“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, February 11, 2014

Gold Shares Continue Strong

Once again another day passes in which the mining shares continue to lead the bullion markets higher. Today the HUI tacked on further gains jumping over 4% in the process compared to a 1.2% gain in the yellow metal.

As long as these shares continue to trek higher, the metals have some additional upside to run.

The key is now what do the shares do now that they have reached a strategic chart resistance level. Notice that they have run to the 200 day moving average. That is a big accomplishment as it has been a long time since the HUI was trading above that particular moving average. To be precise, one has to go all the way back into late 2012 to see this! It would not be unexpected to see this level hold the market for a bit as it takes some time to digest these recent gains. If the bulls keep pushing however, and if the shorts continue to exit, there are two separate overhead resistance zones that the index will try to reach. The first is near 250; the second is near 260. Pushing through both would allow for a test of what should be very, very strong resistance near 280.


I have noted on the Directional Movement Indicators some interesting developments. The upward progress of the index has now taken the +DMI to its best reading since September of 2012. I do not know whether this is a pleasant development in the sense that the index was trading between 520-525 at that time! OUCH is far too mild of a word to note the devastation that has occurred in this sector. Objectively however, that denotes the strength of the recent buying.

The flip side is that the -DMI reading is also at its lowest reading since that same September 2012 period.

One could therefore make the case that the sector is overbought and due for a setback in price. If we did get such, it would not therefore surprise me. The question is whether the bulls will allow for a pause and cash out of some profitable short term trades or if they want to try to push for some more gains before ringing the cash register.

With the ADX rising and just shy of 29, the market is trending higher. That means we should expect to see dip buyers emerge on any setback in price that we might get. The most logical zone to see this occur would be down near the breakout point of 220-222. Support also lies beneath that region near 210. Bulls would not want to see 210 give way as the market would probably fall to 200 to test this important level.

Once again, we had another day in which the US Dollar was weak although that weakness was rather muted. What seems to have been the driver today that goosed both gold and the equities higher in unison was the theme of Janet Yellen's dovishness. The market is convinced that the Fed under her leadership is going to be quite loose when it comes to liquidity issues regardless of the fact that the Fed is on record as hoping to end the QE program completely by the end of the year. Yellen reiterated nothing new or nothing that should come as a surprise when she reaffirmed that the Fed will be heavily dependent on economic data when discussing its retreat from QE. Traders however seem to have the last two most recent jobs reports on their brains and are convinced that the doves are going to dominate the Fed.

I should note however that from my perspective the reason gold continues to move higher is because longer term rates continue moving lower. Take a look at the chart of the yield on the Ten Year Treasury note. You might recall that from the beginning of November last year through the end of December, the price of gold fell from $1350 all the way to below $1200. It was no coincidence that as this was taking place, the yield on the Ten Year ran from near 2.45% all the way to above 3.00%.  See the chart below....




As yields have moved lower for the Ten Year, especially due in great part to the fears surrounding the emerging market concerns, gold has responded by moving higher.

If long term interest rates begin perking up again, I expect gold to come under renewed selling pressure once more. The reason for this is because in spite of the great love which the gold bugs have for the yellow metal, the majority of the investment world views gold as just another asset class. Note to gold bugs - please do not condemn the messenger for stating what is obvious but too often overlooked in gold bug circles. What this means is that those who buy it do so not for any yield, dividend or interest payment it might happen to be able to throw off ( it has none) but rather they buy it in the hopes of capital appreciation when they can sell it at a higher price than they paid for it. That requires an environment in which gold is constantly rising higher. (remember the pillars of a bull market in gold).

If gold stalls out in upward movement at the same time that interest rates on the long end of the curve begin to move higher, investors looking to obtain RETURN ON INVESTMENT will jettison gold in favor of another asset class that throws off gain, whether it be by capital appreciation like equities or bonds.

Needless to say it is a given that a higher interest rate environment in the US will make the Dollar more attractive than some of its Western competitors all things considered equal. A stronger Dollar can be expected to put downward pressure on gold prices ( as well as commodity prices in general ) while a weaker dollar provides an incentive for gold to rise ( keep in mind the connection between lower interest rates and a weaker currency).

Interestingly enough, the dynamic of higher interest rates tends to cut into economic growth as it runs at cross purposes to the Fed's QE program which by nature is designed to keep interest rates artificially low to encourage more indebtedness. There does not yet seem to be a consensus as to what level the yield on the Ten Year would have to run to begin negatively impacting overall economic growth but the number that I keep seeing circulating around is the 3.5% level.

Time will make all things clear however.

I will leave you with just a bit of simple advice which I am repeating from yesterday - now that gold is rising higher, resist the urge/temptation/folly to throw caution to the wind and begin swallowing all the usual wild-eyed predictions that will inevitably surface. Stay calm and reasoned and above all - stay a hard-nosed realist.

If gold stops rising, look for factors across the other various markets that are at work instead of the simple-minded "gold is being manipulated" once again chatter. None of these markets trade in a vacuum nowadays but all are interconnected in ways that can be discovered if one takes the time to diligently dig and examine the various reactions that occur regularly through the financial markets. The themes do change and that is what makes trading/investing so challenging at times because we have no way of knowing when those themes will change and if they do, what the new relationship will be. Patient study reveals these things but that requires effort, lots of it.

22 comments:

  1. DAn,
    I take what you say very seriously. So I almost feel sometimes it is semantics in terms of whether there is manipulation or that the word should be used at all. Certainly though a fact that I just read that says something is not right when JPM holds short 14000 contracts at the Comex of the entire 14,800 shorts that exist there. How is that allowed what kind of regulation or lack of does that speak to in a fair market? Just trying to figure it out as I know this is loaded question.

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  2. Concord

    A lot of things are not right. You will see posts proclaiming economic paradise and booms.
    I personally know 4 people (skilled and educated) who cannot find a job that will support a family or buy a house (let alone barely support themselves)
    There is a lot of things that do not pass the smell test…but hey…all is well..right??

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  3. Concord

    Sorry, I just noticed you used the word "fair" in your question…ha ha ha

    ReplyDelete
  4. Dean,
    Things as you say have not been right for a long time. The Comex is the least of them.

    ReplyDelete
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    1. By The Following List. You can tell what path we are on currently


      Valerie Jarrett - Marxist - Communist - Top Obama Advisor
      Bill Ayers - Marxist - Communist - Convicted Domestic Terrorist
      Bernadine Dorn - Communist / Marxist / Convicted Domestic Terrorist
      David Axlerod - Communist / Marxist - Was a Writer for a Communist Newspaper /Member of CPUSA
      Rev. Jeremiah Wright - Radical White-Hating Racist who Obama offered $150,0000 to keep quiet in 08
      Derrick Bell - Radical White Hating Racist and one of Obama's top mentors from Harvard
      Frank Marshall Davis - White-Hating Marxist Communist Who Was Integral Part of Obama's Young Life
      Carl Davidson - Communist / Marxist - Former Leader of the Chicago New Party and Staunch Maoist
      Anita Dunn - Communist / Marxist / Maoist - Commended Chairman Moa for his slaughter of the Chinese
      Jodi Evans - Communist / Marxist - Avid Supporter of the Extremely Anti-American Group Code Pink
      Sam Felson - Socialist / Communist - Ran Obama Campaign Blogs
      Patrick Gaspard - Communist / Marxist - Tied to ACORN and Very Active with Obama and the CPUSA
      Van Jones - Communist Marxist - Close Friend - Founder & Leader of the Communist group STORM
      Jeff Jones - Communist / Marxist - Close Obama Friend and Colleague, very close ties to Ayers & Jones
      Marilyn Katz - Communist / Marxist - Close Friend of Obama & Axlerod, Head of SDS with Bill Ayers
      Rashid Khalidi - Communist / Marxist - Close Friend, Head of the Anti American/Israel PLO
      Mike Klonski - Communist / Marxist - Gave nearly $2Million to the Obama Campaign in 08
      Mike Kruglik - Communist / Socialist / Marxist - Teaches Saul Alinski Methods
      John McKnight - Communist Socialist / Marxist - Close Friend, Teaches Saul Alinski Methods
      Khalid Al-Mansour - Close Friend, White-Hating Racist, Close Supporter of the Bl a c k Pant!es
      Alice Palmer - Communist Marxist - Close Friend - Picked Obama to Replace her in IL State Senate
      Zach Pollet - Communist / Marxist - Close Friend and Political Director for ACORN Project Vote
      Tony Rezko - Close Friend and Convicted Felon Who Assisted Obama in thepurchase of his House
      Wade Rathke - Close Friend and Advisor, Founder of ACORN
      Joel Rogers - Close friend and Advisor - Founder of The new Socialist Party
      Goerge Soros - Communist / Socialist / Economic Destroyer / One of Obama's Puppet Masters
      Percy Sutten - Top Campaign Fundraiser and Mentor ot the New B l a c k Pant!es Party.
      Madeline Talbot - Communist / Socialist - One of Obama's Top Mentors at ACORN
      Quentin Young - Communist Marxist - One of Obama's long-time close friends and Personal Physician

      You are not simply judged by the company you keep...
      You are Defined by It.

      Delete
  5. Dan,

    I meant to say silver short positions.

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    Replies
    1. Concord, the short positions are massive because during the last CRISIS that we never even attempted to solve, Geitner, Paulson, Bernanke and the boys put a gun to Bear Stearns Merchant Banking (they had the largest share of the MBS derivatives) and pulled the trigger. They then gathered up all the useful body parts and sold (GAVE) them to JPM along with a huge bailout. JPM took the last few years (PAINFUL FOR BUGS) and (Sound Money Advocates) to turn these positions around from SHORT to LONG. Dan has been harping about this for the last couple of months. My opinion is that they will not "stop out" these positions, they are just using them to control the price rather than try to make money on them. I really believe that the Big Banks are Big Gov right now and will continue to be so. Yes Dan, it will be miserable, if Gold Rises, or if it doesn't. It just is going to be miserable until we as Americans kick out all the lying cheating government officials, and the lying bankers. Just tell the truth. I think we can handle it, rather than stealing the hope. Truth = Hope. Or we can just continue till the train hits the floor. It is unstoppable at this point.

      Delete
    2. Sorry, I really do not have a place to share my frustrations. Bear Stearns had an awful lot of Short Silver Positions. Those were taken over at a fair price (Geitner ,Bernanke, Paulson and others say it was) from Bear to none other than JPM. If my rants were confusing I apologize. Now back to the normal centrally planned programming. The criminality continues because even though they were bailed out , they then took the last 5 years making highly leverage bank on FREE MONEY from the FED. Just mark our balance sheets to fantasy on our holdings, then keep making bank while the getting is good. When Bernanke "performed" this miracle bail out, he commented that he was not supportive of the "Management" of these banking institutions. Gee, giving Bankers free money is not "supportive"? This whole charade is sickening and continuing to watch it makes me more sick.

      Delete
  6. If any of you did not read these two articles then they are worth reading. No fee from them. It is the current state of our union.
    http://www.zerohedge.com/news/2014-02-11/guest-post-broken-limb-burst-pipe-fallacies

    http://www.barnhardt.biz/2014/02/08/the-one-about-defense-spending-and-shadow-welfare/

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  7. Dan, I pray everyday that this would change somehow. The only way it is going to change is for the current momentum to take us right over the cliff. No amount of currency manipulation on the FX traders, central bank manipulation, Hedge fund algos, or anything else is going to stop this FREIGHT TRAIN. Just the ground when we hit at a thousand miles per hour. No matter how you look at it, it is make believe land. Japan printing faster than they have ink, and the machinery production just fell 15%. Yet the stock market is up. Print print print. Earnings and revenues falling, print print print. Add make believe numbers to GDP, print print print. Lie about housing market, lie about the employment figures. Lie about not protecting those that protect us, lie about the immigrants in order to keep self sustaining SS contributions (heck the immigrants are the only ones willing to multiply in a harsh country). Lie about the low inflation, lie about great new BS Healthcare law. Heck we are worse than ROME prior to its fall. No question in my mind. Hey Mark, how is the Tesla driving.

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  8. your point near the end of todays post- the need to watch the markets outside of PMs is spot on. I used to post that regularly on a gold/silver forum 3-4 years ago but the talk was all about the PM charts. now I don't bother so much. I knew the wider picture is the important part of things but I don't preach it anymore. I get it (I think) and if others don't so be it

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  9. Thought this was good via @JamesGRickards @GrantsPub

    #Gold is nature's own #Bitcoin

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  10. Dan you were saying a few weeks ago that you believed for gold to rise you then newly believed that you expect the need for interest rates to rise first. Now you say the opposite. I thought that you were considering cash flows from bonds at the time, along the lines of the Fekete's point of view on bond rate.

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    Replies
    1. Jonathan;

      thanks for the comment.... here is how I see things ( for now!) - It is not so much nominal interest rates but REAL rates that are important to gold. Gold thrives in an environment in which REAL interest rates are negative.

      By definition - REAL interest rate is the difference between the yield on the one year Treasury Bill and the official yearly rate of inflation. If inflation is running at a higher rate than the yield on the one year, then the REAL rate that an investor is actually getting, after calculating for this inflation, is below zero. That means his money is actually losing purchasing power in spite of the fact that he is getting a return on it.

      If however REAL rates are positive, gold tends to suffer. A positive REAL rate would mean that the yield on the treasury is higher than the official rate of inflation.

      Many investors looking for conservative areas to park their money will take the treasury ( they consider it riskless) over gold which may rise or fall in price.

      So much is determined by the sentiment towards gold.

      Look back at what happened to gold during the late 1970's when inflation was soaring out of control. Volcker raised rates repeatedly until he got the REAL return much higher than the official rate of inflation and that broke the back of the gold market.

      Of course there are other factors at work that also determine the gold price such as the currency. But currency values are also impacted by the rate of return on riskless treasuries.

      Personally I would no longer view an IOU from this government of ours as riskless given the massive indebtedness but I am telling you how the majority of investors look at these things.

      Hope this helps...

      Delete
  11. ES now up 100 points from last week's lows. As predicted, a "Rip Your Face Off Rally" triggered by too many experts and gurus predicting a "terrifying collapse" worse than 2008.

    All of them came out at once, literally 20 predictions from guys like DeMark, Richard Russell, etc. that said the bull market was over, when SPY was only down 6% from record highs.

    GDX/Gold ratio did break out over the October highs, a good sign for the mining shares, now getting dragged up kicking and screaming with coming economic boom in emerging market countries.

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  12. Dan -

    Question. You mentioned before that a 10 year of 3.5% would drastically curtail growth in this economy.

    With WTI and Brent oil prices going up as of late, is there a certain oil price level that you can share that would seriously impact the economy?

    Thanks!

    ReplyDelete
    Replies
    1. jmsvett;

      I am not sure that a 10 year yield of 3.5% would "drastically" curtail growth but I do believe it would have a significant impact on the real estate sector.

      Hard to say on oil but I would take a guess and say that crude near $120 (WTI ) would be a big negative for overall growth because of what it would mean to transportation costs ( gasoline, diesel and jet fuel).

      Delete
  13. all the wise guys over at kwn are now technicians; sparks

    ReplyDelete
    Replies
    1. They are technicians when the price goes up and conspiracy theorists manipulation exposers when the price goes down. I follow them for the same reason i follow CNBC, namely, for pure entertainment quality.

      Delete
  14. GDX cratering 24 hours after outlandish price predictions on KWN

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    Replies
    1. Dude you really have an issue with KWN , I think they do a fantastic job , they work very hard at what they do . Why do you have to be so negative about everybody ? do your thing and leave everyone alone …. we have to keep up with your non sense all the time , and you keep at it , if you don't like KWN just don't visit that website . At least you have an option ! I don't !, and have to read your crap all the time …

      Delete
  15. Did Bullard's talk about raising interest rates materially affect currency & commodity markets today ? Perhaps keeping a lid on price rises in Precious Metals ? If so, certainly not an immediate reaction.


    Wouldn't 'Real' Interest Rates be the difference between the 10 year rate and the Real rate of inflation ?

    I track inflation via cost of household & industrial products -
    * pound of 80/20 ground beef, Price Inflation Dollar Denom. (DD) > 10% annually
    * 50 pound bag of bird seed, Price Inflation DD = 17.5% annually 2011 to 2014
    * gray plastic busboy trays, 15 x 20 inch standard, Price Inflation DD > 10% annually
    * 5 pound bag of sugar, Price Inflation DD > 10% annually
    * knit cap, like for skiing, Price Inflation DD > 10% annually

    and so on.

    call the 10 year 3%. Therefore Real Interest Rates are -7%, or less (-8, -9 ... it's an approximation in any case).


    Why use parboiled numbers as inputs for an economic calculation, except to understand how the US gov. is calculating their "official" economic metrics ?

    ReplyDelete

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