Metals Commitments of Traders

To start this short set of comments, let's begin with Copper, which was hit hard this past week as news came out of China that the authorities were seriously investigating the double and triple counting of copper used to secure bank loans. I have mentioned in previous posts that the internal positioning of the LARGEST set of speculators in this market was something that I have not seen occur too often; more specifically one in which the hedge funds are positioned rather heavily on one side of the market with the "Other Reportables" taking the opposite side of their trade. I commented that one of these sides was going to be proven very right and the other side very wrong.

Looks like the hedge funds came away holding the short stick!

Take a look at the chart and then look at the COT chart. Notice what has happened to the price this week as that news hit the market to start off the week. The red metal dropped over 15 cents off its ending level last week before rebounding on Friday as some shorts rang the cash register.

Now here is the COT chart. Look at what happened to the hedge fund net long position and compare that to the Other Reportables who have had a significant exposure on the short side of this market. Sadly for us, the report does not cover the action from Wednesday to the close of trading today when copper plunged a further 10 cents since the drop the Tuesday cutoff date. Can you see the hedge funds running and what it did to the price?

Based on what I have seen of this report, when comparing it to the price action over the previous reporting period, it is not hard to see that hedge funds were getting hit hard on their wrong bet and were exiting in size. The late session bounce here on Friday makes it a bit harder to read as to whether they were coming back in to any significant increase in long side exposure once again or whether it was just pre-weekend short covering after such a big drop in price. I suspect it was more of the latter than the former.

The really big thing to me is just how aggressive the hedge fund community is becoming towards the bear side in the silver market.

Silver fell through important chart support centered near the $19 mark early in the week. Yesterday it popped higher on the ECB news but today it failed to extend or build on those gains. As has been the case for this metal for a while now, rallies are being sold. Just look at how the market fell early this week but then ran into more selling today as it failed to recapture that broken level of support near $19.

One look at the COT chart shows why. Hedge funds were aggressively attacking the metal this past reporting period. Interestingly enough, it was not so much of them bailing out of existing long positions as it was them adding a large number of brand new shorts. That is what drove the price down through $19. I have numbers going back further but for the sake of ease-of-reading of the chart, I am using data back to 2009 or five years ago. Hedge funds are now holding the largest net short position in at least five years!

I should continue to note here that the Other Reportables camp is still on the net long side - once again they are at odds with their large cousins but not nearly so balanced out as they have been in copper. It looks like some of these guys are spreading copper against silver with hedge funds taking the bull spreads and the other reportables taking the bear side of that spread.


When it comes to gold, hedge funds were big sellers this past week. Here is the thing however when it comes to gold - they continue to be stubbornly bullish as they remain net long just like the Other Reportables and even the small specs or general public do. In other words, yet another week, another deterioration in the chart pattern, and yet the entirety of the speculators refuse to get out and are still net longs. That continues to cause me to marvel. One wonders how much more money some of these guys are willing to lose before they decide to finally get out. I am concerned that as long as these stubborn bulls, who are mounting greater losses, continue to hang on, they are merely postponing any lasting bottoming process for the yellow metal. It seems that the bulls are going to go down with the ship.

At least one positive sign is that the little guys, the small specs or the Nonreportable Positions, look as if they are finally giving up the ghost. They remain net long but dumped about 1700 more long positions than they covered shorts this past week. Their net long position is the smallest it has been in nearly 4 months so that is somewhat constructive.

Here is the COT chart.

Here is the price chart comparing the net position of the hedge funds.

You can clearly see the speculative selling trend of this group and its impact on the price level As they sell, the metal moves lower. As stated above, they are still net long this market however and that troubles me.

Some are already talking up potential short squeezes but as I have said before - they are always talking POTENTIAL short squeezes - because, are you ready - in every single market on the planet that exists there is the POTENTIAL for a short squeeze. Big Deal! What is required is some sort of news or event that will trigger a technical buy signal to force some of the weaker shorts out. However, what is more important that any nebulous "potential short squeeze" is the prevailing trend of the speculator and right now that prevailing trend is one of selling.

I would much prefer to see these precious metals markets with the speculators all on the short side and sentiment miserable to convince me that we have truly formed a solid, long term bottom. Right now, all we are getting is rallies that get sold.

Let's see what next week brings us and whether or not the actions of the ECB this week will be enough to keep the gold price supported among those investors/traders based in the West.

D Day - 70 year Anniversary

Many us of tend to get so engrossed in the markets that we often forget or are distracted to the point of forgetting, that the reason we are able to sit in comfort in front of a computer screen or engage in arguments over the Internet, without fear of the government knocking down our doors, etc., because brave men, paid the ultimate price to secure our liberty for us.

Such was indeed the case, 70 years ago to this very day, when American and Allied troops waded ashore in the face of a wall of lead and explosions, on the beaches of Normandy, France. Every single time I read their stories and about the events of that day, I am moved by their courage, their dedication and their honor and bravery.

I try to think what it must have been like to approach a beach in those landing crafts, knowing full well that the moment that ramp goes down, you are exposed to enemy gunfire which is not going to end unless you can somehow reach that enemy and silence him before he silences you. Amazing, amazing bravery.

Thank you.

http://hotair.com/archives/2014/06/06/70-years-ago-free-men-stood-against-evil-and-evil-failed/

Jobs Day Arrives

Yesterday was "one down, one to go". Today was the "one to go" day. We got the employment numbers and they came in stronger than the number that the market was looking for. The reported number was 217K for the month of May beating analyst expectations of a 210K increase. The unemployment rate fell to 6.3%.

The response of both the Dollar and the gold price was very interesting. The Dollar initially bumped up while gold dropped slightly but then both reversed course with the Dollar moving lower and gold moving higher. Both markets then reversed course once again. The result of this is to provide evidence that investors/traders are uncertain in their outlook for both interest rates and inflation.

I find this price action noteworthy enough to repeat something that I have been writing about for some time now - that the main factor preventing any inflationary pressures from gaining a foothold in the US economy has been slack in the labor markets.

Along this line, let me make a special note here - coming from the emails that I receive blasting me for being ( insert unprintable curse words here)  'stupid enough to believe the government's numbers'.

Whether it is the stated inflation rates coming from the CPI/PPI, the GDP numbers, or as is the case for today, the employment numbers, I am constantly insulted and reviled in private for detailing what the feds are reporting and how the market is responding to such numbers, as if reporting on those and commenting on those is now considered by that crowd to be "consorting with the enemy".

I have said it previously and will repeat it here however, those GIAMATT perma gold bulls had better STOP ROOTING for lousy economic numbers as if somehow that is going to be bullish for gold, and had instead better be rooting for evidence of growth that is strong enough to generate inflation.

They can repeat their mantra that QE is going to last forever and that the Fed is never going to end it until the cows come home but the facts are quite simple - the Fed has engaged in 4 rounds of QE  ( if you count operation twist in there you could change that number ) and is now tapering the last round. The commodity markets, including gold and silver, both rallied strongly during rounds One and Two, as most everyone on the planet expected that policy to produce a rate of inflation that the Fed was looking for. It DID NOT. Why should any more QE ( as they affirm constantly is guaranteed) going to produce something different, namely no inflation? Answer - it won't - at least not until the employment picture improves in my opinion. That has been the problem all along - namely that the liquidity that the Fed is providing has not made it into the broader economy in a large way as evidenced by the falling Velocity of Money rate.

People must have jobs and they must feel that their jobs are secure enough before they are going to dig themselves deeper into debt by taking on new credit. It is that serious growth in consumer credit that is needed to at least, at the bare minimum, put in place the groundwork necessary for Velocity of Money to increase. Without that, inflation is not going to be an issue.

Traders/investors who dig deeply into such things understand this. This is the reason gold (and silver for that matter) have gone nowhere the last few years. Not because they are constantly manipulated at the Comex or regularly smacked down by evil bullion banks doing the bidding of the government but because investors have NO EXPECTATION of GROWTH fast enough to generate any upward inflationary pressures. If you doubt that, go back and reference that TIPS spread chart that I have provided as evidence. As far as the broader market participants are concerned, it is a near perfect environment for stocks - slow and steady growth with little inflation and extremely low interest rates.

If gold is going to mount a sustained rise, it will at least need inflation to be a concern in the minds of traders, not that it is the best inflation hedge out there ( I happen to think that crude oil is actually a better one ). Nonetheless that means any pickup in interest rates must lag the inflation rate and we need to have an environment in which the general commodity sector as a whole is rising. We have had neither. Simply put, inflation is no where remotely a concern of most traders and the reason it is not, is because of the employment picture and the data connected to that ( consumer credit, VM, etc.).

I am wondering, now that we have gotten some back to back readings of +200K job gains,  if the market is now beginning to take a look inside the headline number of these jobs reports and keying in on the "Average Hourly Wage Growth" number. The jury is still decidedly out on this, based on the movement in the bond markets today with yields actually declining. Still, that being said, the YoY ( year over year) rate of growth for that hourly wage is 2.1%. The Average Workweek came in a 34.5 hours but it is that former number that has peaked some interest. Neither number is evidence that growth is anywhere near strong enough along that front to fan inflation pressures; yet. That average hourly wage growth number is going to take on increased scrutiny in the upcoming months in my view. Investors are going to be looking to see if these wage gains can get back to the level that they were PRIOR to the 2008 Recession.

I guess what I am trying to say here, and perhaps not clearly enough through all of the statistics that I am referencing, is that investors might be coming around to accepting that job growth, while not setting the world on fire, is at least steady enough so that they can now shift their focus somewhat to wage growth or the lack thereof. In other words, they are less concerned about the outright employment numbers and perhaps becoming more interested in whether or not the ingredient to push inflation into the mix is beginning to appear- namely, increasing wages.

We'll have to see if that is the case but that will require that we get no more sub 200K job number readings. There is a bit of chatter out there today that the rebound in this month's readings were due somewhat to pent up job demand that resulted from the inclement weather early in the year and that there is a risk of this demand leveling off somewhat resulting in the number in subsequent months to actually decline from this month's reading. Again, that may be the case - we will just have to wait and see.

I will get some more up later on as the session progresses and we get to see the action across more of these individual markets. For now ( and this could change ) traders are buying stocks, interest rates are ticking slightly lower ( no inflationary concerns), the Dollar is slightly firmer, and gold is a bit lower. Silver has fallen below $19 once again, which is now serving as overhead resistance and copper is down nearly 2%. That China news is dominating the red metal. Let us hope for the sake of the gold bulls out there that China does not turn its attention to gold-backed loans! If you want to see what might happen to the yellow metal should they do so, just look at copper.

Corn and especially wheat, are higher today. Looks to me like some pre-weekend short covering is occurring right now after their big drops this past week.

One Down; One to Go

The big day ( One Down) that we have been waiting for this week has finally arrived with the ECB taking some steps to provide a sort of monetary stimulus to the flagging Eurozone economy. They lowered rates from 0.25% to 0.15% and actually pushed the deposit rate into negative territory, the first time it has ever done so. The idea of the latter is of course to "penalize" banks for NOT lending or perhaps more accurately, to incentivize them to do so.

They are in effect, conducting an experiment to see how much pain banks are willing to endure before they decide that it is more feasible to lend to consumers or business. One has to wonder however if banks are capable of forcing people, whether in business or the consumer, to borrow against their will. In other words, if potential borrowers are not inclined to go into debt because of their particular set of circumstances, they are not going to rush out and initiate loans merely because "we feel your pain big banks".

The Euro is wobbling all over the place as a result of the action, which really came as no surprise since the Central Bank has been pretty good at telegraphing their intentions going into the meeting. The market was led to expect something and that is what it got. The question now becomes how effective it will or will not be in accomplishing their goal to generate that same magical number, when it comes to inflation, of 2%.

The Euro dive bombed on the news but then worked its way up nearly a full point as the session has worn out. It is currently a wee bit lower as I type this. The price action is one of those "sell the rumor, but the fact" sort of things. I will say however that the ECB must certainly not be happy to see the Euro moving higher at this point. They DO NOT WANT a stronger Euro.

I should note here that for the moment, German bunds are the losers while riskier Italian and Spanish bonds seem to be the winners. This is probably welcomed by the ECB as it is a sign that investors are inclined to take on more risk. It will be interesting to watch the future progress of some of the regions stock markets as we move ahead.

Traders took the Euro currency down into a strong level of chart support but apparently are of the opinion that the action by the ECB is not sufficient to justify taking it into a sharper move lower. Note the support level. Of course the rebound higher in the Euro forced the US Dollar to fail at its overhead resistance level.

And the Dollar chart - notice how it broke through its resistance level only to fall back below it as the Euro rebounded higher. I guess traders are not going to get too aggressive either way ahead of that big payrolls number tomorrow morning. Tomorrow? That is going to be an entirely different matter. The "One to Go" day will have come and gone and traders are going to revel in that.

The Dollar has been trending higher however although that trending move is a rather slow and steady one. To accelerate it, the Euro would have had to lose its support at the 1.35 level. That would allow the Dollar to move on up towards 81.50 - 81.60 which is a stronger level of resistance. I would be very concerned for gold were the Dollar to breach this level.

Gold was essentially tracking the Euro moving up with it and backing off with it. So far it is holding $1240 but the rebound looks to be coming mainly from short covering and not from a huge throng of eager new buyers. To become any more than a bounce in a larger ongoing bear market, the price would have to recapture $1280 at a bare minimum. There are traders who are caught on the long side of this market who want to lighten up and have been looking for a rebound in order to do so. I suspect we will see them beginning to lighten up if this market can make it back to $1270. Again, tomorrow will be a very big day. That is why anyone making predictions as to whether gold has bottomed is simply rolling the dice. They might get it right; they might get it wrong. I personally am wanting to see the data before figuring out what to do with the metal for a short term play. Longer term, I think it is headed lower barring any surprises on the currency front - at least that is what the charts are currently saying and we need to respect those.

Something will have to change on the inflation-expectations front to get gold going.

Here is that TIPS spread chart I have been maintaining detailing the movement in that spread and the gold price. As you can see, the spread is moving in a steady to lower pattern, exactly as is gold for the moment.

Copper did not get much of a bump out of the news, unlike silver, which seemed to like the new policy. Copper is still fearing Chinese authorities investigating copper-backed loans and that practice of possibly double or triple counting the metal for use in additional loans. The idea behind the move lower in the red metal is that traders are worried about excess supply hitting the market if the authorities find irregularities. It also would confirm suspicions that demand behind copper is not for actual industrial use but has rather been for speculative purposes in order to secure loans used for other purposes. If they were to move to put an end to this practice, that copper would be sold as the loans are closed out. Again, as I noted yesterday, we will have to watch this closely to see if the authorities shift their focus to gold for any reason. So far I have seen nothing along this line but this is not something to be ignored in my opinion. Remember, Chinese demand for copper, and for gold, and for any metal has been significant as far as traders gauging the strength of the overall demand.

While the focus of many of the markets  has rightfully been on the actions and statements of the ECB today, it is all going to pale by comparison to what we get in the US payrolls data tomorrow. Some are already banking on a disappointing number based off of the ADP numbers were got yesterday. I have not done any research to see how closely the numbers from ADP might or might not track the actual US numbers so I am unable to comment as to whether or not that is a good bet. It seems a bit risky to me however as one never knows we are going to get with these employment numbers.

Suffice it to say, by tomorrow morning, no one is going to be uttering a word about the ECB as it will have been forgotten and consigned to that huge abyss where all market moving data is destined to end up after the obligatory 24 hours focus. Gold, and the Dollar, are going to be moving totally off of that number that the magicians provide for us. Traders are going to also be on the look out for any backward revisions to previous months.

I am noting that crude oil fell through support on its chart near the $102 level but it has managed to pop back above that level again. Once again the $105 region has been a hill too high to climb. Traders are citing the huge supplies as the culprit but all of us have been citing those for some time now. It has not seemed to matter as hedge funds have been drinking up all of the black gold that their computers will let them. There is a growing concern over all that speculative length piled into this market which has been stymied in its upward progress. Stale longs + huge exposure generally makes for some nervous traders. As many years that I have been at this I am still amazed at the sheer size of positions that these gigantic hedge funds can accumulate. Talk about a bottomless pit of buying ( or selling for that matter). I have watched this group defend their holdings time and time again, even when fundamentals become iffy. Doesn't matter - they are the market - don't forget that.

It looks to me like there is some additional chart support near the 100.80 - 100.90 region for the WTI should $102 fail.  Below that is 100.25 on down to $100. Unleaded gasoline has chart support near the 2.90 region. So far it is holding above that level.

The grain markets continue to weaken which is good news for consumers but especially for livestock and poultry producers. So far there does not appear to be any weather threats on the horizon. Old crop beans have once again run into selling near the $15.00 level. They are retreating lower but are still not breaking down on the charts. I would need to see them fall through and remain below $1440 to feel that we have finally gotten this tight carryover story off of the front burner. I still am concerned that the commercials might try to squeeze the shorts in that month as we head into the July delivery process but that is a way off for now.

New crop beans are flirting with the $12.00 level. They have not traded below that level for two months.

Just today Informa raised their Brazil/Argentina Corn Production forecast. Also, El Nino chatter is resulting in sentiment shifting in favor of larger S. American bean production later this year as well as good growing weather here in the US.

The overall commodity sector is moving a bit lower today. The GSCI has broken a short term line of support on the chart, further evidence that at least as far as the sector is concerned, there is no apparent inflationary pressures evident at the moment. Just today alone, both wheat and corn prices hit three month lows.

Looking over at the world of equities -  the Dow made yet another all time high ( as did the S&P 500). The Dow looks like it might make a try at 17,000 believe it or not. The S&P? Who knows how high that is going to go. The Russell 2000 is lagging however and thus far is not confirming those moves. Does that matter? I used to think it did at one time. Now? I do not know. What I do know is that investors continue to chase equities higher as that is where the gains are to be made. Central Banks are undoubtedly quite happy as they observe this.

The lesson to be learned is very simple - In a near zero interest rate environment, one in which there is little to no apparent inflation as far as investors are concerned, the place to be is in stocks. Write this one down for your children and grandchildren as an axiom.

Dueling Economic Data

There were two pieces of economic data released this morning, both of them conflicting ( figures!). The first was the ADP private sector jobs data. It came in at 179,000 for May, well below the market expectation near 220K. That sent bond yields falling. Many market players regard the ADP data as a type of proxy for the government's nonfarm payrolls number and tend to extrapolate that report from this one.

Then the ISM ( remember our pals from earlier this week with the double screw up on the manufacturing number?) came out with the Service sector reading for May. They reported the number rose to 56.3 from last month's 55.2. That sent bond yields moving higher along with the US Dollar.

Once again the pattern of mixed economic data continues as it results in traders, particularly trend following hedge funds, getting whipsawed back and forth as the market responds to one set of data only to reverse on another.

There was a story today on the wire feeds detailing how Chinese officials now appear to be getting ready to crack down in earnest on copper-backed loans. That news sent copper prices lower. Authorities there closed down the third largest port in China, Qungdao, in order to dig deeper into possible warehouse fraud involving copper and aluminum.

Traders fear that those same authorities will force the deals involving the metal, which is used as the loan collateral, to be closed out meaning that the copper in storage will be available for sale into the market. That would send an additional supply out driving prices lower. Those traders selling are obviously convinced that this is going to happen.

Here is the most recent Commitment of Traders report for Copper. Do you recall that I posted this chart up a couple of weeks ago noting the huge disparity between the positioning of the largest speculators in the market? Guess what? That disparity has grown even larger. I noted previously that it is rather uncommon to see the LARGE speculative forces so greatly divided and at odds over their bets as to which way the market is going to move. One side or the other in this copper market is going to be proven to be quite wrong. Over the last week of trading, the hedge funds have been wrong while the "Other Large Reportables" category has been dead on target.

Depending on what we get out of the ECB tomorrow and what we get on the payrolls front this Friday, copper could move higher but this development in China is a big deal.

One of the concerns I have when it comes to gold is that the same thing has occurred with the yellow metal. It is often used as collateral for bank loans in China. The last thing that gold needs at this time is an additional supply hitting the market. If the market were to get wind of anything like what is happening to copper is heading towards gold, prices will fall. I have seen some pretty scary estimates as to how much gold is possibly being used as loan collateral in China. So far it is a non-factor but with any potential market moving event, we need to stay attuned to things that might develop on this front.

As far as market price action today goes, traders are not going to get aggressive ahead of that ECB meeting tomorrow. The result has been a narrow range for gold today with little to speak of. From a technical standpoint however, the market continues to hold above support near $1240 but thus far has been unable to gain much, if any, upside traction.

Old crop soybeans continue their roller coaster ride. Wheat finally managed a bounce today as US wheat prices appear to be getting somewhat more competitive. Also, some excessively heavy rains in certain parts of wheat country during the harvest has raised a few concerns that it might be harmful to wheat quality. The result has been a technical bounce higher.

Some of those same rains are working their way across the corn belt and that is improving prospects for a large corn and bean crop. The tightness in the old crop bean carryover however continues to impact the entire soybean market, both old crop and new crop and will probably continue to do so until we get rid of the July contract. I still wonder if we are going to see the commercials squeeze the bears during the July delivery period. They have pulled this stunt regularly this year up to this point. We have had some time however, as the summer nears, for S. American beans to make their way into the country so any squeeze might not be quite as effective as it has been previously. Needless to say, this game is not for small speculators to play. First of all, you run the likely risk of getting assigned. Secondly, if you are wrong, good luck getting out!

The crude oil number got the EIA numbers this AM and they showed a surprising large drop of 3.4 million barrels. That was a big number! The market was looking for a decline nearer 1.4 million. Crude moved higher on the number but, for now, has surrendered those gains. The market is growing increasingly nervous about the SEVEN YEAR HIGH in speculative length in the market and while today's reported drop was friendly, stocks remain near record highs. One thing will be certain about crude - it is going to be quite the roller coaster moving forward. Personally, I hate trading markets that have this much speculative length in them because they tend to become extremely volatile and snap your neck at the rate they move up and down.

I might throw a chart of gold up later on today but methinks it is best to wait until we get the ECB news tomorrow as the mining shares are relatively quiet today as well.

Silver cannot get back above $19. The Euro is hovering near 1.36 with the Dollar just below key chart resistance near 80.70 - 80.80 basis the USDX.

By the way, the yield on the Ten Year continues to rise today and is now above 2.6%. The last reading as these comments get finished up is 2.611.

The VIX remains very low at 12.03, near the low reading for the year. Complacency reigns.

GLD Holdings continue to Rise

IT has been several days since GLD last reported any change in its gold holdings. You might recall from a previous post here

http://traderdannorcini.blogspot.com/2014/05/gld-reports-big-jump-in-gold-holdings.html

that the initial 8.4 ton increase occurred on May 27th, when gold experienced a $30 drop in price.

Since that day, GLD has remained quiet in terms of any reported changes. Today, they finally issued an update and that update contained another increase, this time it was a 1.8 ton increase.

I maintain that if this trend continues, it will be quite positive for securing an eventual halt to the move lower in the price of gold. Clearly some Western-based interests are interested in securing gold near current levels. Keep in mind that this slight increase comes on the heels of another $20 drop lower in price so someone is actually practicing the old adage ( which seems to be less and less the norm in our modern markets ) of "Buying Low".

Here is the chart updated to reflect the increase over the last week or so. It is still down 11 tons or so from the start of the year but at least it has stopped the bleeding.

This continued build, albeit a modest one, is the first real sign of something friendly that I can see in regards to the sector in general. While the mining shares as evidenced by the HUI and GDXJ charts are not encouraging, if the big gold ETF continues to garner some buying, it might give some bears pause for thought in regards to becoming too aggressive both in the shares and at the Comex.

What will be needed however is for those abovementioned shares to show some better technical price action on their respective charts.

Do not forget that we have two big items later to deal with however. The first is the ECB meeting on Thursday and the second is the monthly payrolls report. One or both of these occurrences could result in some bigger moves in the metal.

Euro Gold Below Chart Support

Trading in gold has been relatively quiet in today's session ( boring would be a better word). I suspect traders on both sides do not want to get too aggressive before the outcome of the ECB meeting on Thursday is known and the monthly payrolls number is released this Friday.

The thinking at this point among the majority is that the ECB is going to provide some sort of stimulus measure. Recent inflation readings in the Eurozone and especially in Germany indicate that the bank has room to make a move along this line. The biggest concern is the lack of lending by banks ( borrowing by others). That is the same issue that had been plaguing the US economy even after the first two rounds of QE came and went. The Fed opened up the liquidity spigots but the money never made it out of Wall Street and the equity markets into the hands of the consumer in a large way. That lack of circulation through the broader economy is the reason that the Velocity of Money fell and has continued to fall.

One wonders if that ECB does unveil some sort of liquidity program whether or not that would produce the same outcome this time over in the broader Eurozone.

It seems to me that the one thing that the ECB could do, which would find broad acceptance among most of the members - and certainly among business - would be to try to knock the Euro even lower.

Keep in mind that when the Japanese government came under new management with the Abe administration, that it set about deliberately trying to weaken the Yen ( even though it denied so doing). Japan was trying to fight deflation but what they managed to do was to, in a sense, export some of that deflation to the Eurozone because the weakening Yen tended to push up the other majors at its expense.

If the ECB starts trying to take the Euro lower, who gets to import the deflation impact from its currency strengthening? That is unclear.

I guess we will all find out soon enough what the ECB is going to do this week.

For the time being, I am keeping a close eye on the gold price in terms of Euros, or Eurogold.

Here is its chart.

You can see, for the last two months ( April and May) whenever the gold price neared the 920 level, it bounced. Last week it fell through that level and has remained below it for the time being. It is still up for the year but its looks heavy.

There is some uncertainty as to what gold might do if the ECB acts. One school of thought is that if they set out to deliberately drive down the value of the Euro, it would benefit the US Dollar and thus pressure the gold market. Another train of thought goes that, depending on whether they engage in their own version of QE, it would tend to shore up the gold price as traders who fear a debauchment of the Euro would buy gold as protection against that.

I have to wonder whether or not the ECB would be any more successful than the US Federal Reserve however when it comes to producing inflation. Central Banks can lower interest rates until the cows come home but they cannot make consumers or even business for that matter, go out and borrow. To take on new debt, individuals have to feel comfortable enough or confident enough, that they can handle the additional debt load. The labor markets, I believe, have more sway over the inflation issue at this point in the game than any other area of economic interest. That is true whether it be in the Eurozone, here in the US or over in Japan.

The key in my mind, at least as it regards gold, is whether these Central Banks efforts can seriously fan the flames of inflation or whether their policies are more or less acting to produce a type of standoff between inflationary forces that they want to set loose and the deflationary forces from large levels of debt and stagnant or moribund labor markets.

Based on the price action in the bond markets, and especially the action of the TIPS spread, the market is looking ahead and seeing a period of slow but stable growth without any strong inflationary pressures. That is what we have had for the last couple of years in particular and why stocks have done so well and why gold has fared so poorly.

Something would need to change on that front to alter the current sentiment.

Interest rates have perked up a bit here in the US with the yield on the Ten Year back above the 2.5 level. It is currently sitting at 2.588, up from 2.438 last Tuesday.

Here is a quick look at the broader commodity sector using the Goldman Sachs Commodity Index.

It has fallen to the same level from which it bounced last month in May. It still is showing no signs of any upward acceleration however.

One of the reasons that this index is thus far refusing to break down is on account of the strength that continues in crude oil. Large hedge funds have huge long positions in that market and have refused to sell those down and that is keeping this market supported even in the face of some sizeable stocks in storage. As I have said before, crude is a mystery to me because I cannot fathom how much of this hedge fund buying is related to their wanting to own the stuff as an asset class into which they can diversify or how much is due to a general perception that the US economy is very slowly improving with a corresponding increase in demand.

I watch both copper and crude very closely in this regard and their chart pattern over the last of week or so has been remarkably similar. both remain supported but have been unable to extend higher. That might change at any time but for now, neither are giving any clues as to what direction they expect the global/US economy to move in.

ISM Statement

"We apologize for this error. We have recalculated and confirmed that the actual index indicates that the economy is accelerating. Our research team is analyzing our internal process to ensure that this doesn't happen again".

The May reading finally came in at 55.4% up from the April reading of 54.9%.

ISM noted that their software incorrectly used the seasonal adjustment factor from the previous month.

It is interesting seeing the bond markets react with such vehemence. The stronger number in the New Orders Index, 56.9% compared to the April reading of 55.1%, is the 12th consecutive month of increases in this reading. Bonds seemed to focus on that today. The result was a bump higher in long term interest rates.

Sadly none of this is going to stop the mouths of the conspiracy crowd who see evil intent lurking behind every proverbial bush.

"It's all part of the sinister plot to drive the gold price lower". I guess the ISM folks have now gotten engaged and have joined the cabal.

I would watch for the Transportation Safety Administration ( TSA ) to be the next collaborator. They will order machines to beep when gold is detected, either in the form of jewelry or bullion, with the express purpose of seizing it from all air travelors in order to provide additional supply to sell into the market to drive down the price.