"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, June 13, 2014

Commodities Getting Some Money Flows

Trying to keep track of the vagaries of these markets in this goofy era is becoming a near exercise in futility. Sentiment flops back and forth faster than the lead in some basketball games changes hands.

Take Copper as an example - yesterday it was fearful of the impact of high energy prices on global growth so down it went. Today, or I should say overnight, there was news out of China that Industrial Production there rose 8.8% in May from a year earlier. During the month of April, it rose 8.7%.

Some immediately seized on that number and jumped into the copper market in a buying mood. Forget the fact that that was last month's number and that futures markets are generally regarded as "FUTURES" markets, not "PAST TENSE" markets. Forgotten in the increase of 1/10 of a percent were the issues with the double and triple counting of Copper in Chinese warehouses for loan purposes and the current debacle in Iraq.

But it was not only copper that was bid higher today. I am not really sure what the heck was going on but for a good part of the session, one has hard-pressed to find a single commodity futures market in the red. Money was coming into nearly every one of them for some odd reason. Why I say, "odd", was because the US Dollar was actually higher today, unlike yesterday when it was not a beneficiary of any safe haven play. Today it was. Go figure.

Regardless, take a look at what this surge in energy prices, courtesy of ISIS in Iraq, has done to the GSCI.

It has pushed the index up towards the top of a mini-range near 662-663 which has held it for the last three months. If the market was worried about higher energy prices slowing global growth yesterday, which it was, today it could care less. "She loves me; She loves me not". These markets are turning an entire generation of traders into 3 minute bar chart junkies.

One could say that there might be some sector rotation out of equities and into commodities, but, if traders really are worried about higher crude oil prices cutting global growth estimates, the last thing one would want to do would be to pour money into growth sensitive commodities. Bonds, yes - commodities?

This is further proof in my mind that today's markets, dominated as they are by unthinking computers, more often than not have the attention span of a dwarf gnat.

You see extreme shifts in sentiment within hours instead of within weeks or months. All it takes is a few big buy or sell orders to get the ball rolling and the computers take over and that is all that matters in that market for the rest of the day.

As an example - we received the USDA Supply and Demand reports this Wednesday revealing a larger global supply of soybeans than the market was anticipating. Also, abundant rainfall and good growing weather induced USDA to up the yield per acre number above most analyst expectations. So, on Wednesday and Thursday the beans, ( both old and new crop) were reacting to a bearish report and bearish weather. Today, someone got the ball rolling to the upside again leaving the pit reporter scratching his head trying to come up with a reason for the move higher. The best the poor fellow could do was to say that the "weather has been so good no one believes it will continue and thus people started buying".  See what I mean?

Kick in a few big buy or sell orders in these computerized markets and you can pretty much take any market anywhere  you want it to go at any time. And notice - this is not being done by players involved with the feds - it is just the nature of the modern market. The key to successful trading used to be understanding the fundamental behind the markets in which one plies their business - not any more - the key has become anticipating what hedge fund computers are going to do and WHEN they are going to do it. Get that right, and you can make a tidy sum even if you happen to be completely ignorant of the difference between a sheaf of wheat and an ear of corn or a pod full of beans. Hedge funds ARE THE MARKET. Don't forget that.

I would not mind it all that much because at one time the large funds ( not hedge funds in general) were run by some knowledgeable guys who intimately knew the markets in which they traded as far as the fundamental factors went. I know - I used to trade against and with them. Today's hedge fund managers are mostly clueless. Take away their mechanical thinking device ( aka computer) and they are helplessly ignorant of anything remotely resembling a fundamental. What is the sad reality is that they could care less about it! Who needs any fundamental knowledge when computers are running the show based on the last price print.

I am noticing here later in the session that gold has now moved into positive territory as have the mining share indices. This reminds me a lot of the recent Ukraine situation during which traders were afraid to be short ahead of the weekend not knowing what might transpire. In the event of Iraq, traders are becoming increasingly worried that this ISIS group is going to take Baghdad. If things go from a disaster over there to an even worse disaster, no one wants to be short.

Gold is knocking right on the door of chart resistance near $1280. As a matter of fact, it has reached initial resistance near $1277. If gold can push past $1280 and hold those gains, it looks to me like it is going to make a run towards $1295 and possibly $1300.

If the Bears are going to be able to prevent a large shorter squeeze from taking place, they will need to hold the line right here; right now. If not, they will be forced out allowing the market to run to the resistance area noted above.

That this is taking place in gold, and in the rest of the commodity sector for that matter, while the Dollar is actually firm, is noteworthy. The Dollar looked as if it was ready to rock and roll to the upside as it was into that resistance zone near 80.70-80.80 but then Iraq struck and down it went once again. Of course, as it went down, the Euro was moving higher but that reversed today with the Euro moving away from the 1.360 level and hovering almost smack dab in the middle between 1.360 and 1.350 which is a key support level.

Feeder cattle, ( fats as well ) are both very strong and that is helping to keep the commodity indices higher. Feeders are soaring into stratospheric levels with floor traders all aghast that they can possibly move to these levels. Funds are pushing everything on the other side of the market out of their way as their buying orgy continues. These things are becoming dangerous if you ask me however.

Shorting them has turned out to be disastrous for the general public which was holding almost the entirety of the short interest in this market. Hedge funds know that and are bleeding them into submission.

Unleaded gasoline has moved a bit lower this afternoon but still remains above the $3.00 mark. Better go fill up your truck this weekend before they raise the price at the pump next week ( if they did not do so already).

I will get some COT stuff up later as my schedule permits.


  1. The way managed money piled in on silver short, there's no smooth resolution. They either win big or lose big. I'm looking at 10% move in silver that'd definitely take gold for the ride as well. I cannot say for sure what the outcome will be tho. In Apr 2013 they won. In Dec 2013 they lost.

    1. ask your computer to ask their computer. like Dan says forget sense and the 'real' market. it's computers reading word clouds. lol

  2. Thanks Dan.
    One theme ran throughout this piece; over and over you said, in so many words, that these aren't really markets. Fundamentals are disconnected from prices.
    The traditional definitions of markets and investing (the core) are about price discovery, the allocation of capital (supposedly to productive purposes), and a commitment of resources to a project with the anticipation of future income.

    All of that still happens, and it may still be the central purpose of the market, but it's not the dominant paradigm. The dominant paradigm is informed gambling. It's gambling because even if you are fully informed, market forces like hedge funds can move in what is essentially a random manner (at least in the statistical long run).

    I can think of only two advantages to everything outside the core: a capital sink for the trillions in fiat, and some degree of pricing information. Are there other advantages?

    One incredible disadvantage that's rarely mentioned is the brain drain. The same is true of the tax system. Imagine all of those minds at work making something people can use.

    The system guarantees malinvestment because malinvestment provides outsized returns for a time, and the desire for them is not tempered because of moral hazard. The nature of the system is such that if it derails it will take the rest of us with it, even if the reason for it derailing has nothing to do with economic fundamentals. The financial sector will always be bailed out, even if it's clumsily hidden as 'asset purchases' (money laundering) or something else.
    If a market were limited to the core, bailouts would not be necessary, or could be accomplished with a nascent-Fed type lender of last resort. Bubbles would be apparent much more quickly.

    Aside from the fact that it will never happen outside of a real collapse, can you think of a reason why the core and the rest shouldn't be rigidly separated? The core can still take all of its price signals from the betting markets if it so chooses, but the betting and the market price would not be wedded. There would be an actual futures market for actual market participants, and on the side traders can bet whatever they want against other traders about that market. But their anomalous actions wouldn't always immediately affect the actual price of an asset. Why should they, since nothing has changed about the market or the asset? The only change is that a trader has decided that he can make more money on one side or the other of a bet. That decision may derive from actual market factors, and an informed market will reflect that decision in the actual price of the asset, in time. But the idea that an asset's value changes because of a decision that has nothing to do with the actual value of the asset seems like a total upending of everything that the market and investing is supposed to be about.
    Any separation might be effectively impossible without requiring people to hold assets purchased in the core for a certain period of time (seconds? hours?).


    1. Greg
      I would have described and characterized this differently but believe you are essentially correct. The markets have fundamentally changed over the last few years due to a lot of things and those who ascribe it to only one factor are being overly simplistic. As Dan continually reminds us we have to accept and use the markets as they exist.

      I see see vertically no chance our political masters will separate the fundamental market from the speculative one. There is no advantage for them in doing it. Not until the gold bulls crash happens any way. JMHO and armpit is course.

      I amso glad Dan provides this dispassionate analysb and place for these discussions. Can't begin to imagine the dedication and effort it takes to edit out the un-civil attacks and the off off off topic debates.

      Thanks again to all of you and Trader Dan for shareing your thoughts. B

    2. Mike;

      Thanks as always for the kind words.

    3. Greg;

      Thanks for the lengthy and well thought out comments.

      One thing I can tell you is that whenever we talk about Supply and Demand we all tend to think of those in terms of the actual demand to use the commodity in question. For example, when it comes to copper, we think in terms of the demand for copper as wire in housing or factories, or electronic equipment, etc.

      Markets however always have another element of demand that gets overlooked and that is SPECULATIVE DEMAND. Before the advent of futures markets, speculators could buy and hoard certain non-perishable commodities and keep it off the market while prices rose before they then sold it into the market at a higher price than that which they paid for it.

      Remember back in late 2007 and early 2008 when we were getting reports of hedge funds actually renting oil tankers ( ships) and buying physical crude oil, paying to lease the ships and storing the oil in the ships off shore while they waited for the price to rise even higher before they then sold it? I sure do.

      Same goes for copper - as long as I have been trading there has always been entities that will buy the real metal, stash it into some warehouse somewhere and then hold it off the market to resell at a later date and profit.

      This speculative demand needs to be factored into the Supply/Demand equation but the problem is no one is quite sure how to measure it. It is fickle. When the Fed unleashed so much liquidity into the markets, it caused this element on the demand side to skyrocket ( speculative demand). Now it is almost impossible to quantify because it can jump and fall with incredible rapidity due to the nature of computerized trading and our increasingly unstable financial markets which in many cases are too small for this amount of liquidity.

      this is why the markets are like they are - in my view, were are not going to see well behaved markets until the Fed raises interest rates back to reasonable levels. That is the only thing that will put an end to this rampant speculation. The problem is it would choke the economy and kill it in its tracks given the current weak nature of the "recovery" which still is at the mercy of ultra low interest rates.

  3. I always like to read your deeply cynical (or honest) reports. If I was spending someone else money which I borrowed for nothing would I care about fundamentals, probably not - one horse has nearly as much chance of winning as the next. One day when this system breaks it will be an issue again.

    1. burmanhands;

      yes - too much liquidity looking for yield in a near zero interest rate environment. The Fed has created this perfect scenario for fostering and fomenting more and more risk taking and leveraged bets.

  4. Why markets have changed forever. For all markets, the supply is generally known and there is a reasonably good way to determine the demand. Now the fed prints 4 trillion of counterfeit dollars, which are actually real, and markets need to determine how that 4 trillion (at least probably more) is going to go into the demand equation. Its almost impossible. So the traditional supply and demand equations have been changed forever.

    1. arnie;

      you make a really good point and one which is the real cause behind the dislocations in our markets - this sea of liquidity has to go somewhere and when it flows into ( or out of ) markets, it produces huge "disturbances in the Force".

      I sometimes wonder if we will ever have normal functioning markets again during those periods in which I am most despairing of our future.

  5. The stage is set for gold to trend higher. Where will it go after 1290? That is the question. Iraq seems like a big piece of news and Syria is part of all this. It is possibly a game changer.

  6. Regarding Iraq....what's happening right now (Iraq chaos, flood of well-armed/ financed ISIS fighters, apparent U. S. apathy) starts to make some sense (in a mad, mad world kind of way) if you look at the situation (this includes Syria) as a purely Sunni/Saudi Arabia & Shia/ Iran confrontation eventually whereas Iraq merely serves as the middle ground where the eventual confrontation starts to take shape.

    Has the U.S. stepped aside (or has SA insisted so) that in order for SA to take the reigns regarding Syria and Assad's removal that Iraq would become the pathway for SA to accomplish this?

    The Iran nuclear talks must've left a bad taste in SA's mouth and maybe their doing what they need to do if the US won't.

    All of this might be simply a case of Saudi Arabia taking matters (Syria) into their own hands with Iran's nuclear ambitions part of the equation.
    SA didn't parade a supposed nuclear weapon/missile recently just for kicks.
    It was a sabre-rattle at Iran.
    Iraq is the middle ground.
    Sunni vs. Shia

    1. DarkPurple:

      I think you have read the geopolitical strategy in that region quite well. It is indeed a rivalry between Shia and Sunni with SA on the one side and Iran on the other. Some folks forget that Iran is actually Persian, which is different than Arabs.

      I have an American friend who was working in the oil fields up in northern Iraq. He switched jobs about 5 months ago. God was looking out for him!

    2. Thanks Dan. The dynamic were starting to witness is a history book changing event whereby Iraq gets mostly erased hoing forward.

      You couldn't be more correct regarding the Arab/Persian angle. It seems most people might think that Iranians are Arabs because they reside in the middle east among mostly Arab neighbors.

      Good thing for your friend that he got out of there when he did.
      About 10 years ago, after I was freshly divorced, I tried looking for work in Iraq in hopes of making some big bucks as a civilian contractor (welder) while the rebuilding was going on.
      I did receive one offer to go there as a foreman of a work detail that would've been responsible for fabbing up and installing armored vehicle metal plating reenforcement at a base over there.
      Unfortunately it didn't pan out and I didn't go. Having children tends to make a parent reconsider what's best for everyone.

      I do wonder though at times how it all would've ended up and where I'd be today.
      Hopefully, where I'm at right now...on my patio relaxing. }:^)

      Happy fathers day to all!


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