Lance has some interesting thoughts on the gold market:
Dogs And Cats Living Together… Mass Hysteria!
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Asia stocks collapsed overnight. Japan fell 10 percent to a new low. Hong Kong fell 7 percent to a new low, and China’s Shanghai Comp fell 4 percent and back to just shy of its September low.
Also of note overnight was the fact that US Treasury bonds were slightly lower all night despite the carnage in equities and the continued seizing up of the credit markets. That trend would also continue through today’s US session as well.
Europe hopped off a cliff this morning to the tune of 5 to 8 percent and made new lows, as LIBOR was once again fixed at a new high.
Meanwhile, Italian Prime Minister, Silvio Berlusconi let it slip that that G7 leaders were considering the idea of closing the world’s financial markets globally while they “rewrite the rules of international finance”. When pressed for details, he said they were “talking about a new Bretton Woods.'' About an later hour, however, the White House denied there were any plans to close markets.
Shortly thereafter, Berlusconi apparently had his memory joggled (probably by a phone call from someone in a house that’s white… wink, wink…). He then said, ``I heard it on the radio…The hypothesis wasn't put forward by any leader, including myself.'' Are you laughing yet? Does anyone smell panic and chaos among world leaders as they try and put Humpty Dumpty back together? Tomorrow’s G20 meeting should be interesting to say the least.
Across the pond in the US the S&P futures were off about 4 percent and would plunge even further on the open....
We gapped down about 8 percent on the open in the S&Ps on enormous volume and immediately took off like a scalded dog to the upside to eventually even turn green for a few moments, which of course prompted the talking heads on HeeHaw and on the floor of the NYSE to cheer. Additionally, various stock bulls were trotted onto the TV to say that their magic 8-balls had told them the “bottom” had been put in.
As quickly as you could say “whoops”, however, we rolled over again and began a slow motion death march back the opening lows that would last for the rest of the morning and the early afternoon.
With about two hours to go, we were sitting on our lows of the day at just under 850 on the S&Ps. After a failing bounce, we slipped back to the lows, and it looked like we were about to hop off into the abyss as we approached the final hour.
Instead of melting down though, we made a 180 degree turn to the upside and made a Saturn V move that took us to a new high for the day and into positive territory to the tune of about 2 percent.
Within minutes of hitting our high tick though, we then had a flameout and collapsed back down into slightly negative territory, where we would literally spend the remainder of the session jumping back and forth in 1 percent lumps between positive and negative territory in what was probably the most volatile 30 minutes of trading that I’ve ever seen in any single stock, let alone the S&P 500.
Finally, with about 10 minutes to go, we found out whether stocks would close positive or negative, as the S&Ps slid back into negative territory to the tune of 2 percent. The cash market ended down a percent at 899.22 or within less than a point of being at 15x trailing EPS mark that we identified as a likely possible place to see a bear market rally finally develop out of the crash. Coincidence?
We shall see, but with the mob is now literally clamoring for anything and everything to be done in order to make the markets dance to the upside, it sets the stage for the Fed and Treasury and the rest of the G20 to potentially do something really drastic over the weekend (more on this below).
Volume exploded to a new high for the crash (2.8 bln on the NYSE and 4.2 bln on the NASDAQ). Breadth was just shy of 2 to 1 negative on the NYSE and slightly negative on the NASDAQ. New lows swamped new highs on both exchanges (2477 to zero on the NYSE and 1651 to 2 on the NASDAQ).
The chips were all over the road once again. TXN closed up over 3 percent, while at the other end of the spectrum MU was down 9 percent. The equips were similarly all over the road and anywhere from up 7 percent to down 9 percent. The SOX fell a percent to a new low.
The “Fab Four” rebounded to end mostly higher. AAPL rose 9 percent. BIDU rose 4 percent, and GOOG rose a percent. RIMM was the lone loser and fell over 6 percent to a new multiyear low.
The rest of tech was mostly lower, but enough of the large caps were apparently higher on the day to allow the NASDAQ to end up just a touch on the day.
The financials began the day lower but rebounded to end up broadly positive. The BKX rose over 8 percent. The XBD rose 3 percent, and the XLF rose over 10 percent.
MS collapsed 22 percent to a new multiyear low, and I was told anecdotally that it has slowed down the process of wiring cash out of the firm to around 24 hours (after various new authorization hoops had been jumped through) vs. the prior “send it now” method with the push of a button. Perhaps this is just a new policy, or perhaps MS is hoarding cash? With the stock under $10 now, I’ll let you decide. GS didn’t fare any better and was down over 12 percent to a new multiyear low and back under $100.
The derivative king (JPM) rose 14 percent. C rose 9 percent, and BAC rose over 6 percent. NCC fell 7 percent, and GE rose over 13 percent after the company reported Q3 earnings and managed to step over its lowered bar.
GM rose 3 percent. AIG fell over 2 percent. ABK rose over 14 percent, and MBI fell over 8 percent. The subprime consumer lenders were somehow mostly higher too. ACF rose a percent, and COF rose over 6 percent. CCRT fell half a percent.
The retailers were mostly lower again, with the RTH falling over 3 percent to a new multiyear low. WMT fell a percent to a new 6-month low. BBY fell over 2 percent to a new multiyear low, and TGT fell over a percent to a new low. Just because stocks stop crashing doesn’t mean the consumer is going to escape the recession or the coming additional rise in inflation. Many retailers that are around today won’t be in business on the other side of this mess.
The homies rebounded back into positive territory to end up by 5 to 8 percent for the most part.
Crude oil fell $8.57 to $74.09 and a new 52-week low, as open interest on the NYMEX fell to a 2–year low. Again, this is more evidence that the market is fleeing the futures markets, and I believe the reason is obvious: fear of counter party risk.
The energy shares cut their losses in half for the most part but still ended at new lows. The XOI fell 6 percent. The XNG fell 7 percent, and the OSX fell 10 percent. SU rebounded from a nearly 20 percent decline to end down over 6 percent and at a new low.
The GSCI tanked 8 percent to a new low, and the CCI-CRB fell 6 percent and back to just below its 200-week moving average for the first time since 2002. The DBA Ag ETF fell 6 percent to a new 52-week low.
The base metals were mostly lower, with the GSCI Industrial Metals Index falling 7 percent to a new low. The XLB materials ETF fell over 2 percent.
The Baltic Dry Index fell over 11 percent to a new 52-week low, and DRYS fell 6 percent to a new 52-week low.
Dec gold opened up about $25 in the US this morning and rallied another $10 to its intraday peak up around $920, which also happened to coincide with the London PM Fix (more on this in a moment). The metal then began a slow tumble that would eventually take it out on the very worst levels of the session and down $27.50 to $859. During electronic trading, Dec gold would continue to slide and eventually fell to as low as $829, or just shy of the October 3rd $822.50 low, before then rallying back to go out near $854. That’s an intraday swing of nearly $100. Amazingly, the Dec contract traded volume equal to the entire open interest today too.
Spot gold collapsed $63.40 to $849.85. I was flooded with emails as to “why” gold fell today. I’m honestly not sure there was a “reason” or that it “means anything” for that matter either. But my guess is that this selling was from the crowd that owns gold as a put on stocks. It was always a given that this crowd was going to dump their futures once they felt that the stock market had bottomed for a while, and I suspect that’s precisely what we saw today.
In all honesty though, so much of what went on today in the markets looked like complete and utter chaos that there is no telling why Dec gold got hammered, but I would note that the hammering occurred in the futures (which are increasingly shrinking in size), rather than in the market where the majority of physical gold is traded (i.e. – London). The GLD gold ETF in fact actually added 5 tonnes today (more on that below).
The London PM fix, which occurs every day at 3:00 PM London time, was actually at $900.50. That fix was also basically this morning’s high tick in the spot gold price in the US. Now, normally I don’t pay any attention to this, but with more and more players exiting the futures market and moving into the GLD or taking physical delivery, the COMEX futures are increasingly becoming a sideshow. Margin calls may swing the futures all over the map, but it’s not indicative of the physical market. Additionally, if anyone was worried about the markets being closed down (which was obviously rumored given what the Italian Prime Minister said this morning), gold “futures” (which can be settled by the COMEX in cash) aren’t exactly what you want to be trapped in either.
Spot gold in the rest of the world’s confetti fared far better than it did in dollars.
3M gold lease rates rose 3 bps to 2.697% and back to just shy of its recent peak, indicating the physical market remains extremely tight and continues to get tighter.
Spot silver collapsed 17 percent to $10.07 and a new 52-week low. Spot platinum fell 4 percent to $992.50 but interestingly did not make a new low.
The GLD gold ETF inhaled another 5 tonnes, bringing its holdings up to 771 tonnes and a new all-time high despite the dumping in the futures market. The SLV silver ETF’s holdings were unchanged.
The GDM once again gyrated around with the equity market, and like the equity market, it bounced off its intraday lows but still ended down 13 percent and back to just shy of Monday’s intraday low. The GDM/SPX ratio fell 12 percent and back to the middle of the week’s trading range.
The South Africans held up the best among the seniors and were even green for much of the session. GFI fell 2 percent, and HMY fell 3 percent. AU and ASA both fell 4 percent.
The XAU/Gold ratio fell 8 percent to 0.1185 and back to just shy of its recent low, which is a slight positive divergence given that the GDM made a marginal new closing low today.
The gold/oil ratio exploded 8 percent to 11.06 and a new 52-week high, which is about as bullish as it get for gold mining margins.
Our junior and intermediate basket fell 7 percent to a new low. BAA was strangely higher by a freckle, while the rest of the basket was crushed. NGD fell 23 percent, while MFN and NXG both fell 21 percent. SA fell 22 percent, while CGR and UXG both fell 12 percent. GSS fell 14 percent, and GRS fell just 7 percent.
What’s happening in the markets right now is obviously historic. Charts, valuations, and historical norms have become totally meaningless. We’re watching complete financial chaos unfold, and that means anything can trade at virtually any price.
As I mentioned above, the mob is now clamoring for the powers that be to “do something” and force a broken financial system to operate. The only problem is that the system is not going to operate unless a huge amount of inflation is generated.
Without inflation, the credit markets will remain shut down and the stock market will likely continue to crash until the entire financial system literally grinds to a halt and trading stops altogether. I have said this since day one, and you can see that it is true based on how all of this is unfolding. With the interbank market shut down, the financial system is essentially growing more and more frozen as the days pass.
On a scary note, the entire system reminds me more and more of Enron or Lehman, and it may end like those did too. It’s so leveraged that without parabolic credit and money growth, it will simply implode. We saw the same thing with Kuwait’s Souk Al-Manakh bubble in the early 1980s. Trading simply stopped once the bubble had popped (much like today’s credit markets), and the Kuwait government had to close the doors of the exchange and bail it out to the tune of billions, which was real money back then. Unlike Kuwait, however, the US is a huge debtor, so it’s only choice is to inflate. Default or debase. Those are the only two options, and they both lead to the same place: more inflation.
Either that inflation is produced by the powers that be through artificial means (i.e. – debasement, which is currently being employed but apparently hasn’t been enough thus far in order to restart money and credit growth), or the financial collapse will continue until the credit-related short squeeze in the dollar finally burns out and the currency simply collapses (i.e. – default) as the financial system seizes up altogether, much like Iceland’s currency has collapsed. And a currency collapse obviously produces plenty of inflation, as Iceland is also now conveniently finding out.
Either way, gold and gold stocks (and secondarily assets and businesses that benefit from inflation) are going to be the chief beneficiaries on the other side of this mess, because inflation is exactly what we’re going to get. Jimmy Rogers called what’s coming an “inflationary holocaust” last night on HeeHaw. I prefer to be optimistic and hope for “stagflation squared”, but “Weimar 2.0” is certainly a possibility. The fact that Treasury bonds are consistently no longer seeing a flight to quality bid as stocks collapse is beginning to confirm that view as well I believe.
Gold stocks may be treated as “stocks” for another day or two until they aren’t, but if one believes gold is going to be where it is or higher going forward in dollars (and assuming property rights will of course continue to be upheld), then the gold miners are going to experience some sot of discontinuous event to the upside at some point here very soon. The rubber band just keeps stretching. It can’t stretch forever.
Wednesday’s 17 percent jump in the GDM and 35 percent pops in the South Africans were apparently just a minor dress rehearsal for what we are going to see off the lows in these stocks. Like then, I don’t know what is going to kick it off (and neither does anybody else), but with the VIX and VXO between 70 and 100, it’s not inconceivable that the entire gold complex could simply meltup in a matter of days in a virtual crash to the upside either as the result of an over-the-weekend inflationary event by the powers that be (such as a devaluation or a massive money print and more government bailouts) or simply as the result of the dollar finally collapsing.
Consider that Australia’s currency has fallen some 17 percent in 5 days against the dollar. This is not Zimbabwe, it’s Australia. Aussies saw not only gold rise this week in Aussie dollars, but they also saw gold stocks rise this week too in Aussie dollars. Likewise, much of the rest of the world has also seen gold rise in its currencies this week, as well as seen the GDM either rise or merely move sideways, depending on their currency (see the GDM in the major foreign currencies here).
Tonight we’ll get the G7 statement, and then tomorrow there will apparently be a G20 meeting. There’s no telling what all of these central planners are going to come up with, but it’s a safe bet that it will be inflationary. Time is running out. If the US doesn’t produce inflation soon, then the market is going to do it for them through the currency markets.
The US dollar index rose nearly 2 percent to a new 52-week high. It’s not excitement about the US economy or interest rates that are causing panic into the dollar that has pushed the dollar index above 80, it’s the credit-related squeeze, and as a short squeeze, it’s unsustainable. Either inflation is produced by the Fed to alleviate the squeeze, or the market will work through the squeeze by itself and trigger an eventual collapse in the dollar.
The yen fell a percent. The euro fell over a percent to a new 52-week low. The pound fell half a percent to a new 52-week low. The CAD fell over 2 percent to a new 52-week low, and the AUD collapsed 6 percent to a new multiyear low. Even the swissie fell nearly a percent to just shy of its recent 52-week low. Meanwhile, the PBOC continues to fool around and flop the dollar/yuan back and forth between 6.85 and 6.80.
Treasuries were interestingly lower in the long end again for a second day in a row despite the continuing crash in the S&Ps. The yield on the 10yr rose 9 bps to 3.87% and back to just shy of its September peak.
The TLT bond ETF fell another percent. The TBT levered short bond ETF rose over a percent. For those that care, I added again to my TBT today.
The 2/10 spread widened 2 bps +226 bps, and the 3M/10yr spread widened 31 bps to +364 bps. The yield on the 3M bill fell 33 bps to 0.18%, so we once again saw only a very slight flight to “paper quality” today despite the panic in the stock market, which suggests once again that the credit markets are on the cusp of thawing to some degree, whether due to something the G20 does over the weekend or simply a collapse in the dollar.
The TED spread (3M bill yield/LIBOR) widened 40 bps to 463 bps and another new all-time high. LIBOR rose 7 bps to 4.82%, as the interbank continues to worsen. To repeat, I would expect the G7 and G20 to now take some sort of extraordinary action over the 3-day weekend, and you can bet your last ounce of gold that it will be inflationary.
The 10yr junk spread to treasuries widened 11 bps to 757 bps and a new multiyear high.
The VIX rose 11 percent to 69.95 after trading up to as high as 76.94, and the VXO rose 13 percent to 85.99 after trading up to as high as 103.41.
Did the stock market crash finally “bottom” today and open the door to a bear market rally? It’s possible, but if it did, then one has to assume that the central planners at the G20 must be getting ready to unleash something fairly drastic this weekend in order to generate inflation and unthaw the credit markets.
Outside of that, I would assume that the selling in stocks is going to continue on Monday, and this time it could be a discontinuous event to the downside. Because unless LIBOR comes down, the system will move closer to seizing up altogether every single day, which means no price is too low for the equity market. Chart points and valuation levels are basically meaningless unless the system is reliquified through massive inflation. And every day that goes by means even more inflation is required.
The bond market will be closed for a holiday on Monday (as will the banks), but the stock market casino will be open for business. I’m quite serious when I say that if LIBOR does not come down dramatically, I think we could see the markets collapse and simply shut down. The pace of this “event” is now moving in a parabolic move to the downside. If the G20 doesn’t step up the efforts at inflating, then the market may just walk away. If we get to that stage, it’s going to require real helicopters full of cash in order to reopen the market’s doors.
There’s a reason that the Italian Prime Minister above was talking about a Bretton Woods 2. The breakdown in the fiat dollar-based monetary system that has been in slow motion up until now is accelerating right before our eyes. I don’t know how this is all going to resolve in the near term, but I do know that gold is going to come out of it looking like a champ one way or the other. |
