Euro Gold closing in on its All Time High

The following chart reveals the strength of gold when priced in terms of the Euro Currency. Notice that it has been steadily working higher and is within striking distance of an overhead resistance level coming in just shy of 1350. If can push through this level, it should be able to match or exceed its all time high.

It has been in a consolidation pattern since late last year but with a definite higher bias as can be seen from the series of higher lows riding along the lower red support line. Notice that mini-trend higher has accelerated since April of this year.

Silver Tacks on the "30" Handle

Short Covering from panicked speculators has led to a sharp rise in silver prices that is also drawing in new buyers who chase momentum.

Note that hedge funds while remaining net longs, had also begun playing silver from the short side as the European sovereign debt crisis had most investors looking at the slowing economic growth environment as one in which to short both copper and silver.  Yesterday's change of wording in the FOMC Statement sent shock waves through the shorts who ran like hell setting the stage for a signficant amount of technically related buying in today's session which commenced in Asian trade last evening.

I am expecting the following chart to change significantly in tomorrow's COT report, even though it will only capture this Tuesday's price action and not the big upmoves Wednesday and today.

We should note here that around noon Chicago time, St. Louis Fed President Bullard, seemed to put the kibosh on the QE 3 party. That promptly took the wind out of the bulls' sails dropping crude oil into negative territory and dragging gasoline lower with it. Silver and then gold both dropped off their best levels during this time frame however both markets remain solidly higher heading into their pit session closes.

With the US equity markets falling apart on Bullard's comments, we will have to keep an eye on the mining sector shares as represented by the HUI to see if they can hold their gains. Both gold and silver bulls will not want to see the HUI go negative after pushing to a significant chart resistance level at the 460 point. Short term oriented traders will sell the shares if this index cannot continue to push past this stubborn 460 level.

Silver needs to close out the week on a strong note to punch through the downtrending resistance line noted on this weekly chart. The ability to put a handle of "30" in front of the price is extremely helpful from both a psychological and technical perspective but a solid trending move is still not yet in the cards until silver can decisively gain the $32.50 level. Even at that, dip buyers should begin making their appearance in this market as the technical posture has changed significantly this week.

Interest Rates Key to Silver Direction

We have said for some time now that Silver will only benefit in a period in which inflation is the main fear and not deflation. That of course implies that the bond and note markets will begin pushing rates HIGHER out of inflation fears.

With this is mind, observe the following chart comparing the price action of Silver to the Yield on the Ten Year Treasury Note. The Silver price is the lighter colored line while the black line is the yield on the ten year. Note how uncannily similar the chart patterns are of the two beginning near the month of October 2010. Why is this? Simple - if interest rates are rising the fears of a slowdown are receding. Silver tends to benefit in such an environment.

Today we were treated to a FOMC statement which hinted at a majority moving towards further action on the bond buying program should economic data warrant such. Perversely for the Fed, any attempt to engage in such a program, which by its nature is designed to PUSH DOWN longer term interest rates, will have the result of sending huge money flows into the commodity sector in general and the precious metals in particular. This will get the attention of the bond vigilantes who will then attempt to sell into the Fed buying driving rates higher instead of lower. After all, whom, besides the Fed, wants to own a bond during a time in which the main fear is inflation???

Gold Needs a Strong Close to End this Week

The following weekly chart provides a bit of longer term perspective as it shows the very solid level of buying support that has marked an accumulation phase by some very large players down below the $1585 - $1565 level. That buying has forged a bottom in this market while it slowly gathered steam for an upside breakout that forced the hands of the speculative shorts and enticed momentum based money flows back onto the long side of the market.

There are two main points to bring away from this chart. The first is that gold has managed to clear a downsloping trend line going back to the its all time peak (in non-inflation adjusted terms). It will tremendously aid the bullish cause should this market close above that line and especially above the $1665 level to end this week.

The second is to note how the market has been recently marching higher along the bottom tine of the pitchfork managing to close each week ABOVE this line since its spring low. This series of higher lows is indicative of a market that is seeing DEMAND arise at a progressively higher price level. That in itself is friendly.

If this market can clear psychological round number resistance at $1700, I expect it to make a fairly rapid run to the $1788 - $1800 level. The reason? Because the move will be starting from a relatively low level of speculative players on the long side in this market.

Remember Open interest has bled out of this market to the extent of over 400K contracts since its peak last year in August. That is an astonishing washout in a year's time! Speculators took their money and headed elsewhere looking for gains. If this market looks as if it is going to begin another trending move to the upside, those funds that were leaving in droves, will be returning in droves to try to capture the move higher and capitalize.

Look at the following chart of the OUTRIGHT LONG positions (Not NET LONGS) of the big managed money/hedge fund community in gold. Since peaking close to 260K contracts near the all time high in gold last year, it has dropped over 50% to the present time. As stated many times over the past few months - the hedge fund community lost interest in gold as it was not trending. They went elsewhere looking for opportunities and found them to a great extent in the grains.

However, this camp LOVES trending markets with lots of momentum, which is why gold will move sharply higher if the algorithms remain solidly on the buy side. That will see the following chart detail a rather abrupt turn higher with the line rising instead of falling. So much of course depends on the actions of the Central Banks but the markets seem to be more and more convinced that the next "PROBLEM" it is going to have to deal with is becoming one of inflation and rising prices rather than deflation and falling prices, thanks mainly to the accomodative monetary policies that many are now expecting to be forthcoming from all corners of the globe.

Silver Breakout Leads to Gold Breakout

Gold put in a very strong showing in today's session the instant the FOMC press release hit the market. All that was necessary was the fact that a few words were changed from "some" to "many" and to "fairly soon". Once traders saw those words, it was off to the races and no looking back.

Traders interpretted this change of wording as evidence that the committee was now largely leaning to a new round of bond buying should future economic data releases confirm the slowdown in growth.

We have noted for some time that Silver would underperform gold during a time in which deflationary or slowing global growth fears are dominant. The exact converse is true when traders begin shifting towards inflationary expectations. Silver leads and then gold follows.

Two days ago silver broke out of its recent congestion pattern as it surged through the $28 level. Gold moved higher that day also pushing through the top of its congestion pattern also as the surge in the grains, combined with higher crude oil, gasoline and heating oil prices had traders concerned that the heretofore rather benign inflationary environment was about to change and change in a big way.


Note on the chart below that gold is now firmly out of the "newest congestion zone" which had been bounded by roughly the $1630 level on the top and is working back into a former congestion zone which top is in a broader range between $1700-$1680.

Short covering by that segment of the hedge fund community which had been playing gold from the short side kicked into high gear once $1630 was taken out and continued today immediately upon the release of the FOMC statement. Fresh buying also came in as momentum based funds now have both metals on their radar screens.

We should now see dip buying surface on any retreats in price as the algorithms are now in the buy mode. Only a drop back below $1610-$1600 would derail this nascent move higher.

PIMCO Buying Gold

Dow Jones is reporting this morning that PIMCO's Commodity Real Return Strategy Fund, with about $20 billion in assets, has raised its gold holdings to 11.5% of it total assets from 10.5% two months ago. The position was apparently taken when gold dipped towards $1500 according to comments from Nic Johnson, its co-portfolio manager.

Their concern is a triple one - loose monetary policy, high levels of sovereign debt and rising commodity prices are going to fuel an inflation outbreak as we move ahead.

Sounds familiar doesn't it?

Here is the point - the chart in gold showed tremendously strong support in gold on any retreats in price down below the $1600 level a short while back. Gold would dip down into these levels but would immediatey attract strong buying and would rebound back higher. WE remarked that this sort of chart action showed ACCUMULATION by deep-pocketed players, whether those were of Asian origin or large investment funds elsewhere. REgardless, these well capitalized players are positioning themselves for what they see coming down the road.

Note, that this is not MOMENTUM BASED buying. That crowd only enters the markets AFTER it starts moving higher and takes out technical resistance levels. They are now coming into gold and into silver. ACCUMULATION puts a floor in a market; momentum based buying drives it higher into a trend.

We'll need to keep a close eye on the yield on the Ten Year Note to see how that acts as we move forward. If the inflation play is replacing the deflation play, we have seen the lows in interest rates for a very long time.

Grain Prices Remaining at Lofty Levels

Word out of the crop tour this AM has sent both corn and soybean prices strongly higher dragging wheat along for the ride.

The supply seems to keep shrinking as each successive yield estimate comes in with a lower number. Once the market comes to grip with the actual supply number for this year, the focus will shift to the demand side of the equation and whether or not the market is doing its job of rationing supplies.

One thing is for certain - we, the consumer, are going to be reeling at the grocery store very soon.

Take a look at my Grain Composite Index - if you thought grain prices were high back at the peak of the commodity bubble in 2008, you ain't seen nuthin' yet! The Index is firmly above that level.

The strong day in the grains, combined with big moves in both gold and silver and another bullish call on oil from Goldman Sachs, has sent the CCI, the Continuous Commodity Index, through the top of its recent trading range. If the CCI does not surrender its gains before the end of the week and remains above that resistance level, from a technical analysis perspective, the trend in commodities will have shifted to UP.

Note how the top of this recent trading range has been in the same zone as the 61.8% Fibonacci retracement level. That makes today's move even more significant. I do not see much in the way of overhead resistance past this point until we get closer to 582 - 585 in this index.

Shifting a bit to the mining sector stocks - the HUI has pushed past 440 and is maintaining its gains as of this hour. It is on course to make a try at heavy resistance centered near 460. If the HUI closes a week above this level, it portends a trending move to the upside which would initially target 540 -555.

Silver has cleared heavy resistance at 29 and is closing in on the last level of chart resistance between it and a handle of "30". If it does that, look for the momentum funds to come piling into this market.

Stealth Mode Rally in Silver Maybe not so Stealthy Anymore

I remarked last week that silver had been slyly working its way higher in very quiet fashion but was knocking on the door of overhead resistance. Today it broke that resistance and so far is doing it in convincing fashion.

Based purely on technical factors, it should try to make a run at $29 where heavier supply awaits. That stands between it and a handle of "30" which will most certainly catch the attention of the momentum crowd.

Take a look at the shorter term moving averages (not labelled). These are the 10 day and 20 day respectively. Notice that late last week BOTH MOVING AVERAGES crossed above the longer term 50 day moving average. This has not been the case since the middle of March of this year! Also notice that both of those are now trending in an upward direction as they pick up the upward shift in momentum.

You will also see the heavier blue line which is the 100 day moving average. That comes in near 28.83, a bit below horizontal resistance near the 29 level. Expect a battle beginning at that level and extending up to $29. This is one of the reasons I expect to see a fairly large amount of supply hit the market near this point. If the silver bulls can eat through and absorb that selling, it will mark a decided shift in sentiment towards the metal.

Downside support lies first near $28 and is staggered at 50 cents intervals below there down to $27.

I should note that this is occuring against a backdrop of a higher CCI (Continuous Commodity Index) which is beginning to move closer to the top of its recent trading range. Note also that this top of the recent trading range happens to correspond EXACTLY with a criticial Fibonacci Retracement level, namely the 61.8% near 566.

If the CCI can clear 570 with gusto, Silver will see an increase in buying.