Frankly I do not see the US economy as strong enough to support either crude or unleaded gasoline at current prices but right now hedge funds are driving these markets higher and the momentum is strong to the upside. There certainly is no shortage of WTI from what I can see but a goodly portion of it appears to be leaving the US via exports to the EU and elsewhere.
One has to wonder however at one point the spike in gasoline prices at the pump is going to hit Mr. and Mrs. Consumer right between the eyes. You can make a case for rising energy prices being inflationary but you can also make a case for them being deflationary.
In the former case, energy costs are a major input in manufacturing of all kinds not to mention shipping/transportation costs of goods that need to move to market. Think also airlines, railroads, etc. Unless companies are willing to eat the higher costs, they have to raise prices to shore up profit margins.
In the latter case, consumers are not exactly awash with surplus income right now thanks mainly to the moribund labor markets and flat wages. If a larger chunk of their disposable income goes toward transportation expenses ( it is also summer vacation time), that results in them having less to spend at the local Wal-Mart.
I do think that if crude somehow manages to push past $110 (basis WTI) and especially if it climbs through $115, we are going to see some market impacts elsewhere. Let's keep a close eye on this.
By the way, those of you working the grains markets might have noticed the sharp selloff in the beans today. Yesterday's forecast changed and that, in combination with the bearish USDA reports yesterday, finally caught up with the corn and the beans. That might be the silver lining for consumers to help enable them to cope better with rising gasoline prices. If food prices begin to drop, it will take some of the pressure off their checkbooks.
Lots of variables to consider - one thing however is extremely important - gold, and especially silver, need an inflationary psyche to thrive. Right now we have energy up and food moving down. One is tending to cancel the other out. What we have to watch is to see whether or not the two groups will move in sync at some point.
Physical market tightness helps keep a floor of support under gold but it takes a genuine shift in sentiment towards one of inflation to make the yellow metal run. Until the gold shares can put in a better performance than they heretofore have managed to accomplish, I look for rallies in gold to be sold. Bulls are going to have to PROVE that they are determined to drive prices higher before the strong-handed shorts are going to panic.
Thanks Dan, just checked due to the release of the Chinese Data on Sunday night. Took the 10% gain in Miners this week. Will wait for futher signs on dollar weakness and inflation through dollar devaluation. Great to have a chartist and information extraordinaire in our corner. It is in and out for awhile until that debt problem surfaces again in September. It might be flow to the fed, but it will still be somewhere north of $17 trillion by end of September and a whole lot of Congressional bickering leading to mass confusion and gold explosions. Maybe even some problems in the COT reports will start hampering the Bears some more.
ReplyDeletesold more yen, silver and beans; that is all; steve in sparks
ReplyDeleteLooks like the current unleaded gas spike is merely "transitory".
ReplyDeleteIf gasoline and CRB inflation was going to be a problem in the near future:
1. The retail and consumer discretionary stocks would not be up 11 consecutive days making new world record highs
2. The transportation index would not be within a stone's throw away from record highs.
3 Newmont Mining, Chevron, and BHP Billiton would be up to $300/share, up 600% in 4 years, not Amazon, Priceline, and Buffalo Wild Wings.
I'm sure the market is pricing in the fact that Bernanke will be opening up his pie-hole soon to talk down the CRB Index with "words", or maybe Obama will spend another $100 million and fly Air Force One to Egypt to talk some sense into those guys over there.
LOL....
very funny indeed.
ReplyDelete"I look for rallies in gold to be sold. Bulls are going to have to PROVE that they are determined to drive prices higher before the strong-handed shorts are going to panic."
ReplyDeleteHi Dan,
What about Jim Sinclair's warning about the emancipation of physical gold prices from paper manipulated prices because of the huge pressure on the Comex stocks?
To make it short, Comex stocks depleting would force them to change the rules and make futures gold market a 100% margin cash = physical market.
I'm sure you know what's his take on this.
Now I'm watching Comex Registered stocks down more than 2/3 of their level of beginning 2013. At this pace, Registered stocks would be at zero before end of august.
My questions :
- is Comex stock indicator a relevant signal, or should be ignored as the warnings about COT reports or Backwardation?
- if it is relevant, can the only depletion of Registered stocks push Comex authorities to change the rules to avoid default, or should we focus mostly on the whole Comex stock (Registered + Eligible).
Thanks a lot for educating us :)
Hubert Du Haut;
DeleteThanks for all your excellent and informative posts. I always enjoy reading your comments.
On the Comex stocks drawdowns - Long ago I urged those who wanted to see an end to the bullion bank suppression of the gold price to take physical delivery of the metal and pull it out of the warehouses. In my opinion, that has been and remains the ONLY VIABLE method of short-circuiting the gold price manipulation scheme.
My rallying cry at that time was "STAND AND DELIVER", as it would force the hand of the paper shorts to come up with the metal or else they would have to cover the shorts and exit.
What I learned about these hedge funds however is that they DO NOT WANT THE PHYSICAL METAL. They want to push paper only as that is how their businesses are set up. Those guys make their living with their computer algorithms, not by acquiring and storing physical metal and having all the costs associated with storing it, insuring it, etc.
At the time I was advocating this, Gold was in a strongly bullish trend with the funds on the long side of the market and the bullion banks on the short side. As the funds had no interest in acquiring the metal, the bullion banks had no reason to cover and thus the scheme went on.
The tables are turning however with the bullion banks having such a small net short position in the futures market now and with the hedge funds doing a large amount of paper selling. Unlike the hedge funds, the bullion banks have the wherewithal and know how to acquire and hold the physical metal so in a bit of irony, it is now the bullion banks actually following my advice to the hedge funds! (not that they are listening to me or even know that I exist).
to answer your question then - yes, if the drawdowns of the metal continue it will be the paper shorts who have the burden to either come up with more metal or exit their short positions. Wouldn't it be ironic (and perhaps not unexpected) to see gold eventually have a strong, sustained rally with the hedge funds COVERING SHORTS OUT OF AN INABILITY TO COME UP WITH THE PHYSICAL!
"STAND AND DELIVER" has always been and will always be the only way to force shorts out of their positions. That, by the way, is what happened in old crop corn this year with the March, the May and to a certain extent, the July corn contracts being squeezed as they entered into their delivery period. The shorts could not come up with the grain and had to make delivery or get out. They got out!
Hubert Du Haut;
DeleteOne more thing my friend - if there is indeed any shortage of physical metal or availability thereof, you will ALWAYS SEE IT IN THE PRICE ACTION.
This is why I have to continually take to task those who kept up with that ill-advised notion of BACKWARDATION. They kept it up but the price action was telling the EXACT OPPOSITE STORY. My beef with those is that they sucked a bunch of novices and other victims into taking long positions in the futures markets just before the price collapsed all the way down from $1600 to below $1200! In other words, all their theories made for nice reading and was entertaining but as far as trading or investing goes, it was foolish and ignorant. I kept trying to warm them but most did not listen. PRICE ACTION IS ALWAYS THE KEY - no exceptions!
Like I have said many times, those who constantly keep calling for market bottoms will eventually get one! Personally, I am not that clever nor am I that reckless with my trading capital. Then again, I am still doing this after hanging around these markets for more than 2 decades now so what the hell do I know!
Thanks Dan.
DeleteComing from you, the compliment is very much appreciated.
Cristal clear explanation, so I'll keep my physical more than ever and have a look at Comex stocks.
Would be great for all long-term investors if we had an unexpected huge short squeeze propelling prices up once more.
In the meantime, I guess the name of the game is : patience.
Have a great weekend,
Do markets send messages? Absolutely, and they are there for anyone and everyone to
ReplyDeletesee as they develop. Most people like to read news about increased demand for gold and
silver, record purchases for silver eagles, etc, etc, etc. The headlines over the past several
months have teemed with such information, raising expectations, but not raising the price
either of gold or silver.
More recently, there is “news” about market bottoms, eminent turnarounds, a renewal of
where gold and silver can reach, [once the central bankers deplete their gold stocks; once
the COMEX fails, and more etcs]. Seems like not as many are paying attention to the
most reliable and obvious source of all, the market price itself.
But it’s manipulated and irrelevant. Manipulated? Without question. Irrelevant? Not
so sure. If the price of gold and silver, as quoted on the New York and London exchanges
is so irrelevant, then why is it still so widely used, and why is the rest of the world going
along with the exchange pricing mechanism? Minds are being more manipulated than the
markets.
- See more at: http://edgetraderplus.com/market-commentaries/gold-and-silver-knowledge-is-not-of-value-using-it-is#sthash.vGTs7SzO.dpuf
Dan,
ReplyDeleteFor NOW, I am bummed out I didn't listen to you like I listened to JS. However, I really believe in a few years I will be very satisfied I did listen to JS AND you! So long as I can buy physical metals at a normal premium at ANY of the coin sellers websites, there is NO SHORTAGE of physical, IMHO. Currently, the premiums on Silver coins and bullion are awfully high ($4+ vs the normal $2.99 for Eagles), so I believe there MAY be a shortage of physical silver (certainly specific to Eagles there is a shortage). The premiums on gold coins are normal, and therefore CURRENTLY, there is no shortage.
I understand a shortage, and even EXTREME shortage, could happen over night. That is what I suspect will happen eventually to prove JS correct. There is so much manipulation in ALL aspects of government, economy, politics, that the physical INDICATORS are the only thing that shows the remotest truth.
Please keep doing what you are doing. It is appreciated by all of us.
Nate