"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


Thursday, March 20, 2014

Easing Ukranian Tensions, Hawkish Fed, undercut Gold

Take a look at the following comparison chart of the price of gold ( IN BLUE ) versus the Volatility Index, or as I prefer to call it, the Complacency Index ( IN RED ). By the way, this is a 2 hour chart.

The VIX measures investor nervousness, lack of confidence, fear, panic or complacency, comfort, ease, confidence. When it is rising, investors are nervous; when it is falling, they are confident.

With that in mind, observe how the VIX spiked higher as tensions began building over in Ukraine as that came onto the radar screens of traders/investors. The more the hype ramped up about WWIII, new Cold War, etc., the more nervous traders became. As the VIX soared higher, gold followed up right along with it as its safe haven status came into play.

Additionally, the US Dollar refused to get any sort of safe haven bid during the crisis, further aiding the upward path of the gold price.

Notice however, that as soon as the VIX moved lower, so too did gold. Simply put, markets that move up on geopolitical events tend to come down just as fast once traders digest the news and the worse possible outcome does not come to fruition.

As the VIX moved lower and investors began to look at the Western sanctions, they realized how insignificant those were going to be and the extremely limited impact it would make on markets worldwide and they began moving back into stocks as nervousness faded.

Yesterday the Fed came out with what were generally interpreted as hawkish comments. Traders were caught off guard by Fed Chair Yellen's comments that interest rates would be going up sooner than expected. The current view, now that the Fed has made its announcement and Yellen has answered questions, is that the bond buying program ( QE) will end this fall and interest rates will possibly move higher 6 months later. Effectively, next spring will see higher yields is how the market is viewing the Fed's new standing.

With no inflation in sight as far as the market ( and the Fed ) is concerned, traders are moving out of gold. Adding to that is the fact that concerns over China's economic growth are mounting. This is putting pressure on some key commodity markets, notably copper and that is working to take some of the buying out of the sector.

An additional headwind for gold is the strengthening Dollar. With the Fed talking higher interest rates, the greenback is drawing support at the expense of the European currencies in particular, as well as the commodity currencies, such as the Canadian and Australian Dollar.

As long as there is the potential for further flare ups or escalation of tensions in Ukraine and in Crimea, traders might be hesitant to remove the total " WAR" premium out of the gold price. They seem to have just about removed it all at this point but it is holding above $1320 for now. That is the zone that they needed to hold in order to maintain control of this market on the daily chart. So far, they are still hanging in there. It looks to me like the buying in the mining shares is offering some support to the actual metals at the Comex.

Silver by the way, is once again flirting with being a teenager. Copper continues to act as an anchor on the grey metal.

The Dollar has generated a buy signal on several of the daily charts. Gold holding support therefore must be a bit encouraging to the bulls but I want to stress this again - this must hold or they will cede control back to the bears and set up a likely test at $1305 - $1300.

Lastly, take a look at the Goldman Sachs Commodity Index, the daily chart. It had managed an upside breakout recently but has since surrendered those gains and is now trading back below its former breakout point which seems to once again be acting as overhead resistance to the sector as a whole. There remain individual commodity markets which are still showing signs of strength but we are trying to see the sector as a whole to gauge whether or not there is a general bid into this asset class. With the US Dollar strengthening once again, my guess is that some of the hot money from index funds that was blindly buying across the sector will be forced to be much more choosy.