Bureaucratic Insanity

I could not resist posting this story as an example of the utter stupidity of unaccountable and unelectable meddling bureaucrats who are destroying the country that I grew up in by their sheer mindlessness and preening sense of self-importance. I have long suspected that many bureaucrats and officials who pull these sorts of stunts have deep psychological issues that prevent their minds from functioning in a rational manner.

Woodpecker-Saving Daughter Costs Mom $500, Possible Jail Time

FREDERICKSBURG, Va. (WUSA) -- Eleven-year-old aspiring veterinarian, Skylar Capo, sprang into action the second she learned that a baby woodpecker in her Dad's backyard was about to be eaten by the family cat.
"I've just always loved animals," said Skylar Capo. "I couldn't stand to watch it be eaten.

http://wusa9.com/news/article/161065/158/Woodpecker-Saving-Daughter-Costs-Mom-500

Bank of Korea buys gold for the first time in 13 years

Dow Jones News is reporting this afternoon that the Bank of Korea has confirmed that it purchased 25 metric tons of gold between June and July of this year and now has gold reserves of 39.4 tons of gold as of the end of July.

The move is noteworthy because it confirms a move towards diversifcation by a large Asian Central Bank away from the Dollar.

While Korea is certainly not among the largest holders of gold in the world, (it ranks 45th in gold holdings according to the World Gold Council data), it indicates another Central Bank's desire to acquire additional gold. So much for the yellow metal being viewed as a "barbarous relic".

Weekly Gold Chart - longer term view

Excuse me for the lack of posts this week thus far but Trader Dan has been staying quite busy of late and has not been able to keep all the plates spinning simultaneously so the posting plate has had to be let down lest the other plates succumb to gravity.

Gold is acting in textbook fashion according to the technical signals thus far. Once it took out the overhead resistance level that the bullion banks were attempting to enforce at the $1610 level, the weaker shorts who were piggybacking the large bears had to beat a hasty retreat and cover. Their buying triggered some of the system trades to send in additional buy orders with the result that prices shot directly to the first resistance level near $1625 before setting back a tad.

I should note that in today's session (Tuesday), gold dipped back down towards $1610 but found more buying and not liquidation related selling. That seem to catch a lot of traders by surprise with the result that the opportunistic shorts were once again forced to retreat under a withering barrage of buy orders.

This market continues to astound skeptics as it as of yet shows no sign of weakening interest on the buy side. Coming on a day in which option sellers were desperate to keep their cash gravy train from sinking in the river crossing, makes the performance even more the sweeter. Those option writers have skinned so many longs in years past that it is nice to see them get their comeuppance, even if it is only for one day's option expiration.

I have put up a weekly chart of gold to attempt to show you the channel in which gold is rising, a channel which has very neatly defined both its upper reaches and its downside forays for the better part of 2 1/2 years now. Note carefully that since March of this year, the downside moves have not made it as low as the bottom of the channel. Instead, buyers have come in rather quickly and kept price from testing the lower limits of the channel. This is evidence that the bulls have been in control of this market since that time frame.

Looking back we know the reason for this from a fundamental standpoint as sovereign debt woes began to intensify out of Euro land, inflation reared its ugly head across China and other emerging economic powerhouses in that region and elsewhere and the Federal Reserve telegraphed that the US economy was so weak that monetary policy was going to stay extremely accommodative for the foreseeable future.

What now appears to be happening is that traders and investors are watching the US' deteriorating fiscal condition and have added that into the mix. Simply put, most want no part of the US Dollar which is paying next to nothing as far as yield goes and is threatening a technical washout to the downside as it inches ever closer to a major chart support level.

The buyers have now taken gold to the top of the innermost channel noted on the price chart. This week that top of the wider channel comes in near $1665 - $1675. There is psychological resistance near the $1650 level, as these increments of $50 are always significant for gold not from a chart level but just from the fact that so many traders look at these round numbers when gauging price performance.

If gold plows through the upper channel anytime within the next few weeks time, it should begin to accelerate at a steeper rate. It will then form another price channel albeit this one will be at a much steeper slope. One thing I would like to point out is that the price channel currently noted on the chart is one that is very modest and orderly; only since March of this year has the rise of gold began to steepen somewhat but even at that, it is a far cry from going vertical. Once gold does go vertical (and it will at some point) then the gains will be remarkable. At that time I expect the long suffering holders of many of the quality mining shares that have been lagging to finally see the rewards of their patience.

From a chart support level, we could conceivably fall as low as $1525 and stay within the steeper channel being formed on the chart but unless we see some rather remarkable turnarounds in the above three factors that have been driving gold of late, I would be very surprised to see the metal move to that level. If it did, one would suspect eager buyers would be quite active, particularly if such an occurrence were to develop during the latter part of the third quarter, since gold will be entering its strongest time of the year from a seasonal perspective.

I would like to make a comment in regards to my good friend Jim Sinclair who caught a fair amount of grief from naysayers and other assorted trolls earlier this year when his gutsy call of $1650 gold did not materialize in January, a call which he made well in advance of 2011. Now that gold is sitting up closer to $1625, a larger number of pundits are now talking about $1650 as a minor stop along the path to considerably higher prices. Nice going Jim - you were a tad early but a prediction that far out ahead of time is still pretty damned good as far as this trader is concerned.

Believe it or not, sometimes a trader or a holder of a particular stock can be absolutely right in their expectations if they have carefully done their homework and have a wealth of experience to back up their conclusions. The problem is that until the rest of the pack actually catches up with you and sees the actual things that you see now, the stock or commodity does not go anywhere. It takes the rest of the herd to come in and reach the conclusion that you have already arrived at to make your investment choice a prosperous one. Their buying then takes the market to new highs or to levels that your analysis suggests it might very well go.

The flip side to this is that you may have found an undiscovered gem out there for an investment but until the rest of the public thinks the same way about that stock or commodity as you do, it ain't going to go anywhere. Remember that the next time you decide to drop your live's savings on some obscure stock. 

Let's see how gold closes out this week to decipher where the market is telling us that this thing might want to head next.

 The Dollar is looking pitiful right now.

Trader Dan on King World News Weekly Metals Wrap

Please click on the following link to listen in to my regular weekly interview with Eric King on the KWN Weekly Metals Wrap.

http://tinyurl.com/3papyj6

I want to make a brief clarification of a comment I made in regards to "limits" on the Commitment of Traders report that might be misconstrued. When I said that there are no limits in regards to "how many specs can come into a market", I did not mean to imply that there are NO POSITION LIMITS in the precious metals. There are of course position limits that apply to speculators. What I want to emphasize is that there are indeed no limits as to how many specs can decide to come into the gold market. The exchanges in conjunction with the CFTC do not publish a rule stating something to the effect, "Oh, we see that there are now 75,000 different speculative accounts on the long side in gold. That's it - shut the barn door and don't let anyone else in".

This is the reason that we cannot look at a build in open interest and dogmatically state that the market will now top out because the speculative net long position has reached such and such levels. All bull markets are marked by INCREASING open interest and along with that, an increase in the number of specs on the long side of that market. The reason is very simple - it takes financial firepower to drive a market higher and that requires a steady steam of buying. Absent this buying, the force of gravity takes over and markets fall lower.

Another way of saying this is that in order to keep markets levitated, thrust or force must be continuously applied. Absent this force, the path of least resistance is downward as gravity takes over. Speculative buying is the force that therefore drives a market higher. The higher a market runs then, the more speculative buying that accompanies that move higher. A bull market that makes new all time highs, should see the size of the speculative long category making new all time highs as well. This is normal and healthy. Whenever you see a market moving higher and the speculative long side exposure DECREASING, beware; the move higher is being driven not by new buying but by trapped shorts who are BUYING back existing short positions or short covering. Once they are done getting out, the market will then collapse because there are no NEW SPECULATIVE BUYERS around to keep applying upward force against gravity.

The thing we do watch with the COT report however is the size of large spec long side levels, AND whether or not the market continues to move higher or whether it stalls out and then drops through a technically significant support level on the price charts. If that occurs, the nature of the markets is that the computer algorithms will generate sell orders among the spec long holders. That is what the bears are always counting on - a rash of sell orders coming from sell stops located below the market which then feed a frenzy of additional selling as the computers take over. The larger the build in the speculative long side exposure, the more POTENTIAL there can be for a sharp move lower as their long positions are flushed out.

Incidentally, the Asians love these spec flushes as they pounce on the markets at lower levels to accumulate more at a better price.

The key for the gold market is whether or not it can continue to attract fresh buying from both existing long holders are who below the position limit threshold and from those who are just coming into the gold market having no previous long positions. As long as you get fresh money inflows, the market can move higher, regardless of the current size of the speculative net long position.

Another leaked news story suggesting a deal on the debt ceiling

Here we go again! Tuesday it was comments from the President that some progress was being made on the debt ceiling negotiations that derailed gold and sent the US equity markets in a tizzy to the upside. Yesterday, that was walked back as things were once again at an impasse. Today another story hits the newswires that a deal is in the works again. Down goes gold; up go the equity markets and down goes the Dollar.

Only in America in the age of hedge fund computer algorithms could we get an upside reaction in stocks and a downside reaction in gold on news that the US could get the greenlight to plunge itself ever deeper into a morass of indebtedness as its financial condition further deteriorates and works closer to looking more and more like that of a banana republic.

Apparently in this brave new age of unlimited indebtedness, safe havens are only needed when it appears as if a country might actually attempt to hold the line on its spending problems and work towards balancing its budget like the rest of us ignorant clods who still attempt to run our family budgets in a responsible manner. Excuse me for not becoming part of the cheerleading crowd who equate more indebtedness with a good thing.

"The borrower becomes the lender's slave" was written by someone far wiser than the current group of debt-addicted politicians who are sending this nation down the roads towards financial oblivion.''

Either way, gold, after staging a titanic struggle revolving around the $1600 level, was knocked lower once that news story broke which gave the day's victory to the bears who managed to keep the metal from holding firm above $1600. Solid Asian-based buying last evening had pushed it further to the upside from yesterday's pit session close in New York and set the stage for the push above $1600 so we will have to see if those buyers come back in this evening. It does appear that as I write this commentary, buyers have appeared in the $1580's again.

More to come later if time permits...

The Dollar has gotten trashed today as it broke below 75 and then continued to plummet right through a critical support level at 74.50 without even a pause. It's weakness is providing even more volatility to an already volatile trading session as the algorithms generate buying across the commodity complex when the Dollar is weaker and risk trades are back on. That is what has pushed crude oil back to the $100 level again for WTI. However, several of the commodity markets are currently experiencing some bearish fundamental factors which is setting up some wild price swings across the sector in general as some of the algos buy while commercial accounts are providing the selling.

Remember that insanely weird 1 1/2 point rally in the long bond that I commented upon the other day? It never happened! Yep, bonds have erased the totality of those gains and have dropped as low as a full point in today's session. I am of the opinion that the best thing traders can do in these volatile market conditions is to sleep in late and upon waking, indulge heavily in video games. If you miss a couple of trading sessions, not to worry, as prices will eventually go right back to where they were before you took your extended nap. Madness, insanity and idiocy are too mild of a choice of words to describe what our financial markets are being reduced to by these damn computer algorithms.

Sellers dig in yesterday - Buyers dig in today

Quite a battle royale is being waged at the current time in the gold market. The bullion banks are digging in at and above the $1600 level while buyers are digging in just above the $1580 level where a new support level is emerging. The victory will be to whichever side refuses to blink. Open interest readings are at relatively high levels so the stakes are serious.

Yesterday we had a bearish outside reversal pattern form on the short term charts that I employ; today we had a bullish thrusting pattern on that same chart. Bulls regained the broken short term support level near $1595 that had failed yesterday but did not manage to recapture the $1600 level for any significant length of time. They will need to clear and HOLD that level to set up a challenge of the bullion bank capping level at $1610.

The new support level formed just above the $1580. This level now takes on a new significance and will need to hold on any subsequent retreat in price to prevent any further long liquidation on the part of the shorter term oriented traders.

For the time being, the bears still retain a slight advantage because of the inability of the bulls to hold $1600. Based on what I can see of the open interest readings, a fairly large contingent of brand new short sellers has formed. Some of them will be squeezed out if $1610 gives way as they are counting on that bearish outside reversal pattern to hold.

There are still plenty of cross currents at work in these markets which has kept just enough uncertainty in the minds of traders to keep most on pins and needles and ready to react very quickly to sudden changes in price. I might add what I said yesterday, the modus operandi is to react first and think later. We saw some of that in the long bond today. Yesterday I marvelled at the apparent "counterintuitive" 1 1/2 point rally based merely on a statement from the President that some progress was being made in the US debt limit negotiations. Traders today did have time to think about this overnight and took back a full point from the best levels of yesterday. Bonds are back to a holding pattern now as traders gauge the next direction for interest rates but most seem to agree with my assessment from yesterday that the sharp move higher was unwarranted.

There are a couple of things worth mentioning on the currency front today. The first is that the US Dollar has ONCE AGAIN fallen back below its 50 day moving average after failing to advance much past the 76 level on the USDX chart. That makes a total of SIX reversals across this significant moving average since May. Clearly, the trend following trading systems are getting whipsawed to death in there. If the Dollar cannot bounce from 75, then it will once again head back down towards 74.50 to retest that level where we will watch to see whether or not it can reverse to the upside.

The other currency worth mentioning is the Japanese Yen. During this period of risk aversion trades and moves towards safe havens, the Yen has been the recipient of rather strong inflows. These inflows have pushed it to levels where the BOJ began voicing concerns about "excessive currency movements not warranted by fundamentals" some months back. We need to watch the yen closely to see if we are going to get another round of Japanese monetary officials appearing at microphones.

There seems to be a type of linkage occuring between gold and the yen recently in much the same fashion that the link between gold and the euro was the norm a few years ago. You remember that link - the euro would move sharply higher and gold would follow it up. It was the anti-Dollar trade. Back then we were watching the Euro-Yen cross as it was the barometer of risk. When it moved up, gold and most other commodities moved up as well. When it moved lower, so too did gold, generally speaking. What we were then monitoring was the Yen carry trade.

Now we are apparently witnessing a move where traders/investors are spurning European debt in general and are having reservations about the Dollar as can be ascertained from its inability to mount a sustained upside breakout of its range trade. They are viewing the Yen as a type of safe haven, no matter the fact that Japan as a percentage of GDP, has amassed a total government debt level near 200%. That makes the US look downright frugal by comparison. Either way, for now the Yen and the Swiss Franc are the safe haven currencies. What this means to us as traders is that on days during which the Yen and Swiss Franc are higher, we should expect to see either higher gold prices or at least, some decent buying on any downdrafts in price. This correlation is not 100% but it is at least close enough that it merits mentioning. Keep in mind that in these volatile markets, this linkage can break down but for now, it is definitely there.

Silver has made a very sharp recovery off of its worst levels of the session and done that in very impressive fashion. It found support just above the $38 level, which is where it should have if it was going to bounce. The fact that it has now climbed back to the $40 level is quite noteworthy as it indicates that the new short sellers that had climbed aboard the bear wagon got way-laid. If the bulls can keep the price ABOVE $40 for the next few hours, they have a very good shot at taking it back up towards $41, where a breach of that level will send this market to $42 very quickly. Right now as I write this, I can see the sellers attempting to hold the line at that $40 level.

I wish to repeat something here that I have said on my radio interviews at King World News and my written comments - the fact that both of these metals are acting so strongly during the period which we seasoned traders refer to as "the summer doldrums" is a testament to the elevated level of fear, uncertainty, confusion and distrust of the monetary authorities in the minds of traders globally. These seasonal patterns have evolved over many years of trading as there is a reason for these cycles. As such, any trader who ignores them or dismisses them as unimportant is expressing profound ignorance and a type of rash recklessness which marks so many neophytes to this business. They tend to be Johnnie One Notes, who are either wildly bullish all the time or wildly bearish and who have not learned yet to read the rhythm of the markets. Sadly we live in an age where any individual with a keyboard and a penchant for striking keys with their fingers is at once considered some sort of divine oracle on the markets.

Professional traders note whenever seasonal patterns are not holding because it is a clue that something is afoot. We seem to be witnessing this right now  based on what I am currently seeing in the price action of the metals. If this is indeed the case, both the gold and silver markets are telegraphing that the normal seasonal pattern of 4th quarter strength, may very well be quite dramatic this year. Stay tuned on this one folks! 

Gold stymied as sellers dig in

There are some very strange happenings in today's trading session with some very contradictory (or to use a favorite expression, 'counterintuitive') price movements in some of the major markets.

Let's start first with the bond market which for some bizarre reason ran up over a full point on the long end supposedly on the (news??) that was made when Obama said an agreement on the debt ceiling looked a bit better. The equity markets went beserk to the upside on the same news while gold and silver were trashed as the need for a safe haven supposedly was decreased but then why would the long bond soar to the upside if traders were throwing away safe haven trades and putting the risk trades back on? In other words, if the intensity to own gold as a safe haven against all of the ungoing turmoil and uncertainty was lessening for today, why would traders trip and drool all over themselves to lap up ever single long bond that they could get their hands on and drive long term rates even lower at the same time the entire commodity complex as indicated by the CCI was marching higher and equities were completely erasing yesterday's losses and then some for added good measure?

The article on gold in the Times worked its usual magic as the bullion banks seized on the news story about a debt ceiling agreement to eat through all of the bids coming into the gold market. That had the effect of stymiing the move higher in gold and induced the short term oriented day traders to ditch their longs once it was evident that the selling cap above the market was not going to give way as it had previously done. Other longs seeing the selling pressure began to dominate then bailed out and down the metal went.

This is the type of action I had expected PRIOR to taking out the $1600 level but not after the fact. Certainly I would not expect to see safe haven gold get knocked back while simultaneously witnessing some sort of inexplicable short squeeze in the ten year note and the long bond. One would have expected to see them going in the same general direction if any safe haven trade was coming off. There was some nervousness in the bond market about a potential downgrade to the US credit rating which would have had negative implications for that market but to see them tack on such a ridiculous gain on ideas that the debt ceiling was going to be extended is the perfect example of what has happened to our once halfway rational markets.

Let me see if I have gotten the message from the markets today correct - here it is:
Since we are now convinced that the US is going to extend the debt ceiling, plunging it further into debt, we can safely buy US Treasuries as our choice of a safe haven while we also simultaneously reject the safety of gold and opt for the safety of US promises to pay. But then again, we really do not need any safe haven the more we think about it so let's bid the price of nearly every commodity out there higher today, including crude oil and gasoline and reload the boat on equities.

I remember the old TV commercial from some years back where they used to show an egg with the words, "THIS IS YOUR BRAIN";  only to then switch to a picture of the egg after frying it up in the pan with these words, "THIS IS YOUR BRAIN ON DRUGS".  I think the hedge fund community collective brain must be heavy drug users since try as I can I do not see how some supposed agreement on the debt ceiling justifies a nearly one and one half point rally in the long bond.

The price action of so many of these markets seems so bizarre today that I am going to have to wait and see the price action tomorrow in order to see if some of these knee-jerk traders have  second thoughts about their panicked buying and selling today. Maybe we will note some regrets. If not, then there is some kind of shift in sentiment that I am currently at a loss to explain and will only be able to understand what that might be after a day or so of further developments.

One thing is for certain however - if the US long bond is going to embark on a strong rally based on some need for a safe haven from the mess in Euroland, then gold is not going to stay down very long as it will find very eager buyers on this setback in price. Either the safe havens will be moving higher together or they will both be moving lower together but we are not going to have a situation where we have one going one way and the other going in the opposite direction for very long. Just ain't gonna happen.

Back to gold however - we are seeing a battle being waged to hold the metal down below $1600, nearly exactly was what happened the first time it ran to $1500. This is normal. The short term chart indicates the reversal pattern that was forced by bullion bank selling leading to the liquidation from some of the weaker longs and the day trading crowd that had enough momentum behind it to take out some light support near the $1595 level. Price then dropped down towards $1580 where buyers surfaced.

We now want to see how it performs in Asia, particularly if it results in some drying up of the scrap sales that JBGJ reports from India. There should be very good technical support near the former all time high at $1578 or so if the market is going to find a floor. To kick off the next leg higher gold will now need to get back through $1600 for starters but also $1610, it's new all time high in Dollar terms.

Gold clears $1600 in convincing fashion

A further deterioration in the sovereign debt woes involving the Euro zone coupled with an increasing loss of confidence in the monetary authorities of the West led to a strong opening in Asian trade last evening as gold came in well bid from the get go.

The buying picked up steam as it moved into very early European trading and continued to be firm as the action shifted into New York. One could see the attempt to cap the rally at $1600 by the bullion banks who no doubt had recruited some of the pit locals to their side but shortly after the close of lunch hour there in New York a burst of buying came in that startled the shorts for its intensity and drove them back decisively from the $1600 level.

The market pushed as high as $1608 ($1607.90) to be exact and has stayed strong going into the afternoon hours. This is no mean feat as one would normally expect a sizeable amount of profit taking from longs to come in at a round number like $1600, particularly after a rally of over $120 in the last two weeks time. I think the shorts were expecting that to occur also based on the attempt they were making to hold it below $1600. The idea is that they could induce a bout of long liquidation beginning with the short term oriented day traders who would be inclined to sell seeing the market stall at $1600. Instead of that occuring, some powerful long or group of longs came in and snatched up the offers to sell on the dip back below $1600 and then never let it go the rest of the session. If that group sticks around and pulls a repeat of today's showing, this thing will go to $1650 faster than some of us are already imagining.

Since we are basically in uncharted territory (unless we use an inflation adjusted chart to mark resistance levels) I am attempting some price projections levels to try to get an idea of where the technical chart resistance might appear. I am using the weekly chart to do so.

If you look at the chart below, one can see the solid red line that is the upper prong of the pitchfork which should provide some levels against which selling should enter. Above that is the center line of a longer based pitchfork (blue) which as you can see is well above $1700 and for the next few weeks out sets up a run towards $1720-$1750 should $1650 give way.

One thing I have also noticed about this chart is that while it shows the powerful uptrend that gold has been in since early 2009, the angle of ascent, even after the past two weeks strong showing, is still not all that steep. In other words, gold has not yet gone parabolic but is rising in a strong, yet relatively tempered fashion. For all the buying that has been and is presently occuring, there is not yet evidence of any PANIC. What there is evidence of is increasing fear and concern but not PANIC. It is that emotion which produces nearly vertical moves up.

Downside technical chart support remains near the previous all time high made earlier this year close to $1580 followed by stronger support near $1550. As said previously, the close above $1600 targets $1650 but as I honestly do not see much in the way of any sizeable technical resistance until then. There might be some selling at the $1625 level but that would be more psychological rather than technical in nature.

By the way, gold notched a print above the 1,000 British Pound level today as well as scoring another all time record high when priced in Euro terms. Clearly, it is trading as a currency as that makes three record highs now in three various major currency terms all in the same day.