"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

Trader Dan's Work is NOW AVAILABLE AT WWW.TRADERDAN.NET



Wednesday, September 17, 2014

FOMC Statement sends Dollar Higher, Gold lower

The big thing that traders are taking away from today's much anticipated FOMC statement is the $10 billion further reduction in QE which is now down to $15 billion/month. Of that remaining $15 billion in QE, $10 billion consists of Treasuries and $5 billion of MBS debt. The Fed is on track to wrap up QE completely next month and that is what has traders pushing the Dollar higher and gold lower. Simply put, the era of abundant liquidity here in the US appears to be over. Note to QE taper deniers- you had better wake up in a real hurry. The market is telling you clearly that it believes the Fed.

Not that the Fed is in a hurry to raise short term interest rates. That still does not look as if it is going to happen any time soon.

What it therefore translates to as far as traders are concerned, is an environment in which low inflation still appears to be the general rule and one in which economic growth will be slow to moderate at best. This means that stocks are still the place to be; gold is falling out of favor even further, and commodities in general are going to be moving lower.

Not that they will not be exceptions to this general rule based on the individual set of fundamentals governing each specific commodity market. However, the big leveraged macro trade buying indiscriminately across the entirety of the commodity sector is not in the cards for now.

The result of this readjustment is that the Dollar remains the "Go-To" currency which can be easily seen in the steep plunge in the Yen, Euro, Swiss Franc and Australian Dollar ( the Aussie is a good proxy for commodities in general). The British Pound is getting a bid of a respite as traders are afraid to push too hard on it with the upcoming referendum over Scotland tomorrow looming.

With the Dollar/Yen hitting a six year high, the story is that the currency markets are going to dictate money flows and for now, those flows are into equities and out of commodities, including gold.

I have a full plate right now but here is a quick updated chart of gold for the reader. Notice that it is poised for a test of the last remaining support zone standing between it and the psychological $1200 number. That zone extends from near $1220 down towards $1212. If it fails there, it is going to test $1200. Below that is the low at $1180. Below that? That is scary.

India/Asia may be buying for festivals, etc. but that in and of itself will not be enough to launch gold higher on any wild surge higher before the year is out; not without Western oriented investment demand which has made the vote against gold for the time being.



One more quick chart - the US Dollar... If the Dollar closes through 85 basis the USDX by this coming Friday afternoon, look out above!




24 comments:

  1. Peter Schiff must be coughing up blood.

    USDX has cleared to new highs, gold getting crushed.

    ReplyDelete
  2. The market has spoken.

    New intraday records on the Dow, S & P 500, and Transports

    New 12- mo. lows for gold and silver

    New high for the move in USDX

    Institutions are now convinced, more than ever, that U.S. stocks priced in U.S. Dollars are the primary bastion of financial safety and security.

    And rising interest rates won't matter.

    And there is zero inflation. None whatsoever.

    Now, what did the "Godfather" say?

    Oh, yeah, "Lies and Manipulation", LOL......

    ReplyDelete
  3. Peter Schiff , he was talking about $5000 gold, so funny. But it's needed to keep his business on I guess.

    Anyways , Great updates Dan.
    Thx

    ReplyDelete
  4. FYI -

    http://www.reuters.com/article/2014/09/16/us-china-gold-contract-idUSKBN0HB17F20140916

    China and Singapore are opening up gold exchanges.

    Also - Dan - or anyone - what happens to growth if $WTIC falls below $90. A lot of the US growth is fracking - as far as I know.

    ReplyDelete
    Replies
    1. According to article breakeven for tight oil is about $70 nd could go down to under $60 with efficient drilling techniques. I've always found that numbers are not consistent and it's extremely hard to find pod data on actual drilling costs.

      http://www.reuters.com/article/2014/04/02/energy-crude-bakken-idUSL1N0MU21Z20140402

      Delete
  5. There is no observable correlation between Asian retail demand and the Gold price:

    1. In Q2-2013 the Gold price tanked, and the Chinese imported masses of it

    2. In Q1-2014 the Gold price rose, and Chinese demand fell 17%

    Clealry, there is no cause & effect here, but the notion that Chinese gold demand is a leading indicator of Gold price is nonsensical

    Similarly, we now find that India has tripled its Gold imports YOY during August: http://www.zerohedge.com/news/2014-09-17/gold-demand-india-triples-china-launches-global-gold-bourse-thursday

    However, in August 2013 the Gold price rallied from 1295 to 1400 or so, whilst in August 2014 it fell from a similar level. Sure, the price may be manipulated, but wasnt it also manipulated last year, and if the manipulation is capricious, then surely the net import figure is useless as a leading indicator

    ReplyDelete
    Replies
    1. Zhang Lan;

      You confirm what I have been saying for several years now that gold has entered its current bear market; Asian demand for gold cannot, in and of itself, take gold higher into a bull market. All it can do is to SLOW THE RATE OF DESCENT, or, if it is sufficiently robust, put a floor under the market. But it cannot make up for the lack of Western-based investment oriented demand for the metal.
      The ETF, GLD, is what I use as a proxy for that and that is the reason I post that chart fairly regularly. Gold demand in the West stinks right now.

      Delete
  6. Silver appears to have the Subterranean Homesick Blues

    i.e. it originally came out of the Earth's core, and that's where the price appears determined to head back to

    Look out below! Anyone have an indicative price for $9.90 Dec Calls?

    ReplyDelete
    Replies
    1. $16 Dec Puts at less than 6 cents? That looks like a viable proposition

      http://www.cmegroup.com/trading/metals/precious/silver_quotes_openOutcry_options.html#strikeRange=ALL

      Delete
    2. Just ran the numbers on Silver performance in December alone over the last 10 years. A down month overall surprisingly (2.65% avg) 2004-13. Getting ready to see performance last qtr avg on SI...fun stuff.

      Delete
    3. The Dec $10 Calls (IF you can actually trade them) look expensive compared to the Dec $16 Puts

      If you are bearish on Silver, shorting the Call and buying the Put gives you quite an interesting P&L curve, as the Puts would come into the money far sooner than the Calls if the underlying price of Silver fell.

      On the other hand, the delta on a $10 Call is so high that your losses if the Silver price rose would be pretty linear i.e. no worse than if you had shorted the Futures

      Net-net, therefore, you would get a free ride of the Gamma (i.e. option price curvature) from $18.55 all the way down to $16.00 (with a nice little Vanna kicker), without much additional downside risk compared to simply shorting the Futures contract, and in the meantime you could bank whatever deposit interest you could get on the net $8.55 intrinsic value

      Delete
    4. Silver % Annual Change

      2001 -0.1%
      2002 4.8%
      2003 24.0%
      2004 14.3%
      2005 29.6%
      2006 45.3%
      2007 15.4%
      2008 -23.8%
      2009 49.3%
      2010 83.7%
      2011 -9.8%
      2012 8.2%
      2013 -35.9%
      2014 -6.5% (through Sep 15)
      14.2% Avg

      Delete
    5. Check it out here:

      http://www.option-price.com/option-portfolio.php?up=1855&rate=2&div=0&time=70&inc=100&cp1=c&cp2=p&cp3=n&cp4=n&cp5=n&pos1=-1&pos2=1&pos3=1&pos4=1&pos5=1&vm1=1&vm2=1&vm3=0&vm4=0&vm5=0&ex1=1000&ex2=1600&ex3=0&ex4=0&ex5=0&vol1=14&vol2=14&vol3=0&vol4=0&vol5=0&Calculate=Calculate

      I have used 70 days to expiry and a 14% implied Vol, 1% discount rate

      Delete
    6. Thanks Lan, this confirms that options trading is not for amateurs and one should learn about it before starting to bet.
      I find the illustrating of real examples where options make sense compared to directional trading quite interesting.

      Delete
  7. My working target price is $15 silver. 1200 gold, with a GSR of 80. Not sure if 1200 will hold though...

    ReplyDelete
  8. interesting last nite after all the movement from the 'china injection' moved commodities, the china stock market $SSEC actually gapped down:
    http://stockcharts.com/freecharts/candleglance.html?$ssec,FXE,UUP,FXB,FXF,FXY,FXA,FXC|B|H14,3|0

    forex brokers are stopping margin ahead of the scotland vote: "Scotland may find it has no EU, no currency and not much oil"

    cme, however wants more ags traded:
    "CME lowers corn, soybeans, wheat, soybean meal, soybean oil margins."

    el nino hasn't been getting alot of press, but notice how there was zero hurricanes that affected florida or new orleans this year! el nino should bring a 2nd year of great crops to south america.

    alot of hanging about the 20-day MA right now: NDX SPX USO VIX . RUT small caps weaker hanging at 50-day MA.

    actually was a poor close for SPX nine points off the high o day (did not make a new all time high either missed it by less than a point) and volume was generally uninspiring across the board.

    cheerio pip pip!

    ReplyDelete
  9. what i don't get is why the 10 year is at 2.6% ...

    ReplyDelete
  10. Let's get a concensus on what would be a new low on silver. Last time I looked it depended a lot on what website, or comex, or London Fix, or whatever you look at. Whatever it is, it's coming up in 3...2...1...

    ReplyDelete
    Replies
    1. http://silverenthusiast.com/wp-content/uploads/2014/09/Flag.png

      Seems like we are at a critical point to me on Silver. There is still hope for the 30+ year cup and handle formation to follow through but I am losing confidence by the day in that move playing itself out here. If $17/$17.50 doesn't hold it will probably go to $15 and then bottom out at $10?

      I feel silver has become a risk asset meaning you are at risk of Not being able to sell it if you have it in your physical possession.

      But who knows as these markets are tricky indeed...

      Delete
  11. Eric - I don't think its realistic to expect the price of Silver to go negative. Well, not fully negative anyhow, just low double digits


    And before you scoff at another Zhang "multiple sarcasm", most Silver is extracted as a waste product from the refining of other metals, and so there could certainly theoretically be a point at which it made sense for miners to pay someone to take it off their hands. Not tomorrow, admittedly, but Friday might be a possibility

    ReplyDelete
    Replies
    1. Zhang, isn' a double sarcasm the same as a sincerity?
      Negative seems a bit of a stretch--unlike gold there is real demand for silver. Even as a byproduct metal, the miner could easily store dorĂ© bars on site until prices turned positive. I would also guess that mines like Cannington factor silver sales into their costing models…i.e. it's not just like dolphins that are caught in a tuna net. In any case, I enjoy your posts. Thanks.

      Delete
  12. PCB; I think Salient people are winners and I thank you for showing them to me. There is another Texas group that I also think is worth paying attention to, and they are

    http://streettalklive.com/index.php/blog/daily-x-change/2352-alternative-measures-suggest-weaker-economy.html

    Good luck the rest of the week ! (Queenie is priceless)

    ReplyDelete

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