Are we Witnessing a Shift in Investor Sentiment?

As many of you who listen in to my regular weekly radio interview on the KWN Markets and Metals Wrap are aware, in my mind, the most important financial market is the bond or interest rate market. Everything revolves around interest rates and as such, those levels are the key in understanding where traders/investors are in their thinking at any given moment in time.

Take a look at the following chart denoting the interest rate being paid or the yield on the US Ten Year Note. Within the span of a mere 3 weeks or so, this yield has shot up from down near 1.4% all the way to 1.8%. That is a very rapid shift. It is now sitting at levels that we have not seen since the middle of May of this year.

From a technical analysis perspective, it has reached an inflection point. ON the way down, this 1.8% level, held the market in check back late last year and early this year. Once it was broken to the downside in May, it subsequently tried to rally back above that level but failed. From that point on, it was straight downhill.

Now it has regained this level. Where it closes this week is going to be critical to our understanding of where things are headed in the following weeks. Apparently, investors have moved past the European debt crisis in their thinking (at least for the present). Something has gotten their attention to the point that they are pushing up interest rates.

Now, whether the Fed is particularly happy with this remains unclear but one has to suspect that the last thing the Federal Reserve wants to see is these longer dated rates getting too far out of hand. Also, keep in mind that the higher these yields move, the higher the cost of servicing the gargantuan, humungous, mind-boggling, stupendously large (how's that for superlatives?) US federal debt burden will become.

Given the mediocre condition of the US economic recovery, it is difficult for me to envision yields breaching this overhead resistance level. Still with a great deal of speculative short positions in the US bond and note futures markets, their short covering might be enough to take them higher for a while longer. A lot of those positions were put on as a result of anticipating the "slowing global growth" scenario; in other words, deflationary forces.

If this market however does not reverse course soon, chances are we might have seen a long term low point in interest rates. Stay tuned on this one folks as it will have implications for gold.

Also, I am wondering if the following chart might have something to do with bond and note traders shifting away somewhat from the "falling prices" scenario. I doubt that this in itself would be sufficient to take the bloom off of the deflation rose but when combined with the soaring price of grains, it certainly has to regarded at the very least as a contributing factor.

Note that the gasoline market has retraced 61.8% of its entire decline from the peak made earlier this year. That is a key Fibonacci retracement level. If it powers up and through this level, particularly if it closes the week above this level, odds will favor a push towards $3.20 initially followed by a test of the high near $3.40 if the former level does not hold. Generally speaking, if a market fails at the 61.8% level, it will drop back towards the 50% level and retest that to see if the bulls are still eager to buy.

By the way, if the shift towards inflation fears has gained ascendancy over the fear of deflation, you silver guys will be very happy indeed. Again, let's watch what develops. It is still too early too tell and we are not out of the wood yet on the European debt mess but things are indeed getting interesting.

Retail Sales Number Derails QE Expectations

This morning's Retail Sales number came in above expectations giving those expecting a Fed move on the QE front at the upcoming Jackson Hole summit reason for pause. The number caught a lot of folks off guard and while it was not spectacular, it was not in the "the consumer is not spending money" category. The market interpretted it as another reason for the Fed NOT TO ACT.

Gold, which had been moving higher in its recent consolidation range until yesterday, immediately fell back on the data as the further squashing of another round of bond buying in early September seems even more remote at this point.

Still it did attract value based buying just above the $1590 level and is currently back above the psychologically significant $1600 level. Whether it can stay there without strong expectations of a forthcoming QE is unclear however.

It does seem as if stubborn strength in crude oil, particularly in Brent, is keeping selling from becoming too aggressive in gold especially with the bonds moving lower and interest rates moving up again. The CCI and the CRB are both higher today which helps feed into more of an inflation scenario rather than the deflationary psyche which has gripped these markets for so long. Additionally, an article in a prestigious European based newspaper dealing with a potential breakup of the Euro has kept a decent floor under the gold price.

A quick explanation for those who seem unclear about my comments from yesterday regarding hedge fund money flows. I mentioned that gold needs a spark to break it out of this range to the upside; one which will bring in speculative flows from the hedgies on the long side of the market to send it forth on a trending move higher. Let me remind those who are unclear on this - hedge fund money flows dominate our financial markets today, whether we like it or not. If they are not committing to a market in size on the long side, it is not going to be able to sustain a trending move higher. Most of that crowd are momentum players meaning that they need to find a market that is moving and has some momentum to it, whether that is up or down, in order to make any money off of their algorithms. For the most part, the hedge fund crowd is mindless relying on its computers to do their thinking for them. When markets range trade, they lose interest because these systems generally do not perform well in sideways markets. Locals and other large traders love these conditions on the other hand.

What is supporting gold on the downside is not hedge fund money but rather value based buying originating out of Asia and from other large entities which actually study fundamentals and make buying or selling decisions based upon that analysis. We curse the hedge funds when they are liquidating longs or establishing new short positions in gold or in silver but keep in mind, it is these same clumsy trading clods that also drive these metals higher when their computers flip over to the buy side. Love 'em or hate 'em, they are a force to be reckoned with; any analysis of the markets that disregards their impact is not worth the paper it is written on.

Gold Retreats from the Top of its Trading Range

Nothing doing on gold being able to break out from its consolidation pattern. Last week I showed a chart with gold right at the very top of that range and working into a heavy resistance level. Today it failed to better that resistance and was shoved back lower meaning that the odds favor it working lower within that range from here as we wait for the next round of buying support to surface. It should be able to garner buying near $1600 initially on down towards $1585 should that not hold it.

Keep in mind that this market must have a spark to take it up and out of this range. Until it does, the consolidation pattern remains in effect.

There are several factors working in gold's favor but until we get the hedge fund community to come back in on the long side in a big way, the needed firepower to kick off a trending move is not there.

Trader Dan on King World News Markets and Metals Wrap

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

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Gold right at the Top of its Recent Trading Range

Gold has pushed to the very top of its recent trading range as it works within the confines of its consolidation pattern noted on the chart below.

It either mounts a solid breakout this time around or it will fall back towards $1600 and slightly below once again.

I have noted that for the last 5 weeks or so, the lows have been slowly creeping higher hinting at market strength. It simply needs a spark, something to ignite it and push it past the strong selling pressure emerging between $1620 - $1630.

Today's strength is predicated on news out of China showing its economy slowing also. Traders are expecting the Chinese authorities to therefore be more inclined towards further monetary accomodation there also.

However, bond yields are moving lower today and equities are flat to lower suggesting that traders are hesitant to read too muchn into the Chinese news. The focus continues to be on Jackson Hole at the end of this month and early September for the ECB. My guess is that neither one of these Central Banks is going to do anything on the bond buying front.

As a general rule of thumb, the 4th quarter tends to favor a stronger gold price which is helpful to the cause of the bulls. The summer doldrums however are in full force as volume in the gold pit is pitifully low. In such an environment, relatively small orders are able to push prices around rather easily resulting in times at some wild swings. Right now watching gold trader is about as interesting as watching paint dry.

The HUI has pushed strongly past the resistance level at 420 and is now on course for a push towards the 440 level.

The HUI to Gold ratio continues to improve with the mining shares leading the bullion price for a change.

Euro Gold Hinting at Upside Breakout

US centered investors/traders more often than not develop a US Dollar-centric view of the price of commodities, gold included. As such we oftentimes can miss how a large portion of the global investment community can be viewing the price action of an individual asset.

It is no secret that the current epicenter for global economic troubles is Europe. Sovereign debt woes and squabbles among the various members of the EU have led to a sort of impasse which is sapping confidence from investors in that corner of the world.

The result has been a significant amount of gold buying as a safe haven among Europeans.

This is quite noticeable when one compares the current chart of gold priced in Euros to a gold chart priced in US Dollar terms.

Frankly, Euro gold has a much stronger chart than US Dollar priced gold currently has. As a matter of fact, you can see from the following chart, that Euro Gold is a mere 50 euros or so just off its all time high! Compare that to US Dollar priced gold which is currently trading closer to $300 off its best all time level.

Unless we get a significant downside move in EuroGold, US Dollar gold bears are going to have their work cut out for them getting much more in the way of additional downside price action.

Unleaded Gasoline Flirting with the $3.00 Level

One of the casualties of all this chatter about another round of funny money from the Monetary Masters of the Universe is the price of Unleaded Gasoline. Throw in a dose of tensions in the Mid-East on top of this, and you get a market that is clearly going to cause headaches for the Central Planners if they stupidly unleash another round of Quantitative Easing at the end of this month or early in September.

Consumers will soon be reeling from the effects of rising grain prices related to the worst drought in decades to have struck the critical corn and soybean growing regions of the US. The impact of this surge in grains is going to be most deeply felt later this winter and into early spring of next year as the poultry, pork and beef industry will have no choice but to pass this surge in feed costs along to the consumer. However, it will not take that long for the impact to felt as cereal, bread, pasta, etc, all start rising within the near future.

Consider this, the central bankers have not yet given the decided go-ahead for another round of bond buying and already we are watching the price of commodities moving ahead, right at the exact time that the US economy is on life-support, with its job creating engine having blown a gasket.

These meddling Central Bankers may feel it is their divinely-inspired purpose in life to create an environment of ever-rising stock markets, but in the process of so-doing, they have sown the seeds for the ruination of the middle class and have heaped another lead weight on those already struggling to barely get by.

Food and energy are the two essentials for modern life. They are about to get more expensive if Wall Street pressures the Fed and the ECB into another round of bond buying.

Take a look at the CCI Chart below. Notice that it has been in a downtrend since early last year. This time however it looks as if it is trying to change that. It is currently bumping up against an overhead resistance level near 565. Unlike the rally in July-Aug of 2011 and that of Jan-Feb of this year, which rallies prompty and abruptly fizzled out as prices then resumed a sharp fall, this latest rally is showing signs of "sticking" and moving sideways in more of a consolidation type pattern rather than a bear market bounce.

If this index takes out the key 38.2% Fibonacci retracement level coming in near 575, look for gold to break out above its resistance levels on the chart as well. Why? It will indicate that trader psychology has moved past any deflation scares and is now shifting toward the inflation front. Such an event would have to be accompanied by a breakdown in the longer dated Treasuries and bond markets.

Note what has been happening to the yield on the Ten Year Treasury Note over the past two weeks, but particularly this current week. It has managed to clear a resistance hurdle at the 1.7% level. We need to keep a close eye on this. If we are going to get a full asset shift away from bonds and a solid rotation into equities and tangibles, yields will continue to rise steadily higher as money exits from this sector. My guess is that the Fed is also keenly watching this particular chart. The LAST THING That they want is higher longer dated interest rates.

Gold and Silver Continue Marking Time

Both Gold and Silver remain in consolidation patterns with tightening ranges as speculative HOT money flows which are exiting are being met by value-based buying and accumulation by stronger hands.

The loss of speculative interest in the precious metals over the last few months can be seen by the steady decline in overall open interest (the number of contracts open). Generally speaking, whenever speculators are interested in establishing positions in a particular market, the open interest will rise. When they are not, the open interest will fall.

Look at the following open interest chart of gold and tell me which of the two above-mentioned possibilities is occuring? Answer - speculative interest has been drying up in the gold market.

The reason for this is simple - the hot money crowd has no clear conviction as to whether or not the two big Central Banks of the West are going to move forward with a clearly defined bond buying program (aka - Quantitative Easing) of sufficient size to counter the effects of the sovereign debt crisis in Europe and the abysmal rate of growth in the US. That has sent them looking elsewhere for trading opportunities which they have found in the grain markets. While open interest has been shrinking in gold and in silver, it has been soaring across the grains.

Take a look at the following chart of Soybeans and note the vast difference in the open interest and by consequence, the VAST DIFFERENCE in its price chart.

What this once again demonstrates is that the driver of today's markets remains the gigantic hedge funds and the rest of the hot money crowd. Once they train their guns on a market and come in on the long side in size, it will move higher. Whenever they lose interest, it will drift lower and if they exit their longs in large numbers, it will move lower quite sharply unless it is countered by extremely large buying of commercial interests and other deep pocketed spectulative forces.

Keep this in mind whenever you read comments that the current malaise in the gold and silver markets is being orchestrated by the bullion banks so that they can position themselves on the long side of the market for the next wave higher. That is pure nonsense. The gold and silver markets are currently moving lower because the hot money crowd has currently lost interest in them and is putting its money to work in other markets for the time being as they chase profits. Markets in sideways patterns do not make money for hedge funds. They require TRENDING MARKETS to ply their algorithms. Any hedge fund manager that wishes to retain its clients will, by necessity, be forced to look for markets that are trending and once they find them, that is where their monies will be put to work.

I wish that my friends in the gold community who keep attributing every single period of downward price action or sideway activity in the gold market to some nefarious suppression attempt by the bullion banks would realize that they are losing credibility among professionals whenever they assert such things. As a firm believer in the view that the feds have a vested interest in keeping the gold price under wraps, it is distressing to read some of the recent comments that I have seen attempting to explain why gold and silver are currently not trending higher.

I have stated clearly previously and repeatedly, that an objective analysis of price action and open interest that includes the Commitment of Traders reports, reveals that price suppression by the bullion banks occurs during periods of RISING OPEN INTEREST during which the large buy orders of speculative forces are met and attempted to be countered by large blocks of sell orders originating from the bullion banks. The selling, which is vastly different from ordinary scale-up selling programs that we see in every single commodity futures market, is designed to absorb as many of the hedge fund buy orders as possible to slow the upward progress of the gold market.

I have remarked in the past that sellers by nature wish to receive as HIGH A PRICE AS POSSIBLE for their product and thus will not try to OPPOSE a rise in price brough about by determined speculators. They will wisely sell only as much as is needed to offset their risk or lock in profitable prices for the future. AS price continues to rise, they will sell more at these higher levels and are obviously happy to see speculators take prices ever higher. Why would they ever attempt to actually knock the price lower if they are a legitimate hedger? If someone is determined to pay me a lot more money for my product, I'll be damned if I am going to make a serious effort to try to prevent them!

That is not what we see in gold however as bullion bank sell orders oftentimes come with a ferocity that is mind boggling to any trader that can watch the screen. However, this almost inevitably and with only rare exceptions occurs in a rising gold market with rising open interest. Note on that previous gold chart shown above that we did witness an exception with a bout of short covering among some of the big bullion banks on that run to $1900 and a corresponding decrease in total open interest - that was indeed a rarity but one that will at some point be witnessed again in the future.

The exact opposite occurs in a falling gold market - open interest declines as the bullion banks who have instituted the majority of the short positions then use the long liquidation wave to cover those shorts and realize their cash gains in the paper market. Remember as existing longs sell out and existing shorts buy back or cover their positions, open interest shrinks or declines. The result is that the NET LONG position of the speculators shrinks while the NET SHORT position of the bullion banks decreases. Recently we have even seen the relatively rare situation where the SWAP DEALERS, another normally negative force in the gold market, have actually managed to briefly hit a NET LONG position, albeit a small one.

That is what we are currently witnessing in both gold and silver - nothing more and nothing less. When we do get the return of speculative monies into the gold and silver markets once overhead technical resistance levels are taken out, look for the bullion banks and swap dealers to once again resume their selling programs.