"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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As of the close of trading, this Friday, tomorrow, the CME Group[ will be lowering margin requirements for their flagship gold and silver contracts. Spec margins will be moving down to $7,975 from $8,800 for opening a contract while maintenance margins will be lowered to $7,250 from $8,000.
For the full sized Silver contract, initial margin requirements will be $11,000 from the current $12,375 with maintenance levels at $10,000 from the previous $11,250.
Volatility has waned somewhat in both metals allowing the computer to mark these margins lower.
The HUI closed extremely poorly today barely managing to maintain itself above all-important chart support near the 210 level. Owners of these beleaguered shares will not want to see this give way, especially to end the week. If it does, get set for even further losses in this bleeding sector in the near future. Where these things are going to find buying support and at what level is very difficult to see right now. Quite frankly, the entire sector has fallen completely out of favor with the mainstream investment world. Only the most die-hard of gold bulls remains holding them.
As mentioned in last night's post and many other posts, those miners which did not HEDGE expected gold production were quarreling against all sound wisdom as they have left themselves completely naked and exposed to downside price risk in the underlying metals. This could have been completely avoided had they instituted some decent analysis in their risk management departments, assuming they even have one.
Keep in mind, any economic data that looks the least bit rosy will feed ideas that the Fed is going to taper sooner rather than later. That will undercut the reason to hold gold or anything gold-related for the time being.
I want to also emphasize that even if the Fed were to taper, say something in the vicinity of $20 billion, that would still leave them purchasing $65 billion/month of Treasuries/MBS. While that is still an extremely significant amount, what the market is looking at is the expected IMPACT ON INFLATION. The way the market currently sees it, if $85 billion/month is not producing any measurable inflation, then any reduction in that amount should further lesson any inflationary impact from the overall bond buying program. That is why gold is paying such close attention to the Tapering/Non- Tapering debate.
I want to reiterate - until the market in general becomes convinced that inflation threats are rising, gold is going to struggle. Also, we will have to see NEGATIVE REAL RATES to bring some serious and concerted buying into the metal. Barring that, it is CONFIDENCE that is going to have to give way for the current bear market in gold to reverse course.
The following story detailing a medical treatment for some of these new and extremely dangerous antibiotic resistant bacteria is most encouraging...
http://www.foxnews.com/health/2013/11/21/necrotizing-fasciitis-new-treatment-discovered-for-deadly-flesh-eating-disease/?intcmp=latestnews
Crude oil is currently experiencing a rather sharp rally as it is being led higher by the products, based on recent data suggesting the steep drop in prices is stimulating demand. Throw in a weaker Dollar, a weaker Yen ( no safe haven trade), a pop in grain and bean prices, and even a bump in cattle, and you have some buying hitting the general commodity sector. From what I can see right now, a goodly portion of this is short covering, with some bottom picking occurring across the sector. This is serving to lift gold from its worst levels of the session, along with silver.
Let's see where the dust settles by day's end to draw some conclusions.
There is an interesting story from Dow Jones this morning mentioning Venezuelan newspapers reports about a swap deal between that country's Central Bank and Goldman Sachs in which the bank will supply 1.45 million ounces, (around 45 tons) of gold up to October 2020 for cash. We are talking about a duration of about 7 years (depending on when the actual gold swaps would begin) so when averaged out it means a bit more than 6 tons per year. That is rather mediocre in my view but I do find this story noteworthy in the sense that perhaps some Central Banks are souring on gold in the present environment.
Also, Thomson Reuters GFMS, estimates that gold production will reach a record 2,920 tons this year. Their report, which draws on data from the China Gold Association, states that China has produced 253 tons of gold through the first nine months of this year, an increase of 4.9%.
Gold currently has several headwinds that it is having to contend with. Among these are the lack of inflation pressures (energy prices and food prices at the wholesale level are basically flat, according to the PPI which came out this AM.) Additionally, rising interest rates here in the US, in combination with the low, official stated rate of inflation, have produced POSITIVE REAL INTEREST RATES, always a barrier to upward progress in gold.
Until investors here in the West become concerned with inflation, gold and silver are going to struggle to maintain any rallies.
In looking at the VIX or the Complacency Index as I prefer to call it, it is once again down sharply today revealing the lack of fear among investors. Nearly every single dip lower in equities continues to be seized upon as the only fear out there is the FEAR OF MISSING FURTHER GAINS IN US STOCK MARKETS. It really is amazing watching this phenomenon. When it will finally end is anyone's guess at this point. In the meantime, one cannot fight the tape and expect to profit.
As mentioned in a previous post this month, gold has fallen below TWO key Fibonacci Retracement Levels of the entire bull market that began in 2001 and ended in 2011. Using the low made in 2001 and the high made in 2011, and then the low made in 2008 and that same high made in 2011, we can construct two different sets of Fibonacci lines to see if we can any confluences which will give those regions/levels more significance should they not hold. The first level came in near $1298.60; the next level is at $1282.
These are not meant to be hard numbers but rather REGIONS where we can look for buying support to emerge. Thus far this month, both levels have fallen to the bears. If the bulls cannot recapture at the very least, the $1282 region, they are in serious trouble should this market end the month BELOW both levels.
I have noted a rectangle as Key Support. It begins near $1210 and extends down to the spike bottom near $1180 made earlier this past spring. It sure does look to me like gold is going to test at least the top of this range near $1210. If for any reason the market fails to rebound sharply from this level, the stage will be set for another test of $1180. If that gives way, this market will more than likely move all the way down to the 50% Fibonacci retracement level of the entire bull market move which comes in near $1086.
One could make the technical case that the price action over this year has formed a BEARISH PENNANT that has just failed to hold support. I would certainly hope not since the repercussions of this technical chart pattern would portend a move as low as $800, as inconceivable as that seems right now.
What I can say is that gold would be well below the cost of production were this to occur and last for any length of time. For that matter, even gold below $1100 is below the cost of production for many mines. The key will be, if it were to get there, how long it stays down there. It is one thing to spike into a region and then violently rebound. It is another for the price to languish there.
I have mentioned many times over the last few months that I believe gold miners should be using price strength to HEDGE portions of expected future production as downside price risk is just too high for any responsible mining outfit not to secure protection and at least lock in some guaranteed profitability on some production. It is a pity that more are not doing so as they would have been able to weather this storm in the gold price allowing their stock price to hold much better than many individual outfits are currently faring. I can only say that if gold were to violate that key support level, they had better be hedged. They can always lift some hedges at the time they sell some actual production but being naked and exposed to the vagaries of the market is simply asking for trouble.
As far as overhead resistance goes, in order for the bulls to dodge the proverbial bullet, the very least they need to do is to push price back over $1300 and change the handle. Even more however, would be to best this month's high which is near $1320.
The release of the FOMC minutes this afternoon, contrary to my expectations, did contain segments that seemed to be a surprise to the market. The tenor of those remarks leaned heavily in the direction of hawkishness and that is what gold sharply lower. It even dented the euphoria in the US equity markets as the S&P 500 initially shrugged off the comments, only to then weaken further as the reste of the session wore on.
The big beneficiary of this hawkish tone was the US Dollar, which in conjunction with speculation that the ECB will move to negative interest rates, soared against the Euro which seemed to fall into an abyss.
All in all, there was quite a bit of commotion across many of the major markets including the bonds which also saw more selling pressure. The all-important yield on the Ten Year Treasury note hit a high of 2.795% today.
I would keep a close eye on that as I feel very strongly that if this thing starts grinding back up towards the 3% level once again, we will be treated to a cacophony of noises coming out of various Fed governors, all of them extolling the virtues of continued QE in full force and warning of the fragile nature of the economic "recovery".
Before getting into gold, I have to make a comment about silver. Losing chart support down between $20.25 - $20.00 has inflicted some heavy chart damage. Barring some sort of news that can be construed as favoring inflation, momentum is to the downside with $19.20 - $19.10 as the next target region.
Moving to gold - I wanted to illustrate something to those who are perennially bullish gold. Notice where the greatest volume in gold has been recently - Yes, on DOWNSIDE MOVES. The only exception to this was the day on which Janet Yellen's testimony statement was released in which we learned ( as if we did not already know this ) Ms. Yellen was extremely dovish. That spooked a short covering rally but as with all recent rallies in gold, it was merely viewed as a selling opportunity.
More later ....
Several news sources are reporting that the European Central Bank is considering moving to Negative Interest Rates in yet another attempt to combat sluggish economic growth in the Eurozone.
Keep in mind that this comes on the heels of their surprise interest rate cut two weeks ago which caught the markets completely off guard. That hit the Euro hard back then and once again, it is getting slammed today as a result.
Gold seemed to catch a bit of a bid on this news but the moves higher are running into selling thus far.
One way of looking at this is that DEFLATION fears are becoming so serious to monetary officials that they are effectively nocking their last arrow on the string to fire. If this move fails to generate any lending/economic activity/growth, what then??
Here is a good story to read dealing with the news....keep in mind that this is not a done deal, yet... the idea is probably being floated to gauge market reaction.
http://www.bloomberg.com/news/2013-11-19/nikkei-futures-gain-on-weak-yen-after-u-s-stocks-retreat.html
So much for quiet trading ahead of today's release of the FOMC minutes from their last meeting! Volume had just dried up with the market killing time as the hour of the release drew near when a batch of large sell orders came out of nowhere and caught the market sleeping. The intention was to run the stops sitting down below yesterday's lows - guess what? They got them!
The surge in volume caused a temporary halt in trading. When trading resumed, momentum based selling then entered in large size dropping gold further. It fell through $1258 which was acting as a temporary floor.
Here is another example of how hedge funds can push price by taking advantage of lulls in liquidity. I am sure some in the gold camp will once again credit this "takedown" to the big bullion banks but that is simply not the case. They continue to lift their existing short positions and add to their exposure on the long side of the market. It is hedge funds who continue to reduce long side exposure and add to their growing, and profitable, number of short positions.
We will get to see this as the December contract enters its delivery period soon. I suspect we will see J P Morgan taking delivery of a rather large amount of gold. Either way, we will see.
One bummer is the fact that this move lower through support occurred today, Wednesday, so unfortunately this week's CFTC report ( Commitment of Traders ) will not pick up the positioning of players.
Silver is dangerously flirting with the $20 level. If it loses support there, another 50 cent drop will come rather quickly with potential for further losses down towards $19.
More later today after the release of the FOMC minutes. Let's see what they might say and whether or not it has an impact on the markets or if they have correctly anticipated the contents.
Crude oil is sinking further today having bounced back above $93 yesterday. That seems to be a general pivot region with the market oscillating around this level.
