US Dollar Relieving Overbought Condition

(Please note that this article is taken from www.traderdan.com).

It is no secret that the currency flavor of the year has been the US Dollar. King Dollar has reigned supreme over the Forex markets especially since this summer when it began a torrid bull move higher breaking out above 81 and making a run to near 87 before it caught its breath and backed down a bit. It decided to run some more, this time to 88.50 before again pausing.
 
Right now, the currency markets are rather subdued thanks to the US holiday ( don't blink however because it all might change!). There has been some movement in the major crosses but not that much to speak of in terms of anything significant. It seems that for the moment, traders are content to let the various pairs meander in some tight ranges.



In looking over the chart of the US Dollar Index (USDX), the currency unit seems to be consolidating in a tight range between 88.50 on the top and 87.50-87.25 or so on the bottom.
 
I have drawn in a shaded rectangle to denote the region where it is encountering some buying.

If you look down at the indicator on the lower plot, you will see the RSI or Relative Strength Indicator, an old but helpful measure of buying or selling internals. Note that since the strong bull trend started in July, the RSI has ranged exactly where it ought to range for a market in a bullish posture - it has not dipped below the 40 level ( see the lower dashed line).



To show the strength of this move, look at how long the RSI has remained above the 80 level, which is considered overbought.

The recent leg higher has produced a negative divergence ( higher high on price not confirmed by a higher high on the RSI) but the market thus far is unconcerned about this, so we will also remain unconcerned. We know this because the lower part of the range remains intact.



The market appears to be working off the overbought condition by moving sideways, allowing the RSI to fall towards the 40 level ( see the shaded rectangle on the RSI insert). The longer the Dollar can move sideways with the price remaining above the support zone on its plot AND the RSI remains above the 40 level ( and the rectangle), the more the odds increase that this is just another pause before the next leg higher in the US Dollar. Traders will want to monitor this closely the next week or so.

If the Dollar were to fall through its support, we would not want to see the RSI fall below 40. That would introduce some doubt as to the staying power of the current leg higher and would bode for a deeper correction. Let's keep an eye on this.

Those who are actively working gold, especially, will want to monitor this most closely.

A Special Announcement

Dear Readers;

 

When I first began this site, more than three years ago, I did so for two reasons.  First, I wanted to use it to both freely express my own personal views of the markets, without feeling constrained by the fact that I was a guest at the sites of others. Secondly, I wished to convey some of the knowledge I had gained from trading for many years to those who were attempting to learn how to understand and look inside the markets for themselves.

 Regarding the latter of these, when I first started trading, I had no mentor, and no one I could look to in order to make sense out of what was happening. You talk about confusion and bewilderment! The sums of money I lost in gaining my experience were quite large to be honest.  One could say that I paid dearly for my education at the School of Hard Knocks! Along that line there is an old joke in our profession:

 

“How do make a small fortune trading commodities?”

 

“Simple – start with a large fortune first!”

 

Some might think it rather quaint but in response to many emails I received back then from those who had read my writings, I was convinced that it might be a good thing to actually try helping these many wonderful folks learn how to make some informed trading/investment decisions on their own and thus rid themselves of dependency on others when it came to making wise choices into which to put their precious wealth.

 After so many years of doing this, I think I might have succeeded in a small way based on some of the responses I have received from this, my current site. The old adage comes to mind: “Give a man a fish and feed him for a day. Teach a man how to fish and feed him for a lifetime”.

 

That being said, the amount of time and effort that this site takes from me can be overwhelming at times. I mentioned this a while ago when seeking the comments of some of my readers about trying to actually cut back or opening the site to accepting Donations or possibly going to per click advertising.

 After much hesitation and with the friendly encouragement/ arm twisting from some of you kind readers, I decided to go with the Donation button.

 I wish to publicly express how grateful I am too all of my readers who were gracious enough to reciprocate and make a kind donation. I understand how valuable that your money is to you and the fact that you have felt moved to freely contribute something towards my efforts, speaks volumes to me about your generosity of spirit and your thoughtfulness. From the bottom of my heart, “Thank You!” You will never know how incredibly encouraging your gifts were – especially when at times it seemed the vast majority of emails in my box were vile, insulting and rude ( coming from members of the gold cult – as we have come to expect).

 As those of you know who have read here for any length of time, I make my living entirely in the markets as a trader. Nothing I have ever written in public, or spoken in an audio interview, has ever netted me a cent as I did it willingly and without charge. There does come a time however that the Scripture: “A laborer is worthy of his hire” becomes apropos. In discussions with my wife and some friends, I believe that this is that time.

 I want to therefore announce that I will be starting a fee-paid site, Trader Dan’s World. Before some of you completely panic, I will be keeping the free site up and running so that the posting community can continue to have a place in which to swap notes and such. I intend to post one or two articles there during the week. That will allow for the current posting regulars to continue to interact; however, the new site will contain the bulk of my work.

 The truth is that I have grown rather fond of some of my regular posters and although I have never met them, feel like I know them rather well as individuals because of the length of time that we have spent reading one another’s comments. I do hope some of you will be moved to come on over to the new site and give it a try.

 I fully understand that for this decision, I will catch some grief from some of the gold bugs, especially those who love to somehow manage to accuse me of always having some sort of agenda ( what that is escapes me but I trust that these all-knowing and all-wise individuals, who somehow know me better than I know myself, will be more than happy to enlighten me as to exactly what that might be). Suffice it to say, that one of the pure delights in having a fee paid site that I hope to enjoy is to finally rid myself of having to deal in any form with such people. And I must also say that having to put up with their non-stop attacks and insults, merely for calling the market as I saw it in the charts, was ONE of the factors that went into my decision to move to this fee-paid site.

 I suppose if they wish to continue their verbal assaults, they will have to fork over some cash for the privilege of so doing! Then again, considering the fact that none of them had the common trading sense to recognize a bear market and protect the value of their metals during a period of lower prices, I suspect that they are too busy nursing their many financial wounds to have any surplus cash available with which to contribute to my fee-paid site for the opportunity of continuing to insult their host. Let them grumble, murmur and complain therefore. I think the rest of us understand their kind!

 A quick word about the new site – I intend to focus on more markets that just gold or mining shares. I have been introducing other markets here at my site for those who are interested in looking at some of the other futures markets. Believe it or not, there is an entire universe of commodity markets which can be traded and which offer profit potential for those who like doing something besides watching gold prices all day long. As some of you know by now, my special areas of expertise lie in the agricultural markets, the livestock and grain markets. Those are the markets that I cut my trading teeth on and the ones that I spend the most time dealing with during the normal trading day.

 There are currency markets, and energy markets, as well as the bond market and of course the equity markets, that are all potential topics of articles that I will post and analyze from time to time. One thing that I can tell you, is that I will continue to call these markets as I see them, with no apologies for so doing. As I have said many, many times now, the business of a trader is to profit. Successful traders profit; those who fail make excuses. It is indeed that simple!

 As a way of introduction, we are going to provide a one month free trial period for my current readers so that they dip their toes into the water and check it out. I am excited about the forum that we will be setting up as well as some of the social media inputs. We plan on the site being an ongoing work in progress, making improvements and changes to it as needed or suggested. Also, I am trying to work up something extra for all those who made Donations to this site as an extra way of saying “THANK YOU”.

 In closing, I would like to thank all of my readers who have come here to read my thoughts over the years. It is an honor to have one’s views respected by a wide audience but it is also an honor that brings with it the responsibility to be truthful and to be honest. I have tried to take that charge seriously and I trust that you as my readers have seen this in my writings.

Sincerely,

Dan Norcini

“Trader Dan”

 

Corn Comments

Trading the grains the last two months has been akin to "Ted and Bill's Excellent Adventure". We have seen hedge funds pour money into the corn and bean markets in spite of the fact that we are dealing with record crops heading into the end of harvest season. The speed at which they have switched sides in these markets, going from big NET shorts to big NET longs has been breathtaking. The end result has been that speculative buying has caused farmers to become stubbornly bullish refusing to let go of their freshly harvested crops as they look for even higher prices.

The move higher was led by the meal, which dragged the beans higher and that in turn pulled corn higher. Of course, it does not hurt the bullish cause when China comes in and gorges on US beans. Grain traders are essentially watching to see when they will start cancelling US bean orders and move to sourcing elsewhere.

In the interim, hot money flows have forced a substantial amount of short covering as there was simply not enough commercially-related hedge pressure to absorb the buying from panicked shorts and bottom-picking bulls. Throw on top of that the usual index fund buying and you can see the result - corn prices have come well off of their late September lows.

The question now becomes - what next? Farmers have been holding back newly harvested grain in those nice shiny new grain silos that they were able to afford when corn prices were above $7.00 and bean prices were in the teens. that has keep the price relatively supported. But while US farmers are the best in the world when growing food they are oftentimes rather poor when it comes to marketing (pricing) it. No matter how one measures it, there is a HUGE amount of grain out there in the nation at this time. Farmers seem to forget this.

They get bulled up at precisely the wrong time and depressed at the wrong time. It is human nature and good business sense to want to obtain the highest price possible for one's goods - the problem occurs when farmers start thinking like speculators instead of business men. Specs take on risk in the hope of making gains - sound business policy involved AVOIDING or MINIMIZING risk as much as possible.

Farmers who are watching prices at the Board working higher and thinking: "I am not selling anything as prices are going higher" are essentially gambling with their farm's income. It makes sense, considering the soaring US Dollar (which is making US corn extremely expensive compared to corn from other source nations ) and the fact of the massive harvest and the fact that this rally has been primarily driven by short-covering (see below) to start taking advantage of this rally to price some of that newly harvested grain.

If a farmer is inclined to try holding out for even better prices, they are betting that weather problems are going to hit S. America or some other extraneous event (like the binge buying related to a modest Chinese interest rate reduction) will provide even better prices at which they can sell later on, but what if none of that happens? What guarantee do they have that weather will not be benign in the southern hemisphere? They are essentially rolling the dice and hoping and that is not a sound risk management plan. It is one thing to hold off some grain for "gambling stocks" but an altogether completely different ( and foolish in my view) thing to not price any grain at all.

That being said, take a look at the chart and notice the move off of the lows. This shows closing prices only so it does not reflect the fact that the front month contract touched $3.89 last week.

Now look at the Commitment of Traders report through this Tuesday where I have broken out the large speculative component and charted their long and short positions.

I have posted this chart up previously but wish to do so once more to make a point - notice that the number of long positions in this category have not varied by a substantial amount since late July/early August.

But look at the red line showing the short positions and note how incredibly volatile it has been. Shooting sharply higher as prices fell and then dropping off equally sharply as prices rose. What this tells us is that it is large spec activity that has been behind the move lower in corn since May of this year and the move higher in corn since October. A goodly portion of the short positions they put on over a 5 month period since late May, have now been taken right back off since October.

The question that should be asked by any farmer is simple - once these big specs are finished covering shorts ( buying back those short positions and closing them out) just who is it that is going to pay these kinds of prices for corn given the massive size of the crop out there?

Today might have been a sign that this short covering has run its course - it is hard to say given the horrific volatility in these markets of late - given the sharp drop heading into the closing minute of trade today. If it is, and again, it is not yet clear, farmers who failed to price any grain during this recent rally are going to end up kicking themselves for not doing so especially considering the amount of revenue that they might have passed up by not pricing any of their grain.

We might have to wait until after the first of the new year before we really see some heavier grain movement off of the farms, as there might be some farmers holding off selling for tax reasons. That being said, there is no guarantee of this rally lasting that long, especially with the US Dollar hitting a 51 month high today.

US corn, driven higher in price by speculative short covering, and a soaring US Dollar, are not the ingredients that go into the recipe for making US origin corn cost competitive on the global market.

Dollar Comments

I am going to keep these comments short mainly because I am utterly exhausted after the roller coaster ride from this week's markets.

The one thing that stands out, now that the dust has settled, is the action in the US Dollar.

One look at the chart and you can easily see the desired currency of choice among global investors. For all its problems, and there are many, the US Dollar remains the "Go-To" currency. The reason I say this is very simple - The Dollar put in the highest WEEKLY CLOSE in 51 months! It is also less than a full point away from taking out the peak made in June 2010. If it does, it is headed to 90.

Now, there are two things that were at work today which created the "Madhouse" that the commodity futures markets became.

The first was the expected inflationary outcome from a Chinese rate cut/ECB monetary stimulus measure. The latter was a deflationary outcome from the soaring Dollar and bond markets.

Interest rates are going down, not up. Many look at this as spurring more borrowing, more lending, more consuming and thus more economic growth. That group bought everything in sight today. The speed at which they did so was terrifying. I chose that word to describe it to see what a tsunami of hot money flows can do to markets when it invades them.

The flip side was another set of traders looking at the strength in the Dollar and drawing the connection between it and a general deflationary wave engulfing the commodity complex. They were big sellers.

The first group won out when the dust settled but you could see some impact from the latter during the session in the grains, and in gold. Gold had regained the "12" handle and then when the latter group came in and start selling, it promptly flopped and lost it. By the time trading ended in the pit, it managed a good close but failed to close above $1200.

Corn did something similar. It went flying higher with shorts being obliterated by the wave of hot money coming into it but in the final minute of trade, it surrendered all of the gains and closed lower.

Soybeans managed to close higher, which is even more bizarre as they had started off with a bang much like corn but during the middle of the session lost every single bit of their gains, went negative and then completely reversed and surged higher again to go out near their highs.

The thinking behind the bean move was that increased credit availability in China will mean more bean purchases from the US's largest foreign bean buyer. Frankly I don't see that connection but the people with the most money decided that was the reason to buy them and there was no one large enough by the time of the end of the session to take them on.

I can see what is taking place in the bonds and frankly, I think the group worried about inflation is greatly overlooking something but based on the bizarre and huge price swings that are being produced by all these infernal Central Bank actions, as well as Chinese actions, I honestly have no idea where all this is headed. Guess what - based on the type of trading we are seeing, no one else does either.

Here is the bond chart in closing. Note the general direction that they have been heading - UP...

 

 

Here is the yield on the Ten Year Treasury - same thing, except in reverse (yields move inversely to price) - it is moving lower reflecting the lower growth.

 

 

 

Lastly, here is a glimpse of the platinum chart - a metal that much like copper, tends to reflect sentiment towards global growth. It had a big up day today as the China news had industrial metal buyers giddy for some reason. It looks as if it might try to make a run towards $1280. If the inflation guys are correct, it will easily better that. If not, back down it will go.

What a week - there are times when I love these markets and then there was this past week, when Charlton Heston's classic line from the original "Planet of the Apes" is exactly how I feel.

My thoughts on today's action

See the link... no other comment offered could say it any better.

https://www.youtube.com/watch?v=VFCM6TZgTMI

Euro plunge below 1.2400 reversed the money flows from the "Buy China" interest rate cut to "Sell out because of the Strong Dollar".

Where the hell this ends today is anyone's guess.

Central Bankers and other foreign government officials have essentially destroyed the integrity of the entire financial system with their constant meddling.

China News, ECB Roil Commodity Markets

I will get more up on this later as I am extremely busy this AM... Overnight news that China was lowering interest rates, (its first in two years) and the ECB is planning on further stimulus measures, has sent massive hot money flows back into the commodity sector.

The grains are seeing big buying, as are silver and copper. Silver loves positive Chinese news as does copper, as does platinum as does palladium, etc.

Gold is also moving as it has recaptured the "12" handle.

When you think of commodities, you think of China, as it is the nation that has the insatiable demand for tangibles. If the lower interest rates spur economic activity, the thinking is more commodities will be consumed. Index funds are now pressing the shorts relentlessly.

The Euro has collapsed sharply lower sending the Dollar soaring. Normally gold has been following the Euro of late but with everyone getting bulled up on account of China, commodities are moving higher nonetheless.

Look at the Aussie - the currency loves anything potentially China positive.

Let's see if this is a flash in the pan, a one day wonder, or the start of something more. Equities will now be unstoppable. I told you silver guys that you had better start rooting for surging stocks and stop trying to find reasons for stocks to go lower. Silver needs inflationary growth, not deflationary collapses if it is to thrive.

TIPS Spread Echoes FOMC Minutes

I mentioned in an earlier post today that the FOMC essentially downplayed inflation fears in the minutes released today. That seemed to be one of the big factors involved in the sharp move lower in gold after it had spiked higher and moved back not only to the unchanged level but had tacked on some mediocre gains as well. That was all abruptly reversed after the market had some time to chew over the minutes.

Along that line, here is an updated chart of the TIPS spread comparing the price of gold to the movements in the spread. I want to point out that the most recent spread fell to more than a 3 year low this week! Clearly, the market has no concerns whatsoever about any budding inflationary fears. Such a thing is not good news for gold bulls.

When I look at this chart, I am struck by how closely the gold price has tracked this simple spread since September 2011. There were only two brief intervals when the spread went one way and the gold price went the other and that was Q4 2012 and briefly again in Q4 2013. It will be interesting to see if something changes in this current year as we are in Q4 and the two lines are tracking very closely to one another.


Gold is going to be especially dependent therefore on very strong offtake from India to keep it supported. I just do not see a fundamental driver right now that would entice Western-based investment demand to ramp up in a large way at the moment.

The metal is going to continue taking its cues from the Foreign Exchange markets therefore. Strong support has emerged at and below $1180 in the past week. That needs to continue or else bears are going to pounce once again with the FOMC minutes giving them some more confidence after the recent torrid rallies had dealt a big blow to it.

It seems to me that bulls have been pinning their hopes on the Swiss Gold Referendum Vote and a Dovish Vote. Scratch the latter after today's FOMC minute release. The former is still unclear.

Fed Downplays Inflation Worries

Going over these FOMC statements is akin to the ancient art of divining the future by the examination of animal entrails. I can see the conversation:

Demetrius: "I see what appears to be a twisted piece of gut. That is a sign from the gods that the future is twisted and unclear. Perhaps we should wait before going to war".

Apollos: " I see the same thing but tells me that our enemies will lie twisted and ruined on the ground. We should to war immediately".


Lydia: " I see a big fat worm. That tells me that this animal is so screwed up on the inside that we should not believe a single thing this entrail reading crap tells us".

The takeaway I get however has to do with inflation. We have been saying here for some time now, much to the chagrin of some of the gold perma bulls, that the market is not the least bit worried about inflation at the moment. That sentiment has been reflected in the flat to lower TIPS spread as well as the sinking commodity indices. Also, the concern of both the ECB and the Bank of Japan as been the LACK of INFLATION and what they like to euphemistically term, 'disinflation'.

Today our Fed said essentially the same thing if I am reading the entrails correctly.

Here is a short excerpt from the statement:

"... inflation edging lower in near term partly due to decline in oil prices..."

There are several other interesting things in the statement but that one seems to have caught the attention of investors/traders. Simply put - if the Fed is not worried about inflation than neither are we going to worry about is how the market seems to have reacted to things.

Another thing was the Fed's remarks on the recent "mid-October turbulence in financial markets". The Fed essentially glossed over that by stating that they saw the impact of those recent "world developments as likely quite limited".

Gold, which has been all over the place in today's session, seemed to finally digest the statement by heading lower. If there is no inflationary concerns and the Fed seems undeterred by any of the recent financial issues buffeting the global economy, traders viewed the statement as "hawkish" or perhaps a better way of saying it, "not dovish".

Like I said when I started this set of comments - deciphering these pronouncements from on high sure is an enormous waste of time but the fact is that the markets respond to them so one might as well at least try to get the flavor of the moment.

Gold has fallen to just above that key $1180 level a second time in today's session. Bulls are trying to hold it there but the mining shares falling out of bed have pretty much undercut any attempt to push it up and away from there at the moment. Maybe that will change before the session is out - give it 5 minutes!

Had Enough of Roller Coaster Rides Yet?

My kids love to ride those wickedly wild roller coasters, the kind that leave your stomach suspended in mid-air at the top of the track while the cart is already down at the bottom of the valley. Every now and then, against my better judgment, I will let them twist my arm enough to strap myself into one of those things just so that I can inflict on myself the same punishment that they seem to delight in inflicting on themselves.

There was one coaster we went to where they had a camera set up with a strobe light that snapped your picture as your cart went past it on a particularly treacherous portion of the ride. I recall looking through those when we finished the ride and were lingering around at the customer staging area to see what the expression on my face was out of sheer curiosity. Yep - it looked like I was the victim of one of those infamous native American Indians, the Apaches, torture of their white eye prisoners.

After watching the doings in gold and silver this AM, I could wear my kids somehow strapped me back into one of those infernal roller coasters!

Look at the Gold Volatility Index and tell me how anyone in their right mind can try to trade this stuff at the moment? I have heard of "day-traders". Hey, that is long term - try "15 second interval traders" for the new kids on the block!

As I have said just recently - if this keeps up much longer in the precious metals, look for margin requirement hikes very soon.... Small traders - I STRONGLY URGE you to be very, very careful in here. I do not care whether you are bullish or bearish. Betting the farm on a move either way is akin to hari-kari. Want to end any fledgling trading career you might have? Then go ahead and "Bet the Farm", or "Load the Truck" or whatever. Don't complain when they carry you out.

Let the volatility die down some if you want to trade large. By the way - ignore ALL NEWSLETTER WRITERS RIGHT NOW. Not a single one of them have the least clue as to which way this thing is going to go. Roll the dice and you have as much chance of getting it right.

Option guys - take notice once again!

"NO" Leading in Polls - Swiss Vote Referendum Derails Gold - UPDATED

I will get more on this later as time permits...

The polls seem to have shifted AGAINST the referendum. That has pulled the rug out from under the gold market which has been drawing support from recent polls showing "YES" had a slight lead.

I believe that once the public realizes that the SWB will be at a serious disadvantage in maintaining the Swiss Franc/Euro peg if the referendum passes, the mood will shift against it.

Quick note - gold has lost $1180 once again. That is a big deal. It needs to stay above that level to keep the bullish hopes alive.

UPDATE:

38% YES

47% NO


For those who are still unclear on this referendum - if it passes, the SWB will be required to hold 20% of its assets in Gold.

Japanese Yen Fall Delights Abe Government in Japan

It is no secret that the Japanese leaders have been wanting a weaker yen. All of their policies, both at the fiscal and monetary level, have been designed to weaken the currency as part of their efforts to pull the nation out of its decades long deflationary funk.

We can get into the various reasons for their woes but this is not the place nor the time for that now. What I do want to look at however is the success that they are having in driving their currency lower.

One look at this chart pretty much says it all. KERPLUNK!

I wish to point out something that occurred last December (2013). The yen broke down below the support level that had formed off the spike low made in May. It looked as if it was getting ready to put in another leg lower but that breach of important support turned out to be a head fake for the bears.

I remember trading it at that time. What was taking place was big swings between "RISK ON" and "RISK OFF" trades. During the risk off trades, the Yen would experience sharp rallies as the highly leverage carry trades would get rapidly unwound with traders covering short yen positions in a very large way. That would squeeze the currency higher. As the fears/concerns that led to the rally subsided, the short selling would begin anew and back down the currency would go. A new set of worries would then see a repeat of the rally and back and forth we went.

The takeaway from all that however was the fact that when we got that initial breach of downside support in December, we DID NOT get a secondary lower close to confirm that breach.

However, look at what happened in August and September of this year. In August the yen once again violated that support zone. This time around, the following month, the market confirmed the breakout by posting a sharply lower close ( the second close below the broken support zone). The rest, as they say, is history.

The Yen has essentially imploded lower as it does the bidding of its monetary masters in Japan who have greenlighted speculators to beat it senseless for them.

Having been on the wrong side of the Bank of Japan on more than one occasion in my currency trading career, I can tell you it is definitely not much fun. When one does find favor in their eyes, it is an entirely different matter.

I have noted some areas on the chart where the currency might be able to find some support. Notice there still seems to be a great deal of air below this market. Keep in mind that any sort of scare that surfaces to trouble investors, will see sharp countertrend rallies in the Yen as the carry trade gets temporarily unwound.

One other point to make about this - there are still gold perma bulls who send me one negative story after another ( or so they think) in regards to the US Dollar and its soon to be imminent demise ( in their mind). For some odd reason, they seem to forget that the Dollar derives any value it has on the crosses from trading  against other currencies. With the yen falling as hard as it has been, reading their breathless predictions about the upcoming Dollar crash seems a bit surreal to say the least. Apparently, they are not looking at this chart.

the last point - notice how the downside "head fake" that I noted on the chart was followed by a seven month or so period of price consolation prior to the next strong leg lower. Until we got that second close below the support level, the yen refused to break lower. In watching what has been happening with gold, it strikes me that we are perhaps seeing something similar.

The recent breach of support at $1180 looked pretty ominous as it was a triple bottom. However, the market has thus far refused to CONFIRM that downside breach by posting solid consecutive closes BELOW the level. It has spiked lower but has popped back up the last two weeks.

I wonder if we might be seeing something similar occurring in gold that we saw in the Yen? If we are, we will get the confirmation by a strong close below $1180 followed by more downside weakness on the weekly chart (( note that this is a weekly chart of gold and not a monthly like I used for the Yen)).

If not, gold should move higher and first take out that resistance zone noted the chart near $1240-$1260. We shall see shall we not?

Gold Taking Cues from Forex Market Movements

Take a look at the following chart comparing the price of the Euro ( in BLACK ) to the price of Gold ( in YELLOW).

During December of last year, and January of this year, the linkage broke down but beginning in February the two have moved in almost perfect lockstep with one another. The connection has been especially tight since this past summer.

The take away from this is rather simple at this point - Tell me what the Euro is going to do next and I will tell you with relative confidence what gold will do.

This morning there was news out of Germany that their ZEW index, a measure of economic confidence, rose in the month of November, the first time it has done so in a year. That produced a big impact in the Euro which completely erased its losses from yesterday ( do you ever get the feeling we are trading yo-yo's and not real markets?) and then added some for good measure. Back down went the Dollar and what do you think gold did? Yep - it moved higher.

The point in all this is that gold is completely at the mercy of developments occurring in the Foreign exchange markets at the moment. There is still widespread weakness across the commodity sector with crude and the grains move lower today.

I should also note that it looks to me like there is a line of thinking that continues to be seen out there which is regarding the sharp selloff in the crude oil and liquid energy markets as STIMULATIVE IN NATURE for the global economy. It is not the majority view but it is out there nonetheless.

Thus far the sell off in crude has fed into the deflationary/slowing global growth scenario. This scenario is NOT BULLISH FOR GOLD OR SILVER. I cannot say this strongly enough.

I have said it before and will say it again and again - my inbox is filled with articles from gold and silver perma bulls constantly finding fault with the US economic performance as they focus on this negative aspect of a set of economic data or that negative aspect. I have yet to find ONE article sent by any of them noting anything positive about the global economy, anywhere. It is all uniformly negative. Yet, they turn around in the very same breath and announce how bullish this is for gold and silver prices? Excuse me - but what in the world do they think has been has happening to gold and silver prices over the last three years, and in particular, the last two years?

SLOW GLOBAL ECONOMIC GROWTH IS NOT BULLISH FOR PRECIOUS METALS PRICES. It is that simple. They need growth, lots of it. The kind of growth which sends the Velocity of Money rising and kicks up inflation worries. That has not been present and as a result, metals prices have been sinking lower. It has nothing to do with some supposed manipulation of the prices of the metals by bullion banks acting as agents of the Fed and everything to do with deflationary fears and a strong US Dollar.

Today we got a bit of a glimpse what might happen to metals prices if the Central Bank efforts to produce an inflation rate of 2% might actually be successful. Notice the very sharp response in the Euro to that improved economic confidence reading!

I would suggest to gold and silver perma bulls that they stop dissing US economic data and actually start rooting for solid growth prospects, not just here, but globally if they wish to see their metals run higher for more than a short period of time.

Just a head's up - along that line, we are going to get some fundamental type news this week.

Gold managed to briefly change the handle from "11" to "12" but it has not lasted very long. Mining shares are still strong at this hour however, so the bull's prospects are improving. They will however have to face the FOMC minutes and see whether or not they can weather any potential impact from those.

The HUI chart looks quite strong at the moment, exactly what one wants to see if they want gold prices to move higher. Notice that the index has closed another downside gap and is actually trading above that gap at the moment. That is very bullish price action!

The index is essentially attempting to work its way back to the downside breakout point made in early October. I have noted that area as "BIG TEST". If this is something more than a bounce in the ongoing bearish trend, albeit a very strong bounce, the index will have to push past this zone and CLOSE ABOVE IT.

If it were able to do this, gold should easily regain a "12" handle and one can say that a more lasting bottom is in this market. If it fails to do that, and retreats lower back down below that gap, that will signal a period of sideways movement in price or what we refer to as consolidation. Stay tuned.

By the way, those of you who want to do so, might wish a Happy Birthday to GLD. It was exactly TEN YEARS ago that it opened up and began trading. There was a note on the wire services that in its first three days of trading, it took in more than $1 billion!

GLD Holdings Vs. Gold Price

At the request of one of the regular posters here, I have constructed a chart comparing the reported holdings of the large gold ETF, GLD, to the price of gold over at the Comex.

As the frequent readers know by now, I view GLD as a proxy for Western-based investment demand for the metal, similar to the manner in which the World Gold Council views it as they just related in their most recent report published this past week.

Notice the symmetry between the two lines on the graph. Both tend to rise and fall together. By the way, when the data is graphed on a logarithmic style plot, the relationship is even more similar.

Weekly View of Gold

Here is a quick look at the intermediate term chart of gold.

There are several things that stand out to me as I survey this chart.

Let's start with the various phases. I have delineated these with the variously colored shaded rectangles for your convenience.

I think the chart speaks for itself.

The peak above $1900 in September 2011, was the climax of the then bull market. Subsequent to that, the market entered what can now be clearly seen as a transition phase. However at that time, we as technicians were unclear as to whether the great bull was finished or was merely taking a rest, gathering itself for another rampage higher.

This transition phase, or consolidation, occurred over a period of 15 months in which the price was essentially range bound. The top of the range that formed was $1800 and the bottom was $1530-$1525.

There is something interesting about this range which we can see clearly in retrospect. The $1800 ceiling was a triple top just as the $1530-$1525 level was a triple bottom. The old trading adage that "triple tops or triple bottoms rarely hold" turned out to be true, but not for the upside. The reason for that is because the US Dollar bottomed out near 79 (USDX) that very same month ( October 2012). As it rallied, any hope for gold taking out $1800 was dead.

In April 2013, gold officially entered its current bear market with a clean break to the downside of that broad range trade defined during the Transition Phase. We remain in that bear as of this weekend.

Please note that gold throughout the bear that has unfolded, gold was demonstrated all the classic signs commensurate with bear markets, namely a series of LOWER highs, with the exception of a horizontal support zone that had formed near $1180.

Unlike the previous trading range where the highs were at the same level ($1800) and the lows at the same level, ( $1530-$1525), the current state has shown us that very good buying has been present down at the $1180 level. So much so that once again, another Triple bottom had formed there.

The market clearly violated that level three weeks ago but has since then not seen much in the way of additional downside follow through. That is evidencing a reluctance to extend the break lower at this time. Normally, when one sees a clean break either ABOVE or BELOW a broad consolidation range, in order to validate it, good technicians like to see three things: First - a move OUTSIDE THE RANGE of 2% or more; Secondly, - strong follow through, and Thirdly - SUCCESSIVE strong downside closes.

In the case of the first requirement, a 2% move below $1180 means price would need to drop another $24 to confirm the breakout. That it did with the market easily falling past $1156.

On the second point - we also got the strong downside follow through the previous week with the price moving as low as $1130. That is a 4% move below the $1180 level.

However, and this to me seems to be the key ingredient that it thus far missing - the all important WEEKLY CLOSES have yet to confirm a 2% move down. In other words, from the perspective of a technician looking to confirm the downside breakout of the triple bottom at $1180, gold would need to sustain a WEEKLY CLOSE BELOW $1156 to confirm a new leg lower.

As you can see from the chart, it clearly has not done that. The week immediately following the downside support breach put in a close at $1169.80. That was well above the 2% threshold. This Friday's close was actually ABOVE the $1180 level, coming in at $1185.60. Thus, as of now, we have not gotten CONFIRMATION that the downside breach of $1180 is valid as far as setting up another leg lower.

By the way, can I just make a quick comment here - any of those pestilential gold newsletter writers who are always bullish gold no matter what, and who state that gold is in a bull market, are not worth being paid a  single dime. Any supposed 'technician' who cannot get something this evident correct is rather frightening in their ignorance. Gold has been a bear for almost 20 months how. Save your money and spend it on something more productive than keeping such misleading writers in  the business of producing such nonsense.

Now that we have covered this, let's come back to something I stated a while back in a previous post. Throughout the entirety of this bear market, there has been countertrend rallies, which have provided opportunities for those traders who are very short term oriented to profit from by playing from the long side of the market. The caveat I added was that they need to be very quick on the drawn however as the rallies have all tended to end with rather sharp downside moves meaning that most of the profits from such trades can be lost unless a trader has been nimble and fleet of foot.

Take a look at this chart in its entirety and note the BLUE ARROWS. I placed them below what we technicians refer to as "Spike Bottoms". Notice also that in ALL THREE PHASES of the gold market, BULLISH, TRANSITION, and BEARISH, these spike bottoms are present. What does this tell us? Simple - gold has a tendency to put in spike bottoms when it reverses direction.

Traders who understand this particular "quirk" of gold's personality can take advantage of that. These are signs that the market has been sold out temporarily. Notice that after each and every one of these blue arrows, the price has rallied. During the current bearish phase, it has provided traders with both the opportunity to make a long side bet as well as eventually finding a higher level from which to reenter on the short side. Remember, the trend is down until proven otherwise but one can always place short term trades while positioning also in the direction of the prevailing trend at key technically significant levels.

Please note that I have also drawn in a RESISTANCE ZONE on this chart which bulls might possibly be able to reach if this Friday's rally turns out to be more than another of those one day wonders. It comes in near $1240 on the chart and is shown by the blue rectangle. That level served to hold the market back in May of this year when it fell to that point and then rallied $100 up to $1340 before failing. However, it gave way most convincingly in September this year, was briefly violated in a short term countertrend rally but the price could not CLOSE above it. It should thus now serve as an upside cap on any subsequent move higher in price. If the market does manage to put in a WEEKLY CLOSE of any significance above $1240, it would decidedly change the complexion of the price chart. One would then have to give some real credence to a solid bottom being in for gold. Only time will tell us however whether or not this is the case. Anything prior to that is pure GUESSING.


Lastly, let me leave you with a LONG TERM MONTHLY chart of gold.

Clearly gold has lost long term trendline support on the monthly chart confirming the current bear. It is however finding some support in the confluence of the zone I have noted. The Fibonacci retracement level of the rally from the 2008 to the 2011 top is $1152. It fell through that level but was able to recover. That is a positive sign.

However it still remains BELOW both trend line and has yet to exceed the previous month high of $1255.60. To give some bullish credence to this otherwise dour looking chart, the metal would at a bare minimum need to exceed that point to get technicians a bit more upbeat on its prospects.

A MONTHLY CLOSE ABOVE $1340 would be necessary to give even more confidence that something more important is afoot.

As stated many times here, and which needs to be repeated - There seems to be a mistaken impression among many people that markets that are going down will bottom and then launch into a bull market with little or no warning. The reverse also seems to be another just-as-frequently mistaken view, that a market which has been going up, will stop going up, reverse and then enter a bear market.

In some cases, notably in the grains, this can be occasionally true due to unpredictable weather driven events. But more often than not, there are TRANSITION PHASES, as I have detailed above, that will occur. These are periods of sideways trade during which a market will move up and down, back and forth, for many months at a time, generally going nowhere outside of the range. Gold may very well be going back to a pattern like that. Or it may not; it could be forming a temporary respite from the selling before making a new leg lower. Or it could be ready to move past $1340 and start something more exciting.

The simple truth is that there is not a single human being on this planet who really knows. We all have our ideas and opinions, but that is exactly what they are, ideas and opinions. Until we get some sort of confirmation any dogmatically asserted opinions, no matter how often that they are repeated, are just people looking for attention as they make their guesses. Don't fall for that.

The market will tell us what it wants to do when it is good and ready to do so. Our business as traders is attempting to ferret out exactly what that voice might be saying.

Watching for Evidence of a Shift in Sentiment

For some time now the general sentiment in the broader markets has been that economic growth is slowing, in spite of Central Bank efforts to stimulate it. We have seen that in data coming especially out of the Eurozone. We have also seen it in Japan, whose Central Bank just recently evidenced how stubborn the deflationary pressures have been in their economy.

Here in the US, last Friday's payroll numbers, which was mildly disappointing, the market reacted by selling the US Dollar with the thinking that the Fed would go slower on any potential rate hike.

In the commodity markets, we have seen in sinking commodity indices in responses to sharp moves lower in crude oil, natural gas, unleaded gasoline, grains, sugar, etc. across the board.

Thus far the sentiment has been in which there is no inflation with the general threat being regarded by Central Bankers as one of deflation , or in their terms, disinflation.

It is this sentiment which has resulted in money flows out of commodities in general and into equities.

In attempting to discern when/if this sentiment might be changing, I have been closely monitoring both copper and crude oil prices. Just yesterday I mentioned that the close of copper below the $3.00 level was something that concerned me, especially with crude oil prices going into a downside freefall.

Something else I watch is the action in the Australian Dollar. I view this currency as a sort of "quasi growth currency". The reason is because so much of Australia's economy is dependent on the export of the huge amount of raw materials it produces. Basically, if world economic growth is moving higher, especially growth in its neighbor China, the Aussie tends to benefit. The converse is true if growth is slowing.

With that in mind, take a look at this intermediate term chart of the currency. Notice the sharp rise beginning in early 2009 which was when the Fed launched its first QE program. Optimism was high that it would be successful in liquefying the financial system and growth would ensue.

Somewhere along the line however, it dawned on markets that Central Bank efforts, including those of the ECB and BOJ, as well as stimulus efforts by China, were not having the intended effect. The currency then began a slow, grinding move lower.

As of this week, it has surrendered exactly one half of its gains from the beginning of QE1, back in early 2009.

So where from here? Good question.

Today, there were two pieces of news that hit the market which came as bullish surprises for the economy. The first of these was Eurozone GDP numbers which, while still pitifully weak, were better than anticipated. The second was US retail sales, which surprised to the upside as well coming in at +0.3% for October compared to an expected +0.2% rise.

Together, both pieces of data had the effect of pushing the Euro higher at the expense of the Dollar but it was especially was seen in the Nasdaq. That market has been lagging the S&P 500 and the DOW, which as the reader knows, have both made new lifetime highs this year. The Nasdaq has not. Today however it pushed up towards levels last seen in March 2000.

I am watching very closely to see if there is any sort of hint, that sentiment might therefore be shifting away from the "slowing growth" scenario to one of "the global economy is over the deflation scare and now will work towards one of growth". Please note that I am NOT saying such a sentiment is here; I am merely stating that to be successful at this business, one has to constantly gauge sentiment which influence money flows and money flows influence price.

It is that simple, especially when it comes to silver, but even gold as well.

Next week we are going to get some more pieces of economic data as well as the minutes from the Fed's October FOMC meeting. This will give us some fresh data to work with to see what kind of response the market has.

My thinking is that if there is indeed any shift that has actually taking place, something of more significance than the price action of a single week, it will begin to show itself in the Australian Dollar chart and in copper and in crude oil.

I noticed that crude oil cut yesterday's horrendous losses by half in today's session and that the XLE was up more than 1%. It is interesting to note that the XLE has performed much better overall than the price of crude itself. Today looked a lot like some big players were taking the opportunity to renew their exposure to the energy sector.

Remember, silver needs a "solid growth environment", one in which inflation dominates, rather than disinflation or deflation, if it is to thrive. In my view, silver is NOT a safe haven. If the sentiment begins to shifts towards one of slow but steady global growth, silver will probably bottom down here. If the sentiment is a short term phenomenon and we start getting more evidence of economic stalling, it is going back down again.

Time will of course make things clear, but I would strongly caution would be silver bulls who are constantly warning us about how crappy the US economy really is and how the stock market is really just a huge bubble, to be careful what they wish for in terms of stocks. they really seem to believe that if stock prices implode silver will soar and therefore are always rooting for equities to tumble as they constantly nitpick and criticize anything positive about the US economy that might actually happen to be reported.

Let me just say this -  If equities were to fall out of bed because markets begin fearing overpriced stock valuation in a slow growth environment, guess which way silver is going? Hint - it ain't higher!