Key Data Points
German 10-year Bund yield up 15.7 bps;
Italy 12 bps tighter;
Spain 47 bps tighter;
Portugal 105 tighter;
Ireland 20 bps tighter;
Greece 176 bps tighter;
Spanish banks up 10+ percent;
Euro FX up 0.40 percent;
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One of our golf buddies, who is an engineer, sent this over today. It really illustrates why we should think about the future with a nonlinear framework. Simply amazing!
Hat tip to James M.!
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You can see from the chart that gold starting selling off right around the release of the Beige Book yesterday,
“Reports from the twelve Federal Reserve Districts suggest overall economic activity expanded at a moderate pace during the reporting period from early April to late May,”
Though Vice Chairman, Janet Yellen, threw the bugs some QE red meat, Chairman Bernanke disappointed. We were expecting more positive QE speak from Mr. Bernanke, but not surprised by the sell-off.
It’s almost Kafkaesque to think the Fed is flirting with another round of QE with the Nasdaq up almost 10 percent for the year. What’s up with that? Economic and monetary theory is seriously broken, folks, and the policymakers are, at best, grasping at straws.
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The Labor Department reported this morning,
UNEMPLOYMENT INSURANCE WEEKLY CLAIMS REPORT
SEASONALLY ADJUSTED DATA
In the week ending June 2, the advance figure for seasonally adjusted initial claims was 377,000, a decrease of 12,000 from the previous week’s revised figure of 389,000. The 4-week moving average was 377,750, an increase of 1,750 from the previous week’s revised average of 376,000.
The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending May 26, unchanged from the prior week’s unrevised rate.
The advance number for seasonally adjusted insured unemployment during the week ending May 26 was 3,293,000, an increase of 34,000 from the preceding week’s revised level of 3,259,000. The 4-week moving average was 3,279,500, an increase of 11,500 from the preceding week’s revised average of 3,268,000.
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Gold is a weird cat with multiple personalities and more than nine lives. The yellow metal is up almost $100 since last Friday’s weak U.S. employment report.
At any given time period gold will assume any one of its multiple personalities based on a fundamental story and trade as: 1) a safe haven; 2) an inflation hedge; 3) a commodity; 4) a store of value against central bank balance sheet expansion; 5) an alternative currency; 6) central bank reserve currency; 7) a diversification asset; 8) an Armageddon hedge; and/or 9) all of the above.
The key for traders is to determine which dominant face it has put on and ride it until perceptions of the fundamental story has changed and then turn it around.
We believe the correction from its Sept 2011 high was based on what is happening in emerging markets. First, and probably most important, China’s current account is shrinking and we hear anecdotal reports capital is moving out of the country thus slowing growth or actually reducing its international reserves. Brazil and other emerging markets have also recently experienced some capital flight.
This has on the margin slowed the growth or reduced the global monetary base. Without a major balance sheet expansion from the Fed or credit expansion in the banking sector where the monetary base expands into money to create inflation, gold has been selling off. Gold, in our opinion, almost always trades on the first derivative of perceptions. That is, not on levels of, say, the monetary base, but on changing perceptions of the change in levels.
Take a look at how gold reacted to the weak U.S. employment report on Friday. It popped big time and hasn’t looked back. It has fully put on its QE personality and will be looking for red meat from the Fed.
We think the Fed Heads will deliver. If not, expect a decent sell off.
The question is will it be enough to thrust gold to new highs? LTRO2 couldn’t.
Stay tuned.
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