Gold Biding Time; Corn Whalloped

The gold market was relatively quiet in today's session as most traders did not want to get too aggressive ahead of a major payrolls report due out tomorrow. That is when the action should pick up.

It does seem to be holding support at the zone noted on the chart below. That is roughly between $1220 - $1224. Notice that once again volume is shrinking but that volume on the down bars continues to exceed that on the up bars. The bears are still in control for now.

There has been a bit of weakness in the US Dollar today which is helping to bring some small buying into gold but as noted above, it is not large. The mining shares are moving lower perhaps partly in response to a Moody's analysis.
I am noticing that a growing number of the larger banks and analytical firms are lowering their price forecast for gold based on the same things that I and others who read this site have been mentioning - the lack of perceived inflation pressures and the steady rise in US interest rates.

Barclay's is expecting a retest of $1050 in gold later this year. Moody's, mentioned above,  lowered their gold price forecast from $1200 to $1100 and also cited concerns about the health of some miners if prices move that low. That same firm lowered their expected silver price from $20 to $18.

Bank of America/Merrill Lynch lowered their projected gold price 11% to $1,150 and their silver price by 21% to $18.38.

You can see how sentiment in gold is being impacted. This is what I refer to when I try to explain to some that it is SENTIMENT that moves MONEY and it is these money flows or lack thereof that drive market prices. Good traders try to grasp sentiment shifts and move with them in order to profit. They do not get married to their opinions but are responsive to changing market perceptions. If you are wrong; you are wrong and you get out of a trade that has gone bad. You do not sit in it and argue why you are right!

That brings me back to the lack of inflation pressures. Something of importance occurred today -corn prices notched a 40 MONTH LOW. Yes, you read that correctly. Wheat prices scored a 21 month low. Sugar prices hit a 42 month low.

The Goldman Sachs Commodity Index hit a 2 month low today as a result of all this. If there are inflationary pressures building in the US economy, they are certainly not occurring in the general price of commodities, especially in the grains.

The standout to this is in the cattle markets where the combination of back to back drought years in 2011 and 2012, combined with high corn prices until recently, has led to wholesale liquidation across the US herd with the result that supply is now being impacted. Throw in a dose of severely cold, record breaking temperatures, and cattle prices are very strong, record strong I might add. While consumers might get a break from the high prices for grain-based products, they should get ready for sticker shock at the meat counter.

One of the things that I am beginning to do as a result of all this is to re-examine my view of what it is going to take to drive the price of gold higher. For many years now, those who were looking for stronger gold prices have been doing so based on continued weakness in the US economy. That weakness has given rise to the Fed's QE programs. The thinking has been that the longer the US economy remains weak, the longer the Fed will have to continue its bond buying program. The longer the QE program continues, the more liquidity that the Fed must provide and the more liquidity the Fed provides, the more friendly it is for the gold price.

That has obviously not been the case for the last several years. Not only has gold been sinking in price, along with silver, but nearly every other commodity has as well. Large speculators realized that the Fed's program was not having the expected impact on the US Dollar and thus they rethought their reasons for having exposure to anything tangible. After all, if the Fed's programs were not generating rapid growth, then why tie up capital in a sector that was being impacted by both shrinking demand/growing supply.

While this has been going on, we have been getting a series of payroll data. That data, until recently, has confirmed tepid job creation and a shrinking labor participation rate. Taken together, both are NOT a recipe for strong consumer spending. Thus the deflation side of the argument was proven to be the correct side. The economy was limping along fueled only by periodic injections of Fed-supplied liquidity but this was not making it into the broader economy. It stayed in Wall Street but no where else did it seem to go. Thus, no inflationary pressures were building...

I am now of the opinion that those who want to see higher gold prices had best be cheering for STRONG PAYROLL NUMBERS and not weak ones. They had best start cheering for shrinking unemployment numbers based not on a shrinking labor participation rate but rather on real hiring. They had best start rooting for increases in consumer spending noted in retail sales and increases in overall consumer credit. They had best cheer for strong PMI Numbers whether manufacturing based or service based. In other words, if two + years of QE has not produced inflationary pressures because of the structural issues in the US economy then why would another year, or two years, or even five years, do anything? It will not in my opinion.

What is necessary for gold now to recover and begin to trek upwards in sustained fashion is inflation or more accurately, the fear or concern of inflation building into the economy. That is not going to happen until WAGES RISE and wages are not going to rise as long as employers do not have to aggressively compete for workers. What will be needed is a catalyst to shift the sentiment in the market away from its current, "The economy is on the mend with slow but steady growth and no inflation" to one of, "The economy is growing strongly and inflationary pressures are building".

When we might get this sort of shift in sentiment is unclear to me as I no more know the future than the next guy. But I do now believe that is what will be necessary to see gold recapture its allure. I suspect that if and when we get such a scenario as the latter one, we will also see the US Dollar weaken. The problem for gold is that as long as the Dollar remains strong, the "anti-dollar", is not going to be sought after as a refuge.

I am noting that even though we are seeing this weakness across many of the commodity markets and in the GSCI in general, gold is holding support fairly well right now. I wonder, if perhaps gold might just be sniffing out some improvements in the US economy and anticipating such a change. I think its reaction to tomorrow's jobs number might be very informative in this regards. If the market does not completely fall apart if we do happen to get a very strong jobs number, it could be that gold is anticipating this improvement in the consumer's well being as the job market improves. We'll just wait and see what we get and go from there.

Traders - stay nimble and stay objective....
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Proof that Gold was Slammed

Don't you love these catchy titles? I apologize to the reader but I just could not resist having a bit of fun. When it comes to gold, it is never boring.

Look - no matter what one thinks of what happened to gold the other day, my view is really simple - Gold needs an inflationary environment in which to thrive. Generally speaking, it also requires an environment in which REAL INTEREST RATES are negative. An inflationary environment in which REAL interest rates are positive ( nominal interest rate yields EXCEED the official rate of inflation as measured by the CPI) is detrimental to the gold price.

Back in the early 1980's, Fed chairman Paul Volcker broke the back of the gold rally by raising short term rates to extremely high levels - higher than the rate of inflation - thus giving buyers of Treasury enormous, risk free profits by moving out of gold and into Treasuries. In the process he slowed down the economy and brought on a recession but he broke the back of the inflation genie that was rampant in the US at the time.

Generally speaking - gold tends to have problems in such an environment because it throws off no yield. Investors who buy it want to see it outperform essentially risk free returns in Treasuries. The only way most investors are going to make a return on gold is through capital gains. In other words, its price needs to rise at a faster pace that the rate of inflation or at the very least, at a faster pace than the rate at which Treasury yields are going up.

I said all this to just make a point - there is no need - AT THIS TIME - for the Fed to fight any sort of rise in the price of gold because the market is convinced that the QE programs have not led to rampant price inflation as many anticipated they would.

Take a look at the following commodity index, the GSCI, and tell me, honestly and without any bias whatsoever, in which direction is the WHOLESALE PRICE of commodities generally headed? Is it up or is it down? The answer is obvious is it not.

Commodity prices have been GRINDING LOWER for over TWO YEARS NOW after spiking to a peak in early 2011. What has the price of gold been doing over that same period? Yep - it has been moving lower as well has it not?

What is so hard to understand about this? There is not the least scintilla of evidence that there is any upward price pressure in things tangible as a whole. So why do some keep insisting that gold should be thousands of dollars higher in price????

Some may want to look at the US Dollar but what has it been doing?

Again, since the early part of 2011, ( GEE WHAT A COINCIDENCE - note the GSCI chart above ) it has been strengthening, first SHARPLY and then, since early 2012, within a more gradual upward sloping price channel. Either way, it is no longer moving sharply lower as it had been during the bullish phase in the gold price. As a matter of fact, the rising Dollar has been an effective lid on rising commodity prices in general.

Now, and lastly, take a look at the weekly chart of the S&P 500 index.

Note that since its bottom in October of 2011, to its current price near 1840, it has returned a stunning 64% return.

Now consider all three of these charts together - given that commodity prices are weak and moving lower, given that the Dollar is strong and moving higher, and given that equities are returning such strong gains, why on earth would any investor rush into gold as protection against runaway inflation and lose missing out on such stellar returns in the US stock markets?

Given all these things, yet, we are to believe according to some, that gold is ready to lift off into the stratosphere any day now and that only manipulation of its price is preventing this from occurring.

Those who cite this manipulation are also ready to whip out the latest GOFO rates, backwardation, etc, to bolster their case that it is only through the clandestine activities of the big bullion banks, working at the behest of the Fed and the US government, that gold is kept from roaring upwards.

Dear reader, just look at the above series of charts and remind yourself, that when the commodity complex shows signs of shifting from a downtrend to an uptrend, when the Dollar shows signs of moving from a gradual uptrend to a downtrend, and when the US stock market shows signs of finally giving up the ghost and moving lower, then gold will have its day.

This is not meant to disparage any of those who keep advocating this manipulation stuff as I count some of them as my friends. It is however meant to discredit their notion that gold is under constant manipulation AT THIS TIME. It is not in my opinion as there is NO REASON FOR GOLD TO RISE sharply right now.

Those who are buying the metal are those who have nagging concerns about the overall well-being of the so-called "global economy". There remain trouble spots in the Euro zone, that is for certain. Also, the gargantuan debt of the US government with its massive amount of unfunded liabilities is not going away. However, and this is key, these are value-based buyers with a LONGER TERM horizon than the majority of hedge funds/investment funds/money managers who are paid to PERFORM in the here and now.

When that money flow from those sources re-enters the gold market, then the metal will rise and will continue to rise as long as that money flow persists. Until then, the feds do not need to waste their time with gold for Western investors are simply not interested in it. Asia is - but Asia, for all its size, is still not Western investment money flows.

Gold chart from Yesterday's Selling Barrage

For those who enjoy entrail reading  of price charts as I do, I thought you might find the following chart an enjoyable reading experience. It is a one second chart and shows the tremendous volume that resulted from yesterday's selling outbreak in gold.

It is difficult to get any sense of perspective when viewing the chart on a one second time frame so I am putting up another one with a big longer time perspective on it so that you can see just how large the number of contracts that were that traded.

Here is a 20 second chart - notice how the volume on the recovery higher exceeded that of the volume on the way down.

I must say that the speed at which this thing recovered makes me suspect more of an erroneous trade than anything. Open interest readings in gold showed a sharp drop of some 6,243 contracts in the most active February contract in yesterday's wild session. Overall volume was not particularly high given the huge sell order that hit the pit around midmorning EST. It came in at a mere 158,991 on the screen. Combined with the pit trade volume, it did not even make it 200,000. That is not large by comparison to other heavy volume days.

If this was a fresh sell order which was met by fresh buying, we would have seen it by an INCREASE in the day's open interest. We did not get that.

One thing I can say from looking through the data was that some short-term longs were kicked out of the market on the plunge lower as their stops were hit so we obviously got some decent sized long liquidation. But that long liquidation must have been met by some short covering as well.

Here is the other thing I can say from going through this stuff - the sell off occurred at a key technical price level on the chart. Gold failed to extend higher as a result. The price fell to, but did not break below initial chart support near $1225 or so - YET. If it does, the support zone that brought in buying yesterday was near the $$1210 level will need to hold to prevent a retest of psychological support at $1200. The mining shares are holding up which should give the bulls some consolation. That will need to continue.

Where gold goes from here is anyone's guess at this point but keep in mind that on the intermediate term chart, the bears remain in control of the market until PROVEN otherwise. The weekly chart shows a downturn in the ADX indicating a break in the downtrend but negative directional movement ( RED LINE ) remains above positive directional movement ( BLUE LINE ). Bearish forces dominate as long as that is the case. The level near $1180 is critically important!

Gold backs down from Resistance

Yesterday's selling barrage up near the resistance zone noted on the chart ( from whatever source it was from it makes no difference from a TA standpoint ) effectively checked the upward progress of gold which moved lower in today's session. A late-in-the-day move higher in some of the gold mining stocks pulled gold off its worst levels of the session with the result that it reinforced the initial support level noted on the chart.

So what do we have for now? Answer - a market ranging between $1245 or so on the top and $1225 or so on the bottom. I am noticing that down volume is picking up which has to concern one if they are bullish but other than that I get no clear sense of overall direction as to any trending move in the metal. It continues to move in a sideways direction.

To kick the metal higher and to give it a chance at perhaps some sort of trending move upwards, bulls will need to take out yesterday's high put in just ahead of the selling barrage that was unleashed. That would set up a shot at testing stronger resistance near $1256 that extends to $1260 and then $1265 or so.

Downside support near $1225 must hold firm to prevent  a drop back towards $1214 - $1210.

If equities continuing moving higher, I think gold will encounter more selling pressure especially if interest rates on the Ten Year tend to hover around the 2.90% level. These higher rates tend to attract money into Treasuries in search of some stable yields and undercut reasons to own gold in the minds of many investors. Remember, gold needs NEGATIVE INTEREST RATES to thrive. If investors believe inflation is low and if REAL INTEREST RATES are consequently positive, gold will lose a reason to own it.

Gold does seem to have bottomed out for now but looks to me to be a market in search of a reason/catalyst to add to its gains. One has to wonder if the physical market demand for the metal, demand which allowed price to push away from sub $1200 prices very quickly, would still remain brisk if prices were to push much higher. That buying must stay strong as Western investment demand from large specs remains suspect.

Gold and the Australian Dollar

Trying to get a read on the gold market has been a bit tricky since we have had to deal with end-of-the-year positioning and now, since the start of the year, index fund rebalancing of portfolios (along with front running of that buying by pit locals). Along with that we have had reports of strong demand for gold out of Asia. If that has not been enough, we all watched a massive selling barrage occur over a one second interval yesterday. Now today we are seeing evidence of the effectiveness of the capping that occurred at a technically significant chart level.

I am noticing a couple of things today that I thought I would share. First is that equities are soaring higher here early in the trading session. That has NOT been the case since the start of trading at the New Year. This is the first UP day in equities since last Thursday.  Also, the Yen is weaker today. It did seem that there was a slight correlation between the downward bias in the broad equity markets and the recent strength in gold - a type of safe haven play, perhaps? Now that equities are moving higher today, gold is moving lower. That was pretty much the theme for the latter part of last year.

Another thing I am watching is the price action of the Australian Dollar of late. The Aussie is sometimes viewed as a type of proxy for the broad commodity complex. This stems from the nature of the Australian commodity which remains very dependent on the export of raw materials in general. Old time traders tended to watch the direction or bias of the Aussie to get a feel for where commodity prices ( in general) were headed.

Take a look at the following chart of Gold vs the Aussie ( No, this is not a Mortal Kombat match - if it were, perhaps gold would have a killer combo move to break free!). Look at how closely the gold price has been tracking the Australian Dollar since the middle of last October. The two are moving almost in perfect sync. I do not know how long this relationship might last or even if it is foretelling anything at this point but it is something we may want to at least keep track of for potential, and I stress the word, 'potential' clues to gold's future fortunes.

When I see a chart like this, where one commodity is moving in pretty good sync with another, it tends to reinforce general trading themes in my mind and at a minimum, perhaps get a glimpse into the general sentiment, even if it is only for the shortest of terms. The one thing about trading these modern markets - the themes change faster than some politicians' convictions!

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A lot can Happen in One Second...

Apparently a $30 plunge among them. Nanex is reporting that in just one second, 4,000 contracts traded hands! Yes, you read that correctly - FOUR THOUSAND!

Eric Hunsander, according to a report by Dow Jones, stated that in the past, 1,000contracts/second has halted trading in gold. He went on to say that 2,000 contracts/second is very rare.

I will leave the implications to the reader.

It is quite remarkable to say the least.

A Real FLASH CRASH

AS those of you who regularly read this blog know, I have minced no words in mocking those whose constantly sing "Gold is being "FLASH CRASHED" by nefarious forces ( usually references to the bullion banks). I have no doubt that there have been large orders that have taken prices down, sometimes during the thin trading conditions in early morning European/N America hours - what I take strong objection to is that these orders were the work of the big bullion banks. My view is that those orders were from hedge funds.

I think I have provided enough documentation to make my point so I am not going to waste any more of the reader's time in rehashing this once again other than to say that my view is that the bullion banks have been buying gold on the way down; not selling it. After all, when JP Morgan's HOUSE ACCOUNT has been the largest stopper of gold during the December gold contract's delivery process, it is a no-brainer that they were buying the metal from large speculators who were selling it. They ( the bullion banks) provide resistance to gold ( SELL) on the way up; not on the way down! I have written quite often on that in the past.

However, today is a great example of a legitimate FLASH CRASH. You will note that it occurred during a COUNTER TREND RALLY in gold during which the price had rallied some $65+ off the recent low.

I had remarked about the dwindling volume during this rally suggesting that it was not fresh, hot money taking long positions in gold but rather the ABSENCE OF WILLING SELLERS that had created an air pocket above the market which provided very little in the way of resistance to the recent "MELT UP" we have been watching taking place in the metal.

Index funds, rebalancing their portfolios ( more exactly - lots of front running by some traders ahead of and alongside of that large index fund buying), must buy gold contracts irregardless of current fundamentals in order to align their books with the new index weightings. Most traders who understand that are not going to fight that forced buying but will merely stand aside and let it happen while they wait for a higher price level against which to sell or perhaps even get long for a very short term trade.

Today, as gold rallied into an important resistance zone centered near the $1245 region, at 10:14 EST, a flurry of orders resulted in 11,662 contracts trading hands. That is no small feat! The result was a drop in the gold price of some $30 in one minute. Now my friends, THAT IS A FLASH CRASH, not the crap that these others have been telling us about. You will also note that it took place during New York trading hours while the pit session was open; it was not something that occurred during the low liquidity overnight hours. I should also note here that the size of the order to sell was so large that many traders believed it was an erroneous trade and that CME would note that. Well, CME made a statement saying that ALL GOLD TRADES WOULD STAND. So much for any notion of a bad trade!

Can you see the difference/distinction?  Note how the volume during the UP BARS - in BLUE) continued to dry up as the market melted higher. Now look at the MASSIVE spike in volume the accompanied the huge spike in the price range!

This large selling took place during an UPMOVE in gold that has been taking place since the beginning of the year, not during a downtrending phase and the volume was ENORMOUS.

I will try to get a bit more information on this for you as the day progresses but needless to say attempting to trade something like this is not for the faint of heart. I will want to see the final volume of trade for the rest of the day as well as the data from the CME Group tomorrow to make a final assessment but needless to say, gold is now at a crossroads. If, and this will be a big, big "IF", the bulls can take price through today's high and they can do that on big volume, then gold has a very good shot at pushing up for a test of the last overhead resistance barrier noted on the chart. I would want to see a push past that level than can be maintained to convince me that the tide has finally turned in favor of the metal in regards to higher prices down the road.

The speed at which the price went down, and the speed at which it recovered, is very, very interesting. It looks as if we have a battle going on with both sides dug in for now. We'll see which side gains the advantage.

Robust physical demand from Asia has put a floor in the market for now. The big question is whether or not money managers in the West want to tie up portions of their client capital in gold for 2014 or stick with their large and lopsided exposure to equities.

My leaning at this point is that gold is now entering a range trade and will be capped on the upside with good physical offtake of the metal providing a solid floor of support on the downside. The range looks to be roughly $1250 on the top and $1200 on the bottom. A push below $1200 that changes the handle on the metal back to "11" would be negative both technically and psychologically. A push past $1265 would provide enough excitement to take price up towards a test of $1300. Western investment demand is now the key to whether or not we get the latter.

Gold working higher

Gold is experiencing what in trader slang is known as a "MELTUP". It continues to work higher but on extremely low volume and without much fanfare - very slow and steady.

As a trader, the way we look at this sort of market and interpret the price action is one in which there appears to currently be a lack of willing sellers. In other words, there is not enough overhead offers to absorb the steady bids coming into the market on the heels of the index fund rebalancing which is occurring to start this new year off.

It looks to me like some would-be shorts are sitting back and observing the price action and waiting to see when the index funds are going to be finishing up before they come back in more aggressively. After all, if a bunch of investment money is going to automatically be flowing into a market, irrespective of the fundamentals, why fight it? Just let them bid it up and then move back in when the buyers have balanced their holdings.

The biggest thing that this current rally has going AGAINST it, is the lack of strong volume. It tells me that no one is in a particular rush to buy the metal other than the index funds. The other thing is that the mining shares are struggling to add to their gains today. Some of them have gone into the red. Thirdly, crude oil and the products are both sharply lower along with the Goldman Sachs Commodity Index. If there are any inflationary pressures at work across the general commodity sector, I sure cannot see it based on what I am seeing in the futures markets.

There does appear to be a bit of safe haven buying that is continuing today. Just like in yesterday's session, when the equities were moving lower, both the US Dollar and the Japanese Yen, safe haven currencies these days, moved higher, so too that is continuing right now as I type these comments.

I do not know exactly how high these index funds are going to take the gold price before their buying needs are finished up but they have managed to draw in some fresh buying from other specs and in the process taken out some overhead resistance levels on the chart. These are more easily seen on the 4 hour chart which I am including below.

Note the declining volume as the market "MELTS UP". The resistance zone near $1220- $1225 has been taken out but the next one up near $1242-$1245 remains untested at this point. I am interested in seeing if there will be enough index fund buying next week to set up a test of this level or if the bulk of their buying will be done by the close of trading today.

I would need to see the metal move and stay above that uppermost resistance zone I have noted on the chart to become bullish

Also interesting to observe will be the reaction out of Asia to this upward price push. Gold has effectively gone up $60 from its recent low near $1180. One wonders if this will stymie some physical buying from that corner of the globe as they wait for a retreat in price or if some buyers who had been holding back waiting for lower prices will throw in the towel and come in and commit some funds to replenish inventories that have been drawn down by the strong demand out of Asia.