The Hangover Effect

Now that the euphoria, controlled as it was for the Democrats, is over and the Republicans still have a splitting headache from being hung over from their "lost weekend" that lasted for almost three weeks, the sober business of figuring out how to realistically cut budgets, deficits and debt is upon Washington once more.

 As might have been expected, gold gave back not quite 10% of yesterday's gain. Mild profit-taking and the fact that it's Friday thwarted any fresh buying impetus. Silver ticked up a couple of pennies. We can safely describe today's trading in both metals as "maintaining the status quo." New assessments will be made over the weekend of exactly what damage has been done to the U.S. and the world's economy, and new questions will be asked about the direction of joint Congressional negotiations.

 A second factor pulling on the reins of the gold and silver horses is the upcoming release on Tuesday of the September labor market data that was delayed due to the shut down. After heavy volume Wednesday and especially Thursday, precious metals traders backed off their hyperactivity and settled on the sidelines.

 Another hold up on interest in gold is the now-raging civil war within the Republican Party. The pro-business faction, the traditionalists so to speak, are fighting it out with the Tea Party. The fighting is particularly acute on the Senate side of the Capitol.

 "We are going to get engaged," said Scott Reed, senior political strategist for the U.S. Chamber of Commerce. "The need is now more than ever to elect people who understand the free market and not silliness." The U.S. C of C is not known for its flightiness. They perceive that the Tea Party is, in the long view, bad for business. There will be plenty of blood let in the form of money in Republican primaries in 2014.

 We should keep an eye on inflation in Asia, particularly China and India. So far, rising prices in those countries has driven many small investors to buy physical gold. As much as physical gold is not an everyday driver of higher prices, inflation eventually will worry big analysts and traders in Asia. The consumer - the stereotypical "Chinese" grandmother - is the canary in the coal mine sniffing for the poison gas of inflation in all Asian economies.

 HSBC economist Frederic Neumann said, "With inflation still elevated in many markets and interest rates not offering adequate compensation, expect Asia's voracious appetite for gold to persist. Asia is going for gold. Over recent years, demand has soared."

 At this point, we just need to say four little letters of the alphabet: FOMC. We are beginning to believe that the Fed is the real government, especially since Congress can't agree on how to judiciously manage the U.S.'s finances. IF, now a word riddled with regret, all the money that has gone into bailing out failed banks, and the sopping up of mortgage debt by the Fed, and the recent $24 billion cost of shutting the government down had gone into infrastructure building, not only would we have full employment, we would have a labor shortage. What are these people thinking?

Finally, there is another drag on gold right now. The metal that is supposed to be an island of calm during times of uncertainty has itself been visited by uncertainty. There have been swings in the market that no one has explained in rational terms. Abrupt rises, spinning and spiraling down on a dime... these have become, if not commonplace, then not unusual.

Speculation abounds concerning this phenomenon. A very fine overview was written for Reuters by Frank Tang. We spotted it in the Chicago Tribune online.. Click here to read it. 

Wishing you as always good trading,

 Gary S. Wagner - Executive Producer