"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, August 31, 2011

Monthly Gold Charts - August 2011

What an impressive performance by Ol' Yeller for the month of August! Note that Gold has bettered the all time high CLOSING price on an inflation adjusted basis.

Gold marking time

Gold has been relatively quiet after the extreme volatility of recent days, a very welcome development. You can note the declining trend in volume as evidence of the more "tranquil" trading conditions. We are currently running into overhead selling resistance near $1850 with buyers either unwilling or unable to take it through this level without some sort of fresh news. Sellers meanwhile have been thwarted in any efforts to break prices significantly lower.

The present posture is one of consolidation with some buying surfacing down near the $1800 level and further below towards $1780.

A strong push through $1850 that can carry through the $1860 level would set up the potential for a push towards the recent peak near $1900.

There is some pressure coming into gold based on today's weakness in the HUI and the inability of that index to push through tough overhead resistance at the former all time high set back in April of this year. Last week the miners pushed up through the 600 level but could not quite muster enough strength to best that previous peak. Price then set back but has subsequently rallied back towards 600 once again, failing today to extend those gains and dropping off lower. For all that, one can still see quite clearly that the miners have been in a nice uptrend since bottoming out in mid June. The more time this index can spend above 580 the better the odds grow that it is soon to mount a breakout and begin its next leg higher.

Silver's status is similar to that of gold's right now. It is consolidating with a short term bias that is friendly. It is being prevented from moving towards $44 by selling originating near the $42.50 level. That will have to be overcome if this thing is going to have a shot at a stronger climb. Note that it is trading near the 50% Fibonacci retracement level from the April peak and May low.

Support is still down near $39.30.

Saturday, August 27, 2011

Trader Dan on King World News Weekly Metals Wrap

Please click on the following link to tune in to my regular weekly radio interview with Eric King on the King World News Weekly Metals Wrap.


Friday, August 26, 2011

Silver - Daily Chart notes

Silver has thus far held solidly at the intersection of three major chart support levels detailed on the following chart. Horizontal support near $39.50, the 38.2% Fibonacci retracement level of the move from $50 down to $33, and the upsloping trendline created by the price action of ther last 6 weeks. Now the bulls will need to take it through the 50% retracement level once again and keep it ABOVE that level to set it up for another test of overhead resistance near $44.

4 Hour Gold Chart

Trying to explain the reasons for the price action in the markets today is an exercise in futility as there are far too many cross currents at work and far too many hedge fund computers sloshing money all over the place. And this does not even take into account the parasitical HFT crowd.

That being said - gold initially dipped a bit lower and came off its best level early in the session as Bernanke's highly anticipated speech turned out to be a dud. Why these guys expected him to come out and announce another round of QE3 escapes me for the reasons we have detailed here on this site previously. The political environment just did not permit it without a SERIOUS DEGRADATION of the economic data (not to mention the glaringly obvious fact that is DOES NOT WORK).

After the initial knee jerk lower (which also took silver down with it), gold moved back up again as the speech was interpreted by the market as saying that the economy was very weak and that the Fed was closely monitoring the upcoming economic reports. Most took it as saying that the Fed left the door open for additional monetary stimulus next month in September and reinforced the demand for gold as a safe haven. Once that theory seemed to gain traction, gold began money steadily higher as the Dollar began heading steadily lower.

I also happen to think that with Bernanke passing the ball off to the political leaders to address the structural issues plaguing the US economy, those who wanted to put their trust in those clowns to fix anything decided that gold looked mighty attractive and decided to trust it instead of their princes.

The other issue working for gold was the thinking that what ECB President Trichet might say this weekend would actually be more important that what was contained in Bernanke's speech. After all, Europe is experiencing its own version of its credit crisis and the ECB is going to be under pressure to deal with that, not the Fed. Whatever they might do, if anything further, to provide some form of monetary accomodation or further increase the size of their bond buying program,  makes gold all that much more attractive.

Let me make a quick comment in regards to some of the "experts" that are continually trotted out to pontificate by stating that "gold is not a safe haven". Have you ever noticed that it is ALWAYS AFTER A SELL OFF IN GOLD that these mushrooms pop up and appear for the sole purpose of annoying us? They are never anywhere to be found while the metal is making one record high after another. But let the market experience a normal price retracement such as those that occur in any bull market and out they come dazzling us with their brilliance. My response is simple - if they think it is not a safe haven, then they should have some courage and short the market with reckless abandon to prove how smart they are? After all, once it broke out above $1500, they could have sold it short over and over again all the way to $1900. After all, a $400 dollar drawdown on a short position would only amount to a paper loss of $40,000 on each short position initiated. What's that to these wizards???

I cannot think of any other statement that so utterly disqualifies these individuals from being taken seriously as stating that gold is not a safe haven. Not only does it display amazing ignorance, the statement has also been proven to have been blatantly erroneous. What else can explain a $400 rally since the beginning of July? Indigestion induced by a bad batch of pepperoni pizzas that made the round in the investing community?

Gold is and always will be a measure of the CONFIDENCE that investors have in their monetary and political leaders. It is that simple.

If you doubt my comments, then let a more objective argument make the case and convince you of the utter stupidity of these babblers who are legends only in their own minds. Following is a chart comparing the price of gold to the price of the long bond. Both are considered CLASSIS SAFE HAVENS.
Which one has proven to have been the better choice as a safe haven since the first inception of the Fed's failed QE policies were first begun? Yes, you have guessed it - Gold.

The chart settles the argument. Ignore the babblers and pay them no heed. They have been discredited and can be and should be ignored by savvy traders and investors.

Wednesday, August 24, 2011

HUI once again retreats below 580

Watching this game being played by the shorts in the mining shares as they attempt to extricate themselves from their rather tenuous short positions in the shares is shaping up to be mighty entertaining.

On Monday of this week, the mining sector finally blasted through the stubborn line of resistance that has formed on its price chart near the 580 level. It ran right through the 600 level and almost as high as 610 before settling near the high of the session. All in all, very bullish chart action. Yesterday it moved lower along with the gold and silver markets but bounced off the 580 level confirming that former resistance level as the new support level even though it ended lower on the day. It kept itself above the low of MOnday's session as well. That too was friendly.

Today, the shares were mangled with the result that the index collapsed back through that same old 580 level and was unable to regain its footing above it before the close of the trading session. It did managed a decent bounce off the session low however.

Since the middle of June, the mining sector, while lagging the performance of gold (and silver to a certain extent) , has been in a definite uptrend marked by a series of higher highs and higher lows. While the long suffering share holders have been distressed by their lack of upside activity, as long as the index stays above the uptrend line shown on the chart, it will still be in a bullish posture although it will have to clear 610 to get another strong leg to the upside.

If this index recaptures the 580 level within the next couple of days, the shorts are in trouble.

Silver Chart

Silver was whacked along with gold in today's session as technical selling kicked in after the takedown began once it appeared that the run to $44 would fail to build on its gains. After $42 gave way, selling accelerated as down side stops were run which were helped along by the frontrunning High Frequency Trading club ( also known as market parasites and general pond scum).

The market did bounce higher from the $39 level however and while it still looks heavy, the level from which it bounced is the confluence of three technical support levels on the chart. The first is horizontal support noted in heavy red which also is the former Fibonacci 38.2% retracement level which was a pivot level around which silver was trading for the better part of the last 5 weeks. You will also note a short term uptrendline which has been forming drawn off the last June lows and the early August swing low that comes in very near this level as well.

Ideally, we would like to see silver hold in this general region to prevent a deeper fall towards $37.00 - $36.50. I would feel a bit more confident about its immediate prospects if it could regain its footing back above the former 50% retracement level up near $41.25 - $41.50 on the price chart.

Volume was very heavy today indicating a great deal of panic type selling was taking place. Unlike the drop that occured in silver back when it neared the $50 level in April, the Commitment of Traders report shows a relatively low level of speculative interest on the long side compared to past  for the managed money or hedge fund category. They are currently about 11,000 contracts shy of their net long position size that they were holding back in April at the peak.

Also noteworthy is the fact that the Swap Dealers are barely net short while the Commercial net short exposure is also relatively small. The latter two categories rarely if ever sell into downward silver markets so if any selling is going to occur in silver, it is going to have to come from either additional long liquidation or fresh speculative side short selling.

In regards to the former - while the hedge funds are net longs, after today it is fairly easy to theorize that that long side exposure has been whittled away considerably. That begs the question - is this category of traders going to start aggressively moving to the short side? One would be rather challenged to build a fundamental case for that. In the meantime  we will watch to see where chart support emerges and where the long liquidation will ease off.

CME GROUP hikes margins for gold

Here it comes....

CME GROUP - Gold Margin Rise Effective After Close Of Business Thursday

Margins will be raised 27%

Old Margin  $7,425
New Margin  $9450

Old Maintenance  $5,500
New Maintenance  $7,000

Tuesday, August 23, 2011

Equity Bulls Banking on Fed's Bernanke playing the role of the Easter Bunny

Stocks are rallying in today's session on anticipation of another round of QE to be announced by Chairman Bernanke this Friday at the annual Jackson Hole, Wyoming meeting of various monetary officials.

As a matter of fact, the commodity complex is rallying as well with the CCI (Continuous Commodity Index) moving back towards the top of its recent trading range. It certainly appears that the hedge funds are trying to send a signal to Bernanke to bring his bag of market jelly beans to the meeting.

What everyone of these reckless money changers are remembering is last year's meeting where the first hint that another round of Quantitative Easing was in the works was announced during Bernanke's speech at this very same event. The hedge funds are hoping that lightning will strike twice. Methinks that they are going to be seriously disappointed.

Politically Bernanke is in no position to announce another round of QE. If he were to try this route once again, a route which has obviously been an abject failure considering that between QE1 and QE2 over $2.5 TRILLION  was spent with nothing to show for it except a collapsing Dollar and rampant inflation in energy and food prices, he would unleash a firestorm of protest here in the US and certainly abroad by our largest creditors, China in particular.

The Chinese have already made quite clear their extreme displeasure with the impact that the QE programs are having on that portion of their reserves which are Dollar-based. One cannot continue to poke their banker in the eye without generating an unpleasant response.

I should note here something I consider extremely telling - if the equity bulls are getting giddy over the prospect of more Fed-dispensed Jelly Beans, the bond market is not buying it. Bonds should be getting hammered with both equities and commodities moving higher and the Dollar lower. Instead, they are barely lower with any dips down generating additional buying. One gets the sense that the bond bulls are just itching to snare the shorts once again and proceed to generate yet another short squeeze.

The prospect of another round of QE, instead of generating buying in gold and silver, is leading to selling. With gold being so overextended to the upside, this is welcome. With silver however it is "Heads - I win; Tails - You lose" for the silver bears. They are talking up silver as a safe haven metal which will not be needed if another round of QE is unleashed and the Fed comes to the rescue of the markets once again. The problem for those guys is that if the RISK trades come back on, then silver is going to be very difficult to keep down, especially if the copper market starts rising.

I would like to see silver keep its footing above the $42.00 level, especially after yesterday's strong showing, if it is going to move back up and revisit resistance near the $44 level.

The HUI needs to hold above 580 to prevent another round of selling in the mining shares.

Monday, August 22, 2011

Monthly Gold Chart with some Price Projection levels

Gold has shown continued strength going into the Asian session this evening. In the process of so doing, it has reached the upper limits of the pitchfork extensions shown on the chart. I have chosen the monthly upon which to do some analysis so as to get the long term picture and point out several things which merit mentioning.

Notice that the dark green center line has acted as the upper boundary for the entire move since the reaction that occured in the gold price in late 2009, early 2010. All subsequent rallies met this line and held below it until this month when price exploded through the center line alerting that the trend higher in gold was now accelerating.

The three red outer lines and the single blue outer lines are projected levels where we can expect to see some resistance form. Thus far the two red lines nearest to the center have failed to cap the price rise. We are currently trading right on the outer 3rd red line of the upper set which this month passes through the $1925 - $1935 level. Beyond that is a blue line which this month comes in near the $1950 - $1960 level.

What we are attempting to do is to project levels at which we might expect some selling to occur and a potential reaction in price to take place. There is nothing set in stone which states that these levels must produce selling. They are merely given as POTENTIAL areas of selling resistance. Should the market blow through these levels, then we will have to resort to other methods to anticipate some potential inflection points.

For now, traders can monitor price action near these levels and trade accordingly.

Should we actually get a turn lower in price, any subsequent retracement should find buying support at each of the upsloping colored lines on the way down. The dark green center line should hold any retracement if the market is going to continue with a strong and sharp advance. Thus gold could move lower to the tune of $150 - $170  from current levels and still be very strong on the chart. If such an event were to occur, the bulls would like to see the price then hug that same green center line as it forms its low and bounce upward off of that level as the overall trend continues to the upside with a bit less steep of a price advance.

Gold to Crude Oil Ratio indicates profitability of Gold miners

Following are two separate charts tracking the ratio of  the price of gold to the price of crude oil.

The first is Brent Crude, the global benchmark for crude prices and the second is WTI crude, which is the Nymex benchmark and the one most often quoted by American wire services and news organizations.

The reason for the charts is that which Eric King and I discussed on this past Friday's KWN Weekly Metals Wrap where we talked about the severe undervaluation of the gold mining stocks. The point we were discussing was the direct impact that lower energy costs have on mining operations. The rise in the price of gold with a simultaneous fall in the price of crude oil, is lowering input costs for mining companies at the same time the price they are receiving for their finished product is rising rapidly. That is a surefire recipe for increased profitability moving forward. Given the fact that one of the arguments against buying the miners has been that their input costs have been rising at the same rate that gold has been rising, this effectively kills that argument.

It does seem from the price action of today's session, that some of the market players are finally catching on to this. If even one or two of the major shorts in the gold shares begin covering in size, the resultant buying wave will take prices of many of these shares through technical resistance levels on their price charts, resulting in further short covering as the hedgies which foolishly overstayed their welcome and attempted to squeeze the last 20% out of an otherwise profitable trade, begin to get snared by their own greed.

A closing monthly push through the all time high marked on the chart should see the miners do some rapid catching up to the gold price and reverse the downward trend in the HUI/Gold ratio.

Saturday, August 20, 2011

Trader Dan on King World News Weekly Metals Wrap

Please click on the link below to listen to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap.


Thursday, August 18, 2011

Silver Stuff

I wanted to post a few comments about the Silver market for some of those who have been asking me to do so. As mentioned in previous posts here, silver is finding itself caught in a war between those running out of risk trades who are selling commodities and equities, and those who are buying it as a safe haven metal.

That tug of war has prevented it from surging alongside of gold but nonetheless, even in the face of such selling, it has been attracting enough buyers that its technical chart picture is slowly but steadily improving.

I want to first note that it has regained its footing above the 50 day moving averaage having bounced firmly off of that key technical level last week. Since then it has established a nice little uptrend which has taken it back to the region where it has encountered selling resistance over the last month or so. I am speaking specifically about the region near and just above the $40 level.

If you will also note, all four of the major moving averages that I use in tracking this market, are now moving higher with the silver price ABOVE those ma's. That is bullish. What I would like to see and what it appears that we are likely to soon get, is for the 10 day moving average (blue line) to move up and crossover the 20 day moving average (red line). That would put the market solidly in an uptrend as it will take some stability at these current price levels for such an event in the moving averages to occur.

If, and this is an important "IF" from a technical perspective, silver can close out the week tomorrow on a firm note, preferably with a push through the $41.30 - $41.50 level, it will enter the following week on very solid technical ground and set up a run to the $44 level for starters.

It still has some downside support first near $39.50 which is followed by another level of support near the $38 level. It would have to breach that latter level for a move towards $35 again.

At some point, as gold continues to move sharply higher, silver will become increasingly attractive to value-based buyers as it is still very affordable if one considers the current options in what can be termed "precious metals", platinum ($1845), palladium( $758), and gold ($1835). None of these metals are cheap any longer ( in the sense that the common man on the street can plunk down some loose change for an ounce) making the little grey metal, "poor man's gold", likely to outperform on a percentage basis in the coming months.

Mining Share ratio to gold back at pre QE1 levels

The following ratio chart says in a picture just how severely undervalued the gold stocks are in relation to the price of bullion.

You might recall that as the credit crisis erupted in the summer of 2008 with the failure of Lehman Brothers and subsequent meltdown of other large financial firms, stocks and commodities plummeted as the Yen carry trade unwound and deflationary fears escalated.

The rumors began to circulate as the crisis deepened that the Federal Reserve was getting ready to implement some unorthodox policies in an attempt to stave off the deflation and prevent a credit market lockup. That was when the phrase, "Quantitative Easing" first began making the rounds in the markets.

So confident were traders that the Fed was not going to sit idly by while the entire US financial system imploded that they began covering shorts and bidding up the price of equities and commodities ahead of what was then announced with certainty in November of that year.

Look at the chart and you can see that while the HUI/Gold ratio is not at the depths it reached during the peak of the credit crisis, after today, it is now at levels last seen just before the QE1 was actually implemented.

If you look across the chart to the left and note the blue line reaching back to the end of 2001, you can see that the mining shares relation to gold had actually plummeted to levels last seen near the VERY BEGINNING of the now decade + long bull market in gold. That is how cheap the shares had become to gold bullion in the third quarter of 2008.

Quite frankly, we are not all that far off from levels seen at that time with today's round of selling across many of the mining shares. This has occured in spite of the fact that we have spent more than $2.5 TRILLION between QE1 and QE2 and seen the gold price leap from $700 in November 2008 to over $1800 as of today's close.

Based on this fact alone, either the price of gold is going to have to plummet quite sharply from current levels or the shares are going to be at levels last seen in relation to the price of gold bullion when the bull market in gold began and that was at a price level of $270-$290 gold. While gold may correct at any time from its strong rally, why in the world would the gold price be the one moving lower given the current state of the global economy and particularly with all the implications regarding the integrity of the currencies of many nations in the West? The only way to correct this glaring imbalance is for a very sharp and incredibly swift rally in the mining sector.

I have been detailing the ratio-spread trade being employed by the hedge funds across the mining sector for some years now. As a trader I understood the rationale behind that trade - why risk issues related to mines such as management changes, labor disputes, environmental lawsuits, hostile laws and regulations, aging mines, etc. when you can get leveraged exposure to gold by using the ETF's instead. One could buy the ETF or Comex gold and sell short some of the weaker gold shares and laugh all the way to the bank. As an investor myself in the gold shares, I was not happy to see this trade but I could understand it.

I must say that it has now reached a point where those who ply the trade are treading on very thin ice. There is no longer a fundamental case that can be made to justify the trade at current levels of the shares in relation to the price of gold. Smart traders will run a trade as long as they can but they will leave the last 20% for the foolhardy and the novices who think that they are clever enough to pick exact tops or bottoms in markets. The pros do not practice such stunts - if they do, they do not remain pros for much longer but soon become, "EX" traders.

The first hedge funds out the door of this trade are the ones who are going to make the money in it. They will take their profits and they begin looking for another golden goose that may lay yellow eggs for them. The ones that stick around and think they are quick enough to exit before getting run over by all the rest of the funds in such a crowded, lop-sided trade will be the ones who overstayed their welcome and end up losing big when they could have retired the trade with decent profits had they not been so mindlessly greedy.

The first inkling we get of any acquistions by a major gold mining outfit of a quality junior and it is game over for this trade.

Wake up hedgies - the trade to have been in for the last few months was to be long the miners and short the broader markets. There was your money maker. How many times on this site did we mention this trade and urge you to get out of the wrong one? Stop relying on your damned computers and do some thinking and analysis on your own.

Wednesday, August 17, 2011

S&P 500 Technical Analysis

Stocks have embarked on a relief rally ever since it appeared that the Fed was going to keep interest rates at an ultra low level and the ECB was going to step in and buy up Spanish and Italian Debt. While such actions tend to keep investor fears subdued it does nothing to actually genarate true economic growth. That requires structural reform which includes looking at the tax code, cutting excessive and burdensome regulation, andgetting the central governments to actually exercise some spending restraint.

Traders are of the opinion that the Central Banks will intervene to prevent any worsening of the factors that have precipitated the move away from risk but at the same time, they all realize that serious problems are still lurking in the background and have not really been dealth with.

I am not sure what trigger might set off another round of broad based equity selling but if the market were to move back down towards the recent low near 1075 and fail to hold there, it will drop at least another 100 points before any technical support will surface based solely on the price projection given by the pennant formation.

Equity bulls really need to get the index above the 1250 level to spook the bears and preferably above the falling 50 day moving average at 1275. That seems a tall order given the state of the US economy. Perhaps the best that they are hoping for is to settle for a draw with the bears and bounce the market back and forth in a wide range trade giving the economy time to improve on its own. Then again they might be crossing their fingers waiting for Uncle Ben to give them some sweet whisperings about another dose of QE when he gives his speech at Jackson Hole near the end of this month.

Given the political firestorm that would set off, I doubt we are going to get anything quite that drastic at this point. We would need to see an equity market debacle to given them the courage to do any such thing as that would basically be the last nail in the coffin of the US Dollar. The Fed has been roundly and rightly criticized for the effect that its two previous doses of QE had on the greenback and the subsequent spike in gasoline and food prices which negated any stimulative impact that the easy liquidity might have had, if any.

Gold - 4 Hour chart update and comments

The ability of gold to push past $1780 set the stage for its test of the $1,800 level. The two lines of technical resistance are noted on the price chart. As you can see, the initial approach to $1780 saw gold encounter some resistance from sellers trying to defend that level. After they were unsuccessful, they then retreated towards the $1800 level from which they are attemping to absorb the bids coming into the Comex gold pit. 

Technically, the gold market is now at a crossroads of sort for the short term price action. Volume has been shrinking as it nears $1800 which is not particularly a good sign for the bulls as it reflects hesitancy on their part to get too aggressive at this point. They will need to stand firm here to prevent the bears from getting emboldened.

If the bulls can push price past $1800 and hold it above that level, they have a very real chance at moving back to the all time high. If they falter, then gold will sink back towards $1780 where the bulls will need to step up to prevent it from dropping back to the $1740 level.

The bears are attempting to create a short term double top on the price chart by digging in and holding price near current chart levels; however, to actually validate such a formation, the price would have to be taken down below $1730 and held there.

The big problem for the bears however is that they are running "out of season" for the seasonal chart pattern. Gold tends to strengthen as it moves into the latter part of the third quarter and into the early 4th quarter as the Asian festival season begins, not to mention the Western Christmas season. The sort of physical demand associated with this time of the year then becomes a headache for the shorts in the market, particularly if the conditions which are bringing safe haven flows into the metal continue to worsen.

The bears are going to be hoping and praying for a strong equity markets rally and a lessening of the "fear factors" driving gold higher. Whether they get that or not is unclear.

I should note here that the Continuous Commodity Index ( CCI ) will simply not go quietly into the night. Every time it appears that this index has topped out and is going to validate the deflationists' arguments, it rebounds and moves back up again. By and large, the complex as a whole was higher today bringing the index back up towards the 650 - 655 level which has been acting as a resistance zone on the chart.

The index has been in a very gradual trend lower on its daily price chart but has not confirmed a solid trending move. It still remains a very good gauge of the risk trade vs the fear trade in this regards. When traders are comfortable with risk, the index moves higher. When traders are running on fear, the index moves lower.

With this CCI Chart in mind, take a look at the following silver chart and you might see the type of connection that exists between the two. The CCI peaked in late April; so too did Silver. The fear trades knocked the CCI down; so too did these trades knock down the price of silver. In effect, silver has been held hostage to the broader climate of risk aversion that has been dominating the market for the last few months.

There is a difference however. The CCI has been in a broad consolidation pattern with a weaker bias; however, Silver has been in a broad consolidation pattern with a friendly bias. If commodities were to start another broad based rally, silver would accelerate up and out of its congestion type pattern very quickly as it continues to hold together better than the overall sector as a whole. It will not matter what the stimulus or triggering factor might be -the chart says it wants to go higher given enough impetus or momentum to break it free from its confines over the last month.

Lastly, I once again need to comment on the failure of the HUI to take out this incredibly stubborn 580 level and hold it. It took out that level early in the session today but then failed to build on its gains and moved lower retreating away from the number almost as if on cue. As a trader I must marvel at the obvious footprint being created on this price chart. I can only surmise at the amount of short selling that is being required to hold these mining shares in general from surging higher. One gets the sense that the bears are doubling down and determined to prevent their positions from going underwater. All it is going to take to see a massive short squeeze in this sector is for one or more of these large short sellers to decide that the better part of valor is getting out. The first guy out will win - the rest will get buried. They must all certainly know this.

One last thing - The US Dollar fell down to a major support level (AGAIN) before it bounced slightly higher off of that level. This level near 73.50 is taking on increasing significance. As you note on the chart, it has not spent much time below this area before it moved higher. If, and this is a big IF, the Dollar falls through this level and does not rebound rapidly, things could turn quite ugly for it in a real hurry. I find it rather telling that with all the turmoil and uncertainty besetting the Euro Zone in regards to its debt issues, the Dollar is barely hanging on for dear life. That is not exactly a ringing endorsement of the merits of the greenback in my estimation.

Chavez makes a run at Venezuela's Gold

Both Dow Jones and the Wall Street Journal are reporting this morning that leftist strongman Hugo Chavez plans to nationalize the gold industry of Venezuela. There looks to be little if any influence on the gold price from this news. About the only effect that I can see is on mining companies that have their operations down there.

Monday, August 15, 2011

Gold - 4 Hour chart update and comments

I've moved back over to a 4 hour chart for the time being to try to get a bit tighter view of the recent trading range that gold has been carving out over the last few sessions. The chart resistance and support levels being created detail the range as gold is still finding buyers on dips below $1740 but has not yet been able to clear $1780.

If it pushes through $1780, it looks to me to have enough momentum to try to take another shot up towards $1800. How it reacts there will be extremely important.

The overall chart pattern is still being dominated by that big down day from last week after the market pushed through $1800 but then failed to hold that level after subsequently setting back.

Bulls would not want to see this market spend much time below $1730 or so before rebounding as that would portend a drop towards $1700 initially.

Volume is easing somewhat ( a welcome relief I might add) reflecting a lull in the emotions of traders. After last week's wild ride, a lot of guys are just worn out and glad to be sitting around on the sidelines or trading a bit smaller in size while awaiting some more definitive signals.

One brief note about the action in the HUI in Monday's session. Once again it has pushed right up into a very stubborn and formidable chart resistance level near 580. It has had trouble dealing with this area since May of this year. Going back to the beginning of the year, it had managed to briefly penetrate the level but spent spent less than a month above it before succumbing to selling pressure and failing to hold its hard fought gains.  If it can clear this level now, and if it can hold those gains going into the end of the week, then we should have something to hang our hats onto from a technical perspective. If it sinks back down away from 580 again, it will just further reinforce how significant this level is becoming on the charts. Apparently, there is a lot of pain coming to short sellers if some of the shares rise much further from today's levels and they are making a concerted effort to prevent that from happening.  Any further move higher in gold is going to complicate their efforts immensely.

Saturday, August 13, 2011

Trader Dan on King World News Weekly Metals Wrap

Please click on the following link to listen to my regular weekly interview with Eric King on the KWN Weekly Metals Wrap.

Thursday, August 11, 2011

Margin Hikes help derail gold; HIgher Equities also hurt

I was a bit surprised last evening NOT to see some selling related to the margin hikes announced by the CME Group yesterday for carrying futures contracts in gold. Eventually however, the selling did kick in. Along with the upside move in the equity markets in today's session, that was enough to take some of the wind out of the gold market and bring it back down to earth for a bit.

We have had a nice run higher which was threatening to get out of hand due to the very steep angle of ascent being created on the price chart ( remember what happened to silver earlier this year) so some retreat in prices and HOPEFULLY a bit of stability in the gold price after some consolidation will be most welcome. We also need to give some time to the big physical markets of Asia to get accustomed to a higher gold price. Wild swings higher in price tend to scare some buyers away over there initially until they become acclimatized to the new levels.

This market will remain very jumpy however as any further signs of deterioration out of Europe can and will send gold right back up again. The computer programs at the CME which monitor volatility will be watching to see if additional margin hikes are warranted. As downside support levels on the price chart come into play, these margin hikes will tend to bring additional selling as long positions go underwater that were placed on above $1780. That tends to amplify selling pressure that would not otherwise occur.

If you note the enormous spikes in volume on the price chart I have included below, you can see the EMOTION being reflected in the market. This sort of emotional intensity is very difficult to sustain for any extended period of time so I for one am welcoming what I hope will be a bit of relative "calmness" if we can get it. After daily moves from $60 to $80, a day in which gold moves "ONLY" $20 will be a pleasant relief. So much depends however on what happens next in the bizarro-land of the equity markets so for now we wait and see like the rest of the investing/trading world what the computer algorithms will do next.

From a technical chart standpoint, the market has indicated that it needs a break and that the easy money on the upside is over for a while. Today's BEARISH OUTSIDE DOWN REVERSAL is signalling additional selling should be following. The fact that the market looks like it is not willing to move below $1,740 makes the reversal not as serious as it could have been. Still, the signal is bearish and will have to be noted due to the nature of todays trading which is highly technical.

Now we have to see at what levels we get some two-sided trading to take place. All depends on just how hungry the bulls are to move back into the market. Initial downside support comes in just below $1720 and then down near $1700. That is followed by more formidable chart support near and just below $1,680. There are a lot of potential gold buyers sitting on the sideline who did not want to chase this market higher out of fears of getting caught flatfooted who are eager to get in. They are going to be doing the same thing as the rest of us; namely watching for a level that they feel they can get in more safely.

If the Bulls are now to have a shot at $1,800, they will have to take price past $1,780 and hold it there first.

I did note that open interest, after falling for the last few days, shot up yesterday on the big volume surge higher. It was a large enough increase that I cannot attribute it all to just spreads being put on so it appears that some of the very strong bearish hands were doing a large amount of selling yesterday. The weak-handed shorts were run out in large numbers recently so this new group of sellers is more formidable. It is going to take a very sharp selloff in equities to threaten them in the least.

If you notice, the Swiss Franc is really getting hammered today, down near 4.5% at one point today. That is an excellent gauge of risk aversion so as it moves lower, gold is moving lower alongside of it. These two markets have recently been moving pretty much in tandem. If Swissie reverses higher, so too will gold.

One last note, as usual, the HUI once again failed to better the 580 level. Until it can take that out convincingly, the shares are not going to go anywhere. Once that level gives way preferably on a weekly basis, the shorts in the shares will be in serious trouble. Until then, they can brazenly sell no matter how much further they push them into severe undervaluation territory.

Wednesday, August 10, 2011

CME GROUP hikes margins for gold

Effective as of the close of trading, margin requirements for gold are being raised from $6,075 to $7,425 for new positions and from $4,500 to $5,500 for "current maintenance" margins. WE had expected this to actually come a bit sooner than it did on account of the extreme volatility and extent of the intraday price moves that have recently been taking place in gold. This is a normal occurence in bull markets which begin to see large moves in price and is designed to protect the integrity of the clearing houses and of the brokerage firms, which can set their own margins for their customers.

Apparently the announced hike has not impacted gold the least as it continues to trade above $1,800 at this hour and as of yet shows no sign of weakening.

Gold Open Interest readings indicate a panic among some of the Bears

Please see the following chart along with the notations I have placed in it for some insight into the distress currently being felt by the gold bears at the Comex. This is one of the reasons that the price of gold has been moving up so sharply - forced short covering is occuring as panic sets in on the part of the bears. Only the strongest shorts are going to be able to sustain their positions in this type of squeeze. We'll have to see how far this wave of short covering can take things before all or most of the weak-handed shorts have been run out of this market. Things could get a bit dicey for the longs after that.

Gold setting new record highs above $1800 in the Kangaroo Session

As trade moves into the Australian morning, gold has shot up above $1800 and has set a brand new all time high above $1,810 reaching to near $1818 as I write this. The market is accelerating higher as fear levels ramp up.

It would seem that any euphoria induced from the FOMC statement of yesterday has been long forgotten as fears of European bank solvency are now taking center stage in the minds of traders/investors. There are enough rumors floating around out there that denials from large bank officials are the order of the day.

Traders are fearing a type of meltdown similar to the 2008 credit crisis here in the US which was triggered when Lehman went down and a domino-like toppling of major firms commenced. Regardless of the reason, those who were trashing gold as a safe haven are now having to stutter and mutter their way back to the obvious. Not only is gold going on to make new lifetime highs in US Dollar terms, but also in Euro terms, and in other major currency terms as well. It is functioning as a currency of last resort.

I had to marvel at the comments coming from some of the guests on CNBC today who when asked by the anchors about where investors can find some sort of place in which to hide from the carnage were oblivious to the simple answer - gold. For Pete's sake, what kind of savvy does it take to at least speak the word (gold) when it is making one record high after another. I kept hearing the same thing from some - "Buy large cap stocks that are DEFENSIVE holdings" - oh sure - that means buy something that is going to lose me LESS money than some tech stock.

What about some seriously undervalued mining stocks to go along with gold bullion? After all, on a day in which the equity markets were bleeding red, the HUI and the XAU were noteworthy in their strong upside showing, in spite of the fact that such heavy volume down days have tended to drag them down in the past.

Note that since the bottom reached during the height of the credit crisis which erupted in the summer of 2008, that the HUI has outperformed the S&P 500 over this same 3 year period - and this comes on the heels of a ratio spread trade by the hedge funds who stupidly have insisted on using the miners as the short end of a spread trade instead of using them as the long leg of a broader equity market spread position as I have been advocating for some time now.

While it is certainly nice to see the mining shares divorce themselves from the broader stock market performance for another day, they are still lagging the gains in the metal itself and have a lot of catching up to do. All it will take for this sector to move sharply higher is for the first wave of short covering to begin among some of the hedge funds in earnest. The trigger could very well be acquisitions of some juniors by majors hungry for new properties that could go into production right away or a serious incursion of Chinese investment money into firms with excellent prospects.

Bernanke and company punishing Savers in their efforts to jam the equity markets higher

I want to make a quick point here as a type of follow up to my comments from yesterday regarding the Fed's intentions to run investors out of bonds and into equities in search of yield.

Think about the horrific effects that this stupidity is having on our senior citizens and those who are retired and attempting to live off of the interest on their life's savings. They have none!

What are they supposed to do? Hire some hot shot hedge fund manager to get them into the latest and hottest IPO?

Bernanke and his pals at the Fed are turning the entire nation into a generation of wild-eyed speculators all in an attempt to get a decent rate of return on their saved wealth.

Don't forget this segment of the population when you hear some double-talking politician or monetary authority flapping his mouth about how the Fed is trying to "help".

Punish savers and reward debtors - Welcome to America in the new millenium.

Central Banks losing in the Wars of Currency Interventions

It was just last week that we witnessed the Bank of Japan intervene into the Forex markets to derail the Yen's rally back towards the former intervention level. It had completely erased the losses that it suffered after the round of coordinated intervention by the BOJ, the ECB and the Fed back in March of this year. It was evident from their action that the Ministry of Finance was dealing with political pressures from industry leaders whose exports were suffering as a result of the surging yen and were complaining quite vocally about its levels. Out came the intervention gun by the BOJ and down went the Yen.

But look out! The Yen has come back once again and it has only taken it FOUR TRADING SESSIONS to erase all of the losses that the intervention had resulted in. Talk about a gigantic waste of resources by the Central Bank!

The problem is the sheer volumes of liquidity that are tied to carry trades using the Yen as the funding currency. Traders continue to unwind those trades and run from risk with the end result being a repurchasing of the Yen. That buying is overwhelming any efforts by the Japanese monetary authorities to rein in the Yen.

There is now an effort by the SNB (Swiss National Bank) to derail the Swiss Franc, which is also attempting to take the Franc lower as it has been the recipient of huge inflows tied to safe haven flows. I expect that they will meet with the same "success" as has the BOJ.

Based on what I am seeing, the Central Banks have now become victims of their own policies. They created this beast of liquidity in an attempt to preserve the status quo and now that it is surging back towards their own shores, they are powerless to stem its tide.

Tuesday, August 9, 2011

S&P 500 Update - US Dollar sacrificed

The FOMC announcement this afternoon sent the equity markets into a complete turnabout from yesterday's big selloff. The catalyst? Try the fact that the Fed said that the economy is so weak that interest rates will not be raised until at least the middle of 2013 - a full two years away! That acknowledgement, namely, that growth is so sluggish, the economy so moribond and unemployment so chronically high, sent money flowing into BOTH stocks and bonds at the same time.

How's that for a neat trick by the boyz at the Fed?

Here is the deal - the FOMC is attempting to drive money out of bonds and INTO equities based on the fact that they have guaranteed practically no return as far as yields go on short term Treasuries for at least two years. Think about that. As an investor would you want to lock up money for that long for that kind of yield or would you want to buy stocks and attempt to capture a bit better return on your investment capital. After all, something beats nothing as far as returns go, especially if you think that this easy money policy is going to feed into further asset appreciation as the Dollar further succumbs to the news. Forget about the ECB's quasi QE program to buy up Italian and Spanish debt. The Euro was bought like mad while the Dollar was pounded lower as the Fed is obviously sacrificing the Dollar in an attempt to keep a low interest rate environment in which stocks are rising. That is at least, what they hope to create. I suspect that they are going after higher equity prices in an attempt to gin up confidence in the US economy by creating a rising stock market. What more can I say than YIELD. Here we go again - chase and chase yield.

On the technical chart, after plowing through the 38.2% Fibonacci retracement level last evening in Asian trading, the S&P shot right back through it to the upside, at the exact moment in time that it needed to I might add. The next target for the bulls will be to take this index back through the 1200 level. Should they be able to do that, then they have a legitimate shot at taking price back towards the former broken support level at the 1250 level.

I would watch the US Dollar very closely right now as a result of today's FOMC statement. I am coming away with the idea that they are now resorting to currency debasement but in a manner in which it is not so obvious as if they had just come out and said, "We are going to do a QE3". They have effectively told everyone that there is not going to be any growth worth speaking of for the foreseeable future in the US economy and that therefore yield on US Treasuries will be very low. They are also now counting on the market to take this idea of slow growth and bid up the back end of the yield curve without fear of the inflation monster. This is going to be an interesting exercise to observe.

Can the Fed manage to induce investors/traders to plow into stocks without having them also plow money into the commodity sector. If Bernanke and company had come right out and announced another attempt at QE3, commodity prices, particularly energy prices would have shot up immediately producing that same dampening impact on the consumer and the overall economy that it did during QE1 and QE2. By taking this line of approach, the Fed is hoping to convince market players that growth in the economy will be so slow that there will be no increasing consumer or business demand for energy and thus no reason to bid up the price of crude oil and thus gasoline. Same goes for food prices. We will simply have to wait and see how this plays out but for today at least, they managed to take equity prices up while taking commodity prices down. After the linkage we have been seeing between the two for both QE's, this is no mean feat.

Gold reaches its inflation adjusted high in Asian trading as Chinese buyers step in

The following chart is more for informative purposes than for trading but I did want to note that using the Federal Government's CPI data, (which is of course deliberately designed to underestimate the true rate of inflation), gold has effectively reached its all time high in terms of a monthly closing price in inflation adjusted terms. Whether or not this induces some profit taking among longs, particularly as global equity markets are now at this hour experiencing a rather sharp upside recovery after yesterday's pounding is as yet unclear but if we see a strong short squeeze in equities, watch for some profit taking to occur in gold. Already the metal is some $30 off its best levels of the evening.

We might also see a recovery in the gold mining shares if this rally continues into the New York trading session as those were moving higher yesterday before they succumbed to the general wave of equity selling.

Monday, August 8, 2011

S&P 500 Technical Analysis

Based on the monthly chart, the S&P has rallied to precisely the 75% Fibonacci Retracement Level and has now failed at that point. One would then expect the market to drop lower and test the next retracement level (61.8%) which it did - and promptly failed there. Following that breach of support, the next move lower should then be expected to test the more significant 50% retracement level. Note that it has currently broken below that quite significantly. Bulls now have their back firmly to the wall and will need to perform here, or else.

If the market cannot rather quickly regain this level, which comes in near the 1126 level, technical analysis tells us that it should then fall down towards the 38.2% retracement located near 1018. Interesting enough, that level corresponds very closely with horizontal support located in that same general vicinity with a swing low right at 1000.

As we move forward, IF, the market were to fall below both the 38.2% level and the 1000 level, it would portend some very serious losses in the broad equity markets and set things up for a drop towards 900 - 896.

Late Session Selling derails mining shares

Throughout most of the day, the mining shares were very strong moving higher in conjunction with gold bullion, and to a certain extent,  silver. AS the session moved into the afternoon hours however, the breach of 1150 in the S&P 500 was apparently too much too keep the money flows coming into the mining sector which then surrendered all of its gains and dipped slightly into negative territory.

It might be a good time to note that with crude oil moving in a totally different direction than gold, one of the major costs of mining companies, energy, is falling off while the price of their product, gold, is moving higher. That looks to me like an ingredient for even better profits moving forward.

Note the ratio chart below showing the extreme level to which the undervaluation of the mining sector is reaching.

Bond Market shrugs off S&P downgrade - Equities reel and Commodities get sold

The bond market has voted and given its assessment of the S&P downgrade of US long term debt  -  investors are not only willing to buy and hold US Treasury debt but they are willing to buy and hold that debt at even lower rates of interest than going into the downgrade. Risk is trumping all right now and investors are running out of nearly everything out there except for gold and Treasuries. Even silver has been feeling the impact of risk aversion trades as it has surrendered a large part of its gains as the collapsing copper and equity markets are pulling the grey metal from its highs while safe haven bids are bringing it support.

One normally expects to see interest rates rise after a downgrade but such is the current environment that investors are rushing into cash and into gold. It would seem that gold is finally getting the due respect it deserves after being constantly harangued as "no safe haven" by far too many talking heads who confuse liquidity driven issues with fundamentals. I marvel at the obtuseness of some who just last week were trashing the metal for being "no safe haven" on a day in which equities were getting hit hard and investors were rushing to get liquid and meet margin calls. Never mind the fact that gold had been making one record high after another across a wide variety of currencies. Never mind that as the sovereign debt crisis in Euroland escalated, more and more buying of gold was occuring. All that mattered was we had a huge selloff in stocks last Thursday so out were trotted CNBC's "experts" on the gold market who pronounced it as "no safe haven" because it was being sold to meet margin calls.

Today, those nitwits are looking very stupid indeed because now the talk is that "gold might be the last safe haven available". Gee, what a surprise - 6,000 years as a currency finally does matter. My oh my what a difference a day or two can make. Let me guess - these same "experts" will now be trotted back out to tell us why gold is such a great safe haven - and they can do this without blushing!

Gold gapped higher from the get go last evening as it opened above strong resistance at $1,680 and never looked back. Anytime you see a "gap and go" above a strong chart resistance level, you know you have something impressive occuring. That is exactly what has happened in the gold market as it has left $1680 resistance in the dust and blown right through psychologically significant resistance at $1,700. As I write this, it has set a new record high of $1,721.90 and is up over $66. If global equity markets do not soon stop the bleeding, these $60 up days could soon become $100.

Further aiding the metal's upside progress is the long awaited divorce of the mining shares from the broader US equity markets. The HUI in particular is having a strong day, up 4.6% at 551 as I write this while the XAU is up 2.82% at 201.59. The HUI must get through last week's high up near 570 to have a shot at taking on critical chart resistance at 580 once again. If we get some further short covering from the hedge fund ratio spread trade, that should occur rather easily. That trade makes increasingly less sense as gold powers on towards one record high after another, especially given the already severe undervaluation of the gold shares in comparison to the metal itself. If they insist on doing a spread trade why not buy the miners and short the broader equity markets. That was has been a winner for more than a month now. If the hedge fund managers could wrap their mind around this trade, the miners would make new all time highs in short order.

I think it is important to note the price action in the Continuous Commodity Index ( CCI ). Now that we have a few months of price action to observe we can get a sense of the shift in investor sentiment towards the overall sector. Back in March, when the earthquake and tsunami struck Japan, commodities were sold down as investors rushed out of risk. The thinking was that the blow would result in slower overall growth globally. Traders then reassessed that view and pushed prices back right up to the old high. Later in April, once the index was unable to push through the former peak in price and go on to make another high, technicians sold and fundamentalists built the case that the slowdown in global growth would lessen prospects for further gains for the sector. Since that time, price has been on a rather slow grind to the downside. Based on this chart, the case can be made from a technical standpoint that unless or until the sector pushes past 660, inflation fears are no longer foremost in traders' minds. The current thinking is that RECESSION is more likely than INFLATION. That view in commodities is being reinforced from the bond pits as well.

Gold is now in an acceleration phase as it continues moving with a new and steeper uptrending channel. Given the huge speculative flows into this market, it will remain quite volatile as traders pay increasing attention to any market moving news and react according to their interpretation of that news. What that means for those who hold the metal, is that they should expect large price swings on a day to day basis. Also look for a margin hike increase very soon coming out of the CME Group for the metal as it is precisely this sort of volatility that triggers such increases.

We have several levels of downside support should we get any sort of pullback or retracement in price. The first is $1,680, followed by $1,650 - $1,644 and then by $1,620.

Silver needs to get above $40 and stay there. It just cannot hold that level as it is unable to shrug off its industrial metal hat to the point where safe haven or monetary related flows can keep it elevated. Downside support in silver is last week's low near $37.50 and then $36.