"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, December 13, 2013

Commitment of Traders and the Reverse Flash Crash

Today's release gives us a pretty decent glimpse into the activities that gave rise to what I have dubbed the "Reverse Flash Crash" in honor of those who see nefarious evil doers behind every move lower in gold recently.

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.

Producer Price Index - Weak Inflation - Gold Rises?

This morning we were treated to the Producer Price Index numbers - the headline number was -0.1%. The market consensus ahead of the report was for the reading to come in unchanged. When Food and Energy were stripped out, the reading was +0.1%. Right in line with the consensus.

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.