CME Hiking Margins on Gold

One look at the Gold Volatility Index is all we need to see to realize that the CME was hiking margins....

Initial margin for speculators is being raised from $7,040 per contract to $8,800. Maintenance levels are going to $8,000 from $6,400.

Obviously the computers there at CME Group are projecting a sharp increase in volatility....

S&P 500 cracks 50 day moving average - Again

Going back to last November's election, the S&P only remained below the 50 day moving average when there were TWO separate events that unnerved traders/investors. The first was the election of the current President which was greeted as a negative for business. The second was the drama surrounding the so-called, "fiscal cliff" drama unfolding in Washington D.C.

Once we moved past those two events, there has been only one day in which the S&P has CLOSED below the 50 day moving average. That occurred in April of this year and even then, it was only barely beneath this key level.

Today's shellacking, coming on the heels of a huge down day yesterday, has sent the index down quite significantly below the 50 day. As a matter of fact, it also fell below the former resistance level which had temporarily stymied its upward progress back in April before it gave way in May.

Tomorrow's close is therefore going to be significant.

That strong overhead bearish reversal pattern that formed in May has taken on new significance with this close below the 50 day moving average. We might just be seeing the shift from a "BUY the DIP" mentality to a "SELL the RALLY" mentality. If that is the case, it is going to manifest itself quite soon. We will then see overhead resistance levels capping rally efforts while support levels on the downside are broken as the market traces out a deeper move lower.

Based on what I am seeing in this chart, if this market cannot recapture 1620-1618 before the closing bell rings tomorrow, odds would favor a continuation  of the move lower down into a congestion range that was in place back in March/April. I have noted that on the chart.

As you can see, the upper portion of that range happens to also coincide with the 38.2% Fibonacci Retracement level of this entire leg higher since late November of last year. My guess is that the market will hold this level if it does indeed get there. If not, well, that is another different story....

During times of market fear, (the rising VIX tells us that we are FINALLY seeing some of that among the equity crowd), the bond market tends to be a safe haven with flows coming out of stocks and into bonds. Right now, flows are coming out of stocks, bonds and commodities; basically out of everything except cash and the Swiss Franc!

We'll see how long that lasts before the "stocks are cheap, cheap, cheap" cry starts up again.

Monthly Gold Chart

By request....


Note that this chart is based only on CLOSING prices for each month. I have included today's close as the price for June to give some sort of feel for where things currently stand.

The first major Fibonacci retracement level comes in near $1230 based on closing prices. I would look for a zone on either side of that of $10 for a target unless price can quickly recover and recapture $1300.

Gold Cost of Production

There are various estimates out there that are being tossed out but the general consensus for most gold producers is somewhere between $1200 - $1250 an ounce or so. Obviously, this is painting with a very broad brush as some producers have lower costs than others and some higher costs, but for a ballpark number, it is probably pretty good.

Some are speaking about production cutbacks if gold prices stay down near current levels or drop into that zone noted above. That is probably true but it all depends on the extent and duration of the lower gold price. If it dips down and pops up, production cuts will not occur. If gold looks as if it is going to linger down in that zone for any length of time, some of those cuts will undoubtedly occur.

The problem is that this is focusing on the supply side. The big issue in front of us is DEMAND. If supply falls off, it matters not one whit if demand is dropping at the same time. If supply falls off and demand increases, now that is an entirely different matter. What we are currently experiencing in gold is a fall off in demand, namely institutional demand as evidenced by the continued decline in the GLD holdings, not to mention the downdraft in Comex gold.

We will need to see some sort of stability in the price of gold before buyers will feel comfortable taking the plunge into mining shares again. When that does occur, there is going to be value found among those that are getting their financial houses in order, cutting costs and seeking to achieve value for shareholders.

Don't try to be a hero and catch a falling knife. Let the market tell you when it has stabilized. Underestimating the extent to which these hedge funds and their maulings of markets, both up and down, can destroy your trading capital is a serious mistake. The sums at their disposal are staggering and those who forget this need to be reminded as to how a grasshopper must feel when surrounded by a flock of hungry starlings.

Gold Crushed in Europe - Further Carnage in the US

Europe wasted no time in responding to the Fed's comments when trading commenced over there as an avalanche of selling swamped over the gold market crushing the metal below support levels that continued to give way in succession. As stated in yesterday's missive - institutions want no part of the metal right now as there are hardly any players who see the least signs of inflation on the horizon. Never mind that the costs of so many basic services and goods are rising - those are not caught in the government's numbers nor is the fact that consumer wages remain stagnant.

The economy may be improving in the minds of some but cash strapped consumers are finding their disposable income shrinking meaning that borrowing is going to have to increase if they hope to maintain their "quality of life". While the Fed wants inflation and is dreadfully terrified of deflation, they do not seem to be having much success at inducing the former yet most Americans all seem to realize that everything they depend upon for life is going up in price. Odd isn't it?

I am not sure whether the tail is wagging the dog or the dog is wagging the tail but one can see the interplay between what is going on in the equities and what is going on in the bonds. As the bonds sink, rising interest rates send worries down the spines of the equity crowd which is creating a sort of vicious feedback loop.

Keep in mind, according to my view, the entire US stock market rally has been nothing but a Fed-induced, artificially created bubble which has sent stocks to ridiculously high levels based on the anemic strength in the economy. If the sentiment, that one has to buy every dip in stocks, begins to come into question, then an awful lot of highly leveraged one way bets are going to begin coming unwound. When I see movements of this magnitude, I know some players, big players, are in trouble and are getting mauled.

About the only thing moving higher today is the US Dollar. There was some strength in the front month July hog contract but given this environment, one wonders how long that is going to last. Bellwether copper was kicked in its rear end and of course the readers of this site know all too well what has happened to gold, and especially to silver.

Silver is an inflation play, pure and simple. If there is no inflation in the minds of these big institutions, then there is no reason to own that metal and even more reason to short it. That is what they are doing having broken it down below a support level that I thought would prove a much tougher nut to crack that it did.

This is so eerily reminiscent of 2008 although this time around, the bonds also are proving to be no safe haven as they were back then. As a matter of fact, it looks as if CASH is the place that investors are running into for the moment.

The Australian Dollar, always a fairly reliable harbinger of the broader commodity complex, was pummeled today especially once the news that China's growth had slowed. Along that same line, the GSCI, or Goldman Sachs Commodity Index, was also beaten with an ugly stick.

We will have to see whether one or two days of this is enough to clear the air and bring some stability into these markets but with the excessive amount of margin debt and with extremely large trades going awry, anything is possible.

I will get some analysis and a chart up of gold later on today. Let's just say for now that losing support at $1300 was a big deal, a very big deal. Judging from the massacre occurring in the gold and silver mining shares, we are seeing a complete rout of even some of the long term bulls. The HUI looks like it is now poised to drop all the way to 200, pretty much back to where it was 5 years ago during the depth of the 2008 credit crisis.

Apparently the laws of economics have been discredited as it is entirely possible to create Trillions in paper currencies with no impact whatsoever. The monetary history books are all going to have to be re-written to reflect this.

Bernanke Speaks; Gold Clocked

The caption says it all - once the FOMC statement was released, followed by some comments from Fed Chairman Bernanke, that was all she wrote for gold. Down, down and down it went as the Dollar went up, up and up.

What the market is currently thinking is that if there is any nation where interest rates are going to rise, it will be in the US before it is anywhere else on the planet.

You combine that with equity markets that promise attractive gains, and large sums of money are moving out of their respective currencies and exchanging into US Dollars with which to buy US equities.

As the Dollar moves higher, gold is moving lower.

The problem for gold continues to be the same; investors do not see any signs of inflation, in spite of the Trillions of Dollars that have been conjured into existence, and hence need no inflation hedge. That, plus the fact that while there was turmoil across the world financial markets in the recent past, that seems to have come and gone as far as many are concerned. Where once the theme was "RETURN OF CAPITAL", now we are back to "RETURN ON CAPITAL".

In other words, since investor fears are basically gone for now, and since gold throws off no yield, and since they see no signs of inflation, they are dumping gold or shorting it.

Take a  look at the following chart of the GLD, the large gold ETF. Look at how there continues to be a drawdown in gold. Investors are selling out and moving the money elsewhere. For the first time in a very long time, the tonnage has fallen below the 1000 level. That is significant.

Now there is another issue to deal with and this is a technical one. I mentioned that there were a large number of sell stops building down below the $1365-$1360 level. The bears finally got to them in a big way today. In the process, they have really inflicted some damage to this chart.

The weekly gold chart is getting quite ugly to be honest. If gold does not quickly get back above that $1365 level before Friday's close, I am afraid that support is not going to hold down near $1320 and this market is going to reach psychological round number support at the $1300 level. If $1300 gives way, we are going to see a test of $1250.

Notice that gold is trading firmly under its 200 week moving average. The 50 week is moving lower and while the 200 day is still ascending, its slope is leveling off. Markets that are trading below their 200 day moving average are not bullish.

I have mentioned to the readers to ignore all that claptrap about hedge fund short positions, about big bank long positions, taking a contrarian position, etc,. and the rest of that useless COT analysis that so many novices keep touting. It means nothing - all that matters right now is money flows and they are leaving the gold market for the time being.

Something needs to occur to change speculative sentiment in gold. What that is right now is unclear. Even on the weekly chart, gold is firmly entrenched in a bear market having now fallen well off the 20% level from its peak at $1900. As a matter of fact, it is fully 30% off the peak.

At this point for the market to have any consolation for the bulls and to give a hint of a reversal, it is going to have to hold near that all-important 50% Fibonacci retracement level from the 2008 bottom noted on the chart. That is just above $1300. This is why that level must hold.

People keep talking about capitulation in gold. If gold breaks through $1300, you will see what capitulation looks like. I have said it once and will say it again; most of those who bought gold shares back in 2008 believing that they would provide some good protection against the wave of money printing that was going to be unleashed, are cursing the day they ever dropped one dime of their investment capital into those things. Maybe some day they will go somewhere; most of us will be dead and gone by then so hopefully our kids can earn something from them.

With the gold shares descending into the abyss, there is simply no evidence of speculative interest in anything gold or silver right now. Yes, physical demand is strong but it is not strong enough to take prices higher in the face of strong short selling in the paper markets and the continued exodus from GLD.

For now, the Central Bankers remain the Masters of the Universe. Thus far they have not been knocked off of their perches.

Incidentally, the one thing that threatens these demi-gods is the rise in the long end of the yield curve. Bonds are breaking down and yield on the Ten Year hit a 14 month high today! It has reached a level that has turned it back lower over that same period. If it continues rising, we will watch to see what if any impact is might have on the all important real estate market.

It still remains to be seen how in the world the Fed is going to ever be able to exit this QE business and reduce the size of its balance sheet. I suppose they could hold the paper they have until judgment day for all that most of the investment world cares. After all, the problem will be for another generation, is the thinking of our self-centered era.

Trader Dan Interviewed at King World News Markets and Metals Wrap

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

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/6/15_KWN_Weekly_Metals_Wrap.html

Japan Stock Market in Bear Market Territory

Watching the mood swings in the Nikkei puts me in mind of someone who would be considered manic-depressive. It has gone from Euphoria to acute Depression in the matter of 4 short weeks. The index has fallen over 20% from its best level this year which puts it in the category of official bear market territory. This is coming in spite of the Bank of Japan and the Abe administration's best efforts to kick the economy out of its state of deflation and induce a 2% annual rate of inflation.

What appears to be happening is that investors are losing confidence in the ability of the Bank of Japan to cure what ails this economy. Initially, upon the election of the new government, optimism that Japan's long season of discontent was finally coming to an end. The Nikkei began a monstrous rally that coincided with the sharp drop in the value of the Yen. However, what has derailed this bull train was the Japanese government bond market. It has proved to be a rebellious, strong-willed and recalcitrant child. Why? Interest rates are going the wrong way! The yield on the all important 10 year is going up, not down! This was not supposed to happen with the BOJ mopping up such a large chunk of those bonds on a regular monthly basis.

As interest rates have risen in Japan, the Yen is now reversing course and as it moves higher, it is sending stocks lower. What then appears to be occurring is a vicious circle in which the Nikkei then drops, sending the Yen higher, which in turn drops Japanese stocks lower, which in turn sends the Yen higher, etc... I think you get the picture.

The reason for this is those pesky speculators which were effectively herded, lemming-like in doing precisely what the Bank of Japan wanted them to do, namely, buy Japanese stocks, pushing the Nikkei higher and generating a wealth effect and a spillover happy optimism among the Japanese consumer and Japanese business. So much so that all the major hedge funds and large buyers of stocks had lost sight of the very concept of RISK. Why worry about that when the mighty BOJ was there to limit any downside moves in equities. As a matter of fact, let's just leverage our bets even more and load the boat for even bigger gains has been the thinking.

When the government bond market rejected this feel-good view, as bond investors wanted no part of locking in pitifully low yields for the foreseeable future, money came OUT OF JAPANESE GOVERNMENT BONDS to be put to work chasing yield in Japanese stocks. That sent interest rates soaring higher which is not want the Bank of Japan wanted.

As a result of this, money flows are violently reversing both in the short Yen trade and in the Long Japanese stock trade. That in turn is setting global equity markets on edge, particularly with all the noise surrounding the new buzz word in the US, "TAPERING".

Since we now live in the age of the zombie and the vampire in pop culture, we can call this newest movie, "The Rise of the TAPER". Sort of scares the hell out you just thinking about this hideous beast doesn't it?

Regardless, I have created a chart of the Nikkei futures indicating some potential support levels, which if it is going to stop falling, it will do so at these levels or else.

The first level of the support is a biggie. It is the 50% Fibonacci retracement level of this year's entire rally. It currently comes in near the 12192 level. Of all the Fibonacci retracement levels, this one is regarded as the most important. Generally, if prices are going to turn around, they will do so at this level. If they do not ( watch for an ancillary shock to US markets if they do not), they the index could drop down towards the red rectangle shown. That comes in between 11600 and 11200. If the Nikkei were to drop this low, I would expect the Yen to soar even more sharply putting even further pressure on the Yen carry trade. That would have big consequences for the entire financial market system, as heavily leveraged bets would continue to suffer huge paper losses.

MY guess is that there are currently a lot of phone calls taking place between the Fed and the Bank of Japan, along with the ECB.

How all of this would impact gold is a bit unclear right now. Back in 2008 when we had the massive unwind of the Yen carry trade, gold was clocked along with everything else as you recall. That was before all this Quantitative Easing began in earnest. Only the advent of QE reversed the bleeding as it encouraged speculators to come back in and speculate again, on the long side of everything in sight!

This time around we have had all the various QE efforts which have apparently run their course. Even some of the most die hard of stock bulls are beginning to wonder if stocks had gotten way ahead of themselves. I have said from the get go that the entirety of the stock market rally is nothing but a massive Central Bank induced bubble. I stand by that view. The bond buying has allowed the economy to muddle along with some improvement but as to generating any sort of robust growth, it is and has been an abysmal failure.

If investors begin to lose faith in the Central Banks and remember this is all a confidence game, then we might see gold actually function as a safe haven this time around. instead of a large flight into government bonds, which are becoming suspect to many, gold could withstand any unwind of the carry trade this time around, unlike it did in 2008. Again, I am unsure of this but one way or the other, we are witnessing economic and monetary history.