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!