Gold vs. Goldman Sachs Commodity Index

Just some FYI stuff for guys and gals that enjoy looking at other markets when trying to interpret the moves in the gold price.

Notice how the peaks and valleys in the gold price have been tracking the broader commodity sector fairly closely.

I should note that this particular commodity index does have a fairly excessive weighting in the energy complex ( well over 60%) so it stands to reason that movements in the crude oil, brent, gasoline, heating oil markets are going to exert a greater influence on this index than movements in the grains or the softs or the livestock markets, etc.

Even at that however, the link between the gold price and this index is fairly significant.

Here is another look at the same index, this time comparing it to the Dollar Index.

It is interesting to note that the overall commodity index tends to follow more of an inverse relationship to the Dollar, falling when the Dollar rises and rising when the Dollar falls. There are some periods however when the two seemed to actually move in sync, so the relationship is not perfect by any means. What I take away from this chart is that the norm is more of an inverse however.

It does look like since February of this year, that inverse relationship has been fairly tight however.

I come away from these charts believing that the relationships we have been watching for years now over here at this site are still worthwhile to monitor. If the Dollar is weaker, we should look, generally speaking, for the commodity indices to show some upward movement. If the Dollar is stronger, we should expect the opposite.

Then, if the commodity index is moving higher, gold should tend to track along with it. The opposite remains true.

We come back to that pesky Dollar thing again, no matter how we try to get away from it!

Gold pushes further into Chart Resistance levels

While the pit session close was very strong, the screen trade continuing in the later afternoon hours has seen the metal moving further up into the next level of chart resistance. Adding the upward march has been good buying that has continued into the closing bell in the mining sector. I am currently showing the HUI up over 5% compared to gold currently up 3.75 % and silver up 4.89%.

One wants to see the gold shares leading any charge higher in the metals and we are definitely seeing that occur.

I am reposting the gold chart from earlier today since the metal has risen further and I do want to note its position on the Daily Chart and show the next challenge that gold bulls need to tackle.

As you can see by examining the chart, the metal is knocking on the LOWER portion of that next resistance zone. As a side note here ( will someone please explain to the gold perma bulls or GIAMATT crowd that "YES", technical charts DO MEAN SOMETHING, in spite of their protestations to the contrary whenever the metal is moving lower), observe how the breach of the initial and a KEY resistance level near $1280 brought in more buying in the form of heavy short covering and fresh new buying. It works the same way in reverse folks - breaches of support levels bring in new selling and induce long liquidation.

This buying produces MOMENTUM and that is what attracts the momentum-based hedge funds who will now come in on that side of the market while those in that crowd who are short will be forced to exit by their computers.

Here's how the technical picture now looks - if the bulls can take out this next zone of resistance, I see another band of resistance centered near $1350 - $1360. Above that, frankly I do not see much, if any, until the market would get nearer to the $1385 level. Resistance would extend from that point all the way to round number and psychological resistance at $1400.

I want to give a tip of the hat to one of our regular readers and frequent poster, Steve Brassey, who rightfully has noted that the Argentinian debt situation is worth monitoring. As Steve has noted, problems tend to start around the periphery and slowly work inward so any sort of fresh occurrence of sovereign debt fears could reawaken some strong interest in gold once again.

It should be noted that equities have been the "go-to" investment of choice by large money managers and institutional funds. Ditto for the hedge fund community. If equities begin to falter (remember what happened when sovereign debt fears arose over Europe), there is going to be some diversification out of them and into gold, especially since its price has been so beaten down in comparison to the major stock indices. Traders/investors are not going to want to lose their nice, fat profits in equities so if they begin to get nervous, they will book some of those gains, take the profits and stash them into safe havens.

A question that I have is whether or not the Dollar and the Yen would serve as safe havens in that event. Today, neither one of them look remotely life a safe haven. It was the European currencies which attracted the big money flows, especially Pound Sterling which registered a near 5 year high against the greenback.

Traders have been looking to sell gold on rallies as it was not performing as were equities. Combine that with the fact that the inflation genie has been relatively well confined in his bottle, (at least in the minds of the majority of players ) and there was every reason to sell the metal.

A couple of things have since changed however. The ECB seemed to take the first step with their recent monetary stimulus measures ( lowering rates from .25% to .15% and implementing negative interest rates for bank excess reserves). Since that time, the Euro has refused to break down below the key 1.350 level, something I have found quite remarkable. It is now back above 1.360 again.

The second thing is Yellen's comments which caught a lot of traders leaning the wrong way. Most everyone expected the Fed to announce further tapering, which they did, to the tune of another $10 billion/month reduction. But most expected the Fed to sound a more upbeat tone about the economy and begin to start preparing the markets for an eventual rate hike. Quite the opposite happened. Disappointed traders, or better yet, shocked traders, ran for cover.

Lastly, is that concern that Argentina's situation has now once again raised and brought onto the radar screens of traders.

I would also like to take this opportunity to hoist up a longer term chart of gold.

This is a weekly chart. Notice that today's big move on the Daily Chart above still leaves gold well within the TRADING RANGE market that has held it for a year now. If you look at the previous trading range, $1800 on the top and $1525-$1530 on the bottom, you can see that was in existence for 20 months! When gold finally broke down below the bottom of the range, it entered a bear market. It is currently working within a very broad consolidation pattern bounded by approximately $1400 on the top and $1200 or so on the bottom. It is now, as a result of today's big move higher, a wee bit above the MIDPOINT or center of this range.

For gold to have a chance at ending the bear market, it would have to break out from the topside of this new range at the very least. It would also have to Close ABOVE the bottom of the former range. That means it would have to regain the $1530 level.

One thing I am noting that makes this weekly chart and the price action within this new and lower range a bit more constructive than the previous range is the fact that the market has bounced higher within this range but the more recent low formed near $1240 is HIGHER than the low of the range ( near $1200). If you look at the previous range, gold tended to move to the bottom of the range before it rebounded back up to the $1800 level.

In this newer range, the market has made a HIGHER LOW which is constructive as it gives the bulls a bit more reason to be hopeful than it does the bears, who were unable to bring the metal back down to the $1200 level for another test. Buyers emerged prior to this occurring which is friendly.

I will want to see several thing now - first of all, I want to see the holdings in GLD move higher. If the ETF fails to confirm this move, it will NOT be a good sign for continued strength. WESTERN INVESTMENT DEMAND must surface and remain solid if the price is to continue moving higher.

Secondly, I want to see continued weakness in the US Dollar, especially at the hands of the European based currencies, notably the Euro.

Thirdly, I want to see continued upward progess in the commodity indices.

And lastly, I want to see some weakness in the equity markets of sufficient magnitude that it would reflect some real FEAR exists out there among stock bulls.

The VIX has been and remains comatose and that bothers me. If there is real nervousness out there, it should be seen in this Volatility index careening higher. Either that or stock bulls are just punch drunk and nothing is going to trouble them until it just does. Check out this chart - NO FEAR ANYWHERE - it is absolutely astonishing....! and scary!

Welcome to New FOMC Chair On the Job Training Ms. Yellen

Apparently Janet Yellen needs an on the job training program to properly school here in the art of choosing the correct words so that all sides hear exactly what they want to hear. Alan Greenspan was so good at it that market players invented a new word to define it: "FedSpeak".

Ben Bernanke took a while to get that down but by the time he left office, he seemed to have improved quite a bit in the fine art of saying things that within the same speech could be found contradicted by more things within that exact speech.

Yellen has yet to learn this - at least so far as the impact on the currency markets. She utterly decimated the US Dollar by her comments yesterday and just gave the green light to every big macro fund and index fund on the planet to pour money into the commodity complex. I find this nothing other than the mistake of a rookie who is oblivious to the fact that as the chief Central Banker, one does not have the luxury of airing their misgivings in front of the general public.

A couple of things to note here - the Gold Volatility Index just shot through the roof and the equity markets are now going to be even more jumpy than they have become, if such a thing was even possible. The LAST THING that this economy needed is RISING COMMODITY PRICES. As I wrote earlier today, the saving grace of this anemic "recovery" has been a lack of sharply rising prices in the commodity sector. That has kept the price of raw materials, food, etc., from embarking on a tear higher such as happened when QE1 and QE2 were unleashed.

It is one thing to have temporary spikes in key commodities such as crude oil that are related to geopolitical events. Such things come and go and tend to fizzle out with as much fanfare as they started. It is altogether another thing to have the chief Central Banker undercut your own currency, especially when it was looking like it was finally going to get some sustained upside strength to it. That would be bad enough but Yellen seems clueless about the impact of a falling Dollar on the rest of the commodity complex at large. One can argue that the talking down of the Dollar was either deliberate or a side affect of a novice Central Bank chief, but the fact is that if investors start thinking that the Fed wants to knock the Dollar lower, either by design or by accident, they are going to start with their "let's buy everything in sight" trading strategy in the commodity sector.

The result of this will be obvious and none of it is good. I personally had seen some real light at the end of the tunnel by looking at the structure of the commodity board and observing that traders had been looking for some significant declines in food prices later this year. That had kept me optimistic on the inflation front that the current spikes in food costs were going to be coming to an end rather soon. Now I am not sure based on what Yellen has unleashed in these commodity markets.

These hot money flows could care less what any fundamentals might or might not be in the markets into which they pour. The buying orgy, (and that is how to best describe these damned funds) obliterates all the bids in its way and destroys any trader who might get short based on their analysis of the fundamentals in the markets that they are trading. In other words, Janet Yellen just injected another round of more extreme volatility into a sector that had begun to show some semblance of becoming a bit more well behaved.

The reason I know that this is a round of hot money is through the action of the spreads in the markets that I primarily trade in. The spreads have been blown to kingdom come today.

I am including a chart of gold here to show the annihilation of the shorts thanks to Ms. Yellen's comments. When the bulls were able to regain $1280 this morning, many of them began getting out. When $1300 was tried on the first round, some selling emerged but the market barely retreated. That give some strong longs the signal to begin pushing and push they did. Out went more shorts as the market kicked through $1302 and then it was almost a vertical shot north to $1317 as wave after wave of shorts' buy stops were nailed.

You can see the next resistance zone noted on the chart -if the bulls best this, things are going to really heat up. Can they do it?

Again, as a trader I have to play with the cards that are dealt, but that does not mean I have to like the hand. If this is the start of a new trend/strategy among the big funds, and it is unclear if this is a one day wonder or something more, trading for a living just got even more difficult than it already was. Thanks Yellen - can you please just keep your mouth closed for a while?

Investors Key in on Fed's Ultra Low Interest Rates - Inflation Fears Rising (UPDATED)

Watching the ever-changing ebb and flow in these markets for as many years as I have been now doing, it never ceases to amaze me how what is of no concern whatsoever one day, can suddenly come into focus the next.

Traders have been not the least bit concerned about inflationary pressures in the economy for some time now. Based on readings of the TIPS spread and the performance of the various commodity indices, along with a falling Velocity of Money indicator, they have relegated inflationary concerns to the dark corner of the attic.

Yesterday however that seems to have changed ( for now at least) - the FOMC statement was interpreted by the market in a fashion that has produced a sentiment that is suddenly now worried about rising prices.

Macro funds have thus wasted no time in piling back into certain commodity futures with the result that the Goldman Sachs Commodity Index or GSCI, has now broken out into a three month high. While the Dollar has recently been flirting with overhead chart resistance, traders took the FOMC statement as dovish towards the greenback and once again it failed at that key resistance level centered near 80.70 - 80.80 on its chart.

The Dollar has been supported by the idea that if interest rates are going to rise anywhere, that will occur first in the United States. Apparently the Fed statement had some rethinking that idea. Pound Sterling hit a level against the Dollar not seen since August 2009 today!

Take a look at the GSCI chart. Is it any wonder that both gold and silver are performing so well today? Both metals have noticed this upside breach of that key resistance level on the GSCI and are moving higher. Remember, for gold, and especially silver, to maintain solid, sustained uptrends, they need the same in the various commodity indices. One cannot expect to see rising gold and silver prices if the overall trend in the general commodity sector is lower.

The next big step for this particular index is near 675.

Gold has penetrated tough resistance near that $1280 level and silver has managed to recapture the elusive $20 level.

The only fly I can see in the ointment today is the lack of any strong showing in Copper. Once again it is lacking in upward excitement.

Heck, even corn and wheat are higher today.

I will get some more up later on today, including an updated TIPS spread chart.

UPDATE:

In watching these various commodity futures markets trade today, I am now more than fearful that Janet Yellen has just unleashed another round of broad-based commodity sector buying by both index funds and macro funds. The one factor that has helped consumers to deal somewhat with this moribund economy has been that the commodity futures markets have been relatively contained ( I am  speaking in general terms and not of specific or individual markets) and that strong upward price pressure on the grains especially has not been present. When you look at corn prices, which were almost 50% less than they were a couple of years ago, and wheat prices moving strongly lower, there was a ray of light at the end of the tunnel when it comes to food costs. While meat costs are at record levels, I expect them to moderate and move lower by the 4th quarter and certainly by Q1 2015. Today, with the Dollar having been undercut by Yellen in her testimony, a boatload of hot money is flooding back into the commodity markets. This is spite of the current bearish fundamentals in some of these individual markets. These hot money flows by large speculative forces now threaten to overwhelm these key markets.

Those of you who read here regularly know my sentiments towards Central Bankers and their constant interference with the natural course of markets by what I believe is reckless monetary policy. Ultra low interest rates are harmful to senior citizens, and those on fixed incomes or in their retirement years who are looking for safe, conservative places into which to park their life's earnings.

The Fed has effectively punished these people at the expense of reckless risk takers. Yellen seems ignorant of the weight that her words carry and she has fanned the flames of this rampant speculation, which had, until yesterday, been pretty much confined to the general arena of equities. If today's wild buying across the commodity sector is any indication of what we now have in store, heaven help us all.

One can be sure that whenever you see commodity markets soaring higher, in the face of bearish fundamentals, hot money flows are pouring in. This is what happens when the monetary authorities undercut their own currency. We now must monitor the overall commodity sector much closer as well as keeping a very close eye on the US Dollar. If the Dollar does not reverse course and loses support on the charts, the US consumer is going to once again be forced to deal with soaring energy and food costs.


Perhaps this is where the weakness in the equities today is coming from.