Since the last week of 2013, through Tuesday of this past week ( 1-7-2014), Gold has rallied from the vicinity near $1180 to a high near $1245 reached Tuesday. That is some $65.
It is no coincidence that over that same period, the hedge fund category has covered nearly 8,000 short contracts. As of the week of Christmas last year, hedge funds held a rather small net long position of some 28,702 contracts (futures and options combined). As of this Tuesday past, their net long position has regrown to 40,229.
To get to that point they have covered 7,345 shorts to be exact while adding 4,182 new longs over the period mentioned above. Another way of saying this is that the buying in the hedge fund category has been dominated by large short covering, not so much by fresh new long position taking.
While the results are the same, namely higher prices, I prefer to see a market dominated by fresh buying outnumbering short covering when I look for a trend to persist. Short covering can catch you off guard because it is so furious and comes in such large blocks when it tends to come. The problem is it can also peter out as quickly as it began.
Think of a market as a rocket engine taking off. It requires THRUST to counter the downward force of gravity. As long as the thrust persists, the rocket can move higher. If for any reason the rocket runs out of fuel, gravity takes over and back down it will come.
Gold can be likened to a rocket that is being driven higher AT THIS TIME, by thrust coming from short covering which is the dominant feature. This short covering needs to be replaced by FRESH BUYING to keep pushing it higher.
That fresh buying will only come as upside resistance levels on the chart give way since that movement generates momentum, which is what the hedge fund computers are looking for. Remember, they do not care which direction the momentum is taking a market, up or down alike make no difference. All they care is that the momentum is present.
That brings us to the price chart. This short covering on the part of the hedge funds has taken the market very near to a strong resistance zone on the price chart ( $1255 - $1260). It will be up to the bulls next week to take price through this zone if they are going to create a trending move in the metal to the upside.
I will be honest and say that I am dubious as to their ability to do this but one thing I have learned is that the market could care less what I think it might or might not do. The last two years of Fed bond buying programs have not undercut the Dollar nor have they generated any strong buying across the general commodity sector. If anything, that bond buying has served to reinforce the idea that the economy is too weak for the Fed to cut back on the QE. During that time, deflationary pressures have dominated and we all know what that has done to gold by now. I see no reason to believe that another year of unabaged Fed bond buying is going to produce anything other than what we have already seen in the last two years.
Only recently did the FOMC start up with the talk about tapering. That talk was based on the Fed's view of a gradually improving economy with a bit of an improvement in the labor markets. November's strong payroll numbers fed into that thinking doing nothing to dissuade the Fed from acting to Taper.
Today's weak payrolls number, coming as so shockingly poor as it did, rekindled the idea of a Fed on hold when it comes to tapering. If we get subsequent economic data that comes in strong, or stronger than expected, look for that notion to begin withering away again.
I am especially interested in watching interest rate yields on the Ten Year Treasury at this time. Any further rise there should support the Dollar and bring pressure to bear on gold. Conversely, if the yields begin sinking lower on the Ten Year, gold should be able to catch a bid and remain firm.
The sharp rise in the GSCI today is evidence to me that the Dollar holds the key to the overall commodity sector as far as these speculative money flows go. When I survey the general global economy and compare the economic status of the major nations of the West ( I am including Japan in that block), the US still seems to be experiencing the best "growth" out of the bunch. That would lead me to believe that if there is going to be any nation out of that group that can see interest rates move higher, it is going to be here in the US. This should bring buying into the Dollar which should tend to bring pressure across the commodity sector in general. But as always, that is a view that must be confirmed by price action.
Next week is therefore an important test for this market.
Have a good weekend all....
Go Hawks...
Friday, January 10, 2014
Dollar Drops; Commodities move Higher
Almost like clockwork, the abysmal payrolls number undercut recent strength in the US Dollar. Just like that - up went the Goldman Sachs Commodity Index. Tell me that the Dollar is not the key to the complex!
It did not hurt that index one iota that the USDA issued a shock report today which contained a bullish surprise for corn prices. It was not that the number they gave us was so bullish; rather it was that no one expected it. The market was leaning heavily on the short side and the pencil pushers over at USDA threw everyone a curve ball.
Quite frankly I do not believe the final number that they gave us. It is what the market has to work with however for the time being, and thus we experienced a gigantic short squeeze in corn that helped keep wheat from falling completely off the cliff, as the USDA number for that grain was decidedly bearish.
The soybean number was also unfriendly as they showed a bit larger crop than the market had been expecting but it was the huge buying in the corn pit that tended to pull money into the entire grain complex. That prevented the beans from selling off on the report.
On top of that you had coffee moving higher, hogs moving higher and the liquid energy complex moving higher. Base metal copper was higher. Given that environment to expect silver or gold to move lower was unwarranted. As a matter of fact, we had a pretty substantial short squeeze in the gold market to accompany some of the short squeezes across the generality of the sector.
Gold has now completely recovered its losses from the "fat finger" trade of Monday to the point that any discussion about the particulars of that event are moot at this point. I stand by my contention that it was an erroneous trade but who cares at this point.
The lousy jobs number has given shorts reason for fear in gold and encouraged some more bottom picking in the metal. This is due to revived talk of a hold on any Fed tapering. However, it is now moving into a very strong resistance level on the price chart. Further upward progress, WITHOUT the accompaniment of a weaker Dollar and more upward price pressure across the commodity complex in general, is going to be much more contested.
Also, based on the strong November jobs number, plus the upward revision in today's report to that already strong number, today's numbers for December should be treated with a bit of skepticism, especially after private firm ADP gave us such strong numbers on Wednesday. A lot of time can pass between now and the next payrolls number but I would not be surprised to see that number move much higher, more in line with what we have been getting recently. If that is the case, look for any move higher in gold, based solely on ideas that the Fed will be on hold for Tapering, to meet with some aggressive selling on the part of the hedge fund community.
Bulls have the opportunity to try to take price up towards the last level of chart resistance I have noted between $1255 - $1260 or so. If they can best this level, they will have recaptured control of the gold market for the time being, at least from the daily or short-term perspective, and even have a shot at a quick run to $1280.
It is going to be educational to see how Asia responds to this price rise. Will the move up curtail some of the strong physical offtake we had been experiencing over there or will price-conscious buyers step away from the market to see if they can get the metal cheaper? We will find out.
A look at the weekly chart below shows the market still under the control of bearish forces, as it has been since late 2012. Today's move was a nice gift to the bulls but looking at the chart from this longer term perspective, it has FAR MORE WORK to do before changing the picture from one of bearishness to one of bullishness.
It did not hurt that index one iota that the USDA issued a shock report today which contained a bullish surprise for corn prices. It was not that the number they gave us was so bullish; rather it was that no one expected it. The market was leaning heavily on the short side and the pencil pushers over at USDA threw everyone a curve ball.
Quite frankly I do not believe the final number that they gave us. It is what the market has to work with however for the time being, and thus we experienced a gigantic short squeeze in corn that helped keep wheat from falling completely off the cliff, as the USDA number for that grain was decidedly bearish.
The soybean number was also unfriendly as they showed a bit larger crop than the market had been expecting but it was the huge buying in the corn pit that tended to pull money into the entire grain complex. That prevented the beans from selling off on the report.
On top of that you had coffee moving higher, hogs moving higher and the liquid energy complex moving higher. Base metal copper was higher. Given that environment to expect silver or gold to move lower was unwarranted. As a matter of fact, we had a pretty substantial short squeeze in the gold market to accompany some of the short squeezes across the generality of the sector.
Gold has now completely recovered its losses from the "fat finger" trade of Monday to the point that any discussion about the particulars of that event are moot at this point. I stand by my contention that it was an erroneous trade but who cares at this point.
The lousy jobs number has given shorts reason for fear in gold and encouraged some more bottom picking in the metal. This is due to revived talk of a hold on any Fed tapering. However, it is now moving into a very strong resistance level on the price chart. Further upward progress, WITHOUT the accompaniment of a weaker Dollar and more upward price pressure across the commodity complex in general, is going to be much more contested.
Also, based on the strong November jobs number, plus the upward revision in today's report to that already strong number, today's numbers for December should be treated with a bit of skepticism, especially after private firm ADP gave us such strong numbers on Wednesday. A lot of time can pass between now and the next payrolls number but I would not be surprised to see that number move much higher, more in line with what we have been getting recently. If that is the case, look for any move higher in gold, based solely on ideas that the Fed will be on hold for Tapering, to meet with some aggressive selling on the part of the hedge fund community.
Bulls have the opportunity to try to take price up towards the last level of chart resistance I have noted between $1255 - $1260 or so. If they can best this level, they will have recaptured control of the gold market for the time being, at least from the daily or short-term perspective, and even have a shot at a quick run to $1280.
It is going to be educational to see how Asia responds to this price rise. Will the move up curtail some of the strong physical offtake we had been experiencing over there or will price-conscious buyers step away from the market to see if they can get the metal cheaper? We will find out.
A look at the weekly chart below shows the market still under the control of bearish forces, as it has been since late 2012. Today's move was a nice gift to the bulls but looking at the chart from this longer term perspective, it has FAR MORE WORK to do before changing the picture from one of bearishness to one of bullishness.
Surprising Weak Payrolls number - What will the Fed do?
That is the question on traders' mind this AM as the jobs report detailing the December numbers shocked the market by coming in so low. The ADP numbers earlier this week had stoked expectations for a strong number above 200K. Many were looking for something closer to 250K, What they got instead was 74K.
Keep in mind that ADP ( a private firm) had given us a 235,000 number on Wednesday. Also, the November payrolls number was upwardly revised from the previous 203K to 241K. That is what makes the December number so shocking.
The labor participation rate continues to shrink and this is something that runs the very real risk of becoming systemic. Sure that tends to shrink the overall unemployment number but at what cost to the rest of society?
The reaction in gold was as dramatic as was the reaction in the US Dollar. As a matter of fact, there seemed to be a bit of a resurgence in the "let's buy commodities" trade across the sector based on the weakness in the Dollar.
Crude oil moved up $1.70 a barrel at one point. Most folks would scratch their head and say, "Duh?" on something like that but we have come to expect the goofy reactions we get based off of these numbers. The market, instead of reacting with concern over the poor numbers and the resultant lower demand for energy, instead looks over at the Fed and thinks, " NO way they are going to taper right now". No immediate reduction in funny money and thus no immediate drop in liquidity being provided. Weakness in the economy means lower interest rates - lower interest rates means weaker Dollar and "Voila!", let's buy commodities today.
The problem is that nothing has therefore changed on the perceived inflation front. I maintain that wages must increase and hiring must pick up if we are to see any signs of serious inflation arise. What today does is just refuel the fears of deflation.
Perhaps some in the market are thinking along the same line and coming to the conclusion that the Fed must also be worried about deflation reasserting itself and thus will ease back on the Tapering.
Who knows but if the last two years of bond buying by the Fed, and certainly the $85 billion/month coming out of the most recent QE4 program has not resulted in any serious inflation issues, why should we expect another 2 years, 2 months, etc of bond buying to produce any at all?
Given that backdrop, gold is still going to face headwinds as it needs to see confidence in the US Dollar eroding to mount a sustained move higher in price. Thus I see two drivers - one -the US Dollar drops sharply or - two- the economic data shows more rapid growth heating up inflationary pressures. Either way the result is the same as far as the inflation issue goes.
The metal is pressing up against the downtrending 50 day moving average, a key technical point that most traders watch closely. It has not been above this level since late October of last year and then it only managed to hold above this level for 5 days before succumbing to another bout of selling. My guess is that we can expect the same as we move ahead. I remain skeptical therefore about gold's fortunes but will respect what the chart action tells me. Right now, the jury is still out as the ADX shows a directionless market on the daily time frame.
Bulls are close to getting control of the market but are not there yet.
Keep in mind that ADP ( a private firm) had given us a 235,000 number on Wednesday. Also, the November payrolls number was upwardly revised from the previous 203K to 241K. That is what makes the December number so shocking.
The labor participation rate continues to shrink and this is something that runs the very real risk of becoming systemic. Sure that tends to shrink the overall unemployment number but at what cost to the rest of society?
The reaction in gold was as dramatic as was the reaction in the US Dollar. As a matter of fact, there seemed to be a bit of a resurgence in the "let's buy commodities" trade across the sector based on the weakness in the Dollar.
Crude oil moved up $1.70 a barrel at one point. Most folks would scratch their head and say, "Duh?" on something like that but we have come to expect the goofy reactions we get based off of these numbers. The market, instead of reacting with concern over the poor numbers and the resultant lower demand for energy, instead looks over at the Fed and thinks, " NO way they are going to taper right now". No immediate reduction in funny money and thus no immediate drop in liquidity being provided. Weakness in the economy means lower interest rates - lower interest rates means weaker Dollar and "Voila!", let's buy commodities today.
The problem is that nothing has therefore changed on the perceived inflation front. I maintain that wages must increase and hiring must pick up if we are to see any signs of serious inflation arise. What today does is just refuel the fears of deflation.
Perhaps some in the market are thinking along the same line and coming to the conclusion that the Fed must also be worried about deflation reasserting itself and thus will ease back on the Tapering.
Who knows but if the last two years of bond buying by the Fed, and certainly the $85 billion/month coming out of the most recent QE4 program has not resulted in any serious inflation issues, why should we expect another 2 years, 2 months, etc of bond buying to produce any at all?
Given that backdrop, gold is still going to face headwinds as it needs to see confidence in the US Dollar eroding to mount a sustained move higher in price. Thus I see two drivers - one -the US Dollar drops sharply or - two- the economic data shows more rapid growth heating up inflationary pressures. Either way the result is the same as far as the inflation issue goes.
The metal is pressing up against the downtrending 50 day moving average, a key technical point that most traders watch closely. It has not been above this level since late October of last year and then it only managed to hold above this level for 5 days before succumbing to another bout of selling. My guess is that we can expect the same as we move ahead. I remain skeptical therefore about gold's fortunes but will respect what the chart action tells me. Right now, the jury is still out as the ADX shows a directionless market on the daily time frame.
Bulls are close to getting control of the market but are not there yet.
Thursday, January 9, 2014
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....
.
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....
.
Wednesday, January 8, 2014
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.
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.
Tuesday, January 7, 2014
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!
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.
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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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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