HUI has "Issues"

The mining shares still continue to sink lower seemingly unable to attract sufficient buying to stem the flow of red ink being seen across the sector. As a fundamentalist, I think one can make the argument that some of the leading shares in the sector are severely undervalued against the price of gold; however, as a technician, one has to respect the chart action be that as it may.

I am presenting a monthly chart but wish to note that the last trading day for February has yet to arrive so there remains sufficient time for the index to recover. It is however flirting with some important chart support level. I thought that the index might have found enough buying near 380 to bottom it. That is evidently not the case.

What concerns me with this chart, and again, the month is not yet out, is the fact that the NEGATIVE DIRECTIONAL INDICATOR is at its highest level since the move lower in the middle of the credit crisis of 2008. The bottom of that move lower in the index was accompanied by the peak in the negative DMI near the 30 level. This -DMI is currently sitting at -26.53. I have noted this level on the chart with a dashed red line.

One might make the argument based on this alone that the shares have now reached oversold levels commensurate with a bottom. That might be true but as of right now, we do not have any technical confirmation of such; we only have an extreme oversold reading based only on this particular indicator. You will notice the lack of any white candle whatsover. In other words, there is no buying in size sufficient to absorb the continued selling occuring in the sector. There is buying just not enough of it.

Here is the problem, the ADX, the solid navy blue line, is rising even as the -DMI is rising while it is above the +DMI (the blue line). That only happened very briefly back in 2008. Keep in mind that a rising ADX indicates the beginning of a trend but generally it needs to get above  the 20 level to be valididated.

BAck in 2008 as it began to turn higher while above the 20 level, the Fed announced the inception of QE1 and that put an abrupt end to the slide in the gold shares, as well as everything else on the planet it seems. Now, we are witnessing the rising of the ADX (it is still below 20) with chatter that the Fed will end the QE sooner than expected. I personally do not believe that they can but what i believe is of no consequence when it comes to what the majority of hedge funds/large investors believe.

While not a particular fan of Head and SHoulder patterns for predictive purposes (those patterns are highly overrated), it should be noted that the index is sitting right on the neckline. A breach on a montly closing basis would get the bearish chatter going even more against this sector but traders need to pay attention regardless.

There is a band of congestion near 320 - 310 that should attract enough buying to at least drop the index into a congestion pattern at a bare minimum should price get there. Let's hope it does not for the sake of those long suffering gold share bulls.

One last thing, you will notice that the HUI tends to make SPIKE BOTTOMS when it finally does exhaust the selling pressure. If it can do this before the end of this month and recapture the 400 level in the process, it should be a fairly reliable signal that the worst is over. We simply have to wait and see.

 

Euro Gold Below 1200

Since July of 2011, forays in gold priced in Euro terms, have been met with solid buying on approaches towards 1200. Only ONCE over that time period did gold end the week below this psychological support level. There was no downside followthrough however and the price rebounded the following week moving back towards 1320 before faltering. The week is still young but the gold price has now fallen below this level with today's sharp move lower.

Some of what we are seeing today in gold is tied to selling ahead of the release of the FOMC minutes for January. Traders/Investors continue to fear a more hawkish tone to the minutes with a rising number of voices perhaps calling for an ending to the QE program sooner than expected. That remains to be seen given the extremely tenuous state of this so-called "recovery" but this is the current thinking for whatever that is worth.

It is no different over in Europe where many believe the worst is now behind the region and has been the case over here in the US, money flows are moving into equities and exiting gold for the time being. Any reversal to the downside in the equity markets there, and here as well, would change that mentality quite rapidly were that to occur.

There is a spike low down near the 1150 level made in September of 2011 that is the last line of bullish defense for the euro gold bulls should the weekly close be below the 1185 level. In a sense, this corresponds closely to the $1550 - $1530 zone on the US Dollar priced gold chart. Bulls would not want to see this level give way without an intraweek recovery as it would portend even lower prices

As far as the US Dollar priced gold chart goes, support at $1600 was crushed with the market attracting fresh short selling on the break below last week's low just under $1600. There is no support just below today's session low on the chart until price nears $1565. Below that, should it fail, is the $1550 level. That one is a biggie. Should it not stem the bleeding, gold is going to test $1535.

Some data providers are showing that the 50 day moving average has already managed to cross below the 200 day moving average, the infamously known "Death Cross". My data does not yet show it although it will probably do so within the next day or two. Either way, technical analysts will view this as further confirmation of a bearish trend in gold prices.

The ADX that I have been including recently picked this up much sooner than the death cross occurence itself. It continues to rise with bearish momentum increasing as it has picked up the fund flows OUT OF GOLD and FRESH SHORTING. The market has fallen rather sharply 7 out of the last 8 trading sessions, so it is perhaps due for a bit of a bounce but expect rallies to be sold unless gold can get back above $1640 for a bare minimum. Even at that, bulls will not be out of the woods until price can move past $1660 - $1665. The bears are currently in the driver's seat.

Physical market buyers of size as of yet do not seem to be interested in moving in right now. Let's see if we can spot their footprints when they do.

I should also note here that the Continuous Commodity Index or CCI, has been getting worked over rather harshly the past week. That is continuing this week. I am getting reports of several large funds and banks exiting commodities due to the sector's poor performance over the last year.

Have to hand it to the elites at the Fed - they have managed to conjure into existence with QE1, QE2, QE3 and now QE4, trillions of dollars out of absolutely nowhere without the least bit of negative impact on commodity prices ( for now!). They have concocted a perfect world in which equity prices move steadily higher, interest rates remain stable at ultra low levels and commodity prices, while higher than several years ago, show no significant impact from the huge increase in liquidity.

Brace yourselves for the potential for some wild price swings when those FOMC minutes are made public.

Sterling Gold Consolidating

Sterling Gold, or Gold priced in terms of the British Pound, displays a chart pattern not unlike that which we have recently seen in US Dollar priced gold, prior to last Friday's sharp downside break.

It is in a consolidation pattern dating back to the summer of last year. Dips below the 1,000 Pound mark have been met with solid buying but the metal has not been able to overcome downtrending resistance. Note that the pattern is forming that same wedge pattern that we saw in US Dollar priced gold.

Note the Gold price in terms of the Swiss Franc, or Swissie Gold. The pattern also reveals a market in consolidation; however, it is now moving down towards the bottom of the channel that has confined price since last summer. Price near and below 1450 Franc has attracted buying consistently, so far.

See also this Euro Gold chart which displays a consolidation pattern much like the Swissie Gold chart above. Gold is probling the lower boundary of the channel noted and is moving towards the 1200 Euro region. Since last summer, buyers have surfaced in this area.

The reason I am noting these three charts above is because unlike the US Dollar priced gold chart, they have not yet broken down technically but remain in their consolidation patterns, although it is evident that they are currently weak.

The big question which many of us are asking is whether or not enough valued based buyers will surface in these countries/regions to stem any downside potential and put in place a floor of support. This is simply unclear at this point in time.

The European finance ministers are hoping that hedge funds will continue to move money into European equities as well as European area bonds. If they can herd them into these sectors, money flows into gold might be dented sufficiently to breach the downside support levels indicated on the charts. On the other hand, enough players might just be suspect enough of economic/finacial conditions in the Euro zone and in Britain to want to hedge their bets with the yellow metal. Again, it is unclear. If the gold bulls in terms of the Pound, Swiss FRanc and Euro are ever going to need to perform, it is right here and right now.

I would breathe a sigh of relief if they can push the Euro gold price back above 1270-1280.

I should also note here that while both the Yen and the British Pound have fallen rather sharply against the US Dollar, the Sterling gold chart is no where near as bullish as the Yen Gold chart. Yen Gold is evidencing a pause up at current levels whereas Sterling Gold is approaching the bottom of its range trade.

With gold currently experiencing weakness in US Dollar terms and having violated a strong downside support level, it behooves us to monitor its price closely in terms of some of these other major currencies to see whether this is merely a Dollar priced phenomenon or something a bit more widespread. If it is the former, the move lower in the price should find a footing sooner rather than later. If it is the latter, odds favor more downside in the US Dollar price of gold. Generally speaking, when the gold price is moving in sync against the majors, it is usually trending. When there is a divergence in its price action among the various majors, it normally tends to favor consolidation. Again, this is a general rule, not one carved in stone.

Time will of course make it clear to all of us.

One last thing - seeing that not much came out of this past weekend's G20 summit over in Moscow, we will have to look to the Eurozone to see what level the Euro must trade at in order to get all of them complaining at the same time. Right now it seems that any complaints about the Euro strength are confined to the Southern tier. Germany seems okay with it. If the Germans begin to make any noises then we will need to see how the Euro begins to react.

Gold Backwardation Chatter

I have been receiving a fair amount of emails asking my opinion on a recent article chatting up "Gold Backwardation". The unspoken inference from the article is that this is bullish for gold.

Let me state two things before proceeding. Number one - I am a trader and make my living by so doing. If I am on the right side of the market, I make money. If I am not, I lose money. It is that simple.

Johnnie one notes cannot trade and make money because they are only always on one side of a market. IN the case of gold, that means that they are always long. Markets go up and markets go down and if you on the long side of a market going lower crashing through support levels, guess what.... You are losing money, sometimes lots of it. Leverage is your friend on the way up if you are long; it is the grim reaper if you are long and the market is dropping lower and lower.

My advice to those who are using futures to trade gold and are not getting out of losing long gold positions while their commodity trading account is imploding - be prepared to suffer large losses to the extent that your potential career as a full time trader will come to an abrupt and rather inglorious end. You have heard it said by myself and others who do this for a living; "Cut your losses and get out of a losing trade when support levels get violated". That is called sound money management. Failure to do that and instead rely on HOPE is a novice's error. HOPE is not a trading strategy.

Do you honestly believe that a hedge fund computer algorithm really gives a damn what yours or my opinion is of a market? Those things are going to sell as long as the signals tell them to sell. When they stop, the market bottoms.When they stop is anyone's guess. That is what the charts are for.

Sometimes as a trader it is best to simply head to the sidelines and do nothing rather than keep trying to catch a falling knife. The market will bottom when it wants to bottom and not because some guy writes an article extolling the virtures of a market in backwardation or someone else makes a statement that the market will bottom in exactly two weeks or some other such nonsense. Use technical chart indicators to tell you when a bottom is in. No exceptions. So what if you do not catch an exact bottom? The greatest profits are made by taking 70-80% out of a move (unless of course you are a guy who likes to play range trades).

The people who consistently brag about buying exact bottoms or selling exact tops are chronic liars. I can tell you that they DO NOT TRADE for a living because no trader can consistently get that right all of the time. We strive to do so but at our best we no more know the future than the next guy. We wait for a confirmation before risking our precious trading capital. Oh yes, it is no where near as sexy as hitting an exact bottom when buying, but then again, after 2 decades plus, we are still surviving. I have seen more casualities in this business than I care to remember. Their last words are always: "I told you I was right - see the market is now going higher". The problem is that they ran out of money before the market turned! So what if they were right. In the short term, they were dead wrong and that is why they lost their money to someone on the other side of the trade who was the "right" one.

There is an old trader's saying that goes like this: "He bought the first break in price. He bought the next break in price. He bought the third break in price. He bought the fourth break in price and after that, He became the break".

Second - that assumes that the backwardation is actually there. Guess what - it is not. When a real backwardation structure exists in a market  it is OBVIOUS from the structure of board. That front month futures contract will be trading at a PREMIUM to the next month contract which will also be trading at a premium to the contract following that and so on. The normal structure of (Most - not all) the futures board will be one of CONTANGO. Translated this means that the front or near month will be trading at a DISCOUNT to the next closest futures contract which will be trading at a discount to the contract following it and so on. Without getting too technical for the sake of getting lost in the weeds, markets such as livestock and grains are a bit more complex because of the nature of the commodity being raised or produced but even the grains will show this pattern when dealing with the OLD CROP against the NEW CROP.

Back to our BACKWARDATION structure however. When the near month trades at a premium to the next month and the one after that, the market is sending a signal that IT WANTS THAT COMMODITY AND IT WANTS IT NOW AND IT IS WILLING TO PAY MORE TO GET IT RIGHT NOW instead of waiting to take it further down the road. All VERY STRONG bull markets will show this pattern although it is not necessary for a market to be in a backwardation structure even during a bullish phase. It all depends on the SEVERITY of the DEMAND and SUPPLY situation. Markets can move strongly bullish even without a shift into backwardation occuring because an imbalance in supply and demand that it expects to continue for some time. However, when there is a supply shortage or huge demand spike, the move towards BACKWARDATION will occur.

Generally this is the result of a type of concern that can easily move to FEAR or outright PANIC on the part of those who need the commodity that they are not going to be able to secure enough supply of that particular commodity that is necessary to conduct their business. Minneapolis Grain some years ago always comes to my mind. More recently, last year CORN prices did the same in the face of a near panic brought on by a drought ravaged crop.

All this being said, the structure currently present in the gold market is normal. Here are the CLOSING PRICES  for the four main gold contracts from last Friday:

February 2013   $1607.50
April  2013        $1610.30
June  2013        $1611.60
August 2013      $1613.30


As you can clearly see, each contract is trading at a discount to its successor. This is a normal market structure which is indicative of the COSTS of storage over those months, plus interest and insurance. There is not the least sign of backwardation.

Those who like to quote the spot price of gold and then compare that to the delivery month and claim backwardation exists simply do not understand the term nor the board structure. Basis is the difference between the spot or cash price of a commodity and the price of the nearest futures contract. Trying to nail that down can be tricky however because basis can be all over the place depending on the one quoting it. For instance, the basis in the corn market right now is swinging wildly. I have seen it quoted as high as $0.50 over. The problem is the corn price is imploding lower all the while the cash market is at a premium. All this means is that farmers here in the US are reluctant to turn loose of their corn right now and that is making supply for old crop scarce. What is happening however is that buyers are not willing to pay them this much for it and are instead sourcing from S. America or holding off on filling their needs until the harvest ramps up down that way. I could just as well make the argument that corn prices should not be moving lower because the cash corn market is trading above the corn futures market that the writer of the article about gold being circulated is making. What matters is the BOARD STRUCTURE. Nothing else.

Besides, there is also the issue of liquidity issues in the front month contract as it prepares to go off the board. Trade dries up and often the contract will not trade at all with bids and offers moving farther apart as the liquidity shrinks. The trades that do occur need to be noted for the exact time of the trade during the day and then obtain the price of spot gold at the exact same time to get anything close to an accurate basis.

This was part of the same nonsense being touted by those claiming that Deutsche Bank was stopping all the gold at the Comex and was moving it back to Germany and cleaning out the Comex warehouses in the process. Guess what, Gold prices have collapsed since that theory has come and gone. Again, no change in board structure; it was just more foolish HOPE masquerading as FACT. Deutsche was indeed doing some large stopping but how the hell do we know where that gold was going. Quite frankly, who even cares. If the board structure had changed as a result of all that, then we would have had something to chew on.

It comes down to this - SUPPLY and DEMAND - when an imbalance exists that is severe, it will always show up on the futures board. Everything else is just market noise. Sort it out and you will be a good trader; act blindly on it as if it is fact and you will join the ever growing ranks of those who become road pizza on the floor of the futures exchanges.

Some Gun Manufacturers are Fighting Back

Hats off to these gun manufacturers  - those of you looking at acquiring firearms for your personal use might want to consider doing business with some of these folks...

http://www.breitbart.com/Big-Government/2013/02/15/Gun-Companies-To-State-Governments-With-Strict-Gun-Laws-No-Guns-For-You

Gun Companies Refuse Sales to State Governments with Strict Gun Laws

Six gun companies have announced plans to stop selling any of their products to any government agency in states that severely limit the rights of private gun ownership.

Trader Dan Interview at King World News Metals Wrap

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

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2013/2/16_KWN_Weekly_Metals_Wrap.html

Speculative Money Flowing out of Gold

This afternoon's (Friday) Commitment of Traders report confirms what I have been discussing here on this site as well as in my audio interviews over at King World News Metals Wrap, namely, that the Central Banks have managed to curtail speculative money flows into Gold and direct those money flows into equities.

This is the reason gold cannot find much in the way of traction to the upside and cannot mount any sustained moves higher. Quite simply, big specs are using rallies into resistance to unload stale longs and put on new shorts. Now that near term momentum has shifted to the downside, they are also selling into weakness and pressuring the metal even lower.

Notice that since October of last year, hedge funds have been steadily liquidating long positions in the gold market while simultaneously instituting brand new short positions. The result of money flows out of the gold market that began in that month,  in addition to fresh shorting, has sent the gold price down $116/ounce as of Tuesday of this week, when the data for the COT is captured by the CFTC. Gold has since fallen another $39 as of Friday so one can assume that further long liquidation has been taking place by hedge funds along with another fresh burst of short selling by this same group of traders. Another way of saying this is that gold has fallen $155/ounce since this movement or repositioning by large hedge funds has occured in earnest.

I should also note that this is the LARGEST outright short position by hedge funds in Five Years.... that is quite remarkable to say the least.

Gold loses Support

Gold bears have been salivating for nearly 5 weeks now over the prospect of setting off the avalanche of sell stops that had been building below the support region marked on the chart starting near $1640 and extending to $1630. They hit them and more today setting off a selling cascade that also nailed the sell stops just below $1620. That was enough, along with some brand new short selling, to take gold down towards the psychological support level at $1600. It then briefly penetrated that line but managed to claw its way back up as short term traders rang the cash register after this week's fall of $60+.

The pit session close was a good $10 off the intraday low but in the aftermarket gold continued to attract selling pressure and was pivoting around the $1606 level for most of the late afternoon. The last 30 minute or so of trading in the stock market saw that sector begin recovering off the Wal-Mart email fiasco news and as it did, gold began to drift higher. Prior to that it had moved back down towards $1604 again.

I mentioned earlier this week that a strong break of support on good volume would turn the trend indicator, the ADX, into a trend mode and that is what it did. Note on the indicator that the negative DMI (red line) has exceeded its previous peak and is now moving towards the next peak made near mid-December of last year. +DMI is also workly steadily lower confirming the move while the ADX line is now rising indicating that a short term trend lower is in effect.

Gold will need to recapture $1640 at a bare minimum to turn this indicator friendly and push out some weak-handed shorts but more than anything, $1665 - $1670 to get any serious large scale short covering started. The 200 day moving average comes in near $1664 and that will serve to attract selling for the time being.

Right now the story remains the same - the Central Banks of the West (Japan is included) have managed to pull off one helluva feat by corraling the hedge funds out of commodities (and gold) and into equities, the only game in town to capture any decent yield on investment in this pathetically low, near zero , interest rate environment that they have created.

As far as downside in gold goes, today's low will serve as the initial level of chart support as handle of "15" will serve to attract some value-based buying as it has been a while since we have seen that price. If the market cannot hold there, I see some light chart support near $1585 or so. Below that, $1560 and then $1545.

The HUI looks beyond pathetic. Barrick announced that they will be selling off some non-productive assets and properties, etc, to streamline their operations and reduce costs. That is a very good sign that some of these mining CEO's are getting the message from the market: "Get your financial house in order and get costs under control so that you can return value to stockholders or else...". It is a pity that it has taken a beating of this severity to wake some of these guys up. One last thing - be selective about which gold companies you want to own. Make sure that management is serious about running a tight ship.