"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


Wednesday, January 22, 2014

Range Trade in Gold remains Intact

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.