"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


Saturday, August 2, 2014

Weekend Comments

If you want to see what the obstacles are to gold embarking on a new, sustained, sharp upward trending move, take a look at the following set of charts.

The first is one drawn from the Commitment of Traders reports. It denotes the TOTAL OPEN INTEREST. I use this to get a sense of money flows either into or out of, a commodity.

The dark line is the total open interest. Can you see what it has been doing since the peak in the gold price back in 2011? It peaked well over a million contracts of futures, plus options. This week it had nearly fallen to nearly one half of that record level!

What does this tell you? Answer - "interest" in gold as an asset class among Western-based investors has plunged over the last three years.

What has been the result? Answer - the gold price has also plunged.

Inference - speculative demand drives gold prices. If that demand falls, so too does the gold price. If that demand rises, so too does the gold price. There is nothing sinister about any of this as those constantly crying up "manipulation" would have you to believe . It is a function of demand or the lack thereof.

Here is the next chart to consider. It is the reported holdings of the large gold ETF, GLD.

The amount of reported gold holdings in the trust at the end of last year was 798.22 tons. The yet to be updated amount reported as of this Friday's close was 801.84 tons. That amounts to a rather lackluster increase of a mere 3.62 tons in eight month's time. Hardly the stuff of legends now is it?

The point in this is to illustrate SENTIMENT. Frankly as a trader I try not to get too bogged down in intricate details when looking at things like this. I want to try to glean whether or not an asset class is in favor among the big speculators that dominate our markets. If it is, I want to be with them. Trying to fade them and play the "contrarian" is a surefire method to lose money. One has no idea when they are going to shift. You can observe their buying or selling and try to anticipate what they are going to do, but until you get a clear signal, do not act, unless of course you enjoy donating your wealth to them on a regular basis.

There seems to be a mindset among some reckless individuals that a successful trader is "brave, daring to go against the masses and take the other side of a popular trade". They seem determined to prove to themselves how noble they are or some other such nonsense by so doing.

 You see it all the time... "prices have fallen so much that it is time to buy". It is said that " a fool and his money are soon parted". That is never so true as in the trading arena, and particularly in the commodity futures world. How do you know that the price cannot fall further? Or how to you know that the price cannot rally higher if you are shorting a market? Answer - you don't. Now of course you can roll the dice and gamble that you are correct but trading is not gambling. I would suggest that if you want to gamble that you exit the trading profession and become a full time player in Vegas. If you are going to lose your money, you might as well do it surrounded by beautiful women and good food and music! It sure beats giving it to some nameless hedge fund manager and his pet computer.

Switching gears here - I mentioned that I wanted to see this week's COT reports for corn to determine whether or not the big speculators were still on the net long ( AND WRONG) side of the corn market or whether they might have finally made the transition to the short side. Guess what? They are still long and wrong! I continue to find this nothing short of astonishing. I have seen a lot of bull and bears markets in the commodity sector in my time but I cannot remember very many of them in which the largest specs had missed out and were on the wrong side of a major trend.

This corn market therefore astonishes me.

Take a look at the chart...

Now look at the positioning of both the hedge funds and the other large reportables. Both of them are still net long

You will observe that the hedge fund net long position peaked in April of this year when corn stalled out near $5.20. Since then it has fallen nearly $1.70/ bushel.

The hedgies began building their net long position back in November of last year when corn prices were in the general vicinity of $4.20. Prices have fallen another $0.70 since then meaning those hedge funds who bought in last November and who are still long are seriously underwater on their trades. One would have thought that once that entry level was violated on the charts, their computers would have taken them out. Apparently not so.  

Not to be outdone, the other large reportables have been net long corn since the days of Noah. They too are getting their butts handed to them. The little guys however, the small speculators, the ones that are constantly being mocked by the big specs as being the "dumb money" have been taking the large specs money from them as they have been short this market for a long time.

Obviously I am speaking in generalities in the sense of "categories" since not all hedge funds are losing money ( some are indeed short as are some of the other large reportables) but the point is being made that sometimes even the large specs screw up royally in a trade.

My question at this point is whether or not the big speculators are ever going to actually move to the net short side of this market. They did so in the soybeans but have not yet done so in the corn. If they do, and I have no way of knowing whether or not they will, there is a fair amount of further downside in the corn market. Maybe they will essentially move to being flat and that will do it for their selling but even if they do that, we could easily see corn drop another $0.20/bushel from current levels, if not more.

I would think that end users would look at prices at that level as being so cheap compared to recent years that they would trip over themselves to get long side coverage. Ditto goes for the export buyers but I have learned that low prices can always go even lower. We will just have to watch the price action and see what the market is telling us.

Still, this is one of those charts and years that I am planning on not forgetting. A huge bear market in which the largest speculators have missed the move lower and were on the wrong side with the small speculator reaping the reward.