"Houston, We have a Problem!"

In this case it might be better written, "FOMC, we have a PROBLEM!"

What I am referring to is the long awaited and long expected, I might add, breakdown in the US long bond. It is my opinion that the US bond market is the single most important market on the planet. For years, many of us have sat and watched as bond prices were driven to levels that very few thought imaginable a decade ago. What with the rush into the perceived "safety" of US Treasury debt and the concerted effort by the Federal Reserve to drive down long term yield through their Quantitative Easing programs, bond bears were blasted from one defensive position after another by the steady influx of money flows.

My oh my how things have changed over the last few weeks! I give you a weekly chart of the long bond where you can see the breakdown in vivid terms. With the advantage that comes from some hindsight now that enough time has passed to trace out a definitive chart pattern, we can see the peak in the bond market, and the low in long term interest rates has come and gone. Do you see that MAJOR TOP that form over the course of most of last year? Three times the bonds were shoved into that region and three times they failed there. The third time turned out not to be a charm and out went speculative money to giddily chase equities as this bond bubble burst and the new one formed in equities.

Once the major support level gave way near the 145 level, a countertrend rally developed that took bond prices through NINE handles before speculators could see that the final rally to retest the former peak could not muster enough strength to move the final 4 handles needed to reach it. Down she went and up went long term interest rates as a result.

I want to point out something on this chart that is more a function of the rolling process that occurs in the futures markets but nonetheless leaves it mark upon the technical price charts. This week the front month bond contract became the September bonds. Prior to this changeover it was the June bonds. There is currently a FULL ONE POINT DIFFERENCE between the value of those two contract months. When a continuous contract is drawn out for analysis purposes, the data it will include always contains the FRONT MONTH contract or the most active. That has now become the September Bond contract. When this is included, you can see the impact on the technical price chart!

Note how the support level that formed where the counter trend rally began, has now given way because of the level at which the September bond contract is currently trading.

The day is not over yet and thus neither is the week, but barring a late session upside movement in the bond market, it is now on track to close below what has been a significant chart support level. If it does so, odds favor a furthering of the new trend to the downside with no significant chart support showing up until another 3 - 31/2 points lower down near the 136 region.(Maybe the boyz at the Fed will send their New York desk buyer to the market to buy some bonds later today....)

One has to wonder if this is what the Fed had in mind when they were attempting to push long term interest rates lower. What they got was a mad rush out of bonds and fixed income in a near ZERO interest rate environment and into equities. All that money flowing out of bonds in search of easy gains in equities has now resulted in a surge higher in interest rates at the back end of the curve.

It is no secret that the formula for the current "recovery" has been ultra low interest rates which have made debt servicing easier for business, consumers and the government I might add. The big question is whether or not this nascent recovery can stand a rise in interest rates. I do not believe that it can. So where does that leave the Fed?

Talk of tapering QE makes investors nervous and actually undercuts any reason to buy bonds since a major buyer has been removed if that were to occur. That engenders selling. On the other hand, if the Fed were to actually reverse course and RAMP UP bond buying once again if the economy were to slow, then all that would do is to further facilitate the bubble in the equity markets that they have created. Money flows would continue to exit bonds and find a home in equities. Either way, bonds suffer as a result and head lower.

Talk about a self-inflicted conundrum! Good luck with this one fellas... You made it; now handle it!

Trader Dan on NPR

For those of you who might be interested in a story dealing with a proposed buyout of giant US pork producer Smithfield, by a Chinese controlled firm, Shuanghui International, you can check it out at the following link. The radio interview is three minutes so you can get the gist of what is happening in a short time.

There is also a write up if you prefer to read that instead.

While I tend to devote most of my writings at this site for gold, currency and interest rate related topics, I cut my trading teeth on the ag markets and still consider them my favorites. The Grains and the Livestock markets and I go back a long way together!

http://www.npr.org/blogs/thesalt/2013/05/30/187163300/will-chinese-firm-bring-home-the-bacon-with-smithfield-deal

Gold Catalyst?

It looks as if we have FINALLY got some sort of catalyst to propel gold through that big round number overhead resistance level at $1400. Based on what I am seeing this morning, it began with the steep slide in the Japanese stock market, with further help from the very disappointing GDP growth number that came out this AM.

To start - the Nikkei fell 5.2% on Thursday, as investors over there are suddenly having concerns about the overall effectiveness of the "inflation" program that has been implemented by the political and monetary authorities. That fall in stocks resulted in a strong safe haven bid into the yellow metal. Keep in mind, that heretofore investors have chosen to ignore gold or outright sell it short as they put investment capital to work in better returning equity markets. If anything upsets that apple cart and begins to cast the least bit of doubt that the strategy is not going to be effective moving forward, we will see money flow out of stocks.

Secondly - the US economy was revised downward in growth for the Q1 2013 from last month's reading. Instead of the 2.5% reported last month, the number was revised lower to 2.4%. That took some of the steam out of the "TAPERING" talk that has been everyone of late. As most of the readers of this site are aware, gold has been under pressure ever since that TAPERING talk began to gain some credence. Today's revision was a reminder that this economy remains quite weak with tepid growth and is still very susceptible to downward pressure. Growth numbers will need to do more than this to provide any factual basis for a curtailing of the Fed's QE program.

I should further note here that the "deflator" number that was used by the BEA was 1.18%. The BLS has a December-March inflation number of 2.10%! That is no mean difference! The lower the deflator number used (another way of saying this is that the lower the rate of inflation employed by the statisticians), the better the headline number for growth comes in. IF the BLS number had been used instead of the 1.18% reading, the growth reported would have been even lower!

The mining shares are showing some welcome signs of life of late. As you can see on the chart below, they gapped higher today but until this index closes through that gap region indicated, I cannot get too excited about their future prospects. To pique my interest, I would need to see two consecutive closes through at least the 290 level. Still, it beats seeing the things dropping to new lows every day! Obviously value buyers are active but we need momentum based buyers to chase these things like they have chased the broader equity markets. That will require a technical chart confirmation that the trend is ready to reverse.

There was some news out the other day about the US Dollar losing a bit of its demand as the chief currency for global reserves. The IMF data on that was interesting. I do not know if that might have had something to do with the weakness that we saw yesterday and are seeing again today, but for whatever reason, the Dollar just took out at least one downside support level on the chart.

I am using a 4 hour chart as it shows the support level more clearly than just the daily chart. You can see the breach of that level was accompanied by a pretty decent spike in volume which is bearish. The week is not over yet but if the Dollar cannot climb back over that support, odds would favor additional downside early next week.

Don't forget the entire world is LONG DOLLARS and the trade is extremely crowded both among the big hedge funds and the general public. If any more downside technical levels were to get taken out, we could see some pretty serious selling occur in the greenback.

Obviously, any weakness in the US Dollar is going to benefit gold, which is exactly what we are seeing occur so far in today's trading session.

Speaking of gold, clearing $1400 is a big deal on account of that fairly hefty hedge fund short position. We did see some short covering occur on the move through this level. My analysis suggests heavier short covering will occur if the metal can push PAST $1425 with a serious unwind of short positions if price can clear $1440. For analysis purposes, we should start to focus on the August gold contract as the June is entering its delivery period and open interest in that contract month is rapidly dropping. It will also be interesting to note the delivery process itself and see what kind of offtake occurs.

Silver is getting some help from the strength in gold today and the bit of strength in copper is not hurting it either. Until that market clears $24 I cannot get excited about it.

The yield on the Ten Year Treasury note has been all over the place today. Volatility in the US bond markets, while nothing like the madness that has been unleashed in the Japanese government bond markets, is definitely increasing. Interest rates that begin wild oftentimes unpredictable movements have the potential to destroy hedging programs put in place by any entity with interest rate exposure. This is especially true of insurance companies and mortgage companies. Things can get out of hand very quickly and become quite ugly if money flows start getting erratic in that critical sector.

If you want to know how bad it can get, just look at what the Japanese monetary authorities are having to do in order to try to calm the jitters in their bond markets.

Month End Positioning Underway

Attempting to make sense of the movement in the currency markets in today's session can be very confusing. Case in point? The Euro/Dollar. A report by the OECD, the Organization for Economic Co-operation and Development, warned that tapering of the bond buying programs (monetary easing) by various Central Banks, could result in a slowdown in global growth. It singled out the Euro-Zone as a region that could be most impacted and consequently lowered its forecast for that region's growth.

Normally, that would have been enough to put pressure on the Euro. No so today! Today seems to be a case of large speculators squaring positions ahead of this month's end. Since everyone and their dog has been long the US Dollar and short nearly every other currency on the planet, we are seeing a bit of an unwind occurring which is taking the Dollar lower, especially given the fact that the equity markets are under pressure today. That too might be a case of end-of-the-month position squaring.

Trying to read too much into price action at this time of the month can be rather futile. I am more interested in seeing how things close the week this Friday instead. Nonetheless, if we can any breaches of chart resistance or support levels, no matter what the cause, we could see additional price volatility.

Speaking of price volatility, has anyone seen the Volatility Index lately? Check it out....What I find rather fascinating is that lately, the VIX has actually been moving higher even as the stock market has been making one new lifetime high after another on an almost daily basis. Perhaps, even some of the perma equity bulls are beginning to wonder if this bubble can keep inflating indefinitely!?

Trading Theme Du Jour

Here's the current mindset in the gold market as of this morning... the stock market looks as if it is experiencing either a bout of profit taking by longs or has temporarily run out of willing buyers near its new lifetime high - that begets a safe haven bid and a bit of the risk aversion trade comes back on.

That can primarily be seen in the bid going into the Japanese Yen, which is becoming extremely volatile due to this risk on, risk off, alternating from day to day. You can also see it in the long bond which rallied over a full 1 1/2 points off its low of the session. This trade then brings back a bid into the gold market.
 especially as the US Dollar weakens.

Today, we have the European majors and the Yen moving up against the US Dollar as the equity markets weaken. The inverse link between the greenback and gold then comes into play and gold pops higher. Gold then functions as a safe haven.

Whether this is sufficient to take gold through the $1400 level and maintain a "14"handle on it is unclear at this time. It all depends on what happens to the equity market. If this is just another dip in price that will be bought by the large specs, then gold will run into further selling as it moves towards overhead chart resistance. Why? Because they will look to jettison their gold holdings to put that money to work in the equity markets. If it is something more serious in regards to the stock market, then gold will be able to clear round number resistance at $1400 and should be able to maintain its gains.

This is what will be required to spook any of the hedge fund shorts out of their positions and touch off some buying by that side of the ledger. Remember, gold needs a catalyst of some sort.

I should also note here that there is general weakness in the grains and in the energy sector today. That combined with weakness in the copper markets is keeping pressure on the Goldman Sachs Commodity Index and furthering the notion that inflation, at least when it comes to the cost of basic commodities, is currently a non-issue.

Take a look at the chart of Unleaded Gasoline. Notice that it is some $0.45/gal cheaper than it was a mere two months ago. You put that together with a stock market nearly daily making one all time high after another, and is it any wonder that consumer confidence readings are moving up?

Ten Year Treasury Yield Surges to a 14 month High

Take a look at the following chart of the yield on the Ten Year Treasury Note. It closed at 2.135% return today, the best level since the first week of April, 2012.

While I personally believe that the economy is too weak to withstand higher interest rates for a prolonged period of time, all that matters right now is money flows. Money is flowing out of safe havens and flooding into equities in search of Yield, Yield, and more Yield.

The Central Banks of the West, and Japan, have created a RISK FREE environment for equity traders and have unleashed a full fledged mania in the process. Mark this well as you are seeing what happens when moral hazard is on full display.

I have said it before here and will say it again, the only risk in the mind of hedge fund managers, institutional fund managers and pension fund managers, is the RISK OF NOT BEING IN STOCKS.

I want to see if this note can take out the dotted green resistance line that shows up near the 2.30% level; that would be a big deal in my view.

Speculators continue to Sell gold

I will get some more details on the Commitments of Traders report later this weekend but wanted to get a graphic up to show just how strongly speculative sentiment here in the West has turned against gold (no doubt that is every bit tied to the bubble in the equity markets, courtesy of the Fed).

You can more or less see the sentiment towards gold by looking at the upper solid dark blue line which dates back to 2006. It rises and falls along with the actual price of the metal. Can you see what direction that line has taken since late 2012 when gold was priced near $1765? It has been steadily declining with a few upward blips. That indicates the outflow of speculative money from gold which as we all well know by now, has been heading into equities in search of yield. Incidentally, you can see the same thing in the gold ETF, GLD, with the steady drawdown in the amount of metal in its holdings.

Now focus on the bottom red line which is a mirror opposite of the upper blue line. You can see that it bottomed out at the same time gold peaked near $1765 on the chart and has been relentlessly climbing higher. That is FRESH SHORT SELLING. Can you see how the hedge funds are building on the short side of the market? As a matter of fact, this is the largest outright short position of that category of traders on record!

Folks, I have to say something here at the risk of irritating some others in the gold community that I consider to be friends. Many keep pointing to this fact of a building speculative short position as a bullish development. It is not. It is bearish. Why? Because as I have stated ad infinitum over here, Speculators drive markets today, not commercials. As long as the specs are interested in selling gold, the market will struggle to overcome chart resistance levels and reverse to the upside. Yes, there is definitely the potential for some strong and sharp short covering whenever you see specs with a building short position, but it requires a CATALYST before that will occur. At some point we will indeed get such a catalyst (we got a preview of it this past week at the introduction of Bernanke's speech when he mentioned that a premature slowdown in QE would not be wise) but until we do, the trend is very obvious.

Let me just say that as a trader, not an investor, and please note this vital distinction, unless I have deep and unlimited pockets, for me to go against the flow of hedge fund money, is financial suicide. This crowd can run over commercial interests and send them crying to their mammas. How in the world are you or I as smaller traders going to be able to handle that sort of selling pressure? No, we have to be wise and only take a contrarian position if the technicals are telling us that it is time to do so. When those guys reverse course and begin covering, it will not come in a stealthy manner!

There is a tendency among some to keep saying over and over again: "this growing short position is wildly bullish". The implied notion among some advocating this (not all of them) is that you should jump in a take a long position in the futures because they just know that the market is going to suddenly reverse to the upside and you will miss the big move if you don't. Well, it may just do that. Then again, it may just not! What if it does not? Down it will go and down will go your trading account with it. Instead of buying on "HOPE" wait for the chart pattern to indicate that a turn is at hand. At least that way you can mitigate the risk somewhat because you will have a definite chart point at which you can tell whether or not the trade has gone wrong.

Again, I want to repeat, this is intended for those who are trading not those who are investing in gold or buying it to protect themselves from the debauchment of currencies which is occurring. The latter group buys gold for peace of mind and will methodically accumulate the metal as price moves down. That is a far cry from buying a LEVERAGED futures contract.

In summation - hedge funds here in the West are selling gold on rallies with strong quality buying emerging on trips back down towards $1360 and below. That buying is coming from the bullion banks and swap dealers in the paper markets. We all know how solid the demand is at those levels in the physical markets, especially in Asia. This looks to be the pattern until proven otherwise by the price action.

Trader Dan Interviewed 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 Markets and Metals Wrap.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/5/25_KWN_Weekly_Metals_Wrap.html

US Dollar - back to being King

It appears as if the globe is convinced that any economic recovery is going to begin here in the US first. It certainly is not going to be Europe that is leading the way. Data from China continues mixed while Japan is gaining traction at the expense of their currency. That leaves many investors from abroad looking to put their risk capital to work in the US equity markets. That is creating strong demand for Dollars with which to buy boatloads of US equities.

You can see the effects of this in the dollar chart. Note this is a weekly chart I am using. As it now stands, the Dollar is on track to make its SECOND and a CONSECUTIVE WEEKLY CLOSE above key resistance at last year's high just above 84.40 or so.

It has already cleared the important 61.8% Fibonacci retracement level of the entire sell off from the double top back in 2010. The last barrier from a Fibonacci retracement theory level it has to face is just above 85 at 85.05. That ties in rather nicely with the upper tine of the pitchfork. If that does not stop the upward march of the Dollar, odds will favor it completely retracing the entire downmove from 2010 and eventually reaching all the way to 89.

With weakness across the Yen, the Euro and the Aussie and Canadian Dollars, not to mention the Swiss Franc and the British Pound, it is difficult to see why the US Dollar will not make it through the 85 level.

If this does occur, it is going to more than likely bring about additional selling pressure across the commodity sector in general and that means we could very well see more hedge fund shorting activity into silver and gold. It will be up to the physical markets to therefore absorb the paper selling to prevent those recent lows from being retested yet again.

One of the other reasons that the US Dollar is rising in my view is the fact that interest rates are rising here in the US. In an environment starved for yield, you are going to get some of that money that wants to hold bonds moving to where it can obtain the highest yield or at least where it can invest where the interest rate trajectory is higher and not lower as is the case in the Eurozone.

Long Term Interest Rates grinding Higher

Keep an eye on the yield on the Ten Year Treasury Note. It is back above the key 2% level once again. The rate peaked for this year about 2 months ago in mid March before moving lower. At that time it was a tad above 2.05%. Rates have moved 40 basis points higher in a month's time. That is quite rapid.

I find today's movement a bit peculiar to be honest because it came against the backdrop of an equity market that had first made a new all-time high before reversing lower later in the session. One becomes accustomed to seeing money flows out of bonds and into stocks and therefore, when stocks are being sold off and bonds also are being sold off simultaneously, it is a bit out of the norm.

Let's see where this thing goes tomorrow and the remainder of the week.

Incidentally, I wrote up some comments on today's price action for Eric King over at King World News. Check in there to find them a bit later this evening.

Have the Mining Shares finally Bottomed?

While one day does not a trend reversal make (and it is very important to keep this is mind), the HUI has found some buying support (finally!) near the confluence of several important technical support levels on the price chart.

I am using a weekly chart to show both the Fibonacci retracement levels and some horizontal support zones plus the pitchfork lines.

The first thing to note is that the index did close below the last Fibonacci retracement level noted which is the 75% retracement of the entire rally off the 2008 low and the 2011 high. That level is near 272. Strict adherence to Fibonacci theory teaches us that if this level gives way, odds favor a complete retracement of the entire upside move meaning we could see the HUI move all the way back down to near 160. However, we have had only one week in which the index CLOSED for the week below this level. Usually we would want to see TWO CONSECUTIVE WEEKLY CLOSES below this level to increase the likelihood that the index will move back to its starting point of the rally. That has not occurred yet.

Also, as you can see, there is a band of horizontal chart support  shown by the red rectangle that comes in near the 240 level. This level of support dates back to early 2009 and still has some validity to it.

Lastly, just outside the median line of the pitchfork lies an area of support coming in right at 240. It seems to me that if this index is going to hold, it is going to hold here and now at this level. If not, it will more than likely track the lower dotted line over the next few weeks.

To feel that the worst is over in this sector, I would like to see the index move back above last week's high near 275 or so to close out this week. If it can do that, I believe we will have seen a final bottom in the mining shares. The jury is out until Friday.

Here is a look at Goldcorp (GG). Notice the Outside Day Bullish Reversal Pattern coming after a very prolonged move lower in price. That tends to give the pattern more credibility. I would prefer to see a higher volume reading, much like the one seen back in April, to go along with today's nice showing but if the bulls can build on this the remainder of this week, they might spark some more serious short covering in this particular share by Friday. We'll see.

Today's Commentary by Trader Dan posted over at King World News

Dear friends and readers;

Eric King over at King World News has asked me to put together some commentary on today's wild ride in the precious metals markets. Please check in over at www.kingworldnews.com to read those along with the charts detailing the price action.

I need some time to go and find my stomach!

Trader Dan

CME reporting Silver Trading halted 4 times last evening

I will get more info posted on this as it becomes available from the CME Group. As mentioned in the brief piece I posted last evening, volume on the collapse in price was extremely light. There was an air pocket underneath the market but once price fell towards that major support zone near the $20 level, it rebounded quite ferociously. Further aiding the buying off the lows is the fact that Copper is proving to be quite resilient.

Japan's Economy Minister sets off Selling Cascade in Silver

News out of Asia is roiling both the gold and silver markets this evening. Apparently Economy Minister Amari spooked the Forex markets Sunday when he stated that further weakness in the Yen could actually end up damaging the nation's economy.

Obviously this is the FIRST sign we have seen out of official Japan that the level of Yen is now low enough for the powers that be there. Again, it is just one minister and there is no official change in policy but he is voicing concerns that the currency might have fallen a bit too far, too fast.

His comments are being used as a reason by some Yen bears to partially cover existing yen shorts and realize some gains. The downside to this as far as the precious metals go, is that Yen Gold and Yen Silver are taking a vicious beating as a result. Take a look at the following chart of Silver in Yen terms and you will see exactly what has happened to that market. It plunged over 8% at one point!

This is resulting in Japanese traders further selling gold and silver to minimize losses or to actually cover losses in their short currency positions, which caught some of them leaning a bit too heavily onto the short side of the Yen.

Silver  in US Dollar terms, has fallen to within 25 cents of MAJOR Chart support near the $20 level where it uncovered ferocious buying so far. Reports out of Asia are emphasizing the surge in demand this is uncovering. We'll see if that holds as we move into Western trading hours.

I want to note here that the volume on the collapse in price towards $20 is pitifully low. The selling appears to have occurred into a void which is the reason that the price fall was so exaggerated. The bulk of the selling is actually occurring in Japan, but there does not appear, thus far, to be the same appetite to sell silver in Dollar terms down at current levels.


Yen gold has confirmed the double top pattern shown on the daily chart with the significant breach of its former support zone. In classic textbook fashion, price rebounded to retest broken support, now turned resistance, and promptly failed. This evening's losses are pushing price back towards the spike low shown on the chart.

It really is quite uncanny; no matter how much money Central Banks continue to create, and Japan is certainly no laggard when it comes to running the printing presses, gold continues to fall completely off the planet, almost as if it is being sucked into an enormous black hole. No matter what it is, gold or silver, investors in general seem to want no part of the metals unless it is to SHORT them.

One would have to judge that the modern Central Bankers have completely redefined the very concept of money itself. It would seem that prosperity can be created at will, with no consequences whatsoever. Have we discovered the Holy Grail of human prosperity? My guess is that it is only a matter of a few more years of this and poverty itself will be resigned to the dust bin of history, a relic of an ancient unenlightened age. What's next - the elimination of death and disease??

Bubble Views

As the regular readers of this site are now fully aware, I am on record as stating that the current rally in the US equity markets is a gigantic Federal-Reserve-induced bubble that has eclipsed all previous equity market bubbles in modern history.

The disconnect between what is going on in this market against what is going on in Main Street, is growing exponentially larger with the passing of each week. You will have the equity perma bulls crying up one reason after another to justify this aberration but the simple fact is that this is what PAPER ASSET INFLATION looks like. In a deliberately created, ZERO INTEREST RATE ENVIRONMENT, investors looking to obtain a return on investment are forced to put capital into stocks. As stated yesterday, the only RISK is the RISK OF NOT BEING IN THE STOCK MARKET.

I cannot state it any more forcefully than that.

Just for the purpose of illustration, I put together a chart of the S&P 500 detailing in graphic form the extent of the growing bubble. The index is shown on the bottom chart. In that chart is a dark blue line which is the 100 Week Moving Average.

In the upper window is the DIFFERENCE between the weekly closing price of the S&P 500 and that same 100 week moving average. There is nothing particularly exotic about this indicator - it is merely a way to measure OVERBOUGHT or OVERSOLD readings.

I think you will find this rather startling. Go back to the year 2000, the year in which the huge speculative bubble in equities popped and which was the catalyst for the now decades+ intervention by the Federal Reserve to create one bubble after another in attempting to deal with the fallout from the enormous bursting that occurred that year. You remember, first we had the equity bubble, then the real estate bubble, then the commodity markets bubble, then the bond bubble and now once again we have the equity bubble, courtesy of these master meddlers known as Central Bankers.

I drew in a horizontal line showing the peak in this indicator which first came in 2000. As you can see, it extends all the way to the current period. At no time prior to this year, did this indicator reach the peak that occurred in the year 2000. Yes, it came close, particularly in early 2011 after QE1 and QE2 had been implemented and run their course, but it failed to reach that prior peak.

Cast your attention upon this week - since QE3 and QE4, a combined $85 BILLION of fresh money creation each and every month by the Fed, the indicator has not only MATCHED the 2000 peak, it has EXCEEDED IT!  In other words, this is now an historic bubble even when measured against what many correctly believed then and still do now, was a bubble of epic proportions all the way back in 2000.

Quite frankly, I already believed the current stock market rally was an historical mania. After seeing this graph, nothing can dissuade me from that view. How high this thing can go is anyone's guess because they will always be fools saying, "this time it is different". When this bubble explodes however, and it  most certainly will, heaven help us all, as there will not be a single soul to buy it on the way down.

Trader Dan Interviewed at King World News Markets and Metals Wrap

You will want to tune in to this week's KWN Markets and Metals Wrap with Eric King as this is a wide ranging interview detailing the psychology behind the poor price performance of the Western paper gold markets.

Please click on the following link as it will take you to that audio file....

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/5/18_KWN_Weekly_Metals_Wrap.html

Gold Chart

Gold has come off of one horrific week in terms of price action. As noted on the price chart, the metal pushed into the region where it recently had its LOWEST CLOSE in some time. You might recall that after the spike down towards $1320, physical demand was unleashed in what can only be described as a torrent. That demand spooked bears and resulted in a wave of short covering that took price nearly $160 off that low. It was at that point that the big selling re-entered.

The resistance at $1485 - $1475 proved to be a bridge too far and down went the metal. It encountered some decent buying near $1440 but once that gave way, especially once $1420 collapsed, sell stops did the rest. Once it lost its "14" handle, many buyers stepped back, expecting that downside momentum would enable them to acquire the metal even cheaper.

I am now watching to see whether or not this market can hold support down at the shaded rectangle I have marked on the chart. Personally, I am welcoming this move back to that recent low because I want to see how it now responds. I do not like buying into markets with spike lows or selling spike tops mainly because the risk/reward can be too great based on the entry point and the exit point that tells you that the trade has soured. A test of a low, that holds is a much better entry point with lower risk. The flip side to this is that if $1320 fails to hold, it will confirm that bearish flag formation noted on the chart with a potential price projection down closer to $1100. Yikes!

It did not help matters any for gold to see in the most recent 13F reports to the SEC, that very large institutional investors have been jettisoning their shares of the gold ETF, GLD. Northern Trust dumped some 910.5 thousand shares alone in Q1 with BlackRock in second place dumping 428.5 thousand shares. If you take the largest institutional investors combined, their selling accounted for nearly 75% of the shares being dumped in GLD.

Paulson is holding firm but it would appear most are not. This is where the pressure keeps coming on the paper markets over here in the West. Institutions see no reason whatsoever to own the metal when they can better put that client money to work achieving historic gains in the US equity market bubble.

The current investing strategy is therefore very simple here in the West - SELL EVERYTHING GOLD and GOLD RELATED and buy equities; i.e. anything that is not a gold or silver mining equity.

With nearly every single passing day bringing us yet another new lifetime high in US stock markets, the pattern is clear - institutional money, and hedge fund money, are buying equities in what they now firmly believe is a NO LOSE SCENARIO. This sure bet is what the Fed and the Central Banks globally hoped to create and they have done just that.

As mentioned many times here - trying to fight the tape is a fool's errand. Traders have to go with the money flow. Investors had better be damned careful is all that I can say. There is a vast difference between trading and investing. This is coming from a professional trader so please do not casually dismiss this.

The Fed has managed to annihilate the very concept of "RISK". If anything, the only risk that now exists is the RISK OF NOT BEING IN the STOCK MARKET and angering your clients who are sure to take their money elsewhere. Money has no loyalty - it goes to where it can gain the largest yield and all money managers understand this. If they wish to retain their client base, they must chase stocks, whether or not they want to. Again, this is just  a reminder, they are not investing client money - they are trading it.

We are living through monetary history. Others coming behind us are going to pour over this period that we are privileged to be first hand participants in trying to come up with explanations for this speculative frenzy in equities that we are now experiencing. Mark it well and remember it; you can tell your kids and grandkids what it was like to watch an entire generation collectively lose their minds and throw caution out of the window. This is what ZERO YIELD environments produce.

Surging US Dollar derailing Gold and Silver

This past Wednesday I posted a chart of the US Dollar detailing its strength from a technical chart perspective. Based on today's price action, in response to a surprisingly strong Reuters/University of Michigan Consumer Sentiment Index, the Dollar has cleared  a major chart resistance level and now looks to be on target to challenge the 85 level, which is the last major block preventing it from returning to its former double top up near the 89 level. I would refer you to that chart in the previous post from Wednesday to see for yourself the remarkable strength currently being exhibited by the US currency.

I should also note here the continued extremely weak showing by the Australian Dollar, a currency whose fortunes typically tend to parallel the overall commodity sector. After falling below par with the US Dollar last Friday, May 10, it has continued moving lower dropping a further 3% against the greenback this week. A falling Aussie does not bode well for the overall commodity sector in general.

With the US Dollar soaring higher, with consumer sentiment ramping up towards the economy (no doubt the precisely desired outcome by the Central Banks when they created the perfect conditions for a bubble in the equity markets), consumers are feeling the wealth effect which comes from seeing their 401K's, pensions and other retirement plans increasing nearly every single day, while at the same time poor demand for unleaded gasoline has sent prices dropping at the pump. Hey, what could be better than this?  My investments are soaring, my costs are the gas pump are dropping and my food bills are even going lower, is the thinking of the average consumer out there right now. Smile, relax, enjoy life, be happy, - there isn't a care in the world.

You have to hand it to the Central Banks; they appear to have made fools out of the honest money crowd and upended the laws of economics and the very theory of money itself. Apparently we can have our cake and eat it too. All we need to do is to have the Central Banks create unlimited amounts of paper money and we can forego any concerns whatsoever about debt.

I must admit to being an adherent to the Austrian school of economics. Right now, we look like well-read DOLTS with all our predictions having been proved utterly wrong.

I tend to use sarcasm here at this site quite frequently to make my point but this time around I am not being sarcastic at all - if the Fed, the Bank of Japan, etc., can create Trillions in Dollars, Yen, etc, with no inflationary fall out whatsoever, If they can create these sums of "money" with absolutely NO EFFECTS OR CONSEQUENCES,  if they can create a runaway bull market in equities, if they can simultaneously drive commodity prices LOWER in the process of so doing, and if they can create conditions in which consumer sentiment can actually move higher, why stop at all? Why not merely have the Fed and the Bank of Japan just keep their bond buying programs in place indefinitely? I am serious - why even bring up the subject of an exit from the QE stuff? After all, they have been engaging in this stuff for years now without any fallout so why stop? Just keep it up into perpetuity thereby guaranteeing a permanently rising stock market with a never ending wealth effect for the average citizen. After all, who wants to leave Nirvana and go back to the messy details of the real world where things like debt and living way beyond one's mean can pour cold water on our wondrous illusion!

Or to put it in terms of popular culture - who in the hell would want to take the RED PILL when they can eat the BLUE PILL and blissfully live in the Matrix? The RED PILL brings pain, discomfort and despair that comes from understanding the truth. Those in the MATRIX can continue to watch Reality TV shows and live out their own lives vicariously through that of others.

Interestingly enough, wages remain flat so while consumers are not bringing home more disposable income, their costs are dropping making them feel better about things in general. I am sure it is now only a matter of time before they start rushing out and begin loading up on those big ticket items; cars and trucks, ATV's, recreational vehicles, new appliances and big screen TV's.

Given this state of mind, is it any wonder that gold is being unceremoniously jettisoned over here in the West? Heck, even the "safe haven" bond market is breaking down. Just today, the yield on the Ten Year note has reached as high as 1.95%! Less than three weeks ago it was yielding 1.6%!

"Safe Havens?" "We don't need no stinking safe havens"!

US Dollar Attempting Weekly Breakout

The strength in the US Dollar has mainly been coming from investors fleeing Europe leading to an outflow from the Eurozone plus Japanese bond investment money that is in search of higher yields. Quite frankly, in the search for yield in a NEAR ZERO interest rate environment, global investors are throwing caution and any reservations that they may or may not have out of the proverbial window and rushing into the US equity markets in anticipation of further ONCE IN A LIFETIME TYPE GAINS.

In other words, the Central Banks have unleashed a speculative frenzy for stocks which is creating a massive equity markets bubble, especially here in the US. As money flows out of various portions of the globe looking for a home in US stock markets, that money must be EXCHANGED for US Dollar with which to buy US stocks. The result - the Dollar is surging higher while the Yen and Euro, along with the other majors, are dropping lower. In other words, foreign money flows are driving the US Dollar higher (this is in spite of the clearly and visibly dysfunctional US government and corruption currently enveloping it).

I expect this to continue until something rattles the cages of the equity bulls. What that might be or when it might occur is anyone's guess at this point. Manias of this nature can continue well past the point of sanity. When they end; they end in a blaze however.

While it continues on, the US Dollar keeps getting pushed past various chart resistance levels. I have noted this week's push into a band of resistance starting near the 84 level and extending up to the session high of today near 84.25. IF, and it is unclear yet, the Dollar closes the week ABOVE this level, it has one more obstacle to clear before it sets up technically for a run all the way back to the double top formation at 89. That last level of resistance is the 85 mark.

It is the confluence of the pitchfork and the 75% Fibonacci Retracement level from the doble top back in 2010 and the low in the summer of 2011 near 73. From a strict technical analysis perspective and based on Fibonacci retracement theory, a market that pushes through the 75% retracement level,can be expected to retrace the entirety of the preceding price move. Translation - back to 89 the Dollar goes.

I want to add here that this rally in the Dollar is that which has been undercutting the entirety of the commodity complex. Hedge fund algorithms are mechanically selling across the sector. Gold is being included in that. While physical market demand remains firm, sentiment towards it in the West remains miserable. It is all about YIELD, YIELD, and YIELD. Gold throws off no yield and stocks do. That is what this is all about right now.

Sell Stops Cascade Gold Down Below $1400

Bears have been salivating at reaching downside sell stops for a while now but had been stymied by strong physical buying of the metal which had kept prices supported. With the US Dollar continuing to strengthen, and with commodities in general seeing strong selling pressure, they finally got their wish in today's trading session.

Price fell through some initial support near the $1420 level which had held the market for the last few sessions but once that gave way, downside pressure intensified until bears took it down to near $1410. Just below that they hit their jackpot and reached the sell stops. It was those stops going off that knocked price through the psychological floor at $1400. That allowed another $10+ fall in the price of gold where some short covering and bottom hunting surfaced right below $1390.

I have noted the next level of chart support for gold. It is currently just beneath today's session low of $1389 coming in closer to the $1385 level. If that does not attract sufficient buying, price will fall down into the rectangle I have noted on the chart somewhere in the vicinity of $1375 - $1365.

I want to note here yet again how volume continues to increase during these downdrafts. This is not a bullish pattern. Bears are firmly in control until we see the volume shift along with the price action.

With the mining shares completely collapsing, there is really no other catalyst for bears to aggressively cover their positions right now other than booking a few profits. Like it or not, approve of it or not, the US Dollar is the strongest game in town right now as investors globally see the US as the best place to stash money. It is a pity that the Treasury International Capital Flows data is so dated by the time we get it but I would wager good money that the component breaking out the foreign money inflows into equities is soaring.

Either way, the strong Dollar is keeping gold buying in check. One thing I might note here - that same strong dollar is now beginning to impact US exports of agricultural goods.

It's funny in a perverse sort of way that the Bank of Japan, which is printing about $74 billion each month in an effort to stave off deflation is seeing that extra supply of Yen drop its currency into an abyss while at the same time, the Federal Reserve is printing an equivalent value of some $85 billion each and every month while its currency soars blissfully into the upper levels of the atmosphere. You tell me how to mentally wrap ones mind around this sort of perverseness. All I know is that Bernanke and Friends have concocted a new elixir and discovered the Holy Grail of Permanent, Pain Free, Prosperity. We really are seeing the very concept of "MONEY" redefined right before our eyes!

Incidentally, LUMBER made a FRESH SEVEN MONTH LOW today.... Homebuilding must be gangbusters right now... (note the sarcasm here).

Gold Range Bound; Drifting Lower

Gold continues with its lackluster performance of late since failing to extend its bounce past overhead resistance between $1475 - $1485.

With equity markets continuing to head vertically north, hedge funds are not interested in safe havens of any nature, be that gold or Treasuries. For that matter, they are not the least bit interested in mining equities either.

Sentiment towards gold among the Western investing community is horrible. It is strong Asian demand which is keeping this market supported. Had it not been for that, gold would never have managed to climb as high off that recent crash lower as it did.

From a technical standpoint it had been trading in a range bounded by $1485 on the top and $1440 on the bottom. That has given way to a new and lower trading range with $1440 now serving as upside resistance at the top and $1420 or so on the bottom.

As mentioned in my post over the weekend, until investors get rattled

either by fears of inflation (judging from the TIPs spread they are no where near so doing) or until some event occurs which rattles their confidence in the Central Banks money creation theme, it is difficult to see sentiment shifting back towards gold among the hedge funds.

The commodity sector, in general, is continuing to move lower which is mind-boggling considering the extent to which the Central Banks have goosed the equity markets with their short-sighted bond buying programs and other easy money policies.  A thinking person would look at the given reasons for rallying stock prices and connect the dots with the idea being if economies were strong enough to engender a stock rally of this magnitude then surely demand for physical commodities, which normally accompany any period of true economic growth, would be rising, not falling as it currently is.

It all just confirms in my mind the disconnect from reality which is currently being seen in this equity phenomenon. For any of your Star Trek fans out there, it is like something that has been programmed into the ship's holographic program array and into which the crew could escape to live out their fantasies. In this case however, it is real enough in the sense that fortunes are being made chasing equities higher on Wall Street. This is a "sure bet" and Wall STreet loves a sure bet.

The result of this madness is that the  word, "RISK" has been rendered meaningless, a non-entity, a bizarre leftover from an ancient world of men by these paper money alchemists. Until it recaptures its meaning in the minds of men, I find it difficult to see why gold will mount any sort of SUSTAINED rally.

Generally speaking, hysterias of this nature end badly. I maintain that it will. Traders can chase stocks higher but investors, need to be extremely careful with this market. It is rising on air and nothing else of substance.

By the way, check out this chart of lumber - sure makes me wonder where the homebuilding industry is heading!

Quick Overview of Gold

Gold has had a nice bounce off the 1320 level due to robust demand for the actual metal, especially out of Asia. The problem for the metal here in the West is that speculators, most notably hedge funds, are eager sellers of the metal with many pressing it from the short side while others have yanked their money out of the metal to shove it into stocks so as not to miss the rocket blast higher and have to deal with unhappy clients.

I have been concerned that physical demand for the metal will wane as the price moves higher with those who are intent on acquiring the metal waiting, hoping, for a chance to buy it down below $1400 again. Whether they get the chance to do that remains unclear at this point.

I would like to note that the metal has now completed a sizeable bounce off that recent low but has run out of steam when it entered the $1475 - $1485 zone. In the process of so doing, it has carved out what is referred to in technical analysis jargon as a BEARISH PENNANT OR FLAG FORMATION. I have sketched the flag in heavy blue lines so that you can more readily see it. Normally this pattern forms after a steep drop in a stock or commodity which is followed by a mini uptrend. That uptrend then fails and the stock or commodity begins to move lower again.

Some TA analysts will use a break of the lower trend line formed on the actual flag portion of the pennant (think of a flag for a golf course hole and you will be able to visualize it better - In this case of a bearish flag it is an upside down golf course hole flag) - to validate the flag. That is an aggressive posture. I am much more conservative especially when you do get a recovery bounce of the nature and size that we saw occur in gold. I prefer to see the actual bottom of the flagstick taken out before confirming a flag. After all, a bounce off the recent low of some $160 is rather significant. Now, if gold had managed to claw its way back only to $1400 or so before failing, I would be a bit more aggressive but the size and extent of the buying down at that $1320- $1340 level was so strong that only the most aggressive of traders would want to call this flag validated merely because it drops through the lower trend line.

Generally how these formations are used, whether it is a bullish flag or bearish flag, is to measure the length of the flagstick. In this case, that flagstick starts up near $1590 and extends to $1320 for a measurement of $270.

If we use the case of the aggressive trader who decides that a break of the lower trend line (the pennant) has validated the flag, that $270 then gets subtracted from the breakout point, approximately $1470 in this case, to give us a downside target for the next leg lower. That would yield a gold price near $1200 as a final target.

As just stated, I do not recognize a valid pattern here until the bottom near $1320 were to give way. Gold may never reach that point or it may. I simply do not know. If it did, then I would consider the pattern validated if that level failed to hold and would have to look for a gold price of $1320 - $270 = $1050.

Let's just hope that we do not get a violation of $1320!

TIPS SPREAD - Inflation Expectations still Subdued

Those who regularly read this site will know that the last two days' worth of action in the interest rate markets has piqued my interest. I am still unclear on what the rather sharp rise means and whether it is just movement tied to currency market volatility or it is a reflection of something else.

I have gone over to look at the TIPS spread to see if there is any pattern or development there that warrants further attention.

Thus far I do not see anything of note. There is no spike higher indicating a shift towards inflation worries in the market at this point even though yields have risen.

As you can see, back during the depths of the credit crisis, when deflation fears were at their peak, the spread collapsed almost to zero. That meant that the market had basically ruled out any chance whatsoever of the least bit of inflation.

Since the Fed has gotten involved with the QE programs, the spread has moved up towards 2.5 and then dropped off as the various QE programs ran their course and expired (You can see where the inflation expectation falls below 2% when the market feared the impact of a QE cessation). As each new QE program was announced, the market built back inflation expectations between 2.0 - 2.5% or so. Currently we are looking at an expected inflation rate by the market of 2.3% as of Friday this week.

It seems to me that the Fed is using this indicator as a means of determining whether or not its policies are having the appropriate impact on investor sentiment. Based on what I can see of this spread, those Dovish Fed governors who are expressing concerns about inflation not being high enough do not really have much to justify their concerns.

I think we would have to see the spread move below 1.75% to give their view any credence. I would think that if the market believes the economy is strong enough on its own to no longer need any QE efforts, talk of ending that program would not move this spread to narrow significantly. In the past, when those programs expired, the market moved back towards expecting deflationary pressures to begin reasserting themselves.

The flip side to this is the ceiling on this spread. Since the beginning of 2008, the spread has not exceeded 2.64%. Anytime it has run up above 2.5% it has not lasted long even with all the massive QE. It just goes to show you that in spite of the enormous sums of money that have been created through the QE programs, it has barely been sufficient to offset the debt that was being extinguished. Inflation expectations have not been nurtured in spite of it all.

AT what point this changes is unclear but once this spread were to ever exceed that 2.64 - 2.65% level we would know without a shadow of a doubt what the market was thinking in regards to inflation. I still believe that at some point we are going to have to pay the piper for all this massive money creation; I am just not sure about the timing of it all.

Let's keep an eye on this spread to see if we can get any advance warnings of when that just might be.

Trader Dan Interviewed at King World News Markets and Metals Wrap

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

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/5/11_KWN_Weekly_Metals_Wrap.html

Aussie Breaks Par with US Dollar

Yesterday the Japanese Yen broke "PAR" with the US Dollar, a significant development. Today it is the Australian Dollar or "Aussie" which has now broken par.

I mentioned this currency because of its ties to the commodity sector in general. While it is not an exact relationship, the Australian Dollar as a general rule of thumb tends to perform strongly when commodities are in a rising trend. This is  because of the nature of a large part of the Australian economy, which is involved in the production of raw materials. Remember, it was soaring Chinese demand for commodities across the board which helped fan the flames of Australia's economy and contributed to its growth. With Chinese demand apparently slowing somewhat, Australia is feeling the impact. Just this week the RBA lowered interest rates there and brought about a wave of selling into the currency as a result.

Today we are seeing across the board weakness in the commodity sector with hardly a single commodity in the green except for copper and feeder cattle, which are moving higher on the bearish USDA grain reports. That is resulting in more selling of the Aussie. Even the Canadian Dollar is lower today as it too is getting some residual selling coming in as commodity prices, most notably, crude oil are sinking.

This is what makes the move in the interest rate markets even more interesting. The Goldman Sachs Commodity Index (GSCI) is really taking it on the chin in today's session even as interest rates soar higher. One has to wonder which one of these signals is more accurate right now. So far the macro funds are jettisoning commodities as the strong US Dollar has their algorithms selling across the board in the sector. If however, some begin to suspect that the Central Bankers might just get their wish of generating "benign" inflation, then we might see some bottoms forged in the commodity sector although that is way too premature to look for at this point in time. It is just something that we will see if and when we do get a solid shift in sentiment towards inflation and away from deflation.

I might make a note here and tell you that the weakness in the Yen is beginning to impact consumers over in Japan. A large number of products are imported into that country, particularly energy, and with the Yen collapsing, the cost of those imported goods is rising rapidly. This is no doubt the reason that we are seeing such volatility in the Japanese government bond markets over there right now.

Abe and company are getting their wish - they are going to win the battle against deflation no matter what, but the "no matter what" is that which should worry the citizenry over in the land of the rising sun.

Yields Spiking Higher

I am not quite sure what to make of it just yet but we are seeing yields rising across the latter end of the curve today. Yields have generally been quietly sneaking up in the last few sessions but when the Yen fell below PAR with the US Dollar yesterday, something changed in the interest rate markets and they are now spiking.

So far we have watched stocks rally into the stratosphere without a large outflow from bonds in general. I think this is because traders/investors still are a bit leery of this broad based equity market rally especially given the signs of a general slowing of overall global economic conditions. With commodity prices sinking, there has been a consensus that inflation is a non-factor and thus bonds are an okay place into which to diversify some money, "JUST IN CASE".

This week however seems to have brought an indication that things might just be shifting a bit. As you can see from the chart, the Ten Year is pushing back towards the 2% level. Rates have not been able to sustain themselves above this level for any length of time. If they do, then we will want to take note of it since it would be a very serious indicator that sentiment towards bonds and thus inflation, could be undergoing some re-evaluation.

What is especially interesting to me is that this spike higher in interest rates is occurring against a backdrop of sinking commodity prices. On the one hand we are getting deflationary signals in that sector. On the other hand, interest rates are rising. Hmmm......

We keep getting comments from the various Fed governors that inflation is not a concern. As a matter of fact, some were just recently concerned that it was perhaps too low! Needless to say, this assessment does not square with a rise in rates on the back end of the curve. The market is obviously beginning to contradict this although I want to repeat that this is not as of yet confirmed.

Stay tuned on this one.... These interest rates are the single most important market on the planet in my opinion and any shift in sentiment, albeit even a small one, must not be ignored.

US Dollar Surge through 100 Yen Derails Gold

This afternoon, the long awaited movement by the US Dollar through PAR with the Japanese Yen finally occurred. As it did, the entire Forex machine was thrown into convulsions with the US Dollar moving sharply higher against most of the majors. Thus far it has gained almost 2% against the Yen, 1% against the Euro; 1.4% against the Swissie, and nearly .85% against the Aussie. The British Pound and Canadian Dollar are also both moving lower against the Greenback although not to the same extent being witnessed in the other majors.

Gold was weaker throughout most of the session failing to extend on yesterday's late session gains but when the Dollar broke through par against the Yen, sellers came out of everywhere to sit on gold.

Silver and copper both moved lower as well with silver once again failing at $24.

Moving over to the gold chart - I want to continue to emphasize the falling volume in this chart. Speculative fever simply does not exist right now judging by the lackluster volume. Rallies are not generation any enthusiasm which is what one wants to see if the momentum is shifting in favor of the bulls.

Chart resistance beginning near $1470 and extending towards $1485 is confirmed by today's action. Support down near $1440 might be tested overnight depending on the attitude of Asian buyers towards the metal. If they believe that additional downside is possible, they will pull back on their bids and wait for prices to drop lower before swooping in to buy. Remember, physical market demand is what is keeping the gold market supported; if that falters for any reason, speculators will be eager to sell it especially with stocks moving higher. Today, the Dow pushed through 15,100 for a while before a bout of profit taking set in. Specs love equities right now (except for gold and silver miners it seems) and continue to chase prices higher there while jettisoning gold.

I am going to be watching the entirety of the commodity complex quite closely the next few days since the Dollar looks like it wants to now move higher across the board. If so that will more than likely continue to feed into the current spec trade of dumping commodities in favor of equities. With the Aussie weakening further today and having fallen down through its chart support level near 101, commodities could be coming in for a rough ride once again. We are going to want to see how it closes out the week tomorrow.

Were it not for gains in the Grains and in Coffee and Unleaded Gasoline, the commodity complex would have been lower based on the GSCI.

Time precludes me from putting up a chart of the US Dollar right now but it has a chance of testing 83 tomorrow. If it can put in a solid gain above that level, odds favor it making a run to 84. We need to keep in mind that while the link between the US Dollar and gold has weakened somewhat in recent times, there still exists a connection that cannot or should not be ignored.