The month of January was kind to equity investors, metals and other commodities. The star performers of last year, U.S. Treasuries, had a quiet month as the FED‘s latest policy statement provided a month-end boost to the long end of the market. I have argued that the BOND markets are badly broken because of the continued intervention of several of the world’s central banks into the sovereign debt markets via QE PROGRAMS of various sorts.
In a BLOOMBERG TV interview today, I was asked about the GOLD MARKET and my thoughts on how high prices could go. Having learned to trade on the floor, one of the first lessons I learned is that it is a fool’s game to pick highs and lows in the market for every market has only one ultimate high and one low and as the saying goes: “PICK A BOTTOM AND YOU WIND UP WITH A HAND FULL OF CRAP.” The GOLD question made me think about what could possibly be a catalyst for new highs in the GOLD. The obvious argument would of course be the policies of the FED and the ECB and any other CENTRAL BANKS that want to join the PUMP LIQUIDITY CLUB.
It seems that another variable that could push GOLD HIGHER is the fact that the BROKEN BOND MARKET is not serving its function as providing a window on the markets inflation expectations. We know that the BOND VIGILANTES have been bloodied by the FED‘s INTERVENTION THROUGH ITS BALANCE SHEET ACCUMULATION, THEREFORE THE GOLD TAKES ON A LARGER ROLE AS THE KEY AGENT OF HEDGING INFLATION EXPECTATIONS.
I am just positing this in the theoretical sense, but as the FED distorts the working of the BOND MARKET investors and speculators will search for other sources to fill the void. THE GOLD IS PAYING HOMAGE TO STEELY DAN and saying, “I DON’T WANT TO DO YOUR DIRTY WORK ANYMORE.” As January ends, the GOLD is up 10% and 10-YEAR NOTES are yielding 1.8%…do the math.
***Today the EUROZONE released the jobs data and the UNEMPLOYMENT RATE FOR THE 17 SINGLE CURRENCY MEMBERS reported joblessness at 10.4% and youth unemployment at more than 25%. The ECB is going to have to provide the stimulus because fiscal policy is under attack and being forced into severe austerity. European Commission President, Jose Manuel Barroso, responded to the high unemployment rate by saying, “We CANNOT RESORT TO FISCAL STIMULUS TO BOOST GROWTH AT THE PRESENT TIME.” If you cannot fight high jobless rates with FISCAL POLICY that leaves the heavy lifting to the ECB and its ability to provide massive amounts of liquidity.
THE FOMC PUT THE DRAGHI LED ECB INTO A VERY DIFFICULT POSITION AS THE EURO RALLIED AS THE FED EASED. MARIO DRAGHI, IT IS YOUR MOVE. Draghi’s position was made even more difficult today as the PORTUGESE 2-YEAR NOTE YIELD INCREASED TO MORE THAN 20%. The 2/10 curve inverted to a negative 450 basis points, indicating great stress in the Portuguese credit markets. Look for the ECB to begin buying massive amounts of 2-YEAR PORTUGESE PAPER, which will put greater pressure on a very large SECOND TRANCHE OF LTRO. Again, the GOLD/EURO must be monitored to see if the GOLD CAN MAKE NEW ALL TIME HIGHS VERSUS THE EURO.
Tags: Bond, bond vigilantes, ECB, Euro, Fed, gold market, LTRO, Portuguese 2-year note, QE
February 1, 2012 at 12:18 am |
Great report…
Re Europe, the definition of a ‘credit event’ seems to be sc***ing the the buyers/owners of CDS’s…and the very banks that have a stake in the payoff of CDS’s are the ones defining the term…a mild conflict of interest to say the least… Things could get ugly quick here…esp w/ Iran threatening to immediately halt oil to Europe.
February 1, 2012 at 8:27 am |
spdbrnr:the issue of the CDS market is giving many different people agita.The Europeans have been opposed to “empty creditors” being paid for betting against Euro sovereigns–they do not want the locusts to be paid and that has caused severe problems and ISDA and others have waivered in their opinions as the players do not want to fall out on the wrong side of the EURO authorities.—Too early to worry about Iran as it is the new bad boy on the world scene as North Korea decides which way it wants to go—Iranian leadership wants the world to know they have a great deal of ability to disrupt the best laid plans of “Davos”
February 1, 2012 at 1:14 pm |
Understood on the empty creditors, almost like betting on the Super Bowl as a spectator, but they did pay money, and they followed the ‘maybe not-so-bright’ rules…