"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
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Watching the late session price action in the Emini S&P 500 is quite disconcerting if you were expecting the market to greet the Fed's announcement of another $45 BILLION/Month in Bond purchases with a hearty round of wild-eyed buying.
It sure looked like that is exactly what it did when the news came out but from that point onward, it has been SELLING and not buying which is dominating. I am not sure whether this is a classic case of "BUY THE RUMOR; SELL THE FACT" since it was no secret that the Fed was going to announce a replacement program for the expired Operation Twist and since the number had already been in the market for the previous couple of weeks.
The bulls had better hope that is all that this is (BUY THE RUMOR; SELL THE FACT) because if it is not, and IF this is the market basically yawning in the face of what amounts to a relatively open-ended HALF A TRILLION in Dollar creation over the next year from this round of QE4, then we are perhaps witnessing something that should be sending tremors into the FOMC.
Keep in mind that each successive burst of QE has had less and less of an impact on the markets and particularly on the economy in general as those rounds have made their impact. One has to wonder if this is the case.
Again, it is too early to speak too dogmatically about any bearish reaction but the bulls had better get a strong close in the S&P in tomorrow's session and especially on Friday of this week or we are going to see a good sized round of profit taking by longs emerging, especially with the end of the year fast approaching and the window to realize any paper profits under this year's lower tax rates rapidly closing.
By the way, gold and silver are both undergoing some tremendous selling pressure in Asian trading as I write this. It seems to me there is a similar reaction in the metals to the reaction in the equities on the QE 4 announcement.
When the sum of another TRILLION DOLLARS (combined QE3 and QE4) over the next year (it will last at least that long) is announced and gold cannot take out its overhead resistance, that is all the excuse that some needed to head for the exits and take what profits they had from any longs put on ahead of the FOMC release or at the very least, cut short their paper losses on a trade gone sour.
I have to wonder also if some of the same suspects that had been beating gold down in the aftermarket hours early last week are surfacing once again to try a repeat of that same stunt. We will have to see whether or not that selling is met with improved physical market takeoff.
Gold is thus far responding to news coming out of the FOMC meeting as could have been expected. It is moving higher as traders build in a more inflationary scenario due to the addition (not at all unexpected by now) of a $45 billion/month Treasury purchase program by the Fed to replace the expired Operation Twist.
Again, this is old news as most pundits were already anticipating exactly this amount for last few weeks now. My guess is that the FOMC was afraid of disappointing the markets with anything lower as the last thing they want heading into the end of the year is a disappearing equity market, which is exactly what they would have gotten had they done anything less than $40 billion.
With the $40 billion in MBS buying from QE3 and this $45 billion in what amounts to QE4, the Fed has now committed to $85 billion/month worth of dollar creation out of thin air for the foreseeable future. Annualized that comes out to $1.02 TRILLION in magic money. Any wonder why the Dollar is dropping today? The only marvel is that the thing has not disappeared into the abyss already. Were it not for the fact that the Japanese are planning on adulterating their Yen into the nether regions and that the Southern Euro Zone is a basket case, the Dollar would have already dropped through 76 on the charts on its way to the all time low.
Either way, what we are getting in the way of cheers for a further continuation of this monetary madness from our Central Bank reminds me of a scene from the old Sci-Fi "Logan's Run". In that mid-seventies movie, there is a scene in which all those whose time is up and whose palm red light is flashing (meaning that they are scheduled for ascension) cheer as their bodies float upwards into the termination zone where they explode and fizzle away into nothingness.
It sure seems to me like Wall Street is cheering while the collective red lights of the palms of the US citizenry are blinking. Make no mistake about it - it is the average citizen who is going to pay the price of this folly in banking madness as the hedge fund crowd will now have a green light to further plow money into "risk assets". That means higher prices lie ahead as the Dollar is further eroded by its keepers.
The only thing that really matters however to our monetary lords is that the equities market will continue to take the path of least resistance and that means higher. Don't forget the level of the US stock markets are now national security issues to our central planners meaning that they will not permit bear markets, ever, even if it means creating trillions in funny money and making it almost impossible for seniors and those living on fixed income investments to earn a decent rate of return on their life's savings. What the Fed believes it can do, and thus far one would have to agree that it has, is to permanently prevent BEAR MARKETS in equities. Mourn for what is left of "free market capitalism". It no longer exists having died in 2008 when the monetary madness sprang into being.
Yes, welcome to the investing generation, forced by the Fed to shove its money into the stock market even if there are some who do not want anything at all risky and seek only conservative investments. Finding such investment vehicles in such an environment is a challenge to all but those who have the good fortune to be able to qualify for products offered only to those whose wealth meets a certain criteria. The rest of them are screwed. Love those high yields on one year CD's at the bank? Glad to hear it because that is all you are going to get for at least another full year and beyond!
The only thing keeping the commodity sector as a whole from powering sharply higher is the unpleasant fact that the economy is stagnant and going nowhere in a hurry. The moribond employment situation and small business fears over the future are preventing it from gaining any significant traction. All the while a rapacious central government continues to swallow up more and more capital in order to sustain itself. Just today the news was reported that the Federal Budget deficit for the month of November was an amazing $172.11 BILION. Try annualizing that and you come up with a number over $2 TRILLION. No worries though; everything is just fine as Ben and da boyz have spiked the punch bowl once again.
I have a big question for Bernanke and company - today they came out and stated that they have a target rate of 6.5% UNEMPLOYMENT that will give them a reason to change course on the interest rate front. Here is the question:
Does that mean if the size of the labor force continues to shrink, bringing the unemployment rate lower without necessarily translating to any true gains in the overall employment picture, that the Fed will raise interest rates if the unemployment number magically drops to 6.5%? What data are they going to use? Keep in mind that the labor force here in the US continues to shrink as more and more people simply have given up looking for a job. You get enough of this long enough and before long, the unemployment rate magically moves lower.
The other thing that Beranke and company stated was that they had a target inflation rate of being below 2.5% for "one to two years ahead" to maintain the current near zero interest rate policy. Which numbers are they going to use (we all know the answer to this already), the doctored and useless government's CPI or something more realistic with an actual connection to reality?
In my opinion everyone on that FOMC Committee should be unceremonially canned with the exception of Richmond Fed Governor Lacker who is in opposition to this idiocy of endless money creation. As I have stated many times before, if creating lasting prosperity was as easy as printing money into existence out of thin air, other nations, kingdoms or empires would have figured it out years before we did. History however has a way of clarifying such things and its verdict will be devastating to this band of elitists at the Fed.
Back to gold - the metal moved up on the news but could not clear resistance at the 50 day moving average near $1728. Until it does, rallies will be sold. If it can power through that level, some of the funds who had been shorting the market will cover. There will also be new money flows coming in from the momentum crowd that will let the market make a run at $1740. It will have to take that out before it can test $1760.
Downside support should be firm now in gold since the Fed is basically attempting to foster an inflationary environment and stave off the deflationary fallout from the excessive debt levels that still plague this economy.
As we enter further into the holiday period, look for liquidity at the Comex to begin shrinking as players square positions and take off for the holidays. We might get some pretty wild price swings as a result. Just be forewarned.
Next year promises to be interesting to say the least with over $1 TRILLION in freshly minted money looking for a home.
The mining shares are doing the same thing they did way back when the first round of QE was introduced in late 2008 - they are outperforming the metal to the upside. The HUI is currently up more than 3% as I type these comments having cleared not only resistance at 440, but also at 450. It has improved its poor chart by so doing but has yet to clear a big batch of overhead selling resistance that will come in near 461 - 464. It will take a weekly push through that level to confirm a solid bottom. For now, it appears that the floor is in with the most likely outcome moving forward being a range trade unless we get some more nervous shorts seeking to cover in the mining sector.
One last chart I will leave you with - if you think the Fed is debauching our own Dollar by design, you are of course correct. As bad as that it, is apparently is nothing compared to what the Japanese are doing to their currency. Take a look at this chart of Gold priced in Yen terms. It is closing in on a lifetime high. Kiss Japan goodbye - its aging population and failure to honestly address its fiscal excesses have taken their inevitable toll on its currency. The standard of living for the poor citizenry there will continue to decline, as of course will that of the average US citizen here. I will caution the readers with a bit of history - in such environments DEMAGOGUES always arise and find a captive audience more than ready to accept their rantings.
Silver continues to mirror the CCI with traders unsure of what direction to take things next.
When I normally lay out a chart detailing the ratio of the mining shares to the price of an ounce of gold, I use the HUI. I will still put up one of those further below but wanted to show you a ratio chart using the XAU to illustrate just how cheap these mining shares have become relative to gold itself.
The chart is simply staggering. I have gone back as far as my data will allow me with this and cannot find a reading so low.
I cannot overemphasize how critical it is that the CEO's of these mining companies listen to the message of the market and make the necessary changes to their organizations.
The two biggest things I can read in this message is to:
1.) Get a handle on expenses and cut them
2.) this follows on #1 - return those savings to the shareholders in the form of higher dividends.
Do this, and investors will react positively. Why? Where else can you buy so much gold at such a discounted price to the current market value? Relative to gold, some of these shares are as cheap as they have ever been, period.
Checking in with the HUI, some of the shares that comprise that index are as cheap, relative to gold itself, as they have been in ELEVEN years.
TAke a look at the following chart of gold, priced in terms of the Japanese Yen, and then tell me that the Japanese monetary authorities and political leaders are not deliberately debauching their currency. "PRINT, PRINT, PRINT; BANSAI, BANSAI, BANSAI"! They are killing their own currency in terms of its purchasing power.
Shorts decided to book profits today when the market appeared to have encountered some decent sized buying down near the session lows. Additionally, the upcoming payrolls report has traders uneasy and it seemed like the better part of wisdom for many was to take what money you might have had on the table and go home and watch the action from a safer vantage point.
Open interest declines are telling us that traders are heading to the exits, both longs and shorts as right now uncertainty seems to be the name of the game.
Tomorrow will provide us with a clue to market direction into next week as we close out the week.
Gold did run down towards the very strong support level noted on the chart at $1680 before running out of sellers. A push back through the $1700 that can remain above that point will be constructive from a technical perspective as it will reinforce the $1680 - $1685 region as good support on the chart.
I would not be the least bit surprised to learn in the future that foreign Central Bank buying of gold is occuring down near these levels.
John Brimelow's excellent Gold Jottings detailed very strong Indian buying of gold overnight. Once again it is the physical market which serves as to remind these paper pushers that there exists life outside of the Comex pits.
One continued fly in the ointment for gold is the pitiful price action of the HUI. At a bare minimum, it will need to close the week ABOVE the 440 level to give any hope of an intermediate term bottom. Seeing that it remains below the various Fibonacci levels shown on the chart, the bears are evidently in solid control of this sector for the time being. Something needs to change on this chart to spook some of them out and convince them to ring the cash register on their tidy profits.
The miners continue to lose ground against the price of gold itself. The ratio of the value of the index compared to the price of the metal is threatening to make a new ELEVEN year low. Keep in mind that this is the CLOSING price for the month so there is yet time to avoid this but the sector needs some help from somewhere.
Over the last few weeks, the Euro has benefitted from growing concerns over the fiscal health of the US. The current grossly misnamed "fiscal cliff" talks have allowed money flows to make their way back into the common currency at the expense of the US Dollar.
That has changed in today's session. ECB President Mario Draghi's comments at a press conference have been interpretted as quite dovish by the trading community. Even though the ECB kept interested rates unchanged, the talk in the market quickly moved in response to what many feel was Draghi's leaving the door open for rate cuts in the not-too-distant future. What this means is that the interest rate environment in the Eurozone will remain negative in real terms. This is the type of scenario in which gold thrives.
While Goldman's report from yesterday pronounced an end of the negative real interest rate environment in the US sometime late next year or early in 2014 (something which I strongly disagree with by the way as higher interest rates will crush this economy),
Draghi's comments seem to have paved the way for the continuation of such over in the Euro Zone for teh foreseeable future.
The result can be seen in the EuroGold chart which has experienced a nice bounce even as the Euro itself has come under some strong selling pressure here in the US session.
In an odd piece of news today, Dow Jones is reporting that Goldman Sachs has issued a report stating that gold is "near an inflection point" which is likely to come next year and is "pointed lower after".
I find it odd because the reason that Goldman states this is because it expects an improved US economy that will supposedly blunt safe-haven demand for the metal based on its assumption that REAL interest rates will rise.
It's twelve month forecast for the price of gold is cut to $1800 with its 2014 view of $1750. That is hardly a big letdown but still it begs the question - Is this the same Goldman that just last week issued a report predicting that the Federal Reserve will be forced to implement QE4 at this month's FOMC meeting? You might recall that in that report Goldman predicted a $45 billion/month Treasury buying program to be announced by the Fed based on the fact that the US economy was still sluggish and that growth was lagging. This is of course in addition to the already announced and implemented $40 billion/month of MBS paper by the Fed.
Additionally, in that same report Goldman stated that this bond buying program would continue all the way through 2103. In the year 2014, economic conditions would improve enough that the Fed could ramp down the combined QE3 and QE4 programs to $50 billion/month which would continue into the early part of 2015. They also stated that they believed the Fed would not raise interest rates until 2016.
So which report are we to believe? Where is the rise in REAL interest rates supposed to be coming from? Is it from the Fed which they just last week predicted would not raise rates until 2016? Is it from the Fed which is expressly focusing on keeping LONG TERM interest rates low by embarking on another round of QE for the next 2 1/2 years?
I am merely stating what these two separate reports coming within a week's time frame are saying.
It is obvious that the people within Goldman who prepared the former report were not consulted with by the people who issued today's report. This is perhaps a great way of making sure that no matter what happens, your "team" got it right.
By the way, do you not find it ironic that on the same day that Goldman issues today's report, Fox Business is reporting that both Goldman and JP Morgan are considering layoffs due to the rotten business climate?
