July ISM Number Gooses the Market

Talk about a stark contrast from one day to the next! Yesterday we were all sifting through the inner parts of the FOMC statement and noting the dovish tone and the more downbeat assessment of the US economy from the Fed. Today the ISM  (Institute for Supply Management) number for the month of July hit the wires and boy howdy was it a shocker.

Activity for US manufactures took a big leap upward to 55.4 from June's 50.9 reading! That was the best reading since June 2011.

If that was not enough, the employment component of the data jumped to 54.4 from 48.7. That, coming on the heels of today's jobless claims number, which came in at 326,000 versus an expected 345,000 got the attention of traders in a big hurry. With that, stocks were off to the races, bonds plummeted and the Dollar soared against all of the majors.

Guess what, gold barely moved! I find that rather remarkable considering the fact that we had a HUGE MOVE UP in the Dollar based on talk that the TAPERING was back on. Normally, with tapering talk back on, a surging Dollar, rising interest rates, etc. gold could have been expected to get knocked for a loop. It is holding steady as I type these comments and is oscillating on both sides of the unchanged level.

The metal had a strong move overnight as yesterday's dovish FOMC put the kibosh on the gold bears and had them second guessing whether or not they should aggressively sell in the face of such a dovish statement. However, it did run out of buyers up near $1330 and then retreated back down towards $1308 where once again, just like it has been doing of late, buyers showed up in a big way.

So here we are back near the bottom of the price range again and that means one thing from a technical aspect - the support zone I noted on yesterday's chart is intact but it MUST HOLD to prevent a drop to $1300. If that gives way, gold will move towards $1280.

Can you notice how the bears are selling up against that downtrending 50 day moving average? Can you also see how stubborn this overhead level of chart resistance is?

What is weighing on gold today, in spite of its strength, is the fact that the miners are moving lower once again. This is making some longs nervous because the shares seem to have gone back to leading bullion whether it is higher or lower of late.


Let me comment here also a bit further on the backwardation thing - I mentioned that I would keep us posted if the delivery month contract, August, were to move to a premium over the next month contract, which for all practical purposes is the October. Currently, as of this hour, the BIDS for August are running about $0.40 premium to the bids for October and are actually on a par with the December. They are also a mere $1.00 discount to the February 2014 gold contract. NOW, we have the beginnings of a true backwardation structure on the futures board that we have not previously had. It is not completely there yet but for today, it certainly is moving that way.

Now whether or not this translates to a higher price is uncertain. So far, as mentioned above, even with the August contract moving out to a slight premium to the October, gold is failing at overhead chart resistance.  It has not broken down technically but it also has not broken out to the upside either.

I have written repeatedly here that PRICE ACTION is the ultimate arbiter of whether or not a development is bullish or bearish. Gold thus needs to prove itself.

Let me give you an example using corn... just today the BASIS for cash corn in Cedar Rapids, Iowa is a whopping + $1.20. That is huge! It means that old crop corn in that location is fetching $1.20 more than the nearby September futures contract which is currently trading at $4.87 as I type this. Cash buyers of corn at that particular elevator are therefore willing to pay, as of today, $6.07 for a bushel of corn when all they have to do is to wait a month and they could get it for $4.87! Someone must need it quite badly.

However, here is the point, while the basis is positive the corn chart is awful....
the price is sinking lower, the basis is positive. In other words, a FUTURES TRADER who moved to buy corn based SOLELY on the positive basis, would have ended up losing a huge amount of money, not to mention the fact of lost profit potentials from using the price action to dictate a short position instead.

I understand that corn is not the same as gold mainly because we have TWO different crop years we are discussing right now and are trading off of in the futures markets, but the main point that I am trying to make, AS A TRADER, is that PRICE ACTION DICTATES whether or not any event has significance to market participants. Never forget this concept if you are to be successful TRADING.

The delivery process for the second day in August gold futures was relatively quiet compared to the large issues from Deutchse yesterday. Again, Morgan was a large stopper with the house taking the bulks of the sales while ABN AMRO was the large issuer. Not much to take away from this right now. We'll keep an eye on it as the delivery process unfolds.

Incidentally, let me take a bit of time to bring up a topic that some might find a bit odd but I feel needs to be addressed in a more public manner. It concerns some of the things being said about King World News here among posters at my site.

First of all, Eric King and his lovely wife Lizz are personal friends of mine. They spend long hours working to bring us interviews from some very smart people many of whom share the same economic world view that I do. While I may not always agree 100% with some of their views, my long term view on where the US is eventually heading is the same as the majority of the guests that appear there.

It needs to be kept in mind - I write primarily as a TRADER. that is vastly different than someone who has an INVESTOR mindset. Traders by nature have to be more short-term oriented if they are to survive in these leveraged markets. An investor can take a longer term approach and not be as concerned about the ups and downs and vagaries of a sector that they have invested money into if they have done their homework or due diligence and are settled in their convictions. Nor do they generally have the exposure to the kinds of leverage that we traders must take on.

What this translates to in real life is that a trader can have a longer term, fundamentally based view of a market while simultaneously understanding that same market can be moving in the opposite direction of that long term view. During such times, prudence dictates that one go with the flow of the money in order to be successful. That means one can be short term or even intermediate term bearish while maintaining a long term bullish view. The opposite is also true - a market can be moving higher while the long term fundamentals suggest it is heading lower.

I know this seems to confuse some who read this site but as I have often said, I wear TWO HATS over here - one of a TRADER and the other of an INVESTOR.

That being said, KWN is not and never has claimed to be a "Trader's Website". It is more of a big picture view of things and thus tends to have a longer term perspective on the precious metals. There are some guests there, myself included, who tend to focus more on the technical aspects of the gold and/or silver markets on a weekly basis and analyze price action accordingly. That means there are times when I am going to be in a bearish posture while some of the other guests are going to be bullish. Please understand this.

So I am asking those who post here to please keep this in mind and to cease from making any derogatory comments about the network or its guests. I personally have no problems if OPINIONS are debated or questioned as there is always two sides to any markets, bull and bear, but I do have a major problem with insulting someone's character or denigrating them personally because of a difference of market opinion. That honestly serves no useful purpose.

My purpose in spending time writing at this website and doing interviews over at KWN, is to try to teach others some of the things I have learned over a lifetime now of trading so that they can make their own INFORMED decisions as to what they want to do with their money. You know the old saying: "Give a man a fish and feed him for a day. Teach a man how to fish and feed him for a lifetime."

For so doing that, some of the personal emails I have received in private of late are downright vile merely because I have chosen to differ from some others who are prominent among the gold community.

Look, we are all human and we are all going to be wrong from time to time. That should not come as a news flash to any decent individual who is honest with themselves and others. If any of us were omniscient, he or she would have more money that Bill Gates. I would like to be able to boast that I have never had a losing trade. In my dreams only is such a thing true. The idea is not to be 100% perfect; it is rather to be right MORE OFTEN that you are wrong. If you can do that, and do it on a consistent basis, you can make money as a trader and as an investor because even investors with long term horizons must deal with unforeseen events or circumstances that alter the fundamentals behind the assumptions that moved them to invest accordingly in the first place.

Humility is a grace/virtue that all of us, myself included, would do well to pursue as we remember our own foibles and weaknesses. That does not mean we cannot be passionate about our beliefs nor go after falsehood or error; but unless we have firsthand evidence, that is plain to all thinking folks with common sense, that someone is corrupt, attacking them personally and denigrating their character merely because they have a different opinion on a market is not something that any of us should be in the business of doing.

So posters here - please keep this in mind as I am going to try to be a bit tougher on things if I see them getting out of hand. Exchange of ideas and views is welcome, not character attacks....

Gold Chart via ADX by request

Here is a look at the daily chart of gold as it stands after the dust has had a chance to settle from the commotion resulting from the FOMC statement of today.

Here is my take on the metal as of now:
it has made a nice recovery off of the low just below $1200. It is stalling out however at the resistance zone noted on the chart. That comes in near $1350 and extends towards $1360.

Bulls will need to push past this region soon or gold does run the risk of seeing some stale long liquidation which would have the potential to drop the metal back down towards $1280. Based on what I am seeing of this chart, if they do clear through $1360 there does not appear to be much in the way of overhead chart resistance until near $1390.

This particular indicator, which I detailed a while back on the site here is showing that the downtrend has definitely stopped. That is evidenced by the continued downward progress of the ADX line (dark purple) which is heading lower from a lofty 47 reading. Remember, a rising ADX indicates the presence of a trending market, either up or down is immaterial.

As far as the two directional indicators go, the red line or -DMI remains above the blue line or +DXI using this particular time frame for reference. This tells me that for right now the bears are still in control of this market and the downtrend has the potential to resume if any downside support levels give way.

If however the bulls can power through that overhead resistance, this indicator would more than likely generate a buy signal.

Other indicators are in a buy mode already but they too are showing signs of a stalling in upside momentum.

Gold had a strange and somewhat convoluted reaction to the Fed minutes as if it was unsure of what to do. First it moved a bit higher, then sold off strongly as players focused in on the statement dealing with the lack of inflation. Then later in the afternoon, the metal gathered strength moving back higher again as the focus shifted to the more dovish tone of the FOMC statement.

Confirmation of that was provided by the rally in the long end of the curve as bonds came well off their worse levels of the session and actually moved into positive territory about the same time as gold broke higher. Evidently, both the bond market and the gold market are now expecting no curtailment of the Fed bond buying program.

We may have to wait until FRiday to see if anything changes that current sentiment.

August Gold enters its Delivery Period

With all the chatter out there about shortages of gold, Comex warehouse stocks drawdowns, etc., the delivery process for August gold could be interesting.

I must say that given all the recent fanfare, to see Deutsche Bank being a large issuer on the first delivery day seems to take the steam out of this talk. They are delivering 1,103 contracts worth of gold at 100 ounces each.

JP Morgan was the largest stopper with 847 contracts picked up for the house and 200 for their clients.

Remember when we had all that talk that Deutsche was taking delivery of Comex gold in order to return it to Germany.... Well...

The truth is that the gold delivery process has always been and will remain opaque. Firms may stop in previous months only to show up as big sellers in subsequent months. We simply have no way of knowing why they are buying or selling because we are not insiders working within their firms.

That is why, while the process is always interesting to observe, drawing conclusions from it can be rather risky.

A better gauge of the demand for gold is merely watching the price action. That will tell you what you need to know and eliminate all the worry and fuss over trying to figure out who is doing what behind the scenes in the gold market. If elephants are walking through a plot of ground, they always leave big footprints that are difficult to not see! Remember that.

FOMC - Worried about a Lack of Inflation

That is the big thing to take away from today's FOMC statement in my opinion.

Here are the two key excerpts in my view:

"Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable."

"The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back towards its objective over the medium term."

If anything, the Fed became more "dovish" if you ask me as they are back to talking about deflation concerns. This translates to no let up for the foreseeable future ( to use Bernanke's words from his recent Congressional testimony) for the bond buying program referred to as QE.

One would expect this to weaken the Dollar against some of the majors, as is currently taking place, and by default help to shore up the gold price. However, it is this concern about the lack of inflation that should get the attention of gold traders. They are focusing more on that than they are on the weakness in the US Dollar.

However, and I think this is important, their statement just further underscores the fact that all future Fed actions in regards to the QE program are going to continue to be heavily reliant on future economic data. If the data shows steady improvement, talk about tapering will increase. If the data shows weak or lackluster growth, tapering talk will be put off. In other words, traders/investors are on the same exact page with the Fed in that we are all going to be sitting around looking at each piece of economic data as it is released and attempting to view it in the light of potential Federal Reserve action based upon it.

An example - if we get a strong payrolls number in the upcoming jobs report, tapering talk will pick up, the Dollar will rise, gold will sell off and the bond yields will rise. If the number is anemic, the opposite will occur. As you can see, we are effectively right back to where we were before today's FOMC statement was released.

Isn't it peachy that our markets have degenerated into entrail reading of the FOMC?

Copper nearing Chart Support - At Key Level

More and more copper is taking its cues from economic data and developments out of China. I can well remember the days when the US was king as far as Copper prices went. If the US economy was humming along and if housing was strong, it was a fairly simple bet that copper prices were going to move higher or stay firm.

Nowadays it is China that is the primary driver of copper prices. Last week's announcement that the authorities over there were ordering production cutbacks in order to deal with what they consider to be a surplus of goods, sent base metal prices on a downward spiral. Copper dropped hard, pure and simple.

However, there is still a US influence on the market and today's GDP number seems to have breathed enough life into the red metal that it has thus far been able to hold above what I consider to be a key technical support level on its price chart, namely the $3.00 zone.

Dr. Copper, as it is affectionately known in trading circles on account of its excellent predictive capacity when it comes to diagnosing the health of the global economy, is signaling a period of relatively flat, decidedly unimpressive growth.

As you can plainly see from the chart pattern, there is nothing bullish about the metal whatsoever. The one redeeming factor has been its refusal to break below the $3.00 level. If, and this is another one of those big "IF's", copper were to collapse through that level, it would signal another slowdown coming our way. My hunch is that the Central Banks of the developed world will more than likely maintain enough monetary stimulus to try to prevent this from happening however.

That should translate into a further continuation of the sideways pattern on the chart with the metal attracting enough buying to keep it limping along above the $3.00 level. It will take some pretty strong economic news to push it up and away from the top of the pattern, but especially above that downtrending 50 week moving average.

What this translates too is that as far as inflation signals go, the red metal is certainly not generating any at this time. That takes away one plank from gold if the industrial metals are generally weak.

Moving over to crude oil and the energy sector... Crude has dropped off its best levels and unleaded gasoline prices are back under the $3.00 level (barely). Thus the energy sector has seemingly run out of upside steam for the moment. That is not to say that it is about to fall apart; what it is saying is that the recent strong drive upward has stalled out.

Couple that with what is expected to be a very large corn crop and soybean crop, and there is not any help for the inflation boogie man coming from the food sector either.

In other words, we are continuing to see the absence of any strong, sustained upward move across the broader commodity complex. With the job market here in the US remaining subdued, it is difficult for me to see, at this time, where the inflation pressures are going to come from, particularly if WAGES REMAIN FLAT.

I should also note here that the yield on the Ten Year Treasury Note briefly popped above the 2.7% level this morning before retreating slightly. keep in mind that the last time it moved above that level, Fed Chairman Ben Bernanke changed his somewhat hawkish stance displayed in June to that of a SUPER DOVE in July when he uttered those now famous words about QE continuing "for the foreseeable future". That sent the yield crashing lower but once again, it has quietly snuck back up again. HMMM... wonder what the FOMC statement will therefore give us this afternoon???? Maybe they will have to sent more Fed governors back out to disavow what they might have written for us.

Either way, it looks as if gold is going to continue being held hostage to the vagaries and whims of the Central Bankers, as is the entire economy for that matter.

I will leave you with this chart of the Australian Dollar for now. The Aussie is particularly sensitive to the commodity cycle as the economy down under is heavily dependent on the production of raw materials, a large chunk of which end up being sold to China. As you can see, it is sinking and sinking heavily. This does not bode well for strength across the commodity sector.

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/2013/7/27_KWN_Weekly_Metals_Wrap.html

Gold showing more signs of Resiliency

Gold was under pressure for most of the session today as the weakness in crude oil and most of the commodity sector - some of which was related to news out of China that their authorities were forcing curtailed manufacturing production - tended to undercut any inflation fears.

After the close of the pit session when the only thing that was open was the screen trade, the metal slowly garnered additional strength and began pushing higher. As I type this, it is now $4.00 higher on the day, a push of some $11 off the pit session close.

That, plus the fact that the HUI managed to claw its way back higher also towards the end of the session, is certainly constructive price action as it takes away any downside momentum edge that the bears had worked so hard to obtain here on Friday. It does seem that the usual Friday selling is appearing but enough players are willing to wait for this selling to make its appearance and then move in and ambush the shorts. That is certainly a change of pace from what we have been accustomed to seeing.

I am of the view that it is going to be difficult for the gold bears to take the metal down and keep it down UNLESS THE DOLLAR COOPERATES with them by moving higher once again. Today, was another day that saw a strong wave of dollar selling - this time accompanied by lower interest rates in the US Treasury market.

At this moment, for whatever reason, the Dollar seems to be running out of friends. Keep in mind that the recent strength in the Dollar was due to a couple of factors.

First was the rising US stock market in a low interest rate environment. Foreign money has been flooding into the US in search of yield and the US markets were the best game in town as far as many were concerned. All that foreign currency must be exchanged for US Dollars with which stocks can be bought and that has contributed to upward pressure on the greenback.

Second was the rising interest rate environment here in the US. Again, in a global economy in which many investors are starving for yield, the thinking has been that out of all the major economies globally, the US was perhaps the only one in which interest rates could be expected to move higher. The others were stagnant. That translates to more foreign inflows and more currency exchanges this time to be used to purchase US debt.

This week something seemed to change in that regards. My own suspicions are that traders are coming back to focusing on the upcoming circus of watching the US argue whether it should increase the size of its national debt faster or slower. Notice, I am not even talking about trying to reduce the damned thing.

This same impasse is what we went through late last year when the government was running up against the federal debt limit. Here we are right back there once again. I believe this is spooking those who might otherwise want to buy Dollars to invest in US Dollar based assets.

As long as this sentiment continues, and the Dollar moves lower, gold will garner dip buying support. If the Dollar were to somehow re-embark on its upward journey, gold would see more selling pressure.

As you can see on the gold chart, the price is oscillating around the zone created by the 40 day and 50 day moving averages. Bulls cannot take it out of the top of that zone yet but neither can the bears break it down. However, with the 10 day moving average turning higher and the 20 day as well, the technical momentum is beginning to shift more firmly in favor of the bulls.

Next week will be important then. If the bears cannot break it down early in the week, there is a good chance that the metal is going to break overhead resistance as some of these more stubborn shorts are going to begin looking to exit. We have already seen quite a bit of hedge fund short covering in this market based on the recent COT reports but there is still a fairly large contingent of them hanging in there and selling into rallies.  That crowd is a pure technical analysis based one and if their computerized black boxes tell them to start buying, that is exactly what they are going to do.

I would say that as long as this week's low near $1297 does not give way, the bulls have short term control of the market.

I also want to note here that gold is back to knocking on the door of that very same level from which it plummeted $180 back in June when Chairman Bernanke started pretending he was suddenly a hawk and was boldly proclaiming his Tapering talk. Of course we all are keenly aware of his morphing back into the supreme dove of the Fed with his now famous "for the foreseeable future" comments in regards to the length of the current bond buying program.

Either way, the $1360 level is that level from which gold collapsed and here it is, a month or so later, and gold is right back up there as if nothing happened. That is why this upcoming week's Fed watch will be a key for this market.

One last thing to watch for next week, and I stated this in an earlier post, is the delivery process for the August gold contract and its subsequent price action. We will be watching to see whether it runs higher in price than the deferred contracts but even more importantly, whether the front of the board takes on a backwardation structure or not. If it does, $1350 should give way easily to confirm that and then $1360. If not, then we can put that to rest for a while again.

The mining shares are tracking the movement in gold quite closely this time around. The HUI is not breaking down but is holding steady and is trying to build up some steam to see if it can press higher. The key to a trending move in the HUI lies above the 290 level. Until then the shares are moving higher off a bottom that appears to be very solid and progressing into a range or consolidative type trade. I am sure that those long term holders of the shares are relieved to see some of their net worth recovering!

August Gold Par with October Gold

In continuing to monitor the gold spreads, I wanted to note that the August gold contract, which will be heading into delivery next week, has moved to now trading at par with the October gold contract based on the current sets of bids and offers. It is still discounted to the most active December however as well as the February 2014 and June 2014 contracts.

Here are the current sets of bids at this moment:

August 2013        $1321.30
October 2013       $1321.30
December 2013    $1321.60
February 2013      $1322.60
June 2014            $1324.70

Hopefully those who have more time on their hands than I do can monitor the delivery process more closely than I will be able to do and keep us posted on how that goes next week.

Price still needs to push through $1350 to get anything more exciting going. I cannot overemphasize this strongly enough. PRICE MUST CONFIRM ANY TALK OF SUPPLY TIGHTNESS.

The HUI is weaker today also and is not providing any support for the metal at this point in the trading game.

Next week traders will be focusing on the Fed once again.

News out of China derailed silver and especially copper today. It seems the authorities there are ordering factories to Cease and Desist overproducing. That is being interpreted by traders as meaning a further slowdown in growth for the biggest base metals user on the planet. The HSBC manufacturing purchaser managers index hit an eleven month low over there this week.

I have no idea what is going on with the Yen today. I can tell you that there is increasing talk about the upcoming US budget battle once again. Here we go with the now "normal" battle between those who believe the US is spending too much money that it does not have  (count me in on this group ) and those who think it needs to spend more and raise taxes again.

By the way, did any of you who follow golf see that Phil Mickelson, who played perhaps the best round of golf of his entire career at last weekend's British Open in Muirfield, will end up paying nearly 61% of all this earnings out in the form of taxes!  Something is horribly wrong when the state takes that kind of money from anyone. I have long said that if the tithe, (10%) was good enough for the Almighty to extract from His ancient people, then it should be good enough for puny, mortal man to extract. Apparently the state puts itself above God but then again, what else is new about that?