Dueling Economic Data

There were two pieces of economic data released this morning, both of them conflicting ( figures!). The first was the ADP private sector jobs data. It came in at 179,000 for May, well below the market expectation near 220K. That sent bond yields falling. Many market players regard the ADP data as a type of proxy for the government's nonfarm payrolls number and tend to extrapolate that report from this one.

Then the ISM ( remember our pals from earlier this week with the double screw up on the manufacturing number?) came out with the Service sector reading for May. They reported the number rose to 56.3 from last month's 55.2. That sent bond yields moving higher along with the US Dollar.

Once again the pattern of mixed economic data continues as it results in traders, particularly trend following hedge funds, getting whipsawed back and forth as the market responds to one set of data only to reverse on another.

There was a story today on the wire feeds detailing how Chinese officials now appear to be getting ready to crack down in earnest on copper-backed loans. That news sent copper prices lower. Authorities there closed down the third largest port in China, Qungdao, in order to dig deeper into possible warehouse fraud involving copper and aluminum.

Traders fear that those same authorities will force the deals involving the metal, which is used as the loan collateral, to be closed out meaning that the copper in storage will be available for sale into the market. That would send an additional supply out driving prices lower. Those traders selling are obviously convinced that this is going to happen.

Here is the most recent Commitment of Traders report for Copper. Do you recall that I posted this chart up a couple of weeks ago noting the huge disparity between the positioning of the largest speculators in the market? Guess what? That disparity has grown even larger. I noted previously that it is rather uncommon to see the LARGE speculative forces so greatly divided and at odds over their bets as to which way the market is going to move. One side or the other in this copper market is going to be proven to be quite wrong. Over the last week of trading, the hedge funds have been wrong while the "Other Large Reportables" category has been dead on target.

Depending on what we get out of the ECB tomorrow and what we get on the payrolls front this Friday, copper could move higher but this development in China is a big deal.

One of the concerns I have when it comes to gold is that the same thing has occurred with the yellow metal. It is often used as collateral for bank loans in China. The last thing that gold needs at this time is an additional supply hitting the market. If the market were to get wind of anything like what is happening to copper is heading towards gold, prices will fall. I have seen some pretty scary estimates as to how much gold is possibly being used as loan collateral in China. So far it is a non-factor but with any potential market moving event, we need to stay attuned to things that might develop on this front.

As far as market price action today goes, traders are not going to get aggressive ahead of that ECB meeting tomorrow. The result has been a narrow range for gold today with little to speak of. From a technical standpoint however, the market continues to hold above support near $1240 but thus far has been unable to gain much, if any, upside traction.

Old crop soybeans continue their roller coaster ride. Wheat finally managed a bounce today as US wheat prices appear to be getting somewhat more competitive. Also, some excessively heavy rains in certain parts of wheat country during the harvest has raised a few concerns that it might be harmful to wheat quality. The result has been a technical bounce higher.

Some of those same rains are working their way across the corn belt and that is improving prospects for a large corn and bean crop. The tightness in the old crop bean carryover however continues to impact the entire soybean market, both old crop and new crop and will probably continue to do so until we get rid of the July contract. I still wonder if we are going to see the commercials squeeze the bears during the July delivery period. They have pulled this stunt regularly this year up to this point. We have had some time however, as the summer nears, for S. American beans to make their way into the country so any squeeze might not be quite as effective as it has been previously. Needless to say, this game is not for small speculators to play. First of all, you run the likely risk of getting assigned. Secondly, if you are wrong, good luck getting out!

The crude oil number got the EIA numbers this AM and they showed a surprising large drop of 3.4 million barrels. That was a big number! The market was looking for a decline nearer 1.4 million. Crude moved higher on the number but, for now, has surrendered those gains. The market is growing increasingly nervous about the SEVEN YEAR HIGH in speculative length in the market and while today's reported drop was friendly, stocks remain near record highs. One thing will be certain about crude - it is going to be quite the roller coaster moving forward. Personally, I hate trading markets that have this much speculative length in them because they tend to become extremely volatile and snap your neck at the rate they move up and down.

I might throw a chart of gold up later on today but methinks it is best to wait until we get the ECB news tomorrow as the mining shares are relatively quiet today as well.

Silver cannot get back above $19. The Euro is hovering near 1.36 with the Dollar just below key chart resistance near 80.70 - 80.80 basis the USDX.

By the way, the yield on the Ten Year continues to rise today and is now above 2.6%. The last reading as these comments get finished up is 2.611.

The VIX remains very low at 12.03, near the low reading for the year. Complacency reigns.

GLD Holdings continue to Rise

IT has been several days since GLD last reported any change in its gold holdings. You might recall from a previous post here

http://traderdannorcini.blogspot.com/2014/05/gld-reports-big-jump-in-gold-holdings.html

that the initial 8.4 ton increase occurred on May 27th, when gold experienced a $30 drop in price.

Since that day, GLD has remained quiet in terms of any reported changes. Today, they finally issued an update and that update contained another increase, this time it was a 1.8 ton increase.

I maintain that if this trend continues, it will be quite positive for securing an eventual halt to the move lower in the price of gold. Clearly some Western-based interests are interested in securing gold near current levels. Keep in mind that this slight increase comes on the heels of another $20 drop lower in price so someone is actually practicing the old adage ( which seems to be less and less the norm in our modern markets ) of "Buying Low".

Here is the chart updated to reflect the increase over the last week or so. It is still down 11 tons or so from the start of the year but at least it has stopped the bleeding.

This continued build, albeit a modest one, is the first real sign of something friendly that I can see in regards to the sector in general. While the mining shares as evidenced by the HUI and GDXJ charts are not encouraging, if the big gold ETF continues to garner some buying, it might give some bears pause for thought in regards to becoming too aggressive both in the shares and at the Comex.

What will be needed however is for those abovementioned shares to show some better technical price action on their respective charts.

Do not forget that we have two big items later to deal with however. The first is the ECB meeting on Thursday and the second is the monthly payrolls report. One or both of these occurrences could result in some bigger moves in the metal.

Euro Gold Below Chart Support

Trading in gold has been relatively quiet in today's session ( boring would be a better word). I suspect traders on both sides do not want to get too aggressive before the outcome of the ECB meeting on Thursday is known and the monthly payrolls number is released this Friday.

The thinking at this point among the majority is that the ECB is going to provide some sort of stimulus measure. Recent inflation readings in the Eurozone and especially in Germany indicate that the bank has room to make a move along this line. The biggest concern is the lack of lending by banks ( borrowing by others). That is the same issue that had been plaguing the US economy even after the first two rounds of QE came and went. The Fed opened up the liquidity spigots but the money never made it out of Wall Street and the equity markets into the hands of the consumer in a large way. That lack of circulation through the broader economy is the reason that the Velocity of Money fell and has continued to fall.

One wonders if that ECB does unveil some sort of liquidity program whether or not that would produce the same outcome this time over in the broader Eurozone.

It seems to me that the one thing that the ECB could do, which would find broad acceptance among most of the members - and certainly among business - would be to try to knock the Euro even lower.

Keep in mind that when the Japanese government came under new management with the Abe administration, that it set about deliberately trying to weaken the Yen ( even though it denied so doing). Japan was trying to fight deflation but what they managed to do was to, in a sense, export some of that deflation to the Eurozone because the weakening Yen tended to push up the other majors at its expense.

If the ECB starts trying to take the Euro lower, who gets to import the deflation impact from its currency strengthening? That is unclear.

I guess we will all find out soon enough what the ECB is going to do this week.

For the time being, I am keeping a close eye on the gold price in terms of Euros, or Eurogold.

Here is its chart.

You can see, for the last two months ( April and May) whenever the gold price neared the 920 level, it bounced. Last week it fell through that level and has remained below it for the time being. It is still up for the year but its looks heavy.

There is some uncertainty as to what gold might do if the ECB acts. One school of thought is that if they set out to deliberately drive down the value of the Euro, it would benefit the US Dollar and thus pressure the gold market. Another train of thought goes that, depending on whether they engage in their own version of QE, it would tend to shore up the gold price as traders who fear a debauchment of the Euro would buy gold as protection against that.

I have to wonder whether or not the ECB would be any more successful than the US Federal Reserve however when it comes to producing inflation. Central Banks can lower interest rates until the cows come home but they cannot make consumers or even business for that matter, go out and borrow. To take on new debt, individuals have to feel comfortable enough or confident enough, that they can handle the additional debt load. The labor markets, I believe, have more sway over the inflation issue at this point in the game than any other area of economic interest. That is true whether it be in the Eurozone, here in the US or over in Japan.

The key in my mind, at least as it regards gold, is whether these Central Banks efforts can seriously fan the flames of inflation or whether their policies are more or less acting to produce a type of standoff between inflationary forces that they want to set loose and the deflationary forces from large levels of debt and stagnant or moribund labor markets.

Based on the price action in the bond markets, and especially the action of the TIPS spread, the market is looking ahead and seeing a period of slow but stable growth without any strong inflationary pressures. That is what we have had for the last couple of years in particular and why stocks have done so well and why gold has fared so poorly.

Something would need to change on that front to alter the current sentiment.

Interest rates have perked up a bit here in the US with the yield on the Ten Year back above the 2.5 level. It is currently sitting at 2.588, up from 2.438 last Tuesday.

Here is a quick look at the broader commodity sector using the Goldman Sachs Commodity Index.

It has fallen to the same level from which it bounced last month in May. It still is showing no signs of any upward acceleration however.

One of the reasons that this index is thus far refusing to break down is on account of the strength that continues in crude oil. Large hedge funds have huge long positions in that market and have refused to sell those down and that is keeping this market supported even in the face of some sizeable stocks in storage. As I have said before, crude is a mystery to me because I cannot fathom how much of this hedge fund buying is related to their wanting to own the stuff as an asset class into which they can diversify or how much is due to a general perception that the US economy is very slowly improving with a corresponding increase in demand.

I watch both copper and crude very closely in this regard and their chart pattern over the last of week or so has been remarkably similar. both remain supported but have been unable to extend higher. That might change at any time but for now, neither are giving any clues as to what direction they expect the global/US economy to move in.

ISM Statement

"We apologize for this error. We have recalculated and confirmed that the actual index indicates that the economy is accelerating. Our research team is analyzing our internal process to ensure that this doesn't happen again".

The May reading finally came in at 55.4% up from the April reading of 54.9%.

ISM noted that their software incorrectly used the seasonal adjustment factor from the previous month.

It is interesting seeing the bond markets react with such vehemence. The stronger number in the New Orders Index, 56.9% compared to the April reading of 55.1%, is the 12th consecutive month of increases in this reading. Bonds seemed to focus on that today. The result was a bump higher in long term interest rates.

Sadly none of this is going to stop the mouths of the conspiracy crowd who see evil intent lurking behind every proverbial bush.

"It's all part of the sinister plot to drive the gold price lower". I guess the ISM folks have now gotten engaged and have joined the cabal.

I would watch for the Transportation Safety Administration ( TSA ) to be the next collaborator. They will order machines to beep when gold is detected, either in the form of jewelry or bullion, with the express purpose of seizing it from all air travelors in order to provide additional supply to sell into the market to drive down the price.

June starts with a Quiet Session

Last Friday was the end of the month and with that, came the usual book squaring and position squaring that typically accompanies that. The result was a round of short covering in the mining shares as the bears rang the cash register to realize some sizeable gains over the month of May. The new month of June is starting off with more selling in the mining sector as it looks like some of those players are repositioning once again and taking short positions to start the month.

Overall trading today seemed to be relatively quiet; at least thus far it has been.

Gold was weaker overnight as it came into very early European trading when it bounced off of the support region near $1240 and stabilized heading into New York. The yellow metal did manage to get a bit of a pop higher off of the ISM number this morning. The May number came in at 53.2 versus the April 54.9 reading. The market was expecting a 55.6 reading.

NOTE:  Around mid-morning ISM sent out a CORRECTED reading for May at 56 and NOT the 53.2 reading that they reported early this AM. Private economists noted the error after the release of the data. ISM noted that the error was due to their use of the wrong seasonal factors. Stocks moved higher when the news of the error hit the wires and gold dropped a bit deeper into the loss category.

That was offset by another piece of economic data showing April construction spending rose 0.2% with the March number being upwardly revised from 0.2% to 0.6%. Gold faded lower as soon as that number hit the wires.

I expect this to be the pattern for gold for the near future; it will be caught in a tug of war between conflicting sets of economic data with a steady grind lower barring any sort of wildly impressive economic data.

The biggest reading that traders/investors will be looking for is on the employment front. That is the key data set as far as the broader market is concerned. Will the moribund jobs picture show any signs of real life or will it continue its pattern very slow improvement?

Along this line, we were greeted with news of yet another job-killing initiative undertaken by the current "we hate business" administration. We have had the disastrous oxymoronically named "Affordable Care Act", the refusal to build the Keystone Pipeline and now we get its war on coal. Again, using its favorite method of doing end-runs around the Congress, the Administration unveiled a new set of EPA regulations which most analysts predict will end up costing 250K jobs.

Every single one of the above have resulted in either job losses or the prevention of the formation of new jobs. The problem for this economy lies not so much in what the Fed is doing or not doing at this point, but in the current administration and its allies in Congress. Simply put, they are at war with the true creators of wealth in the nation. I wonder just how much this economy could actually have grown over the past couple of years had we had an administration that favored and initiated pro-growth policies which would get Americans back to work. It shows just how resilient American business truly is and how much potential our national economy has that in spite of one millstone after another hung around its neck, it still manages to actually manage some growth, even if that growth is rather anemic.

I envision American business as a runner loaded with lead bricks on its back by the current administration valiantly straining to run the race nevertheless. It is ironic that this administration, which constantly touts itself as a champion of the working class, has ruined that same working class with the sort of ideologically driven policies which have been proven time and time again to curtail growth and engender job loss, ESPECIALLY among those who need those jobs the most.

The reason I bring this up is because as long as the current administration is in office, I cannot see this economy really accelerating to the upside any time soon. I see instead it continuing to limp along showing some growth, but that growth will be subdued at best. The TIPS spread is showing the same thing - sluggish growth with little to no inflation. We will hopefully get a change in the Congress in this fall's election but as long as the Obama administration is in office, I cannot envision anything drastically changing on the economic front.

What this translates to in my view is that stocks will continue to be the "Go-To" asset class and where the investment gains are going to be made while bonds will remain in a range trade. Gold will struggle to find any sort of sustained rally as players will look to sell the metal on strength. I would have to see something that radically alters this outlook to have a corresponding change in expectations.

That being said, any sort of shift in the current sentiment, will be reflected on the price charts. That is why all of us, myself included, are served best by not becoming married to any viewpoint that we may or may not have and remaining flexible enough to allow for shifts in investor sentiment.

I should note here that European manufacturing data out this AM further fanned the flames of negative Euro sentiment. Throw in some additional data showing the German inflation rate fell almost by a half and the likelihood, at least among market players, that the ECB is going to take some sort of action on the stimulus front at its meeting this month, increased. That pressure the Euro down towards that 1.36 level once more with the result that the US Dollar was lifted ever closer to its key chart resistance level near the 80.70 - 80.80 level basis the USDX.

With the US expected to see higher interest rates sooner than the Eurozone or Japan, both the Yen and the Euro are losing ground against the Dollar. Today the yield on the Ten Year jumped rather sharply to 2.534 as I type these comments. It had briefly fallen below below the 2.50 level last week dipping as low as 2.402 before bouncing.

This stability in the Dollar is going to create more headwinds for gold.

News out of China on its manufacturing front was completely different than the weak news out of the Eurozone. Its manufacturing purchasing managers index rose to 50.8 from April's 50.4. The market was looking for a 50.6 reading. While not exactly a gangbuster reading ( anything below 50 is considered contraction) it alleviated fears of any short of sharp contraction in that key region. Copper responded by moving higher with its strength dragging silver up somewhat.


On the grains front - soybeans - the market that keeps on proving that only those with some sort of masochistic tendency will trade that old crop contract. It's unpredictable price action continued today with the July soaring back above the $15 level again. There appears to be a contingent of either pit locals or some commercial interest which look as if they are trying to squeeze the shorts in that month. Some days they have better success than others it would seem. Today was one of those days. Once again the focus was on the tight carryover. I still wonder how many beans from last year's harvest that farmers might be sitting on in their shiny new silos.

As far as the new crop goes, the weather, for now, looks ideal. We will get a look at the status of those bean and corn crops this afternoon when we get the conditions reports. Wheat continues to lose any gains it received from hot and dry conditions a while back. The rains that have fallen in the hard winter wheat region have taken that right off the radar of the trading world. Instead the focus has shifted to the lack of competitiveness of US wheat prices compared to other global wheat competition.

Crude oil is weak today with nat gas getting a bit of a bump off of that news about the administration's war on coal. WTI has trouble whenever it nears the $105 region. There are an awful lot of hedge fund longs in that market that is making some nervous. It has managed to stay afloat above the $100 mark in spite of the rather flaccid economic readings of late so demand must be there but it cannot extend higher either. Markets like this, where there are a great number of big long positions, that stall out, are always at risk of a significant round of long liquidation from stale longs that run out of patience. We'll see if that is the case or if the bulls remain resolute and refuse to cede ground.

Here is the gold chart:

The ADX continues to rise but remains below 25. The negative DMI however is well above the positive DMI indicating a market in which the bears are in control which is grinding lower. The price did bounce from that support level noted ( next support zone) but has not managed to extend even so far as last Thursday's and Friday's high. It looks heavy, especially with the mining shares coming under more pressure in the session thus far.

Some thoughts on the Gold Commitment of Traders

For gold bulls, this past week was rather traumatic to say the least. The near two month long support region centered at the $1280 level gave way resulting in a drop of an additional $40. The combination of reduced tensions in the Ukraine, some improvement in key economic data ( although the situation remains mixed ) and tame inflation, along with a soaring stock market, has resulted in Western investors selling gold and moving the funds into equities in order to gain the best possible return on investment capital.

Gold now enters a seasonally weak period during the month of June so additional losses are certainly possible as we move forward into that month. It looks as if there was some late-in-the-session short covering by bears in the miners this afternoon as they rang the register on a very profitable month.

To give you an idea of how successful they were - the HUI started the month of May at the 225 level and moved all the way down to 201 today before the slight bounce to end the month closing at 206.

The GDXJ, fared a bit better ( because it has suffered even more severe losses over the last couple of years than the larger caps) as is started the month at 36.50 and fell to 32.43 ( almost entirely erasing this year's gains) before it closed at 34.

Next Monday brings the start of a new trading month so it will be interesting to see how players position themselves the first entire trading week since the Memorial Day holiday shortened week.

For gold the technical damage done this week was severe. However, based on this afternoon's Commitment of Traders report ( which unfortunately did not include the $20 drop over the last three days of this week) the entire group of speculators, every category, still, in spite of the deteriorating chart pattern, remain net long.  That concerned me last week and it concerns me still this week.

They are still not getting out meaning that their losses are continuing to grow. At least in silver they have finally figured out which side of the market to be on ( short ) and might perhaps be making some money for a change, but when it comes to gold, it seems old habits die hard.

What I wanted to do was to graph out in visual form something showing the reader what the problem is for the longs in this market at the moment.

Take a look at the following chart which has as its beginning point, the middle of December last year. As you can tell, the gold price, which is on the right axis of the chart, was near $1200 then ( closing price). It climbed all the way to near $1381 on Ukraine fears before plummeting back to earth where it currently sits as of the close today slightly below $1250.

The blue line on the chart is the SUM TOTAL of all three categories of SPECULATORS LONG positions only. I am not noting any short positions or the NET position but rather just the Long positions.

If you note the second and third vertical lines in mid-April, you can see that there was a large influx of speculative buying. A great portion of this was related to safe haven flows tied to Ukraine fears. That buying was met with heavy selling by both the Commercial interests ( possibly some hedging by some miners) as well as Swap Dealers. There was also some selling in the large speculative categories as well by that was outnumbered by their buying. Some of the old pros and those with past experience knew that selling gold into geopolitical fears was the proper way to approach the metal as those rallies tend to be fleeting as a general rule.

Nearly all of those brand new longs, put on over a three week period or so, were put on when gold was trading between $1300 and $1290. As the crisis in Ukraine seemed to cool down, disenchanted bulls began giving up as can be seen by the fall off in their numbers early this month. About half of them threw in the towel (look at the horizontal line). That translates to another 9,000 or so that were left and whom did not get out which had paid north of $1290 for their gold. We do not have all of the movement among traders for the last three days of this week unfortunately but suffice it to say, a fall below $1280 was not good from a technical standpoint but from an account management standpoint, a further fall to $1260 and then to $1240 means some very severe losses for that crowd that purchased their gold above $1290 and on towards $1300. One has to wonder how deeply capitalized some of these guys are because included in this number of total speculative long positions is the little spec, the most undercapitalized trader of them all.

It is interesting also to note, ( go back to the first vertical line in early February, that almost all of the longs that bought into gold when it was first near $1260 and then carried towards $1380 are now gone from the market. However some of them still remain ( about 6000 or so). Those 6,000 put on long positions when gold was near the $1260 level so they too are now underwater completely. Their paper losses are not that severe  - yet. The question is at what level will their losses be sufficient to force them to exit?

What I am getting at is the fact that we currently have a still sizeable contingent of speculators on the long side of the market who are underwater on those long positions - if they did not yet exit Wednesday, Thursday and Friday of this week. We have no way of knowing that for sure until next Friday. My guess is however, that some of them did liquidate, either by choice or were forced out by margin calls.

Go back to the beginning of the chart  - As you further see from the chart, there still is a large number of these specs who moved onto the long side back when gold was near $1200 and who then added on more as gold climbed above $1250 in January. So far, those positions are safe, which is the reason for this continued bullishness among the specs when it comes to gold, unlike silver which is losing favor among them.

In going over this chart, I believe gold will need to fall BELOW $1240 to kick some of this crowd out with more coming out if gold falls through $1215.

If this does happen I would expect to certainly see the speculative side of this market also begin to ramp up NEW SHORT positions at the same time. That would bring us selling from two directions - long liquidation and fresh shorting.

 Perhaps we might see a true, lasting, bottom if that were to finally occur. In spite of what many seem to be saying, sentiment towards gold, while it has taken a big hit, remains, based on the still sizeable number of these speculators who are long at the Comex gold market, bullish. That is quite astonishing but at least we know some of the reason why. Many of them are into gold at much lower levels and still have their positions in the black. They do not need to exit as of yet. Just look at that blue line however and see where it stands today compared to where it stood at the middle of December last year. There remains enough specs on the long side to pressure this market lower if those key technical support levels do not hold and they are forced to abandon ship.

Gold bulls certainly do have their work cut out for them. As always, we will watch the price action and let it be our guide.

Silver Loses $19 Level; Gold Has Few Friends

I will come back to silver later on in these comments but for now want to discuss the gold chart and price action.

Today, the Chicago PMI numbers came out with a reading of 65.5 versus the April reading of 63.0. What was picked up by market players was the NEW ORDERS index which rose to 70.2 from its 68.7 reading in April Traders and investors are reading this as further evidence that economic growth, while not roaring higher, is undergoing a type of grinding improvement.

One can argue that case but the fact is that the market is choosing to view this recent rash of economic data in a friendly manner and wants to be bullish. That is why the Q1 GDP was sloughed off - traders blamed it on the severely cold and record breaking winter. I should note here that if the Q2 number does not come in much better, blaming the weather is not going to be a viable excuse!

Regardless, as one watches the long bond moving higher of late, and that TIPS spread which I detailed a couple of days ago, it is evident that as far as the broad market is concerned, inflation is not an issue. With traders/investors convinced that is so, and with no reason, in their mind, for the Fed to delay any further reductions in their bond buying program, gold is finally losing many more of its friends.

The stubborn bullishness that remains among so many speculators based on the Commitment of Traders reports IN SPITE OF what has clearly been a slowly deteriorating chart pattern, might finally be giving way to reality. Unfortunately for us, when we  get the release of the this week's COT data it will not show us what has happened to these specs since Wednesday. Gold has fallen another $20 since that time. It did lose $1280 early in the week so the report should pick up some long side liquidation as that was a very significant technical chart level.

Keep in mind that the last time I commented on that report, every major category of speculative interests was still net long. That means a very large number of those positions are deeply underwater ( especially those who chased the price higher based on Ukraine ) and are now either being met with margin calls or being forced to liquidate their losing long positions.

In looking over the chart, you can see that all three support levels noted, beginning first near $1280 and extending lower, have completely given way. Even the psychological support at the $1250 level could not hold the market. The next level of chart support surfaces near the $1240 level and extends down to $1232 or so. If that gives way, $1220 is next.

For bulls to be able to have a chance at improving this chart, they would have to take price ABOVE $1280 and keep it there at a bare minimum. That might be a tall order because based on the breach of that level and how significant it was from a TA perspective, sellers are going to be lurking there.

The ADX is rising once again but remains below 20. Combine that with the rising -DMI and it tells us that the bears are in firm control of the market for the time being. Speculators are not yet aggressively playing gold from the short side but with this steady, grinding move lower, many of those who are long are growing disillusioned and getting out. This sort of "disgusted selling" tends to have a snowball effect however so we will want to keep a close eye on how this market acts as it nears each respective support level. Failure to manage even a bounce would augur for sharper losses. We will just have to wait and see.

I would need to see the ADX get at least above 25 and continue rising to indicate that a strongly trending move lower is underway. For now, while the short term is decidedly negative, the market continues to GRIND LOWER. If gold cannot manage a bounce away from $1200 for any reason, it is quite possible that we see a move all the way back to that double bottom at $1180.

It is not gold just in Dollar terms that is looking lousy on the charts, it is also Eurogold ( Gold priced in Euros) as well. Take a look at the chart.

Notice how today's move broke it down below its level of chart support near the 920 region. Next support is near 910. If that does not stop the bleeding, it could fall below its round number psychological support at the 900 level.

Compounding gold's woes today is more weakness in the mining shares. The GDXJ has surrendered its mediocre gains from yesterday while the HUI has fallen to a fresh 4 1/2 month low.

GLD, the big gold ETF has not shown any chances in its reported gold holdings since that big jump the other day so I am especially curious to see what is going to be coming out of there when they get a fresh number up for us. That was the one saving grace that I could see for this gold market. If that goes, then that support will have gone the way with the miners. Hopefully they will have some data for us later on today after the close.

Moving over to silver - it finally cratered through that critical support level at $19. Markets that continue to flirt with resistance or support levels are generally going to go through them.

Here is the silver chart.

As you can see, the support level that has held it all the way back to late January was broken in a big way today. It fell through $19 yesterday but manage to squeak back above it but the sharp fall in gold, combined with another drop in the copper price, was too much for the grey metal to withstand. It is now decidedly down for the year. I have included a line showing where this metal closed at the end of 2103 for your reference point.

Silver is now sitting right at the bottom of the next support zone noted. If it cannot recover from here and climb back firmly above $19 in a hurry, odds favor the metal moving down towards $18.30 - $18.20.

One quick comment - I generally receive lots of gold/silver "analysis" in emails that many readers send my way asking for comments. I generally do not answer them because of time constraints hoping that the readers can glean an understanding of what my view might be at any given time based on how I am seeing the price charts. However, I do want to take a bit of time to comment on these perma-gold / perma-silver bull websites and advisory services, who somehow manage to constantly beguile their unsuspecting readers with one bullish "SPIN" after another when referencing the COT reports.

Just the other day I had one pop into my inbox telling the readers that the potential for a good strong short squeeze exists in silver because the swap dealers are long and the specs are moving to the short side. I read this sort of claptrap and shake my head in bewilderment that some people actually pay for this junk or read it with any sort of seriousness. Are these "experts" on the COT trying to tell their readers/subscribers to go long and wait for this expected short squeeze?

I have said it so many times here that I get concerned I might be taxing the readers' patience but the simple facts are that speculators drive markets. While the Swap Dealing positioning is always interesting, they do not drive the market, SPECS DO. If they are buying, the price will rise. If they are selling the price will fall. As long as specs are in a market, there is always the potential for a short squeeze or a bout of long liquidation. That is not news nor is it noteworthy. And I am certainly not going to take a position because a bout of short covering just "MIGHT" occur because the Swap Dealers are holding a position on one side of the market. The possibility exists every day in the futures markets that specs could cover shorts or liquidate existing longs. However, they NEED A REASON TO DO SO.

What is noteworthy is if a key chart level is violated for any reason. Then the spec positioning becomes important. Such was the recent case with gold as the specs remained stubbornly bullish in spite of a deteriorating chart pattern as I have noted. Not until that key downside support level gave way at $1280 did we see them bail out. Same goes for silver on the "potential" for any so-called short squeeze - you need to see a key UPSIDE chart support level give way before that does happen. The problem for silver however is that the resistance level that needed to give way to induce this potential round of short covering was not violated. Quite the opposite happened, a downside support level gave way meaning that is WAS NOT a bout of short covering that took place but rather a bout of long liquidation from those specs which remain long and are now being forced out.


A quick comment on the Goldman Sachs Commodity Index or GSCI. I am including a chart of it to show where it stands in relation to the closing price of the index at the end of last year. It is currently up 2.7% since then. I prefer using this index rather than the CRB because I feel that the latter is too heavily weighted in the energy component side and thus does not give an accurate view into the overall commodity sector as a whole. I liked the old CCI much better but it is pretty much becoming defunct at this point. Anyway, the GSCI is fairly evenly weighted and provides a good picture of how commodities, as a whole, are performing.

One of the reasons I am not too concerned about this index at this point making any stronger gains and breaking out into a trend ( at this point ) is because the makeup of these indices includes the front month futures contract when calculating it. Several of the commodity futures markets that I actively trade are showing lower prices for later in the year however. That will not be noted on the index until those distant months become the front months as the calendar moves ahead.

That being said, a 2.7% increase in the sector, while noteworthy is not setting off any alarm bells at this point. Could things change in the sector and move higher? Sure they could - after all we are talking about markets and NOTHING is ever set in stone in any market but for now, upward price pressures across the sector in general remain muted. I would need to see this particular index breach 675 to become concerned about rising commodity prices at the wholesale level becoming a more serious concern.

Along that line, all of the grains are moving lower today, even the discombobulated soybean market which cannot seem to figure out what it wanst to look at on any given day on a consistent basis. Growing weather is looking ideal at the moment for this year's crop ( remember - we are talking weather so that could change, and probably will at some point in the growing season ) with sufficient rainfall and ground moisture. Rain makes grain is an old but true adage. The lower grain prices are good news for consumers and livestock and poultry producers. Along that line, feeder cattle keep soaring to record highs as cheap corn makes it a bit easier to stomach prices up here in record nosebleed territory.

Today is the end of the month for trading purposes so some of these price movements in the markets today should be viewed through the prism of possible book squaring and positioning evening out. How we start ( and finish ) next week will be more telling but with that being said, the charts are what they are so any moves in price that impact those charts, needs to be respected and heeded.

I will try to get some more up later on......

Gold versus the TIPS Spread

I posted a chart last evening showing the TIPS spread going back to the spring of 2009. I have had a bit of extra time to overlay the gold price on that chart so as to be better able to compare how the price of gold is performing in relation to the changing inflation expectations among those who comprise the market.

I am particularly interested in the gold price performance when the reality dawned on most market participants that the extraordinary monetary measures that the Federal Reserve was engaging in was not producing the kind of upward pressures on inflation that most of us had believed it would when we watched it implemented.

Interestingly enough, this sea change in sentiment and "awakening" among investors, occurred in September 2012. That month the expected inflation rate peaked out above the 2.6% level. As you can see from looking at the chart, that was also the time frame during which gold could not maintain any sort of hold above the $1800 level. As it turned out, once gold failed at $1800 it was a steady downward move until it broke support near the $1530 level and entered into its current bear market.

In looking over this chart, I am struck by how closely the gold price has been moving with this TIPS Spread since it peaked out at the secondary high near $1800.

For another look at the overall commodity sector, take a gander at this chart of the GSCI ( Goldman Sachs Commodity Index) and notice how it failed at the 700 level at the same time ( September 2012) as both the gold price failed at $1800 and the TIPS Spread peaked. It too has been moving in a range since that time.

I find none of this to be coincidental. It helps establish me in my view that the market remains quite unsure about the future of inflation in this extraordinary time in financial market history. Economic data will seem to improve, then fall, then improve once again, etc.

A quick note about the mining shares - looking at the HUI chart, unless it can reverse course tomorrow or Friday, it looks to end the week BELOW another key chart support level on the weekly chart. If it does, there is a good chance that the index will test the psychological support level of 200.

The GDXJ is threatening to lose all the gains, what little it had managed to capture, of this year. Its low print for today's session is 32.43. It closed last year ( 2013) at 31.05.

Until we see these mining shares showing some signs of life, making a case for a good bottom in gold is unwise.

That being said, I am going to be most curious at to what the reported holdings in GLD are by the end of this week. That buying yesterday was rather odd so I want to see if it was an anomaly or the start of an actual trend.

The Euro fell below the 1.36 level in today's trade which is more psychological than anything but nonetheless, it continues weak against the Dollar. There is some support on its chart near 1.356. I don't see much below that until you get closer to 1.350.

The Dollar is inching towards overhead chart resistance near 80.70 - 80.80. It can close out the week above that level, it stands a good chance to make a run at 81.40 or so.

Gold did initially hold at even number support at $1260 but as the day has worn on and the mining shares continue to sink, it fell below that level. There is psychological support near $1250. Rallies in gold are now going to be sold as losing longs will use that to get out while opportunistic shorts are going to be aggressive. Something will have to turn on the fundamental front ( currency concerns or geopolitical events ) to take gold out of its current bearish posture.