Quick Overview of Gold

Gold has had a nice bounce off the 1320 level due to robust demand for the actual metal, especially out of Asia. The problem for the metal here in the West is that speculators, most notably hedge funds, are eager sellers of the metal with many pressing it from the short side while others have yanked their money out of the metal to shove it into stocks so as not to miss the rocket blast higher and have to deal with unhappy clients.

I have been concerned that physical demand for the metal will wane as the price moves higher with those who are intent on acquiring the metal waiting, hoping, for a chance to buy it down below $1400 again. Whether they get the chance to do that remains unclear at this point.

I would like to note that the metal has now completed a sizeable bounce off that recent low but has run out of steam when it entered the $1475 - $1485 zone. In the process of so doing, it has carved out what is referred to in technical analysis jargon as a BEARISH PENNANT OR FLAG FORMATION. I have sketched the flag in heavy blue lines so that you can more readily see it. Normally this pattern forms after a steep drop in a stock or commodity which is followed by a mini uptrend. That uptrend then fails and the stock or commodity begins to move lower again.

Some TA analysts will use a break of the lower trend line formed on the actual flag portion of the pennant (think of a flag for a golf course hole and you will be able to visualize it better - In this case of a bearish flag it is an upside down golf course hole flag) - to validate the flag. That is an aggressive posture. I am much more conservative especially when you do get a recovery bounce of the nature and size that we saw occur in gold. I prefer to see the actual bottom of the flagstick taken out before confirming a flag. After all, a bounce off the recent low of some $160 is rather significant. Now, if gold had managed to claw its way back only to $1400 or so before failing, I would be a bit more aggressive but the size and extent of the buying down at that $1320- $1340 level was so strong that only the most aggressive of traders would want to call this flag validated merely because it drops through the lower trend line.

Generally how these formations are used, whether it is a bullish flag or bearish flag, is to measure the length of the flagstick. In this case, that flagstick starts up near $1590 and extends to $1320 for a measurement of $270.

If we use the case of the aggressive trader who decides that a break of the lower trend line (the pennant) has validated the flag, that $270 then gets subtracted from the breakout point, approximately $1470 in this case, to give us a downside target for the next leg lower. That would yield a gold price near $1200 as a final target.

As just stated, I do not recognize a valid pattern here until the bottom near $1320 were to give way. Gold may never reach that point or it may. I simply do not know. If it did, then I would consider the pattern validated if that level failed to hold and would have to look for a gold price of $1320 - $270 = $1050.

Let's just hope that we do not get a violation of $1320!

TIPS SPREAD - Inflation Expectations still Subdued

Those who regularly read this site will know that the last two days' worth of action in the interest rate markets has piqued my interest. I am still unclear on what the rather sharp rise means and whether it is just movement tied to currency market volatility or it is a reflection of something else.

I have gone over to look at the TIPS spread to see if there is any pattern or development there that warrants further attention.

Thus far I do not see anything of note. There is no spike higher indicating a shift towards inflation worries in the market at this point even though yields have risen.

As you can see, back during the depths of the credit crisis, when deflation fears were at their peak, the spread collapsed almost to zero. That meant that the market had basically ruled out any chance whatsoever of the least bit of inflation.

Since the Fed has gotten involved with the QE programs, the spread has moved up towards 2.5 and then dropped off as the various QE programs ran their course and expired (You can see where the inflation expectation falls below 2% when the market feared the impact of a QE cessation). As each new QE program was announced, the market built back inflation expectations between 2.0 - 2.5% or so. Currently we are looking at an expected inflation rate by the market of 2.3% as of Friday this week.

It seems to me that the Fed is using this indicator as a means of determining whether or not its policies are having the appropriate impact on investor sentiment. Based on what I can see of this spread, those Dovish Fed governors who are expressing concerns about inflation not being high enough do not really have much to justify their concerns.

I think we would have to see the spread move below 1.75% to give their view any credence. I would think that if the market believes the economy is strong enough on its own to no longer need any QE efforts, talk of ending that program would not move this spread to narrow significantly. In the past, when those programs expired, the market moved back towards expecting deflationary pressures to begin reasserting themselves.

The flip side to this is the ceiling on this spread. Since the beginning of 2008, the spread has not exceeded 2.64%. Anytime it has run up above 2.5% it has not lasted long even with all the massive QE. It just goes to show you that in spite of the enormous sums of money that have been created through the QE programs, it has barely been sufficient to offset the debt that was being extinguished. Inflation expectations have not been nurtured in spite of it all.

AT what point this changes is unclear but once this spread were to ever exceed that 2.64 - 2.65% level we would know without a shadow of a doubt what the market was thinking in regards to inflation. I still believe that at some point we are going to have to pay the piper for all this massive money creation; I am just not sure about the timing of it all.

Let's keep an eye on this spread to see if we can get any advance warnings of when that just might be.

Trader Dan Interviewed at King World News Markets and Metals Wrap

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

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/5/11_KWN_Weekly_Metals_Wrap.html

Aussie Breaks Par with US Dollar

Yesterday the Japanese Yen broke "PAR" with the US Dollar, a significant development. Today it is the Australian Dollar or "Aussie" which has now broken par.

I mentioned this currency because of its ties to the commodity sector in general. While it is not an exact relationship, the Australian Dollar as a general rule of thumb tends to perform strongly when commodities are in a rising trend. This is  because of the nature of a large part of the Australian economy, which is involved in the production of raw materials. Remember, it was soaring Chinese demand for commodities across the board which helped fan the flames of Australia's economy and contributed to its growth. With Chinese demand apparently slowing somewhat, Australia is feeling the impact. Just this week the RBA lowered interest rates there and brought about a wave of selling into the currency as a result.

Today we are seeing across the board weakness in the commodity sector with hardly a single commodity in the green except for copper and feeder cattle, which are moving higher on the bearish USDA grain reports. That is resulting in more selling of the Aussie. Even the Canadian Dollar is lower today as it too is getting some residual selling coming in as commodity prices, most notably, crude oil are sinking.

This is what makes the move in the interest rate markets even more interesting. The Goldman Sachs Commodity Index (GSCI) is really taking it on the chin in today's session even as interest rates soar higher. One has to wonder which one of these signals is more accurate right now. So far the macro funds are jettisoning commodities as the strong US Dollar has their algorithms selling across the board in the sector. If however, some begin to suspect that the Central Bankers might just get their wish of generating "benign" inflation, then we might see some bottoms forged in the commodity sector although that is way too premature to look for at this point in time. It is just something that we will see if and when we do get a solid shift in sentiment towards inflation and away from deflation.

I might make a note here and tell you that the weakness in the Yen is beginning to impact consumers over in Japan. A large number of products are imported into that country, particularly energy, and with the Yen collapsing, the cost of those imported goods is rising rapidly. This is no doubt the reason that we are seeing such volatility in the Japanese government bond markets over there right now.

Abe and company are getting their wish - they are going to win the battle against deflation no matter what, but the "no matter what" is that which should worry the citizenry over in the land of the rising sun.

Yields Spiking Higher

I am not quite sure what to make of it just yet but we are seeing yields rising across the latter end of the curve today. Yields have generally been quietly sneaking up in the last few sessions but when the Yen fell below PAR with the US Dollar yesterday, something changed in the interest rate markets and they are now spiking.

So far we have watched stocks rally into the stratosphere without a large outflow from bonds in general. I think this is because traders/investors still are a bit leery of this broad based equity market rally especially given the signs of a general slowing of overall global economic conditions. With commodity prices sinking, there has been a consensus that inflation is a non-factor and thus bonds are an okay place into which to diversify some money, "JUST IN CASE".

This week however seems to have brought an indication that things might just be shifting a bit. As you can see from the chart, the Ten Year is pushing back towards the 2% level. Rates have not been able to sustain themselves above this level for any length of time. If they do, then we will want to take note of it since it would be a very serious indicator that sentiment towards bonds and thus inflation, could be undergoing some re-evaluation.

What is especially interesting to me is that this spike higher in interest rates is occurring against a backdrop of sinking commodity prices. On the one hand we are getting deflationary signals in that sector. On the other hand, interest rates are rising. Hmmm......

We keep getting comments from the various Fed governors that inflation is not a concern. As a matter of fact, some were just recently concerned that it was perhaps too low! Needless to say, this assessment does not square with a rise in rates on the back end of the curve. The market is obviously beginning to contradict this although I want to repeat that this is not as of yet confirmed.

Stay tuned on this one.... These interest rates are the single most important market on the planet in my opinion and any shift in sentiment, albeit even a small one, must not be ignored.

US Dollar Surge through 100 Yen Derails Gold

This afternoon, the long awaited movement by the US Dollar through PAR with the Japanese Yen finally occurred. As it did, the entire Forex machine was thrown into convulsions with the US Dollar moving sharply higher against most of the majors. Thus far it has gained almost 2% against the Yen, 1% against the Euro; 1.4% against the Swissie, and nearly .85% against the Aussie. The British Pound and Canadian Dollar are also both moving lower against the Greenback although not to the same extent being witnessed in the other majors.

Gold was weaker throughout most of the session failing to extend on yesterday's late session gains but when the Dollar broke through par against the Yen, sellers came out of everywhere to sit on gold.

Silver and copper both moved lower as well with silver once again failing at $24.

Moving over to the gold chart - I want to continue to emphasize the falling volume in this chart. Speculative fever simply does not exist right now judging by the lackluster volume. Rallies are not generation any enthusiasm which is what one wants to see if the momentum is shifting in favor of the bulls.

Chart resistance beginning near $1470 and extending towards $1485 is confirmed by today's action. Support down near $1440 might be tested overnight depending on the attitude of Asian buyers towards the metal. If they believe that additional downside is possible, they will pull back on their bids and wait for prices to drop lower before swooping in to buy. Remember, physical market demand is what is keeping the gold market supported; if that falters for any reason, speculators will be eager to sell it especially with stocks moving higher. Today, the Dow pushed through 15,100 for a while before a bout of profit taking set in. Specs love equities right now (except for gold and silver miners it seems) and continue to chase prices higher there while jettisoning gold.

I am going to be watching the entirety of the commodity complex quite closely the next few days since the Dollar looks like it wants to now move higher across the board. If so that will more than likely continue to feed into the current spec trade of dumping commodities in favor of equities. With the Aussie weakening further today and having fallen down through its chart support level near 101, commodities could be coming in for a rough ride once again. We are going to want to see how it closes out the week tomorrow.

Were it not for gains in the Grains and in Coffee and Unleaded Gasoline, the commodity complex would have been lower based on the GSCI.

Time precludes me from putting up a chart of the US Dollar right now but it has a chance of testing 83 tomorrow. If it can put in a solid gain above that level, odds favor it making a run to 84. We need to keep in mind that while the link between the US Dollar and gold has weakened somewhat in recent times, there still exists a connection that cannot or should not be ignored.

HUI - Lack of Buyers

Sellers continue to dominate in the gold and silver mining sector as evidenced by the inability of these shares to get any sort of updraft from the now daily repetition of new all time highs in the broader US equity markets.

As you can see on the chart below, the HUI simply cannot get anything going to the upside. There are two overhead resistance levels noted on this daily chart. One has proved so formidable that the latter one has not even been in danger of being tested.

The GAP1 region occurred back when we got what amounted to a $200 downdraft in the price of gold itself. This gap formed between 300 and 280. The HUI did manage to run up about halfway into the gap before the selling intensified knocking it right back down again for its impertinence in daring to poke its head up slightly. As long as the HUI cannot clear this first gap, the gold shares are going nowhere to the upside.

I have included a chart of silver today which is in a 4 hour format as it shows the nature of the recent price action quite well. Notice that silver was in a congestion or range trade from the second through the third week in April. Rallies were capped on approaches towards $24 while dips towards $22.50 were bought. The last week of April, silver managed to forge a bit higher of a range with the metal pushing past $24.50 before attracting selling but securing buying on approaches back towards $23.50 - $23.25.

Silver bulls would not want to see this metal breach the bottom of this new range as that would allow bears to take it back down towards the former congestion range bottom once again. On the other hand, if the bulls can take out $24.50 and keep the metal close to that level, they have a good chance of notching the range up a wee bit more with support moving up to $24. Whether that can be done remains to be seen. Much will depend on the attitude of hedge funds and index-related funds towards the "global growth" trade.

Please note that I have provided some commentary to Eric King over at King World News which will be posted later on today sharing my thoughts towards the stock market rally. Be sure to look for those when you get a chance.

Australian Dollar Drops Sharply on RBA rate cute

Big news in the Forex arena overnight was the move by the Reserve Bank of Australia to lower interest rates by 25 basis points. Chatter had been building ahead of the actual move by the RBA that they would indeed cut rates seeing that growth in China has been slowing. Chinese consumption of Australian raw material assets has been a boon to the land down under. With their biggest customer being impacted, it only made sense to expect a move by the RBA.

This is in keeping with the general trend that we are seeing of Central Banks either keeping bond buying programs going full bore or reducing interest rates as we saw the ECB just recently do.

I want to put up a chart that might be of interest and help us get a handle somewhat on how things are shaping up in general when it comes to the overall commodity sector.

It is a combined chart of both the Goldman Sachs Commodity Index or GSCI and the Australian Dollar. (Just a reminder here that they have effectively killed my old reliable friend, the Continuous Commodity Index or CCI and thus the reason for the switch to the GSCI).

Do you see how similar the chart patterns are? Here is the same chart with the graphs overlayed. Pretty remarkable is it not?

The reason I have noted this chart is because of the historic tendency of the Australian Dollar to act as a proxy for the commodity sector in general. With all the cross currents being introduced by Central Bank interventions, the connection between the two is not as reliable as it once was; nonetheless, it does still correlate fairly well. These past two weeks, we have seen the commodity sector moving up a tad while the Aussie moves lower in a bit of a divergence.

Here is my concern - with the RBA citing slowing growth (we keep hearing this same theme over and over do we not?), it might does us well to pay heed to the future plight of the Aussie. If it were to break down further, we could expect to see continued weakness in the commodity sector as a whole.

The currency is probing the lower end of a consolidation pattern that has been in place for the last few months near the 101 region. Previous visits to this zone have generated buying which has popped the currency back north but the bounces or rallies have been losing steam. There is a descending overhead trendline that has checked any upward progress.

I am watching this 101 zone to see if it holds as it has done in the past. If it does not, I believe we are going to see additional selling in the commodity sector. This does not necessarily mean fresh shorting but it could also be in the form of long liquidation as more money flees the sector to go and chase equities ever higher.

Last week's short squeeze in copper was able to temporarily halt the slide in the red metal. That movement tended to pull the commodity sector a bit higher as we saw crude oil and the precious metals track it higher also.

I mentioned at the time that I believe rallies in copper should be sold (again, at what level is unclear). The reason for this is if the global economy continues to contract in spite of the unprecedented expansion of liquidity by concerted Central Bank activity, then traders are going to note this and will wait for a higher entry point into which to sell. If the Aussie breaks down, it will confirm their suspicions. If not, it will confirm that a range trade in the commodity sector in general is what we can expect instead of a bear trend. In other words, Central Bank actions are preventing a recessionary relapse and thus a bearish breakdown in the commodity sector as a whole but are insufficient to generate any serious, sustainable, robust growth which would be needed to shift the overall sector into a bullish trend. "Muddling along" would become the new norm.

Again, we do not have anything conclusive yet in the Aussie but it does merit watching in the weeks ahead.