“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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Wednesday, May 21, 2014

FOMC Minutes Day

Today was the day on which we get the release of the minutes from the April FOMC meeting. Traders were not expecting much out of these that was not already in the market. In spite of that, the focus seemed to shift to a paragraph:

"In their discussion of the economic situation and the outlook, meeting participants generally indicated that their assessment of the economic outlook had not changed materially since the March meeting. Severe winter weather had contributed to a sharp slowing in activity during the first quarter, but recent indicators pointed to a rebound and suggested that the economy had returned to a trajectory of moderate growth."

It has always been a mystery to me how markets manage to focus on certain aspects of reports, whether from here in the FOMC minutes, the Labor Department or the USDA, and ignore other aspects which are equally important. You could definitely make the case that the Fed is viewing the economy in friendlier terms yet the minutes contained plenty of caveats and concerns. The initial kneejerk reaction however was to ignore the caveats with market players scrutinizing talk about the Fed's exit strategy from low interest rates. In an economy that has become so utterly dependent on these low rates, any talk, any discussion, any focus by the Fed on this topic, is going to create some nervousness.

The first reaction for gold was to sharply plunge scoring a new low back to May 12. That however was quickly erased as players seemed to actually take the time to read through the minutes. Doing so shows nothing especially new from the March meeting in my view. Yes, at some point they are going to raise rates, but the economy is going to have to be strong enough for them to consider doing that and for now, it is not there yet.

Also seeming to help gold recover were lingering concerns dealing with geopolitical risks. While Ukraine seems to have faded somewhat from the minds of traders, some are still buying gold ahead of this weekend's election. I would be a bit surprised to see gold lose chart support before that vote is held and traders get a chance to see the reaction and responses.

The result of all this up and down, go nowhere price movement is to contain gold in its range trade. Once again it should be noted that the pattern of lower highs is continuing. Support remains intact. Nearly the same pattern can be seen in the HUI and the GDXJ, however both of those indices look quite heavy compared to the Comex gold chart. Eventually this constriction is going to be resolved in one direction or the other. Here is the deal - gold could actually break through chart support and drop to $1260 and yet set up another range trade with a lower top and a lower bottom. In other words, the possibility exists that gold could go nowhere for quite some time with the metal being content to just meander back and forth in a prolonged period of sideways price movement.


Much will depend upon traders' assessment of the broader equity markets. If the bulk of them are looking past the current period of hesitancy and caution to better times ahead then risk appetite will stay strong for equities and that will keep gold off the radar screen for most here in the West. It throws off no yield and locks up scarce trading capital and money managers do not get paid to produce nothing. They will put capital to work where it can garner the most returns.

If the environment shifts to one of caution for the majority, then gold will find support and hold up as money managers will be more interested in return OF capital rather than return ON capital. 



Some interesting news today out of India, the world's second largest gold buyer. The consensus has been that the election of a new government would be considered friendly for gold prices as it would eliminate the tariff or import taxes on the metal which the previous government had established. That tax was raised to 10% from 2%. It had also ruled that "20% of all gold imports must be re-exported as jewelry, coins or other finished products" according to a story that appeared on Dow Jones this AM.

However, thus far it seems it is having the opposite effect. According to that same story from Dow Jones, premiums have come down and more gold is actually being sold for the time being. The reason? - Indian dealers are reporting that many fear the relaxation of the taxes will result in more gold coming into the country. That will have the effect of causing prices to actually fall as supply increases. Some are selling out ahead of this. They quote a large dealer in recycled gold in "the western Indian city of Mumbai's Zaveri Bazaar, the country's largest gold market as saying: ' We are getting more sellers than buyers these day. Most of these sellers are coming to offload their bars and coins, which they purchased a few months back".

The big question that many are having, is after this initial response over fears of increased supply, will demand then actually rise as the prices move lower with the premiums coming down. Of course that is the question that we all have.

The World Gold Council projects Indian gold demand for 2014 to range between 900 and 1,000 metric tons. Last year it was 975 tons. That is a fairly wide range. We are certainly going to find out. Gold bulls need Indian demand to stay very strong to help offset reduced Western investment interest.


Along that same line, GLD reported yet another reduction in its gold holdings. They are now down to 780.19 tons, the lowest reading since late December 2008.

Here is a funny thing - shortly after looking over the story mentioned above, more news broke from out of India which sent gold higher almost immediately. India's Central Bank slightly relaxed their gold import rules. I suspect traders were thinking that it would help gold demand when the period for peak buying in India emerges later this year. However, the short term impact might be negative as the previous story indicated. That took the market right back down.

Hard to say - we'll just watch and see how things shake out and go from there.

One thing that I can say with some certainty, which is becoming harder and harder to do in these goofy markets anymore, is that the mining shares, basis the HUI continue to perform quite poorly. Same goes for the GDXJ, which is hovering above a recent low near 33.75. Buyers seem scarce at the moment. Maybe they will come back before the close of trading today. Gold, and anything gold related right now seems to be an enormously BORING sector. By the way, this is the reason that CME recently cut margin requirements to trade it. Markets that go nowhere lose speculative interest. They are also enormously frustrating for many traders because of the random price movements up and down without rhyme or reason. Most of the time that is caused by speculators just getting out, whether long or short and saying, "the hell with this useless market". Gold seems to fit this description very well right now.

By the way, I am sure that we are going to get more breathless commentary from the GIAMATT crowd how gold "was attacked in a brutal takedown" as soon as the FOMC minutes were released. We will not however get any comments on the equally goofy spike back up in price which erased all those losses in minutes. Of course we all know here that evil manipulators are at work in the gold market attempting to manipulate prices higher and giving the appearance to the masses that inflation is ramping up proving that the Fed's policies are working and that they are achieving their goal of an inflation rate of 2%. Why just today several Fed governors were out congratulating themselves about this increase in inflation.

Actually what happened was the exact opposite - several of them were bewailing the lack of inflation and were telling us that is could be several years before it returns to their target rate of 2%.

However, these Fed-sponsored buyers were buying huge, obscene amounts of gold contracts, without any attention to finesse or the impact that such indiscriminate buying will have on those hoping to obtain the best possible buying price for their metal. They drove the price higher and well up from session lows, punishing the bears who dared to short this key metal that the Fed obviously now wants to stop going lower.

Those of you who read here regularly know by now that I enjoy using sarcasm and hyperbole to illustrate absurdity. Can you see the folly in this never-ending, day in and day out dissecting of every move lower and higher in gold? It is such a waste of time, energy and talent. Just call it what it is - markets are confused - traders are unsure of much - data is conflicting and the Fed itself is uncertain. One moment they focus on one thing - the next moment they are looking at something else. Pick your daisy, pluck the pedals off, repeat the phrase, " She love me; she loves me not" and you have a pretty good description of what takes place on some days in these confused markets.

Speaking of confused markets - Jack had his magic beans but the soybean pit has its magic word, "CHINA". it was old news but China reported huge demand for US beans. That sent visions of empty bins here in the US and up they went. Yesterday they went flying high only to implode lower. Today they went sharply higher yet again ( for now). For the sake of illustration, here is a one hour chart of the old crop bean contract. And these gold guys think they have seen price volatility. Soybeans make gold trading look like it is similar to watching paint dry.

Observe the huge swings in price, soaring rallies followed by steep plunges only to reverse sharply at move higher again followed by another steep drop. Behold what wonders hedge fund computers have wrought!



Moving to touch on the currencies a bit - The Draghi verbal takedown of the Euro that began back when it was near the 1.400 level, has been most effective in undercutting that currency. It has fallen about 2.5% against the greenback since the second week of May and is now perched above a major chart support zone.

If you notice the ADX, it is rising and above 25 indicating the presence of a trending move lower. Bears are currently in control. Bulls have a shot at holding the Euro near current levels but if they do not, we should see it drop initially to slightly below the 1.36 level. Failure there and 1.35 is in store.


Since the Euro makes up such a large portion of the basket of currencies that comprise the US Dollar Index ( USDX), any sharp fall in the Euro will tend to magnify any upward movements in the Dollar. This will need to be watched closely for if the Dollar begins to gain some additional tailwinds pushing it up, gold is going to test that key chart support region near $1280 yet again.

Keep in mind that these currencies have been extremely volatile due to the ebb and flow of safe haven plays of late ( ask any Yen traders about this if you are doubters). Currencies are always sensitive to anything their respective Central Bankers might say but given the current environment, they are even more so at the current time.

That being said, I am especially on alert for interest rate movements here in the US or in the Euro Zone. Current thinking is that while the market does not expect any rate hikes here in the US until at least next year, odds favor higher rates here much sooner than in the Euro Zone. Some are talking interest rate reductions in the Euro zone if it does not show some more increased growth by the time the next ECB meeting occurs next month. Either that or some form of QE coming from the ECB. We shall see but this type of talk tends to pressure the Euro at the expense of the Dollar. I am also noticing on the crosses that the British Pound is gaining on the Euro as well. UK retail sales were very strong in April according to data released today over there. That fed talk of a higher rates there in the UK as well.


Another bit of foreign news - Moody's Investor Service released a report noting concerns over China's housing market. They lowered the sector rating outlook from stable to negative. " A significant slowdown in residential property sales growth, high inventory levels and weakening liquidity over the coming 12 months" was the key phrase. Copper seemed to take it cues from that as it put in its lowest close since May 9.

On the energy front, can anyone say "Soaring Crude Oil Prices". Crude is working its way back higher again after only the briefest of forays beneath the $100 level early this month. In looking at the price action of this key market, I have to wonder if it is telling us something about the health of the US economy. Like just about everyone else out there, I am unclear on the exact picture when it comes to US growth. Some data looks promising when it comes out; some data looks negative.
Obviously, in the face of big supply coming from domestic shale production, demand is staying quite strong. Is the US economy driving this alone?

The chart shows some heavy overhead resistance near and around the $105 zone. Thus far that level has capped the price rise. If crude clears that, it should trade to $108 in short order. Can it? I have no idea but am watching.


On a different note - check out the following link when you can:

http://www.hollywoodreporter.com/news/fast-furious-7-insurance-claim-706037

It concerns the wildly successful "Fast and Furious" franchise. Many of you are no doubt familiar with the very sad passing of Paul Walker, one of the main stars in this series of movies. Apparently, they are planning on some technological tricks to keep his character going in the planned 7th installment. This is similar to what they did with the movie, "Tron - Legacy" where they used the same technology to overlay a younger face of the actor Jeff Bridges on a different actor. I guess it is "progress" but the whole thing strikes me as pretty weird, almost morbid, when it comes to replacing an actor that has passed away with a computerized image. 

If I were a Hollywood actor, I would be a bit nervous about this. Before long, they will not need any actors - they will be able to do the whole thing with computer generated characters. That should lower the cost of making the movie which I am sure will be passed on to us, the consumer, in the form of lower theater ticket costs.  ( note this is sarcasm here) Have any of you out there been to the movies lately and grabbed some pop corn and a drink? Yikes! I mentioned just recently having some fun with the movie "Godzilla" but I can report that another thing that the monsters savaged besides Honolulu, Las Vegas and San Francisco was my wallet.

17 comments:

  1. Damn good letter again Dan. PM's are beginning to be both bulls and bears worst nightmare. Volume drying up big moves looking unlikely. We could be range-bound for a long, long time. I just for the life of me do not know what the next major black swan catalyst could be. All the bullshit from the FED is so tired for all players concerned. And as for geopolitical events, well, there is no shortage, but then again, that is all baked into the cake it would seem also. Seems to me that the best action for the next 90 days lies in the beans and grains, and of course, stks. Yes Mark, you are still right here. Take care all, swb

    ReplyDelete
    Replies
    1. Hi Steve,

      Do you see the opportunity in stocks mostly on the long side or do you think there are good opportunities both long and short because of volatility?

      Delete
    2. Gene; Impossible to answer here, but, depending on whether you are trading indexes, individual stks, I would only say that we are not going to go SIDEWAYS here. Ultimately, the huge $ from here on out and that may still be 6 months out or so, but it will be on the downside. swb

      Delete
  2. Believe this is smuggled gold being timely sold before import duties are reduced.

    "However, thus far it seems it is having the opposite effect. According to that same story from Dow Jones, premiums have come down and more gold is actually being sold for the time being. The reason? - Indian dealers are reporting that many fear the relaxation of the taxes will result in more gold coming into the country. That will have the effect of causing prices to actually fall as supply increases. Some are selling out ahead of this. They quote a large dealer in recycled gold in "the western Indian city of Mumbai's Zaveri Bazaar, the country's largest gold market as saying: ' We are getting more sellers than buyers these day. Most of these sellers are coming to offload their bars and coins, which they purchased a few months back".

    ReplyDelete
    Replies
    1. To wit: Smugglers are taking advantage between spot price and import duty price, and now best to sell their inventory pipeline before 10% import duty reduced. My estimate is smuggled gold comprises more than 50% of total India gold supply over the past 6 months.

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  3. Thanks for your effort Dan and another solid, well-rounded market analysis.

    The Hollywood/TV industry is culturally toxic for the most part and it's extreme/abstract subject matter is about as far from everyday reality as could be.
    Anyone whose glanced at the menu of "reality" based shows (past or present)probably knows what I'm getting at.

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  4. The "Harrowing Decline" in GDX continues unabated.

    The only hope for the Gold Bugs is to see GDX pull a 28% boner move like Trina Solar (TSL) did today on 10x normal volume. However, those are usually long shot plays, happens only once in a blue moon.

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  5. I find it interesting today that the MSM and the markets barely noticed that in March alone, Russia sold a record $26 billion, or 20% of its U.S. TREASURY holdings and that China and Russia entered into a significant gas deal bypassing the petro dollar. I also wonder if events like these imply the start of things to come for our precious USD. Things are really starting to smell. During the financial crisis between 2008 and 2010, the FED loaned out 16 TRILLION to banks and corporations around the world to keep the system afloat based on the GAO audit under Dodd Frank. Is the FED funding the back door purchase of US. TREASURIES through these type of loans? Only a new audit would prove it but the congress, the president and the FED won't allow it...so much for transparency.

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    Replies
    1. P.S. in the meantime, thank GOD for Belgium and its financial ability to pick up the slack in Russian TREASURY purchases.

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    2. Mad Max, Russia is very over-rated and has their hands full at the moment. Let 'em buy Greek, Spanish and Italian bonds if they want. Better yet, JGB's.

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    3. Yea Russia is one of those silly net producer countries that has yet to discover the joys of unconstrained credit creation or the luxury of exorbitant privilege.

      Delete
  6. I read and reread this article several times. Brilliant! You don't get this level of commentary nowhere on the web. Thanks!

    ReplyDelete
  7. Ditto that. Thanks for the con continuing well thought analysis + objectivity, Dan.

    ReplyDelete
  8. Dan- Thank you for your ongoing insightful and interesting analysis. Your blog helps to keep these wild market movements in proper perspective. A gift to your followers...

    ReplyDelete
  9. "Can you see the folly in this never-ending, day in and day out dissecting of every move lower and higher in gold? It is such a waste of time, energy and talent. Just call it what it is - markets are confused - traders are unsure of much - data is conflicting and the Fed itself is uncertain."

    Hey Dan, if you are right, they'd have to fire all those guys working at Bloomberg, financial newletters, financial magazines...you don't want to see millions more unemployed people, do you?

    ReplyDelete
  10. I notice you keep pointing out the lower highs being made in gold but seem to notice the higher lows that are also being made on each sell off. The pattern has been one of a tightening wedge pattern and you are correct we will get a resolution shortly one way or the other. And of course the outflows from the GLD continue. Question again is where is this gold going? And if gold does garner favor where are they going to find the gold to replenish this fund. IMO opinion it has been one of few sources of physical to meet Eastern demand.

    ReplyDelete

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