"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

Trader Dan's Work is NOW AVAILABLE AT WWW.TRADERDAN.NET



Thursday, June 30, 2011

USDA Shocker

The widely anticipated USDA Crop report came out this AM and stunned the grain world with its much larger than expected corn acreage number. Widespread flooding in combination with much cooler than normal weather across the northern tier of the country had resulted in major planting delays due to excessive ponding and water-logged soils. Farmers simply could not get into their fields to plant in numerous regions.

That is what makes the number given to us by the USDA this morning so incredulous. Either way, the corn market was absolutely devastated as it was swamped with orders from panicked longs trying to get out. The front month July contract, which is in its delivery period is trading without price limits and is currently down over $0.70/bushel while the most active December contract (the new crop) has more than 200K orders to sell at the limit price.

This massive sell off in corn has taken down wheat (over $0.50 as I write this) and soybeans and led to sharply lower prices across the cattle and hog markets.

The result has been to take the CCI (Continuous Commodity Index) lower in spite of the fact that the RISK TRADES are back on again today with the Dollar moving lower. Were it not for the USDA shock numbers, I believe we would have seen strength across the entire commodity complex. As it is, the selling in the grains is leading to margin related selling across some of the other commodity markets this morning which is putting pressure on the entire sector as a whole. This is coming in spite of the fact that the long bond market continues its recent collapse as trader euphoria over the Greek bailout continues to produce what can only be described as more "irrational exuberance" among the equity market bulls. Traders are acting as if inflation is back in the cards and are jettisoning bonds after stampeding into them for the last two months. ( I might note here that the bonds are moving off their worst levels of the session as I write this so perhaps the selling in there is beginning to dry up somewhat - we will have to see how they close today).

Personally I think the rally in stocks borders on insanity but the shorts are all being systematically squeezed out (AGAIN). The short term effect of the political release of oil from the SPR has totally evaporated with the crude oil market higher in price than when the news was released. GAsoline prices have jumped nearly $0.30/gallon off the recent low and are back above $3.00 at the wholesale level on the NYMEX. Clearly energy prices are stubbornly refusing to stay down for long.

If that were not enough, Jobless claims numbers came in at 428,000 for the week, well over analyst expectations of 420,000. That makes 12 straight weeks of reading above 400K, not exactly the thing that signals the economy is improving. Consumer confidence readings continue to weaken. Yet, we get a huge rally from off the critical technical chart support level of 1250 in the S&P, which has gone straight up for 4 days in a row based on what? Greece?  It is now trading above the 50 day moving average after having fallen down below that important average only a short month ago. Try as I can I do not see anything of note on the data front that suggests anything has improved to the point of pushing a 50+ point rally in the S&P. Must be a national security issue to keep the stock market levitated. Then again, what else would Goldman and Morgan be doing with their spare time if not propping up the US equity markets.

Either way, the big rally in equities is having the effect of pushing money back into the mining sector shares as those ratio spread trades have seen some unwinding at the expense of the actual metals. I am therefore very hesitant to read too much into the action of the miners since they are currently joined at the hip with the broader equity markets. The downtrending 50 day moving average has been the lid on both the HUI and the XAU since late April of this year. Only if the bulls can push both indices solidly above this level will we be able to conclusively say that the miners have a shot at beginning a trend higher. For the HUI that comes in near 533 and for the XAU the level is near 203. The XAU looks the firmer of the two as the large cap miners are holding better than the juniors in general.

The indices have a bottom in near 490 on the HUI and 190 on the XAU which continues to hold firm but that is a far cry from meaning we are going to see an uptrend develop. That will take more conclusive technical price action.

Gold ran into selling near $1515 as it was unable to get back above $1520. As long as it is unable to climb over its 50 day moving average, rallies will be sold. Lingering worries about sovereign debt issues in the Euro zone coupled with concerns over the US Dollar's fortunes are keeping safe haven flows into the metal but not of sufficient size at this point to flip the technicals to a bit more friendly posture. As was the case yesterday, for starters, gold needs a solid pit session close over $1520 to turn the chart picture more friendly. Downside support in the market remains near this week's low of $1490.




The US Dollar continues to play Yo-Yo with its 50 day moving average, first popping over it back last month, then dropping below it, then moving back above it the middle of this month, and now caving in and losing that level day. Trying to read where it is going next is hopeless for the immediate time being. Basically it is the "picture worth 1000 words" to demonstrate the fickle nature of the hedge fund community and the boy wonders who manage them. I cannot even imagine what some of those guys would come up with were they forced to take one of those ink blot tests.

Oh, one last thing - the Peoples Republic of California just managed to run Amazon out of its borders as the leftists in charge of that place just decided to tax internet sales. Yep - that should really help create some more jobs out there. I am waiting for the day when they begin regulating what color socks and underwear are permitted.




 

Wednesday, June 29, 2011

Gold-Silver Ratio reflects trader views towards "risk"

To get a decent indicator of whether the risk trades are on or are back off once again, this ratio is as good an indicator as anything. During times when risk is in, silver has been leading gold to the upside or not dropping as hard as the yellow metal to the downside. In other words, it outperforms gold when the hedge funds are in love with risk. This will be reflected by a ratio moving lower on the chart.

When risk trades are out of vogue and risk aversion is the play, then gold outperforms silver as it is viewed as a more substantive safe haven than the gray metal. This will be reflected in a widening of the ratio.

One can see the concerns over the Greek debt situation through the price action of this ratio chart. As traders became convinced the last few days that Greece will get the bailout and their government will approve the austerity program, the ratio has moved lower with silver outperforming gold.

Lingering fears however concerning the well-being of several other Euro-zone countries, is keeping safe haven buying coming into gold and that has kept the ratio from dropping too severely right now.

I would watch to see the 40 level to see whether it holds or not. A break through this level accompanied by a sharp move lower in the long bond would indicate a shift back towards inflation fears on the part of traders/investors. Discerning any clear trend in these extremely volatile and illiquid markets at this time is an exercise in futility given the erratic price action.


Gold - 4 Hour & Daily chart update



Following below is a daily chart showing the current negative posture of the gold market from a technical perspective as it remains below the 50 day moving average which is also flattening out and attempting to turn down. This level needs to be regained to put a more friendly face on the daily chart. Note also the longer term 100 day moving average which continues to rise and above which gold remains. That brings added technical significance to the $1470 level which closely corresponds to the horizontal support level noted on the chart.

Momentum is currently bearish and will need to break above the steeper downtrending red line to give evidence that some hedge fund type buying is picking up.

Tuesday, June 28, 2011

Yesterday it was Global Slowdown fears and deflation - today it is Inflation fears

Yesterday the hedge funds were busy jettisoning commodities across the board ( We don't need no stinkin' commodities); today they are back in love with them (Alas, we love thee, we surely do).

The difference is that most are expecting the Greek bailout to go through and make everything well with the world once again. That is why I keep stating not to read too much into one day's price action. Tomorrow? Draw a straw or throw a dart - you are just as likely to come up with the prevailing sentiment for that trading day as a chimpanzee. In psychological terms they call this manic depression but it now passes for hedge fund trading "strategy".

Take a look at the Daily CCI chart. Note the hedge fund selling orgy that occured last Friday and continued into yesterday's session. Risk was out and so were commodities. Today, risk is back in and so are commodities.



If you note however, the CCI is negative for the year as it is trading below last year's closing price. In other words, backing away a bit from the very short-sighted near term price action, commodities as a whole have fallen out of favor for the time being as traders fear a slowdown in the overall global economy. The Fed's refusal thus far to hand out more goodies in terms of another round of Quantitative Easing has ruined the commodity party as rallies are getting sold. The hedgies are off looking elsewhere for greener pastures. They are having huge trouble finding one however. As soon as they think there might be the faintest hope of discovering one, all of them go plowing everything that they have into that asset class or sector as they make fools of themselves by their undisciplined trading patterns.

As mentioned in my radio interview on KWN this past weekend, I am looking to see what level it is on this chart at which buying will surface that indicates a solid bottom has emerged in the sector overall. This has not yet occurred especially with the weekly trend moving lower at present.

My own view at the current time is that the bottom in the CCI will coincide with a confirmed top in the long bond market. That has not yet occurred as it will take a solid close below the double bottom near 123^23 to confirm such an event.




Given the state of flux and the uncertainty reigning over the markets, the bonds are totally capable of reversing to the upside and negating any downside signals should the papering over of Greece's problems fail to stem the bleeding or should any of this spread to Spain, Portugal, Italy or Ireland. I have said this about the bonds previously - they can reverse to the upside on a moment's notice with all the cross currents and headwinds facing the global economy.

One has to keep in mind that in spite of today's "euphoria" and schizophrenic move higher in the equities, the Consumer Confidence level just hit a 7 month low here in the US. Perhaps some are looking at the price of gasoline which has come down off its peak levels helped by an obvious politically motivated release of crude oil from the SPR and thinking that consumers are going to run right out now that they can fill up their cars a bit cheaper and start stocking up on LED TV's, cool 4 wheelers, new jet skis and boats or even some nice new SUV's or crossovers.

Whatever the thinking, the bloom is off of the bond rose for today as the safe haven flow into that asset class is being reversed with traders loading the boats back up with equities and commodities. It does appear to me however that without some sort of fundamental sea change, rallies in the commodities and equities are going to be sold without a definitive announcement of some sort of further monetary accomodation forthcoming from the Fed. There simply is little hiring take place and the housing market is not yet showing any signs that it is ready to work higher and reverse the current trend that is entrenched. QE has not given any evidence that it has worked to generate job creation and that is the Achilles heel preventing any significant economic improvement. It is one thing to muddle along the bottom and not get worse; it is quite another thing to see actual solid economic growth. That takes a change in policy and is not something that we can expect to see from the anti-business Obama administration.

Gold is reacting higher today and has been able to climb back above psychologically important $1,500. It is fading off its best levels of the session however as we near the end of pit session trading. It needs to recapture $1520 to give the chart a bit better looking perspective however. Right now it looks weak. Given the fragile nature of things economically, the market has buying beneath it but any market trading below its 50 day moving average, as gold currently is, cannot be said to be in a bullish posture. That is why it needs to climb above $1520 to turn its chart picture a bit more friendly in the short term. Remember that this level was also the bottom of its recent trading range and had been serving as a floor of buying support before it gave way last week. It is now serving as selling resistance and the bulls are going to have to absorb any offers there if they hope to take it back towards $1550 once again.


Saturday, June 25, 2011

Random Thoughts on the Passing Scene

In some private emails I have received some of the writers have expressed fears of a 2008 type meltdown in the precious metals whenever they see me use the word, "deflation". Let me try to address this somewhat here on the website so as to avoid having to make an individual response repeatedly.

First of all, when I use the word, "deflation", I am talking more about the symptoms rather than the causes. My understanding of the actual word is a reduction in the money supply evidenced by falling prices. It is the latter part of that sentence I am particularly interested in. For comparison's sake, when I use the word, "inflation", I am also more interested in the symptoms, i.e. rising prices, rather than the causes behind it which is an increase in the money supply not matched by an increase in productivity.

Regardless, the point I am making when talking about the forces of deflation battling it out against the forces of inflation, is one which means a period of falling prices versus a period of rising prices.

As you aware of by now, the Fed has been at war with the forces of deflation ever since the credit crisis erupted with the failure of Lehman Brothers back in the summer of 2008. Lehman was not the cause; it was merely the first victim. The result was a massive unwinding of highly leveraged speculative positions which drove asset prices lower across the board. Whether it was equities or commodities, it did not matter. They were all taken down hard as the Yen carry trade was unwound and money flowed back into the carry currency (the Yen) and into the Dollar as those short positions were lifted.

Enter the Fed into the fray. They began round one of QE which consisted of buying up the Mortgage Backed Securities and other alphabet-named securities which were plummeting in value and threatening to wipe out the balance sheets of the big banks who were greedy enough to buy and sell those things. That combined with the TARP program provided an enormous surge of liquidity into the markets which lifted both equities and commodities across the board. You had a classic example of the Fed ramping up the money supply in order to stave off deflationary forces. The policy was deliberately inflationary and had its intended affect. It also drove the Dollar sharply lower.

When QE1 began winding down, both the commodity markets and the equity markets began fading off their peak levels. With the economy showing that it lacked sufficient traction on its own to be able to grow at a sufficient pace to generate new hiring or one that made policy makers feel comfortable, QE2 was announced and then implemented. That had the immediate effect of unleashing inflationary forces into the economy in the sense that the liquidity it produced through the increase in the money supply shoved equity and commodity prices higher once again. Once again the forces of deflation (falling asset prices) were beaten back and once again the Dollar moved lower.

Now that QE2 is ending and the economy still shows no signs that it is growing at a pace strong enough to turn the labor markets around, prices of assets are dropping once again. Both commodity and equity markets are moving lower. In other words, this is a deflationary environment although it must be pointed out that the move lower in prices is starting from a very high level in the commodity sector as a whole. Gold is near $1500, crude oil is closer to $90, and corn is close to $7.00. None of these price levels can be considered cheap. So please keep this in mind when I use the word, "deflation", that I am not saying corn is headed back to $3.50, crude oil to $35-$40 or gold to $680 - $700. I am merely saying without the Fed created liquidity to goose up the money supply, prices are responding to the decreasing liquidity and are moving lower, albeit from a higher level. Eventually this will show up at the retail or consumer level but there will be at least a 3-4 month lag, if not a bit more. Prices will come down but will still remain high by historical standards.

This is one the reasons that I believe we will see another round of QE if Bernanke and the Fed feel it is warranted, even though they will face criticism should they do so. You will recall that throughout the rise in commodity prices, the Chairman repeatedly stressed in his testimonies before Congress and in his speeches that the rise in commodity prices was moderate and was temporary. I disagreed then and still do now that the rise was moderate (a move from below 400 in the CCI to near 680 in the CCI is not "moderate") but we all must admit that the index has come down lately and so have the prices of most commodities at the various commodity futures markets.

Having set a benchmark with these extremely high prices, any move lower in commodity prices will be measured against that new benchmark. Should the stock market take out a major downside support level and the economic data turn from bad to worse, Bernanke could rightfully argue that he has "upside room" for another round of QE in terms of commodity prices seeing that they are off recent highs. In other words, the public has now been conditioned with a spike to high prices and any move down from those levels will be seen as relief even if the price stabilizes at a new, permanently higher price level. When corn moves from $3.50 to nearly $8.00, a drop down towards $6.50 will be seen as a bargain even though the price is now $3.00/bushel higher than it was a mere 3 years ago. Same goes for crude oil. A drop from $120 towards $90, or even $80 or $70 will make the stuff look dirt cheap even though it will be trading at twice the price it was back in 2008. The list could go on and on.

What we are seeing then is a sort of three steps forward, two steps back in the commodity markets in terms of prices. The public, whether it realizes it or not, has now been conditioned to accepting the new and permanently higher price levels some of which are tied directly to the loss of purchasing power of the US Dollar. The new NORMAL is higher prices. When another round of QE comes our way, the drive to the former peak will be seen as inflationary but the impact will not be as psychologically devastating as was the first surge to these record highs. The next time it will be met with more of a yawn unless prices surge past these old peaks. Then the cries of inflation will arise once again, the Fed will face another round of criticism and the cycle will be repeated as they back off from stimulus yet again.

In such a fashion will the battle between the forces of deflation and inflation play out with the loser being the middle class and those who do not realize what is happening to their way of life.

Trader Dan interviewed at King World News

Please click on the following link to listen to my regular weekly radio interview with Eric King on the King World News Weekly Metals Wrap.

Friday, June 24, 2011

Continuous Commodity Index signaling Deflationary Forces are in the Ascendancy

Those of us who have nothing better to do with our lives than to sit in front of computer screens watching prices change have been watching the battle being waged between the forces of Deflation and the forces of Inflation ever since the credit crisis erupted back in the summer of 2008.

On the one hand is the relentless and merciless pressure from excessive Debt and all the issues arising from that; on the other hand has been the Federal Reserve and its monetary stimulus programs, aka, Quantitative Easing or QE for short. When the Fed has entered the Fray, the forces of deflation have been routed and run off the field. When the Fed withdraws, the opponents regather and send out their war parties to hack and slice once again.

This battle can be seen through the chart detailing the price action of the commodity sector as a whole, namely the Continuous Commodity Index or CCI. As the Fed wins ground, the index rises; as the Deflation forces triumph, this index falls. Right now it is falling and falling in a big way as once again it is threatening to put in a major top on its longer term weekly chart.

Take a look at the two red support levels shown on the chart. The upper red line was the previous bottom made in the index earlier in the year which was broken early last month as traders began suspecting that the Fed was going to indeed end the QE2 program at the end of June. However, they began second guessing that notion with the result that prices were able to rebound and move back above this level and push towards 660. However, as economic data continued to deteriorate and fears of an overall global slowdown increased, the index has now dropped lower through the upper line and are pressing into the lower red line confirming that a double top in indeed in place for the overall commodity sector. The price action is indicative of a market in which a "SELL THE RALLY" mentality has replaced one of BUYING DIPS. In other words, traders are looking for lower commodity prices ahead as they anticipate deflation and not inflation. Only if prices are able to immediately move back above the upper red line will one be able to say authoritatively that inflationary forces are rising in the minds of investors.

If you will also note the particular technical indicator I have chosen to overlay on this price chart, the Directional Movement Indicator, you will see that the solid black line, or ADX, which began rising in July 2010, and accompanied the rise in the index all through February of this year (indicating a STRONG TREND HIGHER) turned down at that point indicating a pause in the ongoing higher trend. The blue line or Positive Directional movement indicator has been trending lower since December of last year while the Negative Directional Movement Indicator, or red line, has begun trending higher since February of this year. What this indicator is telling us is the trend toward higher commodity prices is over for the time being. The upside crossover of the Negative Directional Indicator ABOVE the Positive Directional Indicator, is BEARISH.While the index has not yet fallen through the lower of the two red support lines on the chart, it is signaling that weakness in the sector lies ahead.



The last line of defense will be the rising 50 week moving average what comes in near the 600 level. This level now takes on increasing significance as we move forward. You will note how it held back in April/May 2010 when talk began surfacing that the Fed was going to come up with some sort of additional stimulus to take the place of the then expiring QE1 program. Once that QE2 was announced, the index accelerated higher. Now that the end of QE2 is here and there yet appears to be no improvement in the overall economy nor any concrete steps for a QE3 or some further stimulus from the Fed, the index is breaking down once again. Should it move towards 600 and fail there, we will be entering a deflationary period.

Mr. Bernanke left the door open for further stimulus from the Fed should the economy not respond and economic data continue to reflect deterioration. One suspects that the market is going to force the hand of the Fed sooner rather than later. Again, this Fed has signaled clearly that it is deathly afraid of deflation and will do whatever is necessary to stave it off.

Additional proof of the deflationary mindset taking hold has been the relentless move higher in the bond market which is moving in a manner suggestive of global slowdown fears. While the Fed enjoys the lower long term interest rates (as does the US government which is keeping its exorbitant borrowing costs lower), they do not want a rally in the bond market of the nature that would see money exiting stocks and other assets.


Thursday, June 23, 2011

Gold under pressure from SPR release and abysmal Jobless claims number

What a difference a single day can make! Yesterday, gold managed to punch through $1550 and close above that level at the end of pit session trading but as the afternoon wore on, it slowly slid lower and inched closer to $1550 once again. As the market opened for early Kangaroo trading, it then fell back below $1550 and remained a tad weaker throughout early Asian trading. That all came to an abrupt end when news hit the wires that the US was releasing some 30 million barrels of oil from its Strategic Petroleum Reserve (SPR).

Crude oil immediately swooned falling below $90 (it has since recovered). As it did, the hedge fund algorithms kicked in and began unloading commodities across the board. If that were not enough, the Jobless Claims number reminded the entire planet why those who were filling our ears with their nauseating talking points of "Green Shoots" some months ago, should have to do mandatory community service on the Discovery Channel's, "Dirty Jobs" show. The number was terrible.

That sent the risk aversion trades into high gear and out the window went everything that did not resemble a US paper IOU or the Dollar. IN looking across my quote screens this morning, the only commodity on the planet that I can see which is currently showing green is the Cocoa market. Everything else is in the red. Time to hoard chocolate.

The result of this hedge fund carnage has been to send the CCI (Continuous Commodity Index) crashing down to major chart support just below 630 and the S&P 500 to within a few whiskers' width of the psychologically and technically significant chart support level of 1250. If the CCI and the S&P crash through those levels the Fed is going to be forced to do some sort of stimulus on the monetary front as it will signal a deflationary mindset has now gained the ascendancy. Based on my reading of Bernanke's comments yesterday, I think he left the door open for such action if they believe the need should arise.

I might add here that the oil release from the US of $30 million barrels of crude is equivalent to less than TWO DAYS TOTAL USAGE here in the US. Call me cynical but while the release was much heralded as a response to the loss of Libyan crude oil in the marketplace thanks to Mr. Obama's "kinetic military action" or non-hostile hostilities over there, I believe it is totally related to the same's poll numbers which are going down the toilet faster than an unwanted baby alligator which has gotten too big for its 55 gallon aquarium. High gasoline prices are threatening to make him a one termer (I can only hope) and what best to do but to dump some oil on the market to try to knock a dime or so off the price at the pump. Here's a new flash to the clueless one - instead of these cheap political gimmicks, stop spending money that we do not have and open the country up to domestic drilling. That would actually be a much better long term fix instead of playing political games with what is supposed to be for emergency purposes. The only emergency that I can see is his sinking poll numbers and that is no emergency as far as I am concerned but rather cause for rejoicing.

Back to gold however - the failure to extend past $1550 has sent the market back down into the former range with $1550 on top and $1520 on the bottom. Buying associated with sovereign debt fears is keeping it from sinking much below that $1520 level for the time being. ECB President Trichet today said that the risk signals from the situation in Greece are "flashing red" as far as stability in the Euro zone are concerned. That is why gold is so firm on the Continent. Earlier in the session gold had just posted another all time high when priced in British Pounds and still is very close to its all time high price in terms of the Euro. Fears of some sort of contagion spreading to the big European banks are running very high over there. As long as these fears remain downside in gold will be limited, even with the hedgies throwing everything out the window.

The HUI and XAU are both moving lower in conjunction with the weakness in the broader equity markets but thus far remain above the recent lows. The XAU currently looks to be the stronger of the two indices as the large caps are holding better than the juniors generally speaking.

The Dollar is on a tear higher but has yet to take out the 76.50 level on its chart. Until it can do that convincingly, it remains rangebound also.

I will try to get a later update on gold this afternoon after we get a chance to see how things are when the dust from all this commotion settles a bit. Heck, they knocked the old crop corn market down the limit yesterday and ran it to extended limits today but it has since rebounded well off its lows. Certain markets will respond to their fundamentals once the technical fund selling has exceeded value levels. The algorithms ALWAYS overdo it - either to the upside or to the downside.

Wednesday, June 22, 2011

Gold chart analysis

The FOMC release this morning basically reaffirmed what most of the market has been thinking for some time now, namely, that the economic "recovery" is proceeding at a moderate pace though "somewhat more slowly" than had previously been expected. What a surprise? It is more like "YAWN".

The translation - they will be keeping interest rates near zero for the next few months, or in their words, "an extended period of time".

They repeated that the QE2 program would come to an end this month but at this point they had no intention of actually reducing their balance sheet or selling any of the $600 billion in Treasuries which they have purchased over the last 6 months or so. What they will do however is to reinvest the proceeds from maturing Treasury bonds. That will give some stimulus but compared to the massive sum of $600 billion, amounts to a drop of water into the bucket.




Gold liked what it heard and shot higher taking out the sellers who had been stalking the $1550 level. They were forced to retreat towards $1560.

From a technical perspective, the strong move past this solid resistance level, takes the market out of the recent tight range trade bounded by $1550 on the top and supported at $1520 on the bottom. It is now poised to make a run towards $1570-$1575. Downside support moves up initially towards $1540 followed by good support near $1530.

Keep in mind that this is occuring during the summer, not a time in which one generally expects to see a very strong gold market. A grinding move higher during this time frame would set this market up for a move to a fresh all time high later this year when the seasonally stronger period of the metal arrives. This just further underscores how currency concerns are moving gold as distrust in paper currencies continues to increase. Gold is signaling investors' lack of confidence in their monetary authorities and political leaders.

By the way, Gold priced in British Pounds set another all time record high price today.

Impact from Dodd-Frank

I have fielded quite a bit of emails from people scared out of their minds because of a rash post over at a widely read website which tends to post first and think later. That is the problem with this Wild West of the Internet - too many are interested in "first scoops" and not in arriving at solid conclusions based on analysis.

The regulations which have Forex.com issuing a statement to its clients to close out their gold and silver positions affect US based Retail customers on non-regulated over the counter markets. It will not have any impact on the COMEX market or any other regulated futures markets.

If anything, this will serve to drive more business towards the Comex which is a regulated futures exchange market. The regulations are attempting to stem US-based retail investor activity in non-transparent, non-regulated over-the-counter markets.

Keep in mind that in this day and age, the more "clicks" a website gets, the higher it rises in the "ratings" and the more advertising revenue its owner gets from paid ads. This sort of thoughtless sensationalism is a perfect example of that.

Sunday, June 19, 2011

Eric King interviews Jim Sinclair and Trader Dan for a special report on the mining shares

Eric King of King World News, this weekend, interviewed my good friend and legendary trader Jim Sinclair, and myself, to get our thoughts on the recent price action of the mining shares. I highly recommend that our readers take a bit of time to listen carefully to this piece. I think you will come away both enlightened and encouraged by what you hear.

http://tinyurl.com/3kubx6o

Saturday, June 18, 2011

Friday, June 17, 2011

CME Group lowers margin requirements for Gold futures

As of the close of business this coming Monday, CME Group has lowered the margin requirement for its gold contract from $6,751 to $6,075 per contract. Maintenance Margin also moves lower from $5,001 down to $4,500.

While not a large drop, it always helps on the speculative front when margin rates are lowered.

HUI - Gold ratio reflects the return of a deflationary mindset

If one examines the ratio of the HUI/Gold you can determine whether or not a deflationary mindset or psychology is prevalent among investors/traders.

Note that when the credit crisis erupted in full force in the summer of 2008, the mining shares underperformed drastically against the price of gold as the gold shares plummeted along with the rest of the broad stock market.

It was not until the Fed announced the inception of QE1 in the fall of 2008, that the gold shares began to outperform gold. As a matter of fact, they led the market higher.

Now that the Fed has announced the end of QE2, the gold shares are seriously underperforming against the price of gold bullion as you can see by the sharp move lower in the ratio early this year.

This is the basis behind the ratio spread trade being played by the hedge fund community and why they are able to push the shares lower seemingly at will. As long as a deflation mindset is in place, the shares will underperform against bullion. Not until we get a return of inflation fears (that will come if the Fed moves ahead with some sort of additional monetary stimulus) will the mining shares outperform gold.

I have had some critics rail against me for detailing this strategy but I can tell you from a trader's perspective, it has been an effective and extremely profitable trade. It will stay in place as long as it works and makes money for those who are using it. The hedge funds are simply too large for any other market players to take them on and challenge them on this trade. Only a shift in the deflation/inflation mindset will shake them out.

If rumblings of another case of Fed action on the stimulus front begin to surface, this ratio trade will begin to turn as the smartest ones plying it will exit while they can still secure those paper profits.

In the meantime, one has to be extremely selective in which mining stocks they buy. The weaker ones will be and are the targets of the ratio trade while the stronger ones are more resistant to its effects, even though they are seeing weakness at the present time. Once the market for the shares turns, the strongest ones now will be the leaders on the way back up. Fundamentals will ultimately determine their share prices even while these technical plays are dominating at the present.




Gold holding relatively firm as its Safe Haven status comes to the forefront

With all the volatility in the markets attempting to decipher defined trends from short term price action has become a fool's game. Markets are torn between optimism that the global economy is not as bad as some have feared and worries over sovereign debt issues in Euroland, particularly Greece, which have the potential to carry a contagion effect and bleed over into that same global economy, mainly due to large bank exposure to Greek debt.

I should note however that there are several key markets that I am monitoring to try to cut through some of the uncertainty. Among those are gold, crude oil, copper and the bonds. Also, the broader measure of the commodity complex, the CCI, is most helpful in this regards.

Let's take a look at each of these key markets and see how the charts shape up and whether or not we can discern any message as to underying investor sentiment.

Starting first with the larger commodity complex, here is the CCI, Continuous Commodity Index. You will note that it has fallen back below what I consider to be a key level, namely 640, and is flirting dangerously with its chart support levels noted on the chart. A downside breach of this level which cannot be regained within the next week, should that event occur, would signal a longer term top among commodities in general and a shift back to a deflationary mindset among investors/traders. I am of the opinion that Chairman Bernanke is closely monitoring this chart and will be forced to act ( provide another round of monetary stimulus) should this break down as the current FOMC will not tolerate a deflationary mindset taking hold. We know that from reading his papers and his comments in general.

For the time being however, this chart is signaling that traders do not fear inflation at the current time but are seeing the overall global economy as slowing. Keep in mind that I am just the messenger and am reporting what the current thinking of the market is as reflected in the charts. That is the role of a trader - not imposing your view on the market but allowing the market to speak to you and attempting to interpret that speech so that you can profit accordingly.



I want to repeat here, particularly to my silver bull friends, that silver will UNDERPERFORM gold in such an environment. Silver will only outperform gold in an inflation biased environment.

Now let's take a look at the crude oil markets. I say, 'markets', because we are going to look at both WTI and at Brent. WTI is becoming less and less of a reflective market in the sense of giving us an accurate read on the value of oil in general. The reason for that is because of the nature of the oil that this contract is based on. I prefer to look at Brent crude as a better benchmark for gauging oil supply and demand but old habits die hard and therefore we want to also look at WTI.

Note on the weekly NYmex crude oil chart that the market has broken down below a horizontal support level near the $95 level. While price is still in an uptrend as it remains above the upsloping trend line, it will need to hold there as that is also the confluence of the 50 week moving average. If crude is going to hold, it should not fall below $90 or if it does, should immediately pop back up through that level. In other words, a sharp spike below that level and an upside recovery leading to a close above $90 would be okay but if it cannot recover $90, the technicals would point it lower as that would confirm a bearish flag formation with the potential for a move towards the $80 level.



Brent crude has a much stronger looking chart. It is not yet signaling a breakdown of the nature that WTI crude is and as such, I believe is a better indicator that oil demand is still relatively firm. I would have to revise that view if it closes below the $108 level and particularly if it were to then move towards $100 and not hold there. We are a long way from the $100 level however so for now this market has yet to signal a deflationary bias.


Let's now turn our attention to Copper, a very good market for gauging sentiment towards the health or lack thereof of the global economy.

I am providing both a dail chart and  weekly chart. On the daily chart, the market is in a bearish posture trading below its 50 day moving average. Instead of providing buying support as it does in a bullish trend, that average is providing a place for sellers to enter. This tells us that sentiment towards higher copper prices has shifted in favor of lower prices as we move forward. Clearly copper is signaling more of a deflationary mindset at the current time.



On the weekly chart we get a different perspective. This chart shows the copper market remaining in a longer term uptrend as it holds above both the 50 week moving average and the upsloping trendline. It is therefore not yet reflecting any deflationary mindset. That would change should if close below the red support line shown on the chart. For the inflationist mindset to be reflected detailing a shift back towards growth in the minds of investors, copper will need a pair of consecutive weekly closes above the $4.50 level. Until it does, the short term bias is down with the market moving into a level where buying should soon surface. If that buying does not surface, then copper will be voting for deflation. Again, Mr. Bernanke and company will be watching.




turning lastly to gold - its daily chart reflects the safe haven status of the metal in the midst of the uncertainty and confusion currently reigning over the markets. You can see that unlike some of the other members of the commodity complex, gold is above its 50 day moving average and holding horizontal chart support.  The market is range bound on the daily chart with a slight bias to the upside.  A drop through $1510 would dent sentiment towards the metal as it would turn the technicals bearish on this chart but as long as it holds $1480 it will not be signaling deflation. Should this market take out $1550, it will signal a move back towards inflation fears based on currency woes.





Incidentally, Gold, priced in terms of the British Pound, scored a new all time today. This is one of the reasons that in spite of the "risk off" trades that are currently in vogue, the bears are having trouble breaking it down in terms of the US Dollar at the Comex. Gold is trading as a CURRENCY and not so much as a commodity. When gold bears look at the strength in the metal when priced in terms of the other various majors, they lose conviction, even in the midst of large amounts of risk off trades while the gold bulls take heart and step up to buy.

Markets making new all time highs (even if priced in terms of another currency) are not in bearish phases - period! US centric traders do not seem to be able to understand this. For gold to enter a bearish phase, we would need to see it break down across the board, whether priced in Dollars, Euros, British Pounds, etc. The reason for this is that the surge into new highs or near all time highs reflects FEAR about currency stability in the various countries where the gold market is performing so well. That generates buying of gold as a safe haven and reveals strong demand for the metal from those quarters of the globe.




Thursday, June 16, 2011

HUI at a crossroads

I do not need to point out to the readers the abysmal performance of the mining shares. The hedge fund ratio spread trade has destroyed their share value and most of management seems unwilling or incapable of fighting back to protect the interest of their shareholders.

The Gold and Silver ETF's are also partly to blame in that these Trojan Horses have siphoned off a huge amount of speculative money flows that otherwise would have found its way into the mining sector shares. Those products can be used to obtain LEVERAGED exposure to the precious metals without the risk normally associated with outright purchase of a particular mining company. That makes them attractive to hedge funds which can also use them as the long leg of a spread against a short leg in whatever company they have decided that they can target.

Paying out a dividend to shareholders might put a dent in this little game being played by the gold and silver share shorts as it currently costs them nothing to LATHER, RINSE and REPEAT this strategy. If something works for a money making trade, it will continue just as long as it keeps on working. That means they can short the shares at will since they have no opposition. Shareholders may bitch and complain about it, but as long as the status quo continues, the shares will lag the price of bullion.

The non-stop selling barrage has brought the HUI down into a critically significant technical support level near 492-490. This level must hold or if broken, must be recaptured by the close of trading Friday, to prevent a further drop lower.

At this point in time, the only thing that I can see which will lead to the shares outperforming bullion would be another round of monetary stimulus from the Fed. In such an environment, the share prices will outperform the metals initially with silver outperforming gold as well. Will we get one? I do not know but if the stock market continues to slide and the economic data numbers do not improve, I bet we will, impact on the US Dollar notwithstanding.

Gold very strong in terms of the Euro

Investors fears concerning the nation of Greece with a potential for default on its bonds has kept a very firm bid beneath the price of Gold on the Continent. As you can see on the chart, gold priced in euro terms is within a whisker of its recent all time high. It is this strength which is preventing the Comex gold bears from substantially breaking down the price in US Dollar terms even as we are seeing a general selling theme across the commodity complex today.


Wednesday, June 15, 2011

XAU trying to hold support

European sovereign debt woes erupting once again

Growing fears of a Greek government debt default have sent the Euro plummeting in today's trading session. It has also fueled a mad rush back into US bonds after the bottom fell out of that same market in yesterday's session. As I mentioned in my post last evening, the US bond market was liable to reverse course in a heartbeat as soon as the fear index rose once again. That is exactly what happened.

Investors fear a domino-like contagion effect upon the big European banks holding a substantial portion of Greek debt. Combine that with an Empire State Manufacturing Index reading of negative 7.8 (anything below zero shows contraction) plus a 0.3% rise in the core CPI reading (the sharpest rise since 2008), and stocks were hammered while the long bond regained most if not all of its huge losses from yesterday.

What we have here in the US seems more and more like the stagflation of the late 1970's - a slowing economy in which prices continue to rise - a notable exception being that wages are going nowhere. None of this is positive for consumer spending moving forward. While US companies that do a large portion of business overseas are showing good earnings, it is not translating into growth at a sufficient pace to put a dent in the lousy job market.

Oddly enough, I read some news this morning that housing prices in the Silicon Valley are surging as new found wealth from the recent technology IPO's has fueled what looks like another one of those insanely stupid buying binges with all the new rich kids tripping over themselves to bid up the price of their newest status symbol. In some cases they are bidding ABOVE the asking price. It was that same sort of imbecilic psychology that helped contribute to the housing bubble in many communities across the nation back in 2004-2007. I am sure the realtors there are extremely happy but I have to shake my head in bewilderment that many in this nation never seem to learn a single thing.

I think that is what happens when money is made too easily and too quickly instead of sysymetically increased year over year. Don't get me wrong, I begrude no ones success, but there is something that happens to those who find themselves suddenly extremely wealthy. They lose a sense of the value of wealth and how difficult it is to make it and hold onto it. Show me someone who has made a lot of money and then lost it, only to make it back through hard work and I will show you someone who is far more careful of it and far more frugal than those who meet with sudden success. More often than not, it goes straight to their head. It is said that youth is wasted on the young and foolish. I think the same thing could be said of riches on the young and foolish.

Back to the markets however - the collapse in the Euro has sent the US Dollar surging higher as risk trades from yesterday are being yanked off today. This is why I keep saying to traders - do not let any single day's price action fool you into thinking a trend is developing and spur you into placing large positions on. Only the dipsticks that run the hedge funds do that sort of thing. (As you can tell I have nothing but contempt for the majority of hedge fund managers - they are the worst traders on the planet). Smart traders will look at this schizophrenic market behavior and reduce position size or just get out altogether and enjoy some hobbies. Let these other fools shred each other to pieces. You can still trade but just trade in size that will not seriously hurt you if you are on the wrong side of the daily price action.

As the risk trades come off, the equity markets sink ever lower and the commodity markets see further downside. The S&P 500 is getting perilously close to the 1250 level, the level at which it goes negative for the year and at which it threatens to put in a double top on the longer term weekly chart. Should it do so, consumer confidence will fall off the charts. Consumer spending will suffer as the psychological impact of losses in their 401K and other retirement accounts, combined with home values that are also underwater, dampens the desire for big ticket items and forces further retrenchment on that part of the US economic engine. All this will do is build further pressure on the Fed to act. And thus the addiction to monetary stimulus continues until the junkie is hopelessly ruined.

Earlier in the session, gold had recaptured broken support near $1530 and looked like it was attempting to get its footing there. As the equity markets dropped near midsession, the unwind in the risk trades derailed it and took it lower towards $1520. I might add here however that in terms of both the Euro and the British Pound, gold is holding very firm. That should keep it supported in US Dollar terms and prevent a sharper selloff such as what we are seeing in the grains, fiber and energy markets.

As can be expected in this sort of environment, the Continuous Commodity Index is taking a sharp hit and has sunk below 650. As long as it stays above 640 it is still range bound however. A decline through that level which cannot be recaptured quickly will not be good news for commodity bulls as it will reflect the return of the deflation mindset. Rest assured that Bernanke and company are closely watching this chart also.

The Dollar's rally has it strongly back above the 50 day moving average. What is more important that that however is the fact that is has now reached the 100 day moving average. It fell below this critical moving average in January of this year and has been unable to put in a close above it since that time. Should it manage to push past 76 one has to give the move higher respect from a technical perspective. If it can push above 76.50 and hold those gains, we could see the Dollar make a run towards 78 in short order.


Tuesday, June 14, 2011

Crude Oil mired in a sideways rut

Commodity complex action reflects trader/investor uncertainty

Gold and the summer doldrums

The summer months are TYPICALLY not a particularly strong period for both of the precious metals. A lot of traders in the West are taking vacations with their families as the kids are out of school. Then there is  the lack of the far East festivals during which large amounts of gold are generally purchased for gifts.

This summer will be very interesting however as the Fed ends its QE2 program in two weeks time. As we get nearer this date, many traders are going to be particularly interested in seeing the kind of economic data releases we are going to be getting from the feds. If the data continues to deteriorate and disappoint, there will be growing pressure on the Fed to "do something". I have already mentioned that there will also be pressure from some in political positions to get some sort of stimulus from the government (in some quarters the complaint is that the former programs were "too small"). I do not think that will happen however as the Republicans control the House of Representatives and they are in no mood to spend and further worsen the deficit. As you know, a growing battle over raising the federal debt ceiling is now fully engaged. The notion that the Republicans will allow any sort of additional stimulus-type deficit spending is wishful thinking on the part of some as those legislators who might be inclinded to vote for it, will find themselves being primaried by the Tea Party.

That means if anything is going to occur, it will be left up to the Federal Reserve. Do they act and kill the Dollar in the process or do they cross their fingers and hope and pray that the economic data improves? What happens if the S&P 500 takes out the critical 1250 level? Then what? Remember that the Obama administration now fully owns this economy and if the stock market tanks further and consumer confidence plunges even further while on its watch, kiss his election hopes goodbye. The entire Democratic party knows that their fortunes are tied directly to the well-being or lack thereof of the US economy. It was thanks in no small part to the plunge in the stock market in September 2008, that Mr. Obama found himself and his party with complete control of the federal government. Should the economy remain as pathetic as it currently is, their party will be the ones getting a good old-fashioned ass-whipping at the polls in 2012.

I have said all this to prime the way for the analysis of the gold market and the Dollar. Right now both markets are in sideways patterns waiting and watching and pouring over every single bit of economic news, no matter from what source, in an attempt to glean what the next move of the Fed will be. Today we got news that the Chinese economy did not slow as much as some had expected (funny how the Chinese naysayers continue getting it wrong over there). That set off a huge short covering squeeze in the broad US stock markets as bulls pushed the shorts out  on the idea that the global economy was not slowing quite as much as some were anticipating or fearing. Sales numbers were also not as bad as expected. When markets get lousy news that is not as lousy as they initially feared, they go up. That is what happened today.

That same news and stock market reaction pulled the rug out from under the long bond which had a huge down day losing over a point and a half. The thing with the bonds however is that the first bit of bad economic news once again, and back up they will go while the stock market goes right back down.

Market conditions like these are extremely dangerous to trade for all except a handful of day traders and players with expensive computer algorithms who think nothing of reversing yesterday's trade completely or even last hour's trade. TRend traders had best forget about it if they expect to pile on large positions. the only thing that will lead to is a dwindling trading account. Be smart - trade smaller and forget about the big score. Your number one priority is to stay alive and be there for the next trending move when that eventually does arrive.

As far as the gold market goes, the chart is self-explanatory - it is range bound having failed to take out $1550 on the top and it is now drifting lower to see where buying will be uncovered in decent size. We should get a bit of a better feel how this market is going to fare for the rest of the summer as we actually arrive closer to the end of this month. For now, do not read too much into a single day's price action. Half of these damn hedge funds have no idea what they are doing anyway. AS a matter of fact, I would venture that 2/3 of them don't.

Saturday, June 11, 2011

Trader Dan on King World News Weekly Metals Wrap

Please click here to listen to this week's radio interview with Eric King of King World News on the Weekly Metals Wrap.

 
 

Tuesday, June 7, 2011

A potential signal for further monetary stimulus, aka, Quantitative Easing

Ever since talk began surfacing of the ending of QE2 this month, the stock market has rolled over on the technical price charts. The more convinced that the markets have become that the Fed was going to take away the fun and games, the further the equity markets have dropped. It has now reached a point where the stock market is threatening to take out a critical support level. Should it do so, consumer confidence, already reeling from high foreclosure rates, falling property values, soaring gasoline, food and other energy prices, and a lackluster jobs situation, would immediately plummet.

The one thing that has helped to keep some of the population from becoming completely depressed has been the fact that they could look at their 401K programs and still see that those were in the plus column for the year. In other words, while the rest of the world was seemingly going to economic hell, at least they were making a bit of money on their retirement accounts.

Take away this last refuge of happiness, and the mood of the public will grow foul and fester, not to mention that of Wall Street and the many brokerage houses which do not generally make money during bear markets in equities.

Look at the weekly chart of the S&P (note - I use the emini S&P for charting purposes) and you will see the rising 50 week moving average along with a critical horizontal support level that comes in near the 1250 level. That is also the level near which the S&P began the new year of 2011. If it falls below that level, all gains from the year are gone and losses begin to then mount. That is when the general public will lose its last refuge of consolation.

I mentioned last week that if 1300 were to give way on the weekly chart, it would bode ill for the broad equity markets going forward. That level is still a key level but as of now the S&P is trading below it and cannot seem to recapture its footing above it. The momentum is growing to the downside on the charts and if we continue to get economic data that disappoints and reinforces the growing perception that the economy is in serious danger of rolling over, a very strong possibility exists for a move lower in the S&P to the 1250 level.

If this level gives way allowing the market to fall down towards the 50 week moving average which currently comes in near the 1225 level, expect a chorus of voices clamoring, nay, demanding further stimulus from the Fed. Those voices will firstly come from the Democrats whose election fortunes next year are directly linked to the welfare (or lack thereof) of the US economy. It will also come from the doves on the FOMC. Lastly it will come from many in the financial community who are more willing to take their chances on a falling Dollar than a falling stock market.

If the Fed hearkens to those voices, and I have no reason to doubt at this time that they will not, expect the US Dollar to not only take out critical chart support near 73 - 72.50, but to continue sinking lower. The result will be to push gold sharply higher and into new all time highs.


Silver - 4 hour chart update

There seems to be some risk type trades coming back on in today's session as many of the commodity markets are seeing good inflows of speculative money. In this environment silver will generally outperform gold. I should point out however that the buying is not broad based but seems to be selective in nature. Cotton for instance is sharply lower and copper is having some trouble maintaining any gains. On the flip side, sugar, cattle, hogs, corn and soybeans are higher. The weakness in the Dollar along with a generally higher US equities market has encouraged both short covering and new buying in some markets. Ironically, gold is moving lower as the move toward risk has some selling gold with its safe haven role being minimized somewhat.

Try not to read too much into any given day's price action as tomorrow can just as easily bring risk aversion to the forefront in this fickle environment.

The long bond is lower but has still not broken down through any major support levels indicating that bond traders are not convinced that the risk trades are warranted to any sizeable degree, at least for today.

The Dollar is inching closer to that critical 73 level on the USDX chart. Support seems to have evaporated from beneath the greenback. It has not been able to recover ever since FOMC governor Bullard first pulled out the rug from under it. As stated previously here, the voices of the hawks at the Fed have gone silent and I expect them to remain that way until the economic data numbers begin to improve.

The HUI and the XAU are weaker but continue to hold above their recent lows. They too look rangebound. The summer doldrums are approaching for the precious metals markets. They will need a catalyst to arise to generate some strong excitement.


4 Hour Gold Chart - update at 10:30 AM CDT

Saturday, June 4, 2011

Trader Dan on King World News Weekly Metals Wrap

Click on the following link to tune in to my interview with Eric King of King World News on the Weekly Metals Wrap.



Friday, June 3, 2011

Gold - 4 Hour chart update

Continuous Commodity Index grinding higher but overall trend lower

Employment Data undercuts US Dollar

This morning's abysmal US payrolls data caps off a 'weak' in which economic data releases confirmed that the US economy is headed for a "double dip". A pitiful 54,000 jobs were supposedly created in the month of May with the unemployment rate moving up to 9.1%.

While we market watchers and traders have come to expect news like this to drive off the risk trades and send safe haven flows into the US Dollar, no such thing happened. I mentioned earlier this week that the Dollar's tepid response to the weak ADP numbers was interesting and beared watching. Looking back that was now a harbinger of things to come.

What has apparently happened is that the US economic data has become so rotten, that traders are not moving money into the US Dollar even on news that otherwise would have driven safe haven flows in its direction. The reason is simple - market players are now convinced that the string of consecutive poor news is leaving the hawks at the Fed with no arguments for their case and has brought the doves there into the ascendancy. In other words, interest rates in the US are going to be forced to stay at ultra low levels for a long time to come and while QE2 is coming to an end this month, further monetary accomodation is coming forthwith. At least that is what the market is attempting to signal to the Fed as to its wishes.

The news initially caused a sell off in stocks taking the S&P futures below important chart support near the 1300 level. It has since recovered and moved above it as I write this but as to how it is going to fare the rest of the day is unclear. A close below this level and the stock market chart gets even uglier. A stock market that enters a bearish downtrend is going to be at the forefront of the minds of the FOMC as they consider their next move on the monetary front.


BAck to the Dollar however. It is now trading well below the 50 day moving average and has fallen back below all of the major shorter term moving averages as well. The 10 dma has made a bearish downside crossover of the 20 dma and both look to be getting ready for a bearish downside crossover of the 50 dma. In short, the technicals have completely soured for the greenback and it is once again flirting with the 74 level on its daily chart. A breach of this level that sees the Dollar close underneath it and it is going back down to 73, a level which is extremely, and I do mean, 'extremely' critical from a technical support level.

Meanwhile the combined weakness in the Dollar along with true safe haven flows into gold, is pushing the metal back up and away from its chart support near $1530. If it can claw back towards $1550 and push through that level, it is going to make a run towards $1575 very quickly. The key will be the $1550 level.


Wednesday, June 1, 2011

Gold - 4 Hour chart update and comments

Gold has met the initial upside target of $1,550 based on the breakout above $1,530. It is displaying this strength in the face of widespread commodity selling by the hedgies as they run from risk once again and unload long positions cross the entirety of the complex. Only the markets with the strongest fundamentals have been able to shrug off this huge algorithm-generated selling.

I am now looking for a solid close in gold ABOVE the $1,550 level to signal a run back towards the recent all time high near $1575. If gold fails to extend its gains above $1,550 it will set back some and dip towards $1,530 where it should encounter some decent sized buying, particularly if strength in both Euro-gold and British Pound-gold continues.

Risk trades are being yanked off in droves today but in spite of that, the Dollar, while higher, is not getting that much of a bid. That is most interesting and bears watching. This is the 4th consecutive close by the Dollar below the 50 day moving average, not particularly inspiring if you are a Dollar bull. A failure by the Dollar to extend its gains will be positive for the metals, gold in particular, which is trading as a hard currency against the paper currencies right now.

The ADP number has taken the wind out of the equity bulls' sails and has left the chart of the S&P looking quite ugly and very disconcerting for any future prospects regarding the US economy overall. It had managed to claw its way back above the 50 day moving average but completely broke down in today's session. It looks heavy and feels like it wants to go back down and retest 1300. If it fails there, it is going to get ugly in equityville.

The long bond bubble is beginning to form once again and it will take another round of QE to pop it. While the Fed loves the low interest rate environment being created by this mad rush into low yielding bonds, they do not love the ACCOMPANYING market behavior of the equities and many of the commodity markets because that is signaling deflation. What the Fed wants, and is NOT GOING TO GET, is a low interest rate environment accompanied by RISING stock prices and gradually rising commodity prices. They will not get that either. If they push in another round of stimulus, they are going to get a collapse in bond prices alongside a surge in equities and commodities. If they fail to stimulate, they are going to get their dreaded deflation bubble in bonds.



Markets are on their hands and knees begging for more QE

Take a look at the following two charts. These tell you all you need to know about the market's view towards Federal Reserve policy. As you know by now, the Fed is supposedly going to end QE2 at the end of this month. Ever since that announcement, coupled with continued disappointingly weak economic data, the yield on the Ten Year has fallen and the US equity markets have swooned.

There are TWO, not ONE, Achille's heals in this so-called economic recovery theme that had been making the rounds earlier in this year. The first is the lack of job growth; the second is the horrific numbers that keep coming out of the housing market.

I suspect that if the yield on the Ten Year keeps plummeting along with the equity markets, we are going to hear more and more talk about QE3.

Keep in mind that this Bernanke-led Fed fears DEFLATION more than anything. In the past Bernanke has deliberately led the markets to expect inflation based on the QE programs. They wanted that mindset to kill any talk of deflation. It did seem to work until the hedge funds, which do the bidding of their masters at the FEd, got too carried away and trained their guns on the energy markets and started to bid up the price of gasoline. That was a big, "No-No". Out came the Hawks at the Fed talking up the ending of QE2 and the need to raise rates at some point and down went the entire commodity complex along with gasoline prices.

However, the bond market is now signaling deflation once again and when that is coupled with stagnant wages, no job growth, a moribond housing market and overall economic weakness, the word dreaded most by Central Bankers, the "D" word, deflation, is now surfacing once again.

If this continues we are going to see QE3 sooner rather than later.