“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)

"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

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Tuesday, January 7, 2014

Gold and the Australian Dollar

Trying to get a read on the gold market has been a bit tricky since we have had to deal with end-of-the-year positioning and now, since the start of the year, index fund rebalancing of portfolios (along with front running of that buying by pit locals). Along with that we have had reports of strong demand for gold out of Asia. If that has not been enough, we all watched a massive selling barrage occur over a one second interval yesterday. Now today we are seeing evidence of the effectiveness of the capping that occurred at a technically significant chart level.

I am noticing a couple of things today that I thought I would share. First is that equities are soaring higher here early in the trading session. That has NOT been the case since the start of trading at the New Year. This is the first UP day in equities since last Thursday.  Also, the Yen is weaker today. It did seem that there was a slight correlation between the downward bias in the broad equity markets and the recent strength in gold - a type of safe haven play, perhaps? Now that equities are moving higher today, gold is moving lower. That was pretty much the theme for the latter part of last year.

Another thing I am watching is the price action of the Australian Dollar of late. The Aussie is sometimes viewed as a type of proxy for the broad commodity complex. This stems from the nature of the Australian commodity which remains very dependent on the export of raw materials in general. Old time traders tended to watch the direction or bias of the Aussie to get a feel for where commodity prices ( in general) were headed.

Take a look at the following chart of Gold vs the Aussie ( No, this is not a Mortal Kombat match - if it were, perhaps gold would have a killer combo move to break free!). Look at how closely the gold price has been tracking the Australian Dollar since the middle of last October. The two are moving almost in perfect sync. I do not know how long this relationship might last or even if it is foretelling anything at this point but it is something we may want to at least keep track of for potential, and I stress the word, 'potential' clues to gold's future fortunes.

When I see a chart like this, where one commodity is moving in pretty good sync with another, it tends to reinforce general trading themes in my mind and at a minimum, perhaps get a glimpse into the general sentiment, even if it is only for the shortest of terms. The one thing about trading these modern markets - the themes change faster than some politicians' convictions!



  1. last bear mkt in Aussie lasted 12 years; this one is only into its 3rd year; sparks

  2. A generational low in the U.S. Dollar was likely put in 3 years ago, probably never to be seen again for at least 10 years.

    Emerging market currencies still under enormous pressure, because those countries do not have adopted the "Perpetual Motion Machine" central banking theme perfected by Bernanke. Whereby "Infinite Fiat" and continued handouts to Joe Sixpack financed with zero cost financing creates unprecedented consumer spending booms, world record runups in stock prices, creating a positive feedback loop which eventually leads to economic growth and prosperity.

    It is only a matter of time before these other countries "get it" and follow the same Bernanke/Yellen prescription, and start printing money faster and hand out benefits to the population.

    Once that happens, we will see a global boom of epic proportions, combined with the cheapest money in decades and a continued bear market in commodities, just like we saw in 1997 - 2000.

    Stay in the System.

    1. Mark,

      If that IS intentionally being written with a ton of sarcasm, you are great at it. If you actually believe what you wrote, well then I don't know what to say!

    2. Lol " combined with the cheapest money in decades " Ya and no one Qualified to borrow it.

      Show of hands who wants to take on more Debt in this environment? Mark suggests they will just be giving it away, lol. I know I know " Its different this time ".

  3. I hope this was posted in sarcasm as the US's irresponsible fiscal policy is a ticking time bomb of disaster, hardly a recommended policy for other countries.

    1. Poly metallic.
      I share your concern at a fundamental level.
      On a practical results basis it seems the third world countries have done rather well with it IMHO.
      That have borrowed money, given it away, received write downs and borrowed more.
      I don't like it but being old I remember lots of this coming from South America.

  4. Dan, I'd really like your input on this. My comment is regarding the previous post you made.

    If the position limits for any single trader on the Comex are 3,000 contracts per, how can 4,100 contracts be dumped in a single second? Surely someone either has a position way larger than these position limits supposedly allow or there is a concerted effort to all dump at the same time. I'm not trying to be a thorn in your side, I just have read this elsewhere on the blogosphere and would like your level headed take on this.

    Thanks in advance Dan!

    1. Adam;

      My understanding of position limits is that they generally refer to the amount of contracts that can be HELD, not the amount that can be traded in and out of during the course of a single day.

      However, there are safeguards put in place for most trading platforms that will block or prevent extremely large orders coming from a single trader from taking place unless something goes wrong with the software and it does not catch the mistake. Generally speaking, the safeguard will monitor the size of the trader's account, the number of his positions and then block the order from being routed if it exceeds the safeguard limits put in place. This is to prevent the so-called "fat finger" trades that take place on occasion when a trader enters the wrong information in the wrong field, etc.

      When a software failure occurs, then you get an erroneous order that hits the pit and creates all sort of chaos. Many times a large number of the trades that took place as a result of that trade get "busted" by the exchange or cancelled.

      But back to your question - 3000 contracts is the amount of contracts HELD at the end of the day that cannot be exceeded by a single entity, not necessarily traded as long as the size of the account will allow a large trade to be sent without triggering a safeguard.

  5. Adam

    I'm also curious. These big dumps are apparently normal behaviour for a hedge fund as they use computer algorithms for trading…..what kind of algorithm just sells in one huge lump at one time? I could write an algorithm like that….actually you don't even need a computer period to sell like that.

  6. http://edegrootinsights.blogspot.fr/2014/01/cot-technical-review-of-australian.html

  7. Dean, I'm curious at to how it is even legal unless someone is above the law if the position limits are only 3,000 contracts to begin with.

  8. Adam

    I am not a trader so I can't answer that question…Dan can.
    My attitude is "there is no law for those with connections and big money"
    Bankers can make 10 billion on illegal or questionable trades and pay a 1 billion dollar fine…don't you wish you could do that ? (the real ratio is probably higher in favour of the banks)
    The Fed has printed trillions to (IMHO) bail out the TBTF banks and their cronies. Their OTC derivatives (which I also do not really understand) blew up and they want their payback. Mark to model just isn't good enough, they want it all.
    We are witnessing the pillaging of the wealth of the USA(world?) by a tiny minority of individuals.
    I have stated this a few times but….imagine the Fed approached you and gave you unlimited money and immunity from prosecution and let you loose on the markets…is there a market you could not sway to your favour?
    This is what I think is happening…and NO…I have no real proof…but I don't think it is an outrageous idea either.


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