"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, February 8, 2011

Today's Daily Commentary and Chart action in Gold

Today’s big news once again came out of China, which announced yet another rate increase in what has now been a series of hikes over the last several months. In what has to be a significant development, gold, which initially dipped lower upon the news, ricocheted higher, surging through overhead resistance just above the $1350 level. It appeared that a series of buy stops were set off which then allowed price to run into the next resistance zone centered around the $1365 level.

What I find so noteworthy about today’s performance in gold is that it also mirrored what was taking place to a greater extent across the entire commodity complex. If anything, gold took on a leadership role along with silver. You might recall that in the past, these rate hikes by China have brought in extremely heavy selling in commodities as the prevailing sentiment at those times has been that any attempt by China to rein in its inflation stallion was going to result in a slowdown in what has been the main driver of the global economic engine. That would lead to a global slowdown which would pressure commodity prices.

Copper, in particular, would get hit hard during such episodes due mainly to its historic role as a leader in the overall commodity sector. Today, copper did what it has done in the past – it moved sharply lower but then it too rebounded and while it did not make it back into positive territory, it came back well off of its lows working back to nearly unchanged at one point.

The same pattern was seen in the grains and in the meats, which were also lower overnight as the news came down the wires but those too came back off their worst levels thanks also to some help from wheat (more about that later).

Why I want to bring this to your attention is that we might indeed be seeing another one of those frequent shifts in trader/investment psychology which makes markets so interesting and fresh. To see market action like this tells me that an inflation psychology is beginning to become more entrenched in the minds of global investors who are slowly coming to realize that the Central Banks are well behind the inflation curve. I think it is also safe to say, based on the price action across these various markets, that the deflation bogeyman is losing his allies.

Perhaps this is what has been foretold in the bond market’s breakdown of last Friday. Were it not for the continued meddling by the US monetary authorities in that bond market ( they euphemistically term it “Quantitative Easing ), I suspect that the bonds would have been sharply lower today as well. Inflation is raging across Asia and in many places in Latin America and it is just a matter of time before even the worst skeptic is going to be forced into acknowledging the obvious – that it is coming to a movie theater near you. Certainly a plunging US Dollar is not synonymous with deflationary pressures!

Which brings me to the US Dollar – in yet a further development certain to rekindle investor suspicions concerning the “health” of this economic recovery, news came out of Denmark, that Amagerbanken,  the nation’s eighth largest bank in terms of lending, was toppled due to a series of failed real estate related loans. The Danish government is now on the hook for $2.8 billion worth of losses.

 News like this tends to remind those who are looking through rose-colored glasses, that beneath the apparent tranquil surface there still lurks issues that have been essentially plastered over with money printing. This sort of thing is what brings buying into gold across a wide assortment of various currencies as investors become fearful of the erosion of the value of their currencies. It did not help the Dollar any for the current Chairman of the Federal Reserve to be out leading the cheerleading squad to warn the Republicans that they had better not mess with NOT RAISING the debt ceiling from its current cap of $14.3 TRILLION.

I can see it now – Ben is dressed in a cheerleader’s costume with pom-poms:

2 bits,
4 bits,
6 bits a dollar,
all for raising the debt ceiling,
stand up and HOLLER…..


I find Ben’s comments particular obscene seeing that the mass of the nation is seriously worried about the US debt level. The recent election blowout was due in large part of concerns over the economy and rising levels of national indebtedness and here we are treated to the pathetic spectacle of what should be a beacon of frugality and responsibility thinking he is leading the charge in some sort of economic war:

Admiral Ben Farragut:

“Damn the torpedos – full speed ahead”.

To show you that it is not just the dollar that is a concern, the euro fell against gold. Gold, when priced in Euro terms, moved higher coming in at €999.707 at the PM Fix but actually trading above the €1,000 mark at one point during the session.

The technical posture of gold just got a tremendous boost with today’s good showing. Both the 10 day and the 20 day moving averages have now turned higher and momentum has now broken the downtrend line that has been in place for the last two months. What is now needed to put some icing on the cake is for momentum to move into positive territory. This will further encourage traders to Buy dips rather than Sell rallies.

Open interest stabilizing down near 466,000 seems to have done the trick for gold as the failure of the longs to liquidate in any further size has short circuited the bears’ attempts to break it down below $1320. All of those shorts slammed on below $1320 in anticipation of another move lower were snared by Chinese buying and are now taking their medicine as those positions are all deeply underwater. Only the strong handed shorts can handle that sort of loss.

A quick comment about silver – those of you who have been tuning in to my weekly radio interviews with Eric King over at King World News have heard us discuss its technical price chart. I am still watching for a strong close above the $30 level for a sign that this market is ready to kick up another leg higher. One can see the action of the Bears attempting to hold it down below this level by watching the 3 minute bar chart, as they realize what such a close would mean to their positions. Going into the close, it is apparent that they failed. If silver can stay above $30 the rest of the day, odds now favor a test of the recent high in short order. Keep in mind, as we discussed on our recent radio interview, the COT report shows that last week the hedge funds (managed money) finally began increasing their net long exposure after having whittled that down for the last couple of months. They are now returning to this market and doing so from a sharply reduced long side exposure. There is plenty of room available for them to begin piling back in and that is what leads me to believe that the recent high is going to fall. Also, a lot of guys sitting on the sideline waiting for silver prices to move lower so that they could buy are now realizing that they had better get in. That is what buying does – it begets more buying.

On the food front, wheat, notched yet another 30 month high as it moves ever closer to the $9.00 mark. It seems like just yesterday when we were talking about watching for wheat to make a run towards the $8.00 level! The impetus for its move higher today was news out of China (not about rate hikes) that severe drought could be affected as much as 37% of its entire wheat crop. Great goggly moogly – the news on the food front just keeps getting worse with each passing week it seems.

Platinum and palladium were both strong today.
Bonds are beginning to give up their artificial gains as I finish this commentary up. We will see how they fare going into the close this afternoon.


  1. Hi, Dan. This is simply fantastic info that you are sharing.
    I've always appreciated your daily gold chart. Would you consider posting a daily silver chart, too, whenever you have the time? I know that the inhabitants of Turd's World would appreciate it.
    Keep up the great work! TF

  2. Great post...keep up the hard work as it is greatly appreciated. Dan or Turd, would either of you care to comment on the possibility of JPM taking gold as collateral so they (JPM) can use these gold deposits to cover other areas/demands. Also, won't these deposits also find their way into the inventories available for lease and then be double counted...even though it is owned by a client? This is all theory on my part right now, but seems plausible.

  3. Trader Dan on the blogosphere with his own blog...

    The market is becoming prime for acquisition of knowledge... This is just the beginning of the market starting to realize the inflationary pressures that are hidden behind the doors of fake government statistics and empty catch phrases preaching "recovery" and avoiding "double dip."

    The whole system is garbage!
    End the Federal Reserve,
    Elect Ron Paul 2012
    Scott J

    Keep up the good work!
    Scott J

  4. I would also like to point out on the gold chart, that the nearly 4 month downtrend line on MACD (12,26,9) is looking as if it is ready to break as well. Momentum is certainly seeming to come back to the gold market.

  5. Jack;

    I cannot speak to the Morgan decision to accept gold as collateral otehr than to say that it is positive in my view as it indicates a sea change in opinion towards the metal. It is now being viewed as money.

    On the idea that they might be using the gold deposits to cover other areas of demand, I can only tell you that I am not sure how they would do that if the customers were futures traders. The manner in which the clearinghouse settles each day's trade requires customers to have sufficient margin in their accounts or else they are given a call to bring the funds to the necessary level. If the metal was lent out, there would be issues with ascertaining whether the customers actually had sufficient funds available to cover existing trades.
    I do not see how a firm could get around that.

  6. Hi Dan,

    Great piece. The failed bank in Denmark reminded me to check the failed bank list http://www.fdic.gov/bank/individual/failed/banklist.html
    which has been interesting reading. Last year the FDIC taxed their members (pre-paid fees) and delayed the closing processes to avoid running out of cash themselves. It ain't over yet. Has anyone seen an update on the financial status of the FDIC?

  7. Dan,

    It would be my guess that the customer would deliver the gold to JPM into their vaults as colateral. This value would be credited to their account, meanwhile JPM would use this physical deposited gold in their vaults to cover other obligations. This type of action is taking place all the time. It is the game of chasing gold to cover and put out fires. When the customer wants their gold back, JPM would just "borrow" from another account to cover. This will continue to happen, until the demand for physical delivery of gold not to be held by the big banks and bullion trading centers gets overwhelmed blowing up the whole system.

    Jack out


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