"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

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Monday, July 16, 2012

Grain Index Approaching 2008 Peak

I have mentioned that one sector of the commodity complex that has been able to defy the general selling trend that strikes the overall sector during RISK AVERSION or SLOWING GROWTH trades, has been the grain sector.

The reason? Simple - the fundamentals on the SUPPLY side are so strong due to the horrendous drought impact that any setback in price related to algorithm selling has been met with very strong buying from fundamental based buyers.

As the drought continues to ravage the crops here in the US, wheat has been pulled higher due to inclement growing weather in the Black Sea region. The end of all this has been to take my personal GRain Index to levels nearly equal to the peak prior to the onset of the 2008 credit crisis here in the US.

Unlike that time period however, when the entire commodity sector was running wildly higher and crude oil was making a go at the $150/bbl level, the commodity sector is being GENERALLY sold as an asset class due to fears of a  slowdown on the DEMAND side of the equation.

It is going to be interesting to watch to see if demand for the grains can be sustained at these lofty levels.

Regardless, with this all important ESSENTIAL sector moving to these near record levels, suffice it to say that consumers and end users are going to feel the impact in the months ahead, if not already. The last thing that cash strapped consumers wanted or needed was further stick shock at the grocery counter.

My guess is that this huge move in the grain sector is going to put a serious dent in the disposable income of the average consumer and that this is going to be witnessed in another hit to the retail sales moving forward. Simply put - more and more of the shrinking pie of consumer income is going to end up going to food costs in the coming months. That is not exactly bullish for the US economy nor the global economy for that matter.

With one sector of the commodity complex moving sharply higher and other sectors languishing, we are once again being treated to yet another set of conflicting crosswinds that will muddy the prognosis between fears of inflation and fears of deflation.

Same Play - Second Act

Nothing has changed in the complexion of the gold market for nearly two months now. It is rangebound in a consolidation pattern. What this means is quite simple - all predictions of gold either collapsing or soaring are just that - predictions - the truth is until this market breaks out of its trading pattern, no one knows with 100% certainty exactly where it it is going or what it is going to do next.

The best traders never hurry a market nor do they curse it because it does not act like they want it to do - they just accept it for what it is currently doing and watch for an opportunity to act.

Having said that, most floor locals are enjoying this range trade - they put their kids through college in these kinds of markets since they are able to sell at the top of the range as they watch the order flow and buy it all back near the bottom of the trading range, again, as they watch the order flow. In the event the market deviates from its pattern trade, they will go with the breakout and see how far it can run before the momentum ebbs.

Most novice traders will buy near the top of the range, expecting a breakout, only to watch the market reverse on them and stop them out with a nice fat loss. They will also sell near the bottom of the range as all the bearish analysts and prognosticators surface, only to watch the market snare them in a bear trap and snatch their money away from them.

To be successful, one has to recognize the pattern a market is in and respect it.

I obviously have a long term bullish bias towards this metal due to what I know is happening in the currency markets and the actions of the Central Banks and other monetary authorities. I do also know however that until the MAJORITY OF TRADERS become convinced that the next real thing to FEAR is INFLATION, gold is going to have trouble maintaining any rallies.

As I have stated here many times over the last two months - the current mindset of most traders is one of fearing a global slowdown or deflationary pressures. The only thing that snaps them out of that is anticipation of further Central Bank activity along the monetary stimulus front.

Another way of saying this is that the ONLY THING PREVENTING AN OUTRIGHT WAVE OF SELLING PRESSURE ACROSS THE RISK ASSET SECTOR IS HOPE FOR FURTHER CENTRAL BANK LIQUIDITY PROVIDING MEASURES. Whenever the market thinks that the economic data is rotten enough to pressure the Fed into acting on the monetary front, they will bid up both equities and commodities in general. Whenever the opposite is true, and the market is depressed as it loses hope for any immediate or forthcoming stimulus, down goes the equity markets and the commodity markets, in general. (As stated before, the fundamentals in some markets are so strong, as is the case with the grains, that they can defy the general RISK OFF Trade).

Until we get some sort of resolution to this stalemate, the odds favor a continuation of the current trading pattern. As usual, we will be closely monitoring price action to see if we can spot any potential shift in this current sentiment.