Keep an Eye on Newmont for signs of a bottom in the gold shares

Newmont has recently been one of the best performing gold stocks on the board. As such it should be closely watched for signs of a potential bottom across the entirety of the gold mining sector. Note the chart below and look at the former resistance level near the $60 region. That held the stock in check for some time and prevented it from moving solidly higher. Now that it has decidedly cleared this level, technical analysis principles tell us that this level should provide some support in the way of buying once it is approached again on a retest lower in price. The reason is that buyers who missed the initial move higher and still want to own the stock will use the move lower towards this level as an opportunity to acquire the stock.

It does seem that there were some fairly active buyers in Newmont today. The stock rebounded fairly well off its worst levels of the session. In the process it has created a POTENTIAL hammer formation (not yet confirmed). Some refer to this as a spike low. If the stock can close above $66, that would confirm a bottom is in. It does not mean that the stock will go immediately higher. It only means that the stock has found willing buyers at the $60 level and that it could then move in a sideways pattern marking time until it can build a base for another leg up towards the recent high. Time as always will make things clearer for us.

Gold Chart comments

Gold was taken down very hard this week for several reasons.

First, look at both charts below of the S&P and the CCI. Notice that both are now solidly in the red for this year. What this tells us is that the vast majority of hedge funds have lost money for the year unless they have been very nimble and were able to beat the rest of their world to the sell button.

Also consider that many of their positions are heavily leveraged. Margin calls are now coming in. What do they do? They can obviously sell out of their positions and take the losses or they can try to pony up additional cash and hold the positions a bit longer in the hope that the markets will rally up and let them sell out at a better level or even initiate some new longs.

That helps to explain why gold was hit so hard this week and why many are now questioning its safe haven status as a result.

First, examine the long term charts of the S&P 500 and the CCI. Notice that both charts are underwater for the year.

What positions could a hedge fund actually sell that are PROFITABLE if they need to raise cash? Answer - They have none -  the only market that is still showing a profit for this year (other than the treasuries trade) is GOLD. It started the year at $1422 on the Comex and closed today at $1640. That is a gain of 15% on the year even after the whipping put on it this week. A short note here - silver is back to where it began this year so there are no profits left in it after this week.

Now consider that hedge funds are getting a boat load of redemption requests from disgruntled clients and from those who are simply scared stiff and have had enough of the insane volatility. They want their money back even if it means sticking it under a mattress. That requires these funds to sell the assets that they have to raise the necessary cash.

In other words, gold, is the only profitable investment these funds have that is both liquid and available for them to meet margin calls and meet redemption requests. This is why it is being sold. The selling has nothing to do with it not being a safe haven but rather functioning as an extremely liquid investment that has shown them a solid profit. Winners are getting sold to meet losing trades and redemptions. Nothing more; nothing less.

Once this money flows issue is resolved sufficiently, the factors that have led gold to rise will reassert themselves.

I am a bit amused by those who keep crying up the 2008 debacle as if gold is doomed once again. I can still hear their voices from back then and as I kept some of their emails to amuse myself in the future. The same things are being said now as were being said then.

Yes, a 30% decline in the gold price then was not fun living through as gold was sold off fiercely as carry trades were unwound and a mad scramble for cash commenced for the same reasons I just listed above. However, looking back in hindsight and at the price chart, that steep move lower amounted to a tempest in a tea pot on the longer term chart. Gold went on to more than double in price from that reaction low.

Not that I would be particularly happy about it should it occur, gold could drop as low as $1500 and still not dent the long term uptrend in the metal. If you look at this chart carefully, note that the red uptrend line was actually violated in 2008 leading to cries that the end of the bull market was upon us. However, that foray lower corresponded with the advent of QE1 and the rest is now history.

I expect that before we see the global stock markets utterly implode, we are going to see more concerted Central Bank action, on a global level, to provide more liquidity to these markets in an attempt to prevent any sovereign debt meltdowns or credit lockups. I am not saying it will be effective, I am only stating that anyone who thinks these monetary authorities will sit idly by and do nothing while the global stock markets fall apart, taking the commodity markets with them, is a stranger to the nature of these people.

I will betcha dollars to donuts that the FOMC is still seething over the response of the markets to its latest "Operation Twist". There is no doubt in my mind that they are already planning their next move.

Commodity complex reeling but still standing

Please examine the following chart to see where the complex is as a whole in terms of its technical posture. With traders currently leaning towards the "slowing global economy" theme, the complex is moving lower to revalue many of the individual markets comprising this index. That is more of the deflationary emphasis and is reflected in the breach of chart support and accelerated move lower once price broke out of the downside of the recent channel.

There has been some chatter that the G20 will attempt to take some sort of concerted action to assuage investor fears. also, today there was news of a speed up in the formation of a European Stabilization Mechanism by some of the European nations. I would also not be surprised to learn at some point further yet down the road that the Fed will openly buy equities to prop up the US market should they feel the need to do so. This will be another form of QE but would target stocks instead of interest rates. The idea would be to influence investor sentiment and "revive the animal spirits".

If the investment world believes that some sort of liquidity mechanism will be introduced that might serve to reflate stock markets and stave off deflationary pressures should those get too far out of hand in the minds of monetary officials and some policy makers, the commodity complex would get a jolt higher once again.

Sadly, until we get structural reforms and changes in fiscal policy, the efforts to shock the economy into getting a stronger heart beat are destined to fail. The economy in the US is being held back by policy blunder after policy blunder by the current administration, which is in way over its head and is actually making matters worse.

Detailing a monthly Silver chart

Silver has been the victim of its industrial metal status this week as fears of a global slowdown in growth slammed the base or industrial metals complex. Copper, aluminum, lead, zinc, platinum and palladium, to name some of them, were all hammered sharply lower as traders were heading for the exits trying to snatch what little might have been left of their profits for this year.

Under those circumstances, silver was facing far too strong of a headwind to hope to rely on its status as a monetary metal. The resultant selling has done some serious damage to the chart.

We now want to look at the longer term monthly to see if we can spot any levels that might provide us a bottom in this market and to perhaps gauge how low it might fall before it attracts buying in sufficient size to halt the decline.

I am using two sets of Fibonacci retracement levels to do this. The first originates from the bottom in the silver market made back in late 2008 when QE1 was first announced. That is in blue. The second originates from the breakout point late last year when silver embarked on its stunning run from down near $20 all the way to $50 before it sold off. That is in red.

Note that if we use the latter set (in red), silver has violated all of the major Fibonacci retracement levels except for the last one, the 75% retracement level. That comes in near the $28.50 level.

It just so happens that this level is fairly close to the more significant 50% retracement level of the entire rally from 2008. That comes in near $29.22 (in blue).

Also note that there was a bit of a pause in the silver move higher over a two month interval in NOvember and December 2010 that hovered in that same general area. This is a potential support level for the metal. If silver can recapture $30 and then $32.50, today's low might be as low as we get. If it cannot and fails at today's low, then the band between $29.22 - $28.50 will come into play.

If the market were to fail there, it will then have potential to retrace the entire movement higher from last year with only the $24.30 region to prevent that.

Let's see what the next week brings us.

CME hiking Margins on the Precious Metals Monday

As of  the close of trading on Monday afternoon, margins for the precious metals will be increasing.


For Gold

Old Margin                     New Margin

$9,450                         $11,475

Old Maintenance           New Maintenance

$7,000                         $8,500


SILVER

Old Margin                  New Margin
$21,600                      $24,975

Old Maintenance         New Maintenance
$16,000                     $18,500

I would not read too much into these margin hikes as far as any determined attempts by the exchange to induce more selling. This time around I believe the hikes are legitimate. When you get a market like silver that drops 15% in ONE DAY, you are going to get margin hikes. The reason - the very integrity of the Clearinghouse comes into play.

Silver closed down $6.48 today. In a single session, one long contract in this market cost the buyer a paper loss of $32,400! That is enormous. If you consider the fact that the previous old margin was $21,600, that was wiped out and then some.

During the clearing or settlement process, the winners get paid (have their accounts credited) by debiting the loser's accounts. If the losers do not have sufficient funds in their accounts, the whole process breaks down. Guess what then happens? The Clearinghouse comes to the brokerage firm whose clients do not have sufficient funds and says to them "You pay us the difference and then go and get it from you customer". If the brokerage house does not have sufficient wherewithal financially to make good on those losing trades, we have a major problem.

When we get these wild, insanely huge ranges in a single day, the computer programs used by the exchanges to measure volatility are going to flag those markets and will raise the margins to make certain that there are no problems paying ther winners.

We might see some additional selling pressure from this margin hike hit the metals Sunday evening or Monday morning but I am of the opinion that anyone who was trading gold or silver and who was already undercapitalized going into today's (Friday's) session, has already been paid a visit by the resident margin clerk and been told to either sell out the position or wire the money immediately. Not many have sufficiently deep pockets in the smaller spec category to carry that sort of paper loss, so I believe a large number of them are now gone.