By Dan Norcini
It was another one of those mass long liquidation days by index funds and hedge funds as nearly everything that remotely resembled a commodity or was associated with commodities was jettisoned in favor of paper IOU’s (also known as US bonds). About the only commodities that I could see that were in the plus column today were the grains, particularly the soybean market which found buying on drought fears out of South America and wheat which found support out of hard freeze fears. Corn went along for the ride. Other than that the continued idiocy in the futures markets continues with panic buying one day giving way to panic selling the next.
I know I risk sounding like a scratched CD but the hedge funds and index funds have created near chaos in the markets with no clear, durable signals being generated- the result is confusion and volatility that gives the lie to the efficient market theory. How can markets be the least bit efficient when commercial end users and legitimate hedgers cannot even use them because of the massive amounts of price foam being churned up by these out of control funds? You’ll remember that it was just a few days ago when near euphoria reined in the markets over the upcoming new stimulus plan – that euphoria sent the funds tripping and drooling all over themselves to establish longs – now we are back to manic depression and they are tripping and drooling over themselves running for the exits. Now imagine a bona fide commercial hedger attempting to formulate some sort of hedging plan to offload his risk and lock in profits while at the same time attempting to limit huge margin calls on that same hedge. My point is quite simple – the futures markets came into being as a mechanism to allow producers and end users to manage risk – that advent of speculators was designed to facilitate that end – we have now reached the point in my opinion where the entire purpose of the futures market has to be questioned. Either the regulators get off their butts and institute serious reforms in these markets, notably being a drastic curtailing of the position size of these players, or they risk having commercial end users begin to look at serious alternatives to using these markets for hedging purposes. If that were to happen in size (it is already occurring), all that will be left in the futures markets is funds playing against other funds. Then we will have nothing but casinos left. The biggest problem I see standing in the way of these reforms might very well be the commodity exchanges themselves who are now public companies and love the extra volume being generated by the incessant trading activity of the funds. That is good for exchanges SHORT term as it increases profits and makes members and shareholders happy. The problem is, like so much in the West these days, such an attitude sacrifices LONG term viability for short term gain. But enough of my little soap box rant for now.
Gold was caught in the crosswinds stirred up by the funds as this liquidation clashed with safe haven buying. It did not help paper gold any to see the technical breakdown in the HUI and the XAU whose charts have turned decidedly bearish. I have been mentioning the 260 level on the HUI and the 107 level on the XAU – those are well behind us now with the only hope the bulls now have is for support to emerge near the 50 day moving averages which come in near 241 for the HUI and 100 for the XAU. Failure there and we could see the HUI back down near the 200 level. The HUI and XAU must quickly get back above 260 and 107 respectively to turn the selling tide.
The commodity currencies, the Australian, Canadian and New Zealand Dollars, were all weaker against the US Dollar today although the Aussie managed to work upwards at one point and move into the plus column. Surprising strength was seen in the British Pound. The Swiss Franc was higher while the Euro came well off its worst levels of the session although is still lower against the greenback. Ongoing concerns over Europe’s economy and the downgrading of several member countries’ sovereign debt continue to weigh on the Euro. The Japanese Yen continued its ridiculous rise as further carry trade unwinding occurs there. One has to wonder when the apparently sleeping Japanese monetary officials are going to saunter out of their dens and inflict their vengeance on the specs who have done this to their yen. Having been on the receiving end of their forays into the market, all I can say is heaven help the yen bulls when this tiger finally comes forth. For now they continue to press their advantage against the monetary lords of Japan.
Bonds are back in full bubble mode after having bounced, stabilized and then said, “Let’s go back to the stratosphere where the air is cleaner”. They are currently trading between the 10 day and 20 day moving averages with the 40, 50 and 100 day all moving solidly higher. Whether the top is in will be seen if we can set up a retest of those recent highs above the 140 level. We may or may not get there; I simply am not sure and with the bonds’ behavior lately, who knows?
Technically gold bounced off of horizontal support just below the $810 level which also closely corresponds to the 100 day moving average. That level has to hold firm to prevent even more spec selling which could potentially take the market down below the $800 level. Resistance remains in place near yesterday’s high ($830) followed by $860.
Pulling back and looking at the weekly continuous chart, the 100 period moving average comes in near $798 with gold bouncing off of the 20 week moving average at $807. This serves to reinforce the technical significance of the region where today’s lows in gold were made.
The short term daily trend in gold is down while the intermediate term shows a down-sloping trendline drawn off the peaks made last year is still in effect. That line has served to cap upward movement and it is no coincidence that the bullion banks came in near the $880 level, which is where that line hit last week. They read the same charts we do, which is just another reason for the funds, who trade against them, to wise up and think for a change. The long term trend remains higher. Gold bulls will have to push prices back above $840 to send a bit of concern into the bear camp.
We still continue to see index fund liquidation related to that infernal commodity index reweighing trick. Seeing that we are entering the rollover period, the most likely course of action that the funds will take to rebalance their holdings will be to simply lift their longs in the February contract and simply not rollover some of them into the April or June. I would expect pressure coming on gold from that angle to cease after the rollover period ends in a couple of weeks. Seeing that the low point in open interest readings in the Comex gold market was made back in the second week of December last year when gold was trading near the $740 level, those funds that began building positions near that time still have some profits left that they can actually catch even with this rebalancing act. Those that came in late and chased prices higher get to see red on their gold trades, which serves them right for being so dense. Hedge fund managers – are you tired of losing money trading gold against the bullion banks – then start your buy ins into weakness and begin scale down buy programs instead of your losing strategy of chasing price both higher and lower. And if you wish to further your chances, then use some of your assets to take delivery of physical gold bullion from the Comex warehouses and hold it off the market.
Crude oil is flirting with a breakdown of strong double bottom support near the $35 level on the continuous chart. The spread between the front month crude contract and the March makes buying crude difficult for futures players during a rollover period – that’s why so many are up and leaving. Natural gas made a new yearly low in today’ session – how do you like that given that intensely bitter cold gripping the heavy gas consuming region of the upper mid West. There is just too much crude and too much natural gas out there given the current levels of demand. We really need some more of this very cold weather to put a serious dent in the supply side of things. Technically however, if and this is a big IF, crude can bounce from today’s low and close higher either today or tomorrow, short term traders will view it as a bottom signal. It is just too soon to say as of the hour I am writing this.
Speaking of spreads, I mentioned that I would be monitoring the spreads between the front month gold contract and some of the back months to keep you informed on that backwardation issue which surfaced about a month ago. So far the structure in the futures market has not shown any backwardation occurring although the forward spreads remain tight.
May I once again please remind some of our readers that I am a private trader only and not an investment advisor nor do I accept phone calls from people asking for my opinions on various stocks or commodity markets so that they may trade accordingly. I welcome emails with comments from readers but please do not pester me with timing buys and sells nor with recommendations on various equities.
Courtesy: www.jsmineset.com
