Monthly Gold Charts - October 2011

I have to keep my comments brief today as it is time for Halloween!

Looks like precious metals owners got a back of tricks today instead of treats. The culprit was the intervention by the Japanese monetary authorities who hit the Yen with a barrage of selling and sent the markets into a tizzy. The subsequent rally in the US Dollar then had the mindless hedgies dumping everything they bought late last week as equities were trashed along with the commodity sector in general.

Copper and silver were both sold off and gold went along for the ride to the downside.

If some of you might have noticed the Treasury bond had a gargantuan 3 point rally after just suffering a three point sell off last Thursday. How's that for ridiculously insane price action. The entire business cycle, just completely changed over the course of the last 4 days. Tomorrow it could merely take 24 hours to re-reverse the business cycle again. This is what computerized trading algorithms have created. And to think this is somehow supposed to be the "smoothly functioning price discovery mechanism".

What happened in the Treasury markets is that the Japanese came into the Forex markets and bought a boatload and then some of US Dollars and had to do something with all those worthless slips of paper so they turned around and bought up the equivalent amount of intervention's worth of worthless Treasuries.

No doubt the officials at the Federal Reserve are glad to see the Japanese doing their Operation Twist for them but I suspect that they are not particularly happy about seeing the Dollar moving higher!

We'll see where the dips buyers surface once again, particularly as Asia moves further into its session.

Happy Halloween to all!

Bank of Japan Intervention in Yen is doomed to Fail

The Bank of Japan stepped into the Forex markets overnight in an attempt to punish the impertinent speculators who have dared to nullify their former intervention efforts undertaken back earlier this year when the nation suffered the onslaught of the earthquake/tsunami.

Note the previous intervention, which I might add was a VERY RARE example of COORDINATED CENTRAL BANK EFFORTS involving the BOJ, the ECB and the FED. If intervention is going to be effective, it will generally need to be coordinated, sustained and have an eventual fundamental backing. Without those factors, it always ends up being a gigantic waste of money.

Note that even this coordinated intervention failed to stem the advance of the Yen. Now are we to believe that the Lone Ranger effort by the Bank of Japan this time around is going to be successful? Hardly. They have bought a bit of time but all that will happen is that speculators will use the intervention to step in on the buy side of the Yen and get it at a lower level.

In the process of intervening however, the Bank of Japan is devaluing the Yen when measured against Gold. Gold still remains a store of value protecting those who own it against the depradations of their own monetary authorities.

Trader Dan on King World News Weekly Metals Wrap

Please click on the following link to listen to my regular weekly radio interview with Eric King on the King World News Weekly Metals Wrap.

http://tinyurl.com/3qzxc6u

Dollar Bulls are Trapped if the RISK TRADES continue

Take a look at the following Commitment of Traders chart detailing the huge number of speculators that are positioned on the Long side of the US Dollar. There was a large amount of talk about the Dollar embarking on a Bull market not all that long ago and that combined with the Flight out of the Euro sent huge numbers of these specs rushing into the Dollar.

When the Europeans rained on their parade this week, the bottom dropped out of the Greenback as there was no one on the other side of the market to buy the Dollar from these specs who were all frantically selling it at the same time.

If the risk trades continue, the Dollar is going to come under additional selling pressure which will likely drop it down into a major support zone on the chart. If that gives way, there exists an enormous amount of speculators who are going to get hurt very badly and will be selling frantically which just might be the firepower to crack this major support zone which has been holding for the last two years.

Weekly Silver Chart

Silver had a very impressive weekly performance gaining more than $4 for the week and managing to squeak out a close above the 50 week moving average.

You will note that it still remains below both the 10 week and the 20 week moving averages which continue heading lower so silver is not out of the woods just yet. One would ideally want to see the metal get above both of these moving averages and see the shorter term 10 week turn higher. That would give us a shift from bearish to bullish on the WEEKLY CHART.

Also, note that downsloping line drawn on the chart that comes in very close to the 10 week moving average. That reinforces this level as resistance that the bulls need to overcome.

The MACD has been a pretty good indicator at measuring the direction and "trendiness" of this market nad it has turned up from a deeply oversold zone. While still bearish it is moving in the right direction.

A push by silver past $37 that can hold that level will turn the tide firmly in favor of the bulls and target $40 for starters.

HUI technical chart

The HUI put on a spectacular showing this week gaining more than 65 points and taking out several overhead resistance levels on its price chart in the process. The catalyst seemed to be the positive response by the broader equity markets to news coming out of Europe regarding their bank recapitalization plan and their funding of the Stability Mechanism. While I am personally repulsed by such actions the facts are that the hedge fund community could not wait for the ink to dry on the press release before they began pouring money back into the Risk Trades.

The resultant rally in stocks fed into the gold mining shares with the HUI actually outperforming gold this week.

We will have to wait to see whether there is a continuance of these risk trades next week but from a technical perspective the strong price action bodes wells for additional gains early next week. That would put the index up against a strong overhead chart resistance level coming in near 595 and extending towards 600. The shares have been stymied near this level in the past so the bulls have a big test of resolve coming.

The push past the last Fibonacci Retracement level of note near 580 should allow the index to first test the level just a few point above today's high. Should the bulls take this out, then the run towards major resistance will commence.

If the index sets back, dip buyers should surface down near the 560 level and again near 545.

My thinking is if we are moving back towards a period when RISK TRADES are back in vogue, the HUI should continue to lead the metals and outperform gold in particular. Note on the chart it is close to decisively ending the downtrend against the gold price. If the shares are going to eventually take a leading role then the horizontal resistance level noted on this ratio chart will need to be bested.

As a side note, that we are seeing some companies in this sector raising their dividends is a good sign and indicates that their management feels that earnings are strong enough to do so and should remain so for the foreseeable future. In other words, they are optimistic on future price prospects for the metal. That is also a sign that we should expect to begin seeing or hearing about planned aquistions by some of the majors or even larger mid-tiers as they look to increase their reserves. That should support the juniors which are of high-quality. This might be occurring already based on the ratio of the GDX to the GDXJ (major to juniors).

Note that since May of this year the majors have been outperforming the juniors as a whole. Beginning late last month (September) that began to change. Apparently some are already sniffing this change and are thinking acquisitions based on the profitability of the larger miners in the sector.

Wall Street Journal Editorial Page Dissects the European Bailout Plan

I would like to recommend the commentary from the editors at the Wall Street Journal dealing with the proposal that came out of Europe yesterday; a proposal which launched a massive short covering squeeze in both the Euro and in the equity markets.

Their editors are much more eloquent than I am but the crux of their analysis is in complete agreement with my own  - all these leaders have done is to temporarily paper over a problem that will not go away until the root of this weed is pulled up and disposed of. That however requires unpleasant business that will no doubt engender a loss in popularity to whatever leaders brash enough to actually roll up their sleeves and get down to the dirty business of fixing the cause of this morass.

Simply put - those governments in fiscal trouble have spent too much for too long and can no longer afford to do so.

If that sounds familiar, it should - it is exactly the path the current administration is leading the US down.

Forestalling the day of reckoning might make political sense in the short term but in the long term it is the stuff that composes the ruin of nations.

Everyone Bails Out Everyone

European deal has something for everyone, except the real problem.

http://online.wsj.com/article/SB10001424052970203687504577001671498250002.html?mod=WSJ_Opinion_AboveLEFTTop

Are Foreign Central Banks Slowing dumping Treasuries

Each week the Federal Reserve provides an updated number for its Custodial Accounts. A very crude way of understanding these is to consider them as a type of savings account for Foreign Central Banks that are held at the New York Branch of the Federal Reserve.

When the US buys goods from a foreign country and pays for those goods with US Dollars, oftentimes it ends up running a trade deficit with that particular nation. The result is that the foreign country ends up with a large amount of Dollars that it needs to "sterilize" in order to prevent an inflationary outbreak. What generally happens with a good portion of these surplus Dollars is that the country in question will purchase US Treasury obligations. That way it gains interest on its trade surplus of US Dollars which constitute part of its overall reserves.

For the sake of simplicity and convenience, the Treasuries are not actually shipped over to that country but are instead held "in custody" for that nation with the New York Branch of the Federal Reserve. Selling the Treasuries in question becomes very easy for the foreign Central Bank as it simply phones or wires  in its instructions and the deal is done.

Note the nearly exponential growth in the number of Treasuries held in these custodial accounts. As you can clearly see, beginning with the credit meltdown here in the US in the summer of 2008, the line has gone parabolic. This is a picture of the amount of indebtedness generated by the US as it took the path of enormous deficit spending to keep the liquidity flowing into the markets.

What strikes me about this chart is that for the last 3 years, the growth in the size of these custodial accounts has been steadily upward with only a few brief periods during which it was interrupted. Even at that, the line on the chart really never dipped all that much moving more or less sideways for a brief interval before resuming its upward path.

However something noteworthy now appears to have been underway since September of this year. The amount of Treasuries held in custody for these foreign Central Banks now appears to be slowly, but steadily declining. It reached a peak of $2.752 trillion the first week of September this year and has now declined to $2.67 trillion as of this week. That is a drop of $82.5 billion.

I do not know the exact composition of these custodial accounts in terms of the duration of the bulk of these Treasuries but I am fairly confident that there is a pretty good mix of both shorter dated and longer dated securities. The Federal Reserve's Operation Twist is designed to purchase $400 billion of longer dated Treasuries as it sells the same amount of shorter dated Treasuries.

I wonder if we are seeing foreign Central Banks using this Operation Twist to unload some of their longer dated Treasuries into the hands of the Fed. The Fed is basically buying, no questions asked. If you plan on getting rid of some of them, why not take advantage of the program?

It might be a bit too early to say with certainty, but if this is the beginning of a trend, it will signify that we are headed for a period of rising interest rates as it is doubtful that the Fed alone could soak up the Treasuries that foreign Central Banks might choose to unload if they begin getting nervous about the prospects of the US Dollar in the months and years ahead.

Stay tuned.

The US Dollar gets Annihilated

"Whack a Mole" does not even come close to what the Forex crowd did to the US Dollar today. Earler in the week it fell below the 50 day moving average but seemed to be trying to regain its footing just above the 76 level.

Today it was blasted to kingdom come breaking through multiple support levels in the process and crashing through the critical 100 day moving average as if it did not even exist.

Based on the current chart picture, there seems to be little in the way of downside support until it reaches the former consolidation zone. Failure to stop there and it will make a new low.

Save the Stock markets - destroy the Consumer

While money managers, talking heads and other assorted various market pundits are wildly cheering the actions of the Europeans who have agreed to a plan for papering over the Greek bond, Italian bond, Spanish bond, Portugal bond, and heaven only knows what other country's bond problem, I cannot help but shake my head in wonder at such incredibly shortsighted "wisdom".

I think it safe to say that the level of the various equity markets have now become national security issues for most of the industrialized nations of the world; so much so that bear markets in stocks are no longer permitted by the monetary and/or governing authorities. The notion seems to be that an adjustment in prices by a free market cannot be permitted because of the fallout such an event would have on the overall financial system. Therefore, the end justifies the means - the end being preventing a credit lockup justifies governments using taxpayer money to bail out banks which made poor investment decisions and nations which apparently cannot balance their budgets.

While the Ra-Ra crowd cheers this sort of thing on extolling how wonderful it is for the economy, they are ignorant of the fact that the BEAST once let loose, cannot be controlled. Do these shortsighted fools not realize that the hedge fund community is not going to selectively bid up the prices of equities and completely ignore the basics of life such as food and energy? The same speculators that these governing authorities are attempting to placate are going to devour the hand that feeds them, or better yet, the food that our hands use to feed ourselves.

Just look at what is happening to the Continuous Commodity Index ( CCI ) as a result of this spiking of the punch bowl. The hedge funds are piling back into the commodity sector as they now have a green light for their risk trades and will begin leveraging up all over again. In the process they are pushing back up the grains and the energy sector. While recently both had come down in price, giving cash-strapped and hard-pressed citizens a bit of relief from the double whammy of stagnant wages and rising food and energy prices, that now appears to be going with the wind.

One can already see the impact at the grocery store of the rise in prices earlier this year as the cost increase finally worked its way through the distribution channel. Buy a box of cereal and spend more than $5.00. What in the hell is the average citizen supposed to do by the time these pestilential governing authorities finish with us? Spend $10.00 for a single box of cereal?

We have reached a point in Western society where this non-stop interference by the monetary and governing authorities is steadily destroying what is left of the middle class. Nice job you clowns. Keep the stock market elevated and the price of the huge bank share prices elevated but destroy the very foundations of the society itself.

I hope I live long enough to see the history books accurately portray where the ruin of the West originated - the Central Banks and the stupidly clueless political leaders who led us down this rabbit hole.

Silver has reached a key technical level

"Let the good times roll" is once again the motto of the stock market perma bulls as the Europeans graced the world financial markets with a gigantic sized punch bowl to help slake the thirst of the liquidity junkies. Mix in a dose of a better than expected US GDP number and it was "RISK ON" in a big way.

Silver, as expected when the risk trades are in full force, outperformed gold to the upside putting on nearly 6% against gold's 1.5% gain.

Note the chart and you can see that it has climbed exactly to the key Fibonacci 50% retracement level of its recent decline off the August high. It has also punched slightly above the 40 day moving average (dotted line) which a large number of fund traders monitor and is not far from the 50 day moving average.

If you recall the recent Commitment of Traders data, it showed a very low level of hedge funds on the net long side of this market, most of them having washed out over the past few months. If that crowd becomes convinced that the Europeans have effectively dealt with the sovereign debt crisis ( papering over the losses of the banks), they will pour money back into silver with a vengeance. Just take one look at what they have done to the copper and crude oil markets.

A push through today's session high puts silver on a path to make a run at $37.30 - $37.50.

Downside support is back near $33 followed by $32.50

Nice move by Barrick

The financial press is announcing that Barrick Gold raised its quarterly dividend today by 25% to $0.15/share.

Every time a miner does something like this, it makes it that much harder for the short sellers to go in and play.

Gold hits resistance at $1720; holding gains

Gold has run exactly to the projected resistance level on the charts, backed off a bit, and then encountered additional buying which is keeping it well supported at the current hour.

It might be a bit early but it seems as if we might be seeing the gold market anticipating some sort of QE3 coming from the Fed sooner rather than later. The fact that it is acting as a safe haven and is shrugging off any weakness in equities and strength in the US Dollar is very telling. We'll see if this new pattern continues to hold in gold.

If gold plows through the resistance level noted on the chart near $1720, it looks to have a fairly clear path to $1750 or so. Volume on the move higher remains pretty decent.

Downside support likes first near $1680 followed by better support at $1650.

Euro Gold chart

Once again gold is getting a very firm bid even as weakness appears in the broader US equity markets. News out of Europe continues to leave traders unimpressed as once again those various nations prove why the idea of creating a single monetary union and a single political union out of a group of such disparate countries cannot ever hope to succeed.The differences between the nations of the north and the nations of the south cannot be more stark.

Quite frankly, those citizens of the countries that are on relatively solid financial footing are rightfully indignant that their wealth should be used to prop up those countries whose political leaders spent their own country into ruin. The situation would be akin to US taxpayer dollars being sent to prop up Mexico.

One outcome of this is fear - fear that the cracks in the monetary union are going to worsen. This is leading to selling in the Euro. What it is also doing is driving money on the Continent into gold.

Take a look at the following Euro-gold chart and note how relatively firm it continues to trade. It is currently about 120 euros off its all time high and is on track for a very firm weekly performance.

If you also note, the price accelerated quite sharply beginning in late June/early July and moved up out of the price channel that for the most part has defined its trend going back into the bottom it made in late 2008. This is what happened to US dollar-priced gold which got ahead of itself somewhat before correcting and spinning off some froth out of the market.

Let's see how this closes for this week to see whether or not it can strongly surpass the 1260 level. Ideally the market would begin another price channel with a base at a elevated level and not one of those nearly vertical rocket shots which are not sustainable and tend to run out of steam and then give back most of the gains.

HUI attempting to make up lost ground against the S&P 500

If one goes back to the beginning of July of this year, you can see that for the next two months, the mining shares were outperforming the broader equity markets as a whole.

Once September rolled around, the shares gave back their gains against the broader market and severely underperformed. With today's strong surge higher, we might be seeing the reversal of this recent lagging in terms of performance.

Much depends on the willingness of traders to see gold and silver as "SAFE HAVENS" and not as part of the broader risk trade. The reason the mining shares are doing so well in today's session, especially with the broad based selling across the general equity world, is that traders/investors have re-awakened to both gold and silver as safe havens in the midst of some very palpable fears about the shaky European debt crisis. As money flows have returned to those precious metals, flows are also coming into the mining shares which will of course benefit if the metals continue to move higher.

One day a trend does not make but this is such a drastic departure from recent behavior that it must be noted and also closely watched to see if this is the start of something significant.

As a side note - if the chart pattern is moving higher, the HUI is outperforming the broader US equity markets. The opposite is true if the pattern is moving lower. Note the sharp surge higher in this ratio and the breach of the downtrend.

Gold Breaks out

Gold bulls finally managed to beat back the line of defense erected by the perma shorts at the Comex in today's session as safe haven buying came into gold from all quarters early in the session and continued to build as it wore on. The technical breakout above resistance also brought in both short covering and new momentum based buying.

Volume on the upside move has been very good which is generally regarded as confirmation to the validity of the breakout.

The next technical target lies near the $1720 level.

Downside support now moves up towards $1680 with much better support near $1650.

Helping confirm the move is the surge in both the mining shares as evidenced by the HUI and the upside breakout above $32.50 in Silver.

Note on the silver chart that the market is  currently up against the 50% retracement level of the most recent leg down. Clearing this should allow it push first towards $34 and then up against the $35.15 - $35.25 level.

Downside support levels are first near $31 and then back down towards $30.

Silver and Copper are parting ways today

Both of these metals have been moving in lockstep recently as risk trades were either jammed on or taken off. Silver has been trading like an industrial metal during such times. Today it is moving like a safe haven metal. Very interesting developments to say the least.

In the process it is now trading solidly above critical resistance near the $32.50 level. If it can hold these gains, it will be on target for a shot towards $34.

Is Gold resuming its Safe Haven Status?

In a departure from recent price action in which it has been acting more like a "risk" asset rather than a safe haven asset, gold is moving higher alongside of both the US Dollar and the US Treasury market. It appears that traders are becoming increasingly "jittery" over developments in Europe concering the bank recapitalization plan and the Stability Mechanism. Safe havens flows are definitely returning to gold based on what we are witnessing today.

Thus far the volume has been very strong on the breakout above key resistance at the $1680 level with the market challenging overhead psychological resistance at the $1700 level. If gold can put on a handle of "17", it will get the attention of money that has been sitting on the sidelines as well as putting some further pressure on shorts.

I will get a chart up a bit later towards the end of the session today as I want to see how it does for another couple of hours.

Let's Play "Guess a Chart"

Take a look at the following TWO charts and see if you can notice how similar the two of them are.

You can tell that both charts, while not identical, are eerily similar in the manner in which they depict the overall price action.

The top chart is the S&P 500. The lower chart is Crude Oil.

They both tend to move up at the same time, mover lower at the same time and grind sideways at the same time.

What these charts tell us is that there is no longer any SERIOUS INVESTMENT "STRATEGY" in today's financial markets. All that they are doing is reflecting either the willingness of the HEDGE FUNDS to take on RISK TRADES or to FLEE from RISK.

On any given day, if the risk trades are on, these nitwit hedge fund managers buy everything in site except for US TREASURIES or the US DOLLAR. If the following day brings in risk aversion trades, they throw away everything purchased the previous day and do the exact opposite.

Truth be told this sort of thing has nothing to do with INVESTING. It has everything to do with MONEY FLOWS generated by computer algorithms. This sad state of affairs is what Central Bank interventions and constant interference into the financial markets has reduced our markets to.

Traders have to put aside their personal disgust at this madness and trade accordingly if they wish to profit. Still, in this trader's opinion, this is one more symptom of the decline of the West. No longer is the stock of various companies bought because of long term prospects for solid profits based on solid research and good analysis. Instead it goes up based on whether or not the Central Banks will spit more liquidity into the marketplace.

Heaven help us all.

Trader Dan on King World News Weekly Metals Wrap

Please click on the following link to listen to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap.

http://tinyurl.com/3bwf22e

Fed's Balance Sheet not growing but not shrinking much either

Take a quick look at the chart below to get a sense of what is taking place as a result of the cessation of the Fed's QE2 program and the inception of its "Operation Twist".

Recall that Operation Twist is nothing more than a rolling over of maturing shorter term Treasury debt into longer term Treasury debt in a deliberate attempt by the Federal Reserve to manipulate the rate of interest on the longer end of the yield curve.

While I personally find the idea that a small group of individuals presumes to be able to determine the exact rate of interest to fine tune an economy and make in move in the direction of their choice to be repugnant, it is what it currently is. I believe this constant interference into the interest rate sector is causing more complications than it is supposedly curing. It was the lowering of interest rates down to 45 year old levels some while back that paved the way for all this malinvestment and contributed to the excess that we are all too sadly aware of by now.

The notion that the same people who were partly responsible for creating this mess are the saviors to rescue us from it is laughable for its stupidity.

That being said, the Street loves nothing more than a Fed-induced liquidity party. As you can see, during both episodes of Quantitative Easing, I and II, the S&P 500, which is an excellent proxy for the US stock markets as a whole, moved higher, nearly reaching levels that it had climbed to just prior to the bust of Lehman Brothers in mid-2008, which ushered in the credit crisis.

As long as the Fed was expanding its balance sheet, there were "Blue Skies - nothing but Blue Skies, do I see" ahead. When the FOMC pulled the plug on QE2 in June of this year, down went the S&P, and it has not yet been able to recover from that cold turkey withdrawal of Billions in liquidity.

What the Fed is now doing with its Operation Twist is not expanding its Balance Sheet but is rather rolling over some of the maturing shorter term debt into longer term Treasuries. The effect has been to basically keep the Treasury portion of their Balance Sheet from not shrinking but also from not expanding. As their Balance Sheet flatlines, the broader stock markets are buckling under the weight of the rotten economy and global slowdown that is now taking hold.

Given the current conditions, it is difficult to gauge what might be a driving factor that would take the S&P anywhere near back to its recent peak just below 1400. Without another injection boost of liquidity, the best that the market could hope for is a period of sideways movement.

Another down day for the Metals

Both gold and silver continue to move lower and towards the bottom of their trading ranges. In the case of gold it dropped through $1620 and fell to just above $1600 where buyers showed up. It is currently attempting to get back over the $1620 level.

Silver violated support at both $31 and then again at $30 but it did encounter some decent-sized buying just below that latter level and has bounced back above $30 as I write this.

As expected, the HUI, once it sank through the support region near 520, fell all the way to the next support zone near 500 which extends down towards 490. This needs to hold if the mining shares are going to avoid even steeper losses.

The HUI is already deeply negative for the year but has been able to recover on each trip down towards 490 for nearly an entire year now. We would not want to see this level give way. If it does, the critical Fibonacci of 50% comes in near 470 and one would expect that to stem the selling. Should it fail there really is not muchn on the chart as far as support goes until we get all the way down towards 460-450.

Note that the weekly uptrend line on the chart has given way. The shares will need a strong rally tomorrow to go off the board for this week on a better note.

Gold fails at the upper end of its trading range - moves lower

Once again, the $1680 level has proved to be too high a mountain for the gold bulls to climb.Having failed there the previous trading session, it has now begun moving back down within the recent trading range testing support levels in the process.

The first level that gave way was $1660. We are now challenging $1640. If that gives way, we then move towards $1625 - $1620, followed by the region near $1600.

The HUI is absolutely no help once again as the ratio trades are back, due mainly to weakness in the broad equity markets and the dumping of risk trades.

Traders who love changing their convictions on the markets every day, ought to be head over heels in love with these markets being there simply is no "rhythm" to them. UP- DOWN; UP - DOWN, The entire world of the equity markets has gone Bi-Polar.

Technically the HUI is still in a bearish posture as it cannot get back above the 50 day moving average. That is the first strike. Until it can clear that marker decisively, technicians are going to be selling rallies.

The second strike against it is that it cannot push through the top of its recent trading range which comes in near 555- 560. Having failed there is has now moved back down towards the bottom of the trading range but has thus far failed to hold at the important 520 level. It is now vulnerable to a dip back towards 500 or even 490 once again if the broader equity markets cannot soon rally back.

Silver failed to best very stubborn resistance at $32.50, fell back within its trading range, violated support near $31 but is trying to regain that level. If it does not, it will drop back to $30.

If you want my opinion as to when all this idiocy is going to end and we are going to get some better behaved markets instead of the madness that we are now forced to witness each and every day - it will end when this stupid attempt by the Central Banks of the West to keep the liquidity spigots open comes to an end. It is this meddling by the monetary authorities, who refuse to let the markets cleanse themselves by punishing foolish decisions, whether made by countries or businesses, and rewarding prudent decisions, which is the source of this volatility. Remove that and the markets will trend in one direction or the other. That is what terrifies them and why they refuse to stop interfering with the necessary cleansing process. All they are doing however is making matters worse and guaranteeing that the day of reckoning will be all that much worse.

Same Play - Different Act

Gold has once again failed to sustain its footing for any length of time above the critical $1680 resistance level. Last Friday it managed to eke out a close above this level but just barely. "Just barely" does not constitute a convincing technical breakout so it had the opportunity to try to be more emphatic in today's session.

As trade moved into early European trade, the gold price took off to the upside buoyed by comments out of the G20 summit that seemed to indicate decisive action and timely action was going to occur in Europe in regards to their bank recapitalization/stability mechanism plan. It moved up towards $1700 on strong buying which then evaporated as comments out of Germany throw a bucket of cold water on the hopes of traders/investors that the bureaucrats were going to follow through on intentions expressed at the summit.

Down went gold along with silver and along with the stock markets. Up went the Dollar; up went the long bond and down went the Euro and the commodity currencies. Once more it was, "RISK OFF" and so back to the same old same ol'.

It certainly did not aid the case of the bulls in the metals to look over at the HUI and observe it disintegrating as it failed to even touch the 560 level, a level which it MUST better to get anything exciting going to the upside. It dropped back down towards support at 540 and managed a squeaker of a close above there but if it loses that level, it is going to fade towards the lower end of the range near 520 to see if any buyers will emerge there.

Silver once again stumbled at the $32.50 level and dropped back into the trading range which continues to confine it. As expected when the risk trades are being yanked, silver underperformed gold in today's session. That will continue as long as RISK AVERSION is in vogue.

Trader Dan on King World News Weekly Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap.

http://tinyurl.com/3bkqx2p

US Dollar getting hit hard as "safe haven" trades are being unwound

Over the last 5-6 weeks, as fears spread regarding the European debt crisis and the resultant impact on the large banks over that way, hedge funds and specs in general, fled out of nearly everything and into the US Dollar and Treasury markets as a safe haven. That made sense seeing that there were some suspicions that the Euro might not even survive and a breakup of the EuroZone was coming.

This panic buying took the Dollar from a major support level on the technical price chart and send it skyrocketing higher all the way towards the 80 level.

No sooner than rumors began to spread that the Europeans were working on a mechanism to recapitalize the banks and head off the contagion effect that might result from a Greek default, than the Dollar began sliding lower and forex traders went careening back into the Euro.

Take a look at the following chart drawn off this week's Commitment of Traders report from the CFTC. Note the extremely lopsided positioning of the speculators on the long side of the US Dollar. Guess what this means? As soon as any downside technical support levels are violated on the price chart, every single one of these spec longs beginto liquidate and head for the exits. The result is a cascade of selling that feeds upon itself and the paper gains turn into paper losses for those on the long side of the US Dollar trade.

That is an awful lot of potential and now actual selling that we are seeing or could see in the Dollar if it continues to move lower. The perverse thing about all of this is that the more optimistic the hedge fund world becomes in regards to the European bank situation, the more the horrific fiscal condition of the United States comes to the forefront of their minds. That translates to a wave of Dollar selling, especially seeing that the Fed's stupid "Operation Twist" mechanism is working to guarantee that foreign holders of US Treasuries are getting the lowest yield level possible for those Treasuries that they might happen to purchase when sterilizing trade flows.

The end result is that there is no reason to hold US Dollars or US Dollar based debt by foreign creditors.

As mentioned many times here on this site - the Fed's plan is to deliberately debase the US currency as a means of making debt repayment in devalued bills to its creditors. Many foreigners seeing this are working to sell their Treasuries and unload them into the arms of the Fed.

If the Dollar violates chart support at the critical 50 day moving average near 76.40, the chart picture will turn decidedly bearish and could allow a huge wave of speculative long side liquidation, plus fresh short selling, which could usher in another crisis in the Dollar, as that could drive the greenback back down towards chart support below the 74 level.

Dollar bulls had better hope the Europeans fail to get their act together and botch the recapitalization plan.

Backing out and taking a bit of a longer dated look at the US Dollar on its Weekly Chart one can see that the market remains in a longer term BEARISH TREND. Until or unless the Dollar breaks through the 50% Fibonacci Retracement Level near the 81 level, the Dollar's trend is down.

Gold still being held by $1680

The battle for $1680 is increasing in intensity as bears dig in to prevent what they know will be a defeat if they allow the metal to move convincingly through this level.

The factor allowing them to push a bit harder against the bulls today (and unnerving the bulls somewhat) was increasing doubts concerning the European bank recapitalization plan.

Get used to this - One might as well pick a Flowering Daisy and pull the petals one at a time: "She loves me; she loves me not".

That is what "investing" has been degraded to nowadays.

Tomorrow brings the end of the trading week. If gold can go out over $1680 into the weekend, it will be "GAME ON" for the bulls. If not, we remain trapped in the range trade that has been the model for the last few weeks.

Silver was whacked for a 3% loss today as the Risk Aversion trades came back on the heels of the concern over the European bank plan deal. If the trading contingent feels differently about that plan tomorrow, it will just as likely take back all of today's losses and then some. Again, get your Daisy flower and start picking off the petals. Some business isn't it???

Either way, it too reinforces $32.50 as the resistance barrier that must be taken out and held to get something going to the upside in the Silver market.

The HUI is no help whatsoever to the metals and will not be until it clears the 50% Fibonacci retracement level near 560 and holds it. Until it does, it is checkmated and in a range trade.

Money flows out of Bonds is fueling the current stock rally

Modern markets are all about speculative money flows, and primarily money flows from hedge funds. That can be subdivided further into "RISK" trades versus "RISK AVERSION" trades.

Take a look at the following composite chart of the US Treasury Bond and the S&P 500 index. Note the extremely close inverse relationship between the two lines.

Basically you can see the RISK trade versus the RISK AVERSION trade portrayed here. When traders are running away from risk trades, they are running into Bonds pushing those prices higher in the process.

When they are feeling aggressive towards risk, they are dumping bonds driving those prices lower and shoving equity prices higher.

So where are we in all this? Simple - if traders/investors believe that the actions of the European monetary and political leaders in regards to the bank recapitalization plans will be successful in averting any worsening of that situation, they will continue to move towards RISK trades and sell their recently purchased bond holdings as at least one source of "deflation" will be eliminated from off their radar screen.

If risk trades come back into favor, then the SILVER/GOLD Ratio is going to move  back in the FAVOR of SILVER after having moved in favor of gold since late April of this year.

Gold Bulls Pressing against the Bears' Line of Defense

I have noted that $1680 is a key technical chart resistance level for the gold market to overcome if it is to have a shot at $1700 and a chance to begin a trending move higher. I say this because one can see from the short term price chart that since late September, all forays into this zone have been successfully repulsed by the shorts.

Today the bulls pressed through this defense line but could not muster enough strength to hold their gains in a convincing fashion as the market retreated back below the $1680 level, although just barely. We have two days left in this week for trading. If gold can clear $1680 and hold this level by the time it closes for trading Friday afternoon, it should easily hit $1700 next week where the only resistance is more psychological in nature than technical.

Note that the downsloping red trend line has been broken in today's session gains by the bulls.

There are several factors currently working in favor of gold. The first is the recapitalization plan for the European banks which seems to have enough traders/investors convinced that the worst of that storm is over and thus are willing to take on the "risk trades" once again. The second is closely related to that in the sense that the safe haven trades are being jettisoned meaning that the US Dollar is getting slammed lower as long liquidation is the order of the day in there. The combination of a weaker Dollar and an environment in which risk trades are in favor has brought buying into the gold market. Since there is no need to sell gold to raise cash for any trades that have soured nor a need to meet margin calls, this overhead pressure on gold has for the time being been vanquished.

One other factor, which is important, needs to be mentioned. The upcoming Diwali festival season is fast approaching in India. A tremendous amount of gold is bought by dealers ahead of this season in order to meet the surge in demand that ordinarily results from Indians buying of the metal. That is working to keep a good flow of support into the physical gold market, especially on dips lower in price. That is being reflected in the rising levels of chart support that can be seen on the price chart.

The US Dollar continues to fade

Dollar bulls had better hope for a breakdown in the plans of the Europeans to get their bank recapitalization rescue package moving forward because it is rapidly falling out of favor as hedge funds flee the "SAFE HAVEN" trades (buying the Dollar and the US Treasury market). The Aussie is back over the 1.00 level, the Euro has pushed up to the 1.38 level, the Loonie is at the .98 level and threatening to move back to parity and even the Swiss Franc is showing a few signs of life.

There is a fairly large contingent of speculators who are (were) on the long side of the Dollar as they were plying the safe haven trade. Those positions, especially the ones that have been placed within the last three weeks, are all under water and bleeding red.

The Dollar is now moving into what should provide some buying support so some of these trapped longs are holding out hope that it can bounce from here. If not, it will fall back towards 76.50 as long liquidation is going to occur.

HUI nearing important chart resistance level

Mining stocks have been rallying alongside the broader equity markets as the bulls are frollicking in the pastures of increased liquidity being provided to the European banks courtesty of the recapitalization plans being discussed in that corner of the globe. That has taken away fears of bank failures tied to deteriorating balance sheets over in Europe and by inference, any hit to the banks here in the US. The result is "GAME ON" for the hedge funds once again as in they come into a variety of markets once again.

That had led to both a wave of short covering in the mining shares as well as fresh buying in some issues that has taken the index nearly 70 points off the recent spike low made earlier this month. However, shares have basically moved lower since the opening period of trade today as chartists are seeing a zone of formidable resistance against which some of either booking profits from fresh longs or are using as a strategic entry point for fresh shorts. That zone is a combination of of horizontal resistance associated with the swing high made back in May of this year as well as the most significant of the Fibonacci retracement levels, the 50% level which happens to come in very near the 560 level.

If the bulls want to take prices higher, they are going to have to buy in sufficient size across the sector to drive the index through 560 for a minimum. If they hesitate here, the index runs a good chance of retreating and moving back down towards 520 once again.

If the bulls show some mettle and charge higher, then 577-580 comes into play. A close of the index through this level would set up another run at 600-605.

Commodity complex reflecting more optimism related to the European bailout plan

The commodity sector has been slammed by hedge fund long side liquidation over the last 5 weeks which has basically taken the complex on a one way ride down and down hard at that. It has now finally bounced as nervous shorts cover for fear of getting caught overstaying their welcome on that side of the market should the hedgies' algorithms flip over into the buy mode over the chatter over European and IMF plans to deal with Greece.

The bounce could take it as high as the zone delineated by the pair of blue lines drawn on the chart. Should it breach this area with some gusto, it should see a return of some speculative money that has been sitting on the sidelines into the commodity sector as a whole.

Interestingly enough, corn locked limit up today with a decent sized pool of orders. News out of Russia on a ban on certain exports send buyers scrambling into both wheat and corn as Russia has been providing a substantial amount of cheaper quality feed wheat. The idea that this source will now end caused significant short covering. Considering there is a major report out tomorrow morning from the USDA, it is going to be anything but boring if the numbers provide any unexpected surprises.

Gold chart update

Gold took out overhead chart resistance last evening in Asian trade and looked very strong until trading came around into the London session, where selling surfaced taking it back down from its best levels and dropping it into negative territory for the day. Support surfaced just below $1665 level but the market could not get back into positive territory.

Gold is trying to break out to the upside but is being kept in check.

Silver once again flirted with overhead resistance near $32.50, moved through it and them promptly failed to hold onto its gains above that level. It found support just above $31.50, bounced higher and managed to claw its way back above $32. It too is attempting to breach chart resistance and make a break higher.

Both of these precious metals markets are very close to changing the "sell the rally" mentality so it will not take that much to flip the psyche. The fact that the mining shares as evidenced by the HUI are finding buyers at the present time is very helpful.

Other than that, there is really not much more worth saying about them until we get a definitive resumption of the uptrend.

Gold at the upper end of its recent range

News out of Europe overnight that appeared to confirm thinking that the rescue fund being put together by the Europeans  is going to proceed in a timely fashion cheered the hedge fund community which ran pell mell back into the risk trades. In the process, both gold and silver moved up towards the upper end of their recent ranges, the Dollar sank like a rock, the Euro soared and the US Treasury market was mauled with an avalanche of willing sellers.

What a party it seems liquidity can provide! Then again, when all is said and done, there is nothing left for the monetary and political leaders left to do except to intervene and bail out the banks. Dealing with the root causes (the failure of socialism and a cradle to grave nanny state which spends too much) would entail too much hardship on the populace which is addicted to government handouts, witness a huge hit on the balance sheets of the banks who bought this junk and thereby threaten the re-election prospects of too many politicians. That is a big no-no so the path of least resistance and the one that will ALWAYS be seized upon by short-sighted political leaders is to have the taxpayers pay for all this seeing that governments have no money except that which they take from the citizens in the form of taxes (this also includes borrowing money which will be eventually taken from future generations in the form of higher taxes).

No matter - the markets love it as the punch bowl has been spiked - at least for today.

Seeing that risk was back on, gold moved higher putting in a strong performance that has taken it to the upper end of its range during this period of consolidation. It must break through $1680 with some gusto to convince technicians that this consolidation is over and it is getting ready to at least have a shot at resuming its longer term uptrend.

As mentioned in the KWN Weekly Metals Wrap, the speculative side of both the gold and silver markets has been severely flushed with ongoing long liquidation continuing for some time now. What is needed is for a halt to be put to the rush to the exits by the specs and a renewed interest or desire in taking long positions on the Comex in both metals if these two precious metals are going to have a shot at a trending move higher. Neither metal will be able to sustain upside breakouts if the speculators do not return and inject their cash into these markets. If they are convinced that the bailouts in Europe are going to be of sufficient size to prevent any further credit market lockups, then this could be the fundamental spark needed to convince those sitting on the sidelines to re-enter.

The chart for gold remains the same as it has been for the last few weeks. Note the resistance levels and you can see where the yellow metal is at from a technical perspective. If it clears here, then it should make a move towards psychological resistance at the $1700 level. If that gives way, then $1720-$1725 is up next.

Downside support is a bit higher coming in first near $1640  followed by $1620 with more substantial support remaining at the $1600 level.

Silver is knocking on the door of strong resistance near $32.50 once again and continues to tease with this level. If the bulls can power through the selling coming in here, then it has a good shot at moving to near $34 before any serious resistance arises. Above $34, and we have some real potential to trend, especially if the specs come roaring back into this market. They have been fleeing in droves and at extremely low levels of concentration on the long side based on last Friday's Commitment of traders report.

The HUI thus far (it is still early) looks very strong and is trading right at a tough resistance level (540). If it can push through this level and close strong, it should have enough technical momentum to try a run at the 20 day moving average near 558.

The Dollar is getting the fire beat out of it today as Treasuries sink over a full two points and the forex crowd is salivating over the Euro. If it cannot claw back above the swing low noted on the chart, there are a large contingent of speculative longs in the greenback which are going to be in some serious trouble. Many of these guys ( and a large number of them are undercapitalized small traders) bought in above this level and those positions are going to be seriously underwater if this support level fails to hold.

Precious Metals continue Range Bound - Ditto for the HUI

Both silver and gold continue putting in wide-ranging price swings on a day to day basis providing plenty in the way of volatility but when the dust is settling at the end of the week, neither metal can escape its range bound trade.

What we are witnessing on the price charts is merely the pictorial form of uncertainty that currently is reigning over the minds of traders/investors. The long term bullish trends for both metals remains intact but short term fears over further risk aversion trades and hedge fund long liquidation in the commodity sector is preventing both the bull camp and the bear camp from gaining a tactical advantage.

Gold is unable to break through overhead selling resistance near the $1680 level but continues to attract good-sized buying, especially from Asia, on dips towards the $1600 level and below.

Silver runs into selling above $32.50 from nervous longs as well as opportunistic shorts. On the downside it is attracting interest from buyers when it moves into the region near $30 and below.

This range trade in the metals is keeping the mining shares in a similar pattern with the current markers at 540 in the HUI on the topside and 500 on the bottom. Trips below 500 on the HUI are generating good buying among the shares keeping this index above the 485 level.

The cross currents remain ample - on the European front many traders fear that the ECB and the European leaders are not going to act quickly enough or with enough vigor to prevent their version of the Lehman Brothers meltdown from occuring. Whenever the news seems to favor more decisive action on their part, traders/investors are cheered and plunge into equities and commodities on the long side. Whenver the opposite is true, out go stocks and commodities and everything else that does not look like a US Treasury.

Long term such action on the part of the ECB is inflationary and will end up debauching the Euro in the same fashion that QE has done and will do to the US Dollar if and when it will be employed again over here. Short term none of these hedge funds gives a hoot about any of the long term ramifications. They will try to squeeze every nickel out of such an event if they can and leave the political and monetary leaders to fix what they are eventually going to destroy by this imbecility. Call me a simpleton but I believe human actions should carry implications whether those actions affect only individuals or even countries. Rewarding stupidity, greed and folly is a prescription for more, not less, of the decisions that led to such crises in the first place.

In the fading West, we have reached a point in our history where political leaders want all the benefits of capitalism but none of its drawbacks. Those drawbacks include allowing poor decisions to be met with failure. When the lessons that result from poor choices are painfully learned, those same choices and actions are generally avoided in the future. Not any more - no we can have all the gain without any pain thanks to this magical fairy-tale land created by monetary officials who seem to believe it is their God-ordained destiny to save men from themselves.

Would that it were that easy! We could create heaven on earth and absolve men from any consequences for their poor judgment. Unfortunately there now exists a permanent class of individuals who cheer this sort of thing on not realizing how harmful it is in the long term. It enlarges the scope of government and allows it to intrude into the cleansing process that MUST occur in a capitalistic system if that system is to function efficiently. The STRONG survive; the WEAK perish. That may seem brutal on the surface and in some manner it is but leaving human emotion aside, it is this weeding out process that allows for efficiency and ultimately rewards good judgment and sound policy.

I survey where we are today with this constant enlargement of Central Bank activity and increased interference by political leaders and I often wonder whether a Steve Jobs could create a company like Apple, step down and then come back and lead it back to its place of prominence today. He did that through his sheer genius and ruthless insistence on creating products that consumers would want.

Imagine a world in which the political leadership finds an Apple losing market share, fading from its former glory and lacking creativity only to hear the company's leadership begging and pleading before the ruling powers about how it is too big to fail and needs government assistance to keep it viable "because of all the jobs it creates". Then imagine those same political leaders providing it taxpayer funding (from borrowed money) to give it a lifeline and rescue it. Instead of the company being forced to take a hard look at itself and get its creative juices flowing, as Apple did under the helmship of Steve Jobs, it takes the taxpayer money and survives but does not thrive by introducing a new line of products that consumers desire.

That is not capitalism; it is more closely akin to fascism or as some prefer, crony capitalism, which truth be told, is no capitalism whatsoever. Either a company stands on its own merits or it doesn't. How many family-owned businesses have we see fail in the last few years? There has been no rescue plan for them. If anything the federal government has made their life even more difficult by piling on more regulations and now attempting to saddle them with a huge boondoggle known as Obamacare? That is where we have now come in our journey here in the West - a system where government picks winners, allows fools to thrive in spite of themselves and works to undercut small business. I wonder what our Founding Fathers would think were they to see this now.