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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (32255)	5/12/2005 12:01:26 PM
From: ild	Read Replies (1) \| Respond to of 110194

Date: Thu May 12 2005 11:42 trotsky (@market psychology) ID#248269: Copyright © 2002 trotsky/Kitco Inc. All rights reserved it is quite natural that bearish opinions are coming to the fore, receive more attention and are more widely published AFTER a big decline has already taken place. the opposite of course holds for bullish opinions, which are usually most forcefully voiced right at the end of strong up moves. these opinions themselves contribute to the final spikes, be they up or down, in a kind of self-fulfilling prophecy effect. however, per experience it is actually best to turn bullish or bearish when it seems hardest to do so. to me it looks like gold itself is likely to correct some more - the market structure ( i.e. the amount of outstanding speculative net long positions ) has improved somewhat, but probably not yet suffciently. otoh, the gold shares have already discounted this correction - and more importantly, their performance is reflective of the shape of the yield curve ( which indicates a tight monetary policy stance when it flattens ) . so the crucial question is actually whether the yield curve is likely to flatten further ( or even invert ) or whether the compression that has taken place over the past 1 1/2 years is due for a correction as well. there are indications that the compression of the curve is coming to an end. for instance, the best leading indicator of Fed policy is not, as is commonly believed, the federal funds futures contract, but rather the 3 month t-bill yield. during a perceived tightening phase, it tends to rise AHEAD of the changes in the FF rate, while at turning points and perceived loosening phases it tends to fall ahead. it is perhaps a bit early to tell, but this yield has essentially gone sideways for two months now and currently resides a comfortable 17 basis points BELOW the FF rate. it appears iow that traders in t-bills are beginning to doubt the rate hike campaign's durability - probably the strength at the long end of the market contributes to this perception. in fact, the entire govt. debt market seems to be saying that the Fed is way 'ahead of the curve' as the saying goes and will be forced to change tack again. this however conflicts with practically every word uttered in public by FOMC members, who keep stressing the likelihood that 'measured tightening' will continue. obviously the gold sector trades more in keeping with this official stance - but ultimately, the Fed has always followed the signals from the govt. debt markets historically. this is because these markets rarely get it wrong...when they signal an economic slowdown, a slowdown is usually exactly what we get. a side note: signs of retail holder capitulation in the sector also abound lately. admittedly this is mostly anecdotal evidence, but judging from money flows it's actually what has happened over the past few trading days.