Bond Market update

The long bond has been the beneficiary of safe haven flows over the last few days which from a technical perspective has greatly altered its once decidedly bearish price chart.

This market, which had been held together from the month of December to very early in February by Federal Reserve purchases related to its QE program, broke down sharply earlier this month turning and appeared to be on course to ending a trending move to the downside.

That began to change last week once the market was able to push back into the former congestion zone although it lacked the ability to actually manage a close within that zone. Once the unrest in the middle East began flaring further and crude oil rocketed higher, the bonds staged a huge rally easily penetrating into the zone today pushing towards the level that had effectively contained price for those 7 weeks.

Whether it was the poor auction results of today or whether it was the fact that the rally had made bonds too expensive for the lower yields, they are clearly hesitating at today's peak.

It will be up to the bond bulls to take price convincingly through the upper level near the 121^28 region if they are to make this anything more than a return to another trading range. Failure to do so will more than likely see the bonds retrace a decent portion of this week's gains and then test whether or not we are back to the consolidation pattern once again.

While commodity prices continue their surge higher, this time led by the energy sector, which I might add, I have been commenting on for some time as being the laggard of the sector, one would think that the spectre of inflation would be resulting in a wholesale reguritating of bonds particular at the rate at which the Federal government is cranking them out. So far that has not been the case as the current mentality in the bond pit is more short-sighted and is looking at the spike in crude oil prices and the rest of the liquid energies as a type of tax on the entire economy which will slow down economic growth. I think this is absolutely correct for the short term.

Higher energy costs will impact everyone, regardless of whether individuals or business owners. Profits will suffer unless this cost increase can be passed on to end users and consumers. If businesses are fearful of passing the costs on out of concern with maintaining their customer base, how can they increase hiring if their profits are not growing? The answer is self-evident - they cannot. No hiring - fewer jobs - slower growth - this is what the bonds are currently thinking.

One has to wonder however if at some point they must pass on the increase in costs in order to remain viable. Whether it becomes another fuel surcharge or whatever, if crude oil prices do not retreat, it will certainly occur. Then we get the inevitable cost push inflation that so many of us fear is coming.

First it was food and industrial metals; now it is energy. What else is left? Maybe we could all give up our automobiles and trucks and get horses but they have to be fed and grain is out of sight for those who do not have plenty of pasture land available!  Walking is an option I suppose but as the Dollar shrinks in value, the cost of those imported sneakers starts rising as well.

Daily Market Commentary

Strong upmoves in both gold and silver today with both metals feeding off of the surging oil price and drawing safe haven money their way.

Gold shot up right into its next resistance band on the chart near the $1420 level before setting back some. One can see the bids flowing into the screen and as they abate somewhat, the bullion banks are able to shove price lower with their offers. When the funds engage in another round of buying, the offers get overwhelmed and back up it goes. It is a similar situation in silver.

From a technical perspective, gold has now established $1420 as the last level that needs to be taken out before a run to the lifetime high commences. I am expecting the bullion banks to fight like hell at this level to prevent that but if crude continues its charge higher, and certainly if the unrest in Libya and elsewhere spreads to Saudi Arabia, no amount of BB selling is going to hold $1420 much less prevent a run to the old high. 

Downside support can be expected near the $1400 level with strong support below that back near $1385.

The open interest data from yesterday’s gold and silver trading session is a tale of competing cities. Gold open interest surged over 14,000 with heavy speculative buying competing against heavy bullion bank selling (what else is new). Silver however saw a sharp drop in open interest which plunged a bit over 5,000 with the rollover beginning in earnest as traders move out of the March into the May contract. It is going to be interesting to see how the delivery process unfolds in the March contract as we enter that period next week. The backwardation structure still exists but it seems to be loosening up a bit based on where the first three futures months are trading as I write this.

Back to the silver open interest - it is a bit tricky trying to get a read on the drop off because we had a big wave down in silver yesterday followed by a pretty decent recovery higher. Both longs and shorts were getting out. My guess is that some of the trapped shorts wasted no time in taking advantage of drop from $34 and covered furiously while they had a chance. Tomorrow’s data will give us a bit more insight into what is happening on this front. Trying to get a firm read on this stuff during a rollover period can be tricky at times.

On gold, a surge in open interest of this nature, is indicative of very keen interest on the part of Managed Money again. They look to have gold back in their crosshairs once again and if they keep returning at this kind of rate, it is not going to take them long to push the price up to the recent all time high above $1430.

The HUI is up but fading a bit from its best levels of the session here at midday. Technical indicators show a trending move is underway so dips should be expected to uncover buying support. Moving averages are all positive as well, further reinforcing the bullish picture. The one fly in the ointment is that big ugly downside bar on the chart from yesterday. It needs to be cleared to give the index a shot at running up towards the next resistance level on the chart which comes in near 580.

Well - what do you know - after acting like fools and throwing away all their corn yesterday for no reason other than their damn black boxes told them to, the hedgies are in there today buying it all back again. As I commented yesterday, the unrest in the middle East is serious but it is not going to stop the rest of the world from having to deal with a shortage of corn stocks that had shows no signs of ameliorating. If they could not shut off demand at $7.00 for corn, they sure as hell are not going to shut it off any further by discounting the price another $0.40 /bushel. End users did what we expected them to do - they stepped up and bought all the corn that the hedge funds were throwing away.

Soybeans too recovered in price and the strength in those two markets help to pull wheat up, which is also in low supply but has been dropping because some of the big wheat buying countries are in the middle East and traders are uncertain how the unrest over there might affect the government bids for wheat on the global market.


Cotton has continued its recent sell off from record levels but looks like it might be finding a temporary bottom in here. That market is enough to make all of one's hair turn grey very quickly if you happen to get on the wrong side of it, either moving up or moving down. It is merciless and extremely volatile right now but even after its three day move lower, it is still incredibly expensive meaning all of us will be seeing higher prices for cotton goods, towels and clothing, for some time. That could not come at a better time seeing that we will soon be leaving our firstborn child at the gasoline pump.

Speaking of gasoline - it was up as much as 13 cents a gallon at the wholesale level today at one point and is currently trading over 12 cents higher. Think of how this is going to affect not only all of us consumers at the pump but all the businesses that move freight or packages or anything. The cost to haul our fruit, vegetables, and meat to the grocery store is going to rise not to mention here we go with the airlines once agian as aviation fuel costs rise further. What are they going to do next that they haven't already done  - charge us for wearing clothes on the plane?

Stocks are broadly lower but the S&P is off its worst levels of the session helped no doubt by strength in the energy sector. Technical damage has been severe on the daily chart but the weekly still shows the market in an uptrend. Further weakness will begin to put that into doubt. The market will need to hold the 50 day moving average near 1280 to keep the bulls charging.

Safe Haven Dollar - What Safe Haven?

Dear friends:
I mentioned yesterday in my comments that the Dollar was very weak even in the midst of what was most certainly a day in which risk trades were being pulled off and a rush to safety was underway.

Normally during such events, the Dollar along with the Japanese Yen, tend to be the beneficiaries of such activity. All that the Dollar could do was to end up a few points after spiking initially almost 100 points higher. That sort of activity was very telling and indicates that the safe haven bid for the Dollar was practically non-existent.

Today, with crude oil soaring, the broad equity markets, particulary the Nasdaq, getting slammed, and increasing unrest in the middle East as fear grows about the stability of Saudi Arabia, the Dollar is actually getting sold off. That is most remarkable.

I am thinking that the market is looking at the fragile state of the US economy and voting that rising oil prices are going to hit the US harder than most others. Keep in mind, that this is an "economic recovery" built almost completely around the Fed's massive liquidity injections through its QE program. That liquidty is being eaten up by rising crude oil prices as if by a munching PacMan.

It is as if the Fed is pouring water into a container full of holes punched in it by a awl with the words "crude oil" engraved on the handle.

As I am writing this, I am also noticing that the long bond is fading quite dramatically from its best level of the session. That too will bear watching.

Daily Gold Price Chart

Broad Dollar Index coming under Increasing pressure

The Broad Dollar Index is comprised of a much larger or broad basket of currencies than the USDX which we more commonly reference. In this regards, it is a better representation of the how the Dollar is faring on the world currency markets. Notice how weak it has become and how close it is to challenging a key downside support level.

The inability of the US government to come to grips with its fiscal problems combined with the Fed's asinine Quantitative Easing policies are crushing the Dollar.

4 Hour Silver Chart

Brent Crude hits $110; WTI closes in on $98

The surge in oil is effectively working to negate the stimulus being provided by the Fed's QE purchases. What good does it do to artificially attempt to force long term interest rates lower to keep credit cheap if businesses and consumers are paying out higher and higher costs for energy? Any savings from lower borrowing costs will be eaten up by higher fuel costs.

Both markets hit new 29 month highs today.

Indian Farmers getting on the Silver Bandwagon

Thanks to another reader, David, for sending another obscure but important story our way. A little more demand here, a little more demand there and the next thing you know, a little short squeeze you know where.


23 Feb, 2011, 04.57AM IST, Ram Sahgal & Jayashree Bhosale,ET Bureau
Rich farmers now buy silver bars, not jewellery

MUMBAI/PUNE/KOCHI: Rural India is opening a new chapter in personal finance. Instead of jewellery and utensils, farmers are celebrating their rich pickings from high crop prices by buying traditional favourite silver in coins and bars as the precious metal touches a 30-year top of Rs 50,000 per kilo. That’s no small thing. Rural consumers purchase 60% of over 2,000 tonne of silver India imports annually.

Traders say rural families are convinced silver will continue to spiral and therefore want to buy it in forms that are easy to encash later. Coins and bars, with guaranteed purity, make it easy. In 2010, silver outperformed gold in terms of returns, generating three times more.

You can read the entire story here:

http://economictimes.indiatimes.com/articleshow/7552751.cms?frm=mailtofriend