"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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Gold is putting in a "dead cat bounce" in today's session after setting a fresh low of $1268 in early Asian trading last evening. For those of you new to our trader's lexicon - even a dead cat will bounce if it is dropped to the ground from a high enough point.
Look at the volume on the bounce higher however - it is miniscule. There is simply no conviction among the bulls to come wading in feet first and buying with both fists. A market that plunges $100+ in a single day is not normally going to see an abrupt "bout face" unless there are some unusual fundamental occurrences that negate the horrendous technical damage done to the gold chart.
I do not know how to say it other than this - the gold chart stinks to high heaven right now. We are getting some short covering due to shorts booking some profits before the weekend after a nice week's work but other than a few bottom fishers, there is no strong interest in owning gold right now among the institutional crowd and certainly not among most of the large hedge funds. They are short and getting shorter.
Same goes for silver although it did manage to claw its way back above the $20 level; barely, if only for a brief period.
We will have to see if any of this short covering and bottom fishing can take the price of either metal high enough to reach some important technical chart resistance levels above the market to trigger some further buying. Frankly I would be surprised if it does.
I do think that the selling we have seen hit the entirety of the financial markets is a bit overdone as I am not expecting the Fed to pull the plug on their QE program as some seem to have read into the FOMC statement and Bernanke's comments. When markets are this highly leveraged, lopsidedly so, the carnage being inflicting on trading accounts and the subsequent margin calls always result in an amplification of price movement. The bulk of the crowd is all on one side of equities and that can be seen in the extent of the downside movement in the S&P for example.
It looks however as if we are getting some two-sided trade in the Emini S&P futures in today's session so maybe the worst of the reaction in stocks is over. Once the bleeding stems, traders will then have some time to actually think about and reflect more on the comments of the FOMC instead of just reacting to every price tick.
The close today in the S&P will be critical but perhaps the response of traders come Monday will be more telling. If we see the S&P moving higher again and getting back above Thursday's high early in the week, that will be a sign that the "buy the dip" crowd is back. If however the index falters, especially if it violates this week's low, that would portend a deeper retracement. Every bit of this depends on just exactly how the majority interpret the latest round of Fed-speak when it comes to their QE.
Sad isn't it that the once proud US financial market system, which actually traded fundamentals has been reduced to a quivering hulk of jelly begging sustenance from its masters as the Fed.
The US Dollar seems to be the King of the World again although from a technical chart perspective it is stuck in a broad trading range of some 4 full points on the USDX; 84.50 on the top and 80.50 on the bottom.
One look at the Gold Volatility Index is all we need to see to realize that the CME was hiking margins....
Initial margin for speculators is being raised from $7,040 per contract to $8,800. Maintenance levels are going to $8,000 from $6,400.
Obviously the computers there at CME Group are projecting a sharp increase in volatility....
Going back to last November's election, the S&P only remained below the 50 day moving average when there were TWO separate events that unnerved traders/investors. The first was the election of the current President which was greeted as a negative for business. The second was the drama surrounding the so-called, "fiscal cliff" drama unfolding in Washington D.C.
Once we moved past those two events, there has been only one day in which the S&P has CLOSED below the 50 day moving average. That occurred in April of this year and even then, it was only barely beneath this key level.
Today's shellacking, coming on the heels of a huge down day yesterday, has sent the index down quite significantly below the 50 day. As a matter of fact, it also fell below the former resistance level which had temporarily stymied its upward progress back in April before it gave way in May.
Tomorrow's close is therefore going to be significant.
That strong overhead bearish reversal pattern that formed in May has taken on new significance with this close below the 50 day moving average. We might just be seeing the shift from a "BUY the DIP" mentality to a "SELL the RALLY" mentality. If that is the case, it is going to manifest itself quite soon. We will then see overhead resistance levels capping rally efforts while support levels on the downside are broken as the market traces out a deeper move lower.
Based on what I am seeing in this chart, if this market cannot recapture 1620-1618 before the closing bell rings tomorrow, odds would favor a continuation of the move lower down into a congestion range that was in place back in March/April. I have noted that on the chart.
As you can see, the upper portion of that range happens to also coincide with the 38.2% Fibonacci Retracement level of this entire leg higher since late November of last year. My guess is that the market will hold this level if it does indeed get there. If not, well, that is another different story....
During times of market fear, (the rising VIX tells us that we are FINALLY seeing some of that among the equity crowd), the bond market tends to be a safe haven with flows coming out of stocks and into bonds. Right now, flows are coming out of stocks, bonds and commodities; basically out of everything except cash and the Swiss Franc!
We'll see how long that lasts before the "stocks are cheap, cheap, cheap" cry starts up again.
By request....
Note that this chart is based only on CLOSING prices for each month. I have included today's close as the price for June to give some sort of feel for where things currently stand.
The first major Fibonacci retracement level comes in near $1230 based on closing prices. I would look for a zone on either side of that of $10 for a target unless price can quickly recover and recapture $1300.
There are various estimates out there that are being tossed out but the general consensus for most gold producers is somewhere between $1200 - $1250 an ounce or so. Obviously, this is painting with a very broad brush as some producers have lower costs than others and some higher costs, but for a ballpark number, it is probably pretty good.
Some are speaking about production cutbacks if gold prices stay down near current levels or drop into that zone noted above. That is probably true but it all depends on the extent and duration of the lower gold price. If it dips down and pops up, production cuts will not occur. If gold looks as if it is going to linger down in that zone for any length of time, some of those cuts will undoubtedly occur.
The problem is that this is focusing on the supply side. The big issue in front of us is DEMAND. If supply falls off, it matters not one whit if demand is dropping at the same time. If supply falls off and demand increases, now that is an entirely different matter. What we are currently experiencing in gold is a fall off in demand, namely institutional demand as evidenced by the continued decline in the GLD holdings, not to mention the downdraft in Comex gold.
We will need to see some sort of stability in the price of gold before buyers will feel comfortable taking the plunge into mining shares again. When that does occur, there is going to be value found among those that are getting their financial houses in order, cutting costs and seeking to achieve value for shareholders.
Don't try to be a hero and catch a falling knife. Let the market tell you when it has stabilized. Underestimating the extent to which these hedge funds and their maulings of markets, both up and down, can destroy your trading capital is a serious mistake. The sums at their disposal are staggering and those who forget this need to be reminded as to how a grasshopper must feel when surrounded by a flock of hungry starlings.
Europe wasted no time in responding to the Fed's comments when trading commenced over there as an avalanche of selling swamped over the gold market crushing the metal below support levels that continued to give way in succession. As stated in yesterday's missive - institutions want no part of the metal right now as there are hardly any players who see the least signs of inflation on the horizon. Never mind that the costs of so many basic services and goods are rising - those are not caught in the government's numbers nor is the fact that consumer wages remain stagnant.
The economy may be improving in the minds of some but cash strapped consumers are finding their disposable income shrinking meaning that borrowing is going to have to increase if they hope to maintain their "quality of life". While the Fed wants inflation and is dreadfully terrified of deflation, they do not seem to be having much success at inducing the former yet most Americans all seem to realize that everything they depend upon for life is going up in price. Odd isn't it?
I am not sure whether the tail is wagging the dog or the dog is wagging the tail but one can see the interplay between what is going on in the equities and what is going on in the bonds. As the bonds sink, rising interest rates send worries down the spines of the equity crowd which is creating a sort of vicious feedback loop.
Keep in mind, according to my view, the entire US stock market rally has been nothing but a Fed-induced, artificially created bubble which has sent stocks to ridiculously high levels based on the anemic strength in the economy. If the sentiment, that one has to buy every dip in stocks, begins to come into question, then an awful lot of highly leveraged one way bets are going to begin coming unwound. When I see movements of this magnitude, I know some players, big players, are in trouble and are getting mauled.
About the only thing moving higher today is the US Dollar. There was some strength in the front month July hog contract but given this environment, one wonders how long that is going to last. Bellwether copper was kicked in its rear end and of course the readers of this site know all too well what has happened to gold, and especially to silver.
Silver is an inflation play, pure and simple. If there is no inflation in the minds of these big institutions, then there is no reason to own that metal and even more reason to short it. That is what they are doing having broken it down below a support level that I thought would prove a much tougher nut to crack that it did.
This is so eerily reminiscent of 2008 although this time around, the bonds also are proving to be no safe haven as they were back then. As a matter of fact, it looks as if CASH is the place that investors are running into for the moment.
The Australian Dollar, always a fairly reliable harbinger of the broader commodity complex, was pummeled today especially once the news that China's growth had slowed. Along that same line, the GSCI, or Goldman Sachs Commodity Index, was also beaten with an ugly stick.
We will have to see whether one or two days of this is enough to clear the air and bring some stability into these markets but with the excessive amount of margin debt and with extremely large trades going awry, anything is possible.
I will get some analysis and a chart up of gold later on today. Let's just say for now that losing support at $1300 was a big deal, a very big deal. Judging from the massacre occurring in the gold and silver mining shares, we are seeing a complete rout of even some of the long term bulls. The HUI looks like it is now poised to drop all the way to 200, pretty much back to where it was 5 years ago during the depth of the 2008 credit crisis.
Apparently the laws of economics have been discredited as it is entirely possible to create Trillions in paper currencies with no impact whatsoever. The monetary history books are all going to have to be re-written to reflect this.
The caption says it all - once the FOMC statement was released, followed by some comments from Fed Chairman Bernanke, that was all she wrote for gold. Down, down and down it went as the Dollar went up, up and up.
What the market is currently thinking is that if there is any nation where interest rates are going to rise, it will be in the US before it is anywhere else on the planet.
You combine that with equity markets that promise attractive gains, and large sums of money are moving out of their respective currencies and exchanging into US Dollars with which to buy US equities.
As the Dollar moves higher, gold is moving lower.
The problem for gold continues to be the same; investors do not see any signs of inflation, in spite of the Trillions of Dollars that have been conjured into existence, and hence need no inflation hedge. That, plus the fact that while there was turmoil across the world financial markets in the recent past, that seems to have come and gone as far as many are concerned. Where once the theme was "RETURN OF CAPITAL", now we are back to "RETURN ON CAPITAL".
In other words, since investor fears are basically gone for now, and since gold throws off no yield, and since they see no signs of inflation, they are dumping gold or shorting it.
Take a look at the following chart of the GLD, the large gold ETF. Look at how there continues to be a drawdown in gold. Investors are selling out and moving the money elsewhere. For the first time in a very long time, the tonnage has fallen below the 1000 level. That is significant.
Now there is another issue to deal with and this is a technical one. I mentioned that there were a large number of sell stops building down below the $1365-$1360 level. The bears finally got to them in a big way today. In the process, they have really inflicted some damage to this chart.
The weekly gold chart is getting quite ugly to be honest. If gold does not quickly get back above that $1365 level before Friday's close, I am afraid that support is not going to hold down near $1320 and this market is going to reach psychological round number support at the $1300 level. If $1300 gives way, we are going to see a test of $1250.
Notice that gold is trading firmly under its 200 week moving average. The 50 week is moving lower and while the 200 day is still ascending, its slope is leveling off. Markets that are trading below their 200 day moving average are not bullish.
I have mentioned to the readers to ignore all that claptrap about hedge fund short positions, about big bank long positions, taking a contrarian position, etc,. and the rest of that useless COT analysis that so many novices keep touting. It means nothing - all that matters right now is money flows and they are leaving the gold market for the time being.
Something needs to occur to change speculative sentiment in gold. What that is right now is unclear. Even on the weekly chart, gold is firmly entrenched in a bear market having now fallen well off the 20% level from its peak at $1900. As a matter of fact, it is fully 30% off the peak.
At this point for the market to have any consolation for the bulls and to give a hint of a reversal, it is going to have to hold near that all-important 50% Fibonacci retracement level from the 2008 bottom noted on the chart. That is just above $1300. This is why that level must hold.
People keep talking about capitulation in gold. If gold breaks through $1300, you will see what capitulation looks like. I have said it once and will say it again; most of those who bought gold shares back in 2008 believing that they would provide some good protection against the wave of money printing that was going to be unleashed, are cursing the day they ever dropped one dime of their investment capital into those things. Maybe some day they will go somewhere; most of us will be dead and gone by then so hopefully our kids can earn something from them.
With the gold shares descending into the abyss, there is simply no evidence of speculative interest in anything gold or silver right now. Yes, physical demand is strong but it is not strong enough to take prices higher in the face of strong short selling in the paper markets and the continued exodus from GLD.
For now, the Central Bankers remain the Masters of the Universe. Thus far they have not been knocked off of their perches.
Incidentally, the one thing that threatens these demi-gods is the rise in the long end of the yield curve. Bonds are breaking down and yield on the Ten Year hit a 14 month high today! It has reached a level that has turned it back lower over that same period. If it continues rising, we will watch to see what if any impact is might have on the all important real estate market.
It still remains to be seen how in the world the Fed is going to ever be able to exit this QE business and reduce the size of its balance sheet. I suppose they could hold the paper they have until judgment day for all that most of the investment world cares. After all, the problem will be for another generation, is the thinking of our self-centered era.
