"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


Thursday, September 19, 2013

Whiplash in Crude

If you ever wanted proof that the Federal Reserve has become the single largest source of market volatility, chaos and confusion, take one look at the following hourly chart of Crude Oil.

Notice that crude was moving higher prior to the announcement at the 1:00 PM Central Time hour. When they news hit about them standing pat, it rocketed higher, pulling gasoline along for the ride. The move was good for a full $2.00/barrel add on to the price.

Why did this happen? Because computer algorithms from the hedge funds started buying everything in sight without asking any questions. If it was not nailed down, they bought it. The so-called reason cited was that the policy not changing was inflationary.

Excuse me - but we have had 5 years of QE now and we still have yet to see the inflationary fruits of these policies. The reasons are numerous but most important is the fact that the jobs market in this nation is comatose. We are learning with the passing of each day the crippling effects of this most misnamed piece of legislation that was shoved down our throats, namely, the AFFORDABLE CARE act. What a pile of hooey!  Everywhere one looks health insurance costs are going up, not down and more and more we learn that employers are cutting hours and health care benefits as a result of this abomination. Hell, even the President's union buddies want no part of this monstrosity after they were among its loudest cheerleaders back in 2010.

The labor market is weak and consumers just do not seem to be in any mood to saddle themselves with loads of debt anymore. Low rates - courtesy of this QE help consumer borrowing ( as well as business borrowing ) but many consumers who are working several part times jobs to make ends meet  are in no hurry to bury themselves under a debt load again. Along that line I recently read somewhere that the NUMBER ONE dream of most Americans is no longer owning their own home but rather has become one of being debt free! That is a stunner and reflects just how pessimistic the nation at large has become as they watch the slow disintegration of their country.

Regardless, the crude oil market completely gave up any gains related to yesterday's fund buying orgy and actually lost ground sinking below the launch point generated by the FOMC release.

Here is the thing with crude as I see it - while some want to look at the crude oil market as a natural recipient of hot money playing the inflation psyche I see it as a huge drag on the national economy. Think about it - we have report after report, as noted above, of folks unable to obtain full time employment. So many are being forced to take two or even three part time jobs in order to pay their bills. What do you think happens to the spending habits of such folks when they pull their automobile or truck into the gasoline station to fill up and look with dismay at the rising price of gasoline which will not stay down for long? I have a buddy of mine up here who filled up his truck the other day with diesel ( it has duel tanks) and had the "satisfaction" of getting away with spending "only" $150.

That is money that has to be spent if he is to get around to work. That is a huge chunk of cash for most folks to have to plop down on the counter in order to keep their wheels turning. What is left over from their dwindling disposable income then must be stretched into paying higher medical insurance premiums which are now rising all across the country in every single state. You tell me that these things are somehow NOT A DRAG on the growth of the US economy! Of course they are.

The way I see this crude oil market is that it is the battleground for the war between the deflationists and the inflationists.

This is also one of the reasons I keep coming back to the overall commodity sector and watching the various commodity indices such as the Goldman Sachs Commodity Index or as some prefer to watch, the Reuters/Jefferies CRB index. If the commodity complex as a whole cannot rally strongly and sustain those gains on the heels of this latest FOMC announcement, then I suspect gold is also going to be greeted with further selling on rallies once again as soon as the rash of short covering is finished.

Keep in mind something I have said here before - the recent gains in gold prior to the FOMC release of yesterday were driven PRIMARILY by large speculator short covering and NOT by the FRESH INFLOW OF NEW HOT MONEY. If gold is to maintain any rallies, and silver also for that matter, this must change. Speculators MUST feel the urgent need to acquire both metals at successively higher prices and be willing to commit wholeheartedly to their conviction if both of these markets are going to be able to sustain these rallies and actually trend higher.

While it is nice to see both metals moving higher, we are in no way out of the woods for either of them until we see some significant changes on the price charts, changes that involve the complete obliteration of overhead resistance zones that still loom quite large.

Let's give them some time before we render a verdict and watch the price action to see what we will get next before becoming too dogmatic. Personally I worry about gold when I see the HUI surrendering so much of yesterday's gains the very next day after the big FOMC-related rally. At the very least the gold mining stocks should have seen some upside follow through. Instead they sold off and moved lower. Until I see that 280 level give way on the chart of the HUI, call me a skeptic on these miners. I have that Missouri attitude - "SHOW ME"!


  1. Dan consistently makes more sense than anyone I read.

  2. A bit of healthy consolidation here is good, if it were not for the take down from 1400+ over the last two weeks I have no doubt we would be well north of 1500 now, so many shorts would have capitulated higher up. All that fuel is still up there I would say be patient.

    On the previous topic the US as are many countries suffering from the classic politicians we are here to help you 'the people' along with bankers to politicians we are here to help you. We are now seeing the results, could it be a second Weimar maybe. Some form of Gold backing would bring back some sanity and we would need a lot fewer TBTF bankers and hedge funds.

  3. i know what you mean by expecting a follow through rally in the miners, but i felt the jump was so big yesterday that it was almost inevitable that there would be a day of rest before the next jump up...im not that pessimistic after yesterday and everyone everywhere just talking about QE infinity..there is just too much going for gold now for me to be as scared as i was a few days/months ago...

  4. What I think drives the price of gold these days is confidence. Gold got creamed this past year not because of lack of inflation, or a recovering US economy, but because everybody believed the Fed was in control. Just like gold went up $500 in 2011 when it looked like things were out of control.

    So, on a day where it looks like the Fed has lost control, by not tapering after all but telling us it was going to do so for the past few months, gold skyrockets. Sure, a lot was short covering, but I think we'll see in the next weeks and months that the faith in the Fed is gone, gold and bonds will go back up and equities - well, equities have no base in reality as far as I can see, so who knows. Just my humble opinion.

  5. Platinum has gone from +$190 to gold to only +$100 in last 5 weeks and that is a bit peculiar and throws sand into the gears of the wholesale commod inflationists; I just do not know; swb

  6. Thanks for all of your posts Dan.

    Most of my miners averaged 15% gain yesterday. Some were up over 20%. Surely today's pullback is just some profit taking and consolidation given many work hard for that kind of return over 2 years.

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  8. Hi Dan,

    Thanks for all those regular and frequent comments, especially regarding all the spectrum of commodities, which helps understand intermarket relationships!
    It's also always comforting to see you share some of my thoughts. I'd be nervous if you didn't, and I guess it would make me double check :)

    Just one question, when you write :
    "the recent gains in gold prior to the FOMC release of yesterday were driven PRIMARILY by large speculator short covering and NOT by the FRESH INFLOW OF NEW HOT MONEY."

    Do you come to that conclusion through your readings of the COT reports, or is there by any chance a more "realtime" source of information about the flows? I guess there is only COT reports to sort out who is who, but just in case I missed an interesting source of information here :) (COT are released with a few days delay...)

    17th september I met physically a trader I was chatting with only through the web for ten years, he lives 300 km from Paris but I took the train (we have a fast train, cocorico!). Quite nice guy, very interesting system, so I'll try yo "integrate" a few of his indicators to my analysis and share with you all if I feel ok with them.

    Maybe if someday I come close enough to Texas, I'll bring a nice bottle of French wine to you with my thanks for your blog :)
    Have a nice day,

    1. I will better the offer. When gold does make a new all time high, I will give Dan an all expenses paid trip to Paris with his wife so you can give him the bottle of wine yourself there. Its a magnificent city. Lets not wait too long.

  9. Dan, love your analysis of the markets. You appear to neither be a perma-bull nor bear, just an interpreter of what you see. So many guests on KWN only talk up the market, losing them and the site reputation. Please ask Erik to invite James Richards back for a piece. Anyway, great blog and comments. Thanks.

  10. I feel QE will never reach the effect it intends to do so since the majority of that money never reaches the part of population which it should to stimulate the economy.
    While it makes the rich richer, the middle and lower class people are getting poorer at most parts of the world.
    How can you stimulate the economy when only the already rich has more money to spend?
    It is as if I wanted to kill a house fire by throwing more and more water on the neighbor's house and wondering why the fire does not go away?
    Well eventually it will once the whole house has burned down and than I can pray myself how smart I was to use water against the fire.
    With another words I am just wondering without QE the recovery would be any slower at all?

  11. Dan or anyone,

    Doesn't there come a time that people bid up gold and silver because the potential returns over the long run are greater than stocks despite a deflationary environment? Or do you need inflation?

    1. After reading a lot of posts by Martin Armstrong, I've come to the conclusion that confidence in the system must be lost in order for PMs to trade at new highs. QE is miniscule, and withdrawing it is positive long term for gold. QE reduction to raise interest rates to blow the budget deficit up to undermine confidence in the entire bond market to drive up PMs. Just a question of time.

  12. That gold chart is rapidly turning ugly again.

    1. From someone who owns a fair amount of gold, it hasnt been pretty for a long time.

  13. Wow, crude oil and gold selling off again.

    Shows how skittish commodity investors are, they will sell at the first whiff of trouble, even without "Jawboning" from the Fed.

    This proves that there will never be any inflation, because if gold or oil prices were to start a decent run higher, all the "Magnificent Fed" has to do is to start talking about "managing inflation expectations" and commodity investors will instantaneously dump everything and send the CRB Index crashing in a flaming heap.

  14. GDX/GLD ratio now plummeting back to world record lows again.

    The systemic weakness in this sector is unparalleled.

    I don't think I've ever seen a group stay in the dumps for this long.

  15. Sheesh, same trading pattern over and over.

    Everybody now in a tizzy about Bullard's "Tapering" comment.


    Instantaneous bid into UUP, TLT, and Russell 2000 stocks while GLD and DBC is plummeting.

    All of GDX's gains from the other day wiped out in one fell swoop, all the result of a few words from Bullard.

    1. Mark - Agreed - Bullard out there talking tough again spooked everyone even though he as said as much as Bernanke did the other day, namely "DEPENDING on economic conditions" the tapering could begin.

      The Fed really does play these markets like a fiddle.

      There is simply no serious inflation pressures out there so there is no reason to chase gold higher because confidence in the system still remains high.

      It will take a total loss in confidence for gold to sustain gains without any strong upward price pressures in the economy. With the grains imploding today and with crude oil surrendering all of its gains from the day of the FOMC, energy and food costs are moving lower.

    2. Hi,

      This just contract liquidation..

      Oil is entering high season so i expect it to stay high.

      There will be whipsaw effect in trading ..


  16. ran two dec contracts short all they way down from close last night. It closed down in the last couple minutes. However, I work hard... I sleep in three daily cycles. I was awake all night, as usual, with my laptop on my bed. Added two more contract at 1359... If the people who bought those contracts knew who I was, they would hunt me down....

    I also knew that my limit orders to sell were not being executed and were just being missed. This told me that the execution firms knew the order flow and were not giving anything away. That was between 12-4am....

    The end of overnight session at 2am convinced me to keep strong. I didn't even waste my time to cover at 7:30am, as I usually do, in prep for day session at 8-8:30... Price points kept getting taken out. Official intervention was obviou overnight in preparation for today's fed mouthpieces.

    Professionals make a lot of money. I am up about 12k so far today in my account. make hay while the sun shines. Why did I know gold would fold? The shares looked like crap.

    And the regular gold bugs were once again shouting from the rooftops.

    I love the fact that people don't believe me. My teacher, Al Martin, must be worth at least 100mm. Learn from real traders.

    1. Eph 6:7

      I do not know what the purpose you have in mind is when you use this board to cackle like a chicken in a hen house which has just laid an egg. Good traders are humble because we have been kicked around enough by the markets to learn to respect them and to know our own limitations as traders and as fallible human beings.

      And seeing that you have chosen to reference a Scriptural text as a handle when posting here, then I suggest you should read the rest of that epistle to the Ephesians and concentrate especially on Chapter 4, verse 2:

      EPH 4:1-2... walk in a manner worthy.. IN ALL HUMILITY...

      Posting comments about market action and trades is one thing - bragging and preening are another. Please spare the rest of us from any further preening.

      Humility is a grace that adorns the souls of those who possess it. You would do well to secure some of it.

    2. "Why did I know gold would fold? The shares looked like crap."

      Eph, as you have time to write a post here, next time you are so sure of yourself, please just don't forget to share with us before, and lot after your trade is done.
      That way, you'll have a real track record : share your entry, stop loss, target, methodology, reason for the trade, possible profit...if you want to talk like a trader, then post like a trader :)

  17. precious metals isn't scheduled to rise substantially until mid 2014 to early 2015. the insiders have pretty much publicly said that.

    precious metals future isn't about inflation as much as it is about the future of the dollar.

    1. prioris:

      inflation and the dollar are one and the same thing. A loss of confidence in the US dollar leads to inflation as the value of the dollar against hard assets falls meaning the price of those assets in dollar terms rise.

    2. Yes dan,

      That is why gold always on the opposite of dollar value


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