Gold Weekly Chart: Gold 10 Yr Bond Correlation; Bond Crash

"The CME Final indicates that on volume of 291,445 lots (27.2% or 62,000 lots higher than estimate) open interest fell 15, 107 lots (46.99 tonnes or 2.49%) to 590,685 contracts. On a stock market close basis gold was down 3.66%.

This was the heaviest volume since late May, a period of significant activity somewhat distended by the roll-over. Open interest is merely back to the level of mid-June.

A purely long-liquidation driven drop would most likely seen open interest contract more than the price fell. Some important short selling took place yesterday as well."

John Brimelow

“Gold's huge drop on Thursday is not the beginning of a new major leg down for the yellow metal. That at least is the conclusion reached by a contrarian analysis of gold market sentiment. There does not currently exist the kind of stubborn optimism among gold timers that is the hallmark of major market tops...The bottom line? The sentiment winds will be blowing strongly in the gold market's sails in coming sessions”

Mark Hulbert

I am mindful of a further breakdown in equities, but the more likely we will see an important sector rotation in July from bonds to stocks, and this may provide further lift for gold.

However a short term trading range seems more likely to me now, since the bullion banks seem so terrified of gold breaking up through the 1260 level. It is not inconsistent to have a protracted handle on the current cup and handle formation on the daily chart.

What are they afraid of? The physical offtake at the COMEX, especially in silver, was beginning to cause enough strain to raise concerns of a market 'break' which would be highly embarrassing to the Obama Administration. The last thing they need now is another scandal of failed regulation and crony capitalism. But this does not resolve the problem; it merely kicks the can down the road.



Although the correlation is far from perfect, indicative of the variety of drivers that constitute the gold price, the relationship between the 10 Year Note and the Price of Gold has long been in my dataset. It makes fundamental sense when you think about it. But it should be stressed that it is only a minority correlation, and its influence waxes and wanes, especially since the prices of both assets are subject to official meddling by the Treasury and the Fed.



Someone asked me if Big Daddy was Warren Buffett. No, its trader slang for the 30 Year US Treasury Bond.

Speaking of an expected sector allocation smackdown in July, I would not be surprised to see the wiseguys driving investors out of the bonds in July, shoving them into riskier trades, the better to eat you with, my dears.

The US bond is a fairly safe place for now, as long as you don't worry about the coming devaluation of the dollar which I would expect to hit around 4Q this year when they recalibrate the SDR.

But Bonds do crash. Here is a representation of the Bond Crash that followed the stock crash of 1929. See the flight to safety, and then the collapse as the dollar was devalued, a form of soft default? Cyclepro originally posted this. As I queried him he said it was based on data from Martin Armstrong. My own analysis indicated these were not Treasuries but corporates. Treasuries did 'crash' but not to this degree. But the point remains that bond at some point will be no safe haven.

When will this crisis bottom? I don't know, but it will almost certainly end badly because the kleptocracy forgot rule number one of the Trade: bears make money, bulls make money, but pigs get slaughtered.

Muni Bonds: Time to Head for Higher Ground?

J. P. Morgan and Charles Schwab have just announced a program to make municipal bonds more available to small investors.

Let's see, record low interest rates and looming risk of default from undisclosed obligations, or perhaps a brisk uptake in inflation. Sounds like a plan (for the big dogs to unload).

Yikes!

Who Is Buying All These US Treasuries (And Can They Keep It Up in 2010)?

Earlier this evening I was reading the latest issue of TheContraryInvestor "Quite The Personal Bond," and was puzzled by his account of the Treasury market.

As shown in this chart, the foreign sector has begun to reduce their exposure to US sovereign debt, just as they were sellers of Agency debt in 2008.



So who is buying Treasuries according to the latest government data?

"US households purchased $529 billion of US Treasuries in the first nine months of 2009, accounting for 45% of total new Treasury issuance. And you have been wondering just how Treasury yields have stayed so low for so long? Wonder no more. US households have done the heavy lifting unlike any other buyer this year. And as we have stated in the past, this decision by households has been driven by two very strong human emotions- fear and greed. Fear of losing money in what is a once in a generation credit bust environment. And greed from the standpoint that the Fed has made money funds completely unpalatable in terms of nominal yield prospects. Of course Treasury yields are not much higher by any means."

So far this year the Fed has purchased $293.3 Billion of Treasury Debt, and is by far the largest purchaser of Agency Debt at $803.8 Billion.

Foreign entities bought $373.3 billion of Treasury debt, and were net sellers again of $110.3 billion of Agency debt and $73.1 of US corporate debt.

"US households purchased $529 billion of US Treasuries in the first nine months of 2009, accounting for 45% of total new Treasury issuance. And you have been wondering just how Treasury yields have stayed so low for so long? Wonder no more. US households have done the heavy lifting unlike any other buyer this year. And as we have stated in the past, this decision by households has been driven by two very strong human emotions- fear and greed. Fear of losing money in what is a once in a generation credit bust environment. And greed from the standpoint that the Fed has made money funds completely unpalatable in terms of nominal yield prospects. Of course Treasury yields are not much higher by any means."

So, according to the government, US households are absolutely piling into US sovereign and corporate debt at record levels, and at record low interest rates.

And almost no one but the Fed is buying Agency Debt.

Bill Gross of Pimco has the largest mutual fund ever, compliments of the bond stampede. The prior record was in 2007 with a growth fund that was decimated by the market crash of that year. And this is why I think we might see quite a bloodbath in the bonds in 2010, as mom and pop get skinned by the Street for weighing in so heavily on this one sided trade in US sovereign debt. The US household sector is a slow moving convoy, presenting a traditional and tempting target for the Wall Street wolf packs.

Here is another viewpoint on essentially the same data that I was just reading this evening at Trader's Narrative titled, Is It All Just a Ponzi Scheme? His take on this is a little less sanguine than the ContraryInvestor.

"At first it seems that the common US household is stepping up and lending Uncle Sam the almost $2 billion. We’ve discussed at length the stampede of retail investors into bond funds this year. But as Sprott [Asset Management] details below, according to the Fed’s own disclosures, this is not what is happening. No wonder then that the US dollar has cratered and gold is the best performing asset this decade..."

Sprott Asset Management says:

"Our concern now is that this is all starting to resemble one giant Ponzi scheme. We all know that the Fed has been active in the market for T-bills. As you can see from Table A, under the auspices of Quantitative Easing, they bought almost 50% of the new Treasury issues in Q2 and almost 30% in Q3. It serves to remember that the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing. We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital. If our research proves anything, it’s that the regular buyers of US debt are no longer buying, and it amazes us that the US can successfully issue a record number Treasuries in this environment without the slightest hiccup in the market."

So what does all this mean?

The bottom line is that the data seems to indicate that the foreign sector traditional buyers (at least for the past 20 years or so) of US sovereign debt are walking away from the market as they had said they would do, and are moving their reserves into other instruments.

This may not be such a great problem if the US trade balance continues to narrow, but it certainly is not healthy to see the Fed and the US household sector as the major markets for US sovereign debt.

If 2010 is not a year of recovery for the average American, the ability of the Treasury and Fannie/Freddie to keep expanding their debt offerings is going to become quickly constrained. How can Joe Sixpack keep saving and buying Treasuries, and at the same time consume at a rate sufficient to grow GDP? All on a stagnant median wage and a contracting housing market? Think the rest of the world is suddenly going to grow a taste for US exports? Will the US retreat into isolationism and trade barriers? That might not be Price Index friendly.

The US is marshaling its ratings agencies and multinationals to cast doubt on the European union, their currency, and their solvency, and threaten to take them down first to maintain an equilibrium of failures.

But in fact, the US is much closer to the point of a serious debt crisis than one might imagine from what is being put out by most US based financial analysts. There is a nasty convergence of constraints bearing down on the Fed and the Treasury that look to push the ability to market dollar debt to the breaking point. If a couple big States go under next year, the dominoes may start falling very quickly.

I see the problem, but I have to confess that I do not yet see how the Bernanke Fed intends to dodge this collision. And I know that they must see this as well, and have a game plan. Could counting on an exogenous event that would provoke an artificial demand and neo-isolationism (something like a regional war, or at least a trade war) be called a plan? Can they possibly be in denial, and just looting the capital before the Empire falls? It is hard to see how the resolution of this will unfold just yet, but I am pretty sure that many of the simple scenarios that people are laying out so nicely with such fine rhetoric are more fantasy than probable outcomes. This is going to knock our socks off default-wise.

If you think that this crisis will be deflationary, then you might be a bit surprised to see what happens if and when a US sovereign debt offering fails in the market. It will not be pretty. And it will not be dollar friendly in the longer term. But who can say what will happen, when there are so many possibilities.

The market may likely reveal to us what is coming, if we are observant, and lucky, and have the willingness to listen to what we may not wish to hear.

There are some definite gaps and assumptions in the case that Sprott makes, raising more questions than providing answers. It is possible that Americans have shifted an enormous amount of capital out of consumption and stocks into Treasuries. It is also possible that this is just masking something else, as Sprott suggests. But this does not affect the argument we make, that something has got to give, as the US consumer is tapped, and cannot sustain this type of sovereign debt purchasing given the offerings that the Treasury must make in 2010. And if it is something else, then that will be revealed 'when the tide goes out' next year. The Fed and its enablers are the buyers of last resort, increasingly so. And that means increasing monetization, and a stretching of the value basis of the bonds and the dollars.

Read the full analysis from Sprott Asset Management here.

Latvia Goes "No Bid"

This bears watching. It may be nothing on the grander stage, but then again, there is a precedent for small events to trigger larger actions and reactions.

Latvia on the brink
By MarketWatch
Oct. 7, 2009, 10:04 a.m.

LONDON (MarketWatch) -- It's never good news when a government bond auction fails. It's particularly bad news when an auction fails for a note maturing in just six months. And it's really bad news when there isn't any bid at all.

Yet that's what happened Wednesday when Latvia tried to sell close to $17 million of paper. It's not hard to figure out why.

The Baltic country is squabbling with Western -- mostly Swedish -- leaders over spending cuts, and it's a very real possibility that the country may be forced to devalue its euro-pegged currency if emergency global funds don't arrive.

Were Latvia to devalue, that would hit economies in neighboring countries like Lithuania, and Swedish banks would rack up additional losses on the loans they have made throughout the region.

The real nightmare scenario would be the Swedish banks then pulling down other European banks, and then triggering Credit Crunch: Part 2.

There is, of course, a long way before that unwieldy scenario comes to pass. Latvia hasn't devalued -- yet - and, even if it does, that doesn't mean it would drag the Swedish banks under.

Lenders like Swedbank which has more branches in the Baltic countries and Ukraine than in Sweden -- have endured plenty of losses, and Swedbank, for one, just raised more than $2 billion to weather stormier times. See earlier story.

Still, investors might recall a minor matter involving teaser loans that only took down the entire world economy.

Not every domino falls. But there's one that's looking shaky.