“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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Thursday, January 2, 2014

Index Funds buy Precious Metals

Every year, those who manage the major commodity indices such as the Goldman Sachs Commodity Index ( GSCI) and the Dow Jones/AIG Commodity Index, REWEIGHT the composition of the various commodities that comprise their respective index. Some category of commodities see DECREASES in the weighting for that particular index; other commodities see INCREASES in the weighting.

This is common practice and happens every single year. It impacts the various markets for about a week or so as those INDEX FUNDS (These are sometimes referred to in industry slang as LONG ONLY funds) that benchmark against these indices must then BUY or SELL those commodities in order to bring their portfolio into line with the NEW WEIGHTINGS for that year.

In the case of gold and silver, both GSCI and DOW/AIG RAISED the weighting for these precious metals for 2014. That means index funds will be buying this first week of the year to align their portfolios.

That is what we are seeing occur in gold and silver today. I would expect this to provide some support to both markets until the bulk of this new money allocation process is completed.

Alongside of this today there seems to be some risk aversion related activity. As equities have moved lower, the VIX has jumped higher. Yields on Treasuries have subsequently fallen a tad as money flows move into bonds and out of stocks today. Also, the US Dollar and the Japanese Yen - both viewed as Safe Haven currencies - are moving higher. That is attracting some safe haven buying into gold with silver choosing to follow it higher rather than move lower in tandem with copper and crude oil.

I still want to wait and see what we get next week when the full complement of traders return.

For now, support in gold at $1180 is holding. Physical demand out of Asia is strong right now.  That is encouraging for the bulls.

Also, those money managers who bought the mining shares on Monday and Tuesday of this week ahead of the holiday, with the expectation that the bulk of the tax-loss selling was finished, have made a nice tidy profit for this short term play. I tend to not make too much of the mining share action right now because of the nature of the buying, which is short-term opportunistic in nature. We'll watch it however. Bulls, who were beaten senseless last year in these things will however welcome any relief no matter the source.

Gold has much chart work to do in order to turn the picture friendly. Resistance comes in near today's high first, followed by $1242- $1245; and then $1260 or so. For the pattern to turn bullish, $1260 would need to give way at a bare minimum.

By the way, in honor of the FLASH CRASH crowd, gold experienced some more of these REVERSE FLASH CRASHES, first in overnight trade in Asia and then again later in the European session. Don't expect any comments on this however from them - after all it is not good for sensationalizing their conspiracy views.

One could make the case, purely out of sarcasm, that nefarious forces are at work manipulating the gold price higher so as to squeeze the shorts out and paint the chart picture in their favor. But we would not do that now would we?  Note - to those who are humorless - this is meant as a tongue in cheek statement.

I am noting with interest that volume in gold is quite light. I would put a bit more credence in today's price action were the volume extremely heavy. Also to be noted is that the Goldman Sachs Commodity Index referenced above, is sharply lower being driven down by losses in the energy sector and in the soybeans and wheat. This is not yet the stuff of which inflation pressures are made.

Let's just watch it unfold and see where all this leads when the dust settles out a bit. It is too early to get dogmatic one way or the other.

24 comments:

  1. Repost from something I posted earlier today at the end of your previous post...

    Happy New Year to Dan and Blog Members. ( Dan: Thanks for responding to my Q re: Jan effect. Fund ee-balancing could definitely be a factor in Gold's bounce back. )

    Needless to say the Bulls do not seem to want to surrender the July Low 1180 level without a major fight.

    Another person's opinion ( from down under)
    http://sentiment-trader.blogspot.com.au/

    PS: Thanks for making the robot checker a little less stressful on my poor old eyes one of which due for a cataract removal this year.

    ReplyDelete
  2. The overnight jumps were truly steep, like running into a wall. Buying with few / no sellers available. Really appreciate you put forth an explanation for it.

    ReplyDelete
  3. Gold pushing websites will once again be harping on:

    "This Is It!"

    "It Is Now!"

    "GATA rockets are launching!"

    "Buy, buy, buy!!!"

    Gold to $9,000, "any minute now!"

    ReplyDelete
    Replies
    1. Cannot agree more. The one data point equals a trend crowd is tedious.

      Happy, healthy & prosperous 2014 to Dan, his family & those us that follow his excellent service.

      Delete
    2. Dan, I have been a loyal follower of your site since the beginning. I have always enjoyed your writings, in addition to following your interviews on KWN.

      Unfortunately, the comments section of this site is becoming dumbed down just like many of the sites out there in the blogosphere. Reading some of these comments reminds me of being in kindergarten. Just a bunch of whiny crybabies that cannot help themselves from acting out.

      I'm just ranting. I get it that everyone has a right to free speech, and I don't have to force myself to read some of this nonsense. I'm just here to say that a place that I found as a bit of an oasis of civility just gets quite a bit tarnished by some of these folks, in particular the writer of the previous post.

      At any rate. Keep up the good work. I much appreciate the time and efforts you put out there and very much look forward to reading your opinions on things.

      Delete
    3. doctormyeyes; Mark is just out to needle the hell out of everybody, so relax and have a good life; "Roll Tide"!; sparks

      Delete
  4. Final and enormous payday coming! Few will be there! Gold will see you through! Do as i say and for heavens sake dont sell your shares like i did! I have everything in gold and by the way there will be production this year. 250 an ounce opex!

    ReplyDelete
  5. Best wishes to you and yours Dan from a very appreciative reader

    ReplyDelete
  6. Hail Saruman Norcini, the latest convert to the Evil One whose name we must not pronounce. ;-)
    I am glad that finally somebody from our (gold and silver friendly) camp is addressing the disease that plagued our golden community. The plague has the following symptoms:
    - constant obsession about Au price as the only important thing in the Universe
    - teaching that every uptick is almighty-given fair and square thing to happen and that every downtick is blatant manipulation by the following well-known culprits: GS, JPM, bullion banks, central planners, Rothschilds, Masons, girl-guides and Socialist Martians posing as politicians
    - every opinion other than "gold will reach $12000 within 6 months" is treated with well-deserved verbal brutality and violence
    - confusing ideas that the above listed entities are all-powerful and have manipulated the markets from day 1 but somehow from now on they won't be able to
    I am surprised at the hostility and ideological (neo-con) and religious fervor of that part of the community. I lost lots of money in the gold market too (mostly in the miners), but I feel no anger, except toward myself. I am not angry at myself for buying Ag, Au and the miners when I did, but for risking too much and not being patient enough to acquire them at the bargain prices... If I only exercised more caution and listened to the guys like Dan ... Oh, well, I'll chuck it as a very expensive education.
    Again, Mr. Saruman, thanks for your courage to call it as you see it regardless of those who might not like what they hear. If they had ears to listen it might even do them some good.

    ReplyDelete
    Replies
    1. Abraxas;

      I went down to Dol Gudor and there encountered Sauron, who made me join with his forces... or else.... I decided that I did not like the "or else".

      Seriously, when the trend in gold changes, I will be back to the light. This new year index fund rebalancing is clouding the market right now and I need to see how gold is going to fare once that is finished.

      The same trends that were in place to end 2013 seem to still be intact - namely - strong equity markets, and little to no "official" inflation.

      When crude oil sank sharply lower today, along with soybeans and the GSCI, it made me suspect that the rally in gold would be short-lived. That has not yet been confirmed but I suspect hedge funds are still going to want to short this metal UNLESS they are beginning to position for faster growth/ upticking inflation pressures. The jury is still out on that however.

      Time will tell....

      We are all trying our best to read Mr. Market and see when the shift sentiment and reposition.

      Delete
    2. Dan,

      The moves up lately have all been during Asian hours. From London to NY it has basically been flat.

      Why would the index funds (unless they're Asian funds?) decide to rebalance during the most thin hours, and with gold futures contracts? This seems more likely just the Chinese buying for their New Year... or am I missing something here?

      Thanks.

      Delete
    3. JL,
      do you really expect an answer from someone who is ridiculing KWN and others (he obviously only used to become more popular) for discussing the strange bleeding of GLD, while the same person stays completely silent that SLV has been losing nothing?

      I no longer believe Dan's image, of being the lone individual trader. This image was carefully crafted and, whoever was behind it, simply has shifted from long the PMs sector to short miners and gold and once this position is closed, I guess Dan will suddenly be open to discuss all the strange things that happen(ed).

      Delete
    4. Oh, and btw, what I have forgotten:
      I find it also interesting that Dan is losing no words about the supply-demand relationship in the gold market in 2013 but instead always refers to the GLD bleeding for explaining drops, while ignoring the fact that demand BY FAR exceeded the ETF outflows in 2013.

      Delete
    5. endzeit;

      Honor your word and thus prove to yourself that those mean something. You stated on more than one occasion that you were no longer going to be reading here since you disagreed with the views being set forth. Your one-note moanings degrade this website... goodbye.

      I will leave you with a bit of parting advice - learn to read a price chart if you want to learn to become a successful trader.

      If I see your postings here anymore from this point forward, I will have them deleted. You have MY word on that.

      Delete
  7. Abraxas

    So…you are hindsight investing?
    You wish you would have bought at a lower price?
    Your wishes apply to everything and not just gold.
    How many times has Dan stated that…Nobody…no matter how good they are…can accurately predict future price moves.
    You think gold investors have the market cornered on religious fervor? try telling a stock broker that the stock market is not always a great place to be.
    Try telling a Realtor that real-estate is always not the best investment.
    I could go on but I think you get the idea.
    We have posters here whose Pollyanna views on equities and fiat currency make the most hard core Gold bulls look almost lacklustre in their conviction.

    I now know we must be close to a bottom as the outright hatred towards precious metals is approaching spiritual levels.
    At market bottoms there is no end in sight and you would have to be a fool to buy, at market tops there is no end in sight and you would have to be a fool not to buy. How many times has this played out ? Buy high…sell low.

    This is of course a totally subjective observation.

    ReplyDelete
  8. Hi Dan, after reading your blog today I felt the need to defend the flash crash croud a bit! (as a rookie/ later in life trader market enthusiast I might add)
    Maybe the spikes up in price is a result of people on the sidelines jumping into the market after waiting for so long for the downtrend to end and the manipulators allowing prices to rise.
    here are some points to ponder
    -this week I met a chemical engineer in the industry who worked for a ore /core sample consulting firm here in southern Ontario Canada for the past forty years, he said "the price of gold needs to be around $1800-$2000 per oz. for the industry to survive"
    -one has to admitt there has been some EPIC dumping of paper contracts at weird times of EPIC preportion over the last coouple of years!
    -the US Govt does have a Legal stablization fund
    -a well respected analist of metals, money and mining of 40 years, that I follow says " he feels the bottom is in for the metals", admitting he could be wrong but siteing the key reversal of june earlier this year.
    -gold has been entrenched in a downtrend for probably longer than a lot of people have expected with still a very viable chance of testing the 1000-1100 area
    - we are seeing the result of inflation in some items like fine art, diamonds, , things that the 1% ers can afford, just check the high priced auction houses sales as of late! They are setting records!
    - I might add that bitcoin has seen some inflation!
    One has to think that some of the flash crash croud push their view as they are probably personally sitting on a nice pile of physical! I have always thought that the alleged manipulators have bad intentions when pushing prices lower, but what if the people that want the price of gold to stay low are doing so as to not have gold throw up a red warning flag to the public of spiking prices! They may think panic and mayhem might be worse?
    I am very interested in watching the markets play out in 2014 and would love to hear your comments on the above.
    many thanks, derry
    -

    ReplyDelete
  9. Silver is trying to confirm gold's move up but is not doing a very good job of it.

    I guess fund managers can't elect to sit in cash, they have to commit one way or the other then sit and watch and not sell if the price goes against them because the fund's name is in precious metals or wheat or whatever.

    I suppose bank's trading desks can't wait to suck something else dry due to unwavering commitment.

    ReplyDelete
  10. Aussie Gold stocks have been under accumulation since early December, could be re-balancing but the move has been way ahead of the metal which bottomed end December. Gold has definitely changed it's character since Christmas perhaps with the PPT on holidays. Next week would be a tell.

    Gold to Dow started 2013 around 8 and ended 13.5 similar to the late seventies correction see http://sharelynx.com/chartstemp/DowGoldRatio.php if history has anything to do with it Gold's bull run won't finish till 1:1 so a ways to go yet.

    The FED has only returned 36 tonnes of Gold to Germany in 2013 a bit strange with all the deleveraging in Gold, one would expect the metal more abundant but not so, let's see what they return this year.

    Prosperous New Year to all.

    ReplyDelete
    Replies
    1. some people claim the repatriation of Germany's gold is bullish, but I wonder if they wanted it to sell into the market? = bearish
      Ultimately I think it is bullish.....

      Delete
  11. Just had to add, Swiss refiners are struggling to keep up with demand! (physical not paper!)
    Another analist (currency wars expert) has stated he visited a refinery in Switserland and said they are working 3 shifts a day to keep up with demand and are having troubles sourceing gold! They are also scrapping the 400 oz. bars and making Kilo bars instead.

    http://www.arabianmoney.net/gold-silver/2013/12/08/secretive-swiss-gold-refiners-have-struggled-to-provide-40-tonnes-of-gold-a-week-for-china-or-2000-tonnes-this-year/

    Also you might see a rise in heating fuels soon, it was -52 degrees at my moms farm near Timmins Ont. yesterday! Timmins known as "The city with a heart of gold!" They have some large and deep gold mines there!

    ReplyDelete
  12. Hy Dan,
    may I ask about the INDEX REBALANCING (in gold):

    * The gold price has come down in 2013.
    Why does the GSCI a rebalancing to the upside?
    Have other components in that index gone down even more?
    Is it a matter of intl. trading volume?
    Is it (maybe) even reverse, so that a lower gold-price requires an up-rebalancing to keep the index's composition working?

    * The GSCI weighting takes the intl. Futures trading volumes, as fa as I know. The other indexes' weighting principles are different (measuring physical trading I think).
    Is it possible, that in other indexes a different effect in rebalancing could be required therefore, i.e. a rebal. to the upside in the same year?

    * When and how can I get earliest knowledge about the rebalancing?
    On their website?
    Out of other sources?
    Already in late 2013?

    (Sorry to ask simple things, but as you have done research the last days, it might be easyier for you to just tell, instead of me soing all the same research again.)

    Thank you very much for the good blog!
    All the best for 2014.

    ReplyDelete
    Replies
    1. I found a comment on the Dow/UBS-Index Rebal from Nov 5th, 2013 in this blog, indeed.
      (completely missed it...)
      http://traderdannorcini.blogspot.co.at/2013/11/dow-jones-ubs-commodity-index.html
      anything similar on the GSCI?

      Delete
    2. another source, I found:
      http://www.spindices.com/documents/additional-material/2014-sp-gsci-rebalance-advisory-panel.pdf

      Delete
    3. Alex;
      Each firm that has its own commodity index yearly reviews the performance of each commodity in that index and then raises or lower the percentage in the overall index based on that analysis. Their method that they use to comprise the index varies with each index.

      The best way to see this is to visit their website and read through the papers detailing this. Generally speaking - those commodities which performed the worst have their raised but that may not always be the case.

      This rebalancing is usually completed in about a week's time.

      thanks for the comments.

      Delete

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