Quick Look at GLD

Here is the latest number for the reported holdings of the big gold ETF, GLD. As of the close of business today, GLD is reporting total gold tonnage at 798.85 tons. For a bit of perspective, at the end of last year/start of this year, total holdings were reported at 798.22 tons. In other words, over the last six weeks, Gold holdings in GLD have increased a mere .63 tons!

Yet, the price has gone from 116.17 on December 31, 2013 to 124.43 or an increase of 8.26, some 7%.

What this tells me is that the biggest portion of gains that gold has managed to tack on in this key indicator of Western-based investor gold demand has come from SHORT COVERING, and not from a strong influx of fresh, eager buyers.

No market can sustain any strong advance without a steady, constant steam of fresh buying. Short covering rallies can be quite impressive and can actually flip many technical indicators positive, so they should not be ignored because of the nature of today's computer-based trading programs of the hedge funds.

Also, all true bull markets start with a wave of short covering as the change in sentiment first frightens the bears who have been complacent and riding waves of profits lower as the market descends. Then it attracts some bottom pickers and some opportunistic longs who jump on what they hope is the beginning of a bull freight train leaving the station.

The big question is will this buying become more friendly in the sense that it will consists of more NEW LONGS being put on rather than old shorts being taken off? 

Time makes that clear but from a technical standpoint, how the market handles overhead chart resistance levels is key. As more technical levels get violated on the upside, more skeptics commit to the long side. As more skeptics become true believers, sentiment undergoes a shift in which the longs then become complacent and brimming with confidence so that they eagerly buy into each and every dip in price. Let's watch to see what gold will do now that it is nearing a key overhead resistance level, especially in light of the some of the big moves lower in key gold stocks such as Barrick.

Gold Shares Continue Strong

Once again another day passes in which the mining shares continue to lead the bullion markets higher. Today the HUI tacked on further gains jumping over 4% in the process compared to a 1.2% gain in the yellow metal.

As long as these shares continue to trek higher, the metals have some additional upside to run.

The key is now what do the shares do now that they have reached a strategic chart resistance level. Notice that they have run to the 200 day moving average. That is a big accomplishment as it has been a long time since the HUI was trading above that particular moving average. To be precise, one has to go all the way back into late 2012 to see this! It would not be unexpected to see this level hold the market for a bit as it takes some time to digest these recent gains. If the bulls keep pushing however, and if the shorts continue to exit, there are two separate overhead resistance zones that the index will try to reach. The first is near 250; the second is near 260. Pushing through both would allow for a test of what should be very, very strong resistance near 280.

I have noted on the Directional Movement Indicators some interesting developments. The upward progress of the index has now taken the +DMI to its best reading since September of 2012. I do not know whether this is a pleasant development in the sense that the index was trading between 520-525 at that time! OUCH is far too mild of a word to note the devastation that has occurred in this sector. Objectively however, that denotes the strength of the recent buying.

The flip side is that the -DMI reading is also at its lowest reading since that same September 2012 period.

One could therefore make the case that the sector is overbought and due for a setback in price. If we did get such, it would not therefore surprise me. The question is whether the bulls will allow for a pause and cash out of some profitable short term trades or if they want to try to push for some more gains before ringing the cash register.

With the ADX rising and just shy of 29, the market is trending higher. That means we should expect to see dip buyers emerge on any setback in price that we might get. The most logical zone to see this occur would be down near the breakout point of 220-222. Support also lies beneath that region near 210. Bulls would not want to see 210 give way as the market would probably fall to 200 to test this important level.

Once again, we had another day in which the US Dollar was weak although that weakness was rather muted. What seems to have been the driver today that goosed both gold and the equities higher in unison was the theme of Janet Yellen's dovishness. The market is convinced that the Fed under her leadership is going to be quite loose when it comes to liquidity issues regardless of the fact that the Fed is on record as hoping to end the QE program completely by the end of the year. Yellen reiterated nothing new or nothing that should come as a surprise when she reaffirmed that the Fed will be heavily dependent on economic data when discussing its retreat from QE. Traders however seem to have the last two most recent jobs reports on their brains and are convinced that the doves are going to dominate the Fed.

I should note however that from my perspective the reason gold continues to move higher is because longer term rates continue moving lower. Take a look at the chart of the yield on the Ten Year Treasury note. You might recall that from the beginning of November last year through the end of December, the price of gold fell from $1350 all the way to below $1200. It was no coincidence that as this was taking place, the yield on the Ten Year ran from near 2.45% all the way to above 3.00%.  See the chart below....

As yields have moved lower for the Ten Year, especially due in great part to the fears surrounding the emerging market concerns, gold has responded by moving higher.

If long term interest rates begin perking up again, I expect gold to come under renewed selling pressure once more. The reason for this is because in spite of the great love which the gold bugs have for the yellow metal, the majority of the investment world views gold as just another asset class. Note to gold bugs - please do not condemn the messenger for stating what is obvious but too often overlooked in gold bug circles. What this means is that those who buy it do so not for any yield, dividend or interest payment it might happen to be able to throw off ( it has none) but rather they buy it in the hopes of capital appreciation when they can sell it at a higher price than they paid for it. That requires an environment in which gold is constantly rising higher. (remember the pillars of a bull market in gold).

If gold stalls out in upward movement at the same time that interest rates on the long end of the curve begin to move higher, investors looking to obtain RETURN ON INVESTMENT will jettison gold in favor of another asset class that throws off gain, whether it be by capital appreciation like equities or bonds.

Needless to say it is a given that a higher interest rate environment in the US will make the Dollar more attractive than some of its Western competitors all things considered equal. A stronger Dollar can be expected to put downward pressure on gold prices ( as well as commodity prices in general ) while a weaker dollar provides an incentive for gold to rise ( keep in mind the connection between lower interest rates and a weaker currency).

Interestingly enough, the dynamic of higher interest rates tends to cut into economic growth as it runs at cross purposes to the Fed's QE program which by nature is designed to keep interest rates artificially low to encourage more indebtedness. There does not yet seem to be a consensus as to what level the yield on the Ten Year would have to run to begin negatively impacting overall economic growth but the number that I keep seeing circulating around is the 3.5% level.

Time will make all things clear however.

I will leave you with just a bit of simple advice which I am repeating from yesterday - now that gold is rising higher, resist the urge/temptation/folly to throw caution to the wind and begin swallowing all the usual wild-eyed predictions that will inevitably surface. Stay calm and reasoned and above all - stay a hard-nosed realist.

If gold stops rising, look for factors across the other various markets that are at work instead of the simple-minded "gold is being manipulated" once again chatter. None of these markets trade in a vacuum nowadays but all are interconnected in ways that can be discovered if one takes the time to diligently dig and examine the various reactions that occur regularly through the financial markets. The themes do change and that is what makes trading/investing so challenging at times because we have no way of knowing when those themes will change and if they do, what the new relationship will be. Patient study reveals these things but that requires effort, lots of it.

Gold Shares Coming to Life

I have been watching the HUI encountering difficulties with that stubborn overhead resistance level near the 225 region for a while now but today it finally managed to punch through. One needs to be suspect about any moves in gold itself if the gold shares fail to confirm it for whether we like it or not, the shares tend to lead the metal, both up and down.

Today's move higher in the HUI is the first real sign that this recent move higher has the potential to be something more than a mere short covering bout that has run its course. If you notice on the chart the price has been oscillating around the 100 day moving average for the last two weeks while it has been locked in a fairly tight range. It wasted no time today in dispatching that key level.

To see this index gap higher above last week's higher on today's open and punch through the top of the resistance band noted, is a sign that there might be some legs to this thing.

From a fundamental perspective, it seems that the austerity programs being instituted by some of these mining companies has convinced some larger investors that management is getting serious about controlling costs ( something that very few of them did during the bullish phase in gold before it entered its recent bearish phase). That has them more comfortable taking a position in the sector for now.

I want to repeat something that I noted last week and again last evening - the commodity sector is showing signs of life - nothing remarkable or particularly wildly bullish, but nonetheless, signs of buying. It does look to me like a combination of multi-year lows across some individual markets, combined with signs of increased demand is bringing value based buying into the sector and giving some bears second thoughts about hanging around a bit too long on the short side of the market. Additionally, crude oil continues to hang around the $100/bbl level. That is in spite of the fact that we had sharply lower heating oil prices today and weakness in unleaded.

That general strength is helping silver although it is still reluctant at this point to press past the $20 level with much gusto. Perhaps copper is acting as a drag?

Back to the HUI however, bulls have passed the first hurtle. The big one will be the 200 day moving average that currently comes in near 235. Note that the ADX is rising and is above the 25 level - that is a sign that the market is now trending and dips in price should as a result, attract some decent buying. I would like to see the index stay above last week's low but it could conceivably drop as low as 200 and be okay as long as the price bounces back up from that level quickly were that to occur. In other words, the bottom in the shares look to be finally in on the daily chart. That bodes well for the metal itself.

The intermediate term weekly chart paints a different picture however. While prices have recovered you can see that from this perspective, the recent move higher does not amount to much considering the extent of the move lower since 2011. Price has not managed to make it even to the 25% Fibonacci retracement level - which by the way happens to correspond nicely to a big gap lower!

The ADX line has indeed turned lower indicating that the downtrend has been halted but the positive directional movement indicator ( +DMI - blue line ) remains below the negative directional movement indicator ( - DMI - red line ). It is however moving upwards and threatening a cross to the upside which would indicate that the bulls have seized temporary control of the sector from the bears.

While the bulls have something to definitely cheer about on the daily chart, the weekly should call for some tempering of the wildly outlandish predictions that are once again coming out of the woodwork as if right on cue again.

This is what is so tragic about the gold market - otherwise fine folks tend to lose their perspective any time this market moves higher and begin throwing out outlandish predictions. One would think that having been proven to have been so grossly wrong in the fairly recent past, that some humility and temperance would be seen but alas, 'tis not the case. After all, you can just claim that you would have been correct had it not been for the manipulation.

Talk about a convenient way to save face when the sad truth is that you just completely misread the market! Good traders have no such wondrous luxury as these newsletter peddlers and other assorted pundits most of whom have a clear conflict of interest and cannot remain objective. I have said it before and will say it again - newsletter peddlers get paid from others and make their living OFF THE MARKET. Good traders get paid for being correct and make their living IN THE MARKET.

That is what we are attempting to do here - teach you to read the markets for yourself and keep your hard-earned money so that you can make your own individual trading/investing decisions without having to shell out money to these ticks which prey on the naïve and uninformed. Truth be told, and I realize this will not make me any friends in the newsletter industry, most of these guys could not trade their way out of a wet paper bag if their life depended upon it and thus they are too cowardly to stand on their own two feet and slug it out in the pits with other traders who are perhaps just as sharp as they consider themselves if not sharper. After all, trading is a ZERO SUM game - if you are right you make money. If you are not, someone else takes your money.

I just will never understand why the gold market attracts so many egos. It is unlike any other commodity futures market I have ever encountered over my 25 year commodity trading career.

As said many times here, the most wildly bullish gold bulls had best be careful that they do not get what they are wishing for because life here in this nation will be most miserable and chaotic should it indeed occur. One can prepare for the worst but hope for better things - then again we are now living in a nation where statesmanship which looks to the long-term best interests of the nation has been largely supplanted by short-term political expediency.

As the US drifts further and further into lawlessness and outright hedonism, one wonders how long before such moral decay will impact the financial markets themselves. When both China and Russia, both formerly Communist countries, can now rightly lecture the decadent West about the breakdown of its moral center, we have indeed come full circle have we not?

Let's move on however - Take a look at the GSCI chart. Notice that we had a big push higher last Friday that took the index through both the 100 day moving average and the 200 day moving average.

Do you see what I mean about that quiet buying that has been occurring in the sector? There still remains a very big test for the bulls coming near the zone between 640-645. If they can best this level, then the silver bulls should see their beloved metal kick higher. If the index fails to extend past this level, then silver is going to disappoint. Its fortunes are tied just too closely with the broader commodity sector and the inflation play to move independently of the entire sector.

Here is a bit longer term view of the overall sector. Once again, when viewed from this perspective, the recent move higher is not that spectacular is it? The index has continued to move within a constricting triangle pattern giving no clue as of now which will the triangle will tend to resolve itself as time progresses. The ADX indicator is not much help in a directionless market such as this one for the line is moving lower as one would expect it to do in a non-trending market. Support seems intact near the 600 level but the upside peaks in price continue to make a series of lower highs, not especially comforting if one is looking for the commodity sector to catch fire and embark on an upside tear higher.

One final chart - a weekly of the gold market... Gold has come nearly $100 off the recent low made at the end of last year. Thus far that double bottom has been holding just fine. While it would personally cheer my heart to see old yeller get a handle of "13", the truth is that this market could run as high as $1345- $1350 and still not have broken into a definitive uptrend on this longer term chart. One could make a case that the market could move as high as $1400 and remain in a very broad range trade. This is the reason I am tamping down any tendency to become a full-fledged bull at this point.

As stated earlier, the bulls have done great work and put in a strong effort. They are proving their meddle. That leaves me cautiously optimistic for the short term but still a definite "SHOW ME" on the longer term time frame.

For now, the bulls have some wind at their backs. Let's see what they can do with it.

China Gold Stats

Dow Jones is reporting this evening that the China Gold Association has provided some numbers detailing both Chinese gold demand and production for 2013.

According to the Association, Chinese gold output rose 6.2% on the year reaching 428.16 metric tons.

That continues the trend of China being the world's largest gold producer for the last seven years.

Chinese gold consumption hit a record 1,176.4 tons in 2013 - that was up 41.4%.

Chinese gold jewelry was up 42.5% to 716.5 tons while gold bar demand rose 56.6% to 375.7 tons.

My take on this is that it continues to underscore that demand from Asia, particularly China has been robust and looks to remain that way, especially on dips lower in price.

Western based investment demand is still the missing ingredient in the gold equation. If the Dollar continues to weaken, gold should be able to breach overhead technical price chart resistance levels but that will entail the inflow of hedge fund monies back to the long side of the gold market. We will continue to monitor the reported holdings of GLD to get a read on this.

There seems to be enough concerns about the both geopolitical concerns and monetary/currency/credit issues to keep gold from breaking down in price at this time but it still lacks a catalyst to kick it into a strong uptrending move.

Will we get one? We'll see. Keep an eye on the commodity complex as a whole. If hedge funds begin to view commodities as undervalued in relation to equities, they will return to the buy side across the sector although they will tend to be a bit more choosy as to which markets they will embrace. Specific demand/supply factors will be more closely scrutinized rather than the strategy they took back when QE was first introduced. That consisted of buying everything in sight in the commodity complex no matter what it was.

Higher beef and pork prices are a given this year. Soybean prices have been sneaking higher even in the face of a record S. American harvest expected. Corn, which was one of the worst performing commodities last year, has picked up in price somewhat while coffee prices have shot up sharply. Sugar has been bouncing around a bottom for some time now. We all know what natural gas and heating oil prices have done this winter.

It could very well be that the old adage: The best cure for low prices is low prices" may be at work again as demand is picking up for some of these low priced commodities.

I remain leery of the "February break" as it is a fairly regular occurrence across the commodity sector but as to its specific timing, it is difficult at times to read its arrival. Sometimes it comes early; sometimes it comes late. And to answer a question from a reader, yes, it does tend to affect the precious metals as well.

Based on the price action of some of these individual commodity markets, the break may have already occurred. I simply am not sure but am waiting and attempting to discern from the price action across the sector whether we have seen the "break" or not.

Just to repeat a warning I posted the other day in a column - traders - be careful in the commodity sector right now as many markets are treacherous. Action has been of the whipsaw nature and can really damage you if you are not alert and nimble. Whatever you do - do not remain too dogmatic but rather stay flexible and above all, humble!

Weak Payrolls Number spurs Commodity Buying

Traders were holding their breath to see whether or not today's expected Payrolls number was going to confirm last month's number as a one-off or whether we would get yet another abysmal reading. We got the latter.

Immediately talk of the Fed going on hold for any further tapering emerged and with it, down went the US Dollar along with Treasury yields. The result - hot money poured into equities and strangely enough, into commodities.

Watching crude oil shoot over $100 barrel ( basis WTI) was rather entertaining to say the least given the general weakness across the global economy, not to mention that lackluster US jobs reading. Apparently that is a good reason to take the price higher for what else does a struggling economy need to mend its woes if not more expensive energy costs for all involved? Yes sir - makes perfect sense to me. Hell, they even pushed copper prices higher. Go figure!

Gasoline prices shot up over $0.07/ gallon at one point.

It seems to me, and I am at a loss to explain it to be perfectly honest, hedgies are in the process of covering shorts across a large number of commodity markets and going long. While I do not attribute all of these price rises in the sector to the Tapering issue as some of this is due to hot, dry weather in a certain area of Brazil, I do not understand the thinking behind this stampede into the sector. This looks like the usual lemming-like reaction to the idea that the Fed will be reluctant to taper thus providing more downside pressure on the US Dollar which in turn will feed through in higher prices for commodities due to currency weakness.

We have been down this road before and have seen that Fed bond buying programs have not resulted in that liquidity making its way into the broader economy but I suppose old habits die hard. For now, any talk of a cease or a halt in Fed bond buying is translating into higher commodity prices as it serves to undercut the Dollar.

Equities? they are back to loving BAD NEWS as being good news for higher stock prices. Just look at the S&P 500 which completely erased this week's early losses when emerging market concerns took front and center. Another rotten jobs number and presto! - off go stocks to the races once again. More and more we see this disconnect between Wall Street and Main Street.

Why just this week the CBO served notice that the grossly named, Affordable Care Act ( sounds like something out of Orwell's works), is going to end up costing at a bare minimum another 2.5 million American jobs. Yet somehow this is greeted with applause by stocks! One does not know whether to laugh at such madness or weep.

We are back to living in an upside down world in which the worse the news get, the better stock prices do and the higher commodity prices go. I come from a world in which the last thing needed by struggling consumers with stagnant wages is a rise in the cost of necessary items such as food and energy. And yet that is precisely what we are getting once again. At least the past year we saw gasoline prices drop lower giving some much needed relief at the pump for battered consumers. Now, thanks to hedge fund activity, gasoline prices are moving higher again as crude pushes past $100 barrel.

Hopefully some of this is tied to the spell of severely cold weather which is boosting demand for heating oil and drawing down crude stocks, but rising gasoline prices are not the least bit stimulative in nature if you are hoping to see an economic recovery occur.

From a technical analysis standpoint, the hedge fund computers are now back to buying across the sector again and those guys will buy and buy and buy until the market stops going higher. Then they will sell and sell and sell until the market stops going lower at which time they will reverse and go back to buying and buying and buying. Get the picture yet? There is no thinking - there is just computers reacting to movements in price. That is why trying to come up with explanations at times as to why prices are doing what they are doing is an enormous waste of time and mental energy. The machines are driving the market around - that is all one needs to know. Sometimes there is a underpinning fundamental reality to the movement in price caused by these distorting computers. Many times there is not.

This brings me to the US Dollar. You can see on the chart that it declined from last summer and continued into late fall when it rebounded higher and broke its downtrending pattern. It ran towards 81.40 where it was unable to move any higher and subsequently retreated lower. It did however make a higher low and thus began to undergo a gradual increase in price  which can be seen delineated by the price channel that has formed.

It is effectively unchanged since its start-of-the-year levels but has been declining for most of this month of February this month. As it has weakened, commodity prices have strengthened and so too has gold. Gold has not been able to mount a clear, sustained breach of upside resistance in the same fashion that the Dollar has not managed a clear, sustained breach of downside support.

Where this goes is anyone's guess right now but suffice it to say that many commodity markets are now entering those kind of patterns that are notorious for whipsawing traders mercilessly. Trending markets are bread and butter for traders - sideways markets can be notorious. That is what we are now getting in quite a few commodity markets. Downtrends have been halted with large bouts of short-covering but many of these markets do not possess bullish enough fundamentals to drive them into strong uptrending bull moves. The result is wild swings in price which can completely erase the previous day's move in price and then some only to reverse again on the third day.

Those of you who might doubt this need only look at Coffee and Natural Gas. One either needs to be particularly brave (or really stupid) to take large positions in markets behaving in such ruthless fashion. Truth be told markets moving into those sorts of patterns are graveyards for would-be professional traders. STay out of them or trade them very small in size! Forget about how much you can make - worry more about how much you are going to lose.

As far as gold and silver both go - they are being supported by this weaker Dollar/hold in Tapering stuff. Emerging market concerns are also aiding gold while serving to undercut silver strength. There was some chatter that the return of Chinese traders from the Lunar New Year celebration would bring back copper demand ( and silver ) but Chinese economic data has been relatively weak and that, so far, is muting any buying.

Silver has managed to stick its head up again above the $20 level after holding down near $19 ( once again). We'll see if can do anything next week or if it just drops lower and goes back to the bottom of the range.

Gold too remains rangebound as it nears the upper boundary of that pattern. The HUI cannot clear 225 and thus is not contributing much, if any, support to the metal.

I wonder if the famed February Break is yet to occur this year or if it came last month in January. It tends to be pretty reliable but getting the timing down can be tricky.  If it has yet to occur, we can expect to see selling pressure re-emerge across the commodity sector later this month.

Commodity Strength Aiding Silver, Helping Gold

There are several cross currents at work in the markets this week which are impacting the trading across the overall commodity sector.

Let's start with the worries in the emerging markets because that continues to be the dominant force impacting equities right now and by corollary, the commodity markets.

First, notice the S&P chart - this emerging market issue has resulted in the market being down 5% since the beginning of this year.

Coupled with this has been a rather sharp rise in the VIX or Volatility Index ( I prefer to call it the Complacency Index). Yesterday, the index hit an 8 month high.

What this is telling us is that there is some genuine fear/nervousness among the bulls in the equity camp for the first time in quite a while. The general feeling is that the long bull market in stocks into its 6th year and that has some perma bulls actually looking to book some profits as they wait to see what will happen in regards to these emerging market concerns. I must add however that the bullish tone is still quite obvious based on the majority of comments from analysts who are happy to see the correction lower in order to give them a chance to buy in at lower levels. In other words, while the VIX has risen, there is no panic whatsoever among the perma-bulls.

That brings us to the commodity sector - commodities in general have actually been outperforming equities this year. We have seen sharp rallies in coffee, sugar, hogs, soybeans, natural gas, etc. Natural gas strength has been tied to the severely cold weather the US has been experiencing while coffee, sugar and even OJ strength has been tied to hot, dry weather in certain growing areas in Brazil. However, it does look as if some of that money that was recently yanked out of equities might have found a home in the beaten-down commodity sector. The thinking behind that is the sector is undervalued or at the very least, not as dearly priced as stocks and thus a better risk in terms of risk/reward ratios.

That may well be true since several commodities have been trading at or below multi-year lows but I personally am very leery of wildly chasing commodities higher if the chance exists of this emerging markets crisis worsening. Any such deterioration will feed deflationary concerns as investors brace for a slowdown in global growth. Traders are especially nervous in regards to China and this can be clearly seen in the copper chart which is down nearly 7% on the year!

Oddly enough, this emerging market issue has not really benefitted the US Dollar to the extent that some of us were expecting based on the recent past. If anything, the Yen has been the favored currency along with the Swiss Franc. While the Dollar has not been weak, it certainly has not been powering higher as it is wont to do during these crisis events.

This has enabled gold to garner some inflows ( the ETF has actually reported some inflows and increases in reported holdings ). I have maintained for quite some time now that until WESTERN INVESTMENT DEMAND for gold increases, gold will be unable to mount any SUSTAINED move higher. That nascent increase in GLD's reported holdings therefore is noteworthy.

That being said, if a full fledged crisis were to erupt across the emerging markets, it is not a given that gold will shoot sharply higher. Much would depend upon the US Dollar movements. If the Dollar were to break down, it would amplify gold's chances at breaking higher. On the other hand, if the market takes a view that global growth is going to be impacted for the worse, we could very well see copper, silver and gold all moving lower in tandem while the US Dollar becomes the go-to currency again.

It is simply unclear to me at this point what the consensus is in regards to the overall commodity sector. These short covering rallies are so fierce and so dramatic that they inevitably result in wildly bullish calls immediately springing up but keep in mind that a flash in the pan can also startle only to then quickly subside.

Weather is volatile and attempts to dogmatically predict when/if certain patterns will change are bound to frustrate. In the short term, the change in the technical chart pattern that results from a mass exodus of bears giving up the ghost on their short holdings across a commodity market will bring in bottom picking and fresh buying. Any weather scare immediately impacts the current demand/supply scenario and forces a drastic revaluation of the mindset in place during the extended downturn in price. If traders feel that the equilibrium between supply/demand will be altered by the weather, they will immediately react and the market will come to reflect the new balance that is being sought by the movement in price to another level.

One thing I am noting is that once again the mining shares are weak - until I see the HUI trading consistently above the 225 level, but preferably the 235 level, I am going to remain a skeptic towards gold. For now, gold remains mired in a range trade

Gold Slips; Silver Steady

Gold had a double whammy working against it in today's session. The first was stability in the US equity markets. Every single time stocks have moved higher this week, gold has lost ground. The opposite has also been true; when stocks have dropped on emerging market fears, gold has moved higher. It is acting like a safe haven can be expected to act, at least for now.

This emerging market thing is providing some support to the gold market and preventing it from moving sharply lower as lingering fears are bringing in some dip buying. However, when the US Dollar firms, it attracts selling.

Silver seemed to shrug off weakness in gold as well as copper taking its cues from some general commodity market strength across the softs and grains. Sugar and Coffee both had big up days today. Beans moved higher along with the grains and hogs were strong. So far, support near $19 has been holding but the market is definitely attracting strong selling near $20. If emerging market fears begin to increase, I think silver could slip below $19, especially if copper and the other base metals respond negatively. Remember, any sort of slow down related to emerging market fears is deflationary in general and silver, even more so than gold, will struggle in that environment. It needs a solid - RISK ON" appetite tied to strong growth sentiment leading to inflationary pressures. Without it, no one wants to own it right now above $20.

Natural gas was weak while heating oil and unleaded gasoline parted ways today. The former was up with the continued cold weather while the latter was down. Hey, maybe everyone looked at those photos of cars stranded outside Atlanta and figured if they weren't going anywhere, they sure as hell didn't need any gasoline in the tanks! These weather markets can be notoriously volatile for as soon as a forecast shifts, everyone who bought heating oil or nat gas on cold fears are suddenly on the wrong side of the market. They can fall as fast, if not faster, than they went up so if you are trading these, be careful.

It is exactly what happens to grain traders on the wrong side of a summer forecast! No one asks any questions or thinks - they just panic and run. By the way, this somehow is confused with trading for some reason.

Take a look at the following chart of the US Dollar on a weekly basis and you can see that the price action of the last three weeks has been of the whipsaw type. Up - down - up. If you look only at the short day to day stuff, it will drive you batty; however, on this weekly you can see that the Dollar moved down towards the lower portion of the upward sloping price channel and now appears, for the moment, to be working its way back up again.

There is certainly no clearly define STRONG trend but more of a gradual grind higher. I would keep an eye on the 79.50 level. It has not had a weekly close below there since October of 2013. If it did, it would portend a test of 79. I would think that would coincide with a move through $1280 for gold. The flip side is if the Dollar were to push through 83 on the upside, gold will more than likely not hold above $1200. The jury remains out therefore.
 

Take a look at the 4 hour gold chart and you can clearly see where sellers have gotten aggressive - that is up near $1,280. When it tried to extend past $1,270 on Wednesday and failed, that was it as far as some of the shorter term oriented longs cared - they were out and down she went. There was another push to $1,255 that also failed to extend and back down it went again. The market is trying to hold $1,240 and so far is succeeding but it does look heavy to me. Without an escalation in the emerging market crisis over the weekend, it is doubtful that gold is going to have much in the way of friends, especially if equities keep shrugging off any worries. Sentiment can flip on a dime however so just be prepared for lots of ups and downs.

The daily chart is noteworthy in the sense that the ADX, which was showing the possibility of a fledging uptrending move, has now flattened out again indicating that the upward progress is stalling out. The +DMI has turned lower, and while it still remains above the -DMI revealing that the bulls have control of the market on the daily time frame, it is now falling. This market could go either way but remember that on the weekly chart, the intermediate time frame, the bears are in control and thus the reason I have been citing that rallies are going to be sold.

Speaking of a weekly chart - here it is. Notice that the Bears are still in control of the market as -DMI remains above +DMI although is continues to fall. The weekly ADX is also dropping as can be expected in a trendless market.

 

As long as the emerging market currency/credit issue is a lingering concern, gold will probably continue to hold up. Barring that however, it is an iffy proposition.

Next week will bring the beginning of the delivery process in gold for the February contract. I will keep an eye on it to see whether Morgan continues to issue gold as they did in January or returns as a large stopper as they did in December.

One last chart for now - Goldman Sachs Commodity Index in a weekly view.

The gradual decline continues to extend. It is a slow, methodical move lower. The sector has garnered buying support which is keeping it from falling apart but it lacks any sort of upside vigor at the moment.

Lastly - this is to save myself a bit of work answering emails about the KWN Metals Wrap. I have no idea when or if it will return right now. If I hear anything concrete, I will let the readers know.

I will try to get some charts up or comments on the COT stuff later on as time permits.

Have a good weekend all... Go Hawks....

Gold Tug of War Continues

Today was the big day for another long awaited ( one month) release from the FOMC in regards to their Tapering campaign. There was a general line of thinking that the Fed might not be as aggressive in the tapering as previously anticipated due to the very weak payrolls number that came out not long ago but that was dispelled rather ignominiously when the Fed announced another $10 billion reduction in the bond buying program down to $65 billion/month. They are cutting the rate of Treasury purchases by $5 billion and the rate of Mortgage backed securities by $5 billion as well.

The unanimous vote was revealing as it shows an apparent determination on the part of the Fed to begin weaning the markets off of some of this funny money creation. Needless to say, the equity markets did not seem too happy about the news.

Then again, it is difficult to understand exactly what input the markets were reacting today given the continued fears/concerns over the emerging markets currency/credit issues. Yesterday a sharp surprise rate hike by Turkish officials seemed to bring a sigh of relief into the markets. Today, that quickly dissipated.

The VIX shot higher as the equity markets dropped lower and as it did, back on came the safe haven trades once again. The Yen was up sharply and the Swiss Franc rose also as investors decided to take some money out of stocks just in case things go from bad to worse. Once again, even with the news out of the FOMC, (which one would have expected to be Dollar positive), the US Dollar could not move higher. That had gold moving higher once again as we are seeing a relationship forming in which stocks move lower along with the Dollar as Gold moves higher.

I am not sure how much longer this precise link is going to endure in our fickle market of nowadays but it is keeping gold prices from otherwise breaking down at a time in which many commodity markets are continuing to see weakness. Natural gas was the big exception with prices cleaning out practically every single overhead buy stop on the planet today on huge volume. That sort of thing always catches my attention. Soybeans, corn and wheat however were pummeled today. Copper also moved lower.

Gold is basically caught in a tug of war between downward pressure originating from those selling the metal as the Fed begins to scale back the huge sums of liquidity it has been providing the markets and upward pressure from safe haven flows tied to the emerging markets crisis. In the former, gold acts more as a commodity; in the latter as a currency. Depending on which input the market is focusing on any given day, the metal moves accordingly. There is still no definable pattern.

Based on what I can see the next move in gold is completely dependent on how the emerging market situation is viewed. If it escalates, gold should stay firm. If it recedes somewhat from traders' minds, it will move lower.

The same exact thing is occurring in the interest rate markets. Today's FOMC statement and its hawkish tone should have brought selling into Treasuries taking interest rates HIGHER ( also supporting the US Dollar). Instead, the Treasury markets witnessed lower long term rates as deflation fears trumped hawkish FOMC notes.

Incidentally I have been monitoring some of the delivery process for gold. Thus far JP Morgan has been the big issuer or seller. That is in stark contrast to their buying or stopping last month. As we enter the February contract's delivery period, it will be interesting to see if this new pattern remains the same or if they move back to the heavy buy side stopping that we saw from them in December.

While the HUI has been higher today, it has still been unable to clear chart resistance near the 230 region. So far the index has not confirmed any upside breakout as of now. It has also bottomed out but cannot seem to get an upside trend going. Much the same thing is taking place with gold. Its technical chart pattern on the daily looks pretty good but it acts as if it is looking for some other shoe to drop somewhere before it really breaks out to the upside in a clear and unambiguous manner. As things stand, traders seem willing to sell rallies into overhead resistance and buy dips into downside support.

When this changes is unclear.

By the way, silver still is capped at $20 as it attracts large selling above that zone.