Filed under: Trader Dan Norcini
Dear CIGAs,
Last evening during the Asian trading session, front month gold dipped into the $1310 region where it uncovered considerable buying interest. The buying was large enough to absorb the selling pressure that carried over from the poor performance of yesterday’s trading session. Once gold was able to punch through the $1317 level, there was additional buying that came in which looked like a combination of shorts booking profits as well as some bottom picking. That buying took it up through $1320 which then began sparking short covering. Their forced exit provided further upward progress which then enticed additional buying as locals began looking gunning for the stops above $1330. Around 10:00am Central time, they reached $1330 but were unable to get to the stops. Apparently however some additional recruits came in and on the second approach they took it out. That forced another wave of short covering taking prices to $1340 with more short covering taking the metal up towards $1350.
There is no doubt that some of the buying in gold is tied to events in Egypt and across some of the other nations in the Middle East. There are many nervous investors who are eying that tinderbox of never ending troubles and are concerned about these demonstrations spreading and moving into the OPEC nations. That is the reason crude oil was up nearly $4.00 a barrel at one point.
It seems to me that the catalyst for the huge amount of unrest in the region of the world was the surge in food prices. One of the things that the wheat market has been watching and anticipating has been Egyptian wheat purchases. They are one of our largest buyers of wheat and there was talk that began last week and continued earlier this week that Egypt was going to be forced into buying a good deal more US wheat in an attempt to make sure that there was sufficient supply for one thing and that they could snag it before its price moved even higher. Their leaders no doubt saw what happened to the government of Tunisia and wanted to nip any potential problem in the bud. Apparently things moved too quickly for them. Regardless, we have been warning that this outbreak of the inflation virus, a virus I might add which has been fed, nourished, propagated and even lovingly caressed by the US Federal Reserve, was going to result in global instability as its effects were primarily being seen in the cost of food. Rising food prices in the undeveloped world are NOT INGREDIENTS for peaceful society.
Truthfully, it has happened even more quickly than I had considered it would. I was looking more towards the spring of this year as the price rises work through the global distribution channels. A question for Ben and the boyz at the Fed, (Governor Hoenig exempted), “How do you like your handiwork now?” Is it any wonder that the Chinese are so rightfully disdainful of what the Fed is doing.
I will repeat – the Federal Reserve of the US is exporting runaway inflation across the entire globe with its reckless policy of QE. Bernanke has hubristically asserted in his interview on “60 minutes” late last year that “this fear of inflation is overstated”. We need to record this for history to make certain that it is not forgotten or dismissed. Try telling that to the leaders of the nations across the globe who are now dealing with riots and anarchy in their streets. I am sure that they will take comfort from Ben’s words.
Some may think I am leveling a bit of an exorbitant charge but one has only to look at price charts of the grains in particular to see that they all bottomed exactly during the month when QE was first announced back in 2009 with many of them accelerating sharply higher when QE2 was then successively announced last year. It did not help matters any that the weather caused sharp falloffs in the supply equation at the exact same time that speculative hot money was entering these markets in a quest for tangibles to protect against the deleterious impact of the inevitable currency devaluation resulting from QE. The deadly cocktail has led to an explosion in price for the basics of life.
When the price of wheat effectively doubles in 7 months, corn increases over 90% and soybeans surge more than 55% over the same time span, the quaint notion that the fear of inflation is overstated is stupendous for its sheer brazen audacity in the face of glaring truth.
When you tie this surge in food prices to the potential spike higher in crude oil prices if this unrest in the Middle East takes on additional life, it is not difficult to see why the shorts in gold are getting out.
In the past, moves higher in the gold price that were associated with political turmoil have tended to be rather short lived but this unrest is occurring against a backdrop of huge amounts of excess liquidity that continues being pumped into the system in an effort to keep it moving ahead; not to mention food prices are not going to drop sharply anytime soon. Talk continues to surface that the Fed will soon begin to withdraw this liquidity as the economy “improves” but the facts are that without these continued injections, there is too much debt in the system which will act as an anchor on any so-called “growth”. In my mind it is akin to injecting a nitrogen and trace mineral enriched solution directly into the root zone of a plant that is potted in a mere one inch of soil. What you create is a monstrosity that cannot be supported and will tip over without getting some support from elsewhere.
Changing the subject a bit…
I am very impressed with the action of the HUI. As noted yesterday it refused to follow gold much lower even as the metal took out support near $1320. Even though it was down on the day, it remained well above Wednesday’s low. Today’s good showing gives further credence to the idea that it has been sold out and has put in a bottom near the 500 level. The trading session is net yet over as I write these comments but its ability to push past 517 has just about all of the short term technical indicators generating buy signals from deeply oversold levels. I want to see it close above that level (517) as it would shore up the weekly chart seeing that it spiked down towards the 50 week moving average and held. To really cement the bullish cause, it would need to get a weekly close above 530. We’ll see what happens on the close today.
Some of you have written to ask me about the current correlation between Gold and the Dollar. As you know, gold has been almost tracking the Dollar in the same direction of late. The greenback moves lower; so does Gold. The Dollar moves higher; so does Gold. This is obviously a change from its historic pattern and one that has to a large extent marked a large portion of this decade long bull market.
What I believe is currently at work is a temporary phase during which as fears regarding the overall state of the US economy subside and talk increases of an improvement, the Dollar comes into focus as a result of the massive structural problems overhanging the US economy. That leads to selling in the Dollar as there is no need of it as any sort of safe haven. You will note that as the equities charge higher, the dollar continues moving lower breaking major downside chart support level in the process. That same sentiment that the economy is improving and growth is returning have been leading to selling gold as investors move out of the metal in favor of equities and the “growth trade”. So essentially we have the “risk trade” being moderated somewhat towards the “growth trade”. That is the reason why we can see copper higher while gold moves lower.
Such thinking is more short term oriented in nature and is hoping to catch some profits playing the liquidity game using the Fed as a backstop. Those who macroeconomic view looks past the short term stimulative effects of the liquidity injections will understand that the root causes of our economic woes have not been dealt with and will come back to bite us all down the road. Once one understands that the goal of the Fed is an attempted slow devaluation of the Dollar, they will gravitate towards gold once again and the inverse link between it and the greenback will become more the norm. Even at that, gold can move higher on its own merits as the integrity of many of the world’s fiat currencies continue to be called into question.
Today you will note that the Dollar is higher as it gains as a safe haven play. Bonds too are higher (the Fed loves to see this). You will also note that a mere day after S&P downgraded Japanese sovereign debt to “AA-‘, the Yen is sharply higher as it too reverts back to its “safe haven” status. For the life of me I do not understand how any rational human being can see the Yen as a safe haven with their Debt to GDP ration approaching the 200% level but there is nothing rational about our modern markets.
Equities have actually moved lower today. I have taken a photograph of their price chart to record it for history since one begins to wonder if this “anomaly” will ever duplicate itself ever again. After all, we live during an era in which the official monetary policy is to create a perpetually rising stock market as a way to generate rising consumer confidence to fuel the giant spending machine. How can it be that the stock market does not know this and dares to move lower in the face of unrest in the middle East? Maybe Goldman and Morgan had their electricity fail them as they moved to windwills for their power source to curry favor with the administration and the snowstorm knocked out the turbines. Their traders probably are unable to slam their usual buy orders into the S&P futures pit. Perhaps after the snowstorms subside….. Hey guys – get a generator if you want to get this thing right.
A last note – Eric King and I did our regular weekly metals wrap yesterday instead of today so when you do tune in, we will not be commenting on today’s price action in gold. I hope that this summary will make up for that. Also, if I see anything significant in the COT report today, I will post it up later. Like many of you I am anxious to see how the internals changed with these big drawdowns in the total OI. I am thinking that it is going to show up particularly in the “Other reportables” category.
Enjoy your weekend – who knows what we will wake up to Monday morning. A weekend of turmoil in the Mid East can lead to just about anything.
DAN'S CHART:
http://jsmineset.com/wp-content/uploads/2011/01/January2811Gold.pdf
Last evening during the Asian trading session, front month gold dipped into the $1310 region where it uncovered considerable buying interest. The buying was large enough to absorb the selling pressure that carried over from the poor performance of yesterday’s trading session. Once gold was able to punch through the $1317 level, there was additional buying that came in which looked like a combination of shorts booking profits as well as some bottom picking. That buying took it up through $1320 which then began sparking short covering. Their forced exit provided further upward progress which then enticed additional buying as locals began looking gunning for the stops above $1330. Around 10:00am Central time, they reached $1330 but were unable to get to the stops. Apparently however some additional recruits came in and on the second approach they took it out. That forced another wave of short covering taking prices to $1340 with more short covering taking the metal up towards $1350.
There is no doubt that some of the buying in gold is tied to events in Egypt and across some of the other nations in the Middle East. There are many nervous investors who are eying that tinderbox of never ending troubles and are concerned about these demonstrations spreading and moving into the OPEC nations. That is the reason crude oil was up nearly $4.00 a barrel at one point.
It seems to me that the catalyst for the huge amount of unrest in the region of the world was the surge in food prices. One of the things that the wheat market has been watching and anticipating has been Egyptian wheat purchases. They are one of our largest buyers of wheat and there was talk that began last week and continued earlier this week that Egypt was going to be forced into buying a good deal more US wheat in an attempt to make sure that there was sufficient supply for one thing and that they could snag it before its price moved even higher. Their leaders no doubt saw what happened to the government of Tunisia and wanted to nip any potential problem in the bud. Apparently things moved too quickly for them. Regardless, we have been warning that this outbreak of the inflation virus, a virus I might add which has been fed, nourished, propagated and even lovingly caressed by the US Federal Reserve, was going to result in global instability as its effects were primarily being seen in the cost of food. Rising food prices in the undeveloped world are NOT INGREDIENTS for peaceful society.
Truthfully, it has happened even more quickly than I had considered it would. I was looking more towards the spring of this year as the price rises work through the global distribution channels. A question for Ben and the boyz at the Fed, (Governor Hoenig exempted), “How do you like your handiwork now?” Is it any wonder that the Chinese are so rightfully disdainful of what the Fed is doing.
I will repeat – the Federal Reserve of the US is exporting runaway inflation across the entire globe with its reckless policy of QE. Bernanke has hubristically asserted in his interview on “60 minutes” late last year that “this fear of inflation is overstated”. We need to record this for history to make certain that it is not forgotten or dismissed. Try telling that to the leaders of the nations across the globe who are now dealing with riots and anarchy in their streets. I am sure that they will take comfort from Ben’s words.
Some may think I am leveling a bit of an exorbitant charge but one has only to look at price charts of the grains in particular to see that they all bottomed exactly during the month when QE was first announced back in 2009 with many of them accelerating sharply higher when QE2 was then successively announced last year. It did not help matters any that the weather caused sharp falloffs in the supply equation at the exact same time that speculative hot money was entering these markets in a quest for tangibles to protect against the deleterious impact of the inevitable currency devaluation resulting from QE. The deadly cocktail has led to an explosion in price for the basics of life.
When the price of wheat effectively doubles in 7 months, corn increases over 90% and soybeans surge more than 55% over the same time span, the quaint notion that the fear of inflation is overstated is stupendous for its sheer brazen audacity in the face of glaring truth.
When you tie this surge in food prices to the potential spike higher in crude oil prices if this unrest in the Middle East takes on additional life, it is not difficult to see why the shorts in gold are getting out.
In the past, moves higher in the gold price that were associated with political turmoil have tended to be rather short lived but this unrest is occurring against a backdrop of huge amounts of excess liquidity that continues being pumped into the system in an effort to keep it moving ahead; not to mention food prices are not going to drop sharply anytime soon. Talk continues to surface that the Fed will soon begin to withdraw this liquidity as the economy “improves” but the facts are that without these continued injections, there is too much debt in the system which will act as an anchor on any so-called “growth”. In my mind it is akin to injecting a nitrogen and trace mineral enriched solution directly into the root zone of a plant that is potted in a mere one inch of soil. What you create is a monstrosity that cannot be supported and will tip over without getting some support from elsewhere.
Changing the subject a bit…
I am very impressed with the action of the HUI. As noted yesterday it refused to follow gold much lower even as the metal took out support near $1320. Even though it was down on the day, it remained well above Wednesday’s low. Today’s good showing gives further credence to the idea that it has been sold out and has put in a bottom near the 500 level. The trading session is net yet over as I write these comments but its ability to push past 517 has just about all of the short term technical indicators generating buy signals from deeply oversold levels. I want to see it close above that level (517) as it would shore up the weekly chart seeing that it spiked down towards the 50 week moving average and held. To really cement the bullish cause, it would need to get a weekly close above 530. We’ll see what happens on the close today.
Some of you have written to ask me about the current correlation between Gold and the Dollar. As you know, gold has been almost tracking the Dollar in the same direction of late. The greenback moves lower; so does Gold. The Dollar moves higher; so does Gold. This is obviously a change from its historic pattern and one that has to a large extent marked a large portion of this decade long bull market.
What I believe is currently at work is a temporary phase during which as fears regarding the overall state of the US economy subside and talk increases of an improvement, the Dollar comes into focus as a result of the massive structural problems overhanging the US economy. That leads to selling in the Dollar as there is no need of it as any sort of safe haven. You will note that as the equities charge higher, the dollar continues moving lower breaking major downside chart support level in the process. That same sentiment that the economy is improving and growth is returning have been leading to selling gold as investors move out of the metal in favor of equities and the “growth trade”. So essentially we have the “risk trade” being moderated somewhat towards the “growth trade”. That is the reason why we can see copper higher while gold moves lower.
Such thinking is more short term oriented in nature and is hoping to catch some profits playing the liquidity game using the Fed as a backstop. Those who macroeconomic view looks past the short term stimulative effects of the liquidity injections will understand that the root causes of our economic woes have not been dealt with and will come back to bite us all down the road. Once one understands that the goal of the Fed is an attempted slow devaluation of the Dollar, they will gravitate towards gold once again and the inverse link between it and the greenback will become more the norm. Even at that, gold can move higher on its own merits as the integrity of many of the world’s fiat currencies continue to be called into question.
Today you will note that the Dollar is higher as it gains as a safe haven play. Bonds too are higher (the Fed loves to see this). You will also note that a mere day after S&P downgraded Japanese sovereign debt to “AA-‘, the Yen is sharply higher as it too reverts back to its “safe haven” status. For the life of me I do not understand how any rational human being can see the Yen as a safe haven with their Debt to GDP ration approaching the 200% level but there is nothing rational about our modern markets.
Equities have actually moved lower today. I have taken a photograph of their price chart to record it for history since one begins to wonder if this “anomaly” will ever duplicate itself ever again. After all, we live during an era in which the official monetary policy is to create a perpetually rising stock market as a way to generate rising consumer confidence to fuel the giant spending machine. How can it be that the stock market does not know this and dares to move lower in the face of unrest in the middle East? Maybe Goldman and Morgan had their electricity fail them as they moved to windwills for their power source to curry favor with the administration and the snowstorm knocked out the turbines. Their traders probably are unable to slam their usual buy orders into the S&P futures pit. Perhaps after the snowstorms subside….. Hey guys – get a generator if you want to get this thing right.
A last note – Eric King and I did our regular weekly metals wrap yesterday instead of today so when you do tune in, we will not be commenting on today’s price action in gold. I hope that this summary will make up for that. Also, if I see anything significant in the COT report today, I will post it up later. Like many of you I am anxious to see how the internals changed with these big drawdowns in the total OI. I am thinking that it is going to show up particularly in the “Other reportables” category.
Enjoy your weekend – who knows what we will wake up to Monday morning. A weekend of turmoil in the Mid East can lead to just about anything.
DAN'S CHART:
http://jsmineset.com/wp-content/uploads/2011/01/January2811Gold.pdf
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