Gold Stocks Recover from Late Friday Afternoon Mauling

AS many of you no doubt are aware, there appeared to have been some sort of coordinated bear raid on many of the smaller gold companies late Friday afternoon, particularly in the aftermarket hours when trading conditions are at their absolute thinnest.

The entire sector however is getting a firm bid in today's session even with the metals initially lower. Their strength seems to be pulling both gold and silver higher.

The HUI is closing in on very stubborn chart resistance in the 460 region. This region marked the bottom of a consolidation period back in March of this year and is now serving as a line for sellers to short against. If the leaders in the sector can manage to attract additional buying going into tomorrow's session, it should drag the entire index right back up towards 460 once again.

IF, and this is a big "IF", the bulls can force enough of these hedge fund shorts to cover and in the process take the index through 460 and keep it above this level, we should see additional short covering and fresh buying emerge to take the index all the way to the top of that same former consolidation range. That region lies near 480. That will be the next big test.

Dollar Bulls Leaning Heavily on the Long Side of the Boat

Bullish bets on the US Dollar have reached at least a 7 year high as the crisis in the Euro Zone and the slowing global economy has sent money flows careening wildly into the Greenback.

As you look at the Commitment of Traders chart shown below, you can see that this LONG DOLLAR trade is extremely crowded. Markets in this condition, while they can most certainly continue heading higher, are very unstable and quite susceptible to violent downside action should a technical trigger force a bout of long liquidation.

Friday, we got a bit of a hint as to what might happen to the Dollar should sentiment shift. It was hit rather hard heading into the weekend ahead of the crucial Greece vote as traders began reacting to the possibility of coordinated Central Bank activity early next week. The eager buyers from Monday and Tuesday all ended up as panicky sellers with the market completely erasing its gains early in the week.

Note that the selling did stop at the 38.2% Fibonacci Retracement Level of the rally that began in May.

If, and this is a BIG "IF", the Central Banks do indeed announce a coordinated liquidity infusion, this massive speculative long position may very well be vulnerable.  While certainly the problems afflicting the Euro Zone are not going to be cured by any such Central Bank action, traders will, at least for the short term, view such action as lessening the need for a safe haven. That is when things could get interesting to say the least. I would expect an initial drop down to the 50% retracement level where the mettle of the bulls will be tested.

Longer term, one can still make the case that as soon as further problems begin flaring up over in the Euro Zone, the Dollar will head higher once again but keep in mind, today's markets are dominated by computer algorithms and if those things say "SELL" in regards to the Dollar based on any downside support levels being violated, there is an ENORMOUS amount of longs who are going to get their heads handed to them.

Trader Dan on King World News Markets and Metals Wrap

Please join Eric, Bill and I as we discuss the gold, silver and other pertinent market price action of the past week on the KWN Markets and Metals Wrap by clicking on the following link.

http://tinyurl.com/d8et8br

 

"Heads - I Win; Tails - You Lose"

That's the attitude that gold bulls have apparently adopted heading into this weekend's crucial Greece vote. Whereas yesterday seemed to be a day of caution among traders, today seems to have morphed into a day of expectations of the punch bowl, complete with accompanying hard liquor, being filled to capacity by the Central Banks of the West.

If the Greece vote turns out to be one which threatens the stability of the Euro and sends shock waves through the foreign exchange markets, traders are convinced that a large bouquet of liquidity is coming their way early next week. If the Greece vote turns out to be one in which the party favoring the austerity measures imposed upon the country, then the market will give a collective sigh and the RISK ON trades will be back in vogue - at least until Spain or Italy go kaput.

Either way, we seem to have generated buying in the gold market. Not that I am complaining, being a friend of gold, but I must honestly admit, the entire scenario seems repugnant to me in just stepping back and observing what our economic system, not only nationally, but globally, has degenerated into.

I know the drug addict comparison is old and worn out by now, but it sure as hell seems to me to be the best description of today's financial markets. The problem for the druggie is not that he or she is showing withdrawal symptoms - that is the evidence of an addiction. Their body has grown so accustomed to the presence of this substance that it can no longer functionally normally without it. In other words, the withdrawal symptoms, the shakings, the convulsions, the pain, the distress, are merely the outward evidence of an internal problem - addiction.

So it is in the case of today's financial markets - the symptoms of distress may perhaps be ameliorated by the infusion of additional liquidity - but those are merely the symptoms of an internal problem. That problem is EXCESSIVE DEBT.

For far too long many of the governments of the Euro Zone have lived way beyond their means, spending money with reckless abandon, borrowing more and more, spending more and more, until they have now reached the point at which, just like the addict, more of the drug will eventually kill them. Yet that is EXACTLY what the financial markets want - more of the drug - in essence absolving them of the consequences of their stupidity for spending money they never had in the first place.

Consider the folly of this - the worse the economic news becomes, not only in the Euro Zone, but also here in the US, the better the equity markets perform. Is that not madness? What unbiased observer in the future reading about this insanity will not shake his or her head in astonishment as they marvel that otherwise clear-headed human beings could have been conditioned to behave in such a manner?

Our financial markets are supposed to be a means of allocating precious capital towards segments or industries where goods or services that better our lives can be produced. Instead, they seem to have taken on a life of their own with the roles reversed - in essence the slave has become the master. No attempt can be judged to be incorrect or misquided as long as it serves to resuscitate the price of equities in general. Credit markets must not be allowed to lock up, equity prices must not be allowed to fall sharply, large banks must not be permitted to pay the price for their poor investment decisions - nope - the show must go on, even if in the process we are making fools out of ourselves and deluding ourselves into thinking that Central Banks are the ENGINES of PROSPERITY instead of entrepreneurs and risk takers.

Enough of this display of contempt for now - back to the gold price action - Gold has moved higher on hopes of this aforementioned liquidity coming soon next week. It has pushed through the top of the resistance zone between $1620 - $1630 and is attempting to power past the bullion bank capping efforts at today's high of $1635. Clearing this level will set the market on a path to $1650.

Notice the following 8 hour chart where you can see that it is flirting with the downtrend line formed within the recent congestion zone as well as having moved into the bottom of that zone which was carved out by a top between $1680-$1700 and a bottom near $1625.

If the liquidity punch bowl does indeed come next week in a BIG WAY, look for gold to move initially to $1650 and then, if it can best that level, on to $1680 for a test of that region.

Downside support remains near and just above the $1600 mark.

Gold Market Continues to Reflect Currency Turmoil

Simply put - as the situation in Europe further deteriorates (yesterday the market YAWNED at the $125 billion Spain bailout), Italy is now coming into focus. Strangely enough, the US equity markets somehow think all of this is inconsequential as the bulls there continue to be giddy with delight.

Their attitude is best described by an old Steve Wariner song, "Some Fools Never Learn". You play with the fire, you're gonna get burned".

Considering just how tenuous things are, the degree of complacency that exists among equity bulls is nothing short of astonishing. The situation can best be described by looking at a chart of the VIX, or Volatility Index.

While the index has indeed risen from some of its lowest levels down near 14, it is still generating relatively low readings. Apparently traders could care less about potential headwinds; either that or they have already factored in what in their minds is a worse-case scenario. Personally, I think it is symptomatic of the Pavlovian response by this generation of short-sighted economic ignoramuses who believe in the allmighty power of modern Central Bank money creation to plaster over everything that dares arise that might challenge the comfort of the casino players, aka, hedge funds.


I suppose it will work until it just stops working one day and that will be that. Then maybe we will see some economic sanity prevail.

Back to gold however...  The metal was intially weaker early in the session but uncovered a strong surge of buying that some say was linked to the ETF. Regardless of the reason, the fact is that the metal is moving higher and once again looks like it is setting up a challenge of that tough overhead resistance level that comes in near $1620. If it can overcome the bullion bank selling at this level, it should once again make a run towards $1650 and test to see whether it can this time mount a breakout.

Downside support still looks firm.

Gold Chart and Comments

I have provided an 8 hour gold chart today as it provides a very good glimpse into the technical composition of that market's recent price action.

Note that you can clearly see the solid zone of buying support extending from just slightly above the $1550 level on down towards $1520. It has been at these levels that strong buying has continued to emerge over the last month. I suspect that it is in this zone that Asian Central Banks are gobbling up the metal. Remember, they will not chase the metal higher - only the hedge fund managers buy high and hope to buy even higher before selling. By keeping an eye on this chart we can therefore get a sense of at just what level these buyers believe gold has "value". It is this sort of buying that provides a base for a market upon which it will eventually launch a rally.

For gold, that spark is not there just yet as the absence of an "immediate or forthcoming" QE event means that we lack the ingredient to make the dough rise. However, the continued ultra low interest rate environment, in many instances resulting in negative REAL rates of return, is strongly friendly towards gold as there is little opportunity cost in holding the metal with yields this low. Also, this feeds into the concerns of those who fear continued currency turmoil.

You can also see on this chart that band of congestion or range trade that was bounded by $1700 on the top and checked by $1620 or so on the bottom. Gold had been in that range beginning back in late February/early March with the top of the range retreating down towards $1680 as Europe worsened.

If you notice, this recent rally off the lows near and under $1550 ran right back into this former congestion range before encountering selling pressure from the bullion banks forcing a retreat.

It will take news of a QE launch to take gold up through the top of that former congestion zone and send this market into a strong uptrend.

We are Back - The King World News Markets and Metals Wrap

Trader Dan has been taking a bit of a break away from writing as the volatility in the market tends to wear down even the veterans at times and requires a great deal of undistracted attention to survive.

I am back for the regular weekly radio interview with Eric King at King World News. Join, Eric, Bill (who always provides a terrific insight into what is going on in the world of real gold and real silver transactions) and myself on the Markets and Metals Wrap.

http://tinyurl.com/752htrn

I hope to be able to provide some charting and analyis this coming week. To those who wrote, expressing concern, thanks for that. All is well - just busy, busy, busy, bzzzzzzzzzzzzz.

Oh and by the way, it is SWARMING season for the honeybees up in this neck of the woods. Chasing those down requires time away from the computer screen, which is a welcome relief to be honest! After all, life does exist outside of the markets and accompanying madness!

Trader Dan on King World News Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King of King World News on the Markets and Metals Wrap program as we discuss this past week's action in the gold and silver markets.

http://tinyurl.com/8yaqlgs