With the release of the January unemployment report on Friday morning, there was a rush into safe-haven assets like long-dated U.S. Treasury instruments (TLT). 30 Year bond futures spiked higher along with gold (GLD) and both quickly ran into selling pressure. Gold pushed higher again, attacking the $1680 area but was, ultimately pushed back down. Given that this was the first day of delivery for February contracts and deliveries in January are set to be 7 times higher than they were in December (~10 tons) - more than 72 tons if we factor in both Shanghai and outstanding COMEX deliveries - weakness in gold is understandable if you subscribe to the theory that the COMEX is massively over-leveraged, which I do.
But, the selloff in the 30 year bond was simply stunning. For not only did bond prices retrace back the entire morning rally - thereby confirming it to be nothing more than a brief short-covering rally -- they fell below the open for the day. This does a couple of things technically:
It was a weekly close below the monthly low for January. This is a bearish signal that indicates the selling in 30 year Treasuries is now very likely (95% likely) to be a medium-term trending move- not just a small bit of chart noise.
It brings into focus a move in February near 3.5% with a strong probability after that of pushing through the March 2012 peak at that level to 3.7%.
Friday morning's unemployment report presented the perfect opportunity to hold the price of the 30 year bond within the price range established in January and that failed. Then let's pile on the news of Dutch bank SNS being nationalized and the 2nd LTRO repayment coming in at only $3 billion, putting the total repayment a full 70 billion under projections.
Normally any weak news coming out of Europe is enough for traders to run screaming to the amniotic sac of U.S. Treasury bonds - oops. For it to happen in one day, on a Friday to begin the month, tells me that there is someone on the other side of this market getting ahead of and overwhelming the Fed's purchasing and that a sea change in the markets is taking place right now. Days like Friday do not happen that often and when they do need to be noticed by investors.
I said as much in my last article and Friday's action confirms it further.
Is this a lack of confidence in U.S. Treasuries or just the expectations of higher inflation thanks to QE or a mix of both? Looking at the fund flows of some major ETFs, it is clear that there is selling everywhere with the exception of TIPS (TIP) and the ProShares UltraShort 20+ Year Treasury ETF (TBT). Selling in the Gold ETF tracks with the mild drop in price for the month but the 3% redemption from the SPDR S&P 500 ETF (SPY) is very telling of a market that is not convinced of the validity of this rally based on fundamentals. In fact this January's data perfectly mirrors last January's data ($4.17 billion in outflows from SPY) during a major rally.
ETF Ticker Symbol
January Flow (millions USD)
Source Index Universe Fund Flow Tool
Between these things and the massive blowout in TIPS yield spreads this week tells me that this equity rally and bond sell off is purely a function of Fed policy to drive money flow. Any weakness gold is experiencing in this environment is absolutely temporary and smells of desperation on the part of the U.S. monetary authorities to continue to punish all avenues of savings.
What is important to note is how strong gold has been relative to this sell off in bonds. For all intents and purposes, gold has not moved on a weekly basis for nearly two months, while equities have surged and bonds have fallen relentlessly since the election. U.S. gold eagles are now trading at 5% over spot at discount online dealers, when the premium is normally closer to 3%. Moreover, the buy price at APMEX.com is currently more than $45 over the current futures price. So, again, it is hard for me to conclude that there is no demand for gold.
The only conclusion is that the futures market is continuing to be held down against its will. And the redemptions from GLD could also be seen as rats leaving the paper gold ship as opposed to real fear of gold drawing lower. Huge numbers of longs standing for delivery and gold dealers in the U.S. buying 3% over spot is something only the most willfully blind can ignore.
Friday's rout in the 30 year bond may be one of those moments we look back on and point to as an inflection point. For those seeking yield, the Fed has made its point very clear- don't.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I own physical gold, silver, a few dozen goats and what's left of my sanity.