"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


Thursday, January 2, 2014

Index Funds buy Precious Metals

Every year, those who manage the major commodity indices such as the Goldman Sachs Commodity Index ( GSCI) and the Dow Jones/AIG Commodity Index, REWEIGHT the composition of the various commodities that comprise their respective index. Some category of commodities see DECREASES in the weighting for that particular index; other commodities see INCREASES in the weighting.

This is common practice and happens every single year. It impacts the various markets for about a week or so as those INDEX FUNDS (These are sometimes referred to in industry slang as LONG ONLY funds) that benchmark against these indices must then BUY or SELL those commodities in order to bring their portfolio into line with the NEW WEIGHTINGS for that year.

In the case of gold and silver, both GSCI and DOW/AIG RAISED the weighting for these precious metals for 2014. That means index funds will be buying this first week of the year to align their portfolios.

That is what we are seeing occur in gold and silver today. I would expect this to provide some support to both markets until the bulk of this new money allocation process is completed.

Alongside of this today there seems to be some risk aversion related activity. As equities have moved lower, the VIX has jumped higher. Yields on Treasuries have subsequently fallen a tad as money flows move into bonds and out of stocks today. Also, the US Dollar and the Japanese Yen - both viewed as Safe Haven currencies - are moving higher. That is attracting some safe haven buying into gold with silver choosing to follow it higher rather than move lower in tandem with copper and crude oil.

I still want to wait and see what we get next week when the full complement of traders return.

For now, support in gold at $1180 is holding. Physical demand out of Asia is strong right now.  That is encouraging for the bulls.

Also, those money managers who bought the mining shares on Monday and Tuesday of this week ahead of the holiday, with the expectation that the bulk of the tax-loss selling was finished, have made a nice tidy profit for this short term play. I tend to not make too much of the mining share action right now because of the nature of the buying, which is short-term opportunistic in nature. We'll watch it however. Bulls, who were beaten senseless last year in these things will however welcome any relief no matter the source.

Gold has much chart work to do in order to turn the picture friendly. Resistance comes in near today's high first, followed by $1242- $1245; and then $1260 or so. For the pattern to turn bullish, $1260 would need to give way at a bare minimum.

By the way, in honor of the FLASH CRASH crowd, gold experienced some more of these REVERSE FLASH CRASHES, first in overnight trade in Asia and then again later in the European session. Don't expect any comments on this however from them - after all it is not good for sensationalizing their conspiracy views.

One could make the case, purely out of sarcasm, that nefarious forces are at work manipulating the gold price higher so as to squeeze the shorts out and paint the chart picture in their favor. But we would not do that now would we?  Note - to those who are humorless - this is meant as a tongue in cheek statement.

I am noting with interest that volume in gold is quite light. I would put a bit more credence in today's price action were the volume extremely heavy. Also to be noted is that the Goldman Sachs Commodity Index referenced above, is sharply lower being driven down by losses in the energy sector and in the soybeans and wheat. This is not yet the stuff of which inflation pressures are made.

Let's just watch it unfold and see where all this leads when the dust settles out a bit. It is too early to get dogmatic one way or the other.