Markets are on their hands and knees begging for more QE

Take a look at the following two charts. These tell you all you need to know about the market's view towards Federal Reserve policy. As you know by now, the Fed is supposedly going to end QE2 at the end of this month. Ever since that announcement, coupled with continued disappointingly weak economic data, the yield on the Ten Year has fallen and the US equity markets have swooned.

There are TWO, not ONE, Achille's heals in this so-called economic recovery theme that had been making the rounds earlier in this year. The first is the lack of job growth; the second is the horrific numbers that keep coming out of the housing market.

I suspect that if the yield on the Ten Year keeps plummeting along with the equity markets, we are going to hear more and more talk about QE3.

Keep in mind that this Bernanke-led Fed fears DEFLATION more than anything. In the past Bernanke has deliberately led the markets to expect inflation based on the QE programs. They wanted that mindset to kill any talk of deflation. It did seem to work until the hedge funds, which do the bidding of their masters at the FEd, got too carried away and trained their guns on the energy markets and started to bid up the price of gasoline. That was a big, "No-No". Out came the Hawks at the Fed talking up the ending of QE2 and the need to raise rates at some point and down went the entire commodity complex along with gasoline prices.

However, the bond market is now signaling deflation once again and when that is coupled with stagnant wages, no job growth, a moribond housing market and overall economic weakness, the word dreaded most by Central Bankers, the "D" word, deflation, is now surfacing once again.

If this continues we are going to see QE3 sooner rather than later.

Monthly Gold Charts - May 2011

Trader Dan on King World News Weekly Metals Wrap

Eric King over at King World News and I discuss the metals market along with the Dollar and the mining shares on the Weekly Metals Wrap.

You can listen to the interview by clicking here:

http://tinyurl.com/3bfgrth

Also, I am not sure why the Followers are missing on my blog. I have noticed that several other blogs appear to be having a similiar problem. Apparently something is wrong with the Google Blogger software. Hopefully they will get it fixed soon.

Please do not think that I yanked down all the followers! I appreciate all of you.

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.