Stellar Alchemist

Last Saturday, I wrote about "A Brief History of Gold," which starts with the birth of gold in a stellar furnace. Today, I'm going to show you one of the coolest/hottest songs on the Internet. In it, Kim Boekbinder sings about nucleosynthesis.
 
The lyrics include "My heart is an iron fist" and "When I go, you will get gold." In other words, this song is the lyrical form of the long article I published last week. Kim is singing about heavy nuclear fusion. It's pretty much the best example of pop astrophysics you'll ever see and hear.

You also might get a subtext of romance and loss, but that's what the best music does, anyway. Listen, enjoy, and have a great Saturday.

Nobody Expects A Gold Reversal

Boy, the mood in precious metals is like a funeral directors' picnic right now. And the bad mood comes in spite of the fact that gold is making a decent attempt at putting in a bottom.

Gold closed down a bit yesterday. But it's up this morning (though off its highs), and silver is up, too. The fuel for the move may be that China's gold imports in October were HUGE.  According to Reuters...

China's net gold imports from Hong Kong climbed to their second-highest on record in October, as the country bought more than 100 tonnes of gold for a sixth straight month to meet unprecedented demand.

Mineweb adds ...

Chinese gold imports through Hong Kong accelerated in October to 131.2 tonnes ...  the seventh month this year that China has imported over 100 tonnes of gold and the sixth in a row.

The sheer tonnage of China's gold imports are amazing. It was expected to break 1,000 metric tonnes this year. Obviously that estimate was too low ...

China net gold imports from Hong Kong 2013 to date

Month	(tonnes)
January	20
February	61
March	136
April	77
May	106
June	102
July	113
August	110
September	111
October	131
Total year to date	967

But I can't emphasize enough, this is only gold imported through Hong Kong. China also imports gold through other routes, including Shanghai. So, its total import figures now look likely to be nearer 2,000 tonnes. Some analysts put them even higher.

Bottom line: Gold continues to move from West to East, seemingly at an accelerating rate. The West only has so much gold to sell, and the Chinese have seemingly bottomless pockets with which to buy.

So the China imports are one angle.  Now let me give you another one. As I wrote in my Gold & Resource Trader issue yesterday ...

"Funds that are long gold have hit a four-year low, while short positions spiked recently.  In other words, sentiment on gold got too extreme."

As an indicator of that sentiment (but also a fundamental on gold), Exchange-Traded Products (ETPs) that hold physical gold continue to sell. Their bullion holdings fell by 17.1 metric tonnes in the most recent week to 1,852.4 tonnes, according to Bloomberg data. That’s the lowest level since April 2010.

Now, let's look at two charts from Citigroup on gold and silver ...

Source

Citi's FX Technicals group is now bullish on gold, targeting $1,335 for gold in the short term.

Nobody is expecting a gold reversal, even a short-term rally. And that may just be why we get one.

Just something to think about. Have a great Thanksgiving, and let's all count our blessings.

All the best,

Sean

China's Huge Oil Deal ... With Ecuador

Reuters gives us the scoop on Ecuador's oil deal with China ...

Shunned by most lenders since a $3.2 billion debt default in 2008, Ecuador now relies heavily on Chinese funds, which are expected to cover 61 percent of the government's $6.2 billion in financing needs this year. In return, China can claim as much as 90 percent of Ecuador's oil shipments in coming years, a rare feat in today's diversified oil market.

So how much oil is that?  Well, the same story reveals that Chinese-controlled firms are already getting 83% of Ecuador's oil exports, which run around 360,000 barrels per day. That's from total production of 504,000 barrels per day.

And another Reuters story tells us that Ecuador's oil output should rise 9% to 550,000 barrels per day by the end of the year. That's a 9% gain. Maybe Ecuador's own domestic oil use will expand to use that ... or maybe the new production (90% of it anyway) will go straight on the boat to China. 

The US is currently the #1 export market for Ecuador's oil.

Here's the thing: Ecuador has a much bigger oil prize just waiting to be tapped.

That's because Ecuador discovered an estimated 900 million barrels of oil reserves in 2007. It was hidden beneath Yasuni National Park, a world biological preserve home to several indigenous groups.

President Rafael Correa worked with the United Nations to create a trust fund that would pay Ecuador not to drill. In return Ecuador would preserve  a rainforest with more species per hectare than in all of North America. Also, keeping the oil in the ground is a sure-fire way to avoid putting carbon in the air, and the rainforest itself plays an important role in capturing and storing carbon.The UN estimated that the trust fund would stop 400 million tons of carbon from entering the atmosphere by not burning the oil and another 800 million tons by stopping the removal of carbon-consuming plant life.

The cost would be $3.6 billion. Everybody wins, right?

Wrong. Flinty-fisted global donors put up only $13 million in cash (and $167 million in pledges). So, President Correa railed against foreign donors for their apathy, canceled the trust fund project and went ahead with the oil drilling in the rainforest. 

Anticipating the decision, oil companies built roads and drilling infrastructure adjacent to the park. 

Now, all that oil (or 90% of it) is going into China's hands.

Ecuador probably is making the best of its bad choices. Ecuador has $18.19 billion in foreign debt, up 20% in a year, and equal to 20% of Ecuador's $90 billion gross domestic product. It also has $12.52 billion in public debt, up 25% in a year. 

Part of the problem is the awful terms that Ecuador gets on loans after defaulting on its foreign debt in 2008. Correa, a U.S.-trained economist, declared a large chunk of Ecuador's foreign debt "illegitimate" and "odious."

Reuters adds: 

China's cash advances to Ecuador cover only a slice of the near $13 billion a year Ecuador can earn from oil sales. But since 2009 PetroEcuador has agreed to sell Chinese firms several hundred million barrels of oil, valued far higher than the loans themselves, according to a Reuters analysis of seven different contracts. With those supplies locked up, other buyers now get few chances to purchase crude from PetroEcuador in competitive tenders.

Interestingly, China may or may not send the Ecuadoran oil to China.Instead, Chinese oil firms can sell the oil to would-be Ecuadorean trading partners and capture an enormous discount. 

Down the road, who knows what China will do. But this is certainly an interesting twist in the global oil markets.

An Earth-Shattering Ka-Boom in Shale Gas Production

Just look at the surge in dry gas production from the shale gas deposits.

Source

And here's the total US nat-gas production ...

I made the chart using data from here: http://www.eia.gov/dnav/ng/hist/n9050us2M.htm

A Brief History of Gold

The story of gold begins, as does the story of all metals on earth, 4.6 billion years ago. That’s when a giant star — a real colossus — burned through its last joules of fuel and erupted in a burst of raw energy and heavy metals.

The star was composed primarily of hydrogen with a dash of helium. Those are the original building blocks of the universe. And as stars burn through their hydrogen and then their helium, they transform those elements into lithium, boron, beryllium and carbon.

After burning up all that fuel, most stars graciously dim into white and brown dwarf stars. Some, the bigger ones, will burn even their waste elements, creating other elements — nitrogen, oxygen, fluorine, neon, sodium and magnesium. Soon, even these hulking stars dim their lights.

But not our colossus.

It was one of the rare breed of super-giants that burn even these other waste elements, and in the process make sulfur, silicon and a whole host of other elements. And then it made iron.

Ah, iron! Iron is the last-ditch fuel of a stellar leviathan. After burning their other elements, truly massive stars will then transmogrify their cores into iron in the time it takes to put out a daily newspaper.

But that’s when the giants hit a wall.

The Death Scream of
A Stellar Drama Queen

Iron isn’t a good fuel. The star of our story suddenly found itself without the energy to support its massive size. That’s when our giant star collapsed in on itself — shrinking tens of thousands of miles in a matter of seconds. That collapse crunched the atoms in the core, stripping and compacting them into new forms.

But our giant star wasn’t done.

Like any stellar drama queen, it knew how to make an exit. It EXPLODED with the brightness of a billion stars.

The force of that supernova took the swirling soup of protons, neutrons and electrons in the star’s core. And, using all that leftover iron as a building block, it created the higher elements — including cobalt, nickel, zinc, silver … and gold.

These elements were flung outward, riding the wave of the star’s death like the devil’s own surfers.

These newly born elements, including gold, rode the wave out into space, only to find they weren’t the first. At least one and perhaps two stars had previously gone supernova in our neck of the galactic neighborhood, and the detritus of their explosions lay in path of the supernova like flotsam in the path of a tsunami.

So this wall of energy and matter collided with the dust particles from the previous supernovae, and the whole mess swirled into a super-heated cloud. This cloud got its own momentum mojo going, and became our sun.

Clouds of dust circling the sun began to accumulate, and the rocky, inner planets — Mercury, Venus, Earth and Mars — were born. The outer planets — Jupiter, Saturn, etc. — are mostly failed stars, formed when gas ejected from the sun’s birth pangs clotted together, and they don’t fit into our story, the story of gold.

So, Earth formed, and had coalesced into its basic shape 4.5 billion years ago. It was a mess, a soup of disparate elements. But soon, molecules of like-minded elements began clotting together and formed deposits.

And some of those deposits were gold.

The Restless Earth

We’re still not done with the story of gold. Some of those deposits lay deposited in nice piles, either buried nuggets or placer deposits left behind by water action. Such deposits are rare.

More gold is buried deep beneath the surface of the earth … so deep that you’d never find it. That is, you wouldn’t find it if the Earth were quiet.

But the Earth is restless, and if you did time-lapse photography over millions of years (well, you’d need one heck of a lot of patience), you would see the Earth’s surface move and crack and fold on itself.

Through those cracks, the boiling-hot, resource-rich innards of the Earth bubble to the surface, rising over and over again. And each wave of boiling hot goodness leaves minerals behind, trapped in the cracks of the host rock. And sometimes — rarely — the mineral left behind would be gold.

Over time, miners learned how to release gold from its rocky prison. Hard-rock mining produces most of the world’s gold.

Sure, some molecules of whatever gold you’re wearing may have been found in a riverbed, and may have once graced an Egyptian queen.

Gold is salvaged and melted down and reused over and over again. But most of it was freed from the earth by sweat and blood and cunning artifice.

And it was probably mined fairly recently, too. About two-thirds of the world’s existing gold supply has been mined since 1950.

But How Did Gold Become Money?

The stuff found in streambeds was first used for jewelry, then merchants started using it for payments by weight, but pure gold was still very rare.

In the 7th century B.C., people in Lydia, in what is now central Turkey, started turning natural electrum, an alloy of gold and silver, into coins.

Coins made trade so much easier — the fad caught on.

Finally, around 545 B.C., a very smart Lydian king figured out how to separate electrum into gold and silver. He struck the first gold coin — and became very, very rich. You may have heard of him — King Croesus.

With King Croesus’ invention, gold as money was born. The world would never be the same.

Some people get hung up on the evil associated with gold. To be sure, rivers of blood have been shed over the yellow metal. Slavery, genocide and naked greed are all twisted into bands of gold.

But there are also the good things about gold. How many marriages have been sealed with a gold wedding band? Surely they are countless.

Likewise, countless anniversaries, acknowledgment of years of loyalty, and joyful appreciation in lovers’ eyes have all been marked with gold. Heck, they aren’t just good things, they’re great things!

Gold would sit quietly where nature left it if people didn’t pick it up. Gold would be nothing without humanity. The truth is, we bring out both the best and worst in the yellow metal.

And historically speaking, gold is cheap! Even more so when you realize that paper money is being created at a ton per minute, while all the gold that can ever exist has already been created.

3 Things We Learn From Gold

Lesson #1: Gold is an investment for the real long term. Gold has been around for 4.6 billion years. It’s not going anywhere. So, it’s a good anchor for any portfolio.

Lesson #2: Real rarity has real value. People ask me why I like investing in gold. The reason is I like real wealth — hard assets. It’s all too easy for the government to print more money, or for a high-flying company to print more shares. You can’t make more gold.

Lesson #3: Avoid the easy-come-easy-go syndrome. Investment fads come and go, and all too often, those who get rich quickly on those fads get poor again even quicker. Gold, on the other hand, is in a big trend, and I and my subscribers are riding it for all it’s worth.

Take a look at that gold you’re holding or possibly even wearing. That gleam you see is a last spark of ancient starlight. Gold’s rarity is a fact of nature. Gold’s value is something that has existed since the first gold nugget was plucked out of a riverbed thousands of years ago.

That value — though it may go up or down — will exist as long as people walk this Earth.

Have a great weekend,

Sean

P.S. IWNATTOS points out that I left out Goldschmidt's Classification. Basically, gold is classified as one of the high-density "transition" metals that tend to sink into the core because they dissolve readily in iron either as solid solutions or in the molten state. This is why there is relatively little gold in the Earth's crust. It's a good point that was missing from the original story. 

PPS: Here's a nice UPDATE

Bubble or No? Check Out These Charts

I know some very smart guys and gals who are convinced the market is in a bubble and headed for a crash -- soon.  I disagree.

It's true that stocks aren't cheap and this market is long in the tooth. And sure, investors are rushing back into stocks. A correction wouldn't surprise anybody. But we aren't in bubble territory.

My take on this is technical, because many of the arguments the bears are making ("Overbought!") are technical in nature. Here are some charts to support my case ...

John Murphy at Stockcharts dispells the idea of a tech bubble ...

He agrees that the Nasdsq Composite Index (which is driven mainly by technology stocks) has risen to the highest level in 13 years and its 14-month RSI (red line) has reached the most overbought territory since 2000.

(Updated chart)

However, he says that the rise of the Nasdaq relative to the S&P 500 is not in bubble territory.

Murphy says: "From the start of 1999 to the spring of 2000, the technology-denominated Nasdaq outperformed the rest of the market by 700%. That's what a bubble looks like. Compare that to the more modest rise in the blue line since 2009. The blue line shows the Nasdaq/SPX ratio at a new 13-year high, but nowhere near the bubble-like condition that existed at the start of 2000."

You can read the rest of Murphy's excellent analysis here: http://stockcharts.com/members/analysis/20131121-1.html

And Barry Rithholtz calls on Robert Schiller's cyclically adjusted P/E ratio to show that the S&P 500 is not valued at the levels associated with market tops ... yet.

Meanwhile, Merrill Lynch is projecting that the S&P 500 will go to 2,300 now that it has clearly broken out.

Source. And Barry Ritholtz has more analysis of this chart HERE.

Finally, Miller Tabak chief economist Andrew Wilkinson compares the rally in the S&P 500 to the one seen right before the crash of 1929 ...

Source

Wilkinson says:

"By normalizing the move to the respective start dates we can create a rather different and more favorable picture for the current run. The stock market ran up 80% prior to the crash of 1929 before eroding two years’ worth of gains.
"Looking at the relative position for today’s rally leaves the S&P 500 index higher by only 27% after a comparable period of its recent rally. The comparison to the late ‘20’s experience suddenly loses its magic in this light and helps roll back accusations that the market is running on vapors instilled by the Fed and that valuations are frothy."

Josh Brown seems to have the best take on this ...

Have a good weekend.

Bottom For Key Base Metals Approaching: Scotiabank’s Mohr

“I think we’re approaching the bottom in this cycle…I’m hoping that we’ll see the bottom for some of the key base metals in early 2014,” Scotiabank’s commodity market specialist Patricia Mkohr told delegates at the recent Mine Latin America conference…she’s particularly bullish regarding Zinc…“I think Zinc will be the next big base metal play because of mid-decade mine depletion around the world and because of probable smelter bottlenecks developing in China,” she stated…“It’s something the juniors should look at and get involved in”…Mohr is also generally bullish on the prospects for China…an important factor that will have an indelible effect on commodities through the balance of the decade is the on-coming surge in China’s vehicle ownership, Mohr stated, which stood at just 81 vehicles for every 1,000 people in 2012…this compares with the U.S. figure of 794 cars for every 1,000 people…“I guarantee that everyone in China wants to own their own motor vehicle…they are tripling the number highways to allow greater vehicle ownership…this is going to be a great growth sector…it’s very metal intensive and very gasoline intensive”…

SOURCE

Is the Next Wave of Mergers in Mining on the Way?

Barron's had a story on Friday that I wanted to pass along. Cowen & Co. think that gold miners have a merger wave in the future.

From Cowen:

Major producers with high profile difficulties (e.g. Barrick) and newly promoted CEOs may hesitate to make acquisitions, especially of larger pre-production assets or operating assets. However, those like Goldcorp, Agnico, and Yamana, whose issues have been less severe, will have more leeway with shareholders. The largest North American producers need to continuously develop projects to offset the natural depletion inherent in the mining business. If management teams do not act to purchase advanced assets, many will likely find themselves without replacement production post 2017

Barron's says: "the combo of production needs, the low valuation of speculative project developers, and the widening valuation gap between the small and the large would be three of the factors pushing toward yes."

Watch My Money Show Presentation on Your Best Bet in Energy

Did you miss my eMoneyShow presentation on energy?  You can watch it now, by CLICKING HERE.

On the Radio Talking About Resources With Marc Lichtenfeld

This weekend, Marc Lichtenfeld, Chief Income Strategist of the Oxford Club, had me on his radio show to talk about natural resources. We spent two segments talking about gold, oil, copper and more.

Click here to listen in.

the topic is "The Natural Resources to Own Now."

You'll Laugh at These Dogs Fighting to Get Their Beds Back from Cats

Great video. It will make you laugh.

Cats Stealing Dog Beds

Have a great Tuesday.

Talking Gold With Steve McDonald

I talked to Steve McDonald about the opportunities in gold and other resources.  You can watch that video here: http://oxfordclub.com/media/Video/20131117videolanding.php

The Cariboo Gold Rush: Grub High, Whiskey Bad, Money Plenty!

Gold rushes in Canada have all the exciting elements of one of the old pulp action-adventure novel.  Greed, bloodlust, native Americans, Chinese prospectors! For example, let's look at the Cariboo Gold Rush.

Panning for Cariboo Gold

When I say "Cariboo Gold Rush," you may say "What?"  Most people have forgotten what was the most exciting event of its day. The Cariboo was sandwiched between the California Gold Rush of 49 and the Klondike Gold Rush of 89.

The Native Americans knew about the gold long before the White Man, of course. Heck, it was scattered around for the taking, and when it was buried, they could dig it out with iron spoons. But then some white men found gold on a sandbank in the Fraser River in the 1850s, and the race for gold in British Columbia began in earnest.

The Hudson Bay company first found the gold and succeeded at keeping it quiet for a while. Then Hudson Bay sent 800 ounces to San Francisco to be assayed. Whoops! San Francisco, in that day, along with being a den of villainy, drunkenness and riff-raff, was filled with idle miners who had either blown their fortunes from the 49 gold rush or never found one. At news of the yellow metal, 25,000 men set out from San Francisco for the wilds of British Columbia.

Even before they got there, trouble broke out. The story goes that Indians came into a gold camp under a flag of truce and then slaughtered the unsuspecting miners while their backs were turned. Modern-day historians doubt it was that cut-and-dried. But true or not, one thing the story provided was an excuse to kill the Native Americans who lived on ground the miners wanted to mine. Greed, blood and gold have intertwined throughout history; British Columbia would prove to be no different.

Big Winners and Bigger Losers

On the miners came. More gold was found at a place called Cariboo — even richer than the first strike at Fraser. 

The gold rush started paying off big-time in the summer of 1861.One company estimated that they had made a profit of $80,000 by early August -- this was when gold fetched $18.93 per ounce. A day's worth of work was not measured in ounces of gold -- it was measured in POUNDS of gold.

Some prospecting teams produced up to 30 pounds of gold a day. By the end of the 1861 mining season, $2,600,000 worth of gold had been produced, most of it from the Cariboo region. The output for the next year, 1862, was slightly more.

Thousands of men lined the rivers, panning for gold, and digging up every hopeful inch with wild abandon.

Miners sent letters home to friends, like this one: 

"Dear Joe,
I am well, and so are the rest of the boys. I avail myself of the present opportunity to write you a half dozen lines to let you know I am well, and doing well - making from two to three thousand dollars a day! Times good - grub high - whiskey bad - money plenty.
Yours truly,
Wm. Cunningham"

Such letters spread the word about the gold diggings and the money to be made.

And sure, fortunes were made ... and usually lost. Sometimes they were lost with real style. Big winners who became losers include Billy Barker, Michael Costin Brown and John “Cariboo” Cameron.

"Cariboo" Cameron

 Barker pulled $1,000 worth of gold out of one small crevice he found 80 feet down in a hole that other miners ridiculed. That shut up the doubters right quick.

 Cariboo Cameron gets my vote for the most amazing mix of good and bad luck. He had already made a good strike in the California gold rush with his two brothers. They then heard about the strike on the Fraser River, went north and hit it big again, returning with $20,000 between them, a sizeable sum.

John Cameron then married a beautiful woman, Margaret Sophia Groves, and she had a baby daughter just in time to take her to Cariboo, where Cameron wanted to try his luck.

The baby died on the trip.

Sophia Cameron

Pickled in a Tin Coffin

Meanwhile, Cameron bought $2,000 worth of candles and sold them for $10,000 in the mine fields. That was a surer profit than he could have probably made with gold itself, and a reminder that you can do just as well in pick-and-shovel makers than gold miners, (something Ill be sure to include in my Gold & Resource Trader).

A bitterly cold winter set in. Sophia had another baby, who arrived in the world stillborn. Then Sophia died as well. Cameron became obsessed with the mine, working at it night and day. And sure enough, he struck paydirt.

Cameron was rich, but he was also heartbroken. He wanted to take his wife home for burial, so he hired miners to work three shifts, 24/7 to get the gold out soon as possible. Then he took Sophia home, pickled, in a tin coffin.

The story doesn't end there. Cameron invested his money in everything from steamships to timber, and lost it all. He married a new wife, came back to the gold fields, and met with no success at all. He died flat-broke.

Enter China

Other people were having luck in the gold fields, including the Chinese prospectors.

Yes, even back in the 1850s, the Chinese were hot on the trail of Canadian resources. By 1863, there were some 4,000 in the Cariboo region. They were only allowed to work areas abandoned by the white miners.

But surprising their detractors, Chinese miners were both more disciplined and persistent. They invented the panning machines used to separate gold from mud. And they had some big strikes, even in the abandoned mines. It turns out that the good ol boys just werent looking hard enough.

Chinatown in Barkerville was a huddle of small shacks warmed by wood stoves. There was also a laundry and at least one gambling den. The Chinese men -- and a few women and children -- were used to farming, so they raised pigs and chickens and grew vegetables in their backyards. Along with mining, the Chinese also worked as doctors, herbalists, storekeepers, innkeepers, cooks and restaurant owners.

Welcome to the Boom Town

By the end of 1863, more than 100 companies had staked a total of 3,000 claims, and the value of the gold removed that year was just under $4,000,000.

The years 1864 and 1865 saw similar gold production levels. Most of the gold was found during the first five years of the Cariboo gold rush. Still, many claims were worked until 1900. It is estimated that William's Creek and two of its tributaries, Conklin and Stout's Gulch, produced $30,000,000 worth of gold between 1861 and 1898. 

All Good Things Must End

Gold Rushes always end in a bust. In 1868, the town of Barkerville burned to the ground in what became known as the Barkerville fire. Though reconstruction began the next day, the Gold Rush was already dwindling.

The Cariboo petered out, but the death knell came in an act that had its seeds in 1867; when Russia sold Alaska to the U.S. In 1896, settlers in Alaska found that you could dig up amazing quantities of gold right on the beach.  Those miners that were left in the Cariboo picked up stakes and headed for Alaska. 

Canada hosted other gold rushes -- and an amazing silver rush that I'll have to tell you about as well. But that story, as well as the story of the Klondike Gold Rush, will wait for another time.

4 Lessons from the Cariboo Gold Rush

There are several key lessons to learn from the past:

Lesson #1. Greed may lead you to riches. But keeping them is another matter entirely. For that you need prudent management and financial planning.

Lesson #2. Discipline often separates winners from losers. A disciplined, scientific approach to investing, carefully removing the wheat from the chaff, is equally important.

Lesson #3. There's plenty of ways to make money in a resource boom. You don’t always have to invest in the companies that extract the gold, the oil or other natural resources from the ground. You can do equally well with those that service the industry.

Lesson #4. Booms are often followed by busts. British Columbia sank into an economic depression once the gold ran out.

I think there is plenty of money to be made in gold and other metals right now.  In fact, I'll have new picks for my Gold & Resource Trader subscribers very soon. Good luck and good trades this next week,

Sean

I'm Taking Part in the November eMoney Show

I'm participating in the Money Show's November online event next week. An "e-money show" is a new thing for me, and I always like to try new things.

The Money Show asked me to speak about energy. I'm happy to oblige.

If you want to get the latest insight from me and other analysts, CLICK HERE.

Yellen About the Yellow Metal

Gold is down a bit this morning. I have a new issue of Gold & Resource Trader going out to subscribers TODAY.

News links of interest...

In remarks released on Wednesday afternoon, Federal Reserve Chair nominee Janet Yellen made four critical points …

•  She believes the benefits of the QE program still outweigh the cost.

• She sees “meaningful progress” in the labor market but wants to see signs that the economy is growing fast enough to sustain them.

• There is no set time for removing the QE program. The Fed is assessing its progress at every meeting.

• The program can’t go on forever.

This was pretty “dovish,” meaning that those hoping for an early end to the QE program were disappointed. And that sent the US dollar lower and gold higher on Thursday.

Yellen's take on gold led to this notable Tweet from Merk Investments head Axel Merk: "Yellen may not understand gold, but gold understands Yellen. Gold up today."

Here is Barron's take on Gold and Yellen

WGC: China Already Tops Record For Full-Year Gold Demand
For the year through September, mainland Chinese gold demand was 797.8 metric tons, reported Marcus Grubb, managing director of investment for the World Gold Council. Demand for full-year 2012 was around 776 tons. India’s official demand was listed at 715.7 tons through September, compared to around 602 for the first nine months of 2012, Grubb said.

In fact, China has become the world's top gold buyer.

Central banks continue to be strong buyers of gold, albeit at a slower rate. Q3 2013 was the 11th consecutive quarter of net purchases of gold. And here is a chart of Russia's gold reserves ...

Source

Gold Seen Flowing East as Refiners Recasting Bars for Asia
Asian bullion demand will keep expanding as elevated inflation spurs purchases, HSBC Holdings Plc economists including Frederic Neumann wrote last month in a report that said the region is “going for gold.” A vault that can hold 2,000 tons was opened in Shanghai by Malca-Amit Global Ltd. this month to target increased demand for storage space.

India Paying an Equivalent $1,565 Per Ounce For Physical Gold Bullion

Gold Is Up and the Dollar Is Down -- Chart

I thought we'd revisit a chart I keep posting of the relationship of between the US dollar and gold -- the "seesaw of pain" as I call it. 

(updated chart)

You can see that this morning, gold gapped higher while the US dollar continues to bleed lower. The day's not over yet -- anything can happen -- but this is a potential set-up for a rally in gold and a pullback in the US dollar. Since the US dollar's larger trend is down, maybe we'll see a resumption of that trend. But be sure to wait and see how the day ends.

Naturally, seeing how the dollar ends the week would be even better.

What seemed to spark this was the prepared testimony of Federal Reserve Chair nominee Janet Yellen, which was released late Wednesday afternoon. Yellen said she would continue current Fed Chairman Ben Bernanke’s monetary policies and said the U.S. economy still needs monetary stimulus because it is performing below its potential. The market place read Yellen’s remarks as dovish monetary policy.

This gave gold a lift yesterday afternoon, but REALLY put a fire under the broad stock market. The action in gold is more short-covering. We need to see follow-through. Gold and silver remain totally at the mercy of tapering expectations.

What could help the dollar (and hurt gold) is if the European Central Bank cranks up its easy money policies. That would probably push the euro lower and boost the dollar. 

However, for now, I'll take the good news where I can find it. This is helpful for the three gold mining positions we entered in Gold & Resource Trader this week.

More Gold News

In other gold news, Bloomberg reports -- quoting The World Gold Council -- that in the third quarter, global gold demand slipped to 868.5 metric tonnes, from 1,101.4 tonnes a year earlier. Investors pulled 118.7 tons out of ETFs and similar products, while buying from central banks was 17% lower than a year ago. So, central banks are still buying, but at a lower rate. 

Also, China’s demand for jewelry, bars and coins rose 30% to 996.3 metric tonnes, while usage in India gained 24% to 977.6 tonnes. So it's a continuation of the big shift from West to East.

Finally, as of November 13, holdings in gold-bullion-backed exchange-traded products stood at 1,873.3 tonnes. That is down 29% from the beginning of the year, but selling seems to have subsided, and holdings in the gold ETPs seems to be hammering out a bottom. We'll see.

Charts of Gold, Dollar, Natural Gas and More

Here's an interesting factoid from Bloomberg: 

Holdings in gold-backed exchange-traded products increased for a fourth day yesterday, rising 0.1 metric ton to 1,876.7 tons, data compiled by Bloomberg show. Assets reached 1,874.9 tons on Nov. 5, the lowest since April 2010.

So even though gold prices are trending lower, we seem to have hit a bottom in holdings in the GLD and other ETPs. I think that's REALLY interesting.

(Updated chart)

Yesterday, gold cracked support at $1,268 -- October's closing low. It is bouncing this morning, but not much (so far). If gold breaks support level 1, it should test its last real support at the Oct. 15 intraday low of $1,251. Beyond that it looks like a pretty straight shot down to the $1,200 level. 

I would expect $1,200 to hold on a closing basis.  But that test could be scary. It could also be one hell of a buying opportunity.

And this is happening against a backdrop of what appears to be a bottom in physical holdings in the GLD and other ETPs.

One more puzzling thing:  Last week, I got strong buy signals on select gold miners. Sure, those signals could be wrong. But I'm more inclined to think those signals are just early. In that case, I would add to those positions at lower prices.

But where will those lower prices be? As the saying goes, the best place to pick tops and bottoms is on Miami's South Beach.

China Slowdown?

One of the things driving gold is fear of a slowdown in the China economy (because China is such a huge buyer of gold). There is some fear that Chinese authorities may cut their GDP growth target to 7% from 7.5% this year. So that's a bearish force on gold, in my opinion.

But judging from recent reports of purchases of iron ore, copper, grains and more in China, it's NOT slowing down. Those fears may be misplaced.

We can talk buying by the exchange-traded funds and China all day, but what really seems to be pushing gold lower is strength in the US dollar. The dollar rose against all major currencies yesterday, though the US dollar Index settled the day nearly unchanged. It's testing overhead resistance. What happens next?

(Updated chart)

The US dollar is looking strong. That's partly due to an improving US economy. However, I also think the broad US stock indices hit a short-term overbought condition, and now traders are grabbing gains, and in effect, using stocks to buy US dollars.

So that's hard to read in the short term

A strong US dollar generally weighs on commodities.  One commodity is going against the trend, however ...

(Updated chart)

What causes this? In a word, "snow." It has become a trend recently for natgas to make a weather-driven rally but then fail to hold onto gains. So, as weather warms back up later this week, look for prices to come back in.

If prices DON'T pull back when the sun comes out, we may be looking at a potential breakout in natural gas.  This breakout could come from an inverse head-and-shoulders pattern, but it's too soon to tell. If it does happen, it would give us a target of $4.80 or so on natural gas. That would be quite a move, so stay tuned.

All this said, my best idea in natural resources is something else. I'm saving that for my Gold & Resource Trader subscribers in an update later this week.

Other interesting reads:

• The S&P 500 has spent a year above its 200-day moving average.
• 10 Requirements for a stock market bubble.
• Swimming in crude oil: Over the next three years, the Gulf of Mexico is poised to deliver a slug of more than 700,000 barrels per day of new crude.
• Sales of American Eagle silver coins by the U.S. Mint since the start of the year surpassed the annual record as the futures market rallied from the lowest in 34 months.

Good luck and good trades today.