lunes, 6 de julio de 2015

lunes, julio 06, 2015
Gold Bulls Are On Borrowed Time

by: Ben Lockhart

Jun. 21, 2015 1:36 AM ET           


 
 
Summary
  • Greece is once again in the news, and may act as a catalyst for market volatility in the short term.
  • Any negative news is likely to be dollar bullish and may send gold lower, with a positive outcome resulting in the reverse.
  • Either way, I expect gold will make a very tradable top in the near term, and decline to new bear market lows thereafter.
The range-bound action we have seen in the last couple of months has continued in the gold (NYSEARCA:GLD) market, and it has made clear directional calls difficult. Each time we have looked to break out (or break down) a reversal has followed and frustrated bulls and bears alike. Of course it can't continue like that forever and I believe we are close to resolution, so we should all be on the lookout for a big move on the horizon.

Whenever we have price moving in a tight range it is generally indicative of a lack of conviction on the part of market participants. At such times we are looking for a catalyst to swing sentiment in one direction or the other, and luckily for us there appears to be one looming with the potential to result in massive market volatility.

Despite the rally we have seen this week on the back of a dovish Federal Reserve announcement, we have still not taken out the upper resistance levels which would help to clarify direction in the near term, and my own belief is that we are on the verge of a substantial drop. If you are positioned in a bullish manner I would caution you to at least be aware of your pattern invalidation levels just in case - It never hurts to know when you are wrong.

Greece Once Again Dominates The Headlines

It seems we can't get through any two week period without seeing speculation of an impending Greek default splashed on the front pages. Each time Greece has had a meeting with its creditors in the last six months, the result has tended to be last minute resolution in which a compromise is found that allows them to make repayments for a little while longer, and borrow just enough to allow the government to continue functioning.

Of course the situation is effectively untenable, and if we are all honest about it the band-aid should be ripped off quickly rather than peeled away inch by inch as the 'patient' is suffering.

The longer this continues the more resentment will build, and if we look at the maturity profile of Greek debt we can see clearly that we are coming to the point where the pain will be the greatest. It is little wonder the relationship between Greece and its creditors has become strained and the rhetoric increasingly caustic.

(click to enlarge)

Greece needs to make a €1.6Billion payment to the IMF by June 30th or it will be in default of its debt obligations. They do not have the funds to make this payment, and have already raised taxes, cut public sector jobs and reduced benefit and pension entitlements in order to make previous payments.

This is just the tip of the iceberg however, as Greece will need to repay a further €7Billion to the ECB in July and August, a fact that makes the current discussions laughable really.

The cupboards are bare and the Greek government is becoming increasingly reticent to make further budgetary cuts that are no doubt harming their economy. They want to stay within the Eurozone, but they recognize that they cannot make repayments and thrive under the current structure. In the words of the Greek Finance Minister Yanis Varoufakis:
"We are dangerously close to a state of mind that accepts an accident.. there is no doubt the Greek government is utterly committed to adjusting further; we desperately need these reforms.. but I urge my colleagues in the Eurogroup to take seriously under consideration the great difference between on the one hand reforms that attack parasitic rent-seeking behavior and inefficiencies, and on the other hand parametric changes that simply jack up already high tax rates and reduce benefits to the weakest.. this government, this nation, this state can make ends meet, and if only we had an agreement along the lines of the proposals I have presented tonight, our economy would simply fly and this crisis would be over.."
This issue of further austerity measures (the parametric changes Mr Varoufakis talks about) has been the major stumbling block during increasingly frenetic talks in Luxembourg this week. The talks themselves were foreshadowed by comments two days earlier, in which the Greek Prime Minister Alexis Tsipras stated that the IMF had "criminal responsibility" for the damage caused by Greece's austerity programs. At the meeting itself the IMF walked out within 45 minutes of arrival, with Christine Lagarde stating that there "was an urgent need for dialogue.. with adults in the room". Ouch.

Sooner or later something has to give and in all likelihood Greece will (and probably should) default. The Greek people appreciate the danger - they withdrew over €1Billion in cash from Greek banks on Thursday alone - but there seems to be a prevailing attitude elsewhere that the Eurogroup won't allow it to happen. Those people thinking 'this time it's different' should consider the illustration below:


Admittedly this is the first time in modern history where European countries have had a single currency and a centralized economic and political administration, which of course they will now fight tooth and nail to keep in place. However, the only real solution to the Greek saga is either debt restructuring (forgiveness) or default - austerity in return for further lending has just not worked for Greece. Neither outcome sets a positive example for the rest of the Eurozone countries suffering under the burden of their own debt repayments.

We are approaching crunch-time and you should not automatically believe the crisis will be resolved without default, for it is certain that the Troika will not entertain any kind of debt reduction. As the European Council President Donald Tusk stated:
"..we are close to the point where the Greek government will have to choose between accepting what I believe is a good offer of continued support, or to head towards default. At the end of the day this can only be a Greek decision.. there is still time, but only a few days. Let us use them wisely."
Should the current round of talks be resolved for now as all expect, we should see a pop in the Euro and a corresponding drop in the Dollar. In that case gold may benefit a little in the face of dollar weakness. However, if these talks cannot be settled by the June 30th deadline and Greece does default on its obligations, I believe we can expect to see the Euro in freefall and gold along with it.

Either way, with the Greek creditor repayment schedule ramping up in July and August, I don't think it will be long before we see a low in the dollar and a top in gold. Markets are about to be rocked.

Data Points

US Dollar

The dollar (NYSEARCA:UUP) looked to be moving higher quite nicely, but was firmly rejected at overhead resistance and has since struggled to maintain bullish conviction. There is nothing in the pattern that says we cannot rally higher directly from here given that we have already tested major support and bounced, but if we do decline on the back of Greek resolution we have major support in the 91.60-92.13 range and lower support at 89.50.

(click to enlarge)

Nothing has changed in my long term view of the dollar. I still expect we will see much higher levels once this current correction completes, and I am happy to hold my long positions accordingly.

COT

The latest figures from the Commitment of Traders report are below:

COMMERCIAL LARGE SPEC SMALL SPEC 
      
LONGSHORTLONGSHORTLONGSHORT
153,712230,349191,053115,33033,91132,997
      
CHANGECHANGECHANGECHANGECHANGECHANGE
+3,435+1,483+4,240+3,607-1,326+1,259
      

Not a lot of change to positioning from last week, with all trader categories maintaining roughly similar net positions. However, the spike higher in gold this week came after this report was compiled, and it is likely we will see that the Speculator categories have chased price higher with the addition of long contracts when next week's data is published.

(click to enlarge)

The analysis from a couple of weeks ago remains applicable. We don't have a net position in the large speculator category that has historically led to a large move either way. If anything it is supportive of a small further rally, but there again that cannot be wholly relied upon.

Divergences Within The Sector

We have backwardation in place despite gold prices rising over the last two weeks. This can be interpreted as hungry buyers snapping up all available gold; production levels falling off (finally); or current holders and/or producers of gold not wanting to sell at the current time (hoarding).

It is generally accepted that the bear market is close to completion, so you could understand if it was a combination of all of the above. Price has dropped to a level at which production becomes unprofitable, and you wouldn't blame producers for keeping reserves in place for as long as possible in anticipation of a low forming and a new bull beginning.

However, statistics show that demand has fallen recently, and I am wondering if this is more to do production slowing as a consequence - the key point is that interest in gold seems to be waning of late. If so this is a good thing and may mark the beginning of the end, but it also means we may see a decent drop in the price due to a lack of an underlying speculative bid.

Other divergence of note is the fact that neither the gold mining majors (NYSEARCA:GDX) or silver (NYSEARCA:SLV) has matched the rise in gold in percentage terms this week. To me this shows a lack of faith that the rally is real. A contrarian will say that as the majority don't expect it we will probably get a decent rise as a result, but my opinion is that this is another sign that interest is just not there and to me it is generally bearish the precious metals.

Gold Chart

Gold has been frustrating to say the least. I managed to catch the long trade on the Fed spike but have now covered as although I accept we can go higher, I believe we have just about achieved enough waves for a top to form. We are on potentially shaky economic ground, and it doesn't always pay to be greedy - hogs get fat; pigs get slaughtered. First the daily chart:

(click to enlarge)

Nothing has changed the overall pattern I've been tracking for what seems like an age now.

Technically there is nothing to stop us testing the 618 retrace at $1243 (labeled Alt 2) or even declining trendline resistance at $1270, but that is not my primary count at the current time.

The pattern looks very similar to the last spike higher that started on May 12th and topped out at $1232, and we could very well be in for the same result here, meaning that we get just a couple of small waves higher before the rally completes.

(click to enlarge)

Looking at the current rise in more detail, although we have enough waves in place to start a decline directly from here, if we do get that similar rally the target zone is $1211-$1225 with an ideal price of $1218.50.

Whether or not we get a small rally or a slightly bigger one, for all the reasons I have discussed in this article and in many of my others, I expect gold to put in a very tradable top in the near term, and make new bear market lows into year end. Bulls be careful.

As usual I will update thoughts in the comments section, and I wish everyone good luck for the coming week!

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