Gold was once again knocked for a loop in today's session as Ukranian issues continue to fade from traders' minds. There is not much to add to my weekend post noting the various time frames on the gold charts but suffice it to say for now, that gold is nearing an important inflection point centered around the $1280 level.
The market is working lower in the range noted within the rectangle with the -DMI back above the +DMI indicating the bears are back in control of the market. The daily chart is not, as of yet, reflecting a trend lower, just a move back down within a broad range.
The stochastics indicator is down in the oversold region so if this market is going to bounce, it had better do so now. If the bears can take it down through $1280 and hold its head down under the level, they run an increasing chance of dropping it back down to another test of $1200. They will first have to crack the $1260 level however as support is layered in approximately $20 levels from $1280 on down.
For the bulls to have a chance at salvaging this mess, they need to recapture $1320 at a bare minimum, especially with the mining shares signaling no help whatsoever at this point.
The grains got a shot in the arm today from the USDA numbers which got corn bulls all revved up on ideas of less acreage going to corn this planting season and more going to soybeans. That and they found some more critter mouths to feed. That did not bother the beans one bit however, ( old crop ) as it was off to the races with them to the upside. USDA found some more export business and plugged it in drawing down that carryover even more.
There is already talk of cooler, wetter weather putting a crimp on the field work and resulting in some delays in certain areas of the Corn Belt. That should tend to push more acreage to beans, especially with soybean prices refusing to break down. Corn (old crop ) topped $5.00 once again to the dismay and frustration of cattlemen and hog and poultry producers who cannot seem to get a break when it comes to lowering their feed costs. Blame it on that damned ethanol, which I am coming more and more to despise. When 4 out of every 10 rows of corn ends up getting burned in our gasoline tanks, no wonder livestock and poultry producers are angry. No worries however, we all end up paying for it at the meat counter. Yep - whatever makes the environmental whackos happy in their quest to counter their boogieman of global warming.
Yellen made some comments today which were in line with her dovish views but traders are convinced, whether rightly or wrongly, that the economic data is going to improve with the warmer weather and that the Fed will remain on track with its tapering plans, her comments notwithstanding.
Hogs did what I expected them to do and that was to believe the Hogs and Pigs report. They did come off the limit down move however so there might be a contingent who are skeptical of that Friday report. I am one of those. We will be back to watching slaughter data and other fundamental inputs to gauge whether or not the pencil pushers over at USDA got it right or not. I am convinced that they will have to issue a revision to the numbers at the end of June when the next quarterly report comes out to bring it into line with the weekly slaughter data.
With all that is happening as the fallout from the oxymoronically named "Affordable Care Act" increases, with the complete breakdown of a coherent American foreign policy abroad, and with the polls showing a growing majority of Americans believe the country is on the wrong track, out comes our imperious leader with solutions to a real issue that no doubt ranks right up there at the top of those things which the citizenry is most concerned with - YEP - you guessed it... cow farts.
Boy howdy is that real leadership or what?
White House looks to regulate cow flatulence as part of climate agenda
Read more: http://dailycaller.com/2014/03/28/white-house-looks-to-regulate-cow-flatulence-as-part-of-climate-agenda/#ixzz2xSnFUxFX
As some of you know who have read this blog for some time now, my area of expertise in the commodity markets is particularly in the livestock markets, where I cut my teeth as a trader many, many years ago and where I still tend to concentrate my time and energy.
That being said, I wanted to give you a perfect illustration of how our government agencies that distribute data to the marketplace can be consistently wrong and rarely if ever are taken to task for so doing.
Some of you are aware of a virulent disease has been affecting the US hog herd. It is called Porcine Epidemic Diarrhea or PED for short. This virus has a mortality rate somewhere north of 90% on young piglets. Adult pigs can contract the disease, which by the way does not impact the meat in any way or render it unfit for human consumption, but they generally can be treated and recover. The baby piglets however are usually lost however due to fluid loss from severe dehydration and other associated effects of the virus.
Hog and pork prices have been soaring this year as the disease has devastated the herd here in the US. Heading into this report on Friday (yesterday) estimates of losses due to the virus were ranging on average of up to 6%. Other private firms had forecasted losses upwards of 10% with some running as high as 30%.
Here is where things get interesting. The March report from USDA yesterday showed losses no where near the average of analyst estimates. As a matter of fact, the report showed the impact from the disease was not nearly as widespread as most in the industry expected.
The problem is that all of the recent hard data that we have been getting completely contradicts the USDA numbers from yesterday.
At the risk of boring the reader with the data breakdown ( I am hopeful that some of my readers are hog producers however ) here is what the pencil pushers at the USDA gave us when it comes to the various weight categories.
Market hogs under 50 pounds 96%
50 - 119 pounds 97%
120 - 179 pounds 97%
180 pounds and over 95%
A quick guide to interpreting this: this is the percentage of hogs compared to the previous year at the same time. In other words, the number of 50 pound and under pigs is 4% lower than last year at the same time.
Hogs are generally slaughtered when their weight reaches near 270 - 275 pounds ( this will vary considerably but is a good average ). Since it takes time for hogs to grow to this weight, one can generally gauge the available supply of market ready hogs that will be coming in any one period by looking at the weight numbers and calculating the time for the hogs in that bracket to reach maturity.
Now, let's take a closer look at this and see where things go awry with the USDA.
Many of the readers here are precious metals guys and could care less about pigs or cattle or corn or beans, etc. But laying that aside for the moment, if you look at these numbers not knowing anything else, what would you say that the MAXIMUM REDUCTION in the number of slaughter ready hogs is going to be over the next few months according to the USDA? Answer - 5%. If you said this, go to the head of the class. There will be a period during which one could look for the reduction in the number of slaughter ready hogs to be down nearly 3% from last year and another period in which it will down nearly 4%. But the maximum reduction that the market can expect, based on USDA's numbers is 5%.
Here is where the problem begins... this same USDA also issues, every single week, week in and week out, the total number of hogs that are under inspection by USDA inspectors. The report is usually dated two weeks behind us but it is the industry standard for keeping track of the number of cattle and hogs killed for meat production here in the US. It is based off of hard, on-the-ground data
For the first two weeks of March alone, guess where hog slaughter numbers are running in comparison to last year... The first week they were down 5.75%. The second week they were down 7.77% and estimates over the third and fourth week continue to run near 7%! In other words, we are already EXCEEDING the maximum reduction in hog slaughter numbers that USDA just told us to expect in their report this Friday.
What accounts for this glaring difference? Answer - The Quarterly Hogs and Pigs Report is based off a census taken by USDA of various hog producers. It is essentially a snap shot of the industry. USDA contacts various hog producers, both large and small, and surveys them to get their intentions, numbers, etc. and then uses that data to put together the quarterly report. This is crucial - they do not survey every single hog producer out there although they do the best that they can with the manpower that they have. It is a snapshot but it is an incomplete snapshot.
On the other hand, the weekly slaughter data is tabulated from real live data every single week. We know exactly how many hogs were killed on a single given day based off of those reports. There is no extrapolating - it is actual data.
In effect, what we have is a contrast between facts and estimates drawn from incomplete data.
If that were not bad enough, this is the very same USDA that a mere 3 months ago, in their December Quarterly Hogs and Pigs Report gave us the following weight breakdowns:
Market Hogs under 50 pounds 99%
50 - 119 pounds 100%
120 - 179 pounds 100%
180 pounds and over 100%
That report essentially told the market that any sort of impact from the PED virus was going to be minimal. Take a look at the following continuous hog chart and tell me, that USDA was anywhere near to being close as to impact from the disease!
Herein lies the crux of the problem. Hog producers and other commercial interests who need to institute risk management programs to secure profits and mitigate price risk depend on the accuracy of the data being furnished to them by these various government agencies, in our case here, USDA. Any hog producer who three months ago, used the data given them out of the USDA December Hogs and Pigs report to begin implementing hedges for their expected hog production and put on those short positions has been absolutely obliterated as a result. They have forfeited a large profit ( a once in a lifetime profit I might add ) that could have been theirs had the data actually reflected what the true reality of the impact of the disease was going to be. Not only that, they have been met with large margin calls. Failure to meet those necessitated them having to close out the hedge incurring a large paper loss in the process. All this because the data that came out of the USDA was inaccurate. Please note that I am being kind here by employing the word, "inaccurate". What comes to mind is more akin to horse excrement.
So here we are, some three months later than the last USDA report, and that agency has had to come back and issue another revision to try to bring their previous data more into line with the reality of what has occurred on the ground. Never mind the fact that many producers have been seriously harmed financially as a result. Yet for some bizarre reason, this same USDA, issuing another Hogs and Pigs report, with data that is already at odds with other data from within that same agency, is lent credibility by the various analysts and such in the industry. My question is "WHY?"
Had the agency actually picked up something, anything, of the impact that this disease was going to have three months ago, an impact that many of us said was indeed going to be the case, then, and only then, would I lend it some credibility. But for an agency to miss the mark by such a large extent three months ago, to now come out with yet another report, that is at such great odds with the majority of estimates from many other seasoned and experienced traders and analysts, is further proof that the data coming out of it is next to useless.
Some will argue that it is what it is and that the data is what we have to go by until shown otherwise, but that is missing the point entirely. The point being that it is easy for USDA to come back AFTER THE FACT and issue their revisions but that does no good to those who have made marketing or risk management decisions based off of data that has a notorious track record of being so far off of the mark.
One last thing, here is a chart, courtesy of the fine folks over at Urner Barry (drawn from the American Association of Swine Veterinarians ), of the number of reported and diagnosed incidents of the PEV virus. As you can clearly see, the number has increased sharply since the fall of last year. It was in late September/early October that we began to see the incidents of new cases really pick up - Impact from the disease will not be seen until about 6 months later. Look at the huge spike in cases in late January which continued to increase until it seems to have topped out in late February. The case number TRIPLED from the September/October levels.
Again I ask you reader, without knowing much if anything about the livestock markets, if the impact from the disease is not generally felt until about 6 months later, during what time frame would you expect to see the greatest impact on the number of slaughter ready hogs this year? Answer - in the late June - August time frame. However, if we base our view on the data that the USDA just gave us this past Friday, the worst impact from the disease is already behind us...
The reason given is that USDA suggested that more hog producers farrowed their sows during the December 2013 - February 2014 period than the market expected ( + 3%). That may be true, but even if it is, and I have my own reasons for doubting this, it still does not deal with the rapid spike in the number of cases breaking out during the depth of winter ( Tripled the case during the fall) nor does it explain how slaughter can currently be down by 7% already when USDA tells us that 5% is the absolute maximum reduction we can expect.
I suspect that the USDA is going to be once again, way off base with their numbers and that by the time the next Quarterly Hogs and Pigs report is released at the end of June, they will once again be revising their numbers.
We'll come back and revisit this at the end of June - of that you can be sure.
Quod est demonstratum.
To begin these comments, let's take a look at the hedge fund positioning in the Comex gold futures through Tuesday of this past week. April gold closed at $1311.40 that day having closed at $1359 a week earlier ( Tuesday, March 18). That is a loss of $48 over the reporting period that the CFTC employs.
In looking at the chart ( a comparison of the hedge fund NET positions against the price of the metal ) you can see what happened. A combination of LONG LIQUIDATION and NEW SHORTING produced a drop of some 18,000 contracts ( futures and options combined ) in the overall net long positioning of the group of traders. The Blue Line is the hedge fund net position while the red line is the gold price.
The result? - Gold moved lower as this group of large traders was selling. Through the end of the week, gold dropped another $17 to settle at $1294 in the April contract, which by the way goes into its delivery period next week.
Here is the Daily or short-term chart.
There are several things to note. First, Bears are back in control of this market on this time frame. Negative Directional Movement is above Positive Directional Movement and the ADX has turned lower and is continuing to move down indicating the break in the uptrend. The recent uptrend that began in January has halted with the market having given up over $100 off its best level of this year.
Second - the "golden cross" which some were touting as sign of a new bull market beginning has been negated as price has fallen below that level of the cross ( the 50 day moving average crossed up and above the 200 day moving average from beneath).
Third - the sloping uptrend line drawn off the late December low has been violated to the downside.
These are all bearish signals.
The one bullish signal on this chart is that the important 50% Fibonacci retracement level of the entire rally from that same December low near $1180 to the recent high near $1392 has thus far held. That level is near $1287. Bulls managed to keep price from penetrating that level for long before it recovered.
On the short term chart, the bears have the clear advantage.
Let's shift to the weekly or intermediate chart. I have included another old, but reliable technical indicator, the Stochastics, because of the nature of the price action on this time frame.
Let's first look at the Directional Movement Indicator. Notice that the ADX line ( the dark line ) continues to move lower indicating a TRENDLESS MARKET. If a market is trendless, that means it is moving sideways. That is exactly what gold has been doing on this time frame. It is essentially meandering back and forth in a very broad range as noted in that green rectangle I have shown. Support down near $1200 and below is intact while resistance near $1400 is also intact. We have what amounts to a $200 range within which gold is working.
What one usually experiences with a market moving within a broad trading range is the perma bulls begin coming out with their "to the moon" price predictions and all manner of wildly bullish scenarios as price works its way up towards the top of the range.
The perma bears on the other hand, begin talking their "price is going to collapse" scenario as the price works it way down towards the bottom of the range.
In other words, the bulls get noisier as price moves higher while the bears get noisier as the price moves lower.
The Directional Movement lines indicate that while the bulls have seized control of the market ( +DMI (blue line) crossed above the -DMI ( red line), they are in danger of surrendering their mild advantage if they do not quickly assert themselves.
I have also noted the Stochastics indicator because this is designed for trendless markets. Note the area within the rectangle on the price chart and look at the action of the stochastic indicator. It has been moving higher generating buy signals as price has bounced off of support at the bottom of the range and generating sell signals as price has stalled out at the top of the range. It is currently in a sell mode .
Lastly here is the monthly or long term chart.
The Directional Movement Indicator shows that the market is moving sideways as well with no clear trend although bears currently have a slight advantage in that -DMI remains above +DMI. Those lines are converging however so the bears will need to reassert themselves sooner rather than later if they are to retain control on this long term frame.
Also, the MACD indicator, while still in a bearish mode, is working on putting together an upside bullish crossover which would generate a buy signal based on that indicator.
Lastly, the sloping uptrend line drawn in red has thus far held. One can see that the $1280 level is a pivot with price working around it on both sides.
The chart is inconclusive at this point. The long term uptrend is still intact near the 38.2% Fibonacci retracement level although both indicators show bearish forces still in control. Bulls are attempting to wrest control of the market from them but have not as of yet managed to do so. A push through this week's high near $1400 will be required to tip the scales in their favor in my opinion. Before that can occur however, $1300 will have to be captured.
We'll see how the battle goes.
Same story as yesterday - The US Dollar is gaining some ground at the expense of the Euro and that is undercutting the bullish case for gold.
Geopolitical concerns are still lurking around due to events in Ukraine but as long as the market feels that escalation dangers are limited, safe haven flows into gold are waning.
Gold has now dropped $100 since making a try at $1400 on March 17. That proves the old adage that markets tend to generally fall faster than they go up ( this is not an "always" thing but it does seem to occur more than the reverse). In the case of gold, the market moved up almost entirely on worst case scenarios of WWIII, Russian moves out of the Dollar, a new Cold War, etc. None of these events have panned out exactly as their proponents have suggested they would.
This is the danger inherent in rallies which are predominantly driven by short covering as was being noted here. Once those buyers are run out, who is left to chase the price higher? Gold needed to see FRESH speculative interest coming in from the hedge fund community and it was not getting it; especially after the FOMC gave such a hawkish view on the US economy and proceeded with their tapering plans.
In watching the price action closely during the session, gold managed to claw its way back off the worst levels of the session when the stock indices initially weakened early today. As the equities then moved higher into the plus column, gold began moving lower again. Right now, as I type these comments, the equities are once again weakening a bit but gold is actually moving lower, along with silver I might add.
The HUI was actually higher early in the session but has since then given up its gain and has turned negative. Its losses however have been contained at this point although that could change by the end of the trading day.
Take a look at the following chart of the HUI. Note a couple of things on the Directional Movement Indicator. First, the -DMI ( Red Line ) has crossed back above the + DMI ( Blue Line) for the first time since the month of January. The bears have regained control over the market. Notice also that the ADX line ( Dark Line ) is showing some signs of turning higher suggesting the Potential for a trending move lower. I think we would have to see a downside violation of the 210 level however for this to occur.
I want to also note that much was made on some sites about the so-called Golden Cross, where the 50 day moving average crosses above the 200 day moving average from below. Many technicians regard this as a bullish development. For such an event to actually mean something, it is usually understood that the price of the underlying security ( in this case the index ) must REMAIN ABOVE both moving averages. That has not been the case here with the HUI. It has fallen below both moving averages just shortly after the time the Directional Movement lines reversed signaling the Bears were grabbing control of the market once again. In other words, any bullish signal from that event has been negated.
This underscores the rapidity at which markets move nowadays and especially markets which are driven by geopolitical events. Here is a bit of trading advice - unless you are very fast on the draw and spend significant amounts of time sitting in front of a computer screen watching prices and events, leave markets driven by geopolitical events alone. They are too dangerous for all but the professional traders who can move more quickly than the average screen watcher. Yes, you might miss a great opportunity for a big profit but you also risk suffering from severe losses. Just ask any of the bulls who bought up near $1390 who were just convinced that the West was going to level sanctions on Russia after the results from the Crimea region came in over that weekend a while back.
Also, never base a trade ( or an investment ) for that matter on a headline. NEVER! Let the market technical price action do that for you, AFTER you do some research on your own and not rely on the predictions of some "expert" who makes his or her case about why such and such market is going to the moon.
Remember, markets are based on differing opinions. Some are bullish; some are bearish. But keep in mind that they are just opinions and in that sense, guesses as to how the market might respond to a particular scenario. The only true proof consists of the price action. It either confirms or validates ones opinion or it does not. It really is that simple.
Traders who quickly realize that the market is not accepting their opinion and get out of the way become survivors and experienced traders. Those who want to blame other forces ( manipulators), etc, and whom refuse to get out, become former traders with a lesser net worth.
All that matters in this profession is whether or not you make money; not whether you were "right". You are only "right" if the market confirms you are right. Other than that you are just a guy with an opinion that meant nothing. Period. Humility is a virtue that will serve to protect you long after pride has made fools out of prognosticators who keep serving up one dogmatic prediction after another.
"Put not your trust in princes, in mortal man in whom there is no salvation", says the Psalmist. Wiser words were never recorded.
Here is a Daily Chart of Gold to close out these comments. I have noted the "Golden Cross" on the chart for your convenience. That is the 50 day moving average in green crossing above the 200 day moving average. Note that price has fallen below both of these moving averages, a bearish development. Typically in a strongly trending market to the upside, price will remain above these levels.
Bulls do have a support level within the general vicinity of that cross which comes in at the 50% Fibonacci Retracement Level at $1287. They only missed that by a few dollars today. If the bulls can reverse today's losses tomorrow to close out the week, they have a chance at stabilizing prices here. If not, and if $1287 gives way, there is some light support near $1280. After that, $1262 - $1255 is the next target.
For Gold to get some recent Bears nervous, it will have to regain its "13" handle for starters. If they can manage that, some of the shorts will go ahead and ring the cash register and move back out.
The chatter in the Forex markets today centered around the comments of Bundesbank President Weidman who seemed to be concerned about the low level of inflation in the Euro Zone. Throw in the comments of some other major European Central Bankers and that hit the Euro as talk grew that the ECB was moving in the direction of its own version of Quantitative Easing.
Over here in the US Fed Governor Charles Plosser (head of the Phillie Fed) commented that the hurdle to change course on the Fed's plan to taper was "pretty high". By the way, he was concerned that inflation was currently a little low and that he would actually like to see it creep up a bit! How's that for some candid talk?
This sort of stuff, coming from Central Bankers in the West, along with further weakness in the mining shares, was enough to pull the rug out from underneath those buying gold out of any Dollar weakness concerns. If rates in Europe are not going up anytime soon and if the Fed is continuing its current tapering plans, then Gold has those headwinds to contend with.
if that were not enough, copper prices continued to fall lower today out of worries over the health of the Chinese economy. What really has the market roiled however is that persistent weakness in the Yuan. That makes copper more expensive to purchase for Chinese buyers. In a market already experiencing demand issues, that is not helpful.
There is a bit of chatter however that the economy over there is weakening to the point where the Chinese authorities may soon try to do something to generate some growth. Who knows exactly what that might be but it was enough, at this point, to prevent copper from falling any lower. Copper is holding about last week's spike low near 2.87 for now. I would be concerned if it broke down below there as the odds would increase that silver is not going to hold support down near $19 if that were the case. Silver has become a teenager once again.
Here is the chart of gold. As you can see, the bears have regained control of the market on the short term chart. Notice how the price consolidated the last couple of days near the 38.2% Fibonacci retracement level indicated. Then today, it fell below that and as of now, has not yet recovered.
It did manage to hold above psychological chart support at the $1300 level. Bulls would not want to lose that as it would further shift the sentiment in the market in favor of the bears. If $1300 goes, then look for a test of the 50% retracement level near $1287. Bulls need to recapture $1340 to gain any sort of traction right now. They certainly need some help from the miners which are down over 2% as I type these comments ( basis HUI).
The US Dollar Index needs to clear 80.50 to run out some of the recent shorts. If it does, gold will more than likely be unable to hold support on the downside. We will have to monitor developments in the currency markets to get a sense of whether or not that is going to be the case.
Si
lver had been managing to hold above $20 today in spite of the Gold weakness until late in the session when gold began sinking even lower and the shares continued to puke. That finally pulled the rug out from underneath it and it became a teenager once again. It had managed to become an adult in early February but could not act its age and decided it liked the "freedom" of having "teen" in its age.
In looking over its daily chart, the bears are back in control of the market, which is essentially meandering back and forth in a broad range. It is below the 50 day moving average which is bearish but as is the case with any market stuck in a sideways pattern, moving averages are not especially useful in analyzing them.
This is reflected in the ADX line which continues to head lower indicating the lack of a firm trend.
It is going to be interesting to see how gold trades in Asia this evening. Will bargain hunters surface or will they sense lower prices ahead and thus hold their fire to secure the metal at a better price. If the West starts selling gold once again, Asia is going to have to provide whatever price support this market might have.
The Dollar
Last Friday's COT report showed a fairly large build in new longs among the hedge fund community. Unfortunately for them, those new longs BOUGHT HIGH and ended up SELLING LOW; not a particular good way to impress their clients.
Nearly all of those new longs were immediately under water as soon as the FOMC issued its statement last week. That and the fact that WWIII did not break out, as many of the perma gold bugs were predicting, was enough to turn the momentum back and that did it for the momentum-based funds. They are now selling.
In looking at the Daily Chart, it has now turned negative once again with the loss of downside support near $1320. Gold has currently encountered a bit of buying support at the 38.2% Fibonacci retracement level from the $1180 low to the recent high shy of $1400. Failure to hold here, and a test of PSYCHOLOGICAL support ( there is nothing as far as Technical chart support about this level ) at the $1300 will be shortly in order.
If that is not enough to bring in dip buyers, then the next logical chart level that I can see is closer to $1287.
The ADX turned down last week suggesting a halt in the recent uptrend. That has certainly been confirmed with the crossover by the Directional Movement Lines. The Bears have now seized control of the market once again. We will have to see whether or not the Bulls can seize it back again but they are going to have to resurface very, very soon and at a bare minimum recapture $1340 - $1345 to run out some of the new shorts.
If you notice, the short-term uptrend line has also been broken.
Silver is actually holding up better than gold today as it thus far seems reluctant to move below $20 for any length of time. It might be drawing some stability from the fairly steady copper market.
Mining shares are of no help whatsoever to the entire metals complex at this point. There is a zone of congestion on the HUI chart between 210 - 220. That index looks like it is headed there. So far the miners are down nearly 4% today.
By the way, bonds are getting some money flows into them today. Interest rates have dropped a wee bit on the Ten Year to 2.737 as I type these comments.
No much else to say except the week has started off poorly for gold bulls. Maybe it will end better.
The big news of today in my view is the barrage of selling that engulfed the Biotech sector. It was indiscriminate, hitting the entire sector. The selling in that sector put an end to the feel good stuff that marked yesterday's equity trading.
From what I could tell, what got the ball rolling downhill was some Democrats in Congress who started making noises about Gilead Sciences Hepatitis C drug known as Sovaldi.
That was enough to send investors ( read - hot money ) fleeing in droves out of the entire sector. Biogen Idec, Celgene and others got absolutely mauled as a result.
Take a look at the Ishares Nasdaq Biotech ETF ( IBB). It fell a whopping 4.74% in one day ( sounds like a mining share ). Volume was enormous.
It fell through the 50 day moving average although based on this chart, such moves in the past have tended to be buying opportunities.
The Dollar was a bit weaker today and that helped gold move higher but the big development was back in the Volatility Index or VIX. It leaped sharply higher as the panic selling in the biotech sector triggered a wave of unease across the broader equity markets as the session wore on.
Keep in mind that comparison chart I put up the other day showing the VIX and comparing it to the price of gold.
As the VIX moved higher, so too did gold. Interest rates also moved down a tad today as some safe haven buying was seen in the Treasuries as a result of this biotech event ( the Yen was up once again). What we thus saw today was gold getting a bid as a result of a safe haven play once again.
Whether or not this holds is an unanswered question at this point. From a technical perspective, gold managed to hold above chart support near $1320. At the current moment, gold is stuck in a range between $1340 on the top and $1320 on the bottom. Those two levels hold the key to its IMMEDIATE future. If it powers through $1340 and does not lose that level, it should try again for $1360-$1365 where it should meet up with eager sellers.
If it loses support at $1320, it will be down to $1305 - $1300 for a test.
Copper bounced a bit today as the hammer formation from Wednesday so far has been holding it. Today's COT report shows that the only category of traders that are net long the copper market are the index funds; everywhere else is short, including the Commercials. That is going to be a big level moving forward. If copper falls below that level, I honestly do not see anything on the chart in the way of support for at least another $.10 - $.12 cents. It's chart still looks heavy to me but for now the bulls have managed to hold it together after the metal has plunged nearly $.40 over the last month!
I will get something up later about the Gold COT report. A quick comment I can make at this point before I get the chart together is that this week new buying finally managed to exceed short covering in gold among the hedge fund category. That is encouraging if you are a bull but the problem is that the data DOES NOT COVER what happened in this market beginning on Wednesday, when the Fed came out with its hawkish comments. Gold lost some $40 since then before it managed this biotech-induced bounce today. It would not surprise me to discover that a goodly number of those brand new long positions, many put on above, $1380 are now history as they are deeply underwater at this stage.
A close look at the chart and you can see that gold is currently corralled between the "Initial Support" Zone and the "Secondly Support" Zone. It do not see an opportunity here unless one wants to just roll the dice. Those who are inclined to be bullish, will see the success at holding above $1320 as an opportunity to get long. Those who are inclined to be bearish, will see the inability to clear $1340 as a reason to get short. As for me, I see better opportunities elsewhere until gold can tip its hand. There is nothing wrong with sitting on the sidelines at times and letting others roll the dice because that is what you are essentially doing with gold at this juncture.
It is difficult for me to envision the Dollar breaking down hard as we move foward considering what the FOMC just gave us this week. Barring any further escalations in geopolitical events, that means the driver for gold is going to have to be economic data releases. If interest rates are set to rise as the Fed has stated ( spring 2015) then positive real rates will tend to make for stiff headwinds against gold breaking above $1400. If, on the other hand, the economic data does not improve any with the return of the warmer, more seasonable weather, then the Fed, which is highly data dependent at this point when it comes to make decisions regarding monetary policy, is going to have do modify its hawkish comments from this Wednesday. That should give some support to gold.
I still believe the key to gold is the US Dollar and the key to the US Dollar is interest rate levels here in the US. Higher rates will keep a lid on gold, UNLESS, the market becomes convinced that inflation is moving higher faster than interest rates are moving higher. That seems very unlikely given the benign inflationary environment that the market is convinced now exists. Please bear in mind that I am not giving my own view of inflation - I am giving you the view of the FED and the majority of big players in the financial realm.
What I can tell you is that those of you who love eating red meat ( Bar-B-Q ing is my heritage and pastime) had better get ready for some stunning sticker shock at the meat counter. That is one area where you are going to witness some mind-boggling price increases this spring and summer.
Hopefully we will get a good planting season and a good growing season here in the northern hemisphere next month and produce some very good and large crops. That would go a long way to easing some price pressures at the grocery store but the impact from such an event is still some ways off.
At least the price of electronic goods is staying nice and low. It is going to be interesting to see what happens to crude oil as we move into the warmer weather. Natural gas, after spiking to kingdom come this winter when the now famous Polar Vortex enveloped nearly half the US, has come back down to earth in a rather rude fashion. Anytime we see lower energy costs, it benefits the consumer and business.
I am going to be most interested in seeing if that sell off in the Biotech sector has run its course come next Monday. That will drive money flows next week.
Take a look at the following comparison chart of the price of gold ( IN BLUE ) versus the Volatility Index, or as I prefer to call it, the Complacency Index ( IN RED ). By the way, this is a 2 hour chart.
The VIX measures investor nervousness, lack of confidence, fear, panic or complacency, comfort, ease, confidence. When it is rising, investors are nervous; when it is falling, they are confident.
With that in mind, observe how the VIX spiked higher as tensions began building over in Ukraine as that came onto the radar screens of traders/investors. The more the hype ramped up about WWIII, new Cold War, etc., the more nervous traders became. As the VIX soared higher, gold followed up right along with it as its safe haven status came into play.
Additionally, the US Dollar refused to get any sort of safe haven bid during the crisis, further aiding the upward path of the gold price.
Notice however, that as soon as the VIX moved lower, so too did gold. Simply put, markets that move up on geopolitical events tend to come down just as fast once traders digest the news and the worse possible outcome does not come to fruition.
As the VIX moved lower and investors began to look at the Western sanctions, they realized how insignificant those were going to be and the extremely limited impact it would make on markets worldwide and they began moving back into stocks as nervousness faded.
Yesterday the Fed came out with what were generally interpreted as hawkish comments. Traders were caught off guard by Fed Chair Yellen's comments that interest rates would be going up sooner than expected. The current view, now that the Fed has made its announcement and Yellen has answered questions, is that the bond buying program ( QE) will end this fall and interest rates will possibly move higher 6 months later. Effectively, next spring will see higher yields is how the market is viewing the Fed's new standing.
With no inflation in sight as far as the market ( and the Fed ) is concerned, traders are moving out of gold. Adding to that is the fact that concerns over China's economic growth are mounting. This is putting pressure on some key commodity markets, notably copper and that is working to take some of the buying out of the sector.
An additional headwind for gold is the strengthening Dollar. With the Fed talking higher interest rates, the greenback is drawing support at the expense of the European currencies in particular, as well as the commodity currencies, such as the Canadian and Australian Dollar.
As long as there is the potential for further flare ups or escalation of tensions in Ukraine and in Crimea, traders might be hesitant to remove the total " WAR" premium out of the gold price. They seem to have just about removed it all at this point but it is holding above $1320 for now. That is the zone that they needed to hold in order to maintain control of this market on the daily chart. So far, they are still hanging in there. It looks to me like the buying in the mining shares is offering some support to the actual metals at the Comex.
Silver by the way, is once again flirting with being a teenager. Copper continues to act as an anchor on the grey metal.
The Dollar has generated a buy signal on several of the daily charts. Gold holding support therefore must be a bit encouraging to the bulls but I want to stress this again - this must hold or they will cede control back to the bears and set up a likely test at $1305 - $1300.
Lastly, take a look at the Goldman Sachs Commodity Index, the daily chart. It had managed an upside breakout recently but has since surrendered those gains and is now trading back below its former breakout point which seems to once again be acting as overhead resistance to the sector as a whole. There remain individual commodity markets which are still showing signs of strength but we are trying to see the sector as a whole to gauge whether or not there is a general bid into this asset class. With the US Dollar strengthening once again, my guess is that some of the hot money from index funds that was blindly buying across the sector will be forced to be much more choosy.
All that was required to launch the US Dollar higher away from strong downside chart support near the 79 level on the USDX chart was a hawkish sounding Fed. With the announcement today that they would trim another $10 billion/month off of their bond buys, interest rates shot up on the long end of the curve and with that, so did the Dollar away from support.
The rally in the Dollar, along with higher interest rates ( the latter is the big deal) resulted in a barrage of selling in gold as bulls rushed for the exits. The result was a clean break of the first level of chart support noted on the chart. The selling did not abate until gold reached the secondary support level noted.
This level had better hold or gold is going to fall back closer to $1300.
The breakdown in the ADX indicates the uptrend has been halted. I am closely watching those Directional Movement lines to see if we get a downside crossunder of the +DMI below the -DMI. So far the bulls remain in control of the market but if that support level gives way, I would expect to see it reflected in this indicator. That could very well put the bears back in control on the daily chart.
Keep in mind, based on the long term monthly chart I posted up the other day, the bears have retained control over this market but their hold was slipping. If the daily chart breaks down further, they are going to be emboldened further and a lot of those who were forced out during this recent rash of short covering, are going to come back in on the short side once again.
The jury remains out therefore. Let's see what we get. We are going to need some positive economic data to confirm the Fed's rather rosy view of the economic outlook. They are content to place a fair amount of blame for the recent poor data on the record breaking cold temps. That may be true but the warmer months are arriving and we will know very quickly whether or not that is indeed the case.
One last thing - the Euro failed to best 1.40. In my view, that will be required for gold to best $1400.
The headline title says it all - without a further escalation in the tensions over in the Crimea, gold has nothing to keep the bull fed and thus the path of least resistance is lower for now.
Longs are bailing out, especially those who bought Sunday evening up near the highs and some fresh shorts are attempting to chase them further.
The market has encountered some buying in that first zone of support I noted last evening on the charts. Here is an updated version of the same chart showing the buying zone. If the bulls cannot hold it above today's session low, then the path lower is open towards $1330 - $1325. There looks to me to be a bit of support that could show up near $1340 previous to that.
Yesterday the ADX line was flattening out indicating the potential for a halt in the recent uptrend. Today's action has actually turned it down. Bulls are still in control of the market on this shorter term chart unless gold loses $1320. That would put a big question mark into place.
Gold is therefore probing lower now as it seeks to uncover buying lurking beneath the market. The question is whether or not these buyers are willing to let it move lower before stepping in or are eager enough to hold it here and now. I honestly do not know the answer to that and thus have to wait and watch and observe.
Price will have to extend past $1390 now to run out some of the fresh shorts and to attract some more new longs. With the Fed on track for this week, price action could be volatile so hang onto your hat. If events over in the Crimea region flare up, gold will flare higher as well. STay tuned.
Pardons for the brevity and lateness of this post - it has been a busy day - again....
Gold has been reacting down since about mid-morning on Monday as word spread about the extent of the sanctions that the US was imposing to ostensibly punish Russia for its "invasion" ( US view) of the Crimea region.
I have made no secret of my view that the people of that region consider themselves as part of Russia and wished to remain that way. Why we are meddling in that matter escapes my comprehension as the turnout among the voters was spectacular and the vote was overwhelmingly lopsided in favor of that region becoming a part of the Russian Federation.
To express US displeasure the sanctions were so limited and so puny that one of the Russian ministers or deputies mocked them openly.
Gold wasted no time in properly interpreting them - much ado about nothing and promptly sold off.
Remember, a market that is being news driven especially when that news is geopolitical in nature, requires a constant barrage of bullish events or an escalation to propel it higher. Markets tend to factor in the worst possible outcome - if they get it fine - if they do not get such an outcome, they usually sell off. That is what gold is currently doing.
At this point, gold is going to require a further deterioration on the ground over there to keep driving higher. This is the reason why buying any market on geopolitical events requires one to be extremely fast and nimble on their trading. Everyone who bought the market on expectation of the worst is now in the process of taking profits while they can.
Let's see at what level the dip buyers show up again but for now, gold has failed to extend to psychological resistance at the $1400 level. It made it close but that move higher was met with plenty of profit taking by longs who realized the end of the world did not occur Sunday evening here in the West and new selling by opportunistic shorts who sold against what they believed was a $1400 ceiling.
Interestingly enough, the US Dollar still seems to have few friends. That should tend to keep gold supported on this retracement lower.There looks to me to be some resistance among Forex traders to take the Euro to 1.40 for now and that is keeping the greenback from moving lower. The currency markets are so volatile right now that trying to read where they are going next is relatively fruitless. All I can say is if the Euro can power through 1.40 then gold should respond positively and move higher. If it cannot and the Dollar remains stable, some of the "war" premium is going to be bled out of the yellow metal.
I am observing the ADX line beginning to flatten and possibly turn lower. If it does, that would signal that the current trending move higher is going to take a break. As long as the Blue Line, the +DMI, remains ABOVE the red line, the -DMI, the bulls are in control of the market and the setback in price is just that, a setback in a trending move higher. If it does not however, in conjunction with a turn lower in the ADX and a downside cross of +DMI below -DMI occurs, then I would look for some long liquidation to begin occurring. While not excessively large, we have seen a fairly decent build in long positions although I remind you that the bulk of this move higher in gold has consisted of SHORT COVERING, as I have noted repeatedly. If the shorts are done running for a while, the bulls are going to be in trouble as they are going to need to recruit some new converts to their cause quickly if they want to keep control of this market.
I have two support zones noted here...the first is the zone that was formerly resistance and extends from near $1352 to just below $1350 near $1348 or so. I would look for any dip buyers to first show up here. If they do not appear in sufficient size, then expect a drop back to stronger support centered near the $1330 region.
Let's see what we get...
At the risk of further alienating some former "friends" in the gold community, I felt the necessity to post up a long term chart of the gold price so as to provide a bigger picture perspective of how I see this market at the current time.
The gold price has a nice recovery off of the double bottom near $1180 and in the process, has improved the balances of the long suffering bulls' investment portfolios in the process. Those who failed to heed the charts on the breakdown of support at $1530-$1525 and instead listened to all the perma bulls and their various theories of why the market simply HAD TO GO HIGHER, are finally seeing a respite in the bleeding of their net worth. I am happy for them as some of them are advanced in years ( I Have read their private emails to me) and were incredibly fearful of what these paper losses meant to their retirement plans or their livelihood.
By the way, for some of you folks, I do hope you have learned the painful lesson of being 100% invested in a single sector. Under any circumstances, that is simply not wise. Too many things can occur which none of us can foresee as we are at best mere mortals.
Let's start with the monthly gold chart and with my favorite technical indicator, the Directional Movement Index. I like this one ( I use many others) because it helps me to gauge sentiment and that is what I am after as a trader.
For a bit of a refresher course - the index is comprised of three lines. Two of them are called Directional Movement Indicators. One is the Positive Directional Movement Indicator; the second is the Negative Directional Movement Indicator.
When price is moving higher or sideways, and the +DMI ( the BLUE LINE ) is above the -DMI ( the RED LINE ), the bulls are in control of the market and sentiment is bullish.
When price is moving lower or sideways, and the -DMI is above the +DMI, bears are in control of the market and sentiment is bearish.
The third line, the ADX line ( DARK PURPLE ) is the trending indicator. If it is rising, no matter if prices are going up or going down, the market is trending. If it is falling, the current trend has been interrupted and the market is either reversing course temporarily or moving sideways. Only if this line is rising is the market in a trending move.
With these few facts in mind, let's now apply this to the chart and see what we can discern.
Go back to the early inception of the decade+ long bull move in gold and look at late 1999. There, for the first time in some years, the +DMI crossed above the -DMI. The bulls had regained control of the market from the bears. However, look at the ADX line - notice is was moving lower. What does that tell you?
Answer - the downtrend that had been in place was interrupted but the market had NOT YET entered a trending move higher. All that this indicator was telling us was the bullish forces had asserted themselves with enough vigor that the bears could no longer gain any further downside traction.
It was not until 18 months or so later that the ADX began to turn higher indicating that the strong potential for a trending move was now present. A few months later, that is precisely what happened and look at what happened to the price - it moved $150 or so higher.
Here is what is important to note however and why my current view of gold is what it is - that gold is currently in a BEAR MARKET on the long term charts with the latest move higher a bear market rally. Take a look again at that +DMI line and compare it to the -DMI line. When that +DMI first crossed over the -DMI line back in 1999, it DID NOT once ever fall below that line again for a full 14 years! Please bear in mind that even with the sharp fall in price during the onset of the US credit crisis in 2008, when price imploded lower by over $300, the +DMI remained ABOVE the -DMI line. The two lines did meet but the negative crossover never occurred.
How do we interrupt this? Answer - even though the price had been whalloped, bullish sentiment remained intact. Yes, it was battered and badly bruised, but it was still there.
Do you also see what was happening to the ADX line. Over this same period, it never once ROSE DURING A PERIOD OF FALLING PRICES. What does this tell you? Answer - all moves lower in price were viewed as price retracements in an ongoing bull market. The idea of a LONG TERM BEARISH TREND did not exist.
Now, let's look at what happened in early 2013. Do you see it and do you the significance of that event? If you guessed that the -DMI crossed above the +DMI and that the bears had seized control of this market for the first time in 14 years, go to the head of the class! In other words, the bullish sentiment had been finally broken completely. Bearish forces were now in ascendency in gold.
If you also look closely, you can see for the first time that the ADX line, the trending indicator stopped moving lower during this fall in price and actually began turning higher as price moved lower. For the first time in over a decade, the potential for a trending move LOWER was in place.
That potential was aborted when the price refused to break any lower than $1180, ( not far from the industry average of the cost of production ) and the potential downtrend was halted. However, the -DMI line remained above the +DMI line revealing that bearish sentiment towards gold remained intact.
If you look at the area within the ellipse noted on the chart, you can see that the ADX is again moving lower, this time as the price moves higher. That tells me that the market has not yet resumed a bullish trend higher. What it tells us is that the market is moving sideways and while the bears remain in control, the bulls are attempting to regain control of the market. As long as the +DMI remains below -DMI, the bears, while ceding ground at the moment, still dominate.
That explains the Directional Movement Indicator and why I maintain my view that the current move higher is a rally in a longer term bear market. Based on this analysis, gold is moving sideways ( falling ADX) and is in a range trade between $1425 on the top and $1180 on the bottom. Now one may not agree with my assessment, but that is the interpretation based on my analysis of this particular indicator. Again, one can disagree with using this indicator but I am basing my view on how this same indicator has served us so adequately over the last 14 years. That is an objective interpretation and as such as it is a fact.
Now note the Fibonacci Retracement levels I have noted on the chart. I have drawn them ( the purple dashed lines) off the all time high above $1900 to the double bottom low at $1180. As you can see, gold has managed to claw its way above the first Fibonacci retracement level of that plunge, which is the 25% retracement currently coming in near $1365. Can you now see why there was such a battle at that region and why gold seemed to hesitate before punching through this level last week?
Notice that the next important Fibonacci retracement level does not come in until near the $1463 level ( please bear in mind that I do not use the hard number but rather look at the zone near that area). If gold can crack resistance near $1425, that looks to me to be the most viable nearer term target.
However, and this is a biggie - the 50% retracement level - the level that is most commonly noted and which carries the most significance from a technical analysis perspective, does not come in until near the $1550 region. I think it no small matter that this region is not that far removed from the critical former support level within the ellipse drawn on the chart, namely the $1525-$1530 level. Remember, it was the downside violation of that level that started a bear market in gold; therefore for gold to undergo a change from a bear market to a bull market that level MUST BE RECAPTURED by the bulls and price must stay above it.
I have no doubt that should such a thing occur, the ADX line would be moving higher and the +DMI line would be firmly above the -DMI line.
Let's take a look at one last thing and we are done - I have also drawn in another set of Fibonacci Retracement levels ( the green lines ) that mark the bottom or beginning of the bull market in gold near 250-260 and extend to the high near $1920. That is also to provide some perspective. I did not want to emphasize this set of Fibonacci retracement levels too much because I am using the ADX and the +DMI and -DMI to essentially filter my reliance on this latter set. Those are clearly bearish.
However, I have noticed over the years, that the principle of reverse polarity oftentimes extends to the use of Fibonacci levels. This means that those former levels which oftentimes mark areas of chart support or resistance, can serve as resistance on the way back if - if they served as support on the way down - or vice versa.
Note how the price fall did not fall below the 50% retracement level near $1091. It has since then moved back above the 38.2% retracement level near $1287 but remains well below the 25% retracement level at $1505.
Putting this altogether, one can see levels at which they expect opposition to gold's advance intensify should it continue to move higher. Start near $1463 and go on up to $1550 or so and you have a big zone where selling can be expected to show up in size. You can also see that if bullish forces can take out these respective levels, the bears are going to be on the defensive if their lines are shattered.
I would also think that for the metal to claw itself back up to that region, some significant events, either geopolitically or economically, are going to have occurred.
Let's see how events unfold and what we get moving forward. For now, I am done writing this weekend and need a break!
