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Check out the Treasuries in the second chart, particularly the 30 Year Bond.
If the Fed had not been targeting assets to create some of these price moves it would be the best case for deflation which I have seen thus far.
I think this might be a case in which Fed does something with the right hand, which the audience is watching, while it does something very different with its left hand, using the misdirection of the markets to distract the viewers from its true purposes.
Whatever that may be, the performance is what it is. It shows no recovery in the real economy and an expansion of the 'financing sector.'
"Yesterday, the textbook was thrown out the window. All asset classes saw sudden and sharp moves far in excess of normal volatility patterns. To an old timer, that points to one conclusion. Liquidation. Wide-spread liquidation across asset classes. Currencies, bonds, commodities and stocks all moved swiftly and sharply in a direction that screamed - Seek safety! Raise cash! Get liquid...
All of that had a quick and discernible negative impact on markets. But, the selling was far more pervasive and dramatic than simply a conscious adjustment of positions based upon new data. Thursday’s action screamed liquidation - and not all of it voluntary."
Art Cashin, 22 September 2011
"That day the U.S. announced that the dollar would be devalued by 10 percent. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."
Paul Volcker, Nikkei Weekly 2004
There was a major sell off in gold and silver today that was due in part to the liquidation of assets coming out of Europe. That is the basis of the quotation from Art Cashin, and he is right in what he says.
But while stocks and the dollar all paused today, gold and silver were hammered, and the selling looked to be more calculated than incidental as it has been throughout the week.
There is little doubt that some of this is the association with usual gaming of the Comex option expiration next week, and the potential delivery situation on that exchange with their unusually thin supplies and concentrated short positions held by a few of the banks. Comex Hikes Gold, Silver, Copper Margins After the Bell.
But today in particular seems to be even a little more than that.
Every time the central banks and their affiliates get desperate, some economic essayist trots out an outlandish argument about why gold is a 'barbarous relic.' Here is one that tops even the almost petulant argument of Willem Buiter in 2009.
The Price of Gold in 2160 - Statsguy and James Kwak
I had to read this essay twice to make sure it just was not satire. I can summarize my reaction by saying that finding gold in outer space with assumed technologies speaks to supply, but the author does not present any assumptions about population, economics structures, and of course future demand.
The method by which gold is formed in relatively rare supernova events is fairly well known, and its distribution relative to other elements and compounds is not completely eccentric, at least not as random and eccentric as pseudo-scientific economic theories might become these days.
The author's premise of the discovery of new bullion supplies in outer space is analogous to the discovery of the New World by Europeans, and the remarkable finds of gold and silver on those two vast continents.
And yet here we are today.
Some might say that the author was merely saying in a cute way that commodity based currencies always fail, with an example being salt or Yap stones as Mr. Buiter had argued to greater effect.
And I would say that all currencies do go in and out of favor in their time, since there is an element of relativism in value that can be enforced by ruling authorities, who themselves tend to come and go, even if in their time these authorities might seem invincible, their empires intended to last for a thousand years.
But some stores of value, not based on passing utilitarian criteria or force, do tend to be resilient, and come back again and again, and retain an element of value from generation to generation. Or as some might with a more profound understanding of money might say, they maintain the confidence of their steadfastness that is a pre-requisite of sound money that is difficult to maintain by mere force of will.
As some historians of money have pointed out, the Federal Reserve was initially set up to emulate this type of external immutability of value in what later became a purely fiat currency. As men like Andrew Jackson would have predicted, they failed in exactly the same ways and for the same reasons that every other attempt at this has failed throughout history.
All systems are prone to corruption and decay, but none so much as those that rely exclusively on the goodness and wisdom of small groups of powerful men, especially when acting in secret.
It does seems quite cheeky for a modern economist to criticize a natural store of value with a 5000 year history, while standing on the platform of a purely fiat currency, given the short half life of every fiat currency throughout history. They may be recreated and devalued, but they never retain much of their value and character, with the only remnant their name.
I hear the sounds of printing presses over the horizon. Get ready for Quantitative Easing European style, and massive European bailouts, and increasingly absurd arguments from the econo-sphere as they avoid the subject of justice for the sake of expediency.
I have some limited sympathy for the dilemma facing the increasingly desperate western central banks, and understand their rationalizations. But they are doing something that is the very epitome of moral hazard, and abuse of power, in their attempts to stabilize the unsustainable, without allowing for meaningful change and reform.
The heart of the issue is that the existing monetary and financial system is becoming increasingly arbitrary and corrupt. A relatively small group of interconnected crony capitalists wishes to create a digital money out of nothing, and distribute it increasingly as they will, to whom they will.
And this is the basis of my resentment with this policy abuse, and the irritation with the assault on reason by those in the financial demimonde engaging in what might be politely called perception management.
This self-serving arbitrariness, even if done for 'good motives,' is the very reason why all fiat currencies fail. No matter how you want to rationalize it they are going to create money out of nothing, and give it to whom they will, while corrupting the political system in the process.
And the cumulative results of this abuse of power are corrosive to society. Lawless example by a ruthless few brings out the worst in all the people, always. And that is a shame.
"Our government teaches the whole people by its example. If the government becomes the lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.”
Louis D. Brandeis
I am reading The Garden of Beasts by Erik Larson, and it is diverting as well as instructive, full of personal vignettes of Berlin in the 1930s told from the standpoint of the US Ambassador and his family. It is perhaps not surprising that most cruelty is based in casual disregard for others, and a pre-occupation with the self. And of course, that evil flourishes when the good do and say nothing.
As a preparation for this I read The Long Night by Steve Wick. Perhaps this is responsible for my gloomy frame of mind this week. But these things do not happen overnight, but by measures, until one is firmly in the crude grip of the banality of evil. And then of course it is too late to escape from the maw of the abyss.
So don't go there.
Have a pleasant weekend.
US equities paused their selling and found some support today.
Next week is another story. The markets are looking for some official response on the European debt situation.
There is also concern about political discontinuity in Washington, and it appears to be well-founded.
Although it is slightly less visible to those who only look at US equity markets, there is a liquidation sell off in the world markets especially Europe. This is helping to steepen the correction in the metals markets.
Notice from this chart that the gold/silver ratio is back over 50 again. And so I have become interested in silver again today for my short term interests.
It is important to keep this retracement in context, as alarming as it might be even for those who hold positions for the long term but watch their portfolios in the short term.
Comex expiration is next week. This is always an occasion for mischief, and I think the metals were hit particularly hard because of the delivery situation shaping up on Comex.
But the key driver is the European selloff and the search for liquidity amongst traders and funds. So if you wish an indicator of the future watch how that situation develops.
Once the short term players have raised their cash, the selling will abate and reverse, even if the situation does not remarkably improve. That is how markets work in their different time frames. Treasuries are getting bought to insanity as investors seek to flee European related risk.
And this is why I have two sets of portfolios: short term and long term. And I use two very different sets of strategies and tactics in them. And truth be told, despite some amazing ups and downs in the short term, I make most of my lasting gains in the long term portfolio where I sit and wait on the fundamental trends.
So I have to ask, 'is the gold bull market over?' And so I have added the second chart which shows the market in a longer term context. So far we have had a fairly typical Fibonacci retracement, and the longer term trend lines are intact.
If Europe 'collapses' then we might see a greater selloff similar to that of the Lehman moment in the US. Will Europe collapse in a liquidity panic even deeper than we have seen thus far? I cannot forecast the unknowable, except to say that it is possible, but not probable unless the currency war intensifies and both North America and Asia begin to beat the Europeans while they are down. And if Europe falters, then the UK is next, and then Asia. The financiers have no loyalties, but they need the US dollar at least for now.
Talk is cheap. Europe has to find itself, and decide to DO something. This is one of the darkest hours in their ongoing identity crisis. And the financial wolf packs are taking advantage of their indecision.
