U S Interest Rates Driving Gold Price ( along with Ukraine )

Sorting out the movements in the price of gold recently has been like guessing at the weather forecast. Geopolitical concerns, ( Ukraine ) are keeping a firm bid underneath gold as safe haven buying is focused on the potential for further escalations in those simmering tensions. Other factors are working to pressure it lower.

Having said this, I do want to post up a chart for those who are traders and are tracking fundamental factors driving the price of the metal.

I have mentioned many times now that I am of the view that US interest rates, and more accurately, interest rate outlooks, are either providing support to the metal or are working to add to headwinds.

Look at the chart below in which a comparison is made to the yield on the Ten Year Treasury Note and to the gold price over at the Comex  ( RED LINE ).

Go back to November of last year and notice that as the yield on the Ten Year rose, gold headed lower. When the yield on the Ten Year fell, gold tended to rise. The relationship had not been that close prior to November. If you look at the July - mid-October time frame, you can see that the two markets tended to actually rise and fall in harmony for a while.

Clearly in November the market shifted in its perceptions and began looking at interest rates more closely in determining whether or not to allocate capital into gold. For nearly three months, the markets moved in a near perfect inverse manner.

In early February of this year, that began to change  and while the yield on the Ten Year moved sideways, gold prices rose. Then in mid-March interest rates began to rise and gold prices resumed their inverse relationship and moved lower once again. In early April, Ukranian events erupted and that brought about a safe haven bid into bonds knocking interest rates lower. Gold responded by moving higher. Then as fears subsided interest rates moved back up again and gold moved lower. So far in May, interest rates have continued moving lower as safe haven plays are still around due to Ukraine and gold has moved back above $1300 as a result.

Here is my point in all this - the wild card for gold prices at this time are the events in Ukraine. As long as investors are worried over events there, interest rates are going to stay low due to safe haven flows pushing bond prices higher and thus interest rates lower.

If Ukraine events do subside ( and right now that does not seem to be the immediate case ) I would look for interest rates to start rising again meaning that gold will come under renewed selling pressure.

Here is the takeaway from all this - as long as US interest rates stay subdued, the US Dollar is going to have trouble rallying and that should tend to support the gold price. Take away any safe haven buying for any reason, and rising interest rates should bring a bid into the US Dollar and that will pressure the metal.

What do we get next? Who knows? The truth is no one does. Remember that when the predictions start up again. The market's opinion is the only one that matters.

Further Drawdowns in GLD

The reported holdings of GLD, the big gold ETF, are updated as of the close of trading this past Friday ( 5-2-2014) and they showed another reduction.

For the week, GLD showed a drop of 10 tons in gold holdings. Friday alone brought a drop of 2.7 tons, which I find rather remarkable considering the fact that gold over at the Comex shot up sharply when news hit the wires about the first of two helicopters being shot down over in Ukraine.

I have mentioned previously, that many in the West are looking at rallies in gold as selling opportunities. This seems to be the case with GLD. One might have thoughts that with the safe haven plays that we witnessed across the futures market on Friday ( Yen higher, gold higher, and bonds higher ) , that GLD would register an increase in gold holdings. That was not the case.

Western sentiment towards gold remains dubious therefore. Since the beginning of the year, GLD has dropped 16 tons of gold. Total holdings are now reported at 782.85 tons, a 64 month low!

I put a lot of credence in this big ETF as a gauge of Western-oriented investment gold demand. When gold was in a strong bullish uptrend, reported holdings rose along with the trend. When gold entered its current bear market, reported holdings began to drop alongside the move lower in price. Demand from Western-based investors has thus ebbed and flowed along with price which is as it should be.

When we see these sorts of divergences, with the Comex gold price going one way and the reported holdings of GLD going the other, it indicates that the move higher in price was being primarily driven by short covering over in the futures market. Short covering rallies are often quite spectacular and can be very compelling because they can drastically change the chart picture in a short time, but one needs to exercise caution because they can flame out just as rapidly as they flamed on, especially when the move is due to a geopolitical event. Such things are notorious for generating many wild swings in price.

Traders therefore need to be cautious and remain flexible. If GLD holdings begin to rise alongside of a rising gold price, that will be a friendly development. For the time being however, that is not what is happening.

Let's see how events over in Ukraine fare the rest of the weekend and what the opening of trade in Asia on Sunday evening here in the West brings our way.

CME Fines Ontario Teachers' Pension Board over Hog Futures Trading

That is the headline that came down a Dow Jones wire story this afternoon. It seems that the good teachers pension board had too many piggies in its portfolio. In other words, they exceeded exchange position limits.

CME fined the Board $15,000 and ordered them to return the nearly $18,000 profit they made in lean hogs back in March 2013 according to the story.

Hey, I wonder if some of that $18,000 happens to be my money?

How do I get a refund?

Seriously however, I do wonder what these exchanges do with that money that they collect, not as a fine, but rather as profits. The teachers' board had to take it out of someone else's pockets to earn it as this is a zero sum game.

I think I will fill out an application and see if that works! Then again, the report does not say whether they made those profits from being on the short side or on the long side. I will have to go back and see where I was positioned back then. I know I was in that market at the time. What would be a bummer would be if I happened to be on the same side as they were. Then what? do all of us traders who are positioned likewise have to hand over our earnings to the CME?

Obviously I am kidding here but it does go to show that these position limits are a big deal. I am of the view that if the exchanges really want to tame some of these broken markets, that instead of fooling around with raising price limits, they should instead deal with position limits and REDUCE them, not increase them like they have been more prone to doing.

What is Copper Up To?

There is an interesting development in copper this week which I feel deserves noting. It pertains to the Commitment of Traders report and the positioning of the hedge fund category.

This category of traders has been net short for some time now. As a matter of fact, the only category of traders that has held the net long interest in the copper market has been the Swap Dealer category. Every other group, the Commercials, the Hedge Funds, the Other Large Reportables and the General Public or Small Spec trader have all been net short.

That changed this past week for the hedge funds. They are, as of Tuesday, now net long in copper. The movement has been consisting primarily of short covering but now new longs are joining in.

Here is a chart of the COT for copper.

Note how the hedge fund positioning at the beginning of this year started out as big net longs only to see them move to the short side of the market in February. They were briefly long again for a week in late February only to quickly establish a larger short position.

I can tell you that a great deal of this weakness was related to both lackluster home sales here in the US but more importantly, continued weakness in Chinese data. Last month they began covering shorts and they have now, about a month later, moved to a net long exposure once more.

So, we now have the swap dealer and hedge funds on the net long side with the commercials, other large reportables and small specs on the net short side.

Here is the price chart:

You can see that the recovery in copper prices pretty much coincides with the shift by the hedge funds in favor of the long side. Once copper climbed back above $3.00 and held there, funds began covering as the downside appear limited at those levels. That has brought the market up towards $3.12 but weak economic data had limited bullish enthusiasm for the metal. Today was different in the sense that the copper market seemed to read the stronger payroll number as a sign that the US economy was strong enough to keep the price supported above $3.00, in spite of doubts about the vigor of the Chinese economy.

Why do I bring this up? Simple - in my view silver prices are tied to copper prices more so than to gold right now. Hedge funds have been gradually moving to play silver from the short side although they remain as net longs, not by a significant amount however. Thus far, the $19 level has been holding as support for silver. It penetrated that level this week but rebounded today when gold took off on the Ukrainian tensions.

If hedge funds continue to move further towards the net long side of copper, there is a good chance that silver will follow suit. Remember silver needs an improving economy to move higher. During any sort of slow down fears, it is not going to move higher. Those who keep trash talking the US economy and in particular the US equity markets, who yet at the same time expect silver to rally, are at complete odds with themselves, even if they do not realize it.

Silver more so than gold, needs inflation to move strongly higher. It certainly needs something to make it convincingly past the $20 level. Thus far attempts at getting past there have not met with much success.

I am the first to admit that when it comes to silver, its combination of being both an industrial metal and a precious metal to some, make deciphering what it is responding to tricky at times. However, a rising copper price is not going to hurt silver, that is for sure. Let's see if copper can climb past the $3.20 level. If it can do that I would think silver can hold above $20. At this point, the jury is still out however.

If copper succumbs to any further evidence of a slowing China, then it is going to act as an anchor on the silver price.

Each piece of economic data that comes out of both the US and China in the weeks ahead will take on great significance in ascertaining whether or not these metals have a shot at starting an uptrend of any durability. More importantly than the actual data however will be the market reaction to that data.

Commitments of Traders Report

There is not really all that much happening with this report for the week. Today's fireworks will unfortunately not show up so we are left to waiting for another week to try to read what happened today.

Through Tuesday of this week, the big commercial category, the swap dealers and the hedge funds were all net sellers. The buyers were the "other large reportables" category and the small trader or general public.

All three category of speculators remain as net longs in gold, although the hedge fund category has rather sharply curtailed that exposure over the last 6 weeks. They have reduced their net long exposure by approximately 50,000 contracts since its peak of this year when they were at 138,429.

What I find rather noteworthy is that in spite of gold's retreat away from near $1400 in mid-March, and the continued sharp drawdown in reported ETF holdings out of GLD, speculators remain stubbornly bullish in regards to gold.

That is a double-edged sword. On the one hand, their refusal to liquidate more longs is preventing aggressive selling from taking place and keeping gold above chart support. They are certainly doing their best to hold the metal up.

The other side of that sword is that any downside CLOSING BREACH of an important chart support level ( $1280 - $1270 ) means we are going to see quite a wall of technically related selling occur.

A good example of this can be seen in the early morning reaction to the payrolls numbers. A big wave of selling engulfed the market immediately. Were it not for that flare up over in Ukraine, it is highly unlikely the market would have recovered from that.

So far the bulls are preventing prices from closing below that key support level. It has penetrated several times now only to encounter buying, buying tied to a geopolitical event.

Based on what I can see at this point, any lessening of tensions over in Ukraine are going to see aggressive selling. Any escalation will see further short covering as what took place today.

Any of you who are soothsayers and know how events over there are going to play out, please inform the rest of us so that we may place our positions accordingly.

In the meantime, we mere mortals must wait and see.

I am noting a bit of weakness or more accurately, hesitancy in gold to stay above the $1300 level here late in the session. It should be noted that some very big interests are looking to sell any rallies in gold as they see some of the fundamentals that have been supporting it being removed as the year progresses.

We are talking mainly a phasing out of the Fed's QE program. Today's payrolls number further fanned talk about that and potential interest rate hikes in early 2015. That seems a good ways off at this point but if traders see a trend of stronger economic data and especially any upward movement of the US Dollar, gold is going to come under more selling pressure. I would continue to watch interest rates here in the US.

The yield on the Ten Year which was up near 2.7% at one time early today, ended up falling as the safe haven bids brought it down to 2.591%. That is a pretty big swing for that particular Treasury.

Oddly enough, the VIX actually moved lower today. I am not sure what the heck to make of that. I would have expected to see it creep up somewhat. It could be that US stock traders are of the mindset that while the events over there in Ukraine are worth noting, the situation is not likely to spill over outside of that immediate area anytime soon. That might or might not be true but based on that VIX reading, I would think that traders are of that opinion until or unless the events prove otherwise.

The flip side for gold remains the same - geopolitical events are supporting the metal and will continue to do so as long as the market is concerned with chances of escalation in tensions. Look at what the downing of two helicopters can do if you doubt this!

Remember, when a situation is this fluid, stay nimble. Don't get married to any one position for too long. And I mean either long or short! If you really are risk adverse, just stay on the sidelines and watch the rest of the players chop each other up. Find another market to play in - there are plenty of them besides gold.

Ukraine stirs Safe Haven Plays

Look at the following charts:

First the Japanese Yen - I will never understand how the Yen of all currencies, could be considered a "safe haven" by any standard of measurement but apparently it is.

Here is that one minute bar chart I promised you on the gold market and its goofy ride this morning.

 

Here is the bond market:

 

 

 

Do you see the pattern on all three charts? It is the same isn't it? At nearly the same time or very close to the same time, all three markets reversed course after moving lower on the payrolls number as the market's attention shifted almost immediately to the wire reports of the Ukraine conflict and that downed helicopter.

 

Never a dull moment when we are dealing with geopolitical events. This is why making predictions about market movements, is so foolish. No one knows from day to day what we are going to get when these crises occur. Some days the tensions ease; other days the tensions flare. Just try picking the flower petals off of a daisy - "She loves me; she loves me not" and you have about as good odds as guessing what is coming next.

 

Traders out there - if you are unsure about a market - you do not need to be in it trading it. Sometimes just sitting on the sidelines watching is the best place to be until you can get a sense of things. There is no sense in risking your capital on something tied to unfolding events, which can go either way.

 

Exercise extreme caution right now in trading gold and do not get caught with too large of a position. There are times when one needs to have more concern over how much you might lose rather than how much you might make. Remember that!

The Old Reverse Flash Crash

Well, the day we have all been waiting for, again - another Friday payrolls day. The number came in much better than the market expected and the result was instantaneous - gold promptly fell some $14 breaking through $1280 again but then, within less than a minute, the losses were cut in half. Within the span of an hour, it had recaptured all of its losses and then some.


NOTE - the website is not allowing me to post the one minute chart for some reason. As soon as it does, I will get the chart inserted so that you can see the extent of the huge price swing. It is quite graphic and further underscores the havoc that these infernal computers have unleashed on our markets.

What gives? who in their right mind would swallow up the entire string of offers regardless of price or the size of their buying. Did they not know that by so doing they would obtain the worst possible buy price? Obviously this is horrible and it proves that gold is being manipulated on the buy side by a sinister force out to punish the shorts for daring to sell gold with such impunity. These reverse flash crashes must stop!

Those of you who read this site regularly know that I am prone to use hyperbole/sarcasm to prove my point. Actually there was nothing sinister, nor evil about the price action. What happened was that the computers shifted from selling to buying within seconds because while the payrolls number put a firm bid under the US Dollar, events in Ukraine escalated with that attack by its military on the town of Slovyansk, which is being held by pro-Russian militants. These same militants apparently shot down at least one helicopter.

That this area flared up on a Friday, made the bears nervous about getting too aggressive, even the face of a surprisingly decent jobs number, because no one knows what might transpire over a weekend. They did not want to get caught too short just in case.

However, this underscores my contention made this week - gold would be much lower were it not for this Ukraine mess.

The Gold Cult

Cult  -

1.) a religious group which promotes worship of a human leader and devotion of one's life to a specific purpose.
2.)  A misplaced or excessive admiration for a particular person or thing

Cult of Personality -

1.) Intense devotion to a particular person.

Writing this short treatise brings me no particular pleasure but rather sadness. Sadness that some whom I count as friends have become trapped in this prison and cannot see it.

I have chosen in the past, and do so now again, to describe a certain portion ( I want to be clear that I am not lumping all under the same heading ) of the pro-gold or honest money camp as being cultish in nature. The similarities between their comments, writings and blind adherence to an inanimate object and those trapped in a religious cult are striking.

Having had some personal experience in dealing with people trapped in religious cults, it is not hard for me to see the same symptoms in those who have been swallowed up by the cult of gold. The most obvious of such symptoms is the inability to see reality as it is. Statements of fact, logic, sound reason, empirical evidence - all are easily dismissed by those snared in the cult if such things happen to contradict the centrally held tenets. Those who speak against the cult are viewed as unenlightened or uninformed at best, and inimical to truth and therefore enemies at worst.

Generally speaking, a cult also has either a charismatic leader/(s) whose authority is beyond questioning. Those who would challenge the statements of such leader are immediately ostracized if such a challenge arises from within the cult, or ridiculed and held in contempt, if the challenger is outside of the cult.

These leaders more often than not, claim to possess an esoteric knowledge, a sort of key to the mysteries of the universe, which lesser gifted humans are not capable of receiving. They tend to reinforce this as often as possible so as to lend further credibility to themselves among their followers. This special insight into things either divine, or in the case of gold, economic in nature, is claimed so as to strike a sort of awe bordering on the realm of reverence.

Free thinking is discouraged if not outright forbidden as the members are expected to fall into line behind the prescribed belief system.

As you note these characteristics, ask yourself if this is not what we are seeing in some segments of the hard asset community?

Let's be brutally honest here - both gold and silver have been in bear markets for some time now. Silver, three years ago this month, had an epic collapse in price from just below the $50 mark to near $33 in a single week. It never recovered that level, moving up to near $44 before imploding. Gold peaked at over $1900 in August 2011 and while it managed to recover to near $1800 three months later, it has not been able to clear that level again, even after making two tries at it, the first in February 2012, and the last in September 2012.

Both metals have been trending lower since that time having managed to bounce slightly but still remaining well off their peak levels set over two years ago.

An open-minded, serious and conscientious investor/trader looking to maximize his or her return on monies, would have taken notice of this some time ago and acted accordingly. Common sense/prudence dictates that investors put money to work in those areas where they can capture the maximum amount of returns, risk factors considered.

In spite of this, for more than two years, we have been regaled with one outlandish claim after another for both gold and silver. In gold, we have had theory after theory, breathlessly advanced as to why the price of the metal is going to soar "any day now". Among these were backwardation claims, negative GOFO, JP Morgan cornering gold on the long side, Comex defaults, China buying that raided the gold ETF, etc, etc.,etc. In EVERY SINGLE CASE, those who proposed these theories and those who subscribed to them, were left holding the bag looking like dupes at best and like charlatans/hucksters at worst.

Yet for some bizarre reason, many of those people who follow the "advice", prognostications and predictions of these "experts" continue to dote on their every word, every interview and every speech in spite of the fact that many are losing their life's savings by so doing. How else to understand this phenomenon except to deal with it as a cult.

One would think that the severity of the financial losses that they have endured would have awakened them to the reality of what is taking place. In some cases, fortunately, it has. But tragically, in far too many instances, those who are trapped in the gold cult just dig in further, awaiting the inevitable rocketshot to the moon during which they all hope to become rich.

It reminds me of many evangelical prophecy hucksters each claiming to have a special revelation that Jesus was coming any day now. Some, like the famous book " "88 Reasons that Jesus is coming in '88" ( that was 1988) could not have been more wrong. Yet that did nothing to dissuade them from coming out with the next prediction. All they had to do was admit that they have miscalculated somewhat but this next prediction would be spot on.

I personally know of two families, who sold their homes, cancelled their life insurance policies, etc,. while they waited for the heavenly rapture to take place. Needless to say, their lives were wrecked as a result. That however did nothing to impact those "prophets" who issued their predictions - life went on as usual for them, if not better as they reaped the profits from their books which they of course promoted to these poor, but sincere victims. Some of them are still out there plying their deception even now.

I find it remarkable that men, whom God has given a sound mind to and the ability to think, reflect, ponder, analyze, interpret, etc. can be so gullible and continue to allow themselves to be taken advantage of and serve as willing dupes to those who do not have their best interests at heart. The willingness of human beings to allow self-inflicted pain to continue coming their way is an astonishing thing to behold.

Let me just close this by saying, if you are an advocate of honest money, good for you. I like to think that I am. But do not allow your convictions on these matters to cloud your judgment as an investor/trader. Recognize that until the vast majority of investors see things in the same manner as you do, yours is going to be a lonely, lonely habitation. Cast aside subjectivity and let your own senses and sound judgment be a guide to you. Be objective, especially in regards to market action but even more specifically, in regards to a shiny yellow piece of metal.

Gold is an element. Yes, it is rare but it is an element. It is not a god, nor are those who preach it divine or privy to any sort of esoteric knowledge. Judge their predictions and if found to be false, reject them. Gold is an asset class; nothing more, nothing less. Remember that.

Here is hoping that some who read this come to their senses and escape the snares of so many charlatans and wrong-headed prophets. Think for yourself!