Speculative Money Flowing out of Gold

This afternoon's (Friday) Commitment of Traders report confirms what I have been discussing here on this site as well as in my audio interviews over at King World News Metals Wrap, namely, that the Central Banks have managed to curtail speculative money flows into Gold and direct those money flows into equities.

This is the reason gold cannot find much in the way of traction to the upside and cannot mount any sustained moves higher. Quite simply, big specs are using rallies into resistance to unload stale longs and put on new shorts. Now that near term momentum has shifted to the downside, they are also selling into weakness and pressuring the metal even lower.

Notice that since October of last year, hedge funds have been steadily liquidating long positions in the gold market while simultaneously instituting brand new short positions. The result of money flows out of the gold market that began in that month,  in addition to fresh shorting, has sent the gold price down $116/ounce as of Tuesday of this week, when the data for the COT is captured by the CFTC. Gold has since fallen another $39 as of Friday so one can assume that further long liquidation has been taking place by hedge funds along with another fresh burst of short selling by this same group of traders. Another way of saying this is that gold has fallen $155/ounce since this movement or repositioning by large hedge funds has occured in earnest.

I should also note that this is the LARGEST outright short position by hedge funds in Five Years.... that is quite remarkable to say the least.

Gold loses Support

Gold bears have been salivating for nearly 5 weeks now over the prospect of setting off the avalanche of sell stops that had been building below the support region marked on the chart starting near $1640 and extending to $1630. They hit them and more today setting off a selling cascade that also nailed the sell stops just below $1620. That was enough, along with some brand new short selling, to take gold down towards the psychological support level at $1600. It then briefly penetrated that line but managed to claw its way back up as short term traders rang the cash register after this week's fall of $60+.

The pit session close was a good $10 off the intraday low but in the aftermarket gold continued to attract selling pressure and was pivoting around the $1606 level for most of the late afternoon. The last 30 minute or so of trading in the stock market saw that sector begin recovering off the Wal-Mart email fiasco news and as it did, gold began to drift higher. Prior to that it had moved back down towards $1604 again.

I mentioned earlier this week that a strong break of support on good volume would turn the trend indicator, the ADX, into a trend mode and that is what it did. Note on the indicator that the negative DMI (red line) has exceeded its previous peak and is now moving towards the next peak made near mid-December of last year. +DMI is also workly steadily lower confirming the move while the ADX line is now rising indicating that a short term trend lower is in effect.

Gold will need to recapture $1640 at a bare minimum to turn this indicator friendly and push out some weak-handed shorts but more than anything, $1665 - $1670 to get any serious large scale short covering started. The 200 day moving average comes in near $1664 and that will serve to attract selling for the time being.

Right now the story remains the same - the Central Banks of the West (Japan is included) have managed to pull off one helluva feat by corraling the hedge funds out of commodities (and gold) and into equities, the only game in town to capture any decent yield on investment in this pathetically low, near zero , interest rate environment that they have created.

As far as downside in gold goes, today's low will serve as the initial level of chart support as handle of "15" will serve to attract some value-based buying as it has been a while since we have seen that price. If the market cannot hold there, I see some light chart support near $1585 or so. Below that, $1560 and then $1545.

The HUI looks beyond pathetic. Barrick announced that they will be selling off some non-productive assets and properties, etc, to streamline their operations and reduce costs. That is a very good sign that some of these mining CEO's are getting the message from the market: "Get your financial house in order and get costs under control so that you can return value to stockholders or else...". It is a pity that it has taken a beating of this severity to wake some of these guys up. One last thing - be selective about which gold companies you want to own. Make sure that management is serious about running a tight ship.

Wall Street Journal's Richard Barley on the Swiss National Bank

The Wall Street Journal's Richard Barley has written an excellent short piece on the predicament facing the Swiss National Bank that really hits the problem of this nonsensical ZERO INTEREST RATE policies being followed by many of the WEstern Central Banks.

The piece is by subscription only ( I am including the link if you wish to subscribe- Dow Jones subscribers have access to this in their wire feeds).

http://online.wsj.com/article/SB10001424127887324432004578302072850974556.html?KEYWORDS=Richard+Barley

He entitles his piece: "SNB's Zero-Rate Wonderland"
Let me summarize his great analysis:

1.) The Swiss National Bank cannot raise interest rates for fear of derailing their economy

2.) The zero interest rate environment is producing a bubble in real estate prices. UBS, has constructed a Swiss Real Estate Bubble Index to measure the rise in housing prices. It is a Price-to-Income ratio that has risen to size times at the end of 2012 from four in 2000.

3.) Inflation in 2012 was a negative 0.7%.  Growth is sluggish. The SNB cannot raise interest rates because it would send speculative money flows into the Swiss Franc causing the currency to rise in value hurting Swiss exports and slowing any incipient signs of growth.

4.) This would force even more intervention in the Forex markets by the SNB to sell the Franc in their attempt to devalue it.

5.) The SNB is attempting to slow down housing loans by requiring a capital buffer for banks

6.) The Fear is that this will work to curtail loans to small and mid size businesses and enterprises

7.) The SNB has a balance sheet that is ballooning.

This well thought out and solid piece encapsulates not only the problems faced by the Swiss National Bank but the reality is that the other Western Central Banks practicing the same policies are in the exact same predicament. Here in the US, the Fed is attempting to reflate the housing market which imploded when the bubble IT CREATED in that sector burst. The problem for the Fed is that while it attempts to reflate various bubbles it has presided over, it merely creates a new one someone else. CAse in point - the US equity markets which in my opinion are in the beginning phase of yet another speculative bubble.

The exit that the Fed will attempt at some point in the future should be interesting to say the least.

Gold Chart and Comments

Gold continues to work lower as it moves ever closer to a region that has heretofore provided substantial buying support. Bears are attempting to take it down through this support region in the hope of picking off the rather large contingent of sell stops sitting just under the market.

It should be noted that they have strategically used the Chinese Lunar New Year holiday week to press their case. Without that strong physical offtake, speculators on the Comex have lost an important ally. It will be interesting to see what happens next week when that period in China is finished.

By then however, it may be too late for the bulls. This market looks heavy to me. Note that on the technical chart, one of the indicators that I still use ( it is dated but still a very good tool) shows that the ADX of the Directional Movement Indicator is beginning to turn up from a very low level. A rising ADX (the dark line) is a sign that a market is in a TRENDING PHASE. So far, gold has been in a sideways consolidation pattern or range trade. That is evident from both the price action which has been confined between $1695-$1700 on the top and $1640 or so on the bottom. Along with that, the ADX has been falling which is indicative of a market in such a pattern.

The danger for the bulls is if the support level gets taken out, the indicator is going to move higher indicating the possibility of a trending move lower. I am not sure how much downside gold would have under such circumstances but it is easy to envision it moving down to test psychological support near $1600 for starters.

Central Bank buying will no doubt arise should this occur but it will need to be large enough to offset the lack of speculative buying and the fresh shorting that will come from momentum based traders who want to chase the price lower.

Negative DMI has not yet taken out its previous peak but if we do get that support breach, it will. That will bring in more selling.

The problem for gold right now remains the same - the Central Bank money printing bonanza has convinced the majority of speculators that the worst is behind us and that the equity markets are the place to chase yield. Money flows are therefore leaving the safe havens (bonds included) and entering the equity arena. Until that substantially changes, gold is going to be looking for sponsors.

The onus is on the bulls to perform here and now.

HUI / Gold Ratio Chart

By request...

Gold Drifting towards Bottom of its Range

The Asian holiday period has closed down some of the big physical market buys that we normally see from that quarter of the globe. The result has been a lack of physical offtake which typically helps offset speculative selling over in the New York trading hours.

That has allowed bears to take gold lower after it failed to pushed past overhead resistance last week near the $1685- $1690 level. Gold is now retreating towards the bottom of its 6 week+ trading range near $1640 and below.

Bears will try to break through this support level as there are significant sell stops lurking down there that have them salivating. I would expect some Central Bank buying to emerge however should prices reach these levels. It was interesting to note a recent article detailing the extent of Russia's gold buys. Gold is certainly moving from the West to the East.

From a technical analysis standpoint, the market needs to hold support between $1640-$1630. Failure to do so will target the next level of chart support between $1620 - $1615. Below that is round number psychological support at $1600.

Bulls might be able to prevent a sharp move lower but so far they have lacked the resolve to take it up through overhead chart resistance. To get any hope of having some sort of leg higher in gold, price must clear $1700.

Silver has once again failed at $32.50. This last attempt to test that tough resistance level never made it past the $32 level for any length of time. It is now probing lower for support. If it fails to hold near $30.85, it will move back towards $30.25 - $30.10.

Weakness in the HUI is again undercutting the precious metals.

Today is a bit of a strange trading session day. The Euro is the only major currency trading higher. The other majors are moving lower. Equities are at the moment, comatose, while bonds are also lethargic. Crude oil is strongly higher pushing up towards initial overhead resistance near $97 - $97.15. Platinum is weaker but palladium is up. Copper is also weaker along with lumber. I normally would say this looks like a bit of a risk aversion day but the Euro being higher does not fit that general theme.

Let's see how the dust settles when all this is done today before making any assumptions based on a single day's worth of price action.

Federal Reserve Balance Sheet - A Proxy for US Equity Markets

If there are still any skeptics left out there who DO NOT BELIEVE that the entire stock market rally from its low made back in late 2008, has been engineered by the Federal Reserve, then please examine the following chart I have constructed using the data from the Fed's own site which provides a weekly glimpse into their balance sheet.

Note that I am only using the total of their Securities holdings and not the entirety of the data that goes into constructing the overall size of the balance sheet. In other words, I am excluding loans from the Discount Window, swaps and other assets that go into making up the entirety of their available credit. In other words, I am being "conservative". If you take those other factors into account, the size of the balance sheet of the Fed is already over $3 TRILLION!

Even at this, it still provides a very compelling picture of why US equities continue to plumb new highs nearly month after month in spite of the anemic at best growth in the underlying economy.

I maintain that the Fed has engineered one of the most massive bouts of INFLATION in the STOCK MARKET since its inception a century ago. Can you see the connection between the overall size of the Fed's Balance Sheet and the level of the S&P 500?

This is by design of course since in our new, modern age of ignorance, these monetary wizards believe that they can create lasting prosperity by forcing untold amounts of freshly minted liquidity into stocks jamming those prices higher and thereby influencing consumer sentiment. A rising stock market provides cover for all manner of other economic woes, and political woes, I might add. The low information citizen takes one look over at the DOW or the S&P 500 and then falsely assumes that all is well with the world and then goes about his or her business without delving any deeper into these matters. This is of course further propagated by the blind lemmings who constitute the majority of analysts out there on financial TV who breathlessly talk about the wonderful rally in stocks heralding the beginning of solid, sustained economy vitality. Idiots! (Sorry, I could not help myself on this one).

The opposite is true when stock prices are collapsing. Consumers begin to move from concern, to worry, to fear and to outright panic and then most worrisome to the elites, anger as they look for scapegoats.

As I have stated many times now on this site, if it was this easy to create prosperity, it would have been figured out a long, long time ago by previous generations, which unlike this current one, were actually capable of critical analysis. Let's call this current Federal Reserve strategy: "PROSPERITY IN A BOTTLE". It is akin to a cologne for men. Just splash some on and forego the shower for the time being as the aroma masks the smell from a day's perspiration.

What the Fed has done is to cover up the stench from the debt overload and rampant speculation its policies have created in our financial system. The deeply-rooted structural issues have been left unblemished in their vigor.

Do not forget this one thing - ultra low interest rates benefit TWO GROUPS at the EXPENSE OF SAVERS.

FIRST - the borrower  and

SECOND - the large speculator/hedge fund which borrows money for basically no cost and then LEVERAGES that money in speculative bets. Where do you think all that liquidity that the Fed has shoved into the marketplace has gone???? the answer - into equities!

Lastly, here is one more look at the level of the S&P 500 seen through the prism of gold. First look at the S&P in NOMINAL TERMS. Note that the Fed's machinations have jammed it to within a whisker's breadth of its all time CLOSING HIGH made back in late 2007 just before the bottom dropped out of the index and it lost 50% of its value over the next year and a half. "Wonderful, Superb, Splendid, Impressive" all are adjectives being used to describe the "recovery" in stock prices.

Now take a look at the same chart when the price level of the S&P 500 index is compared to the value of one ounce of gold. Note that "recovery" seen in the nominal index off the 2009 low doesn't seem like all that much now does it? Translation from all this - Fed induced RAMPANT INFLATION OF PAPER ASSETS; nothing more. Traders of course can go with the flow of money into equities as long as they do not mistake this equity rally as the herald of a new era of lasting prosperity. When the music finally does stop, and the players rush to find their chairs, many are going to be left standing looking for a place to sit and coming up empty.

Trader Dan interviewed at King World News Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King over at the KWN Weekly Markets and Metals Wrap. There were some issues with their site being hacked but that appears to have been remedied. You might want to clear the cache on your internet browser if you are using a bookmark to head over that way.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/2/9_KWN_Weekly_Metals_Wrap.html

By the way, this week's interview is more of a big picture, long term view of things instead of our normal technical analysis type work that we generally do there. I hope you enjoy it.