"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


Saturday, June 29, 2013

Trader Dan Interviewed at King World News Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King over at the KWN Markets and Metals Wrap. You will especially want to hear this week's recording as it is a companion to the piece I posted last afternoon (Friday) about my theory on the mining companies commencing hedging programs once again.


Friday, June 28, 2013

Mining Companies Appear to be Engaging in Hedging Activities once Again

Once upon a time in the West, We Dig It UP Mining, hedged or forward sold some of its expected gold production in order to mitigate price risk and to ensure that it captured reasonable profits on at least part of its production.

Then came the bull market in gold starting in 2001. We Dig It Up was nonplussed to say the least when it saw what its competitors' stock prices were doing while the price of gold was rising. Theirs' were exploding higher while its was languishing. As a matter of fact, New Kid on the Block Mining was bragging about its disdain for hedging while We Dig It Up Mining spend most of its stockholder meetings explaining why it was engaging in this obsolete strategy.

Eventually, threats from disgruntled shareholders and loss of market performance, were enough to convince the Board of We Dig It Up to abandon the practice of hedging altogether and join the crowd.

That is basically the way things have been since early in the last decade, until now!

What do I mean? Simple - Mining companies are now being faced with life and death decisions when it comes to the well being of their business. No one is quite sure how low the price of gold may or may not go but one thing they are certain of; gold down at current price levels means many miners are not going to be able to profitably (that word is key) dig the ore out of the ground for processing.

Put yourself in the seat of the CEO's and CFO's of the miners - Your life's blood is gold. If you can dig it out of the ground and make a profit, enough to pay your bills and reward shareholders, you can plod along, watching expenses, etc. while you wait for the price of gold to move higher. But when that will happen is unclear right now. So you now have a new risk that you have not faced in OVER a DECADE - namely the risk of price falling so low that you can no longer mine it profitably. Seriously, at what point during the last decade did anyone even dream of not being able to dig gold up profitably given the state of a nearly continuous rise in its price. So what do you do? I think the answer is self-explanatory - you have to lock in a selling price for gold that GUARANTEES your business a profit even if the price for the commodity you are mining were to fall even lower.

Welcome back to the world of risk management and HEDGING for the mining industry. That is what I believe transpired this past week. Many mining companies began to re-examine their swearing off of hedging or forward selling and moved to take steps that would guarantee their survival even if it meant leaving some potential profits on the table.

I have come to this conclusion based on my analysis of this week's Commitment of Traders report. I would like to point out here that Eric King and I discuss this in great detail on this week's KWN Markets and Metals Wrap so I strongly urge the reader to tune in to that audio interview when it is posted tomorrow (Saturday).

I did want to provide some graphics however to go with that audio interview.

Here is what I believe the trigger point was for mining companies to begin hedging once again. In looking at the following weekly chart of gold, note that area in the red rectangle that I have noted as STRONG SUPPORT. Keep in mind that although gold had been in a strong downtrend, it had not fallen below the $1340 - $1320 level since April of this year. As a matter of fact, that had marked the low price for gold this year. Strong buying, reports of record offtake  and long lines in Asia at coin shops had come every single time price moved to this region.

Now, when a market has been in a bullish trend for as long as gold has been, it is very difficult for many people to believe that the trend has changed. After all, that is what gold had been doing for over a decade; it had been retreating in price only to find strong support zones and then rebound and go on to make new highs.

This is why many of my friends in the gold camp continue to miss what has been happening in gold. They are not looking at the price chart objectively but continue to call for bottoms waiting for gold to slingshot back higher JUST LIKE IT HAS DONE FOR 10-11 years. Guess what? It did not do that.

I think this is the same problem that afflicted many of those who make decisions at the mining companies regarding risk management. That phrase, "risk management" has not really been needed in a continuously rising gold price environment. All of a sudden however, all of these mining company decision makers sat and watched gold CRASH through that floor of support in price and then proceed to drop over another $100 lower. Yes, it bounced today and yes, maybe the worst of the selling is over, for now, but as a mining company, can you really take the chance that the price of gold is not going to drop lower?

Good prudence calls for some risk mitigation and that means you lock in profits on SOME gold produced when the market gives you an opportunity to do so. This is one of the reasons I expect to see rallies in gold being heavily sold - hedging programs are going to be back in vogue.

Back to the Commitment of Traders report however from which I have deduced my theory. We have come to expect to see, each and every week, as the price of gold descends lower, the Commercial category, composed of the Producer/User/Processor/Merchants reducing the number of shorts as the price moves lower and increasing the number of longs. The opposite is true of course for the hedge fund category. They of course liquidate existing long positions (sell out) and institute new short positions (sell) as the price moves lower. That has been a very reliable pattern for most of the last decade in gold.

What this pattern fails to take into account however, is the fact that hedging fell out of favor among the mining companies a decade ago. Remember the grief that Barrick caught back then???? As a result, we have been accustomed to seeing the Commercial category as being primarily a proxy for the big Bullion Banks as we have not had to consider hedging of any large size by mining companies to deal with.

Nonetheless, it is in this category, the PRODUCER, that any gold mining company wishing to use the futures market to hedge is going to be placed for classification purposes. We might see some of that indirectly through the Swap Dealer category but let's let that go for right now and focus on the former category.

IN this week's COT report, we witnessed a departure from the norm that I just mentioned above; namely, we did not see the Producer/User/Merchant/Processor category have the normal substantial  shift in their overall net short position. Instead, what we witnessed was an increase of 8,754 new longs (futures and options combined) but we also saw an INCREASE in the BRAND NEW SHORT positions of some 7,151 contracts.

The pattern since the middle of May has been a steady decrease in the number of short positions in this category which is why this week's jump of over 7100 new short contracts caught my eye. In looking over the price action and considering the fact that the recording period for this Friday's release of the COT report included the week in which gold crashed through that critical downside support level of $1320, I am surmising that was the straw that broke the proverbial camel's back and has sent some of the mining companies back into the hedging business. In short, I feel very strongly that miners are now getting downside protection in gold to ensure that they can mine their product at a profitable level and SURVIVE!

Why this has caught my attention, and quite frankly I missed it back in early April, was that at that time, the $1525 level had come to have the same significance from a technical chart perspective as the $1320 level had this week and last week. If you look at the chart of outright commercial short positions, you can see that it has been steadily declining along with the price of gold for most of this year. There are brief periods however when the number of shorts has increased in this category. The first one occurred in early April when we had a huge downside break of chart support at $1525. I believe it was at this time, that some of the mining companies began to quietly institute some hedges. Not wishing to get the word out for fear of the stigma of hedging in the gold investment community, they did however begin showing some signs of worry and decided to get some minimal downside price protection.

We then had another spike in the short positions from late April into middle May. That was associated with the rally back up from below $1350 where price come close to reaching $1480. I have no doubt that was bullion bank fresh shorting but now in hindsight it might also have included some hedging by miners.

Of course we have just covered the reason I believe to be behind this week's spike higher in the number of commercial short positions.

I tend to write quite often that one day or one week for that matter, does not a trend make so I want to watch things proceed from this point and decipher price action further in conjunction with subsequent COT releases, but when I read stories in the financial news wires that mining companies are using a word that had been considered, taboo, for most of the decade, my eyes and ears perk up.

From what I can glean from this week's report, in combination with the price action and news stories, I think we can safely assume that hedging is back in vogue and will be until gold gives some evidence that it is ready to move sharply higher once again.

I wish to remind the readers that I live in the world of commodity futures and thus am not an equity expert nor do I hold myself out to be one. I would say however that it might be useful to long term holders of these mining shares to call their Investor Relations department and see if they will discuss whether or not the company might have instituted some hedges and put in place some risk management. At the very least, it would be enlightening. Quite frankly, any mining outfit that did lock in a selling price through the use of forward contracts or through hedging in the futures market, especially back in April of this year, is going to look like a genius to its shareholders right now, given the carnage to the gold price....

Heavy Call Option activity in GLD

Dow Jones is reporting that some very large bets on a rise in the gold price from current levels are currently being made in the largest gold ETF, GLD.

Gold has dropped to within spitting distance of support near $1150 before rebounding higher as it was led up by Silver in today's session.

The catalyst seemed to come from the Consumer Sentiment number which was quite strong, surprisingly so. Under recent conditions, this sort of number would have been expected to generate strong selling across the precious metals sector as it further feeds the theory of tapering to begin earlier than expected.

What seems to have happened however is that when the wave of selling did not materialize, bottom pickers, as well as extremely profitable shorts, decided that was a signal to either book some profits or establish some new long positions.

Further complicating matters - it is not only the End-of-Month positioning and book squaring that is at work but also the even larger End-of-Quarter movements. Large investment funds and hedge funds will generally square their books especially after amassing such large profits on the drop in gold and gold shares over this past quarter. That generates another wave of buying.

I prefer to see what gold does next week as we start a new quarter to get a better read on whether or not we have established a lasting bottom. I still expect rallies to be sold in this market but from what level is a bit unclear. A second test of the overnight low down near $1180 would be most revealing as to whether the carnage in this market has finally come to an end.

The mining shares are quite strong today and continue to build on yesterday's mild gains. That is a good sign as they led this market lower and I believe will lead it higher when a permanent bottom is finally forged.

Take a look at this quarterly gold chart. This appears to be worst quarterly performance for gold in history!

If we ignore that spike high to $1900 and draw out Fibonacci retracement levels off the triple top at $1800, gold has bounced off the 38.2% Fibonacci retracement level of the entire move beginning back in 2001. That level is near $1200 (1207 to be exact). That is constructive but quite frankly, this market has been beaten up so badly that a bounce of some sort was way overdue. I prefer to err on the side of caution as gold is entering a seasonally slow period for demand with the summer doldrums coming up. That, plus the fact that we have a big June payrolls number coming up soon and if that thing comes in stronger than the markets expect, it is going to further feed the TAPER psychology.

Let's be clear - all the way down we have had bottom callers and none of them have been correct. Eventually they will get it right but as the old saying goes, even a stopped clock is right twice a day!  Let's monitor the subsequent price action for a while before getting too dogmatic. Remember the trend in gold is now down on the shorter term charts so specs will be looking to sell rallies unless something changes on the QE front or the psychology in the market changes to one of expecting a pickup in inflation.

There is no need to be a hero and try nailing an exact bottom. It is next to impossible to do that on a consistent basis. Traders do not need to call exact tops or exact bottoms for that matter. All they need to do is to spot the change in trend and position themselves to take 60-70% out of that trend to make money. Remember, Bottom pickers and Top pickers eventually become cotton pickers!

Thursday, June 27, 2013

Gold Snowballing Lower

We are seeing a snowballing effect now occurring in gold as even long term holders of the metal are getting washed out. As the metal moves lower, those who are still long are eying trendlines and support levels and are growing increasingly worried that what is left of any profits they might have in gold, since coming in back in 2010, are disappearing. That is creating forced selling further emboldening the bears who are now pressing hard on the market.

I mentioned in yesterday's post that the round numbers such as $1400, $1300 and $1200, do not seem to be holding very well on the way down but are acting much better as resistance levels on the way back up. That is proving to be the case with the $1200 level. Gold has dipped down below there twice in the last two sessions (previous session and current session). Downside momentum is favoring a push towards $1150 at this point unless price can QUICKLY recover $1200 and push away from that level to the upside.

See that previous post for downside targets....

I wanted you to notice on the weekly chart that this particular indicator that I employ has not been this oversold since the very beginning of the bull market in gold all the way back to the year 2001. As of now, I do not yet see any signs that this indicator is leveling out or is losing downside momentum. That translates to the odds favoring further downside before this wave lower is exhausted.

With no signs of inflation in the eyes on most investors, with rising interest rates and with little to no focus on the long term structural problems besetting the US (ballooning deficits and an out-of-control growth in entitlements, not to mention sovereign debts fears out of Europe receding from the front pages, gold is struggling to attract any buying among speculators.

I suspect that when price has fallen far enough however, Far Eastern buying by Central Banks and large long-term oriented interests from that region, will abruptly arise. We will continue to monitor the price charts for evidence of their footprints. For now, specs continue to unload the metal.

Let's watch the HUI however to see if there are any signs that the selling in the mining shares might possibly be coming to an end. Remember, the shares led the metal lower and will probably lead the metal higher. One day does not however make an end to a strong trend.

Wednesday, June 26, 2013

HUI - No Buyers

The rate of descent in the mining shares is remarkable. Rarely does one witness a collapse of this magnitude and severity without some sort of period of consolidation. It speaks to me like a final washout is underway, even of the most die-hard, long term bulls.

In a period of only 9 months, the index has lost 60% of its value. As stated before, the damage inflicted on the owners of these shares, both financially and psychologically, has just about guaranteed that the vast majority of those who bought them as a hedge against expected inflation will never again in their lifetime come back as buyers in this sector. If they do come back to gold, it will be the ETF, GLD, or some other entity but it will not be mining shares unless management makes it attractive through dividends or some other novel method to own them.

In looking for a place on the chart where the POTENTIAL for a stem in the bleeding can occur, I have noted two different sets of Fibonacci retracement levels. The first set takes the entire decade long bull market and the second takes the rally off the 2008 low, prior to the inception of QEI.

Note how close the various Fibonacci lines from both sets (red and blue lines) come closely together at key areas. Notice also how both sets have failed to offer any support.

We are now down to a region where we are running out of support levels. I have noted the next one which starts below the 200 level and extends to 186. If that cannot hold, we are back to where the index was at the bottom in 2008, near 159 - 160.

Gold Chart and Comments

Several readers have asked me where I think this move lower in gold could finally exhaust itself. That is a good question.

All I have to go off of is the chart plus the knowledge that various costs of production for gold continue to surface from the investment houses. Some put the cost between $1200 - $1250. I have seen other estimates taking that down to $1150 or so.

The point is that gold is nearing levels that are going to make it extremely difficult for many mining operations to continue at any sort of profit. Already I am getting reports from S. African miners that are in trouble.

As I mentioned in a previous post, mine shut ins will only begin if gold moves to these aforementioned levels and stays there a while. If it just hits those levels and rebounds higher, the shut ins will not take place. I do believe however that we are not currently in an environment in which gold is going to violently rebound higher. Barring some unforeseen event, there is simply no reason to hold the metal especially in the face of rising interest rates and a widespread belief that inflation pressures remain subdued. Throw in the fact that the US Dollar is very strong, and that means gold is going to have a difficult time mounting any sustainable rally in price.

All this being said, the chart does provide us some interesting information when tied in with those cost of production estimates.
Notice the lines that I have marked, "SUPPORT" on the chart and note the price levels that they come in near.

The first one is just about at the $1150 level. That number is mentioned above as one of the costs of production. Then you have a major 50% Fibonacci retracement level coming in near $1090 and another level of support near $1050.

I see things as follows: Gold has round number psychological number support at the $1200 level. Thus far in this meltdown, those round numbers have not been very good at holding on the downside; rather they have served fairly well as selling points for rallies.

If $1200 fails, then you have support down at the cost of production near the $1150 level. Seeing that markets tend to always overshoot prices because of margin calls and other assorted technical factors, if $1150 failed to hold, you could see another $100 or so drop in price. That would take gold into the next support level noted below the 50% Fibonacci level which is $1050.

Let's just say that I do not believe gold prices would stay down below that level for any length of time. I remember what seems an eon ago when it was buying from the INDIAN CENTRAL BANK that took the price of gold through the $1000 level. It never saw that level again.

My thinking is that Central Bank buying will be quite intense should gold ever get to that level.

My view is that $1050 would represent a buying opportunity, should gold get down that low for long-term oriented investors. Remember, this is for investors, not traders.

Obviously any production cutbacks would impact the supply side of the supply/demand equation only. We still need to see how demand will shape up as price descends lower. Demand must exceed supply if price is to rise.

Tuesday, June 25, 2013

Gold Still Struggling to Attract Speculative Interest

I have written in previous posts that the gold ETF, GLD, is a proxy for speculative desire to own gold. As long as it continues to lose tonnage, it is going to be next to impossible for gold to mount a SUSTAINABLE rally.

Check out this chart and you can see what I mean...

Now compare that chart to the following chart of Comex Gold...

Here is the point to takeaway from all this... As long as the holdings of GLD continue to shrink, speculative forces are not coming in on the buy side of anything gold. Obviously, someone is acquiring the gold that is being dumped out of the ETF but for investment/trading purposes, that is all irrelevant at this point. It was speculative interest in gold that took the price higher; while that is lacking, there is no force to take the price higher.

Remember, price is like a rocket ship attempting to escape gravity to ascend - it requires THRUST. If that is missing, price will tend to fall of its own weight.

The difference between that analogy and markets is that sell side pressure can come from two sources - longs who are liquidating and selling out of their positions or fresh shorts who are entering the market. If the majority of longs sell out, then it will take another force pressing down on the gold price from above to do the work of gravity. That is the new short sellers. Whether there are enough of them to press the price significantly lower in the face of buying by strong hands is a question we are all going to learn the answer to.

Saturday, June 22, 2013


In previous posts I had laid out what I believe has been happening across the financial markets this past week on the heels of the FOMC statement and Chairman Bernanke's comments.

In summary - the Fed, the ECB and the BOJ, have created an environment in which the word "RISK" had no meaning. Once upon a time, in a galaxy far, far away,  investors looking to put rare, scarce and hard-earned capital to work weighed the costs of so doing against the potential yield or earnings that they could expect. All things considered, if the reward was sufficient, they would choose to allocate that capital.

That all died with the advent of Central Bank intervention into the marketplace. Hailed by many, who are too short-sighted in their thinking in my view, as necessary saviors and as a sort of cosmic fire hose used to extinguish various financially-related infernos, they gave the green light to hedge funds, institutional buyers and sovereign wealth funds to throw any caution or reservations they might have to the wind and jump into a host of markets with little regard as to what might happen when the spiked punch bowl would be withdrawn.

In a near zero interest rate environment, yield hungry investors were focused on only one thing - how much they could make. Ne'er a thought flit through their minds about how much they might lose. After all, who was going to lose a dime if the almighty Central Banks were there continuously pumping liquidity into the financial systems? When this sort of environment is created, history has already taught us what to expect - a proliferation of highly leveraged, one-way bets. As long as the general consensus of the market players is that the status quo will continue, the game proceeds according to expectations and the seas are smooth.

Let a few rogue pebbles be introduced into the serene pond; a few stray gusts of wind arise, and suddenly, the sleeping mariners are startled from their complacency. That is what occurred this week.

I find it particularly insightful to observe what has happened in the interest rate markets. I have said many times, that those markets are the most significant on the planet, far more so than the equity markets and even more so than the currency markets.

Look at this chart of the US long bond. Notice the continued plunge even in the face of a sell off across the equity markets. Typically we see the exact opposite occurring when equities sell off, namely, bonds rise as money flows into safe havens. In other words, if "RISK OFF" is the play, bonds rise when equities sink.

What we had this week was BONDS FALLING right alongside EQUITIES. This is something far more than "risk off". It is a shift in perceptions aggravated by an enormous unwinding of one way bets in the interest rate and equity markets. Remember, the drive higher in stocks has been the continued expectation of unlimited amounts of liquidity. Same goes for bonds in the sense that $45 billion of Treasuries were going to be bought each and every month by the Fed as part of QE4's $85 billion per month.

Large speculators had positioned themselves accordingly in these markets to take advantage of that continued liquidity. The slightest fear that it would slow or cease altogether has set off a chain of uninterrupted selling as those massive positions built up since the start of the new year are being violently unwound en masse. Selling fuels more selling as margin calls proliferate and losses compound due to that same leverage now working against its owners. One has to wonder if we are seeing the beginning of the Central Bank encouraged bubble bursting?

Selling of the nature that we are witnessing in these markets can continue longer than many expect because it is all about money flows, reducing risk, rethinking exposure, cutting losses, etc. It will continue until all of that repositioning has been accomplished. Then the dust will settle out and we can re-evaluate.

In watching these things for as long as I have been trading, I keep coming back to the same thesis - the SOLE CAUSE OF THE WILD, INCESSANT AND UNPREDICTABLE VOLATILITY IN TODAY'S FINANCIAL MARKETS IS EVERY BIT THE CONSTANT INTERFERENCE BY THE CENTRAL BANKS. They refuse to leave the markets alone and are thus distorting the signals that would otherwise be generated. Their actions move markets from one extreme to the other by herding speculative forces and directing them in whatever direction those policies are designed to drive them. In the process of so doing, they create the perfect environment for reckless leveraging which always ends in creating more havoc and chaos. You would have thought they might have learned something from all the crises faced since the year 2000. Apparently not. Humility is certainly not a virtue found roaming the halls of the buildings that house these Central Bankers.

Trader Dan Interviewed at King World News Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap. This week we are deviating a bit from the usual format so that I can spend more time discussing some developments in the Commitment of Traders for gold. I think this will prove helpful to many of you in better understanding what has been occurring in the gold futures market.


Friday, June 21, 2013

Gold Bounces off Overnight Lows, but no Conviction

Gold is putting in a "dead cat bounce" in today's session after setting a fresh low of $1268 in early Asian trading last evening. For those of you new to our trader's lexicon  - even a dead cat will bounce if it is dropped to the ground from a high enough point.

Look at the volume on the bounce higher however - it is miniscule. There is simply no conviction among the bulls to come wading in feet first and buying with both fists. A market that plunges $100+ in a single day is not normally going to see an abrupt "bout face" unless there are some unusual fundamental occurrences that negate the horrendous technical damage done to the gold chart.

I do not know how to say it other than this - the gold chart stinks to high heaven right now. We are getting some short covering due to shorts booking some profits before the weekend after a nice week's work but other than a few bottom fishers, there is no strong interest in owning gold right now among the institutional crowd and certainly not among most of the large hedge funds. They are short and getting shorter.

Same goes for silver although it did manage to claw its way back above the $20 level; barely, if only for a brief period.

We will have to see if any of this short covering and bottom fishing can take the price of either metal high enough to reach some important technical chart resistance levels above the market to trigger some further buying. Frankly I would be surprised if it does.

I do think that the selling we have seen hit the entirety of the financial markets is a bit overdone as I am not expecting the Fed to pull the plug on their QE program as some seem to have read into the FOMC statement and Bernanke's comments.  When markets are this highly leveraged, lopsidedly so, the carnage being inflicting on trading accounts and the subsequent margin calls always result in an amplification of price movement.  The bulk of the crowd is all on one side of equities and that can be seen in the extent of the downside movement in the S&P for example.

It looks however as if we are getting some two-sided trade in the Emini S&P futures in today's session so maybe the worst of the reaction in stocks is over. Once the bleeding stems, traders will then have some time to actually think about and reflect more on the comments of the FOMC instead of just reacting to every price tick.

The close today in the S&P will be critical but perhaps the response of traders come Monday will be more telling. If we see the S&P moving higher again and getting back above Thursday's high early in the week, that will be a sign that the "buy the dip" crowd is back. If however the index falters, especially if it violates this week's low, that would portend a deeper retracement. Every bit of this depends on just exactly how the majority interpret the latest round of Fed-speak when it comes to their QE.

Sad isn't it that the once proud US financial market system, which actually traded fundamentals has been reduced to a quivering hulk of jelly begging sustenance from its masters as the Fed.

The US Dollar seems to be the King of the World again although from a technical chart perspective it is stuck in a broad trading range of some 4 full points on the USDX; 84.50 on the top and 80.50 on the bottom.

Thursday, June 20, 2013

CME Hiking Margins on Gold

One look at the Gold Volatility Index is all we need to see to realize that the CME was hiking margins....

Initial margin for speculators is being raised from $7,040 per contract to $8,800. Maintenance levels are going to $8,000 from $6,400.

Obviously the computers there at CME Group are projecting a sharp increase in volatility....

S&P 500 cracks 50 day moving average - Again

Going back to last November's election, the S&P only remained below the 50 day moving average when there were TWO separate events that unnerved traders/investors. The first was the election of the current President which was greeted as a negative for business. The second was the drama surrounding the so-called, "fiscal cliff" drama unfolding in Washington D.C.

Once we moved past those two events, there has been only one day in which the S&P has CLOSED below the 50 day moving average. That occurred in April of this year and even then, it was only barely beneath this key level.

Today's shellacking, coming on the heels of a huge down day yesterday, has sent the index down quite significantly below the 50 day. As a matter of fact, it also fell below the former resistance level which had temporarily stymied its upward progress back in April before it gave way in May.

Tomorrow's close is therefore going to be significant.

That strong overhead bearish reversal pattern that formed in May has taken on new significance with this close below the 50 day moving average. We might just be seeing the shift from a "BUY the DIP" mentality to a "SELL the RALLY" mentality. If that is the case, it is going to manifest itself quite soon. We will then see overhead resistance levels capping rally efforts while support levels on the downside are broken as the market traces out a deeper move lower.

Based on what I am seeing in this chart, if this market cannot recapture 1620-1618 before the closing bell rings tomorrow, odds would favor a continuation  of the move lower down into a congestion range that was in place back in March/April. I have noted that on the chart.

As you can see, the upper portion of that range happens to also coincide with the 38.2% Fibonacci Retracement level of this entire leg higher since late November of last year. My guess is that the market will hold this level if it does indeed get there. If not, well, that is another different story....

During times of market fear, (the rising VIX tells us that we are FINALLY seeing some of that among the equity crowd), the bond market tends to be a safe haven with flows coming out of stocks and into bonds. Right now, flows are coming out of stocks, bonds and commodities; basically out of everything except cash and the Swiss Franc!

We'll see how long that lasts before the "stocks are cheap, cheap, cheap" cry starts up again.

Monthly Gold Chart

By request....

Note that this chart is based only on CLOSING prices for each month. I have included today's close as the price for June to give some sort of feel for where things currently stand.

The first major Fibonacci retracement level comes in near $1230 based on closing prices. I would look for a zone on either side of that of $10 for a target unless price can quickly recover and recapture $1300.

Gold Cost of Production

There are various estimates out there that are being tossed out but the general consensus for most gold producers is somewhere between $1200 - $1250 an ounce or so. Obviously, this is painting with a very broad brush as some producers have lower costs than others and some higher costs, but for a ballpark number, it is probably pretty good.

Some are speaking about production cutbacks if gold prices stay down near current levels or drop into that zone noted above. That is probably true but it all depends on the extent and duration of the lower gold price. If it dips down and pops up, production cuts will not occur. If gold looks as if it is going to linger down in that zone for any length of time, some of those cuts will undoubtedly occur.

The problem is that this is focusing on the supply side. The big issue in front of us is DEMAND. If supply falls off, it matters not one whit if demand is dropping at the same time. If supply falls off and demand increases, now that is an entirely different matter. What we are currently experiencing in gold is a fall off in demand, namely institutional demand as evidenced by the continued decline in the GLD holdings, not to mention the downdraft in Comex gold.

We will need to see some sort of stability in the price of gold before buyers will feel comfortable taking the plunge into mining shares again. When that does occur, there is going to be value found among those that are getting their financial houses in order, cutting costs and seeking to achieve value for shareholders.

Don't try to be a hero and catch a falling knife. Let the market tell you when it has stabilized. Underestimating the extent to which these hedge funds and their maulings of markets, both up and down, can destroy your trading capital is a serious mistake. The sums at their disposal are staggering and those who forget this need to be reminded as to how a grasshopper must feel when surrounded by a flock of hungry starlings.

Gold Crushed in Europe - Further Carnage in the US

Europe wasted no time in responding to the Fed's comments when trading commenced over there as an avalanche of selling swamped over the gold market crushing the metal below support levels that continued to give way in succession. As stated in yesterday's missive - institutions want no part of the metal right now as there are hardly any players who see the least signs of inflation on the horizon. Never mind that the costs of so many basic services and goods are rising - those are not caught in the government's numbers nor is the fact that consumer wages remain stagnant.

The economy may be improving in the minds of some but cash strapped consumers are finding their disposable income shrinking meaning that borrowing is going to have to increase if they hope to maintain their "quality of life". While the Fed wants inflation and is dreadfully terrified of deflation, they do not seem to be having much success at inducing the former yet most Americans all seem to realize that everything they depend upon for life is going up in price. Odd isn't it?

I am not sure whether the tail is wagging the dog or the dog is wagging the tail but one can see the interplay between what is going on in the equities and what is going on in the bonds. As the bonds sink, rising interest rates send worries down the spines of the equity crowd which is creating a sort of vicious feedback loop.

Keep in mind, according to my view, the entire US stock market rally has been nothing but a Fed-induced, artificially created bubble which has sent stocks to ridiculously high levels based on the anemic strength in the economy. If the sentiment, that one has to buy every dip in stocks, begins to come into question, then an awful lot of highly leveraged one way bets are going to begin coming unwound. When I see movements of this magnitude, I know some players, big players, are in trouble and are getting mauled.

About the only thing moving higher today is the US Dollar. There was some strength in the front month July hog contract but given this environment, one wonders how long that is going to last. Bellwether copper was kicked in its rear end and of course the readers of this site know all too well what has happened to gold, and especially to silver.

Silver is an inflation play, pure and simple. If there is no inflation in the minds of these big institutions, then there is no reason to own that metal and even more reason to short it. That is what they are doing having broken it down below a support level that I thought would prove a much tougher nut to crack that it did.

This is so eerily reminiscent of 2008 although this time around, the bonds also are proving to be no safe haven as they were back then. As a matter of fact, it looks as if CASH is the place that investors are running into for the moment.

The Australian Dollar, always a fairly reliable harbinger of the broader commodity complex, was pummeled today especially once the news that China's growth had slowed. Along that same line, the GSCI, or Goldman Sachs Commodity Index, was also beaten with an ugly stick.

We will have to see whether one or two days of this is enough to clear the air and bring some stability into these markets but with the excessive amount of margin debt and with extremely large trades going awry, anything is possible.

I will get some analysis and a chart up of gold later on today. Let's just say for now that losing support at $1300 was a big deal, a very big deal. Judging from the massacre occurring in the gold and silver mining shares, we are seeing a complete rout of even some of the long term bulls. The HUI looks like it is now poised to drop all the way to 200, pretty much back to where it was 5 years ago during the depth of the 2008 credit crisis.

Apparently the laws of economics have been discredited as it is entirely possible to create Trillions in paper currencies with no impact whatsoever. The monetary history books are all going to have to be re-written to reflect this.

Wednesday, June 19, 2013

Bernanke Speaks; Gold Clocked

The caption says it all - once the FOMC statement was released, followed by some comments from Fed Chairman Bernanke, that was all she wrote for gold. Down, down and down it went as the Dollar went up, up and up.

What the market is currently thinking is that if there is any nation where interest rates are going to rise, it will be in the US before it is anywhere else on the planet.

You combine that with equity markets that promise attractive gains, and large sums of money are moving out of their respective currencies and exchanging into US Dollars with which to buy US equities.

As the Dollar moves higher, gold is moving lower.

The problem for gold continues to be the same; investors do not see any signs of inflation, in spite of the Trillions of Dollars that have been conjured into existence, and hence need no inflation hedge. That, plus the fact that while there was turmoil across the world financial markets in the recent past, that seems to have come and gone as far as many are concerned. Where once the theme was "RETURN OF CAPITAL", now we are back to "RETURN ON CAPITAL".

In other words, since investor fears are basically gone for now, and since gold throws off no yield, and since they see no signs of inflation, they are dumping gold or shorting it.

Take a  look at the following chart of the GLD, the large gold ETF. Look at how there continues to be a drawdown in gold. Investors are selling out and moving the money elsewhere. For the first time in a very long time, the tonnage has fallen below the 1000 level. That is significant.

Now there is another issue to deal with and this is a technical one. I mentioned that there were a large number of sell stops building down below the $1365-$1360 level. The bears finally got to them in a big way today. In the process, they have really inflicted some damage to this chart.

The weekly gold chart is getting quite ugly to be honest. If gold does not quickly get back above that $1365 level before Friday's close, I am afraid that support is not going to hold down near $1320 and this market is going to reach psychological round number support at the $1300 level. If $1300 gives way, we are going to see a test of $1250.

Notice that gold is trading firmly under its 200 week moving average. The 50 week is moving lower and while the 200 day is still ascending, its slope is leveling off. Markets that are trading below their 200 day moving average are not bullish.

I have mentioned to the readers to ignore all that claptrap about hedge fund short positions, about big bank long positions, taking a contrarian position, etc,. and the rest of that useless COT analysis that so many novices keep touting. It means nothing - all that matters right now is money flows and they are leaving the gold market for the time being.

Something needs to occur to change speculative sentiment in gold. What that is right now is unclear. Even on the weekly chart, gold is firmly entrenched in a bear market having now fallen well off the 20% level from its peak at $1900. As a matter of fact, it is fully 30% off the peak.

At this point for the market to have any consolation for the bulls and to give a hint of a reversal, it is going to have to hold near that all-important 50% Fibonacci retracement level from the 2008 bottom noted on the chart. That is just above $1300. This is why that level must hold.

People keep talking about capitulation in gold. If gold breaks through $1300, you will see what capitulation looks like. I have said it once and will say it again; most of those who bought gold shares back in 2008 believing that they would provide some good protection against the wave of money printing that was going to be unleashed, are cursing the day they ever dropped one dime of their investment capital into those things. Maybe some day they will go somewhere; most of us will be dead and gone by then so hopefully our kids can earn something from them.

With the gold shares descending into the abyss, there is simply no evidence of speculative interest in anything gold or silver right now. Yes, physical demand is strong but it is not strong enough to take prices higher in the face of strong short selling in the paper markets and the continued exodus from GLD.

For now, the Central Bankers remain the Masters of the Universe. Thus far they have not been knocked off of their perches.

Incidentally, the one thing that threatens these demi-gods is the rise in the long end of the yield curve. Bonds are breaking down and yield on the Ten Year hit a 14 month high today! It has reached a level that has turned it back lower over that same period. If it continues rising, we will watch to see what if any impact is might have on the all important real estate market.

It still remains to be seen how in the world the Fed is going to ever be able to exit this QE business and reduce the size of its balance sheet. I suppose they could hold the paper they have until judgment day for all that most of the investment world cares. After all, the problem will be for another generation, is the thinking of our self-centered era.

Saturday, June 15, 2013

Friday, June 14, 2013

Japan Stock Market in Bear Market Territory

Watching the mood swings in the Nikkei puts me in mind of someone who would be considered manic-depressive. It has gone from Euphoria to acute Depression in the matter of 4 short weeks. The index has fallen over 20% from its best level this year which puts it in the category of official bear market territory. This is coming in spite of the Bank of Japan and the Abe administration's best efforts to kick the economy out of its state of deflation and induce a 2% annual rate of inflation.

What appears to be happening is that investors are losing confidence in the ability of the Bank of Japan to cure what ails this economy. Initially, upon the election of the new government, optimism that Japan's long season of discontent was finally coming to an end. The Nikkei began a monstrous rally that coincided with the sharp drop in the value of the Yen. However, what has derailed this bull train was the Japanese government bond market. It has proved to be a rebellious, strong-willed and recalcitrant child. Why? Interest rates are going the wrong way! The yield on the all important 10 year is going up, not down! This was not supposed to happen with the BOJ mopping up such a large chunk of those bonds on a regular monthly basis.

As interest rates have risen in Japan, the Yen is now reversing course and as it moves higher, it is sending stocks lower. What then appears to be occurring is a vicious circle in which the Nikkei then drops, sending the Yen higher, which in turn drops Japanese stocks lower, which in turn sends the Yen higher, etc... I think you get the picture.

The reason for this is those pesky speculators which were effectively herded, lemming-like in doing precisely what the Bank of Japan wanted them to do, namely, buy Japanese stocks, pushing the Nikkei higher and generating a wealth effect and a spillover happy optimism among the Japanese consumer and Japanese business. So much so that all the major hedge funds and large buyers of stocks had lost sight of the very concept of RISK. Why worry about that when the mighty BOJ was there to limit any downside moves in equities. As a matter of fact, let's just leverage our bets even more and load the boat for even bigger gains has been the thinking.

When the government bond market rejected this feel-good view, as bond investors wanted no part of locking in pitifully low yields for the foreseeable future, money came OUT OF JAPANESE GOVERNMENT BONDS to be put to work chasing yield in Japanese stocks. That sent interest rates soaring higher which is not want the Bank of Japan wanted.

As a result of this, money flows are violently reversing both in the short Yen trade and in the Long Japanese stock trade. That in turn is setting global equity markets on edge, particularly with all the noise surrounding the new buzz word in the US, "TAPERING".

Since we now live in the age of the zombie and the vampire in pop culture, we can call this newest movie, "The Rise of the TAPER". Sort of scares the hell out you just thinking about this hideous beast doesn't it?

Regardless, I have created a chart of the Nikkei futures indicating some potential support levels, which if it is going to stop falling, it will do so at these levels or else.

The first level of the support is a biggie. It is the 50% Fibonacci retracement level of this year's entire rally. It currently comes in near the 12192 level. Of all the Fibonacci retracement levels, this one is regarded as the most important. Generally, if prices are going to turn around, they will do so at this level. If they do not ( watch for an ancillary shock to US markets if they do not), they the index could drop down towards the red rectangle shown. That comes in between 11600 and 11200. If the Nikkei were to drop this low, I would expect the Yen to soar even more sharply putting even further pressure on the Yen carry trade. That would have big consequences for the entire financial market system, as heavily leveraged bets would continue to suffer huge paper losses.

MY guess is that there are currently a lot of phone calls taking place between the Fed and the Bank of Japan, along with the ECB.

How all of this would impact gold is a bit unclear right now. Back in 2008 when we had the massive unwind of the Yen carry trade, gold was clocked along with everything else as you recall. That was before all this Quantitative Easing began in earnest. Only the advent of QE reversed the bleeding as it encouraged speculators to come back in and speculate again, on the long side of everything in sight!

This time around we have had all the various QE efforts which have apparently run their course. Even some of the most die hard of stock bulls are beginning to wonder if stocks had gotten way ahead of themselves. I have said from the get go that the entirety of the stock market rally is nothing but a massive Central Bank induced bubble. I stand by that view. The bond buying has allowed the economy to muddle along with some improvement but as to generating any sort of robust growth, it is and has been an abysmal failure.

If investors begin to lose faith in the Central Banks and remember this is all a confidence game, then we might see gold actually function as a safe haven this time around. instead of a large flight into government bonds, which are becoming suspect to many, gold could withstand any unwind of the carry trade this time around, unlike it did in 2008. Again, I am unsure of this but one way or the other, we are witnessing economic and monetary history.

Early Signs of Inflation?

Two different numbers out today are indicating the very early signs of inflation. Whether this is the start of the long-awaited result of the Central Bank money printing policies is unclear, but nonetheless, it needs to be noted.

The first of these was the PPI (Producer Price Index). The other was the Reuters/U Michigan 12 month Inflation Forecast and their 5 Year Inflation forecast. Granted the latter is a forecast whereas the former is an actual measurement but the big thing to take away from all this is that the mantra: "There is no measurable inflation" has been one of the biggest problems for both gold and especially for silver.

The PPI number for the month of May was an increase of 0.5% over April. Analysts had been expecting a mild 0.1%. It was the first increase in the PPI in three months.

The U of Michigan 12 month forecast was +3.2% while their 5 Year forecast was +3.0%.

We should note that once the University of Michigan numbers came out, silver, which was already bouncing higher today on the heels of the PPI, recaptured the very important technical chart level of $22. If it can hold those gains into the close, it will have dodged a major bullet.

I want to see how crude oil closes this week as it was the component of the PPI (energy prices) which saw the big jump. Thus far crude has been unable to breach $100 having only briefly punched through that level last September before fading. If it does, and this is unclear right now, it is going to be very difficult to keep gold under pressure.

Traders are going to want additional proof that the PPI was not an aberration before they get nervous about inflation but at least their complacency over this issue might have gotten a bit of a nudge. Interestingly and noteworthy I might add, the bond market seems utterly indifferent to both sets of numbers with the long bond jumping a full bond higher in a counter intuitive move. There are still a lot of cross currents with all the liquidity flows occurring right now that are clouding the looking glass making it difficult to get a really good read as to what exactly is the current thinking in the marketplace.

I have been consulting my magic 8 ball and asking it questions but the answer it is giving to all my queries is the same - "DUGH?"

Stay tuned.

Thursday, June 13, 2013

Japanese Yen Carry Trade continues to Create Havoc

If you have the least bit of confusion as to what is going on across the financial markets this morning, just take one look at the chart of the Japanese Yen. It is experiencing a MELT UP! This is what happens when the entire world of hedge funds are all on one side of a trade gone very, very bad, very, very quickly!

To define this term, "carry trade", for those who are a bit newer to the markets ~ it consists of borrowing large amounts of Yen for extremely low costs due to the miniscule short term interest rate in that nation, and taking those proceeds, exchanging it into different currencies and then using that money to make investments elsewhere where higher yields may be obtained. If that is not risky enough, most of these hedge funds then leverage their speculative bets in the hopes of compounding their gains. It works until it doesn't and then disaster comes.

What always causes an implosion in this sort of trade is movement in the underlying financing currency, in this case, the Yen. Carry trades bank on a continuation of a trend (down) in that currency and low volatility. As long as it is present, no worries. Once something happens to interrupt that pattern, the mayhem begins in earnest.

One would think that some in this crowd would have learned something about the power of leverage to destroy their capital back in the summer of 2008 when we saw the same sort of violent reversal in the same carry trade when the entire world was short the Japanese Yen and long everything else. Apparently not. My guess is that this crowd figured that the Central Banks had removed all risk from their trade and that meant throw caution to the wind in order to obtain the biggest bragging rights to the largest gains. The problem is that no one rings a bell to warn of an impending reversal. With all of them completely dependent on their computers to do their thinking for them, there is literally no one to take the opposite side of the trade as the mad rush to the exits commences in earnest.

I have mentioned many times that old pros and experienced traders who are still trading are there for a reason - they have learned  the hard way to RESPECT the power of leverage, especially its power to destroy. Many of these hedge fund managers seem impervious to this axiom. What gets me is that there still seems to be a near endless supply of new victims for them to milk even after many of them manage to lose most of their client's money through their insatiable greed and stupidity.

Gold continues to be caught up this mess as it is torn between its role as a safe haven and the need for hedge funds to raise cash to meet ever increasing margin calls.

Again, forget all the claptrap analysis about Commitment of Traders report, hedge fund short positions, big banks long positions in gold, etc. NOTHING MATTERS right now except liquidity. If the Yen finally stops moving higher, you will see a calming effect in the markets but as long as this volatility in the currency markets continues, either scale back your trading positions or get to the sidelines and let others chew and spit each other out. Why be a casualty if you do not need to be one? The markets are not going anywhere - they will be there tomorrow, next week, next month, etc. You can always come back and put your foot into the water when you are ready to wade in. Do not try to be a hero or a bottom picker or a top picker. Leave that to the fools and narcissists who are legends in their own minds.

Treat your trading account as sacrosanct. If you preserve it, you will be able to take advantage of the good opportunities that will ultimately present themselves as a result of this mindless movement of money into and out of respective markets. If you try to be the hero and end up losing it, what are you going to do then???

Silver needs to get back above $22 in a hurry or it risks dropping back to near $20. Gold is stuck between downside support near $1365 and overhead resistance close to $1400. The Mining shares are moving lower again - what else is new there?

The US Dollar chart is turning rather ugly but with all the wild movements in the currency arena, that does not matter as much as it might if conditions that are contributing to this were otherwise.

Tuesday, June 11, 2013

Lack of Conviction - More Volatility Ahead

Investors/Traders are growing more confused and uncertain as to market direction and many are heading to the sidelines or scaling back the size of their positions in this very difficult trading environment. Witness the type of wild moves we are getting in the currency markets, especially the Japanese Yen, and you are seeing these CARRY TRADES involving the Yen being unwound.

When traders place these highly leveraged bets, they expect LOW VOLATILITY in the carry currency. When that does not occur, but rather the opposite takes place, it wreaks havoc on their positions and they have no choice but to liquidate or reduce market exposure at the very least. The results are unpredictable price movements across a host of markets and extremely wide trading ranges as so many of these hedge funds are all on the same side in the markets they are trading that there is hardly anyone to take the other side as they exit.

The Nikkei is now down 18% from its year-to-date high as the continued strength in the Yen is the carry trade being unwound. AS a matter of fact, the Yen had its single biggest daily gain against the US Dollar in over THREE YEARS! Tell me that the Central Banks have not fed and fostered and nourished this insanely leveraged speculative mania that we have been seeing in equities. It is ALL one massive bubble whose fortunes are tied exclusively to the continuation of enormous Central Bank bond buying policies.

The problem in Japan is that investors there are losing confidence in the ability of the Abe government and the Bank of Japan to actually accomplish what they have promised to do. In other words, the aura of invincibility of the Central Banks is beginning to wane.

Silver is getting whacked extremely hard as it has not been able to recapture most critical support at the $22 level. Failure to get back above there almost immediately is going to send it down to retest the $20 level. It was getting a bit of help from copper but now that copper is swooning after temporarily moving higher on supply disruption fears, that leg of support for the grey metal has been cut off.

Gold is flirting with support near the $1365 level with bears eyeing those stops that are building just below that level. If the physical markets blink and do not quickly step up their pace of gold buying, it too looks vulnerable to further downside. I fear that if bears are able to reach those stops and set them off, a cascade of selling will catch the lower-down stops and take this market all the way back to $1340.

I have said it many times of late and will say so again - Gold must have a catalyst of some sort to reverse the downtrend and give traders a reason to chase prices higher. They are looking to sell rallies, not buy dips. The only reason for any buying in this pit right now is due to strong physical off-take. If that fades...

The HUI continues to act as a drag on the metal. That overhead gap noted on the chart is like a THE WALL in GAME OF THRONES. It must be breached if the night walkers are going to invade the realm of men. Translation - until that gap is closed, the HUI is going nowhere. There simply is no reason for the bears to cover and thus no reason for the bulls to chase prices higher either.

A bit of parting advice for TRADERS out there... be very careful - watch your position size does not get too large for your account right now, especially if you are trading currencies, and forget all the glorious predictions and COT analysis and other claptrap. Right now, none of it means anything. All the matters is money flows and carry trades. If you happen to get caught on the wrong side of this, your career as a trader is going to be rather fleeting.

Investors with a longer time horizon obviously have a different perspective on things because we all know where this is going to go.


Sunday, June 9, 2013

Further Signs of Internal Weakening in the US

Most of you who have read this blog for any length of time are by now familiar with my common refrain that we are witnessing an America in decline. I believe the symptoms cut across the cultural, financial, political and educational aspects of the nation.

Vice is encouraged, commended or praised by elitists as traditional standards of righteousness or morality are ridiculed or even mocked. The monetary system is hopelessly corrupted as it is addicted to cheap credit. Economic "growth" depends upon various forms of stimulus and the creation of revolving bubbles moving from one sector to the next now seems to be a permanent fixture. The public education system has produced a generation which seems to have little if any understanding of history and practically no ability to deeply think (witness the proliferation of one reality TV show after another where instead of living their own lives, the viewers live the lives of others).

The thing that really troubles me however is the corruption of our political system, in particular the ever-increasing size and role of the federal government. I am watching in stunned disbelief that a government agency, the IRS, could target and harass American citizens merely because they happen to share an opposing view of government than the current administration. We watch reporters have their phones bugged and reporters doing their jobs to ferret out truth either being charged as criminals by the government or harassed in other manners. If that was not frightening enough, we now learn that phone calls and communications of our citizens are being monitored effectively destroying any privacy rights that we might have.

Additionally we have American citizens killed in Benghazi because apparently an election was upcoming and news of that nature was not conducive to the re-election efforts. We have regulatory agencies such as the EPA answering to no one who are running roughshod over the property rights of many law-abiding citizens as further evidence that the Administrative State, the 4th branch of government, no longer seems to have any constraints on its power.

I truly believe that Liberty itself is increasingly under assault in this nation and am fearful at times that it will be lost.

Take a look at the following story which gives me hope however. It comes out of northern Colorado. This is proof positive to me that liberty is alive and well in this nation, in spite of the onslaught being made against it.

Colorado counties mull forming new state, North Colorado

Read more: http://www.foxnews.com/politics/2013/06/09/colorado-county-proposes-51st-state-north-colorado/#ixzz2Vk9BQXXZ

I wish these folks well in their endeavor. Quite honestly, I expect to see this becoming a trend. I used to see the division in this nation as between red states and blue states and to a certain extent that is still very true. However, more and more I am coming to the conclusion that it is not so much the former but rather a polarization between urban dwellers and rural dwellers. If you look at a map of the US broken down by county, it is almost a given that those counties comprising the big cities are predominantly blue while those counties that encompass rural areas are predominantly red. Perhaps this is how the nation will eventually rectify the deep and unbridgeable division that besets it.