Gold Comments

First, let me take the time to express my sincere and heartfelt gratitude for so many kind comments from so many of you. It is difficult to express how such words of encouragement can impact a weary warrior.

Secondly, I am okay health wise so no need for concern there but am just weary with the day to day battle against the hedge funds and their computer algorithms and subsequent volatility. Trading is an invigorating occupation as it engages the full powers of the mind but it can also wear one down as the extent of price swings makes it difficult at times to gauge what is actually occuring. With 24 hour round the clock markets, getting sleep is sometimes the trader's toughest trading decision!

These markets are nothing like the ones I cut my teeth on when I first began my trading career more than 2 decades ago. Back then, we had volatility, but it was the exception not the norm most of the time. The markets were what I call, "well behaved" back then. Then again, I also vaguely seem to remember being able to buy a fully loaded Camaro Z28 for $3,500 back in 1970 or so!  I was too young to be driving back then anyway. Disclaimer ( I did buy a used one however some years later - it was a 1971 with that LT1, 350 engine - I lost count of how many speeding tickets I got on account of that car - if that thing had come equipped with a set of wings, it would have gone airborne - those of you who know the Beach Boys "Little Deuce Coup" - will know what I mean).

I said all this to let you know that I still plan on posting, but I am backing off the number of posts in order to recharge and refresh a bit. Trying to write and trade and track markets at the same time takes a toll.

With that in mind, here is my latest... by the way, Eric King and I will be doing the regular Weekly Metals Wrap together over at King World News so tune in for that when it gets posted.

Please note several aspects about the gold chart.

Fist of all, from a trend following perspective, it is trading above all the major moving averages once again. That tells us that the chart is bullish. Secondly, the 10 day moving average (blue line), which had been moving down until last Friday, has now turned up and is trending higher. It is also getting ready to make a bullish upside crossover of the 20 day moving average (red line). That will be bullish as well.

Also note that the market held above the 40 day moving average (dotted line) even on its setback in price, failing to close BELOW that level once. That means that the trend following funds were still active and were buying the dip or retracement  in price.

The MACD, a good trend following indicator, is bullish.

Based on what I can see here, gold looks as if it wants to make a try at $1550, one of those even numbered levels that takes on a technical significance as price approaches it. It is important to note that this is occurring late in May, a time frame during which gold tends to show seasonal weakness. This seasonal weakness however can be attributed to factors, which while important, are not what are driving gold at this time. The festival seasons from Asia and India are over and the strong jewelry related demand is therefore missing. However, gold is not deriving the bulk of its strength from that source but rather from currency related matters.

By currency related matters I mean investor concerns over the stability of paper currencies due to the tremendous amount of debt being run up by so many nations. European sovereign debt woes remain a strong source of gold related buying, especially from investors on the Continent. This is reflected in the very strong gold price in terms of the Euro and of the British Pound. As you know, Euro priced gold set a new record high this week.

Here in the US, our total federal debt level is at 100% of GDP. We are looking at entitlement programs which will be bankrupt within less than a decade on the current trajectory. Many states are in precarious financial condition which large numbers of municipalities and counties facing their own set of problems. Much of this is tied to the collapse in real estate values and thus affects valuations which are a source of property tax revenues. News on the housing market continues to reflect a sector that is mired in a supply glut at a time when demand is feeble. That is not a recipe for improving valuations anytime in the immediate future.

Ever since Fed governor Bullard let the cat out of the bag and basically told the market that the Fed would not be withdrawing accommodative monetary policy until at least July 2012, the Dollar has been moving steadily lower. That keeps REAL INTEREST rate yields negative and has strengthened the conviction in many traders’ minds that such an environment is going to be the norm for at least another year. Gold LOVES those kinds of conditions and thus has moved steadily higher ever since Bullard’s comments.

While it may dip in price moving forward, as long as this negative real interest rate environment is present, it is going to attract strong buying on such occasions, particularly if Euro-priced and British Pound-priced gold continue their impressive chart action.

Also, an additional kicker for gold is that the CCI, the Continuous Commodity Index, is now trading above 650 as it puts a bit of distance between itself and that critical technical chart level of 640. The commodity markets are signaling that prices had fallen far enough and that this fall had been sufficient to scare the Fed out of any further hawkish talk. I would be surprised to see much in the way of comments coming out from the usual hawks on the FOMC. As long as these economic data numbers that we keep getting are coming out on the low side of expectations and disappointing investors, the doves at the FOMC are going to be getting the airtime.

Note that the Dollar has broken down through the 50 day moving average at this hour and is also down below support near 75.20. A week close today does not bode well for next week.

Trader Dan taking a bit of a break

I wanted to apologize for the lack of regular postings this past week. I am a bit worn out with these markets of late and am attempting to keep my sanity. I will be posting but until I can get some rest and recuperate a bit, I am going to ease off a tad. Thanks for understanding.

Trader Dan

US Dollar running into some selling

The US Dollar has been able to keep its footing above the 50 day moving average on its daily price chart which is technically bullish but it does seem to be running into plenty of willing sellers between 76.50 - 76.00.

While the Daily chart is much improved its weekly chart still shows it in a definite downtrend.

If the Dollar is going to extend its rally from current levels, it is going to need to take out 76.50 for starters and hold that level going into the close of the trading week.

While gold has been pretty much ignoring what the Dollar has been doing of late, the Dollar still is exerting an influence on the overall commodity sector. Its recent weakness of the past three trading sessions, which I believe is tied to dovish talk coming out of the Fed, has enabled the fund money flows to come back into the commodity sector in general. This has pushed the CCI back above the 640 level, a level which I believe is indicative of the appetite of the hedge fund community for risk. Above 640, they love risk; below 640, they hate risk. Wax on; Wax off.

If the Dollar does rally through 76.50, it is doubtful that the CCI will be able to hold above the 640 level. If the Dollar falls further down towards the 50 day moving average near 75.25, the CCI will continue to push higher.

Since silver is perhaps the strongest recipient of the risk trade, the weaker the Dollar, the more likely we will see silver back up near $40.

What is happening right now is that the same weakness in economic data releases from the US showing an economy that is in danger of stalling, data which had initially worked to throw the risk trades off the table, now seems to be working in the opposite with traders/investors viewing the dovish comments from certain Fed officials as a sign that the Fed is not going to change an accomodative monetary policy. In other words, interest rates will stay at extremely low levels for at least another 12 months. Some are thinking a step further will be some form of stimulus coming from the Fed as well.

If this thinking is for real and begins to take hold, the Fed will be extremely hesitant to cross the market since the reaction would be a huge sell off in equities and a smashing of the commodity markets by hedge funds running out of risk trades. That would instill fears of deflation once again, somethign which the Bernanke-led Fed will not permit.

For now, the commodity complex is signaling that the market has baked into the cake the end of QE2 but not the end of low interest rates with some expecting further stimulus. The more the expectation of additional Fed stimulus grows, the weaker the Dollar will become and the stronger gold will be.

We will have to watch the Dollar's price action to get some sort of clue to what the consensus of the investor community is in this regards.

Investors looking to the Fed for stimulus again?

It is perhaps a bit premature to jump to conclusions but today's price action in the overall commodity sector seems to be signaling that a subtle shift is occuring in the minds of some investors in regards to the Fed and the upcoming end to QE2 at the end of next month.

Fed governor Bullard might have been the one who got the ball rolling by his comments from yesterday when he stated that there would more than likely be no monetary tightening until later next year. That put a firm bid under many commodity markets and kicked some of them strongly higher yesterday. It also seemed to pull the Dollar down somewhat from its best levels of the session even while it was supported by an aversion to the Euro based on the woes in Euroland.

Today we are seeing a sharp rise in the CCI (Continuous Commodity Index) which has taken it up past that key 640 level that I am closely monitoring. We are also seeing the Dollar unable to push higher. With money flows coming back into the commodity sector, it comes as no surprise that those markets which led the sector lower are now leading the sector higher. That is why silver is so strong this morning. Also, crude oil is trading closer to $101.

What might be happening is that investors are looking at the ugly chart pattern forming on the S&P and seeing this recent near-collapse in commodity prices and putting two and two together. What I mean by that is they are thinking that while the come-down in commodity prices, notably energy and some foods has been welcome, no one wants to see a collapse of the magnitude of 2008. It was not that long ago when I posted a comment here at my site and wondered whether a deflationary mindset was creeping back in. That word, "deflation", sends dread and fear running down the backs of Chairman Bernanke. Bernanke will not let such a mindset get firmly established.

With fears of a slowdown in growth for the emerging markets, and a concerns that recent US economic data has been weak, traders are beginning to suspect that the doves at the Fed are going to have their way and that some sort of stimulus is going to be forthcoming from the Fed. Keep in mind that the Fed views as part of its mandate, growth in employment. With this sort of data coming out and with the thinking in connected circles that the sharp fall in commodity prices has taken the wind out of the inflation genie for the short term, the Fed now has room to come up with some sort of stimulus, whether that be another round of QE or something else.

Again, one day does not a trend make but I do find it noteworthy to see the extent of the money flows coming back into the commodity sector today. That would not be occuring unless traders believed that the Fed was going to shift gears and perhaps become more accomodative. It could be that the consensus is that the Fed overshot it to the upside the first time around, then overshot it to the downside by sounding too hawkish of late and now may be trying to find a happy medium.

Either way, for today at least, watching copper moving up nearly 2.5%, enough traders think that something friendly is coming down the pike and is paving the way for "risk trades" to return.

4 Hour Silver Chart

Silver pushed past resistance at the top of its narrow range which came in near $36. It ran higher in very early Asian trade but has not been able to extend its gains and push beyond $37. It has a band of overhead resistance near $37.50 that will be formidable and will need to give way if it is going to make a push towards $40.

Fed's Bullard gives Commodity Rally the Green Light - Goldman helps out

If you are looking for a reason to explain the strength seen across a widespread portion of the commodity sector today, particularly silver, crude oil and gasoline, look no further than comments from the St. Louis Federal Reserve President Bullard, who actually provided a date in the future at which the Fed might begin pulling back on its monetary accomodation.

He was speaking at a Rotary Club meeting in Missouri when he stated that it might be in the SECOND HALF OF NEXT YEAR that the Fed would begin to effectively tighten.

The Fed Funds futures contract is signaling a move higher in the Fed Funds rate in the July 2012 contract.

Once the market digested those comments, some of the commodity markets got a fresh influx of hot money flows lifting them strongly higher on the session. No surprise that Goldman would issue their call to buy commodities. They obviously knew in advance.

That buying was enough to take silver out of the top of its recent tighter range near $36. It has a chance now to make a run towards $37.50. Only a good breakout above $40 will see it resume its uptrending move in earnest.

Crude oil punched through $100 today, no mean feat considering the selling it has been experiencing of late due to risk aversion flows. Goldman Sachs, whose call for lower commodities a few weeks back, touched off an avalanche of selling, changed their colors and came out today with a buy recommendation for several commodity markets, including crude oil. Crude was already moving higher on that news but when the Bullard comments hit the wire, it got an extra kick higher.

While today's move higher in crude is impressive, it is still stuck in a range trade on the technical price charts and will need a solid close above $101 at a bare minimum if it is going to set off any fireworks in there. Unleaded gasoline needs a closing push through today's session high near $302.50 to get something going in there.

The CCI, Continuous Commodity Index, while higher today, is still trading below 640. I view this level as a pivot around which it is rotating and which it must clear on the upside if we are going to see a solid revival in the overall "buy commodities" theme. There are still more than a few individual commodity sectors which are lagging badly, among them the grains and the livestock markets. If those both turn in conjunction with higher energy and metals prices, then I think we are on to something again with the risk trades. If not, it will be more range trading and consolidation for the sector as whole with traders having to hand pick which markets that they want to buy instead of just plopping down money on anything tangible and then waiting for prices to go higher.

In a perverse sort of way, Bullard's comments managed to get the best of all worlds for the Fed - they put a bid under the equity markets as traders were less fearful of monetary accomodation coming off anytime soon while bonds moved higher, shoving yields lower, on the idea that the easy monetary policy was indicative of the Fed's caution towards any economic recovery. Today was one of those days where the Fed got to have its cake and eat it too.

While the broad equity markets were on the plus side today, the mining stocks as exemplified by the HUI and the XAU confirmed technical bottoms by todays strong showing. They have been flirting with bottoming action for nearly a week now but were not quite able to get the job done. The solid push through last week's high for both indices is a bullish chart development and augurs for further gains, provided that we do not get any contradictory statements coming from any other Fed governor soon.

US Dollar now solidly above the 50 day moving average

The "risk aversion/slowing global growth" trades have resulted in a huge unwind of carry trades over the last month. This unwind is bringing upward pressure on the funding currencies of choice, not the least of which has been the US Dollar due to the ultra low interest rates here in the US.

This continued exodus from risk has pushed the US Dollar firmly above its 50 day moving average and put it into position to actually challenge its 100 day moving average, a critical technical level on the price charts. While there is not the least bit of fundamental support for strength in the US Dollar, these technical factors which are driving it cannot be ignored by traders/investors. How much longer the Dollar can benefit from being the "NOT the EURO" trade is unclear but it is coming quite close to the region marked on the chart which will give us a clue as to its direction over the coming summer months.

Note on the chart the two horizontal lines drawn that form a zone between 77.00 - 76.70. Note also that the downward sloping 100 day moving average line falls right into the middle of this zone.

If the Dollar rally is going to fail, it will fail near this zone. If it does not, then there exists a very good chance that the risk trade unwind will push the Dollar upwards toward the 200 day moving average and the region near 78.

What is most interesting however is how gold is responding to this bout of strength in the Dollar - it is not breaking lower but is moving steadily higher. I referenced this in my earlier comments from today where I spoke to the strength in both Euro priced and British Pound priced gold. What these charts are telling us and what this price action is crying is that gold is trading as a currency with its own virtues in a time in which there is a growing lack of confidence in the monetary authorities of both Euroland and the US, as well as other nations around the planet.

Keep in mind also that the summer time is generally not a season during which gold exhibits a great deal of strength on an historical basis. Should we see the kind of resilience continue in gold over the summer that we are currently seeing, I think it will be an early indicator that we are going to see a new record high price in the yellow metal sometime during the 3rd quarter of this year. Stay tuned on this one.

Ron Paul's commentary on the debt ceiling

I recently took quite a bit of flak from those supporters of Ron Paul who disputed the account published in the New York Sun that the Congressman from Texas had advocated selling off some of the nation's gold to pay for its debts.

I was then and still am opposed to that idea on several grounds not the least of which is the idea that there is insufficient gold, even at the current market value, to make a serious dent in the gargantuan $14 trillion + debt burden of the US. That then begs the question as to which class of debtors would get the option of being paid in gold, US citizens who own the debt either directly or indirectly through investments made in pension funds or mutual funds, etc., or foreign creditors such as China who hold a tremendous amount of our overall debt.

First of all, who would make such a decision? Secondly, no matter which group was chosen, the other group was going to be provoked into an angry response. Certainly if China were snubbed in favor of our own citizens, they being our banker, the fallout would not at all be pleasant. If China were paid in gold and our own citizens left to be paid in a depreciating fiat currency, the noise of protest and outrage here at home would be deafening.

The main issue I have with selling our gold to pay off our debt is that it smells too much to me like a scenario in which a drunken spendthrift has run his family into the debt house forcing the unfortunate souls to sell anything they have left of value to extricate themselves from their prison. In our case however it is a prison imposed by the reckless folly and stupidity of the political class of this nation.

I see a future for gold in a revised monetary system and I believe that the US would be much better served by retaining our nation's gold holdings intact (whatever we happen to have left of those holdings is anyone's guess) rather than selling off such a precious asset.

I would love to get further into this topic but that is not my intention at this time. In the interest of fairness and to give credit where credit is due, the honorable Congressman from Texas has issued a statement on his website detailing his strong opposition to extending the debt ceiling. Let me say that this is Ron Paul at his best and he has my complete support when he makes a statement of such nature.

I would much rather see statements of this kind, followed up with action by a majority of Republicans in Congress, that would enforce a fiscal restraint on our reckless and dangerous spending, rather than any talk of potential gold sales.

Hats off to the Congressman for this one. From Dr. Paul's comments below:

Stop Raising the Debt Ceiling
The federal government once again has reached the limit of its legal ability to borrow money, meaning it cannot issue new Treasury debt without action by Congress to increase the debt ceiling limit. 

Please be sure to read the entire set of comments by clicking here:

http://paul.house.gov/index.php?option=com_content&view=article&id=1868:stop-raising-the-debt-ceiling&catid=62:texas-straight-talk&Itemid=69