"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


Thursday, January 23, 2014

Emerging Markets Spark Flight to Safe Havens

I mentioned in an earlier post today that there was a general flight out of equities after the overnight news that Chinese manufacturing had experienced a rather significant slowdown. U S equity markets were spanked hard in the process ( of course the usual dip buyers showed up once again as they have been well rewarded for so doing time and time again).

Interestingly enough, it was the commodity-based currencies such as the Aussie and Kiwi ( initially along with the Loonie) which saw some heavy selling. The Aussie and Kiwi, with their close exposure to China, got hit the hardest which is understandable. I must admit at finding it odd to see the Kiwi rally back from its worst levels of the session like it did however.

I learned later in the session that the Turkish Lira hit another record low against the US Dollar. This was in spite of direct market intervention by the Turkish Central Bank.

This occurrence, along with the weakness in most emerging market currencies, was what sparked some strong buying in the Japanese Yen and the Swiss Franc today. It is also the reason, in my view, that gold experienced another one of those mini-melt ups that it has been famous for lately. It was odd to see the US Dollar sinking so severely on a day in which risk aversion was in, especially in regards to the EM's, but I think it was the lackluster US economic data, coupled with sinking interest rates here in the US coming on the heels of those big money flows into bonds, that undercut any safe haven bid that we might otherwise have seen coming into the Greenback.

Europe and Japan seemed to be the winners in the currency wars today.

Obviously that brought a fair amount of buying into gold as a safe haven, something we have not seen in a while as it and silver have tended to trade more in sync with the risk on/risk off trades, rising on the former and sinking on the latter. Well, today we got the latter ( risk off) and gold benefitted so go figure.

Just goes to prove how fickle these markets are anymore and why extrapolating too much from one day to the next's price action is not too advisable. During episodes such as this, TECHNICALS RULE THE DAY so whichever side, bull or bear, happens to have the technical on their side, will win the day's battle. That is what we saw today in gold.

I should note that silver does not know what it wants to do. It still is having large troubles with the $20 region as it is attracting selling up here. It cannot decide whether it wants to be a safe haven with gold or a risk on trade with copper. Right now it is caught in the middle of them both.

Today's move higher in gold seems a bit overdone to me, but that is more a hunch rather than anything grounded in pure Technical analysis as the gold chart is very much improved by today's strong push higher. We'll see if the bulls can grab the initiative completely in tomorrow's session or if they decide to bank what paper profits that they made today and rest content with those.

Gold Field Mineral Services

The metals consultancy GFMS released an update to its 2013 Gold Survey which was very interesting. A few things in particular stand out to me.

The first was something we have been talking about here for some time now and that was the fall off in world investment demand for gold last year. GFMS stated that demand fell 11% last year to 1,342 metric tons. In terms of value, world gold investment dropped by 25% to just under $61 billion; the lowest level since 2009.

The firm projects world gold investment for the first half of 2014 to total 762 tons, down 14% on the second half of 2013, but also 65% higher than the first half of 2013.

They mentioned solid Asian demand which they suggest ( surprise, surprise) will keep a floor of support beneath the market. Chinese gold jewelry fabrication increased 31% last year and Chinese physical bar investment rose 47% to a record high. The consultancy noted that this buying was essentially bargain shopping as price sensitive buyers picked up the metal when it fell in price.

Net official sector buying ( World Central Banks) fell 34% to 359 tons last year. They believe that official sector net buying for the first half of the year will total 132 tons, down 10% from the preceding six months and down 37% from the first half of 2013.

Central Bank demand is a big factor in the gold price, something that many seem to forget at times.

They also projected gold prices to average $1,225 in 2014, 13% below that of 2013. They do not believe that the price will breach $1,300.

In short, the firm has stated the same thing I have been saying here for quite some time now -namely that while Asian demand for gold is strong and is providing a floor of support for the metal, Western-based investment demand ( I am inserting "Western" whereas they are taking a global view) in and of itself has been falling as money flows into equities in search of yield.

This is the reason I monitor the reported holdings of GLD, the big gold ETF. It is as good as any a gauge of Western investment demand for the metal. Until its ceases dishoarding gold, Asia is going to have to carry the slack. The problem with that is that these buyers generally DO NOT CHASE PRICES higher, especially if they understand that they do not need to compete with Western interests. They tend to wait for price setbacks to buy.

Keep all of this data in mind folks when you read the sensationalized claims about Asian gold demand soaring, etc.... It is indeed solid, I am not disputing that, but Western investment demand is the key to any SUSTAINED RISE in the price of gold.

One thing is certainly going to be interesting to watch is how that Asian demand responds to these higher gold prices of late.

Incidentally, I am noticing that the HUI is stronger today but has not confirmed an upside breakout as of the time I type these comments. Charts are improving however.

Upward Rigging of the Gold Price Continues

I must admit; I just cannot help myself having a bit of fun. I wanted to try these catchy titles the same way that the GIAMATT crowd web sites do in order to generate more site hits to increase their ad revenue dollars!

I should know as my poor inbox gets inundated with such articles whenever gold has experienced a sharp selloff of late. "See - we told you so", seems to be the message.

The poor bears however have no friends for no one writes snappy titles to defend them whenever gold has one of these big up days like it is having today.

On to more serious business however - there was a strong combination of data releases that really lit a fuse under the gold market in today's session. Unemployment numbers, the Chicago Fed's index, China, etc. Each of these data releases showed slowdowns in growth.

If that were not enough, India's ruling Congress party chief, Sonia Gandhi was reported to have requested the Ministry of Commerce to ease restrictions on gold imports into India. The gem and jewelry industry is complaining, rightfully so in my view, that this 10%  barrier is forcing their costs to rise and impacting their businesses negatively. Any easing of this tariff would be viewed by gold traders as friendly towards India gold demand. At least that is how the market seems to be regarding it at the moment.

Back to the US data however but more specifically, back to its impact on the US DOLLAR. It fell SHARPLY and guess what???? -  Yes, Gold rose sharply. No manipulation, no theories, just a simple correlation between the Dollar and the Anti-Dollar or ol' Yeller. The weak economic data, which reminded people of just how weak that last payrolls number was, once again spurred more of the same talk that the Fed was going to be on hold in the regards to the Tapering.

Side note here - one wonders just what will happen if the next payrolls number just happens to be above 200K. Will all of today's talk disappear once again? From a trader's perspective, it is like trying to catch a yo-yo.

With equities selling off sharply on the sharp reported fall in the Chinese manufacturing index, investors are fearing more slowing growth and that translated to sinking interest rates here in the US as bonds were the recipient of money flows today. Those money flows dropped interest rates and that pulled the rug out from beneath the US Dollar which has been supported by a general tend of rising rates here in the US.

The yield on the Ten Year as I type these comments is down to 2.8%. At the start of this year it was trading above 3%! The Dollar has tended to generally track the yield on this note.

Watch the Dollar to get a clue as to whether or not gold can muster the energy to punch through this tough overhead resistance barrier that it has now once again entered.

Around 10:00 AM CST, the Kansas City Fed numbers were released and this data showed a big improvement in the manufacturing in the Plains area. The number rose to 5 from -3 in December. That showed manufacturing growth for the month, the exact opposite of what we got from the Chicago Fed. Gold seemed to fade a bit when that number hit the wires.

This market remains so incredibly sensitive to Tapering/Not Tapering issues that for all practical purposes, we are trading each and every single economic data release with the view to how traders are generally interpreting that data. Predicting this sort of thing in advance is fool's work so just be warned that volatility will continue to remain quite high until we get some sort of clear, defined TREND in this data. Right now there is no consensus and that will lead to sharp bouts of buying/selling depending on which side panics. Today it was the bears' turn; tomorrow - who knows? 

This is the reason I continue to urge caution for those traders who are still attempting to work this gold market. KEEP YOUR POSITION SIZE SMALL OR MANAGEABLE. You are liable to get hurt and hurt badly if the economic data does not come out your way. It is not trading at this point because there is no clear trend. You are essentially gambling or rolling the dice and hoping that the roll comes out in your favor. There is no skill to that, just chance, and good traders do not rely on chance.

Let's see how the dust settles at the end of the day but more importantly, how the market reacts to the next payrolls number coming our way.

A couple of charts for you to examine... note the daily chart and the strong push above the 50 day moving average. That is quite positive. Also, the ADX has gotten a clear crossover of Positive Directional Movement Indicator ( BLUE LINE ) above the Negative Directional Movement Indicator ( Red LINE ). Clearly that bulls have regained control of the market at this time frame. As a matter of fact, the ADX, the trending indicator, is actually beginning to rise, just as gold is moving higher. It is still below 25 so the trend is not yet confirmed but it is very close. What the bulls need is one more ingredient and that is a strong push through that very tough overhead resistance zone noted on the chart. That means we need to see prices above $1,262, preferably a bit higher, to give us the real possibility, the first in a while I might add, of an upside trending move.

Look at the 4 hour time frame. Here you can see the strong volume on today's big move higher ( a lot of this is due to panicked shorts when that data came out). This REVERSE FLASH CRASH is CLEAR PROOF that gold prices are being manipulated higher. After all, who would buy in such a fashion? Sorry - I think I need some help restraining myself at this point. ( it comes from having to deal with all the nasty emails that constantly fill my inbox from the gold acolytes in the cult).

Seriously, look at where the bulls have taken this thing - right on the verge of a breakout! We have a big hurdle to clear with that next payrolls report but suffice it to say, that IF THE US DOLLAR experiences another strong selling-related plunge as it is doing today, gold should break free to the upside. I am noting that the Dollar is holding initial support near the confluence of the 40 and 50 day moving averages. Failure there and it has a strong possibility of visiting 80.20 - 80.00.