Gold - 4 Hour chart update

Continuous Commodity Index grinding higher but overall trend lower

Employment Data undercuts US Dollar

This morning's abysmal US payrolls data caps off a 'weak' in which economic data releases confirmed that the US economy is headed for a "double dip". A pitiful 54,000 jobs were supposedly created in the month of May with the unemployment rate moving up to 9.1%.

While we market watchers and traders have come to expect news like this to drive off the risk trades and send safe haven flows into the US Dollar, no such thing happened. I mentioned earlier this week that the Dollar's tepid response to the weak ADP numbers was interesting and beared watching. Looking back that was now a harbinger of things to come.

What has apparently happened is that the US economic data has become so rotten, that traders are not moving money into the US Dollar even on news that otherwise would have driven safe haven flows in its direction. The reason is simple - market players are now convinced that the string of consecutive poor news is leaving the hawks at the Fed with no arguments for their case and has brought the doves there into the ascendancy. In other words, interest rates in the US are going to be forced to stay at ultra low levels for a long time to come and while QE2 is coming to an end this month, further monetary accomodation is coming forthwith. At least that is what the market is attempting to signal to the Fed as to its wishes.

The news initially caused a sell off in stocks taking the S&P futures below important chart support near the 1300 level. It has since recovered and moved above it as I write this but as to how it is going to fare the rest of the day is unclear. A close below this level and the stock market chart gets even uglier. A stock market that enters a bearish downtrend is going to be at the forefront of the minds of the FOMC as they consider their next move on the monetary front.


BAck to the Dollar however. It is now trading well below the 50 day moving average and has fallen back below all of the major shorter term moving averages as well. The 10 dma has made a bearish downside crossover of the 20 dma and both look to be getting ready for a bearish downside crossover of the 50 dma. In short, the technicals have completely soured for the greenback and it is once again flirting with the 74 level on its daily chart. A breach of this level that sees the Dollar close underneath it and it is going back down to 73, a level which is extremely, and I do mean, 'extremely' critical from a technical support level.

Meanwhile the combined weakness in the Dollar along with true safe haven flows into gold, is pushing the metal back up and away from its chart support near $1530. If it can claw back towards $1550 and push through that level, it is going to make a run towards $1575 very quickly. The key will be the $1550 level.

Gold - 4 Hour chart update and comments

Gold has met the initial upside target of $1,550 based on the breakout above $1,530. It is displaying this strength in the face of widespread commodity selling by the hedgies as they run from risk once again and unload long positions cross the entirety of the complex. Only the markets with the strongest fundamentals have been able to shrug off this huge algorithm-generated selling.

I am now looking for a solid close in gold ABOVE the $1,550 level to signal a run back towards the recent all time high near $1575. If gold fails to extend its gains above $1,550 it will set back some and dip towards $1,530 where it should encounter some decent sized buying, particularly if strength in both Euro-gold and British Pound-gold continues.

Risk trades are being yanked off in droves today but in spite of that, the Dollar, while higher, is not getting that much of a bid. That is most interesting and bears watching. This is the 4th consecutive close by the Dollar below the 50 day moving average, not particularly inspiring if you are a Dollar bull. A failure by the Dollar to extend its gains will be positive for the metals, gold in particular, which is trading as a hard currency against the paper currencies right now.

The ADP number has taken the wind out of the equity bulls' sails and has left the chart of the S&P looking quite ugly and very disconcerting for any future prospects regarding the US economy overall. It had managed to claw its way back above the 50 day moving average but completely broke down in today's session. It looks heavy and feels like it wants to go back down and retest 1300. If it fails there, it is going to get ugly in equityville.

The long bond bubble is beginning to form once again and it will take another round of QE to pop it. While the Fed loves the low interest rate environment being created by this mad rush into low yielding bonds, they do not love the ACCOMPANYING market behavior of the equities and many of the commodity markets because that is signaling deflation. What the Fed wants, and is NOT GOING TO GET, is a low interest rate environment accompanied by RISING stock prices and gradually rising commodity prices. They will not get that either. If they push in another round of stimulus, they are going to get a collapse in bond prices alongside a surge in equities and commodities. If they fail to stimulate, they are going to get their dreaded deflation bubble in bonds.

Markets are on their hands and knees begging for more QE

Take a look at the following two charts. These tell you all you need to know about the market's view towards Federal Reserve policy. As you know by now, the Fed is supposedly going to end QE2 at the end of this month. Ever since that announcement, coupled with continued disappointingly weak economic data, the yield on the Ten Year has fallen and the US equity markets have swooned.

There are TWO, not ONE, Achille's heals in this so-called economic recovery theme that had been making the rounds earlier in this year. The first is the lack of job growth; the second is the horrific numbers that keep coming out of the housing market.

I suspect that if the yield on the Ten Year keeps plummeting along with the equity markets, we are going to hear more and more talk about QE3.

Keep in mind that this Bernanke-led Fed fears DEFLATION more than anything. In the past Bernanke has deliberately led the markets to expect inflation based on the QE programs. They wanted that mindset to kill any talk of deflation. It did seem to work until the hedge funds, which do the bidding of their masters at the FEd, got too carried away and trained their guns on the energy markets and started to bid up the price of gasoline. That was a big, "No-No". Out came the Hawks at the Fed talking up the ending of QE2 and the need to raise rates at some point and down went the entire commodity complex along with gasoline prices.

However, the bond market is now signaling deflation once again and when that is coupled with stagnant wages, no job growth, a moribond housing market and overall economic weakness, the word dreaded most by Central Bankers, the "D" word, deflation, is now surfacing once again.

If this continues we are going to see QE3 sooner rather than later.

Monthly Gold Charts - May 2011

Trader Dan on King World News Weekly Metals Wrap

Eric King over at King World News and I discuss the metals market along with the Dollar and the mining shares on the Weekly Metals Wrap.

You can listen to the interview by clicking here:

http://tinyurl.com/3bfgrth

Also, I am not sure why the Followers are missing on my blog. I have noticed that several other blogs appear to be having a similiar problem. Apparently something is wrong with the Google Blogger software. Hopefully they will get it fixed soon.

Please do not think that I yanked down all the followers! I appreciate all of you.

Gold Comments

First, let me take the time to express my sincere and heartfelt gratitude for so many kind comments from so many of you. It is difficult to express how such words of encouragement can impact a weary warrior.

Secondly, I am okay health wise so no need for concern there but am just weary with the day to day battle against the hedge funds and their computer algorithms and subsequent volatility. Trading is an invigorating occupation as it engages the full powers of the mind but it can also wear one down as the extent of price swings makes it difficult at times to gauge what is actually occuring. With 24 hour round the clock markets, getting sleep is sometimes the trader's toughest trading decision!

These markets are nothing like the ones I cut my teeth on when I first began my trading career more than 2 decades ago. Back then, we had volatility, but it was the exception not the norm most of the time. The markets were what I call, "well behaved" back then. Then again, I also vaguely seem to remember being able to buy a fully loaded Camaro Z28 for $3,500 back in 1970 or so!  I was too young to be driving back then anyway. Disclaimer ( I did buy a used one however some years later - it was a 1971 with that LT1, 350 engine - I lost count of how many speeding tickets I got on account of that car - if that thing had come equipped with a set of wings, it would have gone airborne - those of you who know the Beach Boys "Little Deuce Coup" - will know what I mean).

I said all this to let you know that I still plan on posting, but I am backing off the number of posts in order to recharge and refresh a bit. Trying to write and trade and track markets at the same time takes a toll.

With that in mind, here is my latest... by the way, Eric King and I will be doing the regular Weekly Metals Wrap together over at King World News so tune in for that when it gets posted.

Please note several aspects about the gold chart.

Fist of all, from a trend following perspective, it is trading above all the major moving averages once again. That tells us that the chart is bullish. Secondly, the 10 day moving average (blue line), which had been moving down until last Friday, has now turned up and is trending higher. It is also getting ready to make a bullish upside crossover of the 20 day moving average (red line). That will be bullish as well.

Also note that the market held above the 40 day moving average (dotted line) even on its setback in price, failing to close BELOW that level once. That means that the trend following funds were still active and were buying the dip or retracement  in price.

The MACD, a good trend following indicator, is bullish.

Based on what I can see here, gold looks as if it wants to make a try at $1550, one of those even numbered levels that takes on a technical significance as price approaches it. It is important to note that this is occurring late in May, a time frame during which gold tends to show seasonal weakness. This seasonal weakness however can be attributed to factors, which while important, are not what are driving gold at this time. The festival seasons from Asia and India are over and the strong jewelry related demand is therefore missing. However, gold is not deriving the bulk of its strength from that source but rather from currency related matters.

By currency related matters I mean investor concerns over the stability of paper currencies due to the tremendous amount of debt being run up by so many nations. European sovereign debt woes remain a strong source of gold related buying, especially from investors on the Continent. This is reflected in the very strong gold price in terms of the Euro and of the British Pound. As you know, Euro priced gold set a new record high this week.

Here in the US, our total federal debt level is at 100% of GDP. We are looking at entitlement programs which will be bankrupt within less than a decade on the current trajectory. Many states are in precarious financial condition which large numbers of municipalities and counties facing their own set of problems. Much of this is tied to the collapse in real estate values and thus affects valuations which are a source of property tax revenues. News on the housing market continues to reflect a sector that is mired in a supply glut at a time when demand is feeble. That is not a recipe for improving valuations anytime in the immediate future.

Ever since Fed governor Bullard let the cat out of the bag and basically told the market that the Fed would not be withdrawing accommodative monetary policy until at least July 2012, the Dollar has been moving steadily lower. That keeps REAL INTEREST rate yields negative and has strengthened the conviction in many traders’ minds that such an environment is going to be the norm for at least another year. Gold LOVES those kinds of conditions and thus has moved steadily higher ever since Bullard’s comments.

While it may dip in price moving forward, as long as this negative real interest rate environment is present, it is going to attract strong buying on such occasions, particularly if Euro-priced and British Pound-priced gold continue their impressive chart action.

Also, an additional kicker for gold is that the CCI, the Continuous Commodity Index, is now trading above 650 as it puts a bit of distance between itself and that critical technical chart level of 640. The commodity markets are signaling that prices had fallen far enough and that this fall had been sufficient to scare the Fed out of any further hawkish talk. I would be surprised to see much in the way of comments coming out from the usual hawks on the FOMC. As long as these economic data numbers that we keep getting are coming out on the low side of expectations and disappointing investors, the doves at the FOMC are going to be getting the airtime.

Note that the Dollar has broken down through the 50 day moving average at this hour and is also down below support near 75.20. A week close today does not bode well for next week.