"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


Friday, July 19, 2013

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....


  1. Thanks Dan! I really appreciate your analysis. You the man! Have a great weekend...Looking forward to your commentary on KWN.

  2. On KWN:

    "Today whistleblower Andrew Maguire stunned King World News when he said that hedge funds which are heavily short gold will get massacred and may in fact go under."
    "People say, ‘But they’ve got lots of profits.’ But bear in mind that with their short profits, instead of crystalizing them, they’ve continued to add to these shorts to unprecedented levels and at much lower price levels."

    Get massacred? haha. So dramatic! Thought if the hedge funds keep adding to these shorts the trend is still down and hence the only group or individual that gets "massacred" are the longs?
    Once a upon a time, i think these Max keiser's and the like were chanting "buy silver, crash JP Morgan". Well that didnt happen haha~! In fact, JP morgan shares retured 70.29% year to date!

  3. Thanks as usual for all this detailed analysis.

    Here is a long-term chart on the 2-week candles.


    1) the upward move from 750 to 1950 $ was build with practically no correction inside. Therefore, I consider it as a single move and apply the Fibonacci retracements on it. They seem to be relevant, and gold prices (on a weekly basis) never closed below the 62% retracement at 1205 $, which is good news for the bulls! 62% retracement happen many times in a bull trend. So the bull trend is not threatened yet.

    2) Let's suppose that the bottom is in. Then, I drew a second Finonacci retracement levels, taking into account the whole down reaction movement from 1950 to 1170. Well...first meeting point is at 1360 $. And a 62% retracement of this move would propel us to 1650$ !

    Conclusion : middle-term, I think it's a good time to start and take some risk here on the long side, provided that prices break through the 2 week configuration of another "ligne de poussée" (it would be the 3rd one), i.e above 1307 $. Because I could target first 1360, and then the remaining of my long position could wait for next 50% and maybe 62% fibo levels at 1560 and 1650 $.

    But where to put a stop loss if I'm wrong?

    Let's watch the 2-day candle-chart.

    The Andrew's fork I traced a some time ago is working : the median acts as a support. With a small margin, I guess I could use it to cut my losses in case I'm wrong, around the 1260 $ area. The ema15 is acting as a resistance, but if we break above 1305 $, it will be below the prices, one more validation. As well, the MACD 9 20 7 will probably be crossing higher.

    So let's see: buy around 1310, stop loss 1260, first target 1360 then next fibo levels up to 1650. That's the kind of plan I may consider next week in order to get early in the bullish train if the correction is over. The size of my position will take into account the amount I'd be losing if I'm wrong.
    Have a nice weekend,

    1. P.S : not sure it's a good idea to buy stop above 1305 with the upper bollinger band overhead on the daily chart :( could be a quick head fake, so need to wait for at least a confirmation at the close. Ideally, I'd like to see prices go down towards 1260 $ and see what happens there before making any decision.

  4. Dan, don't know if you've commented on this, but what are your thoughts regarding the recent backwardation in gold lease rates and news about the shrinking eligible gold in JPM's vaults? thanks!

    1. JThai;

      I have commented on it previously in some posts here. All the talk about backwardation is meaningless to me as a trader because the structure of the board does not confirm it. When and if that does, then I will note that and look to the repercussions that always follow from markets that are in true backwardation. Gold is not.

      I do however put more stock in withdrawals from the Comex warehouses because I have long advocated that the only method to thwart the bullion bank capping scheme is to force them to come up with the gold to meet delivery requirements. The problem is that none of the hedge funds want to do that. They are paper pushers and not gold handlers. That is the reason that the price capping scheme was successful. Now that the metal is leaving the approved warehouses, we might be seeing some signs of further pressure on the shorts to deliver. If they cannot, then they have to exit the position or cover it, meaning that you get another source of buying pressure.

      If the stock drawdown continues, it will be interesting to see the exchange's response.

  5. if management of these mining companies is on the ball, they'll be hedging all right - hedging their energy input costs!!!


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