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Mini-Metal Monitor: Danger Is in the Air


...the macro-risk to a bullish stance is intensifying


Train Kept-A-Rolling … All Night Long …

In essence, anyone who thinks that the upside breakout in the U.S. 10-Year Treasury Note yield is an insignificant, short-term fluctuation is saying that they desire to stand in front of a freight train, rolling down the tracks. We focus on commentary from St. Louis Fed President William Poole:

"My sense is that there is a great deal of momentum in the economy, and I think it is momentum of the sort that says we're going to keep rolling down the expansion here, and you're not going to stop this freight train easily."

Of all the Fed regional bank Presidents, Poole is 'in-the-know,' since the St. Louis Fed is the bank responsible for compiling and calculating the U.S. money supply, banking and credit data. We spotlighted this data in last Friday's massive Money Monitor missive on U.S. credit, which is hitting new highs and driving Broad Money growth into a stratospheric double-digit 6-month growth rate. Moreover, we revealed the data details exposing the Fed for their HUGE, outright purchases of Treasuries and the MONSTROUS sized increase in Fed bank credit.

With all that in mind, from the St. Louis Fed we note more of Poole's commentary, offered yesterday during an interview with Reuters:

"Should we get more data in the coming months that are consistently strong, particularly if there are substantial upside surprises, then that says we will have to step a little harder on the brake."

So too, stepping a little harder on the brake, is the BOJ, ECB, Riksbank, Norges Bank, Swiss National Bank, Bank of Thailand, the Chinese Central Bank (Taiwan) and likely today, the Bank of Canada.

Hence, we note a concerted, global breakdown in long-bond prices.

And note a steepening yield curve in the U.S., amid a continued push higher in the deferred short-term USD Deposit Rates, and thus a rally in the Dollar.

In other words, long end yields are now leading all yields higher.

This is not a 'positive' backdrop for Gold, as it implies that finally; some serious degree of credit contraction might result, exerting a disinflationary influence over all 'reflated' assets, from stocks to gold.

Danger is in the air, and the macro-risk to a bullish stance is intensifying.

We let a few of the charts utilized in yesterday's Money Monitor speak.

The U.S. 10-Year Yield is breaking out to the upside, a la a significant technical move noted in the longer-term weekly chart visible below. We specifically note the completion of a prolonged directional turn to the upside in the long-term 2-Year Moving Average of the Yield.

And, with short-rates also rising, a steepening curve is not supportive for gold, or commodities in general, because such implies that all yields are rising, led by the long-end.

In the petro-patch, we focus on the plunge into a state of deepening contango in the summer seasonal Unleaded Gasoline Spread (June/July), a situation not witnessed in years, and a 'negative' symptom for the entire complex.

So too, negative for the petroleum complex, is the teetering act being performed by the AMEX Oil and Gas Index, which has been one of the upside leaders, in term of paper asset reflation.

Further, we are closely monitoring the GSCI weekly chart, seen below, for a potential technical breakdown of macro-significance, which would be signaled via a downside violation of 405. Such a move would complete a topping pattern, violate the long-term 52-Week MA and the multi-year uptrend line (not drawn).

And last, but far from 'least,' in fact, perhaps the most telling of all of today's charts except for the US 10-Year Yield chart itself, is the Dow Utilities Average, shown in the longer-term daily chart below.

Note the head-and-shoulders topping pattern and the downside penetration of the med-term 100-Day MA. The market is also threatening to violate the uptrend line defining the reflation in 2005.

A breakdown below 397.90 in the DJUA would be technically quite negative and would cement our thought-process as applies to the expectation for even higher long-bond yields, amid a return to two-way reflation-deflation risk profiling, away from the recent one-way trend towards perpetually greater paper wealth reflation built on credit.

Indeed, can anyone remember what a 'credit contraction' is like?

We can, and it is not 'pretty.'

Editor's Note: This letter is an excerpt of "The Metal Monitor", and has been reproduced with the full authorization of its publisher. For information about subscribing to macro-market research services, including "The Metal Monitor", e-mail:

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