“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


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Wednesday, May 1, 2013

China Data Fuels Talk of Global Slowdown

China released its version of the PMI (Purchasers Management Index) today and the news was not good. Analysts had expected a reading of 50.9. What they got was 50.6. In all fairness, anything over 50.0 is considered expansion but this news, coupled with the recent slowing in their GDP number, has gotten investors/traders increasingly concerned about a global economic slowdown.

While China is growing, its RATE OF INCREASE IN GROWTH is not and a trend is what traders focus on.

Certainly, the base metals (copper, tin, lead, aluminum) all reacted negatively on this news. Copper fell down towards last week's lows and looks as if it might want to violate that critical region of chart support. Hedge funds are now pressing this metal solidly from the short and if the recent trend in the Commitment of Traders holds, they are liable to now be net short in silver. Unfortunately, this Friday's data release will not catch today's action but I would bet the farm that the hedge funds are shorting across a large number of commodity markets in increasing numbers.

I  want to stress how important this support zone is that I have noted on the chart. If copper fails here to end the week, it is going to portend a definite slowdown in the global economy and one which I am of the opinion of, that not even the stock markets are going to be able to ignore any longer.


Incidentally, Silver failed at the $24 barrier again. It has flirted with that strong resistance level but cannot keep it gains ABOVE that key mark. Hedge funds are pouncing on it whenever it rears its head up here and until it can prove the bears wrong but maintaining its footing above $24, they are going to be emboldened to sell all rallies. Support remains intact below $22.50 or so keeping silver confined in a trading range.



Not to be outdone, the US released the ISM (manufacturing purchasing managers index) today also. The number fell to 50.7 in April, down from 51.3 in March.

If this news was not bad enough, the EIA information this AM, showing crude oil stocks at a THREE DECADE HIGH (yes, I am not making this number up), effectively resulted in both crude oil and unleaded gasoline getting beaten with an ugly stick. (At least we can expect some lower prices at the pump). Astonishingly enough - crude oil inventories were at 395.3 million barrels - that is the highest level since the EIA started reporting this weekly data back in 1982.

While some of this energy data is related to the efficiency and ingenuity of the US domestic oil industry, particularly the increase in production tied to shale production, it still suggests that any "growth" in the US economy is moribund at best.

Combining this data makes me even more resolute in my view that the US equity markets are firmly in bubble territory and are an enormous accident just waiting to occur.

Anyone who would chase stocks higher in such an environment as this, one in which the only supportive factor is cheap money courtesy of the Central Banks, needs his or her head examined. The commodity world is a far more accurate signal of what is coming our way rather than the equity perma bull contingent, whom as I have already sarcastically mocked, would find a reason to buy stocks if an earthquake were to drop the entire state of California into the Pacific ocean.

Incidentally, news out of Australia this morning bears out the fact of slowing global growth and is an additional confirmation of the reason behind the selling across the commodity sector. Down under there is the AIG (Australian Industry Group) which issues a monthly report. It fell to 36.7 in April from 44.4. Reports indicate that is the 14th consecutive month the index has been below 50 (expansion)and just so happens to be the lowest reading since April 2009, a full four years ago! 

Australia's economy is very tightly tied to the health of the Chinese economy since the lion's share of their mineral production ends up being sold to China. This is why many commodities are seeing weakness. Keep in mind that the commodity boom of recent memory was completely dependent on the rapid growth rate of China. Miners gearing up production to meet that demand managed to ramp up supply just in time for the growth rate to begin slowing. That means SURPLUSES and growing stocks in warehouses and that means lower prices.

Besides this negative news, all eyes will now be focused on ENTRAIL READING 101, as analysts and pundits pour over the upcoming FOMC statement for clues to the future in their attempt to discern the will of the gods (those would be the monetary masters). AS far as I am concerned, if QE1, QE2, QE3 and QE4, were not and are not enough to create rapid growth, who the hell cares what these babblers at the Fed are going to say next. They have one weapon and one weapon only and that is the creation of unlimited amounts of funny money.

"If at first you don't succeed, try harder", should be the motto carved in stone over the offices of the Fed. The bond market is sharply higher today with the yield on the Ten Year now down to 1.63 as I write this, hardly an endorsement of "growth" or a testimony to the success of the Fed.

The HUI, mining shares, cannot clear that chart gap formed on the daily. Until they do, the mining shares are going NOWHERE. Profits are lacking in that sector and until investors see a REASON to buy them, even at these incredibly cheap prices in relation to gold itself, (the HUI to Gold ratio continues to plummet), long side sponsorship is going to be lacking.


That brings us to gold. It did fail at the resistance level noted on the charts that was formed last week near $1485. Bulls simply could not overcome the hedge fund selling that was lurking up there. I know it angers my friends in the gold camp but as a trader I have to call it as I see it. That means rallies in gold are going to be sold until the technical posture of the price chart switches from bearish to bullish.

I understand all the implications of the strong offtake in the physical market. That is very real and cannot be underestimated. As I have stated however; a $200 plunge in the price of gold draining the "15" handle down to a "13" handle is exactly the recipe for generating strong physical buying. The problem is that once price rallies back up towards the region from where the plummet in price began, physical gold demand will throttle back again. With the lack of investment demand heading into the gold ETF, traders are looking at that as a bearish factor and a reason to sell on rallies. They will cover on dips lower in price whenever physical demand starts surging again meaning that the ingredients are in place for a range trade.

If gold can maintain its footing above $1440, that will set the parameters of the range at that level on the bottom and $1485 on the top. If $1440 fails, we go to $1420 and then if that fails, test $1400.


That brings me to one more thing - various readers keep sending me reports about the Commitment of Traders report - please keep in mind that those who rely exclusively on those as if they are some sort of Holy Grail of trading are completely off base. They speculate this means that, and that means this and infer one thing and then another. It is all a gigantic waste of time. That sort of foolishness has about as much use as all that talk a while ago about the basis. Remember all those who kept extolling the basis and that nonsense about gold backwardation - that was before gold imploded to the downside along with the mining shares.

The one use for the COT is as a determiner of sentiment. That is how I use them. Anything else makes good fodder for newsletter writers to separate you from your money.

Lastly, the Gold Volatility Index is rising today as can be expected with the sharp selling being witnessed in the metal. Nervousness is creeping back up as is uncertainty ahead of the FOMC statement.


Let's see what the demi-gods from the FOMC give us and how the markets react to that...

12 comments:

  1. Much as I would love the prices of gold and silver to explode higher, and much as I believe that in the long term they will, this site has proved, time and time again, and much to the chagrin of all the precious metal ostriches out there (of which I have been a long term member), to be the only sane, rational, and consistently accurate resource for analysing what is going on in this crazy world. At some point, all these bubbles will burst and everyone who has been buying physical insurance will be vindicated. That time is not yet, and I am truly grateful to Dan for telling it like it is, as opposed to how we hope it should be. Thank you Dan. Yours is now the only commentary I read and I am far more relaxed as a result, having been horribly burned by catastrophic losses in the past. Keep up the good work - it does make a difference.

    ReplyDelete
    Replies
    1. James; How do I send thought to Dan? I am not any of the profiles that drop down and am not a techno-geek; he is a winner I think, not like the donkeys on KWN and so forth, most of whom have not had an original though in years,please. The way I look at it, the final sector to break down will be the grains and beans and no later than 4th of July. Only thing bullish is Bonds and $. Stocks are artificial but still dangerous to sell into. Thank you, steve brassey in sparks, nv

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    2. James and Steve;

      Thanks for the very kind words. AS I have stated many times here, we are navigating through uncharted waters given the size and scope of this Central Bank liquidity operation and where it all ends is unclear. In the meanwhile, we have to try to be objective and see how traders/investors are reacting to any given day's worth of information and see if any trends can be found.

      Hope and "Maybe" are not good trading strategies!

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    3. Very well put, James!
      I'd like to add that Dan is not only competent, but he doesn't listen to his ego.
      Arrogance and over confidence are among the worst ennemies of a trader, especially after a series of successful bets.
      Many so called analysts are full of it.
      Like we say in France (especially since we have Christine in the IMF :)), "competence is like jam : the less you have, the more you spread it."
      So the least competent ones are the ones who boast about it most.

      About gold, bears "manipulators" don't like to fight strong phyiscal demand. Now until august is usually the best time to try to cap prices, because asian demand is traditionally not at its peak.
      In addition, look at the figures from ETFs :

      "Despite the recent volatility, the one clear trend remains, high outflows of physical gold from exchange-traded products like SPDR Gold Shares ETF (NYSE ARCA: GLD). Information provided by the trust shows that 4.45 million ounces of gold were redeemed in April. According to some media reports, that is the biggest outflow in 43 months.
      ...Barclays also said more than 360 metric tons of gold in the total ETP market has been sold so far this year.”

      This is a huge weigh on prices, but...the good news is that an ETF stock can't become negative. The bleeding will necessarily stop sometime. I'm watching this as well.

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  2. Hi Dan,

    Just wondering - in the event of a bubble collapse, what sectors do you think will be most affected (for shorting purposes)? I'd like to make the most fiat as possible in order to buy physical. Seems like the opportunity of a lifetime, although I don't feel good thinking about the consequences and what's in store..

    Thanks!

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    Replies
    1. Michael;

      I am not an equity guy as I dwell in commodity land but I would look to 2008 as an example.

      What we are witnessing is an enormous slugfest between deflationary pressures due to excessive debt and Central Bank reflationary efforts. The sheer size and scope of funny money creation is preventing a collapse but my fear is that the longer this goes on without really dealing with the root causes, the worse the fallout will be.

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  3. Is it hedge funds or proxies of the Federal government that is pressing silver?

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    Replies
    1. bruinjoe - right now it is hedge funds... the big banks are covering shorts and the swap dealers are going long

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  4. Dan's email address is published at http://www.jsmineset.com/contact-us/

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  5. Check the support zone for silver around 23.20 $.
    If it breaks, could be a bearish flag with target around 19.
    I said "IF" :)
    http://postimg.org/image/qbio80iid/

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  6. Why the strong redemption and outflow of physical gold from GLD, but the very opposite happening in SLV?

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  7. all the hoi polloi in lines trying to buy gold is not a bullish indicator, it's more like investor sentiment or put/call ratios... it's a contrary indicator.

    coin shops and dealers are saying 'shortage' because they can't sell their metal at a big loss, especially in silver.

    every low in gold that has started a bounce since the gold all time high, was broken in time.. that is because every low had huge volume, and every bounce had low volume.

    ..the original volume master Wyckoff taught that you need a retest of the high volume lows, and we haven't had a low volume retest of any low since gold was above 1900.

    it's the same for the recent GC SI lows that were made on record high volumes...that demands a retest!

    cheers!

    ReplyDelete

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