing fast enough to justify multiples on equities near current levels, then I can see where it would actually tend to bring more selling pressure into gold as deflationary forces reassert themselves. Then again, we might be back into that nightmarish scenario where we are sitting around on pins and needles waiting for every single economic data release and reading the entrails to discern whether the Fed will taper or back off and not taper.

I am still of the view that if the latest round of MBS and Treasury bond buying by the Fed has not generated solid growth, then what will? If the Fed were to be forced to put any tapering on hold, would it not signify that deflationary forces are reasserting themselves? Why would that not put downward pressure on the gold price? Yes, I know that many in the gold market would view any Tapering on Hold action by the Fed as bullish gold but pray tell, for what reason? Two years have done nothing to generate any significant inflation in the mind of the market - why would another 4-6 months or another year or more do anything different?

From a technical perspective, the volume in gold trading today was quite lackluster - another reason I referred to today's move higher as a melt up. It just seemed that the eager sellers were not there today more so than eager buyers were chasing prices higher. The result was a lack of offers over the market and that allowed prices to "melt" higher.

The market did run into some selling near $1,255. That is the bottom of the resistance zone noted on the chart. The top is close to the $1260 number but also extends a tad above that. If gold can push past that level and keeps its footing there, it would turn the chart friendly in my view and portend a test of $1,280. Above that would be psychological round number $1,300 where the "handle" would change.

I personally do not see what the reason might be for gold to reach that point given the apparent resurgence of deflationary views ( the last jobs number got the ball rolling which Goldman kicked down the hill today) but the key in my mind still remains the US Dollar. If it weakens further, gold will stay supported. If the Dollar rebounds and begins moving higher, look for selling to intensify in gold, especially at these levels.

We'll see what the market gives us.