"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


Tuesday, April 15, 2014

China Demand News, Lessening Ukraine Tensions Sink Gold

Last evening I posted the news concerning the World Gold Council's report about Chinese gold demand for 2014. Please see that post for the details.

Also, chatter continues to surface that China's economy is slowing. Now whether or not that is indeed the case can be argued, ( I tend to think that it is because of what is happening with the price of copper )  but many traders are viewing such talk as bearish for the price of the metal. The reason? If the economy slows the thinking is that there will not be as much money around with which to buy gold. Along this line is news out of China that its money supply grew only 12.1% in March compared to the same period the previous year. The People's Bank of China has a target of 13% growth. This is the first time since April 2012 that the target has been missed.

Another way of saying this is that Chinese credit growth is slowing and that has the buyer of both base and precious metals spooked ( palladium and platinum have been running on Ukraine issues ). This is the reason that silver is getting whacked with an ugly stick today and why copper is swooning once again.  

Traders are going to be watching the GDP numbers for China due out overnight here in the US. This will more than likely be a market mover for copper.

Remember, I am just telling you what the market is trading on; I am not saying it is gospel truth so please, gold perma-bulls, keep the nastygrams at a minimum.

Related to this are reports about Chinese use of gold for collateral in financing business deals. Estimates vary about this but the Financial Times reports that the WGC estimates it may be a high as 1,000 metric tons. That is not an insignificant number!

Today, if that were not bad enough for gold, traders interpreted President Putin's call for talks for a diplomatic solution to the situation in the Ukraine as a lessening of tensions. That is taking some of the risk premium out of gold although traders are reluctant to press it down below support at this time as that situation is anything but resolved. Still, any ratcheting down of tensions is negative to gold.

It must be kept in mind by those who buy gold based on geopolitical events that this is perhaps one of the most riskiest of reasons to buy the metal. I have said it before and will repeat it - price rises in gold due to geopolitical events can and will evaporate just as quickly as they began. Remember that when you bet the farm on more "end of the world as we know it" talk coming from the gold bugs.

Most seasoned traders look to sell such rallies knowing that once the event is full priced in, there is no longer any fuel for a further rally unless things worsen beyond what the market has currently priced in. It is the old adage of "buy the rumor and sell the fact".

From a technical perspective, nothing has changed in relation to gold in one iota. It is still in a broad trading range. Our old friend, the $1280 region continues to define the lower portion of the range while the top of the range has been pressed lower towards $1320. To change the complexion, one or the other level must give way. If the bulls can break through this week's high, they should be able to reach $1340 where another test will occur. On the bottom, a breach of $1280 would portend another drop of $20 towards $1260. Support is layered in $20 increments.

Once again the usual claptrap about GOFO and backwardation in gold has surfaced. Ignore it and listen to what the market is saying. Gold is range trading - no more and no less.

By the way, for those of my European friends who trade the yellow metal, Euro gold has support near the 930 level. Resistance is near 960 followed by 980.

A quick look at silver by request.... notice that while the metal has bounced off its initial level of chart support shown by the upper red rectangle, it has as of yet, been unable to move convincingly above it. A close BELOW $19.50 and the odds favor a move down towards $19 once again.

The metal remains below its 50 day moving average, which is bearish. Also, the ADX, while it has been steadily falling indicating the lack of a clearly defined trend is showing some subtle signs that is has stopped falling and may be getting ready to rise. If, and this is a big "if" at the current time, we see it breach $19 and be unable to get back above it, the ADX will be rising indicating the potential for a fresh leg lower in the metal. That would set it on course to fall towards $18.35 - $18.20.

On the grains front - soybeans continue moving higher as that tight old crop carryover situation here in the US has resulted in a bidding war for available supplies, in spite of the fact that the big S. American crop is now workings its way into distribution channels. The market is ensuring a huge acreage number for this season here in the northern hemisphere. Farmers are no doubt going to oblige.

The beans seem to be pulling everything higher including wheat and corn, which is off to a slow planting start this season. I personally have learned to ignore all that talk about "slow plantings" because too many of these newbie traders have never seen a piece of modern farm equipment but the fact is that the market still reacts to this sort of talk so one has to respect it. As mentioned in a previous post, I am hopeful for large and healthy corn and bean crops this season up here as our livestock and poultry producers need a break from this high priced feed.

The Euro failed at 1.39 and has now fallen to 1.38. There is some support on the charts near the 1.37 level. If that fails, we could see the beginning of a trending move lower for the Euro.

One last thing - any of you hog producers out there, please be mindful about what I wrote this weekend about 4th quarter hog prices. Don't let the wildly bullish talk from some who keep talking about how "cheap" 4th quarter hogs are in relation to the summer months beguile you into missing out on locking in some excellent profits. They are cheap for a reason!

Traders - keep in mind that I am speaking about producers who have to manage price risk and can secure good to excellent profits in their expected production with strategically placed hedges. They must take a different approach to markets than we speculators.

There are several option strategies which can be employed. Talk to your broker if you have any questions. One can secure price protection on various percentages of expected marketings while keeping some open as "gambling stocks" in the event of higher prices later this season. Just be careful as a great deal of uncertainty remains in this market and that is causing some wild swings in price. That will continue until the market settles this virus issue one way or the other. If you roll the dice betting on nothing but higher prices, your odds of getting it right are 50-50. I would not want to bet the farm on that especially if I had the opportunity to guarantee myself some good profits and thus sleep well at night.