Gold Chart and Comments

Gold was on the receiving end of a bloody bear mauling in today's session as the downside breach of what had been a rock-solid level of chart support (courtesy of Far-Eastern buying) gave way in a tremendous avalanche of sell stops. Apparently the physical market buyers decided to step back and pick up their gold cheaper as they have come full well to know what happens to hedge fund long positions whenever a large contingent of stale longs meet up with the usual monthly payrolls number.

Suffice it to say, gold has now experienced a technical break to the downside and has some chart damage to repair. Just how far and how deep this correction will go depends on the willingness of those big physical market buyers to absorb the metal coming onto the market.

The level of chart support that provided an initial downside target once $1700 gave way was the $1680 level. It failed to stem the selling acting as an upside cap to gold during the aftermarket trading once the pit session closed for the day.

My analysis suggests we have a strong band of support beginning near the $1665 region and extending towards $1658. That will need to hold to prevent another drop this time to $1640.

ON the daily chart, gold is now trading firmly below all of the major shorter term moving averages (10, 20, 50 day) with both the 10 day and the 20 day having made bearish downside crosses below the 50 day. That means the posture of the market is now bearish. The metal is closing in on the longer dated moving averages. The 100 day comes in just below today's low at $1670 and should provide a temporary respite from the selling. If it does not however, the all important 200 day moving average comes into play. That currently is at $1666.

I wish to point out that the 50% Fibonacci retracement level of the entire rally from off the May low, at the $1664 level, is in very close proximity to the 200 day moving average noted above. That will tend to reinforce this level as an expected strong buying level.

As also noted above, if this level fails to hold the metal, then it will drop towards $1640 and just below. You can see both a horizontal support level that I have drawn going back to late May. Interestingly enough, the next important Fibonacci retracement level, the 61.8% retracement, comes in very near there at $1633. That zone, as far as I can see things currently, is the absolute bottom of this correction barring any change in monetary accomodation, something which seems highly unlikely given the tenuous nature of the economy.

I must repeat something I wrote earlier this week, namely, the US election could ultimately prove to be very influential on gold. I am of the firm opinion that should Governor Romney win, given his statement that he would not reappoint Ben Bernanke to the Chairmanship of the Fed, some traders might have an initial knee-jerk response to such an event by selling gold out of fear that he would appoint more of a hawk than the dovish Bernanke to that position. That being said, while the Chairman wields tremendous influence, his vote is just one of many on the FOMC. There yet remains many dovish voices on that committee and last I checked, the majority of them still seemed to be of the opinion that accomodative monetary policy, namely ultra low interest rates on out through 2014 and further QE3, will continue a change in the chairmanship notwithstanding.

One last thing about this market - taking a look at the intermediate term weekly chart shows the third failure of gold to best the formidable $1800 level going back into fall of last year. Taking out that price and holding it is the key to a fresh leg upwards to match the all time high. Once gold failed to clear this level yet again, down it went. While today is disheartening to many bulls ( to longer term oriented buyers of the physical metal it is an absolute delight) the fact is that gold is still in a RANGE TRADE and has been for well more than a solid year now. The top of this range is $1800 and the bottom of this range is $1530. It is just now approaching the middle of the range. It just so happens that the MIDDLE OF THIS RANGE IS $1665. Savvy readers will immediately catch the significance of that number when taking another look at the daily chart shown above and the support levels noted there.

Nothing has changed in regards to the longer term trend in the yellow metal; it is just marking time and meandering in a wide range for now awaiting a fresh catalyst to take it higher. I am of the firm opinion that we are going to need to see a CONFIRMED BREAKDOWN in the US long bond market before we get such a catalyst.

IN looking at the chart of the long bond you can see that is remains mired in a Range trade of its own. It has given a bit of a hint that the next big move will be lower, based on the series of lower highs (see the declining blue downtrend line) but so far support from 145^10 down towards 144 has not been tested. I maintain that once that level gives way, and I believe it will if Romney is elected (probably sometime into his second year in office) then gold will go on to make new all time highs. That is a good way's off however and a lot can change in the interim so we will continue to monitor economic and fiscal developments and hopefully react accordingly.

If Obama were to somehow dupe enough idiots to put him back into office so that he can finish his task of destroying and remaking the nation, then my thinking is that the economy will continue to sputter along with both gold and the bonds remaining in a wide range trade. I would see nothing coming from that quarter that would lead me to believe the economic activity will pick up sufficiently to generate a real fear of inflation amongst investors/traders. QE would then continue ad infinitum, ad nauseum, with periodic bouts of optimism giving way to periods of economic despair. In short, the insane volatility would continue wreaking further havoc to traders and investors as the nation plunges ever deeper into debt. At some point a currency crisis would then occur which would boost gold but oh my, at what dreadful cost!

Commodity Index Breaks Down - So Too Does Silver

Another payrolls report today; another down day in the precious metals. Not much of a surprise here as that has been the norm for many a year. In one sense, it really did not matter what the number was as there was more than likely going to be bearish selling pressure no matter what.

When it comes to silver, if the number was a poor one, the bears would point to the fact that the QE3 was already baked into the cake and so was a non-factor. They would then point to the fact that the poor number was sign that the economy was still muddling along without any risk of inflationary factors due to the sluggish growth. Silver MUST HAVE AN INFLATIONARY ENVIRONMENT if it is to mount any sort of SUSTAINED rally.

If the number was considered friendly, then the bears would cry up the idea that the QE was not going to be continued as long as some were initially thinking since the economy was mending.

In other words, Heads, I win; Tails, you lose.

Either way, take a look at the following chart of the Continuous Commodity Index or CCI and notice that it has broken out of the recent congestion pattern. The breakout however was to the downside. Guess what; silver also broke out to the downside of its recent consolidation pattern.

I have pointed this link out to readers here for some time now - Silver is inexorably tied to the hip of the broader Commodity markets and will remain so into the foreseeable future. Next stop for the metal is today's low near $31.25 followed by a test of $31.00 - $30.80 should that previous level fail to stem its decline.

The fact that the open interest in silver refused to sharply decline during its descent was a warning that the stubborn bulls were vulnerable to a breach of chart support. There were just too many stale longs in this market which had not experienced a good and necessary cleansing. We are now finally getting that which is what this market needs in order to generate a more lasting move higher when the conditions are correct for such an event.

Note on that CCI chart, that the red support line which has been violated came in very near the important 38.2% Fibonacci Retracement level. If the index cannot rapidly recover this support level by climbing back above it and holding, it implies a subsequent test of the critical 50% level is in store.

With this in mind, observe the silver chart and note how similar the pattern is to the CCI. As stated above, the two are linked together and will generally rise and fall together.

Notice also how silver has lost support at the bottom of the recent congestion pattern which also was rather close to its 38.2% retracement level. If it cannot reverse the decline and get back above the 32 level, it will more than likely drift first towards psychological round number support near $31 and stronger chart support down near $30.70 - $30.75.

Monthly Gold charts

October is the first month since May that gold has posted a monthly loss.

Initial resistance still begins near the $1720 - $1725 level. Above that, selling will show up near $1740.

The market remains rangebound with a bit of a near term friendly bias.

It remains below the 50 day moving average which comes in at $1737. That corresponds closely with the resistance level I noted above. To see the longer term bullish trend reassert itself, the market will need to convincingly close through this level.

Downside support still is holding firm near the $1700 level as bargain buying out of Asia is very solid here.

Can you see the significance of this $1800 level and why the bulls were unable to take it through there on this go around?  Clearing $1800 and holding it, is the KEY TO THE RESUMPTION OF THE BULLISH TREND.

Silver Clinging to Support Above $31.50 - Needs Catalyst

With market conditions extremely thin today on account of that monster storm churning up along the Eastern seaboard, it is tricky trying to read too much into one day's price action. That being said, it does seem that traders are leery of putting on too large of a position one week out from a critical election.

I know that the silver bulls are making a big deal out of the apparent lack of liquidation from the speculative side of the market; however, this is in truth a double-edged sword. I would have preferred to see a more sizeable flush with the market holding above critical support near the $31.50 level as that would have set the market in a healthier position to break to the upside. These stubborn bulls will flee in size IF, and I want to emphasize the "IF" part of this, support marked "INITIAL SUPPORT" does give way. There is a tremendous amount of firepower available to the shorts should this level fail as the forced selling would easier and quite quickly, I might add, would take the price down to support near $31.25 down to $31 before we would see some value-based buyers put their toes into the water.

The way I see this, as long as the CCI, the Continuous Commodity Index, is headed lower, silver is going to face strong opposition to any sustained uphill climb. The grey metal needs an INFLATIONARY environment in which to thrive and without the CCI confirming one in the commodity sector, rallies into resistance are going to be met with strong selling. Once the CCI turns and breaks out to the upside, so too will silver. But until that time, it is likely to remain rangebound with pressure coming from risk aversion trades and buying coming from those looking further out along the horizon to an expected outbreak of inflation in the future.

Note on the following chart the breakdown in the CCI. It today has moved down to the 38.2% Fibonacci retracement level of the entire rally off the June low. Failure to garner support here and bounce higher will set the market up for a fall down to 550. Should this occur, silver will likely break chart support and move to $31 and lower. We will need to see the CCI move back through 580-585 to see silver have a real shot at an upside breakout.

One thing about the upcoming election - if Romney does win, he has said he already does not plan to renominate Ben Bernanke to the position of Chairman of the Fed. While there still remains a sizeable contingent of doves on the current FOMC, some traders are concerned that he would nominate someone less inclined to continue a monetary policy of perpetual bond or asset buying as their predecessor.

The truth as I see it is that these bond/asset buying programs of the Federal Reserve are NO SUBSTITUTE for overdue STRUCTURAL REFORMS that must be put into place if the US economy is to begin growing at anywhere near its potential. Depending on which party gains control of the Senate, if the Republicans were to win that prize and the Presidency, I would look for an extremely ambitious agenda which will excite the business community and begin to spur economic activity. In that case, the Fed would be able to VERY SLOWLY begin reversing its bond buying program once the economy were to actually turn for the better. That of course would take time as any attempt to rapidly withdraw this mountain of excess liquidity would send a shock wave through the global finance world.

If the Democrats were to hold the Senate, Mr. (everything dies in the Senate) Reid, would do his worst to thwart any needed reforms unless there was strong public support for such. In that case, the monetary pump would continue at full force with little chance of it being scaled back.

I repeat, it is crucial to the long term health of the US economy, that structural reforms begin. Without those, the economy will merely limp along and the present status quo will continue meaning the constant tug-of-war between the forces of deflation and the forces of inflation will go on with the wild volatility only getting worse.

One thing to also watch for will be a repeal of Obamacare if Romney does win the election. Should he make good on his promise to repeal it on day one, business will applaud and money that has been sitting around doing nothing in their accounts, will immediately be put to work.

Trader Dan on King World News Metals Wrap

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


http://kingworldnews.com/kingworldnews/Broadcast/Entries/2012/10/27_KWN_Weekly_Metals_Wrap.html

Dow Jones/UBS Commodities Index Change to Benefit the Precious Metals

Every year, the various commodity indices, that are used by hedge funds and index funds to benchmark against, have a reweighting of the various commodity inputs that are used to comprise each particular index. During this reweighting process, the percentage of some commodities are increased while the percentage of others are decreased. As a result, those funds benchmarking against the index, are forced to recalibrate their particular portfolios, selling some commodity positions while buying some new commodity positions in order to come into alignment with the new weightings.

Dow Jones/UBS recently announced that the precious metal component of their index will be increased by 2% from this year's levels for 2013. This will benefit gold and silver to the extent of an estimated (by Credit Suisse analysts) to the tune of some $1.6 Billion in new money flows. The money will be evenly split between gold and silver.

There might be some buying in the metals this AM on this news given the fact that the Dollar is generally steady this AM, which would normally see some pressure on the metals. Bargain hunting occurred last evening in Asia down near $1700 and is sitll coming in against that support level on the charts.

Gold bulls need to get the price back over $1720 however and KEEP it there to stem the recent declining pattern and stabilize the market.

Strength in the mining shares as evidenced by the HUI is aiding the metals. That bullish flag formation on the weekly chart is still in force but was chipped away at by yesterday's strong down day. Mining share bulls will need to take the index up through 510 for starters to give some further hope of validating the pattern. A close in the index below the 480 level makes the pattern null and void.

Gold Chart and Comments

Gold's failure to hold the $1720 level has led to increased selling pressure taking the metal down to strategic psychological support at the round number of $1700. The market is bouncing off of that level in Asian trade this evening as dip buyers/bargain hunters move in to take advantage of the nearly $100 fall in price from its recent peak made a few weeks ago.

If the bulls can take the price back up through the blue line marked "FAILED SUPPORT", gold should stabilize and range trade. If $1700 gives way, then price is headed for a test of the line marked "SECONDARY SUPPORT".

Notice how the previous steps of the stair step pattern higher are serving as support on the downside. As each of those support levels fail, the next step becomes the new support level.

Right now there is still no sign of a bottom but the market has come down quite a bit so it would not be unexpected to see it stabilize here.

The fundamental factors that led to the August-September rise are still in place, namely the easy money policies of the Fed and the ECB and BOJ, but that is old news and the market is looking for another spark to take it higher. What will need to occur is sufficient VALUE BASED BUYING TO drive a floor under the market and soak up the speculative selling from liquidating hedge funds and other specs who are bailing out.

Trader Dan on the King World News Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap where we discuss this week's action in the gold and silver markets as well as the mining shares.

http://tinyurl.com/8wyjjx6