GLD continues dishoarding gold; Western investment demand remains weak

One look at the following chart pretty much tells the tale of gold demand in the West. It continues to sink and as it does, so does the gold price.

Today's slide in price is disconcerting as it has erased all of the gains it put in earlier this week. Friday is going to therefore be a big test for the yellow metal. Will buyers show up and keep the market supported above $1210 or do we go back down to revisit those lows once again?

With "The Hobbit, the Desolation of Smaug" due out tomorrow, let's hope it is not a case of the Desolation of Gold. Fridays have not normally been fun days for the gold bulls.

Is it a See-Saw or is it a Yo-Yo

When it comes to gold and silver of late, just pick either one. After the big move higher early this week, gold has now surrendered all of its gains and then some. It is now trading down $4.00 for the week compared to last Friday's close.

The region up near $1260 - $1265 has proved to be a bridge too far at this point. Unfortunately for gold, the move down into support at $1250 - $1245 uncovered not more buying but rather more selling. In other words, the dip buyers did not show up and thus they was nothing to hinder the floor locals and others from reaching those downside sell stops.

So where do things now stand? After what looked like it might be a promising week with the possibility of cementing a double bottom at the $1210 level, gold is back in limbo. Neither side has a clear advantage at this point although the bears remain in control of the market on an intermediate term basis.

Here's how things will likely shape up in the immediate future. Bears need to take out the $1210 level and HOLD PRICE FROM RECOVERING to force another leg lower and set up a quick test of the psychological $1200 level.

Bulls need to take out $1265 and HOLD PRICE ABOVE THAT LEVEL to force another round of short covering and bring in some additional momentum based buying and bottom pickers.
A very uneasy truce therefore exists. I would not expect that to last too long.

One thing I have noted today which makes it prudent not to become too dogmatic either way is the rather decent performance of the mining shares as evidenced by the HUI, which although it was indeed lower on the day, was down only 1% closing in the upper half of its session range. A key bellwether, Barrick, was actually higher on the day.

The question is whether a bottom is in for these miners or not. I am unsure at this point and require additional price action to get a better sense of things.

Something interesting is developing which merits some comments. The S&P 500 ( I monitor the emini when studying this index as it is so liquid) is sitting a mere 11 points about its 50 day moving average. The index has not been below this key technical indicator since the early part of October. It briefly dipped below there for all of three days before rebounding and going on to make yet another all time high.

This market continues to look top heavy to me but it has thus far failed to have any sort of extended correction lower. Dips are eagerly bought. If it were to violate this level on a closing basis, support comes in near 1745 and extends down to 1736. Only if the market were to strongly close below that level do I believe we will see a sharp selloff across the market and could then pronounce an intermediate top. Even at that I would want to see how the market acted if it did close below that level  ( 1736 - 1734). It if popped right back over that then it will probably prove to be yet another bear trap. 

Keep in mind that we are entering the Silly Season as I described it the other day in a post. The dwindling liquidity will set up occasions on which it will not take that sizeable of an order flow to produce some rather large moves. Anything therefore becomes possible as we get ever closer to the Year end.

Some of what took place today was in relation to the news about the budget compromise being brokered in the House. That is expected to pass and then make its way to the Senate, which will more than likely pass it and send it on to the President to sign.

Traders viewed that as one less obstacle in the path of the economy ( remember the last time we had a government shutdown all the talk was about the lack of government spending/paychecks to public employees, etc. would have a slowing effect on the overall economy and thus give the Fed no incentive whatsoever to do any tapering). The thought today was with that out of the way, if the Fed wants to taper, that will not be an issue.

I know a lot of this seems convoluted but it is what it is. Our markets today move all over the place on whims and fancies, but this is their nature.

Corn hit by Ethanol Bill; Grains Lower

The big market mover in the grain complex today was news that a Senate Bill which has a group of Senators pushing it, would do away with the ethanol mandate. That would be a HUGE thing if it were to pass and somehow become law but sadly, I do not think it will.

The farm lobby is strong and has some powerful friends in that same legislative body. Even if they were to fail to stop this bill from moving forward, signing it into law would undoubtedly tick off the environmental greenie crowd and that is a big supporter of the current administration.

Personally I am opposed to the idea of government "mandating" ethanol. If the product is viable in and of itself, and if the public really wanted it, the free market should determine that. I am opposed to the idea of the government FORCING people to use the stuff.

I understand it has been a real boon to growers, among whom I have some friends, but I also have friends who are in the cattle and hog business. While the by-product of ethanol production, DDGS, is certainly a good animal feed product, I believe that this forced usage of nearly 40% of our total corn crop unnecessarily drives feed costs higher for cattlemen, hog producers and poultry growers. That in turn drives the cost of our meat and poultry higher than it would otherwise be.

I do not like the corrosive affects of the stuff anyway. It tears the heck out of gaskets and such in lawnmowers and ATV's. But, like most government mandated anything, it will more than likely take on a form of immortality.

At least for one day however, we can bask in the hope of no more ethanol mandate. Certainly traders in the corn pit, which got rolled on the news, are having the usual knee-jerk response to news of this nature.

IN surveying the commodity sector today, the majority of the individual futures are mostly down. There are some exceptions - cattle are higher drawing some support off the lower corn prices and to a certain extent, so are hogs. Coffee is higher as is crude oil, but the products are weak with heating oil leading declines over gasoline.

Soybeans are sharply lower and wheat continues to work lower in price. Weakness in the grains is always welcome news to most everyone with the exception of the hard-working farmers who labor to put  them on our tables.

Silver is doing its usual thing and swinging all over the place although this time in the downward direction. It cannot seem to stay above $20 for long without attracting a plethora of sellers. Gold has fallen well below the initial chart support between $1250 - $1245. Interestingly enough, the HUI is falling far less than the actual metal. That is most curious and bears watching especially on a day in which we get the IAG news.

Markets very often bottom on bad news so if this is the case, we will hopefully see it. If not, the trend remains lower. Barrick is actually trading higher on the day as I type these comments. Most impressive as it has generated buying as it fell into that price gap from MOnday's trade. Stay tuned on this one... that is no small feat but the day is still not over.

Gold Miners taking it on the Chin once again

There is news this morning that IAM GOLD has completely suspended its dividend. Unlike Barrick and Newmont, which both REDUCED their dividend payments earlier this year, IAG has done away with altogether.

News like this never serves a sector well which has already been beaten up so badly. Coming at a time in which it appeared some of the mining stocks were attempting to cement a bottom, it could not have been worse.

In a note to clients, Goldman analysts noted that IAG has one of the highest cash costs in the sector ($1200).

Unfortunately the entire sector is getting hit hard again today. Barrick, which just this week looked as if it was ready to bottom, has now fallen back into that Monday gap on the charts and completely closed it and then some.

Meanwhile, the HUI has now made a new low for this move down. It has scored a new 52 week low and is actually trading below the MONTHLY CLOSING PRICE made back in October 2008.

Let's see what the rest of the day brings. There is still a chance that the index and some of the respective miners could stage a late session move higher. That would be a hugely positive sign. If not, well... not much more needs to be added.

Gold and Silver Decline yields a Victim

There is a devastating story that came down the Dow Jones wire feed today detailing the woes of Eric Sprott and the impact of the consequent severe market losses to his flagship fund. That fund is down more than 50% this year alone!


It should be required reading for all investors/traders.

http://online.wsj.com/home-page?mod=djnwires

The article goes on to state that Mr. Sprott had under management some $3billion in 2008. That has fallen to about $350 million due to a combination of both redemptions and losses.

Here is where the impact of these enormous losses makes itself evident. The investment company, Sprott Inc., is phasing him out of the investment decisions. By the end of next year he will no longer make the firm's investment decisions.

To add insult to injury, the CEO of the company, a Peter Grosskopf, stated that Sprott would be handling "chief cheerleader duties" in addition to remaining chairman.

Furthermore, the article stated that Sprott Inc,. had already added co-chief investment officers to all of the funds. They obviously knew where they were going with all this.

Lesson to be learned - LISTEN TO THE MARKET and ignore everything else!


http://online.wsj.com/home-page?mod=djnwires

Gold seeing some Dip Buying; Sellers digging in

After the strong performance yesterday, gold appears to be taking a bit of a breather as traders digest the recent move and evaluate where things stand. As can be seen on the chart, the market is pivoting around the resistance zone I have noted. Dip buyers are active, but so too are sellers as the market moves up towards $1260.

Volume is mediocre at best indicating the rather quiet price action as neither side seems willing to make a big bet at this juncture. Thus we wait to see how events unfold.

If the market is going to make a run at $1290, it will have to manage to stay above $1260, preferable $1265 to indicate that. If it stalls out here I can see it dropping back towards $1245 or so in an attempt to either uncover buying or, if that fails, to press into some downside stops.

Here is a chart of the metal at noon, CST:

Some of the pressure today is related to the news overnight that a budget "deal" had been brokered here in the US. If such a deal were to be approved by a majority vote in the House first, ( It is a given that it will pass the Senate), then any concerns over another government shutdown/soap opera/drama will be averted. That removes a bit of the reason that some buy gold.

I cannot pass on the opportunity however to comment on something that occurred yesterday. As some of you know by now, early in yesterday's session, a series of large bids pushing gold higher resulted in a temporary halt in trading. For the sake of my sarcasm, I will henceforth refer to this as the
"REVERSE FLASH CRASH". And yes I am mocking those who were peddling this nonsense about the Flash Crash recently as evidence that evil forces were conspiring to beat up on poor ol' Yeller.

I pointed out then and will do so yet again, there was nothing the least bit sinister about these large sell orders. They are being generated by hedge funds who are completely unfamiliar with the concept of SCALE DOWN BUYING and SCALE UP SELLING. Only those of us who have been around these markets for a very long time remember these concepts. The modern hedge fund knows nothing about the concept of "finesse". They brutalize those markets in which they trade. Ask any soybean trader or livestock trader and he will confirm that.

In other words, these enormous bids or enormous offers are now becoming the NORM, instead of the exception. They are merely the symptoms of markets that are increasingly at the mercy of hedge fund computerized buying or selling.

There are those who keep pointing out that no one looking to maximize their selling price would ever sell in such a fashion as to overwhelm all the available bids. That is true - but the fatal flaw in their reasoning is that they erroneously ASSUME that the entities doing the selling are looking to maximize their selling price. They are not. Once the computers start selling, there is NO THINKING. The response just comes. It is all about pushing price in your favor.

It is one thing to note a series of large bids or offers. It is another thing to draw fanciful conclusions from them. The proper conclusion to draw is that computers have unalterably changed the nature of our markets. Traders either adapt or they lose money.

Here is another thing - why is it that there is never an OUTRAGE when gold experiences a REVERSE FLASH CRASH? Or is this outrage only reserved for trips south in the metal? How about the poor shorts who are "unfairly attacked by such nefarious and blatant attempts" to force prices higher so as to paint the charts to favor the positioning of those traders who are on the long side? ( Note - the internet does not allow for sarcasm to be easily observed).

The refuge for those on the losing side of a market is always the same: "But based on the fundamentals, the market OUGHT TO BE DOING SUCH AND SUCH". Guess what? When a market does not "DO SUCH AND SUCH" according to what one thinks it ought to be doing, it does not care about those things which the other side claims to be most important. That is the hardest thing to get many to understand. All that matters is what the price does. All of these things are already well known by market participants. If the price does not respond in the direction that some expect it to go based on such things, then the simple truth is that those things do not concern the MAJORITY of market participants at that time. That is not to say that at some point in the future sentiment or opinion regarding these things could shift. It is to say that they are not important until at some point they become important. Grasp this simple concept and you are well on your way to becoming a professional.

I hope you can see my point - it is one thing to attribute lower price moves in gold to the bullion banks during periods in which gold is sharply rising and the feds are attempting to contain it. It is yet another to blame nearly every single move lower in the metal on nefarious forces.

Here is yet the irony of this. All the hedge fund selling managed to do ( I am talking about the Flash Crashes ) was to provide an opportunity for JP Morgan to pick up the metal at an even better price. Out of the total of 4,469 deliveries issued thus far for December gold, JP Morgan's HOUSE ACCOUNT has stopped 4,194! This is not insignificant!

Keep in mind that we are now entering what I and many other professional traders term, "the Silly Season". By that I mean we are going to see liquidity begin to slowly decline as many traders will be closing out positions/squaring books, in anticipation of taking some time off for Christmas. Some will be out of the market next week and will not come back until the start of the New Year. The result of all this can be increased volatility with sometimes unpredictable and inexplicable swings in price as relatively large orders encounter air pockets both above and below the market.

Also, some of the commodity indices are increasing the percentage of gold and silver in their weightings for next year. That will bring in additional buying by those index funds who benchmark against those particular indices - more fuel for the Silly Season.

For you Silver guys and gals out there - the grey metal is holding above the $20 market and is no longer a Teenager". That is constructive but it has a lot of technical damage to undo before it is going to see any upside fireworks that endure. I need to see the metal scale the $21.25 barrier at a bare minimum before turning friendly towards it. It does seem to continue tracking quite closely with copper. By the way, Chinese data has been supporting copper recently.

The HUI is also digesting some of those big gains from yesterday. While not a technical level, I would like to see the index hold above the 200 mark, which is more of a psychological support level than anything. After all, we are talking  a five year low here so keeping afloat above 200 would provide some consolation to the battered mining bulls.

As I type these comments, I am noticing Barrick is lower but well above the top of the huge gap on its daily price chart. As long as it holds that gap, the odds strongly favor a bottom in this stock. There is definitely some two way trade occurring in these mining shares now. That is a far cry from the one way trade that we have been seeing for a long time now. Goldcorp continues to reap some buying based off that recommended BUY from one of the analytical outfits yesterday.

I am noting something a bit peculiar at this time of the day - equities are lower ( almost 1% in the S&P), but long bond is also lower. Meanwhile the Dollar is also lower. That is certainly not the usual pattern we see. We rarely have seen all three of these markets down at the same time. Not sure what it might mean right now but it is certainly peculiar.

With the VIX shooting up above 15 once again, we would normally get some "safe haven" or risk aversion flows INTO TREASURIES and into the US DOLLAR. We are getting some of those flows into the Yen, which is the norm (even it is a ridiculously insane response ) but not into the Dollar. Again, I am not sure if this is a one day wonder tied more to position squaring or if it is the beginning of something more significant. I am inclined to believe it is more the former rather than the latter right now.

Bonds have come up off of their worst levels for the session but still remain lower as I type these comments meaning longer term interest rates are actually moving a wee bit higher even as the equities slide lower.

Some news in the livestock markets ( not actually market moving but interesting ). It appears that the growing number of drug resistant bacteria has caught the attention of the FDA. They are planning to now ask animal health companies and global drugmakers to voluntarily change the labeling on some widely used antibiotics which are  routinely used in the industry. The idea is to bring such drugs under the oversight of veterinarians and do away with the over-the-counter use. Cargill just announced today that they have already been working to minimize the use of antiobiotics.

Another interesting tidbit of news today - EIA gave us some data that states the US demand for foreign oil was just 26.8% of the total demand of some 18.554 million barrels a day last week. That is the lowest level since February 1991! In 2005, foreign oil was a total of 60% of all US oil demand. This shale drilling has revolutionized the US oil picture and I am thrilled to see it. We are not even talking about federally owned lands either. Those remain largely shut to oil production.

Gold Mining Shares having a Strong Day

Barclays, in one of their research notes today, named Goldcorp as one of their top picks for 2014. They cited an expected increase in gold production of some 33% by the end of the year 2015. This is the result of heavy cap-ex in 2013 to bring these various projects to a state of production. They expect that spending will drop considerably in 2014 while gold output increases. The study also cited an expected cost of production at $888/ounce compared to the industry average of $959/ounce.

GG is up some 3.4% as I type these comments. The HUI is actually doing better as it is up some 4.2%.

It is refreshing to finally see some notes like this hitting the beleaguered mining sector. Value-based buying could very well put a bottom in the mining sector. If, and this is a big "IF", the shares stop moving lower, gold, the metal, will not be far behind. I would keep an eye on the reported holdings of the gold ETF, GLD, to see if that bleeding finally has been stemmed and the reported holdings begint to rise. That would be a clue that the worst is over.

Again, the jury is still out on this in my view but the chart action looks encouraging for a change. Even Barrick gapped higher today and is currently up over 5% on the day! It opened sharply higher on a strong gap and then pushed through the 20 day moving average. That is the first time it has been above this level since October 30th!

Note that the ADX has turned lower from a rather lofty level indicating a pause or interruption in the ongoing downtrend. The market could move into a consolidation pattern at these levels with value based buyers perhaps cementing the recent lows just above $15 as a higher secondary bottom from the low made this summer. The stock could conceivably move up to as high as $21.00 or so and still be in a broader range trade. If it were to climb past that level, on decent volume, it would confirm a long term bottom is in.

Barrick's lousy performance has been a type of proxy for the entire sector as a whole so if this stock were to turn and begin a leg higher, the rest of the sector will more than likely go along for the ride as well. Don't forget that just because a stock stops going down does not mean it is going to immediately start a sustained move higher. It could conceivably meander sideways for some time before a catalyst of some sort kicks it up and out of a range trade.

The intermediate term Weekly chart still shows the bears in control of this stock so try not to get too slap happy. Remain objective ( if you can) but enjoy the respite from the selling barrage.

Grain Day

Lots of fireworks occurring in the grains today on the heels of a major USDA report. Currently all of the grains ( I am including beans in this category) are lower even though the numbers for corn and soybeans were initially considered supportive.

USDA lowered US stockpiles for both corn and beans based mainly on an expected increase in exports due to the lower prices we have been experiencing especially compared to last year. However, they did raise total global bean production, mainly due to an increase in Argentinian production. My reading of this report informs me that there is certainly not going to be any acute shortage of soybeans around. Usage has been strong however and that is keeping a floor beneath the market.

Expectations for beans heading into the report were for a reduction in the ending stocks; however, the number was within expectations and prices moved lower on a "buy the rumor; sell the fact" scenario.

Wheat stockpiles are growing. USDA raised the ending number by 10 million bushels above expectations catching some in the trade by surprise.

Overall the report seems to me to have taken the starch out of the recent move higher in corn and bean prices. It will take some further bullish demand news or some bullish supply side news to kick prices into any further strong rallies.

As many of you who regularly read this blog are aware, I keep a close eye on the grain markets, as well as the livestock markets, to try to get a sense of the overall direction of food prices.

Another thing I am taking away from this report - look for used farm equipment prices to get a bit of a shot in the arm from this data. The big banner money years that farmers had been seeing over the last few year years are over for a while. Corn prices are trading about 50% below their record price and while prices for both corn and beans are still good, they are no where near those historic highs. Maybe some good will come out of this in the sense that the hedge funds can stop buying up farm land in the Corn Belt and prices can bet back to more sane levels.