"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 23, 2014

Copper Prices working Higher

In looking over the recent Commitment of Traders report, one can observe the steady migration of the hedge fund community from off of the short side of the market to the long side. That change in sentiment is reflected on the copper price chart. The red metal has rallied some $0.30 pound in two months.

It would appear that traders are keying off improving economic data here in the US ( today is was new home sales which rose 6.4% in April from March). There also is optimism that Chinese manufacturing might be stronger than originally anticipated. The last factor is shrinking inventory levels in the LME warehouses. Today, the amount of copper in storage there fell to the lowest level since September 2008.

These three factors were enough to prompt some remaining shorts to head for the exits as well as to entice some new buyers. Here is the takeaway however as far as I am concerned.

Copper is one of the best economic indicator around. ( I think crude oil is the other). As such I believe it tells us a great deal about what investors are thinking in regards to the prospects of the overall global economy. A rising copper price should therefore not be ignored, any more than a falling copper price should. When one combines that with the fact that crude oil prices remain stubbornly above the $100 level, in spite of the large amount of shale oil being produced here in the US, it should at least make one hesitant to become too pessimistic about the health of the economy moving forward.

Copper has managed to move into a resistance zone on the price chart. That big sharp drop lower in price that occurred back in March this year is still dominant on the price chart however. I would like to see this market clear the top of that drop zone to feel that copper is sending a firmer " All Clear Ahead" signal. We will watch  this closely, along with crude oil

Ukraine Election moves to the Forefront

All eyes will be on this weekend's upcoming election in Ukraine. Traders, especially gold traders, will be closely watching the reaction to the vote. Any sort of violence should provide support to the metal. In the event that little reaction occurs on the ground, some of the risk premium in the metal will be wrung out. We will have to watch and see how things transpire.

For the meantime, the range trade in gold continues with neither bulls or bears wishing to become too aggressive ahead of a long holiday weekend, especially with this big election taking place.

I am much more interested in the Euro, which continues to weaken ( European currencies are generally losing ground to the Dollar at the moment ). That is providing further lift to the Dollar as is the move higher in equities. Then again, it is early in the day when I am typing these comments. Refer to the chart of the Euro that I posted yesterday. It has fallen through that chart support as of this morning and barring a late session turnaround, looks like it will try to test the 1.35 region. The election might have some impact on the currency so traders will more than likely be content to even up some positions ahead of the weekend as well. If the Euro does lose the 1.35 region, it would push the Dollar through overhead chart resistance near 80.70 basis the USDX. That could work to pressure gold so we will want to continue watching this very closely. Id the Dollar were to push past the 81.50 region, I do not think gold is going to be able to maintain its footing above $1280. Again, we will simply have to wait and see what happens as we move into next week.

The GIAMATT crowd is pointing to a story in the Financial Times noting that the UK's Financial Conduct Authority cited Barclays had failed to "adequately manage conflicts of interest between itself and its customers as well as systems and controls failing, in relation to the gold fixing" between 2004 and 2013. The main focus however was on an event that took place on June 28, 2012. Barclays' trader was attempting to avoid a payment of some $3.9 million to a customer under an option. According to an email that the trader, by the name of Plunkett had sent to some of his fellow workers, he was attempting to create a "mini puke" the next day. That was understood to mean forcing the price lower ahead of the fix.

It is "Hallelujah" Time over there with them. "See - we were right all along - this is proof positive that every single big move lower in gold is the result of evil, nefarious forces suppressing the price of gold on behalf of the government". So what does the story show us? Simple - a big bank has been fined for knocking the price of gold lower in order to prevent having to make a payment to a customer. Indeed, this is most certainly a corrupt thing. Anytime the regulators can catch this sort of thing occurring and attempt to put a stop to it we should all be pleased. I have had more than my fair share of dealing with bizarre price swings in markets - just yesterday I was pointing out to a reporter at Reuters some suspicious activity in the hog market - but is this the same as saying that the price of gold is being CONSTANTLY manipulated by these big banks in order to do the bidding of the government? Not hardly. It seems as if it was much more mundane than that - as noted above, the trader was trying to avoid paying a customer $3.9 million.

It is interesting to note that the price of gold closed on the Comex that day in question at $1550.40. Three days later it closed at $1621.80. As a matter of fact, the price of gold worked steadily higher from that point running all the way to $1798 in October 2012. June 28 was the bottom in the gold price for the next TEN months! If the trader was attempting to knock the price of gold lower at the behest of the feds, he sure as hell did a lousy job of it didn't he? That low in price, near $1550 was not even seen again until April the following year. On April 12, 2013, gold then entered its current bear market.

What we can certainly bring away from the FT story is that Barclays' trader was attempting to keep the price of gold from moving higher  to a certain level until the option expired, and apparently succeeded in so doing. But did he suppress the price of gold at the behest of the government? Hardly! As said, he sure as hell mucked it up if we was trying to drive the price sharply lower!

Here is the actual price chart of gold for that time period. See for yourself.

Here is the point in all this - too many in the GIAMATT crowd lose credibility when extrapolating from one thing to another. It is the result of sloppy analysis in my view. As just noted, the very day on which the trader in question was singled out as having worked to produce a "mini plunge", marked the bottom in a market that then proceeded to rally $250 in the next 13-14 weeks. And this is proof positive that the feds are behind the gold suppression scheme? My goodness, if I were the feds looking for an entity to suppress the price in gold and just witnessed one of my "cohorts" somehow managing to induce a $250 RISE in the price, I think I would be looking for someone more effective!

Look, prices in our modern futures markets are slammed lower and jammed higher with increasing regularity these days. It is the new normal. Pick a market, any market, and watch it closely over the course of the next few weeks, and you will see it. Might I suggest soybeans or coffee? I just this week threw up a chart of the soybean market showing you the wild swings on an hourly chart to demonstrate how volatile the price swings have become. With computers now doing the bulk of the trading, all it takes to move a market is an order large enough to trigger them into buying or selling, depending on which direction the one pushing the market is wanting to take it.

One more thing and I am done with this. I have written more times than I care to remember at this point about the wild-eyed, breathless, sensationalized, much publicized, announcements and proclamations from our "new market wizards" detailing with excruciating exactness practically every sharp move lower in the gold price which they have dubbed as "flash crashes". They have made the conclusion that every sharp fall in the price of gold that results from any large series of sell orders, is proof that the feds ( government ) are working to suppress the price of gold. This shallow analysis is easily refuted as I have mentioned above by watching the price action of other commodity futures markets. But beyond that, the real problem with this "analysis" is that it has a flawed thesis at its foundation.

Those of you who understand anything about building know that if your foundation is flawed, the structure built upon it is shaky. You may have the finest quality of construction upon that foundation, but if is unstable, nothing is going to support that building when the foundation comes under stress.

The foundation behind the "flash crash" theory  is that every sharp move lower in gold is the work of nefarious evil-doers suppressing the price of the metal in order to do the bidding of the government, which, if we are to believe the GIAMATT crowd, is obsessed with a rising gold price under any circumstance. But where is it written that whereas other markets can rise and fall, only gold MUST CONSTANTLY MOVE UPWARDS AND ONWARDS? What magic is it about the yellow metal that it alone, out of all the various markets on this planet, MUST MOVE HIGHER? Their entire postulate relies on an assumption that is absurd - namely - that gold must constantly move only in one direction - up! If it does not, then that in itself is evidence enough that the price is manipulated by the powers that be; so goes their thesis.

But that begs the question: " what are the circumstances required for gold to be in a bull market"? If you answer that, then the shaky foundation upon which the GIAMATT crowd's entire thesis becomes apparent.

Here is a chart of the US Dollar compared to the price of Gold. Most of you know that I have dubbed the yellow metal, "The Anti-Dollar". The two markets tend to move INVERSELY to one another. Again, I wish to repeat -the correlation is not exact but it is pretty close. GENERALLY SPEAKING, gold tends to move lower as the Dollar moves higher and moves higher as the Dollar moves lower. By the way, if the relationship were an exact one, we would hardly ever see much change in the price of gold in terms of other foreign currencies. That being said, look at the chart below:

The Dollar is the green line; gold is the yellow line. You can clearly see the inverse relation existing among the two. There was a brief period noted in the rectangle back in 2010 during which both markets moved higher alongside of each other. That is the exception. Note how back in 2009 as QE ramped up, the Dollar began to sink as traders interpreted it as being currency debauchment which would usher in a round of inflation. Gold responded by moving higher as the Dollar sank lower. Then we saw a period in which the Dollar rallied ( I believe this was the interval when QE I was winding down and QE 2 had not yet begun) back in 2010. As the Dollar then sank after QE2 was underway, it collapsed all the way down to critical support near 73. It was looking incredibly shaky.

What did gold do? Answer - it shot sharply higher as expected and notched an all time high in the process. But what then happened in the summer of 2012 ( by the way, the time period noted above in the article about Barclays)?  Traders and investors both began to notice that the Bond Buying programs of the Fed were not producing the inflationary wave that many had come to expect. They noticed that Velocity of Money was actually falling and that the price of many tangibles ( the commodity sector as a whole ) was moving lower, not higher. In other words, inflation was falling, not rising. Guess what? Gold fell alongside the rest of the commodity complex as the US Dollar proceeded to strengthen. Traders began to suspect that the liquidity being supplied by the Fed was not making it into the broader economy. Such was the case.

Now look at the chart from the peak in the gold price and notice how it has moved gradually lower as the Dollar has moved gradually higher. Since late last year (2013) both markets have been range bound. What can you deduce from this? Answer - the Dollar has stabilized and so has gold. There is nothing sinister about any of this. It is merely a market biding time.

So here is the big question which no one in the GIAMATT crowd will HONESTLY deal with - why should the price of gold be soaring when the Dollar is no longer moving lower?

If you want to regale us with story after story about how the US Dollar is being discarded in trade and how it is going to be abandoned and crash lower, Fine. Then the gold price will rise. But at least be honest enough to note the price charts and observe the FACT, not theory, that the Dollar is not currently sinking. It has moved from off the 73 level to nearly 85 at one point. Why would you people expect gold to keep soaring? It has lost one of the primary drivers required for a SUSTAINED bull market - namely a falling US Dollar.

Here is my contention for the umpteenth time to these cultists - the feds did indeed attempt to slow the rise in the price of gold during the time in which the US Dollar was sinking and especially when it was threatening to crash through chart support. However, ever since gold entered its bear market when it fell through the $1530 level and could not recover that, they have not been interfering in the gold market. They have no reason to interfere because the US Dollar is no longer as weak as it once was.

Please note that I have called gold as being in a BEAR MARKET. There is a reason for so doing. Experienced traders know that a market can be pushed AGAINST its main trend with some temporary success but that any attempt to actually REVERSE a trend driven by fundamental factors will never succeed. This is the reason that while the feds resisted the rise in the price of gold during its bull market phase, they could never reverse the trend. The fundamentals were all on the side of being long the gold market. A sinking Dollar, rising commodity prices, falling interest rates, soaring government debt and generally currency unrest, all favored the long side of gold. The feds could not stop the inexorable rise as long as those factors were in place. Guess what - most of those factors are no longer in place. This is the reason, that until earlier this year, gold was in a bear market leg lower. The trend was lower because the fundamentals shifted. Now it has no clear trend but is moving sideways.

I am on record here as stating that IF ANYTHING, at this point in time,  the Fed is more concerned about a FALLING GOLD PRICE than they are about a rising gold price. I actually think that the Fed is more concerned about the lack of inflation than they are concerned about anything else. Why do I say this? Because you just have to listen to them to hear most of their various governors say this! The past week witnessed several of them all talking about the lack of inflation and how it concerns them.

The Fed fears deflation because they believe they have little control over it in the sense that they have much more direct control over inflation. They can easily hike rates and put the kibosh on any overheating economy in a real hurry but, as we have all learned over the last 5 1/2 years, attempting to pull an economy back from a deflationary spiral is much more challenging.

I have maintained for some time now that the big moves lower ( flash crashes as the cult members call them ) AS WELL AS THE SHARP SPIKES HIGHER, since gold entered its bear market, are being caused by hedge funds or HFT's. They are not evidence of an attempt orchestrated by the government to artificially drive the price of gold lower. These big players jam markets up and down and will continue to do so. They are interested in one thing and that is not obtaining the best possible fill price for their executed trades. (only us dinosaurs of a trader are concerned about that). They are only interested in getting in or getting out before the next guy does and pushing the market in the direction in which they are positioned so as to obtain the maximum amount of price movement in their favor as possible. Be it a Barclay's, be it a hedge fund, be it a large local trader, it does not matter. The goal is the same - either induce or start the MOMENTUM of the market in the direction they favor. The reason - our modern futures markets are not much concerned in the short term about fundamentals anymore -they are all about momentum.

A couple of other things before wrapping this up - I have to marvel at the temerity of those who can, with a straight face, point to the falling reported gold holdings in GLD as being BULLISH. Yes, you read that correctly! Never mind that FACT, ( once again facts are of no consequence to these folks ) that during the rise in the price of gold over the course of its former bull market, the holdings in this giant ETF consistently rose right along with the price. Western investment demand for the metal was strong, solid and sustained. Maybe we should follow their illogic and note that the once-rising gold holdings in GLD was BEARISH! Can you not see the utter absurdity and why so many in the gold community have no credibility whatsoever. "HEADS - I WIN;  TAILS - You LOSE". Nothing ever matters to them, nothing. Whatever it is, it must be bullishly construed for gold.

In closing this post, which has already consumed way too much of my time ( I apologize if I repeated myself anywhere in this post as I am trying to watch price quotes simultaneously to typing this) I will leave you with this.

I suppose it was that trader at Barclays that caused all those big Western based money managers and institutional funds to sell their gold holdings and take the money and put it into equities where they made some spectacular gains by not fighting the Fed. I suppose it was also that same Barclays trader that caused the shareholders of the mining shares to dump them all and buy into different sectors that were performing so strongly. I suppose it was that same trader at Barclays that induced so many index and hedge funds that were once hugely long the overall commodity sector to jettison corn, wheat, beans, copper, sugar, coffee etc, beginning back in 2011 and 2012. And lastly, I suppose it was that same trader at Barclays that was behind the decision by some of these major banks to sell their commodity warehouses and look for buyers of their commodity trading sections. How amazingly astonishing that the traders working for these banks can do all this! Yes indeed, such a air-tight, logically unassailable case that no one who has a normal functioning brain would dare dispute it.

Those of you who have taken the time to read this... you can make up your own minds. Believe what you want. The goal of a trader/investor is to make money from wise choices. I learned a long time ago, the hard way, not to argue with the price charts. Consoling yourself about why an investment class you have become married to is not performing is not a substitute for profits. Remember that. Follow the markets and the charts if you want to succeed and try to glean the sentiment of market participants. That is what drives money flows and ultimately price. Go with it and succeed; fight against it, complain about it, blame others and fail. It really is that simple.

Here is a chart of the HUI as it stands at this hour. Maybe it will stage a late session rebound. Anything can happen ahead of the closing bell but for now, the index is moving closer to losing chart support. Let us hope not for those who are still holding large positions in the sector.

By the way, a brief chart for you grain guys....

KC Wheat has fallen over $1.00 bushel this month as rains in that key growing area are convincing traders that the worst damage for the crop is behind us. Also, US wheat prices remain high on a global basis. The market is probing to see what price level uncovers demand. As a consumer, this kind of wheat, which goes into making bread, one always desires lower prices. Farmers who have a crop in decent shape are still making money at these prices however which is a good thing.

For my readers here in the US - have a great Memorial Day weekend with family and loved ones. Remember those fallen warriors who paid such a terrible price for your liberty. They have earned our respect, admiration and gratitude. It is especially galling to see the pathetic spectacle occurring at the VA during this time frame - a time in which we pause to remember our soldiers while many of them are dying from neglect and outright fraud.