I was wondering when we were going to start seeing and hearing the various FOMC governors after Janet Yellen's now famous comments the other week; comments which launched the entire commodity sector, including gold, higher. You might recall she gave the impression, or at least the market interpreted it this way, that interest rate hikes were off the table anytime soon.
Enter Fed Governor Lacker from Stage Right - His comments during a Q&A noted that he expects the Fed will need to raise interest rates in 2015, although he did say that he ffelt "low interest rates are appropriate given current economic conditions". He also stated that the "precise timing of interest rate hikes will be tricky".
He noted that "stronger inflation data in recent months have not been entirely noise". He also stated that "inflation is firming more quickly than expected but remains below the Fed's 2.0% target".
The big line, at least in my view, was the one, " the Fed may need to raise rates even without a substantial acceleration in economic growth". That one seemed to garner the most attention.
He did note, by the way, that he expected the Q2 GDP to bounce back to 2.25%-2.50%. We will see about that.
Those comments seemed to add some pressure on the gold market when they surfaced on the newswires. (UPDATE - Fed Governor Bullard has just now come out and is speaking).
Gold was already seeing some light selling pressure from two other developments related to Asian physical demand.
The first of these was chatter about the Indian monsoon season which some are viewing as off to a weak start. The idea is that a early and strong monsoon season is necessary for good crop yields there. Since the bulk of Indian gold purchases are made from those engaged in small scale agriculture, any problems with the harvest tend to negatively impact overall Indian gold demand. While it is too early to state dogmatically that the harvest there will not be as strong as might normally be looked for, traders are watching for any sign of lull in demand from this key gold buying region.
Also, and this one seemed to be a bit more of a factor than the above, news out of China reached the market this morning that officials there had uncovered approximately $15.2 billion in loans that are tied to potentially illegal gold-financing deals. The report noted that banks in China have already begun more closely scrutinizing these gold-backed loans and have been cutting back on letters of credit to gold processors.
It is worthwhile to note that the article goes on to say that Goldman Sachs estimates that since 2010, metal-backed loans have been used to bring some $110 billion into China.
Think of these loans as a sort of carry trade - the borrower obtains a letter of credit by a Chinese bank which is secured by gold located in a bonded warehouse either on the mainland or in Hong Kong. The borrower then uses that letter of credit to secure a US Dollar loan from an offshore bank. That money is then converted to renminbi which is then used to invest in a higher-yielding financial instrument there on the mainland. The profit is made in the difference gained on the investment and the interest paid on the loan.
The concern here, not only for gold, but also for copper, is that any tightening of these letters of credit will crimp demand for the metal. If the banks are not going to provide letters of credit, then the ones using the gold as collateral are not going to need it, cutting into future demand. Also, while we are not there yet, some fear the possibility of these loans being called as a result of officials' actions to put an end to the double and triple counting of the same gold. If that were to happen, the spread trade would be unwound. The investment on the mainland would be sold, the money raised would be converted from renminbi to US Dollars, the US Dollar loan would be repaid, and conceivably, the gold which was purchased in the first place to secure these loans, would no longer be necessary and would thus be sold.
It is also interesting to learn that at current gold prices, the amount of gold is 11.5 million troy ounces, according to a report from Dow Jones. In a very interesting way of looking at the sum involved, their sources estimate that on a global scale, it would be the 11th largest gold reserve in the world, just behind Portugal's stash of 12. million ounces and just ahead of the UK's 9.975 million.
No wonder the gold market is noticing this!
The usual "we have never seen a story concerning gold that we could not spin to make it bullish" website somehow manages to contort this story as friendly! Just use common sense and do not get lost in the weeds with their "logic" and you will see what it is that has been lurking out there in the minds of metals traders. They are understandably nervous about this.
Recently the dovish statements by Yellen and by her counterpart Carney over at the BOE, have seemed to outweigh any concerns from these China developments, ( let's also not forget that horrific Q1 GDP reading ) but they are lurking in the background and should be closely watched. I should note here that most analysts, still expect Chinese gold demand to remain strong; however, if, and this is a big, "IF", Western-oriented investment demand were to lag for any reason, any curtailment in gold demand from China would become more significant.
Counterbalancing this bearish news for gold was the Fed's favorite inflation indicator - the Personal Consumer Expenditures index - reading. It rose to 1.8%, the highest reading in 19 months!
It's funny isn't it? - I was bewailing the lack of Western-origin gold demand when gold was moving lower, as evidenced by the reported GLD holdings, for the reason behind the lackluster gold performance. While this was occurring Asian demand was carrying the water in the gold market. Now we have the exact reverse! Western-oriented investment interest in gold is picking up somewhat while Asian demand is beginning to lag! This means that gold is now dependent on buying coming out of the West instead of the East to keep it supported! One thing never changes- the fact that markets are always changing!
The Western-oriented demand is tied to both inflation concerns and uneasiness over the equity markets in the face of sluggish economic growth. Wouldn't it be something if we watched gold move higher at the Comex during the late European and New York trading sessions only to weaken during the Asian trading hours! Talk about a change of pace!
Shifting a bit to the technical side of things - gold continues to fail near key overhead resistance centered around $1320. I am posting the same chart as yesterday with the same notations - gold is stymied here at the resistance zone noted. Dip buyers are coming in however. Bulls need to take the price through this level rather soon however or the stale longs are going to bail out. Depending on whether or not they can hold the price above $1300, we could see another drop towards $1280. A strong, sustained push through $1320 should allow the market to make a run at $1340.
The mining shares remain well bid which is a comfort to the bullish cause in gold.
The yield on the Ten Year Treasury note is hovering just above the 2.5% level.
On the grain front, soybeans are back to worrying over the ending stocks once again. "She loves me; she loves me not". Strong weekly export sales were behind the move higher. We have a big report from USDA due out on Monday and that has once again shifted concerns over what USDA is going to give us in regards to the old crop carryover.
I am still eager to see whether some of the commercials are going to try to squeeze the shorts in that July contract when it enters its delivery period next week. We need to get that month off the Board and out of the way to get an actual decent reading on what the new crop is going to do. July, tied to these ending stocks, has been a real source of volatility and confusion in the beans for a long time now.
I am beginning to wonder if there is not a subtle shift occurring in bean market in regards to the pipeline needs. Old habits die hard but with S. American soybean production rising nearly year after year, I wonder if the importance of the carryover is as big a deal as it once was many years ago when I first started trading these things. Back then, we needed a big carryover to ensure that we would not run out of beans between the harvest of the previous year and the harvest of the current year. More and more however we are seeing S. American cargoes filling needs and with imports of beans from down below now becoming much more common, perhaps the market is going to re-evaluate whether or not the carryover is quite as critical as it once was. I am not saying it is not going to be closely watched - what I am saying is that the global grain trade is changing and S. America is becoming a bigger player with the passing of each year. Their crop is harvested during the spring up here and moving beans north is not as uncommon as it once was. If you can just as easily ( and sometimes more cheaply!) acquire beans from S. America during the spring and early summer than up here in N. America, why do we need carryovers the size that we have historically come to look to here? Just asking....
Corn and wheat are moving higher as the selling down here has dried up some ahead of that above mentioned USDA report due Monday. Traders are going to want to see the numbers before getting too aggressive at this point, especially considering the extended downdrafts that we have been seeing in both markets. We are seeing some signs of demand picking up at these reduced price levels.
Also, I suspect some of the big locals and some others who manage some commodity money might be trying to pick off some of the small specs who are quite short both markets. Buy stop running is always a favorite pastime of that crowd.
Crude oil wasted no time surrendering its gains from yesterday. Perhaps it was the fact that equity bulls were suddenly now concerned that economic growth was not going to be as strong as they were thinking it would be for Q2 ( that did not seem to bother them yesterday now did it?). Where were these guys yesterday when they bid up both the price of crude oil and the price of stocks when we got one of the worst GDP readings I can recall in some time?
Take a look at the crude oil chart - today's move lower has put the market right smack on top of the upper edge of the support zone noted on the chart. You might notice that the $105 level was a tough overhead resistance level on the way up and had held this market in check for some three months or so. It is now serving as support.
Short term indicator is bearish. Bulls so far have held this market together but they are going to have to dig in here and start pushing back if they are going to prevent that massive speculative long position hanging over this market from becoming a bigger factor. They are so far holding things together but have been unable to extend the price higher. Bears are digging in as well.
Of course, as mentioned in yesterday's post, the weakness in crude and its products, along with natural gas which moved lower in a larger-than-expected inventory build, pulled the Goldman Sachs Commodity Index, rather rudely. This is in spite of another push to fresh record highs in the cattle complex and higher prices across the board in the grain complex. Cotton is heading lower and that bodes well for apparel costs although the higher priced crude will tend to push synthetic prices higher.
One last thing - I wish to thank all of those who have graciously donated. I am trying to make a point of personally thanking each and every one of you but time constraints make that difficult on occasion. I did not wish to not acknowledge your kindness lest you think me ungrateful. It is sincerely appreciated.
"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
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Thursday, June 26, 2014
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