"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


Tuesday, October 1, 2013

Falling Commodity Prices undercut Gold and especially Silver

I have been posting a chart of the broad commodity sector for many years now here on this site and elsewhere. Earlier on, I employed my favorite, the Continuous Commodity Index or CCI, which unfortunately died an untimely and unheralded death at the hands of its originators. I have recently moved over to employing the Goldman Sachs Commodity Index in lieu of the more widely known CRB index, which I believe is far too heavily weighted in energies to paint an accurate picture of the broader commodity complex.

Regardless of the reasons I have chosen, the chart speaks for itself. Commodity prices are going no where to the upside. They have not broken down decisively to the downside either but the chart looks like it is leaning lower than higher. This fact, and the fact that the US labor markets are atrocious, is what is undercutting both gold and especially silver.

I have said it many times now, silver must have an inflationary environment if it is to thrive. That is lacking and as long as it is, silver is going to UNDERPERFORM gold.

Also consider something else when you view this chart - the US Dollar is trapped in a broad sideways range between roughly 79 on the bottom and 84 on the top. Currently it is working in the lower portion of this range. In the past Dollar weakness has led to widespread buying of commodities across the board, irrespective of their fundamental supply/demand equation. That is no longer the case. Buying commodities merely because the US Dollar is weaker is no longer a wise option as the markets are beginning to focus more on the fundamentals of specific commodity markets. That in itself is healthy in my opinion as hedge fund buying in the past has skewed price discovery and is not healthy for any commodity over the long haul as it sends false signals to the industry.

Speculative driven rallies in any commodity lead to exorbitantly high prices which foster more production. There is a definite time lag but it is nonetheless axiomatic. We are seeing that now across many individual commodity markets.


  1. If you look at the chart of gold, you will see a Head and Shoulder, nearly horizontal, with a neckline around 1285, shoulders 1360 and head at recent tops.
    You can imagine what happens if we break the neckline.
    The 2-day candle chart has Bollinger Bands in a range, so there too, if it doesn't bounce and we have higher volatility, then we are likely to target 1230 in a short time :(
    Of course, decreasing prices are feeding the depressing mood of the summer gold bulls, who will probably take their profit (or losses) faster than last time...
    I'll post a chart tomorrow, no time (and big cold :)) now

  2. Dan,

    I really really really appreciate your website. But I found something very very interesting/maybe odd about your commentary. Especially when you warn about gold and silver in a very deliberate way. After your warnings . . . the next day. . . .

    Do you know in advance when gold/silver are going to be pummeled? Your timing almost seems too good. After your warnings - things fall 2-4% on average - the next day.

    Take that as a huge compliment/make money. However, from my viewpoint - you appear as an insider who gets signals from the bullion banks.

    Congratulations to you if you get inside information. And thank you for giving us inside information.

    1. jmsvett;

      Thanks for a good laugh... If I were an insider I think I would be sitting on my own island in the S. Pacific sipping drinks out of hollowed out coconut shells rather than having to deal with these markets!

      Trading is about reading the charts and interpreting sentiment. That is what I try to do here.

      One last thing - it is not the bullion banks who are selling gold right now. They are buying it... hedge funds are doing the selling.


  3. Trader Dan
    Thanks for you constant good objective sense. As a believer in gold the counterintuitive nature of the way gold is trading is the opposite of fundamentals. If you were thinking the shutdown was gold positive as evidence tells you it should, of course it goes strongly the other way. Perhaps gold is just in a bear market despite the zero per cent logic in it. Fundamentals and technicals worked in gold for ten years now it is the opposite. That means something and if it is a collapsing bear market what a kick in the head. The fundamentals bailed us out since 2001. They are still here but are taking us in reverse. That means something about the system. I just don't what it is.

    1. Concord - thanks for the kind words... the current thinking in gold is that a government shutdown means no paychecks for furloughed workers as long as it continues and that means a hit to consumer spending and thus, from an economics point of view, a slowdown in the Velocity of Money, thus no inflation..

      throw in the fact that many traders have been accustomed to selling commodities in general whenever fears of slowdown to the economy arise, and down goes gold.

      The only thing that never seems to go down is the US equity market, which is a rigged, one way market because the monetary authorities have NOTHING else to point to in order to dupe the public into believing that the economy is just fine and dandy.

      Reality will catch up to the equity world at some point and when it does, it will be obvious... until then, it is no worries and full speed ahead and buy, buy, buy for equities in this upside down world in which we live.

  4. Good TA Dan.
    I think Comex PM's stuck in range with declining interest, uncertain on the surface, but building anticipation for a direction. While markets burn out from derivative and stimulus OD, the players are suffering withdrawal symptoms even as the dose ceiling is defined by the sky's limit.
    Predictably surreal, star credit rater S&P has strode back into battle for possibly their last stand, undeterred by legal ordinance and pariah status:
    S&P Threatens To Cut US Debt To Junk
    Monday, September 30, 2013 at 3:26PM
    by Wolf Richter http://www.testosteronepit.com/home/2013/9/30/sp-threatens-to-cut-us-debt-to-junk.html
    "...More ominously, S&P warned that if Congress failed to pass a debt-ceiling hike before the out-of-money date in mid-October, it would cut the U.S. to “selective default.”

    Selective default isn’t exactly the end of the world, but close. It “indicates the issuer ... had failed to meet one or more of its outstanding debt obligations.” S&P explained that it “would analyze the changes in the political and economic landscape in determining a post-default rating,” but typically, it warned, a selective default ends up knocking credit ratings to “between CCC and B.”



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