"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


Friday, November 2, 2012

Gold Chart and Comments

Gold was on the receiving end of a bloody bear mauling in today's session as the downside breach of what had been a rock-solid level of chart support (courtesy of Far-Eastern buying) gave way in a tremendous avalanche of sell stops. Apparently the physical market buyers decided to step back and pick up their gold cheaper as they have come full well to know what happens to hedge fund long positions whenever a large contingent of stale longs meet up with the usual monthly payrolls number.

Suffice it to say, gold has now experienced a technical break to the downside and has some chart damage to repair. Just how far and how deep this correction will go depends on the willingness of those big physical market buyers to absorb the metal coming onto the market.

The level of chart support that provided an initial downside target once $1700 gave way was the $1680 level. It failed to stem the selling acting as an upside cap to gold during the aftermarket trading once the pit session closed for the day.

My analysis suggests we have a strong band of support beginning near the $1665 region and extending towards $1658. That will need to hold to prevent another drop this time to $1640.

ON the daily chart, gold is now trading firmly below all of the major shorter term moving averages (10, 20, 50 day) with both the 10 day and the 20 day having made bearish downside crosses below the 50 day. That means the posture of the market is now bearish. The metal is closing in on the longer dated moving averages. The 100 day comes in just below today's low at $1670 and should provide a temporary respite from the selling. If it does not however, the all important 200 day moving average comes into play. That currently is at $1666.

I wish to point out that the 50% Fibonacci retracement level of the entire rally from off the May low, at the $1664 level, is in very close proximity to the 200 day moving average noted above. That will tend to reinforce this level as an expected strong buying level.

As also noted above, if this level fails to hold the metal, then it will drop towards $1640 and just below. You can see both a horizontal support level that I have drawn going back to late May. Interestingly enough, the next important Fibonacci retracement level, the 61.8% retracement, comes in very near there at $1633. That zone, as far as I can see things currently, is the absolute bottom of this correction barring any change in monetary accomodation, something which seems highly unlikely given the tenuous nature of the economy.

I must repeat something I wrote earlier this week, namely, the US election could ultimately prove to be very influential on gold. I am of the firm opinion that should Governor Romney win, given his statement that he would not reappoint Ben Bernanke to the Chairmanship of the Fed, some traders might have an initial knee-jerk response to such an event by selling gold out of fear that he would appoint more of a hawk than the dovish Bernanke to that position. That being said, while the Chairman wields tremendous influence, his vote is just one of many on the FOMC. There yet remains many dovish voices on that committee and last I checked, the majority of them still seemed to be of the opinion that accomodative monetary policy, namely ultra low interest rates on out through 2014 and further QE3, will continue a change in the chairmanship notwithstanding.

One last thing about this market - taking a look at the intermediate term weekly chart shows the third failure of gold to best the formidable $1800 level going back into fall of last year. Taking out that price and holding it is the key to a fresh leg upwards to match the all time high. Once gold failed to clear this level yet again, down it went. While today is disheartening to many bulls ( to longer term oriented buyers of the physical metal it is an absolute delight) the fact is that gold is still in a RANGE TRADE and has been for well more than a solid year now. The top of this range is $1800 and the bottom of this range is $1530. It is just now approaching the middle of the range. It just so happens that the MIDDLE OF THIS RANGE IS $1665. Savvy readers will immediately catch the significance of that number when taking another look at the daily chart shown above and the support levels noted there.

Nothing has changed in regards to the longer term trend in the yellow metal; it is just marking time and meandering in a wide range for now awaiting a fresh catalyst to take it higher. I am of the firm opinion that we are going to need to see a CONFIRMED BREAKDOWN in the US long bond market before we get such a catalyst.

IN looking at the chart of the long bond you can see that is remains mired in a Range trade of its own. It has given a bit of a hint that the next big move will be lower, based on the series of lower highs (see the declining blue downtrend line) but so far support from 145^10 down towards 144 has not been tested. I maintain that once that level gives way, and I believe it will if Romney is elected (probably sometime into his second year in office) then gold will go on to make new all time highs. That is a good way's off however and a lot can change in the interim so we will continue to monitor economic and fiscal developments and hopefully react accordingly.

If Obama were to somehow dupe enough idiots to put him back into office so that he can finish his task of destroying and remaking the nation, then my thinking is that the economy will continue to sputter along with both gold and the bonds remaining in a wide range trade. I would see nothing coming from that quarter that would lead me to believe the economic activity will pick up sufficiently to generate a real fear of inflation amongst investors/traders. QE would then continue ad infinitum, ad nauseum, with periodic bouts of optimism giving way to periods of economic despair. In short, the insane volatility would continue wreaking further havoc to traders and investors as the nation plunges ever deeper into debt. At some point a currency crisis would then occur which would boost gold but oh my, at what dreadful cost!

Commodity Index Breaks Down - So Too Does Silver

Another payrolls report today; another down day in the precious metals. Not much of a surprise here as that has been the norm for many a year. In one sense, it really did not matter what the number was as there was more than likely going to be bearish selling pressure no matter what.

When it comes to silver, if the number was a poor one, the bears would point to the fact that the QE3 was already baked into the cake and so was a non-factor. They would then point to the fact that the poor number was sign that the economy was still muddling along without any risk of inflationary factors due to the sluggish growth. Silver MUST HAVE AN INFLATIONARY ENVIRONMENT if it is to mount any sort of SUSTAINED rally.

If the number was considered friendly, then the bears would cry up the idea that the QE was not going to be continued as long as some were initially thinking since the economy was mending.

In other words, Heads, I win; Tails, you lose.

Either way, take a look at the following chart of the Continuous Commodity Index or CCI and notice that it has broken out of the recent congestion pattern. The breakout however was to the downside. Guess what; silver also broke out to the downside of its recent consolidation pattern.

I have pointed this link out to readers here for some time now - Silver is inexorably tied to the hip of the broader Commodity markets and will remain so into the foreseeable future. Next stop for the metal is today's low near $31.25 followed by a test of $31.00 - $30.80 should that previous level fail to stem its decline.

The fact that the open interest in silver refused to sharply decline during its descent was a warning that the stubborn bulls were vulnerable to a breach of chart support. There were just too many stale longs in this market which had not experienced a good and necessary cleansing. We are now finally getting that which is what this market needs in order to generate a more lasting move higher when the conditions are correct for such an event.

Note on that CCI chart, that the red support line which has been violated came in very near the important 38.2% Fibonacci Retracement level. If the index cannot rapidly recover this support level by climbing back above it and holding, it implies a subsequent test of the critical 50% level is in store.

With this in mind, observe the silver chart and note how similar the pattern is to the CCI. As stated above, the two are linked together and will generally rise and fall together.

Notice also how silver has lost support at the bottom of the recent congestion pattern which also was rather close to its 38.2% retracement level. If it cannot reverse the decline and get back above the 32 level, it will more than likely drift first towards psychological round number support near $31 and stronger chart support down near $30.70 - $30.75.