"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


Wednesday, July 31, 2013

Gold Chart via ADX by request

Here is a look at the daily chart of gold as it stands after the dust has had a chance to settle from the commotion resulting from the FOMC statement of today.

Here is my take on the metal as of now:
it has made a nice recovery off of the low just below $1200. It is stalling out however at the resistance zone noted on the chart. That comes in near $1350 and extends towards $1360.

Bulls will need to push past this region soon or gold does run the risk of seeing some stale long liquidation which would have the potential to drop the metal back down towards $1280. Based on what I am seeing of this chart, if they do clear through $1360 there does not appear to be much in the way of overhead chart resistance until near $1390.

This particular indicator, which I detailed a while back on the site here is showing that the downtrend has definitely stopped. That is evidenced by the continued downward progress of the ADX line (dark purple) which is heading lower from a lofty 47 reading. Remember, a rising ADX indicates the presence of a trending market, either up or down is immaterial.

As far as the two directional indicators go, the red line or -DMI remains above the blue line or +DXI using this particular time frame for reference. This tells me that for right now the bears are still in control of this market and the downtrend has the potential to resume if any downside support levels give way.

If however the bulls can power through that overhead resistance, this indicator would more than likely generate a buy signal.

Other indicators are in a buy mode already but they too are showing signs of a stalling in upside momentum.

Gold had a strange and somewhat convoluted reaction to the Fed minutes as if it was unsure of what to do. First it moved a bit higher, then sold off strongly as players focused in on the statement dealing with the lack of inflation. Then later in the afternoon, the metal gathered strength moving back higher again as the focus shifted to the more dovish tone of the FOMC statement.

Confirmation of that was provided by the rally in the long end of the curve as bonds came well off their worse levels of the session and actually moved into positive territory about the same time as gold broke higher. Evidently, both the bond market and the gold market are now expecting no curtailment of the Fed bond buying program.

We may have to wait until FRiday to see if anything changes that current sentiment.

August Gold enters its Delivery Period

With all the chatter out there about shortages of gold, Comex warehouse stocks drawdowns, etc., the delivery process for August gold could be interesting.

I must say that given all the recent fanfare, to see Deutsche Bank being a large issuer on the first delivery day seems to take the steam out of this talk. They are delivering 1,103 contracts worth of gold at 100 ounces each.

JP Morgan was the largest stopper with 847 contracts picked up for the house and 200 for their clients.

Remember when we had all that talk that Deutsche was taking delivery of Comex gold in order to return it to Germany.... Well...

The truth is that the gold delivery process has always been and will remain opaque. Firms may stop in previous months only to show up as big sellers in subsequent months. We simply have no way of knowing why they are buying or selling because we are not insiders working within their firms.

That is why, while the process is always interesting to observe, drawing conclusions from it can be rather risky.

A better gauge of the demand for gold is merely watching the price action. That will tell you what you need to know and eliminate all the worry and fuss over trying to figure out who is doing what behind the scenes in the gold market. If elephants are walking through a plot of ground, they always leave big footprints that are difficult to not see! Remember that.

FOMC - Worried about a Lack of Inflation

That is the big thing to take away from today's FOMC statement in my opinion.

Here are the two key excerpts in my view:

"Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable."

"The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back towards its objective over the medium term."

If anything, the Fed became more "dovish" if you ask me as they are back to talking about deflation concerns. This translates to no let up for the foreseeable future ( to use Bernanke's words from his recent Congressional testimony) for the bond buying program referred to as QE.

One would expect this to weaken the Dollar against some of the majors, as is currently taking place, and by default help to shore up the gold price. However, it is this concern about the lack of inflation that should get the attention of gold traders. They are focusing more on that than they are on the weakness in the US Dollar.

However, and I think this is important, their statement just further underscores the fact that all future Fed actions in regards to the QE program are going to continue to be heavily reliant on future economic data. If the data shows steady improvement, talk about tapering will increase. If the data shows weak or lackluster growth, tapering talk will be put off. In other words, traders/investors are on the same exact page with the Fed in that we are all going to be sitting around looking at each piece of economic data as it is released and attempting to view it in the light of potential Federal Reserve action based upon it.

An example - if we get a strong payrolls number in the upcoming jobs report, tapering talk will pick up, the Dollar will rise, gold will sell off and the bond yields will rise. If the number is anemic, the opposite will occur. As you can see, we are effectively right back to where we were before today's FOMC statement was released.

Isn't it peachy that our markets have degenerated into entrail reading of the FOMC?

Copper nearing Chart Support - At Key Level

More and more copper is taking its cues from economic data and developments out of China. I can well remember the days when the US was king as far as Copper prices went. If the US economy was humming along and if housing was strong, it was a fairly simple bet that copper prices were going to move higher or stay firm.

Nowadays it is China that is the primary driver of copper prices. Last week's announcement that the authorities over there were ordering production cutbacks in order to deal with what they consider to be a surplus of goods, sent base metal prices on a downward spiral. Copper dropped hard, pure and simple.

However, there is still a US influence on the market and today's GDP number seems to have breathed enough life into the red metal that it has thus far been able to hold above what I consider to be a key technical support level on its price chart, namely the $3.00 zone.

Dr. Copper, as it is affectionately known in trading circles on account of its excellent predictive capacity when it comes to diagnosing the health of the global economy, is signaling a period of relatively flat, decidedly unimpressive growth.

As you can plainly see from the chart pattern, there is nothing bullish about the metal whatsoever. The one redeeming factor has been its refusal to break below the $3.00 level. If, and this is another one of those big "IF's", copper were to collapse through that level, it would signal another slowdown coming our way. My hunch is that the Central Banks of the developed world will more than likely maintain enough monetary stimulus to try to prevent this from happening however.

That should translate into a further continuation of the sideways pattern on the chart with the metal attracting enough buying to keep it limping along above the $3.00 level. It will take some pretty strong economic news to push it up and away from the top of the pattern, but especially above that downtrending 50 week moving average.

What this translates too is that as far as inflation signals go, the red metal is certainly not generating any at this time. That takes away one plank from gold if the industrial metals are generally weak.

Moving over to crude oil and the energy sector... Crude has dropped off its best levels and unleaded gasoline prices are back under the $3.00 level (barely). Thus the energy sector has seemingly run out of upside steam for the moment. That is not to say that it is about to fall apart; what it is saying is that the recent strong drive upward has stalled out.

Couple that with what is expected to be a very large corn crop and soybean crop, and there is not any help for the inflation boogie man coming from the food sector either.

In other words, we are continuing to see the absence of any strong, sustained upward move across the broader commodity complex. With the job market here in the US remaining subdued, it is difficult for me to see, at this time, where the inflation pressures are going to come from, particularly if WAGES REMAIN FLAT.

I should also note here that the yield on the Ten Year Treasury Note briefly popped above the 2.7% level this morning before retreating slightly. keep in mind that the last time it moved above that level, Fed Chairman Ben Bernanke changed his somewhat hawkish stance displayed in June to that of a SUPER DOVE in July when he uttered those now famous words about QE continuing "for the foreseeable future". That sent the yield crashing lower but once again, it has quietly snuck back up again. HMMM... wonder what the FOMC statement will therefore give us this afternoon???? Maybe they will have to sent more Fed governors back out to disavow what they might have written for us.

Either way, it looks as if gold is going to continue being held hostage to the vagaries and whims of the Central Bankers, as is the entire economy for that matter.

I will leave you with this chart of the Australian Dollar for now. The Aussie is particularly sensitive to the commodity cycle as the economy down under is heavily dependent on the production of raw materials, a large chunk of which end up being sold to China. As you can see, it is sinking and sinking heavily. This does not bode well for strength across the commodity sector.

Saturday, July 27, 2013

Friday, July 26, 2013

Gold showing more signs of Resiliency

Gold was under pressure for most of the session today as the weakness in crude oil and most of the commodity sector - some of which was related to news out of China that their authorities were forcing curtailed manufacturing production - tended to undercut any inflation fears.

After the close of the pit session when the only thing that was open was the screen trade, the metal slowly garnered additional strength and began pushing higher. As I type this, it is now $4.00 higher on the day, a push of some $11 off the pit session close.

That, plus the fact that the HUI managed to claw its way back higher also towards the end of the session, is certainly constructive price action as it takes away any downside momentum edge that the bears had worked so hard to obtain here on Friday. It does seem that the usual Friday selling is appearing but enough players are willing to wait for this selling to make its appearance and then move in and ambush the shorts. That is certainly a change of pace from what we have been accustomed to seeing.

I am of the view that it is going to be difficult for the gold bears to take the metal down and keep it down UNLESS THE DOLLAR COOPERATES with them by moving higher once again. Today, was another day that saw a strong wave of dollar selling - this time accompanied by lower interest rates in the US Treasury market.

At this moment, for whatever reason, the Dollar seems to be running out of friends. Keep in mind that the recent strength in the Dollar was due to a couple of factors.

First was the rising US stock market in a low interest rate environment. Foreign money has been flooding into the US in search of yield and the US markets were the best game in town as far as many were concerned. All that foreign currency must be exchanged for US Dollars with which stocks can be bought and that has contributed to upward pressure on the greenback.

Second was the rising interest rate environment here in the US. Again, in a global economy in which many investors are starving for yield, the thinking has been that out of all the major economies globally, the US was perhaps the only one in which interest rates could be expected to move higher. The others were stagnant. That translates to more foreign inflows and more currency exchanges this time to be used to purchase US debt.

This week something seemed to change in that regards. My own suspicions are that traders are coming back to focusing on the upcoming circus of watching the US argue whether it should increase the size of its national debt faster or slower. Notice, I am not even talking about trying to reduce the damned thing.

This same impasse is what we went through late last year when the government was running up against the federal debt limit. Here we are right back there once again. I believe this is spooking those who might otherwise want to buy Dollars to invest in US Dollar based assets.

As long as this sentiment continues, and the Dollar moves lower, gold will garner dip buying support. If the Dollar were to somehow re-embark on its upward journey, gold would see more selling pressure.

As you can see on the gold chart, the price is oscillating around the zone created by the 40 day and 50 day moving averages. Bulls cannot take it out of the top of that zone yet but neither can the bears break it down. However, with the 10 day moving average turning higher and the 20 day as well, the technical momentum is beginning to shift more firmly in favor of the bulls.

Next week will be important then. If the bears cannot break it down early in the week, there is a good chance that the metal is going to break overhead resistance as some of these more stubborn shorts are going to begin looking to exit. We have already seen quite a bit of hedge fund short covering in this market based on the recent COT reports but there is still a fairly large contingent of them hanging in there and selling into rallies.  That crowd is a pure technical analysis based one and if their computerized black boxes tell them to start buying, that is exactly what they are going to do.

I would say that as long as this week's low near $1297 does not give way, the bulls have short term control of the market.

I also want to note here that gold is back to knocking on the door of that very same level from which it plummeted $180 back in June when Chairman Bernanke started pretending he was suddenly a hawk and was boldly proclaiming his Tapering talk. Of course we all are keenly aware of his morphing back into the supreme dove of the Fed with his now famous "for the foreseeable future" comments in regards to the length of the current bond buying program.

Either way, the $1360 level is that level from which gold collapsed and here it is, a month or so later, and gold is right back up there as if nothing happened. That is why this upcoming week's Fed watch will be a key for this market.

One last thing to watch for next week, and I stated this in an earlier post, is the delivery process for the August gold contract and its subsequent price action. We will be watching to see whether it runs higher in price than the deferred contracts but even more importantly, whether the front of the board takes on a backwardation structure or not. If it does, $1350 should give way easily to confirm that and then $1360. If not, then we can put that to rest for a while again.

The mining shares are tracking the movement in gold quite closely this time around. The HUI is not breaking down but is holding steady and is trying to build up some steam to see if it can press higher. The key to a trending move in the HUI lies above the 290 level. Until then the shares are moving higher off a bottom that appears to be very solid and progressing into a range or consolidative type trade. I am sure that those long term holders of the shares are relieved to see some of their net worth recovering!

August Gold Par with October Gold

In continuing to monitor the gold spreads, I wanted to note that the August gold contract, which will be heading into delivery next week, has moved to now trading at par with the October gold contract based on the current sets of bids and offers. It is still discounted to the most active December however as well as the February 2014 and June 2014 contracts.

Here are the current sets of bids at this moment:

August 2013        $1321.30
October 2013       $1321.30
December 2013    $1321.60
February 2013      $1322.60
June 2014            $1324.70

Hopefully those who have more time on their hands than I do can monitor the delivery process more closely than I will be able to do and keep us posted on how that goes next week.

Price still needs to push through $1350 to get anything more exciting going. I cannot overemphasize this strongly enough. PRICE MUST CONFIRM ANY TALK OF SUPPLY TIGHTNESS.

The HUI is weaker today also and is not providing any support for the metal at this point in the trading game.

Next week traders will be focusing on the Fed once again.

News out of China derailed silver and especially copper today. It seems the authorities there are ordering factories to Cease and Desist overproducing. That is being interpreted by traders as meaning a further slowdown in growth for the biggest base metals user on the planet. The HSBC manufacturing purchaser managers index hit an eleven month low over there this week.

I have no idea what is going on with the Yen today. I can tell you that there is increasing talk about the upcoming US budget battle once again. Here we go with the now "normal" battle between those who believe the US is spending too much money that it does not have  (count me in on this group ) and those who think it needs to spend more and raise taxes again.

By the way, did any of you who follow golf see that Phil Mickelson, who played perhaps the best round of golf of his entire career at last weekend's British Open in Muirfield, will end up paying nearly 61% of all this earnings out in the form of taxes!  Something is horribly wrong when the state takes that kind of money from anyone. I have long said that if the tithe, (10%) was good enough for the Almighty to extract from His ancient people, then it should be good enough for puny, mortal man to extract. Apparently the state puts itself above God but then again, what else is new about that?

Monitoring some Gold Spreads

Sometimes a picture can be worth a thousand words so perhaps this graph of the spread between the delivery month August 2013 Gold and the most active December 2013 gold will help illustrate a point that I have been attempting to make in regards to the idea of backwardation in the gold market.

The spread is obtained by taking the price of the August gold contract and subtracting the price of the December gold contract from it. If the August is gaining on the December, the line on the graph will rise, as it is indeed doing.

I wish to note that I have stated several times in previous posts that the spreads in gold have indeed been tightening. That is worth monitoring; however, the market has not moved into a backwardation structure.

Now that August is entering its delivery period, we will get the chance to see if buyers of gold, who are using the Comex to source it, will indeed be willing to pay enough for it to take its price above that of the rest of the field.

Some have asked me in private emails why a market is generally in contango (the nearby months trade below the distant months in price). The reason is that the commodity in question, in this case gold, has to be stored. It also, in nearly all cases that I am aware of, must be insured against loss. Those are costs that are added into the price. Obviously the longer one has to pay storage costs each and every month, and the longer one has to insure it, the more the monthly premiums add up.

Those prices are added in by the futures market as it attempts to move the price structure of the board to line up with the current supply/demand dynamic that traders are working with.

As commodity markets are constantly in a state of flux, these spreads will change according to the changing views of players.

Generally speaking, and again this is a general tendency, markets that are in uptrends will display a tightening of the front month spreads. Gold is an unusual animal in the sense that it is not like cattle or corn or beans, etc, which are eaten and consumed, or copper which is used in electrical wiring, etc. Yes, there are industrial applications for gold which consume it in the sense of taking it out of bullion form , as well as jewelry demand, but for the most part, gold simply changes hands from one entity/person to another and is then stored elsewhere. In the case of jewelry, the gold is still there. It is merely in a different form.

I should note here that even as gold was imploding in price, these spreads were in the processing of tightening which is quite different than that which we can usually expect across most other commodity markets. More precisely, the spreads gave no indication whatsoever of the massive barrage of hedge fund selling and long liquidation which saw the price of gold collapse nearly $400 this year at one point.

I personally do not trade the gold spreads because they are more often than not, about as exciting as watching paint drying and quite frankly there are times that I do not understand what the heck that they are doing.

Here is another spread chart - this time it is the October Gold contract vs the December gold contract. Here too the spread is tightening but has not yet seen the October trading at a premium to the December

We'll continue to keep an eye on all this especially as August deliveries begin to occur. Remember however, spreads or no spreads, tightening or no tightening - the final arbiter is the ACTUAL PRICE ACTION on the board. Strong demand led bull markets consistently breach overhead chart resistance levels. When all is said and done, price alone matters because that is the collective vote of all market participants as to what the VALUE of anything is at any given moment. The market always has the last say!

By the way, as I am finishing up typing these comments, I see that Crude oil is breaking down more sharply once again. There were some analysts who were suggesting gold was gaining strength because of rising crude oil and unleaded gasoline prices which were incipient signs of inflation pressures building in the economy. As previously stated however, energy is just one shoe of the inflation boogey man; the other is food costs and those are sinking....

Either way, with crude moving sharply lower today and breaking downside chart support, with grain prices moving lower, today, at least for this day, wholesale food and energy prices are moving lower and that takes the inflation factor away from the minds of traders, again, at least for today.

Thursday, July 25, 2013

Gold Backwardation Misinformation

Let me preface this short missive by stating that this is pretty much a rehash of a comment I posted in the comments section below one of my recent articles in response to some erroneous information being supplied by a particular reader.

I also wish to state that this is in no ways meant to be singling him out for any sort of ridicule or mockery in any fashion. We have enough of that stuff that goes around these days. He is however, symptomatic of those who continue to greatly err on the subject of backwardation and thus I thought it best to put these comments up as a general post in the hopes of a more widespread dissemination.

I am also glad to see that my pal Jesse over at his website, (which is listed here as one of my favorites ) has also done the gold community a great service by attempting to also define this term and dispel some myths surrounding it. I would urge my readers to check that out when you can.


Here are the comments I posted earlier today repeated in their entirety with some fresh additions.

Thanks as always for your comments. What I am actually saying however is that backwardation is not happening at all on the Comex, not even for a few minutes. I was using absurdity to illustrate the absurd.

For example - here is the latest series of bids for the August, December, February and June gold comex contracts in order as of this snapshot.

August  2013           $1324.2
December 2013       $1325.1
February 2014         $1326.1
June 2014               $1328.4

As usual I am sitting here and have been watching this all morning as well as a goodly portion of last evening's trade and not once has any nearby contract had a bid higher than a back month.

There is no backwardation occurring on the Comex at this present time for any time interval whatsoever.

I am attempting to teach folks about this so as to prevent the spreading of more disinformation that so frequently afflicts the gold bug community. This is the reason why more often than not, many of them get discredited and end up doing disservice to their cause.

The reason why some contracts occasionally have a last trade price higher than a more distant month is because the more distant months are not trading as frequently because there is no liquidity in those months.

when you have a volume of trade of 182,000 in a nearby versus 2,085 in a more distant February for example - there are going to be times when the last trade price of a more distant month might be at a discount to a nearby. That is merely a function of low liquidity. If you want to see where the contract might trade IF AN ACTUAL TRADE OCCURRED, you have to look at the Bids and Offers and see where those are currently sitting.

In the time it took me to type the above comments, here is now the latest series of bids...

August 2013            $1325.3
December 2013       $1326.3
February 2014         $1327.4
June   2014              $1329.7

Again, notice the market is in contango at all times. There is not a single instance of backwardation.

This might help dispel any confusion about this current misinformation going around but in all honesty, I doubt it. Most gold buys are pretty closed mind about this stuff having made up their minds beforehand, truth be damned.

Here we are now in the Asian session this evening as I post these new set of comments and here is a new set of bids for those same contract months at this moment:

August 2013          $1334.70
December 2013    $1335.30
February 2014       $1336.20
June 2014             $1338.20

Once again, NO BACKWARDATION....

Why am I making a big thing out of this? Perhaps because I try to be a stickler for truth. I have been in this industry now as a private trader for more than 2 decades. In that span, I have seen enough charlatans, quacks, con artists, flim flam mans, and what have you. I have also seen a proliferation of misinformation abounding now that anyone with a keyboard and an internet connection can suddenly dub themselves an "expert analyst".

The gold community in particular seems to be plagued with this sort of thing, far more than any other commodity complex. Yes, we have them in the grains as well with the constant spreading of misinformation, falsehood and assorted 'rumors' that just so happen to line up with the position that those who are propagating have taken in the market that they are attempting to either talk up or talk down.

When it comes to the topic of backwardation, I explained the significance of that last evening in a response that I wrote in the comments section.

here are the key highlights from that post:

It  (BACKWARDATION)  that that the commodity is in a serious short supply which is not able to keep up with current demand levels. What the futures board then does is to move into backwardation to entice sellers to part with the metal RIGHT THEN AND NOW instead of holding onto it later in hopes of a better price in the future.

That is done by pushing the price higher  ( in the nearby months) ABOVE The back months and taking away the incentive to hold or store the particular commodity.

A market with a true supply shortage will REMAIN THAT WAY all the way into the closing bell and will maintain that structure for as long as is necessary for the current shortage to be alleviated.
Based on this fact - gold is not in backwardation and has not been at any time whatsoever on the Comex during the entire time this backwardation talk commenced and picked up some gullible followers.

Look, I get it - those who are advocating for honest money ( as I am ) and who are generally bullish gold all the time ( I am not) , without exception, even as it is plunging, will latch hold of any sort of story that can be construed as strongly bullish because it CONFIRMS THEIR BIAS TOWARDS THE LONG SIDE of the metal. That is not hard to understand as it is human nature. However, to try to present something as factual when it is in fact, incorrect, is what causes me to take a stand against it.

Gold does not need a campaign of misinformation to define it is honest money. What too many seem to forget is that outside of the gold community, many other investors/traders do not share their view of the metal.

Let's be blunt, for those in that group, gold is an asset that throws off no yield whatsoever. Thus, they had better have a good reason to take investment capital and allocate it into the metal. If they are getting decent returns on their investments elsewhere, and have no concern whatsoever about inflationary issues, they are not going to buy gold. It really is that simple. We who favor honest money must come to terms with the fact that an extremely large portion of the global investment community does not share our views about the value of the metal.

As far as any "Panic" to buy gold (this is how some are now defining the current state of the gold market as they peddle the backwardation nonsense), the futures board simply does not confirm that by its present contango structure. We just came off what I would describe as a near "panic" in the corn market back when the March contract expired and when the May contract expired. That was a true case of backwardation.

I put far more credence in the withdrawals of the Comex warehouse inventories and the GOFO rates. By the way, Dave, my buddy in Denver, whose website is also linked to here at my site, has done good work on this topic. But, as I have written before and will do so again - without a true backwardation structure in the gold futures market, those things alone are not a sufficient reason for me as a trader to rush in an take a long position in gold. I need market price confirmation and chart pattern confirmation.

One last thing - too many people are erroneously defining the word "backwardation" by confusing it with the term "basis".

As I have already defined it, backwardation is a structure or condition of the futures market that occurs when the price of the nearby contract is trading above the more distant month contracts. It is a signal of a tightness in supply at current demand levels.

BASIS is an entirely different matter. Some are claiming that because the SPOT MARKET CASH PRICE of gold may be, at some times, higher than the nearby futures contract, that the market is in backwardation. AGAIN, It IS NOT.

What a strong basis means, ( when the cash market price is above the futures market price ) is that demand for that commodity, be it gold or soybeans or wheat or whatever, is STRONGER THAN AVAILABLE SUPPLY at THAT PARTICULAR LOCATION.

We see this all the time in the grain markets. I also see it occur at times in the various direct markets for hogs as well as some of the individual packers buying cattle in Nebraska or Kansas or Texas.

There are times in the grain markets that one elevator will be paying higher prices for grains than the nearby on the board because of logistical issues such as a flooded river, etc., which is making it difficult for the grain to get to their location. They will then have to offer incentives to get it there. That does not necessarily mean that there is a world-wide shortage of that grain; it does mean that as far as that location goes, there is a shortage. The strong price being offered is the incentive to give sellers every reason to try to get their product to that elevator operator.

My friend John Brimelow publishes an excellent "Gold Jottings" report where he is perhaps the best in sourcing the cash market prices for gold in India and elsewhere in the Far East. John will report on whether the spot price for gold is at a premium or at a discount. That is a good gauge to demand IN THAT LOCATION OR AREA however and it does not necessarily translate to the same thing here in the US or elsewhere in Europe for example. Heck, there are times when buyers in India are paying huge premiums over the world price of gold elsewhere. That does not mean gold is in backwardation. PERIOD!

When we do however see a STRONG BASIS PLUS a BACKWARDATION STRUCTURE ON THE FUTURES BOARD, then we have the real deal.

I also want to echo something that Jesse mentioned in his nice piece on this; those who keep crying up backwardation in gold had better damned well be careful that they do not get what they are wishing for. As one of the posters here has said, gold at $50,000 or silver at $500 means that I do not want to be living anywhere near civilization. The sheer chaos, fear, breakdown in society, etc. are not the things that I wish for no matter whether gold goes up or not.

I am already fearful enough about the state of our nation, its gargantuan level of indebtedness, its moral decay, its hedonism and lack of work ethic, its dumbing down, and its corrupt monetary system without having to worry about MAD MAX BEYOND THE THUNDERDOME coming to a city or town near me!

Gold owners and buyers - just lighten up a bit... life consists of far more than the last price of gold, or silver for that matter. Family, Friends, Faith - these are far more important... do not let the means to an end become your reason for existence or happiness.

Down goes the Dollar; Up goes Gold

Gold was firm for the entirety of today's New York session after encountering a round of selling in Asian trade last evening. Additional downside momentum was seen following on the heels of yesterday's retreat from chart resistance but dip buyers moved in above psychological round number support at $1300, never allowing it to test that level.

If we wanted to see whether or not those dip buyers were going to make their appearance in Asia, we got our answer.

The market dipped down to as low as $1308 and then moved quickly higher last evening with the buying continuing at a steady pace into Europe and New York.

Late this afternoon, and I am still unclear as to what the exact reason for the sharp selloff was, the US Dollar came under rather intense selling pressure, in spite of the fact that interest rates had been rising for most of the session. The Yen, the Euro, the Aussie, the Swissie, it did not matter - all of them shot upward in a fashion that was reminiscent of their performance that day earlier this month when Bernanke gave his now famous comment about QE continuing "for the foreseeable future". I must have missed some comment from some Fed governor or something but either way, something lit a fire under the Dollar bears.

As the Dollar imploded lower, gold caught another gust of wind and jumped with the result that the metal put in a $30 range from top to bottom and now goes into Asian trade with upside momentum, the exact opposite of yesterday's status! As I said yesterday:

"She loves me; She loves me not; She loves me; She loves me not".

Here we go again.

While the HUI was up, it's performance was rather lackluster given the sharp thrust higher in the metal.

Now we face the Friday Follies once more to see whether or not gold gets its usual beating on that day or if it can mount a counter rally. For the metal to generate some further upside, $1350 needs to be cleared.

By the way, take a look at the following 2 hour composite chart I put together comparing the price action in gold to that of the US Dollar... Can you say the words. " MIRROR IMAGE IN REVERSE"?

Note that as the Dollar gets whalloped, gold shoots higher. Gold is back to acting as the ANTI-DOLLAR.

Wednesday, July 24, 2013

Housing Number Trips up Gold

Today's strong new home sales number caught gold bulls off guard, as it once again fanned the flames of  "TAPERING" talk after Bernanke had put that to rest for a while. Traders had been expecting the recent rise in interest rates on the long end of the curve to impact new home purchases. When the number came out better than expected, it set off a wave of selling in the foreign exchange markets with all of the major currencies dropping off against the US Dollar.

The reason?  - the talk shifted back yet again to the US being the only major global economy in which long term rates were expected to rise. If those higher rates did not apparently impact the all-important real estate market, so the thinking goes, then rates have room to work higher and the Fed can indeed taper sooner rather than later again.

"She loves me; She loves me not; She loves me; She loves me not".   We may see the exact opposite tomorrow for all that any of us know. Once again, we are back to FED-WATCHING. Sigh.....

The proof of this was the sharp selloff in the Treasury markets that dropped the long bond down over a full point and also sent the yield on the Ten Year Note back above the 2.5% level once again. It is currently up above 2.60% as I type these comments.

A rising US Dollar and rising interest rates sent gold lower with the market retreating from the zone near the 50 day moving average and thus unable to build on its gains from Monday and Tuesday of this week. Interestingly enough, the HUI is down quite sharply today (nearly 5%) surrendering all of its gains from yesterday and coming quite close to matching this week's low. It is still trading above that breakaway gap however. We'll have to wait and see if some dip buyers come in later this afternoon. For now, some of the shorter-term oriented metals bulls have been spooked out.

Silver is struggling to hold its gains above that key $20 level. If it can do that and do it convincingly, it can be construed as a moral victory for the bulls considering the sharp selling that is hitting the soybean market and a large number of other commodities in general. That macro trade of selling commodities in the face of a rising dollar picked back up again today with that housing report. If that trend continues tomorrow, it is doubtful that silver is going to be able to stay above $20. It needs help from a "buy commodities" theme and that is difficult to see if the Dollar does not weaken right away.

Crude oil looks as it is breaking down on the charts but there has been a rash of fund type buying supporting that market and whether or not that crowd is ready to give up on it just yet is unclear. From what I can see of the chart, if the price breaks below $104.25 or so, we could see a fair number of downside stops being hit with some of the funds exiting the market.

Moving back to the Dollar - it is not down quite as hard against the Euro as it is against the Yen today. Some of that is due to the fact that some economic data out of Europe was decent today. That is tending to hold some support under the Euro for the time being although the general theme of Dollar buying is dominating today's forex trade.

We'll see how Asia reacts on this retreat in the gold price this evening. I should note that while the spreads on the futures board are fairly tight, the futures board is not in backwardation. Thus there is no signal being given from the futures market itself that there is any shortage of gold at this time. That could change however but for now, nothing doing.

If gold is going to continue moving higher and not experience a deeper setback, it will be imperative that the price find support near the $1300 level if it does dip lower. Failure to hold there and it will see $1280. To generate a renewal of the upside momentum, $1350 needs to be cleared.

Tuesday, July 23, 2013

Late Session Surge in Gold Conquers 50 Day Moving Average

The strong rally in gold was yesterday stopped dead at the key 50 day moving average. Many of the big funds closely track this average. If they are short, they tend to sell against it; it they are short and price exceeds it, more often than not, they will cover. Additionally, if they are long, you may see them adding to existing longs.

Throughout most of the session day, gold was consolidating its recent gains. There was some chatter that some physical market demand, notably out of China, had eased off and that had some short-term oriented longs booking profits after realizing some nice gains. That selling, combined with some fresh short selling was serving to hold the metal in check throughout most of the session. Late in the day however, as the mining stocks caught another gust of wind higher, the metal surged upward breaking the 50 day moving average.

In the process, it also pushed past a band of overhead horizontal chart resistance. You can see that on the chart below.

This is getting interesting. We have both of the shorter term moving averages (10 day and 20 day) now moving higher in sync. The 10 day has not yet completed a bullish crossover of the downtrending 50 day moving average but barring a collapse in the price, looks to soon do that. That has not occurred since last July, which was the last time we witnessed an UPSIDE CROSSOVER of the 10 day above the 50 day. Stay tuned on this one as it could possibly happen this week. That would trigger some further fund buying.

Just like they led the metal to the downside, the mining shares are currently leading the metal to the upside. Gains have been very strong the past few days in the sector as shorts are being forced out and new buyers are coming back in.
That breach of the gap region noted on the chart sent the bears scurrying for cover yesterday and to further compound their misery, bulls pushed them up some more. The result has been a new gap above a previous gap which was a heavy resistance level. That is a bullish sign.

for the sector to begin a trending move to the upside of some duration, it will necessitate further gains but particularly a push past 290 where pretty good selling pressure can be expected. For the short term however, the bulls are back in control while bears are regrouping looking for a fresh spot at which to try selling again.

As long as the US Dollar is the whipping boy of the Forex markets, as it has been of late, bears will have their work cut out for them. We might very well be seeing the market shift back to focusing on the budget battle once again in the US. The government will be up against its borrowing limit soon and that means more of the usual crap that comes out of Washington. You know what I mean:

"we cannot cut anything because it will slow down the economy or put people back on the streets without any food or shelter, blah, blah, blah and more blah".
Meanwhile, my kids and yours will be the ones paying for all this profligacy and vote buying. As a matter of fact, my grandkids and yours will be paying for seeing that it is the size that it is.

At least those who own the mining shares can breathe a bit of relief that their net worth has stopped declining and has actually reversed somewhat.

The grains were whalloped today, as they should have been. The bulls in there have been killing the crop every damned day with too much rain, not enough rain, too cold, too hot,. etc,... meanwhile the crop looks to be improving with the return of milder weather and more moisture during the key pollination stage. Soybeans in particular were whacked pretty hard today which might have put a bit of pressure on silver. Still, the grey metal managed to keep its footing above the $20 level meaning that we should see some nervous shorts the next few days. For silver to get something more positive going, it will take a closing push through $22.50 at a bare minimum. At least it has stopped going down. Now if we could just get rid of the damned annoying radio commercials about how the price is going to double and skyrocket before you can blink....

Monday, July 22, 2013

Gold adding to Asian gains

Gold is adding to its gains from the Asian session last evening in impressive fashion as the climb today has been steady and methodical. It has all the appearances of a strong short squeeze accompanied by an inflow of new long positions, which is exactly what this market has been needing to propel it higher. If the specs start falling back in love with gold again, the rally will have further to run.

It is not hurting things that the HUI is roaring higher today! It is up over 6.5% as I type these comments so gold is firing on both cylinders right now.

A quick take on the gold chart.... note that price has run exactly to match the downtrending 50 day moving average. That is a big level that the funds watch closely. Gold has not been above that key average the entire year and only briefly when it last poked its head above there back in November 2012. If the 50 day moving average cannot hold it, then we will see even more short covering with that hedge fund short position looking quite vulnerable. It is do or die time for those funds playing the metal from the short side. They either hold it here or they will be forced out.

I included a graph of the RSI down below to show you that this is the strongest up move for gold this entire year based on this indicator. It has also matched the highest reading that occurred back in November of last year when it was last above the 50 day moving average.

Combine these and it is evident that the metal has forged a bottom on the chart back at $1180. Now whether or not this thing can start a sustained uptrend is unclear but certainly, a strong push past that 50 DMA is going to take it much closer to so doing. I would also like to see the RSI exceed the 60-65 level and push up towards 70. Bear markets do not normally reach the 70 level.

I noted a band of overhead horizontal chart resistance to show you that the market has now pushed into a region where technically, it can be expected to encounter selling pressure. If the bulls can absorb this, and thus far they are holding their own here about midway through today's New York session, then the bears are going to lose their grip.

Silver has been pulled higher by gold and has pushed past stubborn resistance at $20. Further helping it along is strength in old crop soybeans which are being fueled by more talk of dryness. Grain bulls have been crying up too much water, not enough water, everything they can in order to convince the world that the crop is terminally dead once again. This may be the last gasp for soybean bulls however. If we get some moisture soon, then they are in trouble. If not, prices can run a bit higher but the fact remains that we are going to have a big crop this year and US soybeans are too expensive on the world market. It is domestic demand that is supporting the market for now.

Sunday, July 21, 2013


Gold FINALLY has taken out that pesky overhead resistance at $1300 during early Asian trade. Volume thus far is average but the fact is that the bulls were able to overcome the selling that has consistently shown up on recent approaches towards that key level.

If the market can stay above $1300 as it heads into European trading, but especially New York trading, then we should get some further short covering and actually begin to see some fresh money begin flowing back into the metal. That will be the big test for gold.

Lots of ifs and buts, but if the HUI can close that chart gap and push past 245 then we will have the both cylinders firing at the same time.

One thing I am also noticing is that the price of crude oil is remaining stubbornly high. While food prices are moving lower across the futures markets, the energy sector refuses to break down. If anything, it is escalating higher. It is difficult to see how crude prices could stay this strong given the anemic nature of the economy but other supply-side factors are at work in that market which are keeping a firm bid in it thus far.

A higher crude oil price can be ignored as an inflation factor if players see it as more of a short-term, news driven feature rather than more lasting set of changes in the fundamentals. If the thinking begins to shift and traders see the higher crude oil price as something that is going to stick around longer than initially expected, some might start anticipating a cost push factor from higher energy inputs.

If that becomes the case, we should see some impact on the bond market. As of now, bonds are up even in the face of the higher crude with the thinking being that it will act as more of drag/tax on the economy rather than heating up any inflation push.

Saturday, July 20, 2013

Friday, July 19, 2013

Ten Year Treasury Note back below 2.5%

My thesis is that the recent sharp spike higher in interest rates on the longer end of the yield curve sent shock waves and convulsions into the hallways of the Federal Reserve's headquarters. This is why I maintain that Chairman Bernanke's abrupt reversal and subsequent contradiction of his June comments concerning tapering of the bond buying program was so forthcoming.

The Fed watched in horror as the bond vigilantes did their thing and took interest rates higher. Concerns began arising that the higher yields were already pushing prospective home buyers out of qualifying for certain properties and were reducing downward the size and price of the homes that they were able to quality for.

Enter the Chairman and VOILA!.... presto, change-o, down comes the yield on the Ten Year to back below the 2.5% level. It is going to be entertaining to say the least to see how this all important indicator behaves as we move deeper into the latter part of this year.

My guess is that if it gets too disobedient and begins to climb too sharply once again, we will see more backtracking from the respective Fed governors about the pace of the tapering....

Gold Showing some Resiliency

Wednesday's rejection of gold from the $1300 level emboldened sellers who drove the market down towards the chart support zone of $1270-$1260. Buyers surfaced first in Asia that evening followed by more in both the European and New York sessions on Thursday. Today, Friday, more buying was seen which enabled the market to move back up towards the top of this constricting range in which gold is currently working.

The top of the range is $1300. Gold is just a few dollars away from testing that once again and may very well do it on Sunday evening/Monday. We will have to see.

I am of the opinion that it will take a convincing push PAST $1300 which remains above that level to bring in some fresh speculative inflows into the metal, flows which have heretofore been lacking.

Based on this week's COT report, the predominant factor in the recent advance has been short covering on the part of the giant hedge funds. What that same report reveals however is that there is hardly any NEW BUYING from fresh longs occurring in that camp. Gold must have that in order to generate more upside potential.

On the KWN Markets and Metals Wrap this week, I discussed what I believe is the re-emergence of hedging activity by the miners. Their activity is showing up in the Producer category. I think it important to note that for nearly a decade now, we have not had to deal with any significant amount of hedging coming from the mining community. That appears to be now changing as per one of my previous posts.

From an investor/trader perspective, this is significant in the sense that it brings a fresh new source of selling into the paper gold futures market which we have been able to dismiss for nearly 10 years.

The focus has been primarily on the bullion banks as the ones supplying the bulk of the sell paper throughout the past decade. I believe that they will still be a force to deal with SHOULD GOLD BEGIN TO RALLY but selling from the miners will also have to be absorbed by the hedge funds or any other speculators who will be playing gold from the long side when the technicals shift in that direction for good.

Back to the short covering featured this past week - all major reversals do start with short covering but they must see the infusion of new longs to sustain any upward price movement. Short covering is more closely akin to a bottle rocket - fast, noisy, lots of excitement, but when it fizzles out, back down to earth it comes. What is required to keep anything aloft for long is FORCE. In the futures market that force is supplied by FRESH BUYING.

That remains to be seen as to whether we are going to get it. If we do, we can more definitively say that a lasting bottom is in. I remain hesitant to go that far until the market proves that it can at least put and maintain a "13" handle in front of the gold price.

One thing that is also constructive is that the beleaguered mining sector, as evidenced by the HUI, is also showing some moxie. The index failed to close through the gap this week after pushing into it whereupon it promptly retreated and moved lower. Today, it showed some amazing strength and worked higher this time closing into the gap once again. The key for the index remains working past the gap and that means pushing through 245 and doing it with some gusto.

If that occurs, particularly if it can manage to do this two successive days, then you will see more short covering occur in the respective shares that comprise the index and some new money also flowing in. There are a number of people who believe the gold shares are seriously undervalued but are quite hesitant, understandably so, to commit capital in size into the sector for fear of getting burned. A technical signal is therefore needed to convince them to come back into the water in a larger way.

Will we get that next week? Stay tuned.... There is a big election this coming weekend in Japan that might have an impact on the Yen and therefore the price of gold depending on its outcome. That could be the dominant factor in early Asian trade Sunday evening over here. Quite frankly, Japan is a mess with a national debt that exceeds twice the size of the entire domestic economy over a TWO YEAR PERIOD! At some point the sheer size of the debt begins to crush everything in its path. Forget about Godzilla! Their debt is the only Godzilla they should be fearing!

Then again, one wonders if that is exactly where we are ultimately heading ourselves over here in the US....

Wednesday, July 17, 2013

$1300 Rejects Gold

Gold was stopped cold in its tracks today at the psychological round number resistance level of $1300. It had initially reacted to Ben Bernanke's comments, (which most market analysts and players viewed as dovish) by moving smartly higher. During the Q&A session which followed, gold was slammed lower by a wave of very strong selling.

In watching the price action it occurred to me that just as we suspected in our notes from yesterday, nothing new or fresh proceeded from the Chairman. In other words, there was NO FODDER for the bull. Gold had already run higher last Wednesday when Bernanke first reversed himself from his comments in June. At this point in the game however, that is now old news. What gold needed to propel through $1300 was something far more definitive than what Mr. Bernanke gave the markets today.

Think about it this way - the QE will continue as long as the economy needs it. Okay - what is new about that? We have seen this QE going on for some time now and to the minds of most market participants, there is still no real inflation threat looming on the horizon. What is there to make them waver the least in their convictions that inflation is benign? Answer - there isn't anything... YET.

Now, if crude oil and unleaded gasoline do not soon set back then that might change. But with a large grain harvest expected, food prices look to be moving lower. As stated previously in another piece I wrote - energy prices may be high and moving higher but food prices are going the other way. Just look at a chart of new crop corn or wheat, or sugar, or cattle, etc.

Both of these need to be moving up simultaneously to impact the consumer (and business to a certain extent although that segment is more impacted by higher fuel and energy costs) and to generate the all-important headlines needed to derail an entrenched, "there is no inflation" psyche.

Technically, two things happened today: Gold failed to extend past an obvious chart resistance level while simultaneously, the HUI FAILED TO CLOSE THAT IMPORTANT CHART GAP I noted in yesterday's missive.

Both occurrences are viewed as technical failures and will bring in additional selling by the shorter-term oriented trader. What will be key for gold is whether or not it can generate enough buying to keep it above the "former resistance zone now turned support" that can be seen on the chart. Let's call that the zone between $1270 - $1260. If it can hold here, it will bounce back and set up yet another try to best $1300. If not, down towards $1240 it will go.

I should also note that volume in today's rejection at the $1300 level is very strong. I view that as a bearish sign that a lot of bulls threw in the towel and gave up on a breakout above $1300. Also, guys who have been playing gold from the short side were emboldened to come back in.

I am unclear just yet as to how much of this jump in volume is associated with rollovers as those are occurring in increasing frequency as we move deeper into July. Most traders will be moving out of the soon-to-be-in-delivery August contract and heading into the more active December. That might have distorted the volume somewhat and thus take what I say here about it with a grain of salt but nonetheless, volume was strong regardless.

Silver? What more can you say about it other than the fact that it too failed to push past tough overhead resistance at $20. The level is now reinforced with significance on the technical price chart. For this metal to start any fireworks whatsoever, that barrier MUST BE BREACHED. If not, it ain't going nowhere. Poor English grammar but solid trading analysis.

Silver bulls simply must prove their mettle or the bears will grab control of that market and take it down for another test of $18.

One more thing I want to note was that the yield on the Ten Year note closed the day just below the 2.5% mark ( 2.491 to be exact). Interest rates have set back ever since Bernanke made those comments last Wednesday. Here we are now a week later and they have yet to exceed their recent peak. That being said, it might not be too much longer before they try sneaking up again. Everything will depend now on the content of each piece of economic data that gets released.

Tuesday, July 16, 2013

Strong Day in the HUI

The mining shares finally showed some signs of life in today's session (for a change) but still have some work to do in order to turn the chart pattern more friendly.

Notice that the index managed to CLOSE INTO THE GAP region noted on the chart; it has not, however, managed to close ABOVE that gap. If this index fades and cannot maintain its footing up here, technicians are going to view that as a bearish signal and will be emboldened to come back into the market selling. At least the bulls showed some mettle today which was rather pleasant given the weakness in the broader equity markets.

I do think that the odds are favoring a bottom in this sector based on what I can see thus far. That does not mean these shares are ready to rocket higher as some suggest. What it more likely denotes is some consolidation or sideways movement until the bulls can convincingly seize the initiative.

The metal itself is having trouble clearing $1300, round number resistance that needs to give way before I personally will feel better about gold's prospects for the short term as well as that of the miners.

As mentioned here previously however, I expect more mining companies to be coming on with hedging programs so gold will meet selling resistance on the way higher from the companies that dig it out of the ground. There is no way they should make the mistake of not locking in some profits on future production. Even worse than that would be to end up producing at a loss!

Tomorrow we are going to have to sit around and parse the words that come out of Ben Bernanke's mouth once again, unfortunately. Whether he walks back some of his comments from last Wednesday remains to be seen. Personally, I still believe that his sole purpose in uttering those words was to knock down rising interest rates and send the bond vigilantes scurrying for cover.

The Fed, nor the US government for that matter, DOES NOT WANT higher interest rates. If however, Bernanke sends the US Dollar sharply lower, look for noise to start emerging out of the Eurozone. They do not want a higher Euro over there for the most part. The Swiss do not want a strong Franc either.

Truth be told, I look for him to say what both sides want to hear meaning that we will probably have the same old, same ol'. In other words, "we need accommodative monetary policy to continue but will look at the economic data to determine when and how much to begin scaling back or tapering those bond purchase. Some news flash!

Silver is still struggling to convincingly clear and LEAVE BEHIND the $20 level. Until it does, I am not interested in it.

Saturday, July 13, 2013

Some Chart Analysis on Gold

In light of the recent apparent reversal by Fed Chairman Ben Bernanke when it comes to the timeline for any TAPERING of the Fed's Bond Buying program, affectionately known as "QE" for short (I like to think it stands for QUICK and EASY profits for Wall Street), I felt it might be a good idea to take a look at where gold stands on the technical price charts.

Let's start off with the Daily Chart only as I am pressed for time but wanted to get something posted for the readers. Note also I am using an old but very reliable technical indicator known as the Directional Movement Index. I like this index because it is basically a trending indicator. It is thus very useful for determining whether a market is in a TRENDING pattern or whether it is in a sideways or NON-TRENDING pattern.

A quick primer on this indicator is therefore in order before proceeding - it consists of THREE lines; two of them are DIRECTIONAL INDICATORS ( +DMI and -DMI ); the third is the TRENDING INDICATOR ( ADX ).

You can see those noted on the chart. The +DMI or positive directional movement indicator is the blue line; the -DMI or negative directional movement indicator is the red line and the ADX is the dark purple line.

When prices are moving higher, the +DMI will move higher and the -DMI will move lower with the result that +DMI will BE ABOVE -DMI.

When prices are moving lower, the -DMI will move higher while the +DMI will move lower with the result that -DMI will be ABOVE +DMI.

If the blue line is rising therefore and remains above the red line, the price is rising.

If the red line is moving higher and remains above the blue line, the price is falling.

That takes some getting used to among those new to using this indicator but once that is understood, the direction of price is very easily seen by a quick glance at the respective lines.

The third indicator, the ADX (purple line) will rise whenever a market is in a trend and fall when the trend is ending. When the market is moving sideways or is trendless, the ADX will move lower until a new trend emerges (either up or down; it doesn't matter) when the ADX will begin to rise once more.

When a market is in a strong uptrend, you will have the +DMI moving higher with the -DMI moving lower  with the +DMI remaining ABOVE the -DMI. You will also have the ADX rising.

When the market is in a strong downtrend, you will have the -DMI rising with the +DMI falling with the -DMI remaining above the +DMI. You will also have the ADX rising.

That being said, look at the chart and see if you determine whether or not gold is in a trend and if so, what that trend has been, up or down? If you chose DOWN, you win the stuffed animal prize.

Can you see how the red line crossed above the blue line back in November of last year? That was your sell signal in gold. It was also an early warning of the impending break of downside horizontal chart support at the critical $1680 level.

Note at that time the ADX was down below 15 indicating the lack of a trending move as it had already turned lower upon the inability of gold to clear $1760. The downside crossover of the blue line  ( +DMI ) below the red line ( - DMI ) was a warning to bulls to book profits or at least protect profits, not necessarily go short.

From the point of the upside crossing of the red line above the blue line in November, this market was to be traded from the short side notwithstanding all that claptrap about gold backwardation, etc.

Now look at the ADX during the time inside the rectangle. You can see that gold was making up its mind whether to continue moving sideways or break lower. The ADX was not moving higher but was stuck in a sideways to lower pattern between 20 and 15 indicating the lack of trend. Once the price broke down below horizontal chart support at the $1640 level, the ADX began to turn up and cleared the 20 level indicating that a downtrend was forming. Note all the while this is occurring, the red line remains above the blue line. Negative directional movement is dominating the chart. This means one DOES NOT BUY no matter what the various headlines some in the gold community were posting on their websites.

From that point on, the ADX continues rise with a few brief periods of mild dips in it before it goes on to rise to new highs. It is now turning down from a very lofty level up near 45 which indicates there is currently a PAUSE in the downtrend, a downtrend which I might add has been very strong and very long in the tooth.

However, while the red line is moving lower and the blue line is moving higher, the fact remains that the two directional lines have NOT CROSSED. What this means is that from a pure chart perspective, the current move higher in gold is nothing more than a rally in an ongoing bear market.

For this market to change complexion, I will need to see an UPSIDE CROSSOVER of the +DMI or blue line ABOVE the -DMI or red line. Keep in mind that because the downtrend in gold has been of such great extent and duration, the ADX will continue to move lower for a while even if price continues to ascend further. A way of interpreting this in English is to say that it will take quite a move higher in the price of gold to REVERSE the downtrend AND SIGNAL the start of a NEW UPTREND.

Remember, a market can end a trend without necessarily beginning a new trend in the opposite direction right away. By the way, have you noticed that DESCENDING 50 DAY MOVING AVERAGE? It is still some $80 or so ABOVE the current price so until or unless that average is cleared, bottom calling is ill-advised. Only short term, TRADEABLE BOTTOMS, are justified but those mean exactly what I stated, "SHORT TERM". I am attempting to illustrate here what the inputs are that are required before I personally will feel comfortable saying we have a MORE LASTING BOTTOM in gold. Perhaps we already do - then again, perhaps we do not. At this point this chart does not confirm a lasting bottom only a pause in an ongoing downtrend in the metal.

Lastly, the variables that one chooses to set up the indicator determine how quickly it will turn and give off trading signals. When it comes to gold, I prefer to use a bit longer than normal timing factor so as to weed out some noise and prevent false signals. This is however the daily chart. This same indicator can be used on all time frames down to 5 minutes if you want although I think the usefulness is pretty much over once you move down any shorter than a two hour chart to be honest.

I wish you readers to know that the reason I am writing this article is to help you to learn to think and trade or invest for yourselves and not be moved by every headline or the latest gold community buzz word or theory. Most of the people who write those websites ( not all of them)  make their livings by selling ads on them based on the number of hits. They have a vested interest therefore in generating as much website traffic as possible as it increases their monthly checks. Those of us who actually make our living IN THE MARKET, have no such luxury but must be prudent. One can find experienced traders and one can find reckless traders but one will search in vain for EXPERIENCED AND RECKLESS traders. There are no such creatures as any of the reckless ones have long ago become road pizzas on the trading floor of the exchanges having failed to survive as Traders long enough to actually have gained enough experience to know what the hell they are prattling about.

One more reminder, this is not a Holy Grail of an indicator. It is just one of many that I use in my tool box. Some are more responsive; others less so. But what I try to do is to use is several trusted indicators to develop a consensus and then tie those in to various support and resistance levels including Fibonacci retracement levels to determine how to approach a particular market. Along those lines you might want to check in with my friend, Trader Garrett, whose website is listed in the favorites section over on the right hand side of this blog. He is also a veteran trader and both of us share the same philosophy when it comes to putting our hard-earned capital at risk in a market. Neither of us are given to sensationalism. Hard nosed realism is the key to survival if you are going to trade in these markets.

Keep in mind an old axiom of mine that sums up how I feel about the need for humility. Opinions are like armpits. Everyone has two of them and they all stink. The only opinion that ultimately matters is price action and whether or not you are on the right side or the wrong side.