After what seems like a nearly vertical fall in the gold price over the last 7 or 8 days, gold is finally getting a bit of a reprieve this evening as it enters Asian trade. The interesting thing about this most recent selloff is that reports of physical offtake have indicated good buying of the metal down here at these levels. This has been swamped by hedge fund liquidation and some fresh short selling as some in this category are moving onto the short side.
As you can see on the chart, gold fell nearly right to the very bottom of this 8 month long trading range before bouncing higher. It is not unexpected to see this sort of thing as those who instituted some fresh short positions a couple of weeks ago have made a very healthy profit and it never hurts being prudent and taking a bit of money off of the table after these kinds of gains.
We also probably have some bargain hunting and some bottom pickers coming in after a fall of this magnitude. Whether this is just what we traders call a "dead cat bounce" (if you drop a dead cat from a high enough altitude, even it will bounce when it hits the ground) before gold drops through the bottom of this range or whether this is indeed marks the end of this round of liquidation is unclear. I would not be rash enough to venture any guesses at this point as traders remain extremely nervous and very fearful of being caught flatfooted on the wrong side of these damned hedge funds.
I would not feel at all comfortable that the selling is finished until gold were to climb back above the $1600 level but barring any further negative developments out of Europe, it looks like it might want to consolidate a bit here. Again, that is unclear and will require a full trading session in New York tomorrow to get a better feel of things.
Regardless of the current technical washout, the interest rate environment continues to be one of low or negative "Real Yields" and is conducive to holding gold. I suspect a fairly large amount of the gold that is entering the system to be sold is coming from European banks selling off liquid assets in an attempt to raise cash in the attempt to help their pathetic balance sheets. After all, what can they sell that has much of any value at this point besides gold?
The Dollar is still having trouble with the 82 level on the USDX but the week is still not over. A weekly close ABOVE this level would be noteworthy.
With all the turmoil and commotion occurring in Europe, with slowing growth in China and with mixed signals coming out of the US, and now, especially with global stock markets reeling and talk of "US fiscal cliffs" abounding, one would expect the doves on the Fed to begin making noises and talking nicely to the investment community about future plans for additional QE measures. Some have even suggested that one of the things that the Fed also might do is to further push back their date for any rate hike until "late in 2014". For now however we are getting an eerie silence. Even today's minutes of the recent FOMC meeting are rather vague, pretty much just stating what everyone already knows - the Fed will act if they think conditions warrant them so doing. What gives?
Take a look at the following chart of unleaded gasoline which might possibly provide a clue. It seems to me that gasoline prices have become a sort of marker as this commodity is perhaps one that has the greatest impact on the general public at large since it is so obvious as price boards for it are stationed practically everywhere one looks. Notice how gasoline prices have formed a double top on the chart above the $3.40 (these are wholesale prices with no federal or state taxes added) and have begun to come down having fallen some 55 cents or so over the last few weeks.
However, they still remain quite expensive by historical standards and are more than 16% expensive than last fall. My guess is that the policy makers understand full well that any certainty in regards to the advent of a new round of bond purchases by the Fed would turn this chart to the upside faster than one can say "Whoa Nellie".
It is very difficult to deny that while the Fed attempts to stimulate or to provide stimulus to the economy, if gasoline prices rise too highly as a result, it tends to short circuit the impact from such stimulus as higher gasoline/energy prices in general have a depressing or slowing impact on overall economic growth. I suspect that the Fed is hoping and waiting for speculative selling to push gasoline prices even lower yet so that the next round of stimulus will have gasoline prices back closer to levels seen late last year.
The problem for these Central Planners however remains the same, how do they herd speculative money OUT of the COMMODITY MARKETS and particular the ENERGY MARKETS and yet at the same time keep them from abandoning the EQUITY MARKETS? Remember, the more that people talk up the "SLOWING GLOBAL GROWTH" theme to push commodity markets lower the harder it is to justify stock prices at current levels. AFter all, what is good for the goose is also good for the gander and if the prices of basic commodities are plunging due to slowing growth concerns, then it is extremely difficult if not downright impossible to talk up the stock markets. Rising stocks need an economy that is growing and strongly rising stock prices need an economy that is growing strongly. You cannot have rising stock prices and falling commodity prices simultaneously as it is a logical aberration.
While the ESF and other entities would like to see this aberration - notwithstanding the impossibility of it occurring, if push comes to shove and they have to choose between falling equity prices or rising commodity prices, they will opt for the latter every time, particularly in an election year.
