GLD Drawdown Continues, Confirming the WGC Findings

If you have not taken some time out to read through the World Gold Council's recent report on the gold market ( see my earlier post from today for the link) I would strongly urge you do so. It is an excellent and illuminating read.

I already made some comments in regards to the section on ETF's.

In tracking the largest of these gold ETF's, namely, GLD, this afternoon is just more confirmation of the accuracy of that report. They have come to exactly the same conclusion as we have over here - namely that money is being pulled out of GLD in order to take advantage of obtaining better yields elsewhere, specifically in equities.

Notice that ever since that big upside day in gold last week (Nov 7), when we got a massive short covering burst of buying on the heels of the jobs report, the reported tonnage in gold has continued to drop. Simply put, investors are taking advantage of the moves higher in the price to exit and put the money to work elsewhere.

Here is the latest chart of GLD and it is a doozy. Since the day just before the big price surge last Friday, GLD has disgorged another 12+ tons of the metal. It's holdings are now down to 720.62 tons, the lowest level since September 2008. Interestingly enough, it is back to levels last seen PRIOR to the onset of any of the QE programs by the Federal Reserve.

Also, as of today, the ETF has shed an astounding 77.6 tons of gold this year alone. No matter how one slices it or dices it, that is one heckuva lot of gold.

As I have stated so often over here the last couple of years, the market sees no inflation worries whatsoever at this point so any buying of the metal as an inflation hedge is non-existent.

Just look at the carnage in crude oil today and the liquid energies! Crude oil prices are falling out of bed as the world is swimming in the black goo. The impact from this key market is being keenly seen on the various commodity indices.

Here is the latest for the Goldman Sachs Commodity Index. It hit a 51 month low today! The last time it was at this level was all the way back in September 2010!

Just look at this chart of unleaded gasoline. I recall posting a chart of unleaded just very recently and remarking that it might actually put a "1" handle in front of the price at the rate it has been plummeting, but I never expected to see it get there this quickly! Talk about a bonanza for the transportation industry and for the consumer!

This is coming at the perfect time for retailors as it puts more money in the pocket of the US consumer at precisely the exact time for Christmas shopping season. No wonder retail stocks are doing what they are doing!

I think this has a lot to do as well with the fact that the cattle market simply refuses to break down. As the frequent readers know, I am on record as saying that I believe both pork and beef prices would come down in Q4 and certainly by Q1 2015. Pork prices had come down somewhat ( they are now beginning to movce back up at the wholesale level) as had beef, but only slightly. My view was that the economy was too weak for consumers, who had been cash strapped to afford record high beef prices, especially in light of cheap pork and chicken. However, the beef market has been the beneficiary of these incredibly cheap gasoline prices which is freeing up money for consumers to spend elsewhere. As a result, packers have been able to force the wholesale price higher and so far, distributors and grocers have been willing to pay it. Apparently they are able to move it, high price notwithstanding. It is almost as if demand for beef is proving to rather inelastic due to the cheap gasoline prices.

Just look at this market. Talk about one helluva strong bull! I keep watching this for some evidence of a top but the funds are in the driver's seat and are pushing it for all their worth. Until the beef shows signs of end user resistance, feedlots are in control and are squeezing packers and forcing them to pay up, even though they are losing in the vicinity of $100 head for every single animal they put down. Good thing they have such excellent margins in the hogs.

A brief comment on the gold - again, nothing doing as it remains range bound. Safe haven buying related to the ongoing mess in Ukraine is propping it up with strength in the Dollar keeping pressure on the market. I expect this standoff to continue for a while until we get some piece of fundamental data to drive it either way.

The mining shares are proving to be of no help whatsoever to the metal as they displayed exactly ZERO upside follow through to last week's one day wonder.

Copper is trading below $3.00 and in my mind, that is a very big deal, especially if it stays below that level.

The Japanese Yen has entered Asian trade at this moment notching a fresh SEVEN YEAR LOW against the US Dollar.

 Lastly, one of the things I must do as a trader is try to juggle all the various cross currents that buffet the markets that we trade and try to understand their impact on price. One thing I can say is that in an environment such as this one, where the overall trend for commodities is lower, it makes me suspect rallies that might break out in certain sectors. I have to respect the chart pattern but I do wonder about their staying power. Thus far cattle have been the exception as has been the meal market, which continues to drag the grains higher, but one wonders how much longer those stalwarts are going to be able to buck the wider trend.

World Gold Council Issues its Latest Report

I would urge my readers to take some time perusing the contents of the WGC's most recent report on supply and demand in the gold market. It is a most informative read.

I wanted to pull a short extract from their section on ETF's as I found their analysis remarkably similar to mine when it comes to GLD for instance.

From their GOLD DEMAND TRENDS, page 6:

"ETF outflows were far smaller in scale than those in Q3 last year. As of end-September, ETF holdings have declined by a little under 84t, equivalent to just 12% of the outflows over the same period of 2013. This lends weight to our analysis - as laid out in previous research - that more tactical investors have largely exited and the remaining base of ETF positions are held as strategic investments.

There was, however, little during the quarter to encourage fresh investment in ETFs as investors kept their gaze locked on the US economic scenario. The prospect of US interest rates remaining low 'for a considerable time' and the widely-anticipated end to quantitative easing( QE) by the Federal Reserve eclipsed all other considerations. The soundness of gold's underlying fundamentals was widely acknowledged, but in itself offered little fresh impetus to drive an increase in investor positions."

Is this not exactly what I have been saying here? To launch gold into a soaring bull market, as the gold perma-bulls continue to assert it would be were it nor for constant price manipulation by banks acting as agents of the Fed, requires steady inflows of investment capital ( HOT MONEY). That requires a CHANGE IN SENTIMENT towards gold which currently is not there among the Western-based investment crowd.

The continued drawdown in GLD is EVIDENCE of this lagging Western-based investment demand for the metal. Those types are moving money into equities where the big return on invested capital has been made this year.

When the WGC speaks of "tactical investors", I substitute hedge funds. Those are short-term oriented, market timing and MOMENTUM-based trader/investors. They are simply not interested in the metal at this time. Many of those entities are selling their holdings in GLD, which are producing nothing in the way of gains and moving those funds into equities and putting the money to work there. That is simply smart money management. After all, hedge funds get paid to produce profits - not sit on invested monies which are going nowhere and potentially even losing! That is why you see them shorting the metal.

The ones who are interested, as the report says, are more long term oriented investors who see gold as a strategic asset to hold in their portfolio. Many of us at this site fall into this category but we are with the "tactical investors" when it comes to reading the price charts and understanding the current rather poor sentiment towards gold among traders and short term oriented investors.

Changing the theme slightly now, I am especially interested in the section on "hedging". I always find it fascinating to see how little downside protection most mining companies manage to put in place for themselves. Essentially they become businesses largely involved in speculation rather than mitigating risk and locking in profits. It is a strange business model that most commercial firms would have some real problems with.

Perhaps that is one of the reasons that their stock price sink so rapidly. Investors realize that many have few, if any, strategies in place to mitigate price risk to the downside and will punish the share price mercilessly as a result.

Here is the link to the report....

http://www.gold.org/supply-and-demand/gold-demand-trends

Soybeans and Shortened Life Expectancy

If you ever see me on the street and I am making some incoherent mutterings, I ask for your sympathy. You see, I am suffering from what is referred to as an acute case of SOYBEANITIS.

This is a serious condition brought on traders by prolonged, incessant exposure to the bean market. It impacts different traders in different forms but the one common among them all is that it results in an inability to form complete sentences. Short bursts of random words such as:

"What the ****!"

"You've got to be kidding me!"

" I am not believing this"!

"What kind of idiot would do that"?

"NO way"!

"What planet do they live on?"

When a trader afflicted with soybeanitis attempts to string all these expressions together, the words come out  in rapid fire succession, more often than not, completely jumbled, intermixed, interposed and transposed with the result that it produces a strange amalgamation of sounds that some have said sounds a great deal like the Klingon language from the old Star Trek shows.

What I am referring to is a follow up to the chart I posted earlier today. After today's session, those zombies on "The Walking Dead" are probably former soybean traders.

Here is the updated chart AFTER the close of trading today.

There are a couple of things to point out here. First, in the early part of the session, funds went on a buying binge across the entire grain floor. They took this month bean contract up through the 100 DMA yesterday and proceeded to push it even higher. In the process they closed the gap formed on the continuous chart back in mid-July. That gap was formed from the transition from the July contract to the August contract which was trading at a discount to the July as traders had begun to dial in the enormity of this year's crop.

However, after the fund buying exhausted itself, the market began to slowly fade. I get the impression that a lot of guys were looking at the huge rally from off the lows near $9.00 and turned to one another remarking: "What in the hell are we doing way up here?"

Whether or not that is true is immaterial. What did happen however is that the market seemed to run out of buyers up here. Price then faded and as it did, it looks as if some of the longs began to bail out. I am unsure at the moment but I suspect we finally awakened some serious commercial hedge-related selling.

The point is that the bulls failed to hold the priced above the 100 DMA. If they had been able to come in and buy it near that level and push it back away from there, I would have to say that they had a very good chance at changing the bear trend and actually cementing a longer term bottom. Now, I am unsure once more.

Not only did they fail at the 100 DMA, they also failed to hold the price at the BOTTOM OF THE FORMER GAP. They had pushed into that gap in yesterday's session and actually closed the gap, but they penetrated through the upper edge of the gap again today. However, by the time the closing bell rang, price had fallen below the low of the gap. From a technical analysis perspective, that constitutes a failure and would normally usher in some selling.

With this market however, who the heck knows? I thought the same thing after we got that USDA report on Monday. Then yesterday all hell broke loose to the upside with that outside reversal day ( in the meal) erasing the outside reversal day lower from Monday.

I was actually hoping we would see yet one more outside reversal day today so we could make it a perfect trifecta. By the way, I am trying to recall any time in my entire trading career in which I ever saw three back to back outside reversal days. Guess that will have to wait for another time?

The way this market has been of late, who the heck knows what it will do next. As of today however, the bulls have been wounded somewhat as the beleaguered and shell-shocked bears managed to land a body blow. Stay tuned - this one ain't finished yet... but maybe the bears are starting to dig in up here.

Quick comment on gold - nothing doing right now... just stuck in a range as I had noted the other day. It might be a season for price consolidation before a fresh leg lower or the bulls might be able to take it up through $1180 and try changing the handle to a "12". Just like the beans, the jury is still out.

Soybean Bulls Recapture the Bean Market

I have been writing of late how the strength in the meal has led the entirety of the grain floor higher, as it has been dragging not only the actual beans higher, but also the corn. It now appears that the beans themselves, which had been moving higher but had not put in as impressive a performance on the charts as had the meal, are now doing just that.

Bulls have not only managed to close a significant chart gap, but they have also bested a key technical indicator, namely the 100 day moving average. That level should now serve as support on any downside tests for the bulls to maintain control of this market.

If it does, the next likely target for the bulls is near the highs made in August. As unlikely as it seemed based on the size of the mammoth crop, the logistics involved in an historically low 2013-2014 carryover of some 90 million bushels, have set meal and bean buyers competing against each other to secure sufficient supplies to meet current demand.

I do not know how long this can last in front of such a massive crop but one cannot argue with the charts and expect to either prosper or survive, especially in this day and age of gargantuan hot money flows which obliterate everything in their path. With so very few commodity markets moving higher on account of the strong Dollar, when funds do find a market that they can push from the long side, as they recently did with cattle, they will mercilessly force it higher to maximize their profits.

It is interesting that the Brazilian Real continues to sink against the Dollar making US beans less and less competitive on the global market but for now, no one seems to care as the mad scramble is on to obtain meal supplies, regardless of cost. How the bean and meal markets end this week is going to be key to whether or not this is the merely the waning moments of a counter trend move or the actual start of a new bull trend.

I will be the first to admit that I did not think this was possible given the currency differentials, the soaring Dollar, and the size of the crop, both here in the US and what is expected in S. America. There is certainly not going to be any shortage of beans based on all the available information we have but apparently demand is there to absorb it all, at least for now. I still wonder what is going to happen to prices when the supplies of meal become more plentiful and crushers' margins start to erode.

Yesterday's Outside Reversal in Meal, Negated by Today's Outside Reversal

Please see the comments and chart I posted yesterday asking the question whether the Meal has finally topped out. That price action was in response to a bearish USDA supply and demand report for the beans, especially the global supply numbers that they announced.

Today, that report was completely ignored. Instead, hedge fund computers began gorging themselves on the meal and the beans early in the session with the result  being an enormous reversal day on huge volume, this time to the upside.

In other words, today's OUTSIDE REVERSAL DAY exceeded the range of yesterday's reversal day, which had exceeded the range of Friday's.

Welcome to the idiocy of the modern futures markets, courtesy of both the hedge fund algorithms and the exchange officials who not only allow it, but love it.

I should note that the volume in the contracts that I was tracking actually exceeded the volume of the USDA report day. In all my years of trading, I cannot recall seeing anything remotely like this. Report days generate massive amounts of trading and produce huge surges in volume as the markets react to what is the new demand/supply numbers provided by the USDA.

This is the reason I have to constantly take the gold permabulls to task for their erroneous, breathtaking comments and articles detailing what they naively refer to as "Flash Crashes". I have no problem with anyone noting huge swings in price but those who propose the Flash Crash theory when it comes to GOLD, use it as evidence that the price of gold is being manipulated by the bullion banks, acting as agents of the Fed, to suppress the price of the metal.

As I have written in response to this nonsense more times than I can remember at this point, "Flash Crashes" or "REVERSE FLASH CRASHES" are now the NEW NORMAL in many of our futures markets, thanks to these pestilential computer algorithms and the fact that there is such an enormous amount of hot money that has been throw into the futures markets, markets which are simply too small to handle either the ingress or egress of such huge sums of money.

This is where I fault not any supposed "evil bullion banks" but rather those who are charged with enforcing strict limits on the number of futures positions that any one entity should be allowed to place in any one market.

Many years ago, when we had transparent, honest and "normal" open outcry pits in which business was being conducted, larger positions were okay because everyone on the floor could see who was doing what and figure out the why eventually. Scale up selling and scale down buying was also a regular feature of most professional traders.

Not any more - these enormous hedge funds ( way too large) swamp everything in sight whether they are coming into a market or exiting a market. They know nothing of finesse or skill - they simply rapid fire huge blocks of buys or sells into a market, regardless of its size in relation to the number of positions they either have on or wish to add, and obliterate anything that happens to be on the other side. That also includes COMMERCIALS, a growing number of which have had enough of the kind of carnage produced by these mindless machines and their owners and are moving more and more of their business to OTC markets, where they do not have to put up with this sort of thing.

Just keep in mind this chart whenever you hear some gold perma bull start yakking about Flash Crashes once again. You will realize that they have not the faintest idea of what they are even talking about and you can safely ignore them and whatever strange and exotic conclusions that they manage to draw from it.

Hedge funds computers have NOW BECOME THE MARKETS. That is the sad truth and based on the inaction and blasé attitude of exchange officials, it is never going to change. Maybe, in a few more years, after the computers have run all of the commercial interests and small specs out of the market, and all that is left is computers trading against other computers, some enterprising group of individuals will construct an exchange in which transparency and actual price discovery once again becomes the main focus of the exchange. Wouldn't that be something?

USDA World Production for Soybeans

here are the numbers we are currently working with compliments of the USDA:

In million metric tons.
                                                              --change--
                         --2014/2015-                  --2013/2014--                   Nov 14/15   Nov 14/15
                              Nov     Oct                  Nov     Oct                       Oct 14/15   Nov 13/14
World                  312.06  311.20             285.01  285.01                       0.86      27.05
United States       107.73  106.87              91.39   91.39                         0.86      16.34
Total Foreign       204.33  204.33              193.62  193.62                      0.00      10.71
 
South America
Brazil                     94.00   94.00                86.70   86.70                        0.00       7.30
Argentina               55.00   55.00                54.00   54.00                        0.00       1.00
Paraguay                 8.20    8.20                    8.10    8.10                         0.00       0.10
Bolivia                    2.50    2.50                     2.40    2.40                        0.00       0.10
Uruguay                  3.40    3.40                     3.50    3.50                        0.00      -0.10
 
East Asia
China                     11.80   11.80                  12.20   12.20                       0.00      -0.40
Korea South              0.13    0.13                   0.15    0.15                        0.00      -0.02
Korea North              0.17    0.17                   0.16    0.16                        0.00       0.01
Japan                          0.21    0.21                  0.20    0.20                        0.00       0.01

The thing that really stands out to me is the size of the increase of global supply for the 2014-2015 marketing year compared to last year. What is even more interesting is that Brazil had a huge crop last year and this year the USDA is projecting it to be even larger. Barring any sort of serious weather related issues down there for their growing season, there is not going to be any shortage of beans anytime soon.

None of this however has seemed to faze the hedge funds which have been buying beans like they are going out of style of late. It is also apparently, at least for the immediate moment, lost on China, which has been sucking up beans from here in the US like an oversized vacuum cleaner.

We'll now see with these numbers, if the cancellations from China begin in earnest or whether they will play some more with the US markets.

Has Meal Topped Out?

That has been the question on the minds of grain traders for some time now as it has been strength in the meal which has dragged the entirety of the grain floor higher. Funds are big, big longs in the meal and as also net long in the beans and in the corn based on last Friday's COT reports.

Today's USDA report generated a negative reaction in the beans, and especially in the meal, when the dust finally settled at the close of pit session trading. The report showed a slight increase in yield but that was fully priced into the market.

Essentially, the way I am reading the reaction to this report, is that it did not contain enough of a bullish surprise to justify beans levitating up at current levels. After all, we have seen them put on more than $1.50/bushel over the last few weeks. With a run like that, it would have taken a strong bullish surprise to generate much in the way of determined buying up at these levels. The beans did not get that in the report and it looks as if their inability to extend the bump higher after the first few seconds of the report, started some profit taking from some of those heavy speculative longs.

I do not want to count them out too soon however as those who have been buying them are looking more at demand issues rather than supply issues. they have been able to use a recent torrid export pace by China, coupled with logistical issues in the eastern portion of the belt, to obliterate a great deal of the shorts, not to mention pushing even harder on their profitable longs.

However, in watching the chart performance of the January meal, we may have, and I am not convinced just yet, seen a top in this complex. The meal led it up and the meal will lead it down, if indeed it is going to do so.

I am not focusing so much on the December meal because that particular month might still be impacted by the transportation bottlenecks and has seen some very wild buying and selling as it swings back and forth. However, most in the trade expect whatever remains of those issues to be cleared up sometime before the end of the year, and maybe by the end of this month. Thus we are looking past the December meal and focusing on the January meal.

That month missed a textbook outside reversal day lower by 10 cents today. The strict definition of such an occurrence is when a market that has been in an uptrend, makes a new high, exceeding that of the previous day, and then proceeds to move steadily lower throughout the session scoring a low EXCEEDING the previous day's low. Ideally it also CLOSES below that same previous day's low.

Look at the chart and you can see that the January meal exceeded the high from Friday, then moved lower throughout the session, taking out Friday's low in the process and then closing at $364.70 compared to Friday's low of $364.6.

So it did not quite make that close below the previous day's low. Yet the range it established was well outside of Friday and it occurred on extremely heavy volume.

I am also noting that the market ran up to the near the 75% Fibonacci retracement level where it failed. Also, today's high failed to reach the $384 level essentially establishing the potential for a double top with a weak right side.

All this gooblygook might not mean anything much to some but for those of us who study the charts, it does look like a serious chink in the armor of the meal bulls has been inflicted. Yet, as treacherous as this market has been of late, I am not getting too dogmatic about it just yet.

We'll have to watch subsequent price action and see what we get and then perhaps we can get some confirmation, one way or the other.

A quick note on gold.... the violent short covering rally of Friday reversed rather quickly today as soaring equities and sinking commodities, along with a resurgence in the Dollar, brought a large amount of selling back into the metal. Mining shares gave back nearly every single bit of the gains made that day as well.

We'll probably range for a while unless we get a stronger signal from another outside market to work with. Bears will try to take it back down to $1130, while bulls must get the price above $1180 to have a shot at doing something more than a one day wonder.

USDA Supply/Demand Report Day

The much anticipated USDA report hit the wires this AM and as usual, has touched off an enormous flurry of algorithmic activity.

As far as the soybean market goes, pre-report expectations were very accurate this time around. Most analysts expected a slight bump higher in the yield per acre number which would boost the final crop size somewhat but keep it below the 4 billion bushel number.

The total production number, on a yield of 47.5 bushels, is expected to be 3.958 billion bushels. That is slightly higher than last month's number of 3.927 billion.

USDA bumped up the crush 10 million bushels and exports by 20 million bushels, in response no doubt to the torrid export pace that we have seen thus far.

They thus managed to find another enough demand to offset the pop in supply leaving the expected carryover at 450 millions bushels, exactly unchanged from last month's number.

It is however, 5X larger than the ending stocks of the 2013-2014 marketing year which USDA left unchanged at 92 million bushels.

The corn is what took many by surprise as USDA lowered the yield from 174.2 bushels to 173.4. That took the total production down slightly to what is still a record 14.407 billion bushels from the previous month's 14.475 bushels. That is a drop of 68 million bushels.

They did kick corn used for ethanol up 25 million bushels as ethanol producers have been having a field day with this cheap corn.

Ending stocks thus were reduced down to 2.008 billion bushels compared to last month's 2.081 billion bushels. Last year's marketing year carryover was 1.236 billion to give you some perspective. Thus we are a bit shy of having twice the corn left over this marketing year than we had last year.

Corn bulls are getting all giddy over the number but it is difficult for me to get too excited about a record corn crop and a carryover of this size, especially given the very weak export numbers we have been getting of late. Maybe end users will decide to buy now based off of this report but that remains unclear.

The question will be what are farmers going to do now that the market has rallied some 60 cents ahead of this report and are slightly higher now after the report? Unless we get a demand surge from somewhere, we are certainly not going to be running out of corn anytime soon.

Early price action in response to the report is some weakness in the beans, notably in the meal, and some strength in the corn. I am unsure what percentage of this is spread unwinding. There are HUGE numbers of spreads that are being lifted or implemented right now and that activity if causing some fairly widespread volatility.

We will have to see how the dust settles today after some of the big commercial firms have had some time to go through the numbers and digest them. Right now it is all machine driven action.