"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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The following chart is a bit dated as it only covers through the first quarter of this year but even at that, the trend is glaringly obvious - down!
Combine this with a CRB index or Goldman Sachs Commodity Index that cannot gain any upside traction, abysmal to miniscule job creation and of those, many are now part time jobs thanks to Obamacare, flat to relatively stagnant wages, and you can understand why, even without this chart, that the factors necessary to push prices sharply higher are currently missing.
I also would include something which is more anecdotal but which I feel is also a contributing factor to the deflationary pressures being exerted upon the US economy in general, namely, the fallout from Obamacare in the area of soaring health insurance for a large number of Americans. You have already or will have very soon, heard the horror stories as they continue to increase about health insurance premiums tripling for many Americans. In an environment in which wages are flat, that price increase comes right off the top of the consumers' disposable income. That means less money available for discretionary spending.
I believe this is what we are seeing reflected in this chart.
From the standpoint of gold, this helps explain why the metal keeps sinking lower. With the US Dollar not falling apart, the urgency to own the metal is subsiding among Western-based investors. That is evident from the continued drawdown in the reported gold holdings of the giant ETF, GLD.
Also, when one considers especially an artificially goosed US equity market working its way higher and higher throwing off ridiculous gains practically month after month, investment capital is going to need a compelling reason to be taken out of that sector and allocated into gold. Since gold pays no yield all investment gains from the metal must necessarily come from capital appreciation. In other words, if the price of gold does not keep rising, why own it when the Fed has created a perpetual motion machine in the form of US stocks?
This is why I keep coming back to the same point that I have been making - it is going to take something, some event, some occurrence, something, to break CONFIDENCE in the US Dollar or in the US monetary and political leaders for gold to respond upward in price.
Most of you who read this site, and I myself believe that the US is on an unsustainable path which is going to end badly. I believe over the long term, we will be proven correct but here is the current issue - as bad as the US is, does anyone believe that the UK, Japan, the Euro Zone, etc are really and truthfully any better? They have the same problem as we do, out of control spending at their national levels and gargantuan debt levels. There remains malinvestment in China which has its own set of problems while Brazil also has its issues to deal with.
The current monetary system, with the US Dollar as the Reserve currency is fatally wounded but what is there realistically to replace it at this point? Answer - nothing! At some point there will be but for now, the game continues. This is what allows the Federal Reserve to enlarge its balance sheet to obscene levels ( it is currently sitting near a mind-blowing $3.7 TRILLION and rising) without the Dollar imploding into Hades. It should come as no news to those who are informed that thanks to the Federal Reserve's shortsightedly stupid programs known as Quantitative Easing, the Fed is now the largest owner of US Treasury debt in the world. This is a Ponzi scheme, the likes of which the world has never seen and will never see again for it is one of near Cosmic Proportions.
Which brings me to another point - no nation out there which is holding US Treasury obligations as part of their reserves wants to see the Dollar crash and the "value" of those reserves go up in smoke. Thus, no one rocks the boat other than some bilateral trade agreements here and there and noise about a new reserve currency. For all that noise and all those grumblings, the US Dollar is still enthroned as the king of the current monetary system.
This is why I go back to what I have been saying when it comes to gold - only if confidence is lost in the US Dollar will we see gold sentiment shift here in the West. I would watch the Dollar more closely than anything right now as a result. Interestingly enough or perversely enough if your mind thinks like mine, a rising interest rate environment would theoretically make US Treasury debt more attractive in the sense of better yields but this same rise in interest rates tends to crush any incipient forms of life in the US economy further aggravating its already out of control national debt ( less economic activity means lower tax revenues). If that were not bad enough in itself, it also makes servicing any interest payments of newly issued debt even more challenging for a country whose DEBT to GDP ratio is already over 100%. And yet, this rising interest rate environment is what had pulled the Dollar higher until recently.
In the long term this is why I believe gold will ultimately benefit but between the long term and the shorter term in which trading/investment decisions are made, there remains some formidable headwinds to the upward progress in the price of gold.
Please click on the following link to listen in to my regular weekly audio interview with Eric King over at the KWN Markets and Metals Wrap.
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/10/12_KWN_Weekly_Metals_Wrap.html
Love or it hate it, the largest gold ETF on the planet, GLD, is still one of the best, if not the best indicator of the size of Western investment demand for the yellow metal.
As noted here many times now, the reported gold tonnage in this vehicle, continues to sink.
You thus have two key indicators here in the West, GLD and the HUI or index of gold shares, both of which are telling us that gold has fallen out of favor with the investment class. Whether we like this or not is immaterial. It is a fact and reflects the sentiment towards gold here in the West. To be successful at trading one must learn to accept what the market is saying even if you disagree with it. That means becoming a hard-nosed, thick-skinned realist and tuning out anything to the contrary.
When sentiment turns, you either turn with it or lose money. It is really that painfully simple.
Now, you may be correct in the long run and your view may ultimately be vindicated, but you could end up broke by then. Let the market itself speak to you and tell you when it has come around to your way of thinking. Otherwise, you are apt to look as foolish as someone spitting into a hurricane. It may make you feel better than you are defiant and standing tall, but all you are going to end up with for your effort is a wet face, courtesy of yourself!
Here is a chart of the total tonnage of GLD. Notice how it continues to sink lower and lower. Until this disgorging of gold is over and the trend reverses, rallies in gold will be sold. While Asian demand will be strong, in and of itself that is insufficient to reverse the disgorging trend here in the West.
The HUI to gold ratio continues to plumb new lows over the last few months having already moved well below the spike bottom made back in late 2008 when the first news about Quantitative Easing hit the markets. The falling ratio is disturbing.
Either one of two things is going to happen - either gold shares are going to stage a rebound sooner rather than later or the price of gold is going to start moving lower at a faster rate than the shares. There always remains the possibility that both will rise higher in sync with the shares outperforming to the upside. That would restore the ratio but thus far the technical charts of the HUI index do not show any serious buying by anyone but the value crowd.
The ratio has fallen through every single Fibonacci retracement level shown on the chart drawn off the 2000 low and the 2003 high. Classic Fibonacci theory would tell us that if the 75% retracement level is bested, odds favor the entire move being erased. that is more than sobering; it is a catastrophe.
It is telling that no matter what gold does, the shares simply cannot seem to gain much in the way of traction to the upside. Perhaps that will change but thus far the shares, which have been rather good at predicting in what direction the price of gold will be going, are heading lower.
One wonders just how far this ratio will continue to move. This is the reason that I have strongly recommended to miners that if they have the opportunity to lock in some good profits on gold under production, that they do so, at least a decent percentage of that production, to ensure those profits. In other words, hedge or use some forward contract methods so that they do not sit there and watch the metal sink lower on them without any downside price protection.
The ratio at such low levels would seem to be saying that there is a distinct possibility of lower gold prices ahead. Gold at $1300 is certainly not the same as gold at $1900 but if a miner can dig it out of the ground and secure profits at that price, why risk all of those profits? Something is going on in the mining shares which simply makes investors reluctant to buy them even after such a protracted decline. Perhaps investors are wondering whether profits are in the picture before they put hard earned capital at risk.
It cannot get into heaven and it does not yet appear to be headed down into hell. So it goes nowhere bouncing up and down, without any apparent rhyme or reason. In short, trading gold right now is a complete waste of time unless you are a glutton for punishment or have the absolute shortest of time spans before pulling the trigger on an ultra short term trade. Translation - unless you want to scalp this market, leave it be until it makes some sense.
I still feel that the intermediate and even the short term trend is down but with the sort of wild intraday price swings it is currently experiencing, there are better opportunities elsewhere to trade.
It does seem as if there is a large enough contingent of dip buyers who are trying to keep it levitated above $1300 to make it tough for the market to actually break and stay below that psychological support level. Based on the current action in the mining shares however, odds favor a breakdown of that level sooner rather than later in my view. While the HUI did manage to close near the high end of today's session ( some of the individual stocks that comprise this index actually closed in the green), the chart pattern on the HUI still looks atrocious. I would want to see some improvement in the miners before feeling any positive vibes toward the actual metal.
It was rather comical reading the comments today from those who were foolish enough to try offering reasons for the inexplicable. First was the news that Yellen - Ms. Dove of Doves, will be heading the Fed. That was viewed as friendly towards stocks and somewhat towards gold. Then the market seemed to focus back on the partial government shutdown and upcoming debt ceiling battle and that brought out the forces of deflation. Then we got some employment numbers from private firm ADP. "Go this way and that way and this way and that way".
When the FOMC news hit the wire gold was all over the place as traders tried to make sense of the oracles who sit on that committee.
Some FOMC governors wanted to taper; some did not; some were concerned about the Fed's credibility; some were concerned about this and some were concerned about that. Some wanted to taper before year's end. All of this is moot in my view because what some may or may not want is rather immaterial in my view. What is not immaterial and what will ultimately have the final say is the economic data coming our way. I repeat, it is difficult for me to see them tapering anytime soon based on the anemic, miserable state of the US economy.
Back to the charts only briefly for the reasons explained above ( it is stuck in a range trade).
Price remains stuck in a very broad range between $1280 or so on the bottom and $1340 or so on the top. Within that broad range is a secondary range with $1300 or so on the bottom and $1320 or so on the top. Bulls have no chance of getting anything going until they clear $1340 and keep the price from falling back below that level. Bears have no chance of getting anything sustained to the downside until they push through $1280 and prevent price from recapturing that level.
The current bias is negative based on the indicators presented with those favoring the bears. Additionally, volume on up bars is lackluster reflecting the lack of bullish enthusiasm.
Simply put, I am not sure how much longer this will continue but until one side or the other grabs the ball and runs with it, we appear to be stuck in limbo. Hopefully something will change soon and we can get some sort of decent trend, even if it is down to at least escape this nauseating go-nowhere - do nothing market.
What I am watching is the slide in crude oil prices along with lower gasoline prices. That is certainly not contributing any upward pressure on the overall commodity complex in general which continues to slide lower. It is difficult to see gold managing any sort of lasting rally as long as this index drifts to the downside.
While I would dearly love to be able to provide some bullish news for those who favor gold, unfortunately I cannot. The charts are simply not showing any reason to refute the bearish case.
Consider in particular the HUI, or index of mining shares. I have deliberately included a weekly chart to provide a longer term perspective.
Notice the second indicator which is a proprietary one that I employ - it is basically a trending indicator. What is really striking is just how bearish the price action in this sector has been for the last two years. As you can see, this indicator only flipped positive for a mere 12 weeks out of the entire period since October 2011. In other words, 12 weeks out of 104 week total. That is just horrendous!
What is most discouraging is the indicator has resumed moving lower once again as it is now down for the last 5 weeks in a row. For a brief moment, it appeared that it was going to make an effort to cross above the "0" line and become positive but hopes for that faded at the end of August.
About the only thing I can say the least bit positive about this particular indicator right now is that it has the "possibility" of setting up a bullish divergence if the HUI moves down to the previous low made in late June but even at that, it would only confirm the existence of a friendly divergence, but not necessarily an actual buy signal.
Below that indicator is the Directional Movement Indicator, another trend following tool. Note that the Red Line or Negative Directional Movement has been above the Blue Line, or Positive Directional Movement for most of the last two year period. It is currently far above that blue line even now. In other words, though the solid ADX line is moving lower indicating that the downtrend has been broken or suspended which is perhaps a better way of saying things, the bias is still to the DOWNSIDE unless or until proven otherwise.
When you look at the 50 week moving average which is over 100 points ABOVE the current price and headed lower, it is impossible to make any sort of bullish argument for this sector.
One can argue that the gold shares might be attractive from a "Value" buying perspective but the problem with that is that many expect them to fall even further yet and are certainly in no hurry to buy. Maybe in 2014... who knows at this point....
Like I said, it is very difficult to find any bullish consolation in the entire sector. What has me concerned is this bearish price action in the shares is suggesting that the worst is not over for the actual gold price. We will see how predictive these things are, one way or the other.
I noted in yesterday's comments that neither US bonds or the gold market were acting like the typical safe haven trade that one would have normally expected to see during a time of crisis ( debt ceiling, government shutdown, etc.).
Gold was sold off on fears of a slowing economy as were the majority of commodities in yesterday's trading. Bonds were also dumped.
Today, we seem to have the exact opposite price action occurring - gold is up, the majority of commodity markets are in the green and the bond market was soaring earlier in the session. It is almost as if the big macro trade was back on today with the lower US Dollar spurring buying of commodities rather indiscriminately as was prone to happen during past episodes of that particular trade.
What I find almost bizarre is seeing report after report about analysts/investors worried about the current government shutdown being prolonged and a risk of a failure to get any sort of agreement to raise the debt ceiling which would result in either a credit downgrade of the US rating or default. such fears are preposterous in my view as the US takes in plenty of money to service its interest payments. However, think about this - the supposed fear is one of default or a credit downgrade and yet the lemmings cannot seem to stuff enough of these US government IOU's (bonds, notes, etc.) into their portfolio merely because the US stock market has been experiencing some weakness in today's session.
The analogy is obvious - let's say my next door neighbor is head over heels in debt and has been paying his bills by borrowing money from the folks in the neighborhood. He has enough of an income coming in that he can pay the interest that he has promised to pay to anyone willing to lend him money but one thing is for sure, he cannot pay back the principal. Now, he finds that his expenses continue to rise because he refuses to make any changes in his extravagant lifestyle so he announces with great fanfare that he is going to borrow more money from another set of neighbors promising to pay them back both principal and interest. Would any of you feel comfortable lending to this leech? Yet, that is exactly what is transpiring in the bond market today. The very items that investors are supposedly worried about being downgraded ( U S debt obligations) are being scooped up in droves by eager buyers.
I don't know whether to laugh at such lunacy or weep that so many can be so ignorant and oblivious to the staggering amounts of debt that the US government and its spendthrift politicians continue saddle the nation with.
Crowds go mad en masse and only come to their senses one by one, and slowly at that.
Gold seemed to get a bid today on the heels of the ADP jobs number. The private firm released a number that was LOWER than analysts had been expecting and this fed into the idea that the Fed would be forced to maintain the QE at full capacity.
Seriously, this sort of nonsense gets really old. The Fed will be doing QE until the cows come home without any structural changes to the US economy (getting rid of obamacare) and reform of regulations that are impeding companies from expanding and thus hiring. As stated here previously, if 4 rounds of QE has yet to produce any sort of runaway inflation why does anyone believe that a prolonging of the current program (QE4) is going to somehow be a catalyst for future inflation.
The truth is that gold is stuck in a broad sideways pattern in which dips get bought and rallies get sold. Until it shows me something on the price charts which indicates anything to the contrary, I expect this pattern to continue. For traders, that will mean rallies are selling opportunities while dips can be used to cover.
Crude oil has a big rally today for some reason - that which was cited was an EIA report showing a drawdown in stockpiles at Cushing as well as news from TransCanada which released news that the southern leg of the Keystone pipeline which it is constructing is 95% and should be open to move crude sometime after October. That was seized upon as a reason to buy crude oil futures, especially after the sharp fall in price the last few days as the thinking was this would help to further drawdown crude stockpiles at that all important hub.
It's funny how thinking shifts from day to day isn't it? Yesterday, government shutdown fears entailing furloughed workers and no salaries for many was viewed as a drag or negative factor for growth in the US economy. Today, it is no where to be seen!
Personally, my view is that this is further evidence that the hedge fund computers have destroyed any integrity that might have been left in our financial markets. To see silver implode lower one day only to watch it shoot back up the next is beyond silly - it is a sign of a dysfunctional market system.
I have noted some levels on the gold chart below which are worth monitoring. Other than that, there really is not much worth saying about gold today. Until it gets a clear break out of this range trade, the market is going to bee-bop back and forth as it responds to the vagaries of shifting sentiment and economic news.
Lastly, surprise, surprise, the gold stocks, as evidenced by the HUI are higher today. Take a picture of that screen because no one is liable to believe you if you don't document this rare occurrence.
