Long term Gold Chart

This monthly chart reveals possible downside targets IF critical support just below the $1180 level gives way.

Notice the median line and how price is pivoting around this line as it moves lower. This month's price action is especially ominous for price has barely managed to poke its head ABOVE the line before succumbing to selling. Upon closer inspection, one can tell that the selling is picking up tempo. That is why it is imperative that support at $1180 NOT GIVE WAY. If it does, $1155 will be hit in short order, followed by a test of the $1100 - $1089 level.

Gold Mauled as Bears Growl

Yesterday's late session plunge in gold, during the Bernanke press conference, was a harbinger of things to come for the yellow metal. It dawned on investors that the Fed still had enough concern about deflationary pressures that they were willing to leave interest rates at extremely low levels for a long time. That reinforced the idea that the mild inflation which the Fed wishes to show up, has not yet made its appearance.

Were it not for the fact that crude oil prices rose sharply today, one would have to think that the fall in the gold price would have the Fed concerned. Crude took off however on ideas that the early tapering by the Fed was enough evidence that the economy is going to be on a steady mend next year and that will result in a pick up in crude demand as gasoline and heating oil prices rise to meet that.

Also helping crude rally was further confirmation that the pipeline from Cushing to Port Arthur will be moving oil down to refineries and alleviating any glut in supplies which had been weighing on the market of late.

With yesterday's FOMC actions and the subsequent Bernanke comments, investors seem to believe that they now have the best of all possible worlds - ultra low interest rates for the foreseeable future, no signs of inflation and an economy on the mend. Translation - buy stocks. That is the message of the market.

In this sort of environment, investors simply see no reason to own gold, which throws off no yield and depends solely on capital appreciation to return on investment. If inflation pressures remain muted, and if confidence is high, ( the VIX SANK EVEN FURTHER TODAY providing proof that it is), gold is a pariah at this point.

People can talk about Chinese demand for gold all they want but it makes no difference as far as Western sentiment goes. Here in the West - gold has few friends. Until this confidence in the Fed and the economy is shattered, gold is going to struggle against strong headwinds.  At some point it will get beaten up badly enough to move down into the cost of production and remain at those levels long enough to perhaps force some mine closures, etc,. Maybe then it will finally bottom out.

Keep in mind something I wrote last Friday when the Commitment of Traders report was released - there can be NO CAPITULATION in gold and thus no end to the selling as long as speculators REMAIN AS NET LONGS in the gold market. Too many keep pointing to the building hedge fund SHORT position as some sort of bizarre rationale that gold prices must now stage some sort of rally. I read this sort of thing and ask myself if those who advocate such nonsense have ever really traded anything besides baseball cards and comic books. When the trend is lower and speculators are making money by being short, they have no reason to buy unless upside resistance levels are taken out. If the price moves into those resistance levels and then fails to extend higher, it is a signal to every hedge fund on the short side of the market to sell even more, not buy and get out!

This is what happens when too many self-anointed "experts" give us one prediction after another based on their tea-leaf reading of the Commitment of Traders report without understanding market sentiment and price action.

That brings me back to gold - the failure to hold at what had been shaping up as a secondary bottom at $1220, followed by a primary bottom at $1210, was a huge technical failure. What is worse however is the market's inability at this point to even hold above psychological support at $1200. Losing the "12" handle is a big deal because it deals another psychological blow to the bulls and emboldens the bears even more who are now trying to press their advantage. Every bear on the planet now is salivating over the prospect of reaching that mountain of sell stops sitting just below the $1180 level. If they can reach it, and that is unclear at this point whether they can or not, we will see an avalanche of selling hit the gold market which will easily carry it down to $1150 for starters.

I have put up a Daily Chart to illustrate how tenuous gold's position is right now. It has effectively worked its way lower into a band of EXTREMELY CRITICAL CHART SUPPORT. I would say that this level has almost as much significance as did the $1530 level some time back. When gold fell through that level, we saw wave after wave of selling as hedge fund longs, and other speculative longs, bailed out in large numbers and fresh shorting was established. We would see the same thing occur in my view if this level were to give way and PRICE BE UNABLE TO CLIMB BACK ABOVE IT SWIFTLY.

If you look at the ADX indicator, that line is beginning to turn back up again, after having moved lower. That move lower indicated that the bearish trend was halting and that a range trade was forming. Now that gold has broken below the bottom of that range, the indicator is suggesting that a new leg lower in price could be forming. For that to be confirmed, this chart support level that I have noted would have to give way.

Bulls need some help from somewhere and fast. That the HUI is holding up a bit better than the actual metal today is some consolation. Bellwether Barrick is down nearly 2% as I type these comments but gold is down over 3% so that is a positive, although I will be the first to admit, not much of one on a day like this for the gold bulls. ABX is still holding above that chart gap it made Tuesday of last week; however, it had better not close that gap or it will more than likely retest its recent low.

With rising interest rates here in the US bolstering the Dollar, the precious metals need some Asian buying to keep things from getting even uglier. This rise in rates, which I think is being closely watched by the FOMC, in conjunction with POSITIVE REAL RATES  ( due to the official low rate of inflation ) is not helping gold demand here in the West. Remember, traders will view a strong currency as inhibiting inflation.

The question I still have in my mind is how the Fed is looking at this fall in the gold price and whether it is becoming a concern to them at this point. I do not think it is UNLESS it breaks chart support and REMAINS BELOW THAT SUPPORT for an extended period of time. Spikes below support followed by rebounds in price that occur quickly will not disturb them whatsoever as that can be rightly attributed to market volatility. Low prices however that remain are a more serious signal. Gold is signaling no fears of inflation currently exist. If it sinks further and will not pop back, it will be signaling the potential return of deflationary pressures. That will be a problem for the Fed.

Time will tell.

One last thing about crude oil and gasoline prices. There are two ways of looking at a sinking crude oil price and by consequence a sinking gasoline price. It could be interpreted as a deflationary signal, evidencing a sluggish economy in which demand for energy is weak as a result. It could also be interpreted as having a STIMULATIVE effect in the sense that it acts as a sort of "tax cut". It puts more money in the pocket of both consumers and business as their energy costs drop off. I personally think the Fed welcomes a lower crude oil price more in the latter sense although I am sure that were it to rise too much in their estimation, it could have a deleterious effect on the overall economy. What I am trying to say is that just reacting to a rising crude oil price by saying it is inflationary is not quite as easy as it might sound. It requires a bit more nuance to sort the implications out.

Gold breaks support but recovers

Gold was all over the place today but it really took it on the chin during the Bernanke press conference. It actually broke down below the bottom of its trading range but managed to recover somewhat and claw its way back into the range.

If it breaks below today's low, look out... it will test round number and psychological support at $1200. Right now, it looks tentative to me.

I repeat what I wrote earlier - based on my interpretation of Chairman Bernanke's comments, the Fed is hoping to strike a balance between deflation and inflation in the sense that they want to see inflation but they want to see it tame. What they DO NOT WANT, is a resurgence of deflation. A sinking gold price (below what level I am unclear) that stays down is a deflationary signal. Thus, I suspect the Fed would not welcome a gold price that is significantly lower than current levels, especially if that gold price were accompanied by a collapse in certain key commodity prices.

If that were to occur, in conjunction with a labor market that shows no signs of strong improvement, I could easily see the Fed INCREASE bond buying. At this point, we are going to remain heavily dependent on subsequent economic data releases for a clue as to whether or not inflationary pressures are increasing or not. I believe that the payrolls numbers are going to be even more significant than they have been moving forward.

I noticed that once again silver could not maintain its footing above the $20 mark for long. If growth both globally and domestically is indeed picking up, one would expect silver to move higher alongside of copper. The jury is still out.

Ten Year Treasury Yield Closing in on Yearly Highs

It will be interesting to see the response from the various FOMC governors should this critical indicator push ever closer to 3%. Their response or lack thereof will give us a good clue into the thinking of the broad committee.

You might recall that this summer, the rate spike elicited extreme nervousness and concern among the Fed governors who immediately began sounding a dovish tone on the economy overall and the bond buying program in regards to any tapering.

Remember, the Fed today left the door open to additional monetary stimulus should the economic data warrant such.

Market Confidence Soars on FOMC

As those of you who regularly read this blog know by now, my favorite indicator for measuring investor confidence/complacency is the Volatility Index or the VIX.

Notice how the index initially soared higher when the news that the Fed was tapering to the tune of $10 billion. A large number of investors panicked. However, the reaction following that was one of increasing confidence due to both the wording of the FOMC statement, and, Chairman Bernanke's comments during his last press conference.

I maintain that gold needs something to impact CONFIDENCE before it mount a SUSTAINED RALLY HIGHER. With the VIX falling, and the stock market soaring into new all time highs, gold is looking for some friends right now as there is nothing on the radar screen of investors AT THIS MOMENT, to give them a strong reason to chase gold prices higher.

Now the key for gold is whether or not it can hold chart support near $1220. If it loses that level, it is going to test round number psychological support at $1200.

I will get a chart of gold up a bit later today. As you no doubt realize, it has been a very busy day for traders.

FOMC - Taper Arrives - Finally!

We finally got the big "T" word today. The announcement by the Fed of a $10 billion cut in the bond buying program was greeted by the markets with the usually volatility as the HFT crowd had a field day picking pockets but once the dust settled down a bit and some saner heads prevailed, traders were able to actually think about what the Fed statement means.

It looks to me like the Fed basically gave the market a near perfect bowl of punch. Cut back on the bond buying program and dispel some of the criticism it has been receiving from some quarters about keeping the program at full size for too long while simultaneously sounding an EXTREMELY DOVISH TONE on the interest rate front. In short, they managed to convey that they are still concerned about DEFLATIONARY forces reasserting themselves but are comfortable scaling back some bond buying as they monitor that situation.

The reaction in the gold market was fascinating to watch as traders tried to figure out exactly what to think about this new state of affairs. The initial kneejerk reaction was to sell on the announcement of a taper; however, I believe the dovish attitude towards interest rates eclipsed any fears of a slowdown in the liquidity injection mechanism. That allowed gold to catch a bid and keep above that now incredibly significant chart support level at $1220.

Basically the Fed left the door open for a period of ultra low interest rates for an extended period of time. One thing I noticed was that they seemed to play with the unemployment number threshold a bit ( "well past 6.5%"). That was something new to me.

What really matters to traders however is not the news so much as the reaction to the news. The equity markets are looking at the announcement of a $10 billion/month taper as evidence that the US economy is actually recovering enough for the Fed to slightly scale back the QE. Also, the Fed's benign view on inflation, means that equities remain the "GO-TO" sector for gains.

Given that view, and the fact that there is still going to be $75 billion/month of bond buying, it was a go on all cylinders for the US stock markets. From what I can see, the Fed under Ben Bernanke has managed to pull off nothing short of a financial miracle. They conjured into existence nearly $4 trillion of new money without completely debasing the Dollar or generating widespread inflationary outbreaks. In the process, they generated an historic rally in the equity markets, a rally which I might add, now looks as if it will continue.

With the decision to taper finally out of the way, with the uncertainty surrounding that decision clarified, investors are now breathing a sigh of relief and going back to what they have been doing for all of this year, buying equities. And why not? - the Fed has given them the green light by restating the "Bernanke Put" is still in effect should economic data justify additional monetary action. Stock investors have never had it better. It is rather remarkable.

That brings us back to gold - in my view gold's progress from this point forward will be completely dependent (as it has been in my view) on whether or not the market believes that inflationary pressures are now more of a danger than deflationary pressures. The Fed reiterated that inflation is consistently running BELOW its 2% benchmark. What they want is the Goldlilocks scenario - inflation not too hot, and not too cold, but just right.

I mentioned last week or the week before that in a post, that the Fed might actually WELCOME a HIGHER GOLD PRICE. Why? Because as long as it does not soar out of control, but manages to stay firmer perhaps within a broad range, it would signify that inflation is not a problem nor is deflation. I believe the Fed would be concerned if gold prices were to experience a sharp, PROTRACTED move lower just as much as they would be if it experienced a sharp, PROTRACTED move higher.

If this is the case, we might have finally found a lasting bottom in gold. That does not mean it is going to enter a strong uptrend in price ( see my thoughts above) but rather that the forces of deflation and inflation might now be balanced, at least in the view of the FOMC. I still believe that gold will underperform the broader equity markets unless we see some sort of black swan event.

It was interesting listening to the outgoing Chairman's comments during his presser. He mentioned as a deflationary force falling crude oil prices but also expressed concerns about the potential for rising health care costs and the possibility of rising wages. I came away with the idea that the Fed is going to remain heavily dependent on the financial/economic data. They are very concerned about the deflation issue, that is beyond dispute.

Let's see how things look when the dust settles for the day and then make some assumptions from that point.

Silly Season Silliness

I am strongly suggesting that parents still looking for last minute Christmas kids for their children, look no further than the gold market as it can quite easily be substituted for one of those new, sleekly designed yo-yo's. Yes siree Bob, it goes up and down, up and down, up and down, with hardly any hiccups whatsoever ( you know how annoying those strings can be when they get knots in them ).

Seriously, the Silly Season Silliness was on full display today as the gold market gave back what it put on yesterday, which by the way brought it back to nearly where it closed last Thursday.

That is why I keep saying, do not read too much into any one day's price action. I marvel that all the usual perma-bullish players continue to come out of the woodwork whenever we get a strong move higher. Then they all disappear when the market gives it all back ( some of them blaming manipulation). When gold moves back up, they will come back. Count on that. I could also just as well say that the perma-bears are always growling whenever gold makes a move lower.

Here is the simple truth - gold continues to be stuck in a RANGE TRADE. That means it "ain't goin' nowhere" until it breaks out of the range in one direction or the other. The weekly trend is still down so the bears have a bit of an advantage but downside momentum has also been blunted so until they can force the price below $1210 and keep it there, they are not out of the wood yets either.

Until then, find something better to do with your life ( like going to see "The Hobbit- the Desolation of Smaug" - I LOVE HATING Azog and Bolg), instead of watching every single tick in price. As long as we are dealing with the vagaries of the Fed and the FOMC meeting, as long as we are dealing with year-end book squaring, and as long as we are dealing with pre-holiday thinning trade conditions, we are going to see volatility.

Since there is not much to say right now, I will merely leave you with a price chart noting the price action as it remains constrained within that broader range.

Market Comments 12-16-2013

I mentioned in a post last week that I am beginning to wonder if we are seeing a shift in sentiment towards "growth" in the economy. What is needed in gold, and especially in silver, is for investor sentiment to begin looking away from the "growth is steady but sluggish" theme to one of "growth is picking up and with it, so are the chances of inflation".

Today we had the US Industrial Production numbers. This is a gauge or measurement of the output of US manufacturers, utilities and mines. It registered a 1.1% increase from last month's number, the biggest jump in a year.

That seems to have sparked a move higher in silver which then yanked gold higher. I noticed that Copper was higher as well.

Equities went on a tear higher today as once again the thinking in regards to the QE thing shifted yet again. Today the thinking was that the Fed will hold pat on this month's meeting and will do nothing until March at the earliest so as to not jeopardize the recently improved economic data.

That in turn undercut the US Dollar and thus we seemed to get a binge of commodity buying. Crude oil, gasoline and heating oil, all rallied higher. The metals were all higher. Soybeans moved higher. Coffee and sugar went higher. There were some commodity futures markets that moved lower today but the majority of the sector saw steady inflows.

Whether this is a shift in sentiment towards the sector in general is still up in the air. Part of what makes deciphering all this even more tricky is the fact that these moves are now occurring in the middle of the Silly Season. Market liquidity is shrinking as traders square their book, closing out positions as we move to the end of the year. That allows for excessive price swings in both directions on relatively small-sized orders as more and more air pockets, both above and below the markets, are encountered.

Back to gold - it confirmed that it has entered a range trade for the time being as that uneasy truce between bulls and bears that I mentioned last week continues. The range is defined on the bottom near $1220 and on the top up near $1250 with short covering related spikes pushing prices up towards $1265 before the selling re-enters. Until this range is violated, in either direction, gold is marking time.

It seems to be unwilling at this point to make a decisive break in either direction more than likely due to the time of the year. As mentioned above, many traders are simply not all that willing to establish sizeable positions as the calendar is about to shift. They will wait until the beginning of the New Year before moving back into some of these markets in size. That is why I stated last week and wish to restate here for the sake of emphasis that reading too much into the day to day gyrations in these markets is not wise.

Tax considerations are also at work and trying to unravel that knot can be fruitless most of the time.

I have noticed that as I type these comments, silver has once again been unable to maintain its footing above the $20 mark. It is back to being a teenager once again. For the bulls to have any sort of chance of generating some upside fireworks in the silver market, they will need to get at least past the $21.25 level.

The S&P 500 is stuck between the 50 day moving average and the 10 day moving average. It is basically in the business of whipsawing traders right now.