Commodity Strength Aiding Silver, Helping Gold

There are several cross currents at work in the markets this week which are impacting the trading across the overall commodity sector.

Let's start with the worries in the emerging markets because that continues to be the dominant force impacting equities right now and by corollary, the commodity markets.

First, notice the S&P chart - this emerging market issue has resulted in the market being down 5% since the beginning of this year.

Coupled with this has been a rather sharp rise in the VIX or Volatility Index ( I prefer to call it the Complacency Index). Yesterday, the index hit an 8 month high.

What this is telling us is that there is some genuine fear/nervousness among the bulls in the equity camp for the first time in quite a while. The general feeling is that the long bull market in stocks into its 6th year and that has some perma bulls actually looking to book some profits as they wait to see what will happen in regards to these emerging market concerns. I must add however that the bullish tone is still quite obvious based on the majority of comments from analysts who are happy to see the correction lower in order to give them a chance to buy in at lower levels. In other words, while the VIX has risen, there is no panic whatsoever among the perma-bulls.

That brings us to the commodity sector - commodities in general have actually been outperforming equities this year. We have seen sharp rallies in coffee, sugar, hogs, soybeans, natural gas, etc. Natural gas strength has been tied to the severely cold weather the US has been experiencing while coffee, sugar and even OJ strength has been tied to hot, dry weather in certain growing areas in Brazil. However, it does look as if some of that money that was recently yanked out of equities might have found a home in the beaten-down commodity sector. The thinking behind that is the sector is undervalued or at the very least, not as dearly priced as stocks and thus a better risk in terms of risk/reward ratios.

That may well be true since several commodities have been trading at or below multi-year lows but I personally am very leery of wildly chasing commodities higher if the chance exists of this emerging markets crisis worsening. Any such deterioration will feed deflationary concerns as investors brace for a slowdown in global growth. Traders are especially nervous in regards to China and this can be clearly seen in the copper chart which is down nearly 7% on the year!

Oddly enough, this emerging market issue has not really benefitted the US Dollar to the extent that some of us were expecting based on the recent past. If anything, the Yen has been the favored currency along with the Swiss Franc. While the Dollar has not been weak, it certainly has not been powering higher as it is wont to do during these crisis events.

This has enabled gold to garner some inflows ( the ETF has actually reported some inflows and increases in reported holdings ). I have maintained for quite some time now that until WESTERN INVESTMENT DEMAND for gold increases, gold will be unable to mount any SUSTAINED move higher. That nascent increase in GLD's reported holdings therefore is noteworthy.

That being said, if a full fledged crisis were to erupt across the emerging markets, it is not a given that gold will shoot sharply higher. Much would depend upon the US Dollar movements. If the Dollar were to break down, it would amplify gold's chances at breaking higher. On the other hand, if the market takes a view that global growth is going to be impacted for the worse, we could very well see copper, silver and gold all moving lower in tandem while the US Dollar becomes the go-to currency again.

It is simply unclear to me at this point what the consensus is in regards to the overall commodity sector. These short covering rallies are so fierce and so dramatic that they inevitably result in wildly bullish calls immediately springing up but keep in mind that a flash in the pan can also startle only to then quickly subside.

Weather is volatile and attempts to dogmatically predict when/if certain patterns will change are bound to frustrate. In the short term, the change in the technical chart pattern that results from a mass exodus of bears giving up the ghost on their short holdings across a commodity market will bring in bottom picking and fresh buying. Any weather scare immediately impacts the current demand/supply scenario and forces a drastic revaluation of the mindset in place during the extended downturn in price. If traders feel that the equilibrium between supply/demand will be altered by the weather, they will immediately react and the market will come to reflect the new balance that is being sought by the movement in price to another level.

One thing I am noting is that once again the mining shares are weak - until I see the HUI trading consistently above the 225 level, but preferably the 235 level, I am going to remain a skeptic towards gold. For now, gold remains mired in a range trade

Gold Slips; Silver Steady

Gold had a double whammy working against it in today's session. The first was stability in the US equity markets. Every single time stocks have moved higher this week, gold has lost ground. The opposite has also been true; when stocks have dropped on emerging market fears, gold has moved higher. It is acting like a safe haven can be expected to act, at least for now.

This emerging market thing is providing some support to the gold market and preventing it from moving sharply lower as lingering fears are bringing in some dip buying. However, when the US Dollar firms, it attracts selling.

Silver seemed to shrug off weakness in gold as well as copper taking its cues from some general commodity market strength across the softs and grains. Sugar and Coffee both had big up days today. Beans moved higher along with the grains and hogs were strong. So far, support near $19 has been holding but the market is definitely attracting strong selling near $20. If emerging market fears begin to increase, I think silver could slip below $19, especially if copper and the other base metals respond negatively. Remember, any sort of slow down related to emerging market fears is deflationary in general and silver, even more so than gold, will struggle in that environment. It needs a solid - RISK ON" appetite tied to strong growth sentiment leading to inflationary pressures. Without it, no one wants to own it right now above $20.

Natural gas was weak while heating oil and unleaded gasoline parted ways today. The former was up with the continued cold weather while the latter was down. Hey, maybe everyone looked at those photos of cars stranded outside Atlanta and figured if they weren't going anywhere, they sure as hell didn't need any gasoline in the tanks! These weather markets can be notoriously volatile for as soon as a forecast shifts, everyone who bought heating oil or nat gas on cold fears are suddenly on the wrong side of the market. They can fall as fast, if not faster, than they went up so if you are trading these, be careful.

It is exactly what happens to grain traders on the wrong side of a summer forecast! No one asks any questions or thinks - they just panic and run. By the way, this somehow is confused with trading for some reason.

Take a look at the following chart of the US Dollar on a weekly basis and you can see that the price action of the last three weeks has been of the whipsaw type. Up - down - up. If you look only at the short day to day stuff, it will drive you batty; however, on this weekly you can see that the Dollar moved down towards the lower portion of the upward sloping price channel and now appears, for the moment, to be working its way back up again.

There is certainly no clearly define STRONG trend but more of a gradual grind higher. I would keep an eye on the 79.50 level. It has not had a weekly close below there since October of 2013. If it did, it would portend a test of 79. I would think that would coincide with a move through $1280 for gold. The flip side is if the Dollar were to push through 83 on the upside, gold will more than likely not hold above $1200. The jury remains out therefore.
 

Take a look at the 4 hour gold chart and you can clearly see where sellers have gotten aggressive - that is up near $1,280. When it tried to extend past $1,270 on Wednesday and failed, that was it as far as some of the shorter term oriented longs cared - they were out and down she went. There was another push to $1,255 that also failed to extend and back down it went again. The market is trying to hold $1,240 and so far is succeeding but it does look heavy to me. Without an escalation in the emerging market crisis over the weekend, it is doubtful that gold is going to have much in the way of friends, especially if equities keep shrugging off any worries. Sentiment can flip on a dime however so just be prepared for lots of ups and downs.

The daily chart is noteworthy in the sense that the ADX, which was showing the possibility of a fledging uptrending move, has now flattened out again indicating that the upward progress is stalling out. The +DMI has turned lower, and while it still remains above the -DMI revealing that the bulls have control of the market on the daily time frame, it is now falling. This market could go either way but remember that on the weekly chart, the intermediate time frame, the bears are in control and thus the reason I have been citing that rallies are going to be sold.

Speaking of a weekly chart - here it is. Notice that the Bears are still in control of the market as -DMI remains above +DMI although is continues to fall. The weekly ADX is also dropping as can be expected in a trendless market.

 

As long as the emerging market currency/credit issue is a lingering concern, gold will probably continue to hold up. Barring that however, it is an iffy proposition.

Next week will bring the beginning of the delivery process in gold for the February contract. I will keep an eye on it to see whether Morgan continues to issue gold as they did in January or returns as a large stopper as they did in December.

One last chart for now - Goldman Sachs Commodity Index in a weekly view.

The gradual decline continues to extend. It is a slow, methodical move lower. The sector has garnered buying support which is keeping it from falling apart but it lacks any sort of upside vigor at the moment.

Lastly - this is to save myself a bit of work answering emails about the KWN Metals Wrap. I have no idea when or if it will return right now. If I hear anything concrete, I will let the readers know.

I will try to get some charts up or comments on the COT stuff later on as time permits.

Have a good weekend all... Go Hawks....

Gold Tug of War Continues

Today was the big day for another long awaited ( one month) release from the FOMC in regards to their Tapering campaign. There was a general line of thinking that the Fed might not be as aggressive in the tapering as previously anticipated due to the very weak payrolls number that came out not long ago but that was dispelled rather ignominiously when the Fed announced another $10 billion reduction in the bond buying program down to $65 billion/month. They are cutting the rate of Treasury purchases by $5 billion and the rate of Mortgage backed securities by $5 billion as well.

The unanimous vote was revealing as it shows an apparent determination on the part of the Fed to begin weaning the markets off of some of this funny money creation. Needless to say, the equity markets did not seem too happy about the news.

Then again, it is difficult to understand exactly what input the markets were reacting today given the continued fears/concerns over the emerging markets currency/credit issues. Yesterday a sharp surprise rate hike by Turkish officials seemed to bring a sigh of relief into the markets. Today, that quickly dissipated.

The VIX shot higher as the equity markets dropped lower and as it did, back on came the safe haven trades once again. The Yen was up sharply and the Swiss Franc rose also as investors decided to take some money out of stocks just in case things go from bad to worse. Once again, even with the news out of the FOMC, (which one would have expected to be Dollar positive), the US Dollar could not move higher. That had gold moving higher once again as we are seeing a relationship forming in which stocks move lower along with the Dollar as Gold moves higher.

I am not sure how much longer this precise link is going to endure in our fickle market of nowadays but it is keeping gold prices from otherwise breaking down at a time in which many commodity markets are continuing to see weakness. Natural gas was the big exception with prices cleaning out practically every single overhead buy stop on the planet today on huge volume. That sort of thing always catches my attention. Soybeans, corn and wheat however were pummeled today. Copper also moved lower.

Gold is basically caught in a tug of war between downward pressure originating from those selling the metal as the Fed begins to scale back the huge sums of liquidity it has been providing the markets and upward pressure from safe haven flows tied to the emerging markets crisis. In the former, gold acts more as a commodity; in the latter as a currency. Depending on which input the market is focusing on any given day, the metal moves accordingly. There is still no definable pattern.

Based on what I can see the next move in gold is completely dependent on how the emerging market situation is viewed. If it escalates, gold should stay firm. If it recedes somewhat from traders' minds, it will move lower.

The same exact thing is occurring in the interest rate markets. Today's FOMC statement and its hawkish tone should have brought selling into Treasuries taking interest rates HIGHER ( also supporting the US Dollar). Instead, the Treasury markets witnessed lower long term rates as deflation fears trumped hawkish FOMC notes.

Incidentally I have been monitoring some of the delivery process for gold. Thus far JP Morgan has been the big issuer or seller. That is in stark contrast to their buying or stopping last month. As we enter the February contract's delivery period, it will be interesting to see if this new pattern remains the same or if they move back to the heavy buy side stopping that we saw from them in December.

While the HUI has been higher today, it has still been unable to clear chart resistance near the 230 region. So far the index has not confirmed any upside breakout as of now. It has also bottomed out but cannot seem to get an upside trend going. Much the same thing is taking place with gold. Its technical chart pattern on the daily looks pretty good but it acts as if it is looking for some other shoe to drop somewhere before it really breaks out to the upside in a clear and unambiguous manner. As things stand, traders seem willing to sell rallies into overhead resistance and buy dips into downside support.

When this changes is unclear.

By the way, silver still is capped at $20 as it attracts large selling above that zone.

US Stocks fade from highs on emerging market worries

The S&P 500 gave up its gains over renewed concerns with emerging market currency/credit issues this afternoon but neither the Japanese Yen or the Swiss Franc seemed to catch any sort of safe haven bid as they were doing last week. Neither did gold when the dust finally settled. Even the bond market moved lower today.

It was thus a very strange day seeing interest rates actually rising in the face of sinking stocks. If there was a safe haven today, it was the US Dollar all by itself as nothing else seemed to be moving higher besides the Australian Dollar and the British Pound.

Frankly I have no idea what was going on in some of these other markets so I am not even going to try venturing a guess. Just chalk it up to one of those days where not too many folks were very sure of exactly what they wanted to do.

One thing that many folks were sure of however was to sell the liquid energies, especially heating oil. That has been driven sharply higher on the severely cold weather engulfing the middle and eastern parts of the US, but some forecasters apparently took a bit of the severity out of the cold and that forced some profit taking by longs and some fresh shorting as well. The exact same thing occurred in the natural gas market today. Both these energy sources have been benefitting from the sharp cold but the first sign of more normal weather patterns/temperatures coming and more longs will be heading for the exits. The forecast models are always fickle ( as any grain trader and he will show you the scars from being on the wrong side of a "flip" in the forecasts ) so they might just as well show more cold tomorrow that is more bitter than today's models.

I have some friends up here who are burning as much firewood as we can in order to do our fair share to help our fellow citizens to the east which are getting the brunt of this walrus weather. If we can force enough fossil fuel fumes into the air, we should be able to kick up the global warming enough to warm things up for ya'll over that way. Hang in there and give us some more time to let the smoke plume move east.

I have posted up a very short term gold chart ( 4 hour) to note the resistance and support levels. I want to add here that volume in the February gold contract is going to be shrinking as we draw nearer the delivery process so it will not be long before I switch over to the April contract for analysis purposes.

Gold has obviously failed at its first attempt at $1,280. That was a big number on the way down so it makes technical sense to expect it to be a big number on the way up. The setback initially found dip buyers into the support band noted near $1255 but then failed eventually dropping below the zone in late trading as the gold miners failed as well.

There might be a bit of psychological support near $1,250 for gold but more substantial support actually lies closer to $1,245 or so. If that fails, expect gold to retest $1,235 - $1,230.

For the bulls to generate any more excitement on the upside they now have a solid barrier up near $1,280 that they will have to better.

The FOMC will add more uncertainty to the market this week ( as if we did not have enough of that already to contend with) so do not be surprised at some pretty large swings in price as traders react with the usual calm and measured demeanor that marks our profession ( this last part is pure sarcasm as everyone knows that there is no calm, measured demeanor left anywhere in the trading world nowadays).

Gold Rally stalls at $1280

Strong buying overnight in the early part of the Asian trading session took gold into a region of formidable chart resistance near the $1,280 level. At that point sellers entered sensing that the bulls were booking profits and prices needed a breather.

With the nervousness surrounding last week's emerging markets currency/credit crisis subsiding somewhat, gold ran out of reasons to keep moving vertical. If you notice, the Japanese Yen and Swiss Franc, the beneficiaries of last week's rush to safety plays, are weaker today. Also, the S&P 500 is trading higher while the US Dollar has managed to obtain a firm bid. With the VIX moving lower as well, it appears that for the moment, the market is less concerned about the emerging market issues that plagued it last week. How long this lasts is anyone's guess but for the immediate moment, gold is being sold and stocks are being bought once again.

If anything, last week's price action in response to the emerging markets reinforces in my mind the notion that gold MUST HAVE SOME SORT OF CONFIDENCE SHATTERING event(s) to push it into a sustained uptrend. The recent move up has consisted of a great deal of short covering and while there has indeed been some fresh buying, that has been largely outnumbered by speculative short covering.

As I have written many times here at this site, short covering rallies can be quite ferocious and oftentimes spectacular, but by their very nature, they tend to fizzle out as quickly as they start. Markets require the application of THRUST/FORCE to escape the downward pull of gravity and that necessitates SUSTAINED money flows ( new buying ). If that new buying is lacking, gravity will win out and price will back down.

When it comes to gold that means any sort of credit/currency crisis must be one which escalates in the minds of traders/investors. Such escalation fans more fear and nervousness and that will drive money into gold. Given the current state of low inflationary expectations, it will take this sort of strong emotion to keep those flows active. At the first sign of stability or easing of tensions, gold will tend to surrender its gains with the more recent pattern of buying stocks/selling commodities coming to the ascendancy once again.

What this translates to when it comes to technical price action is selling at resistance zones. Gold thus far has managed to plow through several layers of overhead chart resistance and in the process turned the daily chart positive ( the weekly remains decidedly bearish however). With traders looking for reasons to sell rallies, these resistance zones on the daily chart will take on more importance. Any hesitation by the bulls to extend the rally at these zones will bring in selling as very short term bulls bail out with any paper profits that they might have while longer term oriented bears look to re-enter on the short side.

It is always interesting to watch the battle lines being formed on the charts. Right now dips are being bought in gold based on the improving daily chart picture while rallies tend to stall - at least temporarily - at these resistance zones. Translating to numbers - resistance is the zone near $1280 with support being provided by the zone near $1260-$1258.

I am watching to see what gold does if equities start moving lower once again and particularly if the Dollar cannot hold any gains. I will provide an update later in the session as the direction towards the pit close becomes evident.

Weekly Gold Chart and Comments

Gold posted a nice close to finish out the week although the mining shares were once again refusing to go along with the strong move over at the Comex. That always give me a reason for concern as one likes to see both the shares and the metal moving higher in sync to reinforce the bullish cause.

I wanted to start off with a weekly chart to provide a bit of a longer term perspective before moving in for a closer look at the daily and even shorter time frame charts.

On the weekly chart, using the Directional Movement Indicator (one of my favorites as it is an old, but reliable friend), you can see that the Negative Directional Movement Indicator (  RED LINE ) remains above the Positive Directional Movement Indicator ( BLUE LINE ) as it has been since late in 2012. In other words, the BEARS REMAIN IN CONTROL of the gold market despite gold's heroic performance this past week.

The ADX, the trend indicating line, is moving lower showing that the defined downtrend has been interrupted after it showed a slight rise forming on the failure to extend past $1,350 in late October 2013. So how do we interpret this?

 On this intermediate time frame, no trend currently exists with the bears dominating. We would need to see the directional indicator lines cross and reverse dominance to realize a shift of control in favor of the bulls. That has clearly not occurred on this time frame.

Also notice that the 30 week moving average has been a good defining parameter for the metal at this time frame. It has served as support when the market was moving higher as can be seen from looking over to the left hand side of the chart. Retracements in price were held at this level as buying emerged.

During the sideways phase that lasted for all of 2012, the weekly moving average was not of much use ( moving averages NEVER ARE during sideways or consolidation phases ) but once price started trending lower in early 2013, it did serve to cap all rallies on the upside as can be seen occurring between July 2013 and the end of the year. Currently price can be seen approaching this level from down below. Also note that the moving average has stopped heading lower and is turning up. That is a friendly sign to the bull's cause but as noted above, the DMI is not yet indicating a bullish victory on this time frame.

Let's pull in to a bit closer term look by using the daily chart/.

This presents quite a different picture. Notice that the Positive Directional Indicator ( BLUE LINE ) is decidedly ABOVE the Negative Directional Indicator ( RED LINE ). Translation - Bulls have seized control of the market on the shorter time frame.

If you look a little closer you can see that the ADX line has stopped moving lower and is actually turning higher as the price moves higher. That is a good sign for the bulls as it indicates that they have the potential to turn this into an upside trending move if they can continue to follow through on the upside buying. The ADX remains below 25 however so I would not yet call the market as being in an uptrend. Some technicians like to see the ADX above 30 before stating a trend has formed but I am a bit more aggressive and will look at the 25 level. By the way, this is more of an art form than an exact science so do not write this down in stone.

Notice that this same 30 period moving average has been a decent level to watch as it provides overhead resistance ( see the left side of the chart ) for price rallies. Price has popped above it and is sitting right at a band of overhead chart resistance. It pushed past the top of the band on Friday but fell back.

From a fundamental perspective, if these emerging market credit concerns greet the market Sunday evening and Monday morning, one would expect gold to punch through and move higher. ( Remember the side note I stated repeatedly not too long ago and that gold needed something to dispel CONFIDENCE to kick it higher). That is what happened this week with the currency/credit issues in emerging markets.

Here is how I am looking at this right now - traders with a shorter time frame perspective should go with the flow on the daily but keep in their mind that the intermediate term chart shows a market with a BEARISH pattern. That means rallies are going to be viewed as SELLING opportunities until the weekly chart becomes positive. At that time, the mentality should change and dips should be bought.

Let the longer term charts guide your "big picture" view when you trade. If you are nimble and can move into and out of the market quickly, you can trader on much shorter time frame intervals. Just understand what you are doing and don't get caught up in all the usual hype that will start back up once again now that the metal has moved higher and improved the short term charts. STAY OBJECTIVE and ignore the voices. Let the charts guide your decisions.

Market Response to Emerging Market issues Taking a Deflationary Tone

These credit/currency related crises that we have experienced since 2008 all have produced the same thing after the market begins to sift through the details - a DEFLATIONARY reaction.

By that I mean a rush into the relative safety of US Treasuries out of equities. The result is a drop in interest rates as investors seek return OF capital and not necessarily return ON capital.

In the process, the Japanese Yen has tended to be the recipient of inflows. I am still unclear as to why anyone would regard the Yen as a safe haven currency but I suspect it might have more to do with Yen carry trades being unwound which puts upward pressure on the funding currency as those trades are reversed.

The other thing which typically has happened is we get a spike higher in the Volatility Index or VIX. Here is a chart of what I prefer to call the Complacency Index. For those of you who might be newer to the markets, this index measures investor sentiment in general (derived from option premiums). When it is rising, it indicates investor unease/discomfort/concern with current events. When it is soaring it indicates downright fear/panic. When it is falling or flatlining it reflects complacency/ease/lack of concern/confidence.

To provide you with a better longer term perspective - I am also adding this weekly chart. Note that the current spike upward does not seem to be much when viewed in this light does it?

I am also noticing that commodities in general ( there are some exceptions ) are weak today especially as the US Dollar has actually worked up off its session lows and moved into positive territory. Yesterday the Euro was seen as a safer place to park money than the US Dollar - that has completely reversed today. ECB President Draghi's comments are certainly not helping the Euro especially when he stated that while the economy is recovering, risks on the downside remain and unemployment remains very high. Not exactly a full-throated endorsement of confidence is it?

Copper, another key benchmark, is also lower today. This late session recovery in the US Dollar and further downward movement in equities is actually bringing deflation fears back to traders' minds and as those fears strengthen ( at least for this immediate moment) gold is fading lower along with silver and copper and the other metals.

Emerging Markets Stress Continuing

Yesterday I mentioned that stress in emerging markets was providing strong safe haven flows into bonds and into gold. The Commodity currencies were generally under pressure as a result with Europe benefitting as well as the Japanese Yen. The Dollar is not getting much of a safe haven flow, which coming on the heels of this sort of thing is rather remarkable. US Treasury yields are sinking once again.

The Turkish Lira was a big event yesterday; today it is the Argentinian Peso. Ukranian credit markets, etc,. The list could go on. This is where the bid in gold is coming from especially as equity markets weaken.

This is one of those events where things can spiral out of control very quickly, especially in this age in which huge leveraged bets have been placed.

We will keep a close eye on this but one thing is certain - at least for now - gold is responding like one would expect it to do during times of economic uncertainty.

I am also noticing the VIX is rising once again. It is by no means in "fear/panic" territory but some of the complacency that has marked the US equity markets for so long is having some second thoughts.