Lack of Conviction - More Volatility Ahead

Investors/Traders are growing more confused and uncertain as to market direction and many are heading to the sidelines or scaling back the size of their positions in this very difficult trading environment. Witness the type of wild moves we are getting in the currency markets, especially the Japanese Yen, and you are seeing these CARRY TRADES involving the Yen being unwound.

When traders place these highly leveraged bets, they expect LOW VOLATILITY in the carry currency. When that does not occur, but rather the opposite takes place, it wreaks havoc on their positions and they have no choice but to liquidate or reduce market exposure at the very least. The results are unpredictable price movements across a host of markets and extremely wide trading ranges as so many of these hedge funds are all on the same side in the markets they are trading that there is hardly anyone to take the other side as they exit.

The Nikkei is now down 18% from its year-to-date high as the continued strength in the Yen is the carry trade being unwound. AS a matter of fact, the Yen had its single biggest daily gain against the US Dollar in over THREE YEARS! Tell me that the Central Banks have not fed and fostered and nourished this insanely leveraged speculative mania that we have been seeing in equities. It is ALL one massive bubble whose fortunes are tied exclusively to the continuation of enormous Central Bank bond buying policies.

The problem in Japan is that investors there are losing confidence in the ability of the Abe government and the Bank of Japan to actually accomplish what they have promised to do. In other words, the aura of invincibility of the Central Banks is beginning to wane.

Silver is getting whacked extremely hard as it has not been able to recapture most critical support at the $22 level. Failure to get back above there almost immediately is going to send it down to retest the $20 level. It was getting a bit of help from copper but now that copper is swooning after temporarily moving higher on supply disruption fears, that leg of support for the grey metal has been cut off.

Gold is flirting with support near the $1365 level with bears eyeing those stops that are building just below that level. If the physical markets blink and do not quickly step up their pace of gold buying, it too looks vulnerable to further downside. I fear that if bears are able to reach those stops and set them off, a cascade of selling will catch the lower-down stops and take this market all the way back to $1340.

I have said it many times of late and will say so again - Gold must have a catalyst of some sort to reverse the downtrend and give traders a reason to chase prices higher. They are looking to sell rallies, not buy dips. The only reason for any buying in this pit right now is due to strong physical off-take. If that fades...


The HUI continues to act as a drag on the metal. That overhead gap noted on the chart is like a THE WALL in GAME OF THRONES. It must be breached if the night walkers are going to invade the realm of men. Translation - until that gap is closed, the HUI is going nowhere. There simply is no reason for the bears to cover and thus no reason for the bulls to chase prices higher either.

A bit of parting advice for TRADERS out there... be very careful - watch your position size does not get too large for your account right now, especially if you are trading currencies, and forget all the glorious predictions and COT analysis and other claptrap. Right now, none of it means anything. All the matters is money flows and carry trades. If you happen to get caught on the wrong side of this, your career as a trader is going to be rather fleeting.

Investors with a longer time horizon obviously have a different perspective on things because we all know where this is going to go.

 

Further Signs of Internal Weakening in the US

Most of you who have read this blog for any length of time are by now familiar with my common refrain that we are witnessing an America in decline. I believe the symptoms cut across the cultural, financial, political and educational aspects of the nation.

Vice is encouraged, commended or praised by elitists as traditional standards of righteousness or morality are ridiculed or even mocked. The monetary system is hopelessly corrupted as it is addicted to cheap credit. Economic "growth" depends upon various forms of stimulus and the creation of revolving bubbles moving from one sector to the next now seems to be a permanent fixture. The public education system has produced a generation which seems to have little if any understanding of history and practically no ability to deeply think (witness the proliferation of one reality TV show after another where instead of living their own lives, the viewers live the lives of others).

The thing that really troubles me however is the corruption of our political system, in particular the ever-increasing size and role of the federal government. I am watching in stunned disbelief that a government agency, the IRS, could target and harass American citizens merely because they happen to share an opposing view of government than the current administration. We watch reporters have their phones bugged and reporters doing their jobs to ferret out truth either being charged as criminals by the government or harassed in other manners. If that was not frightening enough, we now learn that phone calls and communications of our citizens are being monitored effectively destroying any privacy rights that we might have.

Additionally we have American citizens killed in Benghazi because apparently an election was upcoming and news of that nature was not conducive to the re-election efforts. We have regulatory agencies such as the EPA answering to no one who are running roughshod over the property rights of many law-abiding citizens as further evidence that the Administrative State, the 4th branch of government, no longer seems to have any constraints on its power.

I truly believe that Liberty itself is increasingly under assault in this nation and am fearful at times that it will be lost.

Take a look at the following story which gives me hope however. It comes out of northern Colorado. This is proof positive to me that liberty is alive and well in this nation, in spite of the onslaught being made against it.

Colorado counties mull forming new state, North Colorado

Read more: http://www.foxnews.com/politics/2013/06/09/colorado-county-proposes-51st-state-north-colorado/#ixzz2Vk9BQXXZ

I wish these folks well in their endeavor. Quite honestly, I expect to see this becoming a trend. I used to see the division in this nation as between red states and blue states and to a certain extent that is still very true. However, more and more I am coming to the conclusion that it is not so much the former but rather a polarization between urban dwellers and rural dwellers. If you look at a map of the US broken down by county, it is almost a given that those counties comprising the big cities are predominantly blue while those counties that encompass rural areas are predominantly red. Perhaps this is how the nation will eventually rectify the deep and unbridgeable division that besets it.

Trader Dan Interviewed at 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 at the KWN Weekly Metals Wrap.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/6/8_KWN_Weekly_Metals_Wrap.html

Gold Specs Washed out and Wrung on Friday

Once again we get a Friday with a payrolls number and once again we get a wave of selling in the gold pit. It does seem as if this has been pretty much the norm for as long as I can remember.

The catalyst was the "Goldlilocks" jobs number of 175,000. I have no idea where this kind of rubbish comes from but somehow, "analysts are in agreement" that the number was not too hot and not too cold, but just perfect, at least for equities (when is anything not perfect for equities these days?).

The talk was that a stronger number would have meant the Fed was going to dial back on its bond buying program or TAPER sooner than expected. A weaker number would have ensured more QE but would have been regarded as disappoint for the overall economy. It seems to me that when it comes to equities, it is "HEADS - I win; TAILS - You lose".

Perversely enough, equity perma bulls were cheering the number as being conducive to no cutting short of the current round of QE but gold bears were crying up the number as proof positive that the economy was coming around and that the Fed was going to indeed begin tapering? Seriously, both pits looked at the same data and came up with two completely, antithetical hypotheses.

Bonds got in on the action as well as traders in that pit seized on the 175,000 number as evidence that the bond buying was going to taper off. Down they went once again and up went long term interest rates. AS a matter of fact, the yield on the Ten Year Note closed at 2.161%, fully 4% higher on the day.

The bond chart is increasingly looking like it wants to break down further as rallies cannot seem to stick. If they take out this week's and last week's low anytime soon, they could easily drop another 3 full points. Both the Fed and the Bank of Japan are now experiencing something that I am sure is not set down in their playbook, mainly how to deal with rising long term interest rates in economies that are not strong enough to handle them.

That brings me back to gold - with safe havens being jettisoned so that money can be put to work in equity markets, "gold is looking for love in all the wrong places; looking for love in too many faces," to quote an old Johnnie Lee song. Any of the readers who ever had a chance to visit legendary Gilleys down in Pasadena, Texas, before it burned down, will remember Johnnie. The metal just cannot seem to engender any sustained speculative buying. All that money is chasing equities instead of no yield gold.

While this week's COT report shows some short covering on the part of the hedge fund community, rest assured that they were selling quite vigorously today. We saw some light covering on their part with the pop through $1400 but when it stalled out, they were back to selling.

I have said it here many times recently and will say it again - specs are looking to sell rallies in gold. They will do so until it can convincingly clear $1420. Those who keep talking "Bullish" on gold while the specs are in a selling mood, simply are not experienced traders. Specs drive markets; not commercials. When the speculative selling trend reverses course and they move to buy dips, then and only then will gold make a SUSTAINED move higher. If anything, gold's poor close this week will further embolden the bears early next week. It will be up to Asian buying to save the day for the yellow metal.

The gold shares, as evidenced by the HUI, cannot find any strong sponsorship. Technically, until the HUI can close the chart gap between 285-301 or so, they are stuck going nowhere. That gap is critical to the future of the mining shares. It will either be filled and have a close ABOVE IT, or it will continue to act as an overhead barrier blocking all pops higher from becoming a sustained trend higher. I am hopeful that the bottom near 244 does not fail; if it does, the gap will have been proved to be an ISLAND GAP lower and the index could fall all the way to 200. At that point my guess is that even the long term holders of the gold shares will curse the day they ever thought of owning any of these things and will probably never return to the mining sector as traders or investors as long as they live.

The Dollar looks to have been stymied in its upward march at the 84 level on the USDX. Perhaps it is carving out a trading range; I am unclear. It will take a weekly push past 84 now to reignite the uptrend that has been in place for nearly a year now. Support lies at every round number interval on the way down; first at this week's low near 81 followed by 80 and then by very strong support near 79.

Refer to Monday's Headline Post

I thought this would make a good quip but the fact is that it is true. The Dollar is once again getting whacked, thanks mainly to ECB President's rather rose-colored glasses prognosis of the Eurozone economy. Then again, what is he supposed to say: "the unemployment rate among the youth is approaching critical mass but what the heck do we care about that? Most of us will be dead and long gone by the time it goes kaput. Hey, things could be worse so lighten up and relax a bit"?

If you want to see two charts that pretty much tell it all, take a look at the Nikkei and the Japanese Yen.

The Nikkei futures have dropped 17% in less than a month! That is mind-boggling to me.

Now look at the Yen.. it has staged a 7% rally over that same time period and is having a monster day to the upside today. It was up nearly 3% at one point during this trading session alone!

What you are seeing taking place is now a reversal of the Yen carry trade in which money was borrowed in Yen terms and leveraged into stock buys for even greater gains. The rally in the Yen has caused these highly leveraged trades to disintegrate and that is causing a ripple effect across the currency markets and the equity markets as those trades in which every mother and their dog was long the US Dollar and long global equities and are now trying to exit those trades. That is why we are seeing the Dollar being crushed and is also the reason we are seeing gold moving higher.

Remember, the big trade was to sell gold and take that money and put it into equities. When the equity markets begin breaking down, money flows out of that sector and back into gold while the Dollar breaks down.

Interest rates on the Ten Year, which, a week ago, were near 2.2%, today fell below 2% at one point. I repeat something which I have said over and over again at this site. This bond buying, QE, easy money policy being followed by the Fed has created the most insane volatility I recall ever witnessing in the totality of my entire trading career. I pity the poor risk manager at a mortgage company, an insurance firm, a pension fund, etc. trying to institute hedges to mitigate risk for his/her firm. There is not a single person on the planet who can read this madness and project where this is going more than one day in advance! Imagine trying to decide which side of the market you are supposed to get protection from in this sort of environment!

Tomorrow we get another payrolls number so this incessant, unprecedented volatility will just continue if not become even more exacerbated. Sigh....

I might make a note here to say, this is what I expect will eventually happen to gold at some point down the road when this monetary experiment in unlimited money creation has proved to be an ultimate failure. The investment world has been herded and corralled into all taking the same side of the same trade knowing that they are being backstopped by the Central Bankers. Once the realization dawns upon them that not a single structural problem has been solved and that the entire "recovery" depends on more crack cocaine being shoved into the victim to ward off the withdrawal symptoms, faith in the almighty Central Banks is going to evaporate.

Case in point is what is going on in Japan. The initial euphoria about the bold new monetary and political reform plan to boost the Japanese economy has rapidly soured. Skepticism is rising and with it, caution, and the desire to not be the one left looking for a chair in which to sit when the music finally stops playing.

Gold has been up and down like a damned yo-yo. Until it can strongly clear $1420, it looks as if the rallies continue being sold. However, the longer this market refuses to break down, the more nervous the bears are going to become and will begin to look for an exit. Keep in mind that while short covering is not enough to build a lasting rally upon, ALL REVERSALS IN DOWNTRENDS BEGIN WITH SHORT COVERING. The test then becomes whether or not NEW MONEY flows into that market. If it does, the trend reverses; if it does not, the market moves lower once the short covering evaporates and runs its course.

Dollar Plummets - Gold Soars

Up, Down; Up, Down; Up, Down... On and on it goes. Today's big market moving data was the ISM manufacturing number. It came in under 50, surprising nearly everyone on the planet. As a matter of fact, the reading at 49, was the lowest since June 2009! That is saying something indeed.

As soon as that number hit the wires, the currency markets erupted in a turmoil. The usual knee-jerk reaction hit Dollar/Yen and up went the "safe haven" Yen (I still have a hard time putting those words together in one phrase for the sheer idiocy of the rationale behind it), up went the Euro and down plunged the US Dollar, falling through a strong support level I might add.

Here is the problem - the entire world is long dollars. Take a look at the following Chart of the Commitment of Traders in the Greenback. Notice I am not posting the usual breakdown which is the Disaggregated Report for simplicity's sake. Just look at the specs, both the large ones and the small ones. This is what can happen when that group is all crowded together on one side of a trade and a chart level gets taken out. There is literally no one to take the other side of their buying or selling, in this case selling.

What that weak ISM number did was to once again put a temporary halt to the idea that the Fed was going to imminently begin the "tapering" of their bond buying program. That was all gold needed to hear before it reversed its downside reversal on Friday, from its upside reversal on Thursday of last week. In other words, the YO-YO market is acting like a YO-YO with its fortunes tied to both the US Dollar and the QE program. With the Dollar breaking down, gold is breaking up. It really is that simple. Now, if we get one of those strong payrolls numbers again...well, you figure it out.

Gold still needs to clear $1420 to get a larger wave of short covering among that hedge fund category. ideally that will occur against a backdrop of a push PAST 290 on the HUI, preferably through 301. They are still selling rallies but if the technicals continue to improve on the gold chart, their algorithms are going to start lifting them off of the short side. The bias in the gold chart is still down and will be until gold can push past $1440.

It will be interesting to see how the specs react to GLD this week. I am curious as to whether they are going to start returning to the buy side or will merely use this rally to further jettison their gold holdings. Keep in mind that there are a lot of money managers out there who still want to buy dips in stocks, whether here in the US or in Japan. They are going to raise funds to do so where and when they can so the onus is on the gold bulls to prove that this is more than a rally back to the top of a trading range market.

Gold ETF, GLD, Bleeding Inventory

Traders and Hedge Fund Managers continue to monitor the largest gold ETF, GLD, for clues to its next direction. For the entirety of this year, 2013, the amount of tonnes of gold in GLD has been dropping - rather sharply at that.

Regardless of where this gold is going, and that is indeed a legitimate question, the facts are that hedge funds, which are the drivers of today's markets, are leaving GLD in droves and taking those funds to play with equities where the big returns are currently coming from.

I would watch to see if this drawdown of gold stores in GLD shows some sign of abating before getting too bulled up about gold. Please see that Goldman Sachs Commodity Index chart that I posted earlier today. One cannot make much of a case for inflationary pressures building in the economy when the commodity complex is not confirming it!

If you look at that chart, and look at this chart, you can see that the biggest speculators on the planet are currently not at all enamored with gold the way that they had once been. When they fall in love with the metal again, and we will know that by monitoring this chart, we will see the results in higher prices that are sustained alongside of dip buying on price retreats. Currently we have specs SELLING RALLIES in gold and covering on moves into support levels when it appears that support will not give way.

Meanwhile, we continue to see many in the gold community continuing to remain stubbornly, wildly bullish. This is more wishful fantasy than solid analysis. Expect a broken clock to be correct at least twice a day. At some point the gold bulls will have their day. Those who have to trade for a living however would do better to try to ascertain the future actions of the hedge funds, because it is that group which will drive the gold price. As long as they are in a selling mood, rallies will not stick.

What is needed is something that changes the complexion of the technical price charts. When that occurs, the computer algorithms of the hedgies will return to buying. Then and only then can we get excited about a SUSTAINED move higher in gold.

One of the greatest mistakes many would-be traders make is allowing emotions, hopes, wishes, etc. to cloud their judgment of what currently is. Wishful thinking is not a trader's friend. If you want to survive in these markets, and prosper, you must become a hard-nosed realist able to master your emotions. Show me an emotional trader, and I will show you another failed statistic. Trading is a business. Treat it that way. Get control of your emotions, both wild-eyed optimism and excessive pessimism. Neither of these are your friend. Read the price action from the chart and then form an opinion. Far too many form their opinion and then go the price chart and try to make IT (the price chart) conform to their opinion. Novices do this and fail. Professionals do not. The play the cards that are dealt to them.

Commodity Prices Continuing Trend of Downward Movement

Following is a weekly chart of the Goldman Sachs Commodity Index or GSCI. Notice the large red line moving from left to lower right. That indicates the general overall trend of the sector which as you can clearly see has not been bullish.

What you are seeing here in graphic form is the result of money flows OUT of the sector by large speculative forces. That money is of course flowing IN to equities.

I am not sure what it will take for this trend to reverse but until it does, upside rallies in silver are going to be difficult to sustain.

One thing you might also notice is that there seems to be a decent base of support between 575-550 on this chart. My take on this is that while the overall complex is moving lower in price, certain sectors within it seem to be near values that would indicate that there is not a lot of additional downside left. Determining exactly what those sectors are takes a great deal of fundamental research and well as comparing chart action to those findings.

What this means is that while we are a long way from seeing sharp upside rallies and SUSTAINED uptrends in the complex as a whole, certain individual markets may merely grind sideways to slightly lower for the foreseeable future until something happens to arrest this general development.

 For investors with a longer term time frame (notice, I am not saying 'traders'), we might be nearing the cost of production in some commodities meaning that your downside is limited.

I would also add a caveat here; if that base at 550 were to give way for any reason, look out, because the deflationary forces would be reasserting themselves. If that were to occur, and I would be very surprised if it did, expect for the bond market to reverse course and for rates to start dropping once again.