"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


Thursday, August 11, 2011

Margin Hikes help derail gold; HIgher Equities also hurt

I was a bit surprised last evening NOT to see some selling related to the margin hikes announced by the CME Group yesterday for carrying futures contracts in gold. Eventually however, the selling did kick in. Along with the upside move in the equity markets in today's session, that was enough to take some of the wind out of the gold market and bring it back down to earth for a bit.

We have had a nice run higher which was threatening to get out of hand due to the very steep angle of ascent being created on the price chart ( remember what happened to silver earlier this year) so some retreat in prices and HOPEFULLY a bit of stability in the gold price after some consolidation will be most welcome. We also need to give some time to the big physical markets of Asia to get accustomed to a higher gold price. Wild swings higher in price tend to scare some buyers away over there initially until they become acclimatized to the new levels.

This market will remain very jumpy however as any further signs of deterioration out of Europe can and will send gold right back up again. The computer programs at the CME which monitor volatility will be watching to see if additional margin hikes are warranted. As downside support levels on the price chart come into play, these margin hikes will tend to bring additional selling as long positions go underwater that were placed on above $1780. That tends to amplify selling pressure that would not otherwise occur.

If you note the enormous spikes in volume on the price chart I have included below, you can see the EMOTION being reflected in the market. This sort of emotional intensity is very difficult to sustain for any extended period of time so I for one am welcoming what I hope will be a bit of relative "calmness" if we can get it. After daily moves from $60 to $80, a day in which gold moves "ONLY" $20 will be a pleasant relief. So much depends however on what happens next in the bizarro-land of the equity markets so for now we wait and see like the rest of the investing/trading world what the computer algorithms will do next.

From a technical chart standpoint, the market has indicated that it needs a break and that the easy money on the upside is over for a while. Today's BEARISH OUTSIDE DOWN REVERSAL is signalling additional selling should be following. The fact that the market looks like it is not willing to move below $1,740 makes the reversal not as serious as it could have been. Still, the signal is bearish and will have to be noted due to the nature of todays trading which is highly technical.

Now we have to see at what levels we get some two-sided trading to take place. All depends on just how hungry the bulls are to move back into the market. Initial downside support comes in just below $1720 and then down near $1700. That is followed by more formidable chart support near and just below $1,680. There are a lot of potential gold buyers sitting on the sideline who did not want to chase this market higher out of fears of getting caught flatfooted who are eager to get in. They are going to be doing the same thing as the rest of us; namely watching for a level that they feel they can get in more safely.

If the Bulls are now to have a shot at $1,800, they will have to take price past $1,780 and hold it there first.

I did note that open interest, after falling for the last few days, shot up yesterday on the big volume surge higher. It was a large enough increase that I cannot attribute it all to just spreads being put on so it appears that some of the very strong bearish hands were doing a large amount of selling yesterday. The weak-handed shorts were run out in large numbers recently so this new group of sellers is more formidable. It is going to take a very sharp selloff in equities to threaten them in the least.

If you notice, the Swiss Franc is really getting hammered today, down near 4.5% at one point today. That is an excellent gauge of risk aversion so as it moves lower, gold is moving lower alongside of it. These two markets have recently been moving pretty much in tandem. If Swissie reverses higher, so too will gold.

One last note, as usual, the HUI once again failed to better the 580 level. Until it can take that out convincingly, the shares are not going to go anywhere. Once that level gives way preferably on a weekly basis, the shorts in the shares will be in serious trouble. Until then, they can brazenly sell no matter how much further they push them into severe undervaluation territory.


  1. Just read your piece at KWN. Great grounded explanation. Always an even hand with the experience we know comes with it.


  2. Thank you Dan. No one has mentioned our failed 30 year auction today puzzling at best.

    Be well

  3. Very informative article, Dan. Thank you.

    It shows your views as a trader very well.

    There is only one reservation I have regarding the in tandem relationship of gold and the Swiss Franc. This has been true up to 11th Aug. 2011. It may no longer be true in the future. I am posting this as a WARNING to those involved in the Swiss Franc as a save haven.

    On 11th Aug. the Swiss National Bank (SNB) made a complete policy turn around showing distictly higher determination to keep the Swissie down on much lower levels.

    On this day the SNB announced their version of QE at the tune of
    CHF 120 bn. They even hinted at the option of tying the CHF to the Euro temporarily. - Talk about shocking the currency markets !

    On this day we may have seen the death of the CHF as a safe haven !

    That leaves gold (and precious metals) standing alone (more or less) as a safe haven.

    Essentially the SNB had chosen this course already since May 2010 when they loaded up on Euros - much too early and at too.high a rate

    The future weeks will tell if they can deliver on their threats. But since they have control over their own printing of money (and there seems to be political consensus in Switzerland that these steps are needed) and have control over tying the CHF to the Euro their threats look realistic at this point.

    Gold remaining as the only substantial safe haven can be seen as a consequence of the US downgrade by S&P.

    Globally US treasuries and bonds are the benchmark for all government bonds. When their rating went down the rating of all other debt globally went down with it. The US$ and all other fiat currencies are based on this debt.

    Therefore this can be seen as a downgrade of the whole Bretton Woods Currency System ! It has the US Dollar as an anchor, a benchmark and reserve currency. If we downgrade the benchmark the whole system follows = Relativity Theory in Currency Systems.

    The CHF responded to the S&P downgrade by moving up within the currency system by the degree the downgrade by S&P seemed to dictate to the markets they have to raise the pricing of the CHF as a safe haven.

    The SNB seems to have destroyed this reality of the CHF as a safe haven.
    It is to protect the Swiss Economy. It is regretable for foreign investors but that's what they chose.

    Closing Note : The S&P downgrade and the related market pricing adjustments in progress have been long overdue - since after 1971 !!! Only then the ongoing Cold War made it impossible to conceive of such a move.

    Now we have to deal with this realty readjustment and discard false and shaky benchmarks used as a store of value in the past.

    Gold seems to remain as the only stable benchmark.

    How long it will take the powers that be to acknowledge that remains to be seen. The accelerating events as of late indicate it may not be that far away that they will loose control and will have to give in to realty.

    Sorry for this long post. I wanted to back my warning by enough data and facts to be understandable for traders and investors.

  4. Thanks, Dan. Good work, as usual.


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