Dear CIGAs,
The battle between the inflationists and the deflationists continues unabated with market gyrations becoming increasingly violent as neither side appears able to gain an advantage. Just as it looks as if the bond market is going to side with the inflationists, it miraculously bounces from a major long term support area and ricochets higher while crude oil simultaneously drops lower giving up the gains from the previous day.
Trying to make sense out of all these wild price swings? Why bother; no one knows what is going on or what is coming with any degree of conviction to stand firm in their trading positions. Traders are buying and then dumping, selling and then covering with what can best be described as bipolar behavior. The markets have become nearly useless for sending any kind of price signals that are remotely reliable.
As such, only short term traders and I do mean short term (one hour or two at the most) can play in this sandbox. Those who believe gold is going much higher are better served simply accumulating the metal on any bouts of price weakness and finding an enjoyable hobby with which to occupy their time while the hedge funds murder and maim one another.
The price discovery mechanism is therefore short circuited for now as these things are merely bouncing around with the money flows on any given day. If the funds decide to buy, they go up – if the funds decide to sell, they go down. That is all that anyone really needs to know to explain any of this. I honestly do feel sympathy for the end users and producers of commodities who are attempting to get some sort of read on all this speculative idiocy in an attempt to establish legitimate risk management positions.
That brings us to gold – it is caught up in these same forces along with the rest of the markets and particularly the commodity sector. It does not know whether to follow crude oil down or follow the movement in the US Dollar or the bond market.
In my opinion, the federal monetary authorities have so interfered in the free market process and in the price discovery mechanism that they are responsible for a great deal of this confusion which is manifesting itself in these bizarre day to day price gyrations. When you have the Fed actively buying in the bond market in a deliberate attempt to artificially keep longer term interest rates excessively low, how can it be said with a straight face that the market is attempting to find the true rate of interest? The feds will not let it. The longer they meddle the more the distortions they are producing will increase and only serve to compound matters and further muddy the already murky waters. Hayek must be rolling over in his grave in witnessing all this centralized planning by hubristic men enamored with their own wisdom and prognosticative ability.
The mining shares, as evidenced by the HUI and the XAU, after bouncing strongly from the last swing low and looking like they are putting in an upside reversal on the weekly charts, are running into a bit of selling associated with the weakness in the broader equities and the deflation play as bonds move higher.
Open interest in Comex gold continues to remain locked within what can also be described as a relatively narrow range which also tends to confirm the lackluster, meandering consolidation pattern that the market continues to sketch on the technical charts. It looks like the summer doldrums are upon us. I am not sure what it will take to snap us out of this range other than a very sharp drop in the Dollar below support firstly near the 79.50 level and more critically, the 78.40 region.
At some point, this struggle between the deflationists and the inflationists will come to a conclusion and the markets will resume a more “orderly” behavior. I am in the camp of the inflationists when it comes to hard assets. When it does, gold will accelerate to the upside as the market then anticipates the wave of inflation. Right now everyone is sitting around debating whether the market has confidence in the Fed to head off any nascent inflationary pressures should those surface. That is folly in my opinion. These guys are wishing, hoping, praying and doing rain dances in the hopes that inflation will show up. They want it to show up and rear its head. The problem they face is that once that genie is out of the bottle, they are no longer in control, all claims to the contrary.
In looking over this environment, it seems to me one of the key missing factors on the inflation front is the absence of any real upward pressure on wages. We do have the commodity world bottoming out as evidenced by the CCI and the move up and away from the $35 – $40 level in crude oil and gasoline price increases but with the economy in the crapper, it is an employer’s market and workers have little in the way of clout that they could bring to justify increases in wages. Hey, if you have 5 guys standing in line to replace you it does not exactly give you the chutzpah to go in and demand a pay increase.
The problem arises when the weakness in the Dollar translates into speculative buying in the commodity complex which forces prices upward in energy, food and raw materials. That translates into higher prices at the retail level if merchants wish to maintain their profit margins. Consumers fall further behind because their wages are not keeping up with the increases in the basic necessities of life so discretionary spending suffers unless they are willing to dig themselves deeper into debt, something which does not appear to be happening. All in all, the middle class gets further squeezed as they find themselves unable to maintain the lifestyle which their parents enjoyed. Increasingly, it seems to me that more and more Americans are finding themselves depressed when looking into the future of their kids and grandkids. For maybe the first time in our history in a long time, more and more Americans do not believe that their children will be better off than they were. That is what is perhaps the most pernicious of effects of the damnable and cursed Federal Reserve and their pals on Wall Street and allies in the federal government who will not stop spending money that they do not have.
That more than anything is the reason to hold physical gold – you must protect your family from the depredations of these detestable leeches who are intent on destroying our national currency all for short term gain.
