China news roils Gold but dip buyers emerge

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

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

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

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

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

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

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

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

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

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

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

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

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

No wonder the gold market is noticing this!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Volatile Crude Oil Impacting Commodity Indices

Hold onto your hat for the wild ride currently taking place in the WTI crude oil market. Yesterday afternoon, the front month soared nearly $1.50/barrel when news hit the wires of a Wall Street Journal "scoop" story that the Obama Administration was supposedly going to relax the export rules to allow two firms to export ultra-light crude. The firms are Pioneer Natural Resources and Enterprise Products Partners. This was regarded as a big deal because the US has not exported oil in nearly 40 years. We can export refined products just not the raw stuff.

Oil spread traders are having a field day on this news.

After being down for the previous two sessions, the price shot up, completely erasing those losses. However, and this is key, the market could not extend past the overhead chart resistance centered near the $107.50 level. It did manage to keep its footing near $107 but as more data hit, this time the storage or stocks number, the market began to slowly retreat.

The EIA showed crude oil stocks rose 1.7 million barrels to 388.09 million. The market was actually looking for a drop of 1.2 million barrels for that week. Both gasoline and distillate stocks rose.

The market however bounced higher mid-morning continuing its extreme volatility. What we are witnessing is the result of the massive speculative long side positioning with hedge fund longs in particular attempting to defend those positions.

The problem however in crude is what we were reminded of by both the EIA data and the bigger news, the incredible downward revision to Q1 GDP. To say that it was lousy, would be a disservice to the word, "lousy". It was abysmal! The number was revised to a nearly 3% shrinkage.

So here is the question - what in the world is crude oil doing up at these levels when the economy is seemingly going backward? Yes, I understand the Q1 number is backward looking and that markets are inherently forward looking, but given this sharp rate of contraction in the economy, we are going to have to have seen some quite rapid improvements in the economy during Q2 to get the number up near even 2.0 -  2.5% GDP growth. Even at a number like that, it is certainly not indicative of an economy roaring full spread ahead and it certainly is not one that would seem to be burning through crude oil at a rate to justify these rather lofty oil prices.

As I wrote previously, just how much of the crude oil price is due to geopolitical premium ( speculative demand ) and just how much is due to actual demand for the product itself? That is the mystery. This is why that big overhang of speculative long positions in this market makes me extremely nervous. At what point has the market fully factored in geopolitical unrest?

Another question - have these speculative players been buying crude as an inflation hedge? If so, how much of that buying is related to this?

I am raising questions that I have no answer for but am doing so to illustrate the complex factors going into the pricing of the black gold. But here is one big question - with an economy limping along, how can inflation pressures be a concern? Or are we witnessing the dreaded stagflation scenario? That the TIPS spread is increasing shows investors are worried about budding inflation pressures yet the economy is going nowhere fast it would seem. Food for thought is it not?

But let me come full circle and actually move towards the headline I chose. The commodity indices that we are now left with are too heavily weighted towards energy in my opinion but they are the only ones we have to work with. As such, energy prices have an unduly disproportional impact on the price levels of these various indices. Thus, I do not believe that they are truly indicative of what is happening across the broader commodity complex. Volatile crude oil prices can disproportionally drive the commodity indices higher when energy is moving higher and can also disproportionally sink the commodity indices lower when energy prices are falling.  

While these commodity indices are always helpful, one has to step back and consider some of the various sectors of the commodity markets, especially those with a lesser weighting in the various indices. Take a look at grains, such as corn and wheat for example. Corn prices, as well as wheat prices are both near a 4 month low. Soybean prices are near a three month low. Natural gas prices are essentially flat and have been for 4 months now. And while both cattle and hog prices have been soaring, they should be moderating later this year and especially into winter and spring of next year.

Then one has to consider whether or not rising energy prices are inflationary in this current economic climate, or deflationary.

The point I am making here is that there is still a great deal of uncertainty out there. Equities move sharply lower one day and then reverse course the next. Interest rates move higher only to retreat. The signals are all mixed up and that is what is leading to lack of clearly defined trends in many markets with the resultant sharp reversals in price from one day to the next.

It does sometimes feel as if we are living in some sort of weird parallel universe where everything is a mirror image of this one. In that universe, a near 3.0% contraction in the US economy for Q1 is greeted with equity buying and strength in crude oil making the stuff even more expensive and further dampening consumer disposable income.

What appears to be at work in equities, at least for today, is that some buyers are still considering that Q1 number an aberration and that growth is going to pick up for the remainder of this year. That may be the case; it may not be the case. No one really knows for sure. All it leads to each piece of economic data being scrutinized ever more closely to see how each piece of the pie comes together.

One brief point here - you hog producers out there - we have a Quarterly Hogs and Pigs Report coming up Friday so be careful. I hope some of you have secured some hedges in expected Q4 production and Q1 2015 production along with long side feed coverage.

More later as time permits.

Russell 2000 showing signs of Fatigue

The Russell 2000 is another one of those key indices that traders can use to gauge risk sentiment. By keeping tabs on it, one can hope to better understand overall market sentiment in general and thus, by consequence, money flows.

Last month, it appeared that the index was in real danger of breaking down as it flirted with the February low before it staged an impressive recovery. However, it has failed ( as of today) to go on to make a new all-time high. As a matter of fact, it has stopped short of reaching its previous peak and is currently down near 0.85% as I type up these comments. This is a warning from a technical analysis aspect that the market is showing some signs of fatigue.

I have noted a POTENTIAL ( and I am heavily emphasizing that this is a 'potential' ) Head and Shoulders pattern that could be emerging after a very long and protracted run higher. I am not one that jumps and shouts about the formation of everyone of these patterns as does seem to be the habit of too many novice analysts, but when one of these patterns arises after a very long trend, either higher or lower, it pays to monitor it closely.

I have noted the left shoulder, the head and a potential right shoulder. The pattern would however only be confirmed by two successive closes below then neckline noted. That is a good way's off just yet.

One of three things will happen -

1.) the pattern will be confirmed by two successive closes below the 1080 level which would generally indicate a more extended move lower.

2.) the market will move down and test the neckline and bounce higher setting up a potential consolidation pattern.

3.) the market will briefly set back before going on to make yet another all time high.

Notice, I am not making any predictions here - I am merely noting probabilities that we as traders need to be alert to.

The indicator I am using has not yet generated a sell signal in spite of today's move lower in the index itself but it is up near levels commensurate with previous downturns that have occurred over  the last 9 months.

I am also noting that the VIX is sharply higher today for some reason. Some nervousness is creeping back in! I wonder if it might have anything to do with the fact, that Yellen, Carney and Trichet are all on the record recently talking about the economy growing slower than anticipated? Who knows - but whatever the reason - equity bulls seem unwilling to drive stocks sharply higher right now.

It is going to be interesting to see the GDP numbers.

Average Hourly Wages

One of the factors that we are trying to closely watch here is anything that might result in the Velocity of Money beginning to rise.

From my armchair perspective, I am of the view that it is the slack in the labor market that has kept inflation pressures well at bay, in spite of how many years now of Federal Reserve Liquidity efforts, also known as Quantitative Easing. I have commented here many times that until that huge sum of "money" that has been created by the Fed, begins to make its way out of Wall Street and onto Main Street, inflation pressures are simply not going to build.

I think many of us who are regulars here view the current stock market rally into all-time highs, seemingly without ending, as a product of these QE programs and a ZIRP ( Zero Interest Rate Policy).

Simply put - if Yield is the name of the game, and it is, then the money flows to where the yield potential is the greatest. For the last several years now, that has been into the general equity markets and out of commodities in general.

Recently however, we have seen the Commodity indices all breaking higher, led primarily by sharply rising energy prices. We have also seen the TIPS spread hitting its highest level in 6 months. These are signs that inflation pressures are building, albeit rather slowly.

What the missing ingredient has been is rising wages. let's face it, the employment situation in this country is rotten. While some folks are indeed getting some long-sought for jobs, many of these are not high-paying. One of the few exceptions has been in the energy sector where things are on fire. There is a shortage of skilled labor there that is very real.

Today we say new home sales pick up so that is a good sign. Also, someone has to build these new homes so construction guys are staying busier than they have been for several years.

All of this is leading me to beginning focusing on another piece of economic data and that is the Average Hourly Wages numbers that we get from the government on a regular basis. For many years, employers have been in the driver's seat and have been able to choose and pick whom they want to hire and what they are willing to offer them in wages pretty much without any sort of hindrance. It has been, and to some extent, still remains an "Employer's Market".

We therefore might want to start watching more closely for any signs that this might be changing. If wages were to pick up, it should tend to see consumer spending rise and in terms of the Velocity of Money, perhaps begin to arrest that long downtrend. If that were to happen, the TIPS spread would widen out even more and the inflation genie would start pushing even harder against the cork that is presently in his bottle.

Here is a chart of the Wages data. I have taken the liberty to convert the data into PERCENTAGE CHANGES compared to the same period in the previous year. In other words, we can see what percentage wages are rising or falling from the previous year to gauge whether wages are beginning to ramp up.

Notice how wages ( again - on a percentage change basis) were falling throughout the height of the credit crisis. Layoffs, firings, hourly wage cuts, etc. all show up on the chart during that time frame. The Fed's QE programs finally seemed to kick in somewhat and arrest the downward trend but what I find really most interesting is the fact that since the decline ended in late 2009/early 2010, wages have essentially gone nowhere.

This is what I mean when I say wages are flat. It does not mean that they are not rising - it means that the rate of percentage change upward is not moving higher.

I believe this is the single most important factor in determining whether or not we see an outbreak of inflation from the Fed's monetary policies.

Remember they are bound and determined to generate inflation of at least 2%. To do so, they are going to need to see wages continuing to rise at a fast clip or at the very least, as fast as overall prices are rising in general.

When I look at the recent rate of increase in the cost of energy, and in the cost of meat for example, it does not take much in the way of math skills to realize that consumer wages are not keeping up with those.

Let's see how things shape up as we move forward. I see that there are several misguided efforts by politicians mandating higher minimum wages ( that is a self-defeating effort to buy votes anyway )  but they might just get some of that legislated into existence. I guess these economic nitwits think that business owners will just gladly surrender their profits and will not pass on higher labor costs to the general public. If we see a movement towards higher minimum wages, it just might be the catalyst to push everything higher for all of us.

Bank of England's Mark Carney Sounds Dovish Note - Up goes Gold

Wow! What is it about these Western Central Bankers all of a sudden? First it was Trichet of the ECB; then it was Yellen over at the Fed, and now it is Mark Carney over the Bank of England! They all sound as if they are using the same notes and passing them around for each other to read.

Commenting today about Britain's economy, Carney remarked that wage growth remains subdued allowing spare capacity to remain and that needs to be taken up before a tighter stance in monetary policy would be appropriate. Translation - higher interest rates are not in the immediate future. Does that not sound eerily familiar to what Janet Yellen said last week? And of course, lest you have forgotten, Trichet and company actually went the "other way" on rates, namely down!

The British Pound, which recently had set a 5 year high against the US Dollar, moved lower on the news and gold moved higher.

This is really getting interesting to say the least. We are back, it would seem, to which Central Banker can undermine his or her own currency the fastest! No wonder gold is moving higher!

It really is becoming a rather tragic state of affairs when consumers are trapped in a box of stagnant wages at the same time Central Bankers are talking down their own currencies and pushing the price of basic needs higher! I really wonder if any of these people have the least bit of realization what they are doing to the average Joe? That of course was completely a tongue-in-cheek comment as they do not care about Joe and Jane - they care about the monied class and rising stock markets.

At least with deflation pressures dominating, the stagnant wage thing was not as big of a deal ( not that it is any good at all) because the cost of food and energy was sinking lower. What these constantly meddling monetary lords and ladies are doing however is  ensuring that the consumer continues getting squeezed as they set about their quixotic task of "reaching a 2% inflation rate".

I sometimes wonder which is more dangerous to consumers - a foreign invading army or a host of Western Central Bankers.

A saving feature, at least for now, is that benign weather is creating excellent growing conditions for this year's major grain crops and prices in that sector are falling. The meats keep rising however meaning that while the cost of our favorite box of cereal might go down ( I am not holding my breath waiting for the makers to pass along the lower costs) my bar-b-q brisket and ribs are continuing to rise. Hey, if you ever were thinking of going Vegan, now is the time to do it ( at least until later this year)!

Beans decided to forget about "Chinese demand" because of a manufacturing purchasing managers index print yesterday and focused on the Crop Conditions report which shows over 70% of the crop in good/excellent condition. I mentioned yesterday how goofy I thought the idea of manufacturing = soybean demand was to me. Corn and Wheat are also moving lower.

I want to take yet another opportunity to remind hog producers to continue any scale in hedging program that they might have instituted for late Q4 and Q1 2015 expected production. We have a major Quarterly Report out for the hogs this Friday. With the Board at high levels, corn prices sinking and incredible profit potential for you as a producer, make sure you lock in some before Mr. Market decides to take them away from you. Again, you don't have to lock up 100% of expected production, but get SOME coverage. It is always better to be able to shrug your shoulders and think, " I could have made a bit more if I had gambled" instead of kicking yourself and thinking, " I cannot believe I left all that potential profit disappear". Don't take risky chances with your farm's income - lock in some profits and leave the risky chance taking to we wild-eyed speculative types.


Shifting back to gold - I am watching the tape and noticing that it is meeting up with some pretty good selling here near the $1320 level. That is a key chart area and it is showing by the price action. Dip buying is very evident as well however.

You can see the selling on the chart. I am closely watching how gold performs right at this level. The indicator below the price graph is well up into the previous regions that foretold a move lower. The ADX is showing the bulls in control but the market has not yet entered into a trending phase. One usually wants to see a breach of a horizontal resistance level alongside of an ADX above 30. It is currently at 22.81 with the resistance level yet unbroken. The price however is not setting back very much which is indicative of that strong dip buying that is still taking place.

There is some light technical downside support coming in near the $1300 level followed by much stronger support back at our old friend $1280.

I should note that there still remains a great deal of skepticism as to this current move in gold among some of the larger banks. The general thinking is that the Fed can easily get control of any inflation ramp up. That may or may not be true but based on that TIPS spread chart I have been maintaining and following, it sure seems as if they are getting well behind the curve when it comes to managing the expectations game. That being said, some of the bigger boys are still looking at the current move higher in gold as a selling opportunity. We definitely have a battle on now.

By the way, here is a freshly updated TIPS spread versus the gold price chart for you. Check out the big spike! Our monetary masters want inflation - they sure as hell are beginning to get it, at least insofar as the market expectations are concerned. 

Silver is working closer to resistance near the $21.50 - $21.65 level. Above that lies $22. That would be a big deal technically if it breached $22 and held its gains.

Copper Smiles at China Data; Soybeans Likewise

Today seemed to be a relatively quiet session ( by recent standards of comparison) in many markets. An exception might be noted in the Cattle markets where those moved higher on last Friday's friendly Cattle on Feed report and corn, which moved smartly lower as traders gauge the impact of the heavy rains that have fallen across many area of the Farm Belt.

There is some concern about excessive rainfall across a strip that includes parts of South Dakota, southern Minnesota and northern Iowa but I personally feel those concerns are way overrated. Yes, if one has crops in that area, it has been too wet but when you look at the total corn belt, this moisture is producing some very good stands of corn.

Under normal circumstances, these good rains would have produced selling pressure in the soybean market as well, but for some odd reason, that pit, which has taken on quite a schizophrenic nature for the last few weeks, decided to focus on news out of China that showed HSBC's manufacturing purchasing managers index activity at a seven month high at 50.8. This was up from 49.4 in May and the first time that the index has been above 50 this year. Recall that a reading above 50 is considered to be expansionary.

Traders decided that demand was the proper place to therefore focus on the bean equation believing that this will somehow generate more bean demand from China. I fail to see the connection between any of this and soybean demand but hey, bean traders are not the brightest bulbs on the planet. That being said, I have essentially given up on trying to guess which mood those guys in that pit are going to be in on any given day.

Copper definitely liked the reading however (which makes perfect sense given its use in manufacturing) and responded by moving higher today. There looks like there might have been some of those copper/silver bear spreads unwound on the news. The Red Metal has now gained $0.10 pound over the last seven trading sessions. For now, the metal seems to care less about the double and triple counting mess going on over in China. Yellen sparked a rally in the metal that began last week and the overnight Chinese news has done nothing to discourage those who want to be bullish copper.


I should note here that some flash estimate for June's Euro-Zone purchasing managers index are out. Those have come in at 52.8 but the data is still rather mediocre. The French reading has their PMI declining to 48. Germany also registered a bit of a decline to 54.2, which is positive but went in the wrong direction.

Interestingly enough, Markit's survey of that data showed the largest monthly increase in input costs since November. The biggest contributor however to this has been rising crude oil prices. This crude thing really needs to be watched closely, not only over there in the Euro-zone but globally, because at some point traders/investors are going to begin worrying about high crude oil prices choking off and restraining growth rather than contributing to inflationary pressures. I just do not know at which price level the shift will occur.

Let's shift back over to the grains however as we are getting the Monday afternoon Crop Condition ratings.

Corn is rated at 74% Good/Excellent with 21% Fair and 5% Poor. The Good/Excellent rating last week was 76%. The slight drop was due mainly to wetter than normal conditions mentioned above in Iowa, Minnesota, and South Dakota.

Illinois and Indiana corn crops got even better looking however offsetting the slight deterioration above. Last week Illinois was rated 75% Good/Excellent; this week it is rated 78%. Indiana, last week, was rated 72% Good/Excellent. This week it improved to 74% Good/Excellent. Looks to me like a toss up - if the heavy rains ever let up in those few problem areas, and we get some sun in there, that moisture will greatly benefit the crop should the conditions turn hot and dry into July for any reason. You have to consider nitrogen leaching in those excessively wet fields but traders should also be looking at the crop as a whole. That is what they did in today's session and that is the reason that the selling was so heavy. There is nothing on the horizon at this point to provide any evidence that the crop is in any kind of serious harm. Growing conditions thus far look good.

Soybeans are rated at 72% Good/Excellent with 23% Fair and 5% Poor. Last week the Bean crop was rated at 73% Good/Excellent. The slight bit of overall deterioration seen is in the same states noted above where the corn declined.

Soybean planting is 95% complete compared to last year's 91% and the five year average of 94%. Beans are 90% emerged, compared to last year's 79% and the five year average of 87%. The crop is certainly ahead.

The conditions ratings come as no surprise whatsoever to grain traders who have been noting the heavy rains in that one region for a while now. That being said, outside of that one area, it still looks like we are going to harvest a big crop. Now if we can just get through the July 4th holiday without any major heat scares. Beans have to be concerned about August more so than July, but it stands to reason that a benign July, with decent rainfall, is going to put the beans in good shape to enter August. As usual with the grains at this time of year, all eyes are on the weather forecast maps.

Also - briefly - wholesale beef prices just shot up today to being a wee-bit shy of the record set back in March this year. Wholesale pork prices are also knocking on the door of the record set in April. In other words, do not look for any relief in high meat prices this coming July 4th holiday! As mentioned many times here this year, it is going to be later in the 4th quarter and into Q1 2015 before we consumers see some relief from these sky high meat prices. I am watching for signs of "Fresh Fish" stands on the roadsides! If Forrest Gump and his pal Bubba, still had their shrimp fishing fleet, they would both be doing quite well right now as consumers look for alternatives/substitutes. My July 4th party is going to be definitely smaller this year with fewer friends being invited!

A quick look at the mining shares as evidenced by the HUI - Bulls, powered by Yellen's comments from last week (which feeds Dollar weakness and lower rates)  and continued nervousness over events in Iraq, have pushed the miners further away from that 200 level. There does not seem to be too much in the way of overhead resistance on the chart to this move until one nears 244-245, with heavier resistance coming in near round number 250. The mining shares continue to lead the metal higher, which is exactly what one wants to see when gold prices are moving up. Say what one wants to about those mining shares, they still, lead the gold price, whether it is up or it is down.

It should be pointed out that GDXJ chart, has shown a bit more hesitation than its cousin listed above over the last couple of trading sessions. Both indices registered strong gaps higher last Thursday but the junior's index actually has lagged the larger-cap HUI since then. The juniors are obviously more of an indication of risk sentiments towards the overall sector so bulls will want to see the latter index outrunning the HUI. Let's watch the gaps on BOTH of these charts.

Gold meanwhile continues to flirt with $1320 and while it has not been able to push convincingly past this level, it is also not retreating very much either. Some light profit taking by longs is occurring, as well as some shorting from some bigger players, but buyers are also stepping up as the price sets back. Dip buying is something that one wants to see if sentiment has indeed shifted from one of selling rallies to one of buying dips. We'll see how things go the remainde of this week.

Referring back to that Saturday post I put up detailing the very large spec long side exposure to crude oil, I am keeping a close eye on its price action. It has not yet been able to penetrate resistance near $107.50 but looks like it has stalled out here for the time being. I am not yet picking up any negative divergence signals but given the massive long positions in this market, it may not generate one before undergoing a downside correction in price. So much hinges on geopolitical developments and as we have said many times here, such things are very fickle and quite fluid by nature and as such, markets can react violently to changes, or even perceived changes, with little to no warning whatsoever. Sentiment towards this market is very lopsidedly bullish but the trend is still strong. It could very well be a market that is just resting before kicking off another pop higher. I do not know but am watching it very, very closely.

It is noteworthy that crude has been temporarily halted not far from the Fibonacci retracement level noted on the chart. That came in near $107. Today it fell back below there once again. The market has been able to breach the level but cannot maintain itself ABOVE the level. If you notice, it did pretty much the same thing with the 61.8% level in late May and into early June before it was able to keep its footing above that level. That is what I am watching for right now.

I should note however that the XLE stayed firm today, in spite of the lower crude oil price.

One final note - I again wish to thank every single one of my readers out there for your very helpful and constructive comments and kind words in response to my solicitation for your input in regards to this blog. It was so very encouraging.

I have decided to go with the Donate button as a result. Now, all I need to do is to figure out how to do this! 

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