“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






Friday, January 10, 2014

Hedge Fund Short Squeeze Continuing in Gold

Since the last week of 2013, through Tuesday of this past week ( 1-7-2014), Gold has rallied from the vicinity near $1180 to a high near $1245 reached Tuesday. That is some $65.

It is no coincidence that over that same period, the hedge fund category has covered nearly 8,000 short contracts. As of the week of Christmas last year, hedge funds held a rather small net long position of some 28,702 contracts (futures and options combined). As of this Tuesday past, their net long position has regrown to 40,229.

To get to that point they have covered 7,345 shorts to be exact while adding 4,182 new longs over the period mentioned above. Another way of saying this is that the buying in the hedge fund category has been dominated by large short covering, not so much by fresh new long position taking.

While the results are the same, namely higher prices, I prefer to see a market dominated by fresh buying outnumbering short covering when I look for a trend to persist. Short covering can catch you off guard because it is so furious and comes in such large blocks when it tends to come. The problem is it can also peter out as quickly as it began.

Think of a market as a rocket engine taking off. It requires THRUST to counter the downward force of gravity. As long as the thrust persists, the rocket can move higher. If for any reason the rocket runs out of fuel, gravity takes over and back down it will come.

Gold can be likened to a rocket that is being driven higher AT THIS TIME, by thrust coming from short covering which is the dominant feature. This short covering needs to be replaced by FRESH BUYING to keep pushing it higher.

That fresh buying will only come as upside resistance levels on the chart give way since that movement generates momentum, which is what the hedge fund computers are looking for. Remember, they do not care which direction the momentum is taking a market, up or down alike make no difference. All they care is that the momentum is present.

That brings us to the price chart. This short covering on the part of the hedge funds has taken the market very near to a strong resistance zone on the price chart ( $1255 - $1260). It will be up to the bulls next week to take price through this zone if they are going to create a trending move in the metal to the upside.

I will be honest and say that I am dubious as to their ability to do this but one thing I have learned is that the market could care less what I think it might or might not do. The last two years of Fed bond buying programs have not undercut the Dollar nor have they generated any strong buying across the general commodity sector. If anything, that bond buying has served to reinforce the idea that the economy is too weak for the Fed to cut back on the QE. During that time, deflationary pressures have dominated and we all know what that has done to gold by now. I see no reason to believe that another year of unabaged Fed bond buying is going to produce anything other than what we have already seen in the last two years.

Only recently did the FOMC start up with the talk about tapering. That talk was based on the Fed's view of a gradually improving economy with a bit of an improvement in the labor markets. November's strong payroll numbers fed into that thinking doing nothing to dissuade the Fed from acting to Taper.

Today's weak payrolls number, coming as so shockingly poor as it did,  rekindled the idea of a Fed on hold when it comes to tapering. If we get subsequent economic data that comes in strong, or stronger than expected, look for that notion to begin withering away again.

I am especially interested in watching interest rate yields on the Ten Year Treasury at this time. Any further rise there should support the Dollar and bring pressure to bear on gold. Conversely, if the yields begin sinking lower on the Ten Year, gold should be able to catch a bid and remain firm.

The sharp rise in the GSCI today is evidence to me that the Dollar holds the key to the overall commodity sector as far as these speculative money flows go. When I survey the general global economy and compare the economic status of the major nations of the West ( I am including Japan in that block), the US still seems to be experiencing the best "growth" out of the bunch. That would lead me to believe that if there is going to be any nation out of that group that can see interest rates move higher, it is going to be here in the US. This should bring buying into the Dollar which should tend to bring pressure across the commodity sector in general. But as always, that is a view that must be confirmed by price action.

Next week is therefore an important test for this market.

Have a good weekend all....

Go Hawks...

11 comments:

  1. You know, Dan, I have defended you, but cannot anymore. Your hubris is astonishing. I'm sure you meant,"GO PATS!!!!"

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  2. Nate;

    That's a good one buddy! Hey if the Patriots win that is okay with me, just so long that the Seahawks win.,

    I am nervous about that Seahawks game because they beat the snot out of New Orleans the last time they played them at Seattle. New Orleans has a good coaching staff and knows how to make adjustments. If they put pressure on Wilson all game long, it is going to be a long day for the Hawks.

    Have fun watching the games... I guarantee it will be a lot more relaxing and fun than having to sit here each day and watching price tickers!

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  3. Dan and others,
    FED still has confidence and credibility with the majority of the market (I don't know why, but they do). Don't you think that, if they reneged on 10 billion taper that they so proudly announced, would undermine their credibility with the mainstream? First they hinted they would do it in Sept 2013 and then pulled back. Now they ANNOUNCED they would taper in March. Do you think they have enough room to renege on this announcement and still retain the credibility? I kind of thought it was a done deal.

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    1. Abraxas;

      That is such an excellent point. They did emphasize that they will be heavily dependent upon data sets coming out but they sure enough said they were going to do the Taper.

      I really suspect that this December number that we got today is going to be a one off. It just does not seem to fit the recent pattern of slowly improving job numbers that we have been getting. Don't get me wrong, I am not wildly bullish on the economy but I am realistic enough to see the recent trend in both government job numbers and private forecasting numbers, which seemed to be headed higher, although not in gangbusters. There might have been some other extenuating factor in today's jobs report to explain that low, low number. If we get a more normal reading next month, I think market consensus will view this as indeed an anomaly and any "Fed on hold for tapering" talk will be put on the back burner once again.

      I wonder how much of this number might be related to the ongoing debacle surrounding obamacare? That is having an impact on employers as they are unsure of fines, etc., Further clouding the issue is these unconstitutional waivers and exemptions that are being granted. No one really knows what to do and thus everything is in a state of flux.

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    2. That's a very insightful commentary, Dan. If I understand it correctly, there is possibility that they are creating factors, which would help them do 180 on the taper and still retain their sainthood with the markets. If this was indeed to prove correct, would that be positive or negative for the PMs and commodities in general? If more QE in the recent past did not result in weaker dollar, why would this 10 billion/month un-taper?
      Thanks again.

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  4. Hi Dan, nice comment. I'd like to add that unfortunately it takes longer-term price action to confirm your theory...the market tends to be irrational over the short term. I'm 100% in agreement with your take on the dollar. Time to short gold again me thinks.

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  5. http://finance.yahoo.com/news/solid-job-gains-seen-december-110815130.html

    Apparently, we blame the weather for slow jobs growth? Cannot be the growth of the Socialist welfare state, or The Affordable Care Act, or the lack of transparent/free markets, or the debt-ridden consumer… must be the weather!

    GO PATRIOTS!!

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  6. Dan, This is too funny, I almost asked you a while back if you were a Seahawks fan.
    With Harvin back the Saints have got to be even more worried!

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  7. Breaking through 1250 / ma50 daily and short-term downwards channel would be nice indeed.
    Immediately above is the 1265-1270 area with upper bollinger band and the horizontal line of the previous Head & shoulders which became resistance.

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  8. Hostile bid from GG to buy OSK this morning … sit tight , I think AEM is going to fight this one out

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