June starts with a Quiet Session

Last Friday was the end of the month and with that, came the usual book squaring and position squaring that typically accompanies that. The result was a round of short covering in the mining shares as the bears rang the cash register to realize some sizeable gains over the month of May. The new month of June is starting off with more selling in the mining sector as it looks like some of those players are repositioning once again and taking short positions to start the month.

Overall trading today seemed to be relatively quiet; at least thus far it has been.

Gold was weaker overnight as it came into very early European trading when it bounced off of the support region near $1240 and stabilized heading into New York. The yellow metal did manage to get a bit of a pop higher off of the ISM number this morning. The May number came in at 53.2 versus the April 54.9 reading. The market was expecting a 55.6 reading.

NOTE:  Around mid-morning ISM sent out a CORRECTED reading for May at 56 and NOT the 53.2 reading that they reported early this AM. Private economists noted the error after the release of the data. ISM noted that the error was due to their use of the wrong seasonal factors. Stocks moved higher when the news of the error hit the wires and gold dropped a bit deeper into the loss category.

That was offset by another piece of economic data showing April construction spending rose 0.2% with the March number being upwardly revised from 0.2% to 0.6%. Gold faded lower as soon as that number hit the wires.

I expect this to be the pattern for gold for the near future; it will be caught in a tug of war between conflicting sets of economic data with a steady grind lower barring any sort of wildly impressive economic data.

The biggest reading that traders/investors will be looking for is on the employment front. That is the key data set as far as the broader market is concerned. Will the moribund jobs picture show any signs of real life or will it continue its pattern very slow improvement?

Along this line, we were greeted with news of yet another job-killing initiative undertaken by the current "we hate business" administration. We have had the disastrous oxymoronically named "Affordable Care Act", the refusal to build the Keystone Pipeline and now we get its war on coal. Again, using its favorite method of doing end-runs around the Congress, the Administration unveiled a new set of EPA regulations which most analysts predict will end up costing 250K jobs.

Every single one of the above have resulted in either job losses or the prevention of the formation of new jobs. The problem for this economy lies not so much in what the Fed is doing or not doing at this point, but in the current administration and its allies in Congress. Simply put, they are at war with the true creators of wealth in the nation. I wonder just how much this economy could actually have grown over the past couple of years had we had an administration that favored and initiated pro-growth policies which would get Americans back to work. It shows just how resilient American business truly is and how much potential our national economy has that in spite of one millstone after another hung around its neck, it still manages to actually manage some growth, even if that growth is rather anemic.

I envision American business as a runner loaded with lead bricks on its back by the current administration valiantly straining to run the race nevertheless. It is ironic that this administration, which constantly touts itself as a champion of the working class, has ruined that same working class with the sort of ideologically driven policies which have been proven time and time again to curtail growth and engender job loss, ESPECIALLY among those who need those jobs the most.

The reason I bring this up is because as long as the current administration is in office, I cannot see this economy really accelerating to the upside any time soon. I see instead it continuing to limp along showing some growth, but that growth will be subdued at best. The TIPS spread is showing the same thing - sluggish growth with little to no inflation. We will hopefully get a change in the Congress in this fall's election but as long as the Obama administration is in office, I cannot envision anything drastically changing on the economic front.

What this translates to in my view is that stocks will continue to be the "Go-To" asset class and where the investment gains are going to be made while bonds will remain in a range trade. Gold will struggle to find any sort of sustained rally as players will look to sell the metal on strength. I would have to see something that radically alters this outlook to have a corresponding change in expectations.

That being said, any sort of shift in the current sentiment, will be reflected on the price charts. That is why all of us, myself included, are served best by not becoming married to any viewpoint that we may or may not have and remaining flexible enough to allow for shifts in investor sentiment.

I should note here that European manufacturing data out this AM further fanned the flames of negative Euro sentiment. Throw in some additional data showing the German inflation rate fell almost by a half and the likelihood, at least among market players, that the ECB is going to take some sort of action on the stimulus front at its meeting this month, increased. That pressure the Euro down towards that 1.36 level once more with the result that the US Dollar was lifted ever closer to its key chart resistance level near the 80.70 - 80.80 level basis the USDX.

With the US expected to see higher interest rates sooner than the Eurozone or Japan, both the Yen and the Euro are losing ground against the Dollar. Today the yield on the Ten Year jumped rather sharply to 2.534 as I type these comments. It had briefly fallen below below the 2.50 level last week dipping as low as 2.402 before bouncing.

This stability in the Dollar is going to create more headwinds for gold.

News out of China on its manufacturing front was completely different than the weak news out of the Eurozone. Its manufacturing purchasing managers index rose to 50.8 from April's 50.4. The market was looking for a 50.6 reading. While not exactly a gangbuster reading ( anything below 50 is considered contraction) it alleviated fears of any short of sharp contraction in that key region. Copper responded by moving higher with its strength dragging silver up somewhat.


On the grains front - soybeans - the market that keeps on proving that only those with some sort of masochistic tendency will trade that old crop contract. It's unpredictable price action continued today with the July soaring back above the $15 level again. There appears to be a contingent of either pit locals or some commercial interest which look as if they are trying to squeeze the shorts in that month. Some days they have better success than others it would seem. Today was one of those days. Once again the focus was on the tight carryover. I still wonder how many beans from last year's harvest that farmers might be sitting on in their shiny new silos.

As far as the new crop goes, the weather, for now, looks ideal. We will get a look at the status of those bean and corn crops this afternoon when we get the conditions reports. Wheat continues to lose any gains it received from hot and dry conditions a while back. The rains that have fallen in the hard winter wheat region have taken that right off the radar of the trading world. Instead the focus has shifted to the lack of competitiveness of US wheat prices compared to other global wheat competition.

Crude oil is weak today with nat gas getting a bit of a bump off of that news about the administration's war on coal. WTI has trouble whenever it nears the $105 region. There are an awful lot of hedge fund longs in that market that is making some nervous. It has managed to stay afloat above the $100 mark in spite of the rather flaccid economic readings of late so demand must be there but it cannot extend higher either. Markets like this, where there are a great number of big long positions, that stall out, are always at risk of a significant round of long liquidation from stale longs that run out of patience. We'll see if that is the case or if the bulls remain resolute and refuse to cede ground.

Here is the gold chart:

The ADX continues to rise but remains below 25. The negative DMI however is well above the positive DMI indicating a market in which the bears are in control which is grinding lower. The price did bounce from that support level noted ( next support zone) but has not managed to extend even so far as last Thursday's and Friday's high. It looks heavy, especially with the mining shares coming under more pressure in the session thus far.

Some thoughts on the Gold Commitment of Traders

For gold bulls, this past week was rather traumatic to say the least. The near two month long support region centered at the $1280 level gave way resulting in a drop of an additional $40. The combination of reduced tensions in the Ukraine, some improvement in key economic data ( although the situation remains mixed ) and tame inflation, along with a soaring stock market, has resulted in Western investors selling gold and moving the funds into equities in order to gain the best possible return on investment capital.

Gold now enters a seasonally weak period during the month of June so additional losses are certainly possible as we move forward into that month. It looks as if there was some late-in-the-session short covering by bears in the miners this afternoon as they rang the register on a very profitable month.

To give you an idea of how successful they were - the HUI started the month of May at the 225 level and moved all the way down to 201 today before the slight bounce to end the month closing at 206.

The GDXJ, fared a bit better ( because it has suffered even more severe losses over the last couple of years than the larger caps) as is started the month at 36.50 and fell to 32.43 ( almost entirely erasing this year's gains) before it closed at 34.

Next Monday brings the start of a new trading month so it will be interesting to see how players position themselves the first entire trading week since the Memorial Day holiday shortened week.

For gold the technical damage done this week was severe. However, based on this afternoon's Commitment of Traders report ( which unfortunately did not include the $20 drop over the last three days of this week) the entire group of speculators, every category, still, in spite of the deteriorating chart pattern, remain net long.  That concerned me last week and it concerns me still this week.

They are still not getting out meaning that their losses are continuing to grow. At least in silver they have finally figured out which side of the market to be on ( short ) and might perhaps be making some money for a change, but when it comes to gold, it seems old habits die hard.

What I wanted to do was to graph out in visual form something showing the reader what the problem is for the longs in this market at the moment.

Take a look at the following chart which has as its beginning point, the middle of December last year. As you can tell, the gold price, which is on the right axis of the chart, was near $1200 then ( closing price). It climbed all the way to near $1381 on Ukraine fears before plummeting back to earth where it currently sits as of the close today slightly below $1250.

The blue line on the chart is the SUM TOTAL of all three categories of SPECULATORS LONG positions only. I am not noting any short positions or the NET position but rather just the Long positions.

If you note the second and third vertical lines in mid-April, you can see that there was a large influx of speculative buying. A great portion of this was related to safe haven flows tied to Ukraine fears. That buying was met with heavy selling by both the Commercial interests ( possibly some hedging by some miners) as well as Swap Dealers. There was also some selling in the large speculative categories as well by that was outnumbered by their buying. Some of the old pros and those with past experience knew that selling gold into geopolitical fears was the proper way to approach the metal as those rallies tend to be fleeting as a general rule.

Nearly all of those brand new longs, put on over a three week period or so, were put on when gold was trading between $1300 and $1290. As the crisis in Ukraine seemed to cool down, disenchanted bulls began giving up as can be seen by the fall off in their numbers early this month. About half of them threw in the towel (look at the horizontal line). That translates to another 9,000 or so that were left and whom did not get out which had paid north of $1290 for their gold. We do not have all of the movement among traders for the last three days of this week unfortunately but suffice it to say, a fall below $1280 was not good from a technical standpoint but from an account management standpoint, a further fall to $1260 and then to $1240 means some very severe losses for that crowd that purchased their gold above $1290 and on towards $1300. One has to wonder how deeply capitalized some of these guys are because included in this number of total speculative long positions is the little spec, the most undercapitalized trader of them all.

It is interesting also to note, ( go back to the first vertical line in early February, that almost all of the longs that bought into gold when it was first near $1260 and then carried towards $1380 are now gone from the market. However some of them still remain ( about 6000 or so). Those 6,000 put on long positions when gold was near the $1260 level so they too are now underwater completely. Their paper losses are not that severe  - yet. The question is at what level will their losses be sufficient to force them to exit?

What I am getting at is the fact that we currently have a still sizeable contingent of speculators on the long side of the market who are underwater on those long positions - if they did not yet exit Wednesday, Thursday and Friday of this week. We have no way of knowing that for sure until next Friday. My guess is however, that some of them did liquidate, either by choice or were forced out by margin calls.

Go back to the beginning of the chart  - As you further see from the chart, there still is a large number of these specs who moved onto the long side back when gold was near $1200 and who then added on more as gold climbed above $1250 in January. So far, those positions are safe, which is the reason for this continued bullishness among the specs when it comes to gold, unlike silver which is losing favor among them.

In going over this chart, I believe gold will need to fall BELOW $1240 to kick some of this crowd out with more coming out if gold falls through $1215.

If this does happen I would expect to certainly see the speculative side of this market also begin to ramp up NEW SHORT positions at the same time. That would bring us selling from two directions - long liquidation and fresh shorting.

 Perhaps we might see a true, lasting, bottom if that were to finally occur. In spite of what many seem to be saying, sentiment towards gold, while it has taken a big hit, remains, based on the still sizeable number of these speculators who are long at the Comex gold market, bullish. That is quite astonishing but at least we know some of the reason why. Many of them are into gold at much lower levels and still have their positions in the black. They do not need to exit as of yet. Just look at that blue line however and see where it stands today compared to where it stood at the middle of December last year. There remains enough specs on the long side to pressure this market lower if those key technical support levels do not hold and they are forced to abandon ship.

Gold bulls certainly do have their work cut out for them. As always, we will watch the price action and let it be our guide.

Silver Loses $19 Level; Gold Has Few Friends

I will come back to silver later on in these comments but for now want to discuss the gold chart and price action.

Today, the Chicago PMI numbers came out with a reading of 65.5 versus the April reading of 63.0. What was picked up by market players was the NEW ORDERS index which rose to 70.2 from its 68.7 reading in April Traders and investors are reading this as further evidence that economic growth, while not roaring higher, is undergoing a type of grinding improvement.

One can argue that case but the fact is that the market is choosing to view this recent rash of economic data in a friendly manner and wants to be bullish. That is why the Q1 GDP was sloughed off - traders blamed it on the severely cold and record breaking winter. I should note here that if the Q2 number does not come in much better, blaming the weather is not going to be a viable excuse!

Regardless, as one watches the long bond moving higher of late, and that TIPS spread which I detailed a couple of days ago, it is evident that as far as the broad market is concerned, inflation is not an issue. With traders/investors convinced that is so, and with no reason, in their mind, for the Fed to delay any further reductions in their bond buying program, gold is finally losing many more of its friends.

The stubborn bullishness that remains among so many speculators based on the Commitment of Traders reports IN SPITE OF what has clearly been a slowly deteriorating chart pattern, might finally be giving way to reality. Unfortunately for us, when we  get the release of the this week's COT data it will not show us what has happened to these specs since Wednesday. Gold has fallen another $20 since that time. It did lose $1280 early in the week so the report should pick up some long side liquidation as that was a very significant technical chart level.

Keep in mind that the last time I commented on that report, every major category of speculative interests was still net long. That means a very large number of those positions are deeply underwater ( especially those who chased the price higher based on Ukraine ) and are now either being met with margin calls or being forced to liquidate their losing long positions.

In looking over the chart, you can see that all three support levels noted, beginning first near $1280 and extending lower, have completely given way. Even the psychological support at the $1250 level could not hold the market. The next level of chart support surfaces near the $1240 level and extends down to $1232 or so. If that gives way, $1220 is next.

For bulls to be able to have a chance at improving this chart, they would have to take price ABOVE $1280 and keep it there at a bare minimum. That might be a tall order because based on the breach of that level and how significant it was from a TA perspective, sellers are going to be lurking there.

The ADX is rising once again but remains below 20. Combine that with the rising -DMI and it tells us that the bears are in firm control of the market for the time being. Speculators are not yet aggressively playing gold from the short side but with this steady, grinding move lower, many of those who are long are growing disillusioned and getting out. This sort of "disgusted selling" tends to have a snowball effect however so we will want to keep a close eye on how this market acts as it nears each respective support level. Failure to manage even a bounce would augur for sharper losses. We will just have to wait and see.

I would need to see the ADX get at least above 25 and continue rising to indicate that a strongly trending move lower is underway. For now, while the short term is decidedly negative, the market continues to GRIND LOWER. If gold cannot manage a bounce away from $1200 for any reason, it is quite possible that we see a move all the way back to that double bottom at $1180.

It is not gold just in Dollar terms that is looking lousy on the charts, it is also Eurogold ( Gold priced in Euros) as well. Take a look at the chart.

Notice how today's move broke it down below its level of chart support near the 920 region. Next support is near 910. If that does not stop the bleeding, it could fall below its round number psychological support at the 900 level.

Compounding gold's woes today is more weakness in the mining shares. The GDXJ has surrendered its mediocre gains from yesterday while the HUI has fallen to a fresh 4 1/2 month low.

GLD, the big gold ETF has not shown any chances in its reported gold holdings since that big jump the other day so I am especially curious to see what is going to be coming out of there when they get a fresh number up for us. That was the one saving grace that I could see for this gold market. If that goes, then that support will have gone the way with the miners. Hopefully they will have some data for us later on today after the close.

Moving over to silver - it finally cratered through that critical support level at $19. Markets that continue to flirt with resistance or support levels are generally going to go through them.

Here is the silver chart.

As you can see, the support level that has held it all the way back to late January was broken in a big way today. It fell through $19 yesterday but manage to squeak back above it but the sharp fall in gold, combined with another drop in the copper price, was too much for the grey metal to withstand. It is now decidedly down for the year. I have included a line showing where this metal closed at the end of 2103 for your reference point.

Silver is now sitting right at the bottom of the next support zone noted. If it cannot recover from here and climb back firmly above $19 in a hurry, odds favor the metal moving down towards $18.30 - $18.20.

One quick comment - I generally receive lots of gold/silver "analysis" in emails that many readers send my way asking for comments. I generally do not answer them because of time constraints hoping that the readers can glean an understanding of what my view might be at any given time based on how I am seeing the price charts. However, I do want to take a bit of time to comment on these perma-gold / perma-silver bull websites and advisory services, who somehow manage to constantly beguile their unsuspecting readers with one bullish "SPIN" after another when referencing the COT reports.

Just the other day I had one pop into my inbox telling the readers that the potential for a good strong short squeeze exists in silver because the swap dealers are long and the specs are moving to the short side. I read this sort of claptrap and shake my head in bewilderment that some people actually pay for this junk or read it with any sort of seriousness. Are these "experts" on the COT trying to tell their readers/subscribers to go long and wait for this expected short squeeze?

I have said it so many times here that I get concerned I might be taxing the readers' patience but the simple facts are that speculators drive markets. While the Swap Dealing positioning is always interesting, they do not drive the market, SPECS DO. If they are buying, the price will rise. If they are selling the price will fall. As long as specs are in a market, there is always the potential for a short squeeze or a bout of long liquidation. That is not news nor is it noteworthy. And I am certainly not going to take a position because a bout of short covering just "MIGHT" occur because the Swap Dealers are holding a position on one side of the market. The possibility exists every day in the futures markets that specs could cover shorts or liquidate existing longs. However, they NEED A REASON TO DO SO.

What is noteworthy is if a key chart level is violated for any reason. Then the spec positioning becomes important. Such was the recent case with gold as the specs remained stubbornly bullish in spite of a deteriorating chart pattern as I have noted. Not until that key downside support level gave way at $1280 did we see them bail out. Same goes for silver on the "potential" for any so-called short squeeze - you need to see a key UPSIDE chart support level give way before that does happen. The problem for silver however is that the resistance level that needed to give way to induce this potential round of short covering was not violated. Quite the opposite happened, a downside support level gave way meaning that is WAS NOT a bout of short covering that took place but rather a bout of long liquidation from those specs which remain long and are now being forced out.


A quick comment on the Goldman Sachs Commodity Index or GSCI. I am including a chart of it to show where it stands in relation to the closing price of the index at the end of last year. It is currently up 2.7% since then. I prefer using this index rather than the CRB because I feel that the latter is too heavily weighted in the energy component side and thus does not give an accurate view into the overall commodity sector as a whole. I liked the old CCI much better but it is pretty much becoming defunct at this point. Anyway, the GSCI is fairly evenly weighted and provides a good picture of how commodities, as a whole, are performing.

One of the reasons I am not too concerned about this index at this point making any stronger gains and breaking out into a trend ( at this point ) is because the makeup of these indices includes the front month futures contract when calculating it. Several of the commodity futures markets that I actively trade are showing lower prices for later in the year however. That will not be noted on the index until those distant months become the front months as the calendar moves ahead.

That being said, a 2.7% increase in the sector, while noteworthy is not setting off any alarm bells at this point. Could things change in the sector and move higher? Sure they could - after all we are talking about markets and NOTHING is ever set in stone in any market but for now, upward price pressures across the sector in general remain muted. I would need to see this particular index breach 675 to become concerned about rising commodity prices at the wholesale level becoming a more serious concern.

Along that line, all of the grains are moving lower today, even the discombobulated soybean market which cannot seem to figure out what it wanst to look at on any given day on a consistent basis. Growing weather is looking ideal at the moment for this year's crop ( remember - we are talking weather so that could change, and probably will at some point in the growing season ) with sufficient rainfall and ground moisture. Rain makes grain is an old but true adage. The lower grain prices are good news for consumers and livestock and poultry producers. Along that line, feeder cattle keep soaring to record highs as cheap corn makes it a bit easier to stomach prices up here in record nosebleed territory.

Today is the end of the month for trading purposes so some of these price movements in the markets today should be viewed through the prism of possible book squaring and positioning evening out. How we start ( and finish ) next week will be more telling but with that being said, the charts are what they are so any moves in price that impact those charts, needs to be respected and heeded.

I will try to get some more up later on......

Gold versus the TIPS Spread

I posted a chart last evening showing the TIPS spread going back to the spring of 2009. I have had a bit of extra time to overlay the gold price on that chart so as to be better able to compare how the price of gold is performing in relation to the changing inflation expectations among those who comprise the market.

I am particularly interested in the gold price performance when the reality dawned on most market participants that the extraordinary monetary measures that the Federal Reserve was engaging in was not producing the kind of upward pressures on inflation that most of us had believed it would when we watched it implemented.

Interestingly enough, this sea change in sentiment and "awakening" among investors, occurred in September 2012. That month the expected inflation rate peaked out above the 2.6% level. As you can see from looking at the chart, that was also the time frame during which gold could not maintain any sort of hold above the $1800 level. As it turned out, once gold failed at $1800 it was a steady downward move until it broke support near the $1530 level and entered into its current bear market.

In looking over this chart, I am struck by how closely the gold price has been moving with this TIPS Spread since it peaked out at the secondary high near $1800.

For another look at the overall commodity sector, take a gander at this chart of the GSCI ( Goldman Sachs Commodity Index) and notice how it failed at the 700 level at the same time ( September 2012) as both the gold price failed at $1800 and the TIPS Spread peaked. It too has been moving in a range since that time.

I find none of this to be coincidental. It helps establish me in my view that the market remains quite unsure about the future of inflation in this extraordinary time in financial market history. Economic data will seem to improve, then fall, then improve once again, etc.

A quick note about the mining shares - looking at the HUI chart, unless it can reverse course tomorrow or Friday, it looks to end the week BELOW another key chart support level on the weekly chart. If it does, there is a good chance that the index will test the psychological support level of 200.

The GDXJ is threatening to lose all the gains, what little it had managed to capture, of this year. Its low print for today's session is 32.43. It closed last year ( 2013) at 31.05.

Until we see these mining shares showing some signs of life, making a case for a good bottom in gold is unwise.

That being said, I am going to be most curious at to what the reported holdings in GLD are by the end of this week. That buying yesterday was rather odd so I want to see if it was an anomaly or the start of an actual trend.

The Euro fell below the 1.36 level in today's trade which is more psychological than anything but nonetheless, it continues weak against the Dollar. There is some support on its chart near 1.356. I don't see much below that until you get closer to 1.350.

The Dollar is inching towards overhead chart resistance near 80.70 - 80.80. It can close out the week above that level, it stands a good chance to make a run at 81.40 or so.

Gold did initially hold at even number support at $1260 but as the day has worn on and the mining shares continue to sink, it fell below that level. There is psychological support near $1250. Rallies in gold are now going to be sold as losing longs will use that to get out while opportunistic shorts are going to be aggressive. Something will have to turn on the fundamental front ( currency concerns or geopolitical events ) to take gold out of its current bearish posture.

Fed Balance Sheet Size

There is a fascinating report on the Dow Jones newswire this AM detailing a paper presented by Harvard University historian, Niall Ferguson at the European Central Bank's inaugural forum in Sintra, Portugal.

The gist of the story :

The authors ( Ferguson, Moritz Schularick and Andreas Schaab) traced the history of central bank balance sheet expansion and contractions of "12 advanced economies since 1900".

"The size of central bank balance sheets has fluctuated between 10% and 20% of GDP most of the time except during WWII and the most recent crisis, which 'has eclipsed all other historical precedents.'"

The authors detail the finding that in the three decades prior to the credit crisis, central bank balance sheets had shrunk significantly when 'measured as a percentage of GDP'. 

"By that yardstick, their (recent) expansion merely marks a return to earlier levels".

The authors state that central bank balance sheets had "become small relative to the financial sector".

Here is a key part of the study:

"Central banks rarely reduce their balance sheets by selling securities; instead they shrink as a share of GDP because the economy expands".

In their own words:
"We have not recorded a single incident in which a central bank has primarily sold long-term government ( or private market) securities to unwind a long expansion in nominal terms".

The authors also note:

"there is little historical evidence that large central bank balance sheets pose ' an imminent risk to price stability'.

Here is another key quote from the story:

"Over time, the size of central bank balance sheets closely tracks the size of the public debt. But there is an important caveat: the lesson of the 1950s is that once a central bank has been buying bonds to keep long-term interest rates low, it can confront political pressures when it tries to reverse course".

Here is a link to the story:
http://blogs.wsj.com/economics/

TIPS Spread

I have had some private emails discussing the TIPS spread as well as some posts recently dealing with inflation expectations so I thought it might be helpful to post a chart of the TIPS spread to portray what the market is currently expecting in that regards.

The TIPS spread is calculated ( I am using the 10 year ) by essentially subtracting the yield on the 10 year Treasury Inflation Indexed Constant Maturity Security by the yield on the 10 year Treasury Constant Maturity Security. The difference between the two is the market's expectation of the inflation rate over that period.

Here is the chart that I have created using that data.

As you can see, the expectations have risen and fallen since the start of this particular data series. As you look at this chart, you can practically see the shift in sentiment as the market looks for deflation, then looks for inflation, then shifts back to deflation, etc.

What is interesting is to observe this chart starting near the end of May 2013 - beginning of June 2013 and move forward to the present time. Note how the pattern on the chart constricts with the inflation expectation oscillating somewhere between 2.30 on the top and 1.93 on the bottom. Then the range tightens on the downside moving up from a low near 2.06 and rising towards lows near the 2.11% level.  The top has come down somewhat as well.

What this tells us is that the market is reaching an inflection point where this indecision will eventually be resolved. One would think that the resolution would be to the upside if the economy were to begin really improving. I maintain that it is slack in the labor markets that is keeping inflation low as wages remain relatively flat. Thus the Velocity of Money continues to either move lower or remain flat. As long as that is the case, it is difficult to see inflation pick up to any degree of noteworthiness. If however, wages begin to move higher, this would have significant impact on the Velocity of Money as many businesses might begin to feel more comfortable passing along any price increases at the wholesale level. So far, it seems that many are trying to absorb as much of those costs as possible to retain pricing competitiveness among very price-conscious consumers.

Along this line, a strengthening Dollar will generally tend to put pressure on commodity prices.


I do want to also point out that the constricting range in the spread above corresponds very closely to the range trade that we have been seeing in gold. In looking over the price chart for the metal, one can see that same sideways pattern going back to last spring and continuing to the present day.

I am going to fine tune this chart as time permits this week and will overlay the price of gold over it. I think you will find the results rather remarkable. One thing I can already tell you in advance from doing a cursory examination of the two, is that peaks in the price of gold have tended to correspond rather closely to peaks in the TIPS spread.

That would confirm that gold is moving based on inflation expectations or the lack thereof, something which I feel confirms the idea that gold is doing exactly what it ought to be doing during a period of uncertainty in regards to the future of inflation expectations. At the risk of again angering the gold manipulation crowd, if the gold price is moving in sync with the TIPS spread, then asserting that the price is being manipulated is a big stretch as one would have to make the serious case that the inflation expectation of the market place over the last several years has been completely misguided. Given the ( up until recently) rather mediocre at best payrolls numbers, stable to falling commodity prices in general, and a steady US Dollar, that would be a very difficult case to make except for all but the most imaginative.

GLD reports Big Jump in Gold Holdings

GLD, reported a very sizeable jump in reported gold holdings this afternoon, something which I felt has enough significance that it should be noted. Holdings were at 776.89 tons as of last Friday but jumped to 785.28 tons this afternoon. After all, an 8.39 ton increase is not a small matter.

Let's keep an eye on this, especially if gold continues to descend lower. It would indicate some buying from some larger players if this sort of buying is more than a one day wonder. Reported holdings are now back to the levels that they were back at the start of this month.

They were at 798.22 tons to start off the year so the holdings are down by some 1.6% so far this year.

I have had my share of dealings with those from the gold bug community who have continually dismissed my notice of falling gold ETF holdings as if it bore no connection whatsoever to the fall in the price of gold over at the Comex. I maintain it is a measure of Western-based investment demand and as long as it is falling, gold is not going to be able to mount any sort of sustained rally.

If GLD reports holdings that begin to increase REGULARLY, then the downside for gold from this point, will be limited. If however the reported holdings begin to drop again after today, and continue to do so for the remainder of the week, gold has more downside left in it.

Stay tuned.

I still am concerned about the number of speculators who remain on the net long side of this market. Maybe today flushed a goodly number of them out but as I stated in the earlier comments from today, I would feel much better about this market moving forward if I could see speculative sentiment become bearish over at the Comex. It is not there as the specs remain bullish at this point.

Gold Gives up Ukraine Premium as Bears Growl

This past weekend's election in Ukraine has come and gone and the long awaited outcome has sent gold bulls packing - apparently the beginning of WW III did not commence as a moderate businessman received the nod from the majority of those who voted. Russia seems to be taking more of a conciliatory tone for now.

Combine that with a stronger Durable Goods number ( 0.8% gain in April and an upward revision to the March gain) ,  and a jump in the Consumer Confidence reading ( from 81.7 in April to 83.0) , and you could hear the umpire calling, "Strike 2". When news about decreasing Chinese gold demand (based on Hong Kong data )  reached the ears and eyes of market players, that was all she wrote for the yellow metal. Bulls jumped ship, bears got aggressive ( something that they have not been doing while Ukraine simmered on the back burner ) and the downside stops were reached. Once $1275 was breached, those stops were activated and the snowball began its downhill roll.

Throw in an option expiration day and the selling was fairly intense.

 I mentioned in my Friday comments that the still fairly sizeable grouping of speculators on the net long side of the gold market had me concerned. With falling GLD reported holdings, a sinking HUI and GDXJ, and a Fed talking quite a bit about their concern for the lack of inflation, it is rather remarkable that many specs were still bullish towards gold. As long as the technical charts held up, they were hanging in there over at the Comex, but today's breach of that key technical downside level near $1280, has now become a market factor insofar as it flips the gold market out of the recent range trade and shifts it more towards the POTENTIAL for a fresh trending move lower. Those speculative long positions are now deeply underwater ( especially those who foolishly chased the price higher fearing global war from the Ukraine crisis) and they are exiting as new shorts also move in. Losing bulls should be very thankful for those recently lowered margin requirements for gold as it might give them a wee bit more ability to hold onto losing positions should they so desire.

The saving grace for gold is that it happens to be near the cost of production for some mining outfits ( not all of them ) and that might serve to slow the downside momentum somewhat.

I can see the metal in a grinding move lower rather than a sharp fall as it slowly bleeds out speculative interest off the long side while meeting some increased physical buying from India and perhaps China. But as far as Western-oriented investment demand goes, that is not going to be there until investors believe that the bull market in equities is over or some fresh geopolitical event arises. As far as the majority of investors are concerned, the lack of inflation in a low interest rate environment with improving economic data is the perfect recipe for continued money flows into that asset class ( stocks ). Money managers are going to put money to work where it can produce returns - it is really that simple.

I would like to make one more point in this regard - again and again we get the chorus from the gold perma bulls that gold sentiment is lousy and that is a great reason to expect a bottom. The problem with this goofy theory is that the Comex positioning indicates the opposite - as I mentioned last Friday, every major group of speculators, whether it be the large hedge funds, the other large reportables or the small traders ( general public ) are NET LONG gold. How in the world can someone say with a straight face that gold sentiment is horrible and that is a reason to buy? It would be better to say that bullish sentiment towards gold is falling but remains positive. That would be more accurate. This is why that talk of a "capitulation bottom" is premature. That is the last hook that gold  perma bulls are now trying to hang their hats onto after their wrong-headed theories on negative GOFO rates and backwardation have collapsed.

My own view on this is that it would be much better for gold if the speculative category of traders actually moved to the NET SHORT Side of the market on the Comex. Then we might start having an intelligent discussion about "capitulation". Anything prior to that is just wishful thinking dressing itself up as market analysis.

Looking at the gold chart ( daily) you can see the loss of initial support near the $1280 level. That was followed by an additional breach of the next downside support level that came in near $1266 or so. The next level extends from $1260 - $1250.

The ADX is just beginning to rise indicating that the market has not yet entered a trending move lower but the potential does exist for such a thing. I am of the view, at the moment, the more likely outcome for gold is a steady grinding move lower, rather than a sharp leg lower. We'll have to see. A breakout of a trading range market, especially the longer the duration of the previous range trade, tends to bring about some big moves. The issue here is the level at which gold is already trading. As mentioned above, it is down near the cost of production of some miners. The problem is that the speculative forces are still trapped on the net long side of this market; the wrong side I might add. They are going to be exiting barring some unexpected geopolitical event but as price descends from the current level, it should attract some decent physical demand from the East. I guess the question is are these speculators on the long side going to only grudgingly throw in the towel and gradually get out or are they going to say, " I am done with this crap" and abandon the metal rapidly. I am leaning towards the former view at this point but as always, will respect the price action. If it is the former, the market will grind lower; If it is the latter, the market will drop very sharply.


In the meantime, let's just watch the price charts and let that guide us. I am especially interested in seeing what now becomes of the HUI and the GDXJ. The shares led the metal lower and should lead it higher when the time comes for a true bottom in the metal. The GDXJ is down over 5% as I type these comments while the HUI is not faring much better, losing over 4% right now.

Here is a chart of the GDXJ:

Note that the market GAPPED DOWN below a key support level that has been in place since April 22 of this year and has extended losses to the point that it is now trading at its worst level since early January. In other words, it is at an over 4 month low.

Forebodingly, the ADX is now beginning to rise indicating that the potential for trending move exists. That trend is however down. Bears are firmly in control with the -DMI registering the highest reading in nearly two months.

The HUI has lost chart support at the bottom of its range as well. It reached a low today right on top of a support level that runs back to December of last year. If that does not hold it, it is probably going to drop below 200. That would essentially wipe out any gains in the index for the entire year.

Silver had best thank copper today that the red metal is bucking the trend towards lower prices. Silver remains caught between following copper and following gold. It is hanging around that $19 level which is becoming more and more technically significant. It is a lot like the $1280 level in gold. The more the price held near that level but failed to extend higher, the greater the damage inflicted if/when that support level fails. Until silver can scale the $20 barrier and REMAIN FIRMLY above that level, it is vulnerable.

Interest rates remain subdued as bonds actually ticked up some despite the new all time high in the equity markets and the improving economic data. What seems to be at work in the US Treasury market is that traders are becoming more and more convinced that some sort of monetary easing is going to be coming the way of the Eurozone with lower rates resulting over that way. This is causing those who want to own bonds to increase ownership of US Treasuries due to the higher yields in what they consider to be a tame inflationary environment. In other words, money is flowing to where it can capture the best yields and with many thinking that the US economy is improving at a better pace than the Eurozone, money is flowing to the US.

That is boosting the Dollar at the expense of the Euro, which initially moved higher after the election results there this past weekend. Those results should prove interesting to see how or if they are going to influence policy coming out of Brussels. Nationalism is on the rise as many Europeans from their respective countries are airing their discontent with being governed by a far-away group of unaccountable bureaucrats. I maintain that the experiment is eventually going to fail there simply because the idea of creating a melting pot of the various European nations modeled around the United States is not possible. Here in the US we share a common heritage, a common culture ( at least we did at one time ) and to a great extent a common Judeo-Christian set of shaped values. No such unifying factors exist in Europe. I would dare say that this weekend's election is a watershed moment for the Eurozone. Is it the high tide in a counter centralization movement or the start of something greater? Time and events will make it clear for us.

Given Europe's past history of warfare and conflict, along with the terrible loss of human life and suffering, it is easy to understand the desire to never again see the rise of nationalistic tendencies that are of such strength, that they foment war among some of the population there and among some political leaders. However, a shared set of traditions, religion, culture, language, etc., is necessary to bind people together. How that can ever be successfully implemented, except for the use of force and that only for a generation or two at best, escapes me.

The Russell 2000 is rebounding nicely today on that positive economic news moving up over 1.1% as I type this. Risk is back on today and that has investors upbeat as they chase equities higher. As you can see, it is quite a ways off of its best level this year but it has officially moved out of "correction" territory ( down 10% or more from a peak) and has actually generated a mild buy signal. I will be most interested in how this index closes not only today, but especially this week. A push through 1160 or so should be accompanied by another all time high in the S&P 500.

 

Here is the S&P 500 chart ( weekly )

 

 

This incredibly uptrend continues. The last time the trending move higher was interrupted was back in October 2011, two and a half years ago!

Switching gears to the grains - they were beaten with the proverbial ugly stick today, especially soybeans which have been on a tear higher of late. Today, beans came back down to earth. The bean market has been a classic example of traders moving prices depending on what factor that they want to focus upon on any given day. When the focus shifts to the tight supply of ending stocks, the market rallies. When the focus shifts to the upcoming new crop and the potential for a massive crop, the price falls. Back and forth; up and down, it has gone. Today, the focus is on the great planting progress that traders are expecting to see in this afternoon's crop progress report and the relatively beneficial weather the planted crops are experiencing.

I realize farmers want the highest price for their crops  - and who can blame them? - as those prices determine their economic welfare. But for the sake of the livestock industry, the poultry industry and the average consumer, I do hope that this year's crops are large ones. Rising food prices are tough on us all but they impact the poorest among us as those are the ones with the least amount of discretionary income to spend. A large harvest of corn and beans, along with wheat, and falling gasoline prices would be of immense help to the average consumer.

Corn is in a trending move lower as indicated by the daily price chart. Same goes for wheat. Beans, both old crop and new crop, had been trending higher. That might change however if we get some downside follow through in either the July or the Nov's. So far, retracements lower in price have been eagerly bought. Whether or not that pattern is going to continue is up in the air at this time.

By the way, the US Dollar is closing on a key overhead resistance near 80.80 basis the USDX. The Euro continues moving lower towards key support near 1.35. It could not maintain its footing at initial support near the 1.366 level. There is some mild support on the chart near 1.3590. If it fails there, it will more than likely test 1.35 - 1.348. That is a big level from a technical analysis perspective. The Euro might very well have seen its best level in a long time if it fails to hold there. All eyes on going to be on this upcoming ECB meeting in June.