"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Thursday, February 28, 2013

Monthly HUI and Gold Analysis

Here we are at the end of yet another month during which the mining shares have lost ground. This makes five months in a row of lower prices.

Given the continued weakness in the sector, I thought it helpful to try to take a look at the monthly chart to see how things now stand from a technical analysis standpoint.

Comparing this downleg that began back in September 2011 to the previous downleg that came on the heels of the inception of the credit crisis of 2008, we can see some similarities. I am using standard Fibonacci retracement levels for comparison's sake.

If we look first at the 2008 selloff, we can see that it occurred over an 8 month period in which prices peaked in March of 2008 and then bottomed in October of that same year. The retracement in prices broke all of the important Fibonacci levels including the 50% retracement level AND the 61.8% level. It was not until prices hit the last remaining retracement level at 75% that the bottom was formed.

Looking at this decline, which began in Sep. 2011 and has been ongoing for 17 months now (with only 6 months that prices closed higher) we can see that while the 50% retracement level has been violated (it was taken out this month after having served as support ), the 61.8% level has not. That level currently comes in near 337. At this point, given the monthly close near the monthly low, odds favor a move towards this level.

This must hold the decline or price will more than likely move to the 75% retracement level down near 272. I know that is difficult to fathom, but that is what the pure technicals would indicate if 336 or so cannot hold this thing.

Looking at a technical indicator that has generated fairly reliable signals, the thing that stands out to me is that the 2008 sell off produced the lowest oversold reading to date. What is a bit disturbing is that the recent selloff has not moved the indicator down towards the same level that produced the 2008 bottom. In other words, it has more downside possible in a straight up head to head comparison.

I should note here that the 2008 low in the HUI corresponded to 680-700 gold. Gold is obviously no where near that level today but it is the ratio that we are interested in, not the outright price.

The HUI/Gold Ratio Chart indicates a continuation of what has now become a 23 month long trend of the mining shares underperforming or losing ground against the price of the actual metal. During the height or should I say "depth" of the credit crisis in 2008, this ratio hit a low near .2040 before it actually rebounded closing that month of October 2008 at .2699. The following month it moved as low as .2174 before closing higher at .3031.

Let's assume for the sake of argument that the ratio, which at the present time stands at .2242, does hit the same low level made back in October 2008 of .2040. Let's also assume that the HUI stops falling and remains for some time at the closing price of today which is 354. That means that the gold price would have to move back up to $1735 to have this ratio hit the same low that it made back in 2008.

Another assumption could be that the gold price stabilizes here at, let's call it $1580 but the HUI continues selling off. The index would then have to fall as low as 322 to yield us the same ratio low made in 2008. I will refer you back to the first two charts in this post and you can see, that a move towards at least 336 is possible in this index. If gold did not move at all from $1580 and the index dropped to 336, the HUI to Gold ratio would then be .2121. That is actually lower than the second worst reading in 2008 which came in November where it did hit .2174 before the rebound.

Another possibility is that the HUI would have to fall further down with the gold price falling along with it. Obviously there are several different scenarios but let's just say for now that none of them look particularly encouraging.

The big question, which none of us really know, is whether or not this ratio is going to have to move back towards the lows made in 2008 before these shares can put in a lasting bottom.

Note that I included some Fibonacci retracement levels on the ratio chart to show you that while the ratio did violate the last Fibonacci retracement level possible, the 75% level, that is did close both the month of October 2008 and November 2008 above that level.

Lastly here are some price charts for the actual metal. I cannot emphasize enough how critical it is that gold does not violate the support levels shown on this chart.

A WEEKLY CLOSE below the last level of support near $1525 - $1520 would do very serious damage to even the long term trend in gold and would suggest a deeper retracement. Note that the 38.2% Fibonacci retracement level on this weekly chart comes in precisely at the horizontal support level I have lined out on the chart. That is near $1534 - $1535. That is the first level of support. Just below that is $1520. There is nothing, and I mean nothing that I can see on this chart with the exception of a bit of a blip near $1480 that could stop the price from testing the 50% retracement level near $1415 should the red support lines give way.

My suspicions are that if the S&P 500 takes out its overhead support resistance near 1520-1530 on a weekly basis, gold will take out that $1535- $1520 support level on the downside. I hope not, but we have to be objective and try to see this thing for what it is at the current time. Do you not find it ironic that in both cases, the S&P with 1520-1530 on the top as resistance and gold with 1530-1520 on the bottom as support that the resistancer and support numbers that mark both markets are identical except in reverse?

Markets can change very rapidly, especially in this age of the infernal computer algorithm, but gold needs something to bring back its sponsorship among the big players. Let's see what the month of March will bring us. Perhaps it will come in like a lamb and go out like a lion for gold. We shall see...

U S Dollar Strength Undercutting Gold

We have seen several headwinds blowing against gold over the last couple of months. These have been noted here and include the rush into equities, the general abandonment of the commodity sector by some large players, the notion that the worst for the global economy is behind us, etc.... At to this list the strength in the US Dollar.

It should be noted here that a great deal of this strength has been at the expense of the Japanese Yen, which has seen a strong move lower although it has temporarily stabilized. It has also been due to general weakness in the British Pound, which as you know by now, is in association with conditions that led to last Friday's downgrade of the UK credit rating.

Since Monday of this week however, the Dollar has gained at the expense of the Euro, which has been on the whipping end of the unwind of large one way carry-trade related bets. As the Euro sinks over fears of the growth potential in Euroland and a rise in concern over the austerity programs that were devised so as to alleviate bond market fears over there, the Dollar has now managed to break out to the upside from a 5 month long consolidation pattern.

The USDX has had trouble clearing the 81.50 level. It did manage to do that last week but only barely. This week however, especially when the results of the Italian election were made known, it added some decent followthrough to the upside and looks as if wants to go higher.

There is the potential for a wild swing however depending on what shape or form this upcoming sequestration thing takes tomorrow. If however, the USDX closes out the week above 82, odds favor a run higher towards 82.70-82.75.

The currency markets are incredibly volatile right now as risk trades are unwound and then reinstated. It is quite difficult attempting to read some of these markets due to the big price swings and somewhat erratic behavior of late. REgardless, a higher Dollar will keep some pressure on the gold price. Should the Dollar exhibit a negative response to the sequestration, look for gold to bounce again as it has entered a support region on its price chart.

Wednesday, February 27, 2013

Three Little Words

"Some Time Soon".

Those words were uttered by Chairman Bernanke this morning in the second day of his bi-annual testimony before the Congress, this time speaking before the House of Representative Committee.

The phrase was in reference to The Fed's plan to review its exit strategy from the QE program. Note that the Chairman did not say anything about actually ending the program; he merely stated that the Fed would review its exit strategy sometime soon. This should not be news for it really is innocous on the surface; however, it just goes to show how incredibly sensitive gold is to anything related to this bond and mortgage-backed securities buying program.

What Bernanke stated was that the Fed will be discussing their exit strategy. They are already in discussions about that as was evidenced by the FOMC minutes that came out last week. So what? Any responsible Central Banker must of course be reviewing these things unless they are completely oblivious to the potential for severe fallout from the creation of what will end up being nearly $3.5 TRILLION by the end of this year when you combine QE1, QE2, QE3 and QE4.

Bernanke spoke to this topic yesterday when he addressed the weighting of the potential risks associated with this degree of QE against the costs of not doing QE. In his opinion, the risk of not doing the bond buying program outweighed the costs of the harm done to the economy ( in his opinion of course). He went on to speak about the aid the program gives to those buying cars, houses, etc, as opposed to the harm the Fed is inflicting on savers. He also spoke to the harm done to those who are unemployed by doing nothing.

In short, you can get a glimpse into the nature of the discussions taking place within the FOMC over all this but it does seem pretty clear that the doves are still in ascendancy in regards to QE and the current monetary policy.

Why this would derail gold is therefore unclear, especially if the reason it did rally yesterday was due to a widely expected continuation of the QE program. As far as I can read this, the Chairman did not offer any changes of note to his comments of yesterday.

Part of what we are seeing in gold (and nearly all of the other markets) is the confusion, uncertainty and lack of clarity as to where all this "boldly going where no man has gone before" adventure in monetary policy by the Central Banks of the West is leading. Is it "RISK ON" and full speed ahead with the hugely leveraged carry trades or is it time for the sidelines? Are interest rates going lower or will they move higher? No one really knows because of the speed at which sentiment can shift globally.

The problem for gold has been and continues to be, the mining sector as evidenced by the HUI. It did manage to fill the first downside gap on its daily chart yesterday but could not even manage a decent close INSIDE THAT GAP. Simply put, the mining sector is so weak, even though it is so oversold, that it is undercutting any strength in the bullion. As I type these comments this morning, the S&P 500 is up nearly 1.3 % while the HUI is down nearly 1.8%. It is that bad.

Yesterday I spoke about these spike lows and how dangerous that they are to trade because of the extent of the price swings that produce them. Here today we are seeing what happens to markets that plunge, reverse sharply higher only to plunge again. I want to repeat what I said yesterday" "TRADE SMALL OR NOT AT ALL". There are times to be aggressive and there are times to be cautious. This is a time to be cautious. Do not be foolish with your trading accounts. Please listen to this as I am trying to prevent some of you from taking foolish advice and getting harmed in the process.

So what if you do not manage to grab an exact bottom or exact top in the market. Guess what? the market will be there tomorrow and the next day and the day after that. You can always wade back into the water once the sharks stop stirring it all up. If on the other hand you like playing Russian Roulette with your trading account, please by all means, throw caution to the wind and go ahead and jump right into the market. All I can say is that you had better be fast on the buy or sell trigger and have a very large trading account that you can be content with as it becomes a very small trading account.

By the way, for the last time, gold is NOT IN BACKWARDATION. Those who keep pushing this nonsense are going to end up hurting many of you who blindly jump into the gold market to buy the futures only to have your rear ends handed to you as the market is doing today.

BAck to the HUI, I need to see this index trading through and above 390 to suggest a longer term bottom has been made in the shares. That will tell us that sponsorship has returned to this sector. Right now there is valued based buying but it cannot force the sector higher by itself. It needs momentum based buying and that is simply not here right now. maybe that will change soon. I do not know and truth to told, neither does anyone else. We are all just watching and trying to read the tea leaves in a very cloudy cup.

For example, if you would have told me two days ago, when the news of the Italian election outcome hit the wires, that stocks would be oblivious to the potential for real harm to occur across the Euro Zone, I would have said that you were blindly optimistic. Yes, stocks cratered on that news as the RISK TRADES were jettisoned with contempt yet here we are, two days later, and the S&P 500 has practically made it right back to the closing level of Friday's trade last week. In other words, the Italian election results, which struck a sharp stinging rebuke to the complete complacency that has enveloped the minds of traders/investors, never happened. We all just imagined that it did. Can you see what I mean by either trading small or not at all.

Closing words, be extremely careful right now. This is not a time to try being a hero lest you end up becoming a zero.

Tuesday, February 26, 2013

Bernanke Attempts to Soothe Markets; Euro Fears Rise

In his testimony before the Senate this morning, Chairman Bernanke did his level best to assure the markets that the Fed was not about to upset the apple cart anytime soon. Even before he actually began his testimony, the transcript of his speech had been released and that was enough to send market prices all over the place.

I have seen some volatile markets in my day, but the last two days worth of price swings have pretty much been as high or higher than anything I have ever witnessed, particulary in the foreign exchange markets. To see the swings in the Yen, one would think that a Central Bank intervention had taken place. Four point handles in one day -YIkes!

What is happening is that risk trades are being unwound and just as we have previously witnessed during any unwind period, markets that were one way bets, now are seeing huge swings in the opposite directions as hedge fund computer buying and selling is on full display.

I can tell you that the Yen, which nearly everyone on the planet had been short, no matter what cross was being used, has seen a massive, and I do mean MASSIVE short squeeze, much to the consternation of the Japanese monetary authorities i might add. Watching their currency once again become the destination of safe haven plays has got to be downright infuriating to policy makers over there, who have made no small secret that a lower yen plays a major role in their strategy of defeating the DEFLATION giant that has had its heavy hand on their economy for what seems like an aeon. If the Yen keeps rallying, look for them to make their displeasure known VERY VOCALLY. The new ABE government is not going to tolerate a strong yen, period!

If you are trying to trade some of these markets, either be content to snatch a few small profits if they come your way, or just get to the sidelines and let the dust settle from all this madness. "TRADE SMALL IF AT ALL",  is my motto right now.

I want to add here that Italian CDS's are moving sharply higher today, surpassing even those of Spain for the first time since December 2011. Clearly, the market is becoming increasingly concerned about the developments in that nation since the election returns have become clarified. Trades/investors fear gridlock in the new government as a result of the lack of a clear majority and this is being viewed as negative to the Euro currency. As a result, the one way long bet on the Euro associated with the return of the risk trades, is now being unwound. This is causing some strange price movements in many of the crosses which are not supported fundamentally for the time being.

This brings us to gold. It is seeing some strong safe haven flows today along with the bonds and the yen. Bernanke's comments were pretty much anticipated to be gold friendly and he did not disappoint. It was interesting watching the initial reaction to those comments however. Gold at first seemed to be unimpressed as it moved down off its best levels ahead of his speech and actually went negative for a while. Then it seemed to catch a new wind and ran back up to the $1600 level from which it had initially been repelled earlier in the session. This time however it appeared that some big bids were able to take it through $1600 and off went the buy stops. The market hesitated again near and just below the $1610 level before finally blasting through it as well. This time the momentum from nervous shorts was enough to take the price towards $1620 before it finally ran out of steam and stabilized.

Near term, the ability to recover its "16" handle and hold on to that has got to make the bears disappointed. What needs to be seen however is whether or not the physical market will be willing to chase prices at these higher levels or whether that demand will drop off. It was certainly amazingly strong below $1580 as evidenced by the premiums quoted by John Brimelow's Gold jottings.

So much depends on the market's view toward risk once again. the Central Bankers had to have been quite pleased with their handiwork as they had managed to herd the entire global hedge fund community into leveraging up those RISK TRADES and making one way bets in favor of equities and pretty much out of favor of safe havens. The fact that the US bond market would not break down significantly in the face of this "All's Clear" mentality certainly has to be taken into account however. While one safe haven - gold - was being jettisoned, the bond market was tracking sideways. Yesterday and today that market moved higher with the result that interest rates dropped lower once more.

We will want to closely monitor this relationship between the US bond market and the US equity markets to see what kind of clues we can glean to as where market participants are positioning themselves as they look ahead.

The day is not yet over but while the S&P 500 is in positive territory, it is certainly down off its best levels of the day as I type these comments. If this index closes into negative territory at the end of today's session, LOOK OUT, is all that I can say. What major elixir will Ben have to provide it at this point seeing that he has already administered his potion this morning.

Let's see how things settle out today. Trying to draw too many conclusions before the day's trading is over is not the course of wisdom on a day like this one.

Lastly, to see how risk aversion is back in vogue as concerns the Eurozone, Gold priced in both Euro and British Pound terms is quite strong today and is moving smartly higher. It's biggest gains is in terms of the Euro which has suddenly seemed to have fallen out of favor with the leveraged crowd.

In US Dollar terms, gold has given a short term buy signal on the charts. There is heavy resistance lurking ahead of it beginning at today's high near $1620 and extending to $1630. If there is enough buying in the physical market overnight, there is a chance that another bunch of buy stops sitting just above $1625 could be vulnerable.

I am including a chart of the metal to show the dip in the ADX which indicates that the near term downtrend in the market has been broken. If gold can climb back above $1640, it will have pulled off quite a feat, especially seeing that Goldman Sachs just lowered their 2013 price estimate for the metal.

Quite frankly I do not like trading spike bottoms because the risk/reward on the trade can oftentimes be rather discomforting. I much prefer and will prefer in gold, were it to retest the $1600 level to at least see if it can hold that. Markets that show huge losses, followed by huge gains, can suddenly and abruptly turn right back around and  show huge losses again. That is the nature of those beasts. More well behaved, or if you will, more orderly markets, are much more to my liking as a trader. My gunslinging days are over as the highs are too often followed by periods of excessive lows and depression. Give me a market that tips its hand a bit more clearly and allows one to at least leave the screen for a few minutes.

The HUI has managed to fill the first and lowest downside gap on its price chart. This index has dropped so sharply and is so oversold that it is well beyond due for a bounce. Let's see how high it can carry. Anything that stops short of 390 is going to be a disappointment. If it is going to give us any protracted strenght, that is the least it will need to clear.

Monday, February 25, 2013

Oh Bennie Boy, the Pipes, the Pipes are Calling

WOW! a bit of news out of Italy and it's ABANDON SHIP for stock market bulls. This coming a mere two days later after I posted my little piece about stock traders ignoring a downside technical reversal signal on the charts. Talk about a rapid shift in sentiment since then!

That news from Italy was enough to put Euroland back on the radar screen of traders after it had been completely erased since the Europeans began their bond buyiong program. The fear is that Italy will be gridlocked due to the election results that have been coming in and render it unable to comply with requirements for these continued bond purchases. The of course brings the stability of the Euro back into question.

That currency was spanked quite rudely today as the Italian news hit the markets. What aggravated the move lower in the Euro was a huge short squeeze in the Yen, that hit the Euro_Yen cross further exaggerating the Yen's move higher and putting additional downside on the Euro-Dollar cross.

The Euro and Yen have both been a sort of proxy for the risk trade with the Euro moving higher and the Yen moving lower as traders felt comfortable assuming risk once again. With risk aversion today's mood, those two currencies reversed their recent trends.

A lot therefore depends on what Chairman Bernanke is going to say when he gets before the Congress tomorrow. Will he whisper sweet nothings to the ears of equity bulls or will he strike a more cautious note? I for one will be greatly suprised if he says anything more about an early cessation to QE. He must certainly know that his words will be parsed with a fine-toothed comb.

The S&P 500 dropped so sharply on such large volume, that it sent the VIX, the Volatility Index surging over 35% today. Talk about rattling the complacency cage.

The S&P will need a lot of help from the Chairman tomorrow in his testimony to prevent a further move towards the Target level I have indicated on the chart. The Directional Movement has not only indicated a halt in the strong uptrend but has generated its first sell signal since December of last year. The loss of upside momentum that had been noted finally caught up to this index today. Quite frankly, there was a very large wave of selling - quite different than what we have been accustomed to when we have seen dip buyers eager to jump right back in. They appear to have been rattled for a change and look to be waiting for a bit deeper correction before plowing back in. By the way, that Directional Index sell signal back near Mid-December of last year was quickly negated by subsequent action. I honestly have no idea what the index is going to do tomorrow - everything depends on how the market interprets Beranke's comments.

Gold showed some signs of life today as it moved up in terms of the British Pound, the Euro and of course the Dollar. I will not be too impressed with gold until I see a handle of "16" in front of this metal that remains there. That will tell us that the spike down towards support near $1550 was a temporary bottom. It is not unexpected to see the metal bounce from its first test of that critical support level; however, to convince me that this is anything more than a type of Dead Cat bounce, I want to see that "16" handle PLUS a clear upside break in the HUI. Gold has found a base of support here about $1550 but specs are still favoring trading it from the short side so we want to see how it handles tests of upside resistance.

The HUI was rather lifeless today given the nice pop higher in gold settling well off its best level of the day. That index has been a drag on the gold price for some time now so if we see it begin to lead to the upside for any reason, a great weight will have been lifted off of the actual metal.

There are several downside gaps that need to be at the very least filled, before this index will give an all clear signal. Aggressive traders can buy shares but please be sure to use sound money management strategies. Don't forget the trend is down so one buying must know that you are going against the trend. Just be careful. You can end up a HERO or you can end up a great big fat ZERO. That is not my style of trading but I realize that we have many wild-eyed specs out there who love taking reckless chances with their trading accounts.

Saturday, February 23, 2013

Stock Market Ignores Downside Reversal

Apparently the equity bulls are right back to work after "suffering" through a whopping two day correction in their permanently rising stock market. As you know by now, stocks took a beating on Wednesday when the FOMC minutes were hinting at some internal dissension among some of the various FOMC members in regards to the duration of the QE program. They then saw further selling on Thursday but come Friday, were right back up again completely erasing the losses of Thursday and cutting into the losses made on Wednesday.

It appears that traders have now come back to the view that the loudest voices in favor of cutting short the extent of QE were coming from the NON-VOTING members of the FOMC. The talk now has become that the VOTING MEMBERS are not going to cut anything short anytime soon.

I expect Bernanke to say as much in this coming week's appearance before the Congress on Tuesday and Wednesday.

If that is the case, and Ben issues soothing words to the crack addicts, then expect the equity bulls to go right back to doing their thing and driving stock prices relentlessly higher. If he even hints at some sort of agreement with the early cessation of QE, then Katie bar the door for stocks. We will certainly be watching very closely to see how the precious metals respond to this.

Notice the chart below - I have set up two indicators for you to observe. The first is the ADX or Directional Movement Indicator that it is more commonly known by. The black line is the ADX. IT rises in a trending market and falls when the market is not trending or in the process of consolidating (market tends to move sideways). Note that the BIG DOWNSIDE REVERSAL pattern in the S&P 500 that I noted earlier this past week caused that line to finally turn lower. That indicates a break in the uptrend. That being said, there is still no sell signal in this indicator. At this point it is indicating a pause, nothing more.

Normally, one of the most powerful technical indicators is one of these downside reversal patterns that come on huge volume. Typically they portend the end of an uptrend, especially one of such long duration and one which has experienced such few corrections over its course. To witness the eagerness of buying which we saw Friday is therefore no mean thing! You talk about "animal spirits" of investors. These guys are so juiced up that they could power light bulbs with their bare hands!

Note also the indicator below which I will leave nameless for the time being. It basically measures momentum. What I have been watching since the rally at the beginning of the year has commenced, has been the loss of upside momentum even as this market has made one new high after another. In other words, this market keeps grinding higher and higher and higher even as more and more momentum or upward energy is dissipating. I get the sense of a market that is at levels that are so ridiculous that more and more traders are getting increasingly nervous yet no one wants to aggressively sell the thing out of fear of the Fed's punch bowl.

We have seen what will happen to this "national security concern" if it believes that Uncle Ben is going to beginning preaching the virtues of monetary sobriety. Is there anyone out there who genuinely believes that the Fed is going to make sure that it crashes the stock market? Just who is in control here - the investing/trading class which just pitched a hissy fit over the FOMC minutes or the Fed which has now become captive to its own QE program.

Think about what we are witnessing here - The nation is addicted to cheap money as much as it is addicted to hedonism and vice and yet the Fed cannot pull the plug or more aptly, cut off the supply of the drug for fear of killing the patient. Our political leaders cannot cut a measely 2 pennies out of a dollar's worth of spending without telling us that Armageddon is about to occur; the madman running N. Korea is working on intermediate range nuclear missles and is even disturbing its only ally, China by so doing; Gasoline prices are topping $5.00 in some locales; Social security tax increases are hitting the entire working population and further scrimping already dwindling disposable income; health care costs are going UP not DOWN as we were assured that they would be once the grossly misnamed "Affordable Health Care" act was deceitfully rammed through Congress; we've got surveillance drones flying all over the damned country spying on us and yet everything is just peachy keen...

I have said it before and will say it again as much as it pains me to do so; America is going the way of ancient Rome as surely as the sun rises in the East. The Fed is doing the modern version of coin clipping. What is next, price controls under edict of death for merchants who hike them? No worries however - the stock market is rising so all is right with the world.

Trader Dan Interview at KIng World News Metals Wrap

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


Friday, February 22, 2013

Silver Specs Reduce Long-side Exposure

This is by request....

The big hedge funds are also exiting from the Silver market as they have been doing in gold but not near to the same extent. The reason is because of silver's industrial use. As a monetary metal it is experiencing selling tied to money flows leaving other sectors and flowing into equites; however, those same money flows, with many looking at the so-called "improving growth" scenario, are finding some of their way into the metal on the way down.

We do need to keep a close eye on the copper market however for if hedgies begin to get bearish on copper, it will be a tough order to keep them bullish on Silver. As of this Friday's COT report, hedge funds remain net long in Copper although they have trimmed that exposure by nearly 12,000 contracts through the reporting period.

Silver bulls do not want to see downside support near $26.25 - $26.00 give way for ANY REASON. It has been a solid base for more than a year and a half and has always attracted very substantial buying near those levels. Value based buyers see the metal as cheap down there. If, and we do not know at this point, if the metal were to test this level and rebound, it would indicate their activity and should bottom the metal. Still, from a momentum based view, it needs to clear $30 to get any excitement going on the part of the bulls.

One last thing - since I caught a lot of flack over my article on Backwardation by some of the uninformed out there who are always ready to swallow the latest nonsense, so long as it confirms their perma-bullish views, I wish to merely state that I hope you have learned something by the experience.

Markets will bottom when they are ready to bottom and not because someone "insists" that they must bottom in order to generate more traffic at a web site and thus reap more money from the Google Ads people. There are way too many in the gold community who seem to have some sort of perverse narcissistic addiction to constantly calling for bottoms (and tops I might also add) no matter what the price action is indicating. It is one thing to have a long term bullish view of gold; it is quite another to dredge up one story after another predicting with each one that a bottom is now imminent in the gold market.  

There is a time when markets go up and a time when they go down. It is really that simple. When the perceptions of market players change (and who among us knows precisely when that will occur?) then the price action will change.

Right now the perception among the majority is that gold's run is over. I am not saying that it is; I am merely telling you what the perception is. This is why gold is seeing so much heavy selling. This is what moves markets. When the conditions change so will the perception. Then those who were rushing to sell gold will be rushing to cover shorts and buy it all back or go long.

The key is in reading the price action on the chart for that is all technical analysis really is; a way to measure changes in perception towards markets.

To summarize - hedge funds are growing very bearish towards gold. They are doing so however now that gold has reached levels commensurate with former levels at which Asian Central Banks were very active as buyers. If the physical market buyers surface in size near current levels, there is fuel for an active short covering rally to squeeze some of them out. However, as long as the equity markets remain the place to be for hedge funds with money to invest, gold is going to struggle to find enough of these momentum based buyers to drive it sharply upwards. For that to occur, we need something in the status quo to change in order to shift perceptions back in favor of gold buying by speculators.

Perhaps Ben Bernanke's testimony in front of Congress next Tuesday and Wednesday will prove to be the Midas touch for gold. We will have to wait and see what he says then. My guess is that he is not going to upset the apple cart as he knows full well what is going to happen to the US equity markets if he even hints at ending this program of QE sooner than the end of this year.

Again, I am not saying that gold cannot rally; it is certainly oversold and due for a bounce; however, rallies are going to be sold until we get some sort of technical chart confirmation that indicates a change in the near term trend has occured. Currently that trend is lower.

Incidentally, in the late afternoon here on Friday, news hit the wire that Moody's had stripped the UK of its AAA rating. That was enough to send the British Pound sharply lower in very thin trade but it also saw gold goosed up into positive territory. We will want to see how the market reacts Sunday evening and early MOnday morning after a weekend to digest the news. Gold priced in terms of British Pounds moved up rather strongly on the news.

here is the British Pound priced gold chart with some notes.

Speculators Exit from Gold Market Continues

This week's Commitment of Traders report indicates a continuation of the trend that has been in place for some time now when it comes to gold, namely, the mass exodus of speculators from the gold market. Not only that, more and more hedge funds are playing gold from the short side of the market expecting lower prices in the future.

The following chart pretty much says it all. Take a look at the sharp drop in the number of outright long positions hedge funds are holding. Do you see the plummeting line. Is it any wonder that gold is plummeting lower? And what makes it even more noteworthy, is that this report DID NOT PICK UP the plunge through $1600 on Wednesday and the subsequent further pressure down towards $1555 the remainder of the week.

Note also the sharp spike higher in the number of outright shorts among hedge funds. This week alone this group was responsible (through Tuesday) for a total of nearly 28,000 contracts sold when you take into effect both their long positions being liquidated in addition to fresh new short positions. My oh my has sentiment towards gold changed!

By the way, the outright short position in gold being held by hedge funds is the largest that I have in my records going back to the beginning of 2006. I do have further dated records but have not bothered checking them. Let's suffice to say, that it is the most bearish hedge funds have been on gold in SEVEN YEARS! When one considers that the Fed has pumped or will pump nearly $3.5 TRILLION into the economy by the end of this year, increasing the money supply exponentially, this is nothing short of an economic miracle to see gold so comatose. You have to hand it to these masters of the Universe at the Fed - They have suspended the laws of economics with supply and demand no longer meaningful.

Not only have they managed to kill the canary in the coal mine but they have simultaneously made it appear as if the canary, and everything else in the mine, is just fine and dandy. Welcome to the Brave New World of the Modern Day Alchemists. Apparently prosperity in a bottle can indeed be created. Pity the ancient Romans; if they had only had their version of the Federal Reserve. We all might be speaking Latin nowadays and Caesar might still be ruling from the eternal city. 

Copper Woes

Copper began a strong rally into the end of last year, followed by a selloff with a resumption of the rally into a new high for this year in February. Since that time however it has been straight down for this important bellwether metal. Today's selloff in the red metal marks a brand new low for 2013 and the matching of a nearly 2 month low.

A couple of things are at work here. First, traders fear Chinese action to ramp down speculative fever in the housing sector over there. The concern is that any slowdown in Chinese building, no matter what the source, is not good news for Copper.

Secondly, there continues to be a general theme of selling commodities by hedge funds here in the US as evidenced not only by this chart, but by the CCI (Continuous Commodity Index) chart as well.

I believe we will want to keep a close eye on this market. With the US equity market once again moving higher today while copper moves lower, there is a divergence that needs to be monitored. I personally believe copper is a much better indicator of future expected economic activity than is the US stock market, which has become a bubble fueled by investors chasing "it is the only yield game in town". Ultra low interest rates, courtesy of the destroyers at the Fed, have sent high octane money flows into stocks. At some point that game is going to come to an ugly and ignominious end. I am just not sure when. Seeing these guys pouring back into equities in spite of the massive high volume reversal day posted this week is quite extraordinary.

The bullish fever refuses to die. What is particularly worrisome to me is seeing the huge outflows from money market mutual funds. Those funds, which are taking some rather reckless risks to try to obtain some sort of return in this insanely low interest rate environment (can you tell by now that I despise the Fed for what it has done to punish savers and retirees), are watching their investors leaving in droves to go and chase the stock market higher. This sort of herd mentality is precisely what the Fed has wanted but it is also precisely the same sort of foolishness that sets up those latecomers to the stock market for serious losses.

Forget all that claptrap being spewed out of the mouths of the various Federal reserve officials when it comes to their "mandate". The Fed has become nothing more than a serial bubble blower and a manager of the mess inherent in such things.

Thursday, February 21, 2013

A Little bit of Fear?

Yesterday's downside reversal in the S&P 500, coming on the heels of the FOMC minutes, combined with a cornucopia of Central Bankers taking to the microphones today, seems to have FINALLY jolted the complacency of the Equity Perma Bulls. The Complacency Index, my name for the Volatility Index or VIX, has jumped quite sharply as signs are beginning to emerge that yesterday's FOMC minutes have rattled those who have somehow been hypnotized into believing that Central Banks have a magic can filled with magic beans that magically make all problems go away into never, never land, never to be seen again except in the dark recesses of our imaginations.

Here is a look at the chart that has gotten the technicians extremely concerned....

The extent of the stock market rally that we have witnessed since the beginning of this year alone is proof in my mind that investors can be herded into unthinking behavior faster than the word, "oligoply" can roll off the tongue.

Let's be honest here, the entirety of the stock market rally has been fueled by hot money courtesy of the Federal Reserve's Electronic Printing Press. It began with it back in 2008 with QE1 and has continued ever since then. Yes I know some point to corporate profits and signs of improving growth but does anyone out there genuinely believe that this economy can withstand higher interest rates? If the growth is so solid and the path to recovery is so entrenched then why is the Fed still continuing to conjure $85 BILLION each month that it might have it injected into the economy. Come on already....

The current fiasco involving the so-called "sequestration" in Washington DC has served to remind the saner among us that the US government is on a path that can only be termed "madness". The projected deficit for this fiscal year is over $ONE TRILLION. In a deficit of this magnitude, talk of even slowing the rate of spending increases (Washington DC speak for a cut) has brought out all manner of apocalyptic doom scenarios. What idiocy is it that grips the mind of these people? They are intent on bankrupting the nation. Historians paint a picture of the Roman emperor Nero supposedly fiddling while ROME BURNED. The current crop of leaders has certainly nothing on him. Matter of fact, they make Nero look downright statesman-like by comparison.

Here is the VIX CHART. Notice the sharp spike higher. Keep in mind that the only reason it had spiked higer in late DEcember of last year was over fears involving the now infamous "fiscal cliff".

Gold finally had some upside movement off its worst levels as it is seeing a bit of a reprieve from the nearly nonstop selling that has hit it since it took out support at $1640 last week. My buddy John Brimelow's excellent "Gold Jottings" reports very good premiums being paid for Gold by Indian buyers overnight. Demand was strong in Asia for the physical metal.

While the bounce is welcome, it does not look particularly impressive at this point. I suspect that there are more guys looking to sell rallies right now as they were caught long in gold and did not get out during the initial break towards psychological support near $1550. As I stated in yesterday's missive, gold needs to get back above $1640 to spook any of the shorts except for the most weak of hands. A move through $1620 will get some of them nervous enough to be ready to exit but the sentiment seems to be to wait around to see if the rallies have any staying power before exiting.

Something worth noting here, the Yen had a sharp rally, lots of short covering, as it and the US Dollar still remain safe haven currencies for some unfathomable reason. That implies a sharply weaker Euro and that is exactly what we saw today so far. The Euro got kicked in the groin by risk aversion trade tied to losses in the stock markets. Heck, the long bond finally showed some signs of buying although considering the extent of the jump in the VIX, for it to have trouble holding onto gains above a full point, tells me that there are still an awful lot of guys who want no part of bonds. Perhaps the thinking is if the Fed is going to throttle back on the bond buying program, there is no particularly compelling reason to lock in yields at such ridiculously low levels.

Let's just close today's thoughts with this... for the better part of nearly two months we have seen a near consensus among traders/investors that the Fed policy, in combination with the ECB, the BOE and the BOJ, had guaranteed smooth sailing in stocks. That led to one way trading in equities and in some of the currencies with the return of TRENDING MARKETS. That is the environment that traders, especially hedge funds LOVE. They find it extremely difficult to trade herky, jerky markets that whipsaw them up and down. The hedge funds were happy; the Central Banks were even happier as they had successfully herded the speculators into the markets they wishes them to ply their leveraged one way bets. All was well with the world, until....

 Yesterday's FOMC minutes have now injected uncertainty back into the minds of enough traders to return us to the wild up and down, nearly unpredictable movements of yesteryear. We'll have to watch these things very closely to see if this is the start of another new norm of more wild price swings or if we can return to the one way trades that marked the beginning of this year. Keep an eye on the Euro as it will give us some clues.... other than that, we are all trying to watch to discern what comes next. No one ever said this business was easy.

Wednesday, February 20, 2013

HUI to Gold Ratio

By request....

HUI has "Issues"

The mining shares still continue to sink lower seemingly unable to attract sufficient buying to stem the flow of red ink being seen across the sector. As a fundamentalist, I think one can make the argument that some of the leading shares in the sector are severely undervalued against the price of gold; however, as a technician, one has to respect the chart action be that as it may.

I am presenting a monthly chart but wish to note that the last trading day for February has yet to arrive so there remains sufficient time for the index to recover. It is however flirting with some important chart support level. I thought that the index might have found enough buying near 380 to bottom it. That is evidently not the case.

What concerns me with this chart, and again, the month is not yet out, is the fact that the NEGATIVE DIRECTIONAL INDICATOR is at its highest level since the move lower in the middle of the credit crisis of 2008. The bottom of that move lower in the index was accompanied by the peak in the negative DMI near the 30 level. This -DMI is currently sitting at -26.53. I have noted this level on the chart with a dashed red line.

One might make the argument based on this alone that the shares have now reached oversold levels commensurate with a bottom. That might be true but as of right now, we do not have any technical confirmation of such; we only have an extreme oversold reading based only on this particular indicator. You will notice the lack of any white candle whatsover. In other words, there is no buying in size sufficient to absorb the continued selling occuring in the sector. There is buying just not enough of it.

Here is the problem, the ADX, the solid navy blue line, is rising even as the -DMI is rising while it is above the +DMI (the blue line). That only happened very briefly back in 2008. Keep in mind that a rising ADX indicates the beginning of a trend but generally it needs to get above  the 20 level to be valididated.

BAck in 2008 as it began to turn higher while above the 20 level, the Fed announced the inception of QE1 and that put an abrupt end to the slide in the gold shares, as well as everything else on the planet it seems. Now, we are witnessing the rising of the ADX (it is still below 20) with chatter that the Fed will end the QE sooner than expected. I personally do not believe that they can but what i believe is of no consequence when it comes to what the majority of hedge funds/large investors believe.

While not a particular fan of Head and SHoulder patterns for predictive purposes (those patterns are highly overrated), it should be noted that the index is sitting right on the neckline. A breach on a montly closing basis would get the bearish chatter going even more against this sector but traders need to pay attention regardless.

There is a band of congestion near 320 - 310 that should attract enough buying to at least drop the index into a congestion pattern at a bare minimum should price get there. Let's hope it does not for the sake of those long suffering gold share bulls.

One last thing, you will notice that the HUI tends to make SPIKE BOTTOMS when it finally does exhaust the selling pressure. If it can do this before the end of this month and recapture the 400 level in the process, it should be a fairly reliable signal that the worst is over. We simply have to wait and see.


Euro Gold Below 1200

Since July of 2011, forays in gold priced in Euro terms, have been met with solid buying on approaches towards 1200. Only ONCE over that time period did gold end the week below this psychological support level. There was no downside followthrough however and the price rebounded the following week moving back towards 1320 before faltering. The week is still young but the gold price has now fallen below this level with today's sharp move lower.

Some of what we are seeing today in gold is tied to selling ahead of the release of the FOMC minutes for January. Traders/Investors continue to fear a more hawkish tone to the minutes with a rising number of voices perhaps calling for an ending to the QE program sooner than expected. That remains to be seen given the extremely tenuous state of this so-called "recovery" but this is the current thinking for whatever that is worth.

It is no different over in Europe where many believe the worst is now behind the region and has been the case over here in the US, money flows are moving into equities and exiting gold for the time being. Any reversal to the downside in the equity markets there, and here as well, would change that mentality quite rapidly were that to occur.

There is a spike low down near the 1150 level made in September of 2011 that is the last line of bullish defense for the euro gold bulls should the weekly close be below the 1185 level. In a sense, this corresponds closely to the $1550 - $1530 zone on the US Dollar priced gold chart. Bulls would not want to see this level give way without an intraweek recovery as it would portend even lower prices

As far as the US Dollar priced gold chart goes, support at $1600 was crushed with the market attracting fresh short selling on the break below last week's low just under $1600. There is no support just below today's session low on the chart until price nears $1565. Below that, should it fail, is the $1550 level. That one is a biggie. Should it not stem the bleeding, gold is going to test $1535.

Some data providers are showing that the 50 day moving average has already managed to cross below the 200 day moving average, the infamously known "Death Cross". My data does not yet show it although it will probably do so within the next day or two. Either way, technical analysts will view this as further confirmation of a bearish trend in gold prices.

The ADX that I have been including recently picked this up much sooner than the death cross occurence itself. It continues to rise with bearish momentum increasing as it has picked up the fund flows OUT OF GOLD and FRESH SHORTING. The market has fallen rather sharply 7 out of the last 8 trading sessions, so it is perhaps due for a bit of a bounce but expect rallies to be sold unless gold can get back above $1640 for a bare minimum. Even at that, bulls will not be out of the woods until price can move past $1660 - $1665. The bears are currently in the driver's seat.

Physical market buyers of size as of yet do not seem to be interested in moving in right now. Let's see if we can spot their footprints when they do.

I should also note here that the Continuous Commodity Index or CCI, has been getting worked over rather harshly the past week. That is continuing this week. I am getting reports of several large funds and banks exiting commodities due to the sector's poor performance over the last year.

Have to hand it to the elites at the Fed - they have managed to conjure into existence with QE1, QE2, QE3 and now QE4, trillions of dollars out of absolutely nowhere without the least bit of negative impact on commodity prices ( for now!). They have concocted a perfect world in which equity prices move steadily higher, interest rates remain stable at ultra low levels and commodity prices, while higher than several years ago, show no significant impact from the huge increase in liquidity.

Brace yourselves for the potential for some wild price swings when those FOMC minutes are made public.

Monday, February 18, 2013

Sterling Gold Consolidating

Sterling Gold, or Gold priced in terms of the British Pound, displays a chart pattern not unlike that which we have recently seen in US Dollar priced gold, prior to last Friday's sharp downside break.

It is in a consolidation pattern dating back to the summer of last year. Dips below the 1,000 Pound mark have been met with solid buying but the metal has not been able to overcome downtrending resistance. Note that the pattern is forming that same wedge pattern that we saw in US Dollar priced gold.

Note the Gold price in terms of the Swiss Franc, or Swissie Gold. The pattern also reveals a market in consolidation; however, it is now moving down towards the bottom of the channel that has confined price since last summer. Price near and below 1450 Franc has attracted buying consistently, so far.

See also this Euro Gold chart which displays a consolidation pattern much like the Swissie Gold chart above. Gold is probling the lower boundary of the channel noted and is moving towards the 1200 Euro region. Since last summer, buyers have surfaced in this area.

The reason I am noting these three charts above is because unlike the US Dollar priced gold chart, they have not yet broken down technically but remain in their consolidation patterns, although it is evident that they are currently weak.

The big question which many of us are asking is whether or not enough valued based buyers will surface in these countries/regions to stem any downside potential and put in place a floor of support. This is simply unclear at this point in time.

The European finance ministers are hoping that hedge funds will continue to move money into European equities as well as European area bonds. If they can herd them into these sectors, money flows into gold might be dented sufficiently to breach the downside support levels indicated on the charts. On the other hand, enough players might just be suspect enough of economic/finacial conditions in the Euro zone and in Britain to want to hedge their bets with the yellow metal. Again, it is unclear. If the gold bulls in terms of the Pound, Swiss FRanc and Euro are ever going to need to perform, it is right here and right now.

I would breathe a sigh of relief if they can push the Euro gold price back above 1270-1280.

I should also note here that while both the Yen and the British Pound have fallen rather sharply against the US Dollar, the Sterling gold chart is no where near as bullish as the Yen Gold chart. Yen Gold is evidencing a pause up at current levels whereas Sterling Gold is approaching the bottom of its range trade.

With gold currently experiencing weakness in US Dollar terms and having violated a strong downside support level, it behooves us to monitor its price closely in terms of some of these other major currencies to see whether this is merely a Dollar priced phenomenon or something a bit more widespread. If it is the former, the move lower in the price should find a footing sooner rather than later. If it is the latter, odds favor more downside in the US Dollar price of gold. Generally speaking, when the gold price is moving in sync against the majors, it is usually trending. When there is a divergence in its price action among the various majors, it normally tends to favor consolidation. Again, this is a general rule, not one carved in stone.

Time will of course make it clear to all of us.

One last thing - seeing that not much came out of this past weekend's G20 summit over in Moscow, we will have to look to the Eurozone to see what level the Euro must trade at in order to get all of them complaining at the same time. Right now it seems that any complaints about the Euro strength are confined to the Southern tier. Germany seems okay with it. If the Germans begin to make any noises then we will need to see how the Euro begins to react.

Saturday, February 16, 2013

Gold Backwardation Chatter

I have been receiving a fair amount of emails asking my opinion on a recent article chatting up "Gold Backwardation". The unspoken inference from the article is that this is bullish for gold.

Let me state two things before proceeding. Number one - I am a trader and make my living by so doing. If I am on the right side of the market, I make money. If I am not, I lose money. It is that simple.

Johnnie one notes cannot trade and make money because they are only always on one side of a market. IN the case of gold, that means that they are always long. Markets go up and markets go down and if you on the long side of a market going lower crashing through support levels, guess what.... You are losing money, sometimes lots of it. Leverage is your friend on the way up if you are long; it is the grim reaper if you are long and the market is dropping lower and lower.

My advice to those who are using futures to trade gold and are not getting out of losing long gold positions while their commodity trading account is imploding - be prepared to suffer large losses to the extent that your potential career as a full time trader will come to an abrupt and rather inglorious end. You have heard it said by myself and others who do this for a living; "Cut your losses and get out of a losing trade when support levels get violated". That is called sound money management. Failure to do that and instead rely on HOPE is a novice's error. HOPE is not a trading strategy.

Do you honestly believe that a hedge fund computer algorithm really gives a damn what yours or my opinion is of a market? Those things are going to sell as long as the signals tell them to sell. When they stop, the market bottoms.When they stop is anyone's guess. That is what the charts are for.

Sometimes as a trader it is best to simply head to the sidelines and do nothing rather than keep trying to catch a falling knife. The market will bottom when it wants to bottom and not because some guy writes an article extolling the virtures of a market in backwardation or someone else makes a statement that the market will bottom in exactly two weeks or some other such nonsense. Use technical chart indicators to tell you when a bottom is in. No exceptions. So what if you do not catch an exact bottom? The greatest profits are made by taking 70-80% out of a move (unless of course you are a guy who likes to play range trades).

The people who consistently brag about buying exact bottoms or selling exact tops are chronic liars. I can tell you that they DO NOT TRADE for a living because no trader can consistently get that right all of the time. We strive to do so but at our best we no more know the future than the next guy. We wait for a confirmation before risking our precious trading capital. Oh yes, it is no where near as sexy as hitting an exact bottom when buying, but then again, after 2 decades plus, we are still surviving. I have seen more casualities in this business than I care to remember. Their last words are always: "I told you I was right - see the market is now going higher". The problem is that they ran out of money before the market turned! So what if they were right. In the short term, they were dead wrong and that is why they lost their money to someone on the other side of the trade who was the "right" one.

There is an old trader's saying that goes like this: "He bought the first break in price. He bought the next break in price. He bought the third break in price. He bought the fourth break in price and after that, He became the break".

Second - that assumes that the backwardation is actually there. Guess what - it is not. When a real backwardation structure exists in a market  it is OBVIOUS from the structure of board. That front month futures contract will be trading at a PREMIUM to the next month contract which will also be trading at a premium to the contract following that and so on. The normal structure of (Most - not all) the futures board will be one of CONTANGO. Translated this means that the front or near month will be trading at a DISCOUNT to the next closest futures contract which will be trading at a discount to the contract following it and so on. Without getting too technical for the sake of getting lost in the weeds, markets such as livestock and grains are a bit more complex because of the nature of the commodity being raised or produced but even the grains will show this pattern when dealing with the OLD CROP against the NEW CROP.

Back to our BACKWARDATION structure however. When the near month trades at a premium to the next month and the one after that, the market is sending a signal that IT WANTS THAT COMMODITY AND IT WANTS IT NOW AND IT IS WILLING TO PAY MORE TO GET IT RIGHT NOW instead of waiting to take it further down the road. All VERY STRONG bull markets will show this pattern although it is not necessary for a market to be in a backwardation structure even during a bullish phase. It all depends on the SEVERITY of the DEMAND and SUPPLY situation. Markets can move strongly bullish even without a shift into backwardation occuring because an imbalance in supply and demand that it expects to continue for some time. However, when there is a supply shortage or huge demand spike, the move towards BACKWARDATION will occur.

Generally this is the result of a type of concern that can easily move to FEAR or outright PANIC on the part of those who need the commodity that they are not going to be able to secure enough supply of that particular commodity that is necessary to conduct their business. Minneapolis Grain some years ago always comes to my mind. More recently, last year CORN prices did the same in the face of a near panic brought on by a drought ravaged crop.

All this being said, the structure currently present in the gold market is normal. Here are the CLOSING PRICES  for the four main gold contracts from last Friday:

February 2013   $1607.50
April  2013        $1610.30
June  2013        $1611.60
August 2013      $1613.30

As you can clearly see, each contract is trading at a discount to its successor. This is a normal market structure which is indicative of the COSTS of storage over those months, plus interest and insurance. There is not the least sign of backwardation.

Those who like to quote the spot price of gold and then compare that to the delivery month and claim backwardation exists simply do not understand the term nor the board structure. Basis is the difference between the spot or cash price of a commodity and the price of the nearest futures contract. Trying to nail that down can be tricky however because basis can be all over the place depending on the one quoting it. For instance, the basis in the corn market right now is swinging wildly. I have seen it quoted as high as $0.50 over. The problem is the corn price is imploding lower all the while the cash market is at a premium. All this means is that farmers here in the US are reluctant to turn loose of their corn right now and that is making supply for old crop scarce. What is happening however is that buyers are not willing to pay them this much for it and are instead sourcing from S. America or holding off on filling their needs until the harvest ramps up down that way. I could just as well make the argument that corn prices should not be moving lower because the cash corn market is trading above the corn futures market that the writer of the article about gold being circulated is making. What matters is the BOARD STRUCTURE. Nothing else.

Besides, there is also the issue of liquidity issues in the front month contract as it prepares to go off the board. Trade dries up and often the contract will not trade at all with bids and offers moving farther apart as the liquidity shrinks. The trades that do occur need to be noted for the exact time of the trade during the day and then obtain the price of spot gold at the exact same time to get anything close to an accurate basis.

This was part of the same nonsense being touted by those claiming that Deutsche Bank was stopping all the gold at the Comex and was moving it back to Germany and cleaning out the Comex warehouses in the process. Guess what, Gold prices have collapsed since that theory has come and gone. Again, no change in board structure; it was just more foolish HOPE masquerading as FACT. Deutsche was indeed doing some large stopping but how the hell do we know where that gold was going. Quite frankly, who even cares. If the board structure had changed as a result of all that, then we would have had something to chew on.

It comes down to this - SUPPLY and DEMAND - when an imbalance exists that is severe, it will always show up on the futures board. Everything else is just market noise. Sort it out and you will be a good trader; act blindly on it as if it is fact and you will join the ever growing ranks of those who become road pizza on the floor of the futures exchanges.

Some Gun Manufacturers are Fighting Back

Hats off to these gun manufacturers  - those of you looking at acquiring firearms for your personal use might want to consider doing business with some of these folks...


Gun Companies Refuse Sales to State Governments with Strict Gun Laws

Six gun companies have announced plans to stop selling any of their products to any government agency in states that severely limit the rights of private gun ownership.

Trader Dan Interview at King World News Metals Wrap

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


Friday, February 15, 2013

Speculative Money Flowing out of Gold

This afternoon's (Friday) Commitment of Traders report confirms what I have been discussing here on this site as well as in my audio interviews over at King World News Metals Wrap, namely, that the Central Banks have managed to curtail speculative money flows into Gold and direct those money flows into equities.

This is the reason gold cannot find much in the way of traction to the upside and cannot mount any sustained moves higher. Quite simply, big specs are using rallies into resistance to unload stale longs and put on new shorts. Now that near term momentum has shifted to the downside, they are also selling into weakness and pressuring the metal even lower.

Notice that since October of last year, hedge funds have been steadily liquidating long positions in the gold market while simultaneously instituting brand new short positions. The result of money flows out of the gold market that began in that month,  in addition to fresh shorting, has sent the gold price down $116/ounce as of Tuesday of this week, when the data for the COT is captured by the CFTC. Gold has since fallen another $39 as of Friday so one can assume that further long liquidation has been taking place by hedge funds along with another fresh burst of short selling by this same group of traders. Another way of saying this is that gold has fallen $155/ounce since this movement or repositioning by large hedge funds has occured in earnest.

I should also note that this is the LARGEST outright short position by hedge funds in Five Years.... that is quite remarkable to say the least.

Gold loses Support

Gold bears have been salivating for nearly 5 weeks now over the prospect of setting off the avalanche of sell stops that had been building below the support region marked on the chart starting near $1640 and extending to $1630. They hit them and more today setting off a selling cascade that also nailed the sell stops just below $1620. That was enough, along with some brand new short selling, to take gold down towards the psychological support level at $1600. It then briefly penetrated that line but managed to claw its way back up as short term traders rang the cash register after this week's fall of $60+.

The pit session close was a good $10 off the intraday low but in the aftermarket gold continued to attract selling pressure and was pivoting around the $1606 level for most of the late afternoon. The last 30 minute or so of trading in the stock market saw that sector begin recovering off the Wal-Mart email fiasco news and as it did, gold began to drift higher. Prior to that it had moved back down towards $1604 again.

I mentioned earlier this week that a strong break of support on good volume would turn the trend indicator, the ADX, into a trend mode and that is what it did. Note on the indicator that the negative DMI (red line) has exceeded its previous peak and is now moving towards the next peak made near mid-December of last year. +DMI is also workly steadily lower confirming the move while the ADX line is now rising indicating that a short term trend lower is in effect.

Gold will need to recapture $1640 at a bare minimum to turn this indicator friendly and push out some weak-handed shorts but more than anything, $1665 - $1670 to get any serious large scale short covering started. The 200 day moving average comes in near $1664 and that will serve to attract selling for the time being.

Right now the story remains the same - the Central Banks of the West (Japan is included) have managed to pull off one helluva feat by corraling the hedge funds out of commodities (and gold) and into equities, the only game in town to capture any decent yield on investment in this pathetically low, near zero , interest rate environment that they have created.

As far as downside in gold goes, today's low will serve as the initial level of chart support as handle of "15" will serve to attract some value-based buying as it has been a while since we have seen that price. If the market cannot hold there, I see some light chart support near $1585 or so. Below that, $1560 and then $1545.

The HUI looks beyond pathetic. Barrick announced that they will be selling off some non-productive assets and properties, etc, to streamline their operations and reduce costs. That is a very good sign that some of these mining CEO's are getting the message from the market: "Get your financial house in order and get costs under control so that you can return value to stockholders or else...". It is a pity that it has taken a beating of this severity to wake some of these guys up. One last thing - be selective about which gold companies you want to own. Make sure that management is serious about running a tight ship.

Wednesday, February 13, 2013

Wall Street Journal's Richard Barley on the Swiss National Bank

The Wall Street Journal's Richard Barley has written an excellent short piece on the predicament facing the Swiss National Bank that really hits the problem of this nonsensical ZERO INTEREST RATE policies being followed by many of the WEstern Central Banks.

The piece is by subscription only ( I am including the link if you wish to subscribe- Dow Jones subscribers have access to this in their wire feeds).


He entitles his piece: "SNB's Zero-Rate Wonderland"
Let me summarize his great analysis:

1.) The Swiss National Bank cannot raise interest rates for fear of derailing their economy

2.) The zero interest rate environment is producing a bubble in real estate prices. UBS, has constructed a Swiss Real Estate Bubble Index to measure the rise in housing prices. It is a Price-to-Income ratio that has risen to size times at the end of 2012 from four in 2000.

3.) Inflation in 2012 was a negative 0.7%.  Growth is sluggish. The SNB cannot raise interest rates because it would send speculative money flows into the Swiss Franc causing the currency to rise in value hurting Swiss exports and slowing any incipient signs of growth.

4.) This would force even more intervention in the Forex markets by the SNB to sell the Franc in their attempt to devalue it.

5.) The SNB is attempting to slow down housing loans by requiring a capital buffer for banks

6.) The Fear is that this will work to curtail loans to small and mid size businesses and enterprises

7.) The SNB has a balance sheet that is ballooning.

This well thought out and solid piece encapsulates not only the problems faced by the Swiss National Bank but the reality is that the other Western Central Banks practicing the same policies are in the exact same predicament. Here in the US, the Fed is attempting to reflate the housing market which imploded when the bubble IT CREATED in that sector burst. The problem for the Fed is that while it attempts to reflate various bubbles it has presided over, it merely creates a new one someone else. CAse in point - the US equity markets which in my opinion are in the beginning phase of yet another speculative bubble.

The exit that the Fed will attempt at some point in the future should be interesting to say the least.