US Dollar running into some selling

The US Dollar has been able to keep its footing above the 50 day moving average on its daily price chart which is technically bullish but it does seem to be running into plenty of willing sellers between 76.50 - 76.00.

While the Daily chart is much improved its weekly chart still shows it in a definite downtrend.

If the Dollar is going to extend its rally from current levels, it is going to need to take out 76.50 for starters and hold that level going into the close of the trading week.

While gold has been pretty much ignoring what the Dollar has been doing of late, the Dollar still is exerting an influence on the overall commodity sector. Its recent weakness of the past three trading sessions, which I believe is tied to dovish talk coming out of the Fed, has enabled the fund money flows to come back into the commodity sector in general. This has pushed the CCI back above the 640 level, a level which I believe is indicative of the appetite of the hedge fund community for risk. Above 640, they love risk; below 640, they hate risk. Wax on; Wax off.

If the Dollar does rally through 76.50, it is doubtful that the CCI will be able to hold above the 640 level. If the Dollar falls further down towards the 50 day moving average near 75.25, the CCI will continue to push higher.

Since silver is perhaps the strongest recipient of the risk trade, the weaker the Dollar, the more likely we will see silver back up near $40.

What is happening right now is that the same weakness in economic data releases from the US showing an economy that is in danger of stalling, data which had initially worked to throw the risk trades off the table, now seems to be working in the opposite with traders/investors viewing the dovish comments from certain Fed officials as a sign that the Fed is not going to change an accomodative monetary policy. In other words, interest rates will stay at extremely low levels for at least another 12 months. Some are thinking a step further will be some form of stimulus coming from the Fed as well.

If this thinking is for real and begins to take hold, the Fed will be extremely hesitant to cross the market since the reaction would be a huge sell off in equities and a smashing of the commodity markets by hedge funds running out of risk trades. That would instill fears of deflation once again, somethign which the Bernanke-led Fed will not permit.

For now, the commodity complex is signaling that the market has baked into the cake the end of QE2 but not the end of low interest rates with some expecting further stimulus. The more the expectation of additional Fed stimulus grows, the weaker the Dollar will become and the stronger gold will be.

We will have to watch the Dollar's price action to get some sort of clue to what the consensus of the investor community is in this regards.

Investors looking to the Fed for stimulus again?

It is perhaps a bit premature to jump to conclusions but today's price action in the overall commodity sector seems to be signaling that a subtle shift is occuring in the minds of some investors in regards to the Fed and the upcoming end to QE2 at the end of next month.

Fed governor Bullard might have been the one who got the ball rolling by his comments from yesterday when he stated that there would more than likely be no monetary tightening until later next year. That put a firm bid under many commodity markets and kicked some of them strongly higher yesterday. It also seemed to pull the Dollar down somewhat from its best levels of the session even while it was supported by an aversion to the Euro based on the woes in Euroland.

Today we are seeing a sharp rise in the CCI (Continuous Commodity Index) which has taken it up past that key 640 level that I am closely monitoring. We are also seeing the Dollar unable to push higher. With money flows coming back into the commodity sector, it comes as no surprise that those markets which led the sector lower are now leading the sector higher. That is why silver is so strong this morning. Also, crude oil is trading closer to $101.

What might be happening is that investors are looking at the ugly chart pattern forming on the S&P and seeing this recent near-collapse in commodity prices and putting two and two together. What I mean by that is they are thinking that while the come-down in commodity prices, notably energy and some foods has been welcome, no one wants to see a collapse of the magnitude of 2008. It was not that long ago when I posted a comment here at my site and wondered whether a deflationary mindset was creeping back in. That word, "deflation", sends dread and fear running down the backs of Chairman Bernanke. Bernanke will not let such a mindset get firmly established.

With fears of a slowdown in growth for the emerging markets, and a concerns that recent US economic data has been weak, traders are beginning to suspect that the doves at the Fed are going to have their way and that some sort of stimulus is going to be forthcoming from the Fed. Keep in mind that the Fed views as part of its mandate, growth in employment. With this sort of data coming out and with the thinking in connected circles that the sharp fall in commodity prices has taken the wind out of the inflation genie for the short term, the Fed now has room to come up with some sort of stimulus, whether that be another round of QE or something else.

Again, one day does not a trend make but I do find it noteworthy to see the extent of the money flows coming back into the commodity sector today. That would not be occuring unless traders believed that the Fed was going to shift gears and perhaps become more accomodative. It could be that the consensus is that the Fed overshot it to the upside the first time around, then overshot it to the downside by sounding too hawkish of late and now may be trying to find a happy medium.

Either way, for today at least, watching copper moving up nearly 2.5%, enough traders think that something friendly is coming down the pike and is paving the way for "risk trades" to return.

4 Hour Silver Chart

Silver pushed past resistance at the top of its narrow range which came in near $36. It ran higher in very early Asian trade but has not been able to extend its gains and push beyond $37. It has a band of overhead resistance near $37.50 that will be formidable and will need to give way if it is going to make a push towards $40.

Fed's Bullard gives Commodity Rally the Green Light - Goldman helps out

If you are looking for a reason to explain the strength seen across a widespread portion of the commodity sector today, particularly silver, crude oil and gasoline, look no further than comments from the St. Louis Federal Reserve President Bullard, who actually provided a date in the future at which the Fed might begin pulling back on its monetary accomodation.

He was speaking at a Rotary Club meeting in Missouri when he stated that it might be in the SECOND HALF OF NEXT YEAR that the Fed would begin to effectively tighten.

The Fed Funds futures contract is signaling a move higher in the Fed Funds rate in the July 2012 contract.

Once the market digested those comments, some of the commodity markets got a fresh influx of hot money flows lifting them strongly higher on the session. No surprise that Goldman would issue their call to buy commodities. They obviously knew in advance.

That buying was enough to take silver out of the top of its recent tighter range near $36. It has a chance now to make a run towards $37.50. Only a good breakout above $40 will see it resume its uptrending move in earnest.

Crude oil punched through $100 today, no mean feat considering the selling it has been experiencing of late due to risk aversion flows. Goldman Sachs, whose call for lower commodities a few weeks back, touched off an avalanche of selling, changed their colors and came out today with a buy recommendation for several commodity markets, including crude oil. Crude was already moving higher on that news but when the Bullard comments hit the wire, it got an extra kick higher.

While today's move higher in crude is impressive, it is still stuck in a range trade on the technical price charts and will need a solid close above $101 at a bare minimum if it is going to set off any fireworks in there. Unleaded gasoline needs a closing push through today's session high near $302.50 to get something going in there.

The CCI, Continuous Commodity Index, while higher today, is still trading below 640. I view this level as a pivot around which it is rotating and which it must clear on the upside if we are going to see a solid revival in the overall "buy commodities" theme. There are still more than a few individual commodity sectors which are lagging badly, among them the grains and the livestock markets. If those both turn in conjunction with higher energy and metals prices, then I think we are on to something again with the risk trades. If not, it will be more range trading and consolidation for the sector as whole with traders having to hand pick which markets that they want to buy instead of just plopping down money on anything tangible and then waiting for prices to go higher.

In a perverse sort of way, Bullard's comments managed to get the best of all worlds for the Fed - they put a bid under the equity markets as traders were less fearful of monetary accomodation coming off anytime soon while bonds moved higher, shoving yields lower, on the idea that the easy monetary policy was indicative of the Fed's caution towards any economic recovery. Today was one of those days where the Fed got to have its cake and eat it too.

While the broad equity markets were on the plus side today, the mining stocks as exemplified by the HUI and the XAU confirmed technical bottoms by todays strong showing. They have been flirting with bottoming action for nearly a week now but were not quite able to get the job done. The solid push through last week's high for both indices is a bullish chart development and augurs for further gains, provided that we do not get any contradictory statements coming from any other Fed governor soon.

US Dollar now solidly above the 50 day moving average

The "risk aversion/slowing global growth" trades have resulted in a huge unwind of carry trades over the last month. This unwind is bringing upward pressure on the funding currencies of choice, not the least of which has been the US Dollar due to the ultra low interest rates here in the US.

This continued exodus from risk has pushed the US Dollar firmly above its 50 day moving average and put it into position to actually challenge its 100 day moving average, a critical technical level on the price charts. While there is not the least bit of fundamental support for strength in the US Dollar, these technical factors which are driving it cannot be ignored by traders/investors. How much longer the Dollar can benefit from being the "NOT the EURO" trade is unclear but it is coming quite close to the region marked on the chart which will give us a clue as to its direction over the coming summer months.

Note on the chart the two horizontal lines drawn that form a zone between 77.00 - 76.70. Note also that the downward sloping 100 day moving average line falls right into the middle of this zone.

If the Dollar rally is going to fail, it will fail near this zone. If it does not, then there exists a very good chance that the risk trade unwind will push the Dollar upwards toward the 200 day moving average and the region near 78.

What is most interesting however is how gold is responding to this bout of strength in the Dollar - it is not breaking lower but is moving steadily higher. I referenced this in my earlier comments from today where I spoke to the strength in both Euro priced and British Pound priced gold. What these charts are telling us and what this price action is crying is that gold is trading as a currency with its own virtues in a time in which there is a growing lack of confidence in the monetary authorities of both Euroland and the US, as well as other nations around the planet.

Keep in mind also that the summer time is generally not a season during which gold exhibits a great deal of strength on an historical basis. Should we see the kind of resilience continue in gold over the summer that we are currently seeing, I think it will be an early indicator that we are going to see a new record high price in the yellow metal sometime during the 3rd quarter of this year. Stay tuned on this one.

Ron Paul's commentary on the debt ceiling

I recently took quite a bit of flak from those supporters of Ron Paul who disputed the account published in the New York Sun that the Congressman from Texas had advocated selling off some of the nation's gold to pay for its debts.

I was then and still am opposed to that idea on several grounds not the least of which is the idea that there is insufficient gold, even at the current market value, to make a serious dent in the gargantuan $14 trillion + debt burden of the US. That then begs the question as to which class of debtors would get the option of being paid in gold, US citizens who own the debt either directly or indirectly through investments made in pension funds or mutual funds, etc., or foreign creditors such as China who hold a tremendous amount of our overall debt.

First of all, who would make such a decision? Secondly, no matter which group was chosen, the other group was going to be provoked into an angry response. Certainly if China were snubbed in favor of our own citizens, they being our banker, the fallout would not at all be pleasant. If China were paid in gold and our own citizens left to be paid in a depreciating fiat currency, the noise of protest and outrage here at home would be deafening.

The main issue I have with selling our gold to pay off our debt is that it smells too much to me like a scenario in which a drunken spendthrift has run his family into the debt house forcing the unfortunate souls to sell anything they have left of value to extricate themselves from their prison. In our case however it is a prison imposed by the reckless folly and stupidity of the political class of this nation.

I see a future for gold in a revised monetary system and I believe that the US would be much better served by retaining our nation's gold holdings intact (whatever we happen to have left of those holdings is anyone's guess) rather than selling off such a precious asset.

I would love to get further into this topic but that is not my intention at this time. In the interest of fairness and to give credit where credit is due, the honorable Congressman from Texas has issued a statement on his website detailing his strong opposition to extending the debt ceiling. Let me say that this is Ron Paul at his best and he has my complete support when he makes a statement of such nature.

I would much rather see statements of this kind, followed up with action by a majority of Republicans in Congress, that would enforce a fiscal restraint on our reckless and dangerous spending, rather than any talk of potential gold sales.

Hats off to the Congressman for this one. From Dr. Paul's comments below:

Stop Raising the Debt Ceiling
The federal government once again has reached the limit of its legal ability to borrow money, meaning it cannot issue new Treasury debt without action by Congress to increase the debt ceiling limit. 

Please be sure to read the entire set of comments by clicking here:

http://paul.house.gov/index.php?option=com_content&view=article&id=1868:stop-raising-the-debt-ceiling&catid=62:texas-straight-talk&Itemid=69

Gold strength in Euro and British Pound terms firming up US Dollar priced gold

The same concerns that are sending equity market bulls scurrying for cover, namely, European sovereign debt fears and  a growing sense that an overall slowdown in the global economy is coming, are sending gold higher in a display of resilience which undoubtedly has been causing a lot of angst among gold bears.

Take a look at the following charts to see the remarkable performance of the yellow metal.

Meanwhile, U S Dollar priced gold has clawed its way back towards heavy resistance near the $1520 level. If gold can take this out and hold above it for a few hours, it sets up a run towards $1530, which is the last barrier standing between it and $1550.

Initial support has moved up towards $1500 which is acting as a floor right now. One has to be tremendously impressed with the strength in gold coming in the face of a Dollar that has breached overhead chart resistance and a sharp move lower in the US equity markets. Additionally, the brainless hedge fund algorithms are busy throwing away anything looking remotely like a commodity today (no one is going to eat since the stock market is falling) which is not having any impact on gold whatsoever. It truly is functioning like a safe haven.

Also, while the equity market weakness is weighing on the mining shares, both the HUI and the XAU continue to hold above recent lows.

Silver - Commitment of Traders

This week's release of the Commitment of Traders report by the CFTC contained some noteworthy developments in regards to the silver market. I discussed this with Eric King so make sure to listen in to the KWN Weekly Metals Wrap where we cover this.

If you want to have a visual to go along with that discussion, I am providing it here in the form of this chart.

First of all, the hedge fund category (Managed Money), has been steadily liquidating their long positions in silver for some time now and that continued this past week. The result is that their overall net long position is now at levels last seen in this category dating back to the late February- March 2010 time frame. At that time, the price of silver was trading between $16.50 and $17.30!  Yet here we are with silver sitting closer to $35. In other words, the price of silver has doubled since then while the hedge fund position is at the same level as it was when price was half of what it is today.

What this tells us is that once silver falls back into favor with the speculative crowd, it will launch its next leg higher from a substantially higher price level. Let's assume for the moment  that the interest to be on the long side reaches levels commensurate with what we have seen recently. It is easily conceivable that the price could effectively double from the point at which that next leg higher commences. I do not know from what level that will occur or the time frame, but with the large specs having been greatly cleaned out of the silver market, there will be enormous upside potential in this market when conditions are ripe.

The flip side of this and the second point worth noting is that the big commercial net short position is shrinking quite rapidly. As you can see on the chart by following the horizontal line across the chart, their net short position is now the smallest it has been since May 2009, a full two years ago! Silver was trading between $12 - $14 back then.

Also related to this is that the Swap Dealers are now net longs. They have not been on this side of the market since late November of last year.

What I am atttempting to say that this consolidation period for the metal is extremely healthy for the long term. It continues to see more and more speculative long side liquidation but that is being met by a very large amount of short covering from the biggest shorts in the silver market. The result of this has been to lock silver into a range trade which is keeping the metal from breaking down substantially further and producing the curent trading range that we see on the price charts.

We therefore would have to see a sharp pullback in commercial short covering activity for the market to collapse in price. They are steadily buying and their buying is of sufficient size that it is absorbing the hedge fund liquidation-related selling. Quite frankly, as long as the bullion banks keep buying I do not see where we will get the firepower of selling that would be necessary to cause silver to fall apart. One would almost have to see the hedge funds actively take to the short side of the market to generate enough force to press silver down through the kind of buying that the commercials are now providing.

The more the hedge fund long side exposure keeps dropping, the better as far as I am concerned provided that this trading range continues with the market holding above the recent lows in price. The ideal setup for silver would be for it to build a rock, solid base of support at a new and higher price level, let's say somewhere near and around $30 or so, from which it can then make the next leg higher in this now decade long+ bull market.