Extreme Volatility in Gold as market digests rumors and risk aversion trades

Very early this morning, gold shot up to another all time record high above the technically significant resistance level near $1680 as sovereign debt fears coming out of the Euro Zone intensified with the worsening news. It did not take long however as trading moved further into the New York session for gold to drop sharply lower as the US equity markets began imploding. The Dollar soared over 100 points, the Euro fell out of bed and the crude oil market was shellacked as investor after investor all began heading to the sidelines and running out of nearly everything out there except for US Treasuries.

Further intensifying the fear trade was news that a large bank (Bank of New Yokr Mellon) was actually charging customers a fee for putting cash INTO their bank!  If that was not revealing, nothing was. It showed how nervous investors are becoming and how desperate they are to find a safe haven to park their wealth. THis news helped to further feed into the buying frenzy in the Treasury markets as investors basically shrugged their shoulders as if saying, "What the heck, if they are going to charge me a fee to put money in their bank, I might as well just buy Treasuries instead".

It occurs to me that the overnight intervention by the Japanese monetary authorities was extremely bullish for gold as it was further evidence of the currency debasement policy proliferation that we have been witnessing. We have seen the Swiss also playing that game along with the Brazilians  which is the reason that gold has been going on to make one record high after another across a variety of major currency terms. However, all of this was outweighed by the sheer volume of money flows out of the markets in general. Many are attempting to come up with a new strategy to deal with the rapidly changing economic paradigm and prefer to just get out of their trades while they weigh their options. Others are just selling in order to raise cash to meet a plethora of margin calls. There will be more than a few utterly exhausted margin clerks before the closing bells ring on the various markets.

The Euro in particular and the commodity currencies in general were all whalloped today as traders are now coming around to the view that the next move by the ECB in regards to interest rates will be LOWER and not higher. That has led to a general theme of Euro selling along with Dollar buying. All of this mess really started in Europe which it now appears is dealing with its own version of Lehman Brothers and the liquidity crisis that erupted when that institution failed back in the summer of 2008. Their problem is related to their big banks however in the sense of the exposure that these entities have to the sovereign bonds of some of the major countries comprising the Euro Zone. Credit lock ups are what the real fear is.

The commodity currencies were crashed along with the CRB and the CCI (more on those indices later).

One of the few bright spots I can see as far as the consumer goes is that UNLEADED GASOLINE crashed through its recent low today which should eventually provide some relief at least at the gas pump for beleagured consumers. A nice $0.40 drop in the wholesale price will perhaps free up a bit of the little disposable income that consumers have left in their wallets.

There have been a large number of references back to the summer of 2008 today as the deflation trade dominated the markets at that time. This is being reflected in the mining shares once again which are absolutely horrendous today as the HUI is currently down over 5% as I write this while the XAU is down over 6%. Both have violated their 50 day moving averages and are back under their 100 day moving averages as well.  There is some support on the price chart of the HUI near the 520 level and 190 on the XAU. Whether or not those hold is unclear at the given moment especially if this fear trade were to intensify further. An awful lot of traders have already thrown in the towel today based on the massive move lower across so many markets so perhaps the bulk of the selling is over. I am simply not sure but what I find rather remarkable is how quickly the "Buy the Dip" mentality in the broader equity markets completely evaporated today. All that happened in the mining sector is that the gold shares became even more undervalued compared to gold than they were before the day started. We will keep watching to see at what level enough value based buyers emerge in the shares to outweigh the hedge fund algorithm related selling that continues in association with that ratio spread trade of theirs.

The S&P 500 has smashed through downside support moving below psychological round number support at 1200. If you look at the weekly chart, you can also see that it is negative for the year and is sitting on the 25% Fibonacci Retracement Level for the rally from the early 2009 low to its recent top.  It will need to recapture 1200 quickly to stem the bleeding somewhat or else we will see an eventual move towards the 38.2% level closer to 1107.

Back to gold however - part of the reason it was hit so hard at one point in the trading session had to do with unsubstantiated rumors that were floating around that the CME Group was going to be hiking margin requirements on their gold futures contracts. Traders hit the gold market so hard with selling on that rumor that they knocked the price of gold down nearly $40 off its best level of the session. Later on the CME felt the need to address that and denied the rumor was true. That denial led to a counter rally in the gold market which came nicely off its lows only to run into another wall of selling once the neighboring silver market puked along with the downward acceleration in the US stock markets. While the near term technical price charts look a bit toppy on gold as a result of the margin related selling, considering the carnage across so many of the commodity markets, it was down less than 1%. I want to see how it performs overnight and into early tomorrow morning when we get the payrolls number from the US pencil pushers before I get a better sense of where it might be heading next in the short term. One has to respect the technicals in today's markets as that is what the computer algorithms are all based on and right now we are looking at a short term negative technical pattern on the gold chart. If Asian comes into to buy overnight or if we see additional gold buying out of Europe when it opens tomorrow, then there is a good chance that today's action will be negated. For the time being however, one cannot ignore the chart pattern so be careful. I will feel a bit more confident for the short term prospects of gold should it be able to recapture the $1,665 level on a closing basis.

Keep in mind that I am speaking as a trader looking at a short term price chart. Longer term I believe many investors are looking for a dip in the gold price to secure more of the metal. The entire problem in the markets right now is that investors world wide, but particularly investors putting money into the Western economies, have LOST CONFIDENCE in the monetary authorities of those nations and in their political leaders. In effect, the markets have voted and that vote says, "WE DO NOT TRUST THEM TO BE ABLE TO PROPERLY DEAL WITH THE ROOT CAUSES OF THE PROBLEMS THAT ARE AFFLICTING THE NATION". Gold in that sense is the "ANTI-GOVERNMENT" vote as there is no government behind the metal. That will keep buyers interested in gold even in the midst of a money flow issue.

Silver was mauled without mercy as it met with the fate of copper. This is to be expected during times of risk aversion. For all the silver bulls out there, please understand this basic principle - Silver will not outperform gold during a period of risk aversion. Period - Comex silver stocks do not matter. All that matters is that risk trades get yanked off and silver gets hit harder than gold because even though it has an historic role as a safe haven metal, it cannot shed its industrial metal role completely during such times. The Gold/Silver ratio will therefore move in the favor of gold during periods of risk aversion when fear trades are the rule. When the risk trades go back on and traders feel very comfortable taking risk, then silver will outperform gold to the upside.

All our eyes will now turn to that payrolls number tomorrow morning to see where things go next.
In the meantime, I cannot tell you how many times I heard the talking heads using the words “OVERSOLD” today. Funny how we rarely if ever see these same financial anchors use the term, “OVERBOUGHT”. One can almost sense just how badly they want the stock market to stop going down. If we get a larger than expected payrolls number tomorrow, they will probably get their wish.

Japanese Monetary Authorities finally show up

It was inevitable that the fellows from the Land of the Rising Sun would make an appearance after what has been taking place in the yen over the past month. Once it began approaching the former level at which coordinated intervention took place back in March of this year, the Bank of Japan and Ministry of Finance began hearing from Japanese industry leaders whose export markets were taking a hit. The strength in the Yen was choking off export business and the crescendo of complaints had recently reached deafening levels.

You wil recall that when the earthquake/tsuanmi struck Japan, a massive unwind of the Yen carry trade began as risk aversion escalated. In addition, there was anticipation of widespread repatriation of overseas Yen investments by Japanese citizens and businesses, especially insurance companies, to deal with the aftermath of that tragedy. The result was a surge in the value of the Yen, especially against the Dollar which resulted in a rare coordinated intervention effort by the Bank of Japan, European Central Bank and Fed all which sold the Yen and bought the Dollar in an attempt to stem its rise. They did exactly that with the yen plummeting 10% in value against the Dollar in about two week's time.

However, the currency bottomed out and had begun a slow climb higher retracing more than half of its losses about a month after the bottom was formed. While Japanese monetary authorities were taking notice, they were content to watch it meander sideways. Not until its surge that began in July did they show any signs of concern. Apparently the move past the former coordinated intervention effort was enough to get them to intervene once again.

This time they have gone it alone (ECB and FEd officials were of course notified) so it remains to be seen how effective this latest round of war between the BOJ and the speculators is going to play out.

Suffice it to say, it is this intervention which is responsible for the strength in the Dollar this evening as it had just had the props knocked back out from underneath it during the day session Wednesday once rumors of additional Federal Reserve monetary stimulus began circulating through the markets. While the Dollar is up sharply against the Yen, note what has happened as a result of this Yen intervention to the price of gold in terms of the Yen - it has soared to a another record high. It seems as if we cannot get enough monetary authorities trying to deliberately debase their currencies can we?

Gold Chart -

The Breach of overhead resistance at the $1650 level set up a run towards resistance at $1680, which is, for charting purposes, effectively where gold has now run. It came in a bit shy of the actual number but as you can see from the chart, has encountered likely bullion bank opposition at the level noted.

You might also note that this resistance level is very near the top of the channel that has been formed over the last month's worth of price action. The angle of ascent for gold is much steeper than it has been in the past but it is certainly no where near parabolic. It has just moved to a bit more sharper angle as investor fears have grown. Even at that, the word "PANIC" is no where yet found (it will be later).

As long as we still hear commentators and analysts talking up how "CHEAP" stock valuations have become, you can rest assured we are no where near any sort of panic stage. Just look at how eager these guys are to back up the truck and reload it once again with equities. It is as if the entire generation has been conditioned to buy dips no matter what the hell is going on in the nation or the globe for that matter. I can see them still buying up stocks when the overall national debt of the nation heads to $20 trillion, then $25 trillion and then $30 trillion. "Buy 'em". Rating agency downgrade - "buy 'em". QE 5 - "Buy 'em". QE6 - "Buy 'em"... and so on and so on and so on. We just don't believe that there is any such thing as a BEAR market - those are no longer possible in this new day and age in which the Fed can print lots and lots of money to fix everything".

Today's big rumors and pit musings were started by Bill Gross of PIMCO commenting on the Federal Reserve preparing for another round of stimulus. A couple of other folks joined in on that parade and that was enough to pull the S&P 500 back from the brink. Yep - that is just what we need - more money printing! Then again, there is no other arrow left in their quiver except that one as the federal government is not going to provide another round of stimulus (not that it would do any good anyway). It was this chatter about another round of QE that knocked the props out from under the US Dollar and took some of the wind out of the long bond today which has recently been on a one way trip due north. I think Bill must be kicking himself still on that previous Treasury bond call.

In an odd manner, Federal Reserve bond buying programs are currently being viewed as NEGATIVE for bond prices. The idea is that once its sets out the punch bowl again, no one else will be buying bonds as they will all be rushing back to get their fill of equities as they load their boats with those and dump all the Treasuries they just stuffed under their mattresses. Yes, this is called "investing" in this day and age. Madness is how I prefer to describe it as another round of QE will do as much good in curing the structurally rooted problems in the US economy as the first two rounds did - mainly NOTHING.

News flash to this gang - QE will not create jobs. It has already been tried twice and been proven to be an absymal failure. Many corporations are showing good profits but that is because some of them have eliminated their single biggest expense - their payrolls! Think about it - the combined QE1 and QE2 was close to if not more than $2.5 TRILLION Dollars and how many jobs did it create?

This is what the monetary authorities of the US economy and that of the EuroZone have been reduced to - money printing. They think that by providing liquidity they can fix years of overspending and massive indebtedness. I don't know whether to laugh at such ignorant stupidity or cry because of where these people are taking us all. I sometimes wonder if we are under a divine curse that has inflicted upon us fools for leaders and policy makers. They act as if they are somehow immune from History. Or could it be that their hubris suggests to themselves that they are actually wiser and more learned than previous generations and know how to accomplish those things which their unfortunate predecessors could not?

It really does not matter at this point as the die are already cast and the drama now waits to be acted out to reach its inevitable conclusion. Debt has consequences not the least of which is it cannot be endlessly multiplied and renamed prosperity without corrupting those who are liable for it. Perhaps I am hopelessly antiquated but I learned that it is the SAVERS and the LENDERS who hold the true power and not the CREDITORS and BORROWERS. The FORMER become the masters; the latter become the slaves.

Back to gold however - it now needs to take out today's high and plow through $1680 to set up a run at $1695 - $1700. It should find some light buying support down first near $1650 and then better support near $1625, levels at which it encountered some selling resistance of the way up. Take a look at the chart and you can see the markings.

Open interest has begun to rise again which is a healthy sign - as long as it does, the market will move higher.

Silver finally made it to its target of $42 today before setting back some. It is basically running in $2 increments so look for a move to $44 should it be able to clear $42 and hold that level. Support in silver is back down near $40 for now.

Copper has rolled over on the price chart and seems to have confirmed a top in there. Any indication that another round of QE is on the way and this market will undoubtedly reverse to the upside once again. For now it is signaling a slowdown in global growth is the dominant view.

S&P now in negative territory for year

The plunge in the stock indices in today's trading has wiped out the entirety of paper gains for the year. There are several things I wish to note about this.

The first is that the so-called "debt ceiling agreement" was supposed to be friendly towards stocks. Remember the soaring indices in Sunday evening trade as the news broke that the agreement had been reached. The market has put all that behind it and is now focusing on the pathetic growth rate in the US economy and the fact that lawmakers and the administration will now proceed to saddle this generation of Americans and the next with even more debt. That debt weighs like an anchor on future economic growth and this is not being lost on traders/investors. As I said in a previous post - only in modern day America could a bunch of hapless politicians congratulate themselves for sinking their nation and their countrymen deeper into a morass of indebtedness. Words cannot express my contempt and disdain for this bunch of pitiful "statesmen". They make Nero look like a genuine patriot by comparison. He at least did something constructive while his city burned. He played his fiddle. Our jokers played us instead.

Secondly - I made a point a while back that the one relatively bright spot for consumers was that even though gasoline prices were soaring higher and still remain stubbornly high, even though food prices continue to trek upwards and consumers leave the grocery stores with fewer goods in their bags for the same amount of money spent, even though medical costs continue to rocket higher, even though their home values continue to sink lower leaving more and more mortgages underwater, even though the employment situation reeks to high heaven, at least, at least, their 401K's and retirement plans were a bit in the black for the year. That has now evaporated like the morning dew. Can you even imagine what the next Consumer Confidence numbers are going to look like?

Friends and readers - this week will be one for the history books in my opinion as it will mark the beginning of the steady decline of the US economic might unless there is a drastic, and I do mean "drastic" change at the ballot box next year. It might even possibly be too late for even that to do any good at this point as the mathematics is now working against us all.

The markets are said to illustrate the combined wisdom of a host of individual traders/investors/players, who survey the current scene and then based on that survey, make decisions accordingly. Based on that alone the markets are saying that looking ahead, the environment for stocks in general is rapidly deteriorating and that we are heading back into Recession.

All eyes will then turn to the Fed for some further round of QE although I doubt it will be called that for political reasons. Either way, should that indeed happen, the floor under the Dollar will collapse.

Uptrending Channel is beginning to steepen for Gold

Since late 2008, gold has been rising in a strong and steady fashion within the confines of a channel that I have marked out on the weekly price chart. As mentioned previously, its rise has been orderly and solid unlike silver which burned itself out by rising too quickly at one point earlier this year and is just now attempting to re-establish a solid uptrend.

Since the year 2011 has begun, a new and steeper price channel appears to be forming as the fundamental factors that have driven the metal onto new record highs show no sign of ameliorationg; if anything they are growing worse.

These three factors are:

(1.) Sovereign debt woes out of the Eurozone
(2.) Raging inflation across China and other parts of Asia
(3.)  Anemic economic growth in the US guaranteeing accomodative monetary policy for the foreseeable future

One can add to this a 4th factor which is the enormous amount of indebtedness being heaped upon the citizens of the US by politicians which is sinking the nation into an inescapable mire of perpetual debt slavery and has now set the stage for an inevitable downgrade of US debt worthiness. It seems to me that this recent travesty of a spectacle, in which lawmakers actually cheered plunging the nation further into bondage has brought home the gravity of the situation to an increasing number of citizens/investors.

In the West this has resulted in a loss of confidence in the monetary authorities and political leaders which has resulted in surging demand for gold as a safe haven and vehicle to protect the earning power of accumulated wealth. In the East it has led to gold buying as a hedge against soaring food and energy costs. All of this has now come together and is feeding the bullish sentiment for the metal.

Gold has been able to better the price cap near the $1625 level and is now in the process of attacking the $1650, the level which my good friend Jim Sinclair long predicted it would approach. Should it take out this level, it looks to be on a path to $1680 based on what I can from this newer channel. Downside support is initially at yesterday's low of $1608 followed by $1600.

Aiding its upward progress in US Dollar terms is the fact that it has once again scored new all time highs priced in both the Euro and the British Pound.

The bond market is acting as if it has totally dismissed any rating agency potential downgrades. The Long bond continues moving vertically shoving rates lower putting a huge smile on the face of Federal Reserve officials and other assorted policy makers who are gleefuly watching the fools who would entrust their wealth to paper IOU's of the federal government. I do not care whether US bonds are considered safe compared to the bonds of many EU member countries' or not - buying Treasuries is a fool's game especially when the US government is spitting them out faster than a Persian cat can spit out hairballs. They are utterly and completely worthless. Even China is sick to death of the things.

China loses trust in US economic stewardship

Asian giant to say no to dollar dominance

By Stephen S. Roach

Published: 00:00 July 31, 2011

New Haven: The Chinese have long admired America's economic dynamism. But they have lost confidence in America's government and its dysfunctional economic stewardship. That message came through loud and clear in my recent travels to Beijing, Shanghai, Chongqing, and Hong Kong.

http://gulfnews.com/business/opinion/china-loses-trust-in-us-economic-stewardship-1.845120

The S&P 500 has returned back down into a region from which it will have to soon reverse or else it will experience a rather rude sell off. If we get another rotten payrolls number, it is difficult to see how it is not going to break below 1250 this time.

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.