I was very surprised by the strength exhibited in the mining shares today given the extreme weakness that was initially seen in both gold and especially in silver.

At one point today, silver had fallen all the way back into the box – the former range trade zone that held it for nearly a year – before it bounced off of that 50 day moving average right near the top of the box.

It was the mining share strength that brought the metal back up from its worst levels of the session. I was watching both the HUI and the Comex futures simultaneously on a tick by tick basis. As the shares refused to garner more selling from their GAP DOWN opening, the metals began to firm. Before long, both gold and silver refused to completely fall apart as it looked like they were going to do.

Needless to say, today’s action in the mining shares is a huge moral victory for the precious metal bulls. While the damage on the chart remains, until this index actually CLOSES BELOW that very critical 210 level, you have to give the edge to the bulls for their sheer tenacity.

Instead of the market breaking down, the bulls might have done enough today to allow for a correction to occur in TIME and not PRICE. It all depends on whether they can hold the line at 210. Now, a close below that level, especially to end the week, would surrender their faint edge to the bears. Thus, tomorrow is shaping up to be a big, big day for both sides.

You can notice that the 20 day moving average was the high of the session. Prior to this week, the HUI has not CLOSED BELOW the 20 day since the very first week of April. Yesterday, the fact that it fell below both the 10 day and the 20 day was a strong chart negative. The bounce today was checked by the 20 day so the first order of business for the bulls tomorrow will be to see to it that the HUI CLOSES ABOVE that level to end the week. If not, I would look for the bears to regain a slight edge heading into next week.

The chart is showing a definite loss of upside momentum with the POSSIBILITY of this week’s high at 233 becoming a LOWER, SECONDARY TOP. Thus the reason that the burden rests firmly on the bulls in tomorrow’s session to stage a strong showing.

The ADX/DMI has not yet given a SELL SIGNAL on the DMI lines as it still shows the bulls holding that slight advantage I spoke of but the fact that the ADX line itself has turned lower indicates that this thing is pausing in its torrid uptrend. Again, these pauses can take the form of a correction in time or a correction in price. This has been a remarkable rally in the mining shares but if the Dollar strength continues, it is going to produce a strong headwind against further mining share rallies.

Back to the silver market for a bit:

We did indeed see a huge wave of selling once $16.75 gave way. The market then fell precisely to the next support level noted which is the top of the BOX and the 50 day moving average. The fact that buying showed up there, prevented an even deeper fall in the metal which would have taken the price down to near $16.20 with the potential to reach $16.00 if that fails.

Current chart pattern remains negative until the bulls can push price back above $16.75 and preferably $16.85. Today’s low is the first level of support. If it goes, along with the 50 day moving average, a significant amount of stop loss selling/long liquidation will yet again kick in.

Sadly, because the brunt of the selling in this market came about yesterday (Wednesday) and today( Thursday), it is not going to be picked up by this week’s Commitments of Traders report which will come out tomorrow. I would love to see that hedge fund long position after the last two day’s worth of selling to get a sense of where it currently stands.

Gold bounced right where its support zone came in. As was the case with silver, strength in the mining shares pulled it off its worst levels. Also, I did notice some SAFE HAVEN trades coming on today. The Yen moved higher, the bonds moved higher and gold moved higher off its worst levels, especially as the Yen pushed into positive territory. That made gold a better performer than Silver.

The region near $1245 continues to draw in buyers. However, sellers are coming in at successively lower levels which shows the weakness inherent in the metal at this time.

As with silver, the gold bulls are making a strong stand considering the huge dislocation resulting from the FOMC hawkishly construed minutes.

For the bulls to recapture some initiative in gold, they need to push the price at least past $1260.

If the miners show the same kind of strength tomorrow as they did today, that is doable. We’ll see what we get tomorrow.

Further providing comfort to the bulls is the downright remarkable showing of GLD.

Since Friday of last week, this enormous gold ETF has added a bit over 9 tons of gold to its reported holdings which now stand at 860 tons. That is at levels last seen in November 2013! And this is in the face of a Dollar that has shown definite signs of breaking out to the upside. Clearly, Western-based investment demand for gold seems completely unfazed at this time.

When you have GLD continuing to add gold and you have the mining shares bending but not breaking, no wonder the metal itself is not falling apart, even in the face of its huge hedge fund long position. As long as they keep buying, the metal will stay supported.

As a side note, frankly, I really wonder what the heck the Fed is going to do when it comes to actually making the decision to hike rates. We have already seen the dislocation effect in the markets as players move from a dovish Fed sentiment to a potentially more hawkish Fed. What is going to happen if they actually hike?

Think about it – the Dollar went on a tear higher merely at a shift in the PERCEPTION of where the Fed stands in regards to raising rates. Look at the chaos it produced in the commodity markets. If they actually do pull the trigger and hike, especially if such a hike was accompanied by a statement that could be construed as a definite shift towards favoring additional hikes instead of just a one-off hike, we are going to see another massive dislocation resulting from position adjustments.

Look at what happened to the bond market today – the bonds sold off sharply yesterday on the shift in perceptions about the Fed due to the FOMC minutes. Today, they rebounded because the commodity sector plummeted lower. After all, why worry about inflation if the price of commodities is crashing lower due to Dollar strength.

This brings me back to a point I made earlier this week – we have that huge interest rate differential between the US government bond markets and the government bond markets of the Eurozone and Japan. That is going to continue to bring foreign investment flows into our bond market which will work to push bond prices higher and thus yields lower on the longer end of the curve.

Now let’s assume a rate hike – the Fed hikes, the Dollar moves higher, the interest rate differential between here and overseas grows larger AND commodities begin to plunge lower. Guess what happens then? Yep- the combination of foreign flows PLUS the lessening of upward price pressures on commodities, means bond prices can rise since there is no inflation ( that is what the market will more than likely think). Instead of long term rates rising after a Fed rate hike, they instead go down due to all the bond buying.

The more I think about this the more dizzy I get. I cannot even imagine how in the world this thing is ever going to get sorted out and we are ever going to get back to some semblance of normalcy in our interest rate markets. It seems like some sort of recurring nightmare. I wonder if these folks at the Fed really worry about this stuff as much as I do.