Dear Friends,
Gold began a nice recovery from yesterday's mild end-of-month/quarter induced weakness with those same funds moving quickly to re-establish longs as the new month commences. Their concerted buying blasted gold through the resistance zone marked on the chart ($935 - $940) where it was being vigorously opposed by the bullion banks.
It was fascinating watching the battle at that level as gold bounced from it repeatedly until the longs were able to recruit additional reinforcements to their cause. The influx of these fresh troops ignominiously dislodged the bullion banks from their self-appointed defensive fortifications shoving them back to a new line near the $950 level.
The impetus for the bull's victory today was the release of the ISM numbers for June. The number unexpectedly rose to 50.2 from 49.6 in May. Initially, equity traders greeted the news by driving up the stock indices while Forex traders sold down the Euro and bid up the Dollar. That enabled the gold cartel to temporarily stuff the rise in gold and hold it below the $940 level. However, as is so often the case, those who foolishly make their trading decisions based on a headline number saddled themselves with an immediate loss because they failed to look deeper into the rest of the data. What they should have paid closer attention to, and what the market did get around to looking at, was the Index of Prices paid number. I had to double check the number to make certain that it was not a typo! It came in at 91.5, jumping from 87.0 in May and to the highest level since 1979! We all remember well what happened to gold in 1979! The dreaded word, “STAGFLATION”, is back in vogue.
That ISM number shoved inflation fears right back onto the front burner. It also did not hurt gold for traders to then be able to look over at the price of crude oil which once again was busy doing what it seems to be doing best of late, namely, defying gravity and moving higher! As the Dollar bulls suddenly became Dollar bears, the Euro began rising. All of this served to put a stiff tailwind behind gold and pushed it to within a couple of dollars shy of $950.
Additionally, soybeans were busy putting in another all time record high reminding traders that food prices are not going to get cheaper anytime soon. The strength in beans helped to pull corn off of its worst levels of the session as well as wheat which moved into the plus column for a while. Corn is watching the weather forecasts which call for a bit of a drier/warmer pattern to emerge over the Western Corn Belt next week. Personally, I think it is too late for the corn crop for this year as the damage has been done. We still have to cope with any potential heat wave that might still emerge during the crucial pollination stage as well as frost fears later this year. Silver hitched a ride on the back of beans and gold while platinum and palladium, along with copper were well bid. In that sort of environment, the bullion banks have as much chance of stopping gold as a snowball in hell.
The mining shares look very good thus far. The XAU is flirting with resistance at the April and May highs near 195 - 197. A close above 200 in the XAU will constitute a technical breakout and set up many of the shares that constitute that index for a test of their highs made back in March of this year. The HUI looks good but needs to clear 460 first and particularly 475 for the issues that comprise that index to test their March highs.
Technically, gold has broken out of its two month range trade and looks to be on the verge of beginning a trending move. Ideally, we need to see the mining shares confirming this move in bullion. Keep a close eye on the XAU in particular. It needs to get over 200.
The $950 level in gold is important resistance since that is all that stands between it and $1000. Expect the enemies of gold to put up a fierce defense of this level. Again, as has been said so often, this is all occurring against a backdrop of what is seasonally, not a particularly strong period for gold prices. That is what makes this move all the more remarkable.
Euro gold is knocking on the door of €600. This is important since it serves to once again remind us that the move higher in gold is not a localized Dollar-based phenomenon but is global as the yellow metal moves higher in all currencies. Inflation fears are not just confined to the US – they are even worse in many portions of the globe. In Vietnam, for example, inflation is so severe that the authorities there are attempting to stop their citizens from buying the yellow metal by restricting gold imports! Bureaucrats and political leaders are the same everywhere are they not? Instead of accepting the blame for a nation’s problems and moving to correct the causes, they shoot the messengers and look for scapegoats to acquit themselves and then institute policies which only make matters worse.
In the adding insult to injury category – those of us who love chocolate are going to have to cough up more money to feed our habit – Cocoa prices hit a 28 year high today!
With Treasuries moving higher in a “flight to safety” mode, yields continue moving lower meaning that REAL YIELDS are becoming increasingly negative. Putting one’s money into bonds to “protect it” in an environment in which inflation is getting out of hand, strikes me a being a fool’s wisdom. At some point, bonds will have to move lower in price to make buying them worthwhile. Who in their right mind would want to lock up the bulk of their wealth in an instrument paying a negative real rate of return and denominated in a currency that is sitting less than a point above its all time low??? As David Hannum once said, “There is a sucker born every minute.” By the way, Hannum was a banker!
Click chart to enlarge today’s 8 hour action in gold in PDF format as of 12:30 pm CDT with commentary from Trader Dan Norcini.
