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

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


Thursday, June 20, 2013

CME Hiking Margins on Gold

One look at the Gold Volatility Index is all we need to see to realize that the CME was hiking margins....

Initial margin for speculators is being raised from $7,040 per contract to $8,800. Maintenance levels are going to $8,000 from $6,400.

Obviously the computers there at CME Group are projecting a sharp increase in volatility....

S&P 500 cracks 50 day moving average - Again

Going back to last November's election, the S&P only remained below the 50 day moving average when there were TWO separate events that unnerved traders/investors. The first was the election of the current President which was greeted as a negative for business. The second was the drama surrounding the so-called, "fiscal cliff" drama unfolding in Washington D.C.

Once we moved past those two events, there has been only one day in which the S&P has CLOSED below the 50 day moving average. That occurred in April of this year and even then, it was only barely beneath this key level.

Today's shellacking, coming on the heels of a huge down day yesterday, has sent the index down quite significantly below the 50 day. As a matter of fact, it also fell below the former resistance level which had temporarily stymied its upward progress back in April before it gave way in May.

Tomorrow's close is therefore going to be significant.

That strong overhead bearish reversal pattern that formed in May has taken on new significance with this close below the 50 day moving average. We might just be seeing the shift from a "BUY the DIP" mentality to a "SELL the RALLY" mentality. If that is the case, it is going to manifest itself quite soon. We will then see overhead resistance levels capping rally efforts while support levels on the downside are broken as the market traces out a deeper move lower.

Based on what I am seeing in this chart, if this market cannot recapture 1620-1618 before the closing bell rings tomorrow, odds would favor a continuation  of the move lower down into a congestion range that was in place back in March/April. I have noted that on the chart.

As you can see, the upper portion of that range happens to also coincide with the 38.2% Fibonacci Retracement level of this entire leg higher since late November of last year. My guess is that the market will hold this level if it does indeed get there. If not, well, that is another different story....

During times of market fear, (the rising VIX tells us that we are FINALLY seeing some of that among the equity crowd), the bond market tends to be a safe haven with flows coming out of stocks and into bonds. Right now, flows are coming out of stocks, bonds and commodities; basically out of everything except cash and the Swiss Franc!

We'll see how long that lasts before the "stocks are cheap, cheap, cheap" cry starts up again.

Monthly Gold Chart

By request....

Note that this chart is based only on CLOSING prices for each month. I have included today's close as the price for June to give some sort of feel for where things currently stand.

The first major Fibonacci retracement level comes in near $1230 based on closing prices. I would look for a zone on either side of that of $10 for a target unless price can quickly recover and recapture $1300.

Gold Cost of Production

There are various estimates out there that are being tossed out but the general consensus for most gold producers is somewhere between $1200 - $1250 an ounce or so. Obviously, this is painting with a very broad brush as some producers have lower costs than others and some higher costs, but for a ballpark number, it is probably pretty good.

Some are speaking about production cutbacks if gold prices stay down near current levels or drop into that zone noted above. That is probably true but it all depends on the extent and duration of the lower gold price. If it dips down and pops up, production cuts will not occur. If gold looks as if it is going to linger down in that zone for any length of time, some of those cuts will undoubtedly occur.

The problem is that this is focusing on the supply side. The big issue in front of us is DEMAND. If supply falls off, it matters not one whit if demand is dropping at the same time. If supply falls off and demand increases, now that is an entirely different matter. What we are currently experiencing in gold is a fall off in demand, namely institutional demand as evidenced by the continued decline in the GLD holdings, not to mention the downdraft in Comex gold.

We will need to see some sort of stability in the price of gold before buyers will feel comfortable taking the plunge into mining shares again. When that does occur, there is going to be value found among those that are getting their financial houses in order, cutting costs and seeking to achieve value for shareholders.

Don't try to be a hero and catch a falling knife. Let the market tell you when it has stabilized. Underestimating the extent to which these hedge funds and their maulings of markets, both up and down, can destroy your trading capital is a serious mistake. The sums at their disposal are staggering and those who forget this need to be reminded as to how a grasshopper must feel when surrounded by a flock of hungry starlings.

Gold Crushed in Europe - Further Carnage in the US

Europe wasted no time in responding to the Fed's comments when trading commenced over there as an avalanche of selling swamped over the gold market crushing the metal below support levels that continued to give way in succession. As stated in yesterday's missive - institutions want no part of the metal right now as there are hardly any players who see the least signs of inflation on the horizon. Never mind that the costs of so many basic services and goods are rising - those are not caught in the government's numbers nor is the fact that consumer wages remain stagnant.

The economy may be improving in the minds of some but cash strapped consumers are finding their disposable income shrinking meaning that borrowing is going to have to increase if they hope to maintain their "quality of life". While the Fed wants inflation and is dreadfully terrified of deflation, they do not seem to be having much success at inducing the former yet most Americans all seem to realize that everything they depend upon for life is going up in price. Odd isn't it?

I am not sure whether the tail is wagging the dog or the dog is wagging the tail but one can see the interplay between what is going on in the equities and what is going on in the bonds. As the bonds sink, rising interest rates send worries down the spines of the equity crowd which is creating a sort of vicious feedback loop.

Keep in mind, according to my view, the entire US stock market rally has been nothing but a Fed-induced, artificially created bubble which has sent stocks to ridiculously high levels based on the anemic strength in the economy. If the sentiment, that one has to buy every dip in stocks, begins to come into question, then an awful lot of highly leveraged one way bets are going to begin coming unwound. When I see movements of this magnitude, I know some players, big players, are in trouble and are getting mauled.

About the only thing moving higher today is the US Dollar. There was some strength in the front month July hog contract but given this environment, one wonders how long that is going to last. Bellwether copper was kicked in its rear end and of course the readers of this site know all too well what has happened to gold, and especially to silver.

Silver is an inflation play, pure and simple. If there is no inflation in the minds of these big institutions, then there is no reason to own that metal and even more reason to short it. That is what they are doing having broken it down below a support level that I thought would prove a much tougher nut to crack that it did.

This is so eerily reminiscent of 2008 although this time around, the bonds also are proving to be no safe haven as they were back then. As a matter of fact, it looks as if CASH is the place that investors are running into for the moment.

The Australian Dollar, always a fairly reliable harbinger of the broader commodity complex, was pummeled today especially once the news that China's growth had slowed. Along that same line, the GSCI, or Goldman Sachs Commodity Index, was also beaten with an ugly stick.

We will have to see whether one or two days of this is enough to clear the air and bring some stability into these markets but with the excessive amount of margin debt and with extremely large trades going awry, anything is possible.

I will get some analysis and a chart up of gold later on today. Let's just say for now that losing support at $1300 was a big deal, a very big deal. Judging from the massacre occurring in the gold and silver mining shares, we are seeing a complete rout of even some of the long term bulls. The HUI looks like it is now poised to drop all the way to 200, pretty much back to where it was 5 years ago during the depth of the 2008 credit crisis.

Apparently the laws of economics have been discredited as it is entirely possible to create Trillions in paper currencies with no impact whatsoever. The monetary history books are all going to have to be re-written to reflect this.