Euro Yen Update

This cross, after notching a recent high, moved lower the last two trading sessions of this week as nervousness over the US fiscal cliff issue brought about selling in the crosses at the expense of the Euro and some of the other "risk" currencies. That allowed a bit of a safe haven bid to come into the yen and pushed some shorts out of that market allowing this particular cross to move lower.

If the cliff issue begins to look as if there is not going to be any sort of agreement worked out before the end of the year, we could see some further safe haven flows into the Yen at the expense of this cross pushing it lower.

That being said, if traders become more and more convinced that next year, the global economy will improve, we will see a strong appetite for risk and I suspect this cross will move higher. If it does, my guess is that the Yen carry trade will be quite large and this should produce a rather healthy appetite for "risk" assets such as commodities in general.

The thing to keep in mind about this commodity trade will be that while there will be general fund flows into the entire sector, those commodities with STRONGLY BEARISH supply/demand scenarios will still move lower. The fund flows will slow the descent from an otherwise faster rate but the price will still move lower in those sectors which have an oversupply or lack of demand factor.

In other words, we will see the CCI ( Continuous Commodity Index ) move higher with specific commodities either outperforming it or underperforming it depending on their own specific set of fundamentals. Either way, I would expect silver to be one of the outperformers, especially if copper resumes its uptrend which was derailed this week.

Trader Dan on King World News Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Markets and Metals Wrap. We will be discussing the price action of both gold and silver this week and the technically significant levels on the price charts.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2012/12/22_KWN_Weekly_Metals_Wrap.html

Silver Chart and Notes

For you Silver guys out there, by request...

With all the recent selling occuring in the silver market, the chart informs us that metal still remains mired within a very broad trading range that has contained price for the better part of 15 months now.

The top of range is from $35 - $35.50 while the bottom of the range is between $27.0 - $26.50. Within that range silver had put in what appeared to be the beginning of an attempt to start a trend back in October with that strong upside reversal week but it then seemed to run out of steam as it approached $35 and now is sinking lower once again.

There is a bit of psychological round number support at $30 although that is not really all that much in the way of actual technical support. Very strong support lies down near $28 and extends all the way to $26.50. This region has proved to be rock solid in terms of buying support for that same 15 month period mentioned above.

I am of the opinion that for silver to take out this significant support level, an enormous shift  in sentiment would have to occur in regards to the overall global economy. In other words, in spite of the easy money policies being followed by the FEd, the ECB, the BOE, the BOJ and the stimulus measures of China, sentiment would have to shift in concluding that none of it is working and the global economy is heading for a sharp contraction in spite of the massive amount of liquidity being injected and the negative ( in real terms ) interest rate environment that now exists across many of the major industrialized nations.

I am also of the opinion that one would also need to see copper prices collapse sharply for silver to violate this downside support level. If that were to happen, that too would tell us the market now believes that all such stimulus measures by the Central Banks is fruitless and doomed to fail.

While no one can predict the future, especially with the entire global economy in a place that none of us have ever witnessed in our lifetime in regards to the sheer magnitude of the debt overhanging it, I suspect that these same Central Banks would waste no time in dusting off another version of the next round of QE were sentiment to deteriorate that badly. Let's face it - that is all they got!

For now it appears that the US economy and the economies around the globe are stabilizing. That does not mean that they are healthy; it merely means that central bank actions have stop the bleeding of the patient and got him stable. It is quite another thing for the patient to leap off of the table and start dancing. I do not expect that to occur at all especially without any serious structural changes being made in most of the Western industrialized nations.

Heading into the end of the year the thinning trading conditions are going to allow for some exaggerated moves due to liquidity issues. Keep that in mind if we see any sharp short covering rallies or even rallies caused by some new buying. I am looking out more to the start of the New Year to get a better sense of what to expect but as I wrote in an earlier piece this week, it would not surprise me one iota to see another YEN CARRY trade develop this coming year with commodities benefitting from another influx of hot money chasing yield in this pitifully, obscenely low interest rate environment.

Macro Trade Day

If you look at the following Continuous Commodity Index chart ( CCI ), you will see that it is sharply lower today. Even LUMBER, which has been on a tear higher is moving lower today. There are very few commodities that are not in the red today.

For whatever reason, hedge fund longs are dumping commodities across the board. I find that rather interesting to say the least, especially with another $1.02 TRILLION in QE coming our way next year. Some are blaming the sell off in gold and silver on the stronger-than-expeced GDP number this morning, but once you get through the headline number, you realize that the feds used a highly dubious inflation number for their "deflator". The chatter on this number was that it "was so much better than expected that it casts doubt about the longevity of the Fed's QE program". Try to stop laughing here.

Out of that 3.09% growth rate for the third quarter government expenditures were responsible for 0.75% of that number. In other words, nearly a quarter of the stated growth number is due to government spending.

Hidden deeper within the report is the fact that personal savings shrank during the quarter as did household per-capita disposable income. What this usually translates to is that consumer spending increases are not coming from rising incomes but rather from either a drawdown in their savings or from increased cash flow due to home mortgage refinancing. My guess ( and perhaps some enterprising reader can run the data to check ) is that consumers are ramping up those credit card balances once again.

Either way, the idea that the Fed is going to suddenly begin thinking seriously of drawing down its balance sheet sooner than expected based on this data is whimsical to say the least. Besides, my view of the QE programs is that it is designed FIRSTLY to keep US government borrowing costs lower and then SECONDLY to keep the big banks happy with very little daylight between item FIRST and item SECOND. If you think the US government's fiscal condition is now a mess, wait 'til you see what happens to it if interest rates start moving higher and the cost of servicing that mountain of debt comes back to bite them ( and us).

Now, if you want to hear another view as to why gold and silver are going down - hold onto yoru hat here: Traders fear that the breakdown in the "fiscal cliff" talks will result in the automatic spending cuts kicking in next year and reducing GOVERNMENT EXPENDITURES while tax rates rise thereby throwing the country into recession and reducing industrial demand for silver and putting pressure on gold in a deflationary environment.

Hmmm - back when I took logic in school I learned what I thought the real world actually believed - that two mutually incompatible things cannot both be true. "A" and "Not "A". But surprise, that is not how the financial world apparently operates. You see - economic growth is proceeding at a much faster rate that we were thinking giving us hope for a continued improvement in the US economy of such magnitude that the Fed is going to discontinue QE sooner than expected.  TRUE

The fiscal cliff talks are not proceeding well meaning we are going to get severe spending cuts meaning government expenditures will not be there to support the GDP numbers and economy meaning that the growth rate is going to slow and thus the economy will slow with it. ALSO TRUE.

Yep - there you have it. The economy is growing well; the economy is not going to grow well. If you can make any sense of this lunacy, please clue me in because I cannot wrap my pitiful brain around this no matter how hard I pretend to be a hamster on a wheel.

Let's move over to gold however. The bears had been greedily eyeing that 200 day moving average for downside sell stops. Strong physical market buying had stymied them however. Today, that buying dried up long enough to allow them to reach those stops and down she went. Volume is pretty heavy meaning a sizeable flush is occuring with a big transfer out of weak hands into strong hands taking place.

Some have questioned why Central Bank buying is not showing up. Rest assured; it is!

Here is a look at the chart around midday today. Note that 200 day moving average and how the market accelerated to the downside once that was taken out. By the way, there was a rash of put options that were bought earlier this week so someone made a lot of money in a very short period of time.

Gold has now reached the next level of chart support shown here. That comes in between 1640 - 1630, an area denoted by horizontal support drawn off early highs as well as the intersection of two different Fibonacci retracement levels. So far this region is holding the metal. If it fails for any reason, we will more than likely see gold down at $1600 - $1590 very quickly. For this market to have bottomed, we will need to see it move back above that same 200 day moving average and hold above that level. This moving average tends to attract buying or selling based on the algorithms of the funds so there will be a tendency for funds to try to sell against this level. If that selling is absorbed, one can feel very confident that the market has bottomed.  so far we are still looking to try to confirm a support level but the jury is still out on that as of now.

The HUI is providing ZERO help at this time. As you can see on its chart, there is not much in the way of chart support under this market. It might, MIGHT, be able to bounce off that former downsloping trendline that held it in check but if that fails to stem this collapse, then it is going back to 400 or even 390.

Rising Economic Powerhouse Brazil Hungry for Gold

Reports coming out of the IMF indicate that Brazil has DOUBLED its holdings of gold since the end of August of this year. It is now officially holding 2.18 million ounces compared to 1.08 million ounces at the end of August. IMF data reveals that Brazil purchased 472,000 ounces in November.

Also, the World Gold Council is reporting that it expects official sector gold demand (Central Banks) to reach 500 tons this year, eclipsing last year's reported 457 tons of the metal.

It is evident that these up and coming economic powerhouses such as Brazil are moving to begin diversifying their burgeoning reserves.

This is the reason why the physical gold market will continue to provide a strong floor of support beneath gold on price setbacks of the nature that we are currently undergoing.

Setbacks like this merely move the gold from weak hands to strong hands. Hedge funds are NOT STRONG HANDS - they are momentum chasers only, either up or down. Strong hands such as Central Banks are generally not prone to selling gold even on rallies in price as their movement to acquire the metal is part of a long term strategy that is not going to be dispensed with based on short term fluctuations in the price of the metal.

Keep in mind that very few people make money trading gold by buying it high and trying to sell it even higher. You have to be faster than the algorithms to consistently pull that off. Be smart and use weakness to acquire the physical metal if you are a long term oriented investor or for that matter, a trader watching for support levels to emerge and be confirmed. Do not chase gold higher. Let the nitwits who run the hedge funds do that for you and use their buying to sell into.

Euro Yen Cross - Redux

It has been several years since I last posted a chart of the Euro-Yen currency cross. Quite frankly, there has been no reason to monitor it in my opinion, not with the ongoing crisis that had engulfed the Euro Zone through most of this now fading year. However, with the strong move lower in the Yen of late, I have been examining this cross once again to see if it can provide us with any signals of upcoming events.

You will note its collapse back in 2008 - this was the year in which the big Japanese Yen Carry Trade was unwound as nearly every hedge fund on the planet was taking part in tthat particular trade. When it was time to unwind it during the panic, there was literally no one on the other side of all those trades involving the Carrry.

During that Carry trade season, as this currency cross moved higher, the price of commodities in general tended to track right along with it. Gold in particular was strongly influenced by this cross. As it moved higher, indicating the presence of a strong appetite for RISK, gold moved right along with it to the upside.

If, and this is a big IF, we begin to see this appetite return ( and remember, it first occured because hedge funds were looking for a way to obtain yield in a strongly low interest rate environment - Sounds familiar doesn't it?), then this cross should continue to move to the upside.

The chart shows a picture of a market that looks as if it is very close to ending the 4 year downtrend. If this cross can end this month of December above the 25% Fibonacci Retracement level shown on the chart, then I think we can begin to say with a great deal more confidence that the risk trades are going to return in a much larger way in 2013. I would be about 99% convinced of that if the cross does indeed move up past the 38.2% retracement level.

If this move is for real, and this cross continues higher, it should indicate that any deflation fears are behind the market and that the Central Banks have won their war against it ( at least for the time being). The cost of that victory however will be a repeat of what we saw leading up to the credit crisis of 2008 - namely, soaring commodity prices driven higher by huge speculative inflows from cash rich hedge funds chasing yield. Who among us can forget $150 crude oil back then?

Either way, gold will benefit strongly, and silver will as well, if this is becomes the trade of 2013.
Time will tell. As I like to say, The Central Banks had better be careful of what they wish for - they are liable to get it and more!

Safe Havens Jettisoned

Apparently we now live in world in which lawmakers squabbling over how to avert tripping over an anthill instead of plunging down into the abyss gives reason to buy stocks while selling nearly anything that appears to be a safe haven.

I find it ironic to say the least that the market analysts continue to be so fixated on the non-sensically named, 'fiscal cliff', when the country is on track to have a national debt of over $20TRILLION by the end of the next 4 years and how many more trillions in unfunded liabilities. Economic growth is so anemic that the Fed will be conjuring the sum of $1.02TRILLION into existence over the course of the next year in order to buy mortgage backed securities and US Treasury obligations with the sole purpose of keeping interest rates ultra low so as to encourage additional debt. Yet everything is okay now because Obama and Boehner are talking and moving closer.

Oh well, it is what it is and there is not much sense in even looking at things in bewilderment anymore. The new era of "PRINT YOUR WAY TO PROSPERITY" apparently is now fully entrenched in this generation.

Just look at the following chart of lumber - this market is forecasting a big recovery in the housing market. Ultra low interest rates are apparently predicted to have their intended effect.

Here is the point in this; one cannot be successful as a trader by arguing with the markets. As I have said many times on these pages and elsewhere - they are going to do what they want to do no matter what you or I or anyone else thinks.

The problem that many of us who are long term gold bulls have is precisely that - we are "LONG TERM" thinkers. In the meantime, our markets today have become completely short-sighted forums. Hedge fund algorithms respond to short term signals and then take over. Remember, there is little thinking involved at this point in the markets - they are governed by computer algorithms and those things will either buy or sell based on the short term signals that they get. Get on the wrong side of them and your trading career will be a short lived one. Instead, learn to either get out of the way if a support or resistance level is taken out or be prepared to weather the storm that will then follow.

Take a look at the bond market. Here is the long bond chart. Notice how this safe haven has been thrown out in favor of equities as money flows out of bonds and back in stocks based on the assumption that the fiscal cliff deal, combined with the Fed's easy money policy, and other decent news from abroad has traders currently expecting a recovering economy. Thus, no need for safe havens and back into equities for gains.

This is precisely what the Fed intended when it announced its plans - it wants the stock markets moving higher to boost consumer confidence so that the consumer will take on new debt. Also, businesses love a stock market moving higher as it inflates the price of their shares.

The breakdown in the bond market has sent the price moving down towards the bottom of a 5 month or so trading range. It is interesting to say the least to see this move lower in bonds, particularly with the announced $40billion/month purchasing program, QE4, being just recently announced. That program however is not targeting bonds of this duration however. Still, if longer term rates continue to rise it is going to work crosswise to the Fed's purpose of deliberately pushing rates lower to not only spur more consumer spending but also to keep the US government's borrowing costs obscenely low.

Take a look at the Japanese Yen - another favorite SAFE HAVEN which has obviously severely fallen out of favor. Most of this is due to the new political situation in Japan in which traders expect a strongly negative Yen policy to be FORCEFULLY advocated by the new governing powers. Still, that in itself does not completely explain the weakness in the Yen. Just like the bonds are being discarded in favor of equities, the Yen is being discarded in favor of currencies with a closer relation to risk assets.

As you can see, the Yen is probing into a region of strong chart support. If it cannot muster much of a bounce from this region, chances are that we have seen a major long term top in the value of Yen against the US Dollar. We might even see the start up of the YEN CARRY TRADE in a large way just like we did prior to its collapse in the summer of 2008. One does not see the Yen Carry trade come into being during a period in which market participants are concerned about DEFLATION.

That is why this currency has my attention. Right now it is signaling that there is a move towards risk assets underway. so far this move has consisted almost entirely of equities. But if history is any guide and we see the risk appetite get whetted, look for the commodity complex to follow as money flows will move into the sector in a much larger way to start off the new year. We will see any evidence of this in the charts.

So far we are seeing it in the Lumber market, Cotton market, and the Copper market. We are also seeing it in the Livestock markets. The grains have not experienced it due to the expectations of a very large corn and bean crop out of South America but if these hedge fund computers go beserk in January, at some point we will see some of that money make its way into the grains.

We will keep a close eye on the CCI ( Continuous Commodity Index ) as a forewarner of such an occurence. Today it is sinking lower but if this risk appetite is real, it will find support sooner rather than later. In this sort of environment, it will be tough to be short of anything that looks like a commodity.

We will just have to wait and see what the New Year brings us and then deal with it accordingly.

As for gold, well, what more can be said than it failed to attract the usual strong buyers that have formerly been coming in between $1690 - $1680. They stepped back and as a result, there was an enormous air pocket below the market without any bids of size. Down went the market with locals pushing it along further until they found the sell stops which they did in a big way.

Volume today has been absolutely enormous, especially during a time period in which liquidity begins drying up and volume normally shrinks. That environment allowed the bears to finally reach those downside stops that they have been salivating after. The question now becomes whether or not Asia comes in this evening and begins scooping up gold.

If we truly are seeing a shift towards inflation concerns ( bond market breakdown) gold will stabilize sooner rather than later. I am still watching the HUI for any hint of this but so far, at least in today's session, nothing doing.

Gold has attracted some buying here later in the afternoon and is bouncing off its 200 day moving average. That level seems to be a pretty good support region as it also happens to coincide with the 50% Fibonacci Retracement level from the October top near $1800 and the May low near $1530. Bulls will not want to see this level violated without a quick, intraday recovery occuring as it would mean the market will likely drop to $1640 before any serious buying would emerge.

Even with all this flight away from safe havens today, it does seem to me like this downside move in gold has been overdone a bit.

Trader Dan on King World News Metals Wrap

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

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2012/12/15_KWN_Weekly_Metals_Wrap.html