Gold Trend May 19, 2014

Posted: 18 May 2014 09:49 PM PDT

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Long Term ~ Bearish - Need a monthly close above 1800 to confirm the bull market final phase underway.
Medium Term ~ Neutral – Gold on the verge of TURNING BEARISH MEDIUM TERM. A close below 1272 on a weekly basis does it.
Intermediate Term ~ Neutral – 1265-1272 downside target met, now need close above 1312 for neutral reading to be enforced and 1322 for bullish.

A close below 1272 goes to bearish reading.
Short Term ~ Neutral– The short term cycle is up in the air at the moment.
A close below 1277 puts us outright bearish on the short term. A close above 1312

Initial Resistance 1298-1308 2nd tier 1312-1316
Initial Support 1278-1288 and 2nd tier 1265-1272

PLEASE see weekly update for additional commentary not covered below (Especially on Fed meetings).
Precious Metals Stuck In Neutral, But That Could Soon Change
By Tim Iacono

Summary

•Gold and silver continue to be stuck in trading ranges, but last week's move by Treasuries could help push the metals out of those ranges.
•A stronger dollar might limit any move to the upside as could a continuation of generally good economic reports in the U.S. that, last week, showed inflation rising.
•Demand from China and India are still key as we approach June, the worst month of the year for precious metals.

Gold and silver prices continue to be range-bound, for gold around $1,300 an ounce and for silver between $19 and $20 an ounce, but with the recent break-out for another safe-haven in Treasuries last week, it's possible the metals will soon break free of their recent trading ranges as well. Unfortunately for gold bulls, a move to the upside has been made more difficult by the U.S. dollar that is again strengthening, and this appears set to continue amid talk of monetary easing by the European Central Bank that could lead to a weaker euro.

The situation in the Ukraine is not improving, but gold traders seem to be getting bored with this story again despite escalating violence and there being no peaceful resolution in sight. Instead, traders pored over a bevy of U.S. economic data last week but, despite clear signs of accelerating inflation in the U.S., this generated little buying interest for gold and silver.

China gold demand has been steady, and U.S. hedge funds made few changes to their gold holdings in the first quarter. Investment banks remain mostly negative about the prospects for precious metals, though less negative than they've been over the last six months, as this market seems to be "stuck in neutral" heading into the traditionally slow summer months. The recent elections in India could liven things up if, as expected, the new government relaxes the draconian gold import curbs that have stifled demand there for more than a year.

For the week, spot gold rose 0.2 percent, from $1,290.10 to $1,292.70, and silver jumped 1.0 percent, from $19.15 an ounce to $19.34. The gold price is now up 7.2 percent so far in 2014, some 33 percent below its record high of over $1,920 an ounce in 2011, and silver moved closer to even for the year, now down just 0.5 percent, still 61 percent below its all-time high near $50 an ounce reached just over three years ago.

Precious metals remain stuck in narrow ranges that have become even tighter in recent weeks and, when this happens, the result is normally a break-out of some sort. At this juncture, the downside appears to be limited due to ongoing geopolitical concerns and all-in mining costs not far below current metal prices. Similarly, the upside seems limited by generally good U.S. economic data and expectations that the Federal Reserve will continue on its current course of reducing its money printing effort through the summer and fall in advance of raising interest rates sometime next year.

Seasonality is also a factor and though May has been a positive month for metals since the bull market began, June has been the worst month of the year by a wide margin, particularly last year when gold tumbled 15 percent.

Beginning in July, however, the best stretch of the year will commence, and it's worth pointing out that October isn't quite as bad as it looks. The average October decline of 0.4 percent turns into a gain of 0.9 percent when removing the single worst month for the metals since the century began - October 2008 when the gold price tumbled 17 percent and silver plunged 28 percent.

The recent rally in Treasuries that pushed yields sharply lower and out of their trading range could prompt a similar move out of the recent trading ranges for gold and silver. Something shook loose in markets last week and that may spread.

Investors are now jittery and traders have become twitchy after a number of warnings from high-profile hedge fund managers last week about stocks and some of the money that has flowed from equities into bonds might be diverted into another safe haven in gold, particularly if the on-again, off-again crisis in the Ukraine heats up.

The trade-weighted dollar has strengthened over the last two weeks after it appeared bound for new multi-year lows and, since there is a strong inverse correlation between precious metals and the dollar, this may limit any upside break-out based on safe-haven demand.

The dollar reached its highest level since February against the euro, and those gains will continue if the European Central Bank takes any of the steps they've been talking about for months now, a move that is more likely after Germany's Bundesbank said it was ready to back new stimulus measures.

Inflation in the U.S. is clearly on the rise as detailed in What Today's Inflation Report Could Mean For Precious Metals a few days ago, however, markets seemed little interested. Granted, there was a deluge of economic data last week and much of it was positive, but if the surge in both wholesale and retail prices continues, pushing the year-over-year inflation rate to a multi-year high as soon as next month, investors in the West are sure to take note. Rates for Treasury Inflation-Protected Securities have been rising since the beginning of the year in anticipation of rising consumer prices, and this could also spur more buying of gold and silver after this sector had fallen out of favor amongst U.S. investors over the last year or so.

Gold holdings by large hedge funds were little changed during the first quarter as SEC filings showed Paulson & Co, the largest institutional investor in the SPDR Gold Shares ETF (GLD), maintained its stake in the fund valued at over $1 billion. The GLD ETF added to its holdings for the first time in a month on Thursday with the addition of two tons, however, it saw a net outflow of one ton for the week and is now down 16 tons for the year. The "tons in the trust" for the iShares Silver Trust ETF (SLV) were again unchanged and they remain up 351 tons so far in 2014.

U.S. investment banks remain quite bearish on precious metals, with Goldman Sachs leading the way and Bank of America not far behind. Goldman reiterated its weekly call for a $1,050 gold price by year-end and BofA's MacNeil Currey said the gold price could fall to below $1,200 an ounce.

UBS analysts were much more constructive than strategists at U.S. banks, but they downgraded their gold price forecasts anyway, dropping their one-month outlook from $1,280 to $1,250 and their three-month forecast from $1,350 from $1,300. In a sign of changing sentiment toward precious metals in Europe (if not yet in the U.S.), French bank BNP Paribas revised its 2014 average gold price forecast up from $1,095 to $1,255, citing strong technical support at around $1,200 an ounce.

Jewelry buying in China was widely reported to be down 30 percent last month versus a year ago, however, it should be noted that April of 2013 was an exceptional month for gold sales as the price dropped by over $100 per ounce in short order, spurring huge demand. According to this IBT report, net gold imports from Hong Kong to mainland China during the first quarter rose from 211 tonnes in 2013 to 276 during the first three months of 2014 as the Middle Kingdom continues to be the important source of global gold demand.

Probably the most encouraging development that could get precious metals prices out of "neutral" and into "forward" rather than "reverse" was the result of elections in India last week that saw Narendra Modi's Bharatiya Janata Party win in a landslide. This sets the stage for a rollback of the many gold import curbs enacted over the last year that have curtailed official gold demand but boosted smuggling to levels last seen 20 years ago.

No action is imminent, but just the expectation of rising demand in what was once the world's leading gold buyer (until being overtaken by China last year) could boost prices in advance of the fall buying season that should see the release of "pent up demand" that stretches back over a year.

Gold short term

We are likely on the final test of this line and the need to turn up is paramount. If gold turns up and fails again at 1312-1322, then the 5th strike of this line will favor a break. A close below 1272-1277 this week might be enough for gold to head lower. Gold needs to turn up this week but is in a full head strong wind by the FEDs and the FOMC minutes once again. There is no choice but to be on total guard and short term trades will need tight stops after Sunday night. IF THERE IS ANY BULLISHNESS TO GLEAN FROM THE WEEKEND, IT MIGHT BE THE INDIA ELECTIONS, WHERE PRO GOLD FORCES HAVE BEEN ELECTED. Let's hope the market clings to that to at least start the week. If not, get your helmets ready. The pattern is choppy and overlapping, thus the potential for another leg down could very well come back in play. If we lose 1272-1277 odds will favor we're heading lower. The other event this coming week will be the RUSSIA/CHINA meeting. That might spark some metal movement.

On Monday, resistance is 1298-1308 and support 1277-1288. Anything below that smells trouble and a break of 1265-1272 would not be good at all. We'd favor 1222-1240 if that happens.

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Gold Weekly Update May 18, 2014

Posted: 18 May 2014 09:04 PM PDT

Trend
Long Term ~ Bearish – Need a monthly close above 1560 for neutral trend without bearish potential. The key resistance area's to regain new bull market leg are 1792 and 1804-1830.
Medium Term ~ Neutral – Resistance 1425-1525 & support 1222 & 1272. Gold held 1272 on a weekly basis and the close in between the moving averages (1288-1295) on May 15 kept gold neutral (barely) If gold can't mount a rally soon, the downside can give in. We are two weeks away from entering month 34 of the gold bear market. We are arriving at a key and most important time to watch for 2014. June has the highest odds of 2014 for a reversal. Doesn't mean we get one, but has highest odds. September 2014 is the other month to watch.
Intermediate Term ~ Neutral – The intermediate trend is neutral and it takes a close below 1272 to add to a bearish outlook. A weekly close above 1322-1336 gets us bullish on the intermediate term.
The next short term cycle turn cycle is underway this week. If we close below 1272 gold can get a BIG DUMP to 1222-1240 for starters and we could move lower to month's end. If the upside is chosen, then we'll have to see the pattern to determine if it has legs. Under 1322-1331 on a weekly closing basis leaves us Neutral.

Resistance for this week 1303-1312 and 2nd tier 1316-1326
Support for this week 1262-1275 2nd tier 1222-1240

Events

How desperate are the Feds getting? We keep asking that question. Here we go again this week. It begins with Richard Fisher speaking on Monday, Charles Plosser on Tuesday, and for mid-week Wednesday, it becomes relentless. Not only will the FOMC minutes be released from the last meeting of a couple of weeks ago, but check out the Pre-game show.
It begins at 10 am EST when William Dudley speaks, then chief Janet Yellen gives her 2 cents beginning at 11:30, followed by a 12:50 speech from Esther George, a speech by Narayana Kocheriakota at 1:30 PM EST and then the Feature Presentation;

Drum roll please!!!

The FOMC MINUTES from two weeks ago.

Ta Da !!

Yes that's right folks. It's the minutes from the very same meeting that was stuffed down our faces just two weeks ago. While some may not remember, holders of gold sure do. That was when at exactly 10am two Tuesday's ago when the Yellen FOMC meeting began and someone rethought their gold position and voila----700,000 ounces of paper gold sells hit the COMEX in one minute, and the gold rally from 1272 to 1316 the prior two trade days got punished back to 1290 BEFORE the Fed Chair begins to even speak.

So why must the minutes now be released?

Well, there are two important reasons for that. The first is to confirm whether the markets were correct in their interpretation of the last Fed Speak. The second reason is reserved for the FED to INCLUDE ANY STATEMENTS that may not have appeared in the previous meeting they had behind closed doors. Master Oracles from the blogosphere will carefully (with magnifying glass in hand) pour over sentence after sentence in search of any potential words that would equal A CHANGE IN DIRECTION from the last "FED SPEAK" event.

In other words, should the stock market continue it major downside reversal from last week, it may be necessary for the FEDS to include certain language to try and give the markets something to give a short term recovery in price some hope, and at the same time, it gives the control boyz yet another event they can time and either clear the stops or just out and out take out any remaining support that gold may have tried to establish.

One of these times, the opposite is going to happen. But until it does, don't think the control boyz can't manhandle another trigger lower (or higher) on any commodity they so choose.

Once the FED gets done with us, Thursday comes in with Jobless claims, Chicago Fed index activity, existing home sales, and the LEADING INDICATORS. Gee, what a coincidence that is eh?

INDIA has elected a new PRO GOLD government leader. Let's see if that helps things out.

Finally, Russia is set to meet with China this week. THIS COULD BE THE BIGGIE OF THE WEEK.

Metals Overview
For the week, spot gold moved from $1,289.80, to $1293.40, and silver rose from (it's tying 2014 low and 2nd lowest weekly close since the bear market started) $19.12 an ounce to 19.35 (It's 3rd lowest weekly close since August 27, 2012.)

The chart below shows that while the flush in gold has decreased the open interest on futures, it is not so in silver. In fact it is rising hard. The last time this happened there were bullish articles on how the silver longs couldn't be shaken. Then it crashed from 30 to 20.

Keith Weiner, Monetary-Metals:
There is a stark difference between the states of the markets for the monetary metals. The number of open futures contracts in gold is low, while in silver it's high. First, let's look at the data and then we'll discuss what it means.
Here is the graph showing the open interest.

The current buying of physical and selling the futures on silver is 1/2 % return. In a world of negative rates, perhaps there is a lot to be said here. They control boyz buy the physical and then sell the futures to gain the premium. It's Ironic how physical holders are a big producer of PAPER, but it is also important that the average silver trader or holder of physical is not part of the mix. We're talking the control boyz all the way.

The Weiner article goes on to say:

The picture is clear enough. Since the beginning of fall, the number of gold contracts has blipped up and down and now there are somewhat fewer (-3.7%). Meanwhile, the number of silver contracts has gone up substantially (+39%).

There is an unmistakable downward trend since the middle of 2010, almost 4 years ago. Then, there were about five gold contracts for every silver contract. Today, the ratio is down to two.

OK, but what does this mean?

Open interest is a proxy for speculative interest. This is not simply because contracts are created by buying, and destroyed by selling. You can't assume that contracts are created and destroyed as the price moves. To see why it doesn't work that way, look at the stock market. The price of a stock can move all over the place, but there need not be any change to the number of shares outstanding.

In the futures market (unlike in the stock market), the number of contracts changes continually. Contracts are added or removed by the computer software that operates the market. When you buy or sell, an existing contract may be transferred from one party to another, or a new one may be created.

It's complex, but in essence if you want to buy a contract just when else wants to sell, the contract will change hands. It works similarly if you want to sell short, right when someone who is already short wants to buy.

By contrast, if there is no current owner of a contract to sell it to you, when you want to buy, then a new contract must be created. Who sells, who takes the short side of this contract? It can certainly be someone else wants to speculate on a falling price. There are always (well, usually) traders who go short silver. However, I don't think that this is the full explanation of the data shown in these two graphs.

I favor a theory of arbitrage. If it's profitable to buy metal in the spot market and sell a future against it, then someone will take this trade. This short seller is a source of unlimited contract creation, if it's profitable.

It's called carrying the metal. If you carry, then you make a small spread without price risk. This spread is called the basis the price of the future minus the price of spot metal. Or, more precisely, basis = Future(bid) – Spot(ask), because you must pay the ask when you buy the metal, and accept the bid when you sell the future.

Look at the gold basis and silver basis for the Dec 2014 contract, from early fall through today.

The profit to carry gold has been steadily falling. It began at 0.35% (annualized), when the duration was 15 months. It was hardly the stuff of legends or getting rich quick even last October. That meager margin has been steadily eroding, and is now 0.1% for 8 months. Suffice to say that gold carry has offered little or no opportunity to make money. Therefore the gold carry trade has not been a big source of contract creation.

The profit to carry silver, by contrast, has not much changed. It's still around 0.5% (annualized) or more. This is far more attractive than gold, and probably more attractive than other opportunities in our zero-interest world. Therefore, the silver carry trade has created many silver contracts.

What drives the basis spread?

Speculators, when they buy a future, drive up its price just a little bit. This is the inducement to the arbitrager to buy a bar of metal and sell the future to the speculator. The arbitrager carries metal, to provide a service to the speculator. He is the one who "converts" (I use this term carefully, in the full context defined here) metal to paper, a bar to a contract. He's ready, willing, and able to deliver that bar should the speculator have the cash to demand delivery.

The long and short of it (to make a tired cliché into a dreadful pun) is that in gold, there just is not much speculation, and therefore no profit to be made carrying the metal, and therefore when a buyer occasionally comes to the market his demand can be satisfied by a previous buyer who is selling a contract. (note; the old long traders are throwing in the towel and have had enough).

However, in silver buyers are running at a much more torrid pace. They're too numerous to be satisfied by the occasional seller. They bid up the price of the futures, which makes it attractive for arbitragers to carry silver and sell them the contracts they desire.

Incredible as it may seem, at the low price of $20, speculation in silver is rampant. Market participants are trying to front-run a big price move. Due to rumors or gut feel or for whatever reason, they are expecting not only that silver will outperform gold, but that the silver price will rocket to a much higher price. Their frenetic buying of futures has pulled a lot of silver into carry trades.

Maybe hoarders will all of a sudden increase their appetite for silver metal that they will take off the market and bury. If so, the silver futures speculators will be proven right, and they will make a lot of dollars (money is a different story entirely).

I would not recommend that anyone bet his hard-earned money on a maybe. The data both open interest and basis show that the buying in the silver market is primarily speculators. They cannot sustain a higher price forever. They are merely trying to front run a higher price driven by hoarders. If hoarders don't come in, the speculators will be forced to capitulate. If that happens, watch out below.

The neutral price of silver is in the $16's today. If the price overshoots as far to the downside as it is now stretched to the upside, we could see silver with a 12 handle.