"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, April 26, 2013

Notes on Gold's Commitment of Traders Report

A brief summary - All classes of speculators, hedge funds, other large reportables, and the general public, were net sellers of gold this past reporting period.

The other side of the equation, the buying, was done by the commercial category (bullion banks, etc,) and the swap dealers. The swap dealers, in particular, are a very good group of traders since they trade not only for clients and for the purpose of hedging, but can also speculate for their own interests.

I should note here that both of the latter categories, remain net short overall but continue to consistently reduce that position as they cover existing shorts and institute fresh long positions.

The small specs, the general public, are now showing the smallest net long position on record from this report which dates back to the beginning of 2006. In going back even further to 1999, they still have the smallest net long position that they have held in over a decade. That is quite remarkable!

The general public is usually a very good contrarian indicator as they are notorious for being on the wrong side of a trade at critical turning points. However, that does not mean that they are always wrong. You must admit, the small specs who have been playing gold from the short side have done pretty doggone well this year while hedge funds have not! Recent action however has not been kind to many of them since a great deal of them have sold short beneath $1400 are those positions are probably blown out of the water by now. Many of them were casualties of this week's rebound in price.

The hedge funds, while remaining net long, continue to rapidly draw down that net long position. As I suggested last week and it seems to have been confirmed this week, hedge funds covered some shorts LAST WEEK on the second attempt down towards $1330 that held. Then they waited for prices to rally towards $1400 whereupon they began to sell anew. It is this group which is selling rallies in gold and will do so until the technical posture of this market shifts from one being bearish to one being bullish. For that to occur, gold must recapture a "15 handle and KEEP IT!.

One thing we have yet to see is the hedge funds moving to an outright short position in gold as they have done in copper and may perhaps be threatening to do so in silver (its fortunes are tied to copper for the time being). This implies that should they actually begin as a whole to approach gold from the short side, the potential remains for their firepower to take price lower towards that support zone that has now been established between $1330 - $1325. That would indeed set up a battle between the physical market buyers of the metal and the paper sellers!

I covered this in this week's KWN Metals Wrap with Eric King over at King World News so be sure to tune in to that on Saturday when it is posted to here this in more detail.

Copper Bounces but will it Hold?

We have been students of Dr. Copper for a long time over here since it has a track record par excellence. This week the red metal experienced a bout of short covering from speculators who have been steadily pushing it lower for the better part of this year.

Again, at the risk of beating a dead horse here for the umpteenth time, I am on record here as stating the current rally in equities is nothing but a massive Central Bank liquidity induced bubble without the least bit of fundamental underpinning. My reason for this view - Dr. Copper, whom I trust far more than lemming like equity buyers, says "No Deal".

In spite of trillions of dollars in Quantitative Easing (the balance sheet of the Fed is now over $3 TRILLION and rising) the best the Central planners have been able to do is to generate economic "growth" a trifling bit north of 2%! That is astonishing.

Economies globally continue to either experience a slowing in the rate of growth or are barely limping along. The result has been rather lackluster demand for a metal which typically rises in price during periods in which growth is robust.

From a technical standpoint, copper hit a region (noted on the chart) in which it previously experienced a good deal of buying back during the summer of last year. That level extends from $3.10 - $3.00. When prices came into this zone last week buyers surfaced. They did again on a second test of that level this week. So far then support is holding and the market is stabilizing.

Incidentally, the Commitment of Traders report reveals some decent short covering on the part of the hedge funds as price held this zone. Now that we have seen price move higher, the question is whether or not they are going to re-enter this market on the short side and sell it down from this higher level.

Here is what I would watch more than anything else - be that talking heads on the various financial news channels, newsletter writers, etc. - the SUPPORT ZONE in this metal.

If it fails to hold price and copper begins a fresh leg lower, watch out. It will indicate that Central Bank reflationary policies are failing. Now the fools who keep chasing stocks higher and higher will probably care less but more savvy investors will take note of this barometer.

Quite frankly, I would not know what to expect from the Central Banks were this level to give way. Would they be forced to actually increase the level of bond buying? I am not sure. It all depends on whether or not the rest of the commodity world would follow copper lower. Either way, it would signal that deflationary pressures are overcoming Central Bank inflationary efforts.

If it holds, then the odds favor more of a range bound type of trade with prices moving back up some as traders/investors would see economic growth just strong enough to prevent prices from falling any lower but not quite good enough to see this market rocket up. In other words, a sort of uneasy truce between bulls and bears with bears banking on deflationary pressures to prevent sharp rises in price and bulls banking on lots of funny money to grease the tracks of the global economy to prevent any drastic decline in price.

The key point that I take away from all this - Central Banks are playing with fire by their continuing interference into the markets. Adam Smith must be rolling over in his grave somewhere.

Gold Bounce coming to an End

Time constraints have prevented me from writing as much as I would have preferred to this week but I want to refer back to my last comments from Wednesday this week when I posted a 2 hour gold chart.

My argument back then was and still remains the same today - there is no enthusiasm to chase prices higher at the Comex gold market. That is indicated by the falloff in volume as price has moved higher. See the chart below....

In other words, this is more of a case of traders covering short positions out of fears popping up over bona fide reports of incredibly strong buying of physical gold than it is over a new found bullish enthusiasm on the part of the hedge fund/investment community.

Yesterday, the return of RISK ON trades came on the heels of the rotten economic data out of the Euro Zone. Once again we are in a situation where for the equity perma bulls, it is "Head's, I win; Tail's, you lose". The news was so bad that traders just knew it in their bones that ECB President Draghi is going to announce an interest rate cut next week. That of course is just what the equity bulls ordered.

Today however was a different case with the moribund GDP reading here in the US serving to remind us all that in spite of all of this reckless Central Bank liquidity creation, we are barely managing to limp along at the bottom when it comes to economic growth. Copper obviously wanted no part of this news today as it appears the short covering rally in that base metal might have come to an end also.

With the yield on the Ten Year Treasury note dipping back to 1.66% and with the 30 Treasury bond futures up nearly a full point today (not to mention the regularly recurring stupidity trade of buying the Yen as a safe haven), it is evident that whatever risk traders were willing to put on yesterday, they are taking it off today.

When it comes to gold here is the situation as I see it (nothing has changed in this regards but I want to restate it again) - Physical demand for gold is very, very strong; however, it is very, very strong at REDUCED PRICE LEVELS. Gold went on a fire sale last week and buyers jumped all over it. After all, a $200 drop in the matter of a couple of days is enough to get the attention of anyone wishing to acquire a metal that had a handle of "15" in front of it and then suddenly had one of "13". This has served to put a solid floor of support beneath the market and I believe a bottom that should hold if prices were to move back down towards that level in the near future for any reason.

The problem that I see is the same; while this sort of demand can bottom a market it CANNOT TAKE IT SHARPLY HIGHER without INVESTOR DEMAND from the hedge funds. Why? Because buying of physical is price conscious. People buy the stuff because it is so cheap. When it jumps back up too sharply, that kind of buying dissipates. What is then needed to take the price higher is the kind of mindless buying by hedge fund algorithms which have no conception of value whatsoever but are programmed to only chase motion.

Value based buyers acquire the metal when they perceive it to be cheap or underpriced. Hedge funds buy the metal when it keeps getting more and more expensive. Their buying kicks in when the value based buying eases off. Until the hedgies come in, what will happen is that price will move up to the point where the demand from the value based crowd gets choked off and loses some of its force.

The result is a market that has bottomed out but needs a shift in sentiment among the hot money crowd. With today's anemic GDP number, none of them are the least bit worried about inflation right now. Any doubts about that can be seen in the bond market price action as noted above.

The bulls did manage to take price through $1440, a level which earlier this week was attracting selling. When they then pushed it through $1450, traders who had sold against that level covered and that took it to $1470, another area that I was watching. Asian demand for the metal enabled buyers to take it another notch higher but as it moved into the mid morning of the Western session, the buyer just dissipated and short term oriented traders took that as a signal to close out some nicely profitable long positions recently established.

Notice how the volume LEAPS as the price drops. That is both long liquidation from day traders/short term guys and fresh shorting. The price action in the HUI, confirms that.

What we want to watch now is how gold acts as it nears the $1440 level. That level was serving as un upside barrier earlier this week and now reverses polarity and becomes a level of chart support. If gold can hold above this level, and so far it is,  it will give bulls some confidence to wade back in and will make a few of those brand new shorts reluctant to push their positions. We would then expect to see the metal move back higher and take another shot at resistance. I would want to watch both the volume and the price action were that to occur to see if this thing has a shot at $1500. Remember, it is still an intermediate term bear market in gold so until the technicals change, strength will be sold unless we get a violation of resistance and a shift in the momentum of this market.

Did anyone notice how the miners faded well off their highs late in the session yesterday even as the rest of the equity world was celebrating another back slapping day of further giddiness. That was another clue that the euphoria in gold was about to hit a temporary wall.

The HUI managed to claw its way back into the technically significant gap region I have previously noted, but as expected, it could not CLOSE THROUGH the GAP to end out the week. That must occur for this to kick up another leg higher. It did manage to close in the gap yesterday but the manner in which it faded out towards the end of the session forebode further downside today.

What does this translate to in terms of the gold shares from a technical perspective as a result? Same as gold - the market posture is decidedly bearish but it does appears as if a bottom is in. The sector is lacking a strong upside catalyst however at the present time. Value based buying is holding it up but the momentum based crowd is absent on the buy side. The result - sideways trade above support near 255 until or unless that gives way or the index pushes past the top of the gap just above 300.

By the way, the HUI to Gold ratio continues to drop.

One thing I am noting today is that the Gold Volatility Index is moving higher again. It had been falling as gold was moving higher reflecting the lack of concern about further price weakness of any sharp degree. With price having regained a very large portion of the overall price decline since key support at $1525 gave way, it looks as if there is some nervousness building on the part of players about some potential for some more downside. We'll see if that is correct or not.