The truth is that last week's Commitment of Traders report showed a very large speculative long side exposure by the hedge funds and as remarked upon in our regularly weekly interview on the KWN Metals Wrap, any downside violation of a major chart support level set up the very real possibility of a good amount of liquidation by these stale longs. That is what has occurred.
Part of the trigger came when the USDA issued what I believe is a totally unrealistic corn acreage number. That number, which is still being met with a huge amount of skepticism among many analysts and traders such as myself, set off a massive wave of liquidation across the entire grain complex. That liquidation then spilled over into the livestock sector as well as other non-related commodity markets as margin calls proliferated and algorithm related selling across the commodity sector picked up. Both gold and silver were whacked with silver leading the way lower as could be expected in that sort of environment. The CCI plummeted yesterday dropping back down below 630 after another failed attempt to recapture the technically significant 640 level. Quite clearly, rallies in the commodity sector are currently being sold.
It certainly does appear that there is a concerted effort taking place by the powers-that-be to take commodity prices lower. The fact that a politically-oriented release of oil from the SPR came in the face of crude oil prices that were ALREADY FALLING AT THE TIME THE RELEASE WAS ANNOUNCED is sufficient reason for me to hold to my view that the release was designed to do one thing and one thing only; knock crude oil prices and by virtue of that, gasoline prices lower, in order to boost the sagging poll numbers of the current administration, and by virtue of that, the welfare of the entire Democratic party which will face a wipeout of epidemic proportions in next year's election if they do not get energy prices lower, especially at the gas pump.
Then there is the issue of annoyingly high food prices to contend with. A nice easy way to knock those lower is to go after the lynchpin of the entire food sector, the corn market. Take it down and you can lower not only food prices for those products using corn, but you can get lower wheat prices and also lower meat and chicken prices all in one fell swoop. Just like the useless jobs report numbers that we constantly get which then are revised the following month after the initial release has its intended effect, the USDA will come back next month and lower the acreage number but the damage will have already been done to the corn market.
I suspect however that some traders are getting wise to these games by now. Crude oil prices, while lower today, remain some $4.00/barrel above the level that the news of the SPR release took them. Corn, while seeing additional downside action today, is working higher off its worst levels as end users are furiously buying and getting hedge coverage into place to take advantage of this gift. Export buyers are probably already booking orders while they can.
None of this matters to the brain-dead hedge fund community however which lets their computers do their "thinking" for them. I wish to repeat here for what seems like the umpteenth time - hedge fund computer selling hits every single commodity market when their algorithms generate sell orders. There are no exceptions, even for gold. What has been occuring however in the gold market until this week was that safe haven buying was coming in and that kept the metal well supported in comparison to the damage that was being inflicted on the broader commodity markets. The bailout of Greece has temporarily derailed this safe haven bid and we are now left to the usual physical demand of the type that proceeds out of India and the middle and far East. That demand is not of sufficient size at this time to absorb the hedge fund selling and thus the market has been unable to regain its footing above $1520, which is what it needed to do in order to prevent a deeper setback in price.
For the time being we are looking to see if the demand can keep price supported here at critical support between $1480 - $1470. This level MUST HOLD to prevent further long side liquidation on the part of the hedge funds. If the physical market can soak up enough gold down here, then we have a shot at stabilizing here during this season of the summer doldrums and building a base for the rally coming later this year.
We must get back above the $1500 level in gold to give the bulls a shot at stemming the bleeding here but more importantly, the 50 day moving average to short-circuit the "sell the rally" mentality currently in place for the gold market. That level coincides with $1520, the bottom of the former range that gold was consolidating within.
The weekly gold chart still shows the BEARISH ENGULFING PATTERN formed the week of May 2 dominating its chart picture. The market had been holding up and been resisting any downside follow through from that week but had not been able to clear and hold $1550 which was needed to negate that chart signal. That week's low, $1462, is the last level of support for the bulls. They cannot afford to let that level go if they wish to avoid a move down towards $1435.
