A Melman Minute
| By | Leonard Melman |
|---|
NOTE: My apologies for the interruption to our "Melman Minutes' but it was unavoidable as our technical manager was recovering from surgery. Hopefully, we will be able to return to our regular schedule with the posting of this "Melman Minute."
For many months, it seemed we were waiting for truly decisive action to take place in the metals and in other associated commodities. The wait is over. Decisive action has abounded over the past few market sessions.
Most notably, the United States Dollar has been on a virtual rampage and that has caused enormous price declines in virtually everything priced in Greenbacks - specifically including the precious metals. Four charts tell the story and also indicate the kind of damage being done to precious metals investors' holdings - if they have remained on the 'long' side of the trading equation. The four charts are the US Dollar Index, Gold, Silver and the XAU mining share index.
US DOLLAR INDEX
As stories of economic problems in areas such as China, Japan and the European Economic Community began to be heard more frequently, the U.S. seemed to stand out as a beacon of sorts for international investments. Another very important factor was the growing international instability illustrated by virtual wars in the Ukraine, Israel/Gaza, Syria's civil war, ISIS' virtual takeover of Iraq and growing unrest in Hong Kong. In addition, the sudden and serious Ebola outbreak in Africa added to that picture.
Beginning in mid-summer 2014, a veritable flood of investments poured into the U.S. which sent the DX Index soaring in a spectacular rally (still continuing) to the highest levels since 2010.
As the Greenback rose, almost all commodity items fell, specifically including gold and silver.
GOLD
When I look at the five-year chart of gold, I am reminded of Yogi Berra's famous quip that, "…it's déjà vu all over again." Please note that following its historic high of $1,930, gold went into an 18-month trading range of $1,530 to $1,800 before encountering massive selling which drove it down to $1,180. Gold then went into an 18 month trading range of $1,180 to $1,430, a range which is holding (just barely!) as of this moment. The question, of course, is whether that range will break down, leading to a flood of new selling or whether strength will come into the market and abort that scenario.
SILVER
Silver's situation appears to be much direr than gold's. Like the yellow metal, silver also went into the same basic trading ranges, first from $26 to $37 and next from $18 to $25. However, silver has now broken below that second range and is currently trading near $17, a clear violation of previous chart support.
While some sort of "pull-back" rally toward previous support might be expected, in our opinion, it appears highly unlikely at the moment that sufficient strength will come into this market to reverse the downward pressure in the near future.
XAU GOLD / SILVER INDEX
As can be seen using the XAU Index, trading in mining shares has suddenly turned weaker and late last week, the XAU Index broke to the lowest level in seven years, falling to under '80', thereby confirming the weakness in gold and silver trading.
It appears to us that gold is in a particularly vulnerable area if it fails to hold above the $1,180 chart support level. We fear a break below that price could be psychologically dangerous and might lead to wholesale selling, perhaps driving the metal under key levels such as $1,100 representing a 50% retracement of the entire 2002-11 bull run and even the psychologically important $1,000 barrier - below which it is difficult to find nearby valid support levels.
Truly, this is a critical time for our precious metals - and the key indicator we are watching most closely is continuing strength pouring into the U.S. Dollar.
…………
Every so often, the 'contrarian' in us runs up against a collection of facts that is so contradictory that we sit up and take notice. The most recent U.S. Department of Labour 'Jobs Report' for September was such an occasion. According to that report, about one-quarter million new jobs were created last month and the U.S. unemployment Rate continued its downward trajectory by falling to a six-year low of 5.9%. If those figures and the implied powerful trend are indeed true, we must ask how the following two facts could possibly be taking place.
First, despite this 'enormous' job growth, there is no evidence of a powerful recovery in wage rates. Normally, one would expect that as hiring rises, some shortages in skilled labour would develop and employers would be forced to offer higher wages in order to attract quality workers - but that has not been taking place. As an AP story this morning notes, "…Yet the September jobs report released Friday contained a puzzling fact. Pay checks still aren't growing…Robust job growth has typically fuelled rising wages."
Second, if the economy is growing stronger from month to month, how can it possibly be consistent for commodity prices to remain in a state of virtual collapse? Yes, the US Dollar Index has improved by about 7%, but the declines in commodity prices virtually across the board in items such as gold, silver, oil and grains far exceeds that percentage.
When I see inconsistencies such as this, they suggest that something is amiss with the entire picture of growing prosperity being proffered by many within the political establishment.
EARLY MONDAY DATA as of 7:00 AM PDT
Dow Industrials, 17,082, + 72
TSX Index, 14,866 +77
Gold, $1,195, + $4
Silver, $17.04, + $0.17
Base metals, (average) + 1.0%
Mining share indexes (avg.), + 0.4%
US Dollar Index, 86.52, - 30 basis points
TYX Index (30-year bond rates), 3.138%, - 4 basis points
Crude Oil - $89.79, + $0.05 (early overnight trading)