"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
Trader Dan's Work is NOW AVAILABLE AT WWW.TRADERDAN.NET
Tuesday, December 31, 2013
Around mid-morning, a rash of "sudden orders" to buy ( Dow Jones wire services quoted traders using those exact words) flipped the market higher after it had run down near $1180. It moved as low as $1181.4 before shorts began ringing the cash register to close out the year.
The lack of selling enabled the buying to take price high enough to catch some overhead buy stops and up she went. Here we have another one of those events that I have sarcastically dubbed, "A REVERSE FLASH CRASH" in honor of those who love to regale us with stories of Flash crashes when gold drops sharply as evidence that the gold price is being manipulated lower by sinister forces intent on delegitimizing it as a viable investment.
I trust we will not hear a peep out of that crowd about today's bizarre price swing higher. After all, according to them, this is what gold should be doing all the time and thus this is legitimate price action whereas gold dropping sharply in price is somehow illegitimate.
Honestly, one grows weary of attempting to dispel the market ignorance on display from this group but this is what happens when anyone with a computer and a keyboard is now an authoritative source on market price action. Then again gold seems to spawn more of this sort of thing than many of the other commodity markets. I guess it just comes with the territory. Gold bugs tend to be very passionate about their views - nothing wrong with that - but that very same fervor is what so often makes it difficult for them to see market price action with any sort of objectivity. They have to keep coming up with reasons to explain why their asset of choice is losing them money instead of just admitting that they were wrong and moving on.
What happened is not hard to understand however - gold dropped into a major, major support zone ( I have stated that $1180 is as critical to the future fortunes of gold as was the $1530 price level some time back) where strong buying surfaced once again. The short term players saw that it was holding and began to cover their shorts realizing that the support zone was going to hold for now. As price rose, with a large number of traders out of the market already in anticipation of the holiday tomorrow and low liquidity, there was no one left to sell. Thus there was a air pocket above the market and little to no resistance to the metal's rise.
There is nothing quite as dramatic as one of these typical short squeezes. The volume leaps dramatically as fear and panic hit those who sold into the bottom of the move and are now forced to scramble in order to avoid deep losses. While it looks impressive on the surface, the key is not what happens on any given day but the SUBSEQUENT market reaction over the next couple of days. If the market builds on its gains and continues to extend, then you have the makings of a legitimate short-term bottom. If however the market simply hangs around near the highs of the short covering day and is unable to extend much higher, the odds then favor a continuation of the downtrend with stronger hands coming in to sell at the new and higher level. We simply have no way of knowing which scenario we are going to get until it occurs. SUBSEQUENT PRICE ACTION is therefore the only safe guide to rely upon; not hunches, guesses, and dogmatic assertions from newsletter writers and other various pundits who know no more than the rest of us what will happen tomorrow.
I can tell you this from experience, making any predictions as to future price movements based on the price action from the last day of trading for the year is not wise. The other thing to keep in mind - one day does not a trend make. Gold is in a BEAR MARKET until proven otherwise. It really is that simple. Any market that loses more than 20% for a year is officially in a bear market and at one point in today's session, gold was down over 29%. Do the math.
I will also add this one last thing - that the market faded from off its best levels tends to confirm the idea that we are not going to see much in the way of additional upside as we begin the New Year. The bulls are living on borrowed time and unless something occurs to change sentiment here in the West in regards to gold quite soon, it looks to me like one will be able to buy gold at a cheaper level than they were even at today's lows early next year.
As always, time will tell...
One last thing, some money managers like to come in and buy distressed stocks from poorly performing sectors towards the end of the year. The idea is that many participants are selling losers to square their books and to realize tax losses. Those who come in and buy these stocks which are being thrown out will then look to make a quick 8% - 10% profit as the selling pressure lets up when the New Year begins. It is a short term trade by nature with the theory that the heavy selling is now finished so one can safely buy. This sort of thing can tend to put temporary bottoms in those stocks. As mentioned above, the key to seeing whether or not a trend reversal/longer-term bottom is in the sector is to watch how subsequent price action unfolds and especially volume.
Moving forward this next year, gold's fortunes will be determined by whether or not Asian demand, especially out of China is sufficient to absorb Western-based selling of the metal. As stated yesterday and reiterated today, I am concerned because in spite of such heavy losses in gold, the large specs remain stubbornly bullish; this is not a recipe for a reversal. If anything it is a recipe for more losses ahead for the metal until the bullishness is killed.
When you take a look at this chart of the reported holdings of GLD and see that the holdings are back at levels last seen in January 2009 ( an incredible 5 years ago), it is not hard to understand the drop in the price of gold. What is difficult for me to grasp is why these big specs remain as net longs over at the Comex. The big money in gold has been made on the SHORT side over the last year; trend followers have done fine. It is those bucking the trend that have gotten badly burnt. One wonders just how much more pain that want to bear.
What I am going to be looking for in 2014 is if/when market sentiment begins to turn strongly in favor of "growth/inflation" and away from "growth/no inflation". If/when it does, commodities should see some risk money moving back into the sector in general with the expectation of higher prices as a result of ramped up demand. I am not saying that this is going to happen as I am not in the business of making predictions ( I will leave that to those who have no money at risk in the markets). What I am saying is that this is something to watch for to see if this were to develop.
Such an occurrence would tend to bottom gold but especially silver. Copper prices have already turned higher over the last several weeks and are now up in levels near the top of a trading range that has been in place since April of this year (2013). If copper begins to push higher, especially if it can clear $3.50 convincingly, silver should get some help on the buy side.
I would also like to take a bit of time here to thank all those who have visited the site this past year. I would especially extend my gratitude towards those who post here for your many encouraging words, your insightful posts, as well as your helping to keep this site clear of profanity, ugly personal attacks on individuals and the other assorted crap that is all-too-frequent nowadays in this unethical age. As I have written many times here, opinions on the markets are fair game; those who offer them should expect that others will often take the other side because there is always a bull side and there is always a bear side. If not, we would not have anyone to buy from if there were no bears nor would we have anyone to sell to if there were no bulls. Personal attacks that impugn the motives/character of others is a different story however and that is something that I will not tolerate here, nor should those of you who read and post here allow either. It demeans the site and interferes with what we are trying to accomplish here which is to provide a forum where folks can learn to read the voice of the market and hopefully become better informed in their trading/investment decisions by applying that which they have learned.
A Happy, Safe, and Prosperous New Year to you all. Personally I like to take this time of the year to look back at the many blessings of God and realize just how gracious He is to we who do not deserve such goodness at times. At times we are prone to measuring our "wealth" by the size of our bank accounts but what price can one put on family, health, friends, and our reputations? Such things are irreplaceable.
Once prior to a famous sermon that he preached during what historians have termed, "The Great Awakening", Jonathan Edwards prayed to the Lord asking Him to "stamp eternity on the eyeballs of those who heard him preach". We might do well to consider that more frequently during the course of the next year. It is remarkable how it tends to help us keep things in their proper perspective!
Monday, December 30, 2013
I see nothing on the near term horizon to suggest that this is going to change as we begin 2014, barring some sort of catalyst such as an event that comes out of nowhere. Right now the VIX is indicating complete complacency and a total lack of fear/concern anywhere.
The daily chart shows the price moving down into a most important technical support zone. Gold has been able to garner enough buying on forays into this zone to force a rebound in the price, even if that rebound did not last all that long. Whether or not these buyers remain willing at this level is unclear. If not, gold is going to break the bottom of the support zone near $1180 and will easily lose another $30 for starters. If the buyers show up, then the metal can continue to grind sideways above this support zone but without a catalyst to kick it higher, the intermediate trend dictates that rallies in the metal should be sold.
I am noting that the ADX is moving sideways indicating that the downtrend has temporarily halted on the daily chart but that the bears remain firmly in control of this market. If support at $1180 breaks, look for the ADX to turn up as gold will resume its downtrend and might then target the $1100 level depending on how many hedge funds decide to exit from the long side of this market. Remember, they are still net longs in there and that is what concerns me that the bleeding in gold is not yet finished.
We got the CFTC Commitments of Traders data released this afternoon as the report was delayed due to the Christmas holiday last week. It did indicate some long liquidation from the hedge fund community occurred last week but they still are NET LONGS in this market to the tune of some 28,700 contracts. The Other Large Reportables actually increased their net long position about 3,800 contracts with the result that the two groups of large speculators remain net longs. The small specs, or general public, actually finally moved to a small net short position.
The big, bad bullion banks were generally buying again this week but never fear, the "gold is always manipulated at all times crowd" will swear up and down that these banks are the ones that are knocking the price lower. Both the Producer/User/Merchant category and the Swap Dealers were Buying from Hedge funds who were selling this past week.
All in all, the report provides further evidence that money flows are coming out of gold and into equities. This is the reason the gold price is continuing to sag lower. It will until this process ends and then reverses.
Tuesday, December 24, 2013
( And this taxing was first made when Cyrenius was governor of Syria.)
And all went to be taxed, every one into his own city.
And Joseph also went up from Galilee, out of the city of Nazareth, into Judaea, unto the city of David, which is called Bethlehem; (because he was of the house and lineage of David:)
to be taxed with Mary his espoused wife, being great with child.
And so it was, that, while there were there, the days were accomplished that she should be delivered.
And she brought forth her firstborn son, and wrapped him in swaddling clothes, and laid him in a manger; because there was no room for them in the inn.
And there were in the same country shepherds abiding in the field, keeping watch over their flock by night.
And, lo, the angel of the Lord came upon them, and the glory of the Lord shone round about them: and they were sore afraid.
And the angel said unto them, Fear not: for, behold, I bring you good tidings of great joy, which shall be to all the people. For unto you is born this day in the city of David a Saviour, which is Christ the Lord.
And this shall be a sign unto you; Ye shall find the babe wrapped in swaddling clothes, lying in a manger.
And suddenly there was with the angel a multitude of the heavenly host praising God, and saying,
Glory to God in the highest, and on earth peace, good will toward men" ( Luke 2: 1-14)
Sunday, December 22, 2013
Friday, December 20, 2013
The bounce today was feeble, considering the extent of the downdraft on Thursday. It did manage to close above $1200 but just barely. The fact that the HUI could not hold its gains on the day is alarming to me. I would have hoped that it could hold its bounce without attracting more selling.
Based on this, I would have to lean towards saying the gold market still looks heavy to me and could come under additional pressure next week. The one saving grace that it will have working in its favor is that the Bears have made a lot of money this year and might still be looking to cover some additional shorts and book those gains before the end of the year. That, plus the fact that rarely do traders pile on large positions heading into the end of the year; they generally tend to do the opposite. That might take some of the pressure off of the market, temporarily.
Bulls need some serious help very soon....
As many of you no doubt know, today's report both includes the sharp selloff associated with the previous Friday's jobs report. It also includes the sharp rebound that occurred on both Monday and Tuesday of this week. It does not include the wild action coming on the heels of this Wednesday's FOMC statement nor the collapse that occurred yesterday ( Thursday).
Here is what I am taking away from the report - speculators are using rallies in price to add to existing short positions. All three categories - Hedge Funds, Large Reportables and the Small Specs - remain as NET LONGS. This continues to concern me because it indicates a STUBBORN bullishness in the face of a deteriorating technical price chart. Any downside violation of that critical support level at $1180 thus has PLENTY of AVAILABLE FUEL to provide large amounts of selling.
If there is any capitulation occurring in the gold market, it is certainly not showing up in the composition of positions that the speculators are holding.
While I am on this topic, I am going to try, ONCE MORE, to dispel this pestilential notion that the reason why gold is CURRENTLY moving lower is because it is constantly being manipulated by the bullion banks at the behest of the Fed.
This concept, which I have written positively about in the past and to which I adhere during PERIODS OF RISING GOLD PRICES AND A SINKING DOLLAR, is already becoming quite old and wearisome. It seems it makes some feel better as they watch their life's savings evaporate into thin air while they loudly screech that the only reason that they are losing money on their gold and gold related stocks, is because the price is being manipulated.
It is notable that this cry of "manipulation" only works in one direction however, and that is when gold is selling off. When gold is moving higher, there is not a peep mentioned about the sharp rallies that sometimes appear because "after all, gold is only doing what it should be doing were it not manipulated".
Here is the problem with this view, at this stage in gold's bearish move lower - the facts simply do not support it.
I have put together a couple of charts to illustrate this. Let's start first with an excerpt from the Commitment of Traders data, both futures and options, going back to the beginning of this year, 2013.
What I would draw your attention to in particular, is the end of the month of October 2013. This is about the time that the latest fad known in gold circles as "the Flash Crash" began appearing. Whether stated or not, it is implied that there is a nefarious force working to suppress the gold price and this force is always the same - the bullion banks working to do the Fed's bidding.
Keep in mind that the argument goes something like this.... " You know, gold is in backwardation, meaning that demand for the physical is so strong that the only reason the paper price can be moving lower is because it is manipulated. Also, these FLASH CRASHES that occur during the thin market conditions of low liquidity mean that NO LEGITIMATE SELLER ( whatever a "legitimate" seller might be is left undefined) would be engaging in such action. Therefore, ergo, quod est demonstratum, the price is being manipulated lower. Why else would we see large offers coming out of nowhere?
Since it is always the bullion banks who get blamed for manipulating price, one assumes that it is they who are somehow behind this "mysterious" move lower in the gold price.
Regardless, I have maintained and continue to maintain, that it is speculative selling, namely HEDGE FUNDS or some other large reportable entities, that are doing the selling in gold and have been for some time now. I am also on record as stating that these same bullion banks who are constantly being blamed for everything nasty happening to gold, happen to be BUYING GOLD, not selling.
With that in mind, look at the above COT chart detailing the positioning of these large commercially-oriented players. This is their NET POSITION in the Comex Gold market. Now look at the date (Oct 29) in which they began to seriously draw down the overall size of their previously held net short position by BUYING contracts.
Over this interval, approximately a seven week time frame, there has been a reduction of over 37,000 in the net short position of the Producer category so that they are now NET LONG. In the Swap Dealer category, there has been a reduction of about 43,000 in their net short position. In other words, both categories have been NET BUYERS over the entire time frame during which, and this is important, gold has experienced a decline of some $115 in price.
Now look at the gold chart below to see the same time frame illustrated there.
This chart, unlike the COT chart above, covers through the end of this week, and not just through Tuesday this week. Since Tuesday the price of gold has declined even more losing another $30+ in the process.
Also, the CME Group, daily releases information detailing the delivery process for its various futures contract which still provide such. When it comes to gold, the December process has been ongoing. Out of the total 5,448 contracts Tendered or Issued ( by sellers who are delivering), J P Morgan, one of the infamous bullion banks, has stopped, or taken delivery of 5,106 of them for their HOUSE account, not their Customer account! That is no mean feat!
So what do we have? We have a source of data indicating a STEADY BUYING occurring by the large commercially-oriented players in the gold market so that their short positions are being covered even as they have moved to some LONG POSITIONS in the futures market so as to TAKE DELIVERY. One cannot take delivery of a futures contract if one is short the market going into the delivery period.
All this is taking place against a backdrop of falling gold prices while the SPECULATIVE COMMUNITY, is selling. Again, at the sake of excessive repetition, the specs remain as net longs but their net long position is declining as they bail out of gold and move to increasingly play it from the short side.
I should also note here that as the month of December has rolled around and the December gold contract has entered the delivery period, the number of OUTRIGHT LONG positions held by the Producer/Merchant/Processor/User category has increased from 89,853 to 90,760 as of this Tuesday. NOTE - this is using FUTURES ONLY data and not futures and options data because one needs a futures position on the long side to stand for delivery.
On the Swap Dealer front, the December long position has increased from 60,771 to 64,050 as of Tuesday this week.
It should also be noted here that as the longs take delivery of any gold, the futures long position is closed out ( as well as the short who was delivering) and the long positions (along with the short) will be reduced.
I want to also cover one more claim made by some who still refuse to accept the facts but will hold fast to their gold is always manipulated all the time thesis. Some claim that the bullion banks have been the ones recently selling gold futures to knock the price during the session only to then use the hedge fund selling that results as a way to BUY BACK or cover the shorts that they put on to precipitate the downward plunge in the futures market. The problem with this theory is that if the bullion banks were doing this ( and they currently are not), they would have to buy back all of those newly instituted short positions AND THEN SOME, in order to achieve the overall reduction in their NET SHORT position that the Commitment of Traders report details.
For example, if the bullion banks were to sell, let's say 1,000 contracts of gold, overnight in Asia and then wait for the inevitable hedge fund selling to show up so that they could then buy those contracts back, they would have to buy ALL 1,000 contracts or their NET SHORT POSITION would never budge. If they did not, let's say they bought back only 900 of those short positions, their TOTAL SHORT POSITIONS would increase by 100 contracts.
What the COT data reveals however is that the number of outright short positions of the Producer/Merchant category as well as the Swap Dealer category have been steadily SHRINKING since that October 29th date that I used as a reference point. Clearly this would not be possible if the bullion banks were only buying back some of these supposed short positions that are being claimed to be the source of the gold price manipulation. Even if they were buying back ALL of them, that would not be enough to REDUCE the number of outright short positions that they have on the books. They would need to buy back MORE THAN THE 1,000 in our example. In other words, they would have to buy 1,100 contracts after selling 1,000 overnight in order to show a reduction in their total short position of 100 contracts. Thus, they would consistently have to be buying large amounts of contracts ( much more than they are supposedly selling according to some) on a regular basis to give us this constant decrease in short positions which the COT report reveals. It would take some near miraculous feat for buying of that magnitude NOT TO DRIVE THE PRICE OF GOLD SHARPLY HIGHER.
Here is the simple truth about gold as it now stands - the bullion banks try to slow the rise of gold during those periods in which it is rising sharply and the US Dollar is sinking as part of the effort to keep the gold price from signaling any sort of distress, distrust or lack of confidence in the US Dollar and by consequence, the Federal Reserve's stewardship of such. Once the gold price broke below the key chart support level of $1530 in April of this year, the trend in gold turned from one of bullishness to one of bearishness. From that point, specs have been gradually abandoning the gold market and moving towards equities. This is why the price continues to fall, not because some nefarious force has continually been at work in gold since then.
At some point the price will reach a level in which the market views strong value. When it does, the willing buyers at that point and price will outnumber the sellers and the price will bottom and then begin to rise.
One last thing for those who listen in regularly to the King World News Metals Wrap on a regular basis. We are not doing one of those this week and are instead giving Eric and myself a bit of a break.
Gold seemed to draw a bit of strength from the number. The thinking was that the Fed's rosier assessment of the economy coming out of the recent FOMC meeting was being confirmed. That led some traders into thinking that if the economy is growing at a faster clip, job hiring will begin to pick up. If that were to occur, there might be some modest pickup in inflation.
Also, Asian demand for gold was stirred last evening as bargain buyers stepped up to grab the metal near 6 month lows in price. Coming at the chart point that it is, technicians are closely watching to see if the critical support zone near $1180 can hold. Gold will have to regain the "12" handle and maintain it to convince bottom pickers that they can wade back into the water. That will buy the bulls a bit of a breather but until they can take price back above $1220 - $1225, rallies will be suspect.
Short covering and bottom picking were the features in gold in today's session. Some shorts are closing out their bets on lower prices and taking their profits with them as they leave for an extended Christmas break. Many will not return until after the start of the New Year. Next week promises to be one of volatility as liquidity begins drying up in earnest. Do not be surprised if we see some strange moves.
By the way, just to have some fun with the Flash Crashers - Gold shot up sharply near mid-morning as some sizeable buy orders entered. One trader quipped that " No LEGITIMATE BUYER would act in such a fashion".
It never seems to end does it? We are even back to backwardation talk once again... sigh.... let's just say it once again - gold will bottom when it is good and ready to bottom. Not a minute sooner and not a minute later. Traders just take the market as it is and attempt to deal with that rather than dealing with conjecture and speculative theories. When the market becomes concerned about something, it will be reflected in the price. Until then, it is just a huge waste of energy attempting to keep up with the latest sensation in the gold market. Honestly, I sometimes wonder if some of these guys have a life outside of the gold price.
I have stated it before but will do so again - Gold is insurance against currency debasement. One buys insurance to protect themselves against unforeseen events HOPING that they will never have to use it. One does not buy insurance and then OBSESS over the policy. You buy it, obtain your peace of mind and then get about with the business of life. Owning gold provides you with the peace of mind that if events unfold that are deleterious to the health of the US Dollar ( if you are an American citizen - obviously citizens of other countries would be focused on their own native currency) your assets are shielded as much as possible.
It does seem to me however that those who keep yearning, pining, hoping, wishing, and even perhaps praying, for a higher gold price are yearning, pining, hoping, wishing and even perhaps praying for the house to burn down so that they can collect on the insurance policy. I find that rather sad. I am interested as much as anyone else in honest money and am more than ever concerned over the mounting US mountain of unfunded liabilities. That is why I own gold but I really marvel that so many seem to almost welcome the chaos that would engulf our society should the price of gold indeed reach some of the levels that many of these prognosticators assure us it will reach. As a father with children, I do not wish to see a society that would more closely resemble something out of a "Mad Max" movie just so that I could bathe in all the Dollars that my $50,000 ounce gold bar would bring me. There is almost a morbid mentality that would wish for such things.
Back to the technical charts - With the S&P 500 making new highs, traders are confirming that money flows are continuing to move into equities as the "go to" investment sector of choice. Until something occurs to change this psyche, I still think gold is going to face some serious headwinds to any sort of SUSTAINED move higher. There will continue to be rallies as shorts book some profits and bottom pickers emerge but the intermediate and short term trend remains lower until proven otherwise. I understand that some of those in the gold community will swear, curse and rant at me for saying this ( Norcini has crossed over to the Dark Side), but the market is what it is and that means accepting it and dealing with it if one is to make money as a trader.
By the way, I am thinking of temporarily changing the name of this blog to "Darth Dan's Market Views" and posting a picture of Darth Vader below mine to show the former Trader Dan and then the transformation to the reviled Darth Dan. When gold finally does bottom and resumes a SUSTAINED uptrend, then I can change the name back to Trader Dan once again with Luke Skywalker having rescued me and turned me back to the correct side of the force.
The HUI is seeing a bit of a bounce today as some shorts cover and some bargain/value buyers move in to take advantage of low prices. That being said, considering that the broader equity markets are soaring into new heights, that this meager bounce is all that the mining shares can put in for right now is rather disappointing. Unless we can see some more concerted buying efforts in the mining sector next week, the HUI is on track for the worst MONTHLY CLOSE since May 2005. That is even lower than the monthly close that occurred during the depths of the credit crisis in 2008. Very depressing stuff indeed.
At least bellwether Barrick Gold remains above that chart gap posted last Tuesday ( Dec 10). While it is not that much, I am sure the beleaguered bulls will take all the consolation that they can find right now. Maybe we will see some guys step in here and buy the miners in anticipation of a short pop higher. Year end book squaring could bring about some selling as investors throw away losers for the year to offset some of the gains that they have made elsewhere in the equity world. Once that selling is finished up, there might be a reduction in willing sellers at these levels, especially as the end of the year draws nigh and traders avoid putting on any sizeable positions as they wait for the advent of the New Year to do so. We'll watch and see what develops.
One more time for emphasis - be prepared for all sorts of strange and inexplicable moves in many of our futures markets. Traders are squaring books for year end and are moving to the sidelines to take some time off. That sort of thing is going to result in some bizarre price swings. Day to day gyrations do not matter as much right now as the longer term trends.
Thursday, December 19, 2013
Notice the median line and how price is pivoting around this line as it moves lower. This month's price action is especially ominous for price has barely managed to poke its head ABOVE the line before succumbing to selling. Upon closer inspection, one can tell that the selling is picking up tempo. That is why it is imperative that support at $1180 NOT GIVE WAY. If it does, $1155 will be hit in short order, followed by a test of the $1100 - $1089 level.
Were it not for the fact that crude oil prices rose sharply today, one would have to think that the fall in the gold price would have the Fed concerned. Crude took off however on ideas that the early tapering by the Fed was enough evidence that the economy is going to be on a steady mend next year and that will result in a pick up in crude demand as gasoline and heating oil prices rise to meet that.
Also helping crude rally was further confirmation that the pipeline from Cushing to Port Arthur will be moving oil down to refineries and alleviating any glut in supplies which had been weighing on the market of late.
With yesterday's FOMC actions and the subsequent Bernanke comments, investors seem to believe that they now have the best of all possible worlds - ultra low interest rates for the foreseeable future, no signs of inflation and an economy on the mend. Translation - buy stocks. That is the message of the market.
In this sort of environment, investors simply see no reason to own gold, which throws off no yield and depends solely on capital appreciation to return on investment. If inflation pressures remain muted, and if confidence is high, ( the VIX SANK EVEN FURTHER TODAY providing proof that it is), gold is a pariah at this point.
People can talk about Chinese demand for gold all they want but it makes no difference as far as Western sentiment goes. Here in the West - gold has few friends. Until this confidence in the Fed and the economy is shattered, gold is going to struggle against strong headwinds. At some point it will get beaten up badly enough to move down into the cost of production and remain at those levels long enough to perhaps force some mine closures, etc,. Maybe then it will finally bottom out.
Keep in mind something I wrote last Friday when the Commitment of Traders report was released - there can be NO CAPITULATION in gold and thus no end to the selling as long as speculators REMAIN AS NET LONGS in the gold market. Too many keep pointing to the building hedge fund SHORT position as some sort of bizarre rationale that gold prices must now stage some sort of rally. I read this sort of thing and ask myself if those who advocate such nonsense have ever really traded anything besides baseball cards and comic books. When the trend is lower and speculators are making money by being short, they have no reason to buy unless upside resistance levels are taken out. If the price moves into those resistance levels and then fails to extend higher, it is a signal to every hedge fund on the short side of the market to sell even more, not buy and get out!
This is what happens when too many self-anointed "experts" give us one prediction after another based on their tea-leaf reading of the Commitment of Traders report without understanding market sentiment and price action.
That brings me back to gold - the failure to hold at what had been shaping up as a secondary bottom at $1220, followed by a primary bottom at $1210, was a huge technical failure. What is worse however is the market's inability at this point to even hold above psychological support at $1200. Losing the "12" handle is a big deal because it deals another psychological blow to the bulls and emboldens the bears even more who are now trying to press their advantage. Every bear on the planet now is salivating over the prospect of reaching that mountain of sell stops sitting just below the $1180 level. If they can reach it, and that is unclear at this point whether they can or not, we will see an avalanche of selling hit the gold market which will easily carry it down to $1150 for starters.
I have put up a Daily Chart to illustrate how tenuous gold's position is right now. It has effectively worked its way lower into a band of EXTREMELY CRITICAL CHART SUPPORT. I would say that this level has almost as much significance as did the $1530 level some time back. When gold fell through that level, we saw wave after wave of selling as hedge fund longs, and other speculative longs, bailed out in large numbers and fresh shorting was established. We would see the same thing occur in my view if this level were to give way and PRICE BE UNABLE TO CLIMB BACK ABOVE IT SWIFTLY.
If you look at the ADX indicator, that line is beginning to turn back up again, after having moved lower. That move lower indicated that the bearish trend was halting and that a range trade was forming. Now that gold has broken below the bottom of that range, the indicator is suggesting that a new leg lower in price could be forming. For that to be confirmed, this chart support level that I have noted would have to give way.
Bulls need some help from somewhere and fast. That the HUI is holding up a bit better than the actual metal today is some consolation. Bellwether Barrick is down nearly 2% as I type these comments but gold is down over 3% so that is a positive, although I will be the first to admit, not much of one on a day like this for the gold bulls. ABX is still holding above that chart gap it made Tuesday of last week; however, it had better not close that gap or it will more than likely retest its recent low.
With rising interest rates here in the US bolstering the Dollar, the precious metals need some Asian buying to keep things from getting even uglier. This rise in rates, which I think is being closely watched by the FOMC, in conjunction with POSITIVE REAL RATES ( due to the official low rate of inflation ) is not helping gold demand here in the West. Remember, traders will view a strong currency as inhibiting inflation.
The question I still have in my mind is how the Fed is looking at this fall in the gold price and whether it is becoming a concern to them at this point. I do not think it is UNLESS it breaks chart support and REMAINS BELOW THAT SUPPORT for an extended period of time. Spikes below support followed by rebounds in price that occur quickly will not disturb them whatsoever as that can be rightly attributed to market volatility. Low prices however that remain are a more serious signal. Gold is signaling no fears of inflation currently exist. If it sinks further and will not pop back, it will be signaling the potential return of deflationary pressures. That will be a problem for the Fed.
Time will tell.
One last thing about crude oil and gasoline prices. There are two ways of looking at a sinking crude oil price and by consequence a sinking gasoline price. It could be interpreted as a deflationary signal, evidencing a sluggish economy in which demand for energy is weak as a result. It could also be interpreted as having a STIMULATIVE effect in the sense that it acts as a sort of "tax cut". It puts more money in the pocket of both consumers and business as their energy costs drop off. I personally think the Fed welcomes a lower crude oil price more in the latter sense although I am sure that were it to rise too much in their estimation, it could have a deleterious effect on the overall economy. What I am trying to say is that just reacting to a rising crude oil price by saying it is inflationary is not quite as easy as it might sound. It requires a bit more nuance to sort the implications out.
Wednesday, December 18, 2013
Gold was all over the place today but it really took it on the chin during the Bernanke press conference. It actually broke down below the bottom of its trading range but managed to recover somewhat and claw its way back into the range.
If it breaks below today's low, look out... it will test round number and psychological support at $1200. Right now, it looks tentative to me.
I repeat what I wrote earlier - based on my interpretation of Chairman Bernanke's comments, the Fed is hoping to strike a balance between deflation and inflation in the sense that they want to see inflation but they want to see it tame. What they DO NOT WANT, is a resurgence of deflation. A sinking gold price (below what level I am unclear) that stays down is a deflationary signal. Thus, I suspect the Fed would not welcome a gold price that is significantly lower than current levels, especially if that gold price were accompanied by a collapse in certain key commodity prices.
If that were to occur, in conjunction with a labor market that shows no signs of strong improvement, I could easily see the Fed INCREASE bond buying. At this point, we are going to remain heavily dependent on subsequent economic data releases for a clue as to whether or not inflationary pressures are increasing or not. I believe that the payrolls numbers are going to be even more significant than they have been moving forward.
I noticed that once again silver could not maintain its footing above the $20 mark for long. If growth both globally and domestically is indeed picking up, one would expect silver to move higher alongside of copper. The jury is still out.
You might recall that this summer, the rate spike elicited extreme nervousness and concern among the Fed governors who immediately began sounding a dovish tone on the economy overall and the bond buying program in regards to any tapering.
Remember, the Fed today left the door open to additional monetary stimulus should the economic data warrant such.
Notice how the index initially soared higher when the news that the Fed was tapering to the tune of $10 billion. A large number of investors panicked. However, the reaction following that was one of increasing confidence due to both the wording of the FOMC statement, and, Chairman Bernanke's comments during his last press conference.
I maintain that gold needs something to impact CONFIDENCE before it mount a SUSTAINED RALLY HIGHER. With the VIX falling, and the stock market soaring into new all time highs, gold is looking for some friends right now as there is nothing on the radar screen of investors AT THIS MOMENT, to give them a strong reason to chase gold prices higher.
Now the key for gold is whether or not it can hold chart support near $1220. If it loses that level, it is going to test round number psychological support at $1200.
I will get a chart of gold up a bit later today. As you no doubt realize, it has been a very busy day for traders.
It looks to me like the Fed basically gave the market a near perfect bowl of punch. Cut back on the bond buying program and dispel some of the criticism it has been receiving from some quarters about keeping the program at full size for too long while simultaneously sounding an EXTREMELY DOVISH TONE on the interest rate front. In short, they managed to convey that they are still concerned about DEFLATIONARY forces reasserting themselves but are comfortable scaling back some bond buying as they monitor that situation.
The reaction in the gold market was fascinating to watch as traders tried to figure out exactly what to think about this new state of affairs. The initial kneejerk reaction was to sell on the announcement of a taper; however, I believe the dovish attitude towards interest rates eclipsed any fears of a slowdown in the liquidity injection mechanism. That allowed gold to catch a bid and keep above that now incredibly significant chart support level at $1220.
Basically the Fed left the door open for a period of ultra low interest rates for an extended period of time. One thing I noticed was that they seemed to play with the unemployment number threshold a bit ( "well past 6.5%"). That was something new to me.
What really matters to traders however is not the news so much as the reaction to the news. The equity markets are looking at the announcement of a $10 billion/month taper as evidence that the US economy is actually recovering enough for the Fed to slightly scale back the QE. Also, the Fed's benign view on inflation, means that equities remain the "GO-TO" sector for gains.
Given that view, and the fact that there is still going to be $75 billion/month of bond buying, it was a go on all cylinders for the US stock markets. From what I can see, the Fed under Ben Bernanke has managed to pull off nothing short of a financial miracle. They conjured into existence nearly $4 trillion of new money without completely debasing the Dollar or generating widespread inflationary outbreaks. In the process, they generated an historic rally in the equity markets, a rally which I might add, now looks as if it will continue.
With the decision to taper finally out of the way, with the uncertainty surrounding that decision clarified, investors are now breathing a sigh of relief and going back to what they have been doing for all of this year, buying equities. And why not? - the Fed has given them the green light by restating the "Bernanke Put" is still in effect should economic data justify additional monetary action. Stock investors have never had it better. It is rather remarkable.
That brings us back to gold - in my view gold's progress from this point forward will be completely dependent (as it has been in my view) on whether or not the market believes that inflationary pressures are now more of a danger than deflationary pressures. The Fed reiterated that inflation is consistently running BELOW its 2% benchmark. What they want is the Goldlilocks scenario - inflation not too hot, and not too cold, but just right.
I mentioned last week or the week before that in a post, that the Fed might actually WELCOME a HIGHER GOLD PRICE. Why? Because as long as it does not soar out of control, but manages to stay firmer perhaps within a broad range, it would signify that inflation is not a problem nor is deflation. I believe the Fed would be concerned if gold prices were to experience a sharp, PROTRACTED move lower just as much as they would be if it experienced a sharp, PROTRACTED move higher.
If this is the case, we might have finally found a lasting bottom in gold. That does not mean it is going to enter a strong uptrend in price ( see my thoughts above) but rather that the forces of deflation and inflation might now be balanced, at least in the view of the FOMC. I still believe that gold will underperform the broader equity markets unless we see some sort of black swan event.
It was interesting listening to the outgoing Chairman's comments during his presser. He mentioned as a deflationary force falling crude oil prices but also expressed concerns about the potential for rising health care costs and the possibility of rising wages. I came away with the idea that the Fed is going to remain heavily dependent on the financial/economic data. They are very concerned about the deflation issue, that is beyond dispute.
Let's see how things look when the dust settles for the day and then make some assumptions from that point.
Tuesday, December 17, 2013
Seriously, the Silly Season Silliness was on full display today as the gold market gave back what it put on yesterday, which by the way brought it back to nearly where it closed last Thursday.
That is why I keep saying, do not read too much into any one day's price action. I marvel that all the usual perma-bullish players continue to come out of the woodwork whenever we get a strong move higher. Then they all disappear when the market gives it all back ( some of them blaming manipulation). When gold moves back up, they will come back. Count on that. I could also just as well say that the perma-bears are always growling whenever gold makes a move lower.
Here is the simple truth - gold continues to be stuck in a RANGE TRADE. That means it "ain't goin' nowhere" until it breaks out of the range in one direction or the other. The weekly trend is still down so the bears have a bit of an advantage but downside momentum has also been blunted so until they can force the price below $1210 and keep it there, they are not out of the wood yets either.
Until then, find something better to do with your life ( like going to see "The Hobbit- the Desolation of Smaug" - I LOVE HATING Azog and Bolg), instead of watching every single tick in price. As long as we are dealing with the vagaries of the Fed and the FOMC meeting, as long as we are dealing with year-end book squaring, and as long as we are dealing with pre-holiday thinning trade conditions, we are going to see volatility.
Since there is not much to say right now, I will merely leave you with a price chart noting the price action as it remains constrained within that broader range.
Monday, December 16, 2013
Today we had the US Industrial Production numbers. This is a gauge or measurement of the output of US manufacturers, utilities and mines. It registered a 1.1% increase from last month's number, the biggest jump in a year.
That seems to have sparked a move higher in silver which then yanked gold higher. I noticed that Copper was higher as well.
Equities went on a tear higher today as once again the thinking in regards to the QE thing shifted yet again. Today the thinking was that the Fed will hold pat on this month's meeting and will do nothing until March at the earliest so as to not jeopardize the recently improved economic data.
That in turn undercut the US Dollar and thus we seemed to get a binge of commodity buying. Crude oil, gasoline and heating oil, all rallied higher. The metals were all higher. Soybeans moved higher. Coffee and sugar went higher. There were some commodity futures markets that moved lower today but the majority of the sector saw steady inflows.
Whether this is a shift in sentiment towards the sector in general is still up in the air. Part of what makes deciphering all this even more tricky is the fact that these moves are now occurring in the middle of the Silly Season. Market liquidity is shrinking as traders square their book, closing out positions as we move to the end of the year. That allows for excessive price swings in both directions on relatively small-sized orders as more and more air pockets, both above and below the markets, are encountered.
Back to gold - it confirmed that it has entered a range trade for the time being as that uneasy truce between bulls and bears that I mentioned last week continues. The range is defined on the bottom near $1220 and on the top up near $1250 with short covering related spikes pushing prices up towards $1265 before the selling re-enters. Until this range is violated, in either direction, gold is marking time.
It seems to be unwilling at this point to make a decisive break in either direction more than likely due to the time of the year. As mentioned above, many traders are simply not all that willing to establish sizeable positions as the calendar is about to shift. They will wait until the beginning of the New Year before moving back into some of these markets in size. That is why I stated last week and wish to restate here for the sake of emphasis that reading too much into the day to day gyrations in these markets is not wise.
Tax considerations are also at work and trying to unravel that knot can be fruitless most of the time.
I have noticed that as I type these comments, silver has once again been unable to maintain its footing above the $20 mark. It is back to being a teenager once again. For the bulls to have any sort of chance of generating some upside fireworks in the silver market, they will need to get at least past the $21.25 level.
The S&P 500 is stuck between the 50 day moving average and the 10 day moving average. It is basically in the business of whipsawing traders right now.
Saturday, December 14, 2013
Friday, December 13, 2013
You might first recall that on Friday of last week, the day when the last Payrolls number was released, gold plummeted lower hitting a low near $1210 before violently rebounding higher. That action alone resulted in a significant number of speculative short positions being squeezed out. There then came a bit of a breather on Monday before the market shot higher during the Reverse Flash Crash on Tuesday which kicked off another round of buy stops.
The action was caught for us by the CFTC in today's report and reveals the reason behind the sharp moves - hedge funds were doing a good bit of short covering. Some in that camp were also fishing for a bottom and moved back onto the long side of the market. The result of that was net buying by this group to the tune of approximately 6600 contracts.
Interestingly enough, the entirety of that , and then some more, was offset by Swap Dealer selling. They were net sellers to the tune of some 8,200 contracts.
The Producer/User/Merchant category were also net sellers for the week to the tune of some 2400 contracts.
The Small Specs were bottom picking this past week as they rushed back onto the long side to the tune of about 2270 contracts. Ditto for the Other Large Reportables who were net buyers of some 1700 contracts.
Note to some: These are approximate numbers for the purpose of quick and easy illustration from which to draw some analysis.
Here is the takeaway. Specs were squeezed in the push back down to $1210 and subsequent inability to break through that support zone. Then as prices moved higher on Tuesday, more buy stops were run. The BULK of the BUYING DONE BY SPECULATORS THIS PAST WEEK WAS THEREFORE NOT FRESH NEW LONGS BUT RATHER SHORT COVERING.
This is hugely significant as it confirms my views held for some time now. Rallies in gold are occurring that have been quite fierce but which have not tended to last because they consist almost entirely of short covering. At this point in time, these rallies DO NOT reflect a wholesale shift in sentiment among this important segment of traders. Until sentiment changes and we see eager NEW BUYING across the speculative categories, gold remains under the control of bearish forces.
I should note here that all market bottoms are first GENERALLY reflected by strong waves of short covering but that gives way to FRESH BUYING that begins to outnumber the short covering.
Gold is not there yet. Keep this in mind before getting too bulled up.
Also, I wish to note here as I did last week - those who keep speaking of capitulation when it comes to the selling in gold are doing so in spite of the fact that the speculative community generally remains as NET LONGS and has been for many years now.
The Small Specs were net short this gold market only in July of this year ( and that was for only one week) but have remained as net longs even as their overall positioning on the long side has indeed decreased. They have not gotten short.
The Hedge fund community has not been net short this market for the entire 7 1/2 years of this data set. Only the Other Large Reportables camp had been net short for more than one week and that was back in July of this year. During that month they remained as net shorts in gold before moving back to net long the first week of August where they have remained since.
With speculators continuing to play gold from the long side of the market, the risk remains that we could yet have one more good downside flush before killing the bullishness that stubbornly remains among the speculators. I can see that happening only if chart support gives way, first at $1210 but more importantly at $1180 - $1178.
In this present case, we might be better served by closely scrutinizing the action of the gold mining shares for clues of a solid bottom in this market. They led the price of the metal lower and will more than likely, although not guaranteed, lead the way higher. I for one would feel a whole lot better about a solid bottom if we could see the hedge funds on the net short side of this market with the entire speculative community all effectively as net shorts as well.
One last thing - with Swap Dealers doing the brunt of the selling this past week, I am beginning to wonder if we are seeing some mining companies working out some hedges/forward contracts with these dealers as prices move higher.
Obviously prices at the wholesale level were generally LOWER indicating the continued lack of an inflationary impact from the Fed's money creation schemes. Upon the news gold moved higher! The proper response from most traders would have been expected to be "DUH?"
Yes, in the absence of any inflation pressures gold moves higher. This is where the money printing policies of the Fed have brought us - to the La-La Land of Unreality.
The reason that gold moved higher instead of falling lower was because Traders believe that the Fed may now look at this data and actually come away more concerned about DEFLATION during next week's FOMC meeting. Just yesterday there was near Terror that they were going to go the opposite way and actually announce the beginning of a taper next week! That is what brought so much pressure into the S&P 500 as well.
Do you see why I find this constant interference by the monetary authorities so distasteful and yes, even repulsive? They have completely turned everything on its head. The stock market rallies on horrible news because it ensures more QE bond buying. It sinks on good news. UP is DOWN; BLACK is WHITE; and IN is OUT in this brave new world. The entire thing has become so convoluted as to be farcical.
I seem to vaguely recall a period a long, long time ago, in a galaxy far, far away when stock prices rose during periods of strong economic expansion. Of course I am exaggerating things here but the point I wanted to make was that today's markets are so sensitive to whatever the Fed may or may not do, that they are moving more often in a contrary manner to sound reason.
By the way, I cannot help but ridicule the "FLASH CRASHERS" once again. Yes, they were back out in full force yesterday giving us the painful details of the carpet bombing of gold once again during its hard move lower yesterday. Not a peep out of them about the REVERSE FLASH CRASH of Tuesday ( you see, that is not unusual but is what gold SHOULD BE DOING all the time) , but that is par for the course with these people. Never let a good down day in gold go to waste when promoting their "gold is constantly under attack by nefarious forces" dogma.
As stated many times here, ad nauseam, ad infinitum, gold is in an intermediate bear trend. The feds do not have to fight the price of gold when it is already sinking due to hedge fund selling.
The actual truth is that what happened yesterday in gold was exactly what happened in the broad equity markets. A wave of near terror/panic hit the markets that for some reason the Fed was most certainly going to announce, NEXT WEEK, the start of tapering.
Today, the PPI number totally erased that fear.
Along that line, gasoline futures just notched a ONE MONTH LOW (let's hear some cheers for that) in today's session. Wheat futures hit a FOUR MONTH LOW. Sugar hit a FIVE MONTH LOW. I could go on but I think the reader will get the point.
With falling prices, we see gold moving higher not because of any imminent threat of inflation but rather because today's thinking ( for this session) is that the real fear that the monetary authorities will have as they meet next week will be cutting back on the bond buying programs TOO SOON and feeding the DEFLATION BOOGIE MAN. And one wonders how we traders can keep our sanity with this sort of flip-flopping back and forth in the markets nearly every single day. Just remember the name of yesterday's missve that I posted up yesterday - "Is it a See-Saw or a Yo-Yo?"
As strange as it may sound to some, I can actually see a point which, and here is a major caveat, IF THE PRICE OF COMMODITIES IN GENERAL CONTINUES TO SINK, and chatter about deflation concerns were to surface ( Note - I am not saying that is going to happen but merely suggesting a possible development) that the Fed would actually LIKE TO SEE THE GOLD PRICE MOVE HIGHER. Not in a large way so as to denote a loss of confidence in the Dollar but rather just enough to dispel any notion that gold is sniffing out a wave of deflation.
Remember, Central Bankers love inflation in the sense that they think they have the tools to control that. What they really fear, and we have been made aware of that by their continued QE programs, is DEFLATION. As a consumer I love deflation because it means I get more for my money. The down side to this however is that a slowing economy indicated by EXCESSIVELY low prices ( in the minds of the central planners) means a sluggish job market and slack/stagnant/falling wages. A gold price that were to sink too low, along with a sharp move lower in some key forward-looking commodities such as crude oil and wheat/beans/corn might convince the monetary authorities to actually ramp up QE in order to induce buying in gold and some other key commodities.
Of course this is all speculation on my part as the odds of this occurring seem rather remote at this point but it just goes to show how fickle the sentiment in the markets has become and how quickly and easily it can shift back and forth based on one piece of economic data or another. While the Fed may downplay the fact, rest assured that they are well aware of the gold price and what it may or may not be doing. This I do know, gold at $1900 was a disaster as far as they were concerned.
This being said, I do not believe that the Fed OBSESSES over the gold price as some apparently believe. They monitor it closely. That is a far cry from spending nearly every waking hour wondering where it is going and what it is doing as far too many in the gold community sometimes seem to give the impression that they do.
Take a look at the chart below and you will see how low the volume is in today's trading session. This is what I have been speaking to when I stated that we are entering the Silly Season when shrinking liquidity will often allow for large swings in price produced by rather small orders compared to the norm. That being said, a new support level has formed at a higher price than the recent double bottom at $1210. This new zone centers around the $1220 level. This is constructive from a technical analysis perspective. Still, until the bulls can push price past the resistance zone noted on the chart ( near $1260 - $1265) volume should remain muted. The flip side to this is if the bears were able to take price down below $1220 at first, but more importantly $1210. That would cause an enormous spike in volume. We will wait to see which side blinks first as there is an uneasy truce in the market right now.
Yesterday I mentioned Barrick Gold as a key bellwether stock to watch for clues/signal to the overall sector. Barrick gapped higher on Tuesday of this week, then fell yesterday and completely closed the gap early in the session but roared back before the close and managed to close higher. That is pretty impressive performance given the fact that gold was hit with an ugly stick yesterday. Today this key stock is actually trading higher and although it has not, as of yet, managed to eclipse Tuesday's high, odds are growing that the stock has finally bottomed. Again this does not mean it is now off to the races, but perhaps, perhaps, we have seen an end to the mauling of the gold shares. That no doubt would be most welcome to those who have sat through the entire retracement of the last few years.
When you are losing money nearly every single week and you look and see that while you are not making any money you are at least no longer bleeding, it lifts one's spirit and provides some encouragement and hope that the worst is over. We will see. Technically there remains a great deal of chart work that the gold shares in general have to do in order to convince a wider audience that they are now at levels commensurate with value. Maybe we are finally there. Time will tell but let's certainly keep an eye on this particular stock. I suspect that its fortunes will quite accurately give us a solid clue as to the metal's.