“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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Tuesday, March 11, 2014

Bears Win the Copper Battle

Those of you who have been regular readers of this site know that I have been very strongly concerned over the divergence between what the copper market has been doing and what the rest of the commodity markets, but especially the equity markets, have been doing.

Equities have been making new highs as if there isn't a care in the world while copper has been among one of the worst performing commodities across the entire sector.

As I have said before, and will say again, this divergence is so abnormal, so strange and so uncommon an occurrence, that I believe we ignore it at our own peril.

Copper is the quintessential bellwether for global economic activity because of its widespread use in construction, both residential and business/manufacturing activity. If its price is sinking lower, it is signaling that economic growth is lackluster at best and slowing at worst.

With that in mind, look at what has happened since my last post about this.




Yes, it collapsed right through major chart support. I honestly did not think this would happen ( I thought it would bounce ) but the problems with China have gotten the copper market extremely nervous and it is definitely showing its cards. China has been the poster child for what a credit bubble looks like and we are now finally seeing some real evidence that the air is coming out of that bubble.

I must say that any news showing slowing growth in China, credit issues, rising bad loan problems, etc., is not bullish for commodities. You'll notice that silver opted to follow copper lower instead of gold higher. Gold, by the way, is only keeping afloat in my opinion because of geopolitical uncertainties concerning the situation in Ukraine. It is doing what it should be expected to do however during times when many desire a safe haven of sorts. It also is not hurting gold any that the Dollar has been a consistently poor performer of late.

Along the line of weakness in the commodity sectors, check out crude oil, which has lost more than $5.50/bbl over the last few trading sessions. Does this look like a chart showing a strong demand scenario which would be the case if economic growth were solid?


We thus have two key bellwether commodities both showing us signs of real weakness. I tend to rely more on the signals of these two markets ( plus cotton to a certain extent although weather issues can mess with it) to get a snapshot of where economic growth is more likely to go. We all can dismiss equities as a TRUE snapshot of the real economic picture ( thus it is and has been since late 2008 in my view) as that sector is driven almost entirely by yield-hungry hedge funds and large investment funds chasing yield in a near-zero interest rate environment. As said many times here, you cannot fight the tape as a trader and survive very long but that does not mean that the market will actually make any sense at times.

I see this lack of real growth as problematic for any sustained rallies in gold mainly because of my experience with the metal during the credit meltdown back in the summer of 2008. It got sucked down along with the rest of the commodity sector and did not live up to its name as a safe haven. It was not until the Fed announced their first foray into the realm of gargantuan money printing that the metal bottomed along with nearly everything else on the planet I might add.

The problem we have now is this boogerboo named deflation. It is still around to haunt us. This is not to say the entire commodity sector is going to implode lower. There are definitely exceptions to this at the current time, coffee and hogs currently among them, along with soybeans, which refuse to sharply break lower. Corn and wheat are both higher as well but they are being supported due to fears involving Ukranian grain shipments which many fear are going to be impacted at some point due to the conflict over there.

However, I still remain of the opinion that one of the fundamental pillars to a SUSTAINED bull market in gold is a bull market in commodities in general alongside of a weaker US Dollar and Negative REAL interest rates. It is difficult to make the case for any of the latter points with the exception perhaps of the US Dollar, which while it has not collapsed, certainly is weak on the charts.

That tells me to expect more of a grinding type price action in gold rather than the roaring, runaway moonshot which far too many of those in the perma-bull camp are anticipating. Only if we were to get the moonshot across the entirety of the commodity sector would I be able to concur with that theory.


You'll note on the gold chart that the metal is not falling apart like copper is but continues to lurk just beneath a key chart resistance level. Geopolitical uncertainties are making it tough for the bears to get aggressive and the bulls are not going away. The trend is still higher, but in a grinding sort of fashion as the ADX is moving higher but leveling off suggesting the waning of the sharp momentum seen earlier this year. I get the sense of a market reluctantly moving higher but not one in which there is unbounded bullish enthusiasm.

It will be interesting to see what we get this Friday in the COT report as it will cover the action in gold only through today's trading. Will we see more of that hedge fund short covering the dominant feature or will we see new longs outnumbering the short covering this time around?

By the way, don't forget that the COT report showed copper with all major category of large traders, including the Producer/User/Processor/Merchant  group all heavily short with the only buying being done by the Swap Dealers and Index Funds. I mentioned on Saturday that struck me as being extremely rare and quite odd - now we finally know the reason don't we?


24 comments:

  1. Copper is a proxy for China. iron ore is a proxy for China. steel is a proxy for China. Gold is NOT a proxy for CHINA. Silver is NOT a proxy for China. Sustained commodities bull market is just beginning. Proof=the breakout in the CRB and CCI index's. You don't need China per se for that to grind higher. History has taught us that. The tapering the fed is now doing will let the inflation genie out of the bottle. Again past history has told us this. It's all there in the past. Just look it up. You'll have to do the work yourself and find when it happened. Hint, it happened within the last 100 years. Yes the same bond buying/printing happened before. Tapering happened also in the past.

    Sometimes conventional wisdom is your worst enemy. Ukraine? Is there an end in sight? lol.....

    On a technical note, Gold looks to forming a bullish symmetrical consolidation. We are in the one of the weakest months for Gold and Silver yet it's staying at the highs. Look for it to breakout out by the end of the month. From there it will test it's all important 100ma on the weekly charts at 1475-1500 ish by May. Yep thats right another short covering rally...lol

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    1. Kevin, maybe I am wrong, but your thought that per se China does not matter for commods to go higher is WAY behind the curve. Do you think Lithuania made the highs in cotton, copper, crude, beans and so on over the past 14 years? China, R.I.P., and coming up next the biggest credit mess the world has ever seen, as the Russians and Chinese newcomers to the modern financial world blow themselves up singlehandedly. Oh, but they have been buying gold all the way down though, huh? LOL; sparks

      Delete
    2. Sparks.....Yes that's what I'm saying. To clarify, commodities in general don't need China as much as you would think. 7% growth in China is good enough to sustain the commodity market, if one would believe china in the driver. Remember the worlds population is 7 billion and China's population is only 1.3 billion. The rest of the world makes the majority here and makes the world move, regardless what the media or the hype says. India, indonesia, south america...etc. Those areas of the world are growing up too and need commodities just as much as China and actually are more sustainable.

      Sparks I'm not a Gold bug, so save the perma bull bashing. I laugh when people think like that. I trade how I see it. and right now the majority of people are convinced that Gold/sector etc... Is still in a bear market and forget to see signs of something different is happening. Signs are starting to emerge that maybe just maybe this is the beginning/resumption of the bull market. It's amazing how many people on both sides will never change their mind or adapt. Even if it isn't the resumption of the bull market there could still be a double top or something close to that.

      In conclusion, I don't care what or why Gold is moving. I'm always looking at it objectively, technically and seasonally. I could care less about Ukraine. Pull up a chart of the CRB and GOLD and lets see if you see something strange since the beginning of this Ukraine crisis. You'll notice that Gold and CRB have been going up BEFORE the crisis started or before it became mainstream.

      cheers,

      Delete
    3. Concur.
      Gold has been in a break out, nice gains have been made from the double bottom.
      Consolidating of late and looking to break out up.

      Delete
  2. Yes, very interesting intermarket analysis, now I often keep a look at Copper.

    As for SP500...or US stock markets in general, they are like the Titanic during the last minutes of the movie : they keep going up above water...but that's because the ship is breaking into two pieces and is about to sink. Should that move make us feel confident? :)
    Anyway, I'll have a very hard time reaching my target on silver, I think it's much more likely that we break through 20.60, so... I put back my stop loss at my entry level and so be it.
    Have a nice day,

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  3. In addition money is starting to flow into the bond market despite tapering by the Fed. Nice double bottom and breaking out over it:

    http://www.marketwatch.com/investing/bond/10_YEAR/charts?symb=10_YEAR&countrycode=US&time=6&startdate=1%2F4%2F1999&enddate=3%2F10%2F2014&freq=1&compidx=none&compind=none&comptemptext=Enter+Symbol%28s%29&comp=none&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=2&style=1013

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  4. you don't want to argue with Dr Copper. he. will send 110 volts down the line and zap you good.

    ReplyDelete
  5. Meh....

    Copper and Iron Ore are so "yesterday".

    Just like the late 1990's, nobody needed resources or "hard assets".

    Hey, by the way, anyone know if the 60-year veteran and "Godfather" correctly predicted the most stunning and spectacular bull runs in world history?

    5-year rise in Disney from $14 to $80
    5-year rise in MMM from $34 to $135
    5-year rise in Nike from $17 to $80
    5-year rise in Macy's from $5 to $60

    5-year rise in Priceline from $55 to $1,375
    5-year rise in Google from $450 to $1,225

    18-month rise in Netflix from $57 to $450
    12-month rise in Tesla from $34 to $250

    Once in a lifetime opportunities to build vast wealth, and at least 25 other "acclaimed experts" and "market veterans" totally missed it.

    All I can say is, wow...

    Oh, I forgot the 2-year "crash" in Newmont Mining from $67 to $20.

    Forgot that one also.

    LOL....

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    1. If you had bought them, then please let us know what you are buying now?
      Let's see after another 5 years... it is easy for people to hindsight 20/20

      Delete
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      Delete
    3. I sold my Priceline when it reached $156,...
      Mark, you also made a point, in order to be rich, you have to hold winners, not trade them.. isn't it?

      Delete
  6. i must say the guys at zh were spot on with their paper on iron replacing copper as the collateral pool for new loans … those idiots at market watch are so behind the curve now saying its all due to a light slow down in the global economy … you have to laugh

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  8. Hi Dan, as I was reading your blog and comments my phone went "beep beep" and alerted me that Gold has hit a 3 month high! Oh look $1359.70! What timing!
    I've mentioned before here that maybe with all the saber rattling and civil unrest all over the world, $ is flowing into US equities and the precious metals etc.regardless of what D.r Copper is doing- the US the nicest horse in the glue factory!
    Over the last several years I've studied the markets only to find that they are BROKEN and RIGGED! I'm looking to invest as any $ in the bank gets zilch interest and probably isn't safe given the new "bail in" regime our good old Gov't here in Canada has adobted!
    I like gold and silver but its tough given the conflicting views and opinions of the pros I follow. Some say we had a double bottom and its up from here, others say because we didn't see a low earlier in the year, it will be delayed till later.......maybe a sell in may and go away???
    Regardless, I bought some silver today but was somewhat trigger shy. More of a long term thing, not a trading position like most of your readers I might add.
    I'm waiting for more confirmation which I was hoping to get from you Dan!
    Maybe I need to come and meet you and bonk you on the head with a gold wand so you will become fully bullish again, maybe then you will be invited to join KWN again and the metal markets will rocket higher! Is that why you don't get interviewed there anymore because you aren't bullish enough? Anyways we miss hearing you on KWN.
    Below are links to an effort I and our company have joined to help regain our sanity and help our broken economy!
    God has told us to be good stuwards of what He has given us!

    thanks again Dan for an excellent read!


    http://transitiontownpeterborough.ca/
    http://thegreenzineonline.com/kawartha_loon/

    ReplyDelete
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    1. woody worx;

      I doubt seriously I would ever be invited back on KWN and even if I was for some odd reason, I would decline at this point. I try to be objective as a trader and for that reason, sometimes I am bearish, sometimes I am bullish and some times I am neutral. They need perma bulls over there and I no longer fit. Fine with me as I do not make a dime off of telling folks what the charts are saying anyway.

      About the metals - keep in mind WHY you buy them - it is for INSURANCE against currency debasement and the mismanagement of a currency by its monetary masters or the excess of its political class. In the end what you are attempting to do is to preserve what you have from the ravages of inflation or a falling currency.

      For that, you BUY AND TAKE POSSESSION of PHYSICAL GOLD and not gold stocks or gold ETFs. You hope for the best and expect the worst. That way you are prepared.

      Trading is an entirely different matter. I have tried to repeat this over and over again so that folks understand I wear two different hats - one as a trader attempting to analyze various markets and their relationships and one as a concerned citizen/longer-term oriented investor.

      Unlike far too many in the gold bug camp, I do not LONG FOR nor do I desire to see the demise of my beloved nation or of its social institutions for the sole reason that my gold will increase in value and I can become rich. I have kids to raise and want them to inherit a country in which they have a viable future.
      '
      If political leaders were true statesmen and had the long term interests of the nation at heart, they would not spend beyond their means ( or its means) in order to buy votes. Nor would they cater to the big international banks by endlessly pumping out trillions in liquidity so as to keep the balance sheets of the banks strong and the stock market levitated to such obscene heights.

      If you own some physical metal, be thankful you have it and forget about it (unless you periodically buy more on a regular basis). Concentrate on seeing where the money flows are headed if you are interested in trading and follow those. Know WHY you are buying something; just do not blindly buy it because it is going up. I made it a habit many years ago of not trading markets that I do not understand - I do not care how much of a move they might or might not make. If I do not understand it; I leave it alone and find something that I do understand. It has been a good course for me to follow over my career and served me well.

      Sincere best to you
      Dan

      Delete
    2. 18 trillion debt says all one needs to know about the statesmenship of the political leaders. There is no leadership. I dont think a much higher gold price means the demise of this nation. Please comment and follow up on Jim Sinclair's point about gold balancing the debt. So instead of a higher gold price meaning the demise of this nation, it could mean the saving of this nation, in that gold would balance the books. Its an interesting idea. But there are always 2 sides to every issue. But its certainly an important one.

      Delete
  9. It's true that gold bounced nicely yesterday on the 1337 fibo retracement level.
    Also, gold is now above the mlh sup of the downwards pitchfork on the weekly time unit.
    Technically, this is so much better imho than just a few weeks ago.
    I keep the remaining of my long positions for sure until at least the next fibo level, and of course the whole of my physical gold which, as Dan mentioned, is not meant for speculation...
    Too bad that some "famous" blogs choose to invite only those who share their exact point of view.

    Best thing we have here on this blog is contradiction and freedom of speech.
    Incredible, that such basic principles are becoming so rare to find.

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  10. http://davidstockmanscontracorner.com/ Hubert and others, here is a brand new site that you may want to give a look to; sparks

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  11. Is it my imagination, or are the miners feeling kind of heavy right now? Perhaps they are torn between the political uncertainty and gold advances on one side, and pressure on copper and oil and depression-like environment on the other. They seem they can't decide if they are on the same side as the overal economy and stock markets, or on the side opposite of them. In choosing their alliances, they are as indecisive as Italians during war times.

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    1. Apologies. I just realized I could have inadvertently offended our gracious host. The comment about the Italians during the war times wasn't aimed at you Dan.

      Delete
    2. Abraxas;

      No worries my friend. the joke around here was:"what was the fastest thing on wheels during WWII". Answer - an Italian tank in reverse....

      Delete
  12. Dan is it not true that there are warehouses in China full of copper bars that were used in part as collateral so developers could borrow $ and build cities where few actually live/work? I also read that iron ore was stockpiled for the same reason, collateral. Now that that bubble is bursting who needs copper and iron ore?

    ReplyDelete

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