martes, 10 de noviembre de 2015

martes, noviembre 10, 2015

The Running Of The Gold Bulls Has Begun


Gold broke the $1160/1770 support cited in my last update and confirmed the high in place.
We may now have started our final decline to the bear market low in gold.
Short term we should be looking for support to hold in the $1030/1060 range, but if that breaks we will see a very strong decline towards $885.

Was it all just a dream? Did we blink and miss the metals bull market? It was only ten days ago that gold was at the highs, the dollar at the lows, and a new bevy of metals bulls (and some old ones) were loudly proclaiming the next leg of a secular ascent to be underway. Last week we saw stats to show the accumulation of the biggest net long position among the silver speculators in history, with gold longs at lofty levels too, but this week we are down 10% and scratching our heads - I thought the running of the bulls took place in July?

In my last article I noted that the minimum target for the rally had been achieved and sentiment was getting a little too frothy to be constructive in the short term, so gold bulls should be on high alert for a reversal. Support was given at 1160-1170 and if the rally was to continue that range should hold, but unfortunately it was exceeded and gold began a steep decline closing this week at a price of 1090 for an overall loss of 4.5%.

The question being talked about now is are we in the final flush to new lows, or will the bulls successfully defend the 1077 level we dropped to in late July. My gut feeling is we are going to break it slightly and then start a little dead cat bounce to set up the final decline into spring 2016, but either way the bulls should take solace in the fact that we are very close to a major low now, albeit with the chance of a final white-knuckle ride of a washout between now and then, and we certainly have a catalyst on the horizon to trigger that drop.

The Fed Tease Again, But Will They Deliver?

The 'will-they-won't-they' rate hike saga has continued unabated for what seems like an eternity, and in the last statement from the Federal Reserve in late October they reiterated that they could raise the base rate in December, with the decision once again being data dependent. Naturally all eyes turned to the data, with the non-farm payrolls announcement attracting much of the focus among traders and money managers on Friday.

A good report and the probability of liftoff at the mid-December meeting would rocket higher, but a bad number would diminish those chances. The monthly addition of 271,000 jobs was the second highest in 16 years, and we immediately saw the reaction in both the US Dollar (NYSEARCA:UUP) and Gold (NYSEARCA:GLD), with the dollar romping higher and gold dropping sharply lower. A rate hike is therefore dollar bullish and commodity bearish then? Surely not I hear you cry - historically, when the US has raised its base rate the Dollar has stopped strengthening:

*courtesy of Thomson Reuters, Credit Suisse

Yes that has been the case in the past, however this time may actually be different given the set of circumstances we currently find ourselves in with respect to US Dollar denominated debt issued by non US governments in the emerging markets. I have made this point in a previous article, but it is worth repeating - there is estimated to be $9T of emerging market debt out there and if the issuers of this debt have failed to engage in an activity that produces the Dollars they need to make their loan repayments, they are stuck having to convert local currency to service the debt.

A rate hike hurts them because the interest rate rises on any debt they choose to rollover, thus making their repayments larger and increasing the amount of local currency they need to convert into Dollars to make those payments. This puts a consistent bid under the Dollar, and exacerbates the situation as a strengthening Dollar also increases the amount of local currency required to make payments. A snowball effect if you will.

Additionally, I have not even touched upon the effect this will have on how the market views their debt in terms of risk - make no mistake this 'cheap' debt issued to take advantage of a fire sale in the Fed Funds rate may end up burning the house down as the market re-prices in the chances of default and the issuers have to increase yields to attract bids.

If the Fed raise the base rate in December and these countries decide to hedge their currency exposure, the Dollar will simply explode higher and no doubt send commodities generally (and gold specifically) much lower. A December liftoff may well be the catalyst to send gold to its final low - certainly something to bear in mind as we watch the show in 5 weeks time. Of course since markets move in anticipation of future events, we only need people to believe the action will be taken and the result becomes reality as we have seen this week.

The Dollar Is Breaking Out

A number of currency pairs broke key support levels versus the Dollar this week, with the Pound dropping below 1.508 and looking likely to re-test the March lows, and the Aussie breaking major long term support and looking very bearish indeed. If you had doubts about true Dollar strength, and were perhaps thinking that the rise was mostly an effect of the weak Euro, those doubts should now be assuaged - the Dollar is breaking out.

Looking at the longer term chart we can see that it has formed a huge base from which it broke out higher in 2014, and even though it has struggled over the last eight months the consolidation has maintained at the highs suggesting a continuation of trend rather than outright reversal:

(click to enlarge)

I am expecting the third wave higher to complete in the 106-110 range, but a measured move for the bull flag pattern would take us higher towards 115 and the top of the trend channel. Either way, the dollar looks primed to move higher, so the question is not whether gold is about to come under pressure but rather how much pressure is going to be exerted. Could we have started the final flush?

Data Points

COT
Massive changes in the Commitment of Traders report this week - the numbers are below:

(click to enlarge)
*courtesy of Goldseek.com

Here we can see that the bulls are indeed running, with the massive net long positions built up by the Large Speculator category being reduced by 40,000 contracts this week. The price drop is not a result of a barrage of new shorts coming into the market to overwhelm the bulls; this is the new bulls giving up on their positions.

Although we have seen a decent reduction in the net long positioning of the specs, there is ample room for this to drop further as over the past couple of years all the swing lows have been formed when their net long position reaches 20,000-60,000 contracts. However, you should keep in mind that the report covers action up until Tuesday each week, and since price has moved lower since then there is a good chance their net long position has already been further diminished. We will find out next week I guess.

One last thing on the CoT report - in order to get the final low in gold, we must see the speculators achieve a net short position (something that has never happened since the report was first published in its current format in 2006) rather than just a small portion of them (I'm thinking of the Hedge Funds here) and the only way that is going to happen is if the price of gold drops and they start to chase it lower.

Gold and the gold miners may seem cheap here, and in historical terms they certainly are, but don't forget that cheap can get cheaper and while they are both oversold you should not discount the chance that a strong decline has now begun to our final lows.

THE MINERS

The major mining index (NYSEARCA:GDX) has taken a real beating since I wrote my last article here on Seeking Alpha. It has dropped 22%, with the move lower looking very strong and I doubt there will be too many brave bulls coming in to buy this decline until we get some kind of consolidation to mark a reduction in the selling pressure.

(click to enlarge)

In an ideal scenario we should start a consolidation in the near term that takes us back up towards 14.60 before making one final low in the 12.50-13.00 range, but the fib supports are detailed on the chart and I am open to a far bigger decline than perhaps people are currently expecting. A drop to somewhere between 9 & 10 is not impossible here.

THE GOLD

If we are to make a swing low in the next few weeks, we need to start a wave 4 consolidation in the early part of this week that takes us back up to the 1120s before heading back down to the 1050/1060 range and possibly as low as 1031.

(click to enlarge)

If however we are in our final decline to bear market lows, we will continue to drop through all of these support levels, and the major fib targets are 1031, 942 & 885. Ultimately gold is close to the bear market low, and has a chance to make it at the end of this month if we see firm new lows and manage to get the majority short in terms of their positioning. If we see only a marginal new low form in the next couple of weeks and we see the Speculators buy en masse, it may only be an oversold bounce before one final decline into spring 2016.

As usual I wish you all good luck for the coming week!

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