Gold Must Battle Through Resistance to Push Higher

Here's a chart that shows the recent action in gold, and why the yellow metal is running into overhead resistance.

(Permanlink)

You can see that a downtrend in gold that has been in place since July is overhead resistance now. This lines up with the 200-day moving average. Technically speaking that's tough sledding, and a formidable obstacle for gold to push through.

I believe gold WILL push higher, for a bunch of fundamental reasons. But it could take some time. The recent action in gold miners is telling us that. Gold miners sold off last week even as gold went higher. This shows that traders were ready to take profits.

With the trend indicators, solidly bullish, here's what I would do. Wait and see if gold can pull back to the mid-point of its Bollinger Band (that blue dotted line that the price action touches every now and then). That might be a good time to buy.

If you like the gold equities, remember: They've been turning higher AHEAD of gold itself. Just as miners lead on the way down, they lead on the way up.

Good luck and good trades.

Real Negative Interest Rates Drive Gold Higher

The Bureau of Labor Statistics delivered the January inflation stats like a bombshell. The U.S. consumer-price index (CPI) hit 0.6% in January.

Source: BLS

That's the fastest pace in four years ... and year-on-year inflation hit 2.5%. That's the biggest gain in five years since March 2012. Frank Holmes had a nice chart on that in Forbes.

Inflation is at 2.5% ... and the 10-year Treasury yield is at 2.4%. That's a negative rate. Meanwhile, the effective Fed Funds rate is much lower, at 0.65%. No matter how you slice it, we are at negative real rates.

And Frank says that negative real rates are a force driving gold higher.

He has a point. So we should ask the question: What is driving inflation? Will those forces continue, and thereby push gold even higher?

One inflation driver is food. The food index rose 0.1% in January, its first increase since April 2016. Housing is playing its part as well. Rent rose 0.3%, and the cost of owning a home rose 0.2%. You'll also see small climbs in clothing and cars.  

But the biggest driver is energy. According to the BLS, the energy index rose 4% in January. That's the fifth increase in a row. And the gasoline index jumped a whopping 7.8%.

So if we can figure out what's happening with energy prices, we should have a clue to what will happen with gold. Here's a chart of West Texas Intermediate, the U.S. oil benchmark.

Chart link

You can see that oil prices have channeled sideways since Mid-December. So, momentum indicators will be useless. However, we can also see prices are tightening up. It's an ascending triangle. A breakout to the upside is likely.

If oil breaks out, inflation should heat up. Real yields will fall even more, even if the Fed raises at a "slow and measured" pace. That should lift gold.

Fundamentally ....

• Global petroleum inventories are falling but still high. At the end of December, inventories fell to below 3 billion barrels, but were 286 million barrels above the five-year average. That's according to the International Energy Agency..
• We know that OPEC is mulling extending its production cuts. Those production cuts (approximately 1.8 million barrels per day between OPEC and its allies) are the main force in oil's recent rise. 
• We know there is a glut of gasoline. That should weigh on prices in the very short term. The gasoline glut is due to weather-related traffic slowdowns. Longer term, Americans are buying more cars, and more gas-guzzling luxury cars.

This all adds up to a potential short-term pullback in energy prices. But the longer term is quite bullish, especially if OPEC extends its production cuts. That's because global demand continues to rise as the global middle class expands and buys more cars. 

So, this started out as a story about interest rates and gold. Now we've gone on to energy. It's all interconnected, as you can see. And this leads us to a big picture that is quite bullish for gold.

Speaking of interconnected, Eurozone inflation also hit a 4-year high in January. That's a part of the world which was in DEFLATION not too long ago. Again, energy prices are the biggest driver.

The point is, gold could see buying pressure on both sides of the Atlantic. And energy prices will be key. 

I'll write about ways to play this trend another time. 

ETF Gold Buying Surges -- Chart!

Check out this chart from Bloomberg. ETF holdings of gold are surging. As Luzi-Ann Javier at Bloomberg explains:

"The hunger for bullion is so strong that purchases of exchange-traded funds backed by gold last year eclipsed buying by the world’s central banks, the biggest holders of the metal, for the first time since at least 2010. So far in 2017, investors poured $3.1 billion into the ETFs backed by precious metals, after a record inflow of $23 billion last year."

Indeed, Commzerbank reports that gold ETF holdings rose by 58.6 metric tons in just the last 13 days.

Let me make a point I've hammered home before: ETF buying is the supercharger of the gold market. It makes rallies soar, and makes corrections swoon lower. Now, it looks like the Bulls are lining up to buy gold in ETFs.

There are two good reasons for it.

The first  is Trump. The President is a wild card for world markets. He is making investors nervous with his tax of border taxes and currency wars.

The other one is that foreign currencies -- the euro, the yen and the pound -- have declined against the U.S. dollar in recent months. So, investors overseas are trying to protect their wealth. One of the best ways to do that, at least in this environment, is to own gold.

Mind the Gap in Gold!

With gold testing $1,240 today, I thought I should update a gold chart I had in Energy and Resources Digest on February 6. These volume gaps could trigger explosive moves higher.

(Updated chart)

You can see gold's price action through Wednesday. It recently pushed above overhead resistance.

The horizontal bars are “volume by price.” In other words, this shows the amount of volume at each $20 increment during this six-month period. The blue side of the bar is bullish volume; the yellow side of the bar is bearish volume.

You can see two huge gaps in the volume-price action. The first one leads up to $1,250. The other one peaks around $1,310.

These are areas where price moved so quickly that there was little to no volume. These form what you might call “air pockets” in price action.

You see, price has what traders call “memory” because of trades done at different prices. If there isn’t any volume at a particular price, there isn’t anyone who got stuck holding shares there. So when a stock gets back to that price again, there’s nothing to stop it in either direction.


On the way down, these air pockets can lead to big drops. On the way up, the air pockets can lead to explosive rallies.

Note: I am no longer affiliated with Oxford Club, and my views are my own.

Chart of the Day -- The Surge in Crude Oil Exports

US oil exports surged over 1 million barrels per day.

That's more than what is pumped by OPEC members Gabon, Ecuador, Libya and Qatar.

Even so, crude stockpiles rose 9.5 million barrels to total 518.1 million barrels for the week ended Feb. 10, the EIA said.

The previous record was at roughly 512.1 million barrels for the week ended April 29, 2016. 

And in the first 41 days of this year, U.S. commercial crude oil stocks are up 38.5 million barrels. That compares to a 10-year average rise of just 14.3 million barrels.

And as John Kemp points out, U.S. crude oil imports averaged around 8.5 million b/d over last 4 weeks compared with 7.7 million b/d at same point last year.

So we're exporting more, but importing more.

Meanwhile, refinery run-rates are down. Even so, gasoline stocks just hit a record. And distillate stocks are much higher than normal.

Bottom line: We are swimming in crude and product. We should see lower prices ahead.

Howe Street Interview: Gold, Inflation and the Wall of Worry

Here's my latest interview with HoweStreet.com.  Jim Goddard and I talked about how the Fed is ratcheting up expectations of a rate hike. We talked about inflation. We talked about what the heck is going on in China. We talked about Trump. And we talked about go-o-o-o-o-o-oold! Gold! Gold!

http://www.howestreet.com/2017/02/14/possible-rate-hikes-have-us-business-nervous/

All that and more.

Chart of the Day -- Inflation Expectations

Fed Chair Janet Yellen gave a nod to further tightening ahead and the risks of waiting too long in her prepared remarks to the Senate today.

However, she also said the pace of rate hikes should remain gradual. This is confusing a market that was writing off the odds of a rate hike on March 15. And that's why gold tanked after rising earlier in the morning.

There are other issues as well. Inflation expectations are rising. In February, they stand at 2.18%, up from 1.42% in June. 

Also, Peter Bookvar, Chief Market Analyst with The Lindsey Group, gives analysis that shows inflation and earnings are heating up, while unemployment is down.

Bottom line: I still expect the Fed to wait until at least July. I only expect two hikes this year, unless inflation really does start to ramp up. And so far, it is just beating lowered expectations. But this rising fear needs to be priced in to the market.

We'll see. In other gold-related news, global gold ETF inflows surged over 40 metric tons so far in February after a plateau in January. There were large daily builds of around 10.5 metric tons on Feb. 1 and 7

Yellen analysis at Marketwatch.

Yellen analysis at Kitco