Silly Season Silliness

I am strongly suggesting that parents still looking for last minute Christmas kids for their children, look no further than the gold market as it can quite easily be substituted for one of those new, sleekly designed yo-yo's. Yes siree Bob, it goes up and down, up and down, up and down, with hardly any hiccups whatsoever ( you know how annoying those strings can be when they get knots in them ).

Seriously, the Silly Season Silliness was on full display today as the gold market gave back what it put on yesterday, which by the way brought it back to nearly where it closed last Thursday.

That is why I keep saying, do not read too much into any one day's price action. I marvel that all the usual perma-bullish players continue to come out of the woodwork whenever we get a strong move higher. Then they all disappear when the market gives it all back ( some of them blaming manipulation). When gold moves back up, they will come back. Count on that. I could also just as well say that the perma-bears are always growling whenever gold makes a move lower.

Here is the simple truth - gold continues to be stuck in a RANGE TRADE. That means it "ain't goin' nowhere" until it breaks out of the range in one direction or the other. The weekly trend is still down so the bears have a bit of an advantage but downside momentum has also been blunted so until they can force the price below $1210 and keep it there, they are not out of the wood yets either.

Until then, find something better to do with your life ( like going to see "The Hobbit- the Desolation of Smaug" - I LOVE HATING Azog and Bolg), instead of watching every single tick in price. As long as we are dealing with the vagaries of the Fed and the FOMC meeting, as long as we are dealing with year-end book squaring, and as long as we are dealing with pre-holiday thinning trade conditions, we are going to see volatility.

Since there is not much to say right now, I will merely leave you with a price chart noting the price action as it remains constrained within that broader range.

Market Comments 12-16-2013

I mentioned in a post last week that I am beginning to wonder if we are seeing a shift in sentiment towards "growth" in the economy. What is needed in gold, and especially in silver, is for investor sentiment to begin looking away from the "growth is steady but sluggish" theme to one of "growth is picking up and with it, so are the chances of inflation".

Today we had the US Industrial Production numbers. This is a gauge or measurement of the output of US manufacturers, utilities and mines. It registered a 1.1% increase from last month's number, the biggest jump in a year.

That seems to have sparked a move higher in silver which then yanked gold higher. I noticed that Copper was higher as well.

Equities went on a tear higher today as once again the thinking in regards to the QE thing shifted yet again. Today the thinking was that the Fed will hold pat on this month's meeting and will do nothing until March at the earliest so as to not jeopardize the recently improved economic data.

That in turn undercut the US Dollar and thus we seemed to get a binge of commodity buying. Crude oil, gasoline and heating oil, all rallied higher. The metals were all higher. Soybeans moved higher. Coffee and sugar went higher. There were some commodity futures markets that moved lower today but the majority of the sector saw steady inflows.

Whether this is a shift in sentiment towards the sector in general is still up in the air. Part of what makes deciphering all this even more tricky is the fact that these moves are now occurring in the middle of the Silly Season. Market liquidity is shrinking as traders square their book, closing out positions as we move to the end of the year. That allows for excessive price swings in both directions on relatively small-sized orders as more and more air pockets, both above and below the markets, are encountered.

Back to gold - it confirmed that it has entered a range trade for the time being as that uneasy truce between bulls and bears that I mentioned last week continues. The range is defined on the bottom near $1220 and on the top up near $1250 with short covering related spikes pushing prices up towards $1265 before the selling re-enters. Until this range is violated, in either direction, gold is marking time.

It seems to be unwilling at this point to make a decisive break in either direction more than likely due to the time of the year. As mentioned above, many traders are simply not all that willing to establish sizeable positions as the calendar is about to shift. They will wait until the beginning of the New Year before moving back into some of these markets in size. That is why I stated last week and wish to restate here for the sake of emphasis that reading too much into the day to day gyrations in these markets is not wise.

Tax considerations are also at work and trying to unravel that knot can be fruitless most of the time.

I have noticed that as I type these comments, silver has once again been unable to maintain its footing above the $20 mark. It is back to being a teenager once again. For the bulls to have any sort of chance of generating some upside fireworks in the silver market, they will need to get at least past the $21.25 level.

The S&P 500 is stuck between the 50 day moving average and the 10 day moving average. It is basically in the business of whipsawing traders right now.

Trader Dan interviewed at King World News Markets and Metals Wrap

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

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/12/14_KWN_Weekly_Metals_Wrap.html

Commitment of Traders and the Reverse Flash Crash

Today's release gives us a pretty decent glimpse into the activities that gave rise to what I have dubbed the "Reverse Flash Crash" in honor of those who see nefarious evil doers behind every move lower in gold recently.

You might first recall that on Friday of last week, the day when the last Payrolls number was released, gold plummeted lower hitting a low near $1210 before violently rebounding higher. That action alone resulted in a significant number of speculative short positions being squeezed out. There then came a bit of a breather on Monday before the market shot higher during the Reverse Flash Crash on Tuesday which kicked off another round of buy stops.

The action was caught for us by the CFTC in today's report and reveals the reason behind the sharp moves - hedge funds were doing a good bit of short covering. Some in that camp were also fishing for a bottom and moved back onto the long side of the market. The result of that was net buying by this group to the tune of approximately 6600 contracts.

Interestingly enough, the entirety of that , and then some more, was offset by Swap Dealer selling. They were net sellers to the tune of some 8,200 contracts.

The Producer/User/Merchant category were also net sellers for the week to the tune of some 2400 contracts.

The Small Specs were bottom picking this past week as they rushed back onto the long side to the tune of about 2270 contracts. Ditto for the Other Large Reportables who were net buyers of some 1700 contracts.

Note to some: These are approximate numbers for the purpose of quick and easy illustration from which to draw some analysis.

Here is the takeaway. Specs were squeezed in the push back down to $1210 and subsequent inability to break through that support zone. Then as prices moved higher on Tuesday, more buy stops were run. The BULK of the BUYING DONE BY SPECULATORS THIS PAST WEEK WAS THEREFORE NOT FRESH NEW LONGS BUT RATHER SHORT COVERING.


This is hugely significant as it confirms my views held for some time now. Rallies in gold are occurring that have been quite fierce but which have not tended to last because they consist almost entirely of short covering. At this point in time, these rallies DO NOT reflect a wholesale shift in sentiment among this important segment of traders. Until sentiment changes and we see eager NEW BUYING across the speculative categories, gold remains under the control of bearish forces.

I should note here that all market bottoms are first GENERALLY reflected by strong waves of short covering but that gives way to FRESH BUYING that begins to outnumber the short covering.

Gold is not there yet. Keep this in mind before getting too bulled up.

Also, I wish to note here as I did last week - those who keep speaking of capitulation when it comes to the selling in gold are doing so in spite of the fact that the speculative community generally remains as NET LONGS and has been for many years now.

The Small Specs were net short this gold market only in July of this year ( and that was for only one week)  but have remained as net longs even as their overall positioning on the long side has indeed decreased. They have not gotten short.

The Hedge fund community has not been net short this market for the entire 7 1/2 years of this data set. Only the Other Large Reportables camp had been net short for more than one week and that was back in July of this year. During that month they remained as net shorts in gold before moving back to net long the first week of August where they have remained since.

With speculators continuing to play gold from the long side of the market, the risk remains that we could yet have one more good downside flush before killing the bullishness that stubbornly remains among the speculators. I can see that happening only if chart support gives way, first at $1210 but more importantly at $1180 - $1178.

In this present case, we might be better served by closely scrutinizing the action of the gold mining shares for clues of a solid bottom in this market. They led the price of the metal lower and will more than likely, although not guaranteed, lead the way higher. I for one would feel a whole lot better about a solid bottom if we could see the hedge funds on the net short side of this market with the entire speculative community all effectively as net shorts as well.


One last thing - with Swap Dealers doing the brunt of the selling this past week, I am beginning to wonder if we are seeing some mining companies working out some hedges/forward contracts with these dealers as prices move higher.

Producer Price Index - Weak Inflation - Gold Rises?

This morning we were treated to the Producer Price Index numbers - the headline number was -0.1%. The market consensus ahead of the report was for the reading to come in unchanged. When Food and Energy were stripped out, the reading was +0.1%. Right in line with the consensus.

Obviously prices at the wholesale level were generally LOWER indicating the continued lack of an inflationary impact from the Fed's money creation schemes. Upon the news gold moved higher! The proper response from most traders would have been expected to be "DUH?"

Yes, in the absence of any inflation pressures gold moves higher. This is where the money printing policies of the Fed have brought us - to the La-La Land of Unreality.

The reason that gold moved higher instead of falling lower was because Traders believe that the Fed may now look at this data and actually come away more concerned about DEFLATION during next week's FOMC meeting. Just yesterday there was near Terror that they were going to go the opposite way and actually announce the beginning of a taper next week! That is what brought so much pressure into the S&P 500 as well.

Do you see why I find this constant interference by the monetary authorities so distasteful and yes, even repulsive? They have completely turned everything on its head. The stock market rallies on horrible news because it ensures more QE bond buying. It sinks on good news. UP is DOWN; BLACK is WHITE; and IN is OUT in this brave new world. The entire thing has become so convoluted as to be farcical.

I seem to vaguely recall a period a long, long time ago, in a galaxy far, far away when stock prices rose during periods of strong economic expansion. Of course I am exaggerating things here but the point I wanted to make was that today's markets are so sensitive to whatever the Fed may or may not do, that they are moving more often in a contrary manner to sound reason.

By the way, I cannot help but ridicule the "FLASH CRASHERS" once again. Yes, they were back out in full force yesterday giving us the painful details of the carpet bombing of gold once again during its hard move lower yesterday. Not a peep out of them about the REVERSE FLASH CRASH of Tuesday ( you see, that is not unusual but is what gold SHOULD BE DOING all the time) , but that is par for the course with these people. Never let a good down day in gold go to waste when promoting their "gold is constantly under attack by nefarious forces" dogma.

As stated many times here, ad nauseam, ad infinitum, gold is in an intermediate bear trend. The feds do not have to fight the price of gold when it is already sinking due to hedge fund selling.

The actual truth is that what happened yesterday in gold was exactly what happened in the broad equity markets. A wave of near terror/panic hit the markets that for some reason the Fed was most certainly going to announce, NEXT WEEK, the start of tapering.

Today, the PPI number totally erased that fear.

Along that line, gasoline futures just notched a ONE MONTH LOW (let's hear some cheers for that) in today's session. Wheat futures hit a FOUR MONTH LOW. Sugar hit a FIVE MONTH LOW. I could go on but I think the reader will get the point.

With falling prices, we see gold moving higher not because of any imminent threat of inflation but rather because today's thinking ( for this session) is that the real fear that the monetary authorities will have as they meet next week will be cutting back on the bond buying programs TOO SOON and feeding the DEFLATION BOOGIE MAN. And one wonders how we traders can keep our sanity with this sort of flip-flopping back and forth in the markets nearly every single day. Just remember the name of yesterday's missve that I posted up yesterday - "Is it a See-Saw or a Yo-Yo?"

As strange as it may sound to some, I can actually see a point which, and here is a major caveat, IF THE PRICE OF COMMODITIES IN GENERAL CONTINUES TO SINK, and chatter about deflation concerns were to surface ( Note - I am not saying that is going to happen but merely suggesting a possible development) that the Fed would actually LIKE TO SEE THE GOLD PRICE MOVE HIGHER. Not in a large way so as to denote a loss of confidence in the Dollar but rather just enough to dispel any notion that gold is sniffing out a wave of deflation.

Remember, Central Bankers love inflation in the sense that they think they have the tools to control that. What they really fear, and we have been made aware of that by their continued QE programs, is DEFLATION. As a consumer I love deflation because it means I get more for my money. The down side to this however is that a slowing economy indicated by EXCESSIVELY low prices ( in the minds of the central planners) means a sluggish job market and slack/stagnant/falling wages. A gold price that were to sink too low, along with a sharp move lower in some key forward-looking commodities such as crude oil and wheat/beans/corn might convince the monetary authorities to actually ramp up QE in order to induce buying in gold and some other key commodities.

Of course this is all speculation on my part as the odds of this occurring seem rather remote at this point but it just goes to show how fickle the sentiment in the markets has become and how quickly and easily it can shift back and forth based on one piece of economic data or another. While the Fed may downplay the fact, rest assured that they are well aware of the gold price and what it may or may not be doing. This I do know, gold at $1900 was a disaster as far as they were concerned.

This being said, I do not believe that the Fed OBSESSES over the gold price as some apparently believe. They monitor it closely. That is a far cry from spending nearly every waking hour wondering where it is going and what it is doing as far too many in the gold community sometimes seem to give the impression that they do.

Take a look at the chart below and you will see how low the volume is in today's trading session. This is what I have been speaking to when I stated that we are entering the Silly Season when shrinking liquidity will often allow for large swings in price produced by rather small orders compared to the norm. That being said, a new support level has formed at a higher price than the recent double bottom at $1210. This new zone centers around the $1220 level. This is constructive from a technical analysis perspective. Still, until the bulls can push price past the resistance zone noted on the chart ( near $1260 - $1265) volume should remain muted. The flip side to this is if the bears were able to take price down below $1220 at first, but more importantly $1210. That would cause an enormous spike in volume. We will wait to see which side blinks first as there is an uneasy truce in the market right now.

Yesterday I mentioned Barrick Gold as a key bellwether stock to watch for clues/signal to the overall sector. Barrick gapped higher on Tuesday of this week, then fell yesterday and completely closed the gap early in the session but roared back before the close and managed to close higher. That is pretty impressive performance given the fact that gold was hit with an ugly stick yesterday. Today this key stock is actually trading higher and although it has not, as of yet, managed to eclipse Tuesday's high, odds are growing that the stock has finally bottomed. Again this does not mean it is now off to the races, but perhaps, perhaps, we have seen an end to the mauling of the gold shares. That no doubt would be most welcome to those who have sat through the entire retracement of the last few years.

When you are losing money nearly every single week and you look and see that while you are not making any money you are at least no longer bleeding, it lifts one's spirit and provides some encouragement and hope that the worst is over. We will see. Technically there remains a great deal of chart work that the gold shares in general have to do in order to convince a wider audience that they are now at levels commensurate with value. Maybe we are finally there. Time will tell but let's certainly keep an eye on this particular stock. I suspect that its fortunes will quite accurately give us a solid clue as to the metal's.

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.