"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
Reports coming in from
nearly all corners of the planet, but especially from Asia, continue to
reveal massive buying of physical gold. Last evening, what was obviously
a huge bear raid that occurred during the early Asian session, was
repulsed by very large buying above the recent low.
That is very interesting and has my attention. In a sense, we seemed to have gotten our second test of the low, a test in which that low held once again. With the wild price swings being made in this market, it is hard to be too dogmatic, but the way this market is acting, based on the news of strong physical offtake down near the $1350 level, I am greatly tempted to say that a low is in.
Here is what I am currently seeing here.
We certainly have the strong demand for physical - the big question I have is whether or not this is sufficient to take the market higher WITHOUT the strong investment demand from the hedge fund crowd that we have seen for so many years. Remember, that crowd is selling right now in the paper markets.
What spooked a lot of the gold analysts were those speculative outflows from the gold ETF, GLD. There was also large scale buying of put options there as well. As a side note, I asked then and continue to ask now, who has been buying all that gold that was being sold out of the GLD?
So once again we are back to witnessing the same battle that we have seen for over a decade now - the clash between the physical gold market buyers and the selling of the paper markets by the hedge funds.
How this might translate to price action is a market that stops moving lower but also one in which it cannot scoot higher either. There is an uneasy truce between bull and bear. Bears cannot break it down any further based on the amount of physical offtake but bulls need more recruits to their side from the hedge funds to have any upside fireworks occur. Thus we move in a broad range between the recent bottom and $1400 on the top.
Obviously, for gold to now recapture any bullish excitement, the handle of "13"needs to be replaced by the handle of "14" at a bare minimum. If that occurs, we will see some short covering begin among those who have sold down below $1350. They are counting on fresh selling into rallies to support their side of the argument and if they suspect that their allies might be wavering, fear of larger losses will send some of the packing.
It will all eventually come down to CONFIDENCE. When enough people around the globe, begin to lose confidence in their own currencies (and bond markets) and the policy of their respective Central Banks, the gig will be up. The large physical buying of gold is evidence enough that a growing number of people are increasingly concerned about the health of their domestic currencies.
When will the paper markets begin to reflect that again? The answer is unclear; but I am convinced it will happen. Keep in mind that the current monetary system as we know it, and I am talking about Bretton Woods, is not even a century old. As flawed as that was, at least there was some place for gold in that system. Since 1971 however, the entire system has been supported by nothing other than CONFIDENCE.
In effect, we are a little over a generation (40 Years) in an EXPERIMENT by Central Banks with a monetary system held together by nothing but sentiment! Think about that for a moment and let it sink in. This is why I believe these monetary masters are pulling out all the stops to somehow keep the public from any sort of nervousness, concern or panic. Yet, in spite of all that, we keep getting hot spots that continue to flare up.
This brings me back to the paper markets -
This gargantuan sum of hot money, every bit
of which has been given to us by the Federal Reserve and the Bank of Japan, is
a rolling juggernaut that crushes whatever is on the other side of it. Whether
it is exiting a market or entering a market, its appearance produces all manner
of price distortions, both on the way up and on the way down.
Eventually, the fundamentals reassert
themselves however. They have to or the paper market ceases to be of any value
in the real world whatsoever. Remember, there are thousands of commercial
entities that must rely on that paper market to hedge both long and short
positions as part of their overall risk management programs. Wild swings in
price, disconnected from reality, destroy hedges put in place by commercial
entities because MARGIN requirements, though lower for bona fide hedgers, still
must be met EVERY SINGLE DAY at the settlement process.
A hedge position can thus be blown to
pieces by this sloshing wave of speculator
activity requiring large margin calls and causing financial duress for a
commercial hedger. This defeats the very purpose for which they employ the
futures markets in the first place, THE MITIGATION OF RISK. The last thing any
entity engaged in the use, production, selling, purchasing, etc., of any
commodity wants is to stay up nights losing sleep over fears of an obliterated
hedge position.
If the paper markets become so volatile and
so disorderly, eventually these commercials will begin to look for other
mechanisms to offset risk other than the futures markets.
This will reduce the size and scope of the commercial participants in
these markets leaving them more and more to the speculators. The problem
with that is that this crowd, thanks to the algorithms, tends to move
to the same side of the market, meaning that there will be fewer and
fewer large traders to take the other side of their trades. Can you even
remotely imagine what that will do to market volatility and to the
eye-popping, stomach wrenching price swings??? It will for all practical
purposes, render many of these markets untradeable.
I
will go on record here and now stating
the NUMBER ONE SOURCE OF MARKET INSTABILITY is the zero interest rate
policies
of the Western Central Banks, (and the Bank of Japan). It is these
institutions
which have created this gigantic pool of hot money and who continue to
increase
it month after month all the while producing a near zero interest rate
environment in which it is impossible to obtain a decent rate of return
on
investment capital for most people. This tsunami of hot money crashing
ashore
and then receding back only to crash ashore again and recede back out
again, repeat ad nauseaum, ad infinitum, is what has given rise to the
insanity that we now daily witness in the paper markets.
Rather than having a calming or stabilizing
influence on the markets, the “masterminds” behind it have re-defined the world
volatility. This wall of money is so fickle, so unwed to any deep-seated conviction,
that it is a beast, a truly out-of-control behemoth that can easily devour the
entire financial global system.
Thank you Mr. Central Banker. Job well done. Keep telling yourselves how successfully your policies are working.
“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)
"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
In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people. Source – The Declaration of Independence
Source
banzai7
That is very interesting and has my attention. In a sense, we seemed to have gotten our second test of the low, a test in which that low held once again. With the wild price swings being made in this market, it is hard to be too dogmatic, but the way this market is acting, based on the news of strong physical offtake down near the $1350 level, I am greatly tempted to say that a low is in.
Here is what I am currently seeing here.
We certainly have the strong demand for physical - the big question I have is whether or not this is sufficient to take the market higher WITHOUT the strong investment demand from the hedge fund crowd that we have seen for so many years. Remember, that crowd is selling right now in the paper markets.
What spooked a lot of the gold analysts were those speculative outflows from the gold ETF, GLD. There was also large scale buying of put options there as well. As a side note, I asked then and continue to ask now, who has been buying all that gold that was being sold out of the GLD?
So once again we are back to witnessing the same battle that we have seen for over a decade now - the clash between the physical gold market buyers and the selling of the paper markets by the hedge funds.
How this might translate to price action is a market that stops moving lower but also one in which it cannot scoot higher either. There is an uneasy truce between bull and bear. Bears cannot break it down any further based on the amount of physical offtake but bulls need more recruits to their side from the hedge funds to have any upside fireworks occur. Thus we move in a broad range between the recent bottom and $1400 on the top.
Obviously, for gold to now recapture any bullish excitement, the handle of "13"needs to be replaced by the handle of "14" at a bare minimum. If that occurs, we will see some short covering begin among those who have sold down below $1350. They are counting on fresh selling into rallies to support their side of the argument and if they suspect that their allies might be wavering, fear of larger losses will send some of the packing.
It will all eventually come down to CONFIDENCE. When enough people around the globe, begin to lose confidence in their own currencies (and bond markets) and the policy of their respective Central Banks, the gig will be up. The large physical buying of gold is evidence enough that a growing number of people are increasingly concerned about the health of their domestic currencies.
When will the paper markets begin to reflect that again? The answer is unclear; but I am convinced it will happen. Keep in mind that the current monetary system as we know it, and I am talking about Bretton Woods, is not even a century old. As flawed as that was, at least there was some place for gold in that system. Since 1971 however, the entire system has been supported by nothing other than CONFIDENCE.
In effect, we are a little over a generation (40 Years) in an EXPERIMENT by Central Banks with a monetary system held together by nothing but sentiment! Think about that for a moment and let it sink in. This is why I believe these monetary masters are pulling out all the stops to somehow keep the public from any sort of nervousness, concern or panic. Yet, in spite of all that, we keep getting hot spots that continue to flare up.
This brings me back to the paper markets -
In
the SHORT term the paper
market can be used to push prices all over the place, sometimes
disconnected
from reality, because of the vast sums of money that are involved due to
the
proliferation of hedge funds who borrow gazillions of the stuff for next
to nothing and then stuff it into various markets around the globe.
Just
watch the extent of the price moves in various markets and tell me that
this is "normal" behavior. Those of us who have been doing this for a
long time can tell you that we can recall periods of extreme volatility
but those periods were more or less exceptions from the norm. They
tended to be of rather short duration and burned out quickly. What we
have nowadays is apparently now the NORM and periods of relative quiet
are the exception!
The
Central Banks, in an attempt to prop up their rotten Dagon, are
fighting furiously again the results of excessive debt by vainly trying
to encourage more of it! They are attempting to counter the forces of
deflation by employing what they can to foster the forces of inflation.
This is the war that is raging in the financial markets and is why this
volatility will be with us until one side or the other vanquishes its
opponent.
“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)
"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
In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people. Source – The Declaration of Independence
Source
banzai7
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