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Welcome a special Saturday release of our Market Wrap Podcast, I’m Mike Gleason.
Coming up we’ll hear from Dan Norcini… Trader Dan… to get his take on the exciting market action this week. Dan talks about a potential sea change in the markets and also hints at the possibility of stagflation developing. And he anticipates some interesting action in gold and silver from a technical perspective. Don’t miss my exclusive interview with Dan Norcini coming up shortly…
Well it was a big week for the gold market. And an even bigger one for silver.
The precious metals rallied strongly on disappointing retail sales data and a weakening dollar. Concerns that the economy isn’t rebounding from its first quarter slump sent the U.S. Dollar Index down for the fifth straight week to its lowest level since January. Investors now perceive the Federal Reserve is likely to hold off on raising rates until the economic numbers improve.
This all worked to the benefit of gold and silver. Gold surged to $1,222 an ounce on Thursday, closing at a 3-month high. A strong weekly close above $1,225 should confirm a breakout above the long trading range gold has been in. As of this Friday afternoon, gold is holding up still and trades at $1,224 an ounce and it’s up 2.9% on the week with just a few market hours left before the weekly close.
Turning to silver, the white metal also broke out to a 3-month high on Thursday, gaining more than a dollar on the week. As of this recording, silver shows an impressive weekly gain of 6.3% to trade at $17.56 an ounce. If silver can gain another dollar that will put prices back at the highs of the year seen in January. Looking further out, a move above $22 an ounce will put silver above its highs for 2014 and in a confirmed cyclical bull market. For more on that, stick around in a bit as one of the most respected technical trading analysts chimes in on what he sees from a chart perspective for both silver and gold.
The U.S. economy and U.S. stock market, meanwhile, could be heading in the opposite direction. Stocks rose this week, but since we are 6 years into a cyclical bull market, it will be difficult for them to sustain continued gains against the backdrop of a weakening economy that could lead to rising budget deficits.
Last Friday, professors from Harvard and Dartmouth published a study showing that Social Security is in worse financial shape than the government lets on. The study found that over the last 15 years, the Social Security Administration’s Chief Actuary has consistently painted an artificially optimistic picture of the program’s financial situation. In other words, Social Security is going broke faster than even the officials have acknowledged.
Trillions of dollars in coming Social Security shortfalls are just one reason why government debt is set to explode. And – surprise, surprise – the latest debt projections are far worse than the government had forecasted just a few years ago.
In 2009, the Congressional Budget Office estimated the federal debt would rise to an alarming $33 trillion by 2035. Since 2009, the economy has recovered, at least on paper, and equity values have surged. Yet the government’s financial future hasn’t brightened. It’s actually gotten a lot darker. Instead of $33 trillion in debt by 2035, taxpayers now face a projected debt burden of $40 trillion. That’s according to calculations by the Committee for a Responsible Federal Budget.
An aging population and longer life expectancies mean more Social Security beneficiaries and fewer workers to support them. The number of Social Security beneficiaries is expected to rise by 57% over the next 30 years, while the number of taxpaying workers will barely grow at all.
It’s a demographic dilemma that the U.S. and most of the developed world will struggle with in the years ahead. Some analysts believe that an aging demographic profile points toward deflation or very low inflation, as has been seen in Japan for more than two decades. But the level of inflation in a country is ultimately a political and monetary phenomenon, not a demographic one.
The Bank of International Settlements recently analyzed 22 advanced economies. It found that a growing share of government dependents is more often associated with higher, not lower, rates of inflation. Politicians don’t like to campaign on cutting people’s benefits. It’s much easier to keep the checks coming and let the debts keep growing. As long as the debt and the currency supply are on an upward trajectory relative to the economy, that’s a recipe for price inflation.
If you want to enjoy a comfortable and sustainable retirement, then you need to implement inflation protection strategies. You know you can’t depend on Social Security alone. Any benefits you do receive may fail to keep up with the real-world inflation rate. You can’t depend entirely on retirement accounts that contain stocks and bonds, either. Financial assets are vulnerable to many types of risk, including that of inflation.
Well now, without further delay, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my privilege to welcome in Dan Norcini. Dan is a professional off-the-floor commodities trader bringing more than 20 years of experience in the markets. Dan's editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world. He is a frequent contributor of both Reuters an Dow Jones, as a market analysts and can be found as a source in the Wall Street commodities section from time to time as well as CBS's 'Market Watch'. You can also follow his fabulously detailed work at traderdan.net. Dan, welcome back. Thanks for joining us again.
Dan Norcini: Mike, it's great to be back. It's been a while, my friend.
Mike Gleason: Well when we first spoke earlier this year, it was right after the big news came out in Switzerland where they decided to un-peg the franc from the euro which sent major shockwaves through the currency markets and now this week we've seen some pretty interesting action in the markets, so our conversation is well-timed, once again. As we are talking here on Thursday evening, we've seen a big advance in the metals so far this week and a pretty big move in the dollar, although they are going in different directions here. So summarize what you've seen this week and then also give us an idea of what is driven the moves here.
Dan Norcini: Well Mike, you can probably sum it up in one word is, pandemonium. That's the word that comes to my mind and particularly, you know when you are looking at the bond markets and not just the U.S Treasury markets but the global bond market, to me has been the instigator behind a lot of these disruptions that we've seen taking place now, really since the beginning of May, it seems like. In particular you've seen a lot of turmoil or cross-currents that are impacting other markets as huge sums of money are just simply being moved, traders are re-positioning.
Some of them are lifting trades, some of them are putting new trades on, but there is a lot of money changing hands. A lot of these trades were crowded trades. A lot of guys piling in on the same, essentially at the same time and using the same sort of philosophy or sort of sentiments that were directing those trades and now all of a sudden we've got an unwind going on and everybody is heading to the exits at the same time and quite frankly there's no liquidity on the opposite sides of some of these markets, Mike, and so you’re getting big pushes.
Particularly in the bond markets and as you mentioned, you are seeing certain ... certainly you've seen some movement in the currency markets, especially with the dollar. I mean, the dollar, has quite frankly surprised me, to the extent of the down-draft we've seen in there recently. It was not something that I had expected, but it sure has seem to have taken place ever since the sentiment has shifted with that first Fed rate hike being delayed. Boy, that thing really changed things in the currency market.
Mike Gleason: As we have discussed before, it is all about the Fed these days and rate hikes seem to have been priced in to the market. They were talked about for a long time so if it becomes clear, and I guess it is, that won't be happening, that we won't be getting those rate hikes. What effect will it continue to have on these markets? What will the market reaction be, not just with the dollar but commodities and metals as well?
Dan Norcini: Let's start with the currency markets first, Mike and then we can go to the interest rate markets and down to the precious metals because they are all related in that order as well. With the currency markets, obviously the dollar has been moving higher heading in to really the end of last year or early part of this year in anticipation that the Fed was going to make its move on interest rates before anybody else in the major western industrialized nations were. I mean, we were the only ones even talking about the possibility of higher rates.
The rest of them were talking about maintaining the status quo with quantitative easing and monetary stimulus, like Japan for example. Then at that time, before February, we were all talking about what the ECB was going to do for its QE program. Well that sort of thinking, essentially said, well, okay if the dollar is the only game in town if you want to talk about yield, so money was just coming in to the dollar, it was pushing treasury prices, it was pushing the currencies and of course, it was also having a corresponding effect for a while, on commodities as well.
Mainly because of the fact that, that stronger dollar, it initiates a trade and I call it a macro trade, it's essentially big funds that usually follow the dollar and if the dollar goes up, they sell commodities, if the dollar goes down, they buy commodities, Mike. There’s really no questions asked, there is not a lot of thinking, there's not a lot of fundamental analysis that goes in to that trade. It's sort of a knee-jerk reflective type of trade but so many big funds practice it and there is so much money involved in it, that it just really tends to influence these markets.
So as long as that dollar is trending higher, the general pressure across the commodity world and essentially you can see that reflect in the precious metals as well. It started to change really when we got that stinker of a jobs report. It was the March job reports, you remember that. I mean, it just shocked everybody, how poor it was and of course that to me seemed to be the catalyst from when we got that March job's number; and I forget what it was originally, like 127,000 or 128,000 created when the market was looking for over 200,0000-something initially. Well, you saw big dislocations in the market at that point.
People really began to re-evaluate what they were going to do with this dollar trade, simply because it sure did seem like the Fed was going to be on hold for any rate hike and you certainly saw that reflected immediately in the Fed Funds Future's market. I mean the probability of a Fed rate hikes in June, just shot ... I mean, just fell through the floor. People all of a sudden said, "wait a minute, they’re not going to move in June. I mean, we'd be lucky if we get a move in September and then maybe we are going to have to wait till December". Well that began to catalyze what was going on in these currency markets and as a result you began to see a lot of movement out of the dollar.
Also what was interesting as well, is that ... the weird thing about this, was that people were talking about interest rate hikes in the dollar but that made money come to the U.S Bond market. Think about it this way, Mike, if you are looking at a 10-year treasury note; it was paying around 2% versus the yield on the 10-year German bond which was about 0.2%, so I mean there was no comparison. That was a no-brainer. You had all sorts of money flowing from all over the globe in to U.S Treasuries, actually working to push rates on the long end of the yield curve, lower.
Even though we were talking at that time, about the Fed hiking rates. So you had a sort of conundrum taking place where the more the Fed talked about raising rates, the lower they got. So go figure that one out. Well, what happened was, once the thinking shifted and the people began to postpone this rate hike, again starting with that economic data from that March payrolls report and then subsequently, being reinforced by the reports that came out afterwards, whether it was the PMI numbers or whether it was the various reports, whether it was retail sales, consumer durables or whatever, the numbers were consistently poor.
Again, you had a shift, so that money began to come out of the bond market, U.S Treasury Bond market. You had a big sell-off start there, the dollar got pressed lower and of course, now all of this money is coming out and particularly you are looking these so-called safe haven plays. People are saying, "okay, bonds are a safe place to be. Look, we've got the; from a European stand-point, we've got the ECB back-stopping us. We know we have a buyer for bonds. You know, we can go in to bonds, here in the U.S. All that money's coming in to bonds there. It's a safe place to be".
Well, that now is thrown in doubt and so you see this huge exodus of money coming out of the bond markets and again, now we are having this same perverse effect. The longer the Fed talks about not raising rates, here we go again, now the rates are going higher. So it seems like when the Fed's talk about raising rates, they go lower. When the Fed's talk about not raising rates, they go higher and all of this is the result of money flows, Mike. It's simply money moving in and out of these bonds, trying to anticipate what these central bankers are going to do next.
Well, if you think about it this way; what was the ultimate safe haven as far as traders were concerned 2 or 3 months ago, or even a month ago, it was in government bonds. Whether it was Euro bonds, whether it was treasury bonds, whether it was Japanese government bonds, whatever. Now government bonds are not looking so safe because of the turmoil, so now they are turning to gold. You are actually seeing a safe haven flow in to gold as a result of this and that's why gold popped up, off of its support level down there, around $1,180, when all of this turmoil in bond market began.
Because typically, Mike, what we have been seeing is as interest rates began to rise in the U.S, at least on the long-end of the curve, that was actually was bringing selling pressure in to gold. Gold was moving, essentially inversely to the interest rates. If interest rates on the long-end was going up, gold was going down simply because it's a non-interest paying asset and traders felt like they should buy... investors looking for a safe haven, they say "hey, I want to get some return on a capital. I want to get something that's relatively safe. I don't want any capital gains risk. I'm just going to put it in bonds".
So as interest rates would go ahead and essentially move one way, gold would move the other. Well now, as a result of this bond turmoil, we are seeing bonds selling off which is pushing interest rates higher, but gold is moving higher, along with the interest rates. So now we have a different pattern where gold is moving, lock-set with interest rates, as they move higher as a direct result of this bond row and this turmoil in the bond markets and traders and investors looking right now for an alternative safe haven besides government bonds.
Mike Gleason: I know when we spoke earlier this year that was one thing you were looking for, to get us out of this sort of consolidation or corrective period in the metals, gold specifically, is that it needed to start acting as the safe haven again instead of government bonds. So then we’ve started to see that shift perhaps occurring and maybe the tide has turned for gold?
Dan Norcini: Well, to me it's a little too soon to say that with absolute certainty, Mike but there's certainly signs of it taking place. The problem that we have in trying to read these markets, and I think anybody who has been around these markets long enough, and particularly with the volatility and just the rapid shift that we see in prices, with on an intraday basis. You know, I have joked and quipped amongst some trader friends of mine that we are now seeing a 6 month business cycle completed in 24 hour trading sessions and essentially because the volatility.
You should see these huge swings in price but certainly, I mean you are definitely seeing gold functioning as a safe haven here at the moment. Simply because that money that is coming out of bonds has got to go somewhere. Normally you would see it come out of bonds, it would go in to equities. If it was going out of equities, it would go in to bonds. You know, there is so much uncertainty and confusion out there and all of it, in my mind is it being introduced by central bankers… “what are you going to do? When are you going to do it. What's next?", whatever.
A lot of traders are simply getting nervous and they are dumping various asset classes that they had been previously heavily positioned in. Like bonds for instance, and they say, "where are we going to put this money?'. So a lot of them are putting it in to gold right now and they managed to push it up. That's the thing, they pushed it away from support. It looked like it was going to break down but they've shoved it back up towards resistance, round $1,220. It's holding up here, it hasn't broken out to the upside.
Personally, Mike, the rout in the bond market, as sharp as it's been, as severe as it's been, I thought that we might see enough safe haven flows in to gold to push it through this heavy resistance level, around $1,225. I thought we might make it up to the start of $1,250 and maybe even make it as high as $1,300, given all the turmoil that we've seen out there but we haven't seen it yet. I think part of that is that there's a lot of people who simply don't believe the bond market is going to break down any more severely, simply because the overall economic global growth numbers we are seeing is so slow.
Let me give you an example of this, yesterday we got the retail sales number and there was no doubt, that was a very poor number for here in the U.S and it was very disappointing. Remember we were anticipating a pick-up in retail sales because we were able to blame the poor showing in the month of March on the bad weather, the rough winter weather. Winter wouldn't go away. So we thought, 'okay, it's a one-off. It's an anomaly. The consumers going to take advantage of maybe these lower gasoline prices. They are going to spend more money now for April'.
Okay, we get the April data yesterday and what is it? It's a stinker. They didn't spend more money. People got shocked when they saw that number. Now okay, normally when you get a poor number like that and you get a very slow growth confirming number like, well what happens? Well money just pours in to the bond market. Well, that was exactly what happened in the first hour of trading. The bonds took off. They moved to the upside, like what you would expect them to do. Then what happened?
Well, after that it seemed like everybody who was looking for a place to sell bonds decided, 'hey, the market's up about a point, let me just slam it'. And all of a sudden the bond market started seeing selling and they just shoved it lower and they crushed it again. There's this whole thing, is that the bonds are not functioning like they typically do in times past. That's made traders and investors nervous to a certain extent and so you have seen some money come in to gold as a result of that. That is where some of that safe haven flow is coming from at the moment.
Mike Gleason: Turning a little bit to silver and some of the technicals there. What are you seeing on the white metal and also some of the other industrial commodities. I know we talked a little bit off-air, copper, platinum, palladium, there's some things to note on those metals as well.
Dan Norcini: Yes, silver and I'll be honest, silver has really surprised me, as has copper, Mike, as has palladium and as has platinum, all the ones that you mentioned. For the reasons that we discussed here too, is that look, all of these markets, all these commodities in general, all moving lower as we were coming out of first of the year. We were looking in to January, to have a little bit of a peek there as far as the minerals go but I mean, crude oil, my goodness. We have watched crude oil drop from what $80 a barrel all the way down to $44 in mid-March. We saw silver prices fall down below $15. It has actually spiked now, very close to $14.
Copper prices had dropped off very hard. Platinum was going down. So all of these commodities, which let's just call them growth-dependent, or growth-sensitive commodities, were all moving lower mainly because the fears of slowing global growth. I don't think that's a secret. Anybody that has been following these markets is pretty much aware of the fact that global growth is not very good right now and so these demand-based, these commodities are so sensitive to demand, they are all moving lower simply because there wasn't enough growth to pull prices and eat through the available supply.
Well low and behold, we still have the same slow growth concerns. As a matter of fact that is the reason we are all talking about the Fed postponing rate hikes now. I mean because why look, the economy is so slow. There is no way the Fed can hike rates. They've may or may not even hike them in September. We may have to wait till December. That's the general thinking but yet, in spite of that slow growth we are watching silver moving up, we are watching copper moving up, platinum's going up, palladium's going up. Of course gold is moving higher and we are watching crude oil…crude oil jumped from $44 a barrel to hit $62
So my question is like how can we have these various commodities that are so growth-sensitive, how can we all of these commodities moving lock-step and higher, at the same time we are worried about slowing global growth? Well, answer that question and go to the head of the class. So I mean, it is just showing that there is some strange things going on behind the scenes. A lot of money being moved, a lot of re-positioning taking place. Some of this is getting ... it's hard to say whether this is simply too many traders on the same side of the market, reversing positions and you are seeing it take a while for that re-positioning to wind down or subside, simply because of the enormous sums of money involved in it.
Or is there a subtle change taking place in sentiment that we haven't quite picked up yet? And maybe there is some winds blowing and saying, 'hey, there's a possibility that sentiment could be shifting, about this overall, slowing global growth, deflationary scenario'. Maybe, just maybe; and I posted this on my website yesterday, maybe we are seeing some very early signs of stagflation out there where you have rising prices in the midst of slow growth. That is essentially how I define stagflation. Maybe we are seeing some insipient signs of that, Mike.
I don't know but certainly it would help explain a little bit of some of the reasons we are seeing some of these prices move higher on these economically sensitive metals like copper and platinum for example and to a certain extent, silver because of its quisi-industrial role. You know, it's a monetary metal and an industrial metal. It tends to kind of follow along with copper at times. Sometimes it tends to follow gold. Well, right now both copper and gold are going up so silver is got everything going with it because industrial metals are going up and so are precious metals, so that's why it's rising, although it's really surprising to be honest. Like I said, so is rise in copper for that matter. I did not expect to see copper prices rise in this kind of environment.
Mike Gleason: If you look at the stagflation back in the 1970's, that was an environment that was very good for precious metals so if we do get that, we could see some real follow through here, I suppose. Before we wrap things up, gives some idea of what the charts look like for gold and silver. What are you looking for there, support levels, resistance levels, etc?
Dan Norcini: Okay, let's start with silver first, Mike, because it's had the stronger move out of that and gold, let's say. I mean we've had ... you know, I thought when I looked at silver, I mean you can look at a chart, it's sort of in a steady down-trend. It looks like it found value-based buying down to around the $15 level. It meandered down there for a while. It would then level, it would bounce up a little bit, it would hit that level again. It went down there in November, it went down there in January, it was down there in March, it was down, close to that level in April.
Every time it got down there, it didn't really continue to break lower. It stabilized down there and what that tells us, from looking at the chart is simply that there are value-based buyers that work in the silver market, below the $15.50 level. Those guys have been there for months now. It's going all the way back to November, so what have you got that with, 6 months? So for 6 months the same buyers that see value in the metal down there, they have made their presence felt. They have essentially put a bottom in that market, down around there. What we have lacked in silver on the up side, is that momentum-based crowd, Mike. That's like the hedge-fund crowd, the large spec(ulator)s that come in.
They are not necessarily value-based buyers, as a matter of fact I don't think value has a place in their lexicon, their vocabulary. All we know is that if it goes up we buy it, if it goes down, we try to sell it. They are the guys that you need to come in and you want to see a market move higher. You need that crowd to get involved because that's the ones that chase prices and if it goes up, they will chase it. Well, it looks to me that we have pushed out ... the move yesterday (Wednesday) in silver and to a certain extent today (Thursday), looks to me like we've pushed out a pretty significant amount of shorts in the silver market. You had a heavy accumulation of shorts in that market, they were not net short yet but they've been building some new short positions.
Looks to me that they got pushed out. That's one of the reasons, you could tell there's a short covering because a market that rises that fast, that quick, that abruptly, that vertically, there's always trouble for one group of traders and that's the shorts when that happens. So you have pushed them up now to a key resistance level, up $17 and a half on the silver chart. You had some sellers come in there in February, you had them show up again in March, to a certain extent. So the question is, are the same silver sellers that were active in February and March, are they going to show up now and do they think silver prices are expensive here at $17.50.
If they do, they will make their presence felt and they will push the price away from that $17.50 level. So far they haven't done it. Today, looks like the Bulls were able to it through that level. They're holding right around there, so to me, Mike, watching this, particularly tomorrow, because it's the end of the week, Friday, the weekly close has a lot to do as far as trader psychology, when they go in to the following week to trade. You get a strong close in the market for the week, you generally see some carry-over momentum-based buying the following week, at least in the early part of the week.
So to me the big test for silver tomorrow, would be can this metal close up above $17.50, or at least can it close closer to $17.25 or higher. If it does, it's got some upside momentum and you might see some more shorts come in there and actually cover again next week. If not, I can see where you’ll get some pressure on this market and it could drop back down, but that's the key we have to watch now. If this market retreats, where will the buyers show up Mike? What we are looking for now, we know we have seen value at $15.50, they've even seen value now since the beginning of May, closer to the $16 level, the question is that if silver does set back, where will these value-based buyers arrive?
Trust me, we will know it when their footprints that they leave in the market. You can't hide where you are buying and selling inside. It always shows up on the chart. So if they come in and they are starting to buy above $16, maybe $16.25, you can make the case that this market is building a pretty good base down here and it's a spark. Again, I don't know what the spark might be but if it gets a spark, you can see it go ahead and pop up and maybe it will even make a run at $18. But again, before we can even talk about $18, we've got to quit at $17 and a half, so that's our overhead resistance level. As far as this chart support, like I have just mentioned, fall around $16 and a quarter is what I'd like to see this thing hold on the downside, if it goes down there.
For gold we have a gold pretty much a trading band, Mike, arranged trade. As a matter of fact, it's being so boring from a trading perspective because this thing has been going on now for about 6 weeks. It trades up to about $1,220 to $1,225. It immediately encounters selling up there. It drops down to $1,175, $1,180 and it immediately encounters buying. So it's been stuck in a range; roughly a $50 range. It has gone from $1,175 to $1,225 and it's been in that range for 6 weeks. It's going nowhere but moving back and forth, up and down, without a lot of rhyme, without a lot of reason.
So it's been frustrating for a lot of traders, both Bulls and Bears because every time it gets to the top of that range they go, 'okay, it's going to break out and trend higher'. And then it disappoints and falls flat on its face and it goes down. When the Bears starts getting excited, yeah, it's finally going to break down and we are going to go through $1,175, we are going to trend lower, well it flips right around and goes right back up again. Neither Bull or Bears have advantage in this market for 6 long weeks.
Well, here we are today, on Thursday and what do we do today? We push right up to $1,225 and if we closed at $1,225 in the pit session, right near the top of that previous trading range so here's the key question; do we push through this tomorrow, on Friday? Do we finally break out of this thing on the upside or do we fall right back down again and do we retreat down towards the bottom of the range? Well, I don't know. We will have to wait and see what we get tomorrow.
But right now Mike, those are the parameters that we are watching for gold and unless we can get a convincing close about $1,225, I don't see any upside in this because what happens is, the sellers will come and they will say, "okay, there's our level of selling at", and they will push it back down. But unless we can close below $1,175, the Bears can't press it lower either. Personally, I would like to see this thing break out of range one way or the other. I know that most of your audience will probably won't want to see it break up to the upside, but either way, let's do something gold, let's either get something going to the upside or break down or whatever.
Until we can get out of this range, that's where we are at. We are in a sideways trading pattern and one way or the other this market is going to tip it's hand, what it wants to do. Again, will it garner additional safe haven buying if the bond market rout continues? That to me is the key question. If bonds keep selling off, I can see where more money will come in to the gold market for safe haven, as an alternative, and you can see it break through the top side of this range and we can maybe get some sort of a possibility of a trend or at least a push higher to another plateau and get it out of this trading range. Maybe we could move to a trading range where we've got $1,275, maybe on the top and $1,225 on the bottom, so sort of stair-step our way up. Right now that's the question scenario. Range trade until this market does something else Mike, and proves itself.
Mike Gleason: Well, it's always a highly educational experience to talk to you Dan and we definitely appreciate it and your wonderful insights. It's always great to talk to you and thanks for taking the time and hope you have a restful weekend my friend.
Dan Norcini: Well, Mike thanks again. It is a pleasure to be with you on your show here. I appreciate the service for your audience out there. There's all these interesting articles interviews that you do, so thanks for having me, Mike. I appreciate that.
Mike Gleason: Well, that will do it for this week. Thanks again to Dan Norcini. If you want to follow the fabulous market commentary and technical information that Dan put's out, just go to traderdan.net.
Check back next Friday for next weekly market wrap broadcast. Until then this has been Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend everybody.
Dan Norcini: Mike, it's great to be back. It's been a while, my friend.
Mike Gleason: Well when we first spoke earlier this year, it was right after the big news came out in Switzerland where they decided to un-peg the franc from the euro which sent major shockwaves through the currency markets and now this week we've seen some pretty interesting action in the markets, so our conversation is well-timed, once again. As we are talking here on Thursday evening, we've seen a big advance in the metals so far this week and a pretty big move in the dollar, although they are going in different directions here. So summarize what you've seen this week and then also give us an idea of what is driven the moves here.
Dan Norcini: Well Mike, you can probably sum it up in one word is, pandemonium. That's the word that comes to my mind and particularly, you know when you are looking at the bond markets and not just the U.S Treasury markets but the global bond market, to me has been the instigator behind a lot of these disruptions that we've seen taking place now, really since the beginning of May, it seems like. In particular you've seen a lot of turmoil or cross-currents that are impacting other markets as huge sums of money are just simply being moved, traders are re-positioning.
Some of them are lifting trades, some of them are putting new trades on, but there is a lot of money changing hands. A lot of these trades were crowded trades. A lot of guys piling in on the same, essentially at the same time and using the same sort of philosophy or sort of sentiments that were directing those trades and now all of a sudden we've got an unwind going on and everybody is heading to the exits at the same time and quite frankly there's no liquidity on the opposite sides of some of these markets, Mike, and so you’re getting big pushes.
Particularly in the bond markets and as you mentioned, you are seeing certain ... certainly you've seen some movement in the currency markets, especially with the dollar. I mean, the dollar, has quite frankly surprised me, to the extent of the down-draft we've seen in there recently. It was not something that I had expected, but it sure has seem to have taken place ever since the sentiment has shifted with that first Fed rate hike being delayed. Boy, that thing really changed things in the currency market.
Mike Gleason: As we have discussed before, it is all about the Fed these days and rate hikes seem to have been priced in to the market. They were talked about for a long time so if it becomes clear, and I guess it is, that won't be happening, that we won't be getting those rate hikes. What effect will it continue to have on these markets? What will the market reaction be, not just with the dollar but commodities and metals as well?
Dan Norcini: Let's start with the currency markets first, Mike and then we can go to the interest rate markets and down to the precious metals because they are all related in that order as well. With the currency markets, obviously the dollar has been moving higher heading in to really the end of last year or early part of this year in anticipation that the Fed was going to make its move on interest rates before anybody else in the major western industrialized nations were. I mean, we were the only ones even talking about the possibility of higher rates.
The rest of them were talking about maintaining the status quo with quantitative easing and monetary stimulus, like Japan for example. Then at that time, before February, we were all talking about what the ECB was going to do for its QE program. Well that sort of thinking, essentially said, well, okay if the dollar is the only game in town if you want to talk about yield, so money was just coming in to the dollar, it was pushing treasury prices, it was pushing the currencies and of course, it was also having a corresponding effect for a while, on commodities as well.
Mainly because of the fact that, that stronger dollar, it initiates a trade and I call it a macro trade, it's essentially big funds that usually follow the dollar and if the dollar goes up, they sell commodities, if the dollar goes down, they buy commodities, Mike. There’s really no questions asked, there is not a lot of thinking, there's not a lot of fundamental analysis that goes in to that trade. It's sort of a knee-jerk reflective type of trade but so many big funds practice it and there is so much money involved in it, that it just really tends to influence these markets.
So as long as that dollar is trending higher, the general pressure across the commodity world and essentially you can see that reflect in the precious metals as well. It started to change really when we got that stinker of a jobs report. It was the March job reports, you remember that. I mean, it just shocked everybody, how poor it was and of course that to me seemed to be the catalyst from when we got that March job's number; and I forget what it was originally, like 127,000 or 128,000 created when the market was looking for over 200,0000-something initially. Well, you saw big dislocations in the market at that point.
People really began to re-evaluate what they were going to do with this dollar trade, simply because it sure did seem like the Fed was going to be on hold for any rate hike and you certainly saw that reflected immediately in the Fed Funds Future's market. I mean the probability of a Fed rate hikes in June, just shot ... I mean, just fell through the floor. People all of a sudden said, "wait a minute, they’re not going to move in June. I mean, we'd be lucky if we get a move in September and then maybe we are going to have to wait till December". Well that began to catalyze what was going on in these currency markets and as a result you began to see a lot of movement out of the dollar.
Also what was interesting as well, is that ... the weird thing about this, was that people were talking about interest rate hikes in the dollar but that made money come to the U.S Bond market. Think about it this way, Mike, if you are looking at a 10-year treasury note; it was paying around 2% versus the yield on the 10-year German bond which was about 0.2%, so I mean there was no comparison. That was a no-brainer. You had all sorts of money flowing from all over the globe in to U.S Treasuries, actually working to push rates on the long end of the yield curve, lower.
Even though we were talking at that time, about the Fed hiking rates. So you had a sort of conundrum taking place where the more the Fed talked about raising rates, the lower they got. So go figure that one out. Well, what happened was, once the thinking shifted and the people began to postpone this rate hike, again starting with that economic data from that March payrolls report and then subsequently, being reinforced by the reports that came out afterwards, whether it was the PMI numbers or whether it was the various reports, whether it was retail sales, consumer durables or whatever, the numbers were consistently poor.
Again, you had a shift, so that money began to come out of the bond market, U.S Treasury Bond market. You had a big sell-off start there, the dollar got pressed lower and of course, now all of this money is coming out and particularly you are looking these so-called safe haven plays. People are saying, "okay, bonds are a safe place to be. Look, we've got the; from a European stand-point, we've got the ECB back-stopping us. We know we have a buyer for bonds. You know, we can go in to bonds, here in the U.S. All that money's coming in to bonds there. It's a safe place to be".
Well, that now is thrown in doubt and so you see this huge exodus of money coming out of the bond markets and again, now we are having this same perverse effect. The longer the Fed talks about not raising rates, here we go again, now the rates are going higher. So it seems like when the Fed's talk about raising rates, they go lower. When the Fed's talk about not raising rates, they go higher and all of this is the result of money flows, Mike. It's simply money moving in and out of these bonds, trying to anticipate what these central bankers are going to do next.
Well, if you think about it this way; what was the ultimate safe haven as far as traders were concerned 2 or 3 months ago, or even a month ago, it was in government bonds. Whether it was Euro bonds, whether it was treasury bonds, whether it was Japanese government bonds, whatever. Now government bonds are not looking so safe because of the turmoil, so now they are turning to gold. You are actually seeing a safe haven flow in to gold as a result of this and that's why gold popped up, off of its support level down there, around $1,180, when all of this turmoil in bond market began.
Because typically, Mike, what we have been seeing is as interest rates began to rise in the U.S, at least on the long-end of the curve, that was actually was bringing selling pressure in to gold. Gold was moving, essentially inversely to the interest rates. If interest rates on the long-end was going up, gold was going down simply because it's a non-interest paying asset and traders felt like they should buy... investors looking for a safe haven, they say "hey, I want to get some return on a capital. I want to get something that's relatively safe. I don't want any capital gains risk. I'm just going to put it in bonds".
So as interest rates would go ahead and essentially move one way, gold would move the other. Well now, as a result of this bond turmoil, we are seeing bonds selling off which is pushing interest rates higher, but gold is moving higher, along with the interest rates. So now we have a different pattern where gold is moving, lock-set with interest rates, as they move higher as a direct result of this bond row and this turmoil in the bond markets and traders and investors looking right now for an alternative safe haven besides government bonds.
Mike Gleason: I know when we spoke earlier this year that was one thing you were looking for, to get us out of this sort of consolidation or corrective period in the metals, gold specifically, is that it needed to start acting as the safe haven again instead of government bonds. So then we’ve started to see that shift perhaps occurring and maybe the tide has turned for gold?
Dan Norcini: Well, to me it's a little too soon to say that with absolute certainty, Mike but there's certainly signs of it taking place. The problem that we have in trying to read these markets, and I think anybody who has been around these markets long enough, and particularly with the volatility and just the rapid shift that we see in prices, with on an intraday basis. You know, I have joked and quipped amongst some trader friends of mine that we are now seeing a 6 month business cycle completed in 24 hour trading sessions and essentially because the volatility.
You should see these huge swings in price but certainly, I mean you are definitely seeing gold functioning as a safe haven here at the moment. Simply because that money that is coming out of bonds has got to go somewhere. Normally you would see it come out of bonds, it would go in to equities. If it was going out of equities, it would go in to bonds. You know, there is so much uncertainty and confusion out there and all of it, in my mind is it being introduced by central bankers… “what are you going to do? When are you going to do it. What's next?", whatever.
A lot of traders are simply getting nervous and they are dumping various asset classes that they had been previously heavily positioned in. Like bonds for instance, and they say, "where are we going to put this money?'. So a lot of them are putting it in to gold right now and they managed to push it up. That's the thing, they pushed it away from support. It looked like it was going to break down but they've shoved it back up towards resistance, round $1,220. It's holding up here, it hasn't broken out to the upside.
Personally, Mike, the rout in the bond market, as sharp as it's been, as severe as it's been, I thought that we might see enough safe haven flows in to gold to push it through this heavy resistance level, around $1,225. I thought we might make it up to the start of $1,250 and maybe even make it as high as $1,300, given all the turmoil that we've seen out there but we haven't seen it yet. I think part of that is that there's a lot of people who simply don't believe the bond market is going to break down any more severely, simply because the overall economic global growth numbers we are seeing is so slow.
Let me give you an example of this, yesterday we got the retail sales number and there was no doubt, that was a very poor number for here in the U.S and it was very disappointing. Remember we were anticipating a pick-up in retail sales because we were able to blame the poor showing in the month of March on the bad weather, the rough winter weather. Winter wouldn't go away. So we thought, 'okay, it's a one-off. It's an anomaly. The consumers going to take advantage of maybe these lower gasoline prices. They are going to spend more money now for April'.
Okay, we get the April data yesterday and what is it? It's a stinker. They didn't spend more money. People got shocked when they saw that number. Now okay, normally when you get a poor number like that and you get a very slow growth confirming number like, well what happens? Well money just pours in to the bond market. Well, that was exactly what happened in the first hour of trading. The bonds took off. They moved to the upside, like what you would expect them to do. Then what happened?
Well, after that it seemed like everybody who was looking for a place to sell bonds decided, 'hey, the market's up about a point, let me just slam it'. And all of a sudden the bond market started seeing selling and they just shoved it lower and they crushed it again. There's this whole thing, is that the bonds are not functioning like they typically do in times past. That's made traders and investors nervous to a certain extent and so you have seen some money come in to gold as a result of that. That is where some of that safe haven flow is coming from at the moment.
Mike Gleason: Turning a little bit to silver and some of the technicals there. What are you seeing on the white metal and also some of the other industrial commodities. I know we talked a little bit off-air, copper, platinum, palladium, there's some things to note on those metals as well.
Dan Norcini: Yes, silver and I'll be honest, silver has really surprised me, as has copper, Mike, as has palladium and as has platinum, all the ones that you mentioned. For the reasons that we discussed here too, is that look, all of these markets, all these commodities in general, all moving lower as we were coming out of first of the year. We were looking in to January, to have a little bit of a peek there as far as the minerals go but I mean, crude oil, my goodness. We have watched crude oil drop from what $80 a barrel all the way down to $44 in mid-March. We saw silver prices fall down below $15. It has actually spiked now, very close to $14.
Copper prices had dropped off very hard. Platinum was going down. So all of these commodities, which let's just call them growth-dependent, or growth-sensitive commodities, were all moving lower mainly because the fears of slowing global growth. I don't think that's a secret. Anybody that has been following these markets is pretty much aware of the fact that global growth is not very good right now and so these demand-based, these commodities are so sensitive to demand, they are all moving lower simply because there wasn't enough growth to pull prices and eat through the available supply.
Well low and behold, we still have the same slow growth concerns. As a matter of fact that is the reason we are all talking about the Fed postponing rate hikes now. I mean because why look, the economy is so slow. There is no way the Fed can hike rates. They've may or may not even hike them in September. We may have to wait till December. That's the general thinking but yet, in spite of that slow growth we are watching silver moving up, we are watching copper moving up, platinum's going up, palladium's going up. Of course gold is moving higher and we are watching crude oil…crude oil jumped from $44 a barrel to hit $62
So my question is like how can we have these various commodities that are so growth-sensitive, how can we all of these commodities moving lock-step and higher, at the same time we are worried about slowing global growth? Well, answer that question and go to the head of the class. So I mean, it is just showing that there is some strange things going on behind the scenes. A lot of money being moved, a lot of re-positioning taking place. Some of this is getting ... it's hard to say whether this is simply too many traders on the same side of the market, reversing positions and you are seeing it take a while for that re-positioning to wind down or subside, simply because of the enormous sums of money involved in it.
Or is there a subtle change taking place in sentiment that we haven't quite picked up yet? And maybe there is some winds blowing and saying, 'hey, there's a possibility that sentiment could be shifting, about this overall, slowing global growth, deflationary scenario'. Maybe, just maybe; and I posted this on my website yesterday, maybe we are seeing some very early signs of stagflation out there where you have rising prices in the midst of slow growth. That is essentially how I define stagflation. Maybe we are seeing some insipient signs of that, Mike.
I don't know but certainly it would help explain a little bit of some of the reasons we are seeing some of these prices move higher on these economically sensitive metals like copper and platinum for example and to a certain extent, silver because of its quisi-industrial role. You know, it's a monetary metal and an industrial metal. It tends to kind of follow along with copper at times. Sometimes it tends to follow gold. Well, right now both copper and gold are going up so silver is got everything going with it because industrial metals are going up and so are precious metals, so that's why it's rising, although it's really surprising to be honest. Like I said, so is rise in copper for that matter. I did not expect to see copper prices rise in this kind of environment.
Mike Gleason: If you look at the stagflation back in the 1970's, that was an environment that was very good for precious metals so if we do get that, we could see some real follow through here, I suppose. Before we wrap things up, gives some idea of what the charts look like for gold and silver. What are you looking for there, support levels, resistance levels, etc?
Dan Norcini: Okay, let's start with silver first, Mike, because it's had the stronger move out of that and gold, let's say. I mean we've had ... you know, I thought when I looked at silver, I mean you can look at a chart, it's sort of in a steady down-trend. It looks like it found value-based buying down to around the $15 level. It meandered down there for a while. It would then level, it would bounce up a little bit, it would hit that level again. It went down there in November, it went down there in January, it was down there in March, it was down, close to that level in April.
Every time it got down there, it didn't really continue to break lower. It stabilized down there and what that tells us, from looking at the chart is simply that there are value-based buyers that work in the silver market, below the $15.50 level. Those guys have been there for months now. It's going all the way back to November, so what have you got that with, 6 months? So for 6 months the same buyers that see value in the metal down there, they have made their presence felt. They have essentially put a bottom in that market, down around there. What we have lacked in silver on the up side, is that momentum-based crowd, Mike. That's like the hedge-fund crowd, the large spec(ulator)s that come in.
They are not necessarily value-based buyers, as a matter of fact I don't think value has a place in their lexicon, their vocabulary. All we know is that if it goes up we buy it, if it goes down, we try to sell it. They are the guys that you need to come in and you want to see a market move higher. You need that crowd to get involved because that's the ones that chase prices and if it goes up, they will chase it. Well, it looks to me that we have pushed out ... the move yesterday (Wednesday) in silver and to a certain extent today (Thursday), looks to me like we've pushed out a pretty significant amount of shorts in the silver market. You had a heavy accumulation of shorts in that market, they were not net short yet but they've been building some new short positions.
Looks to me that they got pushed out. That's one of the reasons, you could tell there's a short covering because a market that rises that fast, that quick, that abruptly, that vertically, there's always trouble for one group of traders and that's the shorts when that happens. So you have pushed them up now to a key resistance level, up $17 and a half on the silver chart. You had some sellers come in there in February, you had them show up again in March, to a certain extent. So the question is, are the same silver sellers that were active in February and March, are they going to show up now and do they think silver prices are expensive here at $17.50.
If they do, they will make their presence felt and they will push the price away from that $17.50 level. So far they haven't done it. Today, looks like the Bulls were able to it through that level. They're holding right around there, so to me, Mike, watching this, particularly tomorrow, because it's the end of the week, Friday, the weekly close has a lot to do as far as trader psychology, when they go in to the following week to trade. You get a strong close in the market for the week, you generally see some carry-over momentum-based buying the following week, at least in the early part of the week.
So to me the big test for silver tomorrow, would be can this metal close up above $17.50, or at least can it close closer to $17.25 or higher. If it does, it's got some upside momentum and you might see some more shorts come in there and actually cover again next week. If not, I can see where you’ll get some pressure on this market and it could drop back down, but that's the key we have to watch now. If this market retreats, where will the buyers show up Mike? What we are looking for now, we know we have seen value at $15.50, they've even seen value now since the beginning of May, closer to the $16 level, the question is that if silver does set back, where will these value-based buyers arrive?
Trust me, we will know it when their footprints that they leave in the market. You can't hide where you are buying and selling inside. It always shows up on the chart. So if they come in and they are starting to buy above $16, maybe $16.25, you can make the case that this market is building a pretty good base down here and it's a spark. Again, I don't know what the spark might be but if it gets a spark, you can see it go ahead and pop up and maybe it will even make a run at $18. But again, before we can even talk about $18, we've got to quit at $17 and a half, so that's our overhead resistance level. As far as this chart support, like I have just mentioned, fall around $16 and a quarter is what I'd like to see this thing hold on the downside, if it goes down there.
For gold we have a gold pretty much a trading band, Mike, arranged trade. As a matter of fact, it's being so boring from a trading perspective because this thing has been going on now for about 6 weeks. It trades up to about $1,220 to $1,225. It immediately encounters selling up there. It drops down to $1,175, $1,180 and it immediately encounters buying. So it's been stuck in a range; roughly a $50 range. It has gone from $1,175 to $1,225 and it's been in that range for 6 weeks. It's going nowhere but moving back and forth, up and down, without a lot of rhyme, without a lot of reason.
So it's been frustrating for a lot of traders, both Bulls and Bears because every time it gets to the top of that range they go, 'okay, it's going to break out and trend higher'. And then it disappoints and falls flat on its face and it goes down. When the Bears starts getting excited, yeah, it's finally going to break down and we are going to go through $1,175, we are going to trend lower, well it flips right around and goes right back up again. Neither Bull or Bears have advantage in this market for 6 long weeks.
Well, here we are today, on Thursday and what do we do today? We push right up to $1,225 and if we closed at $1,225 in the pit session, right near the top of that previous trading range so here's the key question; do we push through this tomorrow, on Friday? Do we finally break out of this thing on the upside or do we fall right back down again and do we retreat down towards the bottom of the range? Well, I don't know. We will have to wait and see what we get tomorrow.
But right now Mike, those are the parameters that we are watching for gold and unless we can get a convincing close about $1,225, I don't see any upside in this because what happens is, the sellers will come and they will say, "okay, there's our level of selling at", and they will push it back down. But unless we can close below $1,175, the Bears can't press it lower either. Personally, I would like to see this thing break out of range one way or the other. I know that most of your audience will probably won't want to see it break up to the upside, but either way, let's do something gold, let's either get something going to the upside or break down or whatever.
Until we can get out of this range, that's where we are at. We are in a sideways trading pattern and one way or the other this market is going to tip it's hand, what it wants to do. Again, will it garner additional safe haven buying if the bond market rout continues? That to me is the key question. If bonds keep selling off, I can see where more money will come in to the gold market for safe haven, as an alternative, and you can see it break through the top side of this range and we can maybe get some sort of a possibility of a trend or at least a push higher to another plateau and get it out of this trading range. Maybe we could move to a trading range where we've got $1,275, maybe on the top and $1,225 on the bottom, so sort of stair-step our way up. Right now that's the question scenario. Range trade until this market does something else Mike, and proves itself.
Mike Gleason: Well, it's always a highly educational experience to talk to you Dan and we definitely appreciate it and your wonderful insights. It's always great to talk to you and thanks for taking the time and hope you have a restful weekend my friend.
Dan Norcini: Well, Mike thanks again. It is a pleasure to be with you on your show here. I appreciate the service for your audience out there. There's all these interesting articles interviews that you do, so thanks for having me, Mike. I appreciate that.
Mike Gleason: Well, that will do it for this week. Thanks again to Dan Norcini. If you want to follow the fabulous market commentary and technical information that Dan put's out, just go to traderdan.net.
Check back next Friday for next weekly market wrap broadcast. Until then this has been Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend everybody.
About the Author:
Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.
