Monthly Gold Charts - October 2011

I have to keep my comments brief today as it is time for Halloween!

Looks like precious metals owners got a back of tricks today instead of treats. The culprit was the intervention by the Japanese monetary authorities who hit the Yen with a barrage of selling and sent the markets into a tizzy. The subsequent rally in the US Dollar then had the mindless hedgies dumping everything they bought late last week as equities were trashed along with the commodity sector in general.

Copper and silver were both sold off and gold went along for the ride to the downside.

If some of you might have noticed the Treasury bond had a gargantuan 3 point rally after just suffering a three point sell off last Thursday. How's that for ridiculously insane price action. The entire business cycle, just completely changed over the course of the last 4 days. Tomorrow it could merely take 24 hours to re-reverse the business cycle again. This is what computerized trading algorithms have created. And to think this is somehow supposed to be the "smoothly functioning price discovery mechanism".

What happened in the Treasury markets is that the Japanese came into the Forex markets and bought a boatload and then some of US Dollars and had to do something with all those worthless slips of paper so they turned around and bought up the equivalent amount of intervention's worth of worthless Treasuries.

No doubt the officials at the Federal Reserve are glad to see the Japanese doing their Operation Twist for them but I suspect that they are not particularly happy about seeing the Dollar moving higher!

We'll see where the dips buyers surface once again, particularly as Asia moves further into its session.

Happy Halloween to all!

Bank of Japan Intervention in Yen is doomed to Fail

The Bank of Japan stepped into the Forex markets overnight in an attempt to punish the impertinent speculators who have dared to nullify their former intervention efforts undertaken back earlier this year when the nation suffered the onslaught of the earthquake/tsunami.

Note the previous intervention, which I might add was a VERY RARE example of COORDINATED CENTRAL BANK EFFORTS involving the BOJ, the ECB and the FED. If intervention is going to be effective, it will generally need to be coordinated, sustained and have an eventual fundamental backing. Without those factors, it always ends up being a gigantic waste of money.

Note that even this coordinated intervention failed to stem the advance of the Yen. Now are we to believe that the Lone Ranger effort by the Bank of Japan this time around is going to be successful? Hardly. They have bought a bit of time but all that will happen is that speculators will use the intervention to step in on the buy side of the Yen and get it at a lower level.

In the process of intervening however, the Bank of Japan is devaluing the Yen when measured against Gold. Gold still remains a store of value protecting those who own it against the depradations of their own monetary authorities.

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 King World News Weekly Metals Wrap.

http://tinyurl.com/3qzxc6u

Dollar Bulls are Trapped if the RISK TRADES continue

Take a look at the following Commitment of Traders chart detailing the huge number of speculators that are positioned on the Long side of the US Dollar. There was a large amount of talk about the Dollar embarking on a Bull market not all that long ago and that combined with the Flight out of the Euro sent huge numbers of these specs rushing into the Dollar.

When the Europeans rained on their parade this week, the bottom dropped out of the Greenback as there was no one on the other side of the market to buy the Dollar from these specs who were all frantically selling it at the same time.

If the risk trades continue, the Dollar is going to come under additional selling pressure which will likely drop it down into a major support zone on the chart. If that gives way, there exists an enormous amount of speculators who are going to get hurt very badly and will be selling frantically which just might be the firepower to crack this major support zone which has been holding for the last two years.

Weekly Silver Chart

Silver had a very impressive weekly performance gaining more than $4 for the week and managing to squeak out a close above the 50 week moving average.

You will note that it still remains below both the 10 week and the 20 week moving averages which continue heading lower so silver is not out of the woods just yet. One would ideally want to see the metal get above both of these moving averages and see the shorter term 10 week turn higher. That would give us a shift from bearish to bullish on the WEEKLY CHART.

Also, note that downsloping line drawn on the chart that comes in very close to the 10 week moving average. That reinforces this level as resistance that the bulls need to overcome.

The MACD has been a pretty good indicator at measuring the direction and "trendiness" of this market nad it has turned up from a deeply oversold zone. While still bearish it is moving in the right direction.

A push by silver past $37 that can hold that level will turn the tide firmly in favor of the bulls and target $40 for starters.

HUI technical chart

The HUI put on a spectacular showing this week gaining more than 65 points and taking out several overhead resistance levels on its price chart in the process. The catalyst seemed to be the positive response by the broader equity markets to news coming out of Europe regarding their bank recapitalization plan and their funding of the Stability Mechanism. While I am personally repulsed by such actions the facts are that the hedge fund community could not wait for the ink to dry on the press release before they began pouring money back into the Risk Trades.

The resultant rally in stocks fed into the gold mining shares with the HUI actually outperforming gold this week.

We will have to wait to see whether there is a continuance of these risk trades next week but from a technical perspective the strong price action bodes wells for additional gains early next week. That would put the index up against a strong overhead chart resistance level coming in near 595 and extending towards 600. The shares have been stymied near this level in the past so the bulls have a big test of resolve coming.

The push past the last Fibonacci Retracement level of note near 580 should allow the index to first test the level just a few point above today's high. Should the bulls take this out, then the run towards major resistance will commence.

If the index sets back, dip buyers should surface down near the 560 level and again near 545.

My thinking is if we are moving back towards a period when RISK TRADES are back in vogue, the HUI should continue to lead the metals and outperform gold in particular. Note on the chart it is close to decisively ending the downtrend against the gold price. If the shares are going to eventually take a leading role then the horizontal resistance level noted on this ratio chart will need to be bested.

As a side note, that we are seeing some companies in this sector raising their dividends is a good sign and indicates that their management feels that earnings are strong enough to do so and should remain so for the foreseeable future. In other words, they are optimistic on future price prospects for the metal. That is also a sign that we should expect to begin seeing or hearing about planned aquistions by some of the majors or even larger mid-tiers as they look to increase their reserves. That should support the juniors which are of high-quality. This might be occurring already based on the ratio of the GDX to the GDXJ (major to juniors).

Note that since May of this year the majors have been outperforming the juniors as a whole. Beginning late last month (September) that began to change. Apparently some are already sniffing this change and are thinking acquisitions based on the profitability of the larger miners in the sector.

Wall Street Journal Editorial Page Dissects the European Bailout Plan

I would like to recommend the commentary from the editors at the Wall Street Journal dealing with the proposal that came out of Europe yesterday; a proposal which launched a massive short covering squeeze in both the Euro and in the equity markets.

Their editors are much more eloquent than I am but the crux of their analysis is in complete agreement with my own  - all these leaders have done is to temporarily paper over a problem that will not go away until the root of this weed is pulled up and disposed of. That however requires unpleasant business that will no doubt engender a loss in popularity to whatever leaders brash enough to actually roll up their sleeves and get down to the dirty business of fixing the cause of this morass.

Simply put - those governments in fiscal trouble have spent too much for too long and can no longer afford to do so.

If that sounds familiar, it should - it is exactly the path the current administration is leading the US down.

Forestalling the day of reckoning might make political sense in the short term but in the long term it is the stuff that composes the ruin of nations.

Everyone Bails Out Everyone

European deal has something for everyone, except the real problem.

http://online.wsj.com/article/SB10001424052970203687504577001671498250002.html?mod=WSJ_Opinion_AboveLEFTTop

Are Foreign Central Banks Slowing dumping Treasuries

Each week the Federal Reserve provides an updated number for its Custodial Accounts. A very crude way of understanding these is to consider them as a type of savings account for Foreign Central Banks that are held at the New York Branch of the Federal Reserve.

When the US buys goods from a foreign country and pays for those goods with US Dollars, oftentimes it ends up running a trade deficit with that particular nation. The result is that the foreign country ends up with a large amount of Dollars that it needs to "sterilize" in order to prevent an inflationary outbreak. What generally happens with a good portion of these surplus Dollars is that the country in question will purchase US Treasury obligations. That way it gains interest on its trade surplus of US Dollars which constitute part of its overall reserves.

For the sake of simplicity and convenience, the Treasuries are not actually shipped over to that country but are instead held "in custody" for that nation with the New York Branch of the Federal Reserve. Selling the Treasuries in question becomes very easy for the foreign Central Bank as it simply phones or wires  in its instructions and the deal is done.

Note the nearly exponential growth in the number of Treasuries held in these custodial accounts. As you can clearly see, beginning with the credit meltdown here in the US in the summer of 2008, the line has gone parabolic. This is a picture of the amount of indebtedness generated by the US as it took the path of enormous deficit spending to keep the liquidity flowing into the markets.

What strikes me about this chart is that for the last 3 years, the growth in the size of these custodial accounts has been steadily upward with only a few brief periods during which it was interrupted. Even at that, the line on the chart really never dipped all that much moving more or less sideways for a brief interval before resuming its upward path.

However something noteworthy now appears to have been underway since September of this year. The amount of Treasuries held in custody for these foreign Central Banks now appears to be slowly, but steadily declining. It reached a peak of $2.752 trillion the first week of September this year and has now declined to $2.67 trillion as of this week. That is a drop of $82.5 billion.

I do not know the exact composition of these custodial accounts in terms of the duration of the bulk of these Treasuries but I am fairly confident that there is a pretty good mix of both shorter dated and longer dated securities. The Federal Reserve's Operation Twist is designed to purchase $400 billion of longer dated Treasuries as it sells the same amount of shorter dated Treasuries.

I wonder if we are seeing foreign Central Banks using this Operation Twist to unload some of their longer dated Treasuries into the hands of the Fed. The Fed is basically buying, no questions asked. If you plan on getting rid of some of them, why not take advantage of the program?

It might be a bit too early to say with certainty, but if this is the beginning of a trend, it will signify that we are headed for a period of rising interest rates as it is doubtful that the Fed alone could soak up the Treasuries that foreign Central Banks might choose to unload if they begin getting nervous about the prospects of the US Dollar in the months and years ahead.

Stay tuned.