Mining Shares Continue Weak

While I would dearly love to be able to provide some bullish news for those who favor gold, unfortunately I cannot. The charts are simply not showing any reason to refute the bearish case.

Consider in particular the HUI, or index of mining shares. I have deliberately included a weekly chart to provide a longer term perspective.

Notice the second indicator which is a proprietary one that I employ - it is basically a trending indicator. What is really striking is just how bearish the price action in this sector has been for the last two years. As you can see, this indicator only flipped positive for a mere 12 weeks out of the entire period since October 2011. In other words, 12 weeks out of 104 week total. That is just horrendous!

What is most discouraging is the indicator has resumed moving lower once again as it is now down for the last 5 weeks in a row. For a brief moment, it appeared that it was going to make an effort to cross above the "0" line and become positive but hopes for that faded at the end of August.

About the only thing I can say the least bit positive about this particular indicator right now is that it has the "possibility" of setting up a bullish divergence if the HUI moves down to the previous low made in late June but even at that, it would only confirm the existence of a friendly divergence, but not necessarily an actual buy signal.

Below that indicator is the Directional Movement Indicator, another trend following tool. Note that the Red Line or Negative Directional Movement has been above the Blue Line, or Positive Directional Movement for most of the last two year period. It is currently far above that blue line even now. In other words, though the solid ADX line is moving lower indicating that the downtrend has been broken or suspended which is perhaps a better way of saying things, the bias is still to the DOWNSIDE unless or until proven otherwise.

When you look at the 50 week moving average which is over 100 points ABOVE the current price and headed lower, it is impossible to make any sort of bullish argument for this sector.

One can argue that the gold shares might be attractive from a "Value" buying perspective but the problem with that is that many expect them to fall even further yet and are certainly in no hurry to buy. Maybe in 2014... who knows at this point....

Like I said, it is very difficult to find any bullish consolation in the entire sector. What has me concerned is this bearish price action in the shares is suggesting that the worst is not over for the actual gold price. We will see how predictive these things are, one way or the other.

Bonds and Gold back to Safe Havens Again?

I noted in yesterday's comments that neither US bonds or the gold market were acting like the typical safe haven trade that one would have normally expected to see during a time of crisis ( debt ceiling, government shutdown, etc.).

Gold was sold off on fears of a slowing economy as were the majority of commodities in yesterday's trading. Bonds were also dumped.

Today, we seem to have the exact opposite price action occurring - gold is up, the majority of commodity markets are in the green and the bond market was soaring earlier in the session. It is almost as if the big macro trade was back on today with the lower US Dollar spurring buying of commodities rather indiscriminately as was prone to happen during past episodes of that particular trade.

What I find almost bizarre is seeing report after report about analysts/investors worried about the current government shutdown being prolonged and a risk of a failure to get any sort of agreement to raise the debt ceiling which would result in either a credit downgrade of the US rating or default. such fears are preposterous in my view as the US takes in plenty of money to service its interest payments. However, think about this - the supposed fear is one of default or a credit downgrade and yet the lemmings cannot seem to stuff enough of these US government IOU's (bonds, notes, etc.) into their portfolio merely because the US stock market has been experiencing some weakness in today's session.

The analogy is obvious - let's say my next door neighbor is head over heels in debt and has been paying his bills by borrowing money from the folks in the neighborhood. He has enough of an income coming in that he can pay the interest that he has promised to pay to anyone willing to lend him money but one thing is for sure, he cannot pay back the principal. Now, he finds that his expenses continue to rise because he refuses to make any changes in his extravagant lifestyle so he announces with great fanfare that he is going to borrow more money from another set of neighbors promising to pay them back both principal and interest. Would any of you feel comfortable lending to this leech? Yet, that is exactly what is transpiring in the bond market today. The very items that investors are supposedly worried about being downgraded ( U S debt obligations) are being scooped up in droves by eager buyers.

I don't know whether to laugh at such lunacy or weep that so many can be so ignorant and oblivious to the staggering amounts of debt that the US government and its spendthrift politicians continue saddle the nation with.

Crowds go mad en masse and only come to their senses one by one, and slowly at that.

Gold seemed to get a bid today on the heels of the ADP jobs number. The private firm released a number that was LOWER than analysts had been expecting and this fed into the idea that the Fed would be forced to maintain the QE at full capacity.

Seriously, this sort of nonsense gets really old. The Fed will be doing QE until the cows come home without any structural changes to the US economy (getting rid of obamacare) and reform of regulations that are impeding companies from expanding and thus hiring. As stated here previously, if 4 rounds of QE has yet to produce any sort of runaway inflation why does anyone believe that a prolonging of the current program (QE4) is going to somehow be a catalyst for future inflation.

The truth is that gold is stuck in a broad sideways pattern in which dips get bought and rallies get sold. Until it shows me something on the price charts which indicates anything to the contrary, I expect this pattern to continue. For traders, that will mean rallies are selling opportunities while dips can be used to cover.

Crude oil has a big rally today for some reason - that which was cited was an EIA report showing a drawdown in stockpiles at Cushing as well as news from TransCanada which released news that the southern leg of the Keystone pipeline which it is constructing is 95% and should be open to move crude sometime after October. That was seized upon as a reason to buy crude oil futures, especially after the sharp fall in price the last few days as the thinking was this would help to further drawdown crude stockpiles at that all important hub.

It's funny how thinking shifts from day to day isn't it? Yesterday, government shutdown fears entailing furloughed workers and no salaries for many was viewed as a drag or negative factor for growth in the US economy. Today, it is no where to be seen! 

Personally, my view is that this is further evidence that the hedge fund computers have destroyed any integrity that might have been left in our financial markets. To see silver implode lower one day only to watch it shoot back up the next is beyond silly - it is a sign of a dysfunctional market system.

I have noted some levels on the gold chart below which are worth monitoring. Other than that, there really is not much worth saying about gold today. Until it gets a clear break out of this range trade, the market is going to bee-bop back and forth as it responds to the vagaries of shifting sentiment and economic news.

Lastly, surprise, surprise, the gold stocks, as evidenced by the HUI are higher today. Take a picture of that screen because no one is liable to believe you if you don't document this rare occurrence.

 

Gold Breaks Psychological Support

Gold has fallen through psychological support at the round number of $1300 surrendering its "13" handle and replacing it with a "12". This will add to the already bearish sentiment towards the metal which once again has failed to act as a safe haven during a time of crisis. For that matter, neither are US bonds providing any kind of haven right. With the US fiscal condition being at the heart of the current crisis, it would certainly be counterintuitive to see US bond prices moving higher.

Additionally, gold has also broken technical chart support down at the recent low at $1290. Bulls must quickly take prices back above this level and preferably above $1300 if they are to avoid suffering deeper losses. Bears are growling today and flexing their muscles having picked off downside sell stops and that has turned the momentum negative. Hedge fund computers will certainly notice that.

There is some additional downside support coming in near $1280 extending to $1270. Should that fail, losses will accelerate. Bulls need some help and they need it quickly.

Losses in the soybean market have also worked to pull the rug out from under silver, which still maintains a connection to this market, even though that link has weakened a great deal in recent times. Many traders tend to look at soybean prices as a sort of proxy for food prices in general and if the former are moving lower, they tend to discount any inflation fears and thus sell silver.

The link was much stronger back in my early days of trading however. Silver is one of those markets that takes its cues from several inputs and right now, those inputs are negative.

The physical market can stem the bleeding in these precious metals but that buying in and of itself cannot push prices higher without momentum based buying and right now momentum is trending lower.

I have also included a longer term weekly chart of gold to illustrate the problem with this market from a technical analysis standpoint. Start at the beginning of 2013 and look at the bottom indicator, the old, very reliable and familiar RSI, or Relative Strength Index. For the entirety of this year, this index has not moved above the 50 level for this weekly time frame. As a matter of fact it has oscillated between 50 on the top and 20 on the bottom. By definition, this is a market that is in a BEARISH posture. If gold were able to at least push high enough to take the RSI above 65, I would feel more comfortable about its prospects for the immediate future. It cannot even accomplish that in spite of the recent FOMC press release stating that there would be no letup in the bond buying program. What is it going to take to get this metal to have anything to the upside if it cannot push higher and remain higher on that sort of news?

Forget all the chatter about BACKWARDATION, DWINDLING COMEX STOCKS, etc. None of that matters. As stated before the only thing that matters is PRICE ACTION. Why is this so important? Simple- because in today's markets Hedge Funds are the drivers of trends and they are not buying this market except for bursts of short covering after which subsides, they promptly return to selling. Translations - they are currently missing in action from the buy side. Until they return, price will move lower. If any of those aforementioned issues were indeed so significant, the price action would reflect it. It is not.


Also, the largest gold ETF on the planets, GLD, continues to experience drawdowns of its reported holdings. How in the world can that be considered anything but bearish as it indicates a lack of sustained speculative interest in the yellow metal?



Back to the chart however - if you note those Fibonacci Retracement levels provided on the chart. I displayed only the 38.2% level for the sake of clarity and to avoid cluttering the chart. Note that the rally higher that began in late June/early July off the spike low below 1200 only managed to reach the 38.2% retracement level off last year's high near 1800 before the metal began moving lower once again. It thus failed to extend above the psychologically important $1400 level. That attracted additional selling.

It is now trading within the confines to the pitchfork with the upper line acting as resistance. If the line is valid, the market has the potential to drop towards the median line again which unfortunately is now below $1200 based on this time frame. Also, since the RSI has been mired in that trading range between 50 and 20 and is now headed lower, it is conceivable that we could see it begin moving  lower until it nears that same level once again.

With all the money printing occurring across the planet, it is difficult to conceive of gold moving lower again but from a purely Technical Analysis perspective, it is quite feasible. Only time will tell if Asian demand for the physical metal is strong enough to overcome Western oriented selling and finally put a LONG TERM bottom in this market.

It would certainly help matters if the Indian government would lift that ill-advised and senseless import curb on gold. After all, a 10% tax on gold coming into the country will only do one thing - kill demand, at least it will kill "legal demand". The festival season will soon be upon us so perhaps saner heads will prevail over there. We will see.

While it would be most unpleasant for the gold bulls, I would personally like to see this metal move lower in order to set up a RETEST of the $1200 level and perhaps that summer low itself to see how the metals acts. If it bounces from there, that would tend to indicate that we finally have a final, lasting bottom. In that case, I believe buyers would be quite active and very vigorous. But the truth is the bulls thus far have had very little conviction especially as indicated by the continued poor performance of the mining shares. We need to see solid bottoms in that sector and in the bullion before there is another chance of a solid up-leg in price.


Also, please keep in mind something I suggested mining companies to do some time ago now.... hedges must be put in place to secure profits. Any mining company that refuses to lock in profitable prices on mined metal is basically taking the role of a speculator with its shareholders' wealth on the line. If you can mine gold at a profit, and fail to act to lock in that profit, exposing your shareholders to the vagaries of the market, that is foolish. Mining companies should be in the business of securing profits; not running a pseudo hedge fund out of their risk management division. Leave the risk to we speculators; that is what we do by profession.

This is also one of the reasons that we are probably seeing rallies being sold so heavily. I believe some miners are indeed using those to secure solid hedges for some of their production and to lock in those profits.

It will take a complete shift in sentiment towards gold and of course, silver, from one of bearishness to one of bullishness in order to dissuade me from seeing hedging as a sound practice at this time. While it is tempting for any mining company to remain unhedged in a rising gold price environment however, it should be obvious that management has no more clue as to where the price of gold is headed over the short term than any other informed market participants.

Falling Commodity Prices undercut Gold and especially Silver

I have been posting a chart of the broad commodity sector for many years now here on this site and elsewhere. Earlier on, I employed my favorite, the Continuous Commodity Index or CCI, which unfortunately died an untimely and unheralded death at the hands of its originators. I have recently moved over to employing the Goldman Sachs Commodity Index in lieu of the more widely known CRB index, which I believe is far too heavily weighted in energies to paint an accurate picture of the broader commodity complex.

Regardless of the reasons I have chosen, the chart speaks for itself. Commodity prices are going no where to the upside. They have not broken down decisively to the downside either but the chart looks like it is leaning lower than higher. This fact, and the fact that the US labor markets are atrocious, is what is undercutting both gold and especially silver.

I have said it many times now, silver must have an inflationary environment if it is to thrive. That is lacking and as long as it is, silver is going to UNDERPERFORM gold.

Also consider something else when you view this chart - the US Dollar is trapped in a broad sideways range between roughly 79 on the bottom and 84 on the top. Currently it is working in the lower portion of this range. In the past Dollar weakness has led to widespread buying of commodities across the board, irrespective of their fundamental supply/demand equation. That is no longer the case. Buying commodities merely because the US Dollar is weaker is no longer a wise option as the markets are beginning to focus more on the fundamentals of specific commodity markets. That in itself is healthy in my opinion as hedge fund buying in the past has skewed price discovery and is not healthy for any commodity over the long haul as it sends false signals to the industry.

Speculative driven rallies in any commodity lead to exorbitantly high prices which foster more production. There is a definite time lag but it is nonetheless axiomatic. We are seeing that now across many individual commodity markets.

The Birth of Obamacare and the Death of American Jobs and Hope

Today is the day that the monstrosity perversely named, "The Affordable Care Act" goes into effect. This job killing abomination is single-handedly decimating the very middle class that it was deceitfully claimed by the Dissembler in Chief to benefit the most.

I have been explaining to friends and acquaintances the deleterious impact of this horrible law but found an excellent article out on the web at one of the websites that I frequent which encapsulates perfectly the carnage that this albatross around the neck of the US economy is inflicting.

Read it and weep....when you do, keep in mind that these are real people, our fellow citizens and neighbors, whose lives are being wrecked by this perversion of liberty.

Get ready to read/hear even more of these horror stories. If you wonder why I keep saying over and over again that unless the US undergoes STRUCTURAL REFORMS, the economy is not going to improve enough to allow the Fed to begin scaling back its bond buying program. you will find your answer here. 

In spite of the Quantitative Easing policy which one would expect to be conducive to inflation, the US job market is comatose and as long as wages are stagnant and the jobs situation remains as abysmal as the following article suggests, the fuel for inflationary pressures ( an increase in the Velocity of Money) is not going to be present. That will keep a lid on the price of gold.

Here are the first two paragraphs of the article followed by the link. I strongly urge my readers to check it out. It is eye opening. I will warn you that it is also extremely depressing because none of this had to be; none of it. This is an example of how foolish and ignorant government policy destroys an economy but more precisely, wrecks human lives.


In a few days, Obamacare’s October 1 launch date finally will have arrived. Ever since its passage, supporters of the law have made countless attempts to convince the American people of its viability, dismissing predictions of lost jobs, decreased hours, and rising costs, among others.
Yet from major corporations to local mom-and-pop shops, from entire states to tiny school districts, a wide range of companies and institutions have seen Obamacare’s negative impact on their workers, budgets, and production. Here are 100 examples of how Obamacare is falling short of what was promised.

http://www.nationalreview.com/article/359861/100-unintended-consequences-obamacare-andrew-Johnson

USDA Surprises Corn and Bean Markets

The USDA released one of those famous Grain Stocks reports this morning and it immediately sent the corn and bean markets into a royal tizzy.

Analysts were way off on their projections of both old crop corn stocks and soybean stocks. By that, they were well below the actual numbers that the USDA gave us.

Apparently, the analysts failed to understand that the best cure for high prices is high prices. The simple truth is that the US has lost some market share because of the stubbornly high prices for both corn and beans in front of what is expected to be a record corn crop and the 4th largest soybean crop in history. Many farmers are being ill served by some advisory firms who refuse to accept the fact that the psychology of buyers in the grain markets have changed from the last two years.

If that were not enough, S. American supplies of both corn and beans are abundant and with planting season kicking off down there this month, there is every reason to expect large intentions in the Southern Hemisphere. Obviously weather down that way will play a major role in overall production but early indications ( and common sense for that matter) indicate a desire to plant a large amount of acreage and take advantage of the relatively high prices that the board is still offering producers.

End users of grain and beans are not foolish and unless they need the grain right away, are obviously trying to wait for more plentiful supplies to flow into the pipeline as the combines begin to roll in a big way this week.

This surprisingly bearish news for corn and beans was tempered a bit by the Wheat news  which was mixed. Ending stockpiles came in BELOW the estimates but the current year crop production is expected to be slightly larger than estimates. That is leading to choppy trading in that market for the time being.

If that were not enough, the hog market got hit with a wicked curve ball from USDA with the Quarterly Snout Count in the form of a big bearish surprise.

Were it not for the stubbornly bullish sentiment in the hog market due to the PED virus, hogs would be much lower than they are trading in today's session.

I bring up these things to point out that the futures market is signaling lower corn and soybean prices and perhaps a peak in pork prices for the short term. This will eventually feed through the pipeline and impact FOOD prices DOWNWARDLY. In other words, both reports are not signaling any inflation from this sector for a while. (Beef is still a wildcard as supplies of cattle will be tight but the question is whether or not consumers are going to pay the kind of money for beef that will be required to keep prices elevated).

With crude oil weakening as the lackluster economy stifles demand for energy, both food and energy prices are seeing some downward price pressure. That undercuts the inflation argument considerably, especially with the stagnant job market contributing to stagnant wages.

We are seeing this reflected in gold this morning which ran up to $1350 overnight only to be met with a barrage of selling. Traders/investors are not going to chase gold prices higher unless they have clear evidence of rising prices across the economy. Right now, they are not getting that unless of course one looks at the result of that abomination known as Obamacare on the premiums of health insurance policies all across the land.

There is still dip buying occurring in the gold market but that in and of itself is insufficient to take the market strongly higher and KEEP IT THERE. Gold still needs a spark, a catalyst of some sort and right now it is hard to envision what that might be.

As usual, the hedge funds hold the fortunes of gold and silver in their hands. Their next move is anyone's guess. Further clouding the picture today is that it is both the end of the month and the end of the quarter and there is a large amount of positioning and book squaring occurring which is making reading price movements quite difficult.

Trader Dan Interviewed at King World News Markets and Metals Wrap

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

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/9/28_KWN_Weekly_Metals_Wrap.html

Another Piece of Economic Data - Another Reaction in Gold

The drama remains exactly the same as it has for some time now....a piece of economic news is released and it either confirms or dispels ideas of Fed tapering of bond buying. This time it was the jobless claims number which came in at 305,00 first time claims versus market expectations of 330,000. The news was interpreted as a jobs market improvement or more accurately, a job market that is not deteriorating as bad as some expected and therefore bolstered Fed tapering ideas. Up goes the US Dollar and down goes gold as a result.

Get used to this - every single economic data release is going to be dissected and examined for "clues" to our monetary masters' next move. This is the tragic state to which our once proud financial market system has been reduced. As stated many times here before, go and grab a Daisy and start plucking the pedals as you recite the phrases, "She loves me; she loves me not" and you pretty much have the modern trading algorithm.

If you have noticed, even the bond market has been reduced to playing this infernal game as it has lower today, with interest rates subsequently moving back up again. Up and down, up and down....

The only major markets seemingly unaffected by this were the equity markets which rose on the news. Then again, they rise on any news these days, whether bad or good. What else can be expected here in the land of perpetual bull markets in equities  where bear markets have been rendered an obsolete concept from days gone by.

From a technical analysis perspective, gold is having trouble maintaining its footing above key resistance centered between $1330 - $1335. Rallies are attracting selling and dips towards $1300 are attracting buying. It is still in a range until it proves which way it wants to go. Weakness in the gold mining shares would seem to indicate that it wants to break lower but thus far that has not been the case. In other words, I have no idea where this thing is headed in the short term.

I have included the RSI or Relative Strength Indicator to show you the range trade and lack of clear direction. Notice that for the better part of three weeks, this indicator has been mostly confined between 60 on the top and 20 on the bottom; not a particularly friendly reading. We did get that sharp spike on the day of the FOMC statement which took the RSI through the top of this range and looked as if more promising things were ahead for the metal but it quickly surrendered its gains with the indicator reverting back to its previous pattern.

On this time frame, the RSI would need to clear at least 65 for me to get the least bit excited about the metal but more importantly, it would have to push past the previous price peak made the day of and the day after the FOMC statement. At this point, that does not appear to be in the cards WITHOUT ANOTHER CATALYST coming from somewhere. After all, if gold cannot sustain a rally with a clear statement coming from the Fed that the economy is too weak for them to consider tapering at this time, then what in the world is it going to take to push this metal higher? My answer to that is the same - a LOSS OF CONFIDENCE in the currency and with the Dollar refusing to break down significantly right now, we are not seeing any signs of that. Perhaps the upcoming federal debt ceiling will change some minds in that regards but the jury is still out on that.

The problem for gold remains the same thing I have been saying for weeks now - speculative money is not interested in chasing prices higher. Money inflows are simply not there and without them, this market cannot sustain any rallies. Something is going to have to change in investor/trader sentiment to bring this hot money back into the gold market, and the silver market, for that matter. Until it does, it looks to me like the bears still have the advantage until proven otherwise.