Dear CIGAs,
Another day, another leg lower in the US Dollar, another violation of an important technical support level, ho hum! The manner in which the dollar is falling through one support level after another is rather disturbing, and that is putting it mildly. Side note – the Yen is continuing to move back toward the level which forced the BOJ to pull the intervention trigger and yet there is no action from Japan. As I said yesterday, if the Yen breaks through their recent cap, and they do nothing, it is going to be an ENORMOUS defeat for the prestige of the BOJ and a sign that they have lost to the Fed and its QE plan. I would view it as historical and a game changer. Stay tuned for this one. Tonight might possibly be quite interesting in the Forex markets especially if the yen puts on another full point.
Gold put in another record high price in late Asian/early European trading last evening with silver also following closely behind as it too set another 30 year high during the same interval. As a matter of fact, all of the “precious” metals were higher today with platinum and palladium continuing to work higher on the charts. Palladium is probably the sleeper among the group as it has quietly managed to rally from $160 in late 2008 to nearly $570 as of today. That is a 250% increase in 2 years.
One of the things about the palladium rally is that it now leaves silver as the least expensive precious metal to own. Yes, I know that palladium and platinum are considered industrial metals but they too, as does silver, often act as precious metals. Gold is now over $1300, platinum is over $1650, and palladium is near $570. None of them could be considered especially cheap for the average citizen to buy. Silver however, even after its strong rally is shy of $22. Tell me that the average citizen who has a few hundred dollars laying around and is becoming increasingly worried about the future of the Dollar as they become informed about the woes of the current monetary system, will not look at these metals and feel very comfortable plopping down some cash on the counter for a few rounds of silver.
I keep reading comments about the “Overbought” condition of the metals and the “oversold” condition of the US Dollar. All such comments are true – by all measures of any technical indicators, they are overbought and the Dollar is oversold. The problem however in attempting to pick a top or a bottom is that “overbought” and “oversold” are subjective terms. Markets can continue in such conditions for far longer than many analysts imagine. I should know having been on the wrong side of an “overbought” trade a fair number of times throughout my trading career after boldly initiating short positions in a market I just knew was “overbought” and was going to fall. Oh yes, it did eventually fall but that was after net sum of my trading account value fell first!
One thing about bull markets versus bear markets – one can eventually find relief as a long if you are on the wrong side of a bear market – the price can only fall to ZERO and then you are done with any pain! Being a bear in a bull market however is an entirely different matter. Price can keep rising and rising and rising long after your trading account is wiped out because there is no ultimate price at which the market must stop. In other words, there is no ZERO line to save you. Price will only stop moving higher until the fear, or panic or shortage or whatever it was that took the price to the launching pad subsides. Who can say when that will happen?
The reason the Dollar continues to drop even though it is technically “oversold” is because the Fed has made it perfectly clear that there is essentially no limit to the amount of liquidity that they are willing to inject into the economy in order to stave off a stall in the economic “recovery”. A trillion here, a trillion there, a trillion everywhere and pretty soon the host currency is rendered valueless for all practical purposes.
Compound that with the fact that we now seem to have entered an era in which there is a race to devalue currencies by the respective central banks and monetary authorities around the globe and you have the reason why gold is continuing its ascent. Quite simply, it is acting as a currency and it will continue to attract buying on dips in price as long as there is fear, uncertainty and doubt about the “health” of the current monetary system and a lack of confidence in the willingness of the global monetary authorities to change their tactics of systematically undermining the value of their own domestic currencies. When the metals do get a correction in price, and they will at some point, we will see how the speculative crowd reacts to the dip lower. Thus far every single dip has been shallow and very short-lived. As long as that pattern continues, the path of least resistance for them is higher. Once the dips no longer attract strong buying, we will see a deeper correction but even at that, it would take a huge setback in price to alter the long term bullish chart patterns.
Gold is insurance against the depradations of the central banking class and the parasitical monetary authorities. Do not throw away your insurance because of another effort by some analyst or “expert” trying to make a name for himself by predicting a market top. Such people come and go as they seem to be insecure souls constantly needing some new mountain to climb in order to feel good about themselves, but they will not be around to write you a check should you be foolish enough to listen to their advice and try to time a market moving up on a crisis involving the current global monetary system. Leave the top picking to traders who sometimes get it right and sometimes get it wrong but who can run in or run out quickly enough to minimize the damage resulting from a bad call on a particular market. If you are an investor with a bit of a trading streak in you, and you get nervous about deeper corrections, you can always sell a few calls or buy a few puts for some downside protection. If the market drops you can cover those and make some money to offset the paper loss on the position but just realize you are going to have to be nimble to react fast enough in today’s warp-speed markets.
Keep your eye on the long term consequences of the Fed’s actions and their signaling to all who can see that they intend to sacrifice the Dollar to achieve their goals. That is set in stone and it will take a huge about face on their part (scrapping QE2 completely) to cause anything more than a bounce in the Dollar. Besides, the US has now past the point at which it is mathematically possible to ever repay all of its outstanding debt. Either it defaults which is unthinkable as it would send the entire global economic system into absolute chaos or it effectively defaults by devaluing the Dollar. Which path do you think it will choose to follow? I don’t think this is a secret to anyone on the planet at this point which is why we are seeing Central Banks all over the planet attempting to stem the rise of their own currencies against the Dollar. Everyone knows that the Fed is killing the Dollar by design.
Back to gold –
Open interest readings are a bit murky from yesterday’s session. The exchange released numbers this AM showing an increase of a relatively modest 3200 contracts. Considering the volume of 243,155, a large amount of short covering took place. That would make sense since the price range was $35 from top to bottom – shorts got trapped by the buying interest that came in at yesterday’s low and drove the market past the unchanged level. Once price took out $1300, it was too much for them. However, the big drop in open interest came in the relatively thinly traded October gold contract where over 13,000 contracts were closed out. Open interest in the active December actually increased by over 11,000 contracts. I am not quite sure what to make of this as of yet but I wonder about the October gold contract. Were shorts fearful of possible delivery issues and did they roll to avoid being confronted with that or what? I need to see some more data and the delivery numbers when that process begins later this week to form a better view of what might be occurring.
Gold is encountering opposition to its rise right near another level of “5”. Remember first it was $1260, then $1,285, then $1,300 and now it is $1,315 where the sellers are or were making their stands. They were driven out of their dens at the first three levels and have now retreated to another “5” den. If they get smoked out from there, price will make a rise towards $1,330. If they are able to hold the line, price should drop towards $1,300 first and then towards $1,285 if that fails to hold.
One thing about the enemies of gold is that they are not the sharpest tacks on the planet as it is too easy to see their tactics on the price chart but they do have lots of financial firepower. Were it not for that, they would be easily dismissed for their clumsiness. Smart traders have learned how not to leave footprints. Then again, this crowd does not care since it is evident that bravado is all part of their strategy when it comes to the gold price. Intimidation is one of their tactics and for many years it has served them well. The problem is that the long term chart shows that while they have won many a battle, they are slowly losing the war for gold. The rising economic powerhouses of Asia are too powerful of a force to contend with in the gold market and they have made it quite clear that they intend to hold gold as part of their official reserves. Price capping efforts by the West only serve to provide a discounted gold price to buyers from the East who must no doubt in private scratch their heads and marvel at such short-sighted madness on display by their debt-plagued counterparts on the other side of the globe. I have said it once and will say it again – the war for gold is the war for economic supremacy in the 21rst century.
My hope is that at some point the US elects leaders who understand the significance of a strong national currency and who will hopefully work to bring gold back into the monetary system in some form to salvage the Dollar. Perhaps things will need to become much worse before wisdom reasserts herself in US monetary matters.
Silver has the more impressive chart of the two metals (gold and silver) as it continues its relentless rise having encountered some light resistance just above $22. There does not seem to be much between that level and $23 to hold it in check from a technical perspective. Support levels are at yesterday’s low which is about $1.00 below its current price.
The HUI is holding above 510 which is constructive but it will still need a closing push past 520 to see the mining shares accelerate as a sector. I would prefer to see it maintain its footing above 510 but as long as it holds above 500, the bulls have the advantage. Bears will start growling if it falls below 495 and fails to recover the 500 level. It is showing some signs of uncertainty today.
Bonds are a tad lower but remain above last week’s high at this point in the trading session. That they will need to do in order to keep the trend moving higher. Failure to hold this line will result in a drop back towards 129.
One thing is for certain, at the current rate of decline there is not much technical support on the price charts for the US Dollar until the region near 75 on the USDX. If that gives way, I think even crude oil is going to respond and move higher as the OPEC nations are not going to exchange their lifeblood for a paper currency that is imploding in value. The supply of easily-accessible crude is finite; the supply of easily-printed Dollars seems to be infinite.
Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini
It is my informed opinion that "Direct Dealers" executing QE are the Fed via beards, nothing else.
This is exactly what the ECB is doing in the Irish, Spanish and Greek auctions. It is hiding in plain view.
As you warned us before, do not do anything you are not afraid to disclose. We move ever closer to total authoritarian free enterprise, another blow against economic freedom in the "Land of the Free."
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