"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


Saturday, March 29, 2014

Weekend Gold Analysis

To begin these comments, let's take a look at the hedge fund positioning in the Comex gold futures through Tuesday of this past week. April gold closed at $1311.40 that day having closed at $1359 a week earlier ( Tuesday, March 18). That is a loss of $48 over the reporting period that the CFTC employs.

In looking at the chart ( a comparison of the hedge fund NET positions against the price of the metal ) you can see what happened. A combination of LONG LIQUIDATION and NEW SHORTING produced a drop of some 18,000 contracts ( futures and options combined ) in the overall net long positioning of the group of traders. The Blue Line is the hedge fund net position while the red line is the gold price.

The result? - Gold moved lower as this group of large traders was selling. Through the end of the week, gold dropped another $17 to settle at $1294 in the April contract, which by the way goes into its delivery period next week.

Here is the Daily or short-term chart.

There are several things to note. First, Bears are back in control of this market on this time frame. Negative Directional Movement is above Positive Directional Movement and the ADX has turned lower and is continuing to move down indicating the break in the uptrend. The recent uptrend that began in January has halted with the market having given up over $100 off its best level of this year.

Second - the "golden cross" which some were touting as sign of a new bull market beginning has been negated as price has fallen below that level of the cross ( the 50 day moving average crossed up and above the 200 day moving average from beneath).

Third - the sloping uptrend line drawn off the late December low has been violated to the downside.

These are all bearish signals.

The one bullish signal on this chart is that the important 50% Fibonacci retracement level of the entire rally from that same December low near $1180 to the recent high near $1392 has thus far held. That level is near $1287. Bulls managed to keep price from penetrating that level for long before it recovered.

On the short term chart, the bears have the clear advantage.

Let's shift to the weekly or intermediate chart. I have included another old, but reliable technical indicator, the Stochastics, because of the nature of the price action on this time frame.

Let's first look at the Directional Movement Indicator. Notice that the ADX line ( the dark line ) continues to move lower indicating a TRENDLESS MARKET. If a market is trendless, that means it is moving sideways. That is exactly what gold has been doing on this time frame. It is essentially meandering back and forth in a very broad range as noted in that green rectangle I have shown. Support down near $1200 and below is intact while resistance near $1400 is also intact. We have what amounts to a $200 range within which gold is working.

What one usually experiences with a market moving within a broad trading range is the perma bulls begin coming out with their "to the moon" price predictions and all manner of wildly bullish scenarios as price works its way up towards the top of the range.

The perma bears on the other hand, begin talking their "price is going to collapse" scenario as the price works it way down towards the bottom of the range.

In other words, the bulls get noisier as price moves higher while the bears get noisier as the price moves lower.

The Directional Movement lines indicate that while the bulls have seized control of the market  ( +DMI (blue line) crossed above the -DMI ( red line), they are in danger of surrendering their mild advantage if they do not quickly assert themselves.

I have also noted the Stochastics indicator because this is designed for trendless markets. Note the area within the rectangle on the price chart and look at the action of the stochastic indicator. It has been moving higher generating buy signals as price has bounced off of support at the bottom of the range and generating sell signals as price has stalled out at the top of the range. It is currently in a sell mode .

Lastly here is the monthly or long term chart.

The Directional Movement Indicator shows that the market is moving sideways as well with no clear trend although bears currently have a slight advantage in that -DMI remains above +DMI. Those lines are converging however so the bears will need to reassert themselves sooner rather than later if they are to retain control on this long term frame.

Also, the MACD indicator, while still in a bearish mode, is working on putting together an upside bullish crossover which would generate a buy signal based on that indicator.

Lastly, the sloping uptrend line drawn in red has thus far held. One can see that the $1280 level is a pivot with price working around it on both sides.

The chart is inconclusive at this point. The long term uptrend is still intact near the 38.2% Fibonacci retracement level although both indicators show bearish forces still in control. Bulls are attempting to wrest control of the market from them but have not as of yet managed to do so. A push through this week's high near $1400 will be required to tip the scales in their favor in my opinion. Before that can occur however, $1300 will have to be captured.

We'll see how the battle goes.


  1. Thanks Dan, great post! What do you make of the "Volcker Rules"? A lot of Gold bugs are coming out and saying that the implementation of the new rules will cause gold to sky rocket given that it will limit 'prop' trading by large banks. It seems they are tying this to the idea that the price of gold can no longer be manipulated lower. But in my mind - it strengthens the influence of private equity and hedge funds - which then strengthens the analysis of your various blog posts on gold. Just wondering about your thoughts. Thanks!

  2. Thanks Dan. You are the Man. Everyone please read David A. Hunter's 2014 Outlook that went out on the March 26 Casey Report. He is calling for possible washout $800 Gold and $13 Silver and Copper and Oil cut in half from here. Totally in-line with what I see coming. You have been warned. GLTA

    1. Bob, you are right on I think. Last sector to completely fall out of bed will be the beans and grains. We all know the Chinese own all the 450 copper and 220 cotton. So much for them having all the answers. sparks, of course

    2. Bob...thanks for the heads-up on that article. Good stuff.

      $800 and $13 sounds low but what the hell do I know?
      My guess would be we bottom around $1050-75 and very low $17's

  3. Great and fully comprehensive analysis, excellent, thanks a lot.
    Being in the middle of this range 1200-1400 now, I guess it's not really easy to take a position on this weekly time unit for now...
    Have a nice weekend,

    "Bulls are attempting to wrest control of the market from them but have not as of yet managed to do so. A push through this week's high near $1400 will be required to tip the scales in their favor in my opinion."

    1. Hubert;

      Thanks yes I see it as a toss up as well.

  4. That was a nice TA overview of the paper gold in the short, medium and long term. However, I think it's worth pointing out that an inverse H&S is setting up basis the weekly chart. The MACD confirms the chart pattern what with the left shoulder being the weakest basis the MACD and the right shoulder-the one forming now, being the strongest. If the pattern plays out it projects to $1600.

    I make this observation as someone who would much prefer to see paper gold print below production cost as that would put most of the miners out of business. And since mining output constitutes the bulk of what passes for the flow in the physical market, a massive collapse in mining output will, in my view, have profound implications for the international monetary and financial system.

    1. this is a very valid point … it is also my reasoning , no doubt about it there is going to be a lot of volatility , and I am pretty sure they are going to take it to 1240 , and try their luck there … there is a lot at stake for the strong hands shorts when it closes up to 1400 , for the strong hand longs on the other hand , if it goes lower , its pretty much business as usual . It is my view that after 2013 , if gold managed to pull a double bottom , then thats it . In the mean time , all the aggressive calls , to either 2000 or 800 , depending on the week , are falling more and more into deaf ears … 2013 helped built a very strong channel 1200 1400 tested twice so far in either direction … how long we will remain stuck in this channel only time will tell .

    2. Archer;

      I do not see any head and shoulders patter on the weekly chart as you see it. I see a double bottom at 1180 and the market in a range trade between that level and 1400.

      I don't think it matters all that much to be honest as to the exact nature of the chart pattern difference between the two of us - the key point is that 1400 would have to be taken out for a big move higher.

      It is currently near the middle of the range so we will have to wait and see what the market does from this point. Gold could meander around in a range for a while essentially marking time for all that we know.

  5. Good stuff Dan, much appreciated.
    I see we have hogs and pigs on tap next. }:^)

  6. A question on COT Dan: Who are these guys classified as SWAP Dealers? Are they made up of banks, hedge funds or whatever? Do you know this part of details? Thanks.

    1. RUI;

      That is a complex group and even to this day there are still some questions as to who should be in that category and who should not. They can be large banks which offer tailor-made, custom contracts for commercial entities looking to manage risk but which do not have a corresponding futures contract to do so on any of the major US exchanges. Those banks will craft the contract with the participant and then find a futures contract that is related to it and take a position in their to offset their risk on the other custom contract.
      Stuff can also be done over the counter and then hedged in the regulated futures market.

      In some cases, the I have seen commodity index funds lumped into this category.

      The SWAPS universe is complex but if I had to try to neatly summarize it I would say mainly big banks and big firms that exist to offer risk management for large commercial entities.

  7. More proof that there is zero inflation (except for crazy temporary spikes in hog prices, just like nat gas did in 2000) and that paper rules.

    Japanese bonds and German bunds still trading near or at 50-year highs with no end in sight.


    Oh well, the guys are all saying "Any Minute Now!!!"


  8. Wonderful analysis Dan - thank you for the detailed look at the short term, intermediate term, and long term charts. Do you typically rely on the daily, weekly, and monthly charts as the reference points for these time frames? I imagine it would be difficult to get a clear picture on hourly charts with these indicators - my best trades have been when I've considered more longer term timeframes as you've noted above.

    Its clear that we are pretty much at the middle of this trading range between 1200 and 1400 right now in gold. If one were trading options, it almost seems that a straddle strategy would be a great play at around the 1300 level using the GLD ETF - simply buy a long dated put and long dated call option and as long as price swings significantly enough either up or down, one would make money.

    Your approach is objective and its greatly appreciated from a trader's point of view, because it allows one to block out all of the white noise by both extreme bulls and extreme bears and recognize what the charts are communicating to us. There are opportunities to make money in either direction.

  9. This comment has been removed by a blog administrator.


Note: Only a member of this blog may post a comment.