I have made no secret of the fact that I am most concerned about a wave of credit/debt issues coming to China sooner rather than later. As a matter of fact, Dr. Copper has been accurately forecasting this for longer than many of the so-called expert analysts.
While I view this development as a deflationary force globally, which should pressure certain key commodity markets, it also seems to be one of the factors bringing some safe haven buying into the gold market at the current time.
My own view is that if there were another deflationary wave that might threaten to engulf the world economy again, gold would struggle in such an environment. This view is based off of what happened to the metal during the outbreak of the credit crisis here in the US in the summer of 2008.
However, back then the Dollar was the recipient of strong safe haven flows. Thus far we are not seeing that and that is why gold continues to remain resilient in the face of these deflationary news. For now, gold is benefitting from nervous equity investors seeking a safe haven from unsettling winds that are buffeting the global economy.
Here is the headline from the article I suggest you read:
China's Li Keqiang warns investors to prepare for wave of bankruptcies
World's second largest economy is facing 'serious challenges' and many companies with high debts are being forced to the wall
http://www.theguardian.com/world/2014/mar/13/china-li-keqiang-wans-investors-bankruptcies
Thursday, March 13, 2014
Fed Custodial Accounts Show Big Drop in Foreign Held US Treasuries
I have not commented on this for a long time but every week I do monitor the Federal Reserve's Custodial Accounts to try to get a sense of the amount of US Treasury obligations sitting "in the vault" in New York, held there for other foreign Central Banks.
I have been trying to get a sense of why we are seeing this general US Dollar weakness and have been at a loss to explain, especially of late during this geopolitical crisis over in Ukraine.
Take a look at the following chart of US Treasury Holdings by these Foreign Central Banks that are on deposit there in the Custodial account at the Fed.
Look at the steep plunge that has occurred since the beginning of this year. We have gone from a peak of near $3.021 Trillion to a current $2.855 Trillion. That is a drop of some $166 billion since the high point reached in the middle of December last year. Folks, that ain't exactly chump change.
Why this is occurring is unclear to me at this point but I feel it will be worthwhile to monitor this. As you can see on the same chart, we have seen episodes during which Foreign Central Banks tended to be fairly large sellers of Treasuries only to then have them return as big buyers. Much of course depends on their Balance of Trade with the US and how they sterilize their surpluses.
The steepness of the plunge is the largest I have yet observed on this chart in terms of the amount involved. In percentage terms, the reduction is approximately 5.5%.
I know that there are some that would be more than happy to jump on the bandwagon and attribute this to the outbreak of tensions surrounding the Ukranian crisis and all the chatter ( baseless in my view ) that Russia, even China and some throw in India, are threatening to dump US Treasuries as a way of waging a sort of financial warfare with the US should the West proceed with sanctions against Russia. However, this trend has been going on since the second week of December of last year, long before things flared up over there. Something else seems to be in play here, although I am unclear what that might be.
If global trade is slowing down, as some fear it will ( myself being among them), I can understand falling Dollar amounts being involved and thus a shrinking need for Treasury purchases for sterilization reasons. That would manifest itself, in my view, as a slower rate of purchases but not necessarily a dropping of the Dollar amount of Treasuries held in custody.
If that is the case AND if some of these Treasuries are maturing, and are not being rolled over in the new purchases, that would explain the shrinking number. It does make me wonder if that recent China data showing shrinking exports from that all-important nation, is indeed having an impact on these Custodial Accounts. This might be SOME of the reason behind the recent Dollar weakness.
Making this more interesting is the fact, that over that same period, from December 19,2013 (when the number of Foreign Central Bank held Treasuries peaked) the Fed has purchased $98.6 Billion Treasuries as part of its ongoing QE program. While not the whole amount, it is still a fairly large number of Treasuries ( about 60% of the total reduction noted above).
The USDX closed at 80.75 on the week containing December 16,2013. Today it closed at 79.62. A little more than a full point but it does seem to me that some of this weakness in the greenback can be attributed to some of that reduction in those Treasury Custodial holdings.
As always, the more we learn of the doings across the global economy and the current financial system, the more factors we have to try to account for in attempting to understand the "why" behind changing money flow patterns.
I have been trying to get a sense of why we are seeing this general US Dollar weakness and have been at a loss to explain, especially of late during this geopolitical crisis over in Ukraine.
Take a look at the following chart of US Treasury Holdings by these Foreign Central Banks that are on deposit there in the Custodial account at the Fed.
Look at the steep plunge that has occurred since the beginning of this year. We have gone from a peak of near $3.021 Trillion to a current $2.855 Trillion. That is a drop of some $166 billion since the high point reached in the middle of December last year. Folks, that ain't exactly chump change.
Why this is occurring is unclear to me at this point but I feel it will be worthwhile to monitor this. As you can see on the same chart, we have seen episodes during which Foreign Central Banks tended to be fairly large sellers of Treasuries only to then have them return as big buyers. Much of course depends on their Balance of Trade with the US and how they sterilize their surpluses.
The steepness of the plunge is the largest I have yet observed on this chart in terms of the amount involved. In percentage terms, the reduction is approximately 5.5%.
I know that there are some that would be more than happy to jump on the bandwagon and attribute this to the outbreak of tensions surrounding the Ukranian crisis and all the chatter ( baseless in my view ) that Russia, even China and some throw in India, are threatening to dump US Treasuries as a way of waging a sort of financial warfare with the US should the West proceed with sanctions against Russia. However, this trend has been going on since the second week of December of last year, long before things flared up over there. Something else seems to be in play here, although I am unclear what that might be.
If global trade is slowing down, as some fear it will ( myself being among them), I can understand falling Dollar amounts being involved and thus a shrinking need for Treasury purchases for sterilization reasons. That would manifest itself, in my view, as a slower rate of purchases but not necessarily a dropping of the Dollar amount of Treasuries held in custody.
If that is the case AND if some of these Treasuries are maturing, and are not being rolled over in the new purchases, that would explain the shrinking number. It does make me wonder if that recent China data showing shrinking exports from that all-important nation, is indeed having an impact on these Custodial Accounts. This might be SOME of the reason behind the recent Dollar weakness.
Making this more interesting is the fact, that over that same period, from December 19,2013 (when the number of Foreign Central Bank held Treasuries peaked) the Fed has purchased $98.6 Billion Treasuries as part of its ongoing QE program. While not the whole amount, it is still a fairly large number of Treasuries ( about 60% of the total reduction noted above).
The USDX closed at 80.75 on the week containing December 16,2013. Today it closed at 79.62. A little more than a full point but it does seem to me that some of this weakness in the greenback can be attributed to some of that reduction in those Treasury Custodial holdings.
As always, the more we learn of the doings across the global economy and the current financial system, the more factors we have to try to account for in attempting to understand the "why" behind changing money flow patterns.
Dollar Weakness Continuing
Do you not find it odd to say the least, that the US Dollar has not been able to garner any support in the form of safe haven buying related to the deteriorating crisis over in Ukraine? For how many years have we seen the greenback as the "Go-To" currency during times of financial or geopolitical crises.
Remember 2008? How about the European Sovereign Debt Crisis? How about that rush INTO the Dollar when the idea of a Fed tapering first began to surface.
What happened to all of that?
It sure makes me wonder if part of the issue is tied to the Obama administration's handling of its foreign policy issues.
One thing for sure is occurring however - Treasuries are getting a firm bid out of safe haven plays. That is dropping interest rates and appears to be undercutting the Dollar although one does wonder how a rush into Dollar-denominated Treasuries is not Dollar supportive. There are so many new and different developments in these markets anymore that attempting to understand them all is proving to be an exercise in futility.
What I do know however is that this persistent Dollar weakness, is providing a strong floor of support in the gold market.
In the past, when we did get a general round of Dollar selling, almost as if in inverse lockstep, the commodity sector would march higher as the weakness in the currency would trigger a big macro trade across the sector.
This is not occurring. Copper continues to sink lower and lower and while crude oil is managing a bit of a bounce today, the products are both weak. Individual commodity markets are powering higher ( Coffee, Hogs, Cotton) but the broad-based buying in the sector is lacking. You can see this in the relatively weak performance of silver compared to gold. Silver is following copper today and acting like an industrial metal rather than a monetary metal ( you never know what you are going to get with schizophrenic silver from day to day).
I am very closely monitoring this Dollar chart however. The market is poised right above an important chart support zone near the 79 level basis USDX. If that goes, I expect to see gold reach the psychological $1400 mark.
The ADX is now rising along with the Negative Directional Movement Indicator ( RED LINE) showing the bears are currently in control of the market and a trending move is looking more likely. Again, that will require the support zone to give way but unless the bulls make a firm stand here, they are going to cede complete control of the market to the bear camp.
The HUI looks like it woke up from its slumber of yesterday. It has finally managed to clear 250 which is a real positive. I need to see this index power above 280 for starters to conclude that a stronger bullish uptrend is developing. Still, one has to be happy for the long suffering mining sector bulls who have been mercilessly pummeled for so long. At least their portfolio balances are finally moving higher.
We'll have to see what develops further over in Ukraine but for now, it has certainly spooked equity bulls and that is sending money flows into both gold and Treasuries for the time being.
This Dollar weakness is troubling, very troubling...
Remember 2008? How about the European Sovereign Debt Crisis? How about that rush INTO the Dollar when the idea of a Fed tapering first began to surface.
What happened to all of that?
It sure makes me wonder if part of the issue is tied to the Obama administration's handling of its foreign policy issues.
One thing for sure is occurring however - Treasuries are getting a firm bid out of safe haven plays. That is dropping interest rates and appears to be undercutting the Dollar although one does wonder how a rush into Dollar-denominated Treasuries is not Dollar supportive. There are so many new and different developments in these markets anymore that attempting to understand them all is proving to be an exercise in futility.
What I do know however is that this persistent Dollar weakness, is providing a strong floor of support in the gold market.
In the past, when we did get a general round of Dollar selling, almost as if in inverse lockstep, the commodity sector would march higher as the weakness in the currency would trigger a big macro trade across the sector.
This is not occurring. Copper continues to sink lower and lower and while crude oil is managing a bit of a bounce today, the products are both weak. Individual commodity markets are powering higher ( Coffee, Hogs, Cotton) but the broad-based buying in the sector is lacking. You can see this in the relatively weak performance of silver compared to gold. Silver is following copper today and acting like an industrial metal rather than a monetary metal ( you never know what you are going to get with schizophrenic silver from day to day).
I am very closely monitoring this Dollar chart however. The market is poised right above an important chart support zone near the 79 level basis USDX. If that goes, I expect to see gold reach the psychological $1400 mark.
The ADX is now rising along with the Negative Directional Movement Indicator ( RED LINE) showing the bears are currently in control of the market and a trending move is looking more likely. Again, that will require the support zone to give way but unless the bulls make a firm stand here, they are going to cede complete control of the market to the bear camp.
The HUI looks like it woke up from its slumber of yesterday. It has finally managed to clear 250 which is a real positive. I need to see this index power above 280 for starters to conclude that a stronger bullish uptrend is developing. Still, one has to be happy for the long suffering mining sector bulls who have been mercilessly pummeled for so long. At least their portfolio balances are finally moving higher.
We'll have to see what develops further over in Ukraine but for now, it has certainly spooked equity bulls and that is sending money flows into both gold and Treasuries for the time being.
This Dollar weakness is troubling, very troubling...
Wednesday, March 12, 2014
Western Investment Demand Surfacing for Gold
I have been adamant in stating that without Western-based investment demand for gold, the market cannot mount any sustained rallies. Asian gold buying provides the solid floor of support underneath the gold market but in and of itself, CANNOT maintain gold in a sharp bullish trend move higher. That requires concerted effort by the big Western specs.
My friend John Brimelow's reports on Asian gold demand and premiums/discounts are the best source for gauging demand for the physical metal from that corner of the world but as a gauge of Western demand, I rely on the large gold ETF, GLD in particular. It is the best bellwether we have to determine whether or not we have some determined buying from this crowd.
We have finally seen some signs that this Western-origin demand is surfacing. Monday and Tuesday's number show a 7.5 ton increase in the reported holdings of GLD. With today's strong move higher in the metal, one would expect to see the number increase further. This is a good sign if you are a gold bull and looking for allies. It is a real shame that this Friday's COT report will not pick up the internal positioning of traders in today's move as I would dearly love to know how much FRESH long buying we are getting in comparison to the amount of short covering that is occurring this morning thus far among the speculative side of this market.
Please note that this has nothing to do with gold forward lease rates, backwardation claptrap or any of the wild theories that consistently are birthed out among the gold community. It has everything to do with good old-fashioned, easy-to-understand INVESTMENT DEMAND.
Here is a look at the chart:
The big driver for gold this AM is the announcement last evening of sanctions being prepared by the West against Russia depending on the outcome of the expected vote in the Crimea region this weekend. That has led to strong safe haven flows for the metal.
Further clouding the picture is disappointing economic news out of China.
Combined, both of the above have the equity markets nervous and this is leading to some outflows from stocks into both bonds and gold. You can see the concern in FALLING interest rates again.
Keep in mind what I have said before, gold needs an environment in which REAL interest rates are negative in order to thrive.
Very noteworthy is the fact that the US Dollar has not been able to garner much if any support during this latest round of events. That needs to be monitored.
If this is not enough to add some uncertainty, crude oil is doing what we could expect it to do on poor global economic news - it continues to sink lower. Copper's woes are also continuing.
Today we got (thus far) a big break lower in soybean prices. The Board structure shows a big drop in bean prices for later this year, barring any unexpected weather woes as the big S. American crop comes online. Issues in China and here in the US with the hog PEDV are expected to dent meal demand.
We now have sharply lower energy prices. Heating oil prices have dropped over $0.40/gallon since their spike peak early this year. Unleaded gasoline prices have lost $0.10 this month ( that is great news for cash strapped consumers). Crude is off nearly $7.00 this month thus far.
Thus there is going to be a deflationary tug lower coming from some commodities while others are firm. Meat prices will be higher this spring and into summer. In other words, the outlook from the commodity sector remains mixed. Some sectors are strong; others are weak.
The overall bias in the commodity sector as a whole is one that reflects the above. Notice that prices continue to work back and forth within a downtrending pattern. Lower highs continue but so do higher lows. In other words, there is no clear discernible trend in the sector as a whole at this time. Individual markets are responding to their own set of demand/supply fundamentals. This is how it should be in my humble view. We do not have the wild, reckless, mindless rush head-long into all things tangible that we have seen in the past by the hedge funds of the world. They appear to be more selective this time around ( finally ). Remember, they are net short copper as an example.
That means we will need a continued catalyst in the form of geopolitical uncertainties to keep gold strongly supported. It is NOT going to come from inflationary expectations UNLESS this chart confirms a strong upside breakout on a weekly basis. Those who keep endlessly screaming hyperinflation are NOT looking at the charts.
The US Dollar will therefore be key moving forward. Will it garner some safe haven buying or will it continue to languish? If it breaks down sharply on the charts, we will get some mindless commodity sector buying in expectation of a currency-induced cost push.
Back to gold briefly - the weekly chart shows how today's move higher is playing out on the intermediate term chart. If the bulls can maintain today's strong gains into the close of trading Friday, they have a real shot at taking the metal higher and even setting up a test of $1400. A change in the handle to "14" that could be maintained, would bring in an entirely new set of momentum based buyers. That will be a tall order but if things deteriorate in the Crimea this weekend, it is certainly not out of the question.
As you can, the reason I say it is a tall order right now is due to the following chart. The miners, while the chart has stopped going down, are certainly not lighting the world on fire. They have not managed to make it anywhere near the 280 level and are certainly no where close to closing that big gap below the 300 level. Whether or not one likes it, the miners still tend to lead the bullion (maybe this time will be different) and based on that, it is not exactly a ringing endorsement of gold at this point. The week is still young however so let's keep an eye on things.
My friend John Brimelow's reports on Asian gold demand and premiums/discounts are the best source for gauging demand for the physical metal from that corner of the world but as a gauge of Western demand, I rely on the large gold ETF, GLD in particular. It is the best bellwether we have to determine whether or not we have some determined buying from this crowd.
We have finally seen some signs that this Western-origin demand is surfacing. Monday and Tuesday's number show a 7.5 ton increase in the reported holdings of GLD. With today's strong move higher in the metal, one would expect to see the number increase further. This is a good sign if you are a gold bull and looking for allies. It is a real shame that this Friday's COT report will not pick up the internal positioning of traders in today's move as I would dearly love to know how much FRESH long buying we are getting in comparison to the amount of short covering that is occurring this morning thus far among the speculative side of this market.
Please note that this has nothing to do with gold forward lease rates, backwardation claptrap or any of the wild theories that consistently are birthed out among the gold community. It has everything to do with good old-fashioned, easy-to-understand INVESTMENT DEMAND.
Here is a look at the chart:
The big driver for gold this AM is the announcement last evening of sanctions being prepared by the West against Russia depending on the outcome of the expected vote in the Crimea region this weekend. That has led to strong safe haven flows for the metal.
Further clouding the picture is disappointing economic news out of China.
Combined, both of the above have the equity markets nervous and this is leading to some outflows from stocks into both bonds and gold. You can see the concern in FALLING interest rates again.
Keep in mind what I have said before, gold needs an environment in which REAL interest rates are negative in order to thrive.
Very noteworthy is the fact that the US Dollar has not been able to garner much if any support during this latest round of events. That needs to be monitored.
If this is not enough to add some uncertainty, crude oil is doing what we could expect it to do on poor global economic news - it continues to sink lower. Copper's woes are also continuing.
Today we got (thus far) a big break lower in soybean prices. The Board structure shows a big drop in bean prices for later this year, barring any unexpected weather woes as the big S. American crop comes online. Issues in China and here in the US with the hog PEDV are expected to dent meal demand.
We now have sharply lower energy prices. Heating oil prices have dropped over $0.40/gallon since their spike peak early this year. Unleaded gasoline prices have lost $0.10 this month ( that is great news for cash strapped consumers). Crude is off nearly $7.00 this month thus far.
Thus there is going to be a deflationary tug lower coming from some commodities while others are firm. Meat prices will be higher this spring and into summer. In other words, the outlook from the commodity sector remains mixed. Some sectors are strong; others are weak.
The overall bias in the commodity sector as a whole is one that reflects the above. Notice that prices continue to work back and forth within a downtrending pattern. Lower highs continue but so do higher lows. In other words, there is no clear discernible trend in the sector as a whole at this time. Individual markets are responding to their own set of demand/supply fundamentals. This is how it should be in my humble view. We do not have the wild, reckless, mindless rush head-long into all things tangible that we have seen in the past by the hedge funds of the world. They appear to be more selective this time around ( finally ). Remember, they are net short copper as an example.
That means we will need a continued catalyst in the form of geopolitical uncertainties to keep gold strongly supported. It is NOT going to come from inflationary expectations UNLESS this chart confirms a strong upside breakout on a weekly basis. Those who keep endlessly screaming hyperinflation are NOT looking at the charts.
The US Dollar will therefore be key moving forward. Will it garner some safe haven buying or will it continue to languish? If it breaks down sharply on the charts, we will get some mindless commodity sector buying in expectation of a currency-induced cost push.
Back to gold briefly - the weekly chart shows how today's move higher is playing out on the intermediate term chart. If the bulls can maintain today's strong gains into the close of trading Friday, they have a real shot at taking the metal higher and even setting up a test of $1400. A change in the handle to "14" that could be maintained, would bring in an entirely new set of momentum based buyers. That will be a tall order but if things deteriorate in the Crimea this weekend, it is certainly not out of the question.
As you can, the reason I say it is a tall order right now is due to the following chart. The miners, while the chart has stopped going down, are certainly not lighting the world on fire. They have not managed to make it anywhere near the 280 level and are certainly no where close to closing that big gap below the 300 level. Whether or not one likes it, the miners still tend to lead the bullion (maybe this time will be different) and based on that, it is not exactly a ringing endorsement of gold at this point. The week is still young however so let's keep an eye on things.
Tuesday, March 11, 2014
Bears Win the Copper Battle
Those of you who have been regular readers of this site know that I have been very strongly concerned over the divergence between what the copper market has been doing and what the rest of the commodity markets, but especially the equity markets, have been doing.
Equities have been making new highs as if there isn't a care in the world while copper has been among one of the worst performing commodities across the entire sector.
As I have said before, and will say again, this divergence is so abnormal, so strange and so uncommon an occurrence, that I believe we ignore it at our own peril.
Copper is the quintessential bellwether for global economic activity because of its widespread use in construction, both residential and business/manufacturing activity. If its price is sinking lower, it is signaling that economic growth is lackluster at best and slowing at worst.
With that in mind, look at what has happened since my last post about this.
Yes, it collapsed right through major chart support. I honestly did not think this would happen ( I thought it would bounce ) but the problems with China have gotten the copper market extremely nervous and it is definitely showing its cards. China has been the poster child for what a credit bubble looks like and we are now finally seeing some real evidence that the air is coming out of that bubble.
I must say that any news showing slowing growth in China, credit issues, rising bad loan problems, etc., is not bullish for commodities. You'll notice that silver opted to follow copper lower instead of gold higher. Gold, by the way, is only keeping afloat in my opinion because of geopolitical uncertainties concerning the situation in Ukraine. It is doing what it should be expected to do however during times when many desire a safe haven of sorts. It also is not hurting gold any that the Dollar has been a consistently poor performer of late.
Along the line of weakness in the commodity sectors, check out crude oil, which has lost more than $5.50/bbl over the last few trading sessions. Does this look like a chart showing a strong demand scenario which would be the case if economic growth were solid?
We thus have two key bellwether commodities both showing us signs of real weakness. I tend to rely more on the signals of these two markets ( plus cotton to a certain extent although weather issues can mess with it) to get a snapshot of where economic growth is more likely to go. We all can dismiss equities as a TRUE snapshot of the real economic picture ( thus it is and has been since late 2008 in my view) as that sector is driven almost entirely by yield-hungry hedge funds and large investment funds chasing yield in a near-zero interest rate environment. As said many times here, you cannot fight the tape as a trader and survive very long but that does not mean that the market will actually make any sense at times.
I see this lack of real growth as problematic for any sustained rallies in gold mainly because of my experience with the metal during the credit meltdown back in the summer of 2008. It got sucked down along with the rest of the commodity sector and did not live up to its name as a safe haven. It was not until the Fed announced their first foray into the realm of gargantuan money printing that the metal bottomed along with nearly everything else on the planet I might add.
The problem we have now is this boogerboo named deflation. It is still around to haunt us. This is not to say the entire commodity sector is going to implode lower. There are definitely exceptions to this at the current time, coffee and hogs currently among them, along with soybeans, which refuse to sharply break lower. Corn and wheat are both higher as well but they are being supported due to fears involving Ukranian grain shipments which many fear are going to be impacted at some point due to the conflict over there.
However, I still remain of the opinion that one of the fundamental pillars to a SUSTAINED bull market in gold is a bull market in commodities in general alongside of a weaker US Dollar and Negative REAL interest rates. It is difficult to make the case for any of the latter points with the exception perhaps of the US Dollar, which while it has not collapsed, certainly is weak on the charts.
That tells me to expect more of a grinding type price action in gold rather than the roaring, runaway moonshot which far too many of those in the perma-bull camp are anticipating. Only if we were to get the moonshot across the entirety of the commodity sector would I be able to concur with that theory.
You'll note on the gold chart that the metal is not falling apart like copper is but continues to lurk just beneath a key chart resistance level. Geopolitical uncertainties are making it tough for the bears to get aggressive and the bulls are not going away. The trend is still higher, but in a grinding sort of fashion as the ADX is moving higher but leveling off suggesting the waning of the sharp momentum seen earlier this year. I get the sense of a market reluctantly moving higher but not one in which there is unbounded bullish enthusiasm.
It will be interesting to see what we get this Friday in the COT report as it will cover the action in gold only through today's trading. Will we see more of that hedge fund short covering the dominant feature or will we see new longs outnumbering the short covering this time around?
By the way, don't forget that the COT report showed copper with all major category of large traders, including the Producer/User/Processor/Merchant group all heavily short with the only buying being done by the Swap Dealers and Index Funds. I mentioned on Saturday that struck me as being extremely rare and quite odd - now we finally know the reason don't we?
Equities have been making new highs as if there isn't a care in the world while copper has been among one of the worst performing commodities across the entire sector.
As I have said before, and will say again, this divergence is so abnormal, so strange and so uncommon an occurrence, that I believe we ignore it at our own peril.
Copper is the quintessential bellwether for global economic activity because of its widespread use in construction, both residential and business/manufacturing activity. If its price is sinking lower, it is signaling that economic growth is lackluster at best and slowing at worst.
With that in mind, look at what has happened since my last post about this.
Yes, it collapsed right through major chart support. I honestly did not think this would happen ( I thought it would bounce ) but the problems with China have gotten the copper market extremely nervous and it is definitely showing its cards. China has been the poster child for what a credit bubble looks like and we are now finally seeing some real evidence that the air is coming out of that bubble.
I must say that any news showing slowing growth in China, credit issues, rising bad loan problems, etc., is not bullish for commodities. You'll notice that silver opted to follow copper lower instead of gold higher. Gold, by the way, is only keeping afloat in my opinion because of geopolitical uncertainties concerning the situation in Ukraine. It is doing what it should be expected to do however during times when many desire a safe haven of sorts. It also is not hurting gold any that the Dollar has been a consistently poor performer of late.
Along the line of weakness in the commodity sectors, check out crude oil, which has lost more than $5.50/bbl over the last few trading sessions. Does this look like a chart showing a strong demand scenario which would be the case if economic growth were solid?
We thus have two key bellwether commodities both showing us signs of real weakness. I tend to rely more on the signals of these two markets ( plus cotton to a certain extent although weather issues can mess with it) to get a snapshot of where economic growth is more likely to go. We all can dismiss equities as a TRUE snapshot of the real economic picture ( thus it is and has been since late 2008 in my view) as that sector is driven almost entirely by yield-hungry hedge funds and large investment funds chasing yield in a near-zero interest rate environment. As said many times here, you cannot fight the tape as a trader and survive very long but that does not mean that the market will actually make any sense at times.
I see this lack of real growth as problematic for any sustained rallies in gold mainly because of my experience with the metal during the credit meltdown back in the summer of 2008. It got sucked down along with the rest of the commodity sector and did not live up to its name as a safe haven. It was not until the Fed announced their first foray into the realm of gargantuan money printing that the metal bottomed along with nearly everything else on the planet I might add.
The problem we have now is this boogerboo named deflation. It is still around to haunt us. This is not to say the entire commodity sector is going to implode lower. There are definitely exceptions to this at the current time, coffee and hogs currently among them, along with soybeans, which refuse to sharply break lower. Corn and wheat are both higher as well but they are being supported due to fears involving Ukranian grain shipments which many fear are going to be impacted at some point due to the conflict over there.
However, I still remain of the opinion that one of the fundamental pillars to a SUSTAINED bull market in gold is a bull market in commodities in general alongside of a weaker US Dollar and Negative REAL interest rates. It is difficult to make the case for any of the latter points with the exception perhaps of the US Dollar, which while it has not collapsed, certainly is weak on the charts.
That tells me to expect more of a grinding type price action in gold rather than the roaring, runaway moonshot which far too many of those in the perma-bull camp are anticipating. Only if we were to get the moonshot across the entirety of the commodity sector would I be able to concur with that theory.
You'll note on the gold chart that the metal is not falling apart like copper is but continues to lurk just beneath a key chart resistance level. Geopolitical uncertainties are making it tough for the bears to get aggressive and the bulls are not going away. The trend is still higher, but in a grinding sort of fashion as the ADX is moving higher but leveling off suggesting the waning of the sharp momentum seen earlier this year. I get the sense of a market reluctantly moving higher but not one in which there is unbounded bullish enthusiasm.
It will be interesting to see what we get this Friday in the COT report as it will cover the action in gold only through today's trading. Will we see more of that hedge fund short covering the dominant feature or will we see new longs outnumbering the short covering this time around?
By the way, don't forget that the COT report showed copper with all major category of large traders, including the Producer/User/Processor/Merchant group all heavily short with the only buying being done by the Swap Dealers and Index Funds. I mentioned on Saturday that struck me as being extremely rare and quite odd - now we finally know the reason don't we?
Saturday, March 8, 2014
GLD Holdings Higher
Most of you who are regular readers of this site are aware of my view that Western investment demand for gold can be gauged by tracking the reported holdings in the big gold ETF, GLD. While physical demand out of Asia is critical to the well-being of the gold market, I have maintained that without a correspondingly STRONG Western-based demand, gold cannot mount a sustained rally. Asia buying has bottomed or put a floor under the gold market for many years now but it is Western origin speculative demand that has driven gold strongly higher in the past.
That being said, as of the close of trading Friday, reported gold holdings in GLD are at 805.2 tons. While this is up 1.5 tons from the last numbers (which were steady for the previous 8 trading days) it is still down from this year's peak of 806.25 back on February 13. Interestingly enough, the price of gold at the Comex closed at $1300 on that date. From that point on, it has ground higher before hitting a wall near the $1350 level. Yet the tonnage is lower.
What to make of this?
My view is that gold's recent rally has been driven PRIMARILY by short covering ( note - I am not using the word, 'solely' ).
Here is a chart drawn from this week's Commitment of Traders report:
Let's start at the date of maximum hedge fund outright short positions. That occurred the week containing December 3, 2013 where the total number of outright short positions, including futures and options registered at 79,631. As of this Tuesday, that position has been drastically drawn down to where it now stands at 26,321, a reduction of 53,310. On that date, gold closed at $1220.80.
Now let's look at the hedge fund outright long positions. The lowest number of those occurred during the week containing Christmas Eve at 104,754. Since that time, this category has now grown to 144,562 as of this past Tuesday, an increase of 39,808.
Can you see what is taking place? Short covering continues to outnumber the fresh new buying in this market. Until I see some evidence of this changing, I cannot be too optimistic for the possibility of an EXTENDED move higher in gold.
What seems to be happening with the metal right now is that certain events, more specifically, two previous payrolls reports and a geopolitical event, namely, the outbreak of tensions and strife in Ukraine, have spooked the bears into covering shorts.
Until yesterday, Friday, the last two payrolls report, came in much weaker than expected by the market. Those reports immediately fanned the idea that the planned tapering activity by the Fed was going to be put on hold, especially with the dovish Yellen now at the helm. With that came the idea that Fed was also not going to raise short term interest rates any time soon. The result was FALLING longer term interest rates and a corresponding weakness in the US Dollar. With that, money came into gold while shorts covered but it was mainly nervous shorts wanting no part of getting steamrolled by the onset of a new "buy tangibles" wave in anticipation of Dollar weakness.
Throw on top of that the fact that fears of escalation in the Ukranian situation caused a panic run into the metal and once again the bears were given no reason to get aggressive in selling. Quite the contrary, they opted to head for the hills first and ask questions later. What they are now doing is watching to see how events are going to unfold over in that volatile region.
The big mover on Friday (yesterday ) however was not Ukraine, but rather the payrolls report. While not exactly a overwhelming display of healthy job growth, it was better than the previous two reports. Also aiding the report was an upward revision in the prior months of 25,000.
But here is an interesting item in that payrolls report - the number of "not at work" due to "bad weather" was 626,000 compared to 253,000 in February 2013 and 200,00 in February 2012. ( Data courtesy of Dow Jones ).
That shifted the psychology in the market to one of " we told you the poor job numbers were due in large part to the record cold and frigid weather conditions experienced over at least half of the continental United States". In other words, traders are coming around to the view that while the payrolls numbers are certainly not exactly setting any records, they were also not as bad as some were fearing and that the recent poor showings were weather-related and thus NOT THE START of a new trend.
Now, it remains to be seen what we are going to get in subsequent payrolls reports but it will be very important to closely monitor those reports as the more seasonal weather slowly sets in. If the numbers DO NOT show strong improvement, then traders will re-evaluate their new attitude as of this Friday and shift back to ideas that the tapering plans of the Fed are going to be on hold. If the numbers do show steady, albeit very slow upward growth, then expect the Dollar to garner some support ( it is also sitting right near some very strong chart support ) and US interest rates ( longer term ) to stay firm and creep higher. Remember the Fed has emphatically stated that it is going to be "DATA DEPENDENT" ( their words, not mine ) when it comes to their approach to tapering and to short term interest rates.
This will tend to work against gold, especially if the US equity markets continue to soar to new heights. Now they are talking 1900 in the S&P!
Where this leaves us is simple - from a technical chart perspective, the near term technicals have improved in gold. This is keeping fund computers buying dips and preventing that category from getting aggressive on the short side. As long as any important downside support levels hold firm, gold should remain in a sideways type of pattern as the geopolitical uncertainties with Ukraine prevent bears from getting aggressive. Any sign that events over there are settling down and this market is vulnerable to a wave of long liquidation. On the other hand, if for any reason things flare up further, then gold will see further short covering that might be strong enough to take it up through the cap near the $1,350 region. It would have to clear $1,365 or so to have at least a chance of reaching the psychologically important $1400 level.
Incidentally, before closing this post, I want to note once again the chart of copper.
This chart continues to amaze me to no end - with equities soaring into record territory seemingly every week, copper is sending the exact opposite signal in regards to the health of the overall global economy.
Note the Directional Movement indicator show the bears in solid control of this market. Also, the ADX line is beginning to rise as the price descends indicating the increasing possibility of a trending move LOWER. Note - for that to occur copper would have to close below the $3.00 level in my opinion however. For now, it is in a sideways to lower pattern.
The COT report for copper is also very revealing as it shows a continued build in SHORT positions by the large hedge funds. In addition to that however, what I find EXTREMELY fascinating is the positioning of the other players in the copper market.
The big commercial category consisting of the Producer/Merchant/Processor/End User category is also a LARGE NET SHORT by more than 2:1! The Other Reportables category is also NET SHORT by 2:1 and the small trader, the general public is net short by nearly 6,000 contracts. The entirety of the long side interest in the copper market is being held by only one category of traders and that is the Swap Dealers, some of those no doubt being index funds which are oftentimes lumped into that category for reporting purposes. This is not something which one sees very often. But regardless, the fact that a combination of both commercials and speculators are short copper is astonishing given what is going on in the equity markets. It could be some are looking at credit issues surfacing in China and are bearish as a result.
I said all that to say this - it makes me suspect this commodity sector rally we have been seeing. Some of the individual commodity markets do have strongly bullish supply/demand scenarios and thus their price rise is justifiable but if any of this buying is based on "hyperinflation" fears as some are suggesting, they are way off base because Copper would be leading that charge higher, not attracting the kind of determined selling that it has been getting of late.
Let's continue to watch this closely...
That being said, as of the close of trading Friday, reported gold holdings in GLD are at 805.2 tons. While this is up 1.5 tons from the last numbers (which were steady for the previous 8 trading days) it is still down from this year's peak of 806.25 back on February 13. Interestingly enough, the price of gold at the Comex closed at $1300 on that date. From that point on, it has ground higher before hitting a wall near the $1350 level. Yet the tonnage is lower.
What to make of this?
My view is that gold's recent rally has been driven PRIMARILY by short covering ( note - I am not using the word, 'solely' ).
Here is a chart drawn from this week's Commitment of Traders report:
Let's start at the date of maximum hedge fund outright short positions. That occurred the week containing December 3, 2013 where the total number of outright short positions, including futures and options registered at 79,631. As of this Tuesday, that position has been drastically drawn down to where it now stands at 26,321, a reduction of 53,310. On that date, gold closed at $1220.80.
Now let's look at the hedge fund outright long positions. The lowest number of those occurred during the week containing Christmas Eve at 104,754. Since that time, this category has now grown to 144,562 as of this past Tuesday, an increase of 39,808.
Can you see what is taking place? Short covering continues to outnumber the fresh new buying in this market. Until I see some evidence of this changing, I cannot be too optimistic for the possibility of an EXTENDED move higher in gold.
What seems to be happening with the metal right now is that certain events, more specifically, two previous payrolls reports and a geopolitical event, namely, the outbreak of tensions and strife in Ukraine, have spooked the bears into covering shorts.
Until yesterday, Friday, the last two payrolls report, came in much weaker than expected by the market. Those reports immediately fanned the idea that the planned tapering activity by the Fed was going to be put on hold, especially with the dovish Yellen now at the helm. With that came the idea that Fed was also not going to raise short term interest rates any time soon. The result was FALLING longer term interest rates and a corresponding weakness in the US Dollar. With that, money came into gold while shorts covered but it was mainly nervous shorts wanting no part of getting steamrolled by the onset of a new "buy tangibles" wave in anticipation of Dollar weakness.
Throw on top of that the fact that fears of escalation in the Ukranian situation caused a panic run into the metal and once again the bears were given no reason to get aggressive in selling. Quite the contrary, they opted to head for the hills first and ask questions later. What they are now doing is watching to see how events are going to unfold over in that volatile region.
The big mover on Friday (yesterday ) however was not Ukraine, but rather the payrolls report. While not exactly a overwhelming display of healthy job growth, it was better than the previous two reports. Also aiding the report was an upward revision in the prior months of 25,000.
But here is an interesting item in that payrolls report - the number of "not at work" due to "bad weather" was 626,000 compared to 253,000 in February 2013 and 200,00 in February 2012. ( Data courtesy of Dow Jones ).
That shifted the psychology in the market to one of " we told you the poor job numbers were due in large part to the record cold and frigid weather conditions experienced over at least half of the continental United States". In other words, traders are coming around to the view that while the payrolls numbers are certainly not exactly setting any records, they were also not as bad as some were fearing and that the recent poor showings were weather-related and thus NOT THE START of a new trend.
Now, it remains to be seen what we are going to get in subsequent payrolls reports but it will be very important to closely monitor those reports as the more seasonal weather slowly sets in. If the numbers DO NOT show strong improvement, then traders will re-evaluate their new attitude as of this Friday and shift back to ideas that the tapering plans of the Fed are going to be on hold. If the numbers do show steady, albeit very slow upward growth, then expect the Dollar to garner some support ( it is also sitting right near some very strong chart support ) and US interest rates ( longer term ) to stay firm and creep higher. Remember the Fed has emphatically stated that it is going to be "DATA DEPENDENT" ( their words, not mine ) when it comes to their approach to tapering and to short term interest rates.
This will tend to work against gold, especially if the US equity markets continue to soar to new heights. Now they are talking 1900 in the S&P!
Where this leaves us is simple - from a technical chart perspective, the near term technicals have improved in gold. This is keeping fund computers buying dips and preventing that category from getting aggressive on the short side. As long as any important downside support levels hold firm, gold should remain in a sideways type of pattern as the geopolitical uncertainties with Ukraine prevent bears from getting aggressive. Any sign that events over there are settling down and this market is vulnerable to a wave of long liquidation. On the other hand, if for any reason things flare up further, then gold will see further short covering that might be strong enough to take it up through the cap near the $1,350 region. It would have to clear $1,365 or so to have at least a chance of reaching the psychologically important $1400 level.
Incidentally, before closing this post, I want to note once again the chart of copper.
This chart continues to amaze me to no end - with equities soaring into record territory seemingly every week, copper is sending the exact opposite signal in regards to the health of the overall global economy.
Note the Directional Movement indicator show the bears in solid control of this market. Also, the ADX line is beginning to rise as the price descends indicating the increasing possibility of a trending move LOWER. Note - for that to occur copper would have to close below the $3.00 level in my opinion however. For now, it is in a sideways to lower pattern.
The COT report for copper is also very revealing as it shows a continued build in SHORT positions by the large hedge funds. In addition to that however, what I find EXTREMELY fascinating is the positioning of the other players in the copper market.
The big commercial category consisting of the Producer/Merchant/Processor/End User category is also a LARGE NET SHORT by more than 2:1! The Other Reportables category is also NET SHORT by 2:1 and the small trader, the general public is net short by nearly 6,000 contracts. The entirety of the long side interest in the copper market is being held by only one category of traders and that is the Swap Dealers, some of those no doubt being index funds which are oftentimes lumped into that category for reporting purposes. This is not something which one sees very often. But regardless, the fact that a combination of both commercials and speculators are short copper is astonishing given what is going on in the equity markets. It could be some are looking at credit issues surfacing in China and are bearish as a result.
I said all that to say this - it makes me suspect this commodity sector rally we have been seeing. Some of the individual commodity markets do have strongly bullish supply/demand scenarios and thus their price rise is justifiable but if any of this buying is based on "hyperinflation" fears as some are suggesting, they are way off base because Copper would be leading that charge higher, not attracting the kind of determined selling that it has been getting of late.
Let's continue to watch this closely...
Friday, March 7, 2014
The Friday Job's Curse
Yes, the dreaded curse has struck the yellow metal once again on a payrolls Friday. These volatile numbers are big market movers and today they did so again as the number came in better than expected. Keep in mind that gold has drawn strong buying support from the PREVIOUS TWO reports which their much worse than expected job hirings. Those reports gave rise to the thinking that the Fed, which by its own admission is going to be heavily relying on economic data to determine its approach to the tapering plans, was going to either slow the rate of tapering or cut it altogether.
I mentioned at that time that the weather was having a big impact on the data. The cold was a RECORD and that cannot be ignored as it makes sense that it was going to have at least some impact on those affected by it. Thus, there was a great deal of uncertainty surrounding these numbers. To draw too dogmatic of a conclusion from them was therefore unwise and premature. Even after today's numbers, I still want to see the next month's numbers to see if we are going to get a trend or these reports are just anomalies.
But for RIGHT NOW, those who were leaning heavily on the idea that the payrolls situation was quickly deteriorating and that the Fed was on hold were caught leaning way too hard to one side and got blindsided. The result - a plethora of sell orders from panicked longs.
This is what I meant when I said to be extremely careful if you cannot stop yourself from trading the metal on the Comex right now. It is just so volatile because no one knows for sure exactly what the Fed may or may not do. Everyone is guessing based on their take on the various economic reports. If they get it right - they are heroes; if they get it wrong - they are zeroes.
The mechanics of this are really quite simple - interest rates went back on the Ten Year - that brought some support ( buying support which has been missing of late) into the US Dollar and this derailed the metals.
I am also noting that once again Dr. Copper is getting hammered lower due to credit-related fears out of China. I have been beating that dead horse for some time now but copper has not been confirming the move higher across a large segment of the commodity markets. It is down nearly 4% today alone crashing through chart support in the process. Unless is can stage a quick recovery prior to the close of trading today, it is on course to put in the lowest weekly close since July of last year...
Keep this in mind particularly when you read the silver perma bulls talking about price manipulation. Silver is both a precious metal and an industrial metal and I have rarely seen it moving higher when copper is sinking lower.
More later
I mentioned at that time that the weather was having a big impact on the data. The cold was a RECORD and that cannot be ignored as it makes sense that it was going to have at least some impact on those affected by it. Thus, there was a great deal of uncertainty surrounding these numbers. To draw too dogmatic of a conclusion from them was therefore unwise and premature. Even after today's numbers, I still want to see the next month's numbers to see if we are going to get a trend or these reports are just anomalies.
But for RIGHT NOW, those who were leaning heavily on the idea that the payrolls situation was quickly deteriorating and that the Fed was on hold were caught leaning way too hard to one side and got blindsided. The result - a plethora of sell orders from panicked longs.
This is what I meant when I said to be extremely careful if you cannot stop yourself from trading the metal on the Comex right now. It is just so volatile because no one knows for sure exactly what the Fed may or may not do. Everyone is guessing based on their take on the various economic reports. If they get it right - they are heroes; if they get it wrong - they are zeroes.
The mechanics of this are really quite simple - interest rates went back on the Ten Year - that brought some support ( buying support which has been missing of late) into the US Dollar and this derailed the metals.
I am also noting that once again Dr. Copper is getting hammered lower due to credit-related fears out of China. I have been beating that dead horse for some time now but copper has not been confirming the move higher across a large segment of the commodity markets. It is down nearly 4% today alone crashing through chart support in the process. Unless is can stage a quick recovery prior to the close of trading today, it is on course to put in the lowest weekly close since July of last year...
Keep this in mind particularly when you read the silver perma bulls talking about price manipulation. Silver is both a precious metal and an industrial metal and I have rarely seen it moving higher when copper is sinking lower.
More later
Thursday, March 6, 2014
The Draghi Party
Early in today's session ECB President Draghi threw the Euro bulls a nice bone to chew on and with that, it was off to the races for that currency with the US Dollar and the Japanese Yen both getting ceremonially dumped.
If that was not enough for the US Dollar, one of the Fed governors, Mr. Dudley, made his way to the microphones to state that the "Fed has a long time before raising short term rates". STRIKE TWO for the DOLLAR.
STRIKE THREE seemed to come in the form of ????. Perhaps it was Dudley's comment about the tapering being data dependent ( recent data has not exactly been resplendent). He did go on to say however that the threshold to change the tapering plans would be "pretty high".
Either way, today was one of those days in which certain commodity sectors were seeing big inflows of hot money. Soybeans continue charging higher with corn getting in on the action. Already there is chatter that the planting season here in the US is going to be delayed on account of the abnormally cold weather ( where is that damned global warming when we really need it?).
Gold garnered support from the surging Euro but was also aided by the vote out of the Crimean Parliament which wants to put to a vote the idea of breaking away from Ukraine and becoming a part of the Russian sphere. Some are viewing this as an escalation in the drama over there and that of course brings a bid into gold.
Like I said the other day, if you have the uncontrollable urge to actually trade the yellow metal at the Comex either lock yourself in vault somewhere away from a computer screen or at least trade small in size. This market is very fickle right now. Just be careful and do not get reckless or listen to all the hype currently coming out of certain segments of the gold community.
I put far more credit on what is happening to the Euro and the Dollar than I do to the ridiculous talk of a nuclear war. If the Euro can clear a strong overhead resistance zone near the 1.39 level while the Dollar CANNOT hold support between 79.50 - 79.00 on the USDX, gold should be able to breach overhead chart resistance near the $1,360 zone. It would have to best $1,375 but if it does, should be able to set up at least a test of psychological resistance at the $1,400 level.
Dip buying has continued to occur in gold with the situation in Ukraine keeping bears nervous but in my mind, the big driver has been the weakness in the Dollar and the continued move higher across certain key commodity markets. Strangely - and I have yet to make any sense out of this - Copper continues to go absolutely NO WHERE. It baffles me to no end to see this key industrial commodity NOT LEADING the sector. Either copper is going to have to make a sudden move higher or I am concerned that we are going to see some big retracements in the commodity sector at some point. There is a lot of hot money flooding into the sector but a great deal of it is purely technical in nature as momentum funds are buying. The problem is that unless there is a strong fundamental underpinning to some of this, once the upside momentum plays itself out, prices could get hit hard as the longs bail out.
The key, at least in my mind, will be whether or not the US Dollar can find its friends again. That is going to take some strong economic data soon. Perhaps it will be a payrolls number but one thing is for sure, the more traders are convinced that the Fed is not going to move on the short term interest rate front any time soon, the more the gigantic specs are going to play their carry trade and shove certain commodity sectors higher.
More later if time permits.... busy, busy week....
If that was not enough for the US Dollar, one of the Fed governors, Mr. Dudley, made his way to the microphones to state that the "Fed has a long time before raising short term rates". STRIKE TWO for the DOLLAR.
STRIKE THREE seemed to come in the form of ????. Perhaps it was Dudley's comment about the tapering being data dependent ( recent data has not exactly been resplendent). He did go on to say however that the threshold to change the tapering plans would be "pretty high".
Either way, today was one of those days in which certain commodity sectors were seeing big inflows of hot money. Soybeans continue charging higher with corn getting in on the action. Already there is chatter that the planting season here in the US is going to be delayed on account of the abnormally cold weather ( where is that damned global warming when we really need it?).
Gold garnered support from the surging Euro but was also aided by the vote out of the Crimean Parliament which wants to put to a vote the idea of breaking away from Ukraine and becoming a part of the Russian sphere. Some are viewing this as an escalation in the drama over there and that of course brings a bid into gold.
Like I said the other day, if you have the uncontrollable urge to actually trade the yellow metal at the Comex either lock yourself in vault somewhere away from a computer screen or at least trade small in size. This market is very fickle right now. Just be careful and do not get reckless or listen to all the hype currently coming out of certain segments of the gold community.
I put far more credit on what is happening to the Euro and the Dollar than I do to the ridiculous talk of a nuclear war. If the Euro can clear a strong overhead resistance zone near the 1.39 level while the Dollar CANNOT hold support between 79.50 - 79.00 on the USDX, gold should be able to breach overhead chart resistance near the $1,360 zone. It would have to best $1,375 but if it does, should be able to set up at least a test of psychological resistance at the $1,400 level.
Dip buying has continued to occur in gold with the situation in Ukraine keeping bears nervous but in my mind, the big driver has been the weakness in the Dollar and the continued move higher across certain key commodity markets. Strangely - and I have yet to make any sense out of this - Copper continues to go absolutely NO WHERE. It baffles me to no end to see this key industrial commodity NOT LEADING the sector. Either copper is going to have to make a sudden move higher or I am concerned that we are going to see some big retracements in the commodity sector at some point. There is a lot of hot money flooding into the sector but a great deal of it is purely technical in nature as momentum funds are buying. The problem is that unless there is a strong fundamental underpinning to some of this, once the upside momentum plays itself out, prices could get hit hard as the longs bail out.
The key, at least in my mind, will be whether or not the US Dollar can find its friends again. That is going to take some strong economic data soon. Perhaps it will be a payrolls number but one thing is for sure, the more traders are convinced that the Fed is not going to move on the short term interest rate front any time soon, the more the gigantic specs are going to play their carry trade and shove certain commodity sectors higher.
More later if time permits.... busy, busy week....
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