"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

Trader Dan's free work will soon be available at www.traderdan.biz

Wednesday, February 5, 2014

Commodity Strength Aiding Silver, Helping Gold

There are several cross currents at work in the markets this week which are impacting the trading across the overall commodity sector.

Let's start with the worries in the emerging markets because that continues to be the dominant force impacting equities right now and by corollary, the commodity markets.

First, notice the S&P chart - this emerging market issue has resulted in the market being down 5% since the beginning of this year.

Coupled with this has been a rather sharp rise in the VIX or Volatility Index ( I prefer to call it the Complacency Index). Yesterday, the index hit an 8 month high.

What this is telling us is that there is some genuine fear/nervousness among the bulls in the equity camp for the first time in quite a while. The general feeling is that the long bull market in stocks into its 6th year and that has some perma bulls actually looking to book some profits as they wait to see what will happen in regards to these emerging market concerns. I must add however that the bullish tone is still quite obvious based on the majority of comments from analysts who are happy to see the correction lower in order to give them a chance to buy in at lower levels. In other words, while the VIX has risen, there is no panic whatsoever among the perma-bulls.

That brings us to the commodity sector - commodities in general have actually been outperforming equities this year. We have seen sharp rallies in coffee, sugar, hogs, soybeans, natural gas, etc. Natural gas strength has been tied to the severely cold weather the US has been experiencing while coffee, sugar and even OJ strength has been tied to hot, dry weather in certain growing areas in Brazil. However, it does look as if some of that money that was recently yanked out of equities might have found a home in the beaten-down commodity sector. The thinking behind that is the sector is undervalued or at the very least, not as dearly priced as stocks and thus a better risk in terms of risk/reward ratios.

That may well be true since several commodities have been trading at or below multi-year lows but I personally am very leery of wildly chasing commodities higher if the chance exists of this emerging markets crisis worsening. Any such deterioration will feed deflationary concerns as investors brace for a slowdown in global growth. Traders are especially nervous in regards to China and this can be clearly seen in the copper chart which is down nearly 7% on the year!

Oddly enough, this emerging market issue has not really benefitted the US Dollar to the extent that some of us were expecting based on the recent past. If anything, the Yen has been the favored currency along with the Swiss Franc. While the Dollar has not been weak, it certainly has not been powering higher as it is wont to do during these crisis events.

This has enabled gold to garner some inflows ( the ETF has actually reported some inflows and increases in reported holdings ). I have maintained for quite some time now that until WESTERN INVESTMENT DEMAND for gold increases, gold will be unable to mount any SUSTAINED move higher. That nascent increase in GLD's reported holdings therefore is noteworthy.

That being said, if a full fledged crisis were to erupt across the emerging markets, it is not a given that gold will shoot sharply higher. Much would depend upon the US Dollar movements. If the Dollar were to break down, it would amplify gold's chances at breaking higher. On the other hand, if the market takes a view that global growth is going to be impacted for the worse, we could very well see copper, silver and gold all moving lower in tandem while the US Dollar becomes the go-to currency again.

It is simply unclear to me at this point what the consensus is in regards to the overall commodity sector. These short covering rallies are so fierce and so dramatic that they inevitably result in wildly bullish calls immediately springing up but keep in mind that a flash in the pan can also startle only to then quickly subside.

Weather is volatile and attempts to dogmatically predict when/if certain patterns will change are bound to frustrate. In the short term, the change in the technical chart pattern that results from a mass exodus of bears giving up the ghost on their short holdings across a commodity market will bring in bottom picking and fresh buying. Any weather scare immediately impacts the current demand/supply scenario and forces a drastic revaluation of the mindset in place during the extended downturn in price. If traders feel that the equilibrium between supply/demand will be altered by the weather, they will immediately react and the market will come to reflect the new balance that is being sought by the movement in price to another level.

One thing I am noting is that once again the mining shares are weak - until I see the HUI trading consistently above the 225 level, but preferably the 235 level, I am going to remain a skeptic towards gold. For now, gold remains mired in a range trade


  1. everyone is blaming the emerging markets, but they have been struggling for three years and it has certainly had no effect on the bull market in the U.S.

    If anything increasing indications that the U.S. economy is slowing, at the same time that the Fed has decided to start to taper I believe is causing the decline in the markets--

  2. Dan, the short term commod volatility is a sight to behold. Whether it be mkts by themselves or inter-mkt spreads like plat/gold, heating oil/rbob, Euro/Yen, it is frightening, and employing strict and tight discipline with regard to stops is virtually worthless and serves only to lighten one's wallet. Better to stand aside, as my convictions on the long term macro picture are quite bearish, but in order to get to that place, one has to survive the short term, right? These recent silver, coffee, nat gas moves I guess have made some players some serious jack, but I was not one of them. But I live to fight another day. sparks and that is all

  3. Looks like largest short position increases in commodities and the metals:


    We could see another 2008 coming up where the dollar becomes the safe haven.

  4. Dollar could very well become a relative safe haven heading into 2015, but a repeat of 2008 is unlikely. The crisis of 2015, possibly running full boar by 2017, will be different. The emerging market crisis represents the flow of money/capital from the periphery to the core as economies and confidence tends to falters in sequential layers. The process which also includes crying is similar to peeling layers from an onion . A different type of crisis, confidence lost on a global scale will emerge once only the core is left. Turkey, Ukraine, Thailand, Greece are being peeled away. The pain will rise as capital reaches the bigger layers/players.

    If the equity reaction holds the breakout channel, we haven't seen the highs. We should know this soon.

    Take care and get some rest,


  5. I assure you that the equity bull market is not dead. Not until every dip buyer has been punished after multiple failed attempts.

    I bet that U.S. stocks start a gradual declinng consolidation with 6 weeks up, 6 week down action for the rest of the year, which will wear down the dip buyers over a long period of time. Each supposed correction, followed by a brief "rip your face off rally", similar to what happened in 2004.

    Meanwhile there will be temporary rallies in gold and other commodities, only to get beaten back once the next equities rally begins.

    And during this entire time, when everything goes sideways for up to a year, the boys over at King World News and Zero Hedge will be screeching and screaming about some fantastic new bear market crash, right around the corner, "any minute now, I swear!!"'

    I mean, check out the headlines now, virtually every expert now claiming that stocks have run too far too fast and a huge 2008 style or even 1929 crash is no imminent.

    1. Mark

      Do you mean the equity market experts who say only buy, the real-estate experts who say only buy or the commodity experts who say only buy?
      All of it is nothing but a giant casino…either they get your money or the Government gets your money…take your pick.
      Yep…the great American consumer is going to save the planet…yeh..right.

    2. @Mark
      Quick - buy Twitter shares. They are now trading at bargain levels, and as the company is at the cutting edge of social media, they can't not go up with the main indices (which are also on the cusp of surging to record highs - mark my words). BUY BUY BUY!

    3. Mark….you read KWN?…why?
      You read Zero Hedge?….why?
      Me thinks you wear gold underwear !

  6. The USD safe haven…like running into a burning building to save yourself from freezing to death.
    After the Wall Street sociopaths have finished pillaging the planet via the Fed and US military, reserve currency status will never again be granted to a single country. This is just going to end so very poorly…damn them all.

    1. Dean, I suspect Mark reads them as do I , just to continue monitoring sentiment and also to see if there is ever a new fundamental thought on their part. An analogy would be the one where, "you keep your friends close, but your enemies even closer"; enemies of course are those holding opposing views to yours; sparks

  7. http://www.bloomberg.com/news/2014-02-05/jpmorgan-said-to-pick-mercuria-for-commodities-unit-sale.html

  8. The one and ONLY answer to the debt problem is to declare it null and void because of FRAUD! It is fraud because it is mathematically impossible to repay ! It can not be repaid because the interest is never created on the loan and that is fraud ! And fraud voids all ! If we don’t void all out of thin air debt the bankers will own almost EVERYTHING ! And we will be homeless slaves ! They have a license to counterfeit ! Can I counterfeit the money to repay the loan ? Why not ? If we even attempt to repay a impossible debt (the national debt) all we do is show our ignorance ! The way to fix this mess is so simple a 3rd grader can figure it out ! We void the fraudulent debt! and everyone keeps ALL the items they have so called debt on ! And then we start to use a debt free currency and / or gold and silver ! And then we will have a robust economy like never before — OR WE LET THE BANKERS STEAL EVERYTHING !
    I was in about the third grade when the news was talking about the national debt and I asked my dad who do we owe money to and who could possibly be richer than the United States? and where did they get the money? And then my dad took a gulp off his beer and said we owe it to our self ! I said that’s the dumbest thing I ever heard of ! that’s like me borrowing from my right pocket and setting fire to the interest and putting the rest in my left pocket ! This was about 1972 ! But Dad was wrong! We owe it to international Bankers running the biggest Ponzi scheme on earth called The Federal reserve system! And yes it really is this simple ! The bankers have a shoe in on ALL loans they make ! All they have to do is stop lending and then start foreclosing on ALL debts!-meaning they now own everything that has a debt by having a license to counterfeit ! So we 1 keep getting fleeced by continuing to pay this fraudulent scheme ! OR 2 we declare ALL out of thin air debt NULL AND VOID because of FRAUD ! And we ALL keep everything we have so called debt on! MOST people don't get this part Every car, boat, house, machine, tool, farm,ect. has already been paid for by the fraudulent paper! So no one looses ! WE sure as hell cant give it to the banksters! (let them steal it) AND IT DOESENT MATTER IF YOU WANT TO REDUCE THE DEBT 90% ITS STILL UNPAYABLE! So when we void the FRAUD This will be the ultimate FRESH start for everyone ! Share this if you want THE solution to the WORLDS problems! If not everything will continue to get worse until we have HONEST DEBT FREE MONEY /and GOLD AND SILVER ! And there is plenty of gold and silver! just Divide the paper money (FRN) by the gold /silver and you have the value of them! NO MATTER WHAT IT COMES TO per OZ ! Then we would be happy to work for SAY A ONE OZ. SILVER COIN A day ! Because NOW REAL MONEY will buy what $100 did before the reset! THINK ABOUT IT! This is what Scripture calls the jubilee !

    1. At the times the Scriptures were written the world was much simpler, especially the financial world.Do you honestly think that it's so simple to delete all debt over night? It's impossible. For every complex question there's a simple and elegant answer, which is almost always incorrect.

  9. This gold trade makes seasickness look like a piece of cake. As Dan once described the trade. Its nauseating.

  10. Here we go. Another "horrific collapse" in the mining shares while gold is brutalized and stocks rally off the lows.

    Just as I predicted, within hours after 15 or so blog headlines at KWN claiming that the end of the world was near, LOL!!!!

  11. uh...Mark...XGD up, HUI up...please define "horrific collapse",...gold also slight up...brutalized ??

    Perhaps you should wait till the end of the trading day before commenting.

    1. Check out chart of NEM.

      End of story.

    2. Um…Mark…I hate to break it to you but NEM is one company.

      So, lets follow your logic…"oh look.. TWTR down 24%!!" another horrific crash in the Dow!! Blow torched S&P !!

      End of story.

  12. Mark,
    You have BY FAR the worst batting average of anyone I've seen post here. BTW, wasn't gold supposed to be about $200 right now? Quick! change the goal posts, now $1,250 gold represents a "brutalized horrific collapse". LOL!!! Stay out of the system!!! (Did I say LOL?!)

    1. Overlay XAU vs. XRT or XLY the last 5 years, even with the recent sharp correction.

      That's what I call a "horrific collapse" in relative strength.

      It' indisputable.

  13. Just a comment on inflation/deflation.

    I bought a new Truck in 2007, just went shopping for a replacement this week. The same truck is now pretty much double the price I paid in 07.
    This equates to a 10% increase per year (rule of 72)

    I don't know about the rest of you but I have not been receiving annual 10% pay increases in the last seven years.

    Back in 07 the average financing package was over 48 months....it is now up to 96 months !! And this is with artificially low interest rates no less.

    That's right..the price of the truck has doubled and in order to sell the new one they also have to double the length of amortization, why?...because household income is not keeping up.
    Oh...but the consumer is thriving they tell us...I just can't wait til the day arrives that my new truck loan is as long as my house mortgage !
    The great Western consumer is nothing but a wounded drunk staggering across a scorched financial landscape...you will be in debt for everything for the rest of your life. Economic recovery my ass!
    What a pitiful scam.

    1. Dean, I hear you. I was looking to replace a string line trimmer (Stihl) and the price was 2.5x what I had paid in 2006. About that truck...Mexico (where I live) is now the 2nd largest importer of vehicles into the US after Canada, having just overtaken Japan. Wages in factories with benefits here (in the Bajio region, which is fast becoming the manufacturing core of Mexico) is something like $4-5/hr. Steel billet is about 1/2 what it was in 2008, ditto Aluminum.

    2. MDLGTO

      If the wages are less than McDonalds pays in the US, steel and aluminum are half price…where does the double retail price come from?
      Paying off rich union pension plans?

  14. sit tight guys … Blythe Masters to join the CFTC !! … no is not a joke , just read it on ZH ! unbelievable … this shit never ends . What a banana republic the US has become .

    1. Anon, this speaks volumes.
      It would be hilarious, if it wasn't tragic.

  15. Hmmm...she's not all that bad looking...and probably makes more in 6 months than most of will in a lifetime.
    I could lower myself to be her kept man bitch sex slave...har har

  16. I mean…really…Blythe Masters ?…
    Sounds more like a character from Marvel Comics….kinda like Pepper Potts or Felicity Smoak.
    I now think that Stan Lee is behind all of this.
    Maybe Iron man or the Fantastic Four will come to the rescue. :)

  17. Best to jump in bed with that looker Blythe rather than be a tin foiler trying to buck the system.

    Big stock selloff day from earlier this week now completely erased.

    Exactly 48 hours after Faber, Russell, and all the other paid experts claimed we were going to crash.'

    Ignore those doomsayers and stay in the system.

    There's not going to be any bail ins, only higher stock prices.

    Gotta be in it to win it!!!


  18. Mark, whether the inflation adjusted distribution top runs out further in time, or we get a full blown blow-off top remains to be seen, but never forget, "trees do not grow to the sky"; sparks and have a good wknd all


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