The big development for today is the price action in the US Dollar, especially in the light of the continued sell off in the US equity markets. By now you all know that the Dollar has been trading inversely to the stock market moving up on lower days in equities and moving down when (the few times) equities have moved higher. That is the result of safe haven flows. Today that came to a rather inglorious end. I noted yesterday that the Dollar was acting weak. Today’s move lower is therefore important as it shows follow through to the selling that began as the Dollar approached technical resistance near the .90 level on the USDX in yesterday’s session.
I am hesitant to call a top in the Dollar just yet because it has been frustrating would-be bears for some time now but its inability to push through the significant .90 level will not go unnoticed by technicians. The monthly chart is showing bearish divergence on the RSI which is also at levels last seen back in the year 2000 so it is at levels commensurate with downturns. The Dollar would have to drop down below .82 to turn the weekly and monthly charts into decidedly bearish patterns. The longer term moving averages however are trending higher so it is a short-term play until those definitively turn down.
Crude oil continues to exhibit resilience in the face of weaker equities which is also telling. While I am not suggesting it is about to immediately embark upon a new bull run, it certainly is looking more and more like a solid bottom is in that market. A further period of basing action is the more likely outcome rather than a new bullish uptrend but that is the thing that eventual bull markets are made of. Supply is drawing down as projects are shut in and with OPEC cuts taking effect, we look to be balancing supply against the new demand level. Any changes in demand will therefore push crude out of a basing pattern and into a trend. A close above $50 would be significant in that regards. That will help gold in my opinion as it will signal a shift out of the deflationary mindset. Keep in mind that many commodity markets appear to be close to bottoming and that at some point, the fears of deflation will give way to fears of inflation – all of which is friendly to gold.
Gold was capped at $940 in New York even in the face of swooning equities. It certainly seems that the gang of usual sellers are active near that level. Bulls will have to shove them out of their lair and move prices to $960 to give gold a shot at resuming its uptrending move and a chance at $1,000 once again.
As I write this, the HUI is trading above the 290 level. If it can hold its gains into the close and maintain this level it will bulls a real chance at pushing this index back into a friendly posture but it will take a weekly close above the 323 level to get the uptrend in the HUI going once again. The XAU looks a bit stronger than the HUI. It has turned its daily chart back to friendly with today’s gains (again – assuming it can hold those gains into the close). IT will take a weekly close above 132 to give bulls a shot at resuming the uptrend in the stocks that make up that index.
Bonds, after yesterday’s torrid gains, attempted to mount a charge higher at one point but were derailed when a Fed official put the kibosh on any idea of immediate Fed purchases out along the long end of the curve. That brought supply fears back to the forefront of traders’ minds and kept sellers active. They are still maintaining some gains with the lower equity markets but the bulls had the wind knocked out of them and will need to reassert themselves soon if they want to turn the weekly chart positive. Right now it is still a series of lower highs.
There is no need to mention the jobs number, or rather, lack thereof. We all know they stink and so does the rest of the Street. American Expresss dropped below $10.00 today. It is quite breathtaking to see the share prices of these “blue chips”. I would suggest that they rename them as “red chips” because all I see in there is bleeding with the Dow looking more and more like it is headed down below 6,000. It is pretty frightening to behold the extent of this carnage seeing that the DOW has now retraced more than 50% of its entire move off the Great Depression lows and it has done this in a matter of 7-8 months time. The amount of wealth destroyed, or better, vaporized, is horrendous. That value represents the hopes and dreams of millions of our fellow citizens. What is even worse is the plan being put forth to supposedly arrest this debacle contains nothing whatsoever to reverse it but rather threatens to turn it into a deep, long lasting depression.
Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini
A caller today asked me why Gold was up.
My answer is simple:
Up is right and down is wrong!
Just ask Alf:
* Major ONE up from $256 to $1,015 (actually 4 times the $255 low);
* Major TWO down from $1015 to $699, say $700 (a decline of 31%);
* Major THREE up from $700 to $3,500 (a Fibonacci 5 times the
* Major FOUR down from $3,500 to $2,500 (a 29% decline);
* Major FIVE up from $2,500 to $10,000 (also a 4 fold increase,
same as ONE)
This move is beyond $1224, beyond $1650 and up to $3500. That is only for starters.
As you know by now I farm for a living. Many farmers sold grain to ethanol plants this past summer between 5 and 8 dollars per bushel. Many of these ethanol plants have gone into bankruptcy and don’t have to pay off the counter-party (the farmer) even though there is a contract. So why do the counter-parties to AIG’s debt have to be paid off? How many farmers lost millions because they chose to pass price risk to ethanol plants who are now bankrupt.
CIGA and in your debt,
Pressure to reveal major AIG counterparties grows
Some suggest fees for firms that got billions of dollars from insurer’s bailout
By Alistair Barr & Greg Robb, MarketWatch
Last update: 6:35 p.m. EST March 3, 2009
SAN FRANCISCO (MarketWatch) — Calls increased Tuesday to reveal the financial institutions that got almost $40 billion in collateral from American International Group shortly after the government first bailed out the insurer last year.
AIG almost collapsed in September after ratings agency downgrades triggered demands for billions of dollars in extra collateral from firms that had bought derivative-based protection from the insurer on complex mortgage-related products known as collateralized debt obligations, or CDOs.
AIG didn’t have that much money and faced bankruptcy. But it was saved by an $85 billion emergency loan facility from the Federal Reserve.
I answered your question earlier in the day when I posted the FYI article on AIG.
Here are two of the many pension plans in trouble:
Oh crap, my wife is in the Missouri Teachers retirement plan!
As always, thank you for all you do!
Below is a story from today’s NY Times about how the specialists finally have to pay up pennies for decades of front running their clients.
14 Trading Firms Settle Charges for $69 Million
By DIANA B. HENRIQUES
March 5, 2009
More than a dozen Wall Street trading firms systematically cheated their customers of millions of dollars by improperly slicing bits of profit from countless trades, federal regulators said on Wednesday.
The Securities and Exchange Commission disclosed the allegations after negotiating settlements. The firms did not admit or deny the charges but agreed to pay a total of more than $69 million in forfeited profits and penalties.
The 14 firms named in the complaints are all “specialists,” trading firms that have a specific duty to maintain orderly markets by matching buyers and sellers and standing ready to conduct trades when buyers or sellers are scarce. They include units or subsidiaries of well-known Wall Street names, including E*Trade Capital Markets, Goldman Sachs Execution and Clearing, Knight Financial Products and TD Options.
Regulators said the firms had engaged in various types of “front-running,” which involves trading ahead of customer orders or timing their own trades to seize profits. For instance, specialists that had a big order to buy a stock would first buy it from a seller themselves and then illegally bid up the price moments before selling it to profit on the transaction.
The numbers are truly staggering with more yet to come as things deteriorate further. Your formula is really gaining momentum!
CIGA Big Tatanka
More Than 8.3 Million U.S. Mortgages Are Under Water
By Dan Levy
March 4 (Bloomberg) — More than 8.3 million U.S. mortgage holders owed more on their loans in the fourth quarter than their property was worth as the recession cut home values by $2.4 trillion last year, First American CoreLogic said.
An additional 2.2 million borrowers will be underwater if home prices decline another 5 percent, First American, a Santa Ana, California-based seller of mortgage and economic data, said in a report today. Households with negative equity or near it account for a quarter of all mortgage holders.
“We have way too much supply and not enough demand,” Sam Khater, senior economist for First American, said in an interview. “People aren’t going to purchase a home as long as prices keep falling, and someone who is worried about their job isn’t going to purchase a home either.”
Prices in 20 U.S. cities fell 18.5 percent in December from a year earlier, the fastest drop on record, according to the S&P/Case-Shiller index. Sales of previously owned homes, which account for about 90 percent of the market, fell in January to the lowest since 1997, and new-home purchases plunged to the lowest since records began in 1963, the National Association of Realtors and Commerce Department said.
The total value of residential properties in the U.S. fell to $19.1 trillion by the end of 2008, down from $21.5 trillion a year earlier, First American said. California lost more than $1.2 trillion in value last year, accounting for roughly half of the national decline in housing values.
Dear President Obama,
You think you have problems now?
Present challenges, economic or political, are nothing compared to when this one lands on your desk; the implications of which are generational in nature.
Pakistan ‘bigger problem’ than Afghanistan: US diplomat
LONDON (AFP) — The top US diplomat in Kabul warned that Pakistan posed a bigger security problem for the rest of the world than Afghanistan, in a newspaper interview published Thursday.
Christopher Dell spoke after Tuesday’s attack on Sri Lanka’s cricket team as they travelled to a Test match in Lahore which left eight people dead, and has raised doubts about the government’s ability to tackle Islamic militancy.
"From where I sit (Pakistan) sure looks like it’s going to be a bigger problem," Dell told the Guardian newspaper.
"It is certainly one of those nuclear armed countries the instability of which is a bigger problem for the globe.
"Pakistan is a bigger place, has a larger population, it’s nuclear-armed.
"It has certainly made radical Islam a part of its political life, and it now seems to be a deeply ingrained element of its political culture. It makes things there very hard," he told the British daily.
Pakistan, a key US power in the "war on terror", is battling Taliban and Al-Qaeda militants along its rugged and lawless border with Afghanistan in the northwest.
More than 1,600 people have died in attacks in Pakistan in the last 22 months and analysts say its security agencies are failing to provide adequate security against militants, who could challenge the rule of President Asif Ali Zardari.
Fundamentalist Islamic law expands in Pakistan
Pakistani officials agree to 17 steps as part of a peace deal with extremists, alarming human-rights groups and others. Also, a bomb exploded at a Peshawar mausoleum where women came to pray.
By Mark Magnier
8:06 AM PST, March 5, 2009
Reporting from Lahore, Pakistan — In an apparent expansion of Islamic fundamentalists’ authority in the picturesque Swat Valley, local Pakistani officials have agreed to close shops at prayer times and crack down on prostitution and drug dealing as part of a proposed peace deal, according to media reports today.
The steps were among 17 points that emerged following a Wednesday meeting involving provincial government officials and supporters of a pro-Taliban cleric mediating the talks, according to the Associated Press.
Although Sharia, or Islamic law, has been in practice in many parts of Pakistan’s North-West Frontier Province and its tribal areas, its official expansion into a region less than 100 miles from Islamabad, the capital, last month has unnerved secular groups, human-rights activists and Western officials.
In a separate development underscoring the debate in Pakistan over religious extremism, a bomb exploded today at the mausoleum of a 17th century Sufi poet in the northwestern city of Peshawar after its management received a letter complaining that women were coming to pray there.
The predawn blast damaged a corner of the monument commemorating Sufi poet Rehman Baba, but no one was injured. The bomb appeared aimed at practitioners of the mystical Sufi form of Islam opposed by more hard-line Muslims
Jim Sinclair’s Commentary
Here is another statement on the condition of government affairs.
Scandal at Treasury: Official Quits Amidst Fraud Scandal
Darrel Dochow Allowed IndyMac Bank to Cook Its Books, Investigators Say
By BRIAN ROSS, JUSTIN ROOD, and JOSEPH RHEE
March 5, 2009
The man at the center of a fraud scandal at the Treasury Department has been allowed to quietly quit and retire from his job as a government regulator, despite allegations that he allowed a bank to falsify financial records and amidst outcries from investigators who say the case shows how cozy government regulators have become with the banks and savings and loans they are supposed to be checking on.
Darrel Dochow, the West Coast regional director at the Office of Thrift Supervision who investigators say allowed IndyMac to backdate its deposits to hide its ill health, quit last Friday. Prior to his leaving, Dochow was removed from his position but remained on the government payroll while the Inspector General’s Office investigates the allegations against him.
Jim Sinclair’s Commentary
Not very long if you are a legislator whose pension fund is run by a subsidiary of AIG.
Pension Plans: How Long Can We Sweep the Problems Under the Rug?
March 05, 2009
Despite the influx of fiscal stimulus money, the governor of Arizona is appearing Thursday afternoon before a joint session of the legislature to lay out the sobering facts about the fiscal condition of the state. The stimulus money only plugged the current hole. It does nothing to address the systemic hole that Arizona has dug for itself.
According to the Goldwater Institute, the state faces a $4 billion funding shortfall for its proposed $10.5 billion fiscal year 2010 budget. To put that another way, in fiscal year 2004 the state’s spending was $6.5 billion and the budget was largely in balance. Arizona is now generating revenues at 2004 levels thus the challenge is to get expenditures right-sized.
Not an easy task and one that most likely is not going to be accomplished by cutting programs exclusively. A tax increase is sure to be on the table. A dire situation but there is probably one item that won’t be discussed this evening even though it may represent the biggest time bomb of all. The state’s pension funds.
The dirtiest little secret in government finance has to be the sorry state of the state and municipal pension plans. Leaving aside the promises of rich retirement benefits that were from inception mathematically impossible to deliver the schemes and deception that the various governments are employing to delay the day of reckoning are stunning.
An article in Bloomberg a couple of days ago shined a much needed light on them.
Jim Sinclair’s Commentary
As long as you do not see the reinstitution of the uptick rule in the USA and the USA and Canada do not enforce the up tick rule, there is no criminal fraud indictment of naked short sellers. The inviting conclusion is that the equity disaster is wanted, desired and engineered. Citi as a penny stock is a disgrace to the USA, its Administration and regulators.
This disaster now exceeds 1929.
Japan to extend curbs on short-selling – Nikkei
Thu Mar 5, 2009 1:54pm EST
NEW YORK, March 5 (Reuters) – Japan’s Financial Services Agency plans will retain restrictions on selling stocks short because the market remains unsettled, financial daily Nikkei said in its Friday edition.
The curbs include a ban on naked short-selling, or shorting a stock without first borrowing the shares, and call for reporting requirements for large short positions, the paper said. Short-sellers with positions of 0.25 percent of a company’s outstanding shares or more must file reports.
The regulations had gone into effect in October, as the global financial crisis deepened, and have been due to expire at the end of March. U.S. measures similar to Japan’s are scheduled to last through July, and Europe also has short- selling restrictions in place.
Short-selling, or betting that stocks will go down, has been blamed for deepening drops in stock prices.
(Reporting by Gerald E. McCormick; Editing by Andre Grenon)
Jim Sinclair’s Commentary
"As Goes Motors So Goes the USA"
–Bert Seligman (1958)
‘Going-concern warning’ raises spectre of GM bankruptcy filing
Kevin Krolicki, Reuters Published: Thursday, March 05, 2009
General Motors Corp on Thursday said its auditors had raised "substantial doubt" about its ability to survive outside bankruptcy if it fails to stem its losses and stop burning cash.
The "going concern" warning from the struggling U.S. automaker had been expected, but underscored the stakes for GM as it seeks up to $30 billion in U.S. government aid to restructure outside a court-supervised bankruptcy process.
GM had warned late last month that it expected its auditors would question its viability at the same time that it reported a loss of nearly $31 billion for 2008.
The automaker faces an end of March deadline to complete concession talks with the United Auto Workers and bondholders to reduce its debt load as part of a bid to convince the autos task force assembled by U.S. President Barack Obama that it can be made viable with a new round of government help.
Jim Sinclair’s Commentary
We shall suffer from the sins of our Financial Fathers.
This is so bad!
Fed Refuses to Release Bank Lending Data, Insists on Secrecy
By Mark Pittman
March 5 (Bloomberg) — The Federal Reserve Board of Governors receives daily reports on loans to banks and securities firms, the institution said in response to a Freedom of Information Act lawsuit filed by Bloomberg News.
The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast “a stigma” on recipients of more than $1.9 trillion of emergency credit from U.S. taxpayers and the assets the central bank is accepting as collateral.
The bank provides “select members and staff of the Board of Governors with daily and weekly reports” on Primary Dealer Credit Facility borrowing, said Susan E. McLaughlin, a senior vice president in the markets group of the Federal Reserve Bank of New York in a deposition for the Fed. The documents “include the names of the primary dealers that have borrowed from the PDCF, individual loan amounts, composition of securities pledged and rates for specific loans.”
The Board of Governors contends that it’s separate from its member banks, including the Federal Reserve Bank of New York which runs the lending programs. Most documents relevant to the Bloomberg suit are at the Federal Reserve Bank of New York, which the Fed contends isn’t subject to FOIA law. The Board of Governors has 231 pages of documents, which it is denying access to under an exemption under trade secrets.
“I would assume that information would be shared by the Fed and the New York Fed,” said U.S. Representative Scott Garrett, a New Jersey Republican. “At some point, the demand for transparency is paramount to any demand that they have for secrecy.”
Jim Sinclair’s Commentary
For Your Information, VALIC are subsidiaries of American International Group (AIG).
AIG VALIC Expands Independent Advice Platform to Serve Participants in Retirement.
HOUSTON — AIG VALIC, a national leading provider of retirement plan services to for-profit and not-for-profit education, healthcare and government organizations, today announced that Guided Portfolio Services(SM) (GPS), its independent advice and managed-account platform offered through VALIC VALIC Variable Annuity Life Insurance Company Financial Advisors, Inc., has been expanded to offer comprehensive capabilities to clients entering the income distribution phase of retirement.
Launched in January 2003, GPS delivers comprehensive investment advice and discretionary managed accounts services to individual participants in employer-sponsored defined contribution retirement plans – principally in the accumulation and transition phases of retirement planning. Entering 2007, GPS has been expanded to service clients entering the distribution phase of retirement by providing personal wealth forecasts, comprehensive portfolio construction and ongoing portfolio optimization.
AIG VALIC is one of the leading retirement plan services providers in the United States. For more than half a century, it has specialized in providing retirement programs and related investment, recordkeeping and administrative services to a variety of employer types, including for-profit and not-for-profit elementary and secondary education institutions, hospitals and healthcare organizations, higher education institutions and governmental entities. VALIC serves 28,000 client groups and more than two million participants. AIG VALIC is the marketing name for the group of companies comprising VALIC Financial Advisors, Inc.; VALIC Retirement Services Company; and The Variable AnnuityVariable Annuity
An insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio.
Fed’s Kohn Says Risks of Not Rescuing AIG ‘Unacceptably Large’
By Scott Lanman and Hugh Son
March 5 (Bloomberg) — Federal Reserve Board Vice Chairman Donald Kohn said that while the decisions to rescue American International Group Inc. have been “difficult,” the costs of withholding aid to the insurer would be “unacceptably large.”
“The disorderly failure of systemically important financial institutions during this period of severe economic stress would only deepen the current economic recession,” Kohn said today in remarks prepared for a hearing of the Senate Banking Committee. “We have been and will continue to work alongside the Treasury and other government agencies to avoid this outcome.”
Kohn’s comments, building on remarks this week from Fed Chairman Ben S. Bernanke, indicate the government may commit more funds to avoid an AIG failure. Bernanke told another Senate panel on March 3 that AIG’s collapse “would be devastating to the stability of the world financial system” and jeopardize taxpayer investment in the firm, now totaling $163 billion.
The government provided a revised rescue this week, adding a $30 billion line of capital, as the New York-based company reported a $61.7 billion fourth-quarter loss. The Fed warned that AIG may need more aid if markets don’t recover.
“Extreme financial and economic conditions have greatly complicated the plans for divestiture of significant parts of the company in order to repay the U.S. government for its previous support,” Kohn said. The new plan will “provide longer-term stability to AIG” while “maximizing likelihood of repayment to the U.S. government,” Kohn said.
Jim Sinclair’s Commentary
Destruction (negative basis crime) is the moving principle of the dollar demons in today’s markets.
Someday they will hurt the wrong people.
They cannot remain immune to their damages of life and fortune.
Darth Wall Street Thwarting Debtors With Credit Swaps
By Caroline Salas and Shannon D. Harrington
March 5 (Bloomberg) — Amusement-park operator Six Flags Inc. and automaker Ford Motor Co. may be pushed toward bankruptcy by bondholders trying to profit from credit-default swaps that protect against losses on their high-yield debt.
By employing a so-called negative-basis trade, investors could buy Six Flags bonds at 20.5 cents on the dollar and credit- default swaps at 71 cents. If the New York-based chain defaults, the creditors would receive the face value of the debt, minus costs. In a Feb. 27 note, Citigroup Inc.’s high-yield strategists put that profit at 6 percentage points, or $600,000 on a $10 million purchase.
Investors who bet on the collapse of a company are pitting themselves against traditional debt holders at a time when Moody’s Investors Service projects defaults will more than triple this year and exceed the level during the Great Depression. The clash may stall restructuring efforts to prevent bankruptcies, as basis traders may be less inclined to participate in distressed debt exchanges, said Matthew Eagan, an investment manager at Boston-based Loomis Sayles & Co., with $7 billion in high-yield assets.
“Before, you really had to worry mostly about where you were in the” company’s capital structure, he said. “Now, you have to consider the possibility that you might have this large holder of CDS incentivized to see it go into bankruptcy. It’s something that’s going to come up more and more.”
Six Flags Debt
Six Flags debt is rated Caa3 by Moody’s and CCC+ by Standard & Poor’s, three and five levels above default. Both rankings were put on “negative outlook” last year. Sandra Daniels, a spokeswoman for the New York-based company, didn’t return a phone call seeking comment.
Jim Sinclair’s Commentary
This could give some naked shorts a new rear end. You have to beat them to death by spectacular successes.
China’s spending spree likely to include Canadian companies
Duncan Mavin, Financial Post Published: Wednesday, March 04, 2009
HONG KONG – Asia’s dealmakers say a Chinese resource spending spree will accelerate throughout the next 12 months, with Canadian mining and energy companies likely on the shopping list.
Chinese buyers have already scooped up US$70-billion worth of global resource assets so far this year, as Beijing looks to secure its energy and resource future by spending some of its US$2-trillion in foreign exchange reserves.
The overseas buying trend will pick up steam in the months ahead, according to China and Hong Kong-based corporate dealmakers, investment bankers and private equity players surveyed by Royal Bank of Scotland and Mergermarket.
The report comes as expectations soar Beijing will deliver another stimulus package on Wednesday to add to the 4-trilion yuan (US$586-billion) in spending announced late last year. Further stimulus measures will be announced at the National People’s Congress – the climax of the country’s political calendar that features 3,000 delegates from across the country – according to government officials quoted in Chinese state media. Reuters reported, citing an unidentified official at the country’s top economic planning agency, that China will spend more on infrastructure and to boost manufacturing in addition to the stimulus package announced in November.
Details of Beijing’s previously announced spending plans are still sketchy although much of it is directed toward resource-intensive infrastructure projects in the transport and energy sectors.
Jim Sinclair’s Commentary
Pakistan is over. It is a process, not a specific event. The Taliban are in control of this process.
Pak facing six critical threats to its survival
Islamabad/London, Mar.4 (ANI): The militant assault on cricket tourists in Lahore puts sharp focus on a fragile democracy that is at risk of disintegration and international isolation in Pakistan.
Whole provinces run beyond the writ of the state.
According to The Guardian, security is not the only problem of a country that the United States now considers a greater threat than neighboring Afghanistan.
With the economy teetering, political tumult building and social conditions ripe for extremists, nuclear-armed Pakistan faces six critical threats to the rule of law and governance of the state.
The current violence started in summer 2007, when security forces routed armed militants at the Red Mosque in Islamabad.
That event turned militant groups that were focused on India or Afghanistan inwards, to Pakistan itself.
Gold came roaring back today as equity buyers from yesterday barfed them all up today in a case of indigestion that was reportedly due to disappointment over lack of further news out of China in regards to their stimulus package. That was at least the rumor – whatever – the fact is that yesterday’s blip turned into a classic example of a “dead cat bounce”. By the way, for those new to the investing and trading jargon – if you drop a dead cat from a high enough building, it will manage a small bounce after it hits the ground. Now that we have that cleared up…Did you ever think you would live to see CITI trading as a penny stock?
While yesterday was a “reflation” day in the commodity sector with money coming back in on the China news, today was a “deflation” day in which most of the commodity markets got sold off once again. Yo-Yo – let’s all play hedge fund Yo-Yo.
Copper ran out of buyers today but silver, platinum and gold were all higher. Again, these three metals are trading as precious metals or safe havens in today’s session. Today hedge fund computers were selling commodities as the equities collapsed. Panic buying also hit the bonds today forcing shorts out and driving the long bond up into the 20- day moving average. For the life of me, I do not understand the obsession of bond buyers in the face of a coming avalanche of supply and serious dilution of any value those paper IOU’s might have but I suppose old habits die hard and lemmings will always be lemmings. It dovetails nicely with Monty’s comments on the rush into the Dollar in his remarks yesterday. Bond buying will run its course when serious minded investors realize that bonds are a sucker’s play. I harp quite a bit on this because if only a small fraction of the knee-jerk, reflexive buying that screams into bonds would instead move to gold, it would easily surpass the $1000 mark again. Of course the cynic in me says that the feds are delighted to see the bonds soaring higher because it sends a signal to the market that those paper scraps are actually worth something especially as they intend to issue gazillions more of them and desperately need some sucker/(s) to buy them. Oh yes, I forgot – they are backed by the “full faith and CREDIT of the US government”. I don’t know whether to sit down and guffaw about that or to weep. The words, “confidence” and “US government”, are like oil and vinegar. They no longer mix.
Technically gold found support near that 40 day and 50 day moving average region that I have detailed. There is a zone of congestion that occurred back in late January and early February that lasted for around 2 weeks from which it may be able to set up a trading range with perhaps $930 as the upper portion of that range and $890-$900 as the bottom of the range. I am simply not sure just yet and need some more time to elapse to get a better read on things. That being said, should $930 give way on a pit session close, it would bring back $960 as a probable test.
The HUI put in a potential spike bottom on Tuesday of this week but needs to close above the 290 level to confirm that. The XAU’ action is very similar and needs a close above the 120 level to confirm a short term bottom is in.
The action in the Dollar is interesting in this sense. Today should have had a lot going for the Dollar with the bonds soaring on a safe haven bid and the equities tanking. We have seen the Dollar put in strong gains on days like this in recent weeks. Today however it seemed to run into a wall of selling just below the 90 level. I do not want to call a top yet in the Dollar because it has defied gravity and been the recipient of safe haven but the fact that sellers were willing to step in on a day like today, at a technically significant level, is something I take notice of. Again, it is too early to make any predictions yet but I am keenly watching this especially because the shorter term technical indicators are showing some signs of bearish divergence. I am also watching the Euro which came well off the session lows.
I want to repeat this even at the risk of beating a dead horse and mainly on account of the emails I receive every single time gold experiences any sort of price movement that is not straight up. The deflationists are dead, flat out wrong about the future of gold prices. The Prechterites, who have been wrong on gold going back as far as this bull market in gold began, continually are forced to raise the ceiling from which their long anticipated and predicted collapse in gold prices must occur. Anytime you see them coming out of the woodwork like roaches keep this in mind – GOLD IS NOT A COMMODITY – it is a CURRENCY. Loss of trust in paper currencies is why gold shines. Whenever you hear chatter about market tops and such, remember that their analysis is US centric and is not global. IN other words, they base their entire premise on the Dollar price of Gold. That is their fatal weakness. While many here in the US think we are the be all and end all of things, there are millions and millions of investors outside of the US who do not price gold in Dollars; they price it in terms of their own domestic currencies. Contrary to the foolish deflationist assertions that gold is experiencing a contra rally in a bearish long term trend, gold has just come off of making new, all-time, record highs in terms of most every other currency on the face of the earth. That my friends, is not a bear market and any assertions to the contrary display an ignorance that is nothing short of remarkable.
According to this mentality, record inflows to the gold ETFs, scarcity of gold bullion coins, high premiums in those same coins, record all time highs in price, etc. are all somehow synonymous with a bear market rally in gold! Astonishing….the only explanation that I can come up with for such a nonsensical assertion is that the proponents of such blather have just loaded up on put options and are hoping like hell that they make some money to compensate them for all their previous trading losses in gold.
Folks – savvy investors buy gold because they are worried about protecting themselves from the depredations of Central Bankers and their currency-debauching activities. Short term oriented traders on the other hand move in and out of gold and will go long or even short at times, but their time-line and their motives are not the same as those seeking safety and capital preservation. Do not confuse the two.
Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini
Click the following chart to enlarge today’s Monthly Gold chart in PDF format with commentary from Trader Dan Norcini
Why the U.S. Dollar Is Vulnerable to Decline Now
March 04, 2009
The Technical Outlook
If we observe the $USD graph for March 2, 2009, we see that the USD has just broken above the resistance level of 88. Will this mark the beginning of a new run higher in the U.S. dollar? Currently the U.S. dollar is benefiting from the propaganda of other countries (i.e. China), political games, intervention ofthe Exchange Stabilization Fund, and the foolish actions of the Bank of England [BOE] and the European Central Bank [ECB] which have caused Europeans to flee the Euro and the Pound Sterling.
However, fleeing the Euro and the Pound Sterling for the U.S. dollar is akin to fleeing the Lusitania for the Titanic. All three currencies are sinking ships and fleeing one sinking ship for another sinking ship is just not intelligent and is destined to end poorly for all involved parties.
Therefore, I believe that this subsequent “breakout” above 88 will be short-lived. While the U.S. dollar may meander higher for a short-time longer above 88 as the U.S. Treasury and the Exchange Stabilization Fund reach deeper into their bag of monetary tricks, I do believe that when it breaks back down below 88 sometime shortly, the retreat will be marked by periods of extreme volatility and rapid decline.
On a subsequent decline below 88, which in my mind is imminent, I have noted an important level of intermediate resistance at around 81-82 in the above chart, as this was the floor that existed for three years before the USD plummeted below it in 2007.
If it breaches this level, the next point of resistance would be at 76. If the USD breaches 76, then the bottom would be anyone’s guess at this point. This breach may take some time to develop, but right now, I would have to say that the dollar’s breakout above 88 is likely to be a false breakout.
However, my belief in a sharp, and at times, violent decline in the dollar’s not-so distant future is not based upon the above technical analysis so much as the political clues that are beginning to slowly rise to the surface in not so aboveboard comments made by other nation-states. So even against the unsound and increasingly risky Euro and Pound Sterling currencies, betting on the U.S. dollar is still a very risky play at this juncture.
The More Important Political Outlook
On February 11, 2009, the Financial Times out of London reported:
“China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday. China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world’s largest holding of Treasuries.”
“Mr. Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: ‘Except for US Treasuries, what can you hold?’ he asked. ‘Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.’ Mr Luo, whose English tends toward the colloquial, added: ‘We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .We know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.’”
This is my analysis of the above statement. If you have ever played poker before, you know that Mr. Luo is bluffing to conceal the true intentions of the Chinese government. If you are planning to dump a significant portion of assets (U.S. Treasuries) that you believe will be heading towards massive depreciation, the last thing an intelligent market player would do is to tip his hand before executing his plan. Instead, an intelligent player would tell the world what he wants the world to believe, i.e., that he has no choice but to continue to hold U.S. Treasuries while he makes alternate plans to offload them. The monetary crisis that is the root of all global economic problems today is a game with massive stakes at hand, and no player in this global game, even a key one such as China, is going to reveal her true intentions.
That said, I imagine that Mr. Luo is not a very accomplished poker player, because it appears that he played his bluff very poorly. If I were him, I would have not said another word after telling the world that “U.S. Treasuries are the safe haven.” Instead, Mr. Luo ruined his bluff by trying hard to convince us that China has no options with his statement: “We hate you guys…we hate you guys but there is nothing much we can do.”
China grows and everyone acts as if it is a surprise. We have followed China for many years, and have been calling for strong Chinese growth in 2009. This is not due to our personal wisdom, this is due to the work of our 3 favorite economists. These economists are based in China and have been remarkably accurate in the past. We also have seen the work of 12 or more China based economists who have not been accurate in the past. Our bullish outlook for China has been based upon the economic outlook of the accurate economic forecasters. Now we get corroborations from the numbers and from the statements of government officials.
China will grow in 2009 much more than any other country of any size.
However let us be realistic, China’s growth alone or when combined with slower growth from India will not be enough to create any semblance of growth in Europe and North America.
The global depression in Europe and the US will continue and accelerate in coming months.
THE US DOLLAR AND THE REPATRIATIONOF US ASSETS TO THE US….. THE CURRENT VIEW VERSUS THE RATIONAL INVESTOR
According to several currency strategists, the US dollar will continue to rally for months or even a year. They say that global fear and panic in the investment and banking environment are causing the repatriation of massive amounts of US dollar assets held overseas to be repatriated into the US and placed back into dollars. They argue that as US holders of foreign stocks, bonds and direct investments made by US companies and individuals for the last 20 years are being repatriated. It is argued that the massive amount of foreign investment by US organizations dwarfs the amount of currency held by central banks, and willy-nilly repatriation based upon fear will cause the US dollar to continue to rise.
This is clearly the current psychology and the reason that so many speculators are buying dollars and selling other currencies… but we doubt the staying power of this thesis.
WHY WE DISPUTE THIS THESIS
We are asking the question “Why would those who want their assets to grow, repatriate them to the US? Why would they not move them from Europe, or other parts of the world where they are not providing good returns to China and India where the economic growth rate is positive, and the opportunities for profit are good?”
The answer is that fear and not rationality is dominating the investment process currently. So some investors are indeed repatriating assets to the US willy-nilly. However, we doubt that most investors are so short term oriented or so panicky. If investors were acting in a rational manner they would seek positive returns in China, India or some other country with good growth prospects, not minute returns in US Treasury Bills.
Further under new US tax proposals, profits will be taxed at higher rates in the US [should profits develop], and there is no doubt that the environment has become decisively less pro business in the past 2 months..
As time passes and rationality returns to the investment process, global investors will for many reasons, send money to those parts of the world where growth continues to be strong. At that point in time, the dollar will once again begin to decline.
Some say it will take a long time for people to become rational and that they will remain panicky for quite a while. I dispute that argument. Those who panic easily never make money in the first place, those who have made money and thus hold it abroad, are not the panicky types and thus we see the dollar rally lasting for a much shorter time than some other observers.