Gold Chart

Gold has come off of one horrific week in terms of price action. As noted on the price chart, the metal pushed into the region where it recently had its LOWEST CLOSE in some time. You might recall that after the spike down towards $1320, physical demand was unleashed in what can only be described as a torrent. That demand spooked bears and resulted in a wave of short covering that took price nearly $160 off that low. It was at that point that the big selling re-entered.

The resistance at $1485 - $1475 proved to be a bridge too far and down went the metal. It encountered some decent buying near $1440 but once that gave way, especially once $1420 collapsed, sell stops did the rest. Once it lost its "14" handle, many buyers stepped back, expecting that downside momentum would enable them to acquire the metal even cheaper.

I am now watching to see whether or not this market can hold support down at the shaded rectangle I have marked on the chart. Personally, I am welcoming this move back to that recent low because I want to see how it now responds. I do not like buying into markets with spike lows or selling spike tops mainly because the risk/reward can be too great based on the entry point and the exit point that tells you that the trade has soured. A test of a low, that holds is a much better entry point with lower risk. The flip side to this is that if $1320 fails to hold, it will confirm that bearish flag formation noted on the chart with a potential price projection down closer to $1100. Yikes!

It did not help matters any for gold to see in the most recent 13F reports to the SEC, that very large institutional investors have been jettisoning their shares of the gold ETF, GLD. Northern Trust dumped some 910.5 thousand shares alone in Q1 with BlackRock in second place dumping 428.5 thousand shares. If you take the largest institutional investors combined, their selling accounted for nearly 75% of the shares being dumped in GLD.

Paulson is holding firm but it would appear most are not. This is where the pressure keeps coming on the paper markets over here in the West. Institutions see no reason whatsoever to own the metal when they can better put that client money to work achieving historic gains in the US equity market bubble.

The current investing strategy is therefore very simple here in the West - SELL EVERYTHING GOLD and GOLD RELATED and buy equities; i.e. anything that is not a gold or silver mining equity.

With nearly every single passing day bringing us yet another new lifetime high in US stock markets, the pattern is clear - institutional money, and hedge fund money, are buying equities in what they now firmly believe is a NO LOSE SCENARIO. This sure bet is what the Fed and the Central Banks globally hoped to create and they have done just that.

As mentioned many times here - trying to fight the tape is a fool's errand. Traders have to go with the money flow. Investors had better be damned careful is all that I can say. There is a vast difference between trading and investing. This is coming from a professional trader so please do not casually dismiss this.

The Fed has managed to annihilate the very concept of "RISK". If anything, the only risk that now exists is the RISK OF NOT BEING IN the STOCK MARKET and angering your clients who are sure to take their money elsewhere. Money has no loyalty - it goes to where it can gain the largest yield and all money managers understand this. If they wish to retain their client base, they must chase stocks, whether or not they want to. Again, this is just  a reminder, they are not investing client money - they are trading it.

We are living through monetary history. Others coming behind us are going to pour over this period that we are privileged to be first hand participants in trying to come up with explanations for this speculative frenzy in equities that we are now experiencing. Mark it well and remember it; you can tell your kids and grandkids what it was like to watch an entire generation collectively lose their minds and throw caution out of the window. This is what ZERO YIELD environments produce.

Surging US Dollar derailing Gold and Silver

This past Wednesday I posted a chart of the US Dollar detailing its strength from a technical chart perspective. Based on today's price action, in response to a surprisingly strong Reuters/University of Michigan Consumer Sentiment Index, the Dollar has cleared  a major chart resistance level and now looks to be on target to challenge the 85 level, which is the last major block preventing it from returning to its former double top up near the 89 level. I would refer you to that chart in the previous post from Wednesday to see for yourself the remarkable strength currently being exhibited by the US currency.

I should also note here the continued extremely weak showing by the Australian Dollar, a currency whose fortunes typically tend to parallel the overall commodity sector. After falling below par with the US Dollar last Friday, May 10, it has continued moving lower dropping a further 3% against the greenback this week. A falling Aussie does not bode well for the overall commodity sector in general.

With the US Dollar soaring higher, with consumer sentiment ramping up towards the economy (no doubt the precisely desired outcome by the Central Banks when they created the perfect conditions for a bubble in the equity markets), consumers are feeling the wealth effect which comes from seeing their 401K's, pensions and other retirement plans increasing nearly every single day, while at the same time poor demand for unleaded gasoline has sent prices dropping at the pump. Hey, what could be better than this?  My investments are soaring, my costs are the gas pump are dropping and my food bills are even going lower, is the thinking of the average consumer out there right now. Smile, relax, enjoy life, be happy, - there isn't a care in the world.

You have to hand it to the Central Banks; they appear to have made fools out of the honest money crowd and upended the laws of economics and the very theory of money itself. Apparently we can have our cake and eat it too. All we need to do is to have the Central Banks create unlimited amounts of paper money and we can forego any concerns whatsoever about debt.

I must admit to being an adherent to the Austrian school of economics. Right now, we look like well-read DOLTS with all our predictions having been proved utterly wrong.

I tend to use sarcasm here at this site quite frequently to make my point but this time around I am not being sarcastic at all - if the Fed, the Bank of Japan, etc., can create Trillions in Dollars, Yen, etc, with no inflationary fall out whatsoever, If they can create these sums of "money" with absolutely NO EFFECTS OR CONSEQUENCES,  if they can create a runaway bull market in equities, if they can simultaneously drive commodity prices LOWER in the process of so doing, and if they can create conditions in which consumer sentiment can actually move higher, why stop at all? Why not merely have the Fed and the Bank of Japan just keep their bond buying programs in place indefinitely? I am serious - why even bring up the subject of an exit from the QE stuff? After all, they have been engaging in this stuff for years now without any fallout so why stop? Just keep it up into perpetuity thereby guaranteeing a permanently rising stock market with a never ending wealth effect for the average citizen. After all, who wants to leave Nirvana and go back to the messy details of the real world where things like debt and living way beyond one's mean can pour cold water on our wondrous illusion!

Or to put it in terms of popular culture - who in the hell would want to take the RED PILL when they can eat the BLUE PILL and blissfully live in the Matrix? The RED PILL brings pain, discomfort and despair that comes from understanding the truth. Those in the MATRIX can continue to watch Reality TV shows and live out their own lives vicariously through that of others.

Interestingly enough, wages remain flat so while consumers are not bringing home more disposable income, their costs are dropping making them feel better about things in general. I am sure it is now only a matter of time before they start rushing out and begin loading up on those big ticket items; cars and trucks, ATV's, recreational vehicles, new appliances and big screen TV's.

Given this state of mind, is it any wonder that gold is being unceremoniously jettisoned over here in the West? Heck, even the "safe haven" bond market is breaking down. Just today, the yield on the Ten Year note has reached as high as 1.95%! Less than three weeks ago it was yielding 1.6%!

"Safe Havens?" "We don't need no stinking safe havens"!

US Dollar Attempting Weekly Breakout

The strength in the US Dollar has mainly been coming from investors fleeing Europe leading to an outflow from the Eurozone plus Japanese bond investment money that is in search of higher yields. Quite frankly, in the search for yield in a NEAR ZERO interest rate environment, global investors are throwing caution and any reservations that they may or may not have out of the proverbial window and rushing into the US equity markets in anticipation of further ONCE IN A LIFETIME TYPE GAINS.

In other words, the Central Banks have unleashed a speculative frenzy for stocks which is creating a massive equity markets bubble, especially here in the US. As money flows out of various portions of the globe looking for a home in US stock markets, that money must be EXCHANGED for US Dollar with which to buy US stocks. The result - the Dollar is surging higher while the Yen and Euro, along with the other majors, are dropping lower. In other words, foreign money flows are driving the US Dollar higher (this is in spite of the clearly and visibly dysfunctional US government and corruption currently enveloping it).

I expect this to continue until something rattles the cages of the equity bulls. What that might be or when it might occur is anyone's guess at this point. Manias of this nature can continue well past the point of sanity. When they end; they end in a blaze however.

While it continues on, the US Dollar keeps getting pushed past various chart resistance levels. I have noted this week's push into a band of resistance starting near the 84 level and extending up to the session high of today near 84.25. IF, and it is unclear yet, the Dollar closes the week ABOVE this level, it has one more obstacle to clear before it sets up technically for a run all the way back to the double top formation at 89. That last level of resistance is the 85 mark.

It is the confluence of the pitchfork and the 75% Fibonacci Retracement level from the doble top back in 2010 and the low in the summer of 2011 near 73. From a strict technical analysis perspective and based on Fibonacci retracement theory, a market that pushes through the 75% retracement level,can be expected to retrace the entirety of the preceding price move. Translation - back to 89 the Dollar goes.

I want to add here that this rally in the Dollar is that which has been undercutting the entirety of the commodity complex. Hedge fund algorithms are mechanically selling across the sector. Gold is being included in that. While physical market demand remains firm, sentiment towards it in the West remains miserable. It is all about YIELD, YIELD, and YIELD. Gold throws off no yield and stocks do. That is what this is all about right now.

Sell Stops Cascade Gold Down Below $1400

Bears have been salivating at reaching downside sell stops for a while now but had been stymied by strong physical buying of the metal which had kept prices supported. With the US Dollar continuing to strengthen, and with commodities in general seeing strong selling pressure, they finally got their wish in today's trading session.

Price fell through some initial support near the $1420 level which had held the market for the last few sessions but once that gave way, downside pressure intensified until bears took it down to near $1410. Just below that they hit their jackpot and reached the sell stops. It was those stops going off that knocked price through the psychological floor at $1400. That allowed another $10+ fall in the price of gold where some short covering and bottom hunting surfaced right below $1390.

I have noted the next level of chart support for gold. It is currently just beneath today's session low of $1389 coming in closer to the $1385 level. If that does not attract sufficient buying, price will fall down into the rectangle I have noted on the chart somewhere in the vicinity of $1375 - $1365.

I want to note here yet again how volume continues to increase during these downdrafts. This is not a bullish pattern. Bears are firmly in control until we see the volume shift along with the price action.

With the mining shares completely collapsing, there is really no other catalyst for bears to aggressively cover their positions right now other than booking a few profits. Like it or not, approve of it or not, the US Dollar is the strongest game in town right now as investors globally see the US as the best place to stash money. It is a pity that the Treasury International Capital Flows data is so dated by the time we get it but I would wager good money that the component breaking out the foreign money inflows into equities is soaring.

Either way, the strong Dollar is keeping gold buying in check. One thing I might note here - that same strong dollar is now beginning to impact US exports of agricultural goods.

It's funny in a perverse sort of way that the Bank of Japan, which is printing about $74 billion each month in an effort to stave off deflation is seeing that extra supply of Yen drop its currency into an abyss while at the same time, the Federal Reserve is printing an equivalent value of some $85 billion each and every month while its currency soars blissfully into the upper levels of the atmosphere. You tell me how to mentally wrap ones mind around this sort of perverseness. All I know is that Bernanke and Friends have concocted a new elixir and discovered the Holy Grail of Permanent, Pain Free, Prosperity. We really are seeing the very concept of "MONEY" redefined right before our eyes!

Incidentally, LUMBER made a FRESH SEVEN MONTH LOW today.... Homebuilding must be gangbusters right now... (note the sarcasm here).

Gold Range Bound; Drifting Lower

Gold continues with its lackluster performance of late since failing to extend its bounce past overhead resistance between $1475 - $1485.

With equity markets continuing to head vertically north, hedge funds are not interested in safe havens of any nature, be that gold or Treasuries. For that matter, they are not the least bit interested in mining equities either.

Sentiment towards gold among the Western investing community is horrible. It is strong Asian demand which is keeping this market supported. Had it not been for that, gold would never have managed to climb as high off that recent crash lower as it did.

From a technical standpoint it had been trading in a range bounded by $1485 on the top and $1440 on the bottom. That has given way to a new and lower trading range with $1440 now serving as upside resistance at the top and $1420 or so on the bottom.

As mentioned in my post over the weekend, until investors get rattled

either by fears of inflation (judging from the TIPs spread they are no where near so doing) or until some event occurs which rattles their confidence in the Central Banks money creation theme, it is difficult to see sentiment shifting back towards gold among the hedge funds.

The commodity sector, in general, is continuing to move lower which is mind-boggling considering the extent to which the Central Banks have goosed the equity markets with their short-sighted bond buying programs and other easy money policies.  A thinking person would look at the given reasons for rallying stock prices and connect the dots with the idea being if economies were strong enough to engender a stock rally of this magnitude then surely demand for physical commodities, which normally accompany any period of true economic growth, would be rising, not falling as it currently is.

It all just confirms in my mind the disconnect from reality which is currently being seen in this equity phenomenon. For any of your Star Trek fans out there, it is like something that has been programmed into the ship's holographic program array and into which the crew could escape to live out their fantasies. In this case however, it is real enough in the sense that fortunes are being made chasing equities higher on Wall Street. This is a "sure bet" and Wall STreet loves a sure bet.

The result of this madness is that the  word, "RISK" has been rendered meaningless, a non-entity, a bizarre leftover from an ancient world of men by these paper money alchemists. Until it recaptures its meaning in the minds of men, I find it difficult to see why gold will mount any sort of SUSTAINED rally.

Generally speaking, hysterias of this nature end badly. I maintain that it will. Traders can chase stocks higher but investors, need to be extremely careful with this market. It is rising on air and nothing else of substance.

By the way, check out this chart of lumber - sure makes me wonder where the homebuilding industry is heading!

Quick Overview of Gold

Gold has had a nice bounce off the 1320 level due to robust demand for the actual metal, especially out of Asia. The problem for the metal here in the West is that speculators, most notably hedge funds, are eager sellers of the metal with many pressing it from the short side while others have yanked their money out of the metal to shove it into stocks so as not to miss the rocket blast higher and have to deal with unhappy clients.

I have been concerned that physical demand for the metal will wane as the price moves higher with those who are intent on acquiring the metal waiting, hoping, for a chance to buy it down below $1400 again. Whether they get the chance to do that remains unclear at this point.

I would like to note that the metal has now completed a sizeable bounce off that recent low but has run out of steam when it entered the $1475 - $1485 zone. In the process of so doing, it has carved out what is referred to in technical analysis jargon as a BEARISH PENNANT OR FLAG FORMATION. I have sketched the flag in heavy blue lines so that you can more readily see it. Normally this pattern forms after a steep drop in a stock or commodity which is followed by a mini uptrend. That uptrend then fails and the stock or commodity begins to move lower again.

Some TA analysts will use a break of the lower trend line formed on the actual flag portion of the pennant (think of a flag for a golf course hole and you will be able to visualize it better - In this case of a bearish flag it is an upside down golf course hole flag) - to validate the flag. That is an aggressive posture. I am much more conservative especially when you do get a recovery bounce of the nature and size that we saw occur in gold. I prefer to see the actual bottom of the flagstick taken out before confirming a flag. After all, a bounce off the recent low of some $160 is rather significant. Now, if gold had managed to claw its way back only to $1400 or so before failing, I would be a bit more aggressive but the size and extent of the buying down at that $1320- $1340 level was so strong that only the most aggressive of traders would want to call this flag validated merely because it drops through the lower trend line.

Generally how these formations are used, whether it is a bullish flag or bearish flag, is to measure the length of the flagstick. In this case, that flagstick starts up near $1590 and extends to $1320 for a measurement of $270.

If we use the case of the aggressive trader who decides that a break of the lower trend line (the pennant) has validated the flag, that $270 then gets subtracted from the breakout point, approximately $1470 in this case, to give us a downside target for the next leg lower. That would yield a gold price near $1200 as a final target.

As just stated, I do not recognize a valid pattern here until the bottom near $1320 were to give way. Gold may never reach that point or it may. I simply do not know. If it did, then I would consider the pattern validated if that level failed to hold and would have to look for a gold price of $1320 - $270 = $1050.

Let's just hope that we do not get a violation of $1320!

TIPS SPREAD - Inflation Expectations still Subdued

Those who regularly read this site will know that the last two days' worth of action in the interest rate markets has piqued my interest. I am still unclear on what the rather sharp rise means and whether it is just movement tied to currency market volatility or it is a reflection of something else.

I have gone over to look at the TIPS spread to see if there is any pattern or development there that warrants further attention.

Thus far I do not see anything of note. There is no spike higher indicating a shift towards inflation worries in the market at this point even though yields have risen.

As you can see, back during the depths of the credit crisis, when deflation fears were at their peak, the spread collapsed almost to zero. That meant that the market had basically ruled out any chance whatsoever of the least bit of inflation.

Since the Fed has gotten involved with the QE programs, the spread has moved up towards 2.5 and then dropped off as the various QE programs ran their course and expired (You can see where the inflation expectation falls below 2% when the market feared the impact of a QE cessation). As each new QE program was announced, the market built back inflation expectations between 2.0 - 2.5% or so. Currently we are looking at an expected inflation rate by the market of 2.3% as of Friday this week.

It seems to me that the Fed is using this indicator as a means of determining whether or not its policies are having the appropriate impact on investor sentiment. Based on what I can see of this spread, those Dovish Fed governors who are expressing concerns about inflation not being high enough do not really have much to justify their concerns.

I think we would have to see the spread move below 1.75% to give their view any credence. I would think that if the market believes the economy is strong enough on its own to no longer need any QE efforts, talk of ending that program would not move this spread to narrow significantly. In the past, when those programs expired, the market moved back towards expecting deflationary pressures to begin reasserting themselves.

The flip side to this is the ceiling on this spread. Since the beginning of 2008, the spread has not exceeded 2.64%. Anytime it has run up above 2.5% it has not lasted long even with all the massive QE. It just goes to show you that in spite of the enormous sums of money that have been created through the QE programs, it has barely been sufficient to offset the debt that was being extinguished. Inflation expectations have not been nurtured in spite of it all.

AT what point this changes is unclear but once this spread were to ever exceed that 2.64 - 2.65% level we would know without a shadow of a doubt what the market was thinking in regards to inflation. I still believe that at some point we are going to have to pay the piper for all this massive money creation; I am just not sure about the timing of it all.

Let's keep an eye on this spread to see if we can get any advance warnings of when that just might be.

Trader Dan Interviewed at King World News Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly interview with Eric King over at the KWN Markets and Metals Wrap.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/5/11_KWN_Weekly_Metals_Wrap.html