21 June 2010

SP Futures and Gold Daily Charts at 2:30 EDT: Smoke and Mirrors

The spike in the overnight futures based on the vague assurances from China to revalue the yuan higher, an obvious and strictly political move to pre-empt the discussion of their currency manipulation at the upcoming G20 meeting, was used to justify a classic 'wash and rinse' in the price of stocks, and bring in some coin for the needy Wall Street banks.

This is how the moral hazard of bailing out the Too Big To Be Banks has returned as an unintended consequence, strangling the real economy and the very markets which the bailouts were intended to save by taxing production and capital with the drag of a corruption tax that also has a dampening effect on efficient capital allocation.

The Banks, being fundamentally unreformed and insolvent, with failed business models based on fraud, are unable to make their expected outsized returns using conventional business means. With the mortgage and CDO ponzi scheme collapsed, they must resort to the more familiar soft control frauds in the capital allocation markets, creating and exploiting inefficiencies to support their unsustainable existence. Better that they would have been broken up and liquidated where necessary, rather than being saved without a structural reform.

No matter the rationales put forward, it was an act of political corruption in which the Congress and the last two Administrations are complicit. More and more wealth is being transferred out of the productive economy and into the hands of a financial elite that spends it in the non-productive accumulation of capital, high risk speculation, and hoarding incented by historically low tax rates for the very wealthy.

As I suggested last night, the spike higher in the futures was artificial, and worth fading to the short side. But while it stays above the trendline now around 1110 I would not lean on it too hard, since the threat of a snapback rally in the last hour is always there on these thin volumes. If it breaks down, we are probably heading down to the 1060 support in a roundabout way. The economy is floundering, with about half of US GDP dependent on fraud in financial assets and corporate accounting.

There is also an FOMC rate decision coming up on the 23rd, Wednesday, so we will see some artificial action around that. It is also the day that GTU closes its shelf offering which should take some of the pressure off the unit price.

Chart Updated at 5:00 PM EDT

As a reminder this is the option expiration week (June 24th) for gold and silver July contracts at the COMEX. Even so, the pullback in the price of gold is well within the range of the handle. Short term it is relatively easy to manipulate the price within a certain range of the primary trend, given the current state of regulatory capture at the CFTC. At some point the primary trend will take a much steeper slope as we head towards a commercial failure to deliver. But no one can accuse the people in New York and Washington of long term thinking when there are short term profits to be made, and campaign contributions to be pocketed.

Chart Updated at 5:00 PM EDT