"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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Gold has now managed two consecutive closes above chart resistance near $1650 and is looking firm at this hour. It has a very good shot at testing resistance at $1675- $1680 where it should experience some fairly heavy selling. If the bulls can break through that line, we should see a handle of "17" in front of the metal.
Weakness in the Dollar is aiding the progress of the metal higher.
Downside support comes in near $1640 - $1635 initially followed by $1620.
Silver is benefitting from risk trades being put back on as it and copper are both seeing decent inflows of investment money from hedgies. This is the first close ABOVE $30 for silver in over a month. Follow through in tomorrow's session should see it make a run towards the $32.50 level, which is what stands between it and a push to $35.
We've all seen the tricks being played by food manufacturers in shrinking the size of their products but charging the same price as the former size. The old 5 pound bags of sugar some to my mind. Whether it is cereal or bar-b-sauce, or whatever, the consumer ends up paying the same amount as they once did but they come home with a smaller quantity for their money spent.
All of this is to hide or disguise the impact of inflation. One goes to the store, buys a bag of sugar for the price they paid for it a few years ago and thinks little if anything about it until they realize that they ended up with one pound less sugar than they might have assumed.
Now, I give you the ULTIMATE INFLATION CASUALTY - yes indeed - the lowly but glorious roll of toilet paper.
Look at the following picture and weep for our old familiar friend... the roll of toilet paper on the right is the old sized roll. The new, inflation adjusted roll is on the left - I actually took out a ruler and measured the thing - it is 5/16" of an inch narrower. Think about how much wood pulp that saves the paper manufacturer. The result - VOILA! the package of the new paper costs as much as the old sized rolls cost but you get that much less.
Alas, let us pause for a moment of respect at the passing of the dear friend of our derriere.
The HUI continues to lose value against the price of gold bullion as evidenced by a continued deterioration in the ratio of the price of the HUI to the price of an ounce of gold.
We are reminded continually of two things that have led to this abysmal performance of the gold shares which are rapidly losing speculative interest in favor of the ETF.
The first is the risk of investing in companies that are subject to surprises which happened to Hecla and recently to Kinross. Hedge funds and other large investment groups or players seeing this say to themselves, "Why risk this sort of thing when we can get LEVERAGED EXPOSURE" to the gold price by buying the gold ETF on margin".
There is no such risk inherent in the ETF. No one worries about nationalization of the ETF or environmental lawsuits or some bureaucratic agency shutting it down to clean up debris in a mine.
Secondly -this then leads us to the ratio spread trade. Buy the actual metal either through the ETF or the physical stuff (or even the Comex) and take a corresponding short position in some of the mining companies to further minimize the risk of investing in gold.
This shows up in the rotten performance of the gold shares in general as they continue to decline against the price of bullion . Note that the line goes nearly straight down since the beginning of 2011 with a brief exception of a lousy two months last year.
If one wanted to devise a mechanism to deliberately depress the price of the mining shares they could not have come up with a better mechanism to do so than the gold ETF. The lesson in this is that investors must be extremely selective in choosing gold mining companies to invest in and not just blindly throw money into the sector and thereby hope to be successful. As long as the Gold ETF is in existence, the hedge funds are going to use it as the long leg of these spread trades and actively seek out the weaker gold mining companies to short. At this point I am not sure what it is going to take to reverse this trade as traders will stick with a strategy as long as it works and not a day longer. Long suffering gold mining share owners should continue to press management to take the steps necessary to make it more difficult to short their shares successfully. Failing that they can always pray for a takeover or acquisition!
Dow Jones news is carrying a report this morning from GFMS (formerly Gold Fields Mineral Services)detailing the amount of gold purchased last year by the world's Central Banks. It was indeed a formidable number.
The net purchases of the yellow metal came in near 430 tons, a more than 5-fold increase on the previous year. It was also the highest level recorded since 1964.
To give you a sense of the significance of these purchases - the amount of NET purchases by Central Banks in 2010 was a mere 77 tons!
Surprising to me was the fact that Mexico was the largest buyer as far as the official monetary sector goes. GFMS reports that they added almost 100 tons of gold to their reserves. I would have thought it would have been China to lead the pack.
The other surprising fact was that signatories to the Central Bank Gold Agreement ( this was set up to limit the amount of gold sold by European Central Banks ) sold less than 10 tons for 2011.
The summary - Central Banks are now absorbing a significant amount of world gold production. This should continue to provide very good downside support for the metal on price retracements lower as these banks do NOT CHASE PRICES HIGHER but are there to buy at levels they consider gold to have "value".
Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap.
The inability of the metal to secure a CLOSE above $1,650 in spite of yesterday's surge towards $1,660 has engendered profit taking by shorter-term oriented longs this morning. As noted the other day, the metal has had a strong rally off of a major double bottom on the chart near $1,535 since the last couple of trading days of 2011 to the present coming over $130 higher since then. Longs are wisely pulling some chips off of the table after watching the push higher in yesterday's session fail to attract enough momentum to keep it trading above that $1650 level.
The US Dollar surge to yet another 52 week high is proving to be a source of some rather stiff headwinds for the longs today as the equity markets are selling off and risk aversion trades are showing their usual signature once again.
Dip buying has been the order of the day since this rally began. We will now watch to see where this buying will resurface. There is some light support that should appear near $1625- $1620. If it does not hold there, $1,600 is the next stop.
Bulls will need to push this thing past $1650 again and KEEP IT ABOVE THAT LEVEL to have a legitimate shot at $1675 - $1680, where bullion bank selling can be expected to appear.
The trend on gold since August has been down on this shorter term chart. However, the inability of the bears to take the metal down below $1535 and start another leg lower resulted in a bout of short covering among the weaker hands in that category. Bulls have pressed hard using the strong physical offtake at the lower price levels as their ally and have managed to take the price over $1600 which is constructive. But they have a lot more work to do to turn this chart pattern decidedly bullish.
All three of the above commodities are responding to news today that inflation in China is supposedly slowing somewhat (one always has to read these numbers with a healthy dose of skepticism as the Chinese are becoming almost as adept as US official-sector statisticians). Also adding to the mix is news that the ECB will keep interest rates low and would not rule out additional rate cuts if necessary in their view.
This is music to the ears of gold as it thrives in environments when there is plenty of room for more liquidity. The thinking in regards to China is that they have room to back away from any rate hikes and actually ease credit restrictions which had been put in place over the last year as the authorities there grappled with inflation problems.
Copper liked the news very much as traders there are viewing the news as positive for future demand if credit stays easy.
Note that in this environment silver is outperforming gold. That will continue as long as traders adopt a psychology focusing on future inflation as a result of easy credit instead of the opinion that deflation is the evil genie to be focused upon.
We are basically back to the risk trade today as most commodities are higher (crude oil continues its Yo-Yo-like trade as it is now higher) as the US Dollar sinks back down while the Euro rallies a full point. Grains are dragging on the commodity indices however as a USDA report has sent corn limit down this morning with spillover being seen in the Soybean market. Wheat bulls were also kicked in the groin by the same report showing larger-than-expected supplies of wheat. That news is good for consumers but disappointing for many farmers who are probably looking at corn with a handle of "5" in front of it unless some sort of crop scare down in Argentina surfaces.
Gold has pushed through $1650 and run as high as $1663 but has fallen back from its best levels. The bulls are performing but need to keep it above $1650 to see it run to $1675- $1680.
If Silver, and this is a big "IF", can hold ABOVE $30, it has a very good shot at seeing $32 relatively quickly. It has been unable to hold gains above $30 for some time now so such an event would signal a shift towards the metal by large speculators and hedge funds. We will see how it fares the remainder of the session.
Gold bulls have performed admirably since the last few trading days of 2011 having taken the gold price up over $100 since that time period. The rally has been very impressive, especially given the strength in the US Dollar and the move to a brand new 52 week low in the Euro. However, bulls are now at an inflection point technically and will need to drive it up through today's session high just shy of $1650 if they are going to be able to force a larger number of shorts out and take this thing to the next layer of heavy chart resistance near the $1,680 level.
The market has been encountering selling coming from both profit taking after that $100+ run in addition to fresh short selling by our favorite group (the bullion banks - who else?) That selling is showing up in the market's inability to extend and get a CLOSE above Monday's high. The market has probed that level twice since then and is thus far unable to push higher. If the bulls can perform tomorrow, then this thing should run rapidly towards $1,675 - $1,680 where the bears will make another stand. If not, and the longs get impatient instead, then expect prices to set back towards $1620 first followed by a test of $1600 if that does not uncover dip buying.
A break below $1535, the double bottom region noted on the chart, that does not quickly recover, would signify deeper losses are ahead.
