"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, December 14, 2011

Gold Chart and thoughts

Gold continued falling lower today plummeting over 4% as it failed to hold support near $1650. Once that gave way, it did not take long before it ran the downside stops gathered there which fueled further selling. That selling gathered additional momentum once $1620 could not hold and really ramped up aftter $1600 collapsed.

There has been severe technical damage done to the charts with today's breach of 3 chart support levels. The last line of defense for the bulls to prevent a drop all the way to $1500 is in a band near $1560 - $1535.

One point of slight comfort for the bulls is that the HUI has thus far held suport down near the 500 level. If the Dollar continues heading higher however, it might not be able to keep from succumbing to selling pressures.

Bonds are rallying strongly today suggesting a flight out of the Euro and by consequence risk trades and back into Treasuries and the US Dollar.

Crude Oil breaking down alongside of the metals

Crude oil has been somewhat immune from selling pressure tied to risk aversion trades mainly due to geopolitical tensions involving Iran and fears of a potential closure of the key Hormuz Straits. While many commodity markets have been moving lower the last month or more, crude had staged a big rally off of the $75 level running all the way to $100+ before faltering. It then retreated towards $95 where buyers promptly bid it back higher again. However, they were unable to beat back selling pressure that emerged above the $100 level. That sent longs liquidating trying to snatch profits before they disappeared and emboldened fresh short sellers who were banking on risk aversion trades outweighing geopolitical fears. Today the latter appear to have won out.

Crude is now sitting precariously on a major support level at $95. If it cannot immediately turn around and rebound higher, a technical case for a top in the market will be evident on the chart. The market could then fall towards $90 relatively quickly mainly due to the fact that it was able to withstand the "slowing global economy" theme for so long.

Falling crude oil prices, while being of immense assistance to both consumers and business, would feed further into the psyche being established in traders' minds that a wave of deflation is coming once again.

It would appear that nothing short of a reinvigorated QE program and some sort of stop gap measure coming out of Europe is going to be able to revive this market. Either that or something more sinister involving Iran.

HUI is bouncing from the bottom of its year long range

Over the last 14 months, the gold mining shares, as represented by the HUI, have been trapped in a very broad range bounded by 600 on the top side and supported by 500 on the bottom side. The fact that this range has continued for such a long period of time and has repeatedly reinforced itself underscores how important from a technical perspective it is should anything occur which forces a violation of this range.

Having moved down to the bottom of this range in today's session it has of this hour bounced rather strongly off of that level once again. That is reinforcing the significance of the 500 level on the technical price charts and makes it all the more critical that the HUI not close substantially below this level. 

A weekly close below 485 - 480 would therefore signify that something significant has changed in regards to investor/trader sentiments towards the precious metals sector as buyers pull back on their bids expecting lower prices. Owners of these shares will want to monitor trading action closely to see how this sector reacts as we move to the end of the year. Odds favor a continuation of the sideways trading pattern but if sentiment sours further as traders fear inaction by the monetary authorities, support levels could give way. We just have to wait and see what the market tells us.

Commodity complex dealing with Deflationary Concerns

Investors worldwide are making a mad rush towards cash as they seek to become liquid based on their fears of a slowdown in the global economy. There is little confidence that monetary authorities and political leaders in Europe are doing anything substantative to deal with the issues plaguing Europe. Over here in the US, investors are reading the tea leaves from the recent FOMC statement and are expressing disappointment that the punch bowl full of QE is not coming forthwith. Then there is talk about China slowing down as well.

All of this is working to generate visions of the summer of 2008 in the minds of traders as they fear another severe downdraft across a wide spectrum of "risk assets" while watching the US Dollar rally up through technical chart resistance levels.

The result - strong selling across nearly every single commodity futures market with a strong breakdown in the Continuous Commodity Index ( CCI ). It is down at levels last seen in October 2010 and is negative for the year 2011. That chart is signaling deflation is the current fear; not inflation. If it is going to bounce, this level will be where it needs to do so or more losses are in store with a potential move as low as 510 or lower.

It could be that some dovish FOMC members might be looking at the CCI chart thinking that they have plenty of room now to manuever should they be able to convince the rest of the members of the committee that more stimulus is needed. Central Bankers are going to panic if a deflation mindset takes hold and will be forced to act.