"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


Friday, June 6, 2014

Metals Commitments of Traders

To start this short set of comments, let's begin with Copper, which was hit hard this past week as news came out of China that the authorities were seriously investigating the double and triple counting of copper used to secure bank loans. I have mentioned in previous posts that the internal positioning of the LARGEST set of speculators in this market was something that I have not seen occur too often; more specifically one in which the hedge funds are positioned rather heavily on one side of the market with the "Other Reportables" taking the opposite side of their trade. I commented that one of these sides was going to be proven very right and the other side very wrong.

Looks like the hedge funds came away holding the short stick!

Take a look at the chart and then look at the COT chart. Notice what has happened to the price this week as that news hit the market to start off the week. The red metal dropped over 15 cents off its ending level last week before rebounding on Friday as some shorts rang the cash register.

Now here is the COT chart. Look at what happened to the hedge fund net long position and compare that to the Other Reportables who have had a significant exposure on the short side of this market. Sadly for us, the report does not cover the action from Wednesday to the close of trading today when copper plunged a further 10 cents since the drop the Tuesday cutoff date. Can you see the hedge funds running and what it did to the price?

Based on what I have seen of this report, when comparing it to the price action over the previous reporting period, it is not hard to see that hedge funds were getting hit hard on their wrong bet and were exiting in size. The late session bounce here on Friday makes it a bit harder to read as to whether they were coming back in to any significant increase in long side exposure once again or whether it was just pre-weekend short covering after such a big drop in price. I suspect it was more of the latter than the former.

The really big thing to me is just how aggressive the hedge fund community is becoming towards the bear side in the silver market.

Silver fell through important chart support centered near the $19 mark early in the week. Yesterday it popped higher on the ECB news but today it failed to extend or build on those gains. As has been the case for this metal for a while now, rallies are being sold. Just look at how the market fell early this week but then ran into more selling today as it failed to recapture that broken level of support near $19.

One look at the COT chart shows why. Hedge funds were aggressively attacking the metal this past reporting period. Interestingly enough, it was not so much of them bailing out of existing long positions as it was them adding a large number of brand new shorts. That is what drove the price down through $19. I have numbers going back further but for the sake of ease-of-reading of the chart, I am using data back to 2009 or five years ago. Hedge funds are now holding the largest net short position in at least five years!

I should continue to note here that the Other Reportables camp is still on the net long side - once again they are at odds with their large cousins but not nearly so balanced out as they have been in copper. It looks like some of these guys are spreading copper against silver with hedge funds taking the bull spreads and the other reportables taking the bear side of that spread.

When it comes to gold, hedge funds were big sellers this past week. Here is the thing however when it comes to gold - they continue to be stubbornly bullish as they remain net long just like the Other Reportables and even the small specs or general public do. In other words, yet another week, another deterioration in the chart pattern, and yet the entirety of the speculators refuse to get out and are still net longs. That continues to cause me to marvel. One wonders how much more money some of these guys are willing to lose before they decide to finally get out. I am concerned that as long as these stubborn bulls, who are mounting greater losses, continue to hang on, they are merely postponing any lasting bottoming process for the yellow metal. It seems that the bulls are going to go down with the ship.

At least one positive sign is that the little guys, the small specs or the Nonreportable Positions, look as if they are finally giving up the ghost. They remain net long but dumped about 1700 more long positions than they covered shorts this past week. Their net long position is the smallest it has been in nearly 4 months so that is somewhat constructive.

Here is the COT chart.

Here is the price chart comparing the net position of the hedge funds.

You can clearly see the speculative selling trend of this group and its impact on the price level As they sell, the metal moves lower. As stated above, they are still net long this market however and that troubles me.

Some are already talking up potential short squeezes but as I have said before - they are always talking POTENTIAL short squeezes - because, are you ready - in every single market on the planet that exists there is the POTENTIAL for a short squeeze. Big Deal! What is required is some sort of news or event that will trigger a technical buy signal to force some of the weaker shorts out. However, what is more important that any nebulous "potential short squeeze" is the prevailing trend of the speculator and right now that prevailing trend is one of selling.

I would much prefer to see these precious metals markets with the speculators all on the short side and sentiment miserable to convince me that we have truly formed a solid, long term bottom. Right now, all we are getting is rallies that get sold.

Let's see what next week brings us and whether or not the actions of the ECB this week will be enough to keep the gold price supported among those investors/traders based in the West.

D Day - 70 year Anniversary

Many us of tend to get so engrossed in the markets that we often forget or are distracted to the point of forgetting, that the reason we are able to sit in comfort in front of a computer screen or engage in arguments over the Internet, without fear of the government knocking down our doors, etc., because brave men, paid the ultimate price to secure our liberty for us.

Such was indeed the case, 70 years ago to this very day, when American and Allied troops waded ashore in the face of a wall of lead and explosions, on the beaches of Normandy, France. Every single time I read their stories and about the events of that day, I am moved by their courage, their dedication and their honor and bravery.

I try to think what it must have been like to approach a beach in those landing crafts, knowing full well that the moment that ramp goes down, you are exposed to enemy gunfire which is not going to end unless you can somehow reach that enemy and silence him before he silences you. Amazing, amazing bravery.

Thank you.


Jobs Day Arrives

Yesterday was "one down, one to go". Today was the "one to go" day. We got the employment numbers and they came in stronger than the number that the market was looking for. The reported number was 217K for the month of May beating analyst expectations of a 210K increase. The unemployment rate fell to 6.3%.

The response of both the Dollar and the gold price was very interesting. The Dollar initially bumped up while gold dropped slightly but then both reversed course with the Dollar moving lower and gold moving higher. Both markets then reversed course once again. The result of this is to provide evidence that investors/traders are uncertain in their outlook for both interest rates and inflation.

I find this price action noteworthy enough to repeat something that I have been writing about for some time now - that the main factor preventing any inflationary pressures from gaining a foothold in the US economy has been slack in the labor markets.

Along this line, let me make a special note here - coming from the emails that I receive blasting me for being ( insert unprintable curse words here)  'stupid enough to believe the government's numbers'.

Whether it is the stated inflation rates coming from the CPI/PPI, the GDP numbers, or as is the case for today, the employment numbers, I am constantly insulted and reviled in private for detailing what the feds are reporting and how the market is responding to such numbers, as if reporting on those and commenting on those is now considered by that crowd to be "consorting with the enemy".

I have said it previously and will repeat it here however, those GIAMATT perma gold bulls had better STOP ROOTING for lousy economic numbers as if somehow that is going to be bullish for gold, and had instead better be rooting for evidence of growth that is strong enough to generate inflation.

They can repeat their mantra that QE is going to last forever and that the Fed is never going to end it until the cows come home but the facts are quite simple - the Fed has engaged in 4 rounds of QE  ( if you count operation twist in there you could change that number ) and is now tapering the last round. The commodity markets, including gold and silver, both rallied strongly during rounds One and Two, as most everyone on the planet expected that policy to produce a rate of inflation that the Fed was looking for. It DID NOT. Why should any more QE ( as they affirm constantly is guaranteed) going to produce something different, namely no inflation? Answer - it won't - at least not until the employment picture improves in my opinion. That has been the problem all along - namely that the liquidity that the Fed is providing has not made it into the broader economy in a large way as evidenced by the falling Velocity of Money rate.

People must have jobs and they must feel that their jobs are secure enough before they are going to dig themselves deeper into debt by taking on new credit. It is that serious growth in consumer credit that is needed to at least, at the bare minimum, put in place the groundwork necessary for Velocity of Money to increase. Without that, inflation is not going to be an issue.

Traders/investors who dig deeply into such things understand this. This is the reason gold (and silver for that matter) have gone nowhere the last few years. Not because they are constantly manipulated at the Comex or regularly smacked down by evil bullion banks doing the bidding of the government but because investors have NO EXPECTATION of GROWTH fast enough to generate any upward inflationary pressures. If you doubt that, go back and reference that TIPS spread chart that I have provided as evidence. As far as the broader market participants are concerned, it is a near perfect environment for stocks - slow and steady growth with little inflation and extremely low interest rates.

If gold is going to mount a sustained rise, it will at least need inflation to be a concern in the minds of traders, not that it is the best inflation hedge out there ( I happen to think that crude oil is actually a better one ). Nonetheless that means any pickup in interest rates must lag the inflation rate and we need to have an environment in which the general commodity sector as a whole is rising. We have had neither. Simply put, inflation is no where remotely a concern of most traders and the reason it is not, is because of the employment picture and the data connected to that ( consumer credit, VM, etc.).

I am wondering, now that we have gotten some back to back readings of +200K job gains,  if the market is now beginning to take a look inside the headline number of these jobs reports and keying in on the "Average Hourly Wage Growth" number. The jury is still decidedly out on this, based on the movement in the bond markets today with yields actually declining. Still, that being said, the YoY ( year over year) rate of growth for that hourly wage is 2.1%. The Average Workweek came in a 34.5 hours but it is that former number that has peaked some interest. Neither number is evidence that growth is anywhere near strong enough along that front to fan inflation pressures; yet. That average hourly wage growth number is going to take on increased scrutiny in the upcoming months in my view. Investors are going to be looking to see if these wage gains can get back to the level that they were PRIOR to the 2008 Recession.

I guess what I am trying to say here, and perhaps not clearly enough through all of the statistics that I am referencing, is that investors might be coming around to accepting that job growth, while not setting the world on fire, is at least steady enough so that they can now shift their focus somewhat to wage growth or the lack thereof. In other words, they are less concerned about the outright employment numbers and perhaps becoming more interested in whether or not the ingredient to push inflation into the mix is beginning to appear- namely, increasing wages.

We'll have to see if that is the case but that will require that we get no more sub 200K job number readings. There is a bit of chatter out there today that the rebound in this month's readings were due somewhat to pent up job demand that resulted from the inclement weather early in the year and that there is a risk of this demand leveling off somewhat resulting in the number in subsequent months to actually decline from this month's reading. Again, that may be the case - we will just have to wait and see.

I will get some more up later on as the session progresses and we get to see the action across more of these individual markets. For now ( and this could change ) traders are buying stocks, interest rates are ticking slightly lower ( no inflationary concerns), the Dollar is slightly firmer, and gold is a bit lower. Silver has fallen below $19 once again, which is now serving as overhead resistance and copper is down nearly 2%. That China news is dominating the red metal. Let us hope for the sake of the gold bulls out there that China does not turn its attention to gold-backed loans! If you want to see what might happen to the yellow metal should they do so, just look at copper.

Corn and especially wheat, are higher today. Looks to me like some pre-weekend short covering is occurring right now after their big drops this past week.