Gold and the Australian Dollar

Trying to get a read on the gold market has been a bit tricky since we have had to deal with end-of-the-year positioning and now, since the start of the year, index fund rebalancing of portfolios (along with front running of that buying by pit locals). Along with that we have had reports of strong demand for gold out of Asia. If that has not been enough, we all watched a massive selling barrage occur over a one second interval yesterday. Now today we are seeing evidence of the effectiveness of the capping that occurred at a technically significant chart level.

I am noticing a couple of things today that I thought I would share. First is that equities are soaring higher here early in the trading session. That has NOT been the case since the start of trading at the New Year. This is the first UP day in equities since last Thursday.  Also, the Yen is weaker today. It did seem that there was a slight correlation between the downward bias in the broad equity markets and the recent strength in gold - a type of safe haven play, perhaps? Now that equities are moving higher today, gold is moving lower. That was pretty much the theme for the latter part of last year.

Another thing I am watching is the price action of the Australian Dollar of late. The Aussie is sometimes viewed as a type of proxy for the broad commodity complex. This stems from the nature of the Australian commodity which remains very dependent on the export of raw materials in general. Old time traders tended to watch the direction or bias of the Aussie to get a feel for where commodity prices ( in general) were headed.

Take a look at the following chart of Gold vs the Aussie ( No, this is not a Mortal Kombat match - if it were, perhaps gold would have a killer combo move to break free!). Look at how closely the gold price has been tracking the Australian Dollar since the middle of last October. The two are moving almost in perfect sync. I do not know how long this relationship might last or even if it is foretelling anything at this point but it is something we may want to at least keep track of for potential, and I stress the word, 'potential' clues to gold's future fortunes.

When I see a chart like this, where one commodity is moving in pretty good sync with another, it tends to reinforce general trading themes in my mind and at a minimum, perhaps get a glimpse into the general sentiment, even if it is only for the shortest of terms. The one thing about trading these modern markets - the themes change faster than some politicians' convictions!

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A lot can Happen in One Second...

Apparently a $30 plunge among them. Nanex is reporting that in just one second, 4,000 contracts traded hands! Yes, you read that correctly - FOUR THOUSAND!

Eric Hunsander, according to a report by Dow Jones, stated that in the past, 1,000contracts/second has halted trading in gold. He went on to say that 2,000 contracts/second is very rare.

I will leave the implications to the reader.

It is quite remarkable to say the least.

A Real FLASH CRASH

AS those of you who regularly read this blog know, I have minced no words in mocking those whose constantly sing "Gold is being "FLASH CRASHED" by nefarious forces ( usually references to the bullion banks). I have no doubt that there have been large orders that have taken prices down, sometimes during the thin trading conditions in early morning European/N America hours - what I take strong objection to is that these orders were the work of the big bullion banks. My view is that those orders were from hedge funds.

I think I have provided enough documentation to make my point so I am not going to waste any more of the reader's time in rehashing this once again other than to say that my view is that the bullion banks have been buying gold on the way down; not selling it. After all, when JP Morgan's HOUSE ACCOUNT has been the largest stopper of gold during the December gold contract's delivery process, it is a no-brainer that they were buying the metal from large speculators who were selling it. They ( the bullion banks) provide resistance to gold ( SELL) on the way up; not on the way down! I have written quite often on that in the past.

However, today is a great example of a legitimate FLASH CRASH. You will note that it occurred during a COUNTER TREND RALLY in gold during which the price had rallied some $65+ off the recent low.

I had remarked about the dwindling volume during this rally suggesting that it was not fresh, hot money taking long positions in gold but rather the ABSENCE OF WILLING SELLERS that had created an air pocket above the market which provided very little in the way of resistance to the recent "MELT UP" we have been watching taking place in the metal.

Index funds, rebalancing their portfolios ( more exactly - lots of front running by some traders ahead of and alongside of that large index fund buying), must buy gold contracts irregardless of current fundamentals in order to align their books with the new index weightings. Most traders who understand that are not going to fight that forced buying but will merely stand aside and let it happen while they wait for a higher price level against which to sell or perhaps even get long for a very short term trade.

Today, as gold rallied into an important resistance zone centered near the $1245 region, at 10:14 EST, a flurry of orders resulted in 11,662 contracts trading hands. That is no small feat! The result was a drop in the gold price of some $30 in one minute. Now my friends, THAT IS A FLASH CRASH, not the crap that these others have been telling us about. You will also note that it took place during New York trading hours while the pit session was open; it was not something that occurred during the low liquidity overnight hours. I should also note here that the size of the order to sell was so large that many traders believed it was an erroneous trade and that CME would note that. Well, CME made a statement saying that ALL GOLD TRADES WOULD STAND. So much for any notion of a bad trade!

Can you see the difference/distinction?  Note how the volume during the UP BARS - in BLUE) continued to dry up as the market melted higher. Now look at the MASSIVE spike in volume the accompanied the huge spike in the price range!

This large selling took place during an UPMOVE in gold that has been taking place since the beginning of the year, not during a downtrending phase and the volume was ENORMOUS.

I will try to get a bit more information on this for you as the day progresses but needless to say attempting to trade something like this is not for the faint of heart. I will want to see the final volume of trade for the rest of the day as well as the data from the CME Group tomorrow to make a final assessment but needless to say, gold is now at a crossroads. If, and this will be a big, big "IF", the bulls can take price through today's high and they can do that on big volume, then gold has a very good shot at pushing up for a test of the last overhead resistance barrier noted on the chart. I would want to see a push past that level than can be maintained to convince me that the tide has finally turned in favor of the metal in regards to higher prices down the road.

The speed at which the price went down, and the speed at which it recovered, is very, very interesting. It looks as if we have a battle going on with both sides dug in for now. We'll see which side gains the advantage.

Robust physical demand from Asia has put a floor in the market for now. The big question is whether or not money managers in the West want to tie up portions of their client capital in gold for 2014 or stick with their large and lopsided exposure to equities.

My leaning at this point is that gold is now entering a range trade and will be capped on the upside with good physical offtake of the metal providing a solid floor of support on the downside. The range looks to be roughly $1250 on the top and $1200 on the bottom. A push below $1200 that changes the handle on the metal back to "11" would be negative both technically and psychologically. A push past $1265 would provide enough excitement to take price up towards a test of $1300. Western investment demand is now the key to whether or not we get the latter.

Gold working higher

Gold is experiencing what in trader slang is known as a "MELTUP". It continues to work higher but on extremely low volume and without much fanfare - very slow and steady.

As a trader, the way we look at this sort of market and interpret the price action is one in which there appears to currently be a lack of willing sellers. In other words, there is not enough overhead offers to absorb the steady bids coming into the market on the heels of the index fund rebalancing which is occurring to start this new year off.

It looks to me like some would-be shorts are sitting back and observing the price action and waiting to see when the index funds are going to be finishing up before they come back in more aggressively. After all, if a bunch of investment money is going to automatically be flowing into a market, irrespective of the fundamentals, why fight it? Just let them bid it up and then move back in when the buyers have balanced their holdings.

The biggest thing that this current rally has going AGAINST it, is the lack of strong volume. It tells me that no one is in a particular rush to buy the metal other than the index funds. The other thing is that the mining shares are struggling to add to their gains today. Some of them have gone into the red. Thirdly, crude oil and the products are both sharply lower along with the Goldman Sachs Commodity Index. If there are any inflationary pressures at work across the general commodity sector, I sure cannot see it based on what I am seeing in the futures markets.

There does appear to be a bit of safe haven buying that is continuing today. Just like in yesterday's session, when the equities were moving lower, both the US Dollar and the Japanese Yen, safe haven currencies these days, moved higher, so too that is continuing right now as I type these comments.

I do not know exactly how high these index funds are going to take the gold price before their buying needs are finished up but they have managed to draw in some fresh buying from other specs and in the process taken out some overhead resistance levels on the chart. These are more easily seen on the 4 hour chart which I am including below.

Note the declining volume as the market "MELTS UP". The resistance zone near $1220- $1225 has been taken out but the next one up near $1242-$1245 remains untested at this point. I am interested in seeing if there will be enough index fund buying next week to set up a test of this level or if the bulk of their buying will be done by the close of trading today.

I would need to see the metal move and stay above that uppermost resistance zone I have noted on the chart to become bullish

Also interesting to observe will be the reaction out of Asia to this upward price push. Gold has effectively gone up $60 from its recent low near $1180. One wonders if this will stymie some physical buying from that corner of the globe as they wait for a retreat in price or if some buyers who had been holding back waiting for lower prices will throw in the towel and come in and commit some funds to replenish inventories that have been drawn down by the strong demand out of Asia.

Strong Physical Demand out of Asia is the story

There are a couple of things currently working in favor of gold for the time being. The first I noted yesterday which is index fund rebalancing as those fund managers benchmarking against the various commodity indices are forced to increase their holdings of gold contracts to bring their overall portfolios into line with the new index compositions. That is bringing buying into the gold market from a spec standpoint at the Comex.

The other is more important because it is longer-term in nature and that is the continued reports of very strong offtake of the physical metal in Asia. You might recall that back in June of the past year ( 2013), it was  this soaring Asian demand that put a floor in the gold price when it had sharply fallen to $1180.

I was curious to see whether or not those same buyers were going to show up if gold revisited this area again. It certainly appears that they have.

Why this is important from a trading perspective is that the buying has come in at almost the exact level to the very dollar, namely $1180. I have written previously that this area on the price chart has as much significance from a purely Technical analysis perspective as did the $1530 level in gold. When the latter was violated, it resulted in a huge shift in sentiment in regards to gold and brought large selling into the market as long liquidation then commenced in size along with fresh shorting. The same thing will happen if $1180 gets violated and the market does not almost immediately reverse those losses and rebounds higher - namely, more long-side liquidation and more fresh short selling that will take the price down to near $1150 for starters and possibly to $1100. Remember, large specs are still net longs at the Comex.

So far $1180 is proving to have held, for now. What this looks like is  the setting up of a range trade affair with the market moving back and forth between this floor near $1180 and resistance near $1242- $1245. If gold can crack the overhead ceiling, it stands a shot at making a run towards $1260 - $1265 based on short covering alone.

If the market fails to extend past $1242-$1245 odds will favor it dropping back to retest $1220, then $1210 and finally psychological support at the $1200 level.

I remain skeptical that gold prices are going to rally much higher because I believe it will shut off price sensitive buying out of Asia. Western investment demand for the metal is still not there and this requires Asia to do all the heavy lifting. Remember, Asia can bottom a market but it cannot by itself drive prices sharply higher. That requires WESTERN INVESTMENT demand and I do not yet see any strong signs of that.

Let's watch the price action, especially in the shares and see where we go from now. I am especially interested to see how the metal performs at the Comex when the index fund rebalancing is complete. That should be sometime towards the end of next week although the bulk of it is going on right now and should be wrapping up by early next week.

I am also watching silver to see how it holds because it too is benefitting from this same index fund rebalancing. However, with Chinese manufacturing data coming in weaker, according to the data released overnight, copper is struggling this morning and so is palladium. That is bringing some selling into the silver market. Together, the lackluster performance in the metals is eroding some of the gains in gold, especially in light of the firmer US Dollar.

Index Funds buy Precious Metals

Every year, those who manage the major commodity indices such as the Goldman Sachs Commodity Index ( GSCI) and the Dow Jones/AIG Commodity Index, REWEIGHT the composition of the various commodities that comprise their respective index. Some category of commodities see DECREASES in the weighting for that particular index; other commodities see INCREASES in the weighting.

This is common practice and happens every single year. It impacts the various markets for about a week or so as those INDEX FUNDS (These are sometimes referred to in industry slang as LONG ONLY funds) that benchmark against these indices must then BUY or SELL those commodities in order to bring their portfolio into line with the NEW WEIGHTINGS for that year.

In the case of gold and silver, both GSCI and DOW/AIG RAISED the weighting for these precious metals for 2014. That means index funds will be buying this first week of the year to align their portfolios.

That is what we are seeing occur in gold and silver today. I would expect this to provide some support to both markets until the bulk of this new money allocation process is completed.

Alongside of this today there seems to be some risk aversion related activity. As equities have moved lower, the VIX has jumped higher. Yields on Treasuries have subsequently fallen a tad as money flows move into bonds and out of stocks today. Also, the US Dollar and the Japanese Yen - both viewed as Safe Haven currencies - are moving higher. That is attracting some safe haven buying into gold with silver choosing to follow it higher rather than move lower in tandem with copper and crude oil.

I still want to wait and see what we get next week when the full complement of traders return.

For now, support in gold at $1180 is holding. Physical demand out of Asia is strong right now.  That is encouraging for the bulls.

Also, those money managers who bought the mining shares on Monday and Tuesday of this week ahead of the holiday, with the expectation that the bulk of the tax-loss selling was finished, have made a nice tidy profit for this short term play. I tend to not make too much of the mining share action right now because of the nature of the buying, which is short-term opportunistic in nature. We'll watch it however. Bulls, who were beaten senseless last year in these things will however welcome any relief no matter the source.

Gold has much chart work to do in order to turn the picture friendly. Resistance comes in near today's high first, followed by $1242- $1245; and then $1260 or so. For the pattern to turn bullish, $1260 would need to give way at a bare minimum.

By the way, in honor of the FLASH CRASH crowd, gold experienced some more of these REVERSE FLASH CRASHES, first in overnight trade in Asia and then again later in the European session. Don't expect any comments on this however from them - after all it is not good for sensationalizing their conspiracy views.

One could make the case, purely out of sarcasm, that nefarious forces are at work manipulating the gold price higher so as to squeeze the shorts out and paint the chart picture in their favor. But we would not do that now would we?  Note - to those who are humorless - this is meant as a tongue in cheek statement.

I am noting with interest that volume in gold is quite light. I would put a bit more credence in today's price action were the volume extremely heavy. Also to be noted is that the Goldman Sachs Commodity Index referenced above, is sharply lower being driven down by losses in the energy sector and in the soybeans and wheat. This is not yet the stuff of which inflation pressures are made.

Let's just watch it unfold and see where all this leads when the dust settles out a bit. It is too early to get dogmatic one way or the other.

Gold loses 28% to end the Year

Extreme volatility/wild swings in price was the highlight of gold trading in today's end-of-the-year session. Some fund managers on the long side of gold were heavily dumping positions early in the session to clear their books of one of the worst performing assets of the year. On the other side of that activity were some large specs who have been short the market for most of the year and were busy lifting some of those positions to capture those paper gains.

Around mid-morning, a rash of  "sudden orders" to buy ( Dow Jones wire services quoted traders using those exact words) flipped the market higher after it had run down near $1180. It moved as low as $1181.4 before shorts began ringing the cash register to close out the year.

The lack of selling enabled the buying to take price high enough to catch some overhead buy stops and up she went. Here we have another one of those events that I have sarcastically dubbed, "A REVERSE FLASH CRASH" in honor of those who love to regale us with stories of Flash crashes when gold drops sharply as evidence that the gold price is being manipulated lower by sinister forces intent on delegitimizing it as a viable investment.

I trust we will not hear a peep out of that crowd about today's bizarre price swing higher. After all, according to them, this is what gold should be doing all the time and thus this is legitimate price action whereas gold dropping sharply in price is somehow illegitimate.

Honestly, one grows weary of attempting to dispel the market ignorance on display from this group but this is what happens when anyone with a computer and a keyboard is now an authoritative source on market price action. Then again gold seems to spawn more of this sort of thing than many of the other commodity markets. I guess it just comes with the territory. Gold bugs tend to be very passionate about their views - nothing wrong with that -  but that very same fervor is what so often makes it difficult for them to see market price action with any sort of objectivity. They have to keep coming up with reasons to explain why their asset of choice is losing them money instead of just admitting that they were wrong and moving on.

What happened is not hard to understand however - gold dropped into a major, major support zone ( I have stated that $1180 is as critical to the future fortunes of gold as was the $1530 price level some time back) where strong buying surfaced once again. The short term players saw that it was holding and began to cover their shorts realizing that the support zone was going to hold for now. As price rose, with a large number of traders out of the market already in anticipation of the holiday tomorrow and low liquidity, there was no one left to sell. Thus there was a air pocket above the market and little to no resistance to the metal's rise.

There is nothing quite as dramatic as one of these typical short squeezes. The volume leaps dramatically as fear and panic hit those who sold into the bottom of the move and are now forced to scramble in order to avoid deep losses. While it looks impressive on the surface, the key is not what happens on any given day but the SUBSEQUENT market reaction over the next couple of days. If the market builds on its gains and continues to extend, then you have the makings of a legitimate short-term bottom. If however the market simply hangs around near the highs of the short covering day and is unable to extend much higher, the odds then favor a continuation of the downtrend with stronger hands coming in to sell at the new and higher level. We simply have no way of knowing which scenario we are going to get until it occurs. SUBSEQUENT PRICE ACTION is therefore the only safe guide to rely upon; not hunches, guesses, and dogmatic assertions from newsletter writers and other various pundits who know no more than the rest of us what will happen tomorrow.

I can tell you this from experience, making any predictions as to future price movements based on the price action from the last day of trading for the year is not wise. The other thing to keep in mind - one day does not a trend make. Gold is in a BEAR MARKET until proven otherwise. It really is that simple. Any market that loses more than 20% for a year is officially in a bear market and at one point in today's session, gold was down over 29%. Do the math.

 I will also add this one last thing - that the market faded from off its best levels tends to confirm the idea that we are not going to see much in the way of additional upside as we begin the New Year. The bulls are living on borrowed time and unless something occurs to change sentiment here in the West in regards to gold quite soon, it looks to me like one will be able to buy gold at a cheaper level than they were even at today's lows early next year.

As always, time will tell...

One last thing, some money managers like to come in and buy distressed stocks from poorly performing sectors towards the end of the year. The idea is that many participants are selling losers to square their books and to realize tax losses. Those who come in and buy these stocks which are being thrown out will then look to make a quick 8% - 10% profit as the selling pressure lets up when the New Year begins. It is a short term trade by nature with the theory that the heavy selling is now finished so one can safely buy. This sort of thing can tend to put temporary bottoms in those stocks. As mentioned above, the key to seeing whether or not a trend reversal/longer-term bottom is in the sector is to watch how subsequent price action unfolds and especially volume.

Moving forward this next year, gold's fortunes will be determined by whether or not Asian demand, especially out of China is sufficient to absorb Western-based selling of the metal. As stated yesterday and reiterated today, I am concerned because in spite of such heavy losses in gold, the large specs remain stubbornly bullish; this is not a recipe for a reversal. If anything it is a recipe for more losses ahead for the metal until the bullishness is killed.

When you take a look at this chart of the reported holdings of GLD and see that the holdings are back at levels last seen in January 2009 ( an incredible 5 years ago), it is not hard to understand the drop in the price of gold. What is difficult for me to grasp is why these big specs remain as net longs over at the Comex. The big money in gold has been made on the SHORT side over the last year; trend followers have done fine. It is those bucking the trend that have gotten badly burnt. One wonders just how much more pain that want to bear.

What I am going to be looking for in 2014 is if/when market sentiment begins to turn strongly in favor of "growth/inflation" and away from "growth/no inflation". If/when it does, commodities should see some risk money moving back into the sector in general with the expectation of higher prices as a result of ramped up demand. I am not saying that this is going to happen as I am not in the business of making predictions ( I will leave that to those who have no money at risk in the markets). What I am saying is that this is something to watch for to see if this were to develop.

Such an occurrence would tend to bottom gold but especially silver. Copper prices have already turned higher over the last several weeks and are now up in levels near the top of a trading range that has been in place since April of this year (2013). If copper begins to push higher, especially if it can clear $3.50 convincingly, silver should get some help on the buy side.

I would also like to take a bit of time here to thank all those who have visited the site this past year. I would especially extend my gratitude towards those who post here for your many encouraging words, your insightful posts, as well as your helping to keep this site clear of profanity, ugly personal attacks on individuals and the other assorted crap that is all-too-frequent nowadays in this unethical age. As I have written many times here, opinions on the markets are fair game; those who offer them should expect that others will often take the other side because there is always a bull side and there is always a bear side. If not, we would not have anyone to buy from if there were no bears nor would we have anyone to sell to if there were no bulls. Personal attacks that impugn the motives/character of others is a different story however and that is something that I will not tolerate here, nor should those of you who read and post here allow either. It demeans the site and interferes with what we are trying to accomplish here which is to provide a forum where folks can learn to read the voice of the market and hopefully become better informed in their trading/investment decisions by applying that which they have learned.

A Happy, Safe, and Prosperous New Year to you all. Personally I like to take this time of the year to look back at the many blessings of God and realize just how gracious He is to we who do not deserve such goodness at times. At times we are prone to measuring our "wealth" by the size of our bank accounts but what price can one put on family, health, friends, and our reputations? Such things are irreplaceable.

Once prior to a famous sermon that he preached during what historians have termed, "The Great Awakening", Jonathan Edwards prayed to the Lord asking Him to "stamp eternity on the eyeballs of those who heard him preach". We might do well to consider that more frequently during the course of the next year. It is remarkable how it tends to help us keep things in their proper perspective!

Gold Down below $1200

Gold is getting hammered down below the psychological support zone at $1200 as we move into the last day of trading before the advent of 2014. The break, coming in spite of a weaker Dollar, does not bode well for the fortunes of the metal to begin the New Year. The story remains the same - gold performed abysmally this past year as big speculators were chasing gains in the equity markets and yanking money out of gold and many other commodities in general.

I see nothing on the near term horizon to suggest that this is going to change as we begin 2014, barring some sort of catalyst such as an event that comes out of nowhere. Right now the VIX is indicating complete complacency and a total lack of fear/concern anywhere.

The daily chart shows the price moving down into a most important technical support zone. Gold has been able to garner enough buying on forays into this zone to force a rebound in the price, even if that rebound did not last all that long. Whether or not these buyers remain willing at this level is unclear. If not, gold is going to break the bottom of the support zone near $1180 and will easily lose another $30 for starters. If the buyers show up, then the metal can continue to grind sideways above this support zone but without a catalyst to kick it higher, the intermediate trend dictates that rallies in the metal should be sold.

I am noting that the ADX is moving sideways indicating that the downtrend has temporarily halted on the daily chart but that the bears remain firmly in control of this market. If support at $1180 breaks, look for the ADX to turn up as gold will resume its downtrend and might then target the $1100 level depending on how many hedge funds decide to exit from the long side of this market. Remember, they are still net longs in there and that is what concerns me that the bleeding in gold is not yet finished.

We got the CFTC Commitments of Traders data released this afternoon as the report was delayed due to the Christmas holiday last week. It did indicate some long liquidation from the hedge fund community occurred last week but they still are NET LONGS in this market to the tune of some 28,700 contracts. The Other Large Reportables actually increased their net long position about 3,800 contracts with the result that the two groups of large speculators remain net longs. The small specs, or general public, actually finally moved to a small net short position.

The big, bad bullion banks were generally buying again this week but never fear, the "gold is always manipulated at all times crowd" will swear up and down that these banks are the ones that are knocking the price lower. Both the Producer/User/Merchant category and the Swap Dealers were Buying from Hedge funds who were selling this past week.

All in all, the report provides further evidence that money flows are coming out of gold and into equities. This is the reason the gold price is continuing to sag lower. It will until this process ends and then reverses.