Gold is setting up some potentially good entry points, although today’s move up might be somewhat too much, we would still look for entry points around these levels. The set up reminds of the SPX bounce we had from last week. The last move down, has scared the weak money. Friday’s hammer formation right of the support levels should mark the short term bottom this time, just like the bounce we had in mid May, as the weak money is shaken out. Look for 150+ to be retested sooner than later.

Chart, Tech Take

Courtesey Gold Core; Gold is higher today and showing particular strength against the euro and the Japanese yen. The relief rally seen in equities since the latest Greek ‘bailout’ is under pressure as S&P have said the debt rollover proposal would be a “selective default”. The ECB may selectively reject the S&P Greek downgrade and arbitrarily select the best credit rating being offered.

Gold in USD – 1 Year (Daily)

The risk of contagion in Eurozone debt markets and banking systems remains. Portuguese, Spanish and Italian debt has been sold this morning. Systemic risk from contagion in the credit-default swaps market also remains a threat.

In the U.S. political squabbling over raising the $14.3 trillion debt ceiling continues. However, it is likely to be resolved as the massive liabilities incurred (not including unfunded liabilities of over $60 trillion) simply cannot be paid back. It is therefore likely that more debt monetization (creating money to buy government bonds) will occur leading to further currency debasement and the risk of stagflation and severe inflation.

Gold’s Seasonal Strength – July to December Could See $1,800/z Challenged

Gold has been supported in the traditionally weak “summer doldrums” period due to institutional demand and strong physical demand at the $1,500/oz level, particularly from Asia.

The summer months of June and July normally see seasonal weakness and it is thus a good time to buy on the seasonal dip.

Gold is now entering its period of traditional seasonal strength which is seen between July and December.

Gold tends to take a break in October and then has a second period of seasonal strength from the end of October to the end of December.

This has been primarily due to Indian religious festival, store of wealth, demand in the autumn and western jewellery demand prior to Christmas.

Since the liberalization of the gold market in China in 2003, demand for jewelry and bullion from China for Chinese New Year (mid to late January) is also becoming an increasingly important factor.

It is likely that seasonal weakness in equity markets, with both the ‘sell in May’ factor and tendency of stock markets to be weak and occasionally to crash in October may also lead to safe haven demand during this period.

As noted in the chart above, gold rose strongly (by 22%) from July 2010 to December 2010. This trend was also seen the previous year in 2009 when gold fell in June, rose marginally in July, was flat in August and then rose strongly from September into early December.

As shown in the excellent Erste Group report on gold released yesterday, the strongest months for gold are September, August and then November (see table below).

Thackray’s 2011 Investor’s Guide notes that the optimal period to own gold bullion is from July 12 to October 9. During the past 25 periods, gold bullion has outperformed the S&P 500 Index by 4.7 percent.

Just in time to start the reversal, once again, as we thought everything was happy dandy.

Moody’s Investors Service has today downgraded Portugal’s long-term government bond ratings to Ba2 from Baa1 and assigned a negative outlook. Concurrently, Moody’s has also downgraded the government’s short-term debt rating to (P) Not-Prime from (P) Prime-2. Today’s rating action concludes the review of Portugal’s ratings initiated on 5 April 2011.

Full Rationale continue reading…..Spain, soon to come?

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Short FX mid day summary;

A typical summer day in the world of FX trading, Asia handed over to Europe with a risk off tone, EUSD seemed to be on its way down, but that was quickly turned to risk on. EUSD been range bound, 1,4460 – 1,45ish most of the day. Cabel problably been the mover of the day, opened at 1,6090.. went all the way down to 1,5990 and now trading at day highs at 1,6115. Riksbank delivered its exp rate hike and eursek is more or less unchanged.

For all interested in Greece, a detailed view;

Full report,

ΤΗΕ-ΕCONOMIC-ADJUSTMENT-FOR-GREECE-4TH-REVIEW-SPRING-2011-JULY-2011

All the relevant and important news. Courtesey our Virtual Trader.

Ft.com
Shares in Sino-Forest soared the most almost two weeks after Wellington Management said it owned an 11.5 per cent stake in the Chinese tree plantation company. Bloomberg says Sino-Forest rose 30 per cent on Monday in Toronto after Wellington Management said in a regulatory filing it held 28.3m shares as of June 30 http://ftalphaville.ft.com/thecut/2011/07/05/612516/sino-forest-shares-soar-on-wellington-stake/

The European Central Bank will continue to accept Greek debt as collateral for loans unless all the major credit rating agencies it uses declare it to be in default, a senior finance official told the FT. The ECB would rely on the principle of using the best rating available from the agencies – Standard & http://ftalphaville.ft.com/thecut/2011/07/04/612416/risk-rally-slowed-as-sp-warns-on-greece/

The spike in global demand for industrial metals has sparked a fierce battle among UK demolition companies as they vie to remove scrap metal from condemned buildings. Competition to demolish sites with a high concentration of copper and steel, http://ftalphaville.ft.com/thecut/2011/07/05/612476/scramble-for-scrap-metal-rich-demolition-jobs/

Paulson & Co, the hedge fund that made billions from betting on a collapse in mortgage-backed securities during the financial crisis, has made more than $550m from a recovery in the value of bonds it bought in failed investment bank Lehman Brothers http://ftalphaville.ft.com/thecut/2011/07/05/612451/paulson-enjoys-550m-lehman-boost/

A rising number of US companies have moved to streamline operations this year through asset sales and spin-offs in a bid to remedy lacklustre stock market valuations for conglomerates, the FT reports. Divestitures have risen to a record share of global mergers and acquisitions activity so far this year http://ftalphaville.ft.com/thecut/2011/07/05/612431/spin-offs-reach-record-share-of-ma/

India’s ruling Congress party has suffered another setback after nine of its members of parliament resigned in protest at New Delhi’s failure to carve a new state of Telangana from the existing state of Andhra Pradeshhttp://ftalphaville.ft.com/thecut/2011/07/04/612371/mps-quit-india-congress-party-over-state-row/

The mayor of a small town in Japan has signed off the restart of two nuclear reactors, in a decision that could help avert a complete shutdown of Japan’s nuclear power stations, the FT reports. The decision by the mayor of Genkai, http://ftalphaville.ft.com/thecut/2011/07/04/612361/japan-mayor-keeps-nuclear-shutdown-at-bay/

China Development Bank, one of the country’s largest state-owned banks, is emerging as an increasingly active overseas investor, using its $10bn CDB capital fund to take stakes in private equity and hedge funds. In its latest move, the CDB fund is seeking to develop its expertise in and understanding of intellectual property associated with lending to small and medium-sized companies, a market Chinese banks have never felt comfortable with due to the risk of default. http://www.ft.com/intl/cms/s/0/91131f46-a668-11e0-ae9c-00144feabdc0.html#axzz1R6ne4OlC

All news continue reading.

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Next Pink Elephant, and the ultimate Black Swan, will be the collapse of the mostly totally unregulated Derivatives market. The Total value of Derivatives around the World, simply does not have any STOP nor possibility of closing positions down, even if they all would be marked to market.

Back in early March, 2011 – PIMCO’s Bill Gross were calling for much higher rates and telling the world that they were selling U.S. Government Bonds.

PIMCO’s Bill Gross Says to Sell U.S. Treasuries Now

03/03/2011

……To wit, he predicts that when the Fed’s QE2 bond-buying binge ends at the end of June, there will be nobody to take the Fed’s place as last-resort buyer of U.S. Treasuries at artificially low rates. Treasury yields will need to ramp up sharply by 1.5 percentage points to attract private buyers. Given that the ten-year U.S. Treasury is currently yielding only 3.5%, a 1.5 percentage point jump would equal a 43% increase in interest rates (1.5/3.5). That’s a big move in interest-rate land and would have a significantly negative effect on bond prices.

Remember folks, Bill Gross [PIMCO] is reputed to run the world’s largest bond fund.  Not only was Gross wrong – in investment terms he was SERIOUSLY WRONG – a great many percentage points wrong.  Not only did 10 yr. bond rates not go up by 150 basis points – they have indeed FALLEN by more than 50 basis points.

This illustrates a point; namely, that being the biggest in your space [and having former Fed Chairman Alan Greenspan acting as advisor to your company] doesn’t ensure that you NEVER, EVER make a poor market call and “lose-your-shirt” – so to speak.

Accordingly, it sure is a good thing that the world’s biggest derivatives player – J.P. Morgan – has “seemingly” NEVER, EVER made a bet even “1 % wrong” with their 80 Trillion derivatives book.  The Morgue has a Market Cap of roughly $180 billion. A wrong bet of a mere 1% on their ‘book’ would translate to a loss of $800 billion dollars eviscerating their entire capital base more than four times over.  The knock on effect from such an event would trigger multiple tsunamis reverberating through the global financial system.  Sounds absurd, but it’s pure math.

Either J.P. Morgan NEVER makes a mistake or they get a pass if / when they do make a mistake.  Back in early 2006, Business Week reported,

President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006,

What that means folks, is:  J.P. Morgan’s derivatives book constitutes national and international security and they along with other large derivatives player are NECESSARILY excused from wrong way bets.  The obscenely large derivatives books of J.P. Morgan and other select money center banks are being used to execute U.S. monetary policy and to achieve other arbitrary financial market outcomes.  This has been occurring since at least the mid 1990’s and severely ramped-up in the mid 2000’s.

Additionally, what can be said for J.P. Morgan can also be said for the likes of B of A, Citibank, Goldman Sachs – all with derivatives books [currently] ranging from 44+ to 79+ Trillion in size.  Take note of the TOTAL derivatives for Commercial Banks at 243 Trillion:

TABLE 1 excerpted from: OCC Quarterly Derivatives Report Q1/11

Full article,

Guest Post by Technical Take;

The easy part was the bounce.  The hard part was knowing that the SP500 was going to gain nearly 5.5% in one week.  Did you know?  Not me.  Anyway, last week is, well,  last week’s news, and in the markets, the question always is “what’s next?”  With the “dumb money” still extremely bearish, I suspect those sitting on the sidelines –and there are a lot of you — will be angling for entry points on any pullback (if that should occur).  I am still a bit concerned that the rally won’t go beyond a couple of weeks or stated differently, I don’t see last week’s blast off as the start of a multi – month up trend.  Although the “dumb money” was very bearish (i.e., bull signal) a week ago, none of the other sentiment indicators were in alignment.  For example, corporate insiders were not buying to any great degree.   Since 2004, the best, most sustainable market moves come when there is a consensus amongst the sentiment indicators.

The “Dumb Money” indicator (see figure 1) looks for extremes in the data  from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio.   This indicator is extremely bearish, and this is a bull signal.

Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel.  From the InsiderScore weekly report: “Transactional volume declined significantly as the quarter wound down and companies closed trading windows. Sellers maintained a narrow edge over buyers, however, both of our key sentiment flashed green indicating positive sentiment. More insiders will be moved to the sidelines during the coming week as the quarter official closes. Transactional volume will continue to slow down and it won’t be until earnings season that we get another macro tell.”