Dear CIGAs,
What a difference a few days time can make. Last Friday was “Get the Hell out of Dodge and head for them thar’ hills” in regards to risk trades. Today is “Damn the torpedoes – full speed ahead” as risk is back in vogue. Evidently “investors” (and I use this term with a great deal of derision these days as we no longer have investors in the true sense of the word; we have motion chasers) are pooh-poohing fears of sovereign debt default as overblown. That sent money pouring back into the commodity sector as more hot money flows distort prices and wreck havoc with commercial hedging across that sector.
Of course, that means that it was once again time to sell the US Dollar, ramp up the carry trades and buy everything else in sight. I will give credit to China as they are correctly taking the US to task for enabling another asset bubble in the commodity markets. The wheat market in particular has become a joke as export demand has fallen off the cliff for US wheat because of high prices yet the brain dead hedge funds continue to pour money into the grain sector, further depressing export sales and causing mighty grumblings among the commercial hedging class who are going to end up deserting the wheat contract altogether. Then all that will be left is hedge funds trading against hedge funds. The exchanges could care less as they are more interested in short term trading fees instead of the long term viability of one of their most important grain contracts.
Then again, this is what happens when a currency crisis begins to unfold – rising prices become inevitable. Even lumber is finally getting in on the act as the index funds suddenly discovered that it is “cheap”; forget the fact that home building has fallen into a black hole. Supply cuts are probably having some impact in there as mill closures across both the US and Canada have taken a large amount off the market, but one still wonders about the demand side of the equation. Regardless, the last hold out in the commodity sector in terms of rising prices associated with a collapsing currency has now joined the commodity market party.
None of this is lost on gold which has taken on a life of its own and is showing signs of getting ready to make a run to $1500 and above. The region centered around $1200 is formidable resistance on the inflation adjusted price chart and gold shot right through it this morning (those December $1200 call sellers are fighting like mad to keep that contract from extending its gains above 1200). In conjunction with that, the HUI took out the 500 level so both barrels are now firing in the gold sector. Not to be left on the sidelines, silver made that tough $19 barrier look like a fig leaf this morning as it pushed above that with relative ease, making a new yearly high in the process. While it is early in the week, weekly closes above $1200 in gold and $19 in silver will set both markets up for accelerated moves to the upside next week. We will need to watch things closely as the week progresses therefore to see whether the bulls remain resolute and committed.
One thing appears certain at this point – that move by India a while back to scarf up 200 tons of IMF gold, has changed the dynamics of the gold market permanently. In addition to that, more rumblings out of China related to gold purchases as part of its reserve diversification strategy have put a strong floor of support beneath the market. The Bullion Banks, while not to be underestimated, have met their match as a new bully has come into the sand box who is not intimidated by the plethora of paper gold that they manufacture daily in the Comex pit. This new bully is not enamored with paper money as is the West and wants to own the real deal.
That brings us to the US Dollar which once again has become the whipping boy for the international Forex markets. It has critical support coming in near the 74 level on the USDX. IF that gives way, we are going to be at 72 before you can say, “oligopoly”. It will take a weekly close above 76 to stem the negative attitude towards the Dollar. Interestingly enough, yesterday’s holiday-related release of the Commitment of Traders data showed the speculator category solidly on the NET LONG side of the greenback with the big funds having just this past week moved over to that side after being net shorts since May of this year . Quite frankly, that is a set up for swift leg down if 74 gives way. Not only will be see long liquidation but a rapid move to the short side of the market by these giant funds will crush the Dollar if the technical support levels cannot stem its decline.
Euro gold is closing in on the 800 level with British Pound priced gold now solidly above the 700 level. The West continues to witness its currencies being systematically destroyed by their own monetary authorities in the name of short term pain relief. No worries –they seem almost giddy at the prospect of ceding economic power to the East. As said so many times on the pages of this site – it is the most destitute among us and the shrinking middle class which will experience the worst of the hardships associated with a currency debauchment. A pox on the entire house of Central Banking and its pestilential inhabitants!
A short side note – check out the price chart of the CCI (Continuous Commodity Index) below and look carefully at the horizontal lines shown on it. The commodity sector as a whole has now been reflated as it has only one more level of resistance standing between it and the high made back last summer before the Japanese carry trade was unwound as part of the global deleveraging trade. Only if you recall at that time, crude oil was trading at nearly double the price where it is today. Crude has actually been lagging the commodity sector as a whole. The reason for that is the lack of demand associated with a stagnant economy in the West. If the hedgies decide “the hell with it” and make a move into crude as part of the inflation play, the CCI will easily move to the old high and then Heaven help us all – the dreaded inflation beast will have arisen to terrify us all. We will see $4.00 – $5.00/gallon gasoline in spite of a moribund economy.
Maybe it is just me, but I am increasingly worried over what is coming this way. The market action in gold tells me that it is something ominous… hopefully it is just a bad pepperoni pizza that has me on edge! To see a stock market that is oblivious to the real world continually chugging merrily higher and higher while its underlying currency is teetering on a precipice is like watching something out of the movie, “the Matrix”. Then again, it is probably just Agent Smith replicating himself over and over and taking control. Where the hell is Neo when you need him?
Click charts to enlarge in PDF format
