Gold and Dollar Market Summary
Dan NorciniComex gold for June delivery closed down $9.30 today at $653.30 .
The London PM fix for euro gold came in at €490.839.
The US Commerce Department released the Durable Goods numbers for the month of April this morning. The data showed a 0.6% increase compared to March. Excluding transportation it was up 1.5%. Excluding Defense it was a 0.6% increase. The “Defense Aircraft/parts” category showed a big jump of 19.5% over March which had experienced a huge decline last month dropping -31.6%.
The big number that had everyone back-slapping and handing out “high 5’s” this morning was the housing sales data. US new home sales supposedly increased more than expected and at their fastest pace in 14 years. I personally greet such data with a huge amount of skepticism but it was enough to get dollar bulls all excited and that allowed gold shorts to press gold through the bottom of its two day range near 658. That set off a huge cascade of stops which ran it down to the swing index low near 654 and maintained sufficient selling momentum to set off those stops below that as well. It was a very happy day for pit locals who made fortunes today and will celebrating this Memorial Day weekend over lots of barbeque and cold beer.
As a point of reference, the gold market is keying far more on the euro than it is directly on the dollar index itself. Any weakness in the euro is being magnified as selling pressure in gold since the dollar index did not have that much strength today all things considered. I wrote yesterday that I felt it would take the US dollar index at 83.25 or better to allow gold to break through support in the mid 650’s. That was obviously not the case as a mere 23 tick move up in the dollar was good for a $10 + spanking of gold. Part of the explanation for this glaring overreaction in gold to a piddly blip in the dollar was that today is June option expiration in the Comex gold pit. It is very obvious to me that someone got hurt quite badly in there today and that the selling pressure became magnified as a result. These kind of machinations related to option expiration can cause very wild gyrations in price. Throw in the fact that we are still in the middle of rollover activity and gold bears are having a veritable field day! You guys that trade out there should file this sort of info in your mind somewhere and utilize it when the next rollover period from August to December gold takes place and option expiration nears. It happens almost like clockwork as the always parasitical pit locals make their yearly incomes during these periods.
Just a short note in hindsight as it occurred to me that some might not understand this thing about option expiration. Anyone who sold or wrote a call option for June gold that had a strike price of $660 for example does not want to see those options expire with June gold above that price. They want June below that price on option expiration day since that means the option expires worthless and they get to keep all that premium money. Those guys will oftentimes gang up on the market on option expiration day and sell the heck out of it to drive price down below the strike price. If they can do this without too much buying opposition, they become quite happy. The same goes for those who sold puts that were out of the money, say at the $650 level. They do not want to see gold trade down below $650 since that means those options can be exercised with the possibility of sticking them with a losing long position. Seeing their option strike price being threatened, they will then buy big time as price drops near that level to prop up the market. The result can be those wild gyrations back and forth as both sides defend their positions.
There were some pretty sizeable buy orders coming into the gold market however down below the 654 level so it still has a chance to make a stand here above psychologically significant 650 which also happens to coincide with the 200 day moving average. Should that fail, we are headed down to test major double bottom support near 640. If the euro cannot stay above the 1.33 level, that level might give way in gold which would open the door to perhaps another $20-$30 drop down near the former important $612 level. But as of now, buying support is coming in above the 200 day moving average near $650. Let’s see if that can hold us.
I think it is worth mentioning again that I feel we are going to be quite surprised by tomorrow’s COT report. There really does seem to me to be very sizeable fresh short positions coming into this market on the fund side as that category abandons the long side in droves. Today’s numbers will not show up on tomorrow’s report but it is more of the same pattern we have been seeing for the last couple of weeks. Many hedge funds are coughing up their longs and moving to the short side while the big index funds are moving in and allocating fresh monies to the long side. Bullion banks are covering lots of shorts making lots of money on the leg down. Eventually the same whacked out hedgies will come back into the gold market with the same reckless abandon that they are now exhibiting as they leap overboard but that will not occur until the technical resistance levels are taken out to the upside. The hedgies do not buy weakness – they chase it just like they chase strength.
By the way, to provide a bit of perspective to the punch-drunk dollar bulls who are hanging their nebulous hopes on a housing market recovery and touting today’s huge increase in new home sales as evidence, please see this article which should be a dose of reality. The longer I am in this business the more I become convinced that we are raising a generation of investors who are sound byte lemmings who either lack the mental energy to examine data beyond the headline or what is worse, are too lazy to care. Note well the first and third paragraphs which qualify as a sobriety check. You can sell lots of anything quite easily if you are willing to give it away!