Quiet Day in Gold

Not much going on in gold today so no comments are really called for in my view... I will leave you with a chart with a few annotations... gold is currently trendless with neither side ( bull or bear) having a clear advantage at this juncture.  Bulls have failed to break it out above $1,260; Bears have failed to break it down below $1,220. Until one of these levels gives way, it is directionless.

Price is oscillating around the 50 day moving average. Gold shares slightly higher today are helpful along with lower interest rates.

We will see what tomorrow brings...there are better markets to trade than gold right now to be frank.

Is there a Change in Gold sentiment occuring?

When you sit here with nothing better to do with your life than watch numbers blipping on a computer screen, sometimes you observe some things that stick out because they are out of line with what you have been accustomed to witnessing. Such was the case with gold, at least for today's session.

As expected, the market moved lower after failing to take out overhead resistance in the zone noted on the chart ( $1,255 - $1,260). It then fell through chart support near $1,240 - $1,244 as follow through selling pressured prices lower. Further aiding its fall was strength in the US Dollar as the market reacted to the BETTER than expected December retail sales data.

That was on the heels of comments that the market regarded as Hawkish from two Fed officials in regards to the Tapering campaign.

I figured we were going to see steady selling coming into the market for the remainder of the session, especially when interest rates started moving higher again but then we got the Crude Oil stocks number. The EIA released data this AM showing a whopping 7.7 MILLION BARREL decline in oil stockpiles when the market was expecting 800,000! Talk about a missed expectation!

There are a couple of ways of looking at this. The first is that demand for crude oil is so strong that the economy is definitely on the mend and upward price pressures are now becoming a real possibility. The other is that the recent large refinery runs have filled the pipeline with gobs of product that now needs to be moved. The latter seem confirmed as refinery utilization rates fell to 90% of capacity. That was down from 92.3% last week. If refiners are cutting back on their runs, then one could argue that stockpiles of the refined products must be building. That could be construed as a sign of weakening demand or perhaps better, a supply that is exceeding the current demand level.

What caught my attention was the manner in which gold reacted following the EIA release. Crude vaulted higher on the news and as it did, it seemed to me that gold began moving off its worst levels pushing back up into the area of broken support which was now offering resistance at $1,240.  It was a modest reaction but it did look out of place because it was unusual. It looked as if Gold was looking at the big draw and the surge higher in crude as perhaps the incipient signs of upward price pressures. I noted that this occurred even as the Dollar was strengthening.

Then after a good half hour elapsed, it began to weaken a bit but thus far it has not revisited the region from which it moved higher when the crude oil data first came out.

Maybe gold is looking at the high crude oil draw and the better than expected retails sales as signs that the latest jobs number was a one off? I don't know but it popped higher for some reason. Someone wanted to buy it along with the mining shares I might add. I have slowly come around to the opinion that without a real concern over inflation, gold is going to run into selling on rallies. Instead of cheering for a lousy economy, the friends of gold might want to consider that as long as deflation concerns trump inflation concerns, the yellow metal is going to flounder.

What needs to occur, in my opinion, is that more of this funny money that has been created by the Fed ( along with the rest of the Central Banks of the West) needs to make it out of the stock market casinos and into their respective economies. Then that money needs to start changing hands more rapidly. In other words, we need to see the Velocity of Money begin to rise. AT the very least, we need to see the officially sanctioned rate of inflation as relayed to us by the feds, (you know  - that bogus one from the CPI) exceed the rate of return on 1 year money. Translation -gold needs NEGATIVE real interest rates to rise sharply. Either that, or some sort of strong selling wave to engulf the US Dollar. I do not see how we get either or those ( or both) without a shift away from the deflation theme to the inflation theme.

Confidence - that the Dollar will hold its "value" against the other majors needs to take a hit for gold to respond upwards. That is how I see it for now. Of course, the one luxury that we traders get to have ( we don't get many any more thanks to the advent of the computer algorithm and its ruinous effect on the stability and integrity of our financial markets ) is that we reserve the right to change our minds/opinions as often as we change our socks!

And... the next Day

Here we go again - another day of yo-yo action from the day before...yesterday the sky was falling as Goldman noted stocks were expensive. Today... everything is okay once again and all is well with the world. I had the feeling that we were going to see another one of those bear traps in the equity markets. It basically boils down to the fact that if you have any profits from playing the S&P from the short side on a daily trade, TAKE THEM, while you can because the perma bulls are simply not going to stop buying every single dip. Why not? They keep getting rewarded for doing. Pavlovian? YEP!

With that, those safe haven trades that were scurried into yesterday... well, they are yesterday's news. As Yoda might say; "No longer needed, are they".

Down went the Japanese Yen and down went the bonds and up went interest rates. The Dollar ticked higher and with the combination of all the above, plus the more important fact that gold failed precisely at the bottom of the resistance zone noted on the chart, down went the yellow metal. Traders who had been long and played the short term recovery, wasted no time in bailing out once they realized that the market was not going any higher.

While the market has retreated from its first try at that very tough overhead resistance level, it is holding support near $1,244 - $1,240. I am noting that volume has picked up as the price has retreated whereas yesterday it was comatose in the gold pit.

If this support level gives way, I am most anxious to see how the metal reacts as it nears $1,225 - $1,220 again. If it bounces up and away from that, it would be constructive and would tend to confirm that recent bottom. If nothing else, it would at least set up a range trade for the short term with the big specs probably bidding it up to see if they can recapture $1240 - $1244.

I am unclear on what the next move or direction will be at this juncture. My position is very small consequently as I think any trader who wants to bet the farm on gold's next move is masochistic. You have to respect the larger term trend and that remains lower with the bears still holding the edge in this market but bulls are trying to flex their muscles.

Asian demand had better hold firm. I am going to be watching closely to Chinese demand once buyers have secured their inventories ahead of the Chinese New Year festivities. That demand has been strong but it was also very price sensitive. My concern is that once the festival buying is over, value based buyers are not going to be in a hurry to chase prices higher but will rather wait to see how sales were and whether or not to restock immediately or wait a bit for prices to recede.

It is unfortunate for the friends of gold that the gold mining shares are sinking once again, in spite of the stronger equity markets. GG is getting hurt by that takeover bid of theirs. I hope the hell they know what they are doing. Management in this gold sector scares the hell out of me.

Stocks Drop on Goldman Note - Safe Haven Plays come on

Goldman was the catalyst for a near seismic wave that struck the US equity markets in today's session. Their analysts felt stocks were overpriced and that earnings were going to have to be quite strong to push stocks signficatnly higher based on my reading of their notes. Surprise... sounds like maybe some are waking up to smell the coffee.

My comments have to do however more with the reaction of some of the other various markets, rather than the equities. Stocks needed a significant correction but no one was sure from what level it would come or at what point. Well, we got a decent correction today. If it turns around and goes right back up tomorrow, who knows? What struck me about the safe haven trades that went right back on, in typical knee-jerk fashion, was the US Dollar was left out of the party.

We had bonds moving higher today with interest rates on the Ten Year dropping down to 2.827. That is no surprise given the steep fall in the equity world. What we usually see happening on a day like this did not occur today. What I mean by that is that while the Japanese Yen moved sharply higher ( I will never understand why the Yen can remotely be considered a safe haven currency), the US Dollar did not rise but fell instead! That is rather remarkable when one is used to seeing the Dollar benefitting from any sort of risk aversion/save haven trade.

I am not sure what that might mean but it is only a one day affair at this point so I do not want to read too much into it.

Gold seemed to experience another one of those "melt up's" as I have dubbed them with some safe haven buying coming into the market, especially as the US Dollar weakened but also somewhat in response to news of Goldcorp's unsolicited takeover attempt of another mining outfit. Some are thinking that the gold shares, which have been beaten with the proverbial ugly stick, might have been mangled severely enough that the long-anticipated consolidation/ acquisition phase is now at hand in the sector. That would tend to benefit some likely takeover candidates which generally lifted the sector higher even while some of the majors were weaker, notably GG, which was down over 1% at one point today.

The news tended to lift some of the pall that has been hanging over the sector. Of course it did not hurt any to see a near 1.4% plunge in the S&P 500 as part of a safe haven bid.

I have mixed emotions about this stock market fall today. If it is coming on expectations that while the US economy might be improving it is not going to be growing fast enough to justify multiples on equities near current levels, then I can see where it would actually tend to bring more selling pressure into gold as deflationary forces reassert themselves. Then again, we might be back into that nightmarish scenario where we are sitting around on pins and needles waiting for every single economic data release and reading the entrails to discern whether the Fed will taper or back off and not taper.

I am still of the view that if the latest round of MBS and Treasury bond buying by the Fed has not generated solid growth, then what will? If the Fed were to be forced to put any tapering on hold, would it not signify that deflationary forces are reasserting themselves? Why would that not put downward pressure on the gold price? Yes, I know that many in the gold market would view any Tapering on Hold action by the Fed as bullish gold but pray tell, for what reason? Two years have done nothing to generate any significant inflation in the mind of the market - why would another 4-6 months or another year or more do anything different?

From a technical perspective, the volume in gold trading today was quite lackluster - another reason I referred to today's move higher as a melt up. It just seemed that the eager sellers were not there today more so than eager buyers were chasing prices higher. The result was a lack of offers over the market and that allowed prices to "melt" higher.

The market did run into some selling near $1,255. That is the bottom of the resistance zone noted on the chart. The top is close to the $1260 number but also extends a tad above that. If gold can push past that level and keeps its footing there, it would turn the chart friendly in my view and portend a test of $1,280. Above that would be psychological round number $1,300 where the "handle" would change.

I personally do not see what the reason might be for gold to reach that point given the apparent resurgence of deflationary views ( the last jobs number got the ball rolling which Goldman kicked down the hill today) but the key in my mind still remains the US Dollar. If it weakens further, gold will stay supported. If the Dollar rebounds and begins moving higher, look for selling to intensify in gold, especially at these levels.

We'll see what the market gives us.

COT Sweet Crude Oil

The following chart is for the reader who had a question about the Commitment of Traders report for the Crude Oil market ( WTI ). I must also confess that I have not been tracking the composition of the trading positions in this market but have rather just been noting its price action.

Given the fact that crude oil is essentially trading at the exact same level as it was to start of the past year of 2013 - near $92/barrel - it is quite remarkable to note the positioning of speculative money in this market.

Note that price had a strong rally during the 3rd quarter but then peaked out in early September and crashed from above the $110 level to its current $92. That is a fairly substantial move lower in price. Yet, look at the positioning of the speculators. They remain as net longs, every single category of them!

Here is a chart of the Commitment of Traders beginning at 2013 through this Friday's report. This is for Futures and Options Combined.

The hedge fund category did peak in their net long exposure around that same time frame but they are certainly not on the net short side of this market.

What is interesting to see is that as price has moved lower, the Producer/Merchant/User category, usually big commercial interests, have been net sellers. That tends to go against the usual pattern of commercial buying into descending markets with hedge fund or large spec selling.

It is obvious that the big shorts in this category are the swap dealers. That too is rather remarkable.

Quite frankly, I do not trade the crude oil market in size and thus am not that familiar with its inner workings as I am with the other markets that I specialize in. Yet, this is certainly odd as the trend following speculative money, money that one would tend to think would be on the side of the trend, which has been lower since September, has not been in this market. They clearly are net longs in a downtrending market. If anything the Hedge fund net long position is still very large. I do not know what to make of this.

I thought it might be tied to spread positions against the products but in checking their COT reports, the hedge funds are also net longs in both the Unleaded Gasoline markets and the Heating Oil market.

Hedge funds are net shorts on the WTI-Brent Spread but not to the degree to offset the totality of exposure to the WTI futures market.

Maybe if any of the readers here are specialists in the Crude market they can help us understand this. But for now, it is something that I am unable to explain.

I do recall that the opening of the pipeline out of Cushing to Port Arthur brought a lot of speculative money into the crude oil market as the belief was that pipeline would help alleviate the glut of supply that has been plaguing Cushing for some time. Yet, crude prices have already given up any gains tied to the news of that particular pipeline opening.

Fracking has given us large supplies of crude, a good deal of which is being refined into products and exported abroad but still the trend in the market has been down, in spite of speculators remaining as net longs.

I am going to be monitoring this situation as the weeks unfold to see I can make any sense out of this and see if there are any clues in here that we can glean as to what might be happening to this very key commodity. Under normal circumstances, an improving economy would lead to an increase in demand for energy which would be reflected in stronger demand for crude and its products but the chart is not reflecting that at the moment.

In today's price action the abysmal jobs number resulted in higher crude prices, a counterintuitive move that can be understood as a play on the Fed holding off on any tapering yet if the threat is one of deflation due to poor demand tied to weak payroll growth, then why the bounce higher?

Maybe we can figure this out; then again, maybe we can't.... That is why I prefer to trade markets that make some sense to me.

Hedge Fund Short Squeeze Continuing in Gold

Since the last week of 2013, through Tuesday of this past week ( 1-7-2014), Gold has rallied from the vicinity near $1180 to a high near $1245 reached Tuesday. That is some $65.

It is no coincidence that over that same period, the hedge fund category has covered nearly 8,000 short contracts. As of the week of Christmas last year, hedge funds held a rather small net long position of some 28,702 contracts (futures and options combined). As of this Tuesday past, their net long position has regrown to 40,229.

To get to that point they have covered 7,345 shorts to be exact while adding 4,182 new longs over the period mentioned above. Another way of saying this is that the buying in the hedge fund category has been dominated by large short covering, not so much by fresh new long position taking.

While the results are the same, namely higher prices, I prefer to see a market dominated by fresh buying outnumbering short covering when I look for a trend to persist. Short covering can catch you off guard because it is so furious and comes in such large blocks when it tends to come. The problem is it can also peter out as quickly as it began.

Think of a market as a rocket engine taking off. It requires THRUST to counter the downward force of gravity. As long as the thrust persists, the rocket can move higher. If for any reason the rocket runs out of fuel, gravity takes over and back down it will come.

Gold can be likened to a rocket that is being driven higher AT THIS TIME, by thrust coming from short covering which is the dominant feature. This short covering needs to be replaced by FRESH BUYING to keep pushing it higher.

That fresh buying will only come as upside resistance levels on the chart give way since that movement generates momentum, which is what the hedge fund computers are looking for. Remember, they do not care which direction the momentum is taking a market, up or down alike make no difference. All they care is that the momentum is present.

That brings us to the price chart. This short covering on the part of the hedge funds has taken the market very near to a strong resistance zone on the price chart ( $1255 - $1260). It will be up to the bulls next week to take price through this zone if they are going to create a trending move in the metal to the upside.

I will be honest and say that I am dubious as to their ability to do this but one thing I have learned is that the market could care less what I think it might or might not do. The last two years of Fed bond buying programs have not undercut the Dollar nor have they generated any strong buying across the general commodity sector. If anything, that bond buying has served to reinforce the idea that the economy is too weak for the Fed to cut back on the QE. During that time, deflationary pressures have dominated and we all know what that has done to gold by now. I see no reason to believe that another year of unabaged Fed bond buying is going to produce anything other than what we have already seen in the last two years.

Only recently did the FOMC start up with the talk about tapering. That talk was based on the Fed's view of a gradually improving economy with a bit of an improvement in the labor markets. November's strong payroll numbers fed into that thinking doing nothing to dissuade the Fed from acting to Taper.

Today's weak payrolls number, coming as so shockingly poor as it did,  rekindled the idea of a Fed on hold when it comes to tapering. If we get subsequent economic data that comes in strong, or stronger than expected, look for that notion to begin withering away again.

I am especially interested in watching interest rate yields on the Ten Year Treasury at this time. Any further rise there should support the Dollar and bring pressure to bear on gold. Conversely, if the yields begin sinking lower on the Ten Year, gold should be able to catch a bid and remain firm.

The sharp rise in the GSCI today is evidence to me that the Dollar holds the key to the overall commodity sector as far as these speculative money flows go. When I survey the general global economy and compare the economic status of the major nations of the West ( I am including Japan in that block), the US still seems to be experiencing the best "growth" out of the bunch. That would lead me to believe that if there is going to be any nation out of that group that can see interest rates move higher, it is going to be here in the US. This should bring buying into the Dollar which should tend to bring pressure across the commodity sector in general. But as always, that is a view that must be confirmed by price action.

Next week is therefore an important test for this market.

Have a good weekend all....

Go Hawks...

Dollar Drops; Commodities move Higher

Almost like clockwork, the abysmal payrolls number undercut recent strength in the US Dollar. Just like that -   up went the Goldman Sachs Commodity Index. Tell me that the Dollar is not the key to the complex!

It did not hurt that index one iota that the USDA issued a shock report today which contained a bullish surprise for corn prices. It was not that the number they gave us was so bullish; rather it was that no one expected it. The market was leaning heavily on the short side and the pencil pushers over at USDA threw everyone a curve ball.

Quite frankly I do not believe the final number that they gave us. It is what the market has to work with however for the time being, and thus we experienced a gigantic short squeeze in corn that helped keep wheat from falling completely off the cliff, as the USDA number for that grain was decidedly bearish.

The soybean number was also unfriendly as they showed a bit larger crop than the market had been expecting but it was the huge buying in the corn pit that tended to pull money into the entire grain complex. That prevented the beans from selling off on the report.

On top of that you had coffee moving higher, hogs moving higher and the liquid energy complex moving higher. Base metal copper was higher. Given that environment to expect silver or gold to move lower was unwarranted. As a matter of fact, we had a pretty substantial short squeeze in the gold market to accompany some of the short squeezes across the generality of the sector.

Gold has now completely recovered its losses from the "fat finger" trade of Monday to the point that any discussion about the particulars of that event are moot at this point. I stand by my contention that it was an erroneous trade but who cares at this point.

The lousy jobs number has given shorts reason for fear in gold and encouraged some more bottom picking in the metal. This is due to revived talk of a hold on any Fed tapering. However, it is now moving into a very strong resistance level on the price chart. Further upward progress, WITHOUT the accompaniment of a weaker Dollar and more upward price pressure across the commodity complex in general, is going to be much more contested.

Also, based on the strong November jobs number, plus the upward revision in today's report to that already strong number, today's numbers for December should be treated with a bit of skepticism, especially after private firm ADP gave us such strong numbers on Wednesday. A lot of time can pass between now and the next payrolls number but I would not be surprised to see that number move much higher, more in line with what we have been getting recently. If that is the case, look for any move higher in gold, based solely on ideas that the Fed will be on hold for Tapering, to meet with some aggressive selling on the part of the hedge fund community.

Bulls have the opportunity to try to take price up towards the last level of chart resistance I have noted between $1255 - $1260 or so. If they can best this level, they will have recaptured control of the gold market for the time being, at least from the daily or short-term perspective, and even have a shot at a quick run to $1280.

It is going to be educational to see how Asia responds to this price rise. Will the move up curtail some of the strong physical offtake we had been experiencing over there or will price-conscious buyers step away from the market to see if they can get the metal cheaper? We will find out.

A look at the weekly chart below shows the market still under the control of bearish forces, as it has been since late 2012. Today's move was a nice gift to the bulls but looking at the chart from this longer term perspective, it has FAR MORE WORK to do before changing the picture from one of bearishness to one of bullishness.  

Surprising Weak Payrolls number - What will the Fed do?

That is the question on traders' mind this AM as the jobs report detailing the December numbers shocked the market by coming in so low. The ADP numbers earlier this week had stoked expectations for a strong number above 200K. Many were looking for something closer to 250K, What they got instead was 74K.

Keep in mind that ADP ( a private firm) had given us a 235,000 number on Wednesday. Also, the November payrolls number was upwardly revised from the previous 203K to 241K. That is what makes the December number so shocking.

The labor participation rate continues to shrink and this is something that runs the very real risk of becoming systemic. Sure that tends to shrink the overall unemployment number but at what cost to the rest of society?

The reaction in gold was as dramatic as was the reaction in the US Dollar. As a matter of fact, there seemed to be a bit of a resurgence in the "let's buy commodities" trade across the sector based on the weakness in the Dollar.

Crude oil moved up $1.70 a barrel at one point. Most folks would scratch their head and say, "Duh?" on something like that but we have come to expect the goofy reactions we get based off of these numbers. The market, instead of reacting with concern over the poor numbers and the resultant lower demand for energy, instead looks over at the Fed and thinks, " NO way they are going to taper right now". No immediate reduction in funny money and thus no immediate drop in liquidity being provided. Weakness in the economy means lower interest rates - lower interest rates means weaker Dollar and "Voila!", let's buy commodities today.

The problem is that nothing has therefore changed on the perceived inflation front. I maintain that wages must increase and hiring must pick up if we are to see any signs of serious inflation arise. What today does is just refuel the fears of deflation.

Perhaps some in the market are thinking along the same line and coming to the conclusion that the Fed must also be worried about deflation reasserting itself and thus will ease back on the Tapering.

Who knows but if the last two years of bond buying by the Fed, and certainly the $85 billion/month coming out of the most recent QE4 program has not resulted in any serious inflation issues, why should we expect another 2 years, 2 months, etc of bond buying to produce any at all?

Given that backdrop, gold is still going to face headwinds as it needs to see confidence in the US Dollar eroding to mount a sustained move higher in price. Thus I see two drivers - one -the US Dollar drops sharply or - two- the economic data shows more rapid growth heating up inflationary pressures. Either way the result is the same as far as the inflation issue goes.

The metal is pressing up against the downtrending 50 day moving average, a key technical point that most traders watch closely. It has not been above this level since late October of last year and then it only managed to hold above this level for 5 days before succumbing to another bout of selling. My guess is that we can expect the same as we move ahead. I remain skeptical therefore about gold's fortunes but will respect what the chart action tells me. Right now, the jury is still out as the ADX shows a directionless market on the daily time frame.

Bulls are close to getting control of the market but are not there yet.