Bloodbath Continuing in the Livestock Complex

Red meat lovers, take a look at the following charts and rejoice... relief from record high meat prices is on the way.

The Russian food ban from the US and Canada ( among other nations) seems to have gotten the ball rolling in earnest but now technical aspects have taken over with margin calls and forced liquidation dominating trade. Producers who were prudent enough to hedge and secure some downside price protection are sitting pretty right now. Those who did not, have let some enormous profits get away from them.

As mentioned previously, those of us who enjoy good Bar-B-Q have suffered through sky-high meat prices so far this year, but relief is on the way!

Combine falling livestock prices with a large crop coming this fall, and energy prices which have taken a dive recently, and one can see the impact on the overall commodity sector as evidenced by the Goldman Sachs Commodity Index.

It was this weakness across the commodity sector today which weighed on copper prices and helped pull silver lower even though gold was able to buck the trend and move slightly higher.

The extent of the collapse in commodity prices over the last six weeks has been stunning. Here is the chart.

It looks like gold is caught in a sort of tug of war between forces springing from the overall sector and upward pressures coming from the mining section.

The HUI is currently quite strong on the charts. As you can see from the chart below, it is flirting with strong overhead resistance near the 250 level. A closing push past this should allow the index to target further resistance near 260. Above 260, there is not much until one gets to 280 or so.

Here is another negative factor:

According to the most recent updated information, GLD holdings have now fallen below the starting level of this year. They were at 798.22 tons at the end of the year and as of yesterday stood at 795.86.

So what to make of this? I think one can make the argument that the gold shares have been the leaders of the gold price both on the way down and on the way up. So far, if I had to pick between following falling commodity prices and falling reported GLD tonnage and the mining shares, I would have to side with the miners. Their track record is very good at predicting future price action in the underlying metal.

That being said, with the negative factors of falling commodity prices, falling GLD tonnage and a stable to rising Dollar, the HUI needs to break out to the upside sooner rather than later to convince enough traders that the move higher in gold is more than a momentary flash. Many of the larger players are obviously moving into the mining shares based on the price action because they apparently feel that the downside is rather limited from this point. However it is difficult to see why some big specs would want to chase gold significantly higher given the above-cited negatives. If the Dollar does finally manage to breakout above that stubborn level of resistance near 81.60 basis the USDX, gold will have to overcome even more headwinds.

The jury is still out therefore. As you can see from the price chart, the level near $1320 is proving to be formidable overhead resistance. Also, the ADX continues to move lower indicating that a trending move is not yet underway but rather that the market continues to move in a range trade. $1280 is the bottom and $1320 is the top within a broader range of $1240 - $1340. Let's see what the next few days bring us.

USDA Report Day

Finally - the big day we grain traders have been waiting for has arrived. As expected with these reports, the market response was immediate and it was furious, especially in the bean complex. USDA left the total acreage number, both planted and harvested unchanged from last month's numbers. Those were at 84.8 million and 84.1 million respectively. Compare that to last year's numbers of 76.5 million planted and 75.9 harvested.

The big factor, as far as the market was concerned, is that they raised the output number from 45.2 bushels per acre last month to 45.4 bushels. That kicked the production number up to 3.816 billion bushels from last month's 3.80 billion.

They left the import number the same at 15 million bushels bringing the total supply, adding in the 140 million bushel carryover, to 3.971 billion bushels. That is up from 3.955 billion in the July report. With crushings and exports remaining unchanged from July, the projected carryover is jumping to a whopping 430 million bushels, more than 3X last year's carryover.

As I have been mentioning this past week, the crushers, or whomever it has been, who have been playing the game with the August bean contract and jamming the price higher, are winning the battle at the expense of losing the war for the farmers who have been watching the price action in that particular month and been led to believe that higher bean prices are just down the road.

Today's USDA numbers did nothing to discredit the notion that this year's bean harvest is going to be producing a huge amount of beans. There is nothing in this report as far as the beans go that would give those looking for higher prices down the road the least bit of consolation. I wonder how many farmers have hedged any expected bean production at this point?

The corn has been a bit different. USDA left both planted and harvested acreage the same as the July report, 91.6 million planted with 83.8 harvested. They did however raise the expected yield from 165.3 bushels per acre to 167.4. I think there was a bit of disappointment that the number was not nearer the 170 bushels that some private advisory services were forecasting. USDA tends to be conservative however and we are therefore going to have to wait until we get closer to the actual harvest and start seeing some actual results before they will push that number higher. Personally I will not be surprised to see the number work higher as the combines roll, especially if the current weather forecasts hold and allow this record crop of some 14.032 billion bushels to finish up without any stress. While the market may have been looking for a higher yield number, and while bulls are trying to talk up the miss in expectations as bullish for the market, it is hard to find anything bullish about a crop of over 14 billion bushels.

I can see buying coming into the corn market as some try to force a bottom based off today's USDA number but I am doubtful that this is anything more than a lull in the coming storm.

USDA did manage to add another 50 million bushels for feed usage, up from 5.2 billion bushels, but frankly I am at a loss to explain that. The cattle herd has been shrinking and the hog herd has been hit by the PED virus knocking its numbers down considerably. Perhaps they are basing this increase in usage on producers feeding a larger quantity of the corn to bring their animals to heavier weights, something that has been occurring with the hogs for certain. With the cattle industry moving away from Zilmax, it could be USDA is also trying to allow for increased corn feeding there as well. We'll have to see how that works out.

Either way, they did show a 25 million bushel increase in projected exports which combined with increases in the other categories bumped up total demand to 13.435 billion bushels from 13.335 billion last month. The result was an increase in total carryover to 1.808 billion bushels compared to last month's projection of 1.801 billion.

To provide a bit of perspective, the past marketing year's carryover is currently projected to be 1.181 billion bushels.

When I look at these numbers for both the beans and the corn, I am growing increasingly concerned about the storage capacity for what is going to be a massive harvest. I can only hope that some farmers have gotten some downside protection on their expected production as I can easily envision a situation in which the supply is going to overwhelm the ability to store it.

A brief comment on the tragic passing of Robin Williams. I grew up watching him and laughing at his incredible wit and rapid-fire ability to roll off one barrage of comic laughs after another without even seeming to need a pause to collect himself. To say that he was talented, is an understatement. He was a once-in-a-generation gift to us all!

 How very sad that a man who could make millions laugh and forget about their own problems for the moment, could have been suffering with his own sadness and inner demons to the point where he would take his own life. In watching interviews of him speaking about the joy he received from watching his children grow, it struck me that they are now deprived of a man who deeply loved them. Not only that, but he tragically deprived himself of their love towards him.

That the form of depression from which he was suffering, could overwhelm such a kind and compassionate man and bring him to the place where he would lose sight of the love of those children and the joy they brought him, as it swallowed him up in its own black hole, is something that should give us all pause to reflect upon. There are so many hurting people in this world, some of which are perhaps very close by to us. A friend, a neighbor, a family member - maybe all they need is a kind word reaffirming what they mean to us or how we appreciate them and value them. It is easy to become wrapped up in our own little worlds to the point where we are senseless to the pain and hurts of others.

I have said it on occasion here that there is more to life than the movements of prices on the computer screen. I sincerely mean that. We do what we do because we want to be able to provide for our families and to have sufficient means left over to help those who might be in need. Life is too short as it is; living it so that we have no regrets on our death bed might perhaps make us all soberly reflect on those things that endure.

I just yesterday learned that a friend of mine has been diagnosed with Stage 4 lung cancer. He is 52 years old, married with children. In talking with him, he told me that he tried to take good care of himself so that he could live a long life. He never smoked, exercised, was not around harmful fumes, etc., and yet he somehow came down with this dreaded disease. Now he has been told he has perhaps 15-18 months to live.

Events like these tend to put things into their real perspective. Markets are what they are and those of us who make our livings live and breathe in them. But after all is said and done, they mean little in the scheme of eternity. What matters is a man's character. One can be wildly successful at trading or investing or whatever, but are those the things that will occupy our thoughts on our death beds? I think not.

Thank you for allowing me the opportunity to just give voice to some thoughts about these things.

Old Crop August Soybeans undergoing the long-expected short squeeze

Take a look at the following chart of the August bean contract which is currently in its delivery period.

The story here is the historically small old crop carryover or ending stocks. With what is expected to be a massive bean crop this year, strong hands have been holding the beans and refusing to let them go. End users who could not wait for the new crop to start rolling in have been forced to pay outrageous prices for these beans to the point that the bull spreads have run the August to an incredible $2.40 premium to beans for November delivery.

We are going to get reminded of the tightness of those ending stocks in tomorrow's USDA report and that has kept selling pressure from intensifying in the rest of the bean complex. With basis weakening however, it did make one wonder if today might have been the last hurrah for the crushers or those who are having some great fun at the expense of the trapped shorts in the nearby August.

To give you an idea of just how many shenanigans are taking place, August beans closed 30 cents higher today while November beans closed 11.5 cents lower. That is a swing of 41.5 cents in just a single day.

This afternoon we will get the usual USDA crop conditions reports so between those, and the expectations heading into the upcoming report, that will set the stage for what could be some very dramatic price moves when the report hits the wires tomorrow morning.

As I am typing this, the crop conditions reports are now out. For corn, the Good/Excellent condition remained the same this week as it was last week, 73%. The difference however was that the Excellent category dropped 1% while the Good category picked that 1% up.

In the big "I" states, the crop condition dropped slightly in Indiana and Iowa while it improved in Illinois.

The corn crop is 96% in the silking stage which was at 93% last year at this time and the 5 year average of 95%. 54% of the crop is in the dough stage compared to last year's 36% and the 5 year average of 46%. Again, this crop continues to remain ahead of schedule.

For beans, the crop deteriorated slightly moving from 71% Good/Excellent last week to 70% this week. Illinois looks outstanding for beans with 78% of its bean crop rated Good/Excellent. Indiana is at 67% which is down from 71% last week. Iowa is rated 75% Good/Excellent which is actually up from last week's reading of 74%.

Beans continue to remain ahead of schedule on an historical basis with 72% of the crop currently podding compared to 55% last year and the 5 year average of 65%. That bodes well for the crop given the current temps. If anything, with the lack of intense heat this year, some are actually hoping for warmer temps to hurry the crop further along ahead of any potential early freezes. With the crop this far ahead of schedule already, that tends to lessen any concerns that some might have from freeze events that would come earlier than normal.

Some were talking deterioration in the bean crop across the northern growing areas which were drier last week but what I can see from the report, I just do not see the deterioration that some are trying to talk up. Indiana seems to have taken the biggest hit but Iowa actually improved and Minnesota is essentially unchanged. North Dakota only lost 1% point from the Good/Excellent category which stands at 73% compared to last week's 74%, hardly a disaster in the making if you listen to some of the bullish comments. Same goes for Wisconsin which is 70% Good/Excellent this week, down from 71% last week.

Additionally, we have been getting some decent rains across the entire mid-West since the time that those surveys were completed. From where I sit, it still looks to me like the crop is going to be very, very strong. You have no heat stress showing up in the forecasts at the moment and what looks like plenty of both subsoil and topsoil moisture to allow those pods to fill out nicely.

My guess is that traders are going to tread cautiously until this USDA report is out of the way as I just do not see enough from this afternoon's conditions reports to move the market in a big way. The corn is in as good a shape at this time of the year as it has was all the way back in 2004. In other words, this is the best looking corn crop we have seen nationally at this time of the year in a decade.

Ukraine Events Supporting Gold, but for How Long?

We are back to the same old "Tale of Two Cities" when it comes to gold. It is garnering support from fears of escalations in Ukraine but seeing selling pressure from concerns about higher interest rates coming to the US.

In looking at the falling yield on the Ten Year, it is hard to envision rising interest rates but both bonds and notes are responding to safe haven flows due to those above mentioned geopolitical concerns at the moment, and that is temporarily masking the slow, but certain shift in sentiment concerning interest rates.

Talk continues that the Fed will be out of the QE business before the end of the year but will hold pat on hiking rates until Q2 of next year. Such talk in recent weeks has put a bid into the Dollar and led to selling in the Euro but money flows coming off of Ukraine are clouding issues for Forex traders at the moment.

The reason I chose the above headline is because deep at heart I am essentially a fundamentalist when it comes to trading. I do not like trading any market that I do not have a solid grasp on the fundamentals. I then rely on technical analysis for entry and for exiting. Over the years I have learned to know the "why" behind moves before I commit to it. If I do not, I simply don't trade it. Others may have a different philosophy but this works for me and thus I stick with it.

Case in point - I have made the claim that I am concerned about the fortunes of the gold market should events in Ukraine recede from the forefront of traders' minds. With a stronger US Dollar, with talk of rising interest rates here in the US, and with commodity indices that are all down on the year, several of the fundamental pillars for a SUSTAINED rise in the price of gold are notably absent.

Yes, gold has been strong of late but as I have written many times here, I learned never to chase gold prices higher on the heels of a geopolitical event. I have been burned too often in the past and have learned my lesson. Since no one knows how an event like that will resolve itself, no one really knows with any degree of certainty when the gold price will have factored in the worst. Once that occurs, (Provided that the event does not worsen or escalate), gold usually surrenders most of its gains. Those who come late to the party are then inevitably left holding the bag.

What does this have to do with fundamentals? Answer - take a look at the chart of GLD, that big gold ETF. Studying this chart in relation to the price of gold has been invaluable to me as an asset to gauge one of the fundamentals that I like to track, namely Western-based investment demand. Look, it is a given that Asian demand for the physical metal has been solid for many years now. I will not waste time arguing whether or not Chinese demand is waning. I happen to believe that it is but others argue that the true level of demand has been masked because of changes in the entry point for gold coming into the country. Fine. Each has their own view on that. It is however irrelevant as far as I am concerned because the factor that led to a SUSTAINED rise in the price of gold prior to the end of the bull market was enormous Western-based investment demand.

One can look at the chart of gold holdings in GLD and compare that to the price of gold and easily see that when money flows from the West were pouring into this investment vehicle, gold was soaring. As money left it, the price of gold began moving lower. What could be more simple than that?

Demand and supply; demand and supply. When all is said and done, the essence of price discovery can be distilled to those two simple factors.

So why am I concerned about gold at this point when so many are bulled up about it as they talk war and collapse, etc. Look at the chart:

Does this look like Western-based investors are tripping over themselves to buy GLD? Would you like to know what the most current reported holdings of the ETF are? Answer - 797.65 tons. Not only has that number been falling as the metal works higher at the Comex on war fears, but it is also now DOWN on the year! At the end of 2013, ( or the start of 2014 if you prefer), reported holdings stood at 798.22 tons. GLD is now down a bit more than a half a ton on the year.

In trying to be as objective as I possibly can, how can anyone look at this number and not be concerned? Where is the haste to acquire the metal or metal products in the West? If it is there, I certainly do not see it.

Yes, I understand that there are other sources of demand for the metal; gold bars, gold coins, etc. that do not show up in this sort of chart. However, I do not think it can be successfully argued that demand among Western-based money managers for gold was not a huge source of demand during the bull phase of the metal's run. This group, or more accurately, the demand from this group, is simply not there at this time.

As a trader or an investor, one wants to have powerful "friends" with them when trading positions in the market. What I mean by this is that one wants to be on the side that hedge funds and other large players are on because those are the ones with the huge capital at their disposal. You can talk all you want about "contrarian" trades but I have learned through painful experience that I would much rather have the hedge funds on my side than be against them. The sheer firepower at their disposal can make even large, well capitalized commercial interests pale at times.

The surest and quickest way I know of to turn a large commodity trading account into a small commodity trading account is to be on the wrong side of a hedge fund buying or selling binge. Do it at your own risk.

That brings me back full circle to the question I posed in the headline. If one is looking for significantly higher gold prices then one should want to see a steady, sustained rise in reported holdings in GLD. If not, then all I can say is that you had better be very quick and nimble when it comes to gold. It can reverse on a dime. If one is long based on the expectation that events will further deteriorate in Ukraine, then that is understandable. Just be careful and don't get complacent is all I want to say. If something occurs over there to significantly lower tensions, gold will surrender a goodly portion of its recent gains because traders will then shift their focus to the negative factors for gold.

As a last comment to the rabid gold bugs - Yes, I know you will hate reading this and I know you will want to vent your spleen at someone who is giving an honest opinion. Spare us your venom. You can rant and rave and spew out all the trite arguments that you have mustered over the years but that will not change the reported holdings in the GLD, nor the fall in commodity indices nor the stability in the US Dollar. If those things change, I will happily note it. If they do not, then I suggest you are losing reason for gold to move to the kinds of levels that some in your camp are throwing around.

Markets move when they are good and ready to move - screaming, throwing temper tantrums, slandering others with different opinions than yours will not do a single thing to disturb the gold market. It will do what it wants to do when it wants to do it. Learn that and accept it - you might be a happier person. As it now stands, one thing I have learned - the rabid gold bugs are your best friends as long as you sing from the same choir book. Change your tune, respond to changes in the price charts and to investor sentiment and money flows, and they are some of the vilest, most bitter and malicious people you will ever run across. Touch their yellow metal god and they will curse you and spew out hatred which is astonishing for its ferociousness.

By the way, cattle are down the limit a second day in the row... as long as I have been at this it still never ceases to amaze me at how quickly sentiment and prices can change!

Russian Food Ban sends Livestock Futures Reeling

Russia has announced a retaliatory ban on food products from nations supporting the sanctions that were imposed on it in response to the ongoing events in Ukraine.

Personally the food ban is going to do nothing except to hurt their own citizens by driving up the cost of food there but it has just knocked a huge chunk of profitability out of the pockets of US livestock producers.

Here are the cattle and hog charts. You can see the carnage that the ban has produced. August cattle are limit down. Feeders were down the limit but have managed to bounce slightly. There is some buying coming into the August  fats as it pops off the limit but selling remains heavy at the moment.

Hogs are getting sucked into the downdraft with the impact being felt more so in the 4th quarter contracts rather than the August which is already deeply discounted and goes off the board next week.

This is the reason that I have been suggesting to both cattle and hog producers for some time now to secure downside hedge protection on expected Q4 production. As a producer, you simply do not have the luxury of staring record profits in the face and not doing a single thing to LOCK IN those profits and GUARANTEE yourself some outstanding, once-in-a-lifetime profits on your product. One never knows what sort of event came come out of the clear blue sky and strike. In a single moment, all of those profits have now gone up in smoke, vanishing, never to be regained. Speculators can play this game but not producers. You are in business to make profits; not risk them. Take them while they are there and lock them in when you can, not when you have to. Remember that if you are a producer of any sort.

My own view is that the market overreacted to the news since Russian red meat demand from the US has lost quite a bit of the significance that it once held over our markets many years ago. I recall trading hogs one year in which Russia announced a ban on US chicken. That sent the entire hog industry into a state of collapse ( it was back in 1996 if memory serves me correctly).

Our export markets have grown considerably since then with a large array of good and reliable importers from abroad. However, old habits die hard and the knee-jerk reaction was to sell first and ask questions later. Once that occurred, the fund computers took over and that is pretty much all she wrote for the rest of the session.

A quick note - The US Dollar is back up there knocking on that overhead resistance door near 81.66 basis the USDX. Safe haven buying is supporting the Dollar as well as bringing buying into gold and the US bond market. If the Dollar does managed to stage an upside breakout, I suspect gold is going to struggle once geopolitical issues fade.

As said many times here of late, gold bulls are basking in the geopolitical fears around Ukraine. As long as that is on traders' radar screen, the metal will hold as it will find dip buyers. If that event were to lose its significance in the minds of traders ( and unless one has an infallible crystal ball and unerringly knows the future when that might occur ) look for selling pressure to hit the metal. Until IF/WHEN that happens, support is intact under the market. All I can say is that traders who believe the Ukranian fears are overrated are going to be selling this rally. Those who look for the situation to worsen, will be buying the dips. One side or the other will eventually be correct. So unless you infallibly know the future, be careful but above all, ignore EVERYONE who is making price predictions about the metal. They know nothing further than any of the rest of us how all this will play itself out.

Beneficial rains are bringing pressure on the grain markets this morning after they experienced a "Ukranian bounce" in yesterday's session. Weather across the Midwest looks ideal for corn and beans to finish up. Corn is essentially made at this point. With beans ahead of last year's pace, the August weather thus far has been almost perfect. Tight old crop supplies in the hands of domestic crushers is supporting the bean market for the time being. Crushers are not turning loose of those beans and that has so far resulted in no deliveries against those August contracts that are in their delivery period. This is going to be interesting to see as the basis weakens.

My own personal view is that the crushers who are holding those beans back are propping up the entire bean market, both old crop and new crop. That is keeping farmers from selling but it is also going to be an important factor as S. American farmers get ready to plant down there. With beans being out of whack price wise against corn, odds would favor more acreage going to beans at the expense of corn. I am concerned that a huge crop here in combination with the potential for huge acreage going to beans down in the Southern Hemisphere, could leave a large number of US farmers stuck with very little in the way of downside price protection at the same time available storage is in going to be strained.

I cannot tell US crushers how to run their business but I believe that they are going to end up hurting many US farmers as they play this game of chicken with the market.

More Selling hitting Commodities

One look at the chart says it all:

A fresh 6 + month low was made in the commodity sector earlier this AM.

Some might recall a while back I mentioned that the forward curve in the commodity markets was suggesting LOWER prices ahead, not higher prices, as the backwardation that existed in some of the major futures markets was dissolving with the structure moving more towards the typical contango structure. That was especially true between the old crop ( 2013) / new crop grains spreads.

With the US Dollar attempting to gain some further upside traction and with the commodity indices plunging, as well as the idea that interest rate hikes are coming to the US sooner rather than later, the headwinds against gold are gathering.

Gold bulls had best be thanking their lucky stars for all the geopolitical risk in place right now. Were it not for that, it is unlikely gold would be maintaining itself above key support near $1280.

I noticed that we finally got an updated number for the gold holdings in GLD yesterday. The number had not changed for nearly a week. The new number is a DECREASE of some 1.8 tons. Interestingly enough, the newly reported 800.05 tons is about the same amount that gold holdings have increased since the last business day of 2013 when the ETF reported holdings of 798.22 tons. Another way of saying this is that over the last 7 months, there has been a increase in gold holdings of a paltry 1.8 tons. Clearly Western-oriented investor demand for gold is comatose at the current time. Perhaps that will change as we move forward into Q3 of this year but that remains yet to be seen. With Chinese demand falling off and with Western investment demand on the wane, gold bulls need something to spark this market. It is very sad but that essentially means that they are either going to have to wish for, and even pray for, bad news for someone.

Knock, Knock, Knock... Here it Comes once more

By that, I am referring to the US Dollar, as portrayed by the USDX. The greenback is once again knocking on the door at the top of a nearly year long trading range. That door is up near the 81.65 level. The bottom of the range is near 79.

The week is not over yet but this far the last month has seen the Dollar firm and garnering strength as more and more traders/investors are coming around to the view that the Fed will be the first among the Western industrialized nations to raise interest rates. Today's Service Sector ISM reading did nothing to disabuse them of that notion as it was very strong; stronger than expected in actuality.

Here's the chart...

If the Dollar can manage to finally put up a Weekly CLOSE above that zone noted, it can easily run another full point and should be able to even make a push to 83. We'll see what we get come Friday of this week.

The number sent the Euro reeling. It fell through last week's low and is currently sitting right on support near 1.3370. Failure to hold here should allow a move to the stronger level of support centered near 1.330.

Once again, for the umpteenth time, the usual price predictions from the same culprits ( who never seem to tire of pulling this sort of stunt ) that silver was about ready to experience a massive short squeeze any day now have failed to materialize. I am pleading with any of the readers here at my site who continue to give these charlatans the least bit of credibility to please ignore them and study the price charts for yourself.

Here is a simple fact - they no more know the direction or the timing of the next move in silver, or for that matter any other market,  than anyone else on this planet. That they hold themselves out as those who do is cause for embarrassment and for shame but then again, when it comes to puffing up themselves like peacocks , some have no shame. Ignore them and let them go on making fools out of themselves but do not base your investment strategy around the claims of such people. They CANNOT BE UNBIASED because their livelihood depends on creating demand for their products or services. Remember that.

The charts are your friends. You may not like them or may not agree with the charts, but fighting them is a hopelessly quixotic errand that will cost you very, very dearly. I have been at this business for over a quarter of a century and while there are some markets that I know very well and trade daily, I still do not have the temerity to suggest that I know exactly when they are going to make a move or to what extent. If I did, Bill Gates would have a rival for one of the world's richest men.

The best of us are still mere mortals. Some have more experience than others and are perhaps a bit wiser but we are not omniscient. There is only ONE who is.

As said many times here before, the grace of humility is much more befitting of a successful trader than arrogance and unbounded hubris.

Weekend Comments

If you want to see what the obstacles are to gold embarking on a new, sustained, sharp upward trending move, take a look at the following set of charts.

The first is one drawn from the Commitment of Traders reports. It denotes the TOTAL OPEN INTEREST. I use this to get a sense of money flows either into or out of, a commodity.

The dark line is the total open interest. Can you see what it has been doing since the peak in the gold price back in 2011? It peaked well over a million contracts of futures, plus options. This week it had nearly fallen to nearly one half of that record level!

What does this tell you? Answer - "interest" in gold as an asset class among Western-based investors has plunged over the last three years.

What has been the result? Answer - the gold price has also plunged.

Inference - speculative demand drives gold prices. If that demand falls, so too does the gold price. If that demand rises, so too does the gold price. There is nothing sinister about any of this as those constantly crying up "manipulation" would have you to believe . It is a function of demand or the lack thereof.


Here is the next chart to consider. It is the reported holdings of the large gold ETF, GLD.

The amount of reported gold holdings in the trust at the end of last year was 798.22 tons. The yet to be updated amount reported as of this Friday's close was 801.84 tons. That amounts to a rather lackluster increase of a mere 3.62 tons in eight month's time. Hardly the stuff of legends now is it?

The point in this is to illustrate SENTIMENT. Frankly as a trader I try not to get too bogged down in intricate details when looking at things like this. I want to try to glean whether or not an asset class is in favor among the big speculators that dominate our markets. If it is, I want to be with them. Trying to fade them and play the "contrarian" is a surefire method to lose money. One has no idea when they are going to shift. You can observe their buying or selling and try to anticipate what they are going to do, but until you get a clear signal, do not act, unless of course you enjoy donating your wealth to them on a regular basis.

There seems to be a mindset among some reckless individuals that a successful trader is "brave, daring to go against the masses and take the other side of a popular trade". They seem determined to prove to themselves how noble they are or some other such nonsense by so doing.

 You see it all the time... "prices have fallen so much that it is time to buy". It is said that " a fool and his money are soon parted". That is never so true as in the trading arena, and particularly in the commodity futures world. How do you know that the price cannot fall further? Or how to you know that the price cannot rally higher if you are shorting a market? Answer - you don't. Now of course you can roll the dice and gamble that you are correct but trading is not gambling. I would suggest that if you want to gamble that you exit the trading profession and become a full time player in Vegas. If you are going to lose your money, you might as well do it surrounded by beautiful women and good food and music! It sure beats giving it to some nameless hedge fund manager and his pet computer.

Switching gears here - I mentioned that I wanted to see this week's COT reports for corn to determine whether or not the big speculators were still on the net long ( AND WRONG) side of the corn market or whether they might have finally made the transition to the short side. Guess what? They are still long and wrong! I continue to find this nothing short of astonishing. I have seen a lot of bull and bears markets in the commodity sector in my time but I cannot remember very many of them in which the largest specs had missed out and were on the wrong side of a major trend.

This corn market therefore astonishes me.

Take a look at the chart...

Now look at the positioning of both the hedge funds and the other large reportables. Both of them are still net long

You will observe that the hedge fund net long position peaked in April of this year when corn stalled out near $5.20. Since then it has fallen nearly $1.70/ bushel.

The hedgies began building their net long position back in November of last year when corn prices were in the general vicinity of $4.20. Prices have fallen another $0.70 since then meaning those hedge funds who bought in last November and who are still long are seriously underwater on their trades. One would have thought that once that entry level was violated on the charts, their computers would have taken them out. Apparently not so.  

Not to be outdone, the other large reportables have been net long corn since the days of Noah. They too are getting their butts handed to them. The little guys however, the small speculators, the ones that are constantly being mocked by the big specs as being the "dumb money" have been taking the large specs money from them as they have been short this market for a long time.

Obviously I am speaking in generalities in the sense of "categories" since not all hedge funds are losing money ( some are indeed short as are some of the other large reportables) but the point is being made that sometimes even the large specs screw up royally in a trade.

My question at this point is whether or not the big speculators are ever going to actually move to the net short side of this market. They did so in the soybeans but have not yet done so in the corn. If they do, and I have no way of knowing whether or not they will, there is a fair amount of further downside in the corn market. Maybe they will essentially move to being flat and that will do it for their selling but even if they do that, we could easily see corn drop another $0.20/bushel from current levels, if not more.

I would think that end users would look at prices at that level as being so cheap compared to recent years that they would trip over themselves to get long side coverage. Ditto goes for the export buyers but I have learned that low prices can always go even lower. We will just have to watch the price action and see what the market is telling us.

Still, this is one of those charts and years that I am planning on not forgetting. A huge bear market in which the largest speculators have missed the move lower and were on the wrong side with the small speculator reaping the reward.