"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, February 19, 2014

Hawkish Fed Derails Gold Rally

Not that it was "new" news but the FOMC minutes set the tone for gold ( and equities) for the rest of the session once they were released. The consensus seems to be a more upbeat view of the economy by the majority of the FOMC members. Keep in mind that this merry group does not exactly have a sterling track record of which to boast!

Either way, the hawkishness lent some support to the US Dollar and pressured gold as a result. Interest rates bumped a bit higher and once again we were back to gold having to compete with higher US interest rates.

I still have my doubts about the strength of the US economy but I suppose we will get a better sense of how things stand in reality after we get through this round of frigid weather and get back to more seasonal norms. Maybe then we can see what retail sales really look like, what housing really looks like and what the trend in the jobs picture really looks like.

If the market starts to believe that the US economy is faltering, interest rates will move lower, the Dollar will move lower and gold should get some further support. If the contrary is the case and the US Dollar bounces away from chart support near the 80 level basis USDX, look for gold to move lower.

Two noteworthy developments today on the heels of that FOMC statement - the mining shares led the bullion price lower with the HUI moving down and, more importantly, there was a rather large dishoarding of gold out of the ETF, GLD - about 5.5 tons to be exact. This brings the total holdings reported to 795.61 tons which incidentally is now BELOW THE STARTING LEVEL of 798.22 tons for the year.

It was just last week that the usual gold hucksters were out heralding the "surge" in gold holdings in GLD as evidence that the bull train was fast leaving the station. Yes, the technical chart posture of gold has improved tremendously, of this there can be no doubt for any unbiased observer. To see GLD give up this much gold so quickly however tells me that bulls are scared to death of any further bond buying reductions by the Fed. There was even chatter today about the Fed actually raising short term interest rates sooner than expected. I personally find that hard to believe but nonetheless, the market did not and thus gold was jettisoned out of interest rate fears.

Gold throws off no yield as any gains must come from price appreciation. Investors looking for yield will often look first at interest bearing Treasuries rather than a non-interest bearing asset, IF THEY ARE NOT FEARFUL OF INFLATION ERODING THOSE GAINS. If inflation becomes a concern, then real rates become important to the gold price.

Here is a chart of the ETF, GLD for your reference. Not exactly awe-inspiring as of yet is it?

Gold, from a technical standpoint, is riding the 200 day moving average. It strongly cleared this level last week and has been backing down this week. Thus far it remains above the moving average, which is friendly. The ADX is continuing to rise indicating that the uptrend is still intact.

We will have to wait to see at what level dip buyers, should they come back in right away, surface. I cannot help but think that today's price weakness is going to give Asian buyers some reason for pause. After all, the metal has risen, practically non-stop since the beginning of February. At some point, price sensitive Asian buyers are going to back away from the market and see if the price will move lower.

Psychological support should come in near the $1300 level. Below that is better support emerging first near $1280 and extending down towards $1270. Resistance is first at today's high near $1330.

Several commodity markets screamed higher today, most notably coffee, which suddenly is the darling of the commodity complex after being the ugly stepsister for a long, long time. Corn also showed some life today and wheat continues pressing further away from the $6.00 level.

Speaking of the $6.00 level, natural gas blew through it like a hot knife through butter. The genius forecasters changed the weather forecast again, this time putting another shot of frigid air into the longer term forecast. The words, "polar vortex" are fast becoming the natural gas equivalent of the grain market's " high pressure ridge". Mention it and traders become raving lunatics devouring their children and anything else that happens to stand between them and the buy button.

I will be watching the Euro to see what it does with the 1.38 level. Gold has essentially been following its movements almost exactly this entire month.