"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


Thursday, April 10, 2014

Foreign Central Bank Holdings of US Treasuries back on the Rise again

A while back, I posted a chart of the Custodial Holdings of Treasuries for Foreign Central Banks that revealed a sharp drop in the number held from over $3.021 trillion to near $2.855 trillion, or about $166 billion. At the time I mentioned it was rather remarkable and thus warranted monitoring.

Shortly after the number became public, we had the usual "end of the world" scenarios for the US Dollar as the perma-gold bull community began talking up their usual the "run on the Dollar has begun" thesis. Many were talking Russian dumping of US Treasuries as a move away from the Dollar that was going to snowball. Of course, implied in all this was talk of gold shooting to the moon again.

Well, here we are exactly 4 weeks after hitting the low point in those reported Treasury holdings and we are back to $2.972 trillion, not far off the all-time peak noted above and the largest number since January 30, 2014.

Apparently the run on the Dollar has not begun in earnest among foreign central banks. Here is the chart:

Safe Haven bids boost Gold

Gold put in a nice showing today building on last week's bounce away from chart support near $1280 and the change in handles from "12" to "13".

The FOMC minutes released yesterday continue to put pressure on the US Dollar, but even more importantly, acted to depress US interest rates. That is the key driver for gold in my view at this time. Gold seems to struggle when interest rates here in the US rise as investors see little threat of inflation and seek out assets that will throw off some sort of yield rather than the yellow metal which only provides gains if it continues to rise in price. In a benign inflation environment, many do not believe gold will continue to rise.

For those who are new to this blog, a bit of a disclaimer here - I am giving you the broader market view of the inflation picture ( plus that of the Fed ), not my own view. As someone who lives in the real world and sees grocery prices moving higher, health insurance premiums rising, local taxes and fees rising, etc., I reject the argument that consumers are not getting squeezed by such things. However, until the broader market consensus shifts towards genuine fears of inflation, rallies in gold are going to be viewed as selling opportunities.

By the way, those record high beef prices that are finally being felt at the grocery store should begin to decline over the course of the next few weeks. It takes a while for the higher priced beef ( and pork for that matter ) to make its way into the pipeline but wholesale beef prices have already peaked for now and are working lower. Consumers should see some relief on both the beef and the pork front  beginning within the next few weeks. What happens this summer depends on whether or not grocers can move the high priced stuff during the warmer months. There is an old adage that the "best cure for high prices is high prices" and that is what we will soon see as demand will shift to chicken until consumers get sick of that. Maybe then beef and pork prices will stabilize at lower levels and we can all afford to eat bacon and throw some red meat on the pit smokers. Grocers are usually hesitant to raise retail red meat prices ( they have excellent margins in meat ) for fear of stunting demand but with the goings on in the livestock markets over the last few weeks, many have had no choice but to bite the bullet, raise prices and hope for the best. From what I am hearing, consumers are noticing and are balking.

Back to gold -

From a chart perspective, gold continues to remain within the broad trading range that I have outlined for some time now. It will need a catalyst of some sort to kick it higher or send it lower. What that might be remains unclear to me.

As you can see from the chart, it has run into some selling near the resistance level noted near the $1320 region. Above that, resistance is layered in approximately $20 increments, first near $1340 and then again near $1360.

Downside support comes in near and just above $1300 followed by our old friend near $1280.

On the ADX, which indicates a trendless market, the bulls have regained the short term advantage ( when it held at $1280). Stochastics are rising as price moves up in the range showing the near term friendly picture. How this market handles this $1320 level today and tomorrow, will be a key as to how to approach it. The trading range is pretty broad ( up near $1400 on the top and $1280 on the bottom ). We could see this range tighten up a bit and narrow down somewhat from the current $120.

As mentioned above, I cannot see what would cause this market to break out of its current range at this time. The Dollar would either have to drop off sharply breaking down below 79 on the USDX or interest rates would have to plummet sharply here in the US, along with perhaps a larger selloff in the broader equity markets to take it up out of the top end of the range. On the downside, we would need to see a sharp rally higher in the US Dollar ( alongside especially of a sharp selloff in the Euro ) and a surge in interest rates above the 3% level in the Ten Year to take it down below $1280 in my view.

Take a look at Eurogold ( gold priced in terms of the Euro ). Notice how it too is essentially rangebound. The ADX reveals the lack of a clearly defined trend. The top of the range is up near the 1000 euro region; the bottom down near 880 - 860. If gold could clear the 1000 euro level, we might finally have something to write about. Can it do that? Who knows but if the ECB were to actually proceed with their chatter about their own version of QE and forcing banks to pay interest on reserves held there at the ECB, then we might finally see the Euro weaken sharply enough to send gold higher and through that 1000 level.

Apparently Europe is having the same problems over there as we are over here - a lack of inflation and in their case, an excessively strong currency, which no one over there wants.

Back to the safe haven thing - equities are showing some surprising signs of weakness today, which is odd considering that they got all bulled up yesterday on those dovish FOMC minutes.

A lot of technicians are watching the 1830 - 1820 zone on the S&P 500. That is a big support level. If it were to give way, especially on a closing weekly basis, we could finally see some deeper losses in stocks. As you can see on the weekly chart, that is some uptrend so unless bulls are sent packing by an avalanche of selling, odds favor them coming in and continuing to buy dips. Maybe we can get some range trading/consolidation in stocks for a change instead of this nearly one-way ticket north.

The gold mining shares are providing little if any support to gold judging from their mediocre performance today. One gets the impression that they do not know whether to follow the broader market lower or the metal higher. Either way, it is not exactly a ringing endorsement of further strong gains in the actual metal. Then again the day is yet young and we could see some better buying enter before the close of today's session.

Switching gears just one more time - recent hog slaughter data shows its running a bit more than 7% below last year's levels. USDA told us in their recent Hogs and Pigs report that the worst we could expect was 5%. Their own data is proving the inaccuracy of that last quarterly report; however, the trade is still confused and unclear. Those who are lending credence to that report have been able to gain some advantage but yesterday's bizarre and extremely rare move from limit down to limit up within the matter of a few hours time shows just how unsettled this issue is in the industry. It is going to take at least another full month to sort it out and even then we might not really know for sure. In all my years of trading the livestock markets, I have never seen the hogs so unsettled or so volatile. They are making my old deceased friend, the pork bellies contract, look tame by comparison and that is saying something. I miss that contract and all the shenanigans that accompanied it.

Corn is moving lower today as once again improving weather conditions are stirring talk of field work taking place. Beans are moving lower probably due to some profit taking by longs who have been making small fortunes playing the demand side of the bean equation. Large expected soybean acreage this season is taking a backseat to insatiable demand for beans. While prices for corn and beans are far off record highs from two years ago, they are still very profitable. I am happy for our hard working farmers but I still must take this opportunity to vent against that boondoggle ethanol mandate. I hate that stuff with a passion because of its adverse impact on our livestock sector. That plus the idea of burning 40% of our corn crop in our gasoline tanks strikes me as the height of stupidity. Whenever I hear some politician from the corn belt start talking up a 15% ethanol blend, I want to scream. Anyone seen what that stuff does to seals?