Crude Oil - Speculative Frenzy Kicking Off

In going over some of the various COT reports and having a look-see to observe who is doing what, I wanted to make a few comments about the crude oil market, especially in light of one of our astute posters here who pointed out the very large imbalance currently existing in that market ( thanks Jesse L.!).

Take a gander at the following COT chart and you will see exactly what he was referring to. This chart goes back Eight Years - to the time that the CFTC began breaking out the Disaggregated Report.

If you notice, all three categories of speculators, the Hedge Funds, the Large Reportables and the Small Specs or General Public, are on the same side of the crude oil market, namely the long side.

There is nothing wrong with that since the trend has been a steady grind upwards, which until recently was stalled near the $105 level.

However, the sheer size of the hedge fund positioning is what is so striking. It is enormous and is at the largest level that has been seen, far eclipsing that which existed when crude was near $150 back in the summer of 2008 ( just before the credit crisis erupted) and when crude was responding to rounds 1 and 2 of QE in April 2011.

Another interesting thing to note - while the big commercial category is not at a record net short length, they are not far from one. The difference in the short positioning in this market at the current time, compared to when the commercials held their record net short position during August 2013, is that back then, the SWAP DEALERS were actually on the net long side of the market as well. Now those Swap Dealers are net short as well. As a matter of fact, the only category of traders that was net short the crude oil market back then, was those commercials - everyone else, including the swap dealers,  was net long.

Crude Oil was just shy of $112/barrel at that time. It then promptly proceeded to collapse some $20 barrel in the matter of three month's time all the way to $92. It has since refused to go back down below that level and is now knocking on the door of $108, a mere $4 off the peak made last August.

How all of this plays out in the coming weeks is going to be very interesting to say the least. I think it important to reiterate that spec positioning in a market can go to extreme lengths and continue to increase long after many believe that a reversal is imminent. After all, who is to say just how many speculators can crowd into a market before it gets too lopsided? Answer - no one.

I well remember taking some of the usual pundits in the gold community to task publicly back when gold was running in a strong bull market some years ago. These self-anointed COT expects were consistently regaling us with "gold is going to have a sharp selloff" nearly every week when the COT data came out merely because they somehow arrived at the conclusion that there were "too many specs" on the long side of the market.

My rebuttal to that simplistic and inept analysis at the time was "who appointed these people to determine how many speculators can come into a market and where did they obtain this special key of knowledge that no one else seemed to have"?
Here was the simple truth back then which remains the simple truth at the present  - We simply have no way of knowing how far their buying can drive prices and to what levels they can take it. As long as they are willing to commit money into a market, it is going to move higher. When you consider the amount of money that has been created by the Fed since the inception of its QE programs, and the ZIRP of the Fed, there is a huge amount of HOT MONEY out there that can invade any market and catapult it higher once the commitment is made to invest in that particular market.

Just look at the stock market for Pete's sake if you have any doubts about what speculative buying can do!

So what are we to think about this crude oil situation as traders? Answer - first -what is the direction of the market? Answer - it is trending higher with a series of higher lows since June 2012. The move up has been stymied at times at key resistance levels ( which we noted was one such occurrence at the $112 level) but the market has steadily ground higher. The $105 level had recently served to cap its upward progress for the last three months but that finally gave way when the situation in Iraq hit the radar screens of traders.

What this tells us is that sentiment towards crude oil remains strongly bullish and the trend is currently higher. Don't try to be a hero therefore and fight the tape just because the positioning of the specs vs the commercials is so lopsided in this market. Guess what? It can become even more so!

Secondly - do watch however and be alert for any signs of market reversals. When you have this many speculators crowded on any one side of the market, it does make for an inherently unstable market, one in which longs can become very jumpy and nervous for fear of sharp moves lower. This can and often is reflected in big spikes followed by sharp selloffs followed by big spikes up again. In other words, rising volatility can indicate increasing nervousness.

I have remarked about this in the past but want to do so again - markets, especially the "futures" markets ( not the "past" markets or even the "present" markets) tend to look ahead and price in the worst ( or the best ) news and price that in accordingly. We traders refer to the event or scenario as the price "having baked into the cake" the news.

In the case of crude, it has already baked into the cake quite a bit of bad news. With ISIS moving down through Iraq and threatening to seize key oil producing regions, the crude oil markets were rightfully concerned. Then we had the Ukraine situation which seems to flare up, recede and is currently flaring again. Once again, crude oil, which is always sensitive to geopolitical events, has priced in some risk premium.

So here is the big question that I am currently grappling with as a trader - just how much higher can these geopolitical concerns take this market at this point? I ask myself that question because of my current view of the US economy - let's face it, given the very tenuous nature of growth taking place at the moment, can this economy cope with sharply higher energy costs without seeing the "energy tax" impact begin to curtail growth? in other words, at what point do energy prices begin to significantly negatively impact growth?

We are all well aware of the high cost of meat right now for consumers. Until recently, gasoline prices, had been a bit more well behaved even if they had somewhat risen. Now they are threatening to move strongly higher also. You then get the ONE-TWO sucker punch to the struggling consumer which has to negatively impact economic growth as disposable income goes more and more to the basic needs.

At some point, demand for energy will then be affected, just like it always is during times of very high prices. When that point comes, and none of us know in advance when it will take place, crude oil is going to experience a significant round of long liquidation as longs begin to book profits and head to out of the market.

I would also be watchful for signs of the various Fed governors heading to the microphones and begin to try talking down some of the commodity sectors if things get too heated. I think Janet Yellen has a steep learning curve when it comes to grasping the significance of her own words and perhaps does not yet understand that she needs to be very, very careful about what she says.

I can still recall Ben Bernanke sounding a hawkish note on the Tapering thing last year and the havoc that produced! It did not take him, or the various Fed governors very long to hit the talk circuit sounding a much more dovish note after they observed the reaction of the various markets.


let me close this by noting that I am sincerely grateful for all of you who took the time out of your schedules to write and post here in response to my solicitation about making a few changes to the site. I cannot honestly make the time to thank each and every one of you personally by responding to your posts but I do want you to know how appreciative I am for both the kind words and very good counsel. Some of you should be webmasters because it is obvious that you are far, far more knowledgeable about internet publishing and websites than I am!

As some of you know, I have wondered at times whether the harsh emails that too often have filled my private email box were worth putting up with in order to keep writing. Sometimes I forget that there are far more very kind, and very gracious people out there and that they, more often than not, usually are quiet and reserved. hearing from some of you as well as some of the regulars here, has been a great source of encouragement to me so I thank you for that!

Speculators Short Copper, Cover in Silver and in Gold

The weekly Commitment of Traders report is out, seeing that it is Friday afternoon, so we can now once again proceed with our entrails-reading and tea leaf-divining as we dissect the internals of some of these commodity futures markets.

I thought I would start with my favorite indicator market, namely copper. Here is the COT chart. It looks like it was a case of - for the Hedge Funds - "If you can't beat 'em, then join them". They finally abandoned the copper market on the long side and moved over to join the other Large Reportables camp on the net short side of the market this past week. Those of you who have been following the site will recall that I have been fascinated by this battle between titans over the fortunes of the red metal. The "large reportables" camp has been winning that war.

I should point out, however, that it does appear we had a big round of short covering among these speculators that took place on Wednesday and continued into today's session. Here is the Daily Chart.

As you can see, I made a pointer to the Wednesday bar; the day on which the FOMC released their statement and Janet Yellen gave her now infamous testimony. Copper put on some $.06 per pound since then. No doubt those who were short the metal were just as spooked and shell-shocked as anyone else when her testimony began getting considered and studied more closely. I suspect they ran strongly for the exits as many shorts did across the entirety of the commodity sector, especially on Thursday when "the Yellen" unleashed havoc on the commodity bears. ( I want to recall that scene in the Russell Crow movie, "Gladiator', at the beginning when the Roman army is fighting in Germania and Maximus tells his officer; 'at my signal, UNLEASH HELL").

I think the shorts all felt like the barbarian army after the Romans finished with them in that battle scene. I know I sure did in my feeder cattle positions. They had gone limit down the previous day and ended limit up on Thursday! Everyone was panicking trying to figure out what the hell was going on.

Silver experienced a round of significant short covering this week, much more of which continued on Thursday and Friday's sessions. The hedge funds underwent a HUGE SWING of some 11,000 contracts in favor of the buy side as they covered  9800 short contracts. They only added about 1450 contracts on the long side however. That probably changed Thursday and Friday however based on what I have been able to glean thus far from the open interest data and volume readings. Prior to those two days, hedge funds, who had been net short silver nearly 6000 contracts were now net long by some 5000 contracts! That did not take long did it?

I would suspect that what silver, and gold, have undergone this week, is pretty much indicative of what happened to many commodity market bears. They were forced out by index fund buying and by hedge fund short covering, which was unleashed by Janet Yellen.

Here is a look at the gold COT chart noting the positioning of the hedge funds on a net basis.

You can see that the Net Long positioning of the hedge funds shot up through Tuesday of this week. As it did, it is not hard to figure out what happened to the gold price - up it went. And remember - this is only through Tuesday and did not include that wild ride higher on Thursday. I cannot even imagine at this point how many speculative shorts were blindsided by Maximus Yellen.

There was a swing of about 15,300 contracts towards the net long side among the hedgies as they covered some 13,600 shorts and added some 1700 new longs. I should point out here something that I have commented on during previous rallies in gold over the last few months - If one is bullish, one does not want to see a market moving higher led by short covering. One should expect to see short covering but they also WANT TO SEE NEW BUYING. That means, in subsequent COT Reports, we are going to want to see the number of new longs, especially on the hedge front side of things, outnumbering the amount of short covering. If this is the case, it will augur for further strength in the metal. If however, and this is key, we do not see that development, I will be concerned about the staying power of this current rally.

It is way too soon to be declaring the bear market in gold is over, especially on the basis of a week's price action but especially with a move higher led mainly by short covering. Let's see what we get for the next week. Also, please keep in mind that weekly chart of gold I posted yesterday showing the rectangular boxes denoting the range trade that gold has been undergoing.

From a technical analysis standpoint, gold has been in a bear market since it broke down below $1530. It has now stopped going down but neither is it in a bull market. It is RANGE BOUND - pure and simple. It will have to break out above the top of the year long range near $1400 before one can make declarative statements that "the bear market in gold is over". That is someone talking their bias and not being objective.

We had the same sort of talk back when gold bounced off of the $1530 level the second time some while back. The same chatter was" the move lower in gold is over- expect it to go on and make new life time highs". We all know how that played out!  

What we can say, and say with a great deal of certainty, is that the recent leg lower in gold has been halted. The market has found support first near $1200 and now again at $1240 ( a higher low within the range as I pointed out yesterday). But it has not yet broken out on the charts. It can run as far as $1400 and still remain rangebound.

Please remember this when we start getting the predictions again and confident assertions. Just stay unbiased and objective, respect the price action for what it is, and go with the flow. Above all, KEEP YOUR EMOTIONS out of it.

One can always tell those whose trading/investing decisions are based on emotions and not objectivity because they will be the first to insult those whose technical view of the markets contradicts their positioning as well as the first to crow when the market moves in their favor.

Trading/investing is not about emotions - it is about remaining objective to the point of becoming almost cold-hearted. That takes years and years of exposure to learn.

Incidentally, one last thing for now, some of you very kindly have suggested I put some sort of "Donate" button on my site. I have opted not to use ads as I feel they clutter the site up anyway and detract from what I am trying to convey. I have long resisted putting anything up here for monetary purposes but I must admit that there are times when trying to keep posting interesting and hopefully useful articles and such does take its toll on me. I am first and foremost a trader and as such I must give my trading my full attention and efforts.

However, the website does take a lot of my time and I am finding that I spend more and more of it in front of the computer to the point where I am wondering if it is worthwhile for me to continue this. I do have another life besides that of a trader. I think every man should try to leave the world a bit of a better place than he or she found it but I also have a legacy to think of in regards to my own kids and wife.

Please send me a bit of feedback about this. I do not want to do anything that would come across as unseemly or blatantly or obscenely mercenary. I would rather however go with a Donate button rather than make this site, fee paid or clutter it all up with ads.

Going the ad routine tempts people into surrendering their objectivity to cater to a particular set of the population ( call them "the choir") and moving towards sensationalism and other efforts that are designed to attract as much viewership as possible to generate more ad revenue. I abhor that personally. I would much rather have a clean conscience and a much less visited web site than one that makes lots of money but ends up harming people because it clouds their objectivity and keeps them in poor investments by marrying them to one point of view only. That is a dangerous and financially destructive path.

Going to a fee paid site might prevent some of those who cannot afford such things from reading the site and maybe learning something that might help them become better investors or traders.

The Donate route seems to me to be a good alternative as it is completely voluntary and not tied in whatsoever to the amount of website clicks that many use to generate revenue.

Let me hear from you on this please.

To those of you who have been reading here regularly, thank you for your continued patronage. I want you to know that I am honored and humbled by your viewership and that I take very seriously what I am writing and my analysis because I realize I have earned the trust of many of you. That trust cannot be valued too highly. The last thing I would ever want to do is to do anything that might be misconstrued as being dishonest or disingenuous. I try to call things as I see them - sometimes I am wrong - sometimes I am right but I do try to stay objective. Hopefully that has been conveyed over the years here.

Again, thanks.
Dan

Inflation Expectations Rise this week

I made mention of this chart not too long ago as another way to try to keep tabs on what market participants are thinking in regards to inflation expectations.

Here is the longer-time frame chart showing the TIPS spread and the gold price.

The chart is valuable in the sense of seeing how well or not so well, gold is tracking the ebb and flow of inflation expectations currently in the market.

I wanted to pull a close up and take a look at this chart on a bit more shorter-term basis so below is the same chart using November 2013 as a starting point. I chose this month late last year as a starting point because gold lost around $100 during that month before a final plunge to $1180 in December.

Here is the close up look:

 

This week, the TIPS Spread has run up 6 basis points as of yesterday afternoon. It is currently sitting a 2.25. Interestingly enough, the spread bottomed out early this month at 2.17. These changes may not seem like all that much but interest rate movements and gold are tied quite closely together. As a matter of fact, the TIPS spread is now at its highest level in nearly 6 months ( Jan 22, 2014). What this is telling us is very simple - there has been a shift in regards to the rate of inflation that the market is now expecting as we move forward.

The sharp spike upward this week, I believe, can be laid completely on the shoulders of the Janet Yellen Fed, especially in regards to her testimony and comments. For whatever the reason, and I suspect that the market is beginning to grow increasingly nervous about this Fed, traders are starting to worry about inflation.

It could be that to some, the Fed is already behind the curve on raising short term interest rates.

That being said, can you see why the price of gold has shot up as sharply as it has this week? With the breakout higher in the Goldman Sachs Commodity Index, and this move to a 6 month high in the TIPS spread, gold is reacting to these increased inflation expectations. Silver, especially, being much more sensitive to inflation concerns than is gold, is reacting ever better.

The market is obviously sending a message to Ms. Yellen and to the rest of the Fed - the question is are they hearing it?

One suspects that they are not.

One sign that they might finally wake up from their stupor and see what their policies of ZIRP ( Zero Interest Rate Policy) is doing to the commodity sector would be a rash of speeches and appearances from various Fed governors starting to talk hawkishly about raising interest rates. That would support the Dollar and undercut some of the strength in the commodity sector in general. If they do not do so very soon, they are going to have some real problems on their hands as the markets will have gotten way out ahead of them.

Keep in mind something that I have mentioned for a while now - I believe that the Fed actually did not want to see the gold price collapsing lower, along with the rest of the commodity complex - that would be a dangerous signal ( to them ) that deflation is gaining the upper hand, and we all know that the Fed, as well as all modern Central Bankers, are terrified of the deflation spectre. They believe that they can handle the inflation genie but the deflation boogey-man is an altogether different and quite unwelcome entity to them.

The problem for the Fed is that they might be able to generate some upward pressure on commodities, perhaps by design, perhaps not, but they run the very real risk of letting things get completely out of hand. One cannot give speculators a green light to blindly buy commodities in general without unleashing a dangerous wildfire. Apparently the Fed thinks that they can handle a campfire but they had better watch out!

Let's continue to track this, along the GSCI, and the Dollar, to see how things proceed as we move forward into this summer.

Silver Takes the Lead over Gold

Long time readers of this site will already know that it is my opinion that silver requires an environment in which inflation expectations are alive and well in order to outperform gold. In an environment in which traders are more concerned over deflationary pressures, silver will fare far less well than the yellow metal.

In other words, one's investment or trading decisions need to take into account the sentiment among players when deciding to approach either or both of these markets. Even more so that than however is the signals that can be derived from tracking these markets. When rightfully understood, it can help one discern what is on the minds of some of the large speculators that dominate these markets and whose buying or selling decisions most greatly influence price direction.

Take a look at the following charts where I have created a comparison for you and you will see what I am getting at.

The top graph, the blue line, is another one of my pesky ratio charts ( Yes, I know, I am addicted to these things). I am essentially taking the price of silver and dividing it by the price of gold. By looking at the direction of the line, one can easily see which one of these metals is performing better than the other.

It is my contention, that if the market is expecting Deflationary pressures to win out, the line will move lower as the price of silver will lag gold to the upside on rallies but lead it on moves to the downside in both metals. If the market is expecting the opposite, namely inflationary pressures, silver will lead gold on the moves to the upside in the metals or will not drop as hard as gold during moves to the downside in the metals.

Below this ratio chart, is a graph of the Goldman Sachs Commodity Index, which I follow religiously to get a bird's eye view of what is taking place in the larger commodity complex as a whole. By closely monitoring these commodity indices, one can see any rise in prices at the wholesale level, long before most other folks have the faintest clue what is happening. The futures market are just that - "Futures" markets - they are not "past" markets nor are they "present" markets. They look ahead.

Now, there are other variables that need to be considered when monitoring commodity indices that I have spoken to here at this site many times - most notably the forward structure of the Board. I have noted this quite frequently in recent posts as I discuss my reasons for expecting lower food prices by Q4 of this year and certainly by Q1 2015.

That being said, I tend to look too far ahead at times as I like to have some idea where things might be headed. However, for the purposes of trading and understanding what the "crowd" is thinking, one can take the commodity indices at face value and draw the proper conclusions.

What do you see when you examine the ratio chart line and the line of the GSCI? Can you see a connection? Yes, you should. When the overall commodity sector is moving higher ( wholesale prices are rising) the ratio moves higher as a general rule ( again - it is not a 100% relationship but it is very close). When the overall commodity sector is moving lower ( wholesale prices are falling) the ratio line moves lower.

In other words, Silver will outperform gold if the market expects to see inflationary pressures in the commodity sector.

What is the GSCI doing right now at this moment and what is the ratio line doing? Both are moving higher. This tells me that the sentiment in regards to the commodity sector at the moment is that players are becoming concerned about rising commodity prices.

Keep in mind that the biggest component of this particular commodity index, the Goldman Sachs Commodity Index, is the energy complex so this index does tend to skew the perception of the complex as a whole in favor of what the price of energy is doing, but ever since my beloved Continuous Commodity Index or CCI, went the way of the dinosaur, I have used the GSCI. The CCI was the best balanced commodity index in my opinion and most accurately reflected what was going on in the entire commodity complex because it was weighted more evenly than any other index out there. We have to use what we have to use however and thus the GSCI, which by the way is a major benchmarking index used by INDEX FUNDS.

I mentioned these index funds in a separate response to a post here at the site yesterday. They are not hedge funds. In my profession, we often call them "long only" funds. The reason is because they mostly take only the long side of the commodity futures markets that they invest in. These funds essentially exist for the purpose of providing investors exposure to the commodity complex as an alternative investment class. They receive monies from clients and buy a basket of commodities exactly the same as the index that they are benchmarking against.

During the big boom in commodities back during the initial rounds of QE, index funds were very active in the commodity futures markets buying huge blocks of commodity contracts. I think it is important to understand that this group DOES NOT TRADE FUNDAMENTALS in individual markets. They must buy every single commodity that the index they benchmark against includes in its basket in the same percentages that comprise the index. These weightings change every year so the index funds who roll their positions from month to month are forced to realign their holdings in early January or February each year.

The thing to come away with however is that whenever one experiences rising interest in commodities as an asset class, these index funds become more influential in the markets because the size of their buying increases. As a trader, they cause me more grief than the hedge funds because of the reason I stated above; they will buy and take long positions no matter what the markets might be doing or what the current fundamentals of that particular market are. In other words, they buy BLINDLY.


However, and this is key - when index funds begin investing more money into the commodity sector, the asset class is coming back into favor and that only happens when investors are worried about potential inflationary issues.

I maintain that something is happening in the marketplace in regards to its confidence in the Yellen-led Fed. I am not sure exactly what Yellen said in her comments this week, but ever since those comments were made, things have heated up considerably in the commodity sector overall. One gets the distinct impression that the market currently has not exactly given her a ringing vote of confidence.

Yet, the VIX, or Volatility Index, has continued to sink lower indicating that COMPLACENCY remains incredibly widespread at least in regards to stocks. However, in watching this climb in the silver/gold ratio and the move higher in the GSCI, I see signs of cracks appearing.

I will leave you for now with this daily chart of silver. Note a couple of things - the market has recaptured the $20 level in very convincing fashion. So far today it has even run to $21 where some profit taking has emerged. Price is above the 50 day and the 200 day moving averages and the 50 day is turning higher. The ADX is rising but it remains below 30. That means the potential for a trending move higher is growing. Bulls are in control

If the price can power through psychological round number resistance at the $21 level, it should be able to make a run at $21.50 and the area just above that, which is the next level of chart resistance.

Gold vs. Goldman Sachs Commodity Index

Just some FYI stuff for guys and gals that enjoy looking at other markets when trying to interpret the moves in the gold price.

Notice how the peaks and valleys in the gold price have been tracking the broader commodity sector fairly closely.

I should note that this particular commodity index does have a fairly excessive weighting in the energy complex ( well over 60%) so it stands to reason that movements in the crude oil, brent, gasoline, heating oil markets are going to exert a greater influence on this index than movements in the grains or the softs or the livestock markets, etc.

Even at that however, the link between the gold price and this index is fairly significant.

Here is another look at the same index, this time comparing it to the Dollar Index.

It is interesting to note that the overall commodity index tends to follow more of an inverse relationship to the Dollar, falling when the Dollar rises and rising when the Dollar falls. There are some periods however when the two seemed to actually move in sync, so the relationship is not perfect by any means. What I take away from this chart is that the norm is more of an inverse however.

It does look like since February of this year, that inverse relationship has been fairly tight however.

I come away from these charts believing that the relationships we have been watching for years now over here at this site are still worthwhile to monitor. If the Dollar is weaker, we should look, generally speaking, for the commodity indices to show some upward movement. If the Dollar is stronger, we should expect the opposite.

Then, if the commodity index is moving higher, gold should tend to track along with it. The opposite remains true.

We come back to that pesky Dollar thing again, no matter how we try to get away from it!

Gold pushes further into Chart Resistance levels

While the pit session close was very strong, the screen trade continuing in the later afternoon hours has seen the metal moving further up into the next level of chart resistance. Adding the upward march has been good buying that has continued into the closing bell in the mining sector. I am currently showing the HUI up over 5% compared to gold currently up 3.75 % and silver up 4.89%.

One wants to see the gold shares leading any charge higher in the metals and we are definitely seeing that occur.

I am reposting the gold chart from earlier today since the metal has risen further and I do want to note its position on the Daily Chart and show the next challenge that gold bulls need to tackle.

As you can see by examining the chart, the metal is knocking on the LOWER portion of that next resistance zone. As a side note here ( will someone please explain to the gold perma bulls or GIAMATT crowd that "YES", technical charts DO MEAN SOMETHING, in spite of their protestations to the contrary whenever the metal is moving lower), observe how the breach of the initial and a KEY resistance level near $1280 brought in more buying in the form of heavy short covering and fresh new buying. It works the same way in reverse folks - breaches of support levels bring in new selling and induce long liquidation.

This buying produces MOMENTUM and that is what attracts the momentum-based hedge funds who will now come in on that side of the market while those in that crowd who are short will be forced to exit by their computers.

Here's how the technical picture now looks - if the bulls can take out this next zone of resistance, I see another band of resistance centered near $1350 - $1360. Above that, frankly I do not see much, if any, until the market would get nearer to the $1385 level. Resistance would extend from that point all the way to round number and psychological resistance at $1400.

I want to give a tip of the hat to one of our regular readers and frequent poster, Steve Brassey, who rightfully has noted that the Argentinian debt situation is worth monitoring. As Steve has noted, problems tend to start around the periphery and slowly work inward so any sort of fresh occurrence of sovereign debt fears could reawaken some strong interest in gold once again.

It should be noted that equities have been the "go-to" investment of choice by large money managers and institutional funds. Ditto for the hedge fund community. If equities begin to falter (remember what happened when sovereign debt fears arose over Europe), there is going to be some diversification out of them and into gold, especially since its price has been so beaten down in comparison to the major stock indices. Traders/investors are not going to want to lose their nice, fat profits in equities so if they begin to get nervous, they will book some of those gains, take the profits and stash them into safe havens.

A question that I have is whether or not the Dollar and the Yen would serve as safe havens in that event. Today, neither one of them look remotely life a safe haven. It was the European currencies which attracted the big money flows, especially Pound Sterling which registered a near 5 year high against the greenback.

Traders have been looking to sell gold on rallies as it was not performing as were equities. Combine that with the fact that the inflation genie has been relatively well confined in his bottle, (at least in the minds of the majority of players ) and there was every reason to sell the metal.

A couple of things have since changed however. The ECB seemed to take the first step with their recent monetary stimulus measures ( lowering rates from .25% to .15% and implementing negative interest rates for bank excess reserves). Since that time, the Euro has refused to break down below the key 1.350 level, something I have found quite remarkable. It is now back above 1.360 again.

The second thing is Yellen's comments which caught a lot of traders leaning the wrong way. Most everyone expected the Fed to announce further tapering, which they did, to the tune of another $10 billion/month reduction. But most expected the Fed to sound a more upbeat tone about the economy and begin to start preparing the markets for an eventual rate hike. Quite the opposite happened. Disappointed traders, or better yet, shocked traders, ran for cover.

Lastly, is that concern that Argentina's situation has now once again raised and brought onto the radar screens of traders.

I would also like to take this opportunity to hoist up a longer term chart of gold.

This is a weekly chart. Notice that today's big move on the Daily Chart above still leaves gold well within the TRADING RANGE market that has held it for a year now. If you look at the previous trading range, $1800 on the top and $1525-$1530 on the bottom, you can see that was in existence for 20 months! When gold finally broke down below the bottom of the range, it entered a bear market. It is currently working within a very broad consolidation pattern bounded by approximately $1400 on the top and $1200 or so on the bottom. It is now, as a result of today's big move higher, a wee bit above the MIDPOINT or center of this range.

For gold to have a chance at ending the bear market, it would have to break out from the topside of this new range at the very least. It would also have to Close ABOVE the bottom of the former range. That means it would have to regain the $1530 level.

One thing I am noting that makes this weekly chart and the price action within this new and lower range a bit more constructive than the previous range is the fact that the market has bounced higher within this range but the more recent low formed near $1240 is HIGHER than the low of the range ( near $1200). If you look at the previous range, gold tended to move to the bottom of the range before it rebounded back up to the $1800 level.

In this newer range, the market has made a HIGHER LOW which is constructive as it gives the bulls a bit more reason to be hopeful than it does the bears, who were unable to bring the metal back down to the $1200 level for another test. Buyers emerged prior to this occurring which is friendly.

I will want to see several thing now - first of all, I want to see the holdings in GLD move higher. If the ETF fails to confirm this move, it will NOT be a good sign for continued strength. WESTERN INVESTMENT DEMAND must surface and remain solid if the price is to continue moving higher.

Secondly, I want to see continued weakness in the US Dollar, especially at the hands of the European based currencies, notably the Euro.

Thirdly, I want to see continued upward progess in the commodity indices.

And lastly, I want to see some weakness in the equity markets of sufficient magnitude that it would reflect some real FEAR exists out there among stock bulls.

The VIX has been and remains comatose and that bothers me. If there is real nervousness out there, it should be seen in this Volatility index careening higher. Either that or stock bulls are just punch drunk and nothing is going to trouble them until it just does. Check out this chart - NO FEAR ANYWHERE - it is absolutely astonishing....! and scary!

Welcome to New FOMC Chair On the Job Training Ms. Yellen

Apparently Janet Yellen needs an on the job training program to properly school here in the art of choosing the correct words so that all sides hear exactly what they want to hear. Alan Greenspan was so good at it that market players invented a new word to define it: "FedSpeak".

Ben Bernanke took a while to get that down but by the time he left office, he seemed to have improved quite a bit in the fine art of saying things that within the same speech could be found contradicted by more things within that exact speech.

Yellen has yet to learn this - at least so far as the impact on the currency markets. She utterly decimated the US Dollar by her comments yesterday and just gave the green light to every big macro fund and index fund on the planet to pour money into the commodity complex. I find this nothing other than the mistake of a rookie who is oblivious to the fact that as the chief Central Banker, one does not have the luxury of airing their misgivings in front of the general public.

A couple of things to note here - the Gold Volatility Index just shot through the roof and the equity markets are now going to be even more jumpy than they have become, if such a thing was even possible. The LAST THING that this economy needed is RISING COMMODITY PRICES. As I wrote earlier today, the saving grace of this anemic "recovery" has been a lack of sharply rising prices in the commodity sector. That has kept the price of raw materials, food, etc., from embarking on a tear higher such as happened when QE1 and QE2 were unleashed.

It is one thing to have temporary spikes in key commodities such as crude oil that are related to geopolitical events. Such things come and go and tend to fizzle out with as much fanfare as they started. It is altogether another thing to have the chief Central Banker undercut your own currency, especially when it was looking like it was finally going to get some sustained upside strength to it. That would be bad enough but Yellen seems clueless about the impact of a falling Dollar on the rest of the commodity complex at large. One can argue that the talking down of the Dollar was either deliberate or a side affect of a novice Central Bank chief, but the fact is that if investors start thinking that the Fed wants to knock the Dollar lower, either by design or by accident, they are going to start with their "let's buy everything in sight" trading strategy in the commodity sector.

The result of this will be obvious and none of it is good. I personally had seen some real light at the end of the tunnel by looking at the structure of the commodity board and observing that traders had been looking for some significant declines in food prices later this year. That had kept me optimistic on the inflation front that the current spikes in food costs were going to be coming to an end rather soon. Now I am not sure based on what Yellen has unleashed in these commodity markets.

These hot money flows could care less what any fundamentals might or might not be in the markets into which they pour. The buying orgy, (and that is how to best describe these damned funds) obliterates all the bids in its way and destroys any trader who might get short based on their analysis of the fundamentals in the markets that they are trading. In other words, Janet Yellen just injected another round of more extreme volatility into a sector that had begun to show some semblance of becoming a bit more well behaved.

The reason I know that this is a round of hot money is through the action of the spreads in the markets that I primarily trade in. The spreads have been blown to kingdom come today.

I am including a chart of gold here to show the annihilation of the shorts thanks to Ms. Yellen's comments. When the bulls were able to regain $1280 this morning, many of them began getting out. When $1300 was tried on the first round, some selling emerged but the market barely retreated. That give some strong longs the signal to begin pushing and push they did. Out went more shorts as the market kicked through $1302 and then it was almost a vertical shot north to $1317 as wave after wave of shorts' buy stops were nailed.

You can see the next resistance zone noted on the chart -if the bulls best this, things are going to really heat up. Can they do it?

Again, as a trader I have to play with the cards that are dealt, but that does not mean I have to like the hand. If this is the start of a new trend/strategy among the big funds, and it is unclear if this is a one day wonder or something more, trading for a living just got even more difficult than it already was. Thanks Yellen - can you please just keep your mouth closed for a while?

Investors Key in on Fed's Ultra Low Interest Rates - Inflation Fears Rising (UPDATED)

Watching the ever-changing ebb and flow in these markets for as many years as I have been now doing, it never ceases to amaze me how what is of no concern whatsoever one day, can suddenly come into focus the next.

Traders have been not the least bit concerned about inflationary pressures in the economy for some time now. Based on readings of the TIPS spread and the performance of the various commodity indices, along with a falling Velocity of Money indicator, they have relegated inflationary concerns to the dark corner of the attic.

Yesterday however that seems to have changed ( for now at least) - the FOMC statement was interpreted by the market in a fashion that has produced a sentiment that is suddenly now worried about rising prices.

Macro funds have thus wasted no time in piling back into certain commodity futures with the result that the Goldman Sachs Commodity Index or GSCI, has now broken out into a three month high. While the Dollar has recently been flirting with overhead chart resistance, traders took the FOMC statement as dovish towards the greenback and once again it failed at that key resistance level centered near 80.70 - 80.80 on its chart.

The Dollar has been supported by the idea that if interest rates are going to rise anywhere, that will occur first in the United States. Apparently the Fed statement had some rethinking that idea. Pound Sterling hit a level against the Dollar not seen since August 2009 today!

Take a look at the GSCI chart. Is it any wonder that both gold and silver are performing so well today? Both metals have noticed this upside breach of that key resistance level on the GSCI and are moving higher. Remember, for gold, and especially silver, to maintain solid, sustained uptrends, they need the same in the various commodity indices. One cannot expect to see rising gold and silver prices if the overall trend in the general commodity sector is lower.

The next big step for this particular index is near 675.

Gold has penetrated tough resistance near that $1280 level and silver has managed to recapture the elusive $20 level.

The only fly I can see in the ointment today is the lack of any strong showing in Copper. Once again it is lacking in upward excitement.

Heck, even corn and wheat are higher today.

I will get some more up later on today, including an updated TIPS spread chart.

UPDATE:

In watching these various commodity futures markets trade today, I am now more than fearful that Janet Yellen has just unleashed another round of broad-based commodity sector buying by both index funds and macro funds. The one factor that has helped consumers to deal somewhat with this moribund economy has been that the commodity futures markets have been relatively contained ( I am  speaking in general terms and not of specific or individual markets) and that strong upward price pressure on the grains especially has not been present. When you look at corn prices, which were almost 50% less than they were a couple of years ago, and wheat prices moving strongly lower, there was a ray of light at the end of the tunnel when it comes to food costs. While meat costs are at record levels, I expect them to moderate and move lower by the 4th quarter and certainly by Q1 2015. Today, with the Dollar having been undercut by Yellen in her testimony, a boatload of hot money is flooding back into the commodity markets. This is spite of the current bearish fundamentals in some of these individual markets. These hot money flows by large speculative forces now threaten to overwhelm these key markets.

Those of you who read here regularly know my sentiments towards Central Bankers and their constant interference with the natural course of markets by what I believe is reckless monetary policy. Ultra low interest rates are harmful to senior citizens, and those on fixed incomes or in their retirement years who are looking for safe, conservative places into which to park their life's earnings.

The Fed has effectively punished these people at the expense of reckless risk takers. Yellen seems ignorant of the weight that her words carry and she has fanned the flames of this rampant speculation, which had, until yesterday, been pretty much confined to the general arena of equities. If today's wild buying across the commodity sector is any indication of what we now have in store, heaven help us all.

One can be sure that whenever you see commodity markets soaring higher, in the face of bearish fundamentals, hot money flows are pouring in. This is what happens when the monetary authorities undercut their own currency. We now must monitor the overall commodity sector much closer as well as keeping a very close eye on the US Dollar. If the Dollar does not reverse course and loses support on the charts, the US consumer is going to once again be forced to deal with soaring energy and food costs.


Perhaps this is where the weakness in the equities today is coming from.