“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)

"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

Thursday, September 18, 2014

Gold Losing Ground in Other Assorted Currencies

Some of the long time readers will know that I like to check the charts for gold, when priced in terms of the other major currencies, to get a sense of how the metal is doing when viewed from outside of this country. Since it is an internationally traded commodity, it makes sense to compare its performance to see whether there is a general global trend in the metal or whether it is diverging from such a trend depending on which currency it might be priced in. This helps us assess overall global sentiment.

With the big Scotland vote in the headlines, I thought it might behoove us to see how the metal was faring in terms of the British Pound. I understand that more than a few Scots fear for their life's savings and were pulling money out of banks just in case. One would think that gold would be a likely recipient for some of that cash.

However, in looking at the price chart, it is rather lackluster ( and that is trying to be kind) as the metal has actually BEEN FALLING ahead of the vote. Not exactly a VOTE of confidence ( sorry, I could not resist the pun) in the metal from what I can see on the chart at this point.

There is chart support near 740 and on down in increments of 10 pounds. If the metal were to lose 720, it would constitute a breach of a major support level.

Here's Euro Gold - a bit better looking chart but is mainly because the Euro has been so weak. That being said, it is range bound and moving lower towards the bottom of the range near 920. For Euro gold to have any chance of a sharply higher move, it will have to clear 990 with the 1000 mark more preferable to get any serious excitement underway.

Here is Yen Gold:

Again, the chart is much better than that of Dollar priced gold but this is a function of how poorly the Yen has been performing on the Forex markets against the Dollar. Remember, the weaker a currency is against the Dollar, the more expensive gold is in terms of that currency. The stronger a currency is against the Dollar, the less expensive gold is in terms of that currency.

That is the reason that gold remains ABOVE the 2013 ending price for all three currencies. All have been weak against the Dollar this year. The British Pound had actually been holding its own against the Dollar until just recently.

Gold bulls can gain some bit of comfort from the above. At least the metal has not been falling apart across the global currency front.

I would keep an eye on the gold shares to see if they sense anything as far as a possible bottom. I do wish to remind the reader however, a market may bottom without beginning a sharp reversal to the upside. All it may do is meander sideways within a lower range.

Gold in US Dollar priced terms is in a short term downtrend but remains mired within that broad trading range I have been noting for some time now. In other words, on the Daily Chart it is TRENDING LOWER but on the intermediate time frame, it is still trading sideways above $1180. If $1180 goes for any reason, this market is in serious trouble.

Wednesday, September 17, 2014

Silver Chart ( by Request)

Here is a look at the weekly chart of silver which has already fallen below chart support near $18.60 and thus far has not been able to regain its footing above that key level.

Note that the indicator below the chart has made a new low for the year which is suggestive of further downside yet to come. The key will be whether or not the metal can stay above $18.00 which is the next level of chart support. If not, it looks headed for a test of the bottom of the 2010 congestion zone near $17.50.

A weekly close below $18.00 would suggest the beginning of a TRENDING MOVE LOWER.

GLD continuing to disgorge gold

One of my main metrics for measuring the intensity of Western-oriented investment demand for gold is the giant ETF, GLD. When gold prices are rising alongside of rising reported holdings in GLD, it is a positive sign for future metal prices. When prices are falling, alongside of falling reported holdings, it is a negative sign for future metal prices.

Today's reported holdings dropped about 4.2 tons bringing the total to 784.22 tons. That is a mere 7.3 tons above the lowest level posted this year back in May. 

One can speculate whether or not the holdings with set a new low for the year as we move ahead but in my mind, it is indisputable, that investors continue leaving gold and buying stocks, as that is where the gains are to be found.

I think it also essential  to remind the more technical analysis-oriented investment/trading crowd out there, that the large speculators (hedge funds and other large reportables) still remain positioned on the NET LONG side of this market. That is based on the most recent Commitment of Traders report. As these key technical support levels on the charts give way, those positions are increasingly underwater and are being liquidated. It is that long side liquidation, coupled with an increasing short side contingent, that raises the very strong possibility of seeing gold change handles from "12" to "11" once more.

Time will tell.

FOMC Statement sends Dollar Higher, Gold lower

The big thing that traders are taking away from today's much anticipated FOMC statement is the $10 billion further reduction in QE which is now down to $15 billion/month. Of that remaining $15 billion in QE, $10 billion consists of Treasuries and $5 billion of MBS debt. The Fed is on track to wrap up QE completely next month and that is what has traders pushing the Dollar higher and gold lower. Simply put, the era of abundant liquidity here in the US appears to be over. Note to QE taper deniers- you had better wake up in a real hurry. The market is telling you clearly that it believes the Fed.

Not that the Fed is in a hurry to raise short term interest rates. That still does not look as if it is going to happen any time soon.

What it therefore translates to as far as traders are concerned, is an environment in which low inflation still appears to be the general rule and one in which economic growth will be slow to moderate at best. This means that stocks are still the place to be; gold is falling out of favor even further, and commodities in general are going to be moving lower.

Not that they will not be exceptions to this general rule based on the individual set of fundamentals governing each specific commodity market. However, the big leveraged macro trade buying indiscriminately across the entirety of the commodity sector is not in the cards for now.

The result of this readjustment is that the Dollar remains the "Go-To" currency which can be easily seen in the steep plunge in the Yen, Euro, Swiss Franc and Australian Dollar ( the Aussie is a good proxy for commodities in general). The British Pound is getting a bid of a respite as traders are afraid to push too hard on it with the upcoming referendum over Scotland tomorrow looming.

With the Dollar/Yen hitting a six year high, the story is that the currency markets are going to dictate money flows and for now, those flows are into equities and out of commodities, including gold.

I have a full plate right now but here is a quick updated chart of gold for the reader. Notice that it is poised for a test of the last remaining support zone standing between it and the psychological $1200 number. That zone extends from near $1220 down towards $1212. If it fails there, it is going to test $1200. Below that is the low at $1180. Below that? That is scary.

India/Asia may be buying for festivals, etc. but that in and of itself will not be enough to launch gold higher on any wild surge higher before the year is out; not without Western oriented investment demand which has made the vote against gold for the time being.

One more quick chart - the US Dollar... If the Dollar closes through 85 basis the USDX by this coming Friday afternoon, look out above!

Tuesday, September 16, 2014

Copper Short Squeeze Pulls Metals Higher

If you ever want to know why we commodity traders are occasionally prone to be heard muttering meaningless, seemingly disconnected sentences, rambling incoherent utterances and other assorted bewildering, strange words, it is because life in the commodity futures pits can produce some of the most inexplicable and bizarre moments that the vast majority of sane, otherwise blissfully ignorant folks will never quite comprehend.

Take copper for example. Around 10:00 CDT, the red metal began to lift sharply higher on big volume. Something began to rattle the shorts in the market. Then at the start of the next hour, it really took off. Look at the extent of the price spike. It ran from 3.10 to near 3.21, a HUGE 11 cent per pound jump on no discernible news whatsoever. By the way, for enquiring minds, that is a near $2500.00 move per contract! Do any of you remember that recent COT chart I posted of the copper market noting the hedge funds had begun positioning on the short side of the market in anticipation of slowing global economic growth? Well guess what? They all must have run at the same time!

I am still trying to discover what the catalyst was to shove copper prices this higher in such a short period of time. I did note however that the move higher in the copper also coincided with a strong burst of buying in the crude oil and related energy markets. Also, in trading the soybean market, I also noted a surge of buying interest coming in at the same time. This all occurred against a backdrop of a push higher in the major currencies against the US Dollar.

What this tells me, and I still do not know the reason behind the move, was that this was the same old MACRO TRADE that we have seen in the past wherein INDEX FUNDS come in and buy a basket of commodities, across the board, regardless of fundamentals, because of the lower dollar trade. That will explain some of this but a large part of the move across the sector was also due to hedge fund short covering.

What makes this even more strange is that expectations are that the press release coming from the FOMC tomorrow is expected to provide some more definitive data on any upcoming rate hike. That has been expected to provide another upside boost to the US Dollar. Maybe the market is changing its views on that? Who knows? Whatever the reason the initial burst of buying has seemed to abate somewhat as the panicked shorts in the red metal apparently have been flushed out but now what?

Also, this big buying binge has been accompanied by another surge in the equity markets with the S&P climbing back above 1990.

I can tell you this - anyone who dismisses the Dollar's significance when it comes to asset prices is making a huge mistake. That big macro trade is always ready to come piling on or come piling off.

By the way, at the risk of having some fun with the "Gold is Always Manipulated All the Time" crowd, ( GIAMATT), is a big short squeeze higher considered upside manipulation or it is "Normal"? Those of us who have borne the brunt of the attacks from this group already know the answer to that. I merely point this out to show their complete silence by way of their condoning sharp spikes higher in price while constantly complaining and bemoaning all sharp moves lower in price. "oh Ye Hypocrites - why art thou so silent at such sinister conduct"? Enough fun for now however!

Remember, copper prices have been taking their cue mainly from disappointing Chinese economic data news with traders fearing a slowdown in the expected growth rate would crimp demand for the metal. Combine that with Dollar strength due to expectations, whether perceived rightly or wrongly is immaterial, of higher interest rates here in the US, and commodities have distinctly fallen out of favor with would be buyers, not to mention been the target of aggressive hedge fund related selling. Any sort of news therefore that sends the Dollar lower (such as dovish talk on interest rates ), for whatever reason, can easily spark a big wave of short covering across the commodity complex.

That is exactly what we got across the vast majority of the complex this AM.

Keep in mind that there are many who believe that the economy is in no shape to handle higher interest rates as it is not growing near fast enough nor has enough inherent strength to overcome the drag that would come from higher loan rates.

We'll see whether this is a one-day blip ( although it is terrifying if one is short in some of those markets that experienced a squeeze of this nature) and it all is for naught tomorrow when we get the actual FOMC decision to taper another $10 billion in QE plus news on the interest rate front or it is might be the start of more prolonged move.

I tend to think it is the former and will fade out fairly quickly but with these goofy markets and computers running the show, anything is possible. All one can do is to stay nimble and either learn to get the hell out of the way or trade very small at times. Be careful out there folks! If the FOMC release tomorrow is considered dovish, there could very well be more selling pressure seen in the Dollar, even though the Euro zone is a mess and going nowhere anytime soon. Ditto that for Japan.

Monday, September 15, 2014

USDA Latest Crop Conditions

Here is a summary:

                                   EXCELLENT                                                                  GOOD
                          09/14/2014            09/07/2014                         09/14/2014                      09/07/2014

CORN                    22                          22                                         52                                52

SOYBEANS          19                          19                                         53                                 53

As you can see, the crops held steady this week with the share rated Good/Excellent at nearly 3/4 of the entire corn crop and 72% for the bean crop. These are superb numbers. Last Friday, frost issues heading into the weekend propped up both markets and enabled them to shrug off the extremely bearish numbers from USDA in last week's Supply and Demand report.

With the frost damage minimal at best, the conditions index and more importantly at this point, the maturity ratings are going to come back into focus.

What a difference a single week can make for maturity.

I have been commenting recently about the lag in maturity of the crop with my thesis being that the outstanding growing conditions, ample moisture and mild temperatures, have kept more energy heading into the ears ( kernels) and pods respectively instead of the plants following their more usual process of beginning to shut down. That I believe is going to lead to heavier/larger kernel fill and the same with pod filling ( heavier/larger beans).

This week however both crops took some nice jumps in their maturity process. Corn is 82% dented now compared to last week's 69% and the 5-year average of 85% so it made excellent progress in that regards. A full 27% is mature compared to 15% last week and the 5-year average of 39%.

The extreme northern tier states are the areas in which the crop is the most behind but that is to be expected. It is also the reason that we got that burst of shortcovering when meteorologists began inserting frost into the forecast last week ( in those same northern tier areas). With recent forecasts showing a more seasonal trend in temps, we should begin to see some catching up on that maturity level pretty quickly now. By the latter half of this week, most of the corn belt will be enjoying some very nice warm temps.

By the way, 4% of the corn crop has been harvested. That compares to last year's number at 4% and the 5-year average of 9%.

For beans, 24% of the crop is now dropping leaves compared to 12% last week and the 5-year average of 32%. Not too bad!

I do not see anything in particular in these reports that would lend much if any support to the bull cause at the moment mainly because the forecasts that I see are not putting in any hard frosts for some time.

Today's blip up was the result of traders looking ahead to tomorrow's USDA acreage numbers ( from a different division with the USDA) trimming some off of the recent numbers we just got. My own view is that anything they come up with is going to be too small, ( if at all ) to change the perception of an enormous crop coming very soon. We will just have to wait and see.

I am more and more of the view that the last straw that the bulls are going to be able to hold to is an early killing frost, and while these weather forecasts are always varying on us, odds are lessening. Another week or two of nice warm days is going to really push this crop towards its final stage of harvest.

China's Economic Data Unsettles Copper Bulls

More pressure on the copper price this morning is coming as a result of news out of China that its industrial production for August showed the slowest rise since December 2008. Industrial output did rise 6.9% from the previous year's August but that was down from a 9% increase in July.

If that were not disconcerting enough to traders, China's retail sales rose 11.9% in August which is a good number, but it too was down from a 12.2% gain in July.

While at face value, these are good numbers, ( and wouldn't we love to see them here in the US!), the problem is that they feed into ideas that overall growth in China is continuing to slow. The general consensus is that China will experience an annual growth rate this year of 7.5%. This recent data throws some cold water on that expectation.

Copper, which is already seeing selling as a result of lower economic growth forecasts ( see my recent post on hedge fund positioning on the short side of the market ), has moved down to retest last week's low in price near the $3.06 level. If bears can succeed in breaching that, I frankly do not see much in the way of chart support until one nears the $3.02 - $3.01 level.  

As a side note, silver is also being pressured as is platinum which is continuing the theme of selling across the industrial metals. Palladium is a bit higher as I type these comments but its recent trend has also been lower. Clearly, investors are fretting about global economic growth rates.

Saturday, September 13, 2014

Large Specs Continue Playing corn from the Long Side....and Losing

I have been commenting for some time now about the apparent disconnect between the hedge fund community and their slavish devotion to computerized trading systems, which are especially fond of trending markets, and their positioning on the wrong side of a major downtrending move in the corn market.

Not only are they long, they actually increased their net long standing this past week just ahead of the major USDA supply and demand report.

Apparently, not wishing to be alone in their misery, they must have recruited some other large reportables in their quest, because that category of traders likewise increased their already net long exposure to the corn market.

Here is the chart... you tell me which way this market is trending:

Here is a look at the Commitment of Traders report as of Tuesday this past week:

Back in early May the hedge fund guys began liquidating longs when the front month corn contract was unable to scale $5.15 or so after several attempts. You can see their exit from the commodity by comparing the price chart above with their net position line on the COT chart. Down, down, down corn went with them still remaining net long, ever after scaling back exposure. That came to a halt towards the end of July when they began rebuilding long side exposure. That re-entry on the long side helped push corn back up another $0.20/bushel towards $3.80 but that did not last long. Down it went some more all the way towards $3.40 with the same group still increasing longs.

What is going on here? How could a group of traders who live by the charts and whose entire discipline of trading consists of blindly following trending markets, whether up or down, miss a move of this extent to the downside? Also, since they are typically considered "smart money" and the small, undercapitalized trader is considered the "dumb money", how can one explain that the small traders, or general public, have been on the winning side of the corn market while the "smart money" has proven to have been the "dumb money" this time around?

A few, whom I respect, have suggested that this is the result of spreads being plied by these large specs who have been buying corn and shorting wheat as the fundamentals for wheat have been even more bearish than for corn. US wheat has been expensive compared other sources and with the US Dollar strength, even more pricey.

That seems to make sense but a closer examination of the spread chart ( corn vs wheat) would seem to conflict with the idea that it was a large number of these spreads with hedge funds on the long side of corn and on the short side of wheat explaining their apparent wrong positioning in corn.

Note on the COT chart that the big move out of corn as far as net long positioning goes by the hedge funds, began in May. Now look at the spread chart and what do you see? In early May the line shoots up sharply from near 225 under and runs all the way to 140 under. Clearly corn was gaining on wheat as it narrowed its discount. But, and this is noteworthy, the gain in the corn/wheat spreads came as hedge funds were bailing out of corn

In other words, hedge funds were not buying corn but rather were liquidating longs and scaling back their exposure to the long side of the corn market even as corn was gaining on wheat. The spread was moving in favor of corn as they were getting out, not as a result of them coming in to institute fresh spread positions.

If hedge funds were positioning on the long side of the corn market because they were spreading corn against wheat, the COT report would have shown them INCREASING THEIR NET LONG exposure to the corn market ( not decreasing it as they did ) all the while the line on the spread chart was moving higher ( favoring corn). The exact opposite happened however.

Referring again to the spread chart, it topped out in favor of corn in mid-June where the spread retraced a large portion of its gains and widened out ( in favor of wheat) by some 65 cents. I think some of this was clearly tied to the events in Ukraine during which wheat experienced some big rallies as traders feared a disruption of exports from key wheat exporter Ukraine. Black Sea origin wheat is a big competitor to US wheat and the latter rallied in price as traders were concerned about more business coming the way of the US and possible "force majeure" declarations.

Those fears were put to rest, flared up again, and put to rest once more as can be seen from the up and down action in the spread since early August. For the rest of that month, the spread moved in a 35 cent range.  Late in August, it began to turn again in favor of corn and has begun to climb once again.

Looking back at the COT chart and the build back in net long positioning for the hedge funds shows an increase that began in late July and has been for the most part continuing up to this past week.

You can also see that the corn/wheat spread has begun favoring corn at the same time these hedge funds have been adding to their net long position in corn. The theory that they are net long ( and on the wrong side of the corn market ) because they are working corn/wheat spreads thus NOW has credibility because the move in the spread in favor of corn is coinciding with the increase in their net long side exposure to corn.

How long they intend to work this spread however remains to be seen. Nor does this explain why they remained such large net longs in a market that clearly broke down in May of this year and has continued to move even lower in the face of one bearish USDA report after another.

The fact is that they have been stunningly wrong about corn and while they may now be playing a spread trade with wheat that is temporarily working in their favor, at some point they are going to be hit with the fact of a massive  ( a RECORD) corn crop alongside of a record soybean crop which is going to run into issues with both STORAGE AVAILABILITY and TRANSPORTATION AVAILABILITY.

My concern for corn is what happens once these hedge funds begin to close out losing longs or reverse spread trades ( which will also result in liquidating the long corn side of the spread)? We could very well see more downside than many are expecting, even at these greater reduced price levels compared to several years ago.