“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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Saturday, March 15, 2014

Gold Price vs. Hedge Fund Activity - Act II

This is to provide a bit more lengthier view of the gold market action vis-a-vis the hedge fund activity going back to the beginning of 2011. It includes the rally to the record high price ( these are weekly closing prices only and thus do not reflect any intra-week spikes but only where price closed that week).



There is one thing I would really like to point out on this chart and that is the section where the words "Gold sinks to $1523 but recovers" begins. Look at the SHARP INCREASE in the number of fund long positions as opposed to the amount of short covering. Can you see it? Massive NEW BUYING in opposition to modest short covering. The number of new longs ramps up by 75,000 positions compared to a reduction of about 11,000 existing short positions. The ratio is nearly 7:1.



Then move to the right on the chart when the words, "Price hits $1525 again and then rallies to near $1800 as funds pile back on the long side and cover shorts". There we have an increase of 101,000 new longs compared to about 36,000 short positions covered. The ratio is less than 3:1 but still strongly favors new buying compared to short covering. Traders were getting excited about the possibility of gold coming back up and taking out $1800 once again and going on to make new highs but the number of skeptics was increasing.

The failure there turned the psychology around completely. Bulls bailed out in earnest and bears became aggressive. The number of longs that bailed out was about 86,000 while the number of new shorts went on to max out near 78,000. Clearly it was a huge change in sentiment that caused this.



What I would like to emphasize is the fact that during times when the bullish psychology was still at work in gold, rallies back off of support levels that were tested and held were led by a huge number of new long positions in comparison to the number of short positions being covered. That was reflective of the bullish sentiment that was still intact even after the big drops in price. Traders were convinced that the bull market was going to resume and did not want to miss it, after it had been ongoing for a decade.

When the price failed on the third test of $1800 the sentiment began to shift and even the most resolute of bulls began to waver. The final blow came when $1530-$1525 gave way and down she went.



This time around we are watching gold rally but the move higher is being led by a greater number of shorts compared to the number of fresh new long positions. That is what has me concerned. A careful analysis shows that there is no longer the same resolute bullish sentiment that once existed prior to the breakdown at $1800 but especially after the failure at $1530-$1525.

That is why, even though we have had a nice move off the lows, we are still not seeing bulls getting aggressive. I am convinced that we will need to see at least a breach of $1425 and a change in the handle to stay at "14" before we will get some skeptics on the sidelines to come in. Gold needs to see a change in sentiment for a brand new bullish trend higher can be maintained.

Please bear in mind that I am talking about a strong new uptrend and the resumption of a bull market. Until $1530 gets recaptured, this is just a rally in a bear market. It is a nice rally, and is certainly a tradeable rally, but it is nonetheless a bear market rally.

There needs to be further developments, whether geopolitically but more importantly concerning the US Dollar to occur before we will once again see the strong NEW BUYING that has in the past been a hallmark of bullish moves higher than have some sticking power.

Again, that certain website and its plagiarizers over there - I am watching you.... You may use this chart and the accompanying notes but I expect full credit to be prominently noted.




21 comments:

  1. Hey Dan, thanks for making additions to your chart, it's very useful.

    Although the bid in the gold rally so far has been very firm, looking at all this more closely, the rise in price hasn't been so impressive considering the total amount of longs added and shorts covered - price is still below the August 2013 high with more longs and fewer shorts now than back then when gold topped.

    This looks like a classic bear market convincing rally, Dan... I think the next big test will be when it finally corrects, are there going to be strong handed buyers to support gold at a higher low, if the market is really back to bull mode?

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  2. Great stuff today Dan, thanks for the charts and your analysis.

    Regarding Ukraine and Crimea....as I said last weekend, I fully expect further Russian encroachment into southern Ukraine and also in the northeast.
    Odessa still remains the key and if Putin goes for that big of a land grab they'll be repercussions from NATO.

    Keep your eye's on Turkey going forward.






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  3. Excellent data, charts and analysis.
    This makes the ups and downs much more understandable.
    Thanks.

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  4. Thanks a lot Dan this is what I was getting at trying to predict how much higher could this rally go. Might we see another round of rallies hovering between 1180-1425 before the final bottom finally gives way to the TRUE next leg of the gold bull? This would be in line with Armstrong's forecast that the real gold bull won't start till 2015.75-2016ish.

    Would be cool to have such predictable points to ride this up and down with the hedge funds and profit before staying long for the real ride up.

    DAN - so how do the commercials who are net short, I believe, play a part in the pricing action compared to the hedge funds that seem to control the price in these bear rallies? Or are they just geniuses in predicting directions while playing the long and short side?

    And what will be the "sign of Jonah" - meaning the market is indeed in bull mode, or is it that simple?

    Thx!

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  5. Hi Dan,
    what is your opinion on the "golden cross" that is likely to appear on the charts next week or so? I am not a TA, but others like Eric Sprott say this is a strong sign of a new bull market for Gold?
    Thanks!

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  6. congratulations on your excellent posts.

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  7. Dan has been bearish since the bottom. Listening to him would have cost you this entire move while people on the sites he bashes have been spot on. Keep listening to Norcini, the man Jim Sinclair sent into exile for being a basher. Ever notice how Dan would put up super bearish posts and them temper them for KWN? Now KWN doesnt want him anymore.

    ReplyDelete
    Replies
    1. Stu, you need to think a little more clearly; Dan is not a basher and Sinclair never sent him into exile. KWN is a laughingstock site. Last but not least, several years ago I had a problem with Sinclair when he posted that he, in the late 70's, early 80's, sold 5000 silver contracts into the close one day at the Comex. I asked him how that was possible since it was WAY over allowable position limits. If you want, ask him the same thing, since you seem to have him up on your pedestal. sparks

      Delete
    2. Ya those KWN'ers are like a broken clock right 2 twice a day.
      Meaning eventually gold rallies so I guess they were "right".....
      I'm sure I don't need to explain further.

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    3. Some people just like to believe the "2000 dollar in 2014 easy" stuff no matter how many times the predictions dont pan out. I have a newsletter by sinclair "senior precious metals advisor" from the mid 1990's where he claims "the bullmarket is definetely over" and sees a 1979-1980 stype rally coming.

      Jim is doing what he has done all his lofe and i am very very sceptical about trx achieving commercial production by september which was this years agm talk.

      I clearly remember dan warning people that selling is an option in 2008 the day gold hit 1024 and 1033 before is crashed while jim was adamant " this leg is not over yet". Same shit diferent day in 2013 when jim herded the sheep into a horrifying bearmarket because he need to "set jims mine".

      The more novices buy the tops the more shorts support the shareprice at bottoms.

      Its that simple with jim.


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    4. Stu;

      Go and learn how to read the directional movement indicator before you make a complete fool out of yourself telling us here what I believe and what I don't believe. When the words, Bulls are in control appear on one of my charts, it means the bulls are in control.

      This is a TRADEABLE rally in a large bear market. that is a technical fact from looking at the long term charts. Until gold can recapture broken support at $1530-$1525 it remains in a bear market. That does not mean one cannot attack it from the long side but it means you need to understand what the long term trend is..
      One last thing - it is incredibly arrogant and presumptuous of you to inform all the world of my relation with my dear friend Jim Sinclair.

      I think the world of JIm and I am sure that the inverse is true. I chose to write at my own site as there are certain things that Jim and I have differences of opinions on. Out of my respect for Jim I could not in clear conscience write there and take the risk of wounding our friendship because after all, it is Jim's site.

      JIm has a long term view of gold. I am a trader and have to respect the charts. That turned me bearish when the chart structure broke down and the bullish trend ended. When the chart structure turns bullish again, I will view in that light.

      for now, the market is range bound between $1425 on the top and $1180 on the bottom. That is a technical fact. I could care less what your opinion is on gold to be honest as my trading career and success is not the least bit predicated on the opinion of a man such as yourself who has the hubris to believe he knows what I am thinking or doing or what my relationship to Jim might or might not be.

      As far a KWN goes, I suspect that my bearish views on gold where not particularly popular at that site. Do I care about that? No, I do not. Have I lost anything by not being on that site? No, I have not because unlike most of the "experts" on that site, I have nothing to sell, nothing to peddle, nothing to hawk. I received no payment for my time nor did I expect or desire any as I make my living entirely from my trading skills.

      I can be objective therefore since I am not married to gold as a career like the bulk of those people are over there. If you want an objective view of gold, you are not going to find it there.

      As far as being a "basher" goes - you toss that word around rather lightly. If by that you mean me attacking shameless hucksters who deceive the unsuspecting into taking long positions in a highly leveraged futures market because the idiocy of claims such as backwardation, constant price manipulation, flash crashes, etc. then I plead guilty. I hate falsehood in any form. It has to do with my quest for truth as a Christian and I will not hesitate to attack it and do my best to discredit and destroy it anytime I see it.

      If that makes me a basher, so be it. I do not care as I am after truth. Successful trading means understanding price movement and the sentiment behind that movement. Those who come up with their buffoonish theories to dupe people into being on the wrong side of a market are shameless Cretans with no conscience.

      Nuff said - the regular readers of this site can judge for themselves whether or not my words ring true. In the meantime, you would do well to think less highly of yourself and your misguided opinions, although I will always believe that fools are best left to their own delusions since they lack understanding and temperance.

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    5. Amen Dan! I can't believe you do this analysis for free! What a Gift to the people!

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  8. thanks a lot Dan!!

    this is definitely the best site to learn something about gold

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  9. Dan:

    Quoting from above " ....That is why, even though we have had a nice move off the lows, we are still not seeing bulls getting aggressive..."

    Is this a good ( bullish ) thing or a bearish thing...doesn't this constitute the proverbial WALL OF WORRY which usually manifests itself at the start of a big move ? Old as I am, I remember how skeptical many of us were in 1982 for almost three years, that a real bull market in US stocks has started.

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    Replies
    1. Wolf, that Dow move didn't really start to go until 1995 some 13 years after the Bull began. Look at the long-term chart. The public is always way behind the curve...

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  10. Nice catch!

    Why don't you add a line with the NET LONG position? My guess is, that it should have a quite high correlation with the price of Gold...

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  11. I was watching Friday's trading and here's what I noticed:

    - Russian ETF RSX rallied very strong off the lows, erasing almost all of previous days losses.

    - Copper stocks like FCX and SCCO refused to make lower lows, selling seems to be exhausted.

    - Regional Bank stock ETF KRE refused to sell off, still pinned at 5-year highs

    - Same with cult IBD Top 50 momentum stocks, most of them were actually green on the day including IWM.

    Verdict?

    Expect a monstrous rally Monday or Tuesday after the Crimea vote.

    And gold could sell off very sharply after short squeeze exhaustion, or it could be dragged up even higher with stocks in general.

    Tomorrow will be the day.

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  12. Imagine the true "rock star" status Egon Von Greyerz would have right now if he made the following announcement in 2011:

    “There will be major wealth destruction in the next few years, with gold stocks, bullion, and commodity prices in general all falling faster than anyone can imagine...."

    "“Very few investments will hold their value in real terms in such an environment. There will be no better asset to maintain wealth and maintain purchasing power than U.S. consumer stocks.. Talking about the dollar, it’s going up on cue and gold has topped."

    "So, Eric, preserving wealth is now so much more important and so much more difficult. Whenever possible, investors must trust the Fed and invest in stock sectors supported by TPTB,especially bank stocks."

    LOL....


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    Replies
    1. mark, no new news from egon, as he repeats a months old story about an un-named friend, at an un-named bank, for an un-named amount of gold and so on and so on and zzzzzzzzzzzzzzzzzzzzzzz; sparks

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  13. I'm quite surprised nobody is at least more constructive on Gold/sector at the present time. Technicals rule here and they are very strong regardless of reasons. I would say it's a very good sign that hedge funds(if it is true)are not as excited as they should be. Bull markets start on a wall of worry right? Looking at the Big picture is very important right now. The weekly chart in Gold is as good as it gets. I'm shocked nobody is talking about this. I really am shocked. Gold on the weekly has crossed over it's 50ma(1326) with conviction/backtested and volume mind you. The next ma it will touch will be the 100 ma which is at 1490. After that it's the 200ma at 1493. Like Dan says, which I concur, once Gold gets over 1435(it will indeed), the hedge funds/speculative community will increase exposure and that will most likely open the door to 1523-50 in short order.

    Folks look up the weekly chart in GOLD, it does indeed follow MA's and the algos DO use these often. Look where Gold stopped during the 2012 decline. Right at the 100ma. It respects this particular ma very must so. Thus, it will test it again(by May imho)

    Don't lose sight of the BIG picture. It's certainly up for now(at least to 1523). Why complain and be negative when it's telling you everything is good to go. The still persistent negativity around the non-gold bugs is very positive imho. Remember Gold bugs will never concede, it's a way of life for them. So the true sentiment comes from the non-gold bugs.

    As a side note, the overall equity market is looking very tired(flat for the year so far) and quite possibly that is the reason for the alternative money flow into Gold. So one could say until we get a correction of size and the equity market shows it's bull horns again, Gold will benefit from the weakness. Mid-term years are always BAD for the overall equity markets. Look it up, it happens like clock work every 4 years. It's all there.

    Make money not excuses.

    Cheers,

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