Saturday, June 9, 2007

Quit Yer Bitchin'

Yeah, this sucks. But let's look at The Big Picture and gain some historical perspective. The daily markets are rife with NOISE. If you allow your emotions to be dragged around by the "daily noise" in the markets you're going to become a basket case staring out the window wondering how hard the pavement is down below. Ignore the noise! Rising rates are GOOD for Gold!

No market goes straight up...not even the Chinese Stock Market has gone straight up. Gold's and Silver's run up to their highs in May of 2006 did not go straight up. The Gold Market and especially the Silver Market will rip your heart out if you let them. But the fact is, Gold and Silver have been rising for the past six spite of all the noise...and rising interest rates.

Just about everyone and their brother have thrown in the towel and that’s what a gold bull market does best. It sucks you in when you have no business buying and it pushes you out just when you should be in. --Enrico Orlandini

DON'T throw in the towel. I've posted four charts above: Gold, Silver, US Dollar, and 10 year US Treasury Note. I have kept the technical analysis to a minimum on purpose because right now facts and fundamentals are what is ultimately going to lead Gold and Silver thru this period of Precious Metals uncertainty. Please click on the charts to enlarge them.

It should be quickly apparent to any observer that over the past 2 years that the 10 year T-bond has been steadily falling. As it has been falling, so has the US Dollar. Conversely, Gold and Silver have been rising.

July 2005 to June 2007:

10 year Treasury Note - 8.2%

US Dollar - 8.6% [ USD since Nov. 2005 top -10.4% ]

GOLD + 61%

SILVER + 94%

Remember...Falling treasury note prices equals rising interest rates, and rising treasury note prices equals falling interest rates. Keeping this in mind, it is obvious then that rising interest rates ultimately are NOT good for the Dollar...but they are good for Gold and Silver.

Well then, why is the Dollar rising as the 10 year note tanks today? I think Chuck Butler over at the Daily Pfennig has some great perspective on that:

The long-term bond yields in the U.S. have finally moved above 5% with the 30-year bond now yielding close to 5.30%. The theory is that investors, seeing yields rising in the U.S., are selling off risky assets (namely emerging market equities) and bringing money back into US$. The rising bond yields are a prediction of global inflation, which will be negative for stock markets. Those markets, which have had the biggest gains, are also some of the riskiest. With rising global inflation, investors are selling these equities and are moving back into cash. The US$ is still seen by the world's investors as the safest place to park cash. With global equity markets moving down, I believe this is the most likely explanation for our sudden rally in the US$.

So where does it go from here? As I said above, the world's investors are currently flocking to cash. Eventually this cash will need to be put back to work, or will be used to pay off the loans that many of these investors have used to create the explosion of liquidity we have seen over the past few years. As I have said in the past, many loans are denominated in the lowest-yielding currencies, the Japanese yen and the Swiss franc. If/when investors finally decide to pay back these loans, they will need to buy both of these currencies and the "carry trade" will be reversed. As I mentioned above, I think blaming a reversal of the carry trade for the move in currencies overnight just doesn't make sense. But at the same time, I do believe we have seen the first step in a reversal of this trade.

The sell-off in the Asian markets last week has been followed up with more selling in other equity markets. Carry trade investors haven't yet given up on the trade, and right now are parking their cash in the US$ waiting to see what happens. After all, with short-term U.S. treasury rates just over 5% they can hold US$ in cash and still make a small spread since interest rates in Japan are at or below 1%. But there are costs associated with these loans, and with interest rates slowly creeping up in both Japan and Switzerland, I don't think they will sit in US$ cash for very long. These investors are either going to have to repay the loans, buying back the yen and Swiss francs, or they will move this cash back into higher-yielding markets.

So this latest move by the dollar is just temporary. Investors are using the US$ as a parking spot while they are waiting to see where to invest next. Europe and Asia continue to grow at a better pace than the U.S., so I believe investors will be returning to these markets. The higher long-term rates here in the U.S. will make all of the adjustments on mortgages impact U.S. consumers even more. A slumping housing market and rising interest rates will continue to make U.S. consumers tighten their spending. The US$ will continue to trend down vs. the currencies of economies that are better off.

Excellent explanation Chuck! I think it also means that there are no "real" buyers of Dollars out there. American investors can't bring their money home from overseas markets with out first buying back the Dollars they sold to buy the foreign assets. They have to buy the Dollar. The Dollar is ca ca, and this recent bump up in the Dollar has needlessly spooked Gold investors. It's interesting once again to note that the brunt of Gold's whupping this week occurred after the "physical trading" on the LME in London closed at 11AM and the crooks [aka dem Rat Bastids] on the COMEX could have their way with Gold and Silver in the "futures pits".

What Will the Fed Make of the Bond Market Panic?

What will the Fed chairman make of this week's panic on Wall Street? Well, inflation expectations are "well contained" said Michael Moskow, president of the Chicago Fed, in a CNBC interview Friday morning. But "that doesn’t mean we’re not concerned about inflation. It doesn’t mean that we don’t think inflation is the predominant risk going forward."

Put Moskow's comment into context – the context of this week's bond-yield panic – and you'd be forgiven for thinking the Fed is happy to see Wall Street hiking long-term rates at last.

After all, no one believed Bernanke was serious when he raised short-term rates 17 times in two years – least of all bond investors, leveraged hedge funds, and speculators in the gold market. Only the sub-prime mortgage market fell for the Fed's "tough on inflation" play-acting. Now the bond market's caught up, however. Should the sell-off in 10-year US bonds continue next week, the yield curve threatens to flip itself right-side up – and stay there – with a vengeance.

The yield curve might even steepen, in fact – making long-term money much more expensive than short-term debt. Most especially if the Fed seizes this chance to start cutting short-term borrowing costs once again.

"Our objective is to have maximum sustainable growth and price stability," Moskow went on.

"We look at the entire economy. We look at the financial markets as part of that.

"We look at all this data and then decide what’s best for the American people."

You won't have the Fed to kick around, in other words, if it was the bond market that raised the cost of borrowing. And now that all the cheap money's piled up – on Wall Street, in home prices, junk bonds, fine art and mortgage-backed notes – what's best for the American people will soon come to look like lower Fed rates. Because if Washington and the US consumer can't borrow cheap at the long end, then they'll just have to go to the short end for cheap money instead.

And as the Fed gets busy destroying what's left of the Dollar, gold below $650 today could soon come to look like the sale of the century. --Adrian Ash

Brilliant! The Fed will blame Wall Street when the economy tanks, and then ride to the rescue with a rate "cut", and then blame Wall Street again when the Dollar implodes and destroy's the Stock market. Remember folks...the fed can do no wrong. Yeah, right...

I hope sharing these observations of mine help get ya'll in "off the ledge", and help you quit thinking of "throwing in the towel". The sale prices on Gold and Silver have been extended. Tell your friends and loved ones to buy some of both today.

I'll give Neal Ryan over at Blanchard the last word:

The funny thing is that as this technical breakdown is taking place in the market, the underlying market fundamentals for why precious metals prices should continue a multi-year bull run are only getting more and more bullish. So we might be caught in a trap right now where technicals are moving the market, but the fundamentals are only continuing to improve. We're going to hit an inflection point in the future where the technical trade points aren't going to matter any more; the fundamentals are going to be so attractive for investors, the technical trading picture will get tossed out the window and prices will simply be forced higher; paper trades be damned.

AS we begin the week, let's stay focused on the 50 week moving averages in Gold and Silver for SUPPORT.

Gold 50 week moving average: 639

Silver 50 week moving average: 12.67

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