"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


Friday, May 30, 2014

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......