"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, July 24, 2012

Precious Metals Succumbing to Deflationary Forces Today

Both Gold and Silver are under selling pressure today as the sell off in the grains seems to have pushed a large amount of hot money out of the commodity sector. Soybeans are currently locked at limit down as is the front month corn contract. Talk that Smithfield is importing corn from Brazil has sent supply side bulls scurrying for cover and demand side bears are pressing their case. The pool in the July was 112K at one time and is now down to 26K currently. In the November Beans, the pool is at 37K as I write this.

Traders had been bidding up commodities in general of late as evidenced by the recent climb in the CCI (Continuous Commodity Index) but apparently the onset of some rain in the Corn Belt combined with continued Dollar strength and nervousness surrounding Spain and other European nations, is too much for some of the new longs to handle. They are heading to the exits today in both commodities and in equities.

One of the results of this has been to push the yield on the Ten Year Note down to an amazing 1.411 as I write this. Clearly interest rates continue to plummet globally as traders rush for anything that they feel can provide some sort of shelter. It is an astonishing thing to see yields in Denmark actually go negative!

The Dollar has also pushed into a new 52 week high today and is currently trading over the key 84 level on the USDX. It looks poised to head higher at this point. that is going to give us some extra headwinds for the precious metals do deal with, particularly silver.

For the last two weeks, every time silver has pushed below the $27 level, it has always popped back above that level before the session has closed. That has indicated the presence of strong buying. If these buyers do not surface before the end of today's trading session, silver will very likely head lower and retest the key $26 level. It must hold that level to prevent another round of long liquidation and fresh short selling by hedge funds playing the "slowing global economy" theme. Weakness in the mining shares is not aiding the cause of the bulls right now.

Gold coin sales are apparently slowing compared to the same period last year as reported by Dow Jones this morning.

Here is the short blurb:

The US Mint's sales of gold coins have been "unusually low" in
July, even when adjusted for the seasonal summer lull in gold coin demand, says
HSBC. With 17,500 troy ounces of gold sold as of July 23, the Mint is far
behind the 65,500 troy ounces it sold in the same month of 2011.

Again, with inflation fears being trumped by slowing growth fears, gold is catching fresh short selling as well as long liquidation. However, it is once again down into the region that has seen strong buying based out of Asia emerge. From here down towards $1525, strong hands have been accumulating. We will watch to see if they are still making their presence felt.

The Complacency Index or the VIX as others properly call it, is finally waking up. Maybe, just maybe, we are finally seeing some of these numbed, see no evil traders begin to get nervous. Hard to see what more they could need to rattle their cages but they apparently have a great deal more confidence in Central Bankers and monetary officials than I do.

The HUI chart has turned ugly once again and is now threatening to close in on the May low near the 370 level. Pressure on the mining shares has been very strong. Some of this is manipulative in nature; some of it is related to the ratio spread trade with hedge funds buying the bullion and shorting selective shares and profiting from the spread between the two. Notice how effective the Fibonacci retracement levels have been when analyzing the price action of this index.

The S&P 500 is flirting with its 50 day moving average, a key technical level on the price charts. Notice how it bounced off of this level earlier this month and proceeded to maka a run back towards what might be a double top forming near 1375. Support is layered under this market as noted on the chart. A breach of 1300 could get things mighty ugly very quickly. We will see if the usual suspects arrive just in time to once again "miraculously" revive the index and prevent it from inflicting technical damage on the charts as they have done so often this year.


  1. Great stuff, Dan. Thank you.
    Something to consider...A very dry and warm March allowed for early planting of corn and beans. Thus, those acres are ahead of "schedule" from a life span perspective. That said, these past two weeks have been brutally hot and at a critical time for pod-setting and kernel-filling. Yes, it may rain in the next 48 hours but the damage has been done AND more heat/drought is coming in August.

  2. Thanks Turd - always good to hear from you.

    Yes, early crop planting pushed the critical window for both corns and beans ahead of schedule. Damage to corn is most irreversible at this point. Rain will only stabilize it, not make it better but even that depends on coverage and totals.
    Bean's critical period is late July/ early August. They stand to benefit more so than corn if rainfall totals are decent. Still, heat in the forecast is not going away anytime soon meaning that the dips will be bought. Demand is an issue that will need to be reckoned with however particulary for corn. STrength in the Dollar has made US corn extremely expensive. Same for beans.

    interesting to note that both markets have come off their limits. That is a tremendous amount of buying to absorb pools of that size.

    Take care buddy!

  3. Dan, I hate to say this because I have valued your judgments for so long, but your comments on gold and silver are beginning to sound like the conventional wisdom. The charts have never been more clear. USD is launching the final wave up to an important double top, gold is holding steady $50 above May-June lows as traders position for the USD crash, silver is steadying with gold, mining shares, the weak sisters, are being panic-dumped, yet holding well above May lows. Check out the inverse performance of USD last August as gold rode to its $1900 top -- USD stayed absolutely flat against a $300 rise in gold. That is what gold is doing now against the final blow-off in USD. Meanwhile, Dow is sinking against higher dollar, applying screws to Fed. All this happening in the traditional July doldrums for PMs that invariable lead to Aug-Sep strength. If you are not a two-fisted buyer in PMs right now, turn in your stinking badge.

    1. I see it the same way. But even those of us who are totally commited to the metals, would like to see this period end as soon as possible. For a market that can move $60 in one day and be so close to 1600 and beyond, and not start that move, is a bit dissappointing. The train should be leaving the station momentarily.

  4. Robert;

    Thanks for the comments.

    Markets are made by differing opinions so all are welcome. I am a long term bull on gold but also a professional trader. That means I make money only by trying to interpret CURRENT market action; not imposing my view on a market. Until it is Proven OTHERWISE, gold is in a consolidation pattern. That is a simple fact.

    When it breaks out of this pattern I will note it. Until it does, all speculation is just that - speculation. When the market becomes convinced that another round of QE is coming, then the gold market will launch higher.

    Today, the only thing that brought back the gold market on the intraday chart was the same exact thing that took the stock market off its lows - namely as WSJ article stating that the Fed was going to move on the QE front as SOON AS NEXT WEEK.

    Up until that article hit the wires, gold was lower on deflationary or slowing economic growth theme. I am not sure how many times i must repeat myself - Gold will not begin a sustained move higher UNTIL The market shifts from fears of deflationary forces to fears of inflation. It really is that simple.

  5. Always good Dan. You do us all an excellent service.


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