Caution ahead of the Fed

With all the hype preceding this week's Fed meeting, not to mention the usual circus atmosphere surrounding some potential action from the ECB, my advice to both gold and silver traders is to be EXTREMELY CAUTIOUS. The market has worked itself into a tizzy in my view as it salivates at the further prospect of additional liquidity measures being undertaken by both Central Banks.

When markets are in this state of mind, you will end up either being a HERO or a ZERO. In other words, you are now in the precarious position of having your fate determined by the roll of the dice. If you get it right, and the Central Banks act when you expect them to, you will be a hero. If you get it wrong, and the Central Banks disappoint, you are dead meat. Frankly, that is not the way to be a long term survivor in these markets. Yes, you may hit it big and congratulate yourself but what happens if you miss???

Personally I do not believe Bernanke has the appetite to go with another round of QE at this time. Maybe in September but not now. Why? Simple - look at the current yield on the Ten Year:

Do you really think that the problem with the economy is that longer term yields are not low enough to stimulate borrowing? How much lower do you think that the Fed might be able to drive this yield by launching another round of bond buying? Perversely enough, if the Fed were to actually pull the trigger, the market will probably do the exact opposite with Yields moving HIGHER instead. After all, yields are moving lower or stuck near historic lows because the market fears the fallout from excessive amounts of debt in the system which is weighing on global and domestic growth. If the psychology were to somehow shift to fears of inflation, yields on this Ten Year will start moving higher. That would actually short circuit any attempt by the Fed to push yields lower so as to stimulate new borrowing.

My own view is why mess with bond buying programs if the market is already doing the work for you on its own?

Then there is the level of the S&P 500. Does this look remotely like a market that is serious trouble??? While we technicians can pour over our indicators and study the internals of this market like the soothsayers of old studied the entrails of slaughtered sheep, the average Joe looks at his stock portfolio and basically yawns. Now, if the S&P 500 were flirting with the 1000 level, this would be a different story; however, as with the yields on Treasuries, why mess with things if the market is doing what you want it to do without taking any additional steps such as another round of bond buying?

Keep in mind that Central Bankers will ALWAYS RESORT TO VERBAL INTERVENTION first to see if that can accomplish their intentions without having to resort to the actual intervention. The latter will proceed only if the market calls their bluff on the former. At that point, in order to preserve their credibility, the CB's will then act.

Think about what the Fed has managed to do thus far (and we might add the ECB which is now getting into the game). They have driven yields down to historic lows and the stock market to not far from its all time high without having to engage in another round of politically toxic Quantitative Easing. Why should they proceed this month with plans to start another round forthwith?

My view is that they will do nothing except more of the same - namely - tell the markets that they are monitoring the economy closely and stand ready to act should the conditions warrant. That is what is so perverse about this stock market rally - the disconnect from stocks and the actual economic conditions is becoming more and more strained with the passing of each week.

As the economy continues to slow the stock market has continued to shrug off each new release of economic data confirming the slowdown. The entire rally has been predicated on the supposition that the rotten economic data will surely force the hand of the Fed to act. But put yourself in Bernanke's place and try to see it through his eyes.

WHo is calling the shots here - the market or the Fed? If the Fed is seen as nothing else but an errand boy of the markets, acquiescing to its demands come hell or high water, then what good is the Fed? After all, if the market determines Central Bank responses, then why have a Central Bank at all? Why not merely take a poll among the investor/hedge fund camp and see what they want and just have it implemented by the Fed? Basically we end up with the situation where the markets say "JUMP" and the Fed responds by saying "HOW HIGH?" Personally I do not think Bernanke is going to allow this to happen.

Now, if the market were to suddenly collapse and a selling rout occur across all asset classes, then the Fed would act.

Of course, the Fed could surprise everyone and announce this week another round of QE which would have serious implications as far as food prices would go. With grains being devastated by the drought and reaching historic highs, a new round of bond buying would send more hot money flows into the commodity sector in an even larger way and would drive prices even higher for a short time. I suspect that it would also shut off demand but for the very short term, it would send shock waves through the food supply chain.

I have said all this to merely emphasize the point, gold traders and silver traders for that matter, be careful out there. It is not the time to play reckless. The market will always be there tomorrow should you miss a move today. Remember that.

Trader Dan on King World News Markets and Metals Wrap

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

http://tinyurl.com/czua7fl

 

 

Gold Chart and Comments

ECB President Draghi apparently has developed a severe case of loose lips as he cannot seemingly keep his mouth from issuing words into the atmosphere fast enough of late. The man has decided to initiate a round of verbal intervention directed at his stinking currency and as a collateral note, the global equity markets.

Yesterday it was: "we will save the Euro at all costs". Today it is "let's propose another round of bond buying and lower interest rates".

Just like that, it was music to the ears of the hedge fund community which wasted no time dutifully responding like the obedient lemmings that they are, jamming the S&P 500 higher, jamming nearly every single commodity market higher, and dumping the Dollar whilst simultaneously falling in love with the rotten Euro. Voila''!  Problem solved - all is right with the world once again as the candy store will now be open.

A point of interest in all this Central Bank madness - the extremely commodity sector-sensitive Australian Dollar has been staging quite a rally on the back of all this bond buying hype. Based on what I am seeing occur in these markets, the hedge funds are now repositioning on the long side of the commodity sector in glorious anticipation of the now "no way it is not going to happen" round of QE that is coming practically tomorrow as far as they are concerned. With this much anticipation, if the Fed disappoints, heaven help us all for these brain-dead funds will annihilate the commodity sector as they all rush to the exits simultaneously.

One has to wonder if a great deal of this has now become captive to the US political election season with Bernanke doing what he can do to keep his boss in office.

As I have stated many times already, we are now witnessing a metamorphosis of the US financial system from one which takes its signals from fundamentals and supply/demand factors to one which is nothing but a product of Central Bank activity or inactivity. The entire house of cards is being held together by liquidity infusions - if the market doesn't get its fix, it promptly sells off until it so unnerves its masters, that they have no choice but to feed the habit for fear of a huge withdrawal symptom manifesting itself.

That brings us to gold upon which none of this madness is being lost. The yellow metal has been behaving quite strongly on the charts this week ever since the first solid hint of an upcoming QE hit the wires. Note that while it has continued within the consolidation range on the chart that I have noted as "NEWEST CONGESTION ZONE", the lows over the last couple of weeks have been occuring at a slightly higher level. In other words, the buyers are coming in sooner instead of waiting for price to drop back to the bottom of the range. They seem actually more worried that they are NOT GOING TO BE ABLE TO BUY THE METAL LOWER and as a result are stepping up to the plate sooner rather than later.

This has put a bit of an uptrend on the chart over the last two weeks and while the metal is still not decisively through the top of the range, it is sure as heck looking like it is only a matter of time before it does so. A push through the $1640 level that maintains that height on any subsequent retreat in price, will then set it up for a push through $1650 and a test of $1665 and then $1680. If the Fed does indeed launch another round of QE, so too will gold launch. If they fail to act, the metal will drift lower again to see if it can keep its important handle of "16" in front  of the price.

It is no coincidence that the gold price is moving higher when one looks at the weekly chart of the US DOllar, which has put in a massive outside reversal signal. This is what will happen to the Dollar, particularly with all those hedge funds positioned on the long side, if the QE comes. It will be obliterated.

A brief note on silver - Silver actually was struggling today until the news hit the wire that Draghi was going to propose another round of bond buying and lower interest rates. That was enough to rattle the shorts who promptly raced to the exits and push it back off the lows and closer to solid resistance near the $28 level. If it can clear this level next week, it should move to $29 relatively easily.

First - Smithfield - Now - Pilgrims' Pride

With the grain markets the center of the commodity universe this year on account of the fierce drought that has gripped the midWest for what now seems like an eternity, commodity firms have been reaping a bonanza pushing the "buy those grains" theme for new speculators.

What has happened however is that corn prices have reached a point where the market is doing what it is supposed to be doing, namely shutting off demand.

First we learned that Smithfield, the nations' largest pork producer, began importing corn from Brazil. Even with the shipping costs to the EAst Coast, South American corn was still cheaper than US corn at the Gulf.

Now we learn today that Pilgrim's Pride, the world's second largest chicken producer, is working on an agreement to also import corn from Brazil.

While this does not signal an end to the bull run, it is a third warning shot across the bow, the first being shrinking ethanol margins, the second being Smithfield.

By the way, for those of you who might have missed it, check out my written interview with Eric King of King World News on the action in the gold market yesterday.

http://tinyurl.com/d88o3pw

Gold Clears $1600 - Psychological Boost to Bulls

The abillity of the gold market to push a "16" handle on the price can be considered a minor victory for the bulls. You can see from the chart below, that within its broader consolidation pattern, gold had been experiencing a somewhat tightening or constricting of its range. The upper boundary of that "mini-pattern" has been the $1600 level. The ability of the bulls to take it through this region gives them a very slight advantage over the bears in the immediate term and provides the possibility of a push towards more stubborn resistance beginning near the $1620 level.

Keep in mind that every bit of today's move higher was predicated on the notion being floated that the Fed is going to ease and provide additional stimulus measures as soon as next month. What the Fed giveth, the Fed can taketh away in a real hurry. What this means is that as long as traders feel fairly confident that the stimulus is coming sooner rather than later, gold will attract dip buyers. On the other hand, if anything comes along to disabuse them of this notion, the market will drop back down towards the bottom of the recent range where the big Asian buyers are lurking.

I have stated many times that I believe any additional bond buying programs are an enormous waste of time which will do absolutely nothing to deal with the underlying problems in the US economy, which are structural in nature. Simply put - there is already too much debt in the system. Trying to lower interest rates even further in order to encourage additional borrowing is a fool's exercise.

For Pete's sake, the yield on the Ten Year note is at 1.406% today. Speaking sarcastically here I am sure that all those fence sitters out there just itching to spend money they do not have will immediately launch forward with those plans if the Fed manages to push the yield down to 1.25%.

They can do all they want to entice banks to lend instead of holding money at the Fed and earning interest but if consumers are afraid of sinking further into debt in this jobless economy, what good will conjuring up more attempts to entice lending do?

Also do not forget - the Fed has spent a minimum of $2.5 Trillion between QE1 and QE2. What lasting good did any of that do??? Answer - nothing.

QE3 Timetable Moves Up to August

The market is abuzz this morning with chatter that the Fed is going to open the candy store next month instead of waiting until September as many had come to believe.

That is all you need to know to understand why nearly every commodity on the Board is moving higher today as well as equities.

Welcome to the brave new world of "investing".

As I mentioned in my post yesterday, if the Fed succumbs to this madness, hold onto your hats for food prices are going to shoot directly to the moon. The entire grain complex is putting back on a large portion of what it took off yesterday. If the Fed does indeed pull the trigger on another round of this idiotic bond buying, hedge fund algorithms are going to jam food prices due north.

Interestingly enough, about the only segment of the commodity complex not moving higher today is the energy complex. The current data releases continue to confirm slow demand due to the poor economic conditions.

Smithfield Importing Brazilian Corn

I mentioned in my morning piece today that some of the pressure in the corn market was tied to news that Smithfield, the largest US pork producer, was sourcing corn from Brazil instead of domestically here in the US. That is big news as it indicates how tight current supplies are and how the rise in price is already beginning to do its job of rationing demand.

According to a consultant at Brazil's Safra & Mercado, reported by Dow JOnes which has been all over this story, corn at Brazilian ports is currently fetching $290/ton compared to US corn at the Gulf of Mexico which is closer to $345.  It costs anywhere from $30 - $40 ton to ship the grain to the US.

There is no doubt that the meteoric rise in the grains this summer on account of the severe drought is going to impact all of us at the grocery store in the near future. My concern in all this is what might happen should the Fed foolishly choose to go forward with another round of QE. Keep in mind that the rise in the grains has been fundamentally driven. In other words, there are legitimate supply/demand fears pushing the price higher.

If the Fed does indeed begin another round of bond buying in order to prop up the US equity markets, a huge amount of hedge fund speculative money is going to flow directly into the commodity sector in a very crude fashion. Think of it as a shotgun instead of a sniper's rifle. They will blast everything in sight higher.

In the grains this will have the immediate effect of pushing prices even higher further exacerbating the impact of the drought. The problem will occur because the money flows can be so huge that even deep-pocketed commercial sellers will have difficulty standing in front of such a torrent of buying. I shudder to think what might happen if their computers drive the price of corn to $9.00!

Remember those food riots that began a while back in Algeria and the spread across parts of Northern Africa and the Middle East? Some, including myself, believe that those riots were the catalyst for what have now become rather euphemistically known as the Arab Spring. When food prices begin soaring, they impact the poor first and when a large enough segment of society becomes restless, it is always a safe bet that further instability soon follows. While Bernanke tried deflecting the entire blame for the surge in wheat prices back then on the weather, the truth, as we pointed out at the time, was that the entire commodity sector, including wheat and the rest of the grains, began moving higher at the exact same time as QE I commenced. QE2 just made matters even worse.

It is bad enough dealing with the devastation coming from a drought - it is entirely another matter dealing with the potential devastation coming from a bunch of meddlers in the economy.

These monetary masters and their utterly useless strategy of buying bonds are playing with fire.

Precious Metals Succumbing to Deflationary Forces Today

Both Gold and Silver are under selling pressure today as the sell off in the grains seems to have pushed a large amount of hot money out of the commodity sector. Soybeans are currently locked at limit down as is the front month corn contract. Talk that Smithfield is importing corn from Brazil has sent supply side bulls scurrying for cover and demand side bears are pressing their case. The pool in the July was 112K at one time and is now down to 26K currently. In the November Beans, the pool is at 37K as I write this.

Traders had been bidding up commodities in general of late as evidenced by the recent climb in the CCI (Continuous Commodity Index) but apparently the onset of some rain in the Corn Belt combined with continued Dollar strength and nervousness surrounding Spain and other European nations, is too much for some of the new longs to handle. They are heading to the exits today in both commodities and in equities.

One of the results of this has been to push the yield on the Ten Year Note down to an amazing 1.411 as I write this. Clearly interest rates continue to plummet globally as traders rush for anything that they feel can provide some sort of shelter. It is an astonishing thing to see yields in Denmark actually go negative!

The Dollar has also pushed into a new 52 week high today and is currently trading over the key 84 level on the USDX. It looks poised to head higher at this point. that is going to give us some extra headwinds for the precious metals do deal with, particularly silver.

For the last two weeks, every time silver has pushed below the $27 level, it has always popped back above that level before the session has closed. That has indicated the presence of strong buying. If these buyers do not surface before the end of today's trading session, silver will very likely head lower and retest the key $26 level. It must hold that level to prevent another round of long liquidation and fresh short selling by hedge funds playing the "slowing global economy" theme. Weakness in the mining shares is not aiding the cause of the bulls right now.

Gold coin sales are apparently slowing compared to the same period last year as reported by Dow Jones this morning.

Here is the short blurb:

The US Mint's sales of gold coins have been "unusually low" in
July, even when adjusted for the seasonal summer lull in gold coin demand, says
HSBC. With 17,500 troy ounces of gold sold as of July 23, the Mint is far
behind the 65,500 troy ounces it sold in the same month of 2011.

Again, with inflation fears being trumped by slowing growth fears, gold is catching fresh short selling as well as long liquidation. However, it is once again down into the region that has seen strong buying based out of Asia emerge. From here down towards $1525, strong hands have been accumulating. We will watch to see if they are still making their presence felt.

The Complacency Index or the VIX as others properly call it, is finally waking up. Maybe, just maybe, we are finally seeing some of these numbed, see no evil traders begin to get nervous. Hard to see what more they could need to rattle their cages but they apparently have a great deal more confidence in Central Bankers and monetary officials than I do.

The HUI chart has turned ugly once again and is now threatening to close in on the May low near the 370 level. Pressure on the mining shares has been very strong. Some of this is manipulative in nature; some of it is related to the ratio spread trade with hedge funds buying the bullion and shorting selective shares and profiting from the spread between the two. Notice how effective the Fibonacci retracement levels have been when analyzing the price action of this index.

The S&P 500 is flirting with its 50 day moving average, a key technical level on the price charts. Notice how it bounced off of this level earlier this month and proceeded to maka a run back towards what might be a double top forming near 1375. Support is layered under this market as noted on the chart. A breach of 1300 could get things mighty ugly very quickly. We will see if the usual suspects arrive just in time to once again "miraculously" revive the index and prevent it from inflicting technical damage on the charts as they have done so often this year.

Trader Dan on the King World News Markets and Metals Wrap

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

http://tinyurl.com/cj2or58

More on Unleaded Gasoline - Ethanol

Yesterday I posted a chart and a very brief comments noting the rise in gasoline prices at the Nymex. Today we are seeing additional gains in this crucial market with the price currently up 1.5% as crude oil soars back through the $90/bbl level.

With the news out this morning that jobless claims ROSE by a GREATER THAN EXPECTED AMOUNT, we are once again being treated to the PERVERSE scenario where BAD IS NOW GOOD.

What I mean by this is what I have been saying for so long now that I feel as if I am beating a dead horse at this point - namely - the US financial markets have now reached a point where they have become completely and totally dependent on EXPECTATIONS OF FURTHER LIQUIDITY by the Federal Reserve.

That is what is driving the stock prices higher this AM as well as a host of various commodity prices; traders have again become convinced that the pressure on the Fed to "do something" is increasing with the passing of each day as each new data release reinforces the notion that the economy is in the crapper and descending further into the bottom of the out house.

Ironically, the higher that these damnable hedge fund algorithms in control of all the hot money floating around the planet push the S&P 500, the lower the odds that the Fed is going to actually start another round of bond buying. Why should they when the hot money crowd is already goosing the price of gasoline back to near the $3.00/gallon wholesale price BEFORE anyone has even hinted that the next round of QE is imminent?

Imagine where the price of gasoline is going to go if indeed the Fed was foolish enough to actually announce a definitive start date for a QE3 or QE4 or whatever!

With some grain prices setting ALL TIME RECORD HIGHS and gasoline soaring under that scenario, any so-called STIMULATIVE EFFECT from a round of QE would be non-existent. In cruder terms, the Fed would have shot its wad and have nothing to show for it.

Keep in mind that the sole purpose of Quantitative Easing is purportedly to LOWER LONG TERM INTEREST RATES to spur increased consumer and business borrowing. How in the hell are consumers supposed to ramp up borrowing with both FOOD and ENERGY prices roaring higher? Answer - they are not. So go ahead and launch another round of QE and keep the hedgies happy but in the end it will accomplish absolutely nothing except further increasing the size of the Fed's balance sheet and generating another round of huge bonuses on Wall Street.

Back to unleaded gasoline however - here is the news from yesterday's EIA report (Energy Information Agency). GASOLINE USE HITS 13 YEAR LOW FOR MID-JULY! How do you like them apples? Demand for gasoline was the lowest for this time of year in 13 years. Why? The EIA cited the weak economy and improved fuel economy. Yet the price of unleaded gasoline has rallied to near the $3.00 level from all the way down at $2.47 at the end of June.

So why is unleaded gasoline continuing to rally and become even more expensive when US domestic demand has fallen off the cliff? Let me first state that there is some built-in risk premium to the futures market over the seemingly always present tensions with Iran. That alone does not explain the price rise however.

Interestingly enough, this surplus gasoline is increasingly being exported overseas!

This brings me to a topic dear to my heart, specifically railing against the idiotic product known as corn based ethanol. This product , while a boon for farmers growing corn, has been an unmitigated disaster for our livestock and poultry producers.

Some may not realize that currently, 4 out of every 10 rows of corn planted goes to producing a product that ends up being burned in our gasoline tanks. That's right, about 40% of all domestic corn demand is the result of a federally mandated ethanol requirement. This "green agenda" has destroyed our livestock and poultry industries. Dairy farmers, Beef cattlemen, hog producers, chicken and turkey producers, are all being financially devastated watching the cost of their feed bills soar into the stratosphere while the price that they are able to fetch for their finished product is either stagnant or unable to rise at a fast enough clip to compensate them for their increased feed costs.

Even with the horrific drought, if 40% more corn was available to use as feed or for our export markets, prices would not be at these current levels and these various live animal producers would be able to avoid being financially crippled.

Interestingly enough, with corn prices rallying to record highs, ethanol plant margins are collapsing with crude oil at current levels. Some of these plants are going to end up shuttering their doors as they close down due to cost constaints. Additionally, there is increasing chatter that politicians are coming under pressure to do away with this foolish federal mandate for ethanol. While I would personally love to see this, with our current tree-hugger in chief in office, I doubt it would escape his veto pen.

That being said, some are buying unleaded gasoline as corn moves ever higher with the thinking be that political pressure is going to be doing nothing but increasing as the impact of this drought worsens. Think of ethanol as a way to stretch a gallon of gasoline - you basically dilute the stuff to 90% strength or 85% strength by mixing white lightning into it. Take away the ethanol and you have to use that much more actual gasoline to end up with the same finished quantity of fuel.

That may be what is pushing gasoline higher - imagine that - we have reached a point in our nation's industrial history where gasoline traders are now essentially trading corn.

Another fine example of a government produced FUBAR event.

Gasoline Prices back on the Rise

Call it a "stealth rally" as it has not been garnering any headlines, but unleaded gasoline futures have quietly been on the rise for the last three weeks after bouncing off of the $2.50 level and are now pushing back towards the important 50% Fibonacci retracement level of the entire decline from the late March peak .

Coming at the same time that we are seeing the grains soaring higher (see my recent article on this), it is soon going to be packing a one-two punch to consumers between food and energy costs. Prices at the pump had been coming down giving some relief to drivers and the transportation industry in general but this advance threatens to pull the plug on that soon enough if price pushes past the $2.96 level on this chart.

So let's take an inventory of what we have thus far - An absolutely horrendous employment picture, rising food prices, rising gasoline prices, underwater mortgages, and an Administration that is totally clueless when it comes to understanding the factors that contribute to job creation and a growing vibrant economy. Is it any wonder that retail sales are tanking and the economy is taking a nosedive? Feeling better yet????

Investors' Attitude: "What? Me Worry? Why?"

Given all that is transpiring across our global economic and financial system, the degree of utter complacency in the US equity markets is astonishing. Looking at the Complacency Index, my name for the Volatility Index or the VIX, one would think that there is hardly a care in the world.

All of this has a somewhat surreal feeling to me. It is almost as if the entire investing community is in a state of denial. It seems to believe that the "all powerful demi-gods" aka, the Central Bankers and monetary officials, are able to suspend the impact of excessive leveraging and exorbitant indebtedness.

"Yeah, things are not very good right now, but no worries. If things were to go from bad to worse, the officials will throw open the bar and we can all think from the freshly spiked punch bowl. Go back to sleep and wake me if there is really a crisis".

I don't know whether to laugh at such an attitude or weep that we have degenerated into this.

Grain Index Approaching 2008 Peak

I have mentioned that one sector of the commodity complex that has been able to defy the general selling trend that strikes the overall sector during RISK AVERSION or SLOWING GROWTH trades, has been the grain sector.

The reason? Simple - the fundamentals on the SUPPLY side are so strong due to the horrendous drought impact that any setback in price related to algorithm selling has been met with very strong buying from fundamental based buyers.

As the drought continues to ravage the crops here in the US, wheat has been pulled higher due to inclement growing weather in the Black Sea region. The end of all this has been to take my personal GRain Index to levels nearly equal to the peak prior to the onset of the 2008 credit crisis here in the US.

Unlike that time period however, when the entire commodity sector was running wildly higher and crude oil was making a go at the $150/bbl level, the commodity sector is being GENERALLY sold as an asset class due to fears of a  slowdown on the DEMAND side of the equation.

It is going to be interesting to watch to see if demand for the grains can be sustained at these lofty levels.

Regardless, with this all important ESSENTIAL sector moving to these near record levels, suffice it to say that consumers and end users are going to feel the impact in the months ahead, if not already. The last thing that cash strapped consumers wanted or needed was further stick shock at the grocery counter.

My guess is that this huge move in the grain sector is going to put a serious dent in the disposable income of the average consumer and that this is going to be witnessed in another hit to the retail sales moving forward. Simply put - more and more of the shrinking pie of consumer income is going to end up going to food costs in the coming months. That is not exactly bullish for the US economy nor the global economy for that matter.

With one sector of the commodity complex moving sharply higher and other sectors languishing, we are once again being treated to yet another set of conflicting crosswinds that will muddy the prognosis between fears of inflation and fears of deflation.

Same Play - Second Act

Nothing has changed in the complexion of the gold market for nearly two months now. It is rangebound in a consolidation pattern. What this means is quite simple - all predictions of gold either collapsing or soaring are just that - predictions - the truth is until this market breaks out of its trading pattern, no one knows with 100% certainty exactly where it it is going or what it is going to do next.

The best traders never hurry a market nor do they curse it because it does not act like they want it to do - they just accept it for what it is currently doing and watch for an opportunity to act.

Having said that, most floor locals are enjoying this range trade - they put their kids through college in these kinds of markets since they are able to sell at the top of the range as they watch the order flow and buy it all back near the bottom of the trading range, again, as they watch the order flow. In the event the market deviates from its pattern trade, they will go with the breakout and see how far it can run before the momentum ebbs.

Most novice traders will buy near the top of the range, expecting a breakout, only to watch the market reverse on them and stop them out with a nice fat loss. They will also sell near the bottom of the range as all the bearish analysts and prognosticators surface, only to watch the market snare them in a bear trap and snatch their money away from them.

To be successful, one has to recognize the pattern a market is in and respect it.

I obviously have a long term bullish bias towards this metal due to what I know is happening in the currency markets and the actions of the Central Banks and other monetary authorities. I do also know however that until the MAJORITY OF TRADERS become convinced that the next real thing to FEAR is INFLATION, gold is going to have trouble maintaining any rallies.

As I have stated here many times over the last two months - the current mindset of most traders is one of fearing a global slowdown or deflationary pressures. The only thing that snaps them out of that is anticipation of further Central Bank activity along the monetary stimulus front.

Another way of saying this is that the ONLY THING PREVENTING AN OUTRIGHT WAVE OF SELLING PRESSURE ACROSS THE RISK ASSET SECTOR IS HOPE FOR FURTHER CENTRAL BANK LIQUIDITY PROVIDING MEASURES. Whenever the market thinks that the economic data is rotten enough to pressure the Fed into acting on the monetary front, they will bid up both equities and commodities in general. Whenever the opposite is true, and the market is depressed as it loses hope for any immediate or forthcoming stimulus, down goes the equity markets and the commodity markets, in general. (As stated before, the fundamentals in some markets are so strong, as is the case with the grains, that they can defy the general RISK OFF Trade).

Until we get some sort of resolution to this stalemate, the odds favor a continuation of the current trading pattern. As usual, we will be closely monitoring price action to see if we can spot any potential shift in this current sentiment.

Trader Dan Interviewed at King World News

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

http://tinyurl.com/899oua7

HUI to Gold Ratio Dipping Down Towards Undervaluation Levels Once Again

The breech of the 400 level in the HUI has brought out some further stop-loss related selling as well as fresh shorting by hungry bears in the sector. GoldCorp's news from yesterday is still impacting the miners in general.

That being said, the underperformance of the mining shares against the price of Gold is dropping this important ratio down toward those levels which have been considered as "undervalued" once again. While it is small consolation to mining equity bulls to see the value of their holdings being diminished once again, it does appear that we are entering a region that should engender value based accumulation sooner rather than later.

In one sense, the miners are suffering from the same fate as gold bullion as it waits for further signs of QE from the Federal Reserve. However, there are also some cases where disappointing fundamental news has given some hedge funds the boldness to ply those ratio spread trades of theirs once again.

Trader Dan on King World News

Please take a bit of time to check out my recent  written interview with Eric King of KIng World News as we discuss the technical price chart of the US Dollar and some general concepts about price action.

It should be kept in mind that a rallying Dollar tends to bring pressure across most of the commodity complex as a sector. There are exceptions however and we note those.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/7/12_Crucial_Chart_%26_What_to_Expect_From_US_Dollar,_Euro_%26_Gold.html

More Long Term Bearish News for the US Dollar

While the near term chart picture for the US Dollar is decidedly friendly, more and more frequently we are reading reports such as the following out of Dow Jones.

It is not difficult to see where all of this is heading. The US is declining and going the way of all empires and kingdoms throughout history who spent themselves into oblivion and refused to consider the long term implications of their policies.

Esau squandered his birthright for a bowl of stew. The US monetary authorities and inept political leaders have squandered the Dollar's reserve currency status for what??? A pox on the whole pathetic batch of them all.



DJ Australia's Swan: To Discuss With China Possible Direct Conversion of Australian Dollar, Yuan

 HONG KONG--Australia will discuss with China officials the potential for
direct conversion of the Australian dollar and the Chinese yuan for
transactions completed in mainland China, Australian Treasurer Wayne Swan said
Wednesday.

  "This has the potential over time to help reduce the cost of trade between
Australia and China," said Mr. Swan, who spoke at a forum in Hong Kong before
heading to Beijing for discussions with officials on yuan internationalization.

  Mr. Swan said Australia has strongly supported China's move toward a freely
traded currency, and toward "a fully integrated economy that will very soon
lead the world."

Silver Chart - by Request

Taking a look at silver on the weekly chart it is not too difficult to see that it has been in a well-defined downtrend since peaking in the spring of last year. Rallies are being sold  but dips into the region near $27.00 - $26.00 have been bought. The result has been to form a perfect triangle pattern on the chart. This latter or bottom level of support has thus become CRITICAL to the future prospects of the metal.

It is getting very close to this downside line again this week. Bears are going to continue to try to press it to see if they can push enough longs out of the market to break it lower. If the bulls falter or waver in the least, the metal will buckle and then drop very quickly to the 75% Fibonacci Retracement level near $25.47 with the $25 level also within range.

To get anything going to the upside in this market is going to require a push through the $30 level that can maintain a handle of "30" in front of this market.

US Dollar Looks Strong

The rally in the US Dollar continues not out of any particular set of strong fundamentals in the US but rather out of a general aversion to the Euro and by consequence, to the European currencies.

While the Fed seems to be basically standing pat for the immediate moment, the Bank of England has announced another round of its bond buying program while the ECB has lowered rates. Given that backdrop and the lingering fears and uncertainty over the bailout mechanism put in place by the European finance ministers and political leaders, traders continue to bid up the Dollar. This buying is a reflection of the unease among traders over current market conditions. People are confused to say the least and when they are, moves tend to be exaggerated as liquidity is falling off with some either lightening up or simply moving to the sidelines altogether.

That being said, this buying has pushed the Dollar right smack dab to an important technical resistance level on its longer term chart. If you note, it has already bested both the 50% and the 61.8% Fibonacci retracement levels of the entire decline from back in 2010 to 2011. It remains above this latter level this week. If it can push through that overhead resistance line, there does not appear to be a whole lot between it and the 2010 peak. That means it would have the potential to make a run towards the 89 level.

While that seems difficult to envision for some Dollar bears, given the pathetic condition of the US economy and it fiscal woes, one has to keep in mind that compared to the Euro, it looks good! (that is not saying much but the USDX is weighted against the "value" of other major currencies). We will have to wait and see should the Dollar indeed manage to move higher as we could normally expect to see pressure across the commodity sector in general.

I would imagine that conditions in the Eurozone would have to begin deteriorating more rapidly to see the Dollar accomplish this feat. If that were the case, traders would most assuredly work those "slowing global growth" trades once again. That would bring some further pressure on the silver market. It would also however ramp up pressure on the US Fed to move forward with their next round of bond buying, a factor which, if traders are convinced is coming, would see the grey metal shrug off that selling pressure and move higher in anticipation of the next wave of liquidation injections.

MidWest US Drought Fueling Talk of Soaring Food Prices

The fierce drought that has gripped the lower section of the US corn belt and has been ravaging both corn and soybeans in the region has sent corn futures limit up today and soybeans for the front month July contract to a new all time high. That has sent shudders through the minds of some traders who are convinced that it is only a matter of time before all of this feeds through to the supply chain. REsult - higher grain prices meaning higher food prices in general.

This phenomenon has gotten hedge funds back to buying commodities across the board this morning even with the equity markets careening lower. Gold and particularly silver are getting money inflows as a result.

I mentioned a while back that the old time traders used to see a connection between the price of soybeans and the price of silver. That connection seems to be back in full force today.

Trader Dan on King World News Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Markets and Metals wrap where we discuss this week's price action in the markets.

http://tinyurl.com/cjfhts6

 

 

Payrolls Number Disappoints - Risk Off

If you recall one month ago, when we got that abysmal jobs number, gold initially moved lower, only to then rebound with a ferocity that caught market watchers and traders completely off guard. Risk off trades were being slammed on as longs bailed out and bears began pressing the downside. Literally, on the drop of a dime, the entire complexion of the market reversed with the bears running for their lives as new longs entered the fray. The reason - the number was so crappy that everyone just "knew" that the Fed was going to immediately launch the next round of QE. In other words, the more rotten the economic data, the more the risk trades were being put on.

Today, as is becoming the pattern in these screwed up markets, the exact opposite has occured. The payrolls number in this morning's release was horrific. Down went gold, and silver, and nearly the entirety of the commodity complex, along with the equity markets, and up went the Dollar. This time however we are not as of yet getting any sign whatsoever that traders are expecting the Fed to act on the basis of the weak payrolls number. I see no upside reversal at this hour in any of these markets - just more selling pressure.

I am beginning to suspect that we are seeing more and more traders/investors coming around to the view that no matter what one might want to call it, QE, additional liquidity, monetary easing, bond buying programs, etc., none of it is going to do the least bit of good in the medium to long term. In other words, one has to wonder whether or not the bloom is off the rose of Central Bank powers. It seems to me that the CB's are losing the war against the global economic slowdown in the minds of more and more traders. What is even worse ( in the minds of some), is that they are losing their status as the all-powerful demi gods of the finance world.

Again, at the risk of beating a dead horse, the problem is not one of liquidity - there is plenty of that - the problem is too much debt and not enough velocity of money. You can lower interest rates all day long until the cows come home but if people do not want to borrow or are afraid to borrow, what good does it do?

In other words, money is simply not changing hands fast enough. As a matter of fact, this morning the ECRI reported that their future inflation gauge, or USFIG dropped to 101.2 from 102.3 in May. Their comment: "US inflation pressures are clearly in retreat".

This is where the pressure is coming from on the Continous Commodity Index and why the bond market is moving higher and yields lower once again. Until something occurs that will change this "lack of inflation" psyche, upside trending moves in the commodity sector are going to be few and far between for all but that sector which has the strongest set of fundamental factors going for it. Right now, that is the grain sector, but even they are beginning to show some signs of stress due to the larger macro economic picture.

IN this environment, gold is going to perform better than silver as the latter must have an inflationary environment present if it is going to run higher. The Yellow Metal cannot seem to clear the resistance level noted on the chart which just so happens to be the BOTTOM OF THE FORMER TRADING RANGE in April of this year. Until it does, it is range bound at a lower price with solid buying down below $1580 on down to $1550. Only a strong weekly close through the $1630 - $1635 level gives Ol' Yeller a shot at getting some upside fireworks going.

Take a look at the following chart of the commodity complex via the Continuous Commodity Index or CCI. It has made an almost textbook retracement halfway or 50% of the distance from the peak in late February of this year to the recent low in early June, and has now stalled out. If the inflationary psyche does not return, it will move lower towards the 541 level to see if it can garner some buying there. If not, further back down it goes. For the bulls to get anything going, they must take the sector through the 560 level for starters.

Happy "What is Left of our Independence" Day

To all my American readers - after this week's convoluted reasoning from the Chief Justice of the Supreme Court, I wonder what really is going to be left of our Independence.

Just be careful not to breath too deep of a sigh - the EPA is liable to come a knocking on your door fining you for emitting excessive amounts of that nasty pollutant, otherwise referred to as Carbon Dioxide.

If you happen to have the misfortune of residing in New York City, no sense in trying to drown your sorrows in a nice big giant cup of Mountain Dew. Nanny Bloomberg has seen to that.

I keep waiting for the Underwear and Sock Police to start passing out tickets for non-compliance with the officially sanctioned color coordinated guidelines.

We are fast becoming slaves in the land of our forefathers.

Live or Die by the QE Sword

Today's rally in gold (and in silver for that matter) was completely based on expectations for additional liquidity measures forthcoming from the Central Banks of the world. First there was chatter than China would be easing. Then came expectations of a rate cut from the ECB. If that were not enough, talk surfaced that the Bank of England would be restarting its bond purchasing program (England's QE) and of course, the non-stop, near religious belief that the Federal Reserve is going to start round 3 of QE "anyday now".

I do not know about you readers but I am more and more disgusted with what is happening to the trading/investing community in this modern financial system. They seem to have lost their collective minds and their ability to reason.

In a most perverse manner, (perverse is about the only word that I can find to express the sickness that pervades the financial system), the worse the economic data has become, the better the stock markets of the world seem to do. Rotten economic data out of China - why let's just buy copper and increase the price $0.25/pound in less than two weeks. After all, China is sure to lower interest rates and that will certainly ramp up demand once again.

Rotten news out of the Euro Zone - sovereign debt issues - let's take crude oil a full $10/barrel higher.

When even Goldman Sachs' reasonable call for a lower stock market based on its solid analysis of the economic condition gets blown out of the water, you know that the financial world now calls light, darkness; bitter, sweet; and down, up. It really does seem as if we are living in a parallel universe where the "normal" rules are inverted.

The short of all this is simple - for whatever reason, traders have now been properly conditioned by the authorities to buy more and more equities, the worse the economic news becomes. Since traders have been led to expect that Central Bank activity will generate inflation, they bid up the price of the so-called "risk assets", which includes both stocks and commodities.

My own personal belief is that the additional QE will do absolutely NOTHING to impact the LONG TERM PROBLEMS that beset the current global economy. The problem is not that money is not cheap enough - the problem is that there simply too much debt. That however will not stop these Central Banks from pushing the accelerator on the liquidity car nor will it stop these SHORT TERM inflationary outbursts that result as this liquidity finds its way into both equities and commodities. At some point the debt has to clear. What we get however is short term bursts where the VELOCITY OF MONEY increases only to then drop off a cliff as the impact of the QE subsides. In a very real sense, the entire global financial system has now evolved to the point where it truly does either live or die by the QE sword.

A quick look at the gold chart shows the market has found strong buying support down near the bottom of a range near $1550 and strong selling near the top of this range between $1620 - $1630. The latter has been a tough nut for the bulls to crack.

Should the gold bulls be able to muster sufficient strength to beat back the bullion bank selling originating up there, it has a real shot at tagging $1650. Getting through there would be the first legitimate shot gold has at getting to $1680, a level it has not seen since April.

One last thing, I had mentioned a while back in another post that I was of the opinion that the Fed did not want to let the QE cat out of the bag too prematurely as they are acutely aware of the ramifications of rampaging hedge funds particularly in the energy sector of the commodity complex. My suspicions were that these monetary gods would try to wait until the price of unleaded gasoline dropped closer to $2.50 or so before their mouths started yapping about bringing on another round. Lo and behold - look at the unleaded gasoline chart.

Now isn't that sweet! We finally start seeing a wee bit of relief at the gasoline pump and what do our barons do to us - they make certain that we will not be spared from our former pain for long. Gasoline has increased $0.25/gallon in two weeks time based on nothing but hype about QE. Imagine what will happen to this chart if they do indeed give the word. Sad thing is even if they don't, Iran is making noises again  and that in itself has the energy markets a bit nervous.

Ben Bernanke has a problem however. If he pulls the trigger on the QE gun to prop up the equity markets for his boss Obama in time for the election, he will NOT BE ABLE TO AVOID surging gasoline prices, which are one helluva negative factor for any sitting incumbent to overcome. Nothing has as much IMMEDIATE impact on the consumer and average citizen as soaring gasoline prices at the pump - NOTHING.