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.