Gold Nearing an Important Inflection Point

Gold was once again knocked for a loop in today's session as Ukranian issues continue to fade from traders' minds. There is not much to add to my weekend post noting the various time frames on the gold charts but suffice it to say for now, that gold is nearing an important inflection point centered around the $1280 level.

The market is working lower in the range noted within the rectangle with the -DMI back above the +DMI indicating the bears are back in control of the market. The daily chart is not, as of yet, reflecting a trend lower, just a move back down within a broad range.

The stochastics indicator is down in the oversold region so if this market is going to bounce, it had better do so now. If the bears can take it down through $1280 and hold its head down under the level, they run an increasing chance of dropping it back down to another test of $1200. They will first have to crack the $1260 level however as support is layered in approximately $20 levels from $1280 on down.

For the bulls to have a chance at salvaging this mess, they need to recapture $1320 at a bare minimum, especially with the mining shares signaling no help whatsoever at this point.

The grains got a shot in the arm today from the USDA numbers which got corn bulls all revved up on ideas of less acreage going to corn this planting season and more going to soybeans. That and they found some more critter mouths to feed. That did not bother the beans one bit however, ( old crop ) as it was off to the races with them to the upside. USDA found some more export business and plugged it in drawing down that carryover even more.

There is already talk of cooler, wetter weather putting a crimp on the field work and resulting in some delays in certain areas of the Corn Belt. That should tend to push more acreage to beans, especially with soybean prices refusing to break down. Corn (old crop ) topped $5.00 once again to the dismay and frustration of cattlemen and hog and poultry producers who cannot seem to get a break when it comes to lowering their feed costs. Blame it on that damned ethanol, which I am coming more and more to despise. When 4 out of every 10 rows of corn ends up getting burned in our gasoline tanks, no wonder livestock and poultry producers are angry. No worries however, we all end up paying for it at the meat counter. Yep - whatever makes the environmental whackos happy in their quest to counter their boogieman of global warming.

Yellen made some comments today which were in line with her dovish views but traders are convinced, whether rightly or wrongly, that the economic data is going to improve with the warmer weather and that the Fed will remain on track with its tapering plans, her comments notwithstanding.

Hogs did what I expected them to do and that was to believe the Hogs and Pigs report. They did come off the limit down move however so there might be a contingent who are skeptical of that Friday report. I am one of those. We will be back to watching slaughter data and other fundamental inputs to gauge whether or not the pencil pushers over at USDA got it right or not. I am convinced that they will have to issue a revision to the numbers at the end of June when the next quarterly report comes out to bring it into line with the weekly slaughter data.

Priorities

With all that is happening as the fallout from the oxymoronically named "Affordable Care Act" increases, with the complete breakdown of a coherent American foreign policy abroad, and with the polls showing a growing majority of Americans believe the country is on the wrong track, out comes our imperious leader with solutions to a real issue that no doubt ranks right up there at the top of those things which the citizenry is most concerned with - YEP - you guessed it... cow farts.

Boy howdy is that real leadership or what?

White House looks to regulate cow flatulence as part of climate agenda

Read more: http://dailycaller.com/2014/03/28/white-house-looks-to-regulate-cow-flatulence-as-part-of-climate-agenda/#ixzz2xSnFUxFX

USDA March 2014 Quarterly Hogs and Pigs Report

As some of you know who have read this blog for some time now, my area of expertise in the commodity markets is particularly in the livestock markets, where I cut my teeth as a trader many, many years ago and where I still tend to concentrate my time and energy.

That being said, I wanted to give you a perfect illustration of how our government agencies that distribute data to the marketplace can be consistently wrong and rarely if ever are taken to task for so doing.

Some of you are aware of a virulent disease has been affecting the US hog herd. It is called Porcine Epidemic Diarrhea or PED for short. This virus has a mortality rate somewhere north of 90% on young piglets. Adult pigs can contract the disease, which by the way does not impact the meat in any way or render it unfit for human consumption, but they generally can be treated and recover. The baby piglets however are usually lost however due to fluid loss from severe dehydration and other associated effects of the virus.

Hog and pork prices have been soaring this year as the disease has devastated the herd here in the US. Heading into this report on Friday  (yesterday) estimates of losses due to the virus were ranging on average of up to 6%. Other private firms had forecasted losses upwards of 10% with some running as high as 30%.

Here is where things get interesting. The March report from USDA yesterday showed losses no where near the average of analyst estimates. As a matter of fact, the report showed the impact from the disease was not nearly as widespread as most in the industry expected.

The problem is that all of the recent hard data that we have been getting completely contradicts the USDA numbers from yesterday.

At the risk of boring the reader with the data breakdown ( I am hopeful that some of my readers are hog producers however ) here is what the pencil pushers at the USDA gave us when it comes to the various weight categories.

Market hogs under 50 pounds  96%
50 - 119 pounds                     97%
120 - 179 pounds                   97%
180 pounds and over               95%

A quick guide to interpreting this: this is the percentage of hogs compared to the previous year at the same time. In other words, the number of 50 pound and under pigs is 4% lower than last year at the same time.

Hogs are generally slaughtered when their weight reaches near 270 - 275 pounds ( this will vary considerably but is a good average ). Since it takes time for hogs to grow to this weight, one can generally gauge the available supply of market ready hogs that will be coming in any one period by looking at the weight numbers and calculating the time for the hogs in that bracket to reach maturity.

Now, let's take a closer look at this and see where things go awry with the USDA.

Many of the readers here are precious metals guys and could care less about pigs or cattle or corn or beans, etc. But laying that aside for the moment, if you look at these numbers not knowing anything else, what would you say that the MAXIMUM REDUCTION in the number of slaughter ready hogs is going to be over the next few months according to the USDA? Answer - 5%. If you said this, go to the head of the class. There will be a period during which one could look for the reduction in the number of slaughter ready hogs to be down nearly 3% from last year and another period in which it will down nearly 4%. But the maximum reduction that the market can expect, based on USDA's numbers is 5%.

Here is where the problem begins... this same USDA also issues, every single week, week in and week out, the total number of hogs that are under inspection by USDA inspectors. The report is usually dated two weeks behind us but it is the industry standard for keeping track of the number of cattle and hogs killed for meat production here in the US. It is based off of hard, on-the-ground data

For the first two weeks of March alone, guess where hog slaughter numbers are running in comparison to last year... The first week they were down 5.75%. The second week they were down 7.77% and estimates over the third and fourth week continue to run near 7%! In other words, we are already EXCEEDING the maximum reduction in hog slaughter numbers that USDA just told us to expect in their report this Friday.

What accounts for this glaring difference? Answer - The Quarterly Hogs and Pigs Report is based off a census taken by USDA of various hog producers. It is essentially a snap shot of the industry. USDA contacts various hog producers, both large and small, and surveys them to get their intentions, numbers, etc. and then uses that data to put together the quarterly report. This is crucial - they do not survey every single hog producer out there although they do the best that they can with the manpower that they have. It is a snapshot but it is an incomplete snapshot.

On the other hand, the weekly slaughter data is tabulated from real live data every single week. We know exactly how many hogs were killed on a single given day based off of those reports. There is no extrapolating - it is actual data.

In effect, what we have is a contrast between facts and estimates drawn from incomplete data.

If that were not bad enough, this is the very same USDA that a mere 3 months ago, in their December Quarterly Hogs and Pigs Report gave us the following weight breakdowns:

Market Hogs under 50 pounds      99%
50 - 119 pounds                        100%
120 - 179 pounds                       100%
180 pounds and over                  100%

That report essentially told the market that any sort of impact from the PED virus was going to be minimal. Take a look at the following continuous hog chart and tell me, that USDA was anywhere near to being close as to impact from the disease!

Herein lies the crux of the problem. Hog producers and other commercial interests who need to institute risk management programs to secure profits and mitigate price risk depend on the accuracy of the data being furnished to them by these various government agencies, in our case here, USDA. Any hog producer who three months ago, used the data given them out of the USDA December Hogs and Pigs report to begin implementing hedges for their expected hog production and put on those short positions has been absolutely obliterated as a result. They have forfeited a large profit ( a once in a lifetime profit I might add ) that could have been theirs had the data actually reflected what the true reality of the impact of the disease was going to be. Not only that, they have been met with large margin calls. Failure to meet those necessitated them having to close out the hedge incurring a large paper loss in the process. All this because the data that came out of the USDA was inaccurate. Please note that I am being kind here by employing the word, "inaccurate". What comes to mind is more akin to horse excrement.

So here we are, some three months later than the last USDA report, and that agency has had to come back and issue another revision to try to bring their previous data more into line with the reality of what has occurred on the ground. Never mind the fact that many producers have been seriously harmed financially as a result. Yet for some bizarre reason, this same USDA, issuing another Hogs and Pigs report, with data that is already at odds with other data from within that same agency, is lent credibility by the various analysts and such in the industry. My question is "WHY?"

Had the agency actually picked up something, anything, of the impact that this disease was going to have three months ago, an impact that many of us said was indeed going to be the case, then, and only then, would I lend it some credibility. But for an agency to miss the mark by such a large extent three months ago, to now come out with yet another report, that is at such great odds with the majority of estimates from many other seasoned and experienced traders and analysts, is further proof that the data coming out of it is next to useless.

Some will argue that it is what it is and that the data is what we have to go by until shown otherwise, but that is missing the point entirely. The point being that it is easy for USDA to come back AFTER THE FACT and issue their revisions but that does no good to those who have made marketing or risk management decisions based off of data that has a notorious track record of being so far off of the mark.

One last thing, here is a chart, courtesy of the fine folks over at Urner Barry (drawn from the American Association of Swine Veterinarians ), of the number of reported and diagnosed incidents of the PEV virus. As you can clearly see, the number has increased sharply since the fall of last year. It was in late September/early October that we began to see the incidents of new cases really pick up -  Impact from the disease will not be seen until about 6 months later. Look at the huge spike in cases in late January which continued to increase until it seems to have topped out in late February. The case number TRIPLED from the September/October levels.

Again I ask you reader, without knowing much if anything about the livestock markets, if the impact from the disease is not generally felt until about 6 months later, during what time frame would you expect to see the greatest impact on the number of slaughter ready hogs this year? Answer - in the late June - August time frame. However, if we base our view on the data that the USDA just gave us this past Friday, the worst impact from the disease is already behind us...

The reason given is that USDA suggested that more hog producers farrowed their sows during the December 2013 - February 2014 period than the market expected ( + 3%). That may be true, but even if it is, and I have my own reasons for doubting this, it still does not deal with the rapid spike in the number of cases breaking out during the depth of winter ( Tripled the case during the fall) nor does it explain how slaughter can currently be down by 7% already when USDA tells us that 5% is the absolute maximum reduction we can expect.

I suspect that the USDA is going to be once again, way off base with their numbers and that by the time the next Quarterly Hogs and Pigs report is released at the end of June, they will once again be revising their numbers.

We'll come back and revisit this at the end of June - of that you can be sure.

Quod est demonstratum.

Weekend Gold Analysis

To begin these comments, let's take a look at the hedge fund positioning in the Comex gold futures through Tuesday of this past week. April gold closed at $1311.40 that day having closed at $1359 a week earlier ( Tuesday, March 18). That is a loss of $48 over the reporting period that the CFTC employs.

In looking at the chart ( a comparison of the hedge fund NET positions against the price of the metal ) you can see what happened. A combination of LONG LIQUIDATION and NEW SHORTING produced a drop of some 18,000 contracts ( futures and options combined ) in the overall net long positioning of the group of traders. The Blue Line is the hedge fund net position while the red line is the gold price.

The result? - Gold moved lower as this group of large traders was selling. Through the end of the week, gold dropped another $17 to settle at $1294 in the April contract, which by the way goes into its delivery period next week.

Here is the Daily or short-term chart.

There are several things to note. First, Bears are back in control of this market on this time frame. Negative Directional Movement is above Positive Directional Movement and the ADX has turned lower and is continuing to move down indicating the break in the uptrend. The recent uptrend that began in January has halted with the market having given up over $100 off its best level of this year.

Second - the "golden cross" which some were touting as sign of a new bull market beginning has been negated as price has fallen below that level of the cross ( the 50 day moving average crossed up and above the 200 day moving average from beneath).

Third - the sloping uptrend line drawn off the late December low has been violated to the downside.

These are all bearish signals.

The one bullish signal on this chart is that the important 50% Fibonacci retracement level of the entire rally from that same December low near $1180 to the recent high near $1392 has thus far held. That level is near $1287. Bulls managed to keep price from penetrating that level for long before it recovered.

On the short term chart, the bears have the clear advantage.

Let's shift to the weekly or intermediate chart. I have included another old, but reliable technical indicator, the Stochastics, because of the nature of the price action on this time frame.

Let's first look at the Directional Movement Indicator. Notice that the ADX line ( the dark line ) continues to move lower indicating a TRENDLESS MARKET. If a market is trendless, that means it is moving sideways. That is exactly what gold has been doing on this time frame. It is essentially meandering back and forth in a very broad range as noted in that green rectangle I have shown. Support down near $1200 and below is intact while resistance near $1400 is also intact. We have what amounts to a $200 range within which gold is working.

What one usually experiences with a market moving within a broad trading range is the perma bulls begin coming out with their "to the moon" price predictions and all manner of wildly bullish scenarios as price works its way up towards the top of the range.

The perma bears on the other hand, begin talking their "price is going to collapse" scenario as the price works it way down towards the bottom of the range.

In other words, the bulls get noisier as price moves higher while the bears get noisier as the price moves lower.

The Directional Movement lines indicate that while the bulls have seized control of the market  ( +DMI (blue line) crossed above the -DMI ( red line), they are in danger of surrendering their mild advantage if they do not quickly assert themselves.

I have also noted the Stochastics indicator because this is designed for trendless markets. Note the area within the rectangle on the price chart and look at the action of the stochastic indicator. It has been moving higher generating buy signals as price has bounced off of support at the bottom of the range and generating sell signals as price has stalled out at the top of the range. It is currently in a sell mode .

Lastly here is the monthly or long term chart.

The Directional Movement Indicator shows that the market is moving sideways as well with no clear trend although bears currently have a slight advantage in that -DMI remains above +DMI. Those lines are converging however so the bears will need to reassert themselves sooner rather than later if they are to retain control on this long term frame.

Also, the MACD indicator, while still in a bearish mode, is working on putting together an upside bullish crossover which would generate a buy signal based on that indicator.

Lastly, the sloping uptrend line drawn in red has thus far held. One can see that the $1280 level is a pivot with price working around it on both sides.

The chart is inconclusive at this point. The long term uptrend is still intact near the 38.2% Fibonacci retracement level although both indicators show bearish forces still in control. Bulls are attempting to wrest control of the market from them but have not as of yet managed to do so. A push through this week's high near $1400 will be required to tip the scales in their favor in my opinion. Before that can occur however, $1300 will have to be captured.

We'll see how the battle goes.

Dollar Rises - Gold Sinks

Same story as yesterday - The US Dollar is gaining some ground at the expense of the Euro and that is undercutting the bullish case for gold.

Geopolitical concerns are still lurking around due to events in Ukraine but as long as the market feels that escalation dangers are limited, safe haven flows into gold are waning.

Gold has now dropped $100 since making a try at $1400 on March 17. That proves the old adage that markets tend to generally fall faster than they go up ( this is not an "always" thing but it does seem to occur more than the reverse). In the case of gold, the market moved up almost entirely on worst case scenarios of WWIII, Russian moves out of the Dollar, a new Cold War, etc. None of these events have panned out exactly as their proponents have suggested they would.

This is the danger inherent in rallies which are predominantly driven by short covering as was being noted here. Once those buyers are run out, who is left to chase the price higher? Gold needed to see FRESH speculative interest coming in from the hedge fund community and it was not getting it; especially after the FOMC gave such a hawkish view on the US economy and proceeded with their tapering plans.

In watching the price action closely during the session, gold managed to claw its way back off the worst levels of the session when the stock indices initially weakened early today. As the equities then moved higher into the plus column, gold began moving lower again. Right now, as I type these comments, the equities are once again weakening a bit but gold is actually moving lower, along with silver I might add.

The HUI was actually higher early in the session but has since then given up its gain and has turned negative. Its losses however have been contained at this point although that could change by the end of the trading day.

Take a look at the following chart of the HUI. Note a couple of things on the Directional Movement Indicator. First, the -DMI ( Red Line ) has crossed back above the + DMI ( Blue Line) for the first time since the month of January. The bears have regained control over the market. Notice also that the ADX line ( Dark Line ) is showing some signs of turning higher suggesting the Potential for a trending move lower. I think we would have to see a downside violation of the 210 level however for this to occur.

I want to also note that much was made on some sites about the so-called Golden Cross, where the 50 day moving average crosses above the 200 day moving average from below. Many technicians regard this as a bullish development. For such an event to actually mean something, it is usually understood that the price of the underlying security ( in this case the index ) must REMAIN ABOVE both moving averages. That has not been the case here with the HUI. It has fallen below both moving averages just shortly after the time the Directional Movement lines reversed signaling the Bears were grabbing control of the market once again. In other words, any bullish signal from that event has been negated.

This underscores the rapidity at which markets move nowadays and especially markets which are driven by geopolitical events. Here is a bit of trading advice - unless you are very fast on the draw and spend significant amounts of time sitting in front of a computer screen watching prices and events, leave markets driven by geopolitical events alone. They are too dangerous for all but the professional traders who can move more quickly than the average screen watcher. Yes, you might miss a great opportunity for a big profit but you also risk suffering from severe losses. Just ask any of the bulls who bought up near $1390 who were just convinced that the West was going to level sanctions on Russia after the results from the Crimea region came in over that weekend a while back.

Also, never base a trade ( or an investment ) for that matter on a headline. NEVER! Let the market technical price action do that for you, AFTER you do some research on your own and not rely on the predictions of some "expert" who makes his or her case about why such and such market is going to the moon.

Remember, markets are based on differing opinions. Some are bullish; some are bearish. But keep in mind that they are just opinions and in that sense, guesses as to how the market might respond to a particular scenario. The only true proof consists of the price action. It either confirms or validates ones opinion or it does not. It really is that simple.

Traders who quickly realize that the market is not accepting their opinion and get out of the way become survivors and experienced traders. Those who want to blame other forces ( manipulators), etc, and whom refuse to get out, become former traders with a lesser net worth.

All that matters in this profession is whether or not you make money; not whether you were "right". You are only "right" if the market confirms you are right. Other than that you are just a guy with an opinion that meant nothing. Period. Humility is a virtue that will serve to protect you long after pride has made fools out of prognosticators who keep serving up one dogmatic prediction after another.

"Put not your trust in princes, in mortal man in whom there is no salvation", says the Psalmist. Wiser words were never recorded.

Here is a Daily Chart of Gold to close out these comments. I have noted the "Golden Cross" on the chart for your convenience. That is the 50 day moving average in green crossing above the 200 day moving average. Note that price has fallen below both of these moving averages, a bearish development. Typically in a strongly trending market to the upside, price will remain above these levels.
 

Bulls do have a support level within the general vicinity of that cross which comes in at the 50% Fibonacci Retracement Level at $1287. They only missed that by a few dollars today. If the bulls can reverse today's losses tomorrow to close out the week, they have a chance at stabilizing prices here. If not, and if $1287 gives way, there is some light support near $1280. After that, $1262 - $1255 is the next target.

For Gold to get some recent Bears nervous, it will have to regain its "13" handle for starters. If they can manage that, some of the shorts will go ahead and ring the cash register and move back out.

ECB Chatter Weakens Euro; Dollar Rises

The chatter in the Forex markets today centered around the comments of Bundesbank President Weidman who seemed to be concerned about the low level of inflation in the Euro Zone. Throw in the comments of some other major European Central Bankers and that hit the Euro as talk grew that the ECB was moving in the direction of its own version of Quantitative Easing.

Over here in the US Fed Governor Charles Plosser (head of the Phillie Fed) commented that the hurdle to change course on the Fed's plan to taper was "pretty high". By the way, he was concerned that inflation was currently a little low and that he would actually like to see it creep up a bit! How's that for some candid talk?

This sort of stuff, coming from Central Bankers in the West, along with further weakness in the mining shares, was enough to pull the rug out from underneath those buying gold out of any Dollar weakness concerns. If rates in Europe are not going up anytime soon and if the Fed is continuing its current tapering plans, then Gold has those headwinds to contend with.

if that were not enough, copper prices continued to fall lower today out of worries over the health of the Chinese economy. What really has the market roiled however is that persistent weakness in the Yuan. That makes copper more expensive to purchase for Chinese buyers. In a market already experiencing demand issues, that is not helpful.

There is a bit of chatter however that the economy over there is weakening to the point where the Chinese authorities may soon try to do something to generate some growth. Who knows exactly what that might be but it was enough, at this point, to prevent copper from falling any lower. Copper is holding about last week's spike low near 2.87 for now. I would be concerned if it broke down below there as the odds would increase that silver is not going to hold support down near $19 if that were the case. Silver has become a teenager once again.

Here is the chart of gold. As you can see, the bears have regained control of the market on the short term chart. Notice how the price consolidated the last couple of days near the 38.2% Fibonacci retracement level indicated. Then today, it fell below that and as of now, has not yet recovered.

It did manage to hold above psychological chart support at the $1300 level. Bulls would not want to lose that as it would further shift the sentiment in the market in favor of the bears. If $1300 goes, then look for a test of the 50% retracement level near $1287. Bulls need to recapture $1340 to gain any sort of traction right now. They certainly need some help from the miners which are down over 2% as I type these comments ( basis HUI).

The US Dollar Index needs to clear 80.50 to run out some of the recent shorts. If it does, gold will more than likely be unable to hold support on the downside. We will have to monitor developments in the currency markets to get a sense of whether or not that is going to be the case.

Silver Succumbs to Gold Weakness

Silver had been managing to hold above $20 today in spite of the Gold weakness until late in the session when gold began sinking even lower and the shares continued to puke. That finally pulled the rug out from underneath it and it became a teenager once again. It had managed to become an adult in early February but could not act its age and decided it liked the "freedom" of having  "teen" in its age.

In looking over its daily chart, the bears are back in control of the market, which is essentially meandering back and forth in a broad range. It is below the 50 day moving average which is bearish but as is the case with any market stuck in a sideways pattern, moving averages are not especially useful in analyzing them.

This is reflected in the ADX line which continues to head lower indicating the lack of a firm trend.

It is going to be interesting to see how gold trades in Asia this evening. Will bargain hunters surface or will they sense lower prices ahead and thus hold their fire to secure the metal at a better price. If the West starts selling gold once again, Asia is going to have to provide whatever price support this market might have.

The Dollar

Gold loses nearly 2%

Last Friday's COT report showed a fairly large build in new longs among the hedge fund community. Unfortunately for them, those new longs BOUGHT HIGH and ended up SELLING LOW; not a particular good way to impress their clients.

Nearly all of those new longs were immediately under water as soon as the FOMC issued its statement last week. That and the fact that WWIII did not break out, as many of the perma gold bugs were predicting, was enough to turn the momentum back and that did it for the momentum-based funds. They are now selling.

In looking at the Daily Chart, it has now turned negative once again with the loss of downside support near $1320. Gold has currently encountered a bit of buying support at the 38.2% Fibonacci retracement level from the $1180 low to the recent high shy of $1400. Failure to hold here, and a test of PSYCHOLOGICAL support ( there is nothing as far as Technical chart support about this level ) at the $1300 will be shortly in order.

If that is not enough to bring in dip buyers, then the next logical chart level that I can see is closer to $1287.

The ADX turned down last week suggesting a halt in the recent uptrend. That has certainly been confirmed with the crossover by the Directional Movement Lines. The Bears have now seized control of the market once again. We will have to see whether or not the Bulls can seize it back again but they are going to have to resurface very, very soon and at a bare minimum recapture $1340 - $1345 to run out some of the new shorts.

If you notice, the short-term uptrend line has also been broken.

Silver is actually holding up better than gold today as it thus far seems reluctant to move below $20 for any length of time. It might be drawing some stability from the fairly steady copper market.

Mining shares are of no help whatsoever to the entire metals complex at this point. There is a zone of congestion on the HUI chart between 210 - 220. That index looks like it is headed there. So far the miners are down nearly 4% today.

By the way, bonds are getting some money flows into them today. Interest rates have dropped a wee bit on the Ten Year to 2.737 as I type these comments.

No much else to say except the week has started off poorly for gold bulls. Maybe it will end better.