Ten Year Treasury Yield Closing in on Yearly Highs

It will be interesting to see the response from the various FOMC governors should this critical indicator push ever closer to 3%. Their response or lack thereof will give us a good clue into the thinking of the broad committee.

You might recall that this summer, the rate spike elicited extreme nervousness and concern among the Fed governors who immediately began sounding a dovish tone on the economy overall and the bond buying program in regards to any tapering.

Remember, the Fed today left the door open to additional monetary stimulus should the economic data warrant such.

Market Confidence Soars on FOMC

As those of you who regularly read this blog know by now, my favorite indicator for measuring investor confidence/complacency is the Volatility Index or the VIX.

Notice how the index initially soared higher when the news that the Fed was tapering to the tune of $10 billion. A large number of investors panicked. However, the reaction following that was one of increasing confidence due to both the wording of the FOMC statement, and, Chairman Bernanke's comments during his last press conference.

I maintain that gold needs something to impact CONFIDENCE before it mount a SUSTAINED RALLY HIGHER. With the VIX falling, and the stock market soaring into new all time highs, gold is looking for some friends right now as there is nothing on the radar screen of investors AT THIS MOMENT, to give them a strong reason to chase gold prices higher.

Now the key for gold is whether or not it can hold chart support near $1220. If it loses that level, it is going to test round number psychological support at $1200.

I will get a chart of gold up a bit later today. As you no doubt realize, it has been a very busy day for traders.

FOMC - Taper Arrives - Finally!

We finally got the big "T" word today. The announcement by the Fed of a $10 billion cut in the bond buying program was greeted by the markets with the usually volatility as the HFT crowd had a field day picking pockets but once the dust settled down a bit and some saner heads prevailed, traders were able to actually think about what the Fed statement means.

It looks to me like the Fed basically gave the market a near perfect bowl of punch. Cut back on the bond buying program and dispel some of the criticism it has been receiving from some quarters about keeping the program at full size for too long while simultaneously sounding an EXTREMELY DOVISH TONE on the interest rate front. In short, they managed to convey that they are still concerned about DEFLATIONARY forces reasserting themselves but are comfortable scaling back some bond buying as they monitor that situation.

The reaction in the gold market was fascinating to watch as traders tried to figure out exactly what to think about this new state of affairs. The initial kneejerk reaction was to sell on the announcement of a taper; however, I believe the dovish attitude towards interest rates eclipsed any fears of a slowdown in the liquidity injection mechanism. That allowed gold to catch a bid and keep above that now incredibly significant chart support level at $1220.

Basically the Fed left the door open for a period of ultra low interest rates for an extended period of time. One thing I noticed was that they seemed to play with the unemployment number threshold a bit ( "well past 6.5%"). That was something new to me.

What really matters to traders however is not the news so much as the reaction to the news. The equity markets are looking at the announcement of a $10 billion/month taper as evidence that the US economy is actually recovering enough for the Fed to slightly scale back the QE. Also, the Fed's benign view on inflation, means that equities remain the "GO-TO" sector for gains.

Given that view, and the fact that there is still going to be $75 billion/month of bond buying, it was a go on all cylinders for the US stock markets. From what I can see, the Fed under Ben Bernanke has managed to pull off nothing short of a financial miracle. They conjured into existence nearly $4 trillion of new money without completely debasing the Dollar or generating widespread inflationary outbreaks. In the process, they generated an historic rally in the equity markets, a rally which I might add, now looks as if it will continue.

With the decision to taper finally out of the way, with the uncertainty surrounding that decision clarified, investors are now breathing a sigh of relief and going back to what they have been doing for all of this year, buying equities. And why not? - the Fed has given them the green light by restating the "Bernanke Put" is still in effect should economic data justify additional monetary action. Stock investors have never had it better. It is rather remarkable.

That brings us back to gold - in my view gold's progress from this point forward will be completely dependent (as it has been in my view) on whether or not the market believes that inflationary pressures are now more of a danger than deflationary pressures. The Fed reiterated that inflation is consistently running BELOW its 2% benchmark. What they want is the Goldlilocks scenario - inflation not too hot, and not too cold, but just right.

I mentioned last week or the week before that in a post, that the Fed might actually WELCOME a HIGHER GOLD PRICE. Why? Because as long as it does not soar out of control, but manages to stay firmer perhaps within a broad range, it would signify that inflation is not a problem nor is deflation. I believe the Fed would be concerned if gold prices were to experience a sharp, PROTRACTED move lower just as much as they would be if it experienced a sharp, PROTRACTED move higher.

If this is the case, we might have finally found a lasting bottom in gold. That does not mean it is going to enter a strong uptrend in price ( see my thoughts above) but rather that the forces of deflation and inflation might now be balanced, at least in the view of the FOMC. I still believe that gold will underperform the broader equity markets unless we see some sort of black swan event.

It was interesting listening to the outgoing Chairman's comments during his presser. He mentioned as a deflationary force falling crude oil prices but also expressed concerns about the potential for rising health care costs and the possibility of rising wages. I came away with the idea that the Fed is going to remain heavily dependent on the financial/economic data. They are very concerned about the deflation issue, that is beyond dispute.

Let's see how things look when the dust settles for the day and then make some assumptions from that point.

Silly Season Silliness

I am strongly suggesting that parents still looking for last minute Christmas kids for their children, look no further than the gold market as it can quite easily be substituted for one of those new, sleekly designed yo-yo's. Yes siree Bob, it goes up and down, up and down, up and down, with hardly any hiccups whatsoever ( you know how annoying those strings can be when they get knots in them ).

Seriously, the Silly Season Silliness was on full display today as the gold market gave back what it put on yesterday, which by the way brought it back to nearly where it closed last Thursday.

That is why I keep saying, do not read too much into any one day's price action. I marvel that all the usual perma-bullish players continue to come out of the woodwork whenever we get a strong move higher. Then they all disappear when the market gives it all back ( some of them blaming manipulation). When gold moves back up, they will come back. Count on that. I could also just as well say that the perma-bears are always growling whenever gold makes a move lower.

Here is the simple truth - gold continues to be stuck in a RANGE TRADE. That means it "ain't goin' nowhere" until it breaks out of the range in one direction or the other. The weekly trend is still down so the bears have a bit of an advantage but downside momentum has also been blunted so until they can force the price below $1210 and keep it there, they are not out of the wood yets either.

Until then, find something better to do with your life ( like going to see "The Hobbit- the Desolation of Smaug" - I LOVE HATING Azog and Bolg), instead of watching every single tick in price. As long as we are dealing with the vagaries of the Fed and the FOMC meeting, as long as we are dealing with year-end book squaring, and as long as we are dealing with pre-holiday thinning trade conditions, we are going to see volatility.

Since there is not much to say right now, I will merely leave you with a price chart noting the price action as it remains constrained within that broader range.

Market Comments 12-16-2013

I mentioned in a post last week that I am beginning to wonder if we are seeing a shift in sentiment towards "growth" in the economy. What is needed in gold, and especially in silver, is for investor sentiment to begin looking away from the "growth is steady but sluggish" theme to one of "growth is picking up and with it, so are the chances of inflation".

Today we had the US Industrial Production numbers. This is a gauge or measurement of the output of US manufacturers, utilities and mines. It registered a 1.1% increase from last month's number, the biggest jump in a year.

That seems to have sparked a move higher in silver which then yanked gold higher. I noticed that Copper was higher as well.

Equities went on a tear higher today as once again the thinking in regards to the QE thing shifted yet again. Today the thinking was that the Fed will hold pat on this month's meeting and will do nothing until March at the earliest so as to not jeopardize the recently improved economic data.

That in turn undercut the US Dollar and thus we seemed to get a binge of commodity buying. Crude oil, gasoline and heating oil, all rallied higher. The metals were all higher. Soybeans moved higher. Coffee and sugar went higher. There were some commodity futures markets that moved lower today but the majority of the sector saw steady inflows.

Whether this is a shift in sentiment towards the sector in general is still up in the air. Part of what makes deciphering all this even more tricky is the fact that these moves are now occurring in the middle of the Silly Season. Market liquidity is shrinking as traders square their book, closing out positions as we move to the end of the year. That allows for excessive price swings in both directions on relatively small-sized orders as more and more air pockets, both above and below the markets, are encountered.

Back to gold - it confirmed that it has entered a range trade for the time being as that uneasy truce between bulls and bears that I mentioned last week continues. The range is defined on the bottom near $1220 and on the top up near $1250 with short covering related spikes pushing prices up towards $1265 before the selling re-enters. Until this range is violated, in either direction, gold is marking time.

It seems to be unwilling at this point to make a decisive break in either direction more than likely due to the time of the year. As mentioned above, many traders are simply not all that willing to establish sizeable positions as the calendar is about to shift. They will wait until the beginning of the New Year before moving back into some of these markets in size. That is why I stated last week and wish to restate here for the sake of emphasis that reading too much into the day to day gyrations in these markets is not wise.

Tax considerations are also at work and trying to unravel that knot can be fruitless most of the time.

I have noticed that as I type these comments, silver has once again been unable to maintain its footing above the $20 mark. It is back to being a teenager once again. For the bulls to have any sort of chance of generating some upside fireworks in the silver market, they will need to get at least past the $21.25 level.

The S&P 500 is stuck between the 50 day moving average and the 10 day moving average. It is basically in the business of whipsawing traders right now.

Trader Dan interviewed at King World News Markets and Metals Wrap

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

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/12/14_KWN_Weekly_Metals_Wrap.html

Commitment of Traders and the Reverse Flash Crash

Today's release gives us a pretty decent glimpse into the activities that gave rise to what I have dubbed the "Reverse Flash Crash" in honor of those who see nefarious evil doers behind every move lower in gold recently.

You might first recall that on Friday of last week, the day when the last Payrolls number was released, gold plummeted lower hitting a low near $1210 before violently rebounding higher. That action alone resulted in a significant number of speculative short positions being squeezed out. There then came a bit of a breather on Monday before the market shot higher during the Reverse Flash Crash on Tuesday which kicked off another round of buy stops.

The action was caught for us by the CFTC in today's report and reveals the reason behind the sharp moves - hedge funds were doing a good bit of short covering. Some in that camp were also fishing for a bottom and moved back onto the long side of the market. The result of that was net buying by this group to the tune of approximately 6600 contracts.

Interestingly enough, the entirety of that , and then some more, was offset by Swap Dealer selling. They were net sellers to the tune of some 8,200 contracts.

The Producer/User/Merchant category were also net sellers for the week to the tune of some 2400 contracts.

The Small Specs were bottom picking this past week as they rushed back onto the long side to the tune of about 2270 contracts. Ditto for the Other Large Reportables who were net buyers of some 1700 contracts.

Note to some: These are approximate numbers for the purpose of quick and easy illustration from which to draw some analysis.

Here is the takeaway. Specs were squeezed in the push back down to $1210 and subsequent inability to break through that support zone. Then as prices moved higher on Tuesday, more buy stops were run. The BULK of the BUYING DONE BY SPECULATORS THIS PAST WEEK WAS THEREFORE NOT FRESH NEW LONGS BUT RATHER SHORT COVERING.


This is hugely significant as it confirms my views held for some time now. Rallies in gold are occurring that have been quite fierce but which have not tended to last because they consist almost entirely of short covering. At this point in time, these rallies DO NOT reflect a wholesale shift in sentiment among this important segment of traders. Until sentiment changes and we see eager NEW BUYING across the speculative categories, gold remains under the control of bearish forces.

I should note here that all market bottoms are first GENERALLY reflected by strong waves of short covering but that gives way to FRESH BUYING that begins to outnumber the short covering.

Gold is not there yet. Keep this in mind before getting too bulled up.

Also, I wish to note here as I did last week - those who keep speaking of capitulation when it comes to the selling in gold are doing so in spite of the fact that the speculative community generally remains as NET LONGS and has been for many years now.

The Small Specs were net short this gold market only in July of this year ( and that was for only one week)  but have remained as net longs even as their overall positioning on the long side has indeed decreased. They have not gotten short.

The Hedge fund community has not been net short this market for the entire 7 1/2 years of this data set. Only the Other Large Reportables camp had been net short for more than one week and that was back in July of this year. During that month they remained as net shorts in gold before moving back to net long the first week of August where they have remained since.

With speculators continuing to play gold from the long side of the market, the risk remains that we could yet have one more good downside flush before killing the bullishness that stubbornly remains among the speculators. I can see that happening only if chart support gives way, first at $1210 but more importantly at $1180 - $1178.

In this present case, we might be better served by closely scrutinizing the action of the gold mining shares for clues of a solid bottom in this market. They led the price of the metal lower and will more than likely, although not guaranteed, lead the way higher. I for one would feel a whole lot better about a solid bottom if we could see the hedge funds on the net short side of this market with the entire speculative community all effectively as net shorts as well.


One last thing - with Swap Dealers doing the brunt of the selling this past week, I am beginning to wonder if we are seeing some mining companies working out some hedges/forward contracts with these dealers as prices move higher.

Producer Price Index - Weak Inflation - Gold Rises?

This morning we were treated to the Producer Price Index numbers - the headline number was -0.1%. The market consensus ahead of the report was for the reading to come in unchanged. When Food and Energy were stripped out, the reading was +0.1%. Right in line with the consensus.

Obviously prices at the wholesale level were generally LOWER indicating the continued lack of an inflationary impact from the Fed's money creation schemes. Upon the news gold moved higher! The proper response from most traders would have been expected to be "DUH?"

Yes, in the absence of any inflation pressures gold moves higher. This is where the money printing policies of the Fed have brought us - to the La-La Land of Unreality.

The reason that gold moved higher instead of falling lower was because Traders believe that the Fed may now look at this data and actually come away more concerned about DEFLATION during next week's FOMC meeting. Just yesterday there was near Terror that they were going to go the opposite way and actually announce the beginning of a taper next week! That is what brought so much pressure into the S&P 500 as well.

Do you see why I find this constant interference by the monetary authorities so distasteful and yes, even repulsive? They have completely turned everything on its head. The stock market rallies on horrible news because it ensures more QE bond buying. It sinks on good news. UP is DOWN; BLACK is WHITE; and IN is OUT in this brave new world. The entire thing has become so convoluted as to be farcical.

I seem to vaguely recall a period a long, long time ago, in a galaxy far, far away when stock prices rose during periods of strong economic expansion. Of course I am exaggerating things here but the point I wanted to make was that today's markets are so sensitive to whatever the Fed may or may not do, that they are moving more often in a contrary manner to sound reason.

By the way, I cannot help but ridicule the "FLASH CRASHERS" once again. Yes, they were back out in full force yesterday giving us the painful details of the carpet bombing of gold once again during its hard move lower yesterday. Not a peep out of them about the REVERSE FLASH CRASH of Tuesday ( you see, that is not unusual but is what gold SHOULD BE DOING all the time) , but that is par for the course with these people. Never let a good down day in gold go to waste when promoting their "gold is constantly under attack by nefarious forces" dogma.

As stated many times here, ad nauseam, ad infinitum, gold is in an intermediate bear trend. The feds do not have to fight the price of gold when it is already sinking due to hedge fund selling.

The actual truth is that what happened yesterday in gold was exactly what happened in the broad equity markets. A wave of near terror/panic hit the markets that for some reason the Fed was most certainly going to announce, NEXT WEEK, the start of tapering.

Today, the PPI number totally erased that fear.

Along that line, gasoline futures just notched a ONE MONTH LOW (let's hear some cheers for that) in today's session. Wheat futures hit a FOUR MONTH LOW. Sugar hit a FIVE MONTH LOW. I could go on but I think the reader will get the point.

With falling prices, we see gold moving higher not because of any imminent threat of inflation but rather because today's thinking ( for this session) is that the real fear that the monetary authorities will have as they meet next week will be cutting back on the bond buying programs TOO SOON and feeding the DEFLATION BOOGIE MAN. And one wonders how we traders can keep our sanity with this sort of flip-flopping back and forth in the markets nearly every single day. Just remember the name of yesterday's missve that I posted up yesterday - "Is it a See-Saw or a Yo-Yo?"

As strange as it may sound to some, I can actually see a point which, and here is a major caveat, IF THE PRICE OF COMMODITIES IN GENERAL CONTINUES TO SINK, and chatter about deflation concerns were to surface ( Note - I am not saying that is going to happen but merely suggesting a possible development) that the Fed would actually LIKE TO SEE THE GOLD PRICE MOVE HIGHER. Not in a large way so as to denote a loss of confidence in the Dollar but rather just enough to dispel any notion that gold is sniffing out a wave of deflation.

Remember, Central Bankers love inflation in the sense that they think they have the tools to control that. What they really fear, and we have been made aware of that by their continued QE programs, is DEFLATION. As a consumer I love deflation because it means I get more for my money. The down side to this however is that a slowing economy indicated by EXCESSIVELY low prices ( in the minds of the central planners) means a sluggish job market and slack/stagnant/falling wages. A gold price that were to sink too low, along with a sharp move lower in some key forward-looking commodities such as crude oil and wheat/beans/corn might convince the monetary authorities to actually ramp up QE in order to induce buying in gold and some other key commodities.

Of course this is all speculation on my part as the odds of this occurring seem rather remote at this point but it just goes to show how fickle the sentiment in the markets has become and how quickly and easily it can shift back and forth based on one piece of economic data or another. While the Fed may downplay the fact, rest assured that they are well aware of the gold price and what it may or may not be doing. This I do know, gold at $1900 was a disaster as far as they were concerned.

This being said, I do not believe that the Fed OBSESSES over the gold price as some apparently believe. They monitor it closely. That is a far cry from spending nearly every waking hour wondering where it is going and what it is doing as far too many in the gold community sometimes seem to give the impression that they do.

Take a look at the chart below and you will see how low the volume is in today's trading session. This is what I have been speaking to when I stated that we are entering the Silly Season when shrinking liquidity will often allow for large swings in price produced by rather small orders compared to the norm. That being said, a new support level has formed at a higher price than the recent double bottom at $1210. This new zone centers around the $1220 level. This is constructive from a technical analysis perspective. Still, until the bulls can push price past the resistance zone noted on the chart ( near $1260 - $1265) volume should remain muted. The flip side to this is if the bears were able to take price down below $1220 at first, but more importantly $1210. That would cause an enormous spike in volume. We will wait to see which side blinks first as there is an uneasy truce in the market right now.

Yesterday I mentioned Barrick Gold as a key bellwether stock to watch for clues/signal to the overall sector. Barrick gapped higher on Tuesday of this week, then fell yesterday and completely closed the gap early in the session but roared back before the close and managed to close higher. That is pretty impressive performance given the fact that gold was hit with an ugly stick yesterday. Today this key stock is actually trading higher and although it has not, as of yet, managed to eclipse Tuesday's high, odds are growing that the stock has finally bottomed. Again this does not mean it is now off to the races, but perhaps, perhaps, we have seen an end to the mauling of the gold shares. That no doubt would be most welcome to those who have sat through the entire retracement of the last few years.

When you are losing money nearly every single week and you look and see that while you are not making any money you are at least no longer bleeding, it lifts one's spirit and provides some encouragement and hope that the worst is over. We will see. Technically there remains a great deal of chart work that the gold shares in general have to do in order to convince a wider audience that they are now at levels commensurate with value. Maybe we are finally there. Time will tell but let's certainly keep an eye on this particular stock. I suspect that its fortunes will quite accurately give us a solid clue as to the metal's.