Gold charts and some comments

Gold breached the downside of the downtrending price channel that had been containing price action for the better part of the month of September last week. Overnight it was hit especially hard as a wave of selling across the entire commodity sector flared up as traders ran away from anything remotely resembling risk trades. That selling sent gold down nearly $100 at one point. The volume of trade was especially heavy for those particular hours. However, the selling exhausted itself as some larger buyers swooped in (very possibly Asian Central Banks) and scooped up the metal that was being discarded by the hedge fund algorithms. The recovery basically brought the market back up to its closing level from last Friday creating a potential spike bottom on the chart.

If you note the first blue level of resistance drawn in on the chart that comes in just shy of the $1640 level. Gold will need to push through this level and stay above it to give the bears a bit of unease who have been very confident of late. If the bulls can take this hill, then they have a legitimate shot at seeing price run back up towards $1680, which was a level commensurate with a former "gap and go" on the daily price chart. That level should bring in some selling and could stall any upward motion barring any fresh fundamental news. 

I am looking for and indeed would prefer to see, some sort of stability in the price. The last thing this market needs is another $100- $150 push higher right away. That might actually spook some of the would-be end users.

A come down in volatility with perhaps a smaller daily trading range is exactly what it needs to inspire some confidence on the part of the many end users who are wanting to stock up before the festival seasons. Extreme volatility can spook those guys and leave them on the sidelines. They will want to see that prices have indeed moved into a level that is going to hold and then they will feel more comfortable making larger purchases.

The other possibility that we will watch for is for another leg back down lower again, only this time on decreasing volume which would indicate a loss of appetite on the part of the bears to sell aggressively at these lower levels.

One does reach a point in these hedge fund driven markets where price overshoots both the upside and to the downside making the risk/reward of a given trade not particularly attractive. In this recent case, how much more downside risk do you think gold has compared to upside risk when price is down below $1550? If we were moving into a rising or higher interest rate environment, that would be one thing but we are going to remain mired in an ultra-low interest rate environment for the foreseeable future; one that I might add is highly conducive to owning gold since opportunity cost is lowered to hold the metal in that sort of environment. Besides, any solution being offered by the West to shore up its tottering economies is going to certainly contain measures designed to increase liquidity (debauch the currency by money creation). In that environment, gold's risk will always be more to the upside than to the downside, again, especially after it has been battered down so severely.

Newmont Mining - further chart analysis

Market Volatility

My initial thoughts on this insanity is that we went from total despair overnight to downright euphoria in about 12 hours time. At this rate of mood swinging, those with bi-polar disorder are going to be looking downright tranquil and serene.

Another thought - all those brand new shorts who loved to chase momentum and sell prices lower just had their entire NEW and REVISED MARGIN requirements to trade silver wiped out. The move from near $26 to near $31 amounts to just a tad less than $25,000 per single contract. The new margin requirement will be raised at the end of today's session to $24,975.

At this rate, they will need to hike margin requirements to $35,000 for single futures contract.

One last thought - I think I waited too damn long to fill up my gas tank today. I should have done that overnight....

Copper Bottoming?

Copper often seems to function as a type of bellwether for the entire commodity sector. As fears of a global economic slowdown have intensified, copper prices have been hammered lower. Chinese buying just below the $4.00 level had kept the market supported but once that evaporated, there was a general dearth of buying. That allowed the bears to press the price into downside sell stops which have then fed on themselves.

However, there are some preliminary signs that the bleeding in copper might be coming to an end. The red metal seems to have found support just above the $3.00 level; a level closely corresponding to horizontal chart support and just a tad above the technically significant 50% Fibonacci retracement level of the rally off the 2008 low and the peak early this year.

The chart damage has been severe however so it is going to take further work to repair both the technical picture and the mental state of some of the badly bruised bulls. The spike off of support is a first step but we will need to see some confirmation for the remainder of this week.

If this is the case and copper has bottomed, it will serve to stop the rampant selling in the silver market. Some of that might be showing up today as silver has put in a massive spike off the $26 level.

Gold coming under selling pressure in very early European trading

Gold opened in Asian trade on a relatively firm note as buyers came in to take advantage of the break in prices. That buying eventually gave way to sellers looking for a bounce to exit from longs. As price dropped down to Friday's closing level (commensurate with the 100 day moving average), longs who had been bottom picking stepped aside removing any support from the market. That allowed the shorts to press it into stops below Friday's low which dropped the metal rapidly into the band of chart support near the $1600 level.

Upon its initial test of this level, it did bounce somewhat but renewed selling then took it back lower and violated this key psychological level.

Should it fail to recapture $1600, the next stop is near the $1580 level. Should that give way, it looks most likely to drop back into the band of congestion on the charts that held the price from late April of this year through the breakout that came in July. Should this occur, the entirety of the leg higher from July will have been erased. The top of that band was centered near $1550 while the bottom of the band was near the $1480 level.

That is rather fascinating to observe considering the fact that the monetary authorities' solution to the woes confronting the European economy and the US economy is further currency debauchment. Some of this is no doubt due to the fact that traders on the losing side (currently the longs) are going to be dealing with increased margins to hold these losing positions come the close of trading Monday (tomorrow) afternoon.

What we are experiencing is very similar to the events of the summer of 2008 when traders began fearing a deflationary outbreak which led to widespread commodity selling as carry trades were unwound. What is different right now is that the US equity markets are not imploding lower ( I suspect we are seeing official sector intervention occuring in there with the Exchange Stabilization Fund very active - whether they can hold it is unclear).

While monetary officials are no doubt quite pleased to see the commodity sector getting pummelled by hedge fund selling, it is going to be very difficult for that sector to continue its freefall without a spillover effect on the equity sector. What's good for the goose is good for the gander. If the global economy is slowing to this extreme to justify the severity of the sell off taking place in commodities, then stocks are overvalued and ripe for a breach of important chart support levels as well. Either the commodity sector will find value based buying very soon or the US stock markets are going to experience a free fall in price.

One further note for those who like to do historical comparisons. The plunge in 2008 took gold down from its peak by approximately 30% before it bottomed out and began its next leg higher. If that same plunge were to occur this time around, the price could drop as low as $1345 or so by comparison. Gold ended last year at $1422 on the front month Comex gold contract so such a plunge would take the metal negative for the year. Those who are buying the physical metal are being given one helluva gift. Scale in buying can take advantage of this setback in price but this is for buyers of physical only. LEveraged futures guys have got to be careful not to let these hedge funds trample you to death in their mindless rush to the exit. Wait for some signs of a bottom before moving in on the long side unless you have extremely deep pockets.

Trader Dan on King World News Weekly Metals Wrap

Please click on the following link to listen to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap.

http://tinyurl.com/3ozndjn

Keep an Eye on Newmont for signs of a bottom in the gold shares

Newmont has recently been one of the best performing gold stocks on the board. As such it should be closely watched for signs of a potential bottom across the entirety of the gold mining sector. Note the chart below and look at the former resistance level near the $60 region. That held the stock in check for some time and prevented it from moving solidly higher. Now that it has decidedly cleared this level, technical analysis principles tell us that this level should provide some support in the way of buying once it is approached again on a retest lower in price. The reason is that buyers who missed the initial move higher and still want to own the stock will use the move lower towards this level as an opportunity to acquire the stock.

It does seem that there were some fairly active buyers in Newmont today. The stock rebounded fairly well off its worst levels of the session. In the process it has created a POTENTIAL hammer formation (not yet confirmed). Some refer to this as a spike low. If the stock can close above $66, that would confirm a bottom is in. It does not mean that the stock will go immediately higher. It only means that the stock has found willing buyers at the $60 level and that it could then move in a sideways pattern marking time until it can build a base for another leg up towards the recent high. Time as always will make things clearer for us.

Gold Chart comments

Gold was taken down very hard this week for several reasons.

First, look at both charts below of the S&P and the CCI. Notice that both are now solidly in the red for this year. What this tells us is that the vast majority of hedge funds have lost money for the year unless they have been very nimble and were able to beat the rest of their world to the sell button.

Also consider that many of their positions are heavily leveraged. Margin calls are now coming in. What do they do? They can obviously sell out of their positions and take the losses or they can try to pony up additional cash and hold the positions a bit longer in the hope that the markets will rally up and let them sell out at a better level or even initiate some new longs.

That helps to explain why gold was hit so hard this week and why many are now questioning its safe haven status as a result.

First, examine the long term charts of the S&P 500 and the CCI. Notice that both charts are underwater for the year.

What positions could a hedge fund actually sell that are PROFITABLE if they need to raise cash? Answer - They have none -  the only market that is still showing a profit for this year (other than the treasuries trade) is GOLD. It started the year at $1422 on the Comex and closed today at $1640. That is a gain of 15% on the year even after the whipping put on it this week. A short note here - silver is back to where it began this year so there are no profits left in it after this week.

Now consider that hedge funds are getting a boat load of redemption requests from disgruntled clients and from those who are simply scared stiff and have had enough of the insane volatility. They want their money back even if it means sticking it under a mattress. That requires these funds to sell the assets that they have to raise the necessary cash.

In other words, gold, is the only profitable investment these funds have that is both liquid and available for them to meet margin calls and meet redemption requests. This is why it is being sold. The selling has nothing to do with it not being a safe haven but rather functioning as an extremely liquid investment that has shown them a solid profit. Winners are getting sold to meet losing trades and redemptions. Nothing more; nothing less.

Once this money flows issue is resolved sufficiently, the factors that have led gold to rise will reassert themselves.

I am a bit amused by those who keep crying up the 2008 debacle as if gold is doomed once again. I can still hear their voices from back then and as I kept some of their emails to amuse myself in the future. The same things are being said now as were being said then.

Yes, a 30% decline in the gold price then was not fun living through as gold was sold off fiercely as carry trades were unwound and a mad scramble for cash commenced for the same reasons I just listed above. However, looking back in hindsight and at the price chart, that steep move lower amounted to a tempest in a tea pot on the longer term chart. Gold went on to more than double in price from that reaction low.

Not that I would be particularly happy about it should it occur, gold could drop as low as $1500 and still not dent the long term uptrend in the metal. If you look at this chart carefully, note that the red uptrend line was actually violated in 2008 leading to cries that the end of the bull market was upon us. However, that foray lower corresponded with the advent of QE1 and the rest is now history.

I expect that before we see the global stock markets utterly implode, we are going to see more concerted Central Bank action, on a global level, to provide more liquidity to these markets in an attempt to prevent any sovereign debt meltdowns or credit lockups. I am not saying it will be effective, I am only stating that anyone who thinks these monetary authorities will sit idly by and do nothing while the global stock markets fall apart, taking the commodity markets with them, is a stranger to the nature of these people.

I will betcha dollars to donuts that the FOMC is still seething over the response of the markets to its latest "Operation Twist". There is no doubt in my mind that they are already planning their next move.