"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
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Gold had a double whammy working against it in today's session. The first was stability in the US equity markets. Every single time stocks have moved higher this week, gold has lost ground. The opposite has also been true; when stocks have dropped on emerging market fears, gold has moved higher. It is acting like a safe haven can be expected to act, at least for now.
This emerging market thing is providing some support to the gold market and preventing it from moving sharply lower as lingering fears are bringing in some dip buying. However, when the US Dollar firms, it attracts selling.
Silver seemed to shrug off weakness in gold as well as copper taking its cues from some general commodity market strength across the softs and grains. Sugar and Coffee both had big up days today. Beans moved higher along with the grains and hogs were strong. So far, support near $19 has been holding but the market is definitely attracting strong selling near $20. If emerging market fears begin to increase, I think silver could slip below $19, especially if copper and the other base metals respond negatively. Remember, any sort of slow down related to emerging market fears is deflationary in general and silver, even more so than gold, will struggle in that environment. It needs a solid - RISK ON" appetite tied to strong growth sentiment leading to inflationary pressures. Without it, no one wants to own it right now above $20.
Natural gas was weak while heating oil and unleaded gasoline parted ways today. The former was up with the continued cold weather while the latter was down. Hey, maybe everyone looked at those photos of cars stranded outside Atlanta and figured if they weren't going anywhere, they sure as hell didn't need any gasoline in the tanks! These weather markets can be notoriously volatile for as soon as a forecast shifts, everyone who bought heating oil or nat gas on cold fears are suddenly on the wrong side of the market. They can fall as fast, if not faster, than they went up so if you are trading these, be careful.
It is exactly what happens to grain traders on the wrong side of a summer forecast! No one asks any questions or thinks - they just panic and run. By the way, this somehow is confused with trading for some reason.
Take a look at the following chart of the US Dollar on a weekly basis and you can see that the price action of the last three weeks has been of the whipsaw type. Up - down - up. If you look only at the short day to day stuff, it will drive you batty; however, on this weekly you can see that the Dollar moved down towards the lower portion of the upward sloping price channel and now appears, for the moment, to be working its way back up again.
There is certainly no clearly define STRONG trend but more of a gradual grind higher. I would keep an eye on the 79.50 level. It has not had a weekly close below there since October of 2013. If it did, it would portend a test of 79. I would think that would coincide with a move through $1280 for gold. The flip side is if the Dollar were to push through 83 on the upside, gold will more than likely not hold above $1200. The jury remains out therefore.
Take a look at the 4 hour gold chart and you can clearly see where sellers have gotten aggressive - that is up near $1,280. When it tried to extend past $1,270 on Wednesday and failed, that was it as far as some of the shorter term oriented longs cared - they were out and down she went. There was another push to $1,255 that also failed to extend and back down it went again. The market is trying to hold $1,240 and so far is succeeding but it does look heavy to me. Without an escalation in the emerging market crisis over the weekend, it is doubtful that gold is going to have much in the way of friends, especially if equities keep shrugging off any worries. Sentiment can flip on a dime however so just be prepared for lots of ups and downs.
The daily chart is noteworthy in the sense that the ADX, which was showing the possibility of a fledging uptrending move, has now flattened out again indicating that the upward progress is stalling out. The +DMI has turned lower, and while it still remains above the -DMI revealing that the bulls have control of the market on the daily time frame, it is now falling. This market could go either way but remember that on the weekly chart, the intermediate time frame, the bears are in control and thus the reason I have been citing that rallies are going to be sold.
Speaking of a weekly chart - here it is. Notice that the Bears are still in control of the market as -DMI remains above +DMI although is continues to fall. The weekly ADX is also dropping as can be expected in a trendless market.
As long as the emerging market currency/credit issue is a lingering concern, gold will probably continue to hold up. Barring that however, it is an iffy proposition.
Next week will bring the beginning of the delivery process in gold for the February contract. I will keep an eye on it to see whether Morgan continues to issue gold as they did in January or returns as a large stopper as they did in December.
One last chart for now - Goldman Sachs Commodity Index in a weekly view.
The gradual decline continues to extend. It is a slow, methodical move lower. The sector has garnered buying support which is keeping it from falling apart but it lacks any sort of upside vigor at the moment.
Lastly - this is to save myself a bit of work answering emails about the KWN Metals Wrap. I have no idea when or if it will return right now. If I hear anything concrete, I will let the readers know.
I will try to get some charts up or comments on the COT stuff later on as time permits.
Have a good weekend all... Go Hawks....
Today was the big day for another long awaited ( one month) release from the FOMC in regards to their Tapering campaign. There was a general line of thinking that the Fed might not be as aggressive in the tapering as previously anticipated due to the very weak payrolls number that came out not long ago but that was dispelled rather ignominiously when the Fed announced another $10 billion reduction in the bond buying program down to $65 billion/month. They are cutting the rate of Treasury purchases by $5 billion and the rate of Mortgage backed securities by $5 billion as well.
The unanimous vote was revealing as it shows an apparent determination on the part of the Fed to begin weaning the markets off of some of this funny money creation. Needless to say, the equity markets did not seem too happy about the news.
Then again, it is difficult to understand exactly what input the markets were reacting today given the continued fears/concerns over the emerging markets currency/credit issues. Yesterday a sharp surprise rate hike by Turkish officials seemed to bring a sigh of relief into the markets. Today, that quickly dissipated.
The VIX shot higher as the equity markets dropped lower and as it did, back on came the safe haven trades once again. The Yen was up sharply and the Swiss Franc rose also as investors decided to take some money out of stocks just in case things go from bad to worse. Once again, even with the news out of the FOMC, (which one would have expected to be Dollar positive), the US Dollar could not move higher. That had gold moving higher once again as we are seeing a relationship forming in which stocks move lower along with the Dollar as Gold moves higher.
I am not sure how much longer this precise link is going to endure in our fickle market of nowadays but it is keeping gold prices from otherwise breaking down at a time in which many commodity markets are continuing to see weakness. Natural gas was the big exception with prices cleaning out practically every single overhead buy stop on the planet today on huge volume. That sort of thing always catches my attention. Soybeans, corn and wheat however were pummeled today. Copper also moved lower.
Gold is basically caught in a tug of war between downward pressure originating from those selling the metal as the Fed begins to scale back the huge sums of liquidity it has been providing the markets and upward pressure from safe haven flows tied to the emerging markets crisis. In the former, gold acts more as a commodity; in the latter as a currency. Depending on which input the market is focusing on any given day, the metal moves accordingly. There is still no definable pattern.
Based on what I can see the next move in gold is completely dependent on how the emerging market situation is viewed. If it escalates, gold should stay firm. If it recedes somewhat from traders' minds, it will move lower.
The same exact thing is occurring in the interest rate markets. Today's FOMC statement and its hawkish tone should have brought selling into Treasuries taking interest rates HIGHER ( also supporting the US Dollar). Instead, the Treasury markets witnessed lower long term rates as deflation fears trumped hawkish FOMC notes.
Incidentally I have been monitoring some of the delivery process for gold. Thus far JP Morgan has been the big issuer or seller. That is in stark contrast to their buying or stopping last month. As we enter the February contract's delivery period, it will be interesting to see if this new pattern remains the same or if they move back to the heavy buy side stopping that we saw from them in December.
While the HUI has been higher today, it has still been unable to clear chart resistance near the 230 region. So far the index has not confirmed any upside breakout as of now. It has also bottomed out but cannot seem to get an upside trend going. Much the same thing is taking place with gold. Its technical chart pattern on the daily looks pretty good but it acts as if it is looking for some other shoe to drop somewhere before it really breaks out to the upside in a clear and unambiguous manner. As things stand, traders seem willing to sell rallies into overhead resistance and buy dips into downside support.
When this changes is unclear.
By the way, silver still is capped at $20 as it attracts large selling above that zone.
The S&P 500 gave up its gains over renewed concerns with emerging market currency/credit issues this afternoon but neither the Japanese Yen or the Swiss Franc seemed to catch any sort of safe haven bid as they were doing last week. Neither did gold when the dust finally settled. Even the bond market moved lower today.
It was thus a very strange day seeing interest rates actually rising in the face of sinking stocks. If there was a safe haven today, it was the US Dollar all by itself as nothing else seemed to be moving higher besides the Australian Dollar and the British Pound.
Frankly I have no idea what was going on in some of these other markets so I am not even going to try venturing a guess. Just chalk it up to one of those days where not too many folks were very sure of exactly what they wanted to do.
One thing that many folks were sure of however was to sell the liquid energies, especially heating oil. That has been driven sharply higher on the severely cold weather engulfing the middle and eastern parts of the US, but some forecasters apparently took a bit of the severity out of the cold and that forced some profit taking by longs and some fresh shorting as well. The exact same thing occurred in the natural gas market today. Both these energy sources have been benefitting from the sharp cold but the first sign of more normal weather patterns/temperatures coming and more longs will be heading for the exits. The forecast models are always fickle ( as any grain trader and he will show you the scars from being on the wrong side of a "flip" in the forecasts ) so they might just as well show more cold tomorrow that is more bitter than today's models.
I have some friends up here who are burning as much firewood as we can in order to do our fair share to help our fellow citizens to the east which are getting the brunt of this walrus weather. If we can force enough fossil fuel fumes into the air, we should be able to kick up the global warming enough to warm things up for ya'll over that way. Hang in there and give us some more time to let the smoke plume move east.
I have posted up a very short term gold chart ( 4 hour) to note the resistance and support levels. I want to add here that volume in the February gold contract is going to be shrinking as we draw nearer the delivery process so it will not be long before I switch over to the April contract for analysis purposes.
Gold has obviously failed at its first attempt at $1,280. That was a big number on the way down so it makes technical sense to expect it to be a big number on the way up. The setback initially found dip buyers into the support band noted near $1255 but then failed eventually dropping below the zone in late trading as the gold miners failed as well.
There might be a bit of psychological support near $1,250 for gold but more substantial support actually lies closer to $1,245 or so. If that fails, expect gold to retest $1,235 - $1,230.
For the bulls to generate any more excitement on the upside they now have a solid barrier up near $1,280 that they will have to better.
The FOMC will add more uncertainty to the market this week ( as if we did not have enough of that already to contend with) so do not be surprised at some pretty large swings in price as traders react with the usual calm and measured demeanor that marks our profession ( this last part is pure sarcasm as everyone knows that there is no calm, measured demeanor left anywhere in the trading world nowadays).
Strong buying overnight in the early part of the Asian trading session took gold into a region of formidable chart resistance near the $1,280 level. At that point sellers entered sensing that the bulls were booking profits and prices needed a breather.
With the nervousness surrounding last week's emerging markets currency/credit crisis subsiding somewhat, gold ran out of reasons to keep moving vertical. If you notice, the Japanese Yen and Swiss Franc, the beneficiaries of last week's rush to safety plays, are weaker today. Also, the S&P 500 is trading higher while the US Dollar has managed to obtain a firm bid. With the VIX moving lower as well, it appears that for the moment, the market is less concerned about the emerging market issues that plagued it last week. How long this lasts is anyone's guess but for the immediate moment, gold is being sold and stocks are being bought once again.
If anything, last week's price action in response to the emerging markets reinforces in my mind the notion that gold MUST HAVE SOME SORT OF CONFIDENCE SHATTERING event(s) to push it into a sustained uptrend. The recent move up has consisted of a great deal of short covering and while there has indeed been some fresh buying, that has been largely outnumbered by speculative short covering.
As I have written many times here at this site, short covering rallies can be quite ferocious and oftentimes spectacular, but by their very nature, they tend to fizzle out as quickly as they start. Markets require the application of THRUST/FORCE to escape the downward pull of gravity and that necessitates SUSTAINED money flows ( new buying ). If that new buying is lacking, gravity will win out and price will back down.
When it comes to gold that means any sort of credit/currency crisis must be one which escalates in the minds of traders/investors. Such escalation fans more fear and nervousness and that will drive money into gold. Given the current state of low inflationary expectations, it will take this sort of strong emotion to keep those flows active. At the first sign of stability or easing of tensions, gold will tend to surrender its gains with the more recent pattern of buying stocks/selling commodities coming to the ascendancy once again.
What this translates to when it comes to technical price action is selling at resistance zones. Gold thus far has managed to plow through several layers of overhead chart resistance and in the process turned the daily chart positive ( the weekly remains decidedly bearish however). With traders looking for reasons to sell rallies, these resistance zones on the daily chart will take on more importance. Any hesitation by the bulls to extend the rally at these zones will bring in selling as very short term bulls bail out with any paper profits that they might have while longer term oriented bears look to re-enter on the short side.
It is always interesting to watch the battle lines being formed on the charts. Right now dips are being bought in gold based on the improving daily chart picture while rallies tend to stall - at least temporarily - at these resistance zones. Translating to numbers - resistance is the zone near $1280 with support being provided by the zone near $1260-$1258.
I am watching to see what gold does if equities start moving lower once again and particularly if the Dollar cannot hold any gains. I will provide an update later in the session as the direction towards the pit close becomes evident.
Gold posted a nice close to finish out the week although the mining shares were once again refusing to go along with the strong move over at the Comex. That always give me a reason for concern as one likes to see both the shares and the metal moving higher in sync to reinforce the bullish cause.
I wanted to start off with a weekly chart to provide a bit of a longer term perspective before moving in for a closer look at the daily and even shorter time frame charts.
On the weekly chart, using the Directional Movement Indicator (one of my favorites as it is an old, but reliable friend), you can see that the Negative Directional Movement Indicator ( RED LINE ) remains above the Positive Directional Movement Indicator ( BLUE LINE ) as it has been since late in 2012. In other words, the BEARS REMAIN IN CONTROL of the gold market despite gold's heroic performance this past week.
The ADX, the trend indicating line, is moving lower showing that the defined downtrend has been interrupted after it showed a slight rise forming on the failure to extend past $1,350 in late October 2013. So how do we interpret this?
On this intermediate time frame, no trend currently exists with the bears dominating. We would need to see the directional indicator lines cross and reverse dominance to realize a shift of control in favor of the bulls. That has clearly not occurred on this time frame.
Also notice that the 30 week moving average has been a good defining parameter for the metal at this time frame. It has served as support when the market was moving higher as can be seen from looking over to the left hand side of the chart. Retracements in price were held at this level as buying emerged.
During the sideways phase that lasted for all of 2012, the weekly moving average was not of much use ( moving averages NEVER ARE during sideways or consolidation phases ) but once price started trending lower in early 2013, it did serve to cap all rallies on the upside as can be seen occurring between July 2013 and the end of the year. Currently price can be seen approaching this level from down below. Also note that the moving average has stopped heading lower and is turning up. That is a friendly sign to the bull's cause but as noted above, the DMI is not yet indicating a bullish victory on this time frame.
Let's pull in to a bit closer term look by using the daily chart/.
This presents quite a different picture. Notice that the Positive Directional Indicator ( BLUE LINE ) is decidedly ABOVE the Negative Directional Indicator ( RED LINE ). Translation - Bulls have seized control of the market on the shorter time frame.
If you look a little closer you can see that the ADX line has stopped moving lower and is actually turning higher as the price moves higher. That is a good sign for the bulls as it indicates that they have the potential to turn this into an upside trending move if they can continue to follow through on the upside buying. The ADX remains below 25 however so I would not yet call the market as being in an uptrend. Some technicians like to see the ADX above 30 before stating a trend has formed but I am a bit more aggressive and will look at the 25 level. By the way, this is more of an art form than an exact science so do not write this down in stone.
Notice that this same 30 period moving average has been a decent level to watch as it provides overhead resistance ( see the left side of the chart ) for price rallies. Price has popped above it and is sitting right at a band of overhead chart resistance. It pushed past the top of the band on Friday but fell back.
From a fundamental perspective, if these emerging market credit concerns greet the market Sunday evening and Monday morning, one would expect gold to punch through and move higher. ( Remember the side note I stated repeatedly not too long ago and that gold needed something to dispel CONFIDENCE to kick it higher). That is what happened this week with the currency/credit issues in emerging markets.
Here is how I am looking at this right now - traders with a shorter time frame perspective should go with the flow on the daily but keep in their mind that the intermediate term chart shows a market with a BEARISH pattern. That means rallies are going to be viewed as SELLING opportunities until the weekly chart becomes positive. At that time, the mentality should change and dips should be bought.
Let the longer term charts guide your "big picture" view when you trade. If you are nimble and can move into and out of the market quickly, you can trader on much shorter time frame intervals. Just understand what you are doing and don't get caught up in all the usual hype that will start back up once again now that the metal has moved higher and improved the short term charts. STAY OBJECTIVE and ignore the voices. Let the charts guide your decisions.
These credit/currency related crises that we have experienced since 2008 all have produced the same thing after the market begins to sift through the details - a DEFLATIONARY reaction.
By that I mean a rush into the relative safety of US Treasuries out of equities. The result is a drop in interest rates as investors seek return OF capital and not necessarily return ON capital.
In the process, the Japanese Yen has tended to be the recipient of inflows. I am still unclear as to why anyone would regard the Yen as a safe haven currency but I suspect it might have more to do with Yen carry trades being unwound which puts upward pressure on the funding currency as those trades are reversed.
The other thing which typically has happened is we get a spike higher in the Volatility Index or VIX. Here is a chart of what I prefer to call the Complacency Index. For those of you who might be newer to the markets, this index measures investor sentiment in general (derived from option premiums). When it is rising, it indicates investor unease/discomfort/concern with current events. When it is soaring it indicates downright fear/panic. When it is falling or flatlining it reflects complacency/ease/lack of concern/confidence.
To provide you with a better longer term perspective - I am also adding this weekly chart. Note that the current spike upward does not seem to be much when viewed in this light does it?
I am also noticing that commodities in general ( there are some exceptions ) are weak today especially as the US Dollar has actually worked up off its session lows and moved into positive territory. Yesterday the Euro was seen as a safer place to park money than the US Dollar - that has completely reversed today. ECB President Draghi's comments are certainly not helping the Euro especially when he stated that while the economy is recovering, risks on the downside remain and unemployment remains very high. Not exactly a full-throated endorsement of confidence is it?
Copper, another key benchmark, is also lower today. This late session recovery in the US Dollar and further downward movement in equities is actually bringing deflation fears back to traders' minds and as those fears strengthen ( at least for this immediate moment) gold is fading lower along with silver and copper and the other metals.
Yesterday I mentioned that stress in emerging markets was providing strong safe haven flows into bonds and into gold. The Commodity currencies were generally under pressure as a result with Europe benefitting as well as the Japanese Yen. The Dollar is not getting much of a safe haven flow, which coming on the heels of this sort of thing is rather remarkable. US Treasury yields are sinking once again.
The Turkish Lira was a big event yesterday; today it is the Argentinian Peso. Ukranian credit markets, etc,. The list could go on. This is where the bid in gold is coming from especially as equity markets weaken.
This is one of those events where things can spiral out of control very quickly, especially in this age in which huge leveraged bets have been placed.
We will keep a close eye on this but one thing is certain - at least for now - gold is responding like one would expect it to do during times of economic uncertainty.
I am also noticing the VIX is rising once again. It is by no means in "fear/panic" territory but some of the complacency that has marked the US equity markets for so long is having some second thoughts.
I mentioned in an earlier post today that there was a general flight out of equities after the overnight news that Chinese manufacturing had experienced a rather significant slowdown. U S equity markets were spanked hard in the process ( of course the usual dip buyers showed up once again as they have been well rewarded for so doing time and time again).
Interestingly enough, it was the commodity-based currencies such as the Aussie and Kiwi ( initially along with the Loonie) which saw some heavy selling. The Aussie and Kiwi, with their close exposure to China, got hit the hardest which is understandable. I must admit at finding it odd to see the Kiwi rally back from its worst levels of the session like it did however.
I learned later in the session that the Turkish Lira hit another record low against the US Dollar. This was in spite of direct market intervention by the Turkish Central Bank.
This occurrence, along with the weakness in most emerging market currencies, was what sparked some strong buying in the Japanese Yen and the Swiss Franc today. It is also the reason, in my view, that gold experienced another one of those mini-melt ups that it has been famous for lately. It was odd to see the US Dollar sinking so severely on a day in which risk aversion was in, especially in regards to the EM's, but I think it was the lackluster US economic data, coupled with sinking interest rates here in the US coming on the heels of those big money flows into bonds, that undercut any safe haven bid that we might otherwise have seen coming into the Greenback.
Europe and Japan seemed to be the winners in the currency wars today.
Obviously that brought a fair amount of buying into gold as a safe haven, something we have not seen in a while as it and silver have tended to trade more in sync with the risk on/risk off trades, rising on the former and sinking on the latter. Well, today we got the latter ( risk off) and gold benefitted so go figure.
Just goes to prove how fickle these markets are anymore and why extrapolating too much from one day to the next's price action is not too advisable. During episodes such as this, TECHNICALS RULE THE DAY so whichever side, bull or bear, happens to have the technical on their side, will win the day's battle. That is what we saw today in gold.
I should note that silver does not know what it wants to do. It still is having large troubles with the $20 region as it is attracting selling up here. It cannot decide whether it wants to be a safe haven with gold or a risk on trade with copper. Right now it is caught in the middle of them both.
Today's move higher in gold seems a bit overdone to me, but that is more a hunch rather than anything grounded in pure Technical analysis as the gold chart is very much improved by today's strong push higher. We'll see if the bulls can grab the initiative completely in tomorrow's session or if they decide to bank what paper profits that they made today and rest content with those.
The metals consultancy GFMS released an update to its 2013 Gold Survey which was very interesting. A few things in particular stand out to me.
The first was something we have been talking about here for some time now and that was the fall off in world investment demand for gold last year. GFMS stated that demand fell 11% last year to 1,342 metric tons. In terms of value, world gold investment dropped by 25% to just under $61 billion; the lowest level since 2009.
The firm projects world gold investment for the first half of 2014 to total 762 tons, down 14% on the second half of 2013, but also 65% higher than the first half of 2013.
They mentioned solid Asian demand which they suggest ( surprise, surprise) will keep a floor of support beneath the market. Chinese gold jewelry fabrication increased 31% last year and Chinese physical bar investment rose 47% to a record high. The consultancy noted that this buying was essentially bargain shopping as price sensitive buyers picked up the metal when it fell in price.
Net official sector buying ( World Central Banks) fell 34% to 359 tons last year. They believe that official sector net buying for the first half of the year will total 132 tons, down 10% from the preceding six months and down 37% from the first half of 2013.
Central Bank demand is a big factor in the gold price, something that many seem to forget at times.
They also projected gold prices to average $1,225 in 2014, 13% below that of 2013. They do not believe that the price will breach $1,300.
In short, the firm has stated the same thing I have been saying here for quite some time now -namely that while Asian demand for gold is strong and is providing a floor of support for the metal, Western-based investment demand ( I am inserting "Western" whereas they are taking a global view) in and of itself has been falling as money flows into equities in search of yield.
This is the reason I monitor the reported holdings of GLD, the big gold ETF. It is as good as any a gauge of Western investment demand for the metal. Until its ceases dishoarding gold, Asia is going to have to carry the slack. The problem with that is that these buyers generally DO NOT CHASE PRICES higher, especially if they understand that they do not need to compete with Western interests. They tend to wait for price setbacks to buy.
Keep all of this data in mind folks when you read the sensationalized claims about Asian gold demand soaring, etc.... It is indeed solid, I am not disputing that, but Western investment demand is the key to any SUSTAINED RISE in the price of gold.
One thing is certainly going to be interesting to watch is how that Asian demand responds to these higher gold prices of late.
Incidentally, I am noticing that the HUI is stronger today but has not confirmed an upside breakout as of the time I type these comments. Charts are improving however.
I must admit; I just cannot help myself having a bit of fun. I wanted to try these catchy titles the same way that the GIAMATT crowd web sites do in order to generate more site hits to increase their ad revenue dollars!
I should know as my poor inbox gets inundated with such articles whenever gold has experienced a sharp selloff of late. "See - we told you so", seems to be the message.
The poor bears however have no friends for no one writes snappy titles to defend them whenever gold has one of these big up days like it is having today.
On to more serious business however - there was a strong combination of data releases that really lit a fuse under the gold market in today's session. Unemployment numbers, the Chicago Fed's index, China, etc. Each of these data releases showed slowdowns in growth.
If that were not enough, India's ruling Congress party chief, Sonia Gandhi was reported to have requested the Ministry of Commerce to ease restrictions on gold imports into India. The gem and jewelry industry is complaining, rightfully so in my view, that this 10% barrier is forcing their costs to rise and impacting their businesses negatively. Any easing of this tariff would be viewed by gold traders as friendly towards India gold demand. At least that is how the market seems to be regarding it at the moment.
Back to the US data however but more specifically, back to its impact on the US DOLLAR. It fell SHARPLY and guess what???? - Yes, Gold rose sharply. No manipulation, no theories, just a simple correlation between the Dollar and the Anti-Dollar or ol' Yeller. The weak economic data, which reminded people of just how weak that last payrolls number was, once again spurred more of the same talk that the Fed was going to be on hold in the regards to the Tapering.
Side note here - one wonders just what will happen if the next payrolls number just happens to be above 200K. Will all of today's talk disappear once again? From a trader's perspective, it is like trying to catch a yo-yo.
With equities selling off sharply on the sharp reported fall in the Chinese manufacturing index, investors are fearing more slowing growth and that translated to sinking interest rates here in the US as bonds were the recipient of money flows today. Those money flows dropped interest rates and that pulled the rug out from beneath the US Dollar which has been supported by a general tend of rising rates here in the US.
The yield on the Ten Year as I type these comments is down to 2.8%. At the start of this year it was trading above 3%! The Dollar has tended to generally track the yield on this note.
Watch the Dollar to get a clue as to whether or not gold can muster the energy to punch through this tough overhead resistance barrier that it has now once again entered.
Around 10:00 AM CST, the Kansas City Fed numbers were released and this data showed a big improvement in the manufacturing in the Plains area. The number rose to 5 from -3 in December. That showed manufacturing growth for the month, the exact opposite of what we got from the Chicago Fed. Gold seemed to fade a bit when that number hit the wires.
This market remains so incredibly sensitive to Tapering/Not Tapering issues that for all practical purposes, we are trading each and every single economic data release with the view to how traders are generally interpreting that data. Predicting this sort of thing in advance is fool's work so just be warned that volatility will continue to remain quite high until we get some sort of clear, defined TREND in this data. Right now there is no consensus and that will lead to sharp bouts of buying/selling depending on which side panics. Today it was the bears' turn; tomorrow - who knows?
This is the reason I continue to urge caution for those traders who are still attempting to work this gold market. KEEP YOUR POSITION SIZE SMALL OR MANAGEABLE. You are liable to get hurt and hurt badly if the economic data does not come out your way. It is not trading at this point because there is no clear trend. You are essentially gambling or rolling the dice and hoping that the roll comes out in your favor. There is no skill to that, just chance, and good traders do not rely on chance.
Let's see how the dust settles at the end of the day but more importantly, how the market reacts to the next payrolls number coming our way.
A couple of charts for you to examine... note the daily chart and the strong push above the 50 day moving average. That is quite positive. Also, the ADX has gotten a clear crossover of Positive Directional Movement Indicator ( BLUE LINE ) above the Negative Directional Movement Indicator ( Red LINE ). Clearly that bulls have regained control of the market at this time frame. As a matter of fact, the ADX, the trending indicator, is actually beginning to rise, just as gold is moving higher. It is still below 25 so the trend is not yet confirmed but it is very close. What the bulls need is one more ingredient and that is a strong push through that very tough overhead resistance zone noted on the chart. That means we need to see prices above $1,262, preferably a bit higher, to give us the real possibility, the first in a while I might add, of an upside trending move.
Look at the 4 hour time frame. Here you can see the strong volume on today's big move higher ( a lot of this is due to panicked shorts when that data came out). This REVERSE FLASH CRASH is CLEAR PROOF that gold prices are being manipulated higher. After all, who would buy in such a fashion? Sorry - I think I need some help restraining myself at this point. ( it comes from having to deal with all the nasty emails that constantly fill my inbox from the gold acolytes in the cult).
Seriously, look at where the bulls have taken this thing - right on the verge of a breakout! We have a big hurdle to clear with that next payrolls report but suffice it to say, that IF THE US DOLLAR experiences another strong selling-related plunge as it is doing today, gold should break free to the upside. I am noting that the Dollar is holding initial support near the confluence of the 40 and 50 day moving averages. Failure there and it has a strong possibility of visiting 80.20 - 80.00.
Yesterday gold ran up and tested the top of the range ( $1,260 - $1,255) where it encountered selling pressure and backed down once again. That has proved to be a strong overhead resistance level against which bears seem to feel quite comfortable selling. Shorter- term oriented bulls, who can read a price chart and understand price action, simply have no stomach, at the present time, to press their luck. They are grabbing any paper profits they have and running to the bank with them.
As usual the GIAMATT ( Gold is always manipulated all the time) crowd is blaming the nefarious gold cartel citing the usual early hours hedge-fund selling for derailing old yeller but the facts are far less sensational and much more boring. Hedge funds playing the metal from the short side love to move in during the period of low liquidity in Asian trade to get the most "bang from their buck" as they seek to drive prices in their favor.
I have seen this stunt so many times during the overnight session in the many markets that I trade that I have longed for the days in which paper orders were run into the pit and handed off to brokers. One never knows when observing price movements during these periods of low liquidity whether news has broken that would validate the movement or whether it is just more game playing. The weary trader has no choice but to respect the move in price and then observe how prices act when liquidity increases as the session moves on. If the move was indeed valid, more often than not, prices will not reverse but will continue in the direction of the overnight push. If the push was hedgies playing games only, the price will reverse when the full contingent of pit players shows up at the exchange.
The exchanges, now that they are public, for-profit businesses who answer to shareholders, want to maximize profits and they do that by catering to big traders, no matter what time zone that they wish to play in. Meanwhile, those of us who unfortunately happen to be carbon-based life forms which require sleep, are forced to endure this idiocy in order to watch the exchanges' stock price keep moving higher. Just part of the job description nowadays is all that one can say about it.
By the way, after yesterday's shellacking of the soybean market, I thought it would be an opportune time to post a more recent chart of the Goldman Sachs Commodity Index. All of that index fund rebalancing has been wrapped up for some time now. You can see that we did get a wee bit of a bounce off the support zone but that upward price pressures remain quite muted. This helps explain the price action in gold and in silver I might add. While prices for both metals have improved, the index remains near 52 week lows thus undercutting any "buy precious metals for an inflation hedge" rationale. The market is still quite sanguine about inflation fears at the moment. I keep watching for any evidence that this might be changing but thus far I do not see any. We get bits and pieces here and there but nothing that is constant nor any sort of pattern that we can detect at the moment. Neither the inflation camp or the deflation camp seems to have the advantage. It is an uneasy truce.
I should note here that the IMF raised the issue of deflation in a report issued Tuesday. They termed it a legitimate concern. Yeah - we are all shocked, I mean, shocked, to discover this! Parents - nota bene - when giving your children career advice, urge them to strongly consider becoming a bureaucrat working for an agency like this. You can achieve the miracle of getting paid a salary to produce mind-numbingly dull research which is essentially useless.
We have another one of those payrolls numbers report coming our way soon so we will get an opportunity to see if last month's was a one off as I suspect it was or whether it is more reflective of an actual sharp drop off in hiring. The revisions will be important in this regard so look past the initial headline number to see what the pencil pushers might or might not do with that paltry number they produced last time around.
The thinking is a strong number, much more in line with the 200K+ that we had been getting, will smooth the way for the Fed to taper as they have announced. A weak number along the line of the previous month, and they will be put on the defensive and forced to hold off on any tapering. One way or the other, it is going to be interesting to watch the gold price action. Those of you who are masochistic by nature, please make sure to have an unusually large position on in gold heading into the report. The rest of us can watch what happens to earthworms who happen to crawl out onto a sun-heated sidewalk in the middle of the summer - there really is not any difference.
Some news in gold that has been making its rounds is that the big international banks who participate in the London Fix have been meeting to discuss establishing an external audit of the entire process. Personally I have always found it rather bizarre that the fix has continued for so long in our modern age. With the ability to collect data (price, volume, etc.) from all over the globe in mere seconds, what is the point of continuing this thing. I believe this process lends itself to far more dubious outcomes than any supposed shenanigans that have been claimed to been occurring over at the Comex over the last year. If a group of large grain elevator operators from all over the country got together to set the price of corn for that day, would not farmers be rightly suspicious?
I do not claim to understand the basis upon which various gold contracts are entered into, nor do I care to know, but I just do not like the idea of any group of large entities, especially banks, meeting (whether in person, by phone or videoconferencing or through whatever means) to determine any price of any commodity anywhere. If a farmer in Peoria can sell his corn to a local elevator operator at a higher price than say a farmer in Des Moines might get, why should he not be able to get it? After all, it is local supply and demand at work and is that not what a free market is supposed to be about? If the grain elevator at Peoria needs the corn worse than the grain elevator at Des Moines, let him bid it up in the cash market. The corn will flow to where it is needed the most until the local demand there is sated and an equilibrium sets in.
I might be simple-minded in this regard but I think the same practice should be occurring in gold, or any other market for that matter. Then again, this is why I am a trader and not a contract writer.
One last bit of news - the S. African union that controls the miners down there had planned a strike against both the gold mining and platinum mining industry for tomorrow. Apparently they have temporarily called off the gold strike. They plan to proceed with the platinum industry strike. And some folks wonder why big hedge funds choose to use the ETF's instead of the mining shares??? Last time I looked, no union decided to strike GLD. It is just another element over which an investor has no control and thus another element of risk that many big investing funds are choosing to avoid altogether by foregoing investing in gold mining companies.
The US Dollar remains rather directionless at this time. It is range bound with a bit of a higher bias to it as can be seen from the small upward channel to the right of the chart. It broke its downtrend that began last summer in late October and has firmed a bit especially to start the new year. Upward progress is capped near 81.50 while support seems pretty solid near the 80 region. I would expect gold prices to suffer were the Dollar to break out above 81.50 and hold those gains. The flip side is that a downside breach of 79.50 should see some good buying enter the gold pit. If the Dollar were to fall through 79, things could get mighty interesting.
If I had to pick at this moment, I would say that the near term chart structure favors additional Dollar strength rather than weakness but I am certainly not married to this view as the chart picture is anything but strongly lopsided.
As some of you who regularly read this blog are no doubt aware, from time to time I will comment on the cattle/beef and hog/pork markets as those are the markets that I cut my teeth on and still are my bread and butter. While the consumer has thus far been insulated from any negative fallout from the massive money creation of the Fed and its QE programs, something has been happening in the livestock markets which will affect everyone who enjoys a good quality steak or beef roast. What I mean by this is that a shortage of cattle has sent wholesale beef prices soaring into record all-time high territory with the trade unsure of just how high prices are going to go before this balloon runs out of hot air.
Take a look at the following chart of the wholesale price of choice beef ( this is a composite price). I have included the data going back exactly 4 years to give you a sense of what has been quietly occurring. Beef prices have increased a whopping 65% in this period! Think about that again!
Yet, many consumers have not yet noticed it because grocers and restaurant owners have been trying to absorb some of the price rise so as not to hurt their business. They share the same concern that many of us also have, namely, an economy, that while the consensus is that it is slowly improving, certainly has not experienced any of the type of growth rates that we are accustomed to seeing with economies coming out of recession. They are aware that consumers remain extremely price conscious and thus have opted not to pass on the bulk of the increase in prices. That is about to change and change rapidly.
The price rise has been of such magnitude that they are no longer in a position to absorb the impact of the high prices without passing it on the consumer. It generally takes a while for the beef that has been purchased to work its way through the pipeline so the brunt of this increase will not show up for a few more weeks, but show up it certainly will.
Just get ready folks - that steak is going to seem like a meal that only royalty can partake of! Personally I am of the view that it is too bad that beef is a perishable commodity - I could have sold gold and loaded up on beef steaks and unloaded them out of the freezer and retired had I been able to do that!
Three Morgan analysts were reported today as issuing some research which essentially is calling for a bottom in the gold market. That is what Dow Jones is reporting from Barron's Blog.
They were especially upbeat on some S. African miners, most notably Harmony and Sibanye. They were downright negative on Randgold and not at all enamored with Anglo.
Regardless, the report was enough to have investors chasing gold mining shares today as well as putting a bid back into gold over at the Comex. It did seem to me that as the session wore on and as news about the call became more widespread, gold continued to move higher. Nothing like a big name bank to give traders/investors their convictions....
You do have to ask why JP Morgan has been loading up on all that gold when it comes to the Comex delivery process. Hey, nothing like acquiring lots of the metal and then letting your analysts give the market a bullish call which essentially guarantees that the price is going to rise and you are going to secure some excellent profits.
It will be interesting to see how the "gold is always manipulated all the time" guys and gals are going to deal with this. AS I have been saying, the big bank(s) have been buying gold - why would they be interested in capping it now that they have amassed so much of it? They have been buying from the hedge funds who were dumping it. That is an incontrovertible fact.
From a technical analysis perspective, gold's ability to hold support down near $1,220 - $1,224 was very constructive. It is now challenging firm overhead resistance. Note that it has moved decidedly above the 50 day moving average which is also constructive but more importantly, look at the DMI lines ( Directional Movement Indicators). The +DMI or Positive Directional Movement Indicator has now touched the -DMI or Negative Directional Movement Indicator Line for the first time since October of last year. What this means is that the bulls are very close to gaining control of this market, if they have not done so already. I personally want to see the price push through $1260 on the topside at a bare minimum to confirm that the near term trend has changed.
Not much going on in gold today so no comments are really called for in my view... I will leave you with a chart with a few annotations... gold is currently trendless with neither side ( bull or bear) having a clear advantage at this juncture. Bulls have failed to break it out above $1,260; Bears have failed to break it down below $1,220. Until one of these levels gives way, it is directionless.
Price is oscillating around the 50 day moving average. Gold shares slightly higher today are helpful along with lower interest rates.
We will see what tomorrow brings...there are better markets to trade than gold right now to be frank.
When you sit here with nothing better to do with your life than watch numbers blipping on a computer screen, sometimes you observe some things that stick out because they are out of line with what you have been accustomed to witnessing. Such was the case with gold, at least for today's session.
As expected, the market moved lower after failing to take out overhead resistance in the zone noted on the chart ( $1,255 - $1,260). It then fell through chart support near $1,240 - $1,244 as follow through selling pressured prices lower. Further aiding its fall was strength in the US Dollar as the market reacted to the BETTER than expected December retail sales data.
That was on the heels of comments that the market regarded as Hawkish from two Fed officials in regards to the Tapering campaign.
I figured we were going to see steady selling coming into the market for the remainder of the session, especially when interest rates started moving higher again but then we got the Crude Oil stocks number. The EIA released data this AM showing a whopping 7.7 MILLION BARREL decline in oil stockpiles when the market was expecting 800,000! Talk about a missed expectation!
There are a couple of ways of looking at this. The first is that demand for crude oil is so strong that the economy is definitely on the mend and upward price pressures are now becoming a real possibility. The other is that the recent large refinery runs have filled the pipeline with gobs of product that now needs to be moved. The latter seem confirmed as refinery utilization rates fell to 90% of capacity. That was down from 92.3% last week. If refiners are cutting back on their runs, then one could argue that stockpiles of the refined products must be building. That could be construed as a sign of weakening demand or perhaps better, a supply that is exceeding the current demand level.
What caught my attention was the manner in which gold reacted following the EIA release. Crude vaulted higher on the news and as it did, it seemed to me that gold began moving off its worst levels pushing back up into the area of broken support which was now offering resistance at $1,240. It was a modest reaction but it did look out of place because it was unusual. It looked as if Gold was looking at the big draw and the surge higher in crude as perhaps the incipient signs of upward price pressures. I noted that this occurred even as the Dollar was strengthening.
Then after a good half hour elapsed, it began to weaken a bit but thus far it has not revisited the region from which it moved higher when the crude oil data first came out.
Maybe gold is looking at the high crude oil draw and the better than expected retails sales as signs that the latest jobs number was a one off? I don't know but it popped higher for some reason. Someone wanted to buy it along with the mining shares I might add. I have slowly come around to the opinion that without a real concern over inflation, gold is going to run into selling on rallies. Instead of cheering for a lousy economy, the friends of gold might want to consider that as long as deflation concerns trump inflation concerns, the yellow metal is going to flounder.
What needs to occur, in my opinion, is that more of this funny money that has been created by the Fed ( along with the rest of the Central Banks of the West) needs to make it out of the stock market casinos and into their respective economies. Then that money needs to start changing hands more rapidly. In other words, we need to see the Velocity of Money begin to rise. AT the very least, we need to see the officially sanctioned rate of inflation as relayed to us by the feds, (you know - that bogus one from the CPI) exceed the rate of return on 1 year money. Translation -gold needs NEGATIVE real interest rates to rise sharply. Either that, or some sort of strong selling wave to engulf the US Dollar. I do not see how we get either or those ( or both) without a shift away from the deflation theme to the inflation theme.
Confidence - that the Dollar will hold its "value" against the other majors needs to take a hit for gold to respond upwards. That is how I see it for now. Of course, the one luxury that we traders get to have ( we don't get many any more thanks to the advent of the computer algorithm and its ruinous effect on the stability and integrity of our financial markets ) is that we reserve the right to change our minds/opinions as often as we change our socks!
Here we go again - another day of yo-yo action from the day before...yesterday the sky was falling as Goldman noted stocks were expensive. Today... everything is okay once again and all is well with the world. I had the feeling that we were going to see another one of those bear traps in the equity markets. It basically boils down to the fact that if you have any profits from playing the S&P from the short side on a daily trade, TAKE THEM, while you can because the perma bulls are simply not going to stop buying every single dip. Why not? They keep getting rewarded for doing. Pavlovian? YEP!
With that, those safe haven trades that were scurried into yesterday... well, they are yesterday's news. As Yoda might say; "No longer needed, are they".
Down went the Japanese Yen and down went the bonds and up went interest rates. The Dollar ticked higher and with the combination of all the above, plus the more important fact that gold failed precisely at the bottom of the resistance zone noted on the chart, down went the yellow metal. Traders who had been long and played the short term recovery, wasted no time in bailing out once they realized that the market was not going any higher.
While the market has retreated from its first try at that very tough overhead resistance level, it is holding support near $1,244 - $1,240. I am noting that volume has picked up as the price has retreated whereas yesterday it was comatose in the gold pit.
If this support level gives way, I am most anxious to see how the metal reacts as it nears $1,225 - $1,220 again. If it bounces up and away from that, it would be constructive and would tend to confirm that recent bottom. If nothing else, it would at least set up a range trade for the short term with the big specs probably bidding it up to see if they can recapture $1240 - $1244.
I am unclear on what the next move or direction will be at this juncture. My position is very small consequently as I think any trader who wants to bet the farm on gold's next move is masochistic. You have to respect the larger term trend and that remains lower with the bears still holding the edge in this market but bulls are trying to flex their muscles.
Asian demand had better hold firm. I am going to be watching closely to Chinese demand once buyers have secured their inventories ahead of the Chinese New Year festivities. That demand has been strong but it was also very price sensitive. My concern is that once the festival buying is over, value based buyers are not going to be in a hurry to chase prices higher but will rather wait to see how sales were and whether or not to restock immediately or wait a bit for prices to recede.
It is unfortunate for the friends of gold that the gold mining shares are sinking once again, in spite of the stronger equity markets. GG is getting hurt by that takeover bid of theirs. I hope the hell they know what they are doing. Management in this gold sector scares the hell out of me.
Goldman was the catalyst for a near seismic wave that struck the US equity markets in today's session. Their analysts felt stocks were overpriced and that earnings were going to have to be quite strong to push stocks signficatnly higher based on my reading of their notes. Surprise... sounds like maybe some are waking up to smell the coffee.
My comments have to do however more with the reaction of some of the other various markets, rather than the equities. Stocks needed a significant correction but no one was sure from what level it would come or at what point. Well, we got a decent correction today. If it turns around and goes right back up tomorrow, who knows? What struck me about the safe haven trades that went right back on, in typical knee-jerk fashion, was the US Dollar was left out of the party.
We had bonds moving higher today with interest rates on the Ten Year dropping down to 2.827. That is no surprise given the steep fall in the equity world. What we usually see happening on a day like this did not occur today. What I mean by that is that while the Japanese Yen moved sharply higher ( I will never understand why the Yen can remotely be considered a safe haven currency), the US Dollar did not rise but fell instead! That is rather remarkable when one is used to seeing the Dollar benefitting from any sort of risk aversion/save haven trade.
I am not sure what that might mean but it is only a one day affair at this point so I do not want to read too much into it.
Gold seemed to experience another one of those "melt up's" as I have dubbed them with some safe haven buying coming into the market, especially as the US Dollar weakened but also somewhat in response to news of Goldcorp's unsolicited takeover attempt of another mining outfit. Some are thinking that the gold shares, which have been beaten with the proverbial ugly stick, might have been mangled severely enough that the long-anticipated consolidation/ acquisition phase is now at hand in the sector. That would tend to benefit some likely takeover candidates which generally lifted the sector higher even while some of the majors were weaker, notably GG, which was down over 1% at one point today.
The news tended to lift some of the pall that has been hanging over the sector. Of course it did not hurt any to see a near 1.4% plunge in the S&P 500 as part of a safe haven bid.
I have mixed emotions about this stock market fall today. If it is coming on expectations that while the US economy might be improving it is not going to be growing fast enough to justify multiples on equities near current levels, then I can see where it would actually tend to bring more selling pressure into gold as deflationary forces reassert themselves. Then again, we might be back into that nightmarish scenario where we are sitting around on pins and needles waiting for every single economic data release and reading the entrails to discern whether the Fed will taper or back off and not taper.
I am still of the view that if the latest round of MBS and Treasury bond buying by the Fed has not generated solid growth, then what will? If the Fed were to be forced to put any tapering on hold, would it not signify that deflationary forces are reasserting themselves? Why would that not put downward pressure on the gold price? Yes, I know that many in the gold market would view any Tapering on Hold action by the Fed as bullish gold but pray tell, for what reason? Two years have done nothing to generate any significant inflation in the mind of the market - why would another 4-6 months or another year or more do anything different?
From a technical perspective, the volume in gold trading today was quite lackluster - another reason I referred to today's move higher as a melt up. It just seemed that the eager sellers were not there today more so than eager buyers were chasing prices higher. The result was a lack of offers over the market and that allowed prices to "melt" higher.
The market did run into some selling near $1,255. That is the bottom of the resistance zone noted on the chart. The top is close to the $1260 number but also extends a tad above that. If gold can push past that level and keeps its footing there, it would turn the chart friendly in my view and portend a test of $1,280. Above that would be psychological round number $1,300 where the "handle" would change.
I personally do not see what the reason might be for gold to reach that point given the apparent resurgence of deflationary views ( the last jobs number got the ball rolling which Goldman kicked down the hill today) but the key in my mind still remains the US Dollar. If it weakens further, gold will stay supported. If the Dollar rebounds and begins moving higher, look for selling to intensify in gold, especially at these levels.
We'll see what the market gives us.
The following chart is for the reader who had a question about the Commitment of Traders report for the Crude Oil market ( WTI ). I must also confess that I have not been tracking the composition of the trading positions in this market but have rather just been noting its price action.
Given the fact that crude oil is essentially trading at the exact same level as it was to start of the past year of 2013 - near $92/barrel - it is quite remarkable to note the positioning of speculative money in this market.
Note that price had a strong rally during the 3rd quarter but then peaked out in early September and crashed from above the $110 level to its current $92. That is a fairly substantial move lower in price. Yet, look at the positioning of the speculators. They remain as net longs, every single category of them!
Here is a chart of the Commitment of Traders beginning at 2013 through this Friday's report. This is for Futures and Options Combined.
The hedge fund category did peak in their net long exposure around that same time frame but they are certainly not on the net short side of this market.
What is interesting to see is that as price has moved lower, the Producer/Merchant/User category, usually big commercial interests, have been net sellers. That tends to go against the usual pattern of commercial buying into descending markets with hedge fund or large spec selling.
It is obvious that the big shorts in this category are the swap dealers. That too is rather remarkable.
Quite frankly, I do not trade the crude oil market in size and thus am not that familiar with its inner workings as I am with the other markets that I specialize in. Yet, this is certainly odd as the trend following speculative money, money that one would tend to think would be on the side of the trend, which has been lower since September, has not been in this market. They clearly are net longs in a downtrending market. If anything the Hedge fund net long position is still very large. I do not know what to make of this.
I thought it might be tied to spread positions against the products but in checking their COT reports, the hedge funds are also net longs in both the Unleaded Gasoline markets and the Heating Oil market.
Hedge funds are net shorts on the WTI-Brent Spread but not to the degree to offset the totality of exposure to the WTI futures market.
Maybe if any of the readers here are specialists in the Crude market they can help us understand this. But for now, it is something that I am unable to explain.
I do recall that the opening of the pipeline out of Cushing to Port Arthur brought a lot of speculative money into the crude oil market as the belief was that pipeline would help alleviate the glut of supply that has been plaguing Cushing for some time. Yet, crude prices have already given up any gains tied to the news of that particular pipeline opening.
Fracking has given us large supplies of crude, a good deal of which is being refined into products and exported abroad but still the trend in the market has been down, in spite of speculators remaining as net longs.
I am going to be monitoring this situation as the weeks unfold to see I can make any sense out of this and see if there are any clues in here that we can glean as to what might be happening to this very key commodity. Under normal circumstances, an improving economy would lead to an increase in demand for energy which would be reflected in stronger demand for crude and its products but the chart is not reflecting that at the moment.
In today's price action the abysmal jobs number resulted in higher crude prices, a counterintuitive move that can be understood as a play on the Fed holding off on any tapering yet if the threat is one of deflation due to poor demand tied to weak payroll growth, then why the bounce higher?
Maybe we can figure this out; then again, maybe we can't.... That is why I prefer to trade markets that make some sense to me.
Since the last week of 2013, through Tuesday of this past week ( 1-7-2014), Gold has rallied from the vicinity near $1180 to a high near $1245 reached Tuesday. That is some $65.
It is no coincidence that over that same period, the hedge fund category has covered nearly 8,000 short contracts. As of the week of Christmas last year, hedge funds held a rather small net long position of some 28,702 contracts (futures and options combined). As of this Tuesday past, their net long position has regrown to 40,229.
To get to that point they have covered 7,345 shorts to be exact while adding 4,182 new longs over the period mentioned above. Another way of saying this is that the buying in the hedge fund category has been dominated by large short covering, not so much by fresh new long position taking.
While the results are the same, namely higher prices, I prefer to see a market dominated by fresh buying outnumbering short covering when I look for a trend to persist. Short covering can catch you off guard because it is so furious and comes in such large blocks when it tends to come. The problem is it can also peter out as quickly as it began.
Think of a market as a rocket engine taking off. It requires THRUST to counter the downward force of gravity. As long as the thrust persists, the rocket can move higher. If for any reason the rocket runs out of fuel, gravity takes over and back down it will come.
Gold can be likened to a rocket that is being driven higher AT THIS TIME, by thrust coming from short covering which is the dominant feature. This short covering needs to be replaced by FRESH BUYING to keep pushing it higher.
That fresh buying will only come as upside resistance levels on the chart give way since that movement generates momentum, which is what the hedge fund computers are looking for. Remember, they do not care which direction the momentum is taking a market, up or down alike make no difference. All they care is that the momentum is present.
That brings us to the price chart. This short covering on the part of the hedge funds has taken the market very near to a strong resistance zone on the price chart ( $1255 - $1260). It will be up to the bulls next week to take price through this zone if they are going to create a trending move in the metal to the upside.
I will be honest and say that I am dubious as to their ability to do this but one thing I have learned is that the market could care less what I think it might or might not do. The last two years of Fed bond buying programs have not undercut the Dollar nor have they generated any strong buying across the general commodity sector. If anything, that bond buying has served to reinforce the idea that the economy is too weak for the Fed to cut back on the QE. During that time, deflationary pressures have dominated and we all know what that has done to gold by now. I see no reason to believe that another year of unabaged Fed bond buying is going to produce anything other than what we have already seen in the last two years.
Only recently did the FOMC start up with the talk about tapering. That talk was based on the Fed's view of a gradually improving economy with a bit of an improvement in the labor markets. November's strong payroll numbers fed into that thinking doing nothing to dissuade the Fed from acting to Taper.
Today's weak payrolls number, coming as so shockingly poor as it did, rekindled the idea of a Fed on hold when it comes to tapering. If we get subsequent economic data that comes in strong, or stronger than expected, look for that notion to begin withering away again.
I am especially interested in watching interest rate yields on the Ten Year Treasury at this time. Any further rise there should support the Dollar and bring pressure to bear on gold. Conversely, if the yields begin sinking lower on the Ten Year, gold should be able to catch a bid and remain firm.
The sharp rise in the GSCI today is evidence to me that the Dollar holds the key to the overall commodity sector as far as these speculative money flows go. When I survey the general global economy and compare the economic status of the major nations of the West ( I am including Japan in that block), the US still seems to be experiencing the best "growth" out of the bunch. That would lead me to believe that if there is going to be any nation out of that group that can see interest rates move higher, it is going to be here in the US. This should bring buying into the Dollar which should tend to bring pressure across the commodity sector in general. But as always, that is a view that must be confirmed by price action.
Next week is therefore an important test for this market.
Have a good weekend all....