“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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Wednesday, March 12, 2014

Western Investment Demand Surfacing for Gold

I have been adamant in stating that without Western-based investment demand for gold, the market cannot mount any sustained rallies. Asian gold buying provides the solid floor of support underneath the gold market but in and of itself, CANNOT maintain gold in a sharp bullish trend move higher. That requires concerted effort by the big Western specs.

My friend John Brimelow's reports on Asian gold demand and premiums/discounts are the best source for gauging demand for the physical metal from that corner of the world but as a gauge of Western demand, I rely on the large gold ETF, GLD in particular. It is the best bellwether we have to determine whether or not we have some determined buying from this crowd.
We have finally seen some signs that this Western-origin demand is surfacing. Monday and Tuesday's number show a 7.5 ton increase in the reported holdings of GLD. With today's strong move higher in the metal, one would expect to see the number increase further. This is a good sign if you are a gold bull and looking for allies. It is a real shame that this Friday's COT report will not pick up the internal positioning of traders in today's move as I would dearly love to know how much FRESH long buying we are getting in comparison to the amount of short covering that is occurring this morning thus far among the speculative side of this market.

Please note that this has nothing to do with gold forward lease rates, backwardation claptrap or any of the wild theories that consistently are birthed out among the gold community. It has everything to do with good old-fashioned, easy-to-understand INVESTMENT DEMAND.

Here is a look at the chart:

 


The big driver for gold this AM is the announcement last evening of sanctions being prepared by the West against Russia depending on the outcome of the expected vote in the Crimea region this weekend. That has led to strong safe haven flows for the metal.

Further clouding the picture is disappointing economic news out of China.

Combined, both of the above have the equity markets nervous and this is leading to some outflows from stocks into both bonds and gold. You can see the concern in FALLING interest rates again.

Keep in mind what I have said before, gold needs an environment in which REAL interest rates are negative in order to thrive.

Very noteworthy is the fact that the US Dollar has not been able to garner much if any support during this latest round of events. That needs to be monitored.

If this is not enough to add some uncertainty, crude oil is doing what we could expect it to do on poor global economic news - it continues to sink lower. Copper's woes are also continuing.

Today we got (thus far) a big break lower in soybean prices. The Board structure shows a big drop in bean prices for later this year, barring any unexpected weather woes as the big S. American crop comes online. Issues in China and here in the US with the hog PEDV are expected to dent meal demand.

We now have sharply lower energy prices. Heating oil prices have dropped over $0.40/gallon since their spike peak early this year. Unleaded gasoline prices have lost $0.10 this month ( that is great news for cash strapped consumers). Crude is off nearly $7.00 this month thus far.

Thus there is going to be a deflationary tug lower coming from some commodities while others are firm. Meat prices will be higher this spring and into summer. In other words, the outlook from the commodity sector remains mixed. Some sectors are strong; others are weak.

The overall bias in the commodity sector as a whole is one that reflects the above. Notice that prices continue to work back and forth within a downtrending pattern. Lower highs continue but so do higher lows. In other words, there is no clear discernible trend in the sector as a whole at this time. Individual markets are responding to their own set of demand/supply fundamentals. This is how it should be in my humble view. We do not have the wild, reckless, mindless rush head-long into all things tangible that we have seen in the past by the hedge funds of the world. They appear to be more selective this time around ( finally ). Remember, they are net short copper as an example.



That means we will need a continued catalyst in the form of geopolitical uncertainties to keep gold strongly supported. It is NOT going to come from inflationary expectations UNLESS this chart confirms a strong upside breakout on a weekly basis. Those who keep endlessly screaming hyperinflation are NOT looking at the charts.

The US Dollar will therefore be key moving forward. Will it garner some safe haven buying or will it continue to languish? If it breaks down sharply on the charts, we will get some mindless commodity sector buying in expectation of a currency-induced cost push.

Back to gold briefly - the weekly chart shows how today's move higher is playing out on the intermediate term chart. If the bulls can maintain today's strong gains into the close of trading Friday, they have a real shot at taking the metal higher and even setting up a test of $1400. A change in the handle to "14" that could be maintained, would bring in an entirely new set of momentum based buyers. That will be a  tall order but if things deteriorate in the Crimea this weekend, it is certainly not out of the question.


As you can, the reason I say it is a tall order right now is due to the following chart. The miners, while the chart has stopped going down, are certainly not lighting the world on fire. They have not managed to make it anywhere near the 280 level and are certainly no where close to closing that big gap below the 300 level. Whether or not one likes it, the miners still tend to lead the bullion (maybe this time will be different) and based on that, it is not exactly a ringing endorsement of gold at this point. The week is still young however so let's keep an eye on things.

30 comments:

  1. Ah, no worries, crude oil has already plunged over $5 in a short time, thereby prompting the big institutional investors to buy names like Winnebago and Starbucks, both stocks now up 7 consecutive days.

    Once again, the "U.S. Consumer" is the ultimate safe haven play in the midst of a geopolitical crisis.

    And GDX is not confirming the advance in GLD, which means another "terrifying collapse" in the mining sector is once again a high probability.

    Stay in the system.

    ReplyDelete
    Replies
    1. Yes!
      The dept of disinformation! LOL!

      Delete
    2. You do know that at some point you will have to remove those Keynesian goggles of yours, right?

      Delete
    3. Mark, did you happen to have your GDX chart upside down or what? LOL. What a fool.

      Delete
    4. And a word on negative GOFO, DAN. We have had 4 out of 4 times of GOFO turning negative that triggered a quick rally since July 2013. You can dis it all you want and yes I agree it's not a trend setter but it provided a very tradable entry on the long side no matter how you look at it.

      Delete
  2. So far Mark about 25% Gdx this year...watching intently for overheated breAch...get your shorts going..we will see

    ReplyDelete
  3. At this times this self proclaimed Gold expert from Weiss Research ( Larry Edelson ) is looking like a real super contrarian:

    ( From his late Feb issue of Real Wealth Report )" :

    "Q: Gold has rallied smartly. Did we miss the bottom?
    A: No! My models indicate that gold has not bottomed. Instead, what you are seeing now is a countertrend
    rally that is giving gold enough fuel to head lower, by sucking everyone in to the long side,
    prematurely.
    My timing models now show this coming May as the most likely period for the final low, which
    will be below $1,100. There is a possibility the low may arrive as early as March. But I do know
    this, gold’s bear market will end no later than May of this year. It will not extend past May.
    Right now, keep your eyes on the
    $1,320.40 level. A weekly close
    above that level would indicate a
    further rally up to the $1,361.60 major
    monthly resistance level.
    I doubt very much gold can reach
    that high. Instead, it looks like it is
    now getting ready to roll over back
    to the downside."

    1320 came and went; 1361 came and went ! Now what next ?

    ReplyDelete
    Replies
    1. Wolf

      that is the problem with all these newsletter writers... they are stuck on making price predictions for some inexplicable reason. It is both camps in the gold market, bulls, especially and bears. Why not just let the charts tell us where price is encountering resistance and where it is garnering support...

      That is too easy I suppose and no one is willing to pay for such boring stuff.

      Delete
    2. Agree 100% ! This guy is from the same publishing house from where another one of their newsletter writers recently copied one of your missives.

      Delete
  4. what is really surprising is the Dollar behavior this time reacting lower to a geopolitical tension topped by a possible Lehman moment from China.
    It should have been a safe heaven but this time it is gold as traditionally.
    Maybe related to USA political weakness perception Worldwide?

    ReplyDelete
  5. Ah letter writers, ah letter writers; all knowing and knowing everything about nothing; I have told you time after time that the answer is in sparks, and that is that there is no answer, and if you try to make 2+2=4 every day, you will just end up with a great big headache; take care

    ReplyDelete
    Replies
    1. a big headache and a big hole in your bank account ...

      Delete
  6. Ukraine can only degenerate into more official tension imho, i.e cold war, because :
    - Russia will hold onto Crimea whatsoever
    - European nations cannot allow to let people think that they agree freely with this situation, i.e that a province part of a country self declares its independance. Because if they did let it happen without protests, this would open the door to the legitimacy of separatist movements in the heart of Europe, into regions such as Catalonia, etc... So the only way for european nations to pretend this is not a rule, even if they know what will happen, is to pretend that Crimea has been invaded, and that a region has no right to proclaim its independance. So it means a cold war. Good, because we need an external enemy during economic crisis, to distract the opinion anyway.

    I'm expecting two levels of communications here as usual.
    We only witness what those puppet masters want to show us.
    I just hope that we don't make the fatal mistake of sending troops down there right into Ukraine. But who knows...

    ReplyDelete
  7. Steve day at a time works for me. I think that edelstein is being chased by feds for fraud....Larry..

    ReplyDelete
    Replies
    1. Made me wonder why he publishes his newsletter from some location in Asia; may be you are on to something.

      Delete
  8. Hmmm how do you interpret DBA ?? I say it broke trendline??? NO??

    ReplyDelete
  9. Hubert; your only problem is you think logically like me and lots of others here; what goes down next in Ukraine is anybody's guess, what with the lame Europeans and Americans trying to distract the public from the real problems in their own backyards.Ask the average American why Stalin makes Hitler look like a piker and his eyes will glaze over. Ask the average European how many Germans were displaced, enslaved, and murdered >1946 by Poles, Czechs, Russians, French and his eyes will also glaze over; man is a brutal sonofabitch; sparks; go light into this weekend and we will see what the vote brings us; good luck to all

    ReplyDelete
  10. yeah...I don't like of this all.
    Anyway, gold hit next and last fibonacci target at 1373 (78% fibo retracement of 1435-1180). After that, it's full retracement, i.e 1435...but there is also a fibonacci on the weekly time unit, at 1418 and reinforced by the "ligne de poussée" at 1412 on the quarterly time unit.
    So...my intermediate target is in this area, around 1415-1420 for the moment, but with an immediate resistance at the fibo of 1373.
    Take care all,

    ReplyDelete
  11. DBC got slammed pretty hard based on the copper and crude oil crashes recently.

    What is amazing is how this happened all by itself without "words" from the Fed.

    Imagine the power of the collapse that would ensue if Yellen or any of the other Fed Heads decided to announce more "Taper" or say they need to be "viligant about inflation".

    That would most likely result in a "horrific decline" in the CRB Index, which it seems to be prone to over and over again.

    ReplyDelete
  12. Hey Dan , your picture in http://jessescrossroadscafe.blogspot.com ! haha .. Chief Brody …! I put the link yesterday with all due respect , i sincerely say that you are one of the few that knows how to handle this beast . Best as always …

    ps .

    To the bulls out there … don't go fishing just yet … and if you do bring a bigger boat ! lol

    ReplyDelete
  13. This comment has been removed by the author.

    ReplyDelete
  14. Alex and Mark; Selling the miners at this stage of the game would, imho, be on of the all time Hoosier plays of them all; sparks

    ReplyDelete
  15. Bill Buckner maneuver if selling the miners.

    ReplyDelete
  16. I am long miners. I agree with Kevin when he said gold will rally on tapering news.

    ReplyDelete
  17. OK well, I sold my positions on gold at 1373, with a buy stop just above 1376...double divergence down between price and MACD (123 - MACD) so I'm out again a bit...but ready to get back in the train right above the resistance, it's all about 2,3 dollars, and a very very short term move.

    ReplyDelete
  18. you trade pretty good, Hubert. sparks

    ReplyDelete
    Replies
    1. That would be an understatement. He is the clean up hitter on the team.

      Delete
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    ReplyDelete
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