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.