"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


Friday, May 2, 2014

CME Fines Ontario Teachers' Pension Board over Hog Futures Trading

That is the headline that came down a Dow Jones wire story this afternoon. It seems that the good teachers pension board had too many piggies in its portfolio. In other words, they exceeded exchange position limits.

CME fined the Board $15,000 and ordered them to return the nearly $18,000 profit they made in lean hogs back in March 2013 according to the story.

Hey, I wonder if some of that $18,000 happens to be my money?

How do I get a refund?

Seriously however, I do wonder what these exchanges do with that money that they collect, not as a fine, but rather as profits. The teachers' board had to take it out of someone else's pockets to earn it as this is a zero sum game.

I think I will fill out an application and see if that works! Then again, the report does not say whether they made those profits from being on the short side or on the long side. I will have to go back and see where I was positioned back then. I know I was in that market at the time. What would be a bummer would be if I happened to be on the same side as they were. Then what? do all of us traders who are positioned likewise have to hand over our earnings to the CME?

Obviously I am kidding here but it does go to show that these position limits are a big deal. I am of the view that if the exchanges really want to tame some of these broken markets, that instead of fooling around with raising price limits, they should instead deal with position limits and REDUCE them, not increase them like they have been more prone to doing.

What is Copper Up To?

There is an interesting development in copper this week which I feel deserves noting. It pertains to the Commitment of Traders report and the positioning of the hedge fund category.

This category of traders has been net short for some time now. As a matter of fact, the only category of traders that has held the net long interest in the copper market has been the Swap Dealer category. Every other group, the Commercials, the Hedge Funds, the Other Large Reportables and the General Public or Small Spec trader have all been net short.

That changed this past week for the hedge funds. They are, as of Tuesday, now net long in copper. The movement has been consisting primarily of short covering but now new longs are joining in.

Here is a chart of the COT for copper.

Note how the hedge fund positioning at the beginning of this year started out as big net longs only to see them move to the short side of the market in February. They were briefly long again for a week in late February only to quickly establish a larger short position.

I can tell you that a great deal of this weakness was related to both lackluster home sales here in the US but more importantly, continued weakness in Chinese data. Last month they began covering shorts and they have now, about a month later, moved to a net long exposure once more.

So, we now have the swap dealer and hedge funds on the net long side with the commercials, other large reportables and small specs on the net short side.

Here is the price chart:

You can see that the recovery in copper prices pretty much coincides with the shift by the hedge funds in favor of the long side. Once copper climbed back above $3.00 and held there, funds began covering as the downside appear limited at those levels. That has brought the market up towards $3.12 but weak economic data had limited bullish enthusiasm for the metal. Today was different in the sense that the copper market seemed to read the stronger payroll number as a sign that the US economy was strong enough to keep the price supported above $3.00, in spite of doubts about the vigor of the Chinese economy.

Why do I bring this up? Simple - in my view silver prices are tied to copper prices more so than to gold right now. Hedge funds have been gradually moving to play silver from the short side although they remain as net longs, not by a significant amount however. Thus far, the $19 level has been holding as support for silver. It penetrated that level this week but rebounded today when gold took off on the Ukrainian tensions.

If hedge funds continue to move further towards the net long side of copper, there is a good chance that silver will follow suit. Remember silver needs an improving economy to move higher. During any sort of slow down fears, it is not going to move higher. Those who keep trash talking the US economy and in particular the US equity markets, who yet at the same time expect silver to rally, are at complete odds with themselves, even if they do not realize it.

Silver more so than gold, needs inflation to move strongly higher. It certainly needs something to make it convincingly past the $20 level. Thus far attempts at getting past there have not met with much success.

I am the first to admit that when it comes to silver, its combination of being both an industrial metal and a precious metal to some, make deciphering what it is responding to tricky at times. However, a rising copper price is not going to hurt silver, that is for sure. Let's see if copper can climb past the $3.20 level. If it can do that I would think silver can hold above $20. At this point, the jury is still out however.

If copper succumbs to any further evidence of a slowing China, then it is going to act as an anchor on the silver price.

Each piece of economic data that comes out of both the US and China in the weeks ahead will take on great significance in ascertaining whether or not these metals have a shot at starting an uptrend of any durability. More importantly than the actual data however will be the market reaction to that data.

Commitments of Traders Report

There is not really all that much happening with this report for the week. Today's fireworks will unfortunately not show up so we are left to waiting for another week to try to read what happened today.

Through Tuesday of this week, the big commercial category, the swap dealers and the hedge funds were all net sellers. The buyers were the "other large reportables" category and the small trader or general public.

All three category of speculators remain as net longs in gold, although the hedge fund category has rather sharply curtailed that exposure over the last 6 weeks. They have reduced their net long exposure by approximately 50,000 contracts since its peak of this year when they were at 138,429.

What I find rather noteworthy is that in spite of gold's retreat away from near $1400 in mid-March, and the continued sharp drawdown in reported ETF holdings out of GLD, speculators remain stubbornly bullish in regards to gold.

That is a double-edged sword. On the one hand, their refusal to liquidate more longs is preventing aggressive selling from taking place and keeping gold above chart support. They are certainly doing their best to hold the metal up.

The other side of that sword is that any downside CLOSING BREACH of an important chart support level ( $1280 - $1270 ) means we are going to see quite a wall of technically related selling occur.

A good example of this can be seen in the early morning reaction to the payrolls numbers. A big wave of selling engulfed the market immediately. Were it not for that flare up over in Ukraine, it is highly unlikely the market would have recovered from that.

So far the bulls are preventing prices from closing below that key support level. It has penetrated several times now only to encounter buying, buying tied to a geopolitical event.

Based on what I can see at this point, any lessening of tensions over in Ukraine are going to see aggressive selling. Any escalation will see further short covering as what took place today.

Any of you who are soothsayers and know how events over there are going to play out, please inform the rest of us so that we may place our positions accordingly.

In the meantime, we mere mortals must wait and see.

I am noting a bit of weakness or more accurately, hesitancy in gold to stay above the $1300 level here late in the session. It should be noted that some very big interests are looking to sell any rallies in gold as they see some of the fundamentals that have been supporting it being removed as the year progresses.

We are talking mainly a phasing out of the Fed's QE program. Today's payrolls number further fanned talk about that and potential interest rate hikes in early 2015. That seems a good ways off at this point but if traders see a trend of stronger economic data and especially any upward movement of the US Dollar, gold is going to come under more selling pressure. I would continue to watch interest rates here in the US.

The yield on the Ten Year which was up near 2.7% at one time early today, ended up falling as the safe haven bids brought it down to 2.591%. That is a pretty big swing for that particular Treasury.

Oddly enough, the VIX actually moved lower today. I am not sure what the heck to make of that. I would have expected to see it creep up somewhat. It could be that US stock traders are of the mindset that while the events over there in Ukraine are worth noting, the situation is not likely to spill over outside of that immediate area anytime soon. That might or might not be true but based on that VIX reading, I would think that traders are of that opinion until or unless the events prove otherwise.

The flip side for gold remains the same - geopolitical events are supporting the metal and will continue to do so as long as the market is concerned with chances of escalation in tensions. Look at what the downing of two helicopters can do if you doubt this!

Remember, when a situation is this fluid, stay nimble. Don't get married to any one position for too long. And I mean either long or short! If you really are risk adverse, just stay on the sidelines and watch the rest of the players chop each other up. Find another market to play in - there are plenty of them besides gold.

Ukraine stirs Safe Haven Plays

Look at the following charts:

First the Japanese Yen - I will never understand how the Yen of all currencies, could be considered a "safe haven" by any standard of measurement but apparently it is.

Here is that one minute bar chart I promised you on the gold market and its goofy ride this morning.

Here is the bond market:
Do you see the pattern on all three charts? It is the same isn't it? At nearly the same time or very close to the same time, all three markets reversed course after moving lower on the payrolls number as the market's attention shifted almost immediately to the wire reports of the Ukraine conflict and that downed helicopter.
Never a dull moment when we are dealing with geopolitical events. This is why making predictions about market movements, is so foolish. No one knows from day to day what we are going to get when these crises occur. Some days the tensions ease; other days the tensions flare. Just try picking the flower petals off of a daisy - "She loves me; she loves me not" and you have about as good odds as guessing what is coming next.
Traders out there - if you are unsure about a market - you do not need to be in it trading it. Sometimes just sitting on the sidelines watching is the best place to be until you can get a sense of things. There is no sense in risking your capital on something tied to unfolding events, which can go either way.
Exercise extreme caution right now in trading gold and do not get caught with too large of a position. There are times when one needs to have more concern over how much you might lose rather than how much you might make. Remember that!

The Old Reverse Flash Crash

Well, the day we have all been waiting for, again - another Friday payrolls day. The number came in much better than the market expected and the result was instantaneous - gold promptly fell some $14 breaking through $1280 again but then, within less than a minute, the losses were cut in half. Within the span of an hour, it had recaptured all of its losses and then some.

NOTE - the website is not allowing me to post the one minute chart for some reason. As soon as it does, I will get the chart inserted so that you can see the extent of the huge price swing. It is quite graphic and further underscores the havoc that these infernal computers have unleashed on our markets.

What gives? who in their right mind would swallow up the entire string of offers regardless of price or the size of their buying. Did they not know that by so doing they would obtain the worst possible buy price? Obviously this is horrible and it proves that gold is being manipulated on the buy side by a sinister force out to punish the shorts for daring to sell gold with such impunity. These reverse flash crashes must stop!

Those of you who read this site regularly know that I am prone to use hyperbole/sarcasm to prove my point. Actually there was nothing sinister, nor evil about the price action. What happened was that the computers shifted from selling to buying within seconds because while the payrolls number put a firm bid under the US Dollar, events in Ukraine escalated with that attack by its military on the town of Slovyansk, which is being held by pro-Russian militants. These same militants apparently shot down at least one helicopter.

That this area flared up on a Friday, made the bears nervous about getting too aggressive, even the face of a surprisingly decent jobs number, because no one knows what might transpire over a weekend. They did not want to get caught too short just in case.

However, this underscores my contention made this week - gold would be much lower were it not for this Ukraine mess.