"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


Friday, March 21, 2014

Carnage in Biotech Sector Provides Support for Gold

The big news of today in my view is the barrage of selling that engulfed the Biotech sector. It was indiscriminate, hitting the entire sector. The selling in that sector put an end to the feel good stuff that marked yesterday's equity trading.

From what I could tell, what got the ball rolling downhill was some Democrats in Congress who started making noises about Gilead Sciences Hepatitis C drug known as Sovaldi.

That was enough to send investors ( read - hot money ) fleeing in droves out of the entire sector. Biogen Idec, Celgene and others got absolutely mauled as a result.

Take a look at the Ishares Nasdaq Biotech ETF ( IBB). It fell a whopping 4.74% in one day ( sounds like a mining share ). Volume was enormous.

It fell through the 50 day moving average although based on this chart, such moves in the past have tended to be buying opportunities.

The Dollar was a bit weaker today and that helped gold move higher but the big development was back in the Volatility Index or VIX. It leaped sharply higher as the panic selling in the biotech sector triggered a wave of unease across the broader equity markets as the session wore on.

Keep in mind that comparison chart I put up the other day showing the VIX and comparing it to the price of gold.

As the VIX moved higher, so too did gold. Interest rates also moved down a tad today as some safe haven buying was seen in the Treasuries as a result of this biotech event ( the Yen was up once again). What we thus saw today was gold getting a bid as a result of a safe haven play once again.

Whether or not this holds is an unanswered question at this point. From a technical perspective, gold managed to hold above chart support near $1320. At the current moment, gold is stuck in a range between $1340 on the top and $1320 on the bottom. Those two levels hold the key to its IMMEDIATE future. If it powers through $1340 and does not lose that level, it should try again for $1360-$1365 where it should meet up with eager sellers.

If it loses support at $1320, it will be down to $1305 - $1300 for a test.

Copper bounced a bit today as the hammer formation from Wednesday so far has been holding it. Today's COT report shows that the only category of traders that are net long the copper market are the index funds; everywhere else is short, including the Commercials. That is going to be a big level moving forward. If copper falls below that level, I honestly do not see anything on the chart in the way of support for at least another $.10 - $.12 cents. It's chart still looks heavy to me but for now the bulls have managed to hold it together after the metal has plunged nearly $.40 over the last month!

I will get something up later about the Gold COT report. A quick comment I can make at this point before I get the chart together is that this week new buying finally managed to exceed short covering in gold among the hedge fund category. That is encouraging if you are a bull but the problem is that the data DOES NOT COVER what happened in this market beginning on Wednesday, when the Fed came out with its hawkish comments. Gold lost some $40 since then before it managed this biotech-induced bounce today. It would not surprise me to discover that a goodly number of those brand new long positions, many put on above, $1380 are now history as they are deeply underwater at this stage.

A close look at the chart and you can see that gold is currently corralled between the "Initial Support" Zone and the "Secondly Support" Zone. It do not see an opportunity here unless one wants to just roll the dice. Those who are inclined to be bullish, will see the success at holding above $1320 as an opportunity to get long. Those who are inclined to be bearish, will see the inability to clear $1340 as a reason to get short. As for me, I see better opportunities elsewhere until gold can tip its hand. There is nothing wrong with sitting on the sidelines at times and letting others roll the dice because that is what you are essentially doing with gold at this juncture.

It is difficult for me to envision the Dollar breaking down hard as we move foward considering what the FOMC just gave us this week. Barring any further escalations in geopolitical events, that means the driver for gold is going to have to be economic data releases. If interest rates are set to rise as the Fed has stated ( spring 2015) then positive real rates will tend to make for stiff headwinds against gold breaking above $1400. If, on the other hand, the economic data does not improve any with the return of the warmer, more seasonable weather, then the Fed, which is highly data dependent at this point when it comes to make decisions regarding monetary policy, is going to have do modify its hawkish comments from this Wednesday. That should give some support to gold.

I still believe the key to gold is the US Dollar and the key to the US Dollar is interest rate levels here in the US. Higher rates will keep a lid on gold, UNLESS, the market becomes convinced that inflation is moving higher faster than interest rates are moving higher. That seems very unlikely given the benign inflationary environment that the market is convinced now exists. Please bear in mind that I am not giving my own view of inflation - I am giving you the view of the FED and the majority of big players in the financial realm.

What I can tell you is that those of you who love eating red meat ( Bar-B-Q ing is my heritage and pastime) had better get ready for some stunning sticker shock at the meat counter. That is one area where you are going to witness some mind-boggling price increases this spring and summer.

Hopefully we will get a good planting season and a good growing season here in the northern hemisphere next month and produce some very good and large crops. That would go a long way to easing some price pressures at the grocery store but the impact from such an event is still some ways off.

At least the price of electronic goods is staying nice and low. It is going to be interesting to see what happens to crude oil as we move into the warmer weather. Natural gas, after spiking to kingdom come this winter when the now famous Polar Vortex enveloped nearly half the US, has come back down to earth in a rather rude fashion. Anytime we see lower energy costs, it benefits the consumer and business.

I am going to be most interested in seeing if that sell off in the Biotech sector has run its course come next Monday. That will drive money flows next week.