The New Land of Oz

Yesterday was an amazing day for the markets.

Gold bullion hit a three-month low despite: 1) inflation rising rapidly in North America; and 2) the Chinese buying half of this year’s world gold production.

The stock market was up to a new high despite: 1) corporate insiders selling like mad; 2) corporate earnings growth collapsing; 3) the amount of money investors have borrowed to buy stocks standing at a record high; and 4) the economy stinking.

In the words of Robert Appel, my esteemed colleague, the following best describes what is happening with the markets:

“Time to take those ruby slippers out of the closet because we are definitely on our way to the ‘Wizard of Oz’ show once again. There is a view that the government and its ‘special contractor’ (the Fed) have things under control and we are now at the beginning of the biggest stock bull in history. We don’t buy that theory for a minute but we do acknowledge it exists.

“Those opposing this view—an ever-declining number—suggest that if inflation were defined as it was when the greatest economic minds of our age were still alive—the U.S. economy would be in big trouble. The recent corporate earnings wipeout in the retail sector was one of the most under-reported financial stories of the year.

“Interestingly (this is too bizarre to make up) the only major upside surprise in the retail sector in respect to first quarter earnings reports was Tiffany’s…where they can barely keep up with demand. No surprise for our readers as the ‘gap’ between rich and poor under QE [quantitative easing] has only intensified. QE (history will eventually show) ONLY rewards the super-rich. Period. End of story.

“As for gold, the most astounding thing was that it took this long to break support. Every technical report we have seen for the last several weeks said to expect a continuation of the downtrend (as we explained in the past, the anti-gold forces are fully aware of how technicals work and use charts and pivots to their advantage, realizing that if they can ‘force’ a move to a pivot, the knee-jerk traders will do the rest of the heavy lifting).

“How hard is it to force the paper gold market, you ask? Well, according to the major media, a lone renegade trader at Barclays was able to do this merely by pushing a few buttons…? So how hard can it be?

“In this new Land of Oz, no one questions why gold, which was so popular a few years ago, is out of favor today. No one asks why demand for gold in the East (China) continues strong while the price is endlessly declining. No one even wonders how it is possible to have robust demand and a declining supply of…a commodity which is now selling more or less AT PRODUCTION COST?

“Best way to think of this market is like a horse race, because, in a horse race, at least everyone making bets KNOWS FULL WELL that the horses actually have owners! For the ‘fiction’ of ‘The Clever Fed and the All-Wise Government’ to continue, the broad market must surge forward from here. For the fiction of the ‘Uselessness of Gold in the Modern Age’ to succeed, gold must break below recent lows ($1,175 an ounce) and then completely disappear off the radar. Could this happen?

“If $1,175 gold is re-tested and holds again, even the most cynical trader would want to consider (at that point) that gold had bottomed. Gold will reach a final bottom mid-summer, whether $1,175 holds in the interim…or not.”

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