Gold Bounce coming to an End

Time constraints have prevented me from writing as much as I would have preferred to this week but I want to refer back to my last comments from Wednesday this week when I posted a 2 hour gold chart.

My argument back then was and still remains the same today - there is no enthusiasm to chase prices higher at the Comex gold market. That is indicated by the falloff in volume as price has moved higher. See the chart below....

In other words, this is more of a case of traders covering short positions out of fears popping up over bona fide reports of incredibly strong buying of physical gold than it is over a new found bullish enthusiasm on the part of the hedge fund/investment community.

Yesterday, the return of RISK ON trades came on the heels of the rotten economic data out of the Euro Zone. Once again we are in a situation where for the equity perma bulls, it is "Head's, I win; Tail's, you lose". The news was so bad that traders just knew it in their bones that ECB President Draghi is going to announce an interest rate cut next week. That of course is just what the equity bulls ordered.

Today however was a different case with the moribund GDP reading here in the US serving to remind us all that in spite of all of this reckless Central Bank liquidity creation, we are barely managing to limp along at the bottom when it comes to economic growth. Copper obviously wanted no part of this news today as it appears the short covering rally in that base metal might have come to an end also.

With the yield on the Ten Year Treasury note dipping back to 1.66% and with the 30 Treasury bond futures up nearly a full point today (not to mention the regularly recurring stupidity trade of buying the Yen as a safe haven), it is evident that whatever risk traders were willing to put on yesterday, they are taking it off today.

When it comes to gold here is the situation as I see it (nothing has changed in this regards but I want to restate it again) - Physical demand for gold is very, very strong; however, it is very, very strong at REDUCED PRICE LEVELS. Gold went on a fire sale last week and buyers jumped all over it. After all, a $200 drop in the matter of a couple of days is enough to get the attention of anyone wishing to acquire a metal that had a handle of "15" in front of it and then suddenly had one of "13". This has served to put a solid floor of support beneath the market and I believe a bottom that should hold if prices were to move back down towards that level in the near future for any reason.

The problem that I see is the same; while this sort of demand can bottom a market it CANNOT TAKE IT SHARPLY HIGHER without INVESTOR DEMAND from the hedge funds. Why? Because buying of physical is price conscious. People buy the stuff because it is so cheap. When it jumps back up too sharply, that kind of buying dissipates. What is then needed to take the price higher is the kind of mindless buying by hedge fund algorithms which have no conception of value whatsoever but are programmed to only chase motion.

Value based buyers acquire the metal when they perceive it to be cheap or underpriced. Hedge funds buy the metal when it keeps getting more and more expensive. Their buying kicks in when the value based buying eases off. Until the hedgies come in, what will happen is that price will move up to the point where the demand from the value based crowd gets choked off and loses some of its force.

The result is a market that has bottomed out but needs a shift in sentiment among the hot money crowd. With today's anemic GDP number, none of them are the least bit worried about inflation right now. Any doubts about that can be seen in the bond market price action as noted above.

The bulls did manage to take price through $1440, a level which earlier this week was attracting selling. When they then pushed it through $1450, traders who had sold against that level covered and that took it to $1470, another area that I was watching. Asian demand for the metal enabled buyers to take it another notch higher but as it moved into the mid morning of the Western session, the buyer just dissipated and short term oriented traders took that as a signal to close out some nicely profitable long positions recently established.

Notice how the volume LEAPS as the price drops. That is both long liquidation from day traders/short term guys and fresh shorting. The price action in the HUI, confirms that.

What we want to watch now is how gold acts as it nears the $1440 level. That level was serving as un upside barrier earlier this week and now reverses polarity and becomes a level of chart support. If gold can hold above this level, and so far it is,  it will give bulls some confidence to wade back in and will make a few of those brand new shorts reluctant to push their positions. We would then expect to see the metal move back higher and take another shot at resistance. I would want to watch both the volume and the price action were that to occur to see if this thing has a shot at $1500. Remember, it is still an intermediate term bear market in gold so until the technicals change, strength will be sold unless we get a violation of resistance and a shift in the momentum of this market.

Did anyone notice how the miners faded well off their highs late in the session yesterday even as the rest of the equity world was celebrating another back slapping day of further giddiness. That was another clue that the euphoria in gold was about to hit a temporary wall.

The HUI managed to claw its way back into the technically significant gap region I have previously noted, but as expected, it could not CLOSE THROUGH the GAP to end out the week. That must occur for this to kick up another leg higher. It did manage to close in the gap yesterday but the manner in which it faded out towards the end of the session forebode further downside today.

What does this translate to in terms of the gold shares from a technical perspective as a result? Same as gold - the market posture is decidedly bearish but it does appears as if a bottom is in. The sector is lacking a strong upside catalyst however at the present time. Value based buying is holding it up but the momentum based crowd is absent on the buy side. The result - sideways trade above support near 255 until or unless that gives way or the index pushes past the top of the gap just above 300.

By the way, the HUI to Gold ratio continues to drop.

One thing I am noting today is that the Gold Volatility Index is moving higher again. It had been falling as gold was moving higher reflecting the lack of concern about further price weakness of any sharp degree. With price having regained a very large portion of the overall price decline since key support at $1525 gave way, it looks as if there is some nervousness building on the part of players about some potential for some more downside. We'll see if that is correct or not.