"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


Friday, June 17, 2011

Gold holding relatively firm as its Safe Haven status comes to the forefront

With all the volatility in the markets attempting to decipher defined trends from short term price action has become a fool's game. Markets are torn between optimism that the global economy is not as bad as some have feared and worries over sovereign debt issues in Euroland, particularly Greece, which have the potential to carry a contagion effect and bleed over into that same global economy, mainly due to large bank exposure to Greek debt.

I should note however that there are several key markets that I am monitoring to try to cut through some of the uncertainty. Among those are gold, crude oil, copper and the bonds. Also, the broader measure of the commodity complex, the CCI, is most helpful in this regards.

Let's take a look at each of these key markets and see how the charts shape up and whether or not we can discern any message as to underying investor sentiment.

Starting first with the larger commodity complex, here is the CCI, Continuous Commodity Index. You will note that it has fallen back below what I consider to be a key level, namely 640, and is flirting dangerously with its chart support levels noted on the chart. A downside breach of this level which cannot be regained within the next week, should that event occur, would signal a longer term top among commodities in general and a shift back to a deflationary mindset among investors/traders. I am of the opinion that Chairman Bernanke is closely monitoring this chart and will be forced to act ( provide another round of monetary stimulus) should this break down as the current FOMC will not tolerate a deflationary mindset taking hold. We know that from reading his papers and his comments in general.

For the time being however, this chart is signaling that traders do not fear inflation at the current time but are seeing the overall global economy as slowing. Keep in mind that I am just the messenger and am reporting what the current thinking of the market is as reflected in the charts. That is the role of a trader - not imposing your view on the market but allowing the market to speak to you and attempting to interpret that speech so that you can profit accordingly.

I want to repeat here, particularly to my silver bull friends, that silver will UNDERPERFORM gold in such an environment. Silver will only outperform gold in an inflation biased environment.

Now let's take a look at the crude oil markets. I say, 'markets', because we are going to look at both WTI and at Brent. WTI is becoming less and less of a reflective market in the sense of giving us an accurate read on the value of oil in general. The reason for that is because of the nature of the oil that this contract is based on. I prefer to look at Brent crude as a better benchmark for gauging oil supply and demand but old habits die hard and therefore we want to also look at WTI.

Note on the weekly NYmex crude oil chart that the market has broken down below a horizontal support level near the $95 level. While price is still in an uptrend as it remains above the upsloping trend line, it will need to hold there as that is also the confluence of the 50 week moving average. If crude is going to hold, it should not fall below $90 or if it does, should immediately pop back up through that level. In other words, a sharp spike below that level and an upside recovery leading to a close above $90 would be okay but if it cannot recover $90, the technicals would point it lower as that would confirm a bearish flag formation with the potential for a move towards the $80 level.

Brent crude has a much stronger looking chart. It is not yet signaling a breakdown of the nature that WTI crude is and as such, I believe is a better indicator that oil demand is still relatively firm. I would have to revise that view if it closes below the $108 level and particularly if it were to then move towards $100 and not hold there. We are a long way from the $100 level however so for now this market has yet to signal a deflationary bias.

Let's now turn our attention to Copper, a very good market for gauging sentiment towards the health or lack thereof of the global economy.

I am providing both a dail chart and  weekly chart. On the daily chart, the market is in a bearish posture trading below its 50 day moving average. Instead of providing buying support as it does in a bullish trend, that average is providing a place for sellers to enter. This tells us that sentiment towards higher copper prices has shifted in favor of lower prices as we move forward. Clearly copper is signaling more of a deflationary mindset at the current time.

On the weekly chart we get a different perspective. This chart shows the copper market remaining in a longer term uptrend as it holds above both the 50 week moving average and the upsloping trendline. It is therefore not yet reflecting any deflationary mindset. That would change should if close below the red support line shown on the chart. For the inflationist mindset to be reflected detailing a shift back towards growth in the minds of investors, copper will need a pair of consecutive weekly closes above the $4.50 level. Until it does, the short term bias is down with the market moving into a level where buying should soon surface. If that buying does not surface, then copper will be voting for deflation. Again, Mr. Bernanke and company will be watching.

turning lastly to gold - its daily chart reflects the safe haven status of the metal in the midst of the uncertainty and confusion currently reigning over the markets. You can see that unlike some of the other members of the commodity complex, gold is above its 50 day moving average and holding horizontal chart support.  The market is range bound on the daily chart with a slight bias to the upside.  A drop through $1510 would dent sentiment towards the metal as it would turn the technicals bearish on this chart but as long as it holds $1480 it will not be signaling deflation. Should this market take out $1550, it will signal a move back towards inflation fears based on currency woes.

Incidentally, Gold, priced in terms of the British Pound, scored a new all time today. This is one of the reasons that in spite of the "risk off" trades that are currently in vogue, the bears are having trouble breaking it down in terms of the US Dollar at the Comex. Gold is trading as a CURRENCY and not so much as a commodity. When gold bears look at the strength in the metal when priced in terms of the other various majors, they lose conviction, even in the midst of large amounts of risk off trades while the gold bulls take heart and step up to buy.

Markets making new all time highs (even if priced in terms of another currency) are not in bearish phases - period! US centric traders do not seem to be able to understand this. For gold to enter a bearish phase, we would need to see it break down across the board, whether priced in Dollars, Euros, British Pounds, etc. The reason for this is that the surge into new highs or near all time highs reflects FEAR about currency stability in the various countries where the gold market is performing so well. That generates buying of gold as a safe haven and reveals strong demand for the metal from those quarters of the globe.


  1. thanks dan.

    I would love if you could spend few minutes about wheat and corn. Another fund liquidation or something else is going on there?

  2. Thanks Dan

    So lets say that in my mythical country I have a currency backed by gold. My currency is now viewed as having safe haven status due to world events. What is happening to the price of gold denominated in my currency?

  3. Great post Dan. Wheat and corn would also be interesting, but I'm about to bid my whiskey future up--enough bad news for now.

    I think the way a gold-backed currency works is that the price of gold in that currency would remain fixed and stable, but the value of the currency would appreciate vs. other non-backed currencies. Right now, I don't think there are any. Swissie went off official gold backing several years ago.

    Maybe time for a new safe-haven country, on a former Greek island, for example...

  4. Dan said: "US centric traders do not seem to be able to understand this."

    I understand it Dan! I really do. I love watching gold in other currencies. That is why I have no fear of Euro weakness becoming Dollar strength becoming gold (in Dollars) weakness. Gold Strength is Gold Strength wherever on planet you want to measure it. Gold stands tall above the fray.

  5. Thanks Trader Dan! I sure do enjoy reading your blog; clear wording without vulgarity, made up words, and endless uncommon acronyms.

    My local currency is the Cdn$ and I recall a few months back that Armstrong posted an editorial which included charts of a number of currencies. He made the case that by 2016 the C$ could SPIKE to 2.0 ~ that is, one C$ will buy two US$. If that were to happen, Canadians could actually suffer losses in PMs even if gold goes to $3,000.

    Jim Dines refers to gold as the hitching post of currencies; and I find it easier to think in terms of gold staying the same, while currencies bob up and down around it.

  6. that is why Americans will be crushed beyond repair...they do not believe in GOLD

  7. Great post Dan, thanks for taking the time

  8. Atlee, I'd say your Au price remains constant because your good-as-gold currency is pegged but the purchasing power of your currency would continue to grow against all others. Your citizens would see the world in a continued deflation while their lifestyles would be maintained.

  9. Dan - time and effort went into this post and both are appreciated. Looking forward to KWN metals wrap. Have a nice weekend.

  10. I disagree. What is important to me is what is the price of gold in my currency. I am interested in gold to preserve my purchasing power in my currency. If my currency is appreciating relative to the rest of the world, then gold is going down in my currency and I don't want to own it. Of course over time devaluation, inflation etc cause gold to appreciate against all currencies. So if I am a long term buy and holder the point is moot. But as a trader, it is not.

  11. I thought we were talking mythical countries and vacuum economics per your original question. Any real life situation is moot in a hypothetical situation. You asked what a currency pegged to gold would view the price of gold as. If it were 1:1 then the price of gold never changes. I don't see how you could ever see gold as declining if, as your original question posed, your currency were gold backed. Plus, you wouldn't need to own gold, your currency would do that for you.


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