Morning Macro Update: "The Only Way Gold Will Drop Is If Sovereign Restructurings Are Allowed"

Submitted by Nic Lenoir of ICAP

The only obvious market going anywhere this morning is Gold. The precious metal broke out yesterday and made all time highs against the green back. As we have discussed at length recently whether it is from a fundamental or a technical standpoint it is the only trend with shorting EURUSD that is clearly established. Back before September 2009 I was a bit dubious as to whether major upside was in the cards for Gold because as we have highlighted several times before I think the deflationary forces at work are huge. However, ever since 1,000 was bypassed again we have validated a technical breakout. What's more: monetary policy by central banks and governments around the world is nothing shy of a race to the bottom as sovereigns have been printing the money needed to make good on their liabilities an that of their private sector. The recent European bailout which was 100% predictable confirmed the trend and the gold market acknowledged it breaking out yesterday. The next key target on the upside is 1,381. We recommended getting exposure in the 1,080/1,090 zone after the pull-back following the previous highs of December 2009 and would advocate riding the trend with a trailing stop on a daily close below 1,170. The only way to stop this train is if the market and the people force politicians into acknowledging defaults and restrucuture while let banks that need to fail and start with a clean slate. That would be hugely deflationary and the shrinking of the money base would cause a collapse in gold. Since we have not seen a politician with one ounce of courage in about 50 years I would feel pretty good being long: heads of states will continue fighting evil speculators by short-squeezing them with trillions of ponzi money.

In Fixed Income the two channels we have identified for the 10Y US Treasury future and the bund are still intact. As long as those supports are not violated more upside is to be expected. We are patiently waiting for a good entry point to sell the long end of the fixed income curves. Hard to think the EUR curve won't stay at close to its steepest ever if not move steeper at this point.

Finally S&P futures tested the C=A extension yesterday at 1,168.50. I was originally thinking we would see 1,175. Looking at the price structure on the 30-minute chart shows we have a potential H&S in formation. We would look at selling the topside of the second shoulder around 1,162 with a stop on a daily close above 1,180, adding to the position on a break of 1,140 (below H&S neckline).

Good luck trading,



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