"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


Tuesday, December 31, 2013

Gold loses 28% to end the Year

Extreme volatility/wild swings in price was the highlight of gold trading in today's end-of-the-year session. Some fund managers on the long side of gold were heavily dumping positions early in the session to clear their books of one of the worst performing assets of the year. On the other side of that activity were some large specs who have been short the market for most of the year and were busy lifting some of those positions to capture those paper gains.

Around mid-morning, a rash of  "sudden orders" to buy ( Dow Jones wire services quoted traders using those exact words) flipped the market higher after it had run down near $1180. It moved as low as $1181.4 before shorts began ringing the cash register to close out the year.

The lack of selling enabled the buying to take price high enough to catch some overhead buy stops and up she went. Here we have another one of those events that I have sarcastically dubbed, "A REVERSE FLASH CRASH" in honor of those who love to regale us with stories of Flash crashes when gold drops sharply as evidence that the gold price is being manipulated lower by sinister forces intent on delegitimizing it as a viable investment.

I trust we will not hear a peep out of that crowd about today's bizarre price swing higher. After all, according to them, this is what gold should be doing all the time and thus this is legitimate price action whereas gold dropping sharply in price is somehow illegitimate.

Honestly, one grows weary of attempting to dispel the market ignorance on display from this group but this is what happens when anyone with a computer and a keyboard is now an authoritative source on market price action. Then again gold seems to spawn more of this sort of thing than many of the other commodity markets. I guess it just comes with the territory. Gold bugs tend to be very passionate about their views - nothing wrong with that -  but that very same fervor is what so often makes it difficult for them to see market price action with any sort of objectivity. They have to keep coming up with reasons to explain why their asset of choice is losing them money instead of just admitting that they were wrong and moving on.

What happened is not hard to understand however - gold dropped into a major, major support zone ( I have stated that $1180 is as critical to the future fortunes of gold as was the $1530 price level some time back) where strong buying surfaced once again. The short term players saw that it was holding and began to cover their shorts realizing that the support zone was going to hold for now. As price rose, with a large number of traders out of the market already in anticipation of the holiday tomorrow and low liquidity, there was no one left to sell. Thus there was a air pocket above the market and little to no resistance to the metal's rise.

There is nothing quite as dramatic as one of these typical short squeezes. The volume leaps dramatically as fear and panic hit those who sold into the bottom of the move and are now forced to scramble in order to avoid deep losses. While it looks impressive on the surface, the key is not what happens on any given day but the SUBSEQUENT market reaction over the next couple of days. If the market builds on its gains and continues to extend, then you have the makings of a legitimate short-term bottom. If however the market simply hangs around near the highs of the short covering day and is unable to extend much higher, the odds then favor a continuation of the downtrend with stronger hands coming in to sell at the new and higher level. We simply have no way of knowing which scenario we are going to get until it occurs. SUBSEQUENT PRICE ACTION is therefore the only safe guide to rely upon; not hunches, guesses, and dogmatic assertions from newsletter writers and other various pundits who know no more than the rest of us what will happen tomorrow.

I can tell you this from experience, making any predictions as to future price movements based on the price action from the last day of trading for the year is not wise. The other thing to keep in mind - one day does not a trend make. Gold is in a BEAR MARKET until proven otherwise. It really is that simple. Any market that loses more than 20% for a year is officially in a bear market and at one point in today's session, gold was down over 29%. Do the math.

 I will also add this one last thing - that the market faded from off its best levels tends to confirm the idea that we are not going to see much in the way of additional upside as we begin the New Year. The bulls are living on borrowed time and unless something occurs to change sentiment here in the West in regards to gold quite soon, it looks to me like one will be able to buy gold at a cheaper level than they were even at today's lows early next year.

As always, time will tell...

One last thing, some money managers like to come in and buy distressed stocks from poorly performing sectors towards the end of the year. The idea is that many participants are selling losers to square their books and to realize tax losses. Those who come in and buy these stocks which are being thrown out will then look to make a quick 8% - 10% profit as the selling pressure lets up when the New Year begins. It is a short term trade by nature with the theory that the heavy selling is now finished so one can safely buy. This sort of thing can tend to put temporary bottoms in those stocks. As mentioned above, the key to seeing whether or not a trend reversal/longer-term bottom is in the sector is to watch how subsequent price action unfolds and especially volume.

Moving forward this next year, gold's fortunes will be determined by whether or not Asian demand, especially out of China is sufficient to absorb Western-based selling of the metal. As stated yesterday and reiterated today, I am concerned because in spite of such heavy losses in gold, the large specs remain stubbornly bullish; this is not a recipe for a reversal. If anything it is a recipe for more losses ahead for the metal until the bullishness is killed.

When you take a look at this chart of the reported holdings of GLD and see that the holdings are back at levels last seen in January 2009 ( an incredible 5 years ago), it is not hard to understand the drop in the price of gold. What is difficult for me to grasp is why these big specs remain as net longs over at the Comex. The big money in gold has been made on the SHORT side over the last year; trend followers have done fine. It is those bucking the trend that have gotten badly burnt. One wonders just how much more pain that want to bear.

What I am going to be looking for in 2014 is if/when market sentiment begins to turn strongly in favor of "growth/inflation" and away from "growth/no inflation". If/when it does, commodities should see some risk money moving back into the sector in general with the expectation of higher prices as a result of ramped up demand. I am not saying that this is going to happen as I am not in the business of making predictions ( I will leave that to those who have no money at risk in the markets). What I am saying is that this is something to watch for to see if this were to develop.

Such an occurrence would tend to bottom gold but especially silver. Copper prices have already turned higher over the last several weeks and are now up in levels near the top of a trading range that has been in place since April of this year (2013). If copper begins to push higher, especially if it can clear $3.50 convincingly, silver should get some help on the buy side.

I would also like to take a bit of time here to thank all those who have visited the site this past year. I would especially extend my gratitude towards those who post here for your many encouraging words, your insightful posts, as well as your helping to keep this site clear of profanity, ugly personal attacks on individuals and the other assorted crap that is all-too-frequent nowadays in this unethical age. As I have written many times here, opinions on the markets are fair game; those who offer them should expect that others will often take the other side because there is always a bull side and there is always a bear side. If not, we would not have anyone to buy from if there were no bears nor would we have anyone to sell to if there were no bulls. Personal attacks that impugn the motives/character of others is a different story however and that is something that I will not tolerate here, nor should those of you who read and post here allow either. It demeans the site and interferes with what we are trying to accomplish here which is to provide a forum where folks can learn to read the voice of the market and hopefully become better informed in their trading/investment decisions by applying that which they have learned.

A Happy, Safe, and Prosperous New Year to you all. Personally I like to take this time of the year to look back at the many blessings of God and realize just how gracious He is to we who do not deserve such goodness at times. At times we are prone to measuring our "wealth" by the size of our bank accounts but what price can one put on family, health, friends, and our reputations? Such things are irreplaceable.

Once prior to a famous sermon that he preached during what historians have termed, "The Great Awakening", Jonathan Edwards prayed to the Lord asking Him to "stamp eternity on the eyeballs of those who heard him preach". We might do well to consider that more frequently during the course of the next year. It is remarkable how it tends to help us keep things in their proper perspective!