"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 3, 2014

Strong Physical Demand out of Asia is the story

There are a couple of things currently working in favor of gold for the time being. The first I noted yesterday which is index fund rebalancing as those fund managers benchmarking against the various commodity indices are forced to increase their holdings of gold contracts to bring their overall portfolios into line with the new index compositions. That is bringing buying into the gold market from a spec standpoint at the Comex.

The other is more important because it is longer-term in nature and that is the continued reports of very strong offtake of the physical metal in Asia. You might recall that back in June of the past year ( 2013), it was  this soaring Asian demand that put a floor in the gold price when it had sharply fallen to $1180.

I was curious to see whether or not those same buyers were going to show up if gold revisited this area again. It certainly appears that they have.

Why this is important from a trading perspective is that the buying has come in at almost the exact level to the very dollar, namely $1180. I have written previously that this area on the price chart has as much significance from a purely Technical analysis perspective as did the $1530 level in gold. When the latter was violated, it resulted in a huge shift in sentiment in regards to gold and brought large selling into the market as long liquidation then commenced in size along with fresh shorting. The same thing will happen if $1180 gets violated and the market does not almost immediately reverse those losses and rebounds higher - namely, more long-side liquidation and more fresh short selling that will take the price down to near $1150 for starters and possibly to $1100. Remember, large specs are still net longs at the Comex.

So far $1180 is proving to have held, for now. What this looks like is  the setting up of a range trade affair with the market moving back and forth between this floor near $1180 and resistance near $1242- $1245. If gold can crack the overhead ceiling, it stands a shot at making a run towards $1260 - $1265 based on short covering alone.

If the market fails to extend past $1242-$1245 odds will favor it dropping back to retest $1220, then $1210 and finally psychological support at the $1200 level.

I remain skeptical that gold prices are going to rally much higher because I believe it will shut off price sensitive buying out of Asia. Western investment demand for the metal is still not there and this requires Asia to do all the heavy lifting. Remember, Asia can bottom a market but it cannot by itself drive prices sharply higher. That requires WESTERN INVESTMENT demand and I do not yet see any strong signs of that.

Let's watch the price action, especially in the shares and see where we go from now. I am especially interested to see how the metal performs at the Comex when the index fund rebalancing is complete. That should be sometime towards the end of next week although the bulk of it is going on right now and should be wrapping up by early next week.

I am also watching silver to see how it holds because it too is benefitting from this same index fund rebalancing. However, with Chinese manufacturing data coming in weaker, according to the data released overnight, copper is struggling this morning and so is palladium. That is bringing some selling into the silver market. Together, the lackluster performance in the metals is eroding some of the gains in gold, especially in light of the firmer US Dollar.


  1. Dan,

    Hedging question for one who has physical, what is a good way to hedge downdrafts? I always promise myself I would buy puts as insurance on my holdings, esp. after 2008, but then I always balk at the cost.

    It would seem the easiest way to fully hedge, say 10 oz of physical is to buy one put of GLD, would you agree or not? GLD is about 1:10 ratio to spot, one put controls 100 shares, so I would effectively hedge 10oz with one put.

    Is this the most effective for an occasional trader? And then the question is length. Would you buy these monthly/weekly/6 months, LEAPS, etc for the time period? ITM/ATM/OTM?

    Just trying to learn how to best protect my physical investment which I have no intention of selling. I just have to get past the fact it is a sunk cost, but of course if I had been doing it the past two years I would be in much better shape!



    1. Cortopassi;

      Mike - I am a futures guy so I think in terms of the Comex. Hedging gold there is very easy because you can merely short one contract for each 100 ounces of gold that you own as a hedge to protect your downside.

      There is a mini gold contract but it does not have the liquidity that one would normally like to see which makes for very poor fills.

      Hedging gold can be tricky however using futures because the magnitude of the price swings that gold has been taking of late can easily dent a leveraged futures account if the market moves higher as it has been doing of late. That means you have to much more active in managing the hedge or leave the futures alone and just employ option strategies.

      You can buy put options to secure some downside protection if you understand that they are basically like paying for insurance and the premium is something that you are willing to forfeit if you do not need it.

      I am not that familiar with the actual workings of GLD or its options. If you have a stock brokerage account I would call your broker and ask him about the GLD option thing. You might be able to employ a combination of option strategies, such as buying a nearer strike price put and selling a more distant strike price put. That way the premium you receive from selling the more distant put will offset some of the cost of the put that you buy which is a nearer strike price and will thus be more expensive.
      See if any of this helps or makes sense...


  2. DBC now in full fledged collapse as energy prices are now falling like a brick.

    Wonder how much longer GLD can hold while the entire commodity complex is about to drop down the elevator shaft.

    What is hilarious is that the freefalling CRB and CCI Indexes is now getting out of hand to the extent that Yellen is probably starting to get nervous.

    So she is probably going to be inclined to jack up QE again due to "price stability" concerns.

    And that will most definitely boost the Dow to 20,000 and beyond and lift gold back up to $1,650 where the "Angels" have been trapped in the battered women's shelter for nearly 2 years, LOL.....

    "This Is It!!"

  3. http://www.bloomberg.com/news/2014-01-03/gold-heads-for-best-week-since-october-on-asian-demand-outlook.html


    At $85B/mo ( Uncle Ben Gettenberg's printing machine ) physical silver and gold can only get more valuable by the month and us samll folk clearly understand the simple math.. Post Christmas, I bought some of the2013 , 25th anniversary 1oz Candian Ag Maple Leaf ( some from Apmex and some from JMBullion)


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