GLD compared to Comex Gold Futures

In response to those who dismiss the idea that GLD is a measure of Western investor sentiment towards gold and therefore as such has little if anything to do with the price of gold, I present the following composite price chart as an illustration.

Please note that this chart shows the MONTHLY CLOSING PRICE only and therefore eliminates a lot of the daily "noise". Can any objective, unbiased observer of these two plotted lines state that the two lines are NOT IN PERFECT SYNC? They both rise together- they both fall together. If instead of plotting the two lines on separate scales for comparison's ease, I overlay the two price plots using no scale, the lines become indistinguishable from one another.

Keep in mind that I have no desire to enter into any discussions or arguments either pro or con as to the theory that gold is being withdrawn from GLD in order to meet higher demand in Asia and to take advantage of the higher premiums on gold in that region of very strong offtake of the physical metal. That may or may not be true. As a trader, speculation such as this does not particularly interest me as it is useless when forming an approach to a market in which one wishes to trade. Buying a market based on hunches, guesses, theories, hearsay, etc., is a very quick path towards ruin for any trader unless one has extremely deep pockets and is quite content to absorb potentially large losses.

To make money as a trader, one needs to understand market sentiment. Market sentiment is gauged by price action as well as studying the positioning of traders against with one is competing in this Zero Sum business.

My theory in trading is the KISS rule. Keep It Simple Stupid. I find it ironic to say the least that when gold was moving on to make new all time highs, and when GLD was reporting new record tonnage amounts nearly every day, we did not hear a peep out of anyone suggesting that the build in GLD reported holdings was in anywhere a bearish development. Quite the contrary; nearly everyone that I am aware of pointed to the surge in GLD holdings as evidence of superb investor demand for gold. I distinctly recall reading breathless reports about how GLD was eclipsing individual nations as one of the largest holders of gold. All of this was excitedly detailed as strongly bullish for the metal.

Now as the reported inventory of GLD shrinks we are also told by many of these same pundits that someone this too is bullish for gold because it indicates strong demand for gold, this time in Asia. Seriously folks, it seems that no matter what the holdings of GLD are, whether they are rising or whether they are falling, that it is always a bullish development! "Heads - I win; Tails - You lose".

All that I am saying is that when the price of gold was rising and moving into new all time highs, the reported holdings of GLD were rising right along with it. As the price of gold has fallen, the reported holdings of GLD have been falling right along with it. While there is no doubt in my mind that the gold being held in GLD has been sold to SOMEONE, the facts are that the reported holdings are sinking.

Since we know that Asia loves physical gold and the West seems to love paper gold, it is obvious that a large chunk of this gold has evidently moved from West to East as the inventory of GLD has been drawn down. This simply proves my point that GLD is a measure of WESTERN INVESTMENT DEMAND for gold and that currently, that demand is falling off as the large hedge funds are buying equities for return and not gold.

Is it not obvious from looking at the Commitment of Traders reports that the big Managed Money accounts are not building the kind of massive long positions that they once were back when gold was soaring into new record highs? Is it also not a fact that this same group of hedge funds has been adopting a more negative tone towards gold based on a  study of their overall short positions?

They may or may not be correct in their assessment from a longer term point of view but our modern markets have by nature become much more short-term oriented whether we like it or not.

Until I see something in the inventory of GLD that indicates GROWTH of their holdings and something on  the Commitment of Traders reports that indicates a solid shift towards a more strongly bullish view in regards to gold by the hedge fund crowd, and until I see a surge upward through overhead chart resistance in the HUI and among the various mining stocks that comprise that index, I have to go with my current assessment that Western investment demand for gold is lagging. As I have stated before, all of this could change at the drop of a hat. Those of us who have a bullish long term view towards gold will be vindicated and hopefully rewarded for our convictions but for the immediate time being, we still lack a catalyst for a sustained upward move in gold until we see some evidence on the charts that this has indeed taken place.

Lastly, for those who want to dismiss anything related to the Comex or to GLD as to having any real connection to the price of the physical metal, I would remind you that many may feel the same exact way, but until the MAJORITY of investors/traders come around to that point of view, railing against the chief barometers used by that sizeable majority will not cause a shift in the current ambivalence towards gold held by the Western investment crowd. Old habits die hard especially in the realm of investing. If you have any doubt about that, just consider the amount of money that large Western investment crowd has made by "NOT FIGHTING THE FED" even though there is a growing number of analysts who see the stock market rise as nothing but a massive bubble blown by 5 years of QE.

Fight the good fight in the meantime, continue to extol the wisdom of holding physical gold against the inevitable but do not be under any illusions about "the herd's" capacity to be irrational for longer than nearly anyone could have expected. It is the LOSS OF CONFIDENCE in the ability of the Monetary Authorities to keep this house of cards supported that will bring back Western buying into all things gold. We mortals have no way of knowing when that will occur but we will certainly recognize it when it does.

A Good Read

Every now and then you come across an article that is well worth the time spend in reading it. The following in the Wall Street Journal is such an article.

Talk about perspective! This is from a man who is on the front lines of the employment situation in this nation.

This goes back to some of my comments related to QE and why I believe it is going to be next to impossible for the Fed to stop or taper that program until we get STRUCTURAL REFORMS. I take the Fed at its word right now that until the employment picture improves, they are not going to taper and quite frankly it will not as long as the Obama administration is in power and Obamacare is the law of the land. The thing has not even been fully implemented yet and it is already leaving a wide swath of devastation across the nation's job market. Don't believe that? Then read the following article.

Bob Funk: Where the Jobs Are—and How to Get One

The man who matches companies with workers talks about the skills gap, the harm from ObamaCare, and the incentive not to work. But he'll still find you a job.

 

By Stephen Moore

 

Here's something you don't often see in Washington: a businessman trying to repeal a law that helps his company. That's Bob Funk's latest mission in life. He's the president and founder of Express Employment Services, the fifth-largest employment agency in America, with annual sales of $2.5 billion and more than 600 franchises across the country. This year he will place nearly half a million workers in jobs.

"ObamaCare has been an absolute boon for my business," he says as we sit in his new office headquarters near downtown Oklahoma City. "I'm making a lot of money thanks to that law. We're up 8% this year. But it's just terrible for the country. I see that firsthand every day."

GLD - Still no Interest from Western Investors

One of the points I have been making about gold is that its recent gains at the Comex have been primarily driven by short covering by large hedge funds and not by the influx of fresh investment demand coming from this same group.

Whether we like it or not, the main driver of our modern markets is this hedge fund community. It is their buying and selling which moves the markets. Once upon a time the big 800 pound gorilla in the commodity markets was the Commercial category. Not any more - while the Commercials are always a force to be reckoned with, as they are generally on the opposite side of the trade from the hedge funds - these Hedge Funds are now the big boys on the block. Ignore them at your own peril.

That being said, those guys are paper pushers. They LOVE paper; they ADORE paper; they DREAM paper. In other words, they are not the least bit interested in obtaining physical supplies of much of anything as most of them are not set up for storage and other associated costs. This is one of the reasons they love the paper gold ETF's. They can flex their financial muscles and buy boatloads of these investment vehicles when it suits them or when it does not suit them, sell boatloads of the same.

What troubles me about gold right now is the lack of interest on their part to own the paper gold ETF, the largest being the SPDR Gold ETF or GLD.

Take a look at the following chart of the reported gold holdings of this enormous ETF. I have posted this chart before on my site here to demonstrate the lack of investment demand coming from the West in regards to gold. Yes, gold demand is very strong in Asia but gold needs this Western investment demand IF IT IS TO TREND HIGHER. It is NOT GETTING THAT. That is a problem if you are a bull.

Even with the recent announcement by the FOMC that the Tapering option is supposedly off the table for a while longer, it seems as if GLD is not attracting any new strong inflows of money. The tonnage is noted on the left hand side of the chart. Notice that it continues to hover near the 900 ton level and has not been able to climb back above the 1000 ton level for some time now. It might be stabilizing here but the jury is still out.

I am not sure when this will change but change it must if we are going to see gold embark on a new leg higher.

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 Weekly Markets and Metals Wrap. We will be discussing this past week's "Yo-Yo" type price action in the metals.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/9/21_KWN_Weekly_Metals_Wrap.html

Return of the Status Quo

Gold has now surrendered half of the gains that it put on as a result of Wednesday's FOMC announcement that the TAPERING was on hold. It is currently trading at 1337 as I type these comments.

While the US equity markets are a bit weaker, the S&P 500 is still sitting firmly above the 1700 level. Interest rates on the Ten Year are near 2.75% while the grain markets are imploding lower and crude oil continues to drop off its best post-FOMC announcement levels.

In short, we are pretty much back to where we were prior to the FOMC. Why do I say this? Simple - this morning Fed governor Bullard managed to do what many in the Fed have been doing since May of this year, namely, jawboning the markets and setting them up for another possibility of tapering later this year. What has it been, 2 days since we got that FOMC press release and here we already are talking about starting the Tapering once again. Good grief! This is like some sort of sick version of the movie  "GroundHog Day".

It seems as if these people simply cannot restrain themselves from yakking away whenever a microphone is present. I do not know about some of you, but I get the distinct impression from watching these events unfold that the Fed literally has no earthly idea what to do next. They would like to start reducing the amount of bond buying but understand that they cannot, given the current economic conditions. So they talk about it perhaps to comfort themselves or even persuade themselves,  that they really are being responsible stewards of the nation's monetary policies and are aware of the inherent dangers in a near-endless barrage of money printing. The truth is that the Fed is trapped in a net of their own making and I think some of these governors realize it. Maybe some of them are making speeches as a sort of CYA strategy just in case history is not kind to them. They can point to their various speeches and say: " Hey I was out there making a case for ending this QE stuff. Don't blame me!"

As I have written repeatedly this week, these QE programs have managed to take on near immortality simply because the job market in this nation is so pathetic that many consumers simply do not have the confidence or financial wherewithal to taken on new and large loads of debt. Velocity of Money keeps moving lower, not higher and thus the driving force needed to generate strong, upward price pressures in the economy is not there. With wages flat and many working at part time jobs, where is the force going to come from to propel economic activity in this nation strongly higher?

IN a debt based system, more and more, larger and larger, amounts of debt have to be taken on for the economy to grow. It is difficult to do that if consumers are afraid to spend with the same reckless abandon as they did during the boom years. Remember when re-financing was the coolest trick in town - turn your house into a giant ATM machine and use the savings from the lower rates to go and buy that new ATV or Jet-ski? Those days are long gone so if the consumer cannot tap their home equity and wages are going nowhere, where is the cash going to come from?

Maybe the Fed should just skip this nonsense about buying MBS's and Treasuries and just send checks to every tax paying household in the US to the tune of $85 billion each and every month? I don't know about you, but I think this money would get directly injected into the economy a helluva lot faster than it does by sitting in the reserves of the big banks or in the equity markets.I guarantee you that if I were to receive a nice, big, fat check from the Fed each and every month, I would have my ATV upgraded to a woodgrain dash and chrome wheels. Heck I would buy a new Polaris RZR just for fun! A nice COBALT boat would somehow find its way into my establishment also!

Obviously I am being facetious here but I think my point is made - most of this new money being created by the Fed is not moving into the system.

What ails this nation cannot be fixed by Fed action only; it requires STRUCTURAL REFORMS, and we are not going to get that while the current administration remains in office. It really is that simple.

At this point in time, seeing that inflation is not a serious concern of most market participants, it is going to take an issue dealing with CONFIDENCE to take gold sharply higher into a sustained uptrend. Remember gold is an asset that pays no interest; therefore it must appreciate in value if it is to be of any benefit to those who buy it as an investment. That means we must have all of the elements in place that are required to drive the price of gold higher.

First and foremost among those is CONFIDENCE, especially in the currency of a nation. A loss of confidence in a nation's currency results in rising prices as the currency's loss of value is reflected in that area first. This is why I keep coming back to the commodity complex as a whole... we must see a broad-based upward move in the commodity complex before gold will find strong, SUSTAINED, new speculative inflows. Currently we are not getting that.

Perhaps at some point this will change - we will try our best to note that if it does. As far as I am concerned we are essentially in uncharted waters and all of us are trying to use the wisdom and experience we have gained from the past to decipher how this mess is going to end. It is certainly a challenge to say the least.

Whiplash in Crude

If you ever wanted proof that the Federal Reserve has become the single largest source of market volatility, chaos and confusion, take one look at the following hourly chart of Crude Oil.

Notice that crude was moving higher prior to the announcement at the 1:00 PM Central Time hour. When they news hit about them standing pat, it rocketed higher, pulling gasoline along for the ride. The move was good for a full $2.00/barrel add on to the price.

Why did this happen? Because computer algorithms from the hedge funds started buying everything in sight without asking any questions. If it was not nailed down, they bought it. The so-called reason cited was that the policy not changing was inflationary.

Excuse me - but we have had 5 years of QE now and we still have yet to see the inflationary fruits of these policies. The reasons are numerous but most important is the fact that the jobs market in this nation is comatose. We are learning with the passing of each day the crippling effects of this most misnamed piece of legislation that was shoved down our throats, namely, the AFFORDABLE CARE act. What a pile of hooey!  Everywhere one looks health insurance costs are going up, not down and more and more we learn that employers are cutting hours and health care benefits as a result of this abomination. Hell, even the President's union buddies want no part of this monstrosity after they were among its loudest cheerleaders back in 2010.

The labor market is weak and consumers just do not seem to be in any mood to saddle themselves with loads of debt anymore. Low rates - courtesy of this QE help consumer borrowing ( as well as business borrowing ) but many consumers who are working several part times jobs to make ends meet  are in no hurry to bury themselves under a debt load again. Along that line I recently read somewhere that the NUMBER ONE dream of most Americans is no longer owning their own home but rather has become one of being debt free! That is a stunner and reflects just how pessimistic the nation at large has become as they watch the slow disintegration of their country.

Regardless, the crude oil market completely gave up any gains related to yesterday's fund buying orgy and actually lost ground sinking below the launch point generated by the FOMC release.

Here is the thing with crude as I see it - while some want to look at the crude oil market as a natural recipient of hot money playing the inflation psyche I see it as a huge drag on the national economy. Think about it - we have report after report, as noted above, of folks unable to obtain full time employment. So many are being forced to take two or even three part time jobs in order to pay their bills. What do you think happens to the spending habits of such folks when they pull their automobile or truck into the gasoline station to fill up and look with dismay at the rising price of gasoline which will not stay down for long? I have a buddy of mine up here who filled up his truck the other day with diesel ( it has duel tanks) and had the "satisfaction" of getting away with spending "only" $150.

That is money that has to be spent if he is to get around to work. That is a huge chunk of cash for most folks to have to plop down on the counter in order to keep their wheels turning. What is left over from their dwindling disposable income then must be stretched into paying higher medical insurance premiums which are now rising all across the country in every single state. You tell me that these things are somehow NOT A DRAG on the growth of the US economy! Of course they are.

The way I see this crude oil market is that it is the battleground for the war between the deflationists and the inflationists.

This is also one of the reasons I keep coming back to the overall commodity sector and watching the various commodity indices such as the Goldman Sachs Commodity Index or as some prefer to watch, the Reuters/Jefferies CRB index. If the commodity complex as a whole cannot rally strongly and sustain those gains on the heels of this latest FOMC announcement, then I suspect gold is also going to be greeted with further selling on rallies once again as soon as the rash of short covering is finished.

Keep in mind something I have said here before - the recent gains in gold prior to the FOMC release of yesterday were driven PRIMARILY by large speculator short covering and NOT by the FRESH INFLOW OF NEW HOT MONEY. If gold is to maintain any rallies, and silver also for that matter, this must change. Speculators MUST feel the urgent need to acquire both metals at successively higher prices and be willing to commit wholeheartedly to their conviction if both of these markets are going to be able to sustain these rallies and actually trend higher.

While it is nice to see both metals moving higher, we are in no way out of the woods for either of them until we see some significant changes on the price charts, changes that involve the complete obliteration of overhead resistance zones that still loom quite large.

Let's give them some time before we render a verdict and watch the price action to see what we will get next before becoming too dogmatic. Personally I worry about gold when I see the HUI surrendering so much of yesterday's gains the very next day after the big FOMC-related rally. At the very least the gold mining stocks should have seen some upside follow through. Instead they sold off and moved lower. Until I see that 280 level give way on the chart of the HUI, call me a skeptic on these miners. I have that Missouri attitude - "SHOW ME"!

If at First you don't Succeed, Try, Try again

Okay - we knew this was coming but one day after the big FOMC announcement! Please, give me a break! What I am referring to is the new "call" from Goldman Sachs that Tapering will now start in December of this year. Yes, you read that right.

Remember, it was Goldman who just a short time ago came out with a prediction of a $10 billion "dovish" tapering (their words) in September and thus advised clients based on that to buy all dips in the US equity markets and the conditions for rising stocks would still remain in place in that sort of easy money environment.

Well, lo and behold this morning news greeted me that Goldman was predicting a Fed Tapering beginning with the December 18 meeting of the FOMC. They commented that there would be insufficient data at the October meeting to change the Fed's newly announced NON-TAPER but by December this year the Fed will move. They also are predicting a complete end of the program by September 2014.

This should be interesting to watch unfold to say the least. Goldman, as well as a lot of other large firms, received a major black eye as they completely misread the Fed. I guess watching stocks soar to new all time highs however is some pretty damned good consolation for them all!

By the way, give credit to those guys who did call for a non-action on the part of the Fed over at King World News, especially Egon for going out on a limb like he did.

I can tell you one thing as a trader - I simply get out of markets before major announcements like that. I can suggest possibilities but that is just what they are, possibilities. Trading on a guess is a quick way to the poor house. If you get it right - you are a hero. If you get it wrong, your account becomes a zero. That is not trading; it is gambling and there is a world of difference between the two things.

Wash, Rinse, Repeat

That is basically what we got from the Fed today instead of the $10 billion cut in bond buying that the market had priced in. I mentioned yesterday that based on the very benign inflation environment, the Fed might just stand pat due to the recent lousy economic data. They did just that. Personally I think it was two factors which swayed them in this decision - more on that later.

Stocks loved it, bonds loved it and gold loved it. The Dollar hated it. What else is new?

It is perverse in the sense that interest rates on the long end of the curve had been steadily moving higher for about 3 months now based on the increasing expectations of a tapering move by the Fed. We have been paying close attention to the yield on the Ten Year Treasury and have noted that it just missed hitting the 3% level at the beginning of this month.

Here is what I consider perverse about this... consider this... the Fed starts some hawkish talk and begins to prepare the markets for a slowdown in the rate of its bond buying program. The market reacts to this apparent change in policy by bidding up interest rates. This then results in mortgage rates moving higher.

The Fed, obviously alarmed at what they believe will negatively impact the very fragile real estate market then backs away from any tapering plans whatsoever sending interest rates on the Ten Year back down to the 2.75% level where they are currently sitting as I type these comments.

Where does this leave us? Quite frankly, in an enormous mess the way I see it. The Fed does not have the luxury of doing a surprise sneak-attack on the markets without preparing them for a tapering of the bond buying program. For the Fed to announce out of the clear blue sky, without the least bit of warning, that it was going to scale back its bond buying program, would send the stock market into convulsions and rattle the entire interest rate market as well as the currency markets.

They therefore must prep the markets, plowing the ground and giving the markets time to come to terms with any change in monetary policy in order to avoid chaotic market reactions. Here is the catch however - in giving the markets time to prepare, the market response is to sell bonds along the long end of the yield curve thus resulting in rising long term rates. This negatively impacts the real estate market and borrowing in general as the rotten employment picture prevents many people from otherwise qualifying for loans that they might have previously been able to had rates remained at lower levels.

Then the times comes for the Fed to make the actual announcement that they have spent so much effort prepping the markets for only to realize that these same markets have pre-empted any need for the Fed to act. The result? - the Fed does nothing whatsoever!

 In short, I can easily envision a scenario in which the Fed is completely trapped unable to do anything at all well into the foreseeable future. It is going to take STRUCTURAL REFORMS to improve the job market and as long as the current Administration is in power, I do not see that happening any time soon. Thus the status quo continues and goes on and on and on...

In regards to gold, it is scooting higher as a large number of shorts were forced out with today's surprise move by the Fed. It did take out that overhead resistance at $1330 which is a positive and is also now trading above $1350, another resistance level. There is $1360 which I am watching right above where it is currently trading to see how it handles that. Beyond that $1380 is the next target.

The key to gold will be whether or not the speculative world believes that the continuation of the Fed's QE4 policy unabated will generate any long-anticipated inflation. Obviously the bond market does not expect any or bonds would not be moving sharply higher. Thus far inflation has been tame. It is going to take a change in perceptions in that regard to bring in a brand new wave of hot fund money into gold as well as the rest of the commodity complex.

The ironic thing about seeing crude oil and especially gasoline rallying sharply higher today is that rising energy prices, while inflationary in their own right, also have recently tended to be seen more as a brake or drag on economic activity and consumer spending and thus are seen as factors leading to a slowdown in growth rather than a catalyst for higher inflation. If specs begin piling into the energy markets based solely on the lack of tightening from the Fed, then these specs may short-circuit any hopes that the Fed has that its latest NON-MOVE will be stimulatory in nature.

Herding cats will prove easier than herding these destructive hedge funds.

Oh what a tangled web the Fed has created!