Another day, another brand new all-time high in gold priced in terms of the British Pound and in Euros. Euro gold indeed looks like it has a legitimate shot at the 700 level while Sterling gold has taken out the 650 level. Euro gold was set at 691.627 at the PM Fix.
I found the remarks by one of the investment houses that gold was undergoing a period of “irrational exuberance” almost laughable to read. People actually pay good money to read such reports which I find a tragic waste of wealth. The gist of the notion set forth in the report was that since there is no inflation and that gold performs poorly during periods of recessionary environments, gold buying has no fundamental underpinnings. I had to wonder if the person who wrote it was just out of business graduate school since it is obvious they have not a clue as to what gold actually is. For some reason there remains this almost fog-like obstruction that exists in the minds of so many, particularly the younger folks working in investment circles, that prevents them from recognizing that gold is a currency, not a commodity. When it is viewed as a commodity, of course its price will decline during periods in which jewelry or even industrial demand is waning. However, and this is the key, when a crisis of confidence in paper currencies exists, then gold resumes its historic, time-tested role of being a store of value and investors seek it out to preserve that which they have labored so diligently to acquire. After all, if Central Bankers are diligently at work seeking to undermine any “value” that might or might not exist in their paper by debauching it as quickly as they can, where else can one put their wealth if not into something tangible that is a perceived store of value. Try telling the good folk of Britain who are watching their once proud currency disappearing that gold is experiencing irrational exuberance. The only thing irrational that I see is the actions of the Central Banks and the governments who continue to manufacture money faster than a flock of hungry wild geese can pick clean a rice field.
Technically gold was able to muster sufficient buying power to kick it above the round number resistance and psychologically significant $900. The handle or “9” in front of the gold price tends to garner attention which is the reason you often see sellers attempting to push prices back from such levels. The push higher was a follow through to the upside breakout of the wedge formation noted last week that can be seen on the daily chart and partially on the shorter-term chart that I use for analysis during the day. Any subsequent setbacks in price should find buyers resurfacing near the $880 and then $870 level to keep the bullish chart picture in the favor of the longs.
Gold was capped however by concerted bullion bank selling which came in especially as crude oil began to weaken and moved into negative territory after rallying to $48.59.
I want to again urge some the bigger players and fund managers to seriously consider making a portion of their long positions at the Comex designated specifically for taking physical delivery of the gold out of the warehouses. Do not settle for the receipt but actually remove the gold. You cannot hope to beat opponents who never have to meet a margin call nor have trading practices put in place that would force them to liquidate losing positions to prevent major losses as most responsible commercial firms currently have in place. Playing the paper game is not the best way to take on such concerted selling. The reason I say this is because Friday’s open interest showed a huge, and I do mean HUGE jump in open interest in gold with an increase of 17,817 contracts to 359,905. That is a lot of new long positions which were added into strength – a number large enough to offset what was undoubtedly a substantial number of buy stops that were triggered forcing out the funds who had gone short. The volume was simply enormous with over 250,000 contracts trading hands – some of that is rollover activity which always artificially distorts volume numbers but even after accounting for switches, it is still a very strong number. Take the gold out of the warehouses – your old “strategy” of chasing prices higher leaves you susceptible to big losses as you are failing to buy low and sell high but are instead hoping to buy higher and sell yet even higher. You will be the first ones to get picked off if prices stall out with the result that you will have a book full of losses before you know it. The reason the bullion banks can sell with impunity in the face of such bullish fundamentals for gold is because no one will call their bluff and take the gold out of the warehouses leaving them with nothing to backstop their gambit.
February gold will be going into the delivery period at the end of this week so I will be switching charts and commentary to the April contract but will also be monitoring and reporting on the deliveries. An interesting side note is that for the month of January, the largest stopper has been JP Morgan’s futures arm. Whether they will retender that gold is unclear but I want to see what they may or may not do with it come next week.
Both of the mining indices, the HUI and the XAU faded well off their highs after punching through horizontal resistance near the December highs and triggering buy stops in the process. A close above those levels would generate buy signals on many of the technical charts particularly the old Point and Figure style charts that were once widely used by longer-term oriented investors. I sometimes wonder if anyone even uses those things anymore since they were primarily trend identifying charts and today’s crowd of money throwers are momentum oriented. I must say that I do not like what I see taking place in these indices today as it shows a potential short term buying exhaustion pattern. Tomorrow’s session will be important in determining what we get in there.
The jump in copper prices today is most interesting and something we will want to watch. A couple of factors were working in its favor in today’s session most notably the weakness in the Dollar, but the December existing home sales, which came in above expectations, sparked a sizeable jump in the red metal which has a large short position among specs built up in it. It is a bit tricky getting a read on this because trading in copper has been thin due to the Chinese Lunar New Year holiday this week. Still, a technical breakout will be significant, should it occur on gold volume as copper is often a barometer of economic activity in advance. We’ll see.
Incidentally, the large SPRD’s gold ETF, GLD, reported that its holdings had reached another record high of 832 tons last Friday.
Bonds dropped yet again today – Gee – what a surprise! Seriously, this market is so overdue for a bounce but the fact that it cannot even seem to hold its gains for more than an hour is quite revealing. Bonds must bounce soon or they are setting up for a major technical collapse. On the technical charts there really is not much support until we get down to the 123^20 – 124^00 level. That is also near the 100 day moving average. Failure there and we are going to see long term interest rates shoot sharply higher; something which the Fed does not want to see with housing still in such a tenuous condition.
Equities managed a bit of a bounce but ran out of buyers after mid-morning.
The Dollar got smacked today and once again faded from the region near 88. It just cannot seem to get through that level which is where the rally failed back in December of last year. Unless it can get through there and do it quickly, it is beginning to look more and more like a double top with a weak right top has formed. That needs to be confirmed however.
Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini