"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


Monday, May 5, 2014

Today's Comments

Last Friday's move higher in gold continued overnight when Asian trade resumed and is continuing in today's trading session. On moderate volume last Friday, open interest rose but rather insignificantly considering the extent of the volume, indicating strong short covering was behind the move higher on Friday. That confirms the move lower in reported holdings from GLD.  Also, spreaders seemed to be active as well. Ukraine events are making it tough on hedge fund computers which are being whipsawed as fears rise and fall.

A couple of things are worth noting in today's session. First, there were safe haven flows into gold and back into the yen today, but the yen's gains were rather mediocre and bonds actually dropped today with a corresponding slight uptick in interest rates on the long end. Stocks also moved off of their worst levels. I am watching this closely to see whether or not the market has "baked into the cake" the current events in Ukraine. Events over there are driving gold at the moment meaning that the situation will need to continue to worsen in order to keep driving the price of gold higher and higher. That is entirely possible as the market waits for a presidential election later this month.

That is the nature of a market responding to geopolitical events. It is also the same nature as the grain markets reacting to a weather forecast. Price will move higher accounting for the events/ forecast and then stabilize while traders take a "wait and see" attitude and attempt to anticipate whether things will go from better to worse or vice versa.

Copper was once again tripped up by weak Chinese factory activity data. HSBC China Manufacturing Purchasing Managers' Index came in at 48.1 in April. That was essentially unchanged from March which registered a 48. To understand what this means, a reading under the 50 level indicates contraction. Copper prices seem to have found a bottom but lack an upside catalyst at the moment. It is going to continue to track Chinese data very closely. Some of this weakness in copper is impacting silver which continues to struggle and cannot yet get firmly above the $20 level.

The Dow initially reacted to poor earning news from Pfizer and JP Morgan Chase. Investors seem to have one eye on Ukraine, as fears that the conflicts there could widen out are keeping them nervous, with the other eye on earnings reports. Price rebounded around mid-session however as some bargain buying showed up. Some money managers are using equity weakness related to Ukraine fears as opportunities to buy on a pullback.

Currency traders are not expecting much in the way of action from the ECB although they are nervously eyeing the lack of inflation in the Euro Zone to see if the ECB is going to eventually move to their own version of QE. The consensus at this point is that nothing is going to happen on that front until next month. No one is expecting a rate move in May. We'll see soon enough.

Something that has been fascinating for me to watch has been the reaction of the bond market to the Fed tapering plans. The thinking was that once the Fed began to back out of the $85 billion per month bond buying program ( split almost evenly between MBS and Treasury purchases) that long term yields would spike higher. The reason for that line of thinking was that "no one was going to be left to buy US Treasuries".

Well, that has not turned out to be the case at all. Either the current Fed has become the greatest bond traders to ever exist or they have gotten extremely lucky with their timing. Who would have thought that safe haven buyers would show up to pick up the slack in their Treasury buying? I mean, what could have been more timely than to have a geopolitical event take place during a period of reduced Fed activity in the Treasury markets? Damn, are these guys/gals good or what? 

The flip side to the bond markets this morning has been  the April ISM Service Sector number. It came in at 55.2 against an expected 54.1 reading and against a 53.1 recorded for March. That served to take some of the safe haven bid out of the bond market as traders viewed the improvement as further confirmation of last Friday's surprisingly strong payrolls number.

All I can tell you as a trader is that the interest rate markets are chewing up a lot of guys right now who are getting whipsawed left and right in there as well. It is not just gold - it is a lot of different markets right now that are shredding traders and investors alike. That is why I keep saying that good traders do not always need to be in the market. Sometimes sitting on the sidelines is the best part of wisdom. Besides, there are lots of different markets out there that are well behaved right now and offer better opportunities.

On the grain side of things - Dryness issues are keeping wheat supported at the moment. Soybean inspection numbers released this AM reflect the impact of these sky high old crop bean prices - they are lousy once again. Old crops beans reacted by moving lower. Corn inspections continue to run above expectations and that is putting a strong bid into corn. Farmers are still sitting on large stocks of last year's harvest however and I am not sure what it is going to take to get them to let go of them. When they do, things could get dicey depending the weather for this year's crop.

Coffee continues to act like a yo-yo. The worst nightmare I ever had as a trader was a dream in which I was trapped in a small room with no exit and forced to trade nothing but coffee for a living. I remember waking up in a cold sweat just as I was about to stick my finger in the electrical socket to end my misery. Seriously - who trades this stuff but more importantly, why????

If the Protestant Reformation had not taken place and penitents were required to abuse themselves like the flagellants once did to atone for their own sins, trading coffee futures would have been right up there with that for the top penance.

Here is the short term chart for gold: Gold continues within its range trade. It has managed to recapture the "13" handle and looks as if it might want to try to test the first level of resistance noted near $1320. Above that lies $1330. Support remains intact near $1280.

If events in Ukraine worsen, gold will more than likely take out $1330. That would set up a challenge of tough resistance between $1350 - $1360.

The ADX is turning down after having begun to rise meaning that the potential trending move LOWER has been aborted and we are back to ranging. The short term buy signal from the stochastics indicator can be seen on the chart.

The HUI gapped higher this morning on the opening of US equity trading but so far in the session, that has been the best level. The gap remains open but the index is not adding to gains and is currently below the opening level. That bears close attention. The session is young however.