HUI at a crossroads

I do not need to point out to the readers the abysmal performance of the mining shares. The hedge fund ratio spread trade has destroyed their share value and most of management seems unwilling or incapable of fighting back to protect the interest of their shareholders.

The Gold and Silver ETF's are also partly to blame in that these Trojan Horses have siphoned off a huge amount of speculative money flows that otherwise would have found its way into the mining sector shares. Those products can be used to obtain LEVERAGED exposure to the precious metals without the risk normally associated with outright purchase of a particular mining company. That makes them attractive to hedge funds which can also use them as the long leg of a spread against a short leg in whatever company they have decided that they can target.

Paying out a dividend to shareholders might put a dent in this little game being played by the gold and silver share shorts as it currently costs them nothing to LATHER, RINSE and REPEAT this strategy. If something works for a money making trade, it will continue just as long as it keeps on working. That means they can short the shares at will since they have no opposition. Shareholders may bitch and complain about it, but as long as the status quo continues, the shares will lag the price of bullion.

The non-stop selling barrage has brought the HUI down into a critically significant technical support level near 492-490. This level must hold or if broken, must be recaptured by the close of trading Friday, to prevent a further drop lower.

At this point in time, the only thing that I can see which will lead to the shares outperforming bullion would be another round of monetary stimulus from the Fed. In such an environment, the share prices will outperform the metals initially with silver outperforming gold as well. Will we get one? I do not know but if the stock market continues to slide and the economic data numbers do not improve, I bet we will, impact on the US Dollar notwithstanding.

Gold very strong in terms of the Euro

Investors fears concerning the nation of Greece with a potential for default on its bonds has kept a very firm bid beneath the price of Gold on the Continent. As you can see on the chart, gold priced in euro terms is within a whisker of its recent all time high. It is this strength which is preventing the Comex gold bears from substantially breaking down the price in US Dollar terms even as we are seeing a general selling theme across the commodity complex today.

XAU trying to hold support

European sovereign debt woes erupting once again

Growing fears of a Greek government debt default have sent the Euro plummeting in today's trading session. It has also fueled a mad rush back into US bonds after the bottom fell out of that same market in yesterday's session. As I mentioned in my post last evening, the US bond market was liable to reverse course in a heartbeat as soon as the fear index rose once again. That is exactly what happened.

Investors fear a domino-like contagion effect upon the big European banks holding a substantial portion of Greek debt. Combine that with an Empire State Manufacturing Index reading of negative 7.8 (anything below zero shows contraction) plus a 0.3% rise in the core CPI reading (the sharpest rise since 2008), and stocks were hammered while the long bond regained most if not all of its huge losses from yesterday.

What we have here in the US seems more and more like the stagflation of the late 1970's - a slowing economy in which prices continue to rise - a notable exception being that wages are going nowhere. None of this is positive for consumer spending moving forward. While US companies that do a large portion of business overseas are showing good earnings, it is not translating into growth at a sufficient pace to put a dent in the lousy job market.

Oddly enough, I read some news this morning that housing prices in the Silicon Valley are surging as new found wealth from the recent technology IPO's has fueled what looks like another one of those insanely stupid buying binges with all the new rich kids tripping over themselves to bid up the price of their newest status symbol. In some cases they are bidding ABOVE the asking price. It was that same sort of imbecilic psychology that helped contribute to the housing bubble in many communities across the nation back in 2004-2007. I am sure the realtors there are extremely happy but I have to shake my head in bewilderment that many in this nation never seem to learn a single thing.

I think that is what happens when money is made too easily and too quickly instead of sysymetically increased year over year. Don't get me wrong, I begrude no ones success, but there is something that happens to those who find themselves suddenly extremely wealthy. They lose a sense of the value of wealth and how difficult it is to make it and hold onto it. Show me someone who has made a lot of money and then lost it, only to make it back through hard work and I will show you someone who is far more careful of it and far more frugal than those who meet with sudden success. More often than not, it goes straight to their head. It is said that youth is wasted on the young and foolish. I think the same thing could be said of riches on the young and foolish.

Back to the markets however - the collapse in the Euro has sent the US Dollar surging higher as risk trades from yesterday are being yanked off today. This is why I keep saying to traders - do not let any single day's price action fool you into thinking a trend is developing and spur you into placing large positions on. Only the dipsticks that run the hedge funds do that sort of thing. (As you can tell I have nothing but contempt for the majority of hedge fund managers - they are the worst traders on the planet). Smart traders will look at this schizophrenic market behavior and reduce position size or just get out altogether and enjoy some hobbies. Let these other fools shred each other to pieces. You can still trade but just trade in size that will not seriously hurt you if you are on the wrong side of the daily price action.

As the risk trades come off, the equity markets sink ever lower and the commodity markets see further downside. The S&P 500 is getting perilously close to the 1250 level, the level at which it goes negative for the year and at which it threatens to put in a double top on the longer term weekly chart. Should it do so, consumer confidence will fall off the charts. Consumer spending will suffer as the psychological impact of losses in their 401K and other retirement accounts, combined with home values that are also underwater, dampens the desire for big ticket items and forces further retrenchment on that part of the US economic engine. All this will do is build further pressure on the Fed to act. And thus the addiction to monetary stimulus continues until the junkie is hopelessly ruined.

Earlier in the session, gold had recaptured broken support near $1530 and looked like it was attempting to get its footing there. As the equity markets dropped near midsession, the unwind in the risk trades derailed it and took it lower towards $1520. I might add here however that in terms of both the Euro and the British Pound, gold is holding very firm. That should keep it supported in US Dollar terms and prevent a sharper selloff such as what we are seeing in the grains, fiber and energy markets.

As can be expected in this sort of environment, the Continuous Commodity Index is taking a sharp hit and has sunk below 650. As long as it stays above 640 it is still range bound however. A decline through that level which cannot be recaptured quickly will not be good news for commodity bulls as it will reflect the return of the deflation mindset. Rest assured that Bernanke and company are closely watching this chart also.

The Dollar's rally has it strongly back above the 50 day moving average. What is more important that that however is the fact that is has now reached the 100 day moving average. It fell below this critical moving average in January of this year and has been unable to put in a close above it since that time. Should it manage to push past 76 one has to give the move higher respect from a technical perspective. If it can push above 76.50 and hold those gains, we could see the Dollar make a run towards 78 in short order.

Crude Oil mired in a sideways rut

Commodity complex action reflects trader/investor uncertainty

Gold and the summer doldrums

The summer months are TYPICALLY not a particularly strong period for both of the precious metals. A lot of traders in the West are taking vacations with their families as the kids are out of school. Then there is  the lack of the far East festivals during which large amounts of gold are generally purchased for gifts.

This summer will be very interesting however as the Fed ends its QE2 program in two weeks time. As we get nearer this date, many traders are going to be particularly interested in seeing the kind of economic data releases we are going to be getting from the feds. If the data continues to deteriorate and disappoint, there will be growing pressure on the Fed to "do something". I have already mentioned that there will also be pressure from some in political positions to get some sort of stimulus from the government (in some quarters the complaint is that the former programs were "too small"). I do not think that will happen however as the Republicans control the House of Representatives and they are in no mood to spend and further worsen the deficit. As you know, a growing battle over raising the federal debt ceiling is now fully engaged. The notion that the Republicans will allow any sort of additional stimulus-type deficit spending is wishful thinking on the part of some as those legislators who might be inclinded to vote for it, will find themselves being primaried by the Tea Party.

That means if anything is going to occur, it will be left up to the Federal Reserve. Do they act and kill the Dollar in the process or do they cross their fingers and hope and pray that the economic data improves? What happens if the S&P 500 takes out the critical 1250 level? Then what? Remember that the Obama administration now fully owns this economy and if the stock market tanks further and consumer confidence plunges even further while on its watch, kiss his election hopes goodbye. The entire Democratic party knows that their fortunes are tied directly to the well-being or lack thereof of the US economy. It was thanks in no small part to the plunge in the stock market in September 2008, that Mr. Obama found himself and his party with complete control of the federal government. Should the economy remain as pathetic as it currently is, their party will be the ones getting a good old-fashioned ass-whipping at the polls in 2012.

I have said all this to prime the way for the analysis of the gold market and the Dollar. Right now both markets are in sideways patterns waiting and watching and pouring over every single bit of economic news, no matter from what source, in an attempt to glean what the next move of the Fed will be. Today we got news that the Chinese economy did not slow as much as some had expected (funny how the Chinese naysayers continue getting it wrong over there). That set off a huge short covering squeeze in the broad US stock markets as bulls pushed the shorts out  on the idea that the global economy was not slowing quite as much as some were anticipating or fearing. Sales numbers were also not as bad as expected. When markets get lousy news that is not as lousy as they initially feared, they go up. That is what happened today.

That same news and stock market reaction pulled the rug out from under the long bond which had a huge down day losing over a point and a half. The thing with the bonds however is that the first bit of bad economic news once again, and back up they will go while the stock market goes right back down.

Market conditions like these are extremely dangerous to trade for all except a handful of day traders and players with expensive computer algorithms who think nothing of reversing yesterday's trade completely or even last hour's trade. TRend traders had best forget about it if they expect to pile on large positions. the only thing that will lead to is a dwindling trading account. Be smart - trade smaller and forget about the big score. Your number one priority is to stay alive and be there for the next trending move when that eventually does arrive.

As far as the gold market goes, the chart is self-explanatory - it is range bound having failed to take out $1550 on the top and it is now drifting lower to see where buying will be uncovered in decent size. We should get a bit of a better feel how this market is going to fare for the rest of the summer as we actually arrive closer to the end of this month. For now, do not read too much into a single day's price action. Half of these damn hedge funds have no idea what they are doing anyway. AS a matter of fact, I would venture that 2/3 of them don't.

Trader Dan on King World News Weekly Metals Wrap

Please click here to listen to this week's radio interview with Eric King of King World News on the Weekly Metals Wrap.

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