Late Session Surge in Gold Conquers 50 Day Moving Average

The strong rally in gold was yesterday stopped dead at the key 50 day moving average. Many of the big funds closely track this average. If they are short, they tend to sell against it; it they are short and price exceeds it, more often than not, they will cover. Additionally, if they are long, you may see them adding to existing longs.

Throughout most of the session day, gold was consolidating its recent gains. There was some chatter that some physical market demand, notably out of China, had eased off and that had some short-term oriented longs booking profits after realizing some nice gains. That selling, combined with some fresh short selling was serving to hold the metal in check throughout most of the session. Late in the day however, as the mining stocks caught another gust of wind higher, the metal surged upward breaking the 50 day moving average.

In the process, it also pushed past a band of overhead horizontal chart resistance. You can see that on the chart below.

This is getting interesting. We have both of the shorter term moving averages (10 day and 20 day) now moving higher in sync. The 10 day has not yet completed a bullish crossover of the downtrending 50 day moving average but barring a collapse in the price, looks to soon do that. That has not occurred since last July, which was the last time we witnessed an UPSIDE CROSSOVER of the 10 day above the 50 day. Stay tuned on this one as it could possibly happen this week. That would trigger some further fund buying.

Just like they led the metal to the downside, the mining shares are currently leading the metal to the upside. Gains have been very strong the past few days in the sector as shorts are being forced out and new buyers are coming back in.
That breach of the gap region noted on the chart sent the bears scurrying for cover yesterday and to further compound their misery, bulls pushed them up some more. The result has been a new gap above a previous gap which was a heavy resistance level. That is a bullish sign.

for the sector to begin a trending move to the upside of some duration, it will necessitate further gains but particularly a push past 290 where pretty good selling pressure can be expected. For the short term however, the bulls are back in control while bears are regrouping looking for a fresh spot at which to try selling again.

As long as the US Dollar is the whipping boy of the Forex markets, as it has been of late, bears will have their work cut out for them. We might very well be seeing the market shift back to focusing on the budget battle once again in the US. The government will be up against its borrowing limit soon and that means more of the usual crap that comes out of Washington. You know what I mean:

"we cannot cut anything because it will slow down the economy or put people back on the streets without any food or shelter, blah, blah, blah and more blah".
Meanwhile, my kids and yours will be the ones paying for all this profligacy and vote buying. As a matter of fact, my grandkids and yours will be paying for seeing that it is the size that it is.

At least those who own the mining shares can breathe a bit of relief that their net worth has stopped declining and has actually reversed somewhat.

The grains were whalloped today, as they should have been. The bulls in there have been killing the crop every damned day with too much rain, not enough rain, too cold, too hot,. etc,... meanwhile the crop looks to be improving with the return of milder weather and more moisture during the key pollination stage. Soybeans in particular were whacked pretty hard today which might have put a bit of pressure on silver. Still, the grey metal managed to keep its footing above the $20 level meaning that we should see some nervous shorts the next few days. For silver to get something more positive going, it will take a closing push through $22.50 at a bare minimum. At least it has stopped going down. Now if we could just get rid of the damned annoying radio commercials about how the price is going to double and skyrocket before you can blink....

Gold adding to Asian gains

Gold is adding to its gains from the Asian session last evening in impressive fashion as the climb today has been steady and methodical. It has all the appearances of a strong short squeeze accompanied by an inflow of new long positions, which is exactly what this market has been needing to propel it higher. If the specs start falling back in love with gold again, the rally will have further to run.

It is not hurting things that the HUI is roaring higher today! It is up over 6.5% as I type these comments so gold is firing on both cylinders right now.

A quick take on the gold chart.... note that price has run exactly to match the downtrending 50 day moving average. That is a big level that the funds watch closely. Gold has not been above that key average the entire year and only briefly when it last poked its head above there back in November 2012. If the 50 day moving average cannot hold it, then we will see even more short covering with that hedge fund short position looking quite vulnerable. It is do or die time for those funds playing the metal from the short side. They either hold it here or they will be forced out.

I included a graph of the RSI down below to show you that this is the strongest up move for gold this entire year based on this indicator. It has also matched the highest reading that occurred back in November of last year when it was last above the 50 day moving average.

Combine these and it is evident that the metal has forged a bottom on the chart back at $1180. Now whether or not this thing can start a sustained uptrend is unclear but certainly, a strong push past that 50 DMA is going to take it much closer to so doing. I would also like to see the RSI exceed the 60-65 level and push up towards 70. Bear markets do not normally reach the 70 level.

I noted a band of overhead horizontal chart resistance to show you that the market has now pushed into a region where technically, it can be expected to encounter selling pressure. If the bulls can absorb this, and thus far they are holding their own here about midway through today's New York session, then the bears are going to lose their grip.

Silver has been pulled higher by gold and has pushed past stubborn resistance at $20. Further helping it along is strength in old crop soybeans which are being fueled by more talk of dryness. Grain bulls have been crying up too much water, not enough water, everything they can in order to convince the world that the crop is terminally dead once again. This may be the last gasp for soybean bulls however. If we get some moisture soon, then they are in trouble. If not, prices can run a bit higher but the fact remains that we are going to have a big crop this year and US soybeans are too expensive on the world market. It is domestic demand that is supporting the market for now.

Finally!

Gold FINALLY has taken out that pesky overhead resistance at $1300 during early Asian trade. Volume thus far is average but the fact is that the bulls were able to overcome the selling that has consistently shown up on recent approaches towards that key level.

If the market can stay above $1300 as it heads into European trading, but especially New York trading, then we should get some further short covering and actually begin to see some fresh money begin flowing back into the metal. That will be the big test for gold.

Lots of ifs and buts, but if the HUI can close that chart gap and push past 245 then we will have the both cylinders firing at the same time.

One thing I am also noticing is that the price of crude oil is remaining stubbornly high. While food prices are moving lower across the futures markets, the energy sector refuses to break down. If anything, it is escalating higher. It is difficult to see how crude prices could stay this strong given the anemic nature of the economy but other supply-side factors are at work in that market which are keeping a firm bid in it thus far.

A higher crude oil price can be ignored as an inflation factor if players see it as more of a short-term, news driven feature rather than more lasting set of changes in the fundamentals. If the thinking begins to shift and traders see the higher crude oil price as something that is going to stick around longer than initially expected, some might start anticipating a cost push factor from higher energy inputs.

If that becomes the case, we should see some impact on the bond market. As of now, bonds are up even in the face of the higher crude with the thinking being that it will act as more of drag/tax on the economy rather than heating up any inflation push.

Trader Dan Interviewed at King World News Markets and Metals Wrap

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

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/7/20_KWN_Weekly_Metals_Wrap.html

Ten Year Treasury Note back below 2.5%

My thesis is that the recent sharp spike higher in interest rates on the longer end of the yield curve sent shock waves and convulsions into the hallways of the Federal Reserve's headquarters. This is why I maintain that Chairman Bernanke's abrupt reversal and subsequent contradiction of his June comments concerning tapering of the bond buying program was so forthcoming.

The Fed watched in horror as the bond vigilantes did their thing and took interest rates higher. Concerns began arising that the higher yields were already pushing prospective home buyers out of qualifying for certain properties and were reducing downward the size and price of the homes that they were able to quality for.

Enter the Chairman and VOILA!.... presto, change-o, down comes the yield on the Ten Year to back below the 2.5% level. It is going to be entertaining to say the least to see how this all important indicator behaves as we move deeper into the latter part of this year.

My guess is that if it gets too disobedient and begins to climb too sharply once again, we will see more backtracking from the respective Fed governors about the pace of the tapering....

Gold Showing some Resiliency

Wednesday's rejection of gold from the $1300 level emboldened sellers who drove the market down towards the chart support zone of $1270-$1260. Buyers surfaced first in Asia that evening followed by more in both the European and New York sessions on Thursday. Today, Friday, more buying was seen which enabled the market to move back up towards the top of this constricting range in which gold is currently working.

The top of the range is $1300. Gold is just a few dollars away from testing that once again and may very well do it on Sunday evening/Monday. We will have to see.

I am of the opinion that it will take a convincing push PAST $1300 which remains above that level to bring in some fresh speculative inflows into the metal, flows which have heretofore been lacking.

Based on this week's COT report, the predominant factor in the recent advance has been short covering on the part of the giant hedge funds. What that same report reveals however is that there is hardly any NEW BUYING from fresh longs occurring in that camp. Gold must have that in order to generate more upside potential.

On the KWN Markets and Metals Wrap this week, I discussed what I believe is the re-emergence of hedging activity by the miners. Their activity is showing up in the Producer category. I think it important to note that for nearly a decade now, we have not had to deal with any significant amount of hedging coming from the mining community. That appears to be now changing as per one of my previous posts.

From an investor/trader perspective, this is significant in the sense that it brings a fresh new source of selling into the paper gold futures market which we have been able to dismiss for nearly 10 years.

The focus has been primarily on the bullion banks as the ones supplying the bulk of the sell paper throughout the past decade. I believe that they will still be a force to deal with SHOULD GOLD BEGIN TO RALLY but selling from the miners will also have to be absorbed by the hedge funds or any other speculators who will be playing gold from the long side when the technicals shift in that direction for good.

Back to the short covering featured this past week - all major reversals do start with short covering but they must see the infusion of new longs to sustain any upward price movement. Short covering is more closely akin to a bottle rocket - fast, noisy, lots of excitement, but when it fizzles out, back down to earth it comes. What is required to keep anything aloft for long is FORCE. In the futures market that force is supplied by FRESH BUYING.

That remains to be seen as to whether we are going to get it. If we do, we can more definitively say that a lasting bottom is in. I remain hesitant to go that far until the market proves that it can at least put and maintain a "13" handle in front of the gold price.

One thing that is also constructive is that the beleaguered mining sector, as evidenced by the HUI, is also showing some moxie. The index failed to close through the gap this week after pushing into it whereupon it promptly retreated and moved lower. Today, it showed some amazing strength and worked higher this time closing into the gap once again. The key for the index remains working past the gap and that means pushing through 245 and doing it with some gusto.

If that occurs, particularly if it can manage to do this two successive days, then you will see more short covering occur in the respective shares that comprise the index and some new money also flowing in. There are a number of people who believe the gold shares are seriously undervalued but are quite hesitant, understandably so, to commit capital in size into the sector for fear of getting burned. A technical signal is therefore needed to convince them to come back into the water in a larger way.

Will we get that next week? Stay tuned.... There is a big election this coming weekend in Japan that might have an impact on the Yen and therefore the price of gold depending on its outcome. That could be the dominant factor in early Asian trade Sunday evening over here. Quite frankly, Japan is a mess with a national debt that exceeds twice the size of the entire domestic economy over a TWO YEAR PERIOD! At some point the sheer size of the debt begins to crush everything in its path. Forget about Godzilla! Their debt is the only Godzilla they should be fearing!

Then again, one wonders if that is exactly where we are ultimately heading ourselves over here in the US....

$1300 Rejects Gold

Gold was stopped cold in its tracks today at the psychological round number resistance level of $1300. It had initially reacted to Ben Bernanke's comments, (which most market analysts and players viewed as dovish) by moving smartly higher. During the Q&A session which followed, gold was slammed lower by a wave of very strong selling.

In watching the price action it occurred to me that just as we suspected in our notes from yesterday, nothing new or fresh proceeded from the Chairman. In other words, there was NO FODDER for the bull. Gold had already run higher last Wednesday when Bernanke first reversed himself from his comments in June. At this point in the game however, that is now old news. What gold needed to propel through $1300 was something far more definitive than what Mr. Bernanke gave the markets today.

Think about it this way - the QE will continue as long as the economy needs it. Okay - what is new about that? We have seen this QE going on for some time now and to the minds of most market participants, there is still no real inflation threat looming on the horizon. What is there to make them waver the least in their convictions that inflation is benign? Answer - there isn't anything... YET.

Now, if crude oil and unleaded gasoline do not soon set back then that might change. But with a large grain harvest expected, food prices look to be moving lower. As stated previously in another piece I wrote - energy prices may be high and moving higher but food prices are going the other way. Just look at a chart of new crop corn or wheat, or sugar, or cattle, etc.

Both of these need to be moving up simultaneously to impact the consumer (and business to a certain extent although that segment is more impacted by higher fuel and energy costs) and to generate the all-important headlines needed to derail an entrenched, "there is no inflation" psyche.

Technically, two things happened today: Gold failed to extend past an obvious chart resistance level while simultaneously, the HUI FAILED TO CLOSE THAT IMPORTANT CHART GAP I noted in yesterday's missive.

Both occurrences are viewed as technical failures and will bring in additional selling by the shorter-term oriented trader. What will be key for gold is whether or not it can generate enough buying to keep it above the "former resistance zone now turned support" that can be seen on the chart. Let's call that the zone between $1270 - $1260. If it can hold here, it will bounce back and set up yet another try to best $1300. If not, down towards $1240 it will go.

I should also note that volume in today's rejection at the $1300 level is very strong. I view that as a bearish sign that a lot of bulls threw in the towel and gave up on a breakout above $1300. Also, guys who have been playing gold from the short side were emboldened to come back in.

I am unclear just yet as to how much of this jump in volume is associated with rollovers as those are occurring in increasing frequency as we move deeper into July. Most traders will be moving out of the soon-to-be-in-delivery August contract and heading into the more active December. That might have distorted the volume somewhat and thus take what I say here about it with a grain of salt but nonetheless, volume was strong regardless.

Silver? What more can you say about it other than the fact that it too failed to push past tough overhead resistance at $20. The level is now reinforced with significance on the technical price chart. For this metal to start any fireworks whatsoever, that barrier MUST BE BREACHED. If not, it ain't going nowhere. Poor English grammar but solid trading analysis.

Silver bulls simply must prove their mettle or the bears will grab control of that market and take it down for another test of $18.

One more thing I want to note was that the yield on the Ten Year note closed the day just below the 2.5% mark ( 2.491 to be exact). Interest rates have set back ever since Bernanke made those comments last Wednesday. Here we are now a week later and they have yet to exceed their recent peak. That being said, it might not be too much longer before they try sneaking up again. Everything will depend now on the content of each piece of economic data that gets released.

Strong Day in the HUI

The mining shares finally showed some signs of life in today's session (for a change) but still have some work to do in order to turn the chart pattern more friendly.

Notice that the index managed to CLOSE INTO THE GAP region noted on the chart; it has not, however, managed to close ABOVE that gap. If this index fades and cannot maintain its footing up here, technicians are going to view that as a bearish signal and will be emboldened to come back into the market selling. At least the bulls showed some mettle today which was rather pleasant given the weakness in the broader equity markets.

I do think that the odds are favoring a bottom in this sector based on what I can see thus far. That does not mean these shares are ready to rocket higher as some suggest. What it more likely denotes is some consolidation or sideways movement until the bulls can convincingly seize the initiative.

The metal itself is having trouble clearing $1300, round number resistance that needs to give way before I personally will feel better about gold's prospects for the short term as well as that of the miners.

As mentioned here previously however, I expect more mining companies to be coming on with hedging programs so gold will meet selling resistance on the way higher from the companies that dig it out of the ground. There is no way they should make the mistake of not locking in some profits on future production. Even worse than that would be to end up producing at a loss!

Tomorrow we are going to have to sit around and parse the words that come out of Ben Bernanke's mouth once again, unfortunately. Whether he walks back some of his comments from last Wednesday remains to be seen. Personally, I still believe that his sole purpose in uttering those words was to knock down rising interest rates and send the bond vigilantes scurrying for cover.

The Fed, nor the US government for that matter, DOES NOT WANT higher interest rates. If however, Bernanke sends the US Dollar sharply lower, look for noise to start emerging out of the Eurozone. They do not want a higher Euro over there for the most part. The Swiss do not want a strong Franc either.

Truth be told, I look for him to say what both sides want to hear meaning that we will probably have the same old, same ol'. In other words, "we need accommodative monetary policy to continue but will look at the economic data to determine when and how much to begin scaling back or tapering those bond purchase. Some news flash!

Silver is still struggling to convincingly clear and LEAVE BEHIND the $20 level. Until it does, I am not interested in it.