Gold ETF, GLD, Bleeding Inventory

Traders and Hedge Fund Managers continue to monitor the largest gold ETF, GLD, for clues to its next direction. For the entirety of this year, 2013, the amount of tonnes of gold in GLD has been dropping - rather sharply at that.

Regardless of where this gold is going, and that is indeed a legitimate question, the facts are that hedge funds, which are the drivers of today's markets, are leaving GLD in droves and taking those funds to play with equities where the big returns are currently coming from.

I would watch to see if this drawdown of gold stores in GLD shows some sign of abating before getting too bulled up about gold. Please see that Goldman Sachs Commodity Index chart that I posted earlier today. One cannot make much of a case for inflationary pressures building in the economy when the commodity complex is not confirming it!

If you look at that chart, and look at this chart, you can see that the biggest speculators on the planet are currently not at all enamored with gold the way that they had once been. When they fall in love with the metal again, and we will know that by monitoring this chart, we will see the results in higher prices that are sustained alongside of dip buying on price retreats. Currently we have specs SELLING RALLIES in gold and covering on moves into support levels when it appears that support will not give way.

Meanwhile, we continue to see many in the gold community continuing to remain stubbornly, wildly bullish. This is more wishful fantasy than solid analysis. Expect a broken clock to be correct at least twice a day. At some point the gold bulls will have their day. Those who have to trade for a living however would do better to try to ascertain the future actions of the hedge funds, because it is that group which will drive the gold price. As long as they are in a selling mood, rallies will not stick.

What is needed is something that changes the complexion of the technical price charts. When that occurs, the computer algorithms of the hedgies will return to buying. Then and only then can we get excited about a SUSTAINED move higher in gold.

One of the greatest mistakes many would-be traders make is allowing emotions, hopes, wishes, etc. to cloud their judgment of what currently is. Wishful thinking is not a trader's friend. If you want to survive in these markets, and prosper, you must become a hard-nosed realist able to master your emotions. Show me an emotional trader, and I will show you another failed statistic. Trading is a business. Treat it that way. Get control of your emotions, both wild-eyed optimism and excessive pessimism. Neither of these are your friend. Read the price action from the chart and then form an opinion. Far too many form their opinion and then go the price chart and try to make IT (the price chart) conform to their opinion. Novices do this and fail. Professionals do not. The play the cards that are dealt to them.

Commodity Prices Continuing Trend of Downward Movement

Following is a weekly chart of the Goldman Sachs Commodity Index or GSCI. Notice the large red line moving from left to lower right. That indicates the general overall trend of the sector which as you can clearly see has not been bullish.

What you are seeing here in graphic form is the result of money flows OUT of the sector by large speculative forces. That money is of course flowing IN to equities.

I am not sure what it will take for this trend to reverse but until it does, upside rallies in silver are going to be difficult to sustain.

One thing you might also notice is that there seems to be a decent base of support between 575-550 on this chart. My take on this is that while the overall complex is moving lower in price, certain sectors within it seem to be near values that would indicate that there is not a lot of additional downside left. Determining exactly what those sectors are takes a great deal of fundamental research and well as comparing chart action to those findings.

What this means is that while we are a long way from seeing sharp upside rallies and SUSTAINED uptrends in the complex as a whole, certain individual markets may merely grind sideways to slightly lower for the foreseeable future until something happens to arrest this general development.

 For investors with a longer term time frame (notice, I am not saying 'traders'), we might be nearing the cost of production in some commodities meaning that your downside is limited.

I would also add a caveat here; if that base at 550 were to give way for any reason, look out, because the deflationary forces would be reasserting themselves. If that were to occur, and I would be very surprised if it did, expect for the bond market to reverse course and for rates to start dropping once again.

Trader Dan Interviewed at King World News Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King over at the KWN Markets and Metals Wrap.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/6/1_KWN_Weekly_Metals_Wrap.html