Gold chart update

Gold took out overhead chart resistance last evening in Asian trade and looked very strong until trading came around into the London session, where selling surfaced taking it back down from its best levels and dropping it into negative territory for the day. Support surfaced just below $1665 level but the market could not get back into positive territory.

Gold is trying to break out to the upside but is being kept in check.

Silver once again flirted with overhead resistance near $32.50, moved through it and them promptly failed to hold onto its gains above that level. It found support just above $31.50, bounced higher and managed to claw its way back above $32. It too is attempting to breach chart resistance and make a break higher.

Both of these precious metals markets are very close to changing the "sell the rally" mentality so it will not take that much to flip the psyche. The fact that the mining shares as evidenced by the HUI are finding buyers at the present time is very helpful.

Other than that, there is really not much more worth saying about them until we get a definitive resumption of the uptrend.

Gold at the upper end of its recent range

News out of Europe overnight that appeared to confirm thinking that the rescue fund being put together by the Europeans  is going to proceed in a timely fashion cheered the hedge fund community which ran pell mell back into the risk trades. In the process, both gold and silver moved up towards the upper end of their recent ranges, the Dollar sank like a rock, the Euro soared and the US Treasury market was mauled with an avalanche of willing sellers.

What a party it seems liquidity can provide! Then again, when all is said and done, there is nothing left for the monetary and political leaders left to do except to intervene and bail out the banks. Dealing with the root causes (the failure of socialism and a cradle to grave nanny state which spends too much) would entail too much hardship on the populace which is addicted to government handouts, witness a huge hit on the balance sheets of the banks who bought this junk and thereby threaten the re-election prospects of too many politicians. That is a big no-no so the path of least resistance and the one that will ALWAYS be seized upon by short-sighted political leaders is to have the taxpayers pay for all this seeing that governments have no money except that which they take from the citizens in the form of taxes (this also includes borrowing money which will be eventually taken from future generations in the form of higher taxes).

No matter - the markets love it as the punch bowl has been spiked - at least for today.

Seeing that risk was back on, gold moved higher putting in a strong performance that has taken it to the upper end of its range during this period of consolidation. It must break through $1680 with some gusto to convince technicians that this consolidation is over and it is getting ready to at least have a shot at resuming its longer term uptrend.

As mentioned in the KWN Weekly Metals Wrap, the speculative side of both the gold and silver markets has been severely flushed with ongoing long liquidation continuing for some time now. What is needed is for a halt to be put to the rush to the exits by the specs and a renewed interest or desire in taking long positions on the Comex in both metals if these two precious metals are going to have a shot at a trending move higher. Neither metal will be able to sustain upside breakouts if the speculators do not return and inject their cash into these markets. If they are convinced that the bailouts in Europe are going to be of sufficient size to prevent any further credit market lockups, then this could be the fundamental spark needed to convince those sitting on the sidelines to re-enter.

The chart for gold remains the same as it has been for the last few weeks. Note the resistance levels and you can see where the yellow metal is at from a technical perspective. If it clears here, then it should make a move towards psychological resistance at the $1700 level. If that gives way, then $1720-$1725 is up next.

Downside support is a bit higher coming in first near $1640  followed by $1620 with more substantial support remaining at the $1600 level.

Silver is knocking on the door of strong resistance near $32.50 once again and continues to tease with this level. If the bulls can power through the selling coming in here, then it has a good shot at moving to near $34 before any serious resistance arises. Above $34, and we have some real potential to trend, especially if the specs come roaring back into this market. They have been fleeing in droves and at extremely low levels of concentration on the long side based on last Friday's Commitment of traders report.

The HUI thus far (it is still early) looks very strong and is trading right at a tough resistance level (540). If it can push through this level and close strong, it should have enough technical momentum to try a run at the 20 day moving average near 558.

The Dollar is getting the fire beat out of it today as Treasuries sink over a full two points and the forex crowd is salivating over the Euro. If it cannot claw back above the swing low noted on the chart, there are a large contingent of speculative longs in the greenback which are going to be in some serious trouble. Many of these guys ( and a large number of them are undercapitalized small traders) bought in above this level and those positions are going to be seriously underwater if this support level fails to hold.

Precious Metals continue Range Bound - Ditto for the HUI

Both silver and gold continue putting in wide-ranging price swings on a day to day basis providing plenty in the way of volatility but when the dust is settling at the end of the week, neither metal can escape its range bound trade.

What we are witnessing on the price charts is merely the pictorial form of uncertainty that currently is reigning over the minds of traders/investors. The long term bullish trends for both metals remains intact but short term fears over further risk aversion trades and hedge fund long liquidation in the commodity sector is preventing both the bull camp and the bear camp from gaining a tactical advantage.

Gold is unable to break through overhead selling resistance near the $1680 level but continues to attract good-sized buying, especially from Asia, on dips towards the $1600 level and below.

Silver runs into selling above $32.50 from nervous longs as well as opportunistic shorts. On the downside it is attracting interest from buyers when it moves into the region near $30 and below.

This range trade in the metals is keeping the mining shares in a similar pattern with the current markers at 540 in the HUI on the topside and 500 on the bottom. Trips below 500 on the HUI are generating good buying among the shares keeping this index above the 485 level.

The cross currents remain ample - on the European front many traders fear that the ECB and the European leaders are not going to act quickly enough or with enough vigor to prevent their version of the Lehman Brothers meltdown from occuring. Whenever the news seems to favor more decisive action on their part, traders/investors are cheered and plunge into equities and commodities on the long side. Whenver the opposite is true, out go stocks and commodities and everything else that does not look like a US Treasury.

Long term such action on the part of the ECB is inflationary and will end up debauching the Euro in the same fashion that QE has done and will do to the US Dollar if and when it will be employed again over here. Short term none of these hedge funds gives a hoot about any of the long term ramifications. They will try to squeeze every nickel out of such an event if they can and leave the political and monetary leaders to fix what they are eventually going to destroy by this imbecility. Call me a simpleton but I believe human actions should carry implications whether those actions affect only individuals or even countries. Rewarding stupidity, greed and folly is a prescription for more, not less, of the decisions that led to such crises in the first place.

In the fading West, we have reached a point in our history where political leaders want all the benefits of capitalism but none of its drawbacks. Those drawbacks include allowing poor decisions to be met with failure. When the lessons that result from poor choices are painfully learned, those same choices and actions are generally avoided in the future. Not any more - no we can have all the gain without any pain thanks to this magical fairy-tale land created by monetary officials who seem to believe it is their God-ordained destiny to save men from themselves.

Would that it were that easy! We could create heaven on earth and absolve men from any consequences for their poor judgment. Unfortunately there now exists a permanent class of individuals who cheer this sort of thing on not realizing how harmful it is in the long term. It enlarges the scope of government and allows it to intrude into the cleansing process that MUST occur in a capitalistic system if that system is to function efficiently. The STRONG survive; the WEAK perish. That may seem brutal on the surface and in some manner it is but leaving human emotion aside, it is this weeding out process that allows for efficiency and ultimately rewards good judgment and sound policy.

I survey where we are today with this constant enlargement of Central Bank activity and increased interference by political leaders and I often wonder whether a Steve Jobs could create a company like Apple, step down and then come back and lead it back to its place of prominence today. He did that through his sheer genius and ruthless insistence on creating products that consumers would want.

Imagine a world in which the political leadership finds an Apple losing market share, fading from its former glory and lacking creativity only to hear the company's leadership begging and pleading before the ruling powers about how it is too big to fail and needs government assistance to keep it viable "because of all the jobs it creates". Then imagine those same political leaders providing it taxpayer funding (from borrowed money) to give it a lifeline and rescue it. Instead of the company being forced to take a hard look at itself and get its creative juices flowing, as Apple did under the helmship of Steve Jobs, it takes the taxpayer money and survives but does not thrive by introducing a new line of products that consumers desire.

That is not capitalism; it is more closely akin to fascism or as some prefer, crony capitalism, which truth be told, is no capitalism whatsoever. Either a company stands on its own merits or it doesn't. How many family-owned businesses have we see fail in the last few years? There has been no rescue plan for them. If anything the federal government has made their life even more difficult by piling on more regulations and now attempting to saddle them with a huge boondoggle known as Obamacare? That is where we have now come in our journey here in the West - a system where government picks winners, allows fools to thrive in spite of themselves and works to undercut small business. I wonder what our Founding Fathers would think were they to see this now.

Trader Dan on King World News Weekly Metals Wrap

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

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Gold - Brent Crude Oil Ratio

While not a perfect measurement of gold mining profitability, this ratio does allow us a look into how the final product of a gold mine, (gold), is doing in relation to one of the single largest expenses involved in mining, namely energy. The higher this ratio, the better for mining companies.

HUI- Daily observations

Gold stocks are closely tracking the broader stock markets moving higher once again on further news out of Europe - this time it was some package of European Central Bank loans that were supposedly being put in place to provide liquidity to European banks who cannot seemingly get loans at what they consider a decent rate of interest in the real market. No worries - the government will loan them the money.

Here we go again - once more we see the unholy alliance between government and business when it comes to "too big to fail banks". Pity the poor mom and pop shops who never had a rich sugar Daddy when they ran out of money and could not obtain loans at a decent rate of interest.

That had the equity markets overlooking the mediocre unemployment report which once again came in over the psychologically significant 400K level. Now we turn our focus to the payrolls number which have been whispered to come in near 60K tomorrow. We'll see. I guess what this means is that if we get 65K, a good portion no doubt coming from that bogus computer Birth/Death model, it will be off to the races for stocks on the "great news" for the economy. The Matrix had nothing on this generation.

Back to the gold mining stocks - they have spiked off the 490 level just as the S&P 500 spiked off the brief foray below the critical 1100 level, a level which infuriated the central planners as it had the market in official bear market territory.

The HUI has now run exactly to the resistance level that comes in near the 540 level. This level needs to be cleared and held to set the sector for further gains. If that occurs, then the big test will be at the 50% Fibonacci retracement level of the recent decline. That is near 560. This level will bring in some sizeable selling so if the bulls can absorb all of that and take it through it, then we have something going.

On the downside, if the equity markets implode tomorrow on the payrolls number then we will probably see selling hit the mining shares which will first test today's low near 520 to see if that will hold. If it does not, back down towards 500 it will go.

Right now, we are all held hostage to the day to day news.

Gold bullion itself managed to push past psychological resistance at $1650, a plus, but until it convincingly clears $1680, it is still rangebound.

Silver must take out $32.50 and hold it to give it a chance at $34. Above that, it begins to trend.

Gold still stuck in a range

Gold has thus far found willing buyers on forays down below the $1600 level. So far, so good. However, it is still effectively range bound until it can at least push past the $1680 level topside. It ran into resistance near $1650 in today's session but has been holding relatively firm as we enter early Asian trade this evening. Downside support is indicated on the chart in the region bounded by the solid red lines.

It seems everytime we get the least whiff of more bailout or rescue talk coming out of Europe, up go the Equity markets, most of the commodity markets and of course, gold. That happens mainly because down goes the Dollar and up goes the Euro. Quite frankly there is nothing more disgusting to a trader than sitting around waiting for some fresh fundamental news to come out of some monetary official's mouth because you never know what the hell words of "wisdom" that they are going to come up with next, which words I might add will either immediately sink your trading account into the netherworld if you guessed incorrectly or make you look like a veritable wizard.

If it is the latter you can wait by your phone for a call from Jack Schwager to include you in his next sequel to Market Wizards where you can pontificate about your expertise and what you look for in a market when the truth is you just happen to be one lucky SOB.

On the other hand, if you guessed it wrong, they have another category of book that they can include your name in. It is called, Famous Trading Recipes, under the heading of Road Pizza, because that is what you will look like if you were on the wrong side and could not run quickly enough to prevent yourself from becoming steamrolled by eighteen gazillion hedge fund managers whose computers all hit the market at the same moment in time.

Seriously, we are back to trading whatever the hell is coming out of Europe next. Who knows what the final package, if any, will look like. All I do know is that once again, just about the time every technical indicator on the planet turned to the sell side in the S&P 500, with headlines flashing the official entry into a Bear Market, up goes the S&P as if nothing happened once again punishing all the short sellers for their impertence in daring to sell stocks in the financial markets of the US. Tsk, Tsk, boys - did you not know that such activity is unpatriotic at best and treasonous at worst? 

Truth be told the monetary authorities of both Europe and the US are terrified of the price charts and probably watch them more closely than we traders. They simply cannot have them casting off belittling signals as to the health of the economy.

Chalk up the rally in the gold shares to this huge short covering squeeze that hit the broader markets. No matter what the real reason is, the fact is that from a technical chart standpoint, the HUI needed to move higher immediately after yesterday's shellacking and it did. It climbed back over the 520 level so if it goes out to end the week above this level, that will be considered a major victory for the bulls. It will need to get its rear end above 540 to get anything of note going to the upside.

The Dollar retreated from the 80 level once again on the USDX but that will not matter if Europe fails to come through and deliver on their stability mechanism. By the way, I love the fact that we have an Exchange STABILIZATION Fund here in the US and they have a STABILITY mechanism over there. Call me a purist but since when did the damn government have the right to interfere in any markets to make them more "stable". My view is that ALL of the instability currently in these markets is being caused by the government. If they got the hell out of the way we would actually have a TREND and it would be a STABLE one. The only problem for them is that the trend would be DOWN. That is something that these meddling clowns cannot tolerate. That is where the instability is coming from (traders trying to guess what these fools are going to do next).

So whatever you do, do not call the current system in place in our financial markets CAPITALISM. This has nothing to do with capitalism and everything to do with Statism and Central Planning. I bet we would have already seen this entire mess cleaned up by the market if the central planners and meddling busybodies had not stuck their noses into it.

That is my soap box rant for today.

HUI Weekly Chart needs to improve - very soon

I am focusing in on the weekly chart to provide a bit of a longer term perspective as today's action (Tuesday) has put the HUI in very dangerous technical territory from which it must recover before the week is out in order to prevent a deeper sell off.

I have drawn in TWO support lines on the chart which have proven to be of significance to this index. The upper line comes in near the 520 level and the lower line near the 500 level.

When the HUI broke down below the first line in today's session, it immediately fell down to the next line or lower support level before bouncing. This lower line is now critical.

The HUI has had only ONE WEEKLY CLOSE below the 500 level the entirety of this year. That was back in June when it closed out the week at 496. The following week saw it close back above the 500 level which in hindsight proved to be the confirmation that a bottom was in for the sector. Perhaps that was a precurser of what we can expect this time around. Let's hope so.

You will note on the chart that over the course of this current year, there have been several other weeks during which the HUI had pushed down below the 500 level but by the end of the week, it had recaptured it.

We will need to see the index close the week above this lower line to prevent a deeper setback in the sector as a whole.

Note that the WEEKLY MACD is now in a bearish mode meaning that most likely rallies are going to be sold unless we see this indicator reverse to the upside.

The bulls have their backs to the wall and are going to need to stand their ground and dig in if they are going to be able to thwart this lastest effort at leaning on the shares. I would breathe a sigh of relief if the index can close OUT THE WEEK ABOVE the 520 level.

One final thing - the HUI/Gold ratio collapsed today taking it down to a new low for the year. It is now at levels last seen way back in March 2009 when gold was trading nearer to 930 - 940. Astonishing!  Wait until some of these gold mining outfits release their quarterly numbers. I find it hard to believe that there is not going to be some very large profits being generated in this industry.