Big Test Ahead for Gold

Gold continues to follow its recent pattern of experiencing a sharp move higher due almost entirely to short covering only to then consolidate a bit and sink lower once again. We have pointed out that hedge fund short positions are growing while their long positions are slowly being reduced. As more of these large speculators position on the short side of the market, it will be vulnerable to these short-duration rallies whenever any news comes out that can be construed as friendly towards the ongoing QE program. The flip side is that any news, such as what happened today, which can be construed as bringing about a Fed Tapering sooner rather than later, generates strong selling pressure in gold. These same hedge funds begin leaning on it once again, especially if it has popped higher and moved into a technical area of resistance on the price chart.

Gold's inability to garner much in the way of concerted buying today, in spite of general weakness in the US Dollar and some late session pressure in the S&P 500, has to be disconcerting if one is a gold bull. If gold for any reason, loses support down there at the region I have noted on the chart as "Key Support", it will be at $1220 before one can blink. Asian demand had better be strong is all that I can say.

Adding to its woes is another plunge in the price of crude oil as it broke below $93 barrel. As a matter of fact, this is the first time it has CLOSED before that pivotal level meaning odds favor another leg lower in this market. Keeping it somewhat supported is ideas that talks with Iran are going nowhere. If however, we do see some sort of agreement over there, look out for crude as that will bring Iranian supplies back onto the world market, a market already swimming in supply.

There was also weakness in nearby futures pits such as silver and copper. Cattle were pummeled lower today and hogs were also weak. Corn dropped over 2% in price as the apparent lowering of the ethanol mandate effectively undercut some of the demand from that commodity, a commodity which I might add, needs all the demand it is going to get seeing that we are looking for a record corn crop. The all-important feed grain hit a 38 month low today. Does that sound remotely like we are having inflation fears in the commodity/food/energy sector?

All in all, there was a general trend of selling across a wide gamut of the commodity sector as headlines such as "DOW 16,000" were blaring pretty much across any financially related web site out there.

Meanwhile we were treated today to the Dueling Banjos from Deliverance. Not really but it makes a nice lead in sentence. What I am referring to is contrasting speeches from two Fed governors, Charles Plosser and Bill Dudley. Dudley loves QE stating its advantages outweigh its disadvantages ( by that he must mean its destruction of safe, risk free investment alternatives for seniors and those on fixed incomes, retirees, and those contemplating retirement). Plosser on the other hand, whose idea is more to my liking, says the Fed should cap the bond buying program and state clearly how many bonds/MBS's it intends to buy. Strangely enough, both were in agreement that the US economy is slowing improving in their view. That last part should be classified under the category "Fiction" on the financial websites and broadcasts covering their remarks.

The S&P 500 generated another one of those short term sell signals today, not that it will mean a single thing since that market has become an example of life in the international space station where gravity does not exist.

Gold shares, as evidenced by the HUI has better generate some buying in tomorrow's session or that index risks moving back down towards the 210 level. I noticed that Barrick was hit again today as it was down over 2%.

We'll see if we get any followthrough to the downside in the S&P although I doubt it. The mania continues with nothing that can seemingly derail it. The only FEAR that I can see anywhere at this time is the FEAR of missing the bull train in stocks or more comically, fear of missing being a part of Bitcoin.

Trader Dan Interviewed at King World News Markets and Metals Wrap

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/2013/11/16_KWN_Weekly_Metals_Wrap.html

Deflation Fears in Europe

In my reading this morning I came across a rather revealing story on the Dow Jones wires concerning that surprise interest rate cut over it the Eurozone last week. Do you remember? That was when we learned that the ECB had cut its main interest rate down to paltry 0.25%, which by the way is a record low.

Now come some comments from one of their council members, a Luc Coene by name who tells us why the bank acted with no advance warning.

The actual story was reported in a Belgian newspaper, L'Echo. In it, Coene states that recent low inflation figures had greatly concerned the members of that council.

here is a quotation: "Once the first signs of deflation are showing, it's already too late to do something. So we've avoided playing with fire".

This confirms my suspicion that the bond buying programs of the Central Banks are losing efficacy.

Here is the problem - what happens when or if the economy no longer responds to ultra low interest rates, Quantitative easing/bond buying programs, government stimulus measures etc?  Then what?????

I have said it before and will say it again - the problem is excessive levels of debt combined with deep-rooted, systemic structural issues that MUST be dealt with. Monetary policy cannot in and of itself CURE ANYTHING. All it does is to create huge imbalances and distortions in certain asset classes. We are witnessing this first hand in the ever-inflating bubble in the equity markets.

The Yellen-led Fed will do absolutely nothing to slow this process.

Gold Knocking on the Door of Overhead Resistance

Take a look at the chart below and you can see that gold is trying to clear chart resistance near $1290 but thus far has been unable to do so. Incoming Fed Chairperson Janet Yellen's testimony has put to rest any fears of bond tapering in the immediate future and this has spurred a round of short covering once again in the gold market.

It seems as if every single time the Fed either seems to shift gears and become more dovish or economic data comes in worse than expected and dispels Tapering fears, we experience a round of short covering in gold. However, these rallies have tended to be fleeting at best as they are viewed as just another opportunity to establish fresh short positions by some of the larger speculators. In other words, the bearish chart posture in gold has traders selling rallies and not looking to buy dips at the present time.

Notice how gold tends to spike higher, followed by a period of a narrowing range only to then drop down and form a fresh new leg lower.

Bulls need at the very minimum to push past $1290 and reclaim a "13" handle in front of the metal or bears will quickly reassert themselves and press for another leg lower. 


Note the sentiment among the large hedge funds when it comes to gold of late. Can you see the rapid build in short positions? In the last two weeks alone, hedge funds have added a massive 34,800 brand new short positions while they have dumped or liquidated 10,450 long positions. That is a sizeable swing no matter how one measures it and reflects the increasing bearishness that is gripping the gold market.

If support at this week's low does give way for any reason, look for additional fund long liquidation and even more momentum based selling to take hold.

The flip side to this is that any breach of overhead chart resistance will have some fuel to run as short positions will be vulnerable.

Frankly, QE expectations/lack of tapering seems to me to be losing its impact on the price of gold. My own view is that it is not proving to be inflationary in the least bit ( the money is not making its way into the broader economy) and therefore gold is beginning to have only fleeting responses to talk of uninterrupted continuance of the bond buying program. I continue to maintain that until CONFIDENCE is lost that gold is going to struggle, QE or no QE.

Look at the VIX, or Volatility Index. I prefer to call it the Complacency Index. It remains parked down near multi-year lows indicating a near complete absence of any fear or concern in the marketplace when it comes to stocks. The very concept of "RISK" has literally been rendered obsolete as Wall Street gorges itself on the liquidity being provided by the Fed. The addiction is hopelessly incurable in my opinion as the Yellen-led Fed will undoubtedly do nothing to upset this new normal.

The Bubble Keeps Getting Bigger

It is almost comical watching stocks soaring into the stratosphere negating one negative technical warning after another and reaching levels that defy rational thinking, yet here we are.

The investing world has been perfectly conditioned by the Central Bankers to buy every single dip, throw caution to the wind, make the word "risk" archaic, and continue to shove stocks higher and higher and higher with no end in sight. It is absolutely astonishing to watch this thing unfold.

Apparently all that is needed to make the very concept of a bear market in stocks obsolete is for endless money printing. There appears to be no consequences whatsoever to this madness as it is now the new normal.

Maybe we will see 1800 in the S&P 500 before the month is out. Who knows? As a trader you have to go with the money flow and the chart but as an observer with a sense of history, you have to shake your head in both bewilderment and sadness. Bewilderment that so many otherwise intelligent individuals see nothing wrong with a near-permanent money creation scheme and sadness, that so many can be herded into something which has no rational basis other than the fact that it is going up.

I do need to make one quick comment - I have stated that the broad universe of investors see no inflation signs whatsoever. Yet, one thing should be very evident - the stock market is a perfect picture of near runaway inflation but in paper assets.

Dovish Yellen performing as Expected

Gold is popping higher in extremely low volume late this afternoon as the prepared remarks from incoming Fed Chairperson Janet Yellen make the rounds through the news wire service. While the tone is extremely dovish, frankly I do not see any cause for news here as it is no secret that Ms. Yellen is perhaps one of the most dovish members of the current FOMC.

In spite of that, the typical knee-jerk reaction is taking place in gold and in the US Dollar, which was undercut by the comments within the statement. Those looking at the remarks are drawing the conclusion that the Tapering will be postponed until sometime next year. Recently, some have begun anticipating an earlier scaling back of the bond buying program.

My suspicions are that this rally is going to be viewed as a selling opportunity and not the start of a new leg higher. We'll see about that however. The volume on the move higher is extremely low as the news surfaced basically early in the kangaroo session in which many were not even paying attention or even trading while they waited for Asia to kick in and lift the liquidity a bit more.

I do find it rather interesting that crude oil is not moving higher on the news however. Crude has tended to be a decent proxy for the inflation expectation trade as in the past it has moved higher with a lower US Dollar and moved down when the US Dollar has been strengthening. Lately however, that market has been moving more in sync with its actual fundamentals and the facts are that the US has large supplies of crude with weakening demand due to the sluggish US economy.

Let's see what happens when the dust settles tomorrow and draw some conclusions then. From a technical perspective, the zone noted as "Key Support" has thus far held. If bulls can take the metal back up through $1300 and change that "12" handle, then we go back into the wider range trade which has marked gold for some time now. If not, and sellers sense weakness, look for another test of the recent low.

My own view of this QE stuff has evolved as I have watched the impact over the last few years. Frankly, I do not see what another month, two months, six months, or even a year is going to do other than keep the stock market bubble inflated. The money is simply not making its way into the larger economy in size. Velocity of Money is going nowhere. The reason is very simple - too much debt is in the system and there are too many structural issues in the US economy, most recently the fiasco being caused by that job-killing obamacare.

The one saving grace of this entire mess is that the deflationary impact of falling energy prices has helped consumers, especially those whose health insurance rates are now soaring higher. Grains, sugar, coffee, etc have also been moving lower, thankfully, but the verdict is out on whether the harvest lows are in for the grains or this is just another bounce in a wider bear market for some of the ag products.

Silver on the Ropes

Silver Bulls had better flex any muscles they might have very quickly as the Bears are out growling and seem quite determined to go a stop huntin'.

The rectangular area shaded and marked support is an important inflexion point for the metal. If it does not bounce from this region and head back up again, in effect reinforcing its range trade, odds will favor a continuation lower to $20 and possibly down to $19.

The 50 day moving average is resuming its downward trend after having leveled off back in late August. It should now serve as an overhead cap to price on any rebound higher unless there is a solid, discernible change in the fundamentals and more important, in sentiment, towards the precious metals.

Gold has also lost an important level of chart support in today's session. This level, $1280, was very important as the price has tended, since August, to uncover some decent buying down here. In the middle of October, it did fall below this point, but its stay down there was only a couple of days in a row at best. If gold can recover in Asia this evening or by Thursday of this week, it will have dodged a bullet. If not, look for the next key support level to come under a test. If the Dollar takes out 81.50 on the USDX, gold is going lower.

Long Term Monthly Gold Chart

Can you see the significance of the 1280 region? It is the 38.2% Fibonacci Retracement level of the entire rally from the secondary low made back in April 2001 and the peak above $1900 made in September 2011. On the monthly chart, the price fell below that level reaching 1180 (1179 to be exact) but it did not see any downside followthrough the next month as it immediately rebounded eventually pushing back above $1400 before failing once again.

Now it is back to testing that level and though it is early in the month of November still, if gold closes out this month below that level, December will be a critical test of the resolve of the bulls. Failure to stay above $1280 on a month ending basis on TWO CONSECUTIVE MONTHS, would increase the likelihood of another test of that spike low near $1180. Were that to fail, the next critical target for gold would be near the 50% retracement of the entire decade long bull market in gold ( 2001- 2011).

That would probably represent a good area for longer term oriented players to begin buying as you are talking about prices below the cost of production for many gold mining companies.

I am not predicting a move to this area as of now, I am merely setting up some possible scenarios IF PRICE PERFORMS AS I MENTIONED ABOVE. Remember, we are trying to listen to the voice of the market only and tuning out anything else. That is the only way to ultimately be successful as a trader/investor.

One thing that this chart also shows us is that in order for the bulls to turn this chart to their advantage, they MUST take price at a bare minimum back above the $1400 level and hold it there.

Much of this will depend on market expectations in regards to the overall inflation picture. Today, crude oil is falling sharply again having neared $93. If it fails to secure a foothold near this level, steeper losses are ahead. It is most difficult, if not impossible, to make an argument for inflation if energy prices are sinking.

On the food side of the ledger, soybeans are moving higher and have been since that USDA report last week but that is coming mainly on the heels of reported sales to China. China is notorious for booking sales but then cancelling those sales later if prices drop so beans need some more time to see how the demand is going to hold up at these higher levels. Corn appears to have found a short-term interim bottom but it is difficult for me to get bullish on corn when a record crop is still coming our way. Much depends on the S. American growing season. If it continues to get off to a good start, both corn and beans should stop moving higher sooner rather than later. I am monitoring both charts to get a sense of these all important foods, not to mention wheat, which also has stabilized. That however seems to me to be more a function of spillover buying from the corn and bean markets than any outright bullish wheat fundamentals.

Stay tuned...