Hedge Fund Short Covering in Gold is the Story

This story simply will not die as it keep happening - hedge funds continue to cover short positions to an extent far surpassing the amount of fresh, new buying that they are doing.

Last week they covered ( closed out) 4,675 short positions. This week they outdid themselves as they covered a whopping 5,248 shorts made up of both futures and option positions! On the long side, they actually reduced their exposure by some 482 contracts. It is too bad that we cannot see what occurred from Wednesday through Friday. My view is that today's strong rally through overhead chart resistance further cleaned out some more of their short positions in a big way.

Let's again put this in perspective - at the start of this year, the hedgies were sitting with a total of 72,571 outright short positions, futures and options combined. As of this past Tuesday, that number has shrunk to a mere 21,073 or a reduction of  51,498 shorts.

Over this same period, the number of outright longs has increased from 106,675 to its current number of 144,080, for an increase of 37,405 futures and options positions.

Again, the clear driver for gold this year has thus far been short covering as the dominant feature among the biggest specs on the planet.

My own personal view is that the hedge funds seem to be reluctant to get too aggressive on gold from the long side. Perhaps some do not trust a rally predicated on a geopolitical event. Either way, in looking at the chart, I am of the view that it will take a push through that spike high near $1425 to get them to really commit in size to the gold market. That is a big level to watch, if we can get there.

What I mean by that is where we need to see some critical chart resistance level give way in a very convincingly manner to convince the doubters and skeptics to come on into the water and get completely wet. There are still many who are content just dipping their toes in. Translation - we need to  see far more new, fresh buying outnumbering the number of shorts getting squeezed out.

You must have more than short covering to SUSTAIN A STRONG BULLISH TREND. As I have said before, all good bull moves begin with short covering but, and it is important to note and understand this, they cannot sustain themselves solely on buying by frustrated or nervous bears; they must have fresh blood.

There is an old saying among we traders - "A bull market requires fresh food every day to feed it". By that I mean one needs to give NEW REASONS for longs to get aggressive and remain brimming with confidence over their existing positions to where they are eager to add on and pyramid up. Short covering does not result in that. That merely provides a burst of fuel that drives the price higher but then fizzles out, sometimes as fast as it began. One has to see sustained waves of buying continue to come into a market to KEEP if defying gravity.

By the way, that certain web site that loves to plagiarize what it finds here, please note that we are watching you so if this shows up on your web site or any of your publications, without attribution to the source, it will be duly noted.

Here is a chart only of hedge fund activity at the Comex gold market. Look at that plunge in short positions. That is what happens when a geopolitical events catches some traders off guard. The damage inflicted can and will occur very quickly and without much, if any, warning, leaving a mad scramble to exit existing positions.

I find it very interesting to also note that once again, this week, these same hedge funds were busy plowing into the SHORT SIDE of the copper market in large size. They piled on 4,618 new shorts while simultaneously dumping 3,288 existing longs. They are now NET SHORT copper to the tune of nearly 10,500 contracts.
As was the same case as with last week, every major category of traders is NET SHORT in copper, with the exception of the Swap Dealers who are holding the entirety of the long side in this market. The small traders, the general public, are also short.

Copper managed to close a bit higher today but after plunging a massive $0.18/lb this week, a bit of a profit taking bounce to head into the weekend is not unexpected.

I therefore find it no coincidence that this week was marked by strong selling in the hedge fund community of the Silver market. A total of 1,939 new shorts were added while 414 longs were dumped. They are still net long the market but have evidently been more inclined to follow copper this week rather than gold. Silver, as always can never seem to quite make up its mind what kind of metal it wants to be on any given day, an industrial metal or a precious metal. Just flip a coin as you can pick either one with about as much success as you can in predicting mountain weather.

We have the market setups - now we wait to see how events in the Crimea will unfold over the weekend. Based on the late-in-the-day price action in gold and in the US equity markets, there remains a great deal of nervousness around.

Ukraine Worries keep Pushing Gold Higher; Dollar Struggles further

In what has been a constant theme for this past week, conditions on the ground over in the Ukraine region have generated nervous safe-haven related buying in the gold market. With equities looking a bit wobbly, some investors are selling stocks and buying gold ( the reverse of what they had been doing for all of last year). Throw on top of the fact that the Dollar continues to be losing friends of late, and the path of least resistance for the yellow metal has been higher.

The strong finish to close out the week puts the market on really firm footing as we head into next week. The wild card, and the potential to be a big spoiler, is this weekend's referendum in the Crimea. If the votes goes as many expect ( with the region voting to become a part of the Russian Federation) and all hell does NOT break loose, there is a very good chance that gold will see a fairly substantial amount of selling come the reopening of trading Sunday evening here in the US ( Monday morning in Asia).

Geopolitical events, by their very nature, are incredibly volatile. As such, both buying and selling tied to these sorts of things is completely emotion driven. That means the losing side acts first and thinks later. All they know is that they are on the wrong side of a trade and their account balance is disappearing. So out they run. Volume tends to run quite high during such times.

What this means is very simple - you have a 50/50 chance of getting it right as a trader when dealing with geopolitical events. I personally will NEVER trade those odds. Why not just hit the casino and roll the dice because that is about the same set of odds. Traders deal with favorable probabilities based on technical analysis. If you want to test your luck, try picking up some out of the money put or call options depending on your perspective and roll the dice on those. At least you know what the extent of your losses is going in while leaving the upside open for some good profits if you happen to hit it right.

I do wonder however with all the hype about massed troops on the border, Western sanctions, deadlines, etc. whether or not the gold market has already factored in most of those expectations. If things disappoint in the sense that WWIII does not break loose, I would expect to see the selling show up. If the conditions worsen, then gold will move higher as it factors in another  and more dangerous scenario.

That is how markets work. They anticipate events ( that is why it is called a "FUTURES" market and not a PAST or a PRESENT market. If the events materialize within expectations, more often than not you get a case of "Buy the Rumor; Sell the Fact". If the events do not unfold as expected, then the reactions can be quite severe, either up or down depending on the particular turn of events and how it is being interpreted by players.

What I can say is that traders of both persuasions when it comes to gold ( bull or bear) had better have some very light and very fast trigger fingers come Sunday evening. They might just need them.

Here is the weekly chart for gold. This week's performance was a real doozy of a show put on by the bulls. I have included the note I put on this same chart earlier this week which stated that if they could close the week over the resistance zone noted, ( $1,350 - $1,355) they have a real shot at reaching psychological resistance at the $1,400 level. They did just that!

Again, the move has been predicated on fear/concerns over that situation in Ukraine ahead of this weekend's big vote so just be prepared because all of this could evaporate if the world does not end come Sunday evening. The obvious flip side - If tensions remain high, so too will the gold price remain supported.

Looking at the technical levels on the chart you can see a couple of things here - the first is that the ADX line is beginning to flatten out. That is suggesting that the sideways action ( on an intermediate term basis the market has merely been moving in a sideways range between $1180-1200 on the bottom and $1425 or so on the top) could be coming to an end and that the POTENTIAL ( please note the use of the word) exists for this broad consolidation pattern to be coming to an end being replaced by a trending move higher.

That spike high near and around the $1,425 level would need to be taken out to shift this particular indicator that I favor into a trending mode. If it were to do so, one could easily make the technical case that a move back up to retest the broken FORMERLY MAJOR SUPPORT near $1,525 is reachable.

The Dollar's action would of course be key to this as well for if it cannot stay above 79 on the USDX chart, I do not believe gold will fail at the $1425 level. Any weakness in the Dollar of that nature would send a lot of strong speculative inflows into gold and those should be enough to better that spike high.

Again, let's see how events unfold over the weekend.

China Woes Becoming Mainstream News

I have made no secret of the fact that I am most concerned about a wave of credit/debt issues coming to China sooner rather than later. As a matter of fact, Dr. Copper has been accurately forecasting this for longer than many of the so-called expert analysts.

While I view this development as a deflationary force globally, which should pressure certain key commodity markets, it also seems to be one of the factors bringing some safe haven buying into the gold market at the current time.

My own view is that if there were another deflationary wave that might threaten to engulf the world economy again, gold would struggle in such an environment. This view is based off of what happened to the metal during the outbreak of the credit crisis here in the US in the summer of 2008.

However, back then the Dollar was the recipient of strong safe haven flows. Thus far we are not seeing that and that is why gold continues to remain resilient in the face of these deflationary news. For now, gold is benefitting from nervous equity investors seeking a safe haven from unsettling winds that are buffeting the global economy.

Here is the headline from the article I suggest you read:

China's Li Keqiang warns investors to prepare for wave of bankruptcies
World's second largest economy is facing 'serious challenges' and many companies with high debts are being forced to the wall

http://www.theguardian.com/world/2014/mar/13/china-li-keqiang-wans-investors-bankruptcies

Fed Custodial Accounts Show Big Drop in Foreign Held US Treasuries

I have not commented on this for a long time but every week I do monitor the Federal Reserve's Custodial Accounts to try to get a sense of the amount of US Treasury obligations sitting "in the vault" in New York, held there for other foreign Central Banks.

I have been trying to get a sense of why we are seeing this general US Dollar weakness and have been at a loss to explain, especially of late during this geopolitical crisis over in Ukraine.

Take a look at the following chart of US Treasury Holdings by these Foreign Central Banks that are on deposit there in the Custodial account at the Fed.

Look at the steep plunge that has occurred since the beginning of this year. We have gone from a peak of near $3.021 Trillion to a current $2.855 Trillion. That is a drop of some $166 billion since the high point reached in the middle of December last year. Folks, that ain't exactly chump change.

 

Why this is occurring is unclear to me at this point but I feel it will be worthwhile to monitor this. As you can see on the same chart, we have seen episodes during which Foreign Central Banks tended to be fairly large sellers of Treasuries only to then have them return as big buyers. Much of course depends on their Balance of Trade with the US and how they sterilize their surpluses.

The steepness of the plunge is the largest I have yet observed on this chart in terms of the amount involved. In percentage terms, the reduction is approximately 5.5%.

I know that there are some that would be more than happy to jump on the bandwagon and attribute this to the outbreak of tensions surrounding the Ukranian crisis and all the chatter ( baseless in my view ) that Russia, even China and some throw in India, are threatening to dump US Treasuries as a way of waging a sort of financial warfare with the US should the West proceed with sanctions against Russia. However, this trend has been going on since the second week of December of last year, long before things flared up over there. Something else seems to be in play here, although I am unclear what that might be.

If global trade is slowing down, as some fear it will ( myself being among them), I can understand falling Dollar amounts being involved and thus a shrinking need for Treasury purchases for sterilization reasons. That would manifest itself, in my view, as a slower rate of purchases but not necessarily a dropping of the Dollar amount of Treasuries held in custody.

If that is the case AND if some of these Treasuries are maturing, and are not being rolled over in the new purchases, that would explain the shrinking number. It does make me wonder if that recent China data showing shrinking exports from that all-important nation, is indeed having an impact on these Custodial Accounts. This might be SOME of the reason behind the recent Dollar weakness.

Making this more interesting is the fact, that over that same period, from December 19,2013 (when the number of  Foreign Central Bank held Treasuries peaked) the Fed has purchased $98.6 Billion Treasuries as part of its ongoing QE program. While not the whole amount, it is still a fairly large number of Treasuries ( about 60% of the total reduction noted above).

The USDX closed at 80.75 on the week containing December 16,2013. Today it closed at 79.62. A little more than a full point but it does seem to me that some of this weakness in the greenback can be attributed to some of that reduction in those Treasury Custodial holdings.

As always, the more we learn of the doings across the global economy and the current financial system, the more factors we have to try to account for in attempting to understand the "why" behind changing money flow patterns.

Dollar Weakness Continuing

Do you not find it odd to say the least, that the US Dollar has not been able to garner any support in the form of safe haven buying related to the deteriorating crisis over in Ukraine? For how many years have we seen the greenback as the "Go-To" currency during times of financial or geopolitical crises.

Remember 2008? How about the European Sovereign Debt Crisis? How about that rush INTO the Dollar when the idea of a Fed tapering first began to surface.

What happened to all of that?

It sure makes me wonder if part of the issue is tied to the Obama administration's handling of its foreign policy issues.

One thing for sure is occurring however - Treasuries are getting a firm bid out of safe haven plays. That is dropping interest rates and appears to be undercutting the Dollar although one does wonder how a rush into Dollar-denominated Treasuries is not Dollar supportive. There are so many new and different developments in these markets anymore that attempting to understand them all is proving to be an exercise in futility.

What I do know however is that this persistent Dollar weakness, is providing a strong floor of support in the gold market.

In the past, when we did get a general round of Dollar selling, almost as if in inverse lockstep, the commodity sector would march higher as the weakness in the currency would trigger a big macro trade across the sector.

This is not occurring. Copper continues to sink lower and lower and while crude oil is managing a bit of a bounce today, the products are both weak. Individual commodity markets are powering higher ( Coffee, Hogs, Cotton) but the broad-based buying in the sector is lacking. You can see this in the relatively weak performance of silver compared to gold. Silver is following copper today and acting like an industrial metal rather than a monetary metal ( you never know what you are going to get with schizophrenic silver from day to day).

I am very closely monitoring this Dollar chart however. The market is poised right above an important chart support zone near the 79 level basis USDX. If that goes, I expect to see gold reach the psychological $1400 mark.

The ADX is now rising along with the Negative Directional Movement Indicator ( RED LINE) showing the bears are currently in control of the market and a trending move is looking more likely. Again, that will require the support zone to give way but unless the bulls make a firm stand here, they are going to cede complete control of the market to the bear camp.

The HUI looks like it woke up from its slumber of yesterday. It has finally managed to clear 250 which is a real positive. I need to see this index power above 280 for starters to conclude that a stronger bullish uptrend is developing. Still, one has to be happy for the long suffering mining sector bulls who have been mercilessly pummeled for so long. At least their portfolio balances are finally moving higher.

We'll have to see what develops further over in Ukraine but for now, it has certainly spooked equity bulls and that is sending money flows into both gold and Treasuries for the time being.

This Dollar weakness is troubling, very troubling...

Western Investment Demand Surfacing for Gold

I have been adamant in stating that without Western-based investment demand for gold, the market cannot mount any sustained rallies. Asian gold buying provides the solid floor of support underneath the gold market but in and of itself, CANNOT maintain gold in a sharp bullish trend move higher. That requires concerted effort by the big Western specs.

My friend John Brimelow's reports on Asian gold demand and premiums/discounts are the best source for gauging demand for the physical metal from that corner of the world but as a gauge of Western demand, I rely on the large gold ETF, GLD in particular. It is the best bellwether we have to determine whether or not we have some determined buying from this crowd.
We have finally seen some signs that this Western-origin demand is surfacing. Monday and Tuesday's number show a 7.5 ton increase in the reported holdings of GLD. With today's strong move higher in the metal, one would expect to see the number increase further. This is a good sign if you are a gold bull and looking for allies. It is a real shame that this Friday's COT report will not pick up the internal positioning of traders in today's move as I would dearly love to know how much FRESH long buying we are getting in comparison to the amount of short covering that is occurring this morning thus far among the speculative side of this market.

Please note that this has nothing to do with gold forward lease rates, backwardation claptrap or any of the wild theories that consistently are birthed out among the gold community. It has everything to do with good old-fashioned, easy-to-understand INVESTMENT DEMAND.

Here is a look at the chart:

 

The big driver for gold this AM is the announcement last evening of sanctions being prepared by the West against Russia depending on the outcome of the expected vote in the Crimea region this weekend. That has led to strong safe haven flows for the metal.

Further clouding the picture is disappointing economic news out of China.

Combined, both of the above have the equity markets nervous and this is leading to some outflows from stocks into both bonds and gold. You can see the concern in FALLING interest rates again.

Keep in mind what I have said before, gold needs an environment in which REAL interest rates are negative in order to thrive.

Very noteworthy is the fact that the US Dollar has not been able to garner much if any support during this latest round of events. That needs to be monitored.

If this is not enough to add some uncertainty, crude oil is doing what we could expect it to do on poor global economic news - it continues to sink lower. Copper's woes are also continuing.

Today we got (thus far) a big break lower in soybean prices. The Board structure shows a big drop in bean prices for later this year, barring any unexpected weather woes as the big S. American crop comes online. Issues in China and here in the US with the hog PEDV are expected to dent meal demand.

We now have sharply lower energy prices. Heating oil prices have dropped over $0.40/gallon since their spike peak early this year. Unleaded gasoline prices have lost $0.10 this month ( that is great news for cash strapped consumers). Crude is off nearly $7.00 this month thus far.

Thus there is going to be a deflationary tug lower coming from some commodities while others are firm. Meat prices will be higher this spring and into summer. In other words, the outlook from the commodity sector remains mixed. Some sectors are strong; others are weak.

The overall bias in the commodity sector as a whole is one that reflects the above. Notice that prices continue to work back and forth within a downtrending pattern. Lower highs continue but so do higher lows. In other words, there is no clear discernible trend in the sector as a whole at this time. Individual markets are responding to their own set of demand/supply fundamentals. This is how it should be in my humble view. We do not have the wild, reckless, mindless rush head-long into all things tangible that we have seen in the past by the hedge funds of the world. They appear to be more selective this time around ( finally ). Remember, they are net short copper as an example.

That means we will need a continued catalyst in the form of geopolitical uncertainties to keep gold strongly supported. It is NOT going to come from inflationary expectations UNLESS this chart confirms a strong upside breakout on a weekly basis. Those who keep endlessly screaming hyperinflation are NOT looking at the charts.

The US Dollar will therefore be key moving forward. Will it garner some safe haven buying or will it continue to languish? If it breaks down sharply on the charts, we will get some mindless commodity sector buying in expectation of a currency-induced cost push.

Back to gold briefly - the weekly chart shows how today's move higher is playing out on the intermediate term chart. If the bulls can maintain today's strong gains into the close of trading Friday, they have a real shot at taking the metal higher and even setting up a test of $1400. A change in the handle to "14" that could be maintained, would bring in an entirely new set of momentum based buyers. That will be a  tall order but if things deteriorate in the Crimea this weekend, it is certainly not out of the question.

As you can, the reason I say it is a tall order right now is due to the following chart. The miners, while the chart has stopped going down, are certainly not lighting the world on fire. They have not managed to make it anywhere near the 280 level and are certainly no where close to closing that big gap below the 300 level. Whether or not one likes it, the miners still tend to lead the bullion (maybe this time will be different) and based on that, it is not exactly a ringing endorsement of gold at this point. The week is still young however so let's keep an eye on things.

Bears Win the Copper Battle

Those of you who have been regular readers of this site know that I have been very strongly concerned over the divergence between what the copper market has been doing and what the rest of the commodity markets, but especially the equity markets, have been doing.

Equities have been making new highs as if there isn't a care in the world while copper has been among one of the worst performing commodities across the entire sector.

As I have said before, and will say again, this divergence is so abnormal, so strange and so uncommon an occurrence, that I believe we ignore it at our own peril.

Copper is the quintessential bellwether for global economic activity because of its widespread use in construction, both residential and business/manufacturing activity. If its price is sinking lower, it is signaling that economic growth is lackluster at best and slowing at worst.

With that in mind, look at what has happened since my last post about this.

Yes, it collapsed right through major chart support. I honestly did not think this would happen ( I thought it would bounce ) but the problems with China have gotten the copper market extremely nervous and it is definitely showing its cards. China has been the poster child for what a credit bubble looks like and we are now finally seeing some real evidence that the air is coming out of that bubble.

I must say that any news showing slowing growth in China, credit issues, rising bad loan problems, etc., is not bullish for commodities. You'll notice that silver opted to follow copper lower instead of gold higher. Gold, by the way, is only keeping afloat in my opinion because of geopolitical uncertainties concerning the situation in Ukraine. It is doing what it should be expected to do however during times when many desire a safe haven of sorts. It also is not hurting gold any that the Dollar has been a consistently poor performer of late.

Along the line of weakness in the commodity sectors, check out crude oil, which has lost more than $5.50/bbl over the last few trading sessions. Does this look like a chart showing a strong demand scenario which would be the case if economic growth were solid?

We thus have two key bellwether commodities both showing us signs of real weakness. I tend to rely more on the signals of these two markets ( plus cotton to a certain extent although weather issues can mess with it) to get a snapshot of where economic growth is more likely to go. We all can dismiss equities as a TRUE snapshot of the real economic picture ( thus it is and has been since late 2008 in my view) as that sector is driven almost entirely by yield-hungry hedge funds and large investment funds chasing yield in a near-zero interest rate environment. As said many times here, you cannot fight the tape as a trader and survive very long but that does not mean that the market will actually make any sense at times.

I see this lack of real growth as problematic for any sustained rallies in gold mainly because of my experience with the metal during the credit meltdown back in the summer of 2008. It got sucked down along with the rest of the commodity sector and did not live up to its name as a safe haven. It was not until the Fed announced their first foray into the realm of gargantuan money printing that the metal bottomed along with nearly everything else on the planet I might add.

The problem we have now is this boogerboo named deflation. It is still around to haunt us. This is not to say the entire commodity sector is going to implode lower. There are definitely exceptions to this at the current time, coffee and hogs currently among them, along with soybeans, which refuse to sharply break lower. Corn and wheat are both higher as well but they are being supported due to fears involving Ukranian grain shipments which many fear are going to be impacted at some point due to the conflict over there.

However, I still remain of the opinion that one of the fundamental pillars to a SUSTAINED bull market in gold is a bull market in commodities in general alongside of a weaker US Dollar and Negative REAL interest rates. It is difficult to make the case for any of the latter points with the exception perhaps of the US Dollar, which while it has not collapsed, certainly is weak on the charts.

That tells me to expect more of a grinding type price action in gold rather than the roaring, runaway moonshot which far too many of those in the perma-bull camp are anticipating. Only if we were to get the moonshot across the entirety of the commodity sector would I be able to concur with that theory.

You'll note on the gold chart that the metal is not falling apart like copper is but continues to lurk just beneath a key chart resistance level. Geopolitical uncertainties are making it tough for the bears to get aggressive and the bulls are not going away. The trend is still higher, but in a grinding sort of fashion as the ADX is moving higher but leveling off suggesting the waning of the sharp momentum seen earlier this year. I get the sense of a market reluctantly moving higher but not one in which there is unbounded bullish enthusiasm.

It will be interesting to see what we get this Friday in the COT report as it will cover the action in gold only through today's trading. Will we see more of that hedge fund short covering the dominant feature or will we see new longs outnumbering the short covering this time around?

By the way, don't forget that the COT report showed copper with all major category of large traders, including the Producer/User/Processor/Merchant  group all heavily short with the only buying being done by the Swap Dealers and Index Funds. I mentioned on Saturday that struck me as being extremely rare and quite odd - now we finally know the reason don't we?

GLD Holdings Higher

Most of you who are regular readers of this site are aware of my view that Western investment demand for gold can be gauged by tracking the reported holdings in the big gold ETF, GLD. While physical demand out of Asia is critical to the well-being of the gold market, I have maintained that without a correspondingly STRONG Western-based demand, gold cannot mount a sustained rally. Asia buying has bottomed or put a floor under the gold market for many years now but it is Western origin speculative demand that has driven gold strongly higher in the past.

That being said, as of the close of trading Friday, reported gold holdings in GLD are at 805.2 tons. While this is up 1.5 tons from the last numbers (which were steady for the previous 8 trading days) it is still down from this year's peak of 806.25 back on February 13. Interestingly enough, the price of gold at the Comex closed at $1300 on that date. From that point on, it has ground higher before hitting a wall near the $1350 level. Yet the tonnage is lower.

What to make of this?

My view is that gold's recent rally has been driven PRIMARILY by short covering ( note - I am not using the word, 'solely' ).

Here is a chart drawn from this week's Commitment of Traders report:

Let's start at the date of maximum hedge fund outright short positions. That occurred the week containing December 3, 2013 where the total number of outright short positions, including futures and options registered at 79,631. As of this Tuesday, that position has been drastically drawn down to where it now stands at 26,321, a reduction of 53,310. On that date, gold closed at $1220.80.

Now let's look at the hedge fund outright long positions. The lowest number of those occurred during the week containing Christmas Eve at 104,754. Since that time, this category has now grown to 144,562 as of this past Tuesday, an increase of 39,808.

Can you see what is taking place? Short covering continues to outnumber the fresh new buying in this market. Until I see some evidence of this changing, I cannot be too optimistic for the possibility of an EXTENDED move higher in gold.

What seems to be happening with the metal right now is that certain events, more specifically, two previous payrolls reports and a geopolitical event, namely, the outbreak of tensions and strife in Ukraine, have spooked the bears into covering shorts.

Until yesterday, Friday, the last two payrolls report, came in much weaker than expected by the market. Those reports immediately fanned the idea that the planned tapering activity by the Fed was going to be put on hold, especially with the dovish Yellen now at the helm. With that came the idea that Fed was also not going to raise short term interest rates any time soon. The result was FALLING longer term interest rates and a corresponding weakness in the US Dollar. With that, money came into gold while shorts covered but it was mainly nervous shorts wanting no part of getting steamrolled by the onset of a new "buy tangibles" wave in anticipation of Dollar weakness.

Throw on top of that the fact that fears of escalation in the Ukranian situation caused a panic run into the metal and once again the bears were given no reason to get aggressive in selling. Quite the contrary, they opted to head for the hills first and ask questions later. What they are now doing is watching to see how events are going to unfold over in that volatile region.

The big mover on Friday (yesterday ) however was not Ukraine, but rather the payrolls report. While not exactly a overwhelming display of healthy job growth, it was better than the previous two reports. Also aiding the report was an upward revision in the prior months of 25,000.

But here is an interesting item in that payrolls report - the number of "not at work" due to "bad weather" was 626,000 compared to 253,000 in February 2013 and 200,00 in February 2012. ( Data courtesy of Dow Jones ).

That shifted the psychology in the market to one of " we told you the poor job numbers were due in large part to the record cold and frigid weather conditions experienced over at least half of the continental United States". In other words, traders are coming around to the view that while the payrolls numbers are certainly not exactly setting any records, they were also not as bad as some were fearing  and that the recent poor showings were weather-related and thus NOT THE START of a new trend.

Now, it remains to be seen what we are going to get in subsequent payrolls reports but it will be very important to closely monitor those reports as the more seasonal weather slowly sets in. If the numbers DO NOT show strong improvement, then traders will re-evaluate their new attitude as of this Friday and shift back to ideas that the tapering plans of the Fed are going to be on hold. If the numbers do show steady, albeit very slow upward growth, then expect the Dollar to garner some support ( it is also sitting right near some very strong chart support ) and US interest rates ( longer term ) to stay firm and creep higher. Remember the Fed has emphatically stated that it is going to be "DATA DEPENDENT" ( their words, not mine ) when it comes to their approach to tapering and to short term interest rates.

This will tend to work against gold, especially if the US equity markets continue to soar to new heights. Now they are talking 1900 in the S&P!

Where this leaves us is simple - from a technical chart perspective, the near term technicals have improved in gold. This is keeping fund computers buying dips and preventing that category from getting aggressive on the short side. As long as any important downside support levels hold firm, gold should remain in a sideways type of pattern as the geopolitical uncertainties with Ukraine prevent bears from getting aggressive. Any sign that events over there are settling down and this market is vulnerable to a wave of long liquidation. On the other hand, if for any reason things flare up further, then gold will see further short covering that might be strong enough to take it up through the cap near the $1,350 region. It would have to clear $1,365 or so to have at least a chance of reaching the psychologically important $1400 level.

Incidentally, before closing this post, I want to note once again the chart of copper.

This chart continues to amaze me to no end - with equities soaring into record territory seemingly every week, copper is sending the exact opposite signal in regards to the health of the overall global economy.

Note the Directional Movement indicator show the bears in solid control of this market. Also, the ADX line is beginning to rise as the price descends indicating the increasing possibility of a trending move LOWER. Note - for that to occur copper would have to close below the $3.00 level in my opinion however. For now, it is in a sideways to lower pattern.

The COT report for copper is also very revealing as it shows a continued build in SHORT positions by the large hedge funds. In addition to that however, what I find EXTREMELY fascinating is the positioning of the other players in the copper market.

The big commercial category consisting of the Producer/Merchant/Processor/End User category is also a LARGE NET SHORT by more than 2:1! The Other Reportables category is also NET SHORT by 2:1 and the small trader, the general public is net short by nearly 6,000 contracts. The entirety of the long side interest in the copper market is being held by only one category of traders and that is the Swap Dealers, some of those no doubt being index funds which are oftentimes lumped into that category for reporting purposes. This is not something which one sees very often. But regardless, the fact that a combination of both commercials and speculators are short copper is astonishing given what is going on in the equity markets. It could be some are looking at credit issues surfacing in China and are bearish as a result.

I said all that to say this - it makes me suspect this commodity sector rally we have been seeing. Some of the individual commodity markets do have strongly bullish supply/demand scenarios and thus their price rise is justifiable but if any of this buying is based on "hyperinflation" fears as some are suggesting, they are way off base because Copper would be leading that charge higher, not attracting the kind of determined selling that it has been getting of late.

Let's continue to watch this closely...