Holiday Trade in Many Markets

About this time of the year, many market participants who trade professionally begin to scale back and lighten up on positions as they look to take some time off from the day to day warfare in the pits. Typically, that means lower trading volumes on certain days oftentimes resulting in some pretty wild swings in price as the liquidity dries up. Floor locals look forward to this time of year as many of them can make some very big gains as they play in the sandbox while some of the larger bullies are no longer present. Stop hunting becomes a favorite pastime.

Do not be surprised therefore if we manage to see some strange, sometimes inexplicable price action. Deciphering some of this can be challenging at times as the thin volume makes price movement somewhat dubious due to the exaggerated nature of the swings.

Gold has moved higher over the last two days bouncing from $1225, which is a bit higher than where I had pegged support ( $1220 - $1215). After spiking as high as $1257.80, it quickly encountered a round of selling which knocked it well off of that level. As I type these comments, it is up $1.00 from yesterday's pit session close.

Meanwhile, silver clawed back over the $20 level and did what we expected it to do, namely elicit more selling. Copper also moved lower. Both metals continue to be sold on rallies.

I have already written some comments on the mining shares ( HUI ) but suffice it to say, expecting gold or silver to mount any strong rally on a day in which the mining shares are further getting beaten with an ugly stick is foolhardy. Another near 3% drop in the HUI puts it just a hairbreadth away from psychological support at the 200 level.

Since the shares have been prescient when foretelling the decline in the gold price, odds favor further weakness in gold to end the week. Much depends on how active the physical market is. Don't forget that gold deliveries for the December Comex Gold contract will begin shortly.

In looking at the price chart I still do not see anything at this point that would be considered to be the least bit bullish. Momentum continues moving lower with many indicators still not at extreme oversold levels. The ten day moving average ( noted on the price chart ) has tended to hold gold rallies for last month or so meaning that we are reaching a potential inflection point once again.

 Also I have noticed that the rallies in gold continue to be driven mostly by short covering which means that they will be limited in duration. You get a spike higher on some decent volume which measures the urgency to exit shorts whereupon the market then proceeds to drop down and begin a leg lower all over again.

What I can say at this point is that this week's low near $1225 had better hold or gold is going to test that support level I have noted above. If that fails, I can see it moving below $1200. At that point we will have to wait to see where more bargain based buying surfaces in sufficient quantity to absorb what is surely going to be momentum based selling by hedge funds and other large speculators.

Pressure in crude oil, even in the face of stronger products, weakness in the grains and bean markets today, was offset by a bit of strength in some of the softs and livestock markets with the result that the commodity complex was a mixed affair today. That is why gold did not do all that much nor did silver. Outside cues were mixed as well.

Continued Weakness Across the Mining Sector

While gold is experiencing a bit of a bounce over at the Comex, the mining shares continue their disappearing act as the selling is just relentless. What concerns me is the technical posture of this index. It is running out of time for the month of November to improve the deterioration showing up on the intermediate and long term charts.

The index is currently sitting near its session low of 203.04. As things stand at this moment, it is on track for the WORST WEEKLY CLOSE since November 2008. That is FIVE YEARS. As painful as it is for me to say this, another way of stating this is that the index has surrendered every single bit of its gains it made over the last 5 years. We are now talking about the potential for the index, IF IT BREACHES 200, to move to levels last seen at the very inception of the first QE program. Five years of wasted opportunity cost

I have said it before and will say it again, those mining companies that did not hedge any expected production when the gold chart broke down technically and the trend reversed from bullish to bearish, have done their shareholders a HUGE DISSERVICE. They willingly took on price risk leaving themselves open to downside risk in the price of gold. Businesses should not be in the business of speculation - that is for speculators such as myself. What businesses should be doing is managing price risk and locking in profits when they are available. That is what hedging is all about and why mining companies should act no differently than any other responsible producer.

Sadly, they are now being punished by the market for this folly. Perhaps we will see an end to this bearish trend in gold in the not too distant future and that will save their bacon, but that is no way to operate in an environment in which money flows are coming out of the commodity sector in general in favor of the broader equity markets ( to the exclusion of the miners ).

Here is the price chart as things stand for the moment. Note on the long term monthly chart that every one of the major Fibonacci retracement levels of the entire decade long bull market rally has been violated to the downside. The last one left is near 185. If the index falls through psychological support at the 200 level and does not immediately recover, odds unfortunately favor a move down to that final level of 185.