"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, June 26, 2014

China news roils Gold but dip buyers emerge

I was wondering when we were going to start seeing and hearing the various FOMC governors after Janet Yellen's now famous comments the other week; comments which launched the entire commodity sector, including gold, higher. You might recall she gave the impression, or at least the market interpreted it this way, that interest rate hikes were off the table anytime soon.

Enter Fed Governor Lacker from Stage Right - His comments during a Q&A noted that he expects the Fed will need to raise interest rates in 2015, although he did say that he ffelt "low interest rates are appropriate given current economic conditions". He also stated that the "precise timing of interest rate hikes will be tricky".

He noted that "stronger inflation data in recent months have not been entirely noise". He also stated that "inflation is firming more quickly than expected but remains below the Fed's 2.0% target".

The big line, at least in my view, was the one, " the Fed may need to raise rates even without a substantial acceleration in economic growth". That one seemed to garner the most attention.

He did note, by the way, that he expected the Q2 GDP to bounce back to 2.25%-2.50%. We will see about that.

Those comments seemed to add some pressure on the gold market when they surfaced on the newswires. (UPDATE - Fed Governor Bullard has just now come out and is speaking).

Gold was already seeing some light selling pressure from two other developments related to Asian physical demand.

The first of these was chatter about the Indian monsoon season which some are viewing as off to a weak start. The idea is that a early and strong monsoon season is necessary for good crop yields there. Since the bulk of Indian gold purchases are made from those engaged in small scale agriculture, any problems with the harvest tend to negatively impact overall Indian gold demand. While it is too early to state dogmatically that the harvest there will not be as strong as might normally be looked for, traders are watching for any sign of lull in demand from this key gold buying region.

Also, and this one seemed to be a bit more of a factor than the above, news out of China reached the market this morning that officials there had uncovered approximately $15.2 billion in loans that are tied to potentially illegal gold-financing deals. The report noted that banks in China have already begun more closely scrutinizing these gold-backed loans and have been cutting back on letters of credit to gold processors.

It is worthwhile to note that the article goes on to say that Goldman Sachs estimates that since 2010, metal-backed loans have been used to bring some $110 billion into China.

Think of these loans as a sort of carry trade - the borrower obtains a letter of credit by a Chinese bank which is secured by gold located in a bonded warehouse either on the mainland or in Hong Kong. The borrower then uses that letter of credit to secure a US Dollar loan from an offshore bank. That money is then converted to renminbi which is then used to invest in a higher-yielding financial instrument there on the mainland. The profit is made in the difference gained on the investment and the interest paid on the loan.

The concern here, not only for gold, but also for copper, is that any tightening of these letters of credit will crimp demand for the metal. If the banks are not going to provide letters of credit, then the ones using the gold as collateral are not going to need it, cutting into future demand. Also, while we are not there yet, some fear the possibility of these loans being called as a result of officials' actions to put an end to the double and triple counting of the same gold. If that were to happen, the spread trade would be unwound. The investment on the mainland would be sold, the money raised would be converted from renminbi to US Dollars, the US Dollar loan would be repaid, and conceivably, the gold which was purchased in the first place to secure these loans, would no longer be necessary and would thus be sold.

It is also interesting to learn that at current gold prices, the amount of gold is 11.5 million troy ounces, according to a report from Dow Jones. In a very interesting way of looking at the sum involved, their sources estimate that on a global scale, it would be the 11th largest gold reserve in the world, just behind Portugal's stash of 12. million ounces and just ahead of the UK's 9.975 million.

No wonder the gold market is noticing this!

The usual "we have never seen a story concerning gold that we could not spin to make it bullish" website somehow manages to contort this story as friendly! Just use common sense and do not get lost in the weeds with their "logic" and you will see what it is that has been lurking out there in the minds of metals traders. They are understandably nervous about this.

Recently the dovish statements by Yellen and by her counterpart Carney over at the BOE, have seemed to outweigh any concerns from these China developments, ( let's also not forget that horrific Q1 GDP reading ) but they are lurking in the background and should be closely watched. I should note here that most analysts, still expect Chinese gold demand to remain strong; however, if, and this is a big, "IF", Western-oriented investment demand were to lag for any reason, any curtailment in gold demand from China would become more significant.

Counterbalancing this bearish news for gold was the Fed's favorite inflation indicator - the Personal Consumer Expenditures index - reading. It rose to 1.8%, the highest reading in 19 months!

It's funny isn't it? - I was bewailing the lack of Western-origin gold demand when gold was moving lower, as evidenced by the reported GLD holdings, for the reason behind the lackluster gold performance. While this was occurring Asian demand was carrying the water in the gold market. Now we have the exact reverse! Western-oriented investment interest in gold is picking up somewhat while Asian demand is beginning to lag! This means that gold is now dependent on buying coming out of the West instead of the East to keep it supported!  One thing never changes- the fact that markets are always changing!

The Western-oriented demand is tied to both inflation concerns and uneasiness over the equity markets in the face of sluggish economic growth. Wouldn't it be something if we watched gold move higher at the Comex during the late European and New York trading sessions only to weaken during the Asian trading hours! Talk about a change of pace!

Shifting a bit to the technical side of things - gold continues to fail near key overhead resistance centered around $1320. I am posting the same chart as yesterday with the same notations - gold is stymied here at the resistance zone noted. Dip buyers are coming in however. Bulls need to take the price through this level rather soon however or the stale longs are going to bail out. Depending on whether or not they can hold the price above $1300, we could see another drop towards $1280. A strong, sustained push through $1320 should allow the market to make a run at $1340.

The mining shares remain well bid which is a comfort to the bullish cause in gold.

The yield on the Ten Year Treasury note is hovering just above the 2.5% level.

On the grain front, soybeans are back to worrying over the ending stocks once again. "She loves me; she loves me not". Strong weekly export sales were behind the move higher. We have a big report from USDA due out on Monday and that has once again shifted concerns over what USDA is going to give us in regards to the old crop carryover.

I am still eager to see whether some of the commercials are going to try to squeeze the shorts in that July contract when it enters its delivery period next week. We need to get that month off the Board and out of the way to get an actual decent reading on what the new crop is going to do. July, tied to these ending stocks, has been a real source of volatility and confusion in the beans for a long time now.

I am beginning to wonder if there is not a subtle shift occurring in bean market in regards to the pipeline needs. Old habits die hard but with S. American soybean production rising nearly year after year, I wonder if the importance of the carryover is as big a deal as it once was many years ago when I first started trading these things. Back then, we needed a big carryover to ensure that we would not run out of beans between the harvest of the previous year and the harvest of the current year. More and more however we are seeing S. American cargoes filling needs and with imports of beans from down below now becoming much more common, perhaps the market is going to re-evaluate whether or not the carryover is quite as critical as it once was. I am not saying it is not going to be closely watched - what I am saying is that the global grain trade is changing and S. America is becoming a bigger player with the passing of each year. Their crop is harvested during the spring up here and moving beans north is not as uncommon as it once was. If you can just as easily ( and sometimes more cheaply!) acquire beans from S. America during the spring and early summer  than up here in N. America, why do we need carryovers the size that we have historically come to look to here? Just asking....

Corn and wheat are moving higher as the selling down here has dried up some ahead of that above mentioned USDA report due Monday. Traders are going to want to see the numbers before getting too aggressive at this point, especially considering the extended downdrafts that we have been seeing in both markets. We are seeing some signs of demand picking up at these reduced price levels.

Also, I suspect some of the big locals and some others who manage some commodity money might be trying to pick off some of the small specs who are quite short both markets. Buy stop running is always a favorite pastime of that crowd.

Crude oil wasted no time surrendering its gains from yesterday. Perhaps it was the fact that equity bulls were suddenly now concerned that economic growth was not going to be as strong as they were thinking it would be for Q2 ( that did not seem to bother them yesterday now did it?). Where were these guys yesterday when they bid up both the price of crude oil and the price of stocks when we got one of the worst GDP readings I can recall in some time?

Take a look at the crude oil chart - today's move lower has put the market right smack on top of the upper edge of the support zone noted on the chart. You might notice that the $105 level was a tough overhead resistance level on the way up and had held this market in check for some three months or so. It is now serving as support.

Short term indicator is bearish. Bulls so far have held this market together but they are going to have to dig in here and start pushing back if they are going to prevent that massive speculative long position hanging over this market from becoming a bigger factor. They are so far holding things together but have been unable to extend the price higher. Bears are digging in as well.

Of course, as mentioned in yesterday's post, the weakness in crude and its products, along with natural gas which moved lower in a larger-than-expected inventory build, pulled the Goldman Sachs Commodity Index, rather rudely. This is in spite of another push to fresh record highs in the cattle complex and higher prices across the board in the grain complex. Cotton is heading lower and that bodes well for apparel costs although the higher priced crude will tend to push synthetic prices higher.

One last thing - I wish to thank all of those who have graciously donated. I am trying to make a point of personally thanking each and every one of you but time constraints make that difficult on occasion. I did not wish to not acknowledge your kindness lest you think me ungrateful. It is sincerely appreciated.


  1. Thanks Dan, I just left a post in the last thread about Bullard and eventual rate hikes.

  2. DarkPurple; You are clear thinking. Bulls and Bears alike are very tiring in here as they massage the same old so called fundamentals to justify their calls. Guess what ladies? That is all IN there. None of us know what is around the corner, so stop already with your moonshots/collapses, letter writers, pundits, talking heads and so on. Bull mkt calls sell and that is always how it has been and that is why I live on the 'Don't Pass Line'. Take care all and realize that we are in a huge mess.

  3. I, personally, am long a small wheelbarrow of physical Gold, and I both want and believe that the price will rise, over the medium-long term. However, right now - and particularly this month - I have less confidence that we will see 1500 any time soon than I have that we will test 1000, and I base that view on the simple fact that there appear to be more people willing to sell Gold than buy it. As Keith Weiner's analysis as Monetary Metals shows, there is no current shortage of Gold and especially not Silver, and if the current crop of economic and geopolitical news cannot cause Gold to rally, then, quite frankly, what will? - certainly not a few have-baked scare stories about "infinite" rehypothecation" and Chinese ponzi this ponzi that

    Personally - and I make no claim to being any better at this than the next man - I have for some time believed that the only real numbers in Gold are for the time being 1000, 1500 and 2000 with all point in between being essentially trendless noise. I wrote here on 13th and again on 20th June that I thought we needed a convincing breakout above 1320 if we were to be able to declare any kind of a rally (next Fib target around 1344-8) and expressing my concerns about being locked into harmonic trading bands below 1314. Frankly, I see the next move as probably downwards to test 1264 (the upper band), and if that doesn't hold, then 1241 (the bottom of the lower band from 1241 - 1277)

    All stuff & nonsense, because NONE of us actually know with any degree of certainty; however, all these breathless forecasts of Silver variously at $50 (within 6 weeks), $65 or $100 need to be treated with utter contempt, and if there is any good to come out of the current market, it may be that these charlatans will finally be exposed as the Snake Oil Salesmen that they truly are. After Nixon - would you lease a secondhand car from this Guy?

    1. Zhang;

      I am with you on this. I really have no idea where these markets are going. Neither does anyone else. The problem is that too many like to dupe others into thinking that they do!

    2. In the spirit of fairness and objective thought, here's a contrarian viewpoint to my post yesterday (last coment, last thread) on bonds/rates that I just came upon.

      On some level "interesting", fictional third person references notwithstanding...


      Hope everyone is enjoying the nice ¤sunny¤ weather and that you have a great weekend!

  4. Bullard is a non voting member of FMOC.

    One day the Fed jawbone isn't going to work and be seen for what it is , hot air.

    1. R. Bart;

      If we could harness the power of Central Bank authorities' hot air, we would have a brand new source of energy to last the entire generation.

      We could all buy shares of Central Bankers' Power company.

      Personally, I could never be a central banker as I would really enjoy going to the microphones and messing with the trading positions of hedge funds too much!

  5. Dan thanks for ANOTHER insightful post!

    Regarding the potential gold issue in China, 11.5 million oz is the equivalent of 115 thousand contracts and (at $1300 gold) is only about 10% (~$15 billion) of the $110 of the total metal backed loans. Wonder what the other 90% is and how much copper is included... If these loans were to unwind as described, I suppose all the dollars coming back would put a bid in the USD?

    Noticed copper is back up to the same overhead resistance level it was at back in late May (you reported on the disparity in the COT between the hedge fund long positions other reportable short positions around that time). At this overhead resistance level, and with the weakness in stocks and oil, makes one wonder if copper will soon follow with weakness of its own...

    1. Trinity - looks like the metals are moving sideways looking for some sort of catalyst to move them one way or the other. Lots of uncertainties.

  6. Accelerating inflation signs...stagflation definitely imho....


  7. This comment has been removed by a blog administrator.

    1. You, Shikah verma are nothing but a leaching, parasitic born loser that needs to crawl back under her pathetic little rock.

  8. Copper.


    Testing its weekly downwards resistance.
    I'm not taking any position at the moment. Just watching.

  9. Bo Polny called for a june top on 26th of june...but as he admitted that he is not God, he gave himself a 1 day window for possible forecast mistake, hence delaying the june gold top to today.
    Hats off, because I would never dare to give such crazy accurate forecasts (free public section), especially when I'm wrong 50% of the time.
    Still...the current june top for gold being 1327, let's see this evening if gold closed makes it above 1327...which then would be a great opportunity to short if we follow his forecasts (as he is seeing a summer low after the june top...)...and let's see how he explains his missing the forecast if gold doesn't get through 1327 in his next free update :)
    Interesting to notice as well that the blog's I'm referencing for forecasts (jsmineset, Armstrong, etc...) are on the same tune : a YEAR low june 2th (1240) then a june top, then a summer corrective low which won't challenge the historical lows (1180).
    Ok, stay tuned...
    Personally, I see gold prices in this no man's land again where it's not interesting for me to try a trade. Once again, I pass.

    1. Hubert;

      I meant to welcome you back from vacation and forgot so WELCOME back to the trading madhouse!

      By the way, I am going to go out on a big limb and make a bold prediction here - before the month of June is out, some market, somewhere, will top and some market somewhere will bottom.

      There - I have stuck my neck out now!

    2. Thanks Dan,

      I see that the support from usually silent readers boosted your motivation to post even more :)
      That's why I don't have a blog : I want to fly above Syria twice and get a chance to swim for a week if I make it through the anti aerial batteries. My wife, who is so scared with turbulences and taking off, didn't seem to bother at all when I noticed we were flying just above Alep. Ok, I'm probably watching the news and MSM too much! :) Next time I'll make sure we fly above Irak by choosing holidays in Kuweit, for example.

      Trading madhouse indeed, but I'll make just as bold a prediction : between june 22nd and september 23rd, there will be a Summer low in every and each market AND a Summer top as well.

      Who will dare reraise me on this bold forecast?

  10. Look like the " bad " news from China is only worth a few dollars of correction (SO FAR) on the recent bug up move in Gold. Perhaps more of a tempest in a tea cup.

    Gold appears to have found some kind of support at around $1300 level. The bears, who were hit by bug margin calls, per my contacts at Lind Wal, probably will go into a short term hibernation as they lick theri wounds.

  11. On the equity side we are starting to see fundamental evidence of the affects of bad weather on a weak economy. DuPont warned on profits Thursday night. While affected by low grain prices and wet weather they are also being hit by the consumer. I don't think Q2 is going to be as good as the forecasters are saying. More likely flat than up 3%.

  12. agree with Dan that hedge funds rule the futures roost, which makes moving averages king!

    he “hot” money category of the COT Reports is the managed money category of the Disaggregated Report. This is the category of registered commodity trading advisors (CTA’s) that mainly trade on momentum and price signals and is most responsible for price movement, both down and up. Most (but not all) of the traders in this category are what I call the technical funds which buy and sell when prices penetrate moving averages. Most of the buying last Thursday and Friday was by technical funds which bought to cover short positions and/or establish new long positions in gold and silver as several important moving averages were penetrated. In essence, this was the sole explanation for the price rally in gold and silver. - Silver analyst Ted Butler: 25 June 2014

    1. 77;

      The CTA's are generally reported in the Large Reportables category, not the managed money category. The hedge funds are in the latter category.

      I have written so much against Butler in the past and his bizarre interpretations on the COT reports that I have lost count over the last 10 years.

    2. 77;

      I received a "nice" email from Mr. Butler commenting on this post so I told him I would respond and correct the record.

      There seems to be a difference in his view of CTA's and mine. He is correct when he states that CTA's are included in the managed money category. What is unclear to me, and I responded to his email asking him about this, is if he defines "hedge funds" as technical funds.

      The difference is that only REGISTERED CTA's are listed in the Managed Money category. All unregistered CTA's are listed under the Large Reportables category depending on whether or not their position sizes for their clients are sufficiently large enough to be reportable.

      I make a distinction between "Hedge Funds" and "CTA's" because there exists a large number of Unregistered CTA's out there, along with unregistered CPO's, as well as large local pit traders and other large private traders, such as myself, who will be listed in that Large Reportables Category.

      I believe referring to hedge funds, at CTA's, clouds the issue and confuses them with the myriad of non-registered CTA's, that exist in the commodity futures arena.

      You might recall that I noted that huge disparity recently between the Hedge funds and the Large Reportables category that existed in the copper market.

      What we had then was a case of "Registered CTA's - to use Mr. Butler's choice to describe them - on the long side of the market against Non-Registered CTA's - to use my choice to describe them - on the short side. Alongside of those non-registered CTA's, they were non-registered CPO's, large pit locals, and other large private traders, who also had a decidedly bearish view of copper.

      It is my view that using the term CTA's to describe Hedge Funds, leads to confusion when attempting to discuss a sharp dichotomy like we saw in copper. For example - To use the term "CTA's" instead of hedge funds, means we would say about copper...

      The CTA's are on the long side of the market while the CTA's are on the other side of the market. That leads only to confusion. It is easier just to use the term Hedge Funds.

      Hopefully, this clears things up.

      By the way, my beef with Mr. Butler goes way back to the mid 2000's when I was constantly having to refute his calls for sharp selloffs in gold due to what he believed was an excessively large speculative long position in the gold market. I said then and still say now - that no one, including Mr. Butler, or ME, knows how large a speculative net long position can become. Even at that, it is no guarantee of any selloff that is imminent. The reason is because none of us know what might occur to change sentiment, if at all.

      I am on record just this past week as stating that the huge, massive, record speculative net long position in crude oil, is troublesome to me. However, there is nothing that says it cannot get even larger and that crude cannot move even higher. No one knows.

      All that we can do is to watch chart support levels, and IF those are taken out, AND we have a large, lobsided speculative long position, we are going to get a wave of selling brought about by longs liquidating. In other words, the massive net long position means NOTHING UNLESS the chart support levels are taken out and since we have no way of knowing whether or not those will be, we cannot call for selloffs. To do so is reckless.

      Trading, by its very nature, teaches one to be careful because of the severe damage that leveraged positions can do to ones trading account. We do not have the luxury of calling for this or calling for that. We can only analyze, observe, study charts and price action and note possibilities and then hopefully react accordingly

  13. agree with Dan the small spec short in corn and wheat might get squeezed here, sunday nite might be a good time off this news:
    "Active weekend with severe storms and HEAVY RAIN in areas that don't need it."

    be flat by 11am monday usda, though.


  14. Gold is strong now and well positioned to move higher ... either by or without chart ... hehehe .... patience makes one suffer, yet patience yiels astronomical gains

  15. Sounds a bit like Kenny Rogers "The Gambler" http://www.youtube.com/watch?v=Jj4nJ1YEAp4&feature=kp and in the long run I believe you may be right; however, as someone famously said, The markets can remain irrational far longer than you can stay solvent and one of the enduring themes which typifies this forum is the need to remain emotionally detached from one's investments.

    Gold is just one of many asset classes, and in this particular phase of the game, Hope has Grown Grey Hairs

    Footnote: Dan, this text editor is truly awful and appears to be getting worse

    1. Every gambler knows
      That the secret to survivin'
      Is knowin' what to throw away
      And knowin' what to keep
      'Cause every hand's a winner
      And every hand's a loser
      And the best that you can hope for is to die in your sleep

    2. PostColonial;

      Sorry about the editing on this site. I can only use what Google provides. Not sure what to do about it my friend.

      Yes, keeping emotions out of trading/investment decisions is one of the things that most folks find the most difficult and one reason that so many fail at this profession.

      Being able to cut loose of bad trades or poor investment decisions, accept the loss and move on is almost impossible for many.

    3. I swear I saw my own front door number in one of those Captchas yesterday :-)


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