"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, October 1, 2013

Gold Breaks Psychological Support

Gold has fallen through psychological support at the round number of $1300 surrendering its "13" handle and replacing it with a "12". This will add to the already bearish sentiment towards the metal which once again has failed to act as a safe haven during a time of crisis. For that matter, neither are US bonds providing any kind of haven right. With the US fiscal condition being at the heart of the current crisis, it would certainly be counterintuitive to see US bond prices moving higher.

Additionally, gold has also broken technical chart support down at the recent low at $1290. Bulls must quickly take prices back above this level and preferably above $1300 if they are to avoid suffering deeper losses. Bears are growling today and flexing their muscles having picked off downside sell stops and that has turned the momentum negative. Hedge fund computers will certainly notice that.

There is some additional downside support coming in near $1280 extending to $1270. Should that fail, losses will accelerate. Bulls need some help and they need it quickly.

Losses in the soybean market have also worked to pull the rug out from under silver, which still maintains a connection to this market, even though that link has weakened a great deal in recent times. Many traders tend to look at soybean prices as a sort of proxy for food prices in general and if the former are moving lower, they tend to discount any inflation fears and thus sell silver.

The link was much stronger back in my early days of trading however. Silver is one of those markets that takes its cues from several inputs and right now, those inputs are negative.

The physical market can stem the bleeding in these precious metals but that buying in and of itself cannot push prices higher without momentum based buying and right now momentum is trending lower.

I have also included a longer term weekly chart of gold to illustrate the problem with this market from a technical analysis standpoint. Start at the beginning of 2013 and look at the bottom indicator, the old, very reliable and familiar RSI, or Relative Strength Index. For the entirety of this year, this index has not moved above the 50 level for this weekly time frame. As a matter of fact it has oscillated between 50 on the top and 20 on the bottom. By definition, this is a market that is in a BEARISH posture. If gold were able to at least push high enough to take the RSI above 65, I would feel more comfortable about its prospects for the immediate future. It cannot even accomplish that in spite of the recent FOMC press release stating that there would be no letup in the bond buying program. What is it going to take to get this metal to have anything to the upside if it cannot push higher and remain higher on that sort of news?

Forget all the chatter about BACKWARDATION, DWINDLING COMEX STOCKS, etc. None of that matters. As stated before the only thing that matters is PRICE ACTION. Why is this so important? Simple- because in today's markets Hedge Funds are the drivers of trends and they are not buying this market except for bursts of short covering after which subsides, they promptly return to selling. Translations - they are currently missing in action from the buy side. Until they return, price will move lower. If any of those aforementioned issues were indeed so significant, the price action would reflect it. It is not.

Also, the largest gold ETF on the planets, GLD, continues to experience drawdowns of its reported holdings. How in the world can that be considered anything but bearish as it indicates a lack of sustained speculative interest in the yellow metal?

Back to the chart however - if you note those Fibonacci Retracement levels provided on the chart. I displayed only the 38.2% level for the sake of clarity and to avoid cluttering the chart. Note that the rally higher that began in late June/early July off the spike low below 1200 only managed to reach the 38.2% retracement level off last year's high near 1800 before the metal began moving lower once again. It thus failed to extend above the psychologically important $1400 level. That attracted additional selling.

It is now trading within the confines to the pitchfork with the upper line acting as resistance. If the line is valid, the market has the potential to drop towards the median line again which unfortunately is now below $1200 based on this time frame. Also, since the RSI has been mired in that trading range between 50 and 20 and is now headed lower, it is conceivable that we could see it begin moving  lower until it nears that same level once again.

With all the money printing occurring across the planet, it is difficult to conceive of gold moving lower again but from a purely Technical Analysis perspective, it is quite feasible. Only time will tell if Asian demand for the physical metal is strong enough to overcome Western oriented selling and finally put a LONG TERM bottom in this market.

It would certainly help matters if the Indian government would lift that ill-advised and senseless import curb on gold. After all, a 10% tax on gold coming into the country will only do one thing - kill demand, at least it will kill "legal demand". The festival season will soon be upon us so perhaps saner heads will prevail over there. We will see.

While it would be most unpleasant for the gold bulls, I would personally like to see this metal move lower in order to set up a RETEST of the $1200 level and perhaps that summer low itself to see how the metals acts. If it bounces from there, that would tend to indicate that we finally have a final, lasting bottom. In that case, I believe buyers would be quite active and very vigorous. But the truth is the bulls thus far have had very little conviction especially as indicated by the continued poor performance of the mining shares. We need to see solid bottoms in that sector and in the bullion before there is another chance of a solid up-leg in price.

Also, please keep in mind something I suggested mining companies to do some time ago now.... hedges must be put in place to secure profits. Any mining company that refuses to lock in profitable prices on mined metal is basically taking the role of a speculator with its shareholders' wealth on the line. If you can mine gold at a profit, and fail to act to lock in that profit, exposing your shareholders to the vagaries of the market, that is foolish. Mining companies should be in the business of securing profits; not running a pseudo hedge fund out of their risk management division. Leave the risk to we speculators; that is what we do by profession.

This is also one of the reasons that we are probably seeing rallies being sold so heavily. I believe some miners are indeed using those to secure solid hedges for some of their production and to lock in those profits.

It will take a complete shift in sentiment towards gold and of course, silver, from one of bearishness to one of bullishness in order to dissuade me from seeing hedging as a sound practice at this time. While it is tempting for any mining company to remain unhedged in a rising gold price environment however, it should be obvious that management has no more clue as to where the price of gold is headed over the short term than any other informed market participants.

Falling Commodity Prices undercut Gold and especially Silver

I have been posting a chart of the broad commodity sector for many years now here on this site and elsewhere. Earlier on, I employed my favorite, the Continuous Commodity Index or CCI, which unfortunately died an untimely and unheralded death at the hands of its originators. I have recently moved over to employing the Goldman Sachs Commodity Index in lieu of the more widely known CRB index, which I believe is far too heavily weighted in energies to paint an accurate picture of the broader commodity complex.

Regardless of the reasons I have chosen, the chart speaks for itself. Commodity prices are going no where to the upside. They have not broken down decisively to the downside either but the chart looks like it is leaning lower than higher. This fact, and the fact that the US labor markets are atrocious, is what is undercutting both gold and especially silver.

I have said it many times now, silver must have an inflationary environment if it is to thrive. That is lacking and as long as it is, silver is going to UNDERPERFORM gold.

Also consider something else when you view this chart - the US Dollar is trapped in a broad sideways range between roughly 79 on the bottom and 84 on the top. Currently it is working in the lower portion of this range. In the past Dollar weakness has led to widespread buying of commodities across the board, irrespective of their fundamental supply/demand equation. That is no longer the case. Buying commodities merely because the US Dollar is weaker is no longer a wise option as the markets are beginning to focus more on the fundamentals of specific commodity markets. That in itself is healthy in my opinion as hedge fund buying in the past has skewed price discovery and is not healthy for any commodity over the long haul as it sends false signals to the industry.

Speculative driven rallies in any commodity lead to exorbitantly high prices which foster more production. There is a definite time lag but it is nonetheless axiomatic. We are seeing that now across many individual commodity markets.

The Birth of Obamacare and the Death of American Jobs and Hope

Today is the day that the monstrosity perversely named, "The Affordable Care Act" goes into effect. This job killing abomination is single-handedly decimating the very middle class that it was deceitfully claimed by the Dissembler in Chief to benefit the most.

I have been explaining to friends and acquaintances the deleterious impact of this horrible law but found an excellent article out on the web at one of the websites that I frequent which encapsulates perfectly the carnage that this albatross around the neck of the US economy is inflicting.

Read it and weep....when you do, keep in mind that these are real people, our fellow citizens and neighbors, whose lives are being wrecked by this perversion of liberty.

Get ready to read/hear even more of these horror stories. If you wonder why I keep saying over and over again that unless the US undergoes STRUCTURAL REFORMS, the economy is not going to improve enough to allow the Fed to begin scaling back its bond buying program. you will find your answer here. 

In spite of the Quantitative Easing policy which one would expect to be conducive to inflation, the US job market is comatose and as long as wages are stagnant and the jobs situation remains as abysmal as the following article suggests, the fuel for inflationary pressures ( an increase in the Velocity of Money) is not going to be present. That will keep a lid on the price of gold.

Here are the first two paragraphs of the article followed by the link. I strongly urge my readers to check it out. It is eye opening. I will warn you that it is also extremely depressing because none of this had to be; none of it. This is an example of how foolish and ignorant government policy destroys an economy but more precisely, wrecks human lives.

In a few days, Obamacare’s October 1 launch date finally will have arrived. Ever since its passage, supporters of the law have made countless attempts to convince the American people of its viability, dismissing predictions of lost jobs, decreased hours, and rising costs, among others.
Yet from major corporations to local mom-and-pop shops, from entire states to tiny school districts, a wide range of companies and institutions have seen Obamacare’s negative impact on their workers, budgets, and production. Here are 100 examples of how Obamacare is falling short of what was promised.