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This week in precious metals was all about the US Treasury Bond auctions.

Would the Chinese and the Russians walk their recent negative talk? Would foreign buyers boycott the offering, holding out for higher rates? And would Ben Bernanke have to step in as a buyer of last resort?

Well, we got our answer…

http://online.wsj.com/article/BT-CO-20090611-714319.html

NEW YORK (Dow Jones)–Credit markets were warmed Thursday by a surprisingly well received auction in Treasurys amid investors’ increasing appetite for risk.

“People have been jumping into deals across the board,” said Mirko Mikelic, portfolio manager at Fifth Third Asset Management in Grand Rapids, Mich., in reference to increased demand for investment-grade corporate debt as well.

Another interesting dynamic was the rise of foreign investment, which understandably dried up amid last-year’s collapse. Both Treasury and Agency debt issues Thursday saw increasing demand from foreign investors, as the U.S. begins to look less risky despite daunting fundamental challenges ahead.”

Not the answer we hoped for…

Foreign buyers showed up. Coverage was strong. The US Dollar bounced. And the momentum traders that were long gold expecting negative Treasury results, are now exiting. And naturally, the hedgies are giving them a little nudge on the short side this morning.

So where does that leave gold?

Well, nothing has changed for the still very positive long term fundamentals underlying the gold price. Real rates are still negative. Both the Chinese and the Russians have announced allocation shifts in their reserve holdings, easing their US Dollar exposure. And in addition to the Fed — the Bank of Japan, the Bank of England, the ECB, and the Swiss Central Bank are all engaging in quantitative easing. And the Canadians are thinking about it.

Last week Kansas City Fed Governor Thomas Hoenig warned that the Fed needed to raise interest rates before inflation forced the Fed’s hand.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaBzLrcx1NmA

June 3 (Bloomberg) — Federal Reserve Bank of Kansas City President Thomas Hoenig said policy makers should lift the benchmark U.S. interest rate before “inflation forces our hand,” resisting public pressure to keep it low.

“If we fail to bring policy into balance, we will have significant inflationary pressure,” Hoenig said in a speech today in Sheridan, Wyoming. Policy makers also need to heed rising Treasury yields, which are signaling the market’s concern that prices will rise, he said.

Hoenig’s comments contrast with remarks today made by Fed Chairman Ben S. Bernanke, who told Congress that he expects inflation to remain low. The regional bank president supported the chairman’s view that the U.S. budget deficit threatens economic growth.

Deficits, along with accommodative monetary policy, are creating volatility in long-term Treasury markets, Hoenig said. Rising Treasury yields have complicated efforts by Fed policy makers to stimulate the economy by bringing down short-term borrowing costs.

“I suggest strongly that we need to be alert to the markets’ message and begin in earnest to bring monetary policy into better balance before inflation forces our hand,” said the 62-year-old regional bank chief, who does not vote on rates this year. “The markets won’t be fooled by artificially low rates for long.”

And perhaps more ominous (and bullish for gold) was the IMF’s warning to European central bankers. The IMF warned European banks to raise capital immediately while sentiment was still “optimistic”, and demanded greater transparency and disclosure of losses. And perhaps most importantly for gold — warned central banks to stand ready to use “all unconventional measures necessary” as a negative feedback loop could soon send Euro economies spiraling once again into deflation.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5479590/IMF-tells-Europe-to-come-clean-on-bank-losses.html

“To restore confidence, you need total disclosure of possible losses,” said Dominique Strauss-Kahn, the IMF’s managing director. “Not only losses which are linked to the original sub-prime crisis, but also the losses linked to the slowdown in the economy, and impaired assets. There are lots of things that still have to be disclosed,” he said, adding that credit mechanism remained jammed.

The latest IMF report said the chance to raise fresh bank equity while optimism lasts should be “seized without delay” and demanded a “comprehensive review to assess capital needs and viability.”

The IMF says eurozone banks will need to raise a further $375bn (£235bn), compared to $250bn for US banks, and has called for a stress-test along the lines of the US Treasury probe.

There are widespread concerns that Germany in particular is hiding bank problems until after the September elections, using its “bad bank” scheme to keep “zombie institutions” alive.

The eurozone is not yet out of the woods, and risks sliding into a deeper downturn. “Adverse feedback loops between the financial and real sectors could trigger a protracted deflation,” said the IMF.

I found it particularly interesting how the IMF warned banks to raise additional capital “immediately” while investor sentiment was still optimistic. So much for those greenshoots they’ve been trying to sell the public.

Tradingwise for gold and the HUI gold stocks, I’ve been sticking to my plan and our trading channel for the HUI as noted in May.

http://www.sliderontheblack.com/gold-silver-stocks/gold-hui-gold-bugs-index-charts-may-2009/

This rally in the HUI Gold Bugs Index gave us a quick 130 point, +47% move in less than six weeks off the HUI 274 lows. The HUI Index has traded beautifully within it’s trading channel since the first of the year, and I’ve always been a believer in - “if it ain’t broke, don’t go trying to fix it.”

I took my first tranche of trading profits off at the top of the trading channel at 370. Another tranche at HUI 400 (expecting resistance at that big round number) and got stops triggered on the pullback from HUI 404…taking me back down to a core hold position.

The greatest benefit of technical analysis is that it removes every traders greatest enemy - emotion. And it also helps us identify discrepancies between price and risk - ie: Silver’s valuation gap to gold…

http://www.sliderontheblack.com/goldsilvercharts/is-silver-too-cheap/

And silver delivered it’s largest one month gain in 22 years.

So where does that leave us now?

Fundamentally, nothing has changed. This pullback was due given the near +50% move in the HUI over the last 6 weeks, and the largest one month gain in twenty two years for silver.

And where I differ from many gold bugs, is I prefer to anticipate the smackdowns and interventions, rather than having to react to them. You must remember that this administration contains both Larry Summers and Paul Volcker.

Summers of course, was the co-architect along with Robert Rubin of the great gold leasing/price suppression scheme of the 1990’s. And we need to heed Paul Volckers “greatest regret” from his time as Fed Governor, that being — “losing control of the gold price.”

Until they lose control of the bond market, they are still “in” the gold price suppression game.

…please heed that.

While I think putting a trade on in front of this weeks Treasury auction was a prudent risk:reward play. Now, after a successful auction cover, we should probably be expecting a potential smackdown.

And the beauty of selling into strength, ahead of, and in anticipation of the market… is that you can now profitably buy the pullback. .

Here’s my updated trading channel & trend chart for the HUI. We’re still building on a series of higher lows and higher highs, and that’s always bullish.

On this present pullback, once again I’ll look to use put “sales” as my preferred initial re-entry trade on a 50%ish pullback and retracement of this most recent move. That would put our initial re-entry target around HUI 340ish.

The trading ranges on the HUI have been highly profitable, and technically stable over virtually this entire gold cycle since 2000. If it ain’t broke - don’t go trying to fix it.

Heed the warning the IMF just gave to the European central banks. There are two catalysts on the horizon that will propel gold to new record highs. Another round of quantitative easing by the Euro Bankers, and the Fed losing control of the US Treasury market,and having to step in as the buyer of last resort… which will of course, crater the US Dollar.

Until then, take what the market gives you — the trading channel trade.

SliderOnTheBlack