China's Inflation problems continue to be Bullish for Gold

It seems as if every time traders (whose attention span these days is easily exceeded by that of a gnat  - a little Dr. Zeuss here) forget the struggles that many nations in the developing Far East (particularly China) are having with inflation, news arises that serves to remind them that gold is not a US game only anymore.

Overnight, China once again hiked interest rates to try to tame this unruly beast. As a matter of fact, it is the third time this year that they have done so in an attempt to keep the monster from further rampaging through their streets. As they did before, it was another 1/4% or 25 basis points hike that was employed. As of tomorrow, the one year deposit rate will be 3.5% with the one year lending rate rising to 6.56%.

There are several points to take away from this. First, if investors/traders begin to believe that these minimal rate hikes will actually have their intended effect, they will see it as a huge negative to global growth overall.

Second, the Chinese well understand the risk trade and are attempting to defuse the hedge fund commodity buying associated with that trade. Rising agricultural and energy prices do not make the Chinese ruling class happy because those things make the working class unhappy. Get the hedgies selling commodities as an asset class in general, and prices for those goods will work lower, or so their thinking is.

Thirdly, with their officially reported inflation rate running above the interest rate on one year money (the Chinese have taken a page from the US authorities and are playing games with their equivalent to our CPI), REAL INTEREST RATES are negative. That environment is one in which GOLD thrives.


You can see that some of these effects are in play in today's trading session. The S&P 500 was knocked strongly lower this morning as news filtered into the marketplace of the rate hike. Combined with a lousy ISM number, it was enough to take stocks lower across the board.

Furthermore, yields on Portugal's debt continue to rise as Moody's downgrade to junk status of the same has made traders extremely nervous about Europe in general. Their 10 year is now at a record 12.44% while their two year is at 15.72%. YIKES!  There are issues also with Irish debt and chatter is rising about Italy's and of course, Spain is not exactly a picture of robust health. This is serving to pressure the Euro  and by default bringing strength into the US Dollar.

Benefitting from all this has been the US long bond, which after plummeting last week has started this holiday-shortened week off by rising nearly a full 1 1/2 points off its worst level of the past week. Bonds are benefitting from both a safe haven trade and fears that the Chinese rate hike will work to slow growth in China during a time in which US employment numbers remain stuck in nowhere land.

While commodities in general are weaker today based on the CCI, Gold, and silver, are actually benefitting from strong flows linked to safe haven buying. Silver remains as it always does, a schizophrenic market which cannot make up its mind whether it wants to be a poor man's safe haven or part of the risk trade. Today and yesterday is was a safe haven - tomorrow, who knows?

Gold on the other hand has been attracting a very strong safe haven bid ever since the Moody's downgrade hit the market. Yesterday it surged back above $1500, giving the bulls a psychological boost and today it has managed to push past the $1520 level, a level which has been noted previously as the bottom of a recent trading range, and through which gold must push if it is going to put a dent in the "sell the rally" mentality that has arisen in the yellow metal due to its position BELOW the 50 day moving average. It is no coincidence that the 50 DMA comes in at $1520 on the charts also. That is why a push through this level is so significant from a technical standpoint

I am closely watching how this market is going to act the rest of the day to see if it can maintain its footing above $1520. If gold is going to have a decent shot at recapturing its former range between $1520 and $1550, then the former level needs to hold on any subsequent retest back down toward there. As I write this about mid-morning CDT, gold has pushed further north and is now above $1530. Shorts are getting squeezed by some very strong buying.

Helping matters has been the good showing of the mining stocks in general as indicated by the HUI and the XAU. Both have continued to push up from their important recent bottoms with the XAU managing a push through its 50 DMA in yesterday's session. They both look like they are taking a bit of a break in their move higher today however. The XAU has pushed nearly 15 points off its support level near 190 while the HUI has tacked on nearly 40 points from its critical bottom around the 490 level. Traders are now stepping back to take the lay of the land and see whether or not they should take them higher or backfill a bit. If gold can better $1530 and hold there, the miners should move higher.

One very good thing however can be said about the mining stocks in general - both the XAU and the HUI set back and retested their previous swing lows that were made in mid June. The retest attracted BUYING however instead of SELLING and that confirms those lows as an important technical bottom on the price charts. Traders felt that prices for the shares were just way, way undervalued against the metals down at those levels and there were no longer any sellers left that were large enough to take them down through the value-based buying that arose at those levels.

They are not trending yet as that will require a closing push through 560 on the HUI and 210 on the XAU but they no doubt have some of the shorts in that complex nervous. The fact that they are moving higher today while the broader equity markets are seeing good selling pressure is indicative of that.

Oh, and by the way, I find it deliciously ironic that the politically-motivated release of oil from the SPR by the current administration has failed miserably. Have you noticed that crude oil is right back to where it was trading before the announcement of the oil release?

Trader Dan on King World News Weekly Metals Wrap

Please click on the following link to listen to my regular weekly radio interview with Eric King of the King World News Weekly Metals Wrap.

http://tinyurl.com/6dc3nae

 

 

Gold nearing Critical Support Level

The euphoria over the Greece bailout continues unabated today with the equity markets rallying further upward and gold moving the other direction. The chatter is that traders are getting rid of gold supposedly for reasons related to the ebbing need for a safe haven. As always, market commentary follows price action and that is no exception when it comes to gold.

The truth is that last week's Commitment of Traders report showed a very large speculative long side exposure by the hedge funds and as remarked upon in our regularly weekly interview on the KWN Metals Wrap, any downside violation of a major chart support level set up the very real possibility of a good amount of liquidation by these stale longs. That is what has occurred.

Part of the trigger came when the USDA issued what I believe is a totally unrealistic corn acreage number. That number, which is still being met with a huge amount of skepticism among many analysts and traders such as myself, set off a massive wave of liquidation across the entire grain complex. That liquidation then spilled over into the livestock sector as well as other non-related commodity markets as margin calls proliferated and algorithm related selling across the commodity sector picked up. Both gold and silver were whacked with silver leading the way lower as could be expected in that sort of environment. The CCI plummeted yesterday dropping back down below 630 after another failed attempt to recapture the technically significant 640 level. Quite clearly, rallies in the commodity sector are currently being sold.

It certainly does appear that there is a concerted effort taking place by the powers-that-be to take commodity prices lower. The fact that a politically-oriented release of oil from the SPR came in the face of crude oil prices that were ALREADY FALLING AT THE TIME THE RELEASE WAS ANNOUNCED is sufficient reason for me to hold to my view that the release was designed to do one thing and one thing only; knock crude oil prices and by virtue of that, gasoline prices lower, in order to boost the sagging poll numbers of the current administration, and by virtue of that, the welfare of the entire Democratic party which will face a wipeout of epidemic proportions in next year's election if they do not get energy prices lower, especially at the gas pump.

Then there is the issue of annoyingly high food prices to contend with. A nice easy way to knock those lower is to go after the lynchpin of the entire food sector, the corn market. Take it down and you can lower not only food prices for those products using corn, but you can get lower wheat prices and also lower meat and chicken prices all in one fell swoop. Just like the useless jobs report numbers that we constantly get which then are revised the following month after the initial release has its intended effect, the USDA will come back next month and lower the acreage number but the damage will have already been done to the corn market.

I suspect however that some traders are getting wise to these games by now. Crude oil prices, while lower today, remain some $4.00/barrel above the level that the news of the SPR release took them. Corn, while seeing additional downside action today, is working higher off its worst levels as end users are furiously buying and getting hedge coverage into place to take advantage of this gift. Export buyers are probably already booking orders while they can.


None of this matters to the brain-dead hedge fund community however which lets their computers do their "thinking" for them. I wish to repeat here for what seems like the umpteenth time - hedge fund computer selling hits every single commodity market when their algorithms generate sell orders. There are no exceptions, even for gold. What has been occuring however in the gold market until this week was that safe haven buying was coming in and that kept the metal well supported in comparison to the damage that was being inflicted on the broader commodity markets. The bailout of Greece has temporarily derailed this safe haven bid and we are now left to the usual physical demand of the type that proceeds out of India and the middle and far East. That demand is not of sufficient size at this time to absorb the hedge fund selling and thus the market has been unable to regain its footing above $1520, which is what it needed to do in order to prevent a deeper setback in price.

For the time being we are looking to see if the demand can keep price supported here at critical support between $1480 - $1470. This level MUST HOLD to prevent further long side liquidation on the part of the hedge funds. If the physical market can soak up enough gold down here, then we have a shot at stabilizing here during this season of the summer doldrums and building a base for the rally coming later this year.

We must get back above the $1500 level in gold to give the bulls a shot at stemming the bleeding here but more importantly, the 50 day moving average to short-circuit the "sell the rally" mentality currently in place for the gold market. That level coincides with $1520, the bottom of the former range that gold was consolidating within.

The weekly gold chart still shows the BEARISH ENGULFING PATTERN formed the week of May 2 dominating its chart picture. The market had been holding up and been resisting any downside follow through from that week but had not been able to clear and hold $1550 which was needed to negate that chart signal. That week's low, $1462, is the last level of support for the bulls. They cannot afford to let that level go if they wish to avoid a move down towards $1435.

Australian Reserve Bank Director issues sobering warning

A reader from New Zealand sends us an article from down that way reporting on a speech given by  Australian Reserve Bank Director Warwick McKibbon. I am including the link here as it needs to be read in full. I find the contrast between his sobering assessment of things and that of the many of the US financial authorities quite remarkable. By the way, I must mention that I have always found the RBA to be one of the more sensible and solid Central Banks.

The article is entitled:

"GLOBAL 'TRAIN WRECK' COMING". That pretty much says it all.

Here is the link.

http://www.stuff.co.nz/business/world/5218159/Global-train-wreck-coming

USDA Shocker

The widely anticipated USDA Crop report came out this AM and stunned the grain world with its much larger than expected corn acreage number. Widespread flooding in combination with much cooler than normal weather across the northern tier of the country had resulted in major planting delays due to excessive ponding and water-logged soils. Farmers simply could not get into their fields to plant in numerous regions. That is what makes the number given to us by the USDA this morning so incredulous. Either way, the corn market was absolutely devastated as it was swamped with orders from panicked longs trying to get out. The front month July contract, which is in its delivery period is trading without price limits and is currently down over $0.70/bushel while the most active December contract (the new crop) has more than 200K orders to sell at the limit price. This massive sell off in corn has taken down wheat (over $0.50 as I write this) and soybeans and led to sharply lower prices across the cattle and hog markets. The result has been to take the CCI (Continuous Commodity Index) lower in spite of the fact that the RISK TRADES are back on again today with the Dollar moving lower. Were it not for the USDA shock numbers, I believe we would have seen strength across the entire commodity complex. As it is, the selling in the grains is leading to margin related selling across some of the other commodity markets this morning which is putting pressure on the entire sector as a whole. This is coming in spite of the fact that the long bond market continues its recent collapse as trader euphoria over the Greek bailout continues to produce what can only be described as more "irrational exuberance" among the equity market bulls. Traders are acting as if inflation is back in the cards and are jettisoning bonds after stampeding into them for the last two months. ( I might note here that the bonds are moving off their worst levels of the session as I write this so perhaps the selling in there is beginning to dry up somewhat - we will have to see how they close today). Personally I think the rally in stocks borders on insanity but the shorts are all being systematically squeezed out (AGAIN). The short term effect of the political release of oil from the SPR has totally evaporated with the crude oil market higher in price than when the news was released. GAsoline prices have jumped nearly $0.30/gallon off the recent low and are back above $3.00 at the wholesale level on the NYMEX. Clearly energy prices are stubbornly refusing to stay down for long. If that were not enough, Jobless claims numbers came in at 428,000 for the week, well over analyst expectations of 420,000. That makes 12 straight weeks of reading above 400K, not exactly the thing that signals the economy is improving. Consumer confidence readings continue to weaken. Yet, we get a huge rally from off the critical technical chart support level of 1250 in the S&P, which has gone straight up for 4 days in a row based on what? Greece?  It is now trading above the 50 day moving average after having fallen down below that important average only a short month ago. Try as I can I do not see anything of note on the data front that suggests anything has improved to the point of pushing a 50+ point rally in the S&P. Must be a national security issue to keep the stock market levitated. Then again, what else would Goldman and Morgan be doing with their spare time if not propping up the US equity markets. Either way, the big rally in equities is having the effect of pushing money back into the mining sector shares as those ratio spread trades have seen some unwinding at the expense of the actual metals. I am therefore very hesitant to read too much into the action of the miners since they are currently joined at the hip with the broader equity markets. The downtrending 50 day moving average has been the lid on both the HUI and the XAU since late April of this year. Only if the bulls can push both indices solidly above this level will we be able to conclusively say that the miners have a shot at beginning a trend higher. For the HUI that comes in near 533 and for the XAU the level is near 203. The XAU looks the firmer of the two as the large cap miners are holding better than the juniors in general. The indices have a bottom in near 490 on the HUI and 190 on the XAU which continues to hold firm but that is a far cry from meaning we are going to see an uptrend develop. That will take more conclusive technical price action. Gold ran into selling near $1515 as it was unable to get back above $1520. As long as it is unable to climb over its 50 day moving average, rallies will be sold. Lingering worries about sovereign debt issues in the Euro zone coupled with concerns over the US Dollar's fortunes are keeping safe haven flows into the metal but not of sufficient size at this point to flip the technicals to a bit more friendly posture. As was the case yesterday, for starters, gold needs a solid pit session close over $1520 to turn the chart picture more friendly. Downside support in the market remains near this week's low of $1490. The US Dollar continues to play Yo-Yo with its 50 day moving average, first popping over it back last month, then dropping below it, then moving back above it the middle of this month, and now caving in and losing that level day. Trying to read where it is going next is hopeless for the immediate time being. Basically it is the "picture worth 1000 words" to demonstrate the fickle nature of the hedge fund community and the boy wonders who manage them. I cannot even imagine what some of those guys would come up with were they forced to take one of those ink blot tests. Oh, one last thing - the Peoples Republic of California just managed to run Amazon out of its borders as the leftists in charge of that place just decided to tax internet sales. Yep - that should really help create some more jobs out there. I am waiting for the day when they begin regulating what color socks and underwear are permitted.

Gold-Silver Ratio reflects trader views towards "risk"

To get a decent indicator of whether the risk trades are on or are back off once again, this ratio is as good an indicator as anything. During times when risk is in, silver has been leading gold to the upside or not dropping as hard as the yellow metal to the downside. In other words, it outperforms gold when the hedge funds are in love with risk. This will be reflected by a ratio moving lower on the chart.

When risk trades are out of vogue and risk aversion is the play, then gold outperforms silver as it is viewed as a more substantive safe haven than the gray metal. This will be reflected in a widening of the ratio.

One can see the concerns over the Greek debt situation through the price action of this ratio chart. As traders became convinced the last few days that Greece will get the bailout and their government will approve the austerity program, the ratio has moved lower with silver outperforming gold.

Lingering fears however concerning the well-being of several other Euro-zone countries, is keeping safe haven buying coming into gold and that has kept the ratio from dropping too severely right now.

I would watch to see the 40 level to see whether it holds or not. A break through this level accompanied by a sharp move lower in the long bond would indicate a shift back towards inflation fears on the part of traders/investors. Discerning any clear trend in these extremely volatile and illiquid markets at this time is an exercise in futility given the erratic price action.

Gold - 4 Hour & Daily chart update

Following below is a daily chart showing the current negative posture of the gold market from a technical perspective as it remains below the 50 day moving average which is also flattening out and attempting to turn down. This level needs to be regained to put a more friendly face on the daily chart. Note also the longer term 100 day moving average which continues to rise and above which gold remains. That brings added technical significance to the $1470 level which closely corresponds to the horizontal support level noted on the chart.

Momentum is currently bearish and will need to break above the steeper downtrending red line to give evidence that some hedge fund type buying is picking up.

Yesterday it was Global Slowdown fears and deflation - today it is Inflation fears

Yesterday the hedge funds were busy jettisoning commodities across the board ( We don't need no stinkin' commodities); today they are back in love with them (Alas, we love thee, we surely do).

The difference is that most are expecting the Greek bailout to go through and make everything well with the world once again. That is why I keep stating not to read too much into one day's price action. Tomorrow? Draw a straw or throw a dart - you are just as likely to come up with the prevailing sentiment for that trading day as a chimpanzee. In psychological terms they call this manic depression but it now passes for hedge fund trading "strategy".

Take a look at the Daily CCI chart. Note the hedge fund selling orgy that occured last Friday and continued into yesterday's session. Risk was out and so were commodities. Today, risk is back in and so are commodities.

If you note however, the CCI is negative for the year as it is trading below last year's closing price. In other words, backing away a bit from the very short-sighted near term price action, commodities as a whole have fallen out of favor for the time being as traders fear a slowdown in the overall global economy. The Fed's refusal thus far to hand out more goodies in terms of another round of Quantitative Easing has ruined the commodity party as rallies are getting sold. The hedgies are off looking elsewhere for greener pastures. They are having huge trouble finding one however. As soon as they think there might be the faintest hope of discovering one, all of them go plowing everything that they have into that asset class or sector as they make fools of themselves by their undisciplined trading patterns.

As mentioned in my radio interview on KWN this past weekend, I am looking to see what level it is on this chart at which buying will surface that indicates a solid bottom has emerged in the sector overall. This has not yet occurred especially with the weekly trend moving lower at present.

My own view at the current time is that the bottom in the CCI will coincide with a confirmed top in the long bond market. That has not yet occurred as it will take a solid close below the double bottom near 123^23 to confirm such an event.

Given the state of flux and the uncertainty reigning over the markets, the bonds are totally capable of reversing to the upside and negating any downside signals should the papering over of Greece's problems fail to stem the bleeding or should any of this spread to Spain, Portugal, Italy or Ireland. I have said this about the bonds previously - they can reverse to the upside on a moment's notice with all the cross currents and headwinds facing the global economy.

One has to keep in mind that in spite of today's "euphoria" and schizophrenic move higher in the equities, the Consumer Confidence level just hit a 7 month low here in the US. Perhaps some are looking at the price of gasoline which has come down off its peak levels helped by an obvious politically motivated release of crude oil from the SPR and thinking that consumers are going to run right out now that they can fill up their cars a bit cheaper and start stocking up on LED TV's, cool 4 wheelers, new jet skis and boats or even some nice new SUV's or crossovers.

Whatever the thinking, the bloom is off of the bond rose for today as the safe haven flow into that asset class is being reversed with traders loading the boats back up with equities and commodities. It does appear to me however that without some sort of fundamental sea change, rallies in the commodities and equities are going to be sold without a definitive announcement of some sort of further monetary accomodation forthcoming from the Fed. There simply is little hiring take place and the housing market is not yet showing any signs that it is ready to work higher and reverse the current trend that is entrenched. QE has not given any evidence that it has worked to generate job creation and that is the Achilles heel preventing any significant economic improvement. It is one thing to muddle along the bottom and not get worse; it is quite another thing to see actual solid economic growth. That takes a change in policy and is not something that we can expect to see from the anti-business Obama administration.

Gold is reacting higher today and has been able to climb back above psychologically important $1,500. It is fading off its best levels of the session however as we near the end of pit session trading. It needs to recapture $1520 to give the chart a bit better looking perspective however. Right now it looks weak. Given the fragile nature of things economically, the market has buying beneath it but any market trading below its 50 day moving average, as gold currently is, cannot be said to be in a bullish posture. That is why it needs to climb above $1520 to turn its chart picture a bit more friendly in the short term. Remember that this level was also the bottom of its recent trading range and had been serving as a floor of buying support before it gave way last week. It is now serving as selling resistance and the bulls are going to have to absorb any offers there if they hope to take it back towards $1550 once again.