"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, June 27, 2014

Inflation Expectations Continue to Firm

I have mentioned in the past that I would keep the readers up to date on the TIPS spread action, especially as it compares to the gold price. I have the data through Thursday of this week ( the Federal Reserve is always a day behind in getting the fresh data) but it does continue to confirm the idea that the broader market is still continuing to see inflationary pressures increasing, albeit at a controlled rate. I believe that this is linked directly to the recently dovish attitudes of three Western Central Bank heads - ECB President Trichet, who got the ball rolling with a reduction in rates in the Eurozone as well as engaging in negative rates for bank reserve deposits, Fed Chair Yellen and BOE Head Carney.

The TIPS spread remains near the highest level in 6 months, a positive key that is keeping gold supported recently. We need to also keep in mind that another of the factors that goes into determining the gold price is also a premium due to the geopolitical factors that might or might not be present. At the current time, the chaotic events in Iraq are undergirding the price of the metal. Lurking around also, although much less of a factor, are events in Ukraine.

The point I want to make here is that inflationary expectations might actually be falling at some point as signaled by the TIPS spread, but geopolitical events could be dominating trader/investor sentiment and such concerns could supercede any signal from the TIPS spread. If figuring out which way markets are going to go, or what the sentiment might be at any given time, were as easy as just looking at one input, we would all be living on our own S. Pacific islands.

Here is the chart update through Thursday.

Along this line, here is the current chart of the Goldman Sachs Commodity Index. As of the close of trading this week, the index is up almost 8% on the year.

From a broader perspective, it continues range bound as noted by the shaded rectangular region on the chart.

That brings me to the US Dollar. It too is range bound. Notice that there exist two defined trading ranges on this longer-term weekly chart. The first and large range has been in effect for a year now. It extends up towards 84 on the top and down towards 78.60 on the bottom. Within this range, is a shorter and narrower one which extends towards 81.50 on the top and near 79 on the bottom. The latter range has kept the Dollar confined for the past 8 months or so.

The relationship between the US Dollar and the broader commodity complex remains fairly consistent which is why the chart pattern for the commodity index and the Dollar index are both showing range bound markets for the time being.

The stock indices did what they have done for so long now - every time they appear to be rolling over, back up they spring. Equity bulls are not going to give up without a fight. The benchmark Russell 2000, a good indicator of investor sentiment towards risk, was up nearly 0.75% today and managed to close higher on the week, after looking like it was finally going to show some downside follow through from weakness earlier in the week.

The index remains well above its 50 day moving average after dipping down into that level last month.

While one can make the case for bearish divergences showing up, this index has continued to shrug off one divergence after another for over a year now!

One last thing ( for now ) I believe it was last week when I mentioned the Gold Commitment of Traders report noted that there was a considerable amount of short covering that occurred in the drive higher coming off of Janet Yellen's dovish remarks back then. Hedgies were caught off guard by that ( as was nearly most everyone else!) and headed for the exits in a big way. They covered around 16,600 short positions against only adding around 1700 new long positions.

I remarked last week that if one is bullish gold, they want to see any move higher in the market accompanied by the infusion of new money from powerful speculative interests and not merely short covering, which while it can be impressive, tends to fizzle out as quickly as it starts.

This week was a welcome change therefore for the bulls in that department. The buying from the hedge funds became much more balanced this week. Short covering was still the dominant feature among that category to the tune of some 24,800 shorts being lifted but here is the noteworthy development - they added nearly 23,000 new long positions. Can you see the difference from the previous week?

Also, this new buying ( dip buyers ) are the reason that gold is currently hanging quite tough up here. It has been stymied at the $1320 level but it is not setting back much at all. This is what steady determined buying does. It keeps a market supported on dips in price. Bulls will want to see this pattern continue. The last thing that one wants to see if they are bullish is for the longs to STOP BUYING these dips. We will know it very quickly if they do just that by the price action.

The events in Iraq, the rising TIPS spread, the lack of strong bullish conviction in the US Dollar at the moment, are all providing some wind at the back of the bulls.

That being said, gold seems to be looking for a catalyst to power it up through $1320 and allow it to maintain its hold ABOVE this key level.  With today's momentum driven markets, any sign that the upward momentum has stalled will get touchy, jumpy short-term oriented longs very nervous. Gold bulls will therefore need to prove their meddle next week. Lacking a fresh catalyst, gold's inability to quickly put $1320 in its rearview mirror, is going to embolden the bears. While bulls are certainly digging in on these dips, bears are also digging in here at this level.

In spite of the strength being shown by gold, some of the big investment banks and their advisory services are still coming out with bearish second half of the year calls on gold. The reason - they expect the economy to continue to improve and interest rates to rise early next year. I am not sure about that prediction but it is basically the same expectation that stock market bulls are relying on. We'll see if it is correct or not.

Lastly, here is the current chart of the GLD holdings. The reported holdings at 785.02 tons has not changed since the beginning of this week. Maybe we will get something new over the weekend or early next week. I sure hope so - these guys are slower than molasses on a winter day in getting us new data to work with.

Compared to exactly one month ago, total reported tonnage is down .26 tons. For the year, holdings were at 798.22 at the start of 2014. Doing the math we get gold tonnage down 13.2 tons for the year thus far. Western-oriented gold bulls are going to need to do much better than this.

Quarterly Hogs and Pigs Report Day (* UPDATED )

I am currently going over this report but will lay out some thoughts on it after I get a bit more time to go through it more thoroughly.

My initial reaction is that it is quite friendly towards the nearby months and neutral to bearish towards the very distant 2015 months.

Some of the negativity towards those months may have already been priced in with the sharp move lower in those contract months throughout this week.

Hog producers, (and cattle ranchers) - please check in later on and I will get those comments up.

Also, for the grain guys out there, we have a big USDA report coming out Monday AM. I will be remarking on that as well.


In looking over today's Quarterly Hogs and Pigs Report, once again, the report lived up to its habit of being one of the most unpredictable, volatile reports that USDA publishes. Last Quarter (March) the report threw the entire trade an enormous curve ball as it was decidedly bearish on the surface when nearly the entire industry was looking for a bullish report.

This Quarter's report was the exact opposite - it was decidedly bullish when most in the trade were looking for a bearish report!

Translation - there will be fireworks come Monday morning in the hog pit. Based on the report, I would not be surprised to see the August and October contracts open limit up, and with the December's possibly there as well. The July should also be well bid.

The reason? the report showed fewer hogs around than the industry was expecting. This is the result of the PED virus which has been, and still remains a serious issue for hog producers.

Here is some of my analysis which was sent off to some of the newswire reporters:

The number of sows that actually farrowed during March-April was much lower than the number that farrowed the previous three months. It does look as if earlier this spring,  producers were very nervous after coming off those flare up in disease incidences being reported. Again, that should be friendly towards the August – September time frame and into October.

 One other thing -  based on the Monthly aspect and the weight breakdown data – late August, early September should see some significant tightness in the supply side of things. The pig crop for March was especially tight coming in nearly 7% lower than last year! April’s pig crop is at 94.5% of last year. By last month, May, we were back to 96% or a 4% reduction.

One wild card is though intentions are obviously very high for the Sep-Nov time period ( 4% above last year) we do not yet know what kind of impact the disease might have as the weather turns cooler and damper. If the expected recently approved vaccine is effective ( and we do not know yet how effective it might or might not be), the herd will be expanding significantly by next year.

Based on my preliminary reading of the report, it looks as if the front months should still continue to outperform the distant 2015 contracts.

The question is how much of this is already priced into the Board. With the big move lower in those 2015 contracts this week, the Board might have already effectively discounted the report with that very high intentions number for the Sep-Nov time frame.

 The USDA showed the expected mortality rate from the disease lessening or improving positively  as the spring has worn on. You can see the improvement in this years 2014 pigs per litter numbers as the spring progresses.


March            10.24              9.58

April               10.30              9.78

May                10.38              9.98


While the pigs per litter number is being impacted from the virus, USDA is looking at the numbers and telling us that the impact from the disease will lessen as the weather warms. That is consistent with what we saw last year.


Hog producers out there - keep an eye on the price action for those distant hog contracts in Q1 2015. If you got some downside hedge protection in the Feb's for example over the last couple of weeks, you should be okay on those, as the contract has dropped over 750 points the last two weeks.

While I do not see anything especially bullish about a 104% intentions number for the fall, the intentions are the most fickle number in the report as those are forward looking  ( estimates) and can easily ramp up or back down depending on the change in conditions when it comes to feed prices and hog prices or both. Those distant months might get dragged higher by the overall bullish tone to the report especially considering that the beating they took this past week ahead of the report pretty much factored in a sizeable bit of expansion for that time frame.

Then again, with a big USDA grains report due out Monday morning, the impact from that report on corn and meal prices could become a factor in the intentions. Frankly, if hog prices stay very high this summer, and there is no reason for them not to at this point based off of this report, and if this season's expected grain and bean harvests are large, I expect the intentions number to continue moving higher - there is just too much profit potential for hog producers at such lofty levels for them to pass it up.

Let's see what we get Monday by the close to get a better sense of how the industry is treating the overall report.

Tracking Gold Shares

The gold shares, as evidenced by the HUI, ended the week on bit of a lower note ( as I type these comments up ).  Sellers emerged up near the week's high but dip buying was also evident. There appears to be an uneasy truce between both camps with the index not making much progress in either direction.

In looking over the chart and trying to get a read on the sector from the chart, I have noticed what appears to be an attempt to form what we technical analysis geeks refer to as an "Inverse" Head and Shoulders Pattern. I tend to only put any faith in these patterns when they appear after a PROLONGED move lower ( the same goes for the opposite pattern  - the Head and Shoulders Pattern - on a prolonger move higher). Even at that, I much prefer to see these patterns validated by a breach of an overhead horizontal resistance level rather than a breach of the neckline. More often than not, the neckline breaches these days only lead to markets entering consolidation patterns, rather than extended trending moves. That is why I personally prefer to wait for a horizontal resistance level to be taken out before getting too dogmatic about things.

Take a look at the chart and you will see the pattern noted. I have drawn in the neckline, which comes in closer to the 250 level. That level could be bettered confirming the pattern but would not necessarily denote the beginning of a sustained, strong uptrending move. Note that there are THREE overhead horizontal resistance zones, the last of which, the gap region, should prove to be quite formidable.

For a sustained strong upside trending move to begin, the gap would have to be taken out. If not, the odds would favor a broad sideways pattern, or a trader's market, with the top of the range being confirmed depending on how the index responds when it nears the horizontal lines noted on the chart.

The bottom of the range would be first at the right hand shoulder which just so happens to be at the round number 200, which is both psychological and technical support.

Here's what we can say from an analysis of this particular chart - For the pattern to remain friendly, the 200 level needs to remain unbroken on any possible setbacks in price ( that is the Right Shoulder). That would keep the pattern moving sideways to slightly higher as it is currently doing.  If that 200 level were to give way, you would then have to say that the pattern has changed back to being slightly unfriendly with price movement sideways to slightly lower.

If the first level of horizontal chart resistance noted near 260 is taken out, the bulls should be able take this index up towards 280. Above that lies the gap region.

By the way, the chart picture and analysis for the juniors as evidenced by the GDXJ is very similar to the HUI. It has horizontal resistance near 45. Above that is also a gap starting near 52 and extending up to 55.

Given the situation in Iraq and recent rash of dovish comments by some heads of the various Western Central Banks, gold is continuing to draw decent buying support here in the West. Throw in a case of some shaky equity markets, and some traders/investors are buying the metal as a safe haven. I remarked yesterday how fascinating it was to see gold finding friends here in the West while losing a few friends in the East ( for now). Western oriented investment demand for gold is what had been missing for the yellow metal for the last number of years. Gold's friends will be happy to see it returning even if it is not at levels previously seen. At least it is there! Compared to being non-existent, anything is a big improvement!