"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, July 11, 2014

USDA Supply - Demand Report Obliterates the Grain Complex

I will have more on that huge USDA report later on, after I can find my stomach and my head, both of which are still spinning after seeing those numbers.

For the immediate time being, let me just put up a quick chart of the Goldman Sachs Commodity Index so that the reader can see for his/her self how much damage has been done to the complex. With crude oil collapsing lower today and with the grains imploding in reaction to an overwhelming bearish report, there was little to support the various commodity indices.

The GSCI not only confirmed a double top on the charts but has now lost all of its gains on the year and has gone negative.

Gold bulls has best rejoice in the woes in the Portuguese bank sector and the turmoil in Israel ( one has to feel sadness for those folks having to endure that sort of thing ) along with the Iraq mess, because that is what is keeping gold afloat right now as the prices for tangibles are sinking.

Rising commodity prices tend to support higher gold prices just as sinking commodity prices tend to undercut its price. Safe haven bids are still at work however due to the events mentioned above. Any change in those and gold bulls had best watch out!

Here is the chart... It is not pretty. The price has collapsed vertically over the last three weeks.


  1. so I guess the question is, as we play musical chairs, who will be the last man standing? Meats, Bonds, or Stks? Forget even trying to value the currencies against each other; just a mugs' game.

  2. Dan, wouldn't confirmation of a double top require losing support in the 605 area? Otherwise, it just looks like a trading range, albeit a rather broad one. Thanks.

    1. Tom;

      Thanks for the comments. It is a double top in the sense of confirming the end of any fledging uptrend that was underway this year but you are correct in the sense that it merely confirms the top of a range trade with that 605 level as the bottom of the range.

      Prior to the fall below the April low, the pattern was more of a grinding move higher. The first warning that something was changing in the commodity sector was the loss of that downside June low.

      Today's move shifts the sentiment firmly into the bearish camp. as long as that April low held, one could argue that the retracement in price was merely a deeper retracement in an ongoing slog higher. Now the bears are back in control.

    2. Thanks Dan. Definitely looks ugly, by any stretch. Just wanted to make sure I understood the pattern correctly.

  3. Wild week Dan. Thanks for being with us.

    1. Loren;

      You sure have that right! I am exhausted!
      have a great weekend! I need another 3 day weekend myself!

  4. Sure enough commodities of every race, stripe, and color except for gold and silver are getting obliterated.

    Any chance that the Fed will raise interest rates when prices are falling off a cliff?




  5. And with crude and gasoline falling off a cliff,

    Now you know that reading 417 posts on jsmineset talking about Ukraine and Iraq and potential inpact on energy markets or destabilizing global financial markets was A COMPLETE WASTE OF TIME.

    Stay in the system

    Don't get bamboozled.

    1. Mark oil is unique as we approach peak oil. The crude chart since 2008 is definitely indicating this. As the Chinese trade bikes in for cars and the US economic boom continues I still stand by my bold prophecy that $175+ oil by late 2015 is in the cards.

      It should start basing around $100 before the next leg up.

  6. Dan, I think it is a sign of desperation when Kitco runs a segment exhorting us to "Accumulate Gold, not invest in it"http://www.kitco.com/news/video/show/FreedomFest-2014/725/2014-07-11/Accumulate-Gold-Not-Invest-In-It-John-Browne

    any thoughts on this "belief-based" approach?

    1. Postcolonial;

      One can accumulate gold, or stocks or bonds or any investment. Heck, they can accumulate bee hives if they are like me.

      I personally think one buys physical gold for insurance. It throws off no yield and only a few clever folks know how to lease it out and turn it into an interest producing asset so for most, it is protection against geopolitical or monetary uncertainty.

      In effect, rooting for sharply higher gold prices is akin to rooting for the destruction of the current monetary system or for global chaos. It is like hoping for one's home to burn down so that they can collect on the insurance. Self-defeating....

    2. My concern is this:

      whilst Gold may indeed perform a useful function as a mitigant to financial disaster, explicitly divorcing "accumulation" from any economic rationale - e.g. investment - represents a form of conceptual and semantic nuancing which may be beyond many retail investors, and could easily be interpreted as a recommendation to "just DO it" because I say so

      Advancing a reasoned case for the various motivations to own Gold - speculation, long-term wealth accretion, disaster insurance etc. - is one thing; suggesting that people should suspend independent and factually-based analysis quite another, as follows:

      If the primary rationale for purchasing Gold is to hold it "just in case", then whilst the exit price should be irrelevant, the entry price is of critical importance, due to the cumulative nature of percentages. If Gold is currently at e.g. €1,000 (for round number purposes), then for any given sum of money, if it falls by €100 then tomorrow I can buy 1.11 oz, 11.1% more than I could today. On the other hand, if it rises by €100, then I will only be able to buy 0.909 oz for my money - around 9.1% less. The "bet" is therefore asymmetric, and if my concern is that the price of Gold will rise, then in a non-trending market every day I can postpone the purchasing decision works on my favour

      We are surely at present in a non-trending market, and unless you subscribe to the view that not only will the to-be-hedged-against-calamitous-event be sudden and irreversible, but also imminent, then logic argues that it is better to either "buy the dips" or just plug away as surplus funds become available, rather than to pile in on the basis of uninformed sentiment http://www.pnas.org/content/early/2014/07/02/1318416111

      In this context, the exhortations to buy when Gold was at 1200, 1250 or 1300 were qualitatively different: back then, the supposed rationale was either that the Gold price was artificially suppressed and sure to skyrocket "like a coiled spring", or that Gold was scarce and unavailable. I think it is now abundantly clear (no pun intended) from the structural contango evident in the forward curve that there is no current shortage of either Gold or Silver, and neither the recent short-term price movement nor the 3 - 5 year chart give no firm indication that the downtrend has yet ended.

      In summary, therefore, if you are buying to hold against a calamity - personal or systemic - then both the entry and especially the targeted "exit" price are irrelevant, and the appropriate course of action is to either steadily drip excess wealth into metals as and when it becomes available, or opportunistically as the Gold price falls relative to other asset classes (i.e. the classic contrarian stance)

      What is certainly not a sane approach is to either suspend independent thought and just follow the herd because some "celebrity" told you to, or allow oneself to get panicked into buying "because by tomorrow it will all be gone". It won't: this year we have seen ISIS, Ukraine, the South China Sea, Gaza, Bulgarian and Portuguese Banks in crisis, inflation spiking and the worst US GDP print in living memory, and not only has the Gold price not yet recovered to where it was 4 months ago on 14th March, there is clearly no shortage of above-ground stocks available for sale i.e. no reason to panic.

    3. Appreciated your comments, if you could have written plain simple English I would have been appreciated a little more..


    4. ok, here is the dope

      If we are in an efficient but non-trending market, then the chances of a price move upwards or downwards are equal i.e. 50%

      If we start at 1000, and the price moves up by 1, my first 1000 will buy me 0.9999 ounces. If the next move reverts to the mean i.e. falls back to 1000, then the my second 1,000 buys me exactly one ounce, leaving me with a total of 1.9999 ounces

      Now consider the opposite pattern: if the price initially falls to 999, then my first 1,000 investment buys me 1.001 ounces. If the price then reverts to 1000, the second 1,000 buys me one ounce again, leaving me with 2.001 ounces

      Net net, therefore, random Brownian noise around a static average price (in this case 1000) will leave me with 1.9999 + 2.0010 = 4.0009 ounces, which is marginally better than if I had spent all 4,000 on Day 1. Drip-feeding investment into a directionless market is therefore marginally preferable to going all-in

      If you build out a Brownian diffusion pattern into a binomial tree (as in the Cox Ross Rubenstein Option pricing model) you will find that this marginal bias persists throughout

      However, if I can postpone the purchase decision selectively - i.e. I don't need to invest every time the price moves, only when it dips, then my accumulation will be even more favourable than if I had gone "all-in" at 1,000. A simple rule to "only buy below 1000" would see me consistently outperforming by 1000/999 = 0.10% (which is at least equivalent to overnight deposit interest)

      This pattern is unstable, in that it breaks down once the market starts to trend: if the market trends downwards, then my "wait and see" strategy will far outperform the "all in" approach, whereas if it trends upwards, it will underperform, and I will "Regret" my decision not to invest earlier

      Firstly, for a statistical approach to valuing Regret, see e.g Ron Dembo's "Seeing Tomorrow" (which you can buy secondhand on Amazon for 4 cents http://www.amazon.com/Seeing-Tomorrow-Weighing-Financial-Everyday/dp/0771026129/ref=sr_1_2?ie=UTF8&qid=1405204117&sr=8-2&keywords=dembo+seeing+tomorrow )

      More importantly, in terms of assessing "Trendiness" and the stability of a market at any given point in time, try reading up on Hurst Coefficients e.g. http://en.wikipedia.org/wiki/Hurst_exponent or http://www.earnforex.com/blog/using-hurst-exponent-in-forex-trading/ or maybe even download the spreadsheet at http://www.gummy-stuff.org/hurst.htm It doesn't work ALL the time, but it gives credence to the notion that there are periods of stability (i.e. trend) and instability (e.g. noise), and that trading just the noise can be highly profitable. This is not the same thing as betting on "reversion to the mean", it is based upon the notion that in a non-trending market the chance of the next price movement being up is equal to the chance that it will go down - and the trading strategy is to invest only on the latter

      How's that for plain English? Or are you perhaps American, without the benefit of having your own language to master?

    5. Here is a very good paper on Regret (which in this context is a financial Utility function which can be "priced", not a human emotion) http://www.jstor.org/discover/10.2307/2631346?uid=3738992&uid=2129&uid=2&uid=70&uid=4&sid=21104486105273

  7. I put a bid in wheat hoping it would get support at the "double bottom" of 550 area. As it turned out, it was one of those "don't try this at home" trades. It was working well for a couple days until the report came out today.Thank goodness for a light position and tight stop...

  8. Here comes Michael Pento with his bold prediction:

    All types of fixed income and high-yielding debt will collapse.

    The real estate market will tumble as flippers are once again forced to dump their investment properties.

    The equity bubble will burst when the record amount of margin debt has to be liquidated.

    All forms of adjustable-rate consumer and business loans will come under stress.

    Bank capital will be greatly eroded as bank assets go under water just as rates on deposits are increasing.

    The Fed will become insolvent as its meager capital vanishes.

    Interest payments on the national debt will soar, causing annual deficits to skyrocket as a percentage of the economy.

    The over-$100 trillion market for interest-rate derivatives, in which Pimco now plays a big part, will go bust."

    And what happens to gold in this scenario?

    Probably crash down to $600.

    As usual, the gold pushers are constantly pushing for their own demise.

    While instead, they should be cheering for a synchronized global recovery and economic boom.

    Any wonder why gold is now back on the upswing? Because there are now unseen industrial and medical applications for the metal being developed which will greatly boost demand.

    And also booming sales of gold jewelry being anticipated as gold will now replace stainless steel and platinum as a "fashion statement".

  9. "gold is now back on the upswing

    are you sure about that? Less than 4 months ago it was above $1387, which is around 3.5% above where it closed on Friday

    I think the Jury is still very much Out on this one


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