"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


Monday, May 9, 2011

Gold - 4 Hour chart update

The spike off of the region near $1460 and subsequent move strongly back above $1500 is indicative that a bottom has been found in the market. Keep in mind that $1500 is a psychological resistance level.This is not to say that the market now goes straight back up however and returns to its all time high in short order. What it does say is that buyers see value in gold below $1480. Now we will wait to see where selling might develop. That will give us a better feel for the new range than gold is carving out.

If you note on the chart, the 50% retracement level of the last leg down from the recent peak comes in just above the market near the $1520 level. That looks like a reasonable target for the short term. Let's see how it handles that region. A push past here could potentially press as high as the $1530 level. If price can best that, then $1550 comes back into play. If prices fade here and selling comes in, then we will head down towards $1500 again to retest that level.

The potential fly in the ointment, much to my surprise, is the lackluster performance of many of the gold shares as evidenced by the HUI and XAU. While both are higher today, neither one has mustered sufficient strength to have taken out Friday's session high on the charts. That is rather disappointing considering that these stocks led the metals on the way down. I fully expected them to lead on the way back up for a short while. As of right now, they are in a follower's role instead.  It is also noteworthy that they are lagging against a backdrop of a rather strong day in the broader equity markets.

I should also point out that while the Dollar is now weaker as traders repurchase the Euro positions that they have thrown away last week, the strength in both gold and silver was occuring while the Dollar was actually higher earlier in the session. As the greenback began to fade going into the afternoon, that generated more buying across the metals, and the crude oil market as well I might add, which took them to their best levels on the day. Hitherfore, price in gold could not get above $1510 and stay there. It took that out as the Dollar dropped back below 75.

Gasoline has erased almost all of last Thursday's enormous drop after spiking off of the $3.00 level on Friday. Hurry up and fill up your truck before the price goes back up! That nice drop in prices that some were expecting to see at the pump suddenly has been cut in half for no particular reason other than the fact that the hedgies were buying today.

It is noteworthy that unlike what happened in 2008 during the commodity downdraft, this time around we have had a plethora of new short sellers enter the commodity arena. Back then it was predominantly long liquidation which was met by commercial short covering. This time a lot of players decided to actually institute brand new short positions hoping to catch a wave lower. Based on the market action of today, with the Dollar dropping back near 50 points off its best level of the session, a lot of these Johnnie-come-lately shorts were crushed across both the metals markets and the energy markets. some also had their heads handed to them in the wheat market.

I want to observe the price action for tomorrow and the next day to see what the markets might be telling us as to what lies ahead. It is a bit too soon to say conclusively but it does indeed appear many of these commodity markets have bottomed out. Again, I want to repeat, this is not the say they are going to now reverse and go straight back up again. It is to say that there evidently remains many well funded players whose macro view has not changed and who are looking to buy into these price breaks as they wait for the downtrend in the Dollar to reassert itself at some point.

Bonds finally faded later in the session after stupidly moving higher even as the equity markets were soaring upward and the Dollar was swooning. That market bears watching as it has been signaling a big slowdown in the US economy with its move higher of late. Whether rates have moved as low as they are going to based off of that thinking is unclear. Some might feel that long term rates are not going to be much cheaper and are now selling bonds.