There is a devastating story that came down the Dow Jones wire feed today detailing the woes of Eric Sprott and the impact of the consequent severe market losses to his flagship fund. That fund is down more than 50% this year alone!
It should be required reading for all investors/traders.
http://online.wsj.com/home-page?mod=djnwires
The article goes on to state that Mr. Sprott had under management some $3billion in 2008. That has fallen to about $350 million due to a combination of both redemptions and losses.
Here is where the impact of these enormous losses makes itself evident. The investment company, Sprott Inc., is phasing him out of the investment decisions. By the end of next year he will no longer make the firm's investment decisions.
To add insult to injury, the CEO of the company, a Peter Grosskopf, stated that Sprott would be handling "chief cheerleader duties" in addition to remaining chairman.
Furthermore, the article stated that Sprott Inc,. had already added co-chief investment officers to all of the funds. They obviously knew where they were going with all this.
Lesson to be learned - LISTEN TO THE MARKET and ignore everything else!
http://online.wsj.com/home-page?mod=djnwires
Wednesday, December 11, 2013
Gold seeing some Dip Buying; Sellers digging in
After the strong performance yesterday, gold appears to be taking a bit of a breather as traders digest the recent move and evaluate where things stand. As can be seen on the chart, the market is pivoting around the resistance zone I have noted. Dip buyers are active, but so too are sellers as the market moves up towards $1260.
Volume is mediocre at best indicating the rather quiet price action as neither side seems willing to make a big bet at this juncture. Thus we wait to see how events unfold.
If the market is going to make a run at $1290, it will have to manage to stay above $1260, preferable $1265 to indicate that. If it stalls out here I can see it dropping back towards $1245 or so in an attempt to either uncover buying or, if that fails, to press into some downside stops.
Here is a chart of the metal at noon, CST:
Some of the pressure today is related to the news overnight that a budget "deal" had been brokered here in the US. If such a deal were to be approved by a majority vote in the House first, ( It is a given that it will pass the Senate), then any concerns over another government shutdown/soap opera/drama will be averted. That removes a bit of the reason that some buy gold.
I cannot pass on the opportunity however to comment on something that occurred yesterday. As some of you know by now, early in yesterday's session, a series of large bids pushing gold higher resulted in a temporary halt in trading. For the sake of my sarcasm, I will henceforth refer to this as the
"REVERSE FLASH CRASH". And yes I am mocking those who were peddling this nonsense about the Flash Crash recently as evidence that evil forces were conspiring to beat up on poor ol' Yeller.
I pointed out then and will do so yet again, there was nothing the least bit sinister about these large sell orders. They are being generated by hedge funds who are completely unfamiliar with the concept of SCALE DOWN BUYING and SCALE UP SELLING. Only those of us who have been around these markets for a very long time remember these concepts. The modern hedge fund knows nothing about the concept of "finesse". They brutalize those markets in which they trade. Ask any soybean trader or livestock trader and he will confirm that.
In other words, these enormous bids or enormous offers are now becoming the NORM, instead of the exception. They are merely the symptoms of markets that are increasingly at the mercy of hedge fund computerized buying or selling.
There are those who keep pointing out that no one looking to maximize their selling price would ever sell in such a fashion as to overwhelm all the available bids. That is true - but the fatal flaw in their reasoning is that they erroneously ASSUME that the entities doing the selling are looking to maximize their selling price. They are not. Once the computers start selling, there is NO THINKING. The response just comes. It is all about pushing price in your favor.
It is one thing to note a series of large bids or offers. It is another thing to draw fanciful conclusions from them. The proper conclusion to draw is that computers have unalterably changed the nature of our markets. Traders either adapt or they lose money.
Here is another thing - why is it that there is never an OUTRAGE when gold experiences a REVERSE FLASH CRASH? Or is this outrage only reserved for trips south in the metal? How about the poor shorts who are "unfairly attacked by such nefarious and blatant attempts" to force prices higher so as to paint the charts to favor the positioning of those traders who are on the long side? ( Note - the internet does not allow for sarcasm to be easily observed).
The refuge for those on the losing side of a market is always the same: "But based on the fundamentals, the market OUGHT TO BE DOING SUCH AND SUCH". Guess what? When a market does not "DO SUCH AND SUCH" according to what one thinks it ought to be doing, it does not care about those things which the other side claims to be most important. That is the hardest thing to get many to understand. All that matters is what the price does. All of these things are already well known by market participants. If the price does not respond in the direction that some expect it to go based on such things, then the simple truth is that those things do not concern the MAJORITY of market participants at that time. That is not to say that at some point in the future sentiment or opinion regarding these things could shift. It is to say that they are not important until at some point they become important. Grasp this simple concept and you are well on your way to becoming a professional.
I hope you can see my point - it is one thing to attribute lower price moves in gold to the bullion banks during periods in which gold is sharply rising and the feds are attempting to contain it. It is yet another to blame nearly every single move lower in the metal on nefarious forces.
Here is yet the irony of this. All the hedge fund selling managed to do ( I am talking about the Flash Crashes ) was to provide an opportunity for JP Morgan to pick up the metal at an even better price. Out of the total of 4,469 deliveries issued thus far for December gold, JP Morgan's HOUSE ACCOUNT has stopped 4,194! This is not insignificant!
Keep in mind that we are now entering what I and many other professional traders term, "the Silly Season". By that I mean we are going to see liquidity begin to slowly decline as many traders will be closing out positions/squaring books, in anticipation of taking some time off for Christmas. Some will be out of the market next week and will not come back until the start of the New Year. The result of all this can be increased volatility with sometimes unpredictable and inexplicable swings in price as relatively large orders encounter air pockets both above and below the market.
Also, some of the commodity indices are increasing the percentage of gold and silver in their weightings for next year. That will bring in additional buying by those index funds who benchmark against those particular indices - more fuel for the Silly Season.
For you Silver guys and gals out there - the grey metal is holding above the $20 market and is no longer a Teenager". That is constructive but it has a lot of technical damage to undo before it is going to see any upside fireworks that endure. I need to see the metal scale the $21.25 barrier at a bare minimum before turning friendly towards it. It does seem to continue tracking quite closely with copper. By the way, Chinese data has been supporting copper recently.
The HUI is also digesting some of those big gains from yesterday. While not a technical level, I would like to see the index hold above the 200 mark, which is more of a psychological support level than anything. After all, we are talking a five year low here so keeping afloat above 200 would provide some consolation to the battered mining bulls.
As I type these comments, I am noticing Barrick is lower but well above the top of the huge gap on its daily price chart. As long as it holds that gap, the odds strongly favor a bottom in this stock. There is definitely some two way trade occurring in these mining shares now. That is a far cry from the one way trade that we have been seeing for a long time now. Goldcorp continues to reap some buying based off that recommended BUY from one of the analytical outfits yesterday.
I am noting something a bit peculiar at this time of the day - equities are lower ( almost 1% in the S&P), but long bond is also lower. Meanwhile the Dollar is also lower. That is certainly not the usual pattern we see. We rarely have seen all three of these markets down at the same time. Not sure what it might mean right now but it is certainly peculiar.
With the VIX shooting up above 15 once again, we would normally get some "safe haven" or risk aversion flows INTO TREASURIES and into the US DOLLAR. We are getting some of those flows into the Yen, which is the norm (even it is a ridiculously insane response ) but not into the Dollar. Again, I am not sure if this is a one day wonder tied more to position squaring or if it is the beginning of something more significant. I am inclined to believe it is more the former rather than the latter right now.
Bonds have come up off of their worst levels for the session but still remain lower as I type these comments meaning longer term interest rates are actually moving a wee bit higher even as the equities slide lower.
Some news in the livestock markets ( not actually market moving but interesting ). It appears that the growing number of drug resistant bacteria has caught the attention of the FDA. They are planning to now ask animal health companies and global drugmakers to voluntarily change the labeling on some widely used antibiotics which are routinely used in the industry. The idea is to bring such drugs under the oversight of veterinarians and do away with the over-the-counter use. Cargill just announced today that they have already been working to minimize the use of antiobiotics.
Another interesting tidbit of news today - EIA gave us some data that states the US demand for foreign oil was just 26.8% of the total demand of some 18.554 million barrels a day last week. That is the lowest level since February 1991! In 2005, foreign oil was a total of 60% of all US oil demand. This shale drilling has revolutionized the US oil picture and I am thrilled to see it. We are not even talking about federally owned lands either. Those remain largely shut to oil production.
Volume is mediocre at best indicating the rather quiet price action as neither side seems willing to make a big bet at this juncture. Thus we wait to see how events unfold.
If the market is going to make a run at $1290, it will have to manage to stay above $1260, preferable $1265 to indicate that. If it stalls out here I can see it dropping back towards $1245 or so in an attempt to either uncover buying or, if that fails, to press into some downside stops.
Here is a chart of the metal at noon, CST:
Some of the pressure today is related to the news overnight that a budget "deal" had been brokered here in the US. If such a deal were to be approved by a majority vote in the House first, ( It is a given that it will pass the Senate), then any concerns over another government shutdown/soap opera/drama will be averted. That removes a bit of the reason that some buy gold.
I cannot pass on the opportunity however to comment on something that occurred yesterday. As some of you know by now, early in yesterday's session, a series of large bids pushing gold higher resulted in a temporary halt in trading. For the sake of my sarcasm, I will henceforth refer to this as the
"REVERSE FLASH CRASH". And yes I am mocking those who were peddling this nonsense about the Flash Crash recently as evidence that evil forces were conspiring to beat up on poor ol' Yeller.
I pointed out then and will do so yet again, there was nothing the least bit sinister about these large sell orders. They are being generated by hedge funds who are completely unfamiliar with the concept of SCALE DOWN BUYING and SCALE UP SELLING. Only those of us who have been around these markets for a very long time remember these concepts. The modern hedge fund knows nothing about the concept of "finesse". They brutalize those markets in which they trade. Ask any soybean trader or livestock trader and he will confirm that.
In other words, these enormous bids or enormous offers are now becoming the NORM, instead of the exception. They are merely the symptoms of markets that are increasingly at the mercy of hedge fund computerized buying or selling.
There are those who keep pointing out that no one looking to maximize their selling price would ever sell in such a fashion as to overwhelm all the available bids. That is true - but the fatal flaw in their reasoning is that they erroneously ASSUME that the entities doing the selling are looking to maximize their selling price. They are not. Once the computers start selling, there is NO THINKING. The response just comes. It is all about pushing price in your favor.
It is one thing to note a series of large bids or offers. It is another thing to draw fanciful conclusions from them. The proper conclusion to draw is that computers have unalterably changed the nature of our markets. Traders either adapt or they lose money.
Here is another thing - why is it that there is never an OUTRAGE when gold experiences a REVERSE FLASH CRASH? Or is this outrage only reserved for trips south in the metal? How about the poor shorts who are "unfairly attacked by such nefarious and blatant attempts" to force prices higher so as to paint the charts to favor the positioning of those traders who are on the long side? ( Note - the internet does not allow for sarcasm to be easily observed).
The refuge for those on the losing side of a market is always the same: "But based on the fundamentals, the market OUGHT TO BE DOING SUCH AND SUCH". Guess what? When a market does not "DO SUCH AND SUCH" according to what one thinks it ought to be doing, it does not care about those things which the other side claims to be most important. That is the hardest thing to get many to understand. All that matters is what the price does. All of these things are already well known by market participants. If the price does not respond in the direction that some expect it to go based on such things, then the simple truth is that those things do not concern the MAJORITY of market participants at that time. That is not to say that at some point in the future sentiment or opinion regarding these things could shift. It is to say that they are not important until at some point they become important. Grasp this simple concept and you are well on your way to becoming a professional.
I hope you can see my point - it is one thing to attribute lower price moves in gold to the bullion banks during periods in which gold is sharply rising and the feds are attempting to contain it. It is yet another to blame nearly every single move lower in the metal on nefarious forces.
Here is yet the irony of this. All the hedge fund selling managed to do ( I am talking about the Flash Crashes ) was to provide an opportunity for JP Morgan to pick up the metal at an even better price. Out of the total of 4,469 deliveries issued thus far for December gold, JP Morgan's HOUSE ACCOUNT has stopped 4,194! This is not insignificant!
Keep in mind that we are now entering what I and many other professional traders term, "the Silly Season". By that I mean we are going to see liquidity begin to slowly decline as many traders will be closing out positions/squaring books, in anticipation of taking some time off for Christmas. Some will be out of the market next week and will not come back until the start of the New Year. The result of all this can be increased volatility with sometimes unpredictable and inexplicable swings in price as relatively large orders encounter air pockets both above and below the market.
Also, some of the commodity indices are increasing the percentage of gold and silver in their weightings for next year. That will bring in additional buying by those index funds who benchmark against those particular indices - more fuel for the Silly Season.
For you Silver guys and gals out there - the grey metal is holding above the $20 market and is no longer a Teenager". That is constructive but it has a lot of technical damage to undo before it is going to see any upside fireworks that endure. I need to see the metal scale the $21.25 barrier at a bare minimum before turning friendly towards it. It does seem to continue tracking quite closely with copper. By the way, Chinese data has been supporting copper recently.
The HUI is also digesting some of those big gains from yesterday. While not a technical level, I would like to see the index hold above the 200 mark, which is more of a psychological support level than anything. After all, we are talking a five year low here so keeping afloat above 200 would provide some consolation to the battered mining bulls.
As I type these comments, I am noticing Barrick is lower but well above the top of the huge gap on its daily price chart. As long as it holds that gap, the odds strongly favor a bottom in this stock. There is definitely some two way trade occurring in these mining shares now. That is a far cry from the one way trade that we have been seeing for a long time now. Goldcorp continues to reap some buying based off that recommended BUY from one of the analytical outfits yesterday.
I am noting something a bit peculiar at this time of the day - equities are lower ( almost 1% in the S&P), but long bond is also lower. Meanwhile the Dollar is also lower. That is certainly not the usual pattern we see. We rarely have seen all three of these markets down at the same time. Not sure what it might mean right now but it is certainly peculiar.
With the VIX shooting up above 15 once again, we would normally get some "safe haven" or risk aversion flows INTO TREASURIES and into the US DOLLAR. We are getting some of those flows into the Yen, which is the norm (even it is a ridiculously insane response ) but not into the Dollar. Again, I am not sure if this is a one day wonder tied more to position squaring or if it is the beginning of something more significant. I am inclined to believe it is more the former rather than the latter right now.
Bonds have come up off of their worst levels for the session but still remain lower as I type these comments meaning longer term interest rates are actually moving a wee bit higher even as the equities slide lower.
Some news in the livestock markets ( not actually market moving but interesting ). It appears that the growing number of drug resistant bacteria has caught the attention of the FDA. They are planning to now ask animal health companies and global drugmakers to voluntarily change the labeling on some widely used antibiotics which are routinely used in the industry. The idea is to bring such drugs under the oversight of veterinarians and do away with the over-the-counter use. Cargill just announced today that they have already been working to minimize the use of antiobiotics.
Another interesting tidbit of news today - EIA gave us some data that states the US demand for foreign oil was just 26.8% of the total demand of some 18.554 million barrels a day last week. That is the lowest level since February 1991! In 2005, foreign oil was a total of 60% of all US oil demand. This shale drilling has revolutionized the US oil picture and I am thrilled to see it. We are not even talking about federally owned lands either. Those remain largely shut to oil production.
Tuesday, December 10, 2013
Gold Mining Shares having a Strong Day
Barclays, in one of their research notes today, named Goldcorp as one of their top picks for 2014. They cited an expected increase in gold production of some 33% by the end of the year 2015. This is the result of heavy cap-ex in 2013 to bring these various projects to a state of production. They expect that spending will drop considerably in 2014 while gold output increases. The study also cited an expected cost of production at $888/ounce compared to the industry average of $959/ounce.
GG is up some 3.4% as I type these comments. The HUI is actually doing better as it is up some 4.2%.
It is refreshing to finally see some notes like this hitting the beleaguered mining sector. Value-based buying could very well put a bottom in the mining sector. If, and this is a big "IF", the shares stop moving lower, gold, the metal, will not be far behind. I would keep an eye on the reported holdings of the gold ETF, GLD, to see if that bleeding finally has been stemmed and the reported holdings begint to rise. That would be a clue that the worst is over.
Again, the jury is still out on this in my view but the chart action looks encouraging for a change. Even Barrick gapped higher today and is currently up over 5% on the day! It opened sharply higher on a strong gap and then pushed through the 20 day moving average. That is the first time it has been above this level since October 30th!
Note that the ADX has turned lower from a rather lofty level indicating a pause or interruption in the ongoing downtrend. The market could move into a consolidation pattern at these levels with value based buyers perhaps cementing the recent lows just above $15 as a higher secondary bottom from the low made this summer. The stock could conceivably move up to as high as $21.00 or so and still be in a broader range trade. If it were to climb past that level, on decent volume, it would confirm a long term bottom is in.
Barrick's lousy performance has been a type of proxy for the entire sector as a whole so if this stock were to turn and begin a leg higher, the rest of the sector will more than likely go along for the ride as well. Don't forget that just because a stock stops going down does not mean it is going to immediately start a sustained move higher. It could conceivably meander sideways for some time before a catalyst of some sort kicks it up and out of a range trade.
The intermediate term Weekly chart still shows the bears in control of this stock so try not to get too slap happy. Remain objective ( if you can) but enjoy the respite from the selling barrage.
GG is up some 3.4% as I type these comments. The HUI is actually doing better as it is up some 4.2%.
It is refreshing to finally see some notes like this hitting the beleaguered mining sector. Value-based buying could very well put a bottom in the mining sector. If, and this is a big "IF", the shares stop moving lower, gold, the metal, will not be far behind. I would keep an eye on the reported holdings of the gold ETF, GLD, to see if that bleeding finally has been stemmed and the reported holdings begint to rise. That would be a clue that the worst is over.
Again, the jury is still out on this in my view but the chart action looks encouraging for a change. Even Barrick gapped higher today and is currently up over 5% on the day! It opened sharply higher on a strong gap and then pushed through the 20 day moving average. That is the first time it has been above this level since October 30th!
Note that the ADX has turned lower from a rather lofty level indicating a pause or interruption in the ongoing downtrend. The market could move into a consolidation pattern at these levels with value based buyers perhaps cementing the recent lows just above $15 as a higher secondary bottom from the low made this summer. The stock could conceivably move up to as high as $21.00 or so and still be in a broader range trade. If it were to climb past that level, on decent volume, it would confirm a long term bottom is in.
Barrick's lousy performance has been a type of proxy for the entire sector as a whole so if this stock were to turn and begin a leg higher, the rest of the sector will more than likely go along for the ride as well. Don't forget that just because a stock stops going down does not mean it is going to immediately start a sustained move higher. It could conceivably meander sideways for some time before a catalyst of some sort kicks it up and out of a range trade.
The intermediate term Weekly chart still shows the bears in control of this stock so try not to get too slap happy. Remain objective ( if you can) but enjoy the respite from the selling barrage.
Grain Day
Lots of fireworks occurring in the grains today on the heels of a major USDA report. Currently all of the grains ( I am including beans in this category) are lower even though the numbers for corn and soybeans were initially considered supportive.
USDA lowered US stockpiles for both corn and beans based mainly on an expected increase in exports due to the lower prices we have been experiencing especially compared to last year. However, they did raise total global bean production, mainly due to an increase in Argentinian production. My reading of this report informs me that there is certainly not going to be any acute shortage of soybeans around. Usage has been strong however and that is keeping a floor beneath the market.
Expectations for beans heading into the report were for a reduction in the ending stocks; however, the number was within expectations and prices moved lower on a "buy the rumor; sell the fact" scenario.
Wheat stockpiles are growing. USDA raised the ending number by 10 million bushels above expectations catching some in the trade by surprise.
Overall the report seems to me to have taken the starch out of the recent move higher in corn and bean prices. It will take some further bullish demand news or some bullish supply side news to kick prices into any further strong rallies.
As many of you who regularly read this blog are aware, I keep a close eye on the grain markets, as well as the livestock markets, to try to get a sense of the overall direction of food prices.
Another thing I am taking away from this report - look for used farm equipment prices to get a bit of a shot in the arm from this data. The big banner money years that farmers had been seeing over the last few year years are over for a while. Corn prices are trading about 50% below their record price and while prices for both corn and beans are still good, they are no where near those historic highs. Maybe some good will come out of this in the sense that the hedge funds can stop buying up farm land in the Corn Belt and prices can bet back to more sane levels.
USDA lowered US stockpiles for both corn and beans based mainly on an expected increase in exports due to the lower prices we have been experiencing especially compared to last year. However, they did raise total global bean production, mainly due to an increase in Argentinian production. My reading of this report informs me that there is certainly not going to be any acute shortage of soybeans around. Usage has been strong however and that is keeping a floor beneath the market.
Expectations for beans heading into the report were for a reduction in the ending stocks; however, the number was within expectations and prices moved lower on a "buy the rumor; sell the fact" scenario.
Wheat stockpiles are growing. USDA raised the ending number by 10 million bushels above expectations catching some in the trade by surprise.
Overall the report seems to me to have taken the starch out of the recent move higher in corn and bean prices. It will take some further bullish demand news or some bullish supply side news to kick prices into any further strong rallies.
As many of you who regularly read this blog are aware, I keep a close eye on the grain markets, as well as the livestock markets, to try to get a sense of the overall direction of food prices.
Another thing I am taking away from this report - look for used farm equipment prices to get a bit of a shot in the arm from this data. The big banner money years that farmers had been seeing over the last few year years are over for a while. Corn prices are trading about 50% below their record price and while prices for both corn and beans are still good, they are no where near those historic highs. Maybe some good will come out of this in the sense that the hedge funds can stop buying up farm land in the Corn Belt and prices can bet back to more sane levels.
Shades of Harry Potter
Or better yet - look out for Klingon and Romulan cloaking devices....
This is a fascinating read...
Chinese scientists upbeat on development of invisibility cloak
http://www.scmp.com/news/china/article/1376652/chinese-scientists-upbeat-development-invisibility-cloak
And some wonder why American students falling behind the rest of the world in science is so hugely important....
This is a fascinating read...
Chinese scientists upbeat on development of invisibility cloak
http://www.scmp.com/news/china/article/1376652/chinese-scientists-upbeat-development-invisibility-cloak
And some wonder why American students falling behind the rest of the world in science is so hugely important....
Gold breaks Resistance
We are experiencing a nice upmove in gold in today's session which is also being participated in by silver.
There are a couple of things at work today. First, after expectations that the Fed was going to announce a tapering at next week's FOMC meeting, traders have now largely dialed that back.
Secondly, and more importantly, this is contributing to further US Dollar weakness. We saw that yesterday but it is more notable in today's session as the USDX slid under the 80 level.
The Dollar has been recently been trapped in a range trade of its own. The top comes in between 81.40 - 81.00 while the bottom of the range is 79.20 - 79.05. As the Dollar has pushed higher in this range, gold has pushed lower. Now that the Dollar is breaking lower and moving back towards the bottom of the range, gold is powering higher.
In the case of gold, its upward progress has been exaggerated due to the build in hedge fund short positions which are vulnerable anytime one of these overhead chart resistance levels can be violated. That brings on another wave of strong short covering, which coupled with bottom picking, results in some sharp moves higher.
It should also be pointed out that we are now at that time of the year when some traders are going to begin squaring books for the end of the year. Shorting gold has been a fantastically profitable trade for 2013 and many shorts will look at the recent price action and decide to actually book those profits before they slip away.
Remember the old adage in trading: Bulls make money; Bears make money but Pigs get slaughtered.
In looking at the chart there are two things to note. The first is that HUGE VOLUME that I have noted on the chart when gold went back down and RETESTED the recent low of $1210 on that payrolls number. As mentioned in a post that day, the price action caught my attention as it portended a possible exhaustion day of the bearish leg lower. Gold however was unable to extend past the initial resistance level noted on the chart which would have confirmed that $1210 region as a double bottom on the chart. It did so today however and that needs to be respected.
I have made some annotations on the price chart. Today's move higher does open the door to a move up towards what will be stubborn selling resistance near $1290 - $1295. Bulls will want to see gold maintain these strong early-session gains however as the day wears on to give the market a realistic shot at such a scenario.
If this move is for real, we will not want to see the rally being losing steam as the day drags on. That would indicate that the short covering burst is failing to attract FRESH NEW BUYING.
Also helping gold is the fact that the HUI has managed to recapture the 200 level.
I am noticing that interest rates are moving lower once again as traders dial back expectations on the timing of any tapering. That is why the Dollar is seeing selling pressure and why gold is moving higher as a result. Recent action in interest rates reveal that rising rates on the long end of the curve have tended to bring selling into gold. In the absence of any widespread inflation fears, traders have tended to see this as a reason to sell gold.
We'll keep monitoring price action and see if we can decipher what the market is thinking.
There are a couple of things at work today. First, after expectations that the Fed was going to announce a tapering at next week's FOMC meeting, traders have now largely dialed that back.
Secondly, and more importantly, this is contributing to further US Dollar weakness. We saw that yesterday but it is more notable in today's session as the USDX slid under the 80 level.
The Dollar has been recently been trapped in a range trade of its own. The top comes in between 81.40 - 81.00 while the bottom of the range is 79.20 - 79.05. As the Dollar has pushed higher in this range, gold has pushed lower. Now that the Dollar is breaking lower and moving back towards the bottom of the range, gold is powering higher.
In the case of gold, its upward progress has been exaggerated due to the build in hedge fund short positions which are vulnerable anytime one of these overhead chart resistance levels can be violated. That brings on another wave of strong short covering, which coupled with bottom picking, results in some sharp moves higher.
It should also be pointed out that we are now at that time of the year when some traders are going to begin squaring books for the end of the year. Shorting gold has been a fantastically profitable trade for 2013 and many shorts will look at the recent price action and decide to actually book those profits before they slip away.
Remember the old adage in trading: Bulls make money; Bears make money but Pigs get slaughtered.
In looking at the chart there are two things to note. The first is that HUGE VOLUME that I have noted on the chart when gold went back down and RETESTED the recent low of $1210 on that payrolls number. As mentioned in a post that day, the price action caught my attention as it portended a possible exhaustion day of the bearish leg lower. Gold however was unable to extend past the initial resistance level noted on the chart which would have confirmed that $1210 region as a double bottom on the chart. It did so today however and that needs to be respected.
I have made some annotations on the price chart. Today's move higher does open the door to a move up towards what will be stubborn selling resistance near $1290 - $1295. Bulls will want to see gold maintain these strong early-session gains however as the day wears on to give the market a realistic shot at such a scenario.
If this move is for real, we will not want to see the rally being losing steam as the day drags on. That would indicate that the short covering burst is failing to attract FRESH NEW BUYING.
Also helping gold is the fact that the HUI has managed to recapture the 200 level.
I am noticing that interest rates are moving lower once again as traders dial back expectations on the timing of any tapering. That is why the Dollar is seeing selling pressure and why gold is moving higher as a result. Recent action in interest rates reveal that rising rates on the long end of the curve have tended to bring selling into gold. In the absence of any widespread inflation fears, traders have tended to see this as a reason to sell gold.
We'll keep monitoring price action and see if we can decipher what the market is thinking.
Sunday, December 8, 2013
QE is not Producing Inflation here in the US
In response to some private emails, I wanted to post up a chart detailing why, in spite of the massive amount of money created through the Federal Reserve's Quantitative Easing, there simply does not seem to be a massive wave of inflation building here in the US. Some may be wondering why I tend to focus on this thing termed, "Velocity of Money" but in my view, even though at times it may seem to delve into the realm of the esoteric, nothing can be more important in determining the future direction of the gold price.
Many will recall that when the first QE program was instituted ( late 2008) commodity prices and stock prices both bottomed out. The view of the majority of investors/traders was that the creation of such enormous sums of money through bond buying and mortgage backed security buying was going to result in a sharp jump in inflation. Almost as if on cue, commodity prices began to rocket higher as hedge funds jumped in on the long side of that asset class.
As the initial QE I began to near expiration, the Fed announced round 2 and thus QE II was born. More commodity buying ensued with gold soaring higher, eventually reaching a peak above $1900.
A strange thing began to happen however after QE II wound down - after that was replaced by QE III, Operation Twist, and then QE IV, gold continued to move lower along with most of the rest of the commodity complex. The US equity markets continued to ascend however.
I am not an economist nor do I make any such pretense of so being. What I am is a trader and traders have to notice when markets no longer respond in the manner to which one expects or assumes that they will respond.
Something had changed and for whatever the reason ( we can leave that to those who are more sophisticated about such matters ) a general wave of deflationary pressures surfaced in the commodity complex. I maintain that most of the "money" being created by the QE programs has not and continues to NOT make its way into the broader economy. It has gone primarily into the hands of speculative forces which have directed into equities. In other words, while these QE programs have not resulted in the widespread outbreak of inflation that most market participants originally expected them to produce during rounds I and II, one thing I think we can say with absolute certainty, is they have indeed produced a MASSIVE WAVE OF INFLATION in the US EQUITY MARKETS.
Such huge sums of "money"/ liquidity cannot be conjured into existence WITHOUT SOME CONSEQUENCES SOMEWHERE. To believe otherwise is to suspend all economic common sense and logic.
Let me interject one note here when it comes to general commodity prices. Many who read this site have seen me use ( to the point of disabuse ) the phrase, " the best cure for high prices is high prices". What is meant by this is that high prices encourage those entities engaged in the creation/manufacture/production/growth of the various commodities that are rising in price to INCREASE their production in order to maximize their profits as they take advantage of this increase in the price.
This is capitalism at its finest - the market gives the signal and the industry responds to the signal. As the supply then increases due, it eventually overwhelms the demand at that level and price then falls to balance the new increase in supply with the current level of demand.
During the run up in commodity prices during QE I and QE II, producers/growers, etc. responded to the higher prices by ramping up the supply. As there is always a lag time between the rise in price and the subsequent increase in supply, we are now seeing that. One can merely look at the corn and soybean markets as an example. I had quipped to some newswire writers and some friends that these extreme prices for both of these commodities was going to send growers in both S. America and here in N. America down to their local Home Depot/Lowes to buy clay pots and other assorted window boxes so as to have even more space/"land" to plant these crops. Lo and behold, we put in a record corn crop this year and an extremely large bean crop. Ditto for S. America.
So now we have two forces that have been working against any rises in commodity prices ( in general ). The increase in supply resulting from higher prices a couple of years ago combined with an outflow of speculative money in SEARCH OF YIELD in this NEAR-ZERO interest rate environment.
This has been a bit of a digression from my main point here but I felt it was important enough to note this. Here is that chart again:
Note how in spite of the QE programs, this key indicator, has continued to fall. Again, not being an economist I cannot get into all the when, where's and why's about this indicator but suffice it to say, my understanding of the inflation phenomenon, in the sense of sharp jumps in inflation, requires that money be changing hands in the general economy at an INCREASING RATE. That is clearly not happening.
What is rather startling is that this indicator has fallen to its lowest level since this data set was collected. That was over 50 years ago!
Look closely at the last grey area on the chart indicating a recession. Can you see how the Velocity of Money plummeted during the onset and into the depth of the credit crisis that erupted in 2008? Then look at the brief blip higher on the right edge of that grey region. Velocity of Money shot up rather sharply when QE I was announced. However it did not last in that uptrend for long. The graph peaked in the second half of 2010 and has been moving lower ever since.
Here is a closer look:
It continued moving higher for nearly a year after the Velocity of Money turned lower. Some of this is the result of the sharp fall in the US Dollar that began at precisely the same time that the Velocity of Money chart peaked.
Here is a chart of the US Dollar index peaking at the same time VoM turned lower:
We then had the outbreak of the European Sovereign Debt crisis which triggered another huge round of gold buying but once that crisis was "contained" ( not solved ) there was nothing left to support gold based on the "inflation is inevitable" prognosis as the Velocity of Money continued moving lower.
Note how gold turned lower after the ECB took actions to stem the bleeding in the European sovereign debt market:
It seems to me that gold is now basically mirroring the Velocity of Money at this point. Outbreaks of confidence-rattling episodes have brought buying into the metal, but once that issue(s) is(are) resolved, or better, removed from the forefront of trader/investor's minds, the path of least resistance takes over and gold heads downwards once again.
This now brings me full circle to why I believe any sort of SUSTAINED RALLY in the price of gold will not occur until either CONFIDENCE in the ability of the monetary masters is shattered or rattled, or INFLATION EXPECTATIONS begin to arise. The latter is tied directly to the Velocity of Money in my opinion. When/if we see that indicator turn higher, gold prices should respond. I do want to note however that it will be important to also watch the bond/interest rate market to confirm market sentiment in that regards.
As always, we can posit a theory but until the market confirms it and sentiment shifts in that direction, a theory is simply that, a theory, or better, an opinion.
Many will recall that when the first QE program was instituted ( late 2008) commodity prices and stock prices both bottomed out. The view of the majority of investors/traders was that the creation of such enormous sums of money through bond buying and mortgage backed security buying was going to result in a sharp jump in inflation. Almost as if on cue, commodity prices began to rocket higher as hedge funds jumped in on the long side of that asset class.
As the initial QE I began to near expiration, the Fed announced round 2 and thus QE II was born. More commodity buying ensued with gold soaring higher, eventually reaching a peak above $1900.
A strange thing began to happen however after QE II wound down - after that was replaced by QE III, Operation Twist, and then QE IV, gold continued to move lower along with most of the rest of the commodity complex. The US equity markets continued to ascend however.
I am not an economist nor do I make any such pretense of so being. What I am is a trader and traders have to notice when markets no longer respond in the manner to which one expects or assumes that they will respond.
Something had changed and for whatever the reason ( we can leave that to those who are more sophisticated about such matters ) a general wave of deflationary pressures surfaced in the commodity complex. I maintain that most of the "money" being created by the QE programs has not and continues to NOT make its way into the broader economy. It has gone primarily into the hands of speculative forces which have directed into equities. In other words, while these QE programs have not resulted in the widespread outbreak of inflation that most market participants originally expected them to produce during rounds I and II, one thing I think we can say with absolute certainty, is they have indeed produced a MASSIVE WAVE OF INFLATION in the US EQUITY MARKETS.
Such huge sums of "money"/ liquidity cannot be conjured into existence WITHOUT SOME CONSEQUENCES SOMEWHERE. To believe otherwise is to suspend all economic common sense and logic.
Let me interject one note here when it comes to general commodity prices. Many who read this site have seen me use ( to the point of disabuse ) the phrase, " the best cure for high prices is high prices". What is meant by this is that high prices encourage those entities engaged in the creation/manufacture/production/growth of the various commodities that are rising in price to INCREASE their production in order to maximize their profits as they take advantage of this increase in the price.
This is capitalism at its finest - the market gives the signal and the industry responds to the signal. As the supply then increases due, it eventually overwhelms the demand at that level and price then falls to balance the new increase in supply with the current level of demand.
During the run up in commodity prices during QE I and QE II, producers/growers, etc. responded to the higher prices by ramping up the supply. As there is always a lag time between the rise in price and the subsequent increase in supply, we are now seeing that. One can merely look at the corn and soybean markets as an example. I had quipped to some newswire writers and some friends that these extreme prices for both of these commodities was going to send growers in both S. America and here in N. America down to their local Home Depot/Lowes to buy clay pots and other assorted window boxes so as to have even more space/"land" to plant these crops. Lo and behold, we put in a record corn crop this year and an extremely large bean crop. Ditto for S. America.
So now we have two forces that have been working against any rises in commodity prices ( in general ). The increase in supply resulting from higher prices a couple of years ago combined with an outflow of speculative money in SEARCH OF YIELD in this NEAR-ZERO interest rate environment.
This has been a bit of a digression from my main point here but I felt it was important enough to note this. Here is that chart again:
Note how in spite of the QE programs, this key indicator, has continued to fall. Again, not being an economist I cannot get into all the when, where's and why's about this indicator but suffice it to say, my understanding of the inflation phenomenon, in the sense of sharp jumps in inflation, requires that money be changing hands in the general economy at an INCREASING RATE. That is clearly not happening.
What is rather startling is that this indicator has fallen to its lowest level since this data set was collected. That was over 50 years ago!
Look closely at the last grey area on the chart indicating a recession. Can you see how the Velocity of Money plummeted during the onset and into the depth of the credit crisis that erupted in 2008? Then look at the brief blip higher on the right edge of that grey region. Velocity of Money shot up rather sharply when QE I was announced. However it did not last in that uptrend for long. The graph peaked in the second half of 2010 and has been moving lower ever since.
Here is a closer look:
Here is a chart of gold:
It continued moving higher for nearly a year after the Velocity of Money turned lower. Some of this is the result of the sharp fall in the US Dollar that began at precisely the same time that the Velocity of Money chart peaked.
Here is a chart of the US Dollar index peaking at the same time VoM turned lower:
We then had the outbreak of the European Sovereign Debt crisis which triggered another huge round of gold buying but once that crisis was "contained" ( not solved ) there was nothing left to support gold based on the "inflation is inevitable" prognosis as the Velocity of Money continued moving lower.
Note how gold turned lower after the ECB took actions to stem the bleeding in the European sovereign debt market:
It seems to me that gold is now basically mirroring the Velocity of Money at this point. Outbreaks of confidence-rattling episodes have brought buying into the metal, but once that issue(s) is(are) resolved, or better, removed from the forefront of trader/investor's minds, the path of least resistance takes over and gold heads downwards once again.
This now brings me full circle to why I believe any sort of SUSTAINED RALLY in the price of gold will not occur until either CONFIDENCE in the ability of the monetary masters is shattered or rattled, or INFLATION EXPECTATIONS begin to arise. The latter is tied directly to the Velocity of Money in my opinion. When/if we see that indicator turn higher, gold prices should respond. I do want to note however that it will be important to also watch the bond/interest rate market to confirm market sentiment in that regards.
As always, we can posit a theory but until the market confirms it and sentiment shifts in that direction, a theory is simply that, a theory, or better, an opinion.
Saturday, December 7, 2013
Barrick Gold
This chart is in response to a query from a reader....
The intermediate term shows the bears still in control of this issue. The downtrend was interrupted in late July. Since then ABX has been moving in a sideways or consolidation pattern. Price remains well below the key 50 week moving average.
The ADX is beginning to turn higher indicating the possibility that this stock could be resuming its bearish trend lower. Bulls cannot allow the price to fall below the July low or further losses will be seen.
If the bulls can take price past $22.50, they will regain control of the stock.
The intermediate term shows the bears still in control of this issue. The downtrend was interrupted in late July. Since then ABX has been moving in a sideways or consolidation pattern. Price remains well below the key 50 week moving average.
The ADX is beginning to turn higher indicating the possibility that this stock could be resuming its bearish trend lower. Bulls cannot allow the price to fall below the July low or further losses will be seen.
If the bulls can take price past $22.50, they will regain control of the stock.
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