"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


Friday, November 1, 2013

More Commodity Weakness

I am monitoring the following chart with a great deal of both concern and interest. Concern because month after month of $85 billion in Bond and MBS buying by the Federal Reserve, deflationary pressures remain undaunted. Interest because the grand experiment in "unconventional" monetary measures by the Fed is proving, thus far, to have little LASTING impact on the US Dollar.

Back in 2008, when I first learned of QE1, I swore up and down that the US Dollar was finished as a result of this. Little did I know then that it would not be long before every Western Central Bank on the planet would be doing the same thing as the Fed!

I learned a valuable lesson and hopefully will be a little less dogmatic when it comes to expectations of market responses as a result. I still believe that in the long run the US Dollar is going to be in serious trouble. No nation that runs deficits and carries a national debt the size that this one does will be able to escape all the consequences of so doing. Then again, I wonder if I will still be alive long enough to see when it comes time to pay the Piper.

So far the modern day alchemists appear to be doing their thing with little consequences. This no doubt will embolden them to do even more should they feel the need (think Janet Yellen and be afraid; be very afraid). As I have stated in some private emails to others - I was shaking in my little boots when I first saw the Balance Sheet of the Federal Reserve approaching the $3 TRILLION mark. Now that it has eclipsed that and is on its way to $4 TRILLION, my attitude is: "Why not just let it go to $5 TRILLION or $6 TRILLION or even higher? Hardly anyone seems to be particularly disturbed by any of this. Certainly the stock market could care less".

Anyway, gold no longer seems to be reacting positively to ideas that the Fed is going to continue QE buying with no abatement for the near term. That is certainly cause for concern if you are a gold bull. The question then becomes, "what is it going to take as a fundamental catalyst to push gold into a sustained trend higher?"

This is the reason that the chart of the commodity sector concerns me - if after $4 trillion + of QE the commodity sector is moving LOWER, and not HIGHER, gold is going to have to find another reason for a rally other than inflation expectations. After all, it is next to impossible to make the case for inflation when the price of tangible commodities is moving down instead of up!

Note that the index below is right on the verge of making one of those important technical developments which sets Technical Analysis geeks such as myself to yapping. What I am referring to is the dreaded "Death Cross". No, this is not when the Death Star crosses in front of the Emperor's Battle Cruiser so that Luke Skywalker and friends can see it, but rather the 50 day moving average crossing down below the 200 day moving average from above.

Such a thing is a big time bearish development and portends, as a general rule, more losses ahead for the complex. In other words, we are looking at falling commodity prices as we move forward, not rising prices. This is obviously great news for the consumer who will benefit as a result but a tougher environment for those whose living deals with these products/commodities.

What this means for farmers is that the banner years that they have enjoyed in recent past are coming to a close, barring any major weather event. It also means that the price of farm land in the Corn Belt is probably as good as it is gonna get.  Farm equipment dealers too are going to get a dose of reality after selling lots of big, shiny, state of the art tractors, planters, combines, etc. As a matter of fact, I would look for the USED farm equipment business to see a boom as a result. Hey, maybe I should move to Iowa and start a used farm equipment business! I can put it right next to Kevin Costner's Field of Dreams!

For the consumer, it means lower gasoline prices at the pump. Yippee! It also means it will be cheaper to heat one's home this winter for those using heating oil. Nat gas prices are well off their lows under $2.00 but remain cheap by historical standards. So perhaps the harm from that abomination known as Obamacare will be offset somewhat for the struggling consumer in the form of lower prices at the grocery store and for energy use.

Maybe, and of course, we can dream, airlines will lower their fares or at least get rid of any fuel surcharges and actually bring us some damned food for free while we sit in their newly scrunched up seats and endure hours of torture merely because we wish to transverse the country and get to another side of it.

I find it perverse that the administration which has never met an energy pipeline it did not hate or a fossil fuel that it did not despise, gets to somehow preside over the greatest energy boom in US history. All this in spite of the obstacles that it places in front of one of the he most innovative industries in the US, the oil and gas industry. Keep in mind that the finds of oil and natural gas have been occurring on PRIVATE LANDS, not government owned lands. Those have been effectively shut to the energy industry except for those where everyone and their dogs knows that there is little to no oil or gas.

Thankfully American know-how and ingenuity continue to help make energy cheap and affordable. As an American who is deeply distressed at what is happening both to and in my nation, I am grateful that at least that is the case. Throw in the fact that the American Farmer is the still the BEST anywhere in the world, and we can be grateful that these two necessities of life, food and energy, remain relatively available and affordable, unlike other places in this world.

As far as the US Dollar and gold goes - It will come down to CONFIDENCE as far as I am concerned. When the game ends and there is the sudden awakening of the investment crowd as to the artificial nature of the entire US financial system, then and only then, will gold find its footing and shoot upward. As to when that will occur or what the catalyst/event/events that will usher in this awareness I am at a loss to say. I can only hope that I can recognize it when it does arrive.


  1. Damn good letter Dan; Top in place for the currencies, as it is all relative and now looking for stark and shattering ideas that Europe has fixed itself; same goes for emerging mkts and Japan, and of course China; swb in sparks

  2. Dan

    Interesting that you mention the price of food and energy falling just in time to counter act obamacare...what a coincidence !
    I agree with you on the farming comment. Farmers have had a good run which leaves a target rich environment for Bernanke's Storm Troopers.

    What they did to gold they will do to Ag and oil, anything to keep the illusion alive.
    As resourceful as our farmers and Oil people are they are about to find out what a gold miner feels like.
    As you have stated, the endless money printing creates improper use of capital and market distortions.

    We are being herded like cattle into US equities.

  3. looks like the bulls may get a bloody nose in the bean complex here in the next 60 mins; swb/sparks

  4. I wanted to say that just because commodity prices go down, that does not mean whatsoever that the prices consumer will pay at the grocery stores and what not will decrease.

    Airlines started the awful bag fees/no food/nickel&dime BS during the last mini-commodity bubble 2006-2008. Prices have come down significantly in jet-fuel feedstock since then. Have we benefited from lower prices or have they taken away the nickel and diming? Nope.

    I haven't done a comparison of the amount of cereal the cereal companies put in the boxes, but I can't imagine the skimping (same size box, less cereal) that they did when commodity prices shot through the roof back then has reversed course by now.

    1. You don't need to go any farther then looking at coffee to make your point. The futures are 1.05 a pound . A cup of coffee is $5. The greatest disconnect in history.

    2. Ah yes...but Corporations are reporting record earnings...hence the illusion of a growing economy.

    3. yep, the Starbucks joke of all time and people bend over and pay! sparks

    4. But dang it Steve....a Cinnamon Dolce Latte with a slice of that poppy lemon loaf is just sooo very good !

  5. I've been shopping at the same costco for 15 years. I am pretty sure they are still using the same milk vendor. But, I can tell you that price of the milk has more than doubled in that 15 years. I'm one of those folks who keeps a written log of his expenses and have done so for 20+ years. I can also, with some precision, after this last halloween to declare that "minis" have morphed in toe "micros" ;)

  6. Yep
    New car loans are now 84 months, only 10 years ago that would have brought on waves of laughter.
    Want a ski boat or travel trailer? they can now be financed over 20 - 30 years...yes that is a fact.
    Your favorite toy is now becoming a life long payment...we all know what a 30 year old travel trailer is worth.
    But hey, the economy is improving, just look at all the shit people can afford to buy.

  7. Plus it creates imbalances to the profit of the richest, with additional risk for every single average guy, forcing them to speculate or finish queuing for food stamps.
    If I understand well this system, to simplify :
    - the poor guy has no money and gets wiped out by the hidden inflation.
    - the average guy is forced to put his savings into Wall Street and hope it will go up to compensate his loss of purchasing power. Here comes the bubble until it pops.
    - the average plus guy understands the market a bit more and knows he can leverage the long side of this Wall Street joke. He buys to compensate and even to make more money (well done, Mark). Here comes the even larger bubble and once again good luck when it pops (bubble due to both domestic and international frenzy looking for some yield in a negative real interest rate world. What a mess)

  8. Since the down move from 1800 to 1180, we had :
    - upwards retracement of 1800-1180, 38% Fibonacci to 1420
    - downwards retracement of 1180-1420, 62% Fibonacci to 1275
    - upwards retracement of 1420-1275, 62% Fibonacci to 1365
    And now on the 50% retracement Fibo of last up move at 1305 $ = yesterday's bottom.

    Do I see a strong trend here?
    No, I see a lower volatility further to the strong 1800-1180 move.
    As long as at least 1275 is not broken, there is no trend on the weekly time unit on gold imho.
    1275 is the important support for the bulls at the moment to me, as we enter november and it is also the mlh inf of the monthly upwards pitchfork. I also find this level in other time units, so to me, 1275 must hold, else it's again an attempt to reach 1220. But at the moment, with only 50% retracement again, there is just not much to do except on shorter time units, which I don't often trade.

  9. Interesting to read Armstrong. Has been stating gold needs to fall likely below $1000 to kill all optimism, then the next leg up begins.

    1. yeah - he's why i got the confidence to enter a short position. Been reading his stuff for more than 3 years now and taking him more and more seriously. l know gold/silver are going higher, but if l can double my returns (ie, making money on my short then entering a long position near lows), why not try? I figure there will never be a better/more visible trade in my lifetime. Entered at $1270, so still some way to go before l break even. I'll be buying his 2014 metals report (out in Jan) to get a better look at how his computer will predict year's trade. Also watching to see if the Dow breaks out violently. If it breaks out before around 1H14, he reckons we could hit 32,000 by Sep 2015. Cant think of anything better than that happening followed shortly by gold putting in its final bottom.

  10. If the trend for Gold and commodities is real anything debt associated is in for big trouble Government debt particularly US, high flying stocks companies using debt for buy backs to inflate stock prices and the like. Just had friends come back from Germany they couldn't believe how cheap food and housing even wages are, Europe's austerity is giving Germany a huge advantage in export markets this is real deflation has anyone noticed the price of German cars lately prices are down. This possibly explains IMF / US criticism of German balance of trade. Gold, commodities could be hinting at the first signs of major deflation. The US cannot survive a world wide deflation without default, the debt has grown to large. Ultimately it must be pretty frustrating for the FED trying in vain to create inflation to hide the debt one has to wonder how long before a USD devaluation occurs to address the huge trade imbalance with the rest of the world. Perhaps the suppression of Gold this year is preparing for such a move. Germany appears to be in a unique position where work ethic, organization and productivity drives consumption as opposed to debt induced consumption as the US and many western countries have been steered into over the last few decades. The tug of war continues, pretty soon the FED may wish for much higher USD / Gold prices!

    1. Rim,
      This issue of why the Fed would not want a higher gold price based on the need for inflation evident somewhere for more growth is the best question I have heard here recently. The Fed due the debt must want a lower dollar thus higher gold price or the QE will strangle what they are trying to do with the debt service. Or am I just wrong?

  11. Rim
    I also do not totally understand the reasoning behind continually hammering gold prices.
    So what if gold is $2500.00? This would mean the dollar gets devalued somewhat which in turn creates inflation which is what they want. If the US is really coming close to being energy self sufficient then in theory it does not effect the price of imported oil..because they are no longer importing it...and your low energy prices continue.
    Also, why is gold flowing eastward? are the Asians stupid? or are we stupid?
    I find it hard to believe that Bernanke and his crew of dollar goons are stupid.
    Or does it simply mean that gold really is a useless relic that no longer matters and equities in consumer discretionary are truly your best insurance.
    Did you see the interview with Rick Santelli and Eugene Fama?
    Eugene Fama is a Nobel prize winner in economics.
    He says that 4 trillion on the Fed balance sheet is no big deal, it means nothing.
    We merely dismissed the whole debt issue out of hand...Santelli I think was shocked by this answer.
    So this means that going forward money printing can go on to infinity with no consequence, Bernanke really could drop it from helicopters and there would be no inflation or loss of faith, why? Because Bernanke can sick his short selling goons loose to make damn sure there is no inflation in your basics like food, energy and raw materials.
    I mean really....there are people who believe this will work in the long term?
    Or am I the one who is delusional?

  12. All of you guys are trying to make sense out of broken, convoluted and rigged mkts; you do not seem to recognize this; you all talk about letter writers and economists, but what you seem to not realize is that those donkeys have never taken any $ out of the mkts; classic example is Easy Al Greenspan, who tried trading stks but finally gave up and bought 6 pairs of knee pads and began his quite successful career going forward of pandering to repubs and dems alike; (is there really a difference?) IF YOU WANT TO TAKE SMITH'S TIPS, THEN SELL SMITH'S TIPS, AND if they do not work, do not bellyache, but man up because you could not think on your own; me, I am bearish everything, except bullshit stks and $; steve in sparks

  13. Dan,
    Your post about GSCI chart confuses me. You speak of the death cross as if it has already occurred even though you might have spoken of it as a potential happening which might be imminent.
    The GSCI is over 40% energy, is it not? It does not have a broad base, right? And lower energy costs spur consumer spending on stuff, as you have said elsewhere, which would be a inflationary force.
    Or, are you speaking of the very short term?

    1. Peter;

      What is so confusing about the chart? It is horribly negative unless of course you see something bullish in there that I must have missed.

      There is no perfect commodity index. I loved the CCI, which I used all the time, but it was discontinued as it became obsolete. It was the most balanced in my view.

      also, I have written several times now that the obamacare abomination is forcing many people to have their hours cut from full time to part time. Also, rate hikes are happening left and right now along with massive cancellations. That means the consumer is having to spend more for health insurance, hardly inflationary for the overall economy.

      What I have said and will now apparently have to clarify again for you personally is that the one good thing I see about falling energy prices is that it will bring down gasoline and heating oil prices for the consumers at the pump and for this winter which will help offset some of the sticker shock from the health insurance fiasco.

      the problems for the US consumer are rooted in a structural mess that the US economy has become. Unless I see something that changes that in the immediate future, and unless I see more full time jobs being created and no more folks getting hit by having their hours cut from full time to part time, I cannot envision the velocity of money picking up. Without that occurring, and without a sharp weakening in the dollar, I cannot see gold having a SUSTAINED RALLY.

      Note - I did not say it cannot rally. I said sustained rally. The charts are showing the market in a trading range. unless or until that changes, it is hard to be dogmatic about gold moving strongly in either direction until the charts note it.

      As a trader, until I see western investment demand for the metal pick up again, as evidenced by a build in the reported gold holdings of the ETF, GLD, I cannot be bullish on the metal near term.

      Long term, I remain friendly towards gold as it will benefit when the Dollar finally does reflect the same concerns that I have for it on a wider basis among the investment community but a rising interest rate environment in the US has been negative for gold of late.

      incidentally, gold did hold the 50 day moving average but then it failed. as a trader one reacts to market events and price action. that is why I do not make unqualified calls as a trader and leave that to those who have very little skin in the game. I cannot risk precious trading capital on hunches, wild calls and other assorted rashness.

      it is also one of the reasons that I am still at this game now after 2 decades.... I prefer to be cautious as my trying to be a hero days are long gone.

    2. Thanks, Dan. I sure appreciate your words of caution. I will look at it again in the light of what you explained.

  14. Sometimes Dan's apparent mood seems to have been a contrary indicator. Recently we had Dan's positive comment over the dollar negative jobs report. Then the positive breach of the 50-day moving average for price of gold which held for over two days. And Dan seemed hopeful. Other times, when the biggest gloom seems to come to me as I read Dan's reasons for gold having fallen down again, well, it gets to the ever-rising support level and goes up from there (lately). So, although I really appreciate many of Dan's insights to date. Here I am contrary. Buying above the last bottom and then selling the last resistance top.

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