"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


Friday, April 12, 2013

Massive Put Option Buying in GLD

News late in the session today, after the close of pit trading at the Comex, revealed a surge in the number of put options being purchased on the gold ETF, GLD. That news seem to further undercut the price of the metal after it had managed to claw its way back above the $1500 level to end the pit session.

Once the news hit about the GLD put options, the price just sank and sank and sank to the point where it not only reached an initial downside support level at $1480, but went right through it, trading as low as $1476 before the damned bell rang to finally close the screen trading and end the miserable session.

Based on what I can see at this point from those put option purchases, these guys are now looking for $1400 gold. Also adding to the mix of things is news that the CBOE Gold VIX (yes, there is even a VIX for gold) added 39% today, a record one day increase in percentage terms. It seems as if gold owners are now looking to purchase insurance on their insurance. How in the hell did we ever get to this place?

One thing I want to point out is what I feel is yet another contradiction in terms. Just this week, gold, priced in terms of the Japanese Yen, put in a 33 year high (possibly an all time high, I am not sure). Why did it do that? Simple - the Bank of Japan, in conjunction with the current political leaders of Japan, have embarked on a very public, very up-front, not at all covert policy, of deliberately debasing their currency in order to generate inflation of 2%. In effect, they are going to debauch the Yen in order to funnel everyone and their dog into Japanese stocks and real estate.

Now what do you think Japanese bond holders/potential buyers are going to think of all this? Why they are obviously quite concerned because they are buying or holding financial assets that throw off a fixed rate of return which is practically zero when their own political and monetary leaders have made it clear that they are going to follow policy which makes those same financial assets worth less than they currently are trading for, not to mention that the currency in which they are denominated is going to lose its value at the same time.

So here is what happened as a result. The yield on the Japanese 10 year bond went from 0.52% to 0.63% this week. How? Holders of these government bonds decided to get rid of some of them. The supply was larger than the demand and thus the price of the bonds fell meaning the interest rates went higher. The reason that they decided to sell bonds was based on expectations of inflation while holding a fixed rate investment.

Yet, at the same exact time that these Japanese institutional holders/buyers of government bonds are expecting inflation to pick up, gold in yen terms, after making a fresh 33 year high, completely does an about face and falls so sharply that, if the month of April were to close of this Friday, it produced a BEARISH DOWNSIDE REVERSAL pattern on its price chart after just having made a brand new high two days ago. I ask you, does any of this make the least bit of sense to anyone with a mind that can analyze and deduce things? How do we go from being concerned about inflation and a currency debasement to a mere two days later, throwing away anything that remotely looks like gold if we are Japanese investors?

Here is the chart...see if you can figure this out. My brain is no longer able to do so. In the world in which I try to live, 2 + 2 = 4. In this brave new financial world in which we live, it equals 5. Then again, maybe we will see this thing climb higher next week and spare us all from having to retake mathematics.

If the big boys and their elite pals were trying to cook up an opportunity to get long the gold market by shifting the largest speculators on the planet into selling, they have managed to do just that.

The Commitment of Traders report of this week is useless since it captured none of this drastic selling that occurred today. My guess is that, based on the volume of trading that occurred today, we have seen a further build in the hedge fund net short position in silver and are very close, if not there already, to seeing the hedge funds actually net short gold for the first time in a decade.

I never thought I would live long enough to see a world in which the very concept of money has been rendered so utterly meaningless. Money, the way I learned it, was a store of value. If "money" can now be created out of thin air, in unlimited quantities, with ZERO implications, repercussions or consequences, then we have indeed entered a new era in which prosperity can be created by a Central Bank, independent of manufacturing or any capital industry whatsoever and in which governments are unlimited in the amount of that money that they can spend. We have also seen the very notion of a bear market in stocks rendered completely obsolete. From this point forward in history, stocks will never go down and debt in itself has been transformed into an non-entity.

In short, every single thing we have ever learned from history is no longer applicable. Modern economics, monetary matters, etc. are need to be updated to reflect the new reality of Central Bank dominance. Pity John Law, he lived and died a few centuries too early. He was a man ahead of his time and a true genius, and would have been sainted had he only lived long enough to sit on the board of the FOMC.

Panic Selling Hits Gold

Volume in both the gold futures market and the Gold ETF has seen a massive spike today as the downside breach of major chart support at $1525 has resulted in wave after wave of both long liquidation and fresh hedge fund selling.

The headlines are screaming today" Gold Enters Bear Market" with the move down through support sending the price off 20% from its peak.

It is interesting reading the various reports from the wire services as no one is quite sure what the catalyst for the sell off is other than the idea that inflation pressures are non-existent. Some keep pointing to continued outflows from the ETF with gold being sold off but the question is, who has been buying that metal?

With crude oil finally succumbing on its price charts, the majority of the commodity sector markets are all moving lower.

This has me beginning to wonder about something... I have mentioned time and time again, that both Dr. Copper and the equity markets cannot be correct in their assessment of the economy. Either the copper bears have it all wrong or the equity bulls have it all wrong. It CANNOT BE BOTH.

Copper is off over 2% today; crude is currently off 3%; Gold by over 4% and silver by 6% at one point. The CCI is down nearly a full percentage point also. The only thing that has kept it sinking even deeper is some mild strength in the grains which I do not expect to last long.

Additionally, the Japanese Yen is getting another one of those stupid "safe haven" rallies that it is prone to get whenever there is a panic out of commodities. Both it and the US Dollar are moving higher while the US bond market is currently soaring. The yield on the 10 year note is down to 1.73%.

So what does all this mean? Obviously the efficacy of both the Fed's QE3 and QE4 and the Bank of Japan's latest round of liquidity injection is failing to produce any signs of solid, sustained economic growth. They have certainly been goosing both respective equity markets higher. Just look at a chart of the Nikkei and the S&P 500! Perhaps however, more and more investors/traders are starting to see these periodic money blasts as nothing more than short-term drug injections for a drug addicted economy. In other words, could we be seeing a shift in sentiment towards these Central Banks and their policies? 

I think it is important to note here, that none of us have ever lived through anything remotely like this. Never have we seen an era of this magnitude of money creation against a backdrop of sovereign nation bankruptcies and meltdowns. What any sane trader will do under such circumstances is to draw on his or her knowledge and experience but that only takes one so far. The truth be told, all of us are learning how this is going to play out from one Act to the next.

The retail sales numbers today were very disappointing for the market. Think about this for a minute - we have been assured by many members of the FOMC recently that the economy is growing, albeit slowly, but steadily enough so that the Fed can begin to scale back its bond buying program later this year. Heck, just this morning, one Fed member, Rosengren by name, stated that there is underlying strength in the US economy and that he expects to see unemployment at 7.25% by the end of the Year.

Well why not? It does not take much to get that number down there if more and more people keep dropping out of the labor force! So the Fed keeps talking about this unemployment number like it really means something significant. It means nothing, not if the labor participation rate keeps imploding yet they have targeted it as if it is some magic numbers with magical esoteric properties that when once reached, implies all of our worries are now over. What a crock of horsesh*t!

But I ask myself the question, if the economy has this sort of underlying strength, why then is crude oil dropping lower and why then are gasoline prices  continuing to sink leading up to a time in which seasonally, we generally see them begin to rise? Why is copper closing in on the bottom of its trading range instead of moving higher as we would expect it to do if there was underlying strength in the economy, not only here but globally?

But more importantly, here in the US, interest rates refuse to rise with any lasting strength. Instead we see them continuing to hover around recent lows unable to gain much traction on the upside. Yes, I understand that the Fed is rigging the interest rate markets but if there were any true signs of solid strength, bond prices would be inching higher. They are not, at least not here in the US.

Perversely enough for the Bank of Japan, their bond market over there is in a huge state of turmoil. It has been roiling ever since the market digested the news of their massive government bond buying policy. What is happening is that while the Bank of Japan is trying to force interest rates lower and drive investors into higher yielding equities and other investments such as REIT's, interest rates over there have actually crept higher. The yield on their Ten Year note has risen to approximately 0.62%. That is up from 0.52% recently.

Some of the largest bond buyers are asking the question why they should lock up money for 10 years at such a pitiful rate of return, with the underlying currency imploding and with the Bank of Japan stating categorically that they are deliberately trying to induce a 2% inflation rate. In other words, it is a lousy deal for holders of fixed income. This is obviously going to pose quite a challenge to the Bank of Japan moving forward for if interest rates rise, it is going to work at cross purposes to their plans. They could end up being the only buyer of size for Japanese government debt which in effect would then be pure and unadulterated monetization.

I said all this to merely point out that something is out of kilter. My own view, and I have thus far been wrong about this, is that the global equity markets are in a bubble that is unsustainable and are being kept levitated solely by Federal Reserve (add in Bank of Japan) liquidity measures. If traders begin to doubt that these measures will actually solve any of the structural issues plaguing these economies, (too much debt), then what is left for these Central Banks to do next? I keep coming back to the facts that US poverty rates are increasing and the labor force is shrinking all the while the population size is increasing. Does that sound anything remotely like an economy with inherent strength?

Meanwhile the volume in gold trading today is enormous. There is a huge change of ownership taking place as hedge funds now move aggressively to short the market abandoning stale longs that are turning into losers (Pity Paulson here as the market is now going after him in earnest - they are going to try to bleed him to death - they might have gotten him today) and beginning to build a larger short position. The sharp bullion banks have been attempting to exit their shorts and move to the long side in anticipation of what is coming but they need large sell orders to do that. They are getting those today.

It is too early to call this as a final washout day but it has the makings of one. Thus far volume is running about 3-4 times its normal size! It might be in the range of over 300K by the time this session is over.The emotions are off the chart as FEAR and PANIC are on full display. The problem is that the damage on the technical chart is quite severe and unless we get one of these spike bottoms that gold is famous for, it is likely that gold is heading lower. If gold can sustain a "15" handle on it by the time the dust settles today, the gold bulls will have dodged a major, major bullet. If not, $1480 is up next. By the way, the 200 WEEK moving average is down near the $1433 level.

Keep an eye on that HUI; the mining stocks have been an excellent precursor to what gold is going to do next. So far, they continue to appear dead in the water with no bounce as I write this. That might change before the session is over. If it does, I will note it. At is now stands however, it is down to levels not seen since May 2009 - nearly three years ago! It has dropped below the lower tine of the pitchfork which I would not have expected it to do. Looking at this chart, you can see a support zone extending down to 275 and below that another tine of a pitchfork extrapolated. One has to hope that it holds here. A worst case scenario is now a complete retracement of the entire rally off the 2008 lows putting it back to the starting point of the QE programs by the Fed.

If the Bank of Japan stimulus and the Fed's QE cannot take this market higher, I am not sure what the catalyst will be. I do know it will be currency related. The big question I am trying to get an answer to is "when will investors lose confidence in the currencies of these western nations?" When they do, gold will reverse course.

The Western Central Banks are propping up a zombie and attempting to portray it as having life. So far, they are fooling the majority of investors. I prefer to use history as a guide however and that tells me that not a single thing has been solved even with a wall of money thrown at it.

Expect Asian Central Bank buying to become quite active. Traders - trade small in size and be careful - this is not the time to become a hero....