Short Covering continues to be the Feature in the Gold market

Gold seems to have run out of gas up near the $1340 level as it has been unable to extend its near month long gains here at the end of February. Upside momentum is waning and that requires close attention.

There are several things that I would like to bring up right now. The first is the nature of the buying that has been driving this market higher since the first of the year. Gold started 2014 near the $1,200 level and has since then put on $140, the largest portion of that this month when it moved $100 higher.

Based on the COT reports since the beginning of this new year, one can easily observe that the largest portion of the buying this year has come from whole scale short covering. Here are the numbers:

At the beginning of the year, the Hedge Fund OUTRIGHT short position consisted of 72,571 futures contracts and options. As of Tuesday this week, that position was 30,996. Doing the math, we can see a reduction of 41,575 short positions or short covering.

That same Hedge Fund category had a OUTRIGHT long position of 106,675 futures contracts and options. Tuesday this week shows a build in that same position to 144,907. The math - an increase of 38,232 positions on the long side.

In other words, short covering by the gigantic hedge fund community has outnumbered the amount of new buying by that same category in the amount of 3343 futures contracts and options since the start of 2014.

This is not a recipe for a sustainable bull market. One wants to see eager, strong, abundant fresh buying driving a market higher because it is a reflection of bullish sentiment, not a wave of aggressive short covering which once it fades, drops the upside momentum. Now, whether we can see something which will spur traders/investors to pile onto the long side with a greater fervor than the short which have been getting out remains to be seen, but until we do, caution is still warranted towards this market. The one thing about rallies led primarily by short covering is that they tend to fade quickly. We'll see what we get to begin the new month.

By the way, as a side note, for you folks over at a certain paid-subscription newsletter site that enjoy taking the articles posted here and republishing them nearly verbatim without giving credit to where you got them, I have not included a chart of the above so that you can at least add something of your own when you indulge your inclination to plagiarize.

Take a look at the chart below however and you can see the extent of the move this year but you can also see the obvious resistance zone that has formed up at $1,340.

The Directional Movement Indicator is showing the ADX line rounding over. It has stopped moving higher which in itself is a warning sign that there exists the potential for a halt in the uptrend. While bulls still remain in control of the market, upward progress is stalling indicated by the falling Positive Directional Movement indicator ( Blue Line ).

Dip buyers have thus far emerged in gold and kept it from breaking down sharply but if the physical market buyers begin to back away and wait for lower prices, I am skeptical that buying from Western-based investment sources will be sufficient take the price through this overhead resistance zone against which it is currently being held in check.

Copper Continues to Fall as Stocks Continue to Soar

Very strange doings occurring in Doctor Copper when one considers the nearly unstoppable surge higher across the US equity markets. One does not generally see copper parting ways with the broader stock market for long as this key bellwether commodity has an excellent track record at predicting ( or at least confirming ) economic strength, not only domestically these days, but globally, especially in regards to China's economy.

Take a look at the following copper chart and notice the sharp drop on the daily chart. Some of today's gap can be attributed to the fact that the March contract has given way to the May as the most active and that is now being plotted on the continuous contract chart; nonetheless, the technicals remain extremely poor for copper - remarkably so given the euphoria around US equities.

Two things stand out - first, copper is trading BELOW both its 50 day and its 200 day moving averages. That is bearish. Secondly - it is sitting right on top of a series of support zones. It tested the first of these today and managed to stay above that zone, but just barely.

Also notice that the Directional Movement Indicator shows the bears currently in control of this market. Negative Directional Movement Indicator ( Red Line ) remains ABOVE the Positive Directional Movement Indicator ( Blue Line ). Also, the ADX is beginning to undergo a slight upturn. It has not managed to climb above the 25 level, much less the 20 level, but it is rising as the market is moving lower indicating the POSSIBILITY of a trending move lower.

If copper were to break chart support indicated above in conjunction with a rising ADX line, it would tend to bode poorly for the overall commodity sector in general, especially those commodities which tend to be good proxies for overall economic activity such as cotton.

Cotton's chart looks decent for now but if it were to drop below 84 simultaneously with an additional move lower in copper, it would not bode well for commodities in general. Obviously there are going to be exceptions to this depending on the specific demand/supply scenario for each commodity market but I am speaking of the sector in general.

I find it particularly disconcerting to see copper moving lower, even as the US Dollar weakens. That has not been a frequent occurrence.

I will try to get some more up on gold later as time permits along with some analysis of the COT data. this has been a busy week in these markets with lots of strange, wild moves occurring and violent whipsaws at times ( the grains come to mind today). I for one am glad to see February come and go and look forward to March trading. While one has to respect the chart action if they are trading, I personally never feel comfortable putting large positions on in any market unless I can understand what is moving it. Some guys like to buy without asking questions based on the technical pattern ( I will too to a certain extent ) but only the brave ( or reckless ) will pile into a market without knowing what in the world is moving it. Reversals in such market come with little to no notice whatsoever and can punish you severely for being so brash and foolish.

Mining Shares Cannot Hold Gains

In what appears to be reminiscent of the not-too-distant past, the mining shares traded hesitantly for the entire session while the broader markets were on a tear higher. Yellen's testimony early in the day seemed to put the precious metals sector on a bullish footing but by the afternoon, prices began to slip with the result that the HUI ended up settling barely above its session low. That is not encouraging especially with the broader market just missing setting yet another all time high ( basis the S&P). It did manage to put in an all-time CLOSING HIGH however.

Here is the chart - a couple of things stand out to me. First, and most importantly, the ADX has turned down indicating that there is at least a temporary halt in what had been the recent uptrending move. Positive Directional Indicator remains above the Negative Directional Indicator meaning that the bulls still have control of the market however.

We will have to monitor the subsequent price action to see at what levels the dip buyers surface. A reasonable place to expect their first appearance would be when/if the index dips towards the 200 day moving average near 231-232. Below that lies the near confluence of the 100 day and 50 day moving averages. That comes in around the 215-217 level on the index. Bulls would not want to see this index fall below that level as it would probably trip the ADX into a negative posture.

There were some very wild moves occurring across several commodity markets today. How much of this is related to end-of-the-month position squaring and how much to actually waning upside momentum but the grains were hit fairly hard today, especially the beans. I definitely want to see the price action across the grains tomorrow as we end this month. AS I said yesterday, maybe the February Break is going to show up here to END the month of February and start the month of March. If so, it is a month overdue.

Fed Chair Yellen gives Gold Bulls Reason to Cheer

Yes indeed, the Dove of Doves is living up to her reputation as far as the gold market is concerned:

"Low inflation gives Fed room to pursue full employment".

What further, besides personally buying gold futures, could she have done to spook gold bears?

The spin being put on this is that the Fed will hold off on the tapering as they wait to see if the recent poor economic data is an anomaly due to the harsh, frigid winter weather or if it is becoming a trend.

Gold bulls are betting it is the latter.

For that matter, Dollar bears are too because back down the Dollar is going this morning and back up are going commodities in general. You could not have asked for a statement that would better clip yesterday's Dollar rally than that which Yellen supplied this morning. I sometimes get the idea that the Fed would love to see the Dollar even weaker - after all - they are not getting the inflation that they want to produce.

I have said it many times, the markets no longer are interested in fundamentals - they are interested in what the Fed may or may not do. I guess this is what free-market capitalism has degenerated into. Then again, with the rest of the decline in this nation, we should not be surprised to see this sort of thing.

America is rotting internally. Any observer from outside of the nation ( and those within who are attuned to these things ) can observe its rising degeneracy and ignorance. We are fast becoming a nation given totally over to hedonism at the expense of discipline, ethics, virtue and morality. Our national character is deteriorating and with that, so too are our various institutions. We are short-term oriented; the longer term consequences be damned.

The Fed's answer to any economic hiccup or slowdown, especially under Yellen, has been and always will be to pump liquidity into the system and artificially suppress interest rates in the hopes of spurring increased borrowing and further indebtedness. They have to because ours is a debt-based economy.

In the process of so doing however, they have created more misallocation of capital than all of the bone-headed decisions of hedge fund managers combined throughout our modern financial era. Big specs cannot be blamed for going with the Fed -  after all they exist to make money from speculating. But if the Fed, particularly this Yellen-led Fed, is not careful, they are going to end up ruining the Dollar with this idiocy. Only the Dollar's reserve status has allowed the US to continue with its reckless spending and incessant borrowing. The more those authorities who are charged with maintaining its "value" undermine that value, the greater the possibility that the financial quality of life for the average US citizen comes under attack.

We are talking about the future of our children. Those who foolishly squander their birthright for a bowl of stew to satisfy the immediate lusts of Wall Street, are doing no service to the next generation.

Wee Bit becomes Big Bit

Yesterday's headline was; " A Wee Bit of Commodity Weakness". Today, that "wee bit" became a lot larger as the combination of a waning upside momentum met early end-of-the-month book squaring.

February has been an incredibly profitable month for anyone who was long the commodity sector. So much so that the famed February Break apparently decided to "take a break" from showing up. Maybe it will appear here at the end of the month or perhaps it has been a bit postponed until early March.

Either way, several key commodity futures markets experienced some big downside reversal patterns. That is taking some of the buying momentum out of the general sector as traders, particularly hedgies, do not want to let these profits slip away prior to getting those monthly statements out to their clients showing them how smart and clever they have been with their investment capital this month.

Here is a BIGGIE - Natural Gas and a HUGE downside reversal pattern.

Check out OATS - which is not a very largely traded market from a spec standpoint but nonetheless tends to be regarded by many as a type of general bellwether for the grain sector.

Here is Cotton:

And of course, Copper, which I continue to maintain has not validated the move higher across so many different commodities as it has been a laggard ( something which should not go unnoticed by those talking up hyperinflation concerns ).

This last chart of copper is the one that has made me such a skeptic when it comes to the recent buying binge that occurred throughout the commodity sector. In my view, you cannot have bellwether copper going one way on chatter about rapid growth and escalating inflation concerns all the while you have the rest of the sector moving higher. Something was not making any sense.

The month is not yet over but I must admit that this is one of the weirdest months I can ever remember because they entire commodity sector was on a tear higher and for the life of me, I haven't a clue as to what the heck was behind the move in some of these markets.

It has certainly been a momentum-driven buying event but other than perhaps some desire for diversification away from equities and into commodities, I failed to see the reason for this sort of wild buying. There has been a tremendous amount of damage done to the bears in the sector who were forced out across so many of these markets. Now the question, at least in my mind, is where do we go from here?

Further clouding the issue is this end-of-the-month book squaring. I want to see how things look at the close of trading this coming Friday ( the last day of this month ) and then see if money is put back to work in the commodity sector to start off the month of March or if we go back to range trading with markets being moved more by their own specific set of demand/supply fundamentals instead of this rather mindless and indiscriminate entire sector buying that we have seen this month of February.

Notice by the way, that both gold and silver are moving lower in sync with the sector. Also putting some pressure on both of the precious metals is a firm US Dollar and generally stable interest rates which seemed to stopped moving lower, at least for today.

Gold has stalled out at the resistance zone noted on the chart but still remains above initial chart support as dip buyers are still coming in on the heels of further nervousness involving Ukraine. The ADX has been steadily rising indicating the good trending move to the upside but it too is beginning to show some signs of that fading upward momentum.

The USDX has managed to get a nice bounce away from strong chart support near the 80 level. The New Home sales number seems  to have made some Dollar bears nervous.

Try not to draw too much from any one day's worth of price action. Remaining flexible and not dogmatic is wise during this zany period.

A Wee Bit of Commodity Weakness

Finally - a sign that some of the commodity markets have seen a brief respite from the recent buying orgy that has dominated the sector for this month. As said in a previous post - so much for the famed February Break this year. Either we missed it or maybe it is going to be renamed the March Break. Then again, maybe it will not come at all this year. As long as the US Dollar continues to lose friends, and some investors are feeling uneasy about the very high level of the US equity markets, commodities are attracting some diversification money flows.

Coffee backed off a bit today as did sugar. Unleaded gasoline is about 6 cents off its recent high. The most active natural gas contract has lost $1.70 from its best level. Cotton puked today and copper continues to slide. Silver could not hold above $22.00 but gold is still getting a bid, especially after the US consumer confidence numbers suggested that sentiment among this all important group faded somewhat. That lousy number led to pretty good buying in the bond market today, especially on the long end with the result that interest rates fell some more. The yield on the Ten Year is now near 2.70%. It was over 3% to start this year.

Take a look at the GSCI ( Goldman Sachs Commodity Index). It is having a bit of trouble moving higher after hitting some fairly hefty overhead resistance noted by the shaded rectangle. One of the indicators is showing some signs of rolling over. My own view is that the overall sector has come too far, too fast, given the very tepid rate of growth across the overall global economy but as I have told others many times before, my opinion, as well as that of any other pundit, is inconsequential as far as the charts are concerned. Right now they are merely showing a pause in the move higher but have not yet indicated a sector-wide turn lower.

Never mind though, that is not going to stop the "gold is always manipulated all the time" crowd from their usual drivel about nefarious forces capping gold once again and preventing it from soaring higher. Sorry - but the older I get the more I cannot seem to resist attacking this nonsense. After a while it is so superficial, so droll, so predictable as to be utterly disdainful.

Look, no market ever goes straight up without a pause at some point. As to when that is going to occur and at what level, we can attempt to locate such potential reversal or pause points by studying the price charts. But merely because a market pauses, does not mean it is under attack. It takes time for buyers of the physical product that underlies the commodity futures market to become accustomed to the new and higher price level. Sometimes those buyers will pull back refusing to chase the price higher if they believe they can buy it lower at some point in the future. Sometimes those same buyers might happen to panic and chase price higher. Sometimes specs are piling in driving prices higher and higher not so much because of strong buying but rather because of a lack of willing sellers at the lower price levels. They can push prices higher because they have no resistance to their buying so they are going to keep pressing until they do get some resistance. When the price moves high enough, those formerly reluctant sellers will begin to let go some of the product that they are holding. It all is just part of the price discovery process.

Some more thoughts on gold however -

As long as US interest rates are not rising and investors/traders are of the opinion that the Yellen-led Fed is not going to hike interest rates anytime soon, the Dollar is going to have some trouble and that means gold should continue to see rather good support on dips in price. The big key will be any economic data that comes out on the strong side - that will put a firm bid back into the Dollar almost immediately and should pressure gold so anyone trading this stuff will need to pay close attention to nearly every single important economic data release.

I am going to be especially interested in watching the payrolls data once the weather disruption issues go away and we can get a better glimpse into the reality of what is taking place. I suspect that the Obamacare issue is going to continue to be a lead anchor on the jobs market and that Yellen and her crew are going to have to avoid putting a heavy-foot on the liquidity hose at the risk of crimping what little growth there already is.

The thing about this however is that there remains two ways of looking at the same glass. If the economy is that sluggish and growth is languishing to that extent, then why would we expect commodity prices to surge in that kind of slow growth environment? After all, that is what have essentially had for some time now and until just recently, commodities have been essentially moving lower.

The flip side is that this same sluggish growth means near zero interest rates for an extended period and that means a Dollar that should have trouble finding a lot of friends. That of course feeds into the carry trade in which the weak Dollar spurs all manner of tangible asset buying by assorted hedge funds and index funds, which exist to provide investors some broad exposure to the overall commodity sector.

Thus one can make a bull case or a bear case for commodities, merely based on how they want to view the same glass.

I personally find it difficult to grasp the bullish case for the overall sector.
That does not mean I am not bullish some sectors or particular commodities within the sector. It does mean however that I am leaning more towards the deflationary aspect at this time unless I see some sort of economic data that tells me that growth is actually really picking up and more importantly that hirings are increasing. After all, if $4trillion + of QE has not managed to turn around growth or generate any serious sustained inflationary pressures in tangible assets, why would another dose do the trick?

IN the meantime, some of these commodity markets are actually moving as they respond to weather or other factors that impact their particular and unique supply/demand scenario. Coffee for example has soared higher on drought fears in Brazil during a crucial growing period. Natural gas had recently been going parabolic due to an extreme weather event known as the Polar Vortex, which has brought an unusually prolonger and bitterly cold spell to nearly the entire Eastern half of the country. Weather events generally get factored into price in a relatively short period of time however and unless the forecasts continue to be the same, once the weather has been factored in, there is not much left after that to support the higher prices for much longer unless the weather pattern remains around longer than originally expected.

In the meantime, try not to lose your sanity over the price action across many of these various markets. computers are doing what computers will do.

Commodities Continue Soaring... Gold and Silver following

If you want to see some absolutely amazing charts for the sheer ferociousness of a combination of short squeezes and fresh longs, look at the following...

Here is Coffee:

Here is Sugar:

Here is the Soybeans Chart:

Here is Copper:

Hey, what gives?

Sugar and Coffee have been driven higher with the recent dry, hot spell in those growing regions of Brazil; however, what really kicked them higher has been the massive number of speculative short positions that are being forced out by the buying that has moved across the entirety of the commodity sector. Beans are being carried higher by some of that same weather talk from Brazil but I think that is more of a knee-jerk reaction as they are grown in a different region. Tight old crop ending stocks are what is kicking that market higher.

Of course crude oil remains strong as does cotton, cattle and hogs.

What I find very odd however is the copper chart. It has managed a bit of a bounce off its recent lows but on a day like today, when there is a orgy of buying ( and that is the best word I can use to describe this sort of bizarre buying ) copper is actually moving lower. Lingering Chinese fears continue to undercut copper even in the face of a soaring US equity market. This chart bears very close monitoring as copper has a very solid record for its overall predictive ability in regards to global economic growth or the lack thereof.

The rate at which some of these markets is rising is simply too steep to be maintained for much longer. Would be buyers in some of these rocket shot moves, be careful....

Commitment of Traders Info

A bit of information...I mentioned a while back (when gold was trading closer to $1200 and the "gold is always manipulated all the time" crowd was crying up their usual blues,) that the reason gold was lower was not because it was being manipulated but rather because speculators were generally shunning commodities in general in favor of high flying equities.

Take a look at the following two charts to illustrate the absurdity of those claims that gold was only lower because it was being manipulated.

Notice that from the peak in outright long positions in gold in October 2012, the TREND in hedge fund long positions was steadily lower until it reached an ultimate low in December 2013. Since that time the number of hedge fund long positions has been increasing while the number of hedge fund shorts has been steadily declining. And what has gold been doing since then...? Answer, why it has been moving higher just like one would expect it to do when the specs are coming back into the market.

Keep this in mind - specs drive our modern markets - when they are buying, prices rise. When they are selling, prices fall. Specs have had no reason to buy gold until apparently the start of this year but more so apparently since the start of this month of February. It has nothing to do with backwardation claptrap, lease rates, JP Morgan, and all the usual BS that so regularly pollutes the web in the gold bug community.

For some reason, commodities in general have been soaring recently. Shorts are getting obliterated across the entire sector with a vengeance. You name it - coffee, sugar, hogs, soybeans, wheat, corn, silver and of course gold. Frankly I am unclear as to what the main driver is for this sudden interest in the commodity sector. I have heard the usual chatter than equities are overvalued and commodities are undervalued, and there is some truth in that, but it seems to me that the weakness in the Dollar of late ( due to the weakness in the recent economic US data) has apparently caused a mass move back into the sector as part of another carry trade.

How far this could go or how long it could last is unclear. Frankly I have no idea what happened to the usual "February Break" but for now the charts in the sector have turned bullish. I have my own doubts that any of this is sustainable but will not argue with those same charts until they show some evidence that the mad buying binge has run its course.

One thing I can tell you, in some of the commodity markets that I monitor, the shorts or the bears if you prefer, have been obliterated. The fact that this has happened in almost every single commodity market makes me suspect that this general rally encompassing the sector is not going to last. A large amount of short covering has been taking place in tandem and that lets me know it is more of a macro trade that is indiscriminate in its buying.

In the meantime, traders, respect the technicals but remain vigilant for signs that this binge buying is fizzling out.

Hawkish Fed Derails Gold Rally

Not that it was "new" news but the FOMC minutes set the tone for gold ( and equities) for the rest of the session once they were released. The consensus seems to be a more upbeat view of the economy by the majority of the FOMC members. Keep in mind that this merry group does not exactly have a sterling track record of which to boast!

Either way, the hawkishness lent some support to the US Dollar and pressured gold as a result. Interest rates bumped a bit higher and once again we were back to gold having to compete with higher US interest rates.

I still have my doubts about the strength of the US economy but I suppose we will get a better sense of how things stand in reality after we get through this round of frigid weather and get back to more seasonal norms. Maybe then we can see what retail sales really look like, what housing really looks like and what the trend in the jobs picture really looks like.

If the market starts to believe that the US economy is faltering, interest rates will move lower, the Dollar will move lower and gold should get some further support. If the contrary is the case and the US Dollar bounces away from chart support near the 80 level basis USDX, look for gold to move lower.

Two noteworthy developments today on the heels of that FOMC statement - the mining shares led the bullion price lower with the HUI moving down and, more importantly, there was a rather large dishoarding of gold out of the ETF, GLD - about 5.5 tons to be exact. This brings the total holdings reported to 795.61 tons which incidentally is now BELOW THE STARTING LEVEL of 798.22 tons for the year.

It was just last week that the usual gold hucksters were out heralding the "surge" in gold holdings in GLD as evidence that the bull train was fast leaving the station. Yes, the technical chart posture of gold has improved tremendously, of this there can be no doubt for any unbiased observer. To see GLD give up this much gold so quickly however tells me that bulls are scared to death of any further bond buying reductions by the Fed. There was even chatter today about the Fed actually raising short term interest rates sooner than expected. I personally find that hard to believe but nonetheless, the market did not and thus gold was jettisoned out of interest rate fears.

Gold throws off no yield as any gains must come from price appreciation. Investors looking for yield will often look first at interest bearing Treasuries rather than a non-interest bearing asset, IF THEY ARE NOT FEARFUL OF INFLATION ERODING THOSE GAINS. If inflation becomes a concern, then real rates become important to the gold price.

Here is a chart of the ETF, GLD for your reference. Not exactly awe-inspiring as of yet is it?

Gold, from a technical standpoint, is riding the 200 day moving average. It strongly cleared this level last week and has been backing down this week. Thus far it remains above the moving average, which is friendly. The ADX is continuing to rise indicating that the uptrend is still intact.

We will have to wait to see at what level dip buyers, should they come back in right away, surface. I cannot help but think that today's price weakness is going to give Asian buyers some reason for pause. After all, the metal has risen, practically non-stop since the beginning of February. At some point, price sensitive Asian buyers are going to back away from the market and see if the price will move lower.


Psychological support should come in near the $1300 level. Below that is better support emerging first near $1280 and extending down towards $1270. Resistance is first at today's high near $1330.

Several commodity markets screamed higher today, most notably coffee, which suddenly is the darling of the commodity complex after being the ugly stepsister for a long, long time. Corn also showed some life today and wheat continues pressing further away from the $6.00 level.

Speaking of the $6.00 level, natural gas blew through it like a hot knife through butter. The genius forecasters changed the weather forecast again, this time putting another shot of frigid air into the longer term forecast. The words, "polar vortex" are fast becoming the natural gas equivalent of the grain market's " high pressure ridge". Mention it and traders become raving lunatics devouring their children and anything else that happens to stand between them and the buy button.

I will be watching the Euro to see what it does with the 1.38 level. Gold has essentially been following its movements almost exactly this entire month.

China, China and China

There continues to be both strong short covering and fresh buying occurring across the broad commodity sector this AM. The reason? Stronger than expected data out of China.

Last week it was data revealing a surge in both imports and exports. Today it was the larger than expected foreign direct investment numbers.

This is the reason that silver continues to outperform gold to the upside for now. It is also the reason that the overall commodity sector continues to march higher. Shorts are getting squeezed out across the board.

Crude oil is now trading above $101/barrel, the highest level since October 2013. Gasoline is closing in on its best level since late December. So much for the relief we were enjoying at the gas pump. That went back up in smoke. I always have mixed views on surging energy prices because while they tend to support the "buy commodity" theme, they also act as a drag on economic growth especially in today's environment in which the US consumer is so cash-strapped and with such stagnant wages.

Soybeans continue their charge higher with wheat and even corn moving up. Cotton prices are firm and coffee is flying higher while even the laggard sugar is higher today.

In short it is very difficult, if not downright impossible, to find any commodity market in the red today. That is what China does when it is in the news in any sort of positive way. Take a look at the "China Effect" on the chart below.

Thus far the fallout from the emerging markets issues has been superceded by this upbeat news out of China; however, China has its own set of issues so one has to carefully monitor the data coming out of that nation.

It will be interesting to see how many of these individual commodity markets settle for the day. As can be expected in seeing this sort of thing, the US Dollar just cannot seem to find a friend just yet. It is flirting dangerously with some strong chart support just below the worst level of the day. It is either do or die time for the greenback or it risks falling all the way to the 79 level basis the USDX.



Thus far the gold shares are lagging. Perhaps they will catch a late bid.

Gold ran into a bout of selling last evening as it traded near $1330. The failed attempt to charge higher through resistance brought about a round of profit taking. The dip lower in price however was bought ( it seemed to coincide with the China news however).

Personal Consumption Expenditure Index

I ran the data series from this index, which is supposedly one of the favorites that the Fed likes to monitor, to see if we could detect any sort of pattern. Here is the chart going back to the beginning of the data series near 1960. I took the numbers and converted them to an annual percentage change from the previous year and then plotted that on the chart. By the way, this particular data series excludes food and energy prices. When those are included, the changes are far more volatile.

Here is the same data set INCLUDING FOOD and ENERGY prices. Notice how much more dramatic the charts becomes. As a matter of fact, using this data set, one can see that the result of the credit crisis that erupted in 2008 actually led to the first DECREASE in price rises since the beginning of the data set!

If you are like me, I was immediately struck by the sharp jump that occurred in this series during the 1970's. Some of you will recall that was the era during which gold embarked on its previous massive bull market.

From its peak in that period, the index then moved lower, with a few, rather brief period of exceptions. This just so happened to coincide with a 20 year bear market in gold. Note then in 1999, the index moved higher and shifted into more of a uptrending pattern. I find it no coincidence that gold then embarked on its next massive bull market higher bottoming in price that very same year.

Here is a closer look at the same chart this time starting from 1999.Do you see what happened after 2008? The index fell sharply. Even though prices did increase then increased at a slower rate than anytime during the lifetime of the data series. Remember that was  the year that brought us the eruption of the credit crisis and the subsequent massive deflationary impact across not only the US economy, but the entire global economy.

Enter Quantitative Easing....Look at what this policy produced in the index beginning in 2009. Price appreciation began to increase at a faster clip once again. It is interesting to overlay the gold price chart over this index during this same time period.

More to the point, the index registered another very small annual percentage  increase in 2013. Prices in general were falling or flat. What was gold doing during this time frame? why it was falling... not unexpectedly at all based on what prices in general were doing.

While this index does not march in perfect lockstep with the price of gold, it is however rather revealing in that sharp moves higher in the chart tend to coincide with sharp moves higher in the price of gold while sharp decreases in the index tend to coincide with periods of lower or stagnant gold prices.

That is why I am keenly interested in what this index will be doing over the next few months/quarters. Are we entering a period during which upward price pressures will be the norm or will we see stagnant prices? Who can say at this point. Emerging market issues have the potential to put downward price pressure on commodity prices should they flare up further. Would that be a hiccup, a bump in the road, or would it be a more ominous occurrence that could produce a more widespread and enduring result? Those are questions that we are all going to get answers to in the months ahead.

In the meantime however, please understand that a fall in the gold price is far more complex than the simplistic notion that it is under attack by the powers that be. That concept has been a favorite face saver employed by too many in the gold community to justify their flagrant misreading of a market and their inability to come to terms with the simple fact that a period of falling prices (deflationary wave) does not favor an upward move in the price of gold.

Gold does not move in a vacuum. If anything, the above index provides us a bit more of a glimpse into the many factors that go into establishing a price for the yellow metal. Investor appetite for risk, currency factors, safe havens, overvalued/undervalued issues, geopolitical uncertainty, confidence, physical jewelry demand, etc... all contribute towards the price of gold.

Trying to get a handle on all of these various inputs is not an easy task. For one reason - who among us is wise enough to be able to process all of these various inputs and arrive at a price target that takes them all into account? Answer - no one. That is why I prefer to use the price charts and the action of the metal. More than anything else, it is a perfect synthesis of these various factors and how they are at work in creating money flows either INTO or OUT OF gold.

Velocity of Money still Falling

Granted the most recent data ( Oct 2013) shows the key indicator still falling, we are still waiting for the January 2014 numbers. They should be available soon and then we might see whether or not Velocity of Money ( M2) is picking up as of yet.

Here are some additional charts detailing EXCESS Reserves of Depository Institutions

One more chart - this one details Total Reserve Balances. Here is what the note on the one of the Fed's websites states:

This item includes balances at the Federal Reserve of all depository institutions that are used to satisfy reserve requirements and balances held in excess of balance requirements. It excludes reserves held in the form of cash in bank vaults, and excludes service-related deposits

Here is the same data except updated on a weekly basis instead of the monthly update as listed above.

Here is what I continue to take away from these data sets. First, Velocity of Money still continues to fall although the data only covers through October of 2013. What might have happened over the last three months since then is unclear but my guess is, with the incredibly frigid winter and massive snow storms, consumer spending would certainly have been impacted. Thus I see no reason for the downward projectory of the Velocity graph to change.

Secondly, and this is the biggie in my mind - note that huge spike in both Excess Reserves and in Total Reserves that has occurred since the beginning of QE in 2008.

There were very few if any who believed that when the Fed first began their grand experiment in QE that it would not adversely impact the Dollar and by consequence positively impact gold, silver and the rest of the commodity complex. Initially it certainly did. However, what we began to notice was that for all this liquidity being created by the Fed, it was not having an inflationary impact as expected. If anything, the only thing seemingly moving higher after the first few years of this QE was the stock market.

Job growth remains abysmal, wages remain stagnant, labor participation rate continues a multi-decade lows, the ratio of total jobs compared to total population is going nowhere, etc,. In short, the economy has stopped worsening, housing sales have picked up somewhat, construction has increased somewhat but as far as strong, rapid growth, forget it. It simply has not happened, even with the enormous sums of money have been conjured out of thin air by the Fed with this Quantitative Easing policy.

Why is that? Well for one reason, based on the above charts, the "money" being created by this bond buying program continues to pile up as excess reserves in the Fed's account. The banks are not lending it into the economy at nearly the same rate that it is being created by the Fed.

Granted, when one looks at those last few charts, it is terrifying to think about what a tsunami that wall of money would unleash in the economy if it were released rapidly into the economy at large in the form of a ramp up in bank lending; however, the fact remains that taking on huge sums of new debt does not seem to be the general order of the day.

If anything, banks are probably more than content to park excess reserves there at the Fed and draw interest on them ( completely risk free) rather than risk lending those sums of monies out and risking some defaults.

The problem in the US economy, in my humble view, is not one of a stingy Fed, it is rather a regulatory and structural environment created by the current administration which continues to stifle business expansion and thus job hiring. One need only look at the runamok EPA and its war on the energy sector, the incredible boondoggle inaptly named the Affordable Care Act ( which is anything BUT that) and the refusal to open more federal lands to oil and gas exploration, a sector which is one of the few creating high-paying and solid jobs.

In short, there is only so much that the Fed can go through monetary policy.

How this impacts gold and the rest of the commodity sector should be considered by those with a bit of a more intermediate term view of things. Given the continued drop in Velocity of MOney and the continued surge in excess reserves, it is unclear to me how inflationary pressures are going to be unleashed into the broader economy as long as those reserves remain parked at the Fed.

Maybe the Fed will next resort of forcing banks to pay it for the "privilege" of holding excess reserves there. In effect, that would amount to a clear effort to force the banks to lend out the money into the economy. Given the increasing lawlessness that marks our nation, and the complete disregards of any Constitutional restraints, who knows what the Fed might do.

I would continue to keep a very close eye on the plight of the US Dollar. If the Fed does anything that might be construed as being negative for the Dollar, gold will move higher. If the Fed however comes out clearly not so much in favor of generating inflation but rather in providing what might be better termed, price stability, then I could easily envision a Dollar that is supported with a corresponding negative impact across the commodity sector in general.

This would not negate the specific supply/demand factors for individual commodity markets but what it would do is remove some incentive for the one-sided, lop-sided "buy everything tangible in sight" mentality that hedge funds are notorious for if they sense a concerted effort to weaken the Dollar.

Sloping Trendlines

I have been asked this question by some readers and wanted to tackle it here. Many have noticed that I do not often use down-sloping or up-sloping trendlines in my analysis and wonder why.

In the earlier days of my trading career, I relied on them rather heavily. However, the longer I ply my profession it seems to me that their value has decreased considerably. I chalk this up to the changing nature of computerized trading. That is another lesson in and of itself but suffice it to say for now that the vast majority of hedge funds do not "think" when issuing buy or sell orders - they REACT, more specifically, their computers react. This buying or selling comes en masse - there is not the least bit of finesse or skill involved with it. It is more akin to a wall of money slamming into a market and brutally shoving it higher or dropping it lower.

In the past, there tended to be more discretion with trading orders - now we have gone over to the systems trader which means the impact on price tends to get exaggerated at times because nearly all of the computers are reacting to the same thing at the same time. This tends to create imbalances in the demand/supply equilibrium in the market which take some time to sort out.

The result of this is an increase in the number of what myself and other technicians refer to as "false breakouts". A wave of buying or a wave of selling hits a market all at once, picks off a huge number of buy or sell stops and price is severely impacted. However, if the fundamentals do not support the technical price action, eventually - and this is always the tricky part - the balance between supply/demand will resolve or correct itself and the underlying trend takes hold once more.

"What in the world is he talking about?" is probably the question that is now popping up in the reader's mind.


Let me give you an example - here is the Weekly Gold Chart. Notice that I have included a sloping downtrend line. I also ran it right to the edge of the paper for a reason... Based on this chart, gold had been in a downtrend for well over a year when this downtrend line was broken to the upside. I remember this well to be honest but that is a different matter. Immediately the cries came forth - "Look out ABOVE - gold is getting ready to blow". We were going to take out $1900 and soar to $2500 for starters based SOLELY on the fact that this sloping trendline had been broken.

Here is the chart after a few more weeks passed.

As you can see, "whoops" is too mild of a word to describe what happened next.  After many proclaimed that merely because a downsloping trendline was broken, gold was resuming its upward march, the market proceeded to plummet from near the breakout point of $1,700 all the way down to $1,200 over the next year's time!

Note something important here which I will talk about farther down in this post - the HORIZONTAL LEVEL of $1,530-$1,525 was violated.

Here is the next downward sloping trendline breach... it occurred in August 2013.

The market had pushed past $1,400 and managed to change its handle, a friendly development. In the process it broke that sloping trendline. Everyone "just knew" that it was back to the moon once more.

OH-OH! It failed to maintain the "14" handle for more than one week and down it went - all the way back down to $1,180 again!

After this week's price action, once again those who dismissed technical analysis when it comes to gold, are pointing out the upside breakout above the down-sloping trendline.

Based on what you have seen above, would you feel completely comfortable with the statement that, "gold has broken out and is about to embark on a major rally"?  Personally, I would not.

While these sloping trendlines still should be noted and monitored, I prefer to use HORIZONTAL resistance and support levels as I have come to believe from my own personal experience that they are much more reliable. Even at that we still do get some head fakes from time to time with horizontal levels but they seem to have more predictability when it comes to future price action. If some are inclined to differ about this and want to argue, that is fine just do not expect me to come around to that line of analysis. Getting burned a few times while trading is the best antidote for putting ones fingers into the flame with reckless abandon.

Seriously, if trading was as easy as buying breakouts of sloping trendlines, do you not think that we would have hordes of wildly successful traders infesting the nation?

Please keep in mind that being successful as a trader means employing a wide arsenal of tools. It also means learning to not be too dogmatic to the point of obtuseness. Stay flexible - stay nimble and never get MARRIED to a viewpoint. Divorce is usually a costly affair!

More Dollar Weakness - More Strength in Gold

Dollar weakness continues to be the theme this week as it continues to work lower nearing a chart support level near the 80.00-79.50 zone. If it does breach that support, gold should respond higher. If it holds, look for pressure on gold to emerge in the form of profit taking.

There is no definitive trend yet in the Dollar as it continues to work back and forth in a broader range. The ADX reveals the sideways pattern but the bears are currently in control. Whether the support level will hold and bulls will be able to mount a counter-attack remains unclear at this point. Time will tell.

I have noted the 50 day moving average on the chart but quite frankly, in a market that is trendless, moving averages are generally useless. They are notorious for resulting in whipsaw trades during such times.

I did want to note that the gold shares, as evidenced by the HUI remain very strong and continue to lead the metal higher as they outperform it on the way up. They did the exact same thing as the market was headed lower so the relationship is quite intact.

Note that the index powered through the 200 day moving average which is a big deal in technical analysis circles. Also note that the ADX, on the daily chart, is showing a very strong uptrend in place with the bulls currently in control. The index however is now closing in on what should be considered a pretty good level of resistance on the charts. If it can clear that, 260 is the next test, Expect fierce resistance to surface at this level barring a sharp break in the US Dollar.

Incidentally, I do want to comment on something - while gold was moving lower, we here were noting the breakdown on the technical price charts and noting the bearish posture of the market. I lost count of the number of emails I received from the rabid gold bugs who went out of their way to mock or rail against the entire concept of Technical analysis when it comes to gold. Their view was that since the gold market is obviously manipulated all the time ( their view - not mine ) they stated the utterly uselessness of applying these concepts to the market since the "market was clearly manipulated". Now suddenly, LO! - It's a MIRACLE - we see a plethora of technical analysis "experts" in the same camp noting the bullish chart pattern as they breathlessly drool over the 200 day moving averages, this oscillator, that indicator, etc.

I can be kind and chalk this up to a sudden case of enlightenment but my more cynical nature tells me that this is what is a rampant case of hypocrisy on full display. Apparently technical analysis is only valid when it confirms that gold is moving higher!

I will leave the fair and open-minded reader to draw their own conclusions about this but I already have mine. One of these days I might just put up some of the emails I have received from these rabid dogs to show you just how hateful they can be towards those who dare to speak poorly of their yellow metal god.

As I have said before, I have had some dealings with those trapped in religious cults and I can tell you that the attitude of some of these gold bugs has convinced me even more deeply that in some parts of the honest money camp ( of which I consider myself a member) there is indeed a cultic mentality at work. It is quite scary to be honest. The one thing about being involved in a cult is that it clouds your mind and negates reason and sound judgment. It can be very difficult, if not downright impossible for many trapped in such things to ever come to their senses and realize just how deceived and misled they have become.

I honestly do not harbor any ill will towards them - I actually pity them. They have no earthly idea of how foolish they appear to clear thinking individuals.

I said all that to say this - it is one thing to have strong convictions about a market. It is another thing not to recognize the present reality, or perhaps deliberately close your eyes to the obvious. Any trader that wishes to be successful MUST, MUST, MUST avoid falling into this trap. Stay OBJECTIVE! Do not let your emotions control your reason and your mind. Learn to recognize when you are wrong about a particular market and either get out of its way or at the very least, cut back your exposure to it. This is the only way to survive in a business that has changed so dramatically over the years.

Computer algorithms are heartless automatons which do not care one whit about the size of your hard-earned trading dollars. They will rip it away from you faster than you can spit if you are not careful. The old adage " learn to run away and play another day" should be plastered all over the monitors at your trading desk until you get it!

One last look at the HUI weekly chart to get a better sense of the intermediate picture in the mining sector.

Notice that the ADX line is still moving lower, indicating the absence of a discernible trend at this time frame. The +DMI is now above the -DMI revealing that the bulls have control of the market for now. They have not yet managed to start a strong trend but they have halted the downtrend. I would like to see this index close above the resistance zone noted to be more comfortable with the possibility of a trending move. Such a thing, if it occurs on a weekly closing basis should turn the ADX higher but it will still take a push through the next resistance levels noted on the chart to suggest a powerful uptrend is underway.

Look at the big gap on this chart. If the miners manage to make it that far, they will have to have some sort of powerful tailwind to take them through this gap and up through the 300 level.

Here is a chart of the GSCI again. Note how the commodity sector is moving higher as it approaches a level of chart resistance that it has been unable to clear successfully since early October of last year. If the sector is going to come to life and convince more of the bears to go back into hibernation for a while, the index will need to clear this zone on a weekly basis. If it does, silver should stay firm.

Note by the way how silver is doing what we suggested it would do WHEN COMMODITY PRICES start rising. Silver will not perform well, ( I do not care one whit for all the BS about chronic silver shortages parroted by those who have a vested interest in higher metal prices ) during any such time when DEFLATION is in ascendancy. Silver must have an inflationary environment to propel it higher. The weakness in the US Dollar is therefore even more noteworthy than for gold as currency weakness has tended to attract hot money flows into the commodity sector in general. This is the reason that silver is currently outperforming gold. It will do so as long as the deflation fears are taking a back seat to Dollar weakness.

I will try to get something up a bit later detailing the COT stuff. Speculators are on the long side with commercial interests/swap dealers on the short side once again so all is pretty much back to normal. Short covering among the big specs has been the dominant feature of the silver market. Then again, so has it been among many individual commodity futures markets. Bears are getting pushed out across the entire sector. Gold has finally seen more fresh buying than short covering, an encouraging feature for the bulls as this is a bit more enduring in nature ( as long as chart support levels do not give way). More on that later...

Note to Bee Hive Thieves - See Punishment meted out to Horse Thieves in the Old West

http://sacramento.cbslocal.com/2014/02/13/honey-price-increases-lead-to-jump-in-beehive-thefts/

Old Yeller makes it above $1300

It has been a while since we have seen a "13" handle in front of Ol' Yeller, three months to be precise! Gold has managed to stay firm and avoid any strong bout of profit taking. Dips are being eagerly bought and retracements are very shallow. Shorts are grudgingly now giving up the ghost while some new longs are pushing into the path of least resistance. I get the distinct impression from watching the recent price action that this looks a lot like reluctant short covering on the part of some more enduring bears who are getting out, not in a panic but methodically as the market refuses to break down.

So far the combination of short covering ( dominant feature) and new buying has taken the metal through the $1300 level and right smack dab to the 200 day moving average. If the bulls can gore their way through that, I do not see much chart resistance until near the $13215 region. Beyond that lies $1350 - $1360.

The ADX is very strong and rising in a steady fashion indicating the presence of a good uptrend underway. The break above $1275 seems to have kicked this particular indicator into a bullish posture. Positive Directional Movement is strong. The market still looks overbought to me but momentum is with the bulls and until they see some sort of halt or blockade to further upward progress, there is not much in the way of incentive to force them to book any profits at this point.

Downside support remains near $1275 - $1270.

The drivers for gold appear to be what they have been for a while now - falling longer term rates on Treasuries which are contributing to weakness in the US Dollar. The USDX started off this month near 81.40 and has fallen practically every day this month hitting a low near $80.30 as I type these comments.

As long as the Dollar is struggling, the commodity complex as a whole is getting a bid as we are seeing further signs of our former macro trade in which hedge funds/index funds and assorted large traders are buying tangibles on the heels of Dollar weakness.

Emerging market concerns continue to underpin the gold price as well although Goldman had an excellent note out today that I saw running on the wires about fears of a slowdown in jewelry demand from the far East (Indonesia, Vietnam, etc,) if this credit/currency issue were to intensify.

Thus far gold has been serving as a sort of currency refuge but one wonders how price sensitive or not, gold buying from that corner of the world might be impacted were those regional economies to begin experiencing any economic slowdown coming as a result of all this.

The gold shares had a very nice day today as more and more buyers are showing some interest in the sector now that the gold miners look to have finally gotten the message of the market and gotten their respective houses in order. It took the snot getting beaten out of their stock prices to wake up the rather sloppy management that has been plaguing many of these companies. They now appear to be taking a hard look at the expense side of their books.

Not much more to say about this market for now as time constraints are harassing me and truth be told, there is no fresh economic news at this point. Crude oil remaining above $100 ( WTI), soybean prices soaring and more commodities showing signs of having bottomed out, gold is getting a wind at its back as the Goldman Sachs Commodity Index is closing in on its late December high near 642. If this index shows an upside breakout, rest assured gold will be moving up right along side of the overall sector.

If the index hits that resistance zone and retreats, look for profit taking pressure to show up in gold.