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The Dollar Index has traded sharply lower over the last few trading days. In this scenario, we would normally expect gold to benefit from a corresponding bid. But the fact that gold has traded in relative calm and has not broken out to the upside leads me to believe that the negative forces affecting gold remain in control.
This thesis will be confirmed if the August futures contract trades down to $1,384. The immediate downside objective would then be $1,357. A subsequent trade above $1,403 would convince me that I was wrong.
S&P 500 futures have stabilized following Friday's massive selloff.
Friday's decline put the June S&P futures at a low of 1,626.25, below the major 1,631 support level. Investors hit the sidelines as they began to fear that the backstop put in place by the Federal Reserve, to the tune of $85 billion in bond purchases a month, will be curtailed.
On Monday, ahead of ISM Manufacturing data, June S&P futures reached to retest the 1,639-1,642 pocket, as many have begun to believe that a curtail in bond purchases is already priced in following the drop.
Doug Kass has long been a bear on gold. In fact the founder of Seabreeze Partners Management engaged in a heated debate about gold with Euro Pacific Capital's Peter Schiff on the April 16 episode of "Futures Now," telling the ultrabullish Schiff that gold has "no intrinsic worth" and is "purchased by buyers in the hope that someone else—who knows that gold will forever be unproductive—will pay more for it in the future."
(Read More: Kass and Schiff Feud About Gold)
But now, Kass has become one of those very buyers. And why not—after all, he believes that someone else will pay more for it in the future!
"There's a time and a place and a price for everything," Kass said on Thursday's episode of "Futures Now." For Kass, this is now the time to buy gold.
As Kass wrote earlier this week, "Negative sentiment in gold has become extreme." So for Kass, gold now "provides a contrarian's appeal."
Indeed, Kass sees bearishness everywhere he looks. "The sharp price drop in gold has brought on a growing short position," he wrote. And "Credit Suisse, JPMorgan and Goldman Sachs have recently slashed their gold price projections. I view this surrender as consistent with a possible contrarian signal."
For the 10-year Treasury yield, it's been a May to remember.
Over the course of three weeks, the 10-year yield have risen from 1.65 percent to 2.15 percent. Although not unprecedented, this type of movement is rare. It's important to remember the causes of the move before we take a shot at trading it.
The surge in yield began when the market began to consider the possibility of the Federal Reserve ending quantitative easing. The velocity of the move, however, was probably caused by a realization that an overwhelming number of positions were not adequately hedged. Most of the selling that we've seen in futures markets appears to be rushed, as many come to grips with the possibility of considerably higher rates.
That being said, markets do tend to be panic-driven, and often overshoot reasonable targets in the short-term. Although I do believe that a 2.40 percent yield is the medium-term target, there is the potential for a quick move back down to 2.06 percent yields.
Gold is in a holding pattern.
Gold rallied nearly $30 from the lows on Tuesday, running stops just above $1,397 and testing $1,401. The rally definitely caught many traders off guard, especially since the market had been grinding lower all morning, reaching as low as $1,372.10.
With the market settling right between the high and the low, the defined range continues to be between $1,364 and $1,397. Gold will truly need to close outside of these levels to pick up any directional momentum in either direction.
The central banks of Russia, Kazakhstan and Azerbaijan all boosted their gold purchases in April, according to a report on Monday from the International Monetary Fund.
Together, the three countries bought up some 24,125 pounds of gold in the month. And as a whole, central bank net purchases contributed to more than 11 percent of the demand for gold in the first quarter of 2013, according to the World Gold Council.
So can the central banks save gold?
"I don't think that central bank buying is going to actually stop this decline in gold," said Kathy Lien of BK Asset Management. That said, central bank purchases "are certainly stemming the slide, and gold would probably be closer to $1,200 if it wasn't for this demand by central banks."
So why doesn't she think those same purchases can save gold?
"You've consistently seen central banks increase their purchases over the last couple months," Lien said on Tuesday's episode of "Futures Now," "and yet you've still seen gold prices fall."
Municipal bonds face trouble ahead that one expert compares to lava flowing from a volcano—that will ooze into the fixed-income sector.
The $3.4 trillion muni industry faces a multitude of threats, ranging from the high-profile financial problems of big cities to tax challenges resulting from Washington budget negotiations.
Consequently, Marilyn Cohen, president of Envision Capital Management, is advising clients to take the unusual step of buying high and selling low.
"That is, only buy high quality municipal bonds and sell the low-quality munis you own," Cohen advises in the most recent edition of her Bond Smart Investing newsletter.
(Read More: Buffett: Right Now, Stocks Are Good, Bonds Are Bad)
The guidance comes from a view that the higher-risk bonds that investors bought in a quest for yield will come back to haunt them as municipal financial pressures mount.
"The great American municipal bond restructuring is selectively in process—like a slow lava flow," Cohen said. "Run away and sell those issues that may scorch your portfolio."
Among the biggest targets are Detroit; Stockton and San Bernardino, Calif.; and Chicago; as well as Puerto Rico. Each has struggled with moderate to severe difficulties. Detroit teeters on bankruptcy, and Chicago has one of the slowest growing city economies in the country. San Bernardino has filed for bankruptcy protection, and Stockton is eligible to do so.
(Read More: Bearish Like Buffett? Some Bonds May Still Be King)
"The sound and fury, posturing and bluffing may appear a bit different in each case, but the subliminal outcome is the same: bondholders must share in the pain and take a haircut," Cohen said. "Like a lava flow, taking a haircut on your municipal bonds—even one position— is destructive. But like a lava flow, casualties should be rare because the information and process is slow enough to allow escape."
The muni market survived a scare in 2010, when banking analyst Meredith Whitney famously predicted widespread calamity and dozens of huge defaults that never materialized. Munis went on to perform superbly but have slowed recently.
The Barclays Municipal Bond Index is up 1.4 percent for the year, worse than even the 1.52 percent return from Treasurys and well below the 8 percent return of the Barclays Composite Index.
Mutual funds focusing on munis have taken in $8.34 billion this year but have lost more than $1 billion over the past six weeks, according to the Investment Company Institute.
In addition, munis face political obstacles in Washington. Congress is toying with capping municipal tax deductions at 28 percent, which critics say would be harsh on the industry and the governments that use the bonds to fund their operations.
Threats of removing the tax-exempt strategy had previously not been taken seriously, but they are now.
"State and local government issuers are facing a clear and present danger that the IRS code relating to the tax exemption will be changed so as to make financing more costly," Citigroup muni analyst George Friedlander said in a research note. "The timing of any such change is uncertain."
Friedlander said, however, that the move probably wouldn't take effect until late this year or 2014.
(Read More: Assessing Just How Much Bond Investors Lost)
But he said the damage would be substantial, because the government is relying on inaccurate models to project the actual costs.
"The costs of such changes to issuers appear to be severely understated relative to potential benefits to the federal government, because they rely upon a flawed model for assessing the cost of the tax exemption and for assessing how changes in the tax exemption would affect borrowing costs," Friedlander said.
Cohen also expressed concern about the tax problem.
"There's enough municipal bond consternation going on that you can't control," she said.
Crude oil continues to be a tremendously volatile trade, and it has presented traders with a plethora of opportunities.
In May, oil has certainly fluctuated inside of the current $91.50 to $97 band. On some days, WTI crude correlates to equities, and on others, the quantitative easing undercurrents seem to dominate. We are flush with supply domestically, but Middle East tensions still exist under the surface—producing somewhat of a tug-of-war.
We are focusing on equities holding this week's lows, as crude would indeed follow the S&P 500 lower on a violation. That could potentially break us out of this May range. However, until we see confirmation of an equity correction, we want to buy the low end of this range and sell the top of it. Of course, it is important to use tight stops—sentiment can turn on a dime, as we have seen this week.
(Read More: Oil Prices, Dollar May Set Off on New Relationship)
So which way is crude likely to break?
Due to the fact that $97 has served has strong resistance (it has been tested five times this month alone), we feel the price will breakout of the range to the downside before it breaks to the upside. For that reason, getting short on stops under the range is the way we'd like to play crude oil today.
Gold isn't trading like a safe haven—it's trading like a currency.
Gold retested major resistance on Thursday night, reaching $1,397.10 before falling back. The market was able to recover from pullbacks earlier Thursday to close back above $1,383.90. But early Friday trading finds gold getting back to this level from the highs.
We have been looking at a chart that discounts the quick move through the $1,411.70 retracement level up to $1,413.10, and this shows a market that has now tested resistance at $1,397 four times and has failed (and fallen back at least $10) each time. Traders have had a tremendous opportunity hedging longs as well as selling outright against this level.
Our level of support at $1,375 held very well Thursday, and a retest Friday will be very negative to the bull camp. However, the line in the sand is the support ranges from $1,464 to $1,467.70. If the market breaks this level, expect to see gold close at the lowest level in more than two weeks, which will put the bears in complete control. A close above major support at $1,380 to $1,383.90 will likely keep the market neutral to the slightest bit positive into the weekend.
The reality is that there is no imminent catalyst to help this market follow through. Recently, as the Japanese yen has moved lower, so has gold. The yen is positive against the U.S. dollar on Friday, but is still trading far from the highs (just as gold has fallen back). If the yen can climb back, you should expect gold to follow through to $1,400. Yes, this means that gold traders should also gauge the dollar, which is trading one point from this week's new swing high at $83.50. If the Dollar Index can climb back above 84, the yen should press lower and so should gold.
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