"Houston, We have a Problem!"

In this case it might be better written, "FOMC, we have a PROBLEM!"

What I am referring to is the long awaited and long expected, I might add, breakdown in the US long bond. It is my opinion that the US bond market is the single most important market on the planet. For years, many of us have sat and watched as bond prices were driven to levels that very few thought imaginable a decade ago. What with the rush into the perceived "safety" of US Treasury debt and the concerted effort by the Federal Reserve to drive down long term yield through their Quantitative Easing programs, bond bears were blasted from one defensive position after another by the steady influx of money flows.

My oh my how things have changed over the last few weeks! I give you a weekly chart of the long bond where you can see the breakdown in vivid terms. With the advantage that comes from some hindsight now that enough time has passed to trace out a definitive chart pattern, we can see the peak in the bond market, and the low in long term interest rates has come and gone. Do you see that MAJOR TOP that form over the course of most of last year? Three times the bonds were shoved into that region and three times they failed there. The third time turned out not to be a charm and out went speculative money to giddily chase equities as this bond bubble burst and the new one formed in equities.

Once the major support level gave way near the 145 level, a countertrend rally developed that took bond prices through NINE handles before speculators could see that the final rally to retest the former peak could not muster enough strength to move the final 4 handles needed to reach it. Down she went and up went long term interest rates as a result.

I want to point out something on this chart that is more a function of the rolling process that occurs in the futures markets but nonetheless leaves it mark upon the technical price charts. This week the front month bond contract became the September bonds. Prior to this changeover it was the June bonds. There is currently a FULL ONE POINT DIFFERENCE between the value of those two contract months. When a continuous contract is drawn out for analysis purposes, the data it will include always contains the FRONT MONTH contract or the most active. That has now become the September Bond contract. When this is included, you can see the impact on the technical price chart!

Note how the support level that formed where the counter trend rally began, has now given way because of the level at which the September bond contract is currently trading.

The day is not over yet and thus neither is the week, but barring a late session upside movement in the bond market, it is now on track to close below what has been a significant chart support level. If it does so, odds favor a furthering of the new trend to the downside with no significant chart support showing up until another 3 - 31/2 points lower down near the 136 region.(Maybe the boyz at the Fed will send their New York desk buyer to the market to buy some bonds later today....)

One has to wonder if this is what the Fed had in mind when they were attempting to push long term interest rates lower. What they got was a mad rush out of bonds and fixed income in a near ZERO interest rate environment and into equities. All that money flowing out of bonds in search of easy gains in equities has now resulted in a surge higher in interest rates at the back end of the curve.

It is no secret that the formula for the current "recovery" has been ultra low interest rates which have made debt servicing easier for business, consumers and the government I might add. The big question is whether or not this nascent recovery can stand a rise in interest rates. I do not believe that it can. So where does that leave the Fed?

Talk of tapering QE makes investors nervous and actually undercuts any reason to buy bonds since a major buyer has been removed if that were to occur. That engenders selling. On the other hand, if the Fed were to actually reverse course and RAMP UP bond buying once again if the economy were to slow, then all that would do is to further facilitate the bubble in the equity markets that they have created. Money flows would continue to exit bonds and find a home in equities. Either way, bonds suffer as a result and head lower.

Talk about a self-inflicted conundrum! Good luck with this one fellas... You made it; now handle it!

Trader Dan on NPR

For those of you who might be interested in a story dealing with a proposed buyout of giant US pork producer Smithfield, by a Chinese controlled firm, Shuanghui International, you can check it out at the following link. The radio interview is three minutes so you can get the gist of what is happening in a short time.

There is also a write up if you prefer to read that instead.

While I tend to devote most of my writings at this site for gold, currency and interest rate related topics, I cut my trading teeth on the ag markets and still consider them my favorites. The Grains and the Livestock markets and I go back a long way together!

http://www.npr.org/blogs/thesalt/2013/05/30/187163300/will-chinese-firm-bring-home-the-bacon-with-smithfield-deal

Gold Catalyst?

It looks as if we have FINALLY got some sort of catalyst to propel gold through that big round number overhead resistance level at $1400. Based on what I am seeing this morning, it began with the steep slide in the Japanese stock market, with further help from the very disappointing GDP growth number that came out this AM.

To start - the Nikkei fell 5.2% on Thursday, as investors over there are suddenly having concerns about the overall effectiveness of the "inflation" program that has been implemented by the political and monetary authorities. That fall in stocks resulted in a strong safe haven bid into the yellow metal. Keep in mind, that heretofore investors have chosen to ignore gold or outright sell it short as they put investment capital to work in better returning equity markets. If anything upsets that apple cart and begins to cast the least bit of doubt that the strategy is not going to be effective moving forward, we will see money flow out of stocks.

Secondly - the US economy was revised downward in growth for the Q1 2013 from last month's reading. Instead of the 2.5% reported last month, the number was revised lower to 2.4%. That took some of the steam out of the "TAPERING" talk that has been everyone of late. As most of the readers of this site are aware, gold has been under pressure ever since that TAPERING talk began to gain some credence. Today's revision was a reminder that this economy remains quite weak with tepid growth and is still very susceptible to downward pressure. Growth numbers will need to do more than this to provide any factual basis for a curtailing of the Fed's QE program.

I should further note here that the "deflator" number that was used by the BEA was 1.18%. The BLS has a December-March inflation number of 2.10%! That is no mean difference! The lower the deflator number used (another way of saying this is that the lower the rate of inflation employed by the statisticians), the better the headline number for growth comes in. IF the BLS number had been used instead of the 1.18% reading, the growth reported would have been even lower!

The mining shares are showing some welcome signs of life of late. As you can see on the chart below, they gapped higher today but until this index closes through that gap region indicated, I cannot get too excited about their future prospects. To pique my interest, I would need to see two consecutive closes through at least the 290 level. Still, it beats seeing the things dropping to new lows every day! Obviously value buyers are active but we need momentum based buyers to chase these things like they have chased the broader equity markets. That will require a technical chart confirmation that the trend is ready to reverse.

There was some news out the other day about the US Dollar losing a bit of its demand as the chief currency for global reserves. The IMF data on that was interesting. I do not know if that might have had something to do with the weakness that we saw yesterday and are seeing again today, but for whatever reason, the Dollar just took out at least one downside support level on the chart.

I am using a 4 hour chart as it shows the support level more clearly than just the daily chart. You can see the breach of that level was accompanied by a pretty decent spike in volume which is bearish. The week is not over yet but if the Dollar cannot climb back over that support, odds would favor additional downside early next week.

Don't forget the entire world is LONG DOLLARS and the trade is extremely crowded both among the big hedge funds and the general public. If any more downside technical levels were to get taken out, we could see some pretty serious selling occur in the greenback.

Obviously, any weakness in the US Dollar is going to benefit gold, which is exactly what we are seeing occur so far in today's trading session.

Speaking of gold, clearing $1400 is a big deal on account of that fairly hefty hedge fund short position. We did see some short covering occur on the move through this level. My analysis suggests heavier short covering will occur if the metal can push PAST $1425 with a serious unwind of short positions if price can clear $1440. For analysis purposes, we should start to focus on the August gold contract as the June is entering its delivery period and open interest in that contract month is rapidly dropping. It will also be interesting to note the delivery process itself and see what kind of offtake occurs.

Silver is getting some help from the strength in gold today and the bit of strength in copper is not hurting it either. Until that market clears $24 I cannot get excited about it.

The yield on the Ten Year Treasury note has been all over the place today. Volatility in the US bond markets, while nothing like the madness that has been unleashed in the Japanese government bond markets, is definitely increasing. Interest rates that begin wild oftentimes unpredictable movements have the potential to destroy hedging programs put in place by any entity with interest rate exposure. This is especially true of insurance companies and mortgage companies. Things can get out of hand very quickly and become quite ugly if money flows start getting erratic in that critical sector.

If you want to know how bad it can get, just look at what the Japanese monetary authorities are having to do in order to try to calm the jitters in their bond markets.

Month End Positioning Underway

Attempting to make sense of the movement in the currency markets in today's session can be very confusing. Case in point? The Euro/Dollar. A report by the OECD, the Organization for Economic Co-operation and Development, warned that tapering of the bond buying programs (monetary easing) by various Central Banks, could result in a slowdown in global growth. It singled out the Euro-Zone as a region that could be most impacted and consequently lowered its forecast for that region's growth.

Normally, that would have been enough to put pressure on the Euro. No so today! Today seems to be a case of large speculators squaring positions ahead of this month's end. Since everyone and their dog has been long the US Dollar and short nearly every other currency on the planet, we are seeing a bit of an unwind occurring which is taking the Dollar lower, especially given the fact that the equity markets are under pressure today. That too might be a case of end-of-the-month position squaring.

Trying to read too much into price action at this time of the month can be rather futile. I am more interested in seeing how things close the week this Friday instead. Nonetheless, if we can any breaches of chart resistance or support levels, no matter what the cause, we could see additional price volatility.

Speaking of price volatility, has anyone seen the Volatility Index lately? Check it out....What I find rather fascinating is that lately, the VIX has actually been moving higher even as the stock market has been making one new lifetime high after another on an almost daily basis. Perhaps, even some of the perma equity bulls are beginning to wonder if this bubble can keep inflating indefinitely!?

Trading Theme Du Jour

Here's the current mindset in the gold market as of this morning... the stock market looks as if it is experiencing either a bout of profit taking by longs or has temporarily run out of willing buyers near its new lifetime high - that begets a safe haven bid and a bit of the risk aversion trade comes back on.

That can primarily be seen in the bid going into the Japanese Yen, which is becoming extremely volatile due to this risk on, risk off, alternating from day to day. You can also see it in the long bond which rallied over a full 1 1/2 points off its low of the session. This trade then brings back a bid into the gold market.
 especially as the US Dollar weakens.

Today, we have the European majors and the Yen moving up against the US Dollar as the equity markets weaken. The inverse link between the greenback and gold then comes into play and gold pops higher. Gold then functions as a safe haven.

Whether this is sufficient to take gold through the $1400 level and maintain a "14"handle on it is unclear at this time. It all depends on what happens to the equity market. If this is just another dip in price that will be bought by the large specs, then gold will run into further selling as it moves towards overhead chart resistance. Why? Because they will look to jettison their gold holdings to put that money to work in the equity markets. If it is something more serious in regards to the stock market, then gold will be able to clear round number resistance at $1400 and should be able to maintain its gains.

This is what will be required to spook any of the hedge fund shorts out of their positions and touch off some buying by that side of the ledger. Remember, gold needs a catalyst of some sort.

I should also note here that there is general weakness in the grains and in the energy sector today. That combined with weakness in the copper markets is keeping pressure on the Goldman Sachs Commodity Index and furthering the notion that inflation, at least when it comes to the cost of basic commodities, is currently a non-issue.

Take a look at the chart of Unleaded Gasoline. Notice that it is some $0.45/gal cheaper than it was a mere two months ago. You put that together with a stock market nearly daily making one all time high after another, and is it any wonder that consumer confidence readings are moving up?

Ten Year Treasury Yield Surges to a 14 month High

Take a look at the following chart of the yield on the Ten Year Treasury Note. It closed at 2.135% return today, the best level since the first week of April, 2012.

While I personally believe that the economy is too weak to withstand higher interest rates for a prolonged period of time, all that matters right now is money flows. Money is flowing out of safe havens and flooding into equities in search of Yield, Yield, and more Yield.

The Central Banks of the West, and Japan, have created a RISK FREE environment for equity traders and have unleashed a full fledged mania in the process. Mark this well as you are seeing what happens when moral hazard is on full display.

I have said it before here and will say it again, the only risk in the mind of hedge fund managers, institutional fund managers and pension fund managers, is the RISK OF NOT BEING IN STOCKS.

I want to see if this note can take out the dotted green resistance line that shows up near the 2.30% level; that would be a big deal in my view.

Speculators continue to Sell gold

I will get some more details on the Commitments of Traders report later this weekend but wanted to get a graphic up to show just how strongly speculative sentiment here in the West has turned against gold (no doubt that is every bit tied to the bubble in the equity markets, courtesy of the Fed).

You can more or less see the sentiment towards gold by looking at the upper solid dark blue line which dates back to 2006. It rises and falls along with the actual price of the metal. Can you see what direction that line has taken since late 2012 when gold was priced near $1765? It has been steadily declining with a few upward blips. That indicates the outflow of speculative money from gold which as we all well know by now, has been heading into equities in search of yield. Incidentally, you can see the same thing in the gold ETF, GLD, with the steady drawdown in the amount of metal in its holdings.

Now focus on the bottom red line which is a mirror opposite of the upper blue line. You can see that it bottomed out at the same time gold peaked near $1765 on the chart and has been relentlessly climbing higher. That is FRESH SHORT SELLING. Can you see how the hedge funds are building on the short side of the market? As a matter of fact, this is the largest outright short position of that category of traders on record!

Folks, I have to say something here at the risk of irritating some others in the gold community that I consider to be friends. Many keep pointing to this fact of a building speculative short position as a bullish development. It is not. It is bearish. Why? Because as I have stated ad infinitum over here, Speculators drive markets today, not commercials. As long as the specs are interested in selling gold, the market will struggle to overcome chart resistance levels and reverse to the upside. Yes, there is definitely the potential for some strong and sharp short covering whenever you see specs with a building short position, but it requires a CATALYST before that will occur. At some point we will indeed get such a catalyst (we got a preview of it this past week at the introduction of Bernanke's speech when he mentioned that a premature slowdown in QE would not be wise) but until we do, the trend is very obvious.

Let me just say that as a trader, not an investor, and please note this vital distinction, unless I have deep and unlimited pockets, for me to go against the flow of hedge fund money, is financial suicide. This crowd can run over commercial interests and send them crying to their mammas. How in the world are you or I as smaller traders going to be able to handle that sort of selling pressure? No, we have to be wise and only take a contrarian position if the technicals are telling us that it is time to do so. When those guys reverse course and begin covering, it will not come in a stealthy manner!

There is a tendency among some to keep saying over and over again: "this growing short position is wildly bullish". The implied notion among some advocating this (not all of them) is that you should jump in a take a long position in the futures because they just know that the market is going to suddenly reverse to the upside and you will miss the big move if you don't. Well, it may just do that. Then again, it may just not! What if it does not? Down it will go and down will go your trading account with it. Instead of buying on "HOPE" wait for the chart pattern to indicate that a turn is at hand. At least that way you can mitigate the risk somewhat because you will have a definite chart point at which you can tell whether or not the trade has gone wrong.

Again, I want to repeat, this is intended for those who are trading not those who are investing in gold or buying it to protect themselves from the debauchment of currencies which is occurring. The latter group buys gold for peace of mind and will methodically accumulate the metal as price moves down. That is a far cry from buying a LEVERAGED futures contract.

In summation - hedge funds here in the West are selling gold on rallies with strong quality buying emerging on trips back down towards $1360 and below. That buying is coming from the bullion banks and swap dealers in the paper markets. We all know how solid the demand is at those levels in the physical markets, especially in Asia. This looks to be the pattern until proven otherwise by the price action.

Trader Dan Interviewed at King World News Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King over at the KWN Weekly Markets and Metals Wrap.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/5/25_KWN_Weekly_Metals_Wrap.html

US Dollar - back to being King

It appears as if the globe is convinced that any economic recovery is going to begin here in the US first. It certainly is not going to be Europe that is leading the way. Data from China continues mixed while Japan is gaining traction at the expense of their currency. That leaves many investors from abroad looking to put their risk capital to work in the US equity markets. That is creating strong demand for Dollars with which to buy boatloads of US equities.

You can see the effects of this in the dollar chart. Note this is a weekly chart I am using. As it now stands, the Dollar is on track to make its SECOND and a CONSECUTIVE WEEKLY CLOSE above key resistance at last year's high just above 84.40 or so.

It has already cleared the important 61.8% Fibonacci retracement level of the entire sell off from the double top back in 2010. The last barrier from a Fibonacci retracement theory level it has to face is just above 85 at 85.05. That ties in rather nicely with the upper tine of the pitchfork. If that does not stop the upward march of the Dollar, odds will favor it completely retracing the entire downmove from 2010 and eventually reaching all the way to 89.

With weakness across the Yen, the Euro and the Aussie and Canadian Dollars, not to mention the Swiss Franc and the British Pound, it is difficult to see why the US Dollar will not make it through the 85 level.

If this does occur, it is going to more than likely bring about additional selling pressure across the commodity sector in general and that means we could very well see more hedge fund shorting activity into silver and gold. It will be up to the physical markets to therefore absorb the paper selling to prevent those recent lows from being retested yet again.

One of the other reasons that the US Dollar is rising in my view is the fact that interest rates are rising here in the US. In an environment starved for yield, you are going to get some of that money that wants to hold bonds moving to where it can obtain the highest yield or at least where it can invest where the interest rate trajectory is higher and not lower as is the case in the Eurozone.

Long Term Interest Rates grinding Higher

Keep an eye on the yield on the Ten Year Treasury Note. It is back above the key 2% level once again. The rate peaked for this year about 2 months ago in mid March before moving lower. At that time it was a tad above 2.05%. Rates have moved 40 basis points higher in a month's time. That is quite rapid.

I find today's movement a bit peculiar to be honest because it came against the backdrop of an equity market that had first made a new all-time high before reversing lower later in the session. One becomes accustomed to seeing money flows out of bonds and into stocks and therefore, when stocks are being sold off and bonds also are being sold off simultaneously, it is a bit out of the norm.

Let's see where this thing goes tomorrow and the remainder of the week.

Incidentally, I wrote up some comments on today's price action for Eric King over at King World News. Check in there to find them a bit later this evening.

Have the Mining Shares finally Bottomed?

While one day does not a trend reversal make (and it is very important to keep this is mind), the HUI has found some buying support (finally!) near the confluence of several important technical support levels on the price chart.

I am using a weekly chart to show both the Fibonacci retracement levels and some horizontal support zones plus the pitchfork lines.

The first thing to note is that the index did close below the last Fibonacci retracement level noted which is the 75% retracement of the entire rally off the 2008 low and the 2011 high. That level is near 272. Strict adherence to Fibonacci theory teaches us that if this level gives way, odds favor a complete retracement of the entire upside move meaning we could see the HUI move all the way back down to near 160. However, we have had only one week in which the index CLOSED for the week below this level. Usually we would want to see TWO CONSECUTIVE WEEKLY CLOSES below this level to increase the likelihood that the index will move back to its starting point of the rally. That has not occurred yet.

Also, as you can see, there is a band of horizontal chart support  shown by the red rectangle that comes in near the 240 level. This level of support dates back to early 2009 and still has some validity to it.

Lastly, just outside the median line of the pitchfork lies an area of support coming in right at 240. It seems to me that if this index is going to hold, it is going to hold here and now at this level. If not, it will more than likely track the lower dotted line over the next few weeks.

To feel that the worst is over in this sector, I would like to see the index move back above last week's high near 275 or so to close out this week. If it can do that, I believe we will have seen a final bottom in the mining shares. The jury is out until Friday.

Here is a look at Goldcorp (GG). Notice the Outside Day Bullish Reversal Pattern coming after a very prolonged move lower in price. That tends to give the pattern more credibility. I would prefer to see a higher volume reading, much like the one seen back in April, to go along with today's nice showing but if the bulls can build on this the remainder of this week, they might spark some more serious short covering in this particular share by Friday. We'll see.

Today's Commentary by Trader Dan posted over at King World News

Dear friends and readers;

Eric King over at King World News has asked me to put together some commentary on today's wild ride in the precious metals markets. Please check in over at www.kingworldnews.com to read those along with the charts detailing the price action.

I need some time to go and find my stomach!

Trader Dan

CME reporting Silver Trading halted 4 times last evening

I will get more info posted on this as it becomes available from the CME Group. As mentioned in the brief piece I posted last evening, volume on the collapse in price was extremely light. There was an air pocket underneath the market but once price fell towards that major support zone near the $20 level, it rebounded quite ferociously. Further aiding the buying off the lows is the fact that Copper is proving to be quite resilient.