As Greece took the spotlight last week, there was an auction going on in the U.S.: "Treasurys rise after record-setting auction."
Our great nation sold more bonds (aka debt) last week to keep itself afloat. Demand was strong.
10 and 30 year bonds were peddled with the Fed on the bid, either in action or in implied waiting.
"On Tuesday, the government garnered weak demand at its sale of 3-year notes. That could have been due to expectations for more Twist from the Fed, which may entail selling that maturity. That logic would also have lent support for the 10-year auction, and presumably the long bond sale in the coming session."
The indisputable message of this chart is that gold generally goes in alignment with the 30 year/2 year yield spread.
What a world; all a great and powerful entity has to do is cannibalize the unproductive legacy debt of the nation, eating what suits him (long term bonds) and serving what doesn't to others (short term bonds) in hopes that they eat the stuff. They are hopped up on deflation fear after all. They'll eat anything that is "risk off" after all.
Point is, we have been following the correlation between gold and the 30-2 spread for many weeks now in NFTRH. The gold correction out of the hysterical phase of the euro crisis was very normal and indeed, expected. But the normal correction was then aided and abetted by the Fed's stated intention of Twisting (aka sanitizing*) its monetization of Treasury debt.
Really, how long can they keep it up? The fact is that whether they Twist again or go for the good old fashioned straight on monetization, we are off the charts and officials are just rearranging deck chairs on the Titanic as far as inflation is concerned. They have been, are and will likely continue to ram inflation into the pipeline through whatever means suits the agenda in the best way.
It will be interesting to see if gold obediently maintains the correlation. When the Twist manipulation scheme was originally cooked up and served in September, all the over bought metal needed was a shove in a southerly direction to get it to go with the program. Now, after what would qualify as a healthy intermediate correction, doing the Twist may not work as well.
Several points of analysis point toward this being a pivotal and very interesting summer; and not in a bearish way either. Real inflators may yet stand up and be counted instead of hiding behind intricate schemes and half measures. Watch the gold sector for clues coming out of what could be a volatile June. We will be keeping an eye on various components of the macro market.
*This sanitization gives the appearance of accommodative policy and subdued inflation all at once.