Gold-Silver Ratio reflects trader views towards "risk"

To get a decent indicator of whether the risk trades are on or are back off once again, this ratio is as good an indicator as anything. During times when risk is in, silver has been leading gold to the upside or not dropping as hard as the yellow metal to the downside. In other words, it outperforms gold when the hedge funds are in love with risk. This will be reflected by a ratio moving lower on the chart.

When risk trades are out of vogue and risk aversion is the play, then gold outperforms silver as it is viewed as a more substantive safe haven than the gray metal. This will be reflected in a widening of the ratio.

One can see the concerns over the Greek debt situation through the price action of this ratio chart. As traders became convinced the last few days that Greece will get the bailout and their government will approve the austerity program, the ratio has moved lower with silver outperforming gold.

Lingering fears however concerning the well-being of several other Euro-zone countries, is keeping safe haven buying coming into gold and that has kept the ratio from dropping too severely right now.

I would watch to see the 40 level to see whether it holds or not. A break through this level accompanied by a sharp move lower in the long bond would indicate a shift back towards inflation fears on the part of traders/investors. Discerning any clear trend in these extremely volatile and illiquid markets at this time is an exercise in futility given the erratic price action.

Gold - 4 Hour & Daily chart update

Following below is a daily chart showing the current negative posture of the gold market from a technical perspective as it remains below the 50 day moving average which is also flattening out and attempting to turn down. This level needs to be regained to put a more friendly face on the daily chart. Note also the longer term 100 day moving average which continues to rise and above which gold remains. That brings added technical significance to the $1470 level which closely corresponds to the horizontal support level noted on the chart.

Momentum is currently bearish and will need to break above the steeper downtrending red line to give evidence that some hedge fund type buying is picking up.

Yesterday it was Global Slowdown fears and deflation - today it is Inflation fears

Yesterday the hedge funds were busy jettisoning commodities across the board ( We don't need no stinkin' commodities); today they are back in love with them (Alas, we love thee, we surely do).

The difference is that most are expecting the Greek bailout to go through and make everything well with the world once again. That is why I keep stating not to read too much into one day's price action. Tomorrow? Draw a straw or throw a dart - you are just as likely to come up with the prevailing sentiment for that trading day as a chimpanzee. In psychological terms they call this manic depression but it now passes for hedge fund trading "strategy".

Take a look at the Daily CCI chart. Note the hedge fund selling orgy that occured last Friday and continued into yesterday's session. Risk was out and so were commodities. Today, risk is back in and so are commodities.

If you note however, the CCI is negative for the year as it is trading below last year's closing price. In other words, backing away a bit from the very short-sighted near term price action, commodities as a whole have fallen out of favor for the time being as traders fear a slowdown in the overall global economy. The Fed's refusal thus far to hand out more goodies in terms of another round of Quantitative Easing has ruined the commodity party as rallies are getting sold. The hedgies are off looking elsewhere for greener pastures. They are having huge trouble finding one however. As soon as they think there might be the faintest hope of discovering one, all of them go plowing everything that they have into that asset class or sector as they make fools of themselves by their undisciplined trading patterns.

As mentioned in my radio interview on KWN this past weekend, I am looking to see what level it is on this chart at which buying will surface that indicates a solid bottom has emerged in the sector overall. This has not yet occurred especially with the weekly trend moving lower at present.

My own view at the current time is that the bottom in the CCI will coincide with a confirmed top in the long bond market. That has not yet occurred as it will take a solid close below the double bottom near 123^23 to confirm such an event.

Given the state of flux and the uncertainty reigning over the markets, the bonds are totally capable of reversing to the upside and negating any downside signals should the papering over of Greece's problems fail to stem the bleeding or should any of this spread to Spain, Portugal, Italy or Ireland. I have said this about the bonds previously - they can reverse to the upside on a moment's notice with all the cross currents and headwinds facing the global economy.

One has to keep in mind that in spite of today's "euphoria" and schizophrenic move higher in the equities, the Consumer Confidence level just hit a 7 month low here in the US. Perhaps some are looking at the price of gasoline which has come down off its peak levels helped by an obvious politically motivated release of crude oil from the SPR and thinking that consumers are going to run right out now that they can fill up their cars a bit cheaper and start stocking up on LED TV's, cool 4 wheelers, new jet skis and boats or even some nice new SUV's or crossovers.

Whatever the thinking, the bloom is off of the bond rose for today as the safe haven flow into that asset class is being reversed with traders loading the boats back up with equities and commodities. It does appear to me however that without some sort of fundamental sea change, rallies in the commodities and equities are going to be sold without a definitive announcement of some sort of further monetary accomodation forthcoming from the Fed. There simply is little hiring take place and the housing market is not yet showing any signs that it is ready to work higher and reverse the current trend that is entrenched. QE has not given any evidence that it has worked to generate job creation and that is the Achilles heel preventing any significant economic improvement. It is one thing to muddle along the bottom and not get worse; it is quite another thing to see actual solid economic growth. That takes a change in policy and is not something that we can expect to see from the anti-business Obama administration.

Gold is reacting higher today and has been able to climb back above psychologically important $1,500. It is fading off its best levels of the session however as we near the end of pit session trading. It needs to recapture $1520 to give the chart a bit better looking perspective however. Right now it looks weak. Given the fragile nature of things economically, the market has buying beneath it but any market trading below its 50 day moving average, as gold currently is, cannot be said to be in a bullish posture. That is why it needs to climb above $1520 to turn its chart picture a bit more friendly in the short term. Remember that this level was also the bottom of its recent trading range and had been serving as a floor of buying support before it gave way last week. It is now serving as selling resistance and the bulls are going to have to absorb any offers there if they hope to take it back towards $1550 once again.

Random Thoughts on the Passing Scene

In some private emails I have received some of the writers have expressed fears of a 2008 type meltdown in the precious metals whenever they see me use the word, "deflation". Let me try to address this somewhat here on the website so as to avoid having to make an individual response repeatedly.

First of all, when I use the word, "deflation", I am talking more about the symptoms rather than the causes. My understanding of the actual word is a reduction in the money supply evidenced by falling prices. It is the latter part of that sentence I am particularly interested in. For comparison's sake, when I use the word, "inflation", I am also more interested in the symptoms, i.e. rising prices, rather than the causes behind it which is an increase in the money supply not matched by an increase in productivity.

Regardless, the point I am making when talking about the forces of deflation battling it out against the forces of inflation, is one which means a period of falling prices versus a period of rising prices.

As you aware of by now, the Fed has been at war with the forces of deflation ever since the credit crisis erupted with the failure of Lehman Brothers back in the summer of 2008. Lehman was not the cause; it was merely the first victim. The result was a massive unwinding of highly leveraged speculative positions which drove asset prices lower across the board. Whether it was equities or commodities, it did not matter. They were all taken down hard as the Yen carry trade was unwound and money flowed back into the carry currency (the Yen) and into the Dollar as those short positions were lifted.

Enter the Fed into the fray. They began round one of QE which consisted of buying up the Mortgage Backed Securities and other alphabet-named securities which were plummeting in value and threatening to wipe out the balance sheets of the big banks who were greedy enough to buy and sell those things. That combined with the TARP program provided an enormous surge of liquidity into the markets which lifted both equities and commodities across the board. You had a classic example of the Fed ramping up the money supply in order to stave off deflationary forces. The policy was deliberately inflationary and had its intended affect. It also drove the Dollar sharply lower.

When QE1 began winding down, both the commodity markets and the equity markets began fading off their peak levels. With the economy showing that it lacked sufficient traction on its own to be able to grow at a sufficient pace to generate new hiring or one that made policy makers feel comfortable, QE2 was announced and then implemented. That had the immediate effect of unleashing inflationary forces into the economy in the sense that the liquidity it produced through the increase in the money supply shoved equity and commodity prices higher once again. Once again the forces of deflation (falling asset prices) were beaten back and once again the Dollar moved lower.

Now that QE2 is ending and the economy still shows no signs that it is growing at a pace strong enough to turn the labor markets around, prices of assets are dropping once again. Both commodity and equity markets are moving lower. In other words, this is a deflationary environment although it must be pointed out that the move lower in prices is starting from a very high level in the commodity sector as a whole. Gold is near $1500, crude oil is closer to $90, and corn is close to $7.00. None of these price levels can be considered cheap. So please keep this in mind when I use the word, "deflation", that I am not saying corn is headed back to $3.50, crude oil to $35-$40 or gold to $680 - $700. I am merely saying without the Fed created liquidity to goose up the money supply, prices are responding to the decreasing liquidity and are moving lower, albeit from a higher level. Eventually this will show up at the retail or consumer level but there will be at least a 3-4 month lag, if not a bit more. Prices will come down but will still remain high by historical standards.

This is one the reasons that I believe we will see another round of QE if Bernanke and the Fed feel it is warranted, even though they will face criticism should they do so. You will recall that throughout the rise in commodity prices, the Chairman repeatedly stressed in his testimonies before Congress and in his speeches that the rise in commodity prices was moderate and was temporary. I disagreed then and still do now that the rise was moderate (a move from below 400 in the CCI to near 680 in the CCI is not "moderate") but we all must admit that the index has come down lately and so have the prices of most commodities at the various commodity futures markets.

Having set a benchmark with these extremely high prices, any move lower in commodity prices will be measured against that new benchmark. Should the stock market take out a major downside support level and the economic data turn from bad to worse, Bernanke could rightfully argue that he has "upside room" for another round of QE in terms of commodity prices seeing that they are off recent highs. In other words, the public has now been conditioned with a spike to high prices and any move down from those levels will be seen as relief even if the price stabilizes at a new, permanently higher price level. When corn moves from $3.50 to nearly $8.00, a drop down towards $6.50 will be seen as a bargain even though the price is now $3.00/bushel higher than it was a mere 3 years ago. Same goes for crude oil. A drop from $120 towards $90, or even $80 or $70 will make the stuff look dirt cheap even though it will be trading at twice the price it was back in 2008. The list could go on and on.

What we are seeing then is a sort of three steps forward, two steps back in the commodity markets in terms of prices. The public, whether it realizes it or not, has now been conditioned to accepting the new and permanently higher price levels some of which are tied directly to the loss of purchasing power of the US Dollar. The new NORMAL is higher prices. When another round of QE comes our way, the drive to the former peak will be seen as inflationary but the impact will not be as psychologically devastating as was the first surge to these record highs. The next time it will be met with more of a yawn unless prices surge past these old peaks. Then the cries of inflation will arise once again, the Fed will face another round of criticism and the cycle will be repeated as they back off from stimulus yet again.

In such a fashion will the battle between the forces of deflation and inflation play out with the loser being the middle class and those who do not realize what is happening to their way of life.

Trader Dan interviewed at King World News

Please click on the following link to listen to my regular weekly radio interview with Eric King on the King World News Weekly Metals Wrap.

http://tinyurl.com/6xnq226

Continuous Commodity Index signaling Deflationary Forces are in the Ascendancy

Those of us who have nothing better to do with our lives than to sit in front of computer screens watching prices change have been watching the battle being waged between the forces of Deflation and the forces of Inflation ever since the credit crisis erupted back in the summer of 2008.

On the one hand is the relentless and merciless pressure from excessive Debt and all the issues arising from that; on the other hand has been the Federal Reserve and its monetary stimulus programs, aka, Quantitative Easing or QE for short. When the Fed has entered the Fray, the forces of deflation have been routed and run off the field. When the Fed withdraws, the opponents regather and send out their war parties to hack and slice once again.

This battle can be seen through the chart detailing the price action of the commodity sector as a whole, namely the Continuous Commodity Index or CCI. As the Fed wins ground, the index rises; as the Deflation forces triumph, this index falls. Right now it is falling and falling in a big way as once again it is threatening to put in a major top on its longer term weekly chart.

Take a look at the two red support levels shown on the chart. The upper red line was the previous bottom made in the index earlier in the year which was broken early last month as traders began suspecting that the Fed was going to indeed end the QE2 program at the end of June. However, they began second guessing that notion with the result that prices were able to rebound and move back above this level and push towards 660. However, as economic data continued to deteriorate and fears of an overall global slowdown increased, the index has now dropped lower through the upper line and are pressing into the lower red line confirming that a double top in indeed in place for the overall commodity sector. The price action is indicative of a market in which a "SELL THE RALLY" mentality has replaced one of BUYING DIPS. In other words, traders are looking for lower commodity prices ahead as they anticipate deflation and not inflation. Only if prices are able to immediately move back above the upper red line will one be able to say authoritatively that inflationary forces are rising in the minds of investors.

If you will also note the particular technical indicator I have chosen to overlay on this price chart, the Directional Movement Indicator, you will see that the solid black line, or ADX, which began rising in July 2010, and accompanied the rise in the index all through February of this year (indicating a STRONG TREND HIGHER) turned down at that point indicating a pause in the ongoing higher trend. The blue line or Positive Directional movement indicator has been trending lower since December of last year while the Negative Directional Movement Indicator, or red line, has begun trending higher since February of this year. What this indicator is telling us is the trend toward higher commodity prices is over for the time being. The upside crossover of the Negative Directional Indicator ABOVE the Positive Directional Indicator, is BEARISH.While the index has not yet fallen through the lower of the two red support lines on the chart, it is signaling that weakness in the sector lies ahead.

The last line of defense will be the rising 50 week moving average what comes in near the 600 level. This level now takes on increasing significance as we move forward. You will note how it held back in April/May 2010 when talk began surfacing that the Fed was going to come up with some sort of additional stimulus to take the place of the then expiring QE1 program. Once that QE2 was announced, the index accelerated higher. Now that the end of QE2 is here and there yet appears to be no improvement in the overall economy nor any concrete steps for a QE3 or some further stimulus from the Fed, the index is breaking down once again. Should it move towards 600 and fail there, we will be entering a deflationary period.

Mr. Bernanke left the door open for further stimulus from the Fed should the economy not respond and economic data continue to reflect deterioration. One suspects that the market is going to force the hand of the Fed sooner rather than later. Again, this Fed has signaled clearly that it is deathly afraid of deflation and will do whatever is necessary to stave it off.

Additional proof of the deflationary mindset taking hold has been the relentless move higher in the bond market which is moving in a manner suggestive of global slowdown fears. While the Fed enjoys the lower long term interest rates (as does the US government which is keeping its exorbitant borrowing costs lower), they do not want a rally in the bond market of the nature that would see money exiting stocks and other assets.

Gold under pressure from SPR release and abysmal Jobless claims number

What a difference a single day can make! Yesterday, gold managed to punch through $1550 and close above that level at the end of pit session trading but as the afternoon wore on, it slowly slid lower and inched closer to $1550 once again. As the market opened for early Kangaroo trading, it then fell back below $1550 and remained a tad weaker throughout early Asian trading. That all came to an abrupt end when news hit the wires that the US was releasing some 30 million barrels of oil from its Strategic Petroleum Reserve (SPR).

Crude oil immediately swooned falling below $90 (it has since recovered). As it did, the hedge fund algorithms kicked in and began unloading commodities across the board. If that were not enough, the Jobless Claims number reminded the entire planet why those who were filling our ears with their nauseating talking points of "Green Shoots" some months ago, should have to do mandatory community service on the Discovery Channel's, "Dirty Jobs" show. The number was terrible.

That sent the risk aversion trades into high gear and out the window went everything that did not resemble a US paper IOU or the Dollar. IN looking across my quote screens this morning, the only commodity on the planet that I can see which is currently showing green is the Cocoa market. Everything else is in the red. Time to hoard chocolate.

The result of this hedge fund carnage has been to send the CCI (Continuous Commodity Index) crashing down to major chart support just below 630 and the S&P 500 to within a few whiskers' width of the psychologically and technically significant chart support level of 1250. If the CCI and the S&P crash through those levels the Fed is going to be forced to do some sort of stimulus on the monetary front as it will signal a deflationary mindset has now gained the ascendancy. Based on my reading of Bernanke's comments yesterday, I think he left the door open for such action if they believe the need should arise.

I might add here that the oil release from the US of $30 million barrels of crude is equivalent to less than TWO DAYS TOTAL USAGE here in the US. Call me cynical but while the release was much heralded as a response to the loss of Libyan crude oil in the marketplace thanks to Mr. Obama's "kinetic military action" or non-hostile hostilities over there, I believe it is totally related to the same's poll numbers which are going down the toilet faster than an unwanted baby alligator which has gotten too big for its 55 gallon aquarium. High gasoline prices are threatening to make him a one termer (I can only hope) and what best to do but to dump some oil on the market to try to knock a dime or so off the price at the pump. Here's a new flash to the clueless one - instead of these cheap political gimmicks, stop spending money that we do not have and open the country up to domestic drilling. That would actually be a much better long term fix instead of playing political games with what is supposed to be for emergency purposes. The only emergency that I can see is his sinking poll numbers and that is no emergency as far as I am concerned but rather cause for rejoicing.

Back to gold however - the failure to extend past $1550 has sent the market back down into the former range with $1550 on top and $1520 on the bottom. Buying associated with sovereign debt fears is keeping it from sinking much below that $1520 level for the time being. ECB President Trichet today said that the risk signals from the situation in Greece are "flashing red" as far as stability in the Euro zone are concerned. That is why gold is so firm on the Continent. Earlier in the session gold had just posted another all time high when priced in British Pounds and still is very close to its all time high price in terms of the Euro. Fears of some sort of contagion spreading to the big European banks are running very high over there. As long as these fears remain downside in gold will be limited, even with the hedgies throwing everything out the window.

The HUI and XAU are both moving lower in conjunction with the weakness in the broader equity markets but thus far remain above the recent lows. The XAU currently looks to be the stronger of the two indices as the large caps are holding better than the juniors generally speaking.

The Dollar is on a tear higher but has yet to take out the 76.50 level on its chart. Until it can do that convincingly, it remains rangebound also.

I will try to get a later update on gold this afternoon after we get a chance to see how things are when the dust from all this commotion settles a bit. Heck, they knocked the old crop corn market down the limit yesterday and ran it to extended limits today but it has since rebounded well off its lows. Certain markets will respond to their fundamentals once the technical fund selling has exceeded value levels. The algorithms ALWAYS overdo it - either to the upside or to the downside.

Gold chart analysis

The FOMC release this morning basically reaffirmed what most of the market has been thinking for some time now, namely, that the economic "recovery" is proceeding at a moderate pace though "somewhat more slowly" than had previously been expected. What a surprise? It is more like "YAWN".

The translation - they will be keeping interest rates near zero for the next few months, or in their words, "an extended period of time".

They repeated that the QE2 program would come to an end this month but at this point they had no intention of actually reducing their balance sheet or selling any of the $600 billion in Treasuries which they have purchased over the last 6 months or so. What they will do however is to reinvest the proceeds from maturing Treasury bonds. That will give some stimulus but compared to the massive sum of $600 billion, amounts to a drop of water into the bucket.

Gold liked what it heard and shot higher taking out the sellers who had been stalking the $1550 level. They were forced to retreat towards $1560.

From a technical perspective, the strong move past this solid resistance level, takes the market out of the recent tight range trade bounded by $1550 on the top and supported at $1520 on the bottom. It is now poised to make a run towards $1570-$1575. Downside support moves up initially towards $1540 followed by good support near $1530.

Keep in mind that this is occuring during the summer, not a time in which one generally expects to see a very strong gold market. A grinding move higher during this time frame would set this market up for a move to a fresh all time high later this year when the seasonally stronger period of the metal arrives. This just further underscores how currency concerns are moving gold as distrust in paper currencies continues to increase. Gold is signaling investors' lack of confidence in their monetary authorities and political leaders.

By the way, Gold priced in British Pounds set another all time record high price today.