"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


Thursday, September 11, 2014

Weekly Gold Chart - Updated

I have posted this chart fairly regularly now for some time to give a more intermediate term look at the gold market for those who are interested.

Not a single thing has changed for gold in over a year now. The metal is still trapped within a broad range defined on the chart. It is now working its way down toward the bottom of the range having failed to make any new weekly high. As a matter of fact, the pattern for gold has been one of LOWER HIGHS for over a year now within that range. That is suggestive of weakness.

This week the HIGHER LOW was broken and while it is still not the end of the trading session for Friday, the metal is threatening to put in a LOWER LOW within the range compared to the May close. That is a sign that the odds favor a move down towards $1200 unless it swiftly reverses and regains the $1240 level in a convincing fashion.

As said many times here to the point of taxing the reader's patience - it is no where written that a market must either be trending lower or if not, then trending higher. Markets can often move within broad, well-defined ranges for a long period of time; essentially they go nowhere. What that suggests is that supply/demand are essentially in balance within that range of prices. Unless an external development occurs which CHANGES the balance between the forces of demand and the forces of supply, the most likely outcome is a furtherance of the range trade.

I find it therefore rather disconcerting that so many of the gold-perma bulls continue their mantra of "Keep Stacking". For those who want to acquire some physical metal for insurance purposes, buying gold near the bottom of a well defined trading range makes sense. However, for those who "keep stacking" while they wait for the "any day now moon launch", theirs is a 'strategy' that has more odds of leaving them disappointed rather than obscenely rich as they dream. As mentioned above, range trades for markets are more the norm than solid, trending moves. The trending moves occur because something happens which triggers a new valuation of the underlying market whether that be an increase in the demand side of the ledger or in the supply side of the ledger.

Take for example the recent rallies in the cattle market, especially feeder cattle, and the recent sharp downdraft in the corn and bean markets. In the case of the bull market in cattle, the supply side has been constrained as ranchers and producers seek to rebuild herds devastated by back to back drought years in 2011 and 2012. The result has been increased demand with sellers of the animals in control as they have the luxury of sitting back and waiting for buyers to pay up and chase prices higher.

In the case of the bear market in the grains, the supply side of the equation continues to increase as the size of the expected harvest increases with each new USDA monthly report. That gives buyers the advantage because they have the luxury of sitting on their heels and waiting for even lower prices before committing in size.

In other words, both markets are imbalanced at the moment and seeking to find a price level or a range which satisfies both sellers and buyers that prices have reached a fair value level.

For gold to therefore move out of its range, a trigger will need to occur. Without that, gold bulls will be disappointed that the metal cannot escape from the upper boundaries of its 14 month long range. Gold bears also have not yet been able to crack prices below the bottom of the range starting near $1200 and extending down to $1180. Within this very broad range, a truce exists between both buyers and sellers. Shorter term within the range; however, there are signs that the buyers are regaining an advantage as demand is falling for available supply meaning sellers are willing to take less for their gold. As long as that is the case, the price will move lower. It will not be until they are more buyers at a lower price than there are willing sellers that the price will bottom. Trying to ascertain at what level that might occur is the business of traders.

If there is a change in either supply or demand, the market will reflect that as the price chart will change accordingly.  Until then, prognostications, predictions, rash claims, etc, about surging gold prices are just that, rash claims founded on nothing but air with no basis in the price chart or in the technical patterns. Objective viewers and students of the markets learn to dismiss all such voices and listen to the only voice that matters - that of the market itself. It and only it knows when demand and supply have come into balance.

Charting the Rate of Growth/Decline in the Fed's overall Balance Sheet

I find it rather fascinating to see the depths of denial that some will sink to when it comes to taking the Federal Reserve's clearly announced intentions to wind down its final Quantitative Easing program. You might recall that this last of their QE's was originally in the amount of purchases of both Treasuries and MBS (Mortgage Backed Securities) debt to the tune of $85 billion/month.

The chart I put together should hopefully dispel the rather foolish talk from some as referenced above and help objective and open-minded observers understand where the Fed is in its intent to bring this program to an end.

The chart details the Rate of Growth/Decline in the "Securities Held Outright" portion of the Federal Reserve Balance Sheet. For all practical purposes, this might as well be considered the total Balance Sheet ( the other items that are involved are dwarfed by comparison ) but that is another matter. Suffice it to say, one can easily tell the start up and the decline or winding down of the various QE episodes that have been in place since the Credit Crisis of 2008 and the Fed's response to that.

The data is constructed by creating a look-back period of 52 weeks and noting the percent change of the current week to the same exact week exactly one year previous. By looking at the data in this manner, we can get a very good view of how the Fed was responding to the lock up of the Credit markets and its determination to be a buyer of last resort of both MBS's ( mortgage backed securities) and Treasuries.

One can see the amazing surge in the 2009 as QEI was undertaken. Then we would see the end of a QE program, and the implementation of the next. The RATE OF INCREASE in the Fed's Balance sheet can easily be noted.

Fast forward to the beginning of this year and the Fed's announced intentions of a "TAPERING" of its final bond buying program with the intent to end it sometime this year.

Note well that the Fed did not say it was going to stop buying both Treasuries and MBS debt when it first began making the markets aware of its timetable to end QE4. It announced that, depending on the economic data, it would begin to scale back those purchases ( roughly $10 billion each month) until it ended them altogether.

Thus while its balance sheet continues to grow, the RATE OF GROWTH, year over year, is definitely declining. Indeed the Fed is tapering just as it said it would.

Just for comparison sake, here is a chart of the overall Fed Balance Sheet ( Securities ) so that the reader can see the growth. It is rather remarkable is it not? Even in this view, one can see the leveling off of the line over at the far right hand side. Their purchases are slowing down.

The reason for this short set of comments and charts is simple - there are those in the gold permabull camp who continue to deny that the Federal Reserve is tapering and preparing to end its QE programs. We will let the reader decide from the data whether their claim has any merit. I for one reject their specious assertions.

Now, it is going to be an entirely different matter if the Fed chooses to actually REDUCE the size of their balance sheet. That is going to be an interesting education we will all receive when once that happens, if at all. For all that one knows, they could simply choose to hold the securities (Treasuries and MBS debt) until they mature and return any interest earned to the Treasury.

USDA report sends Grains Reeling

Talk about a bearish set of reports! Most everyone was expecting the numbers to be on the bearish side as reports from private firms have been indicating crops in incredible shape with the potential for strong yields picking up with the passing of each month. USDA tends to be a bit conservative however and that had most in the trade expecting them to confirm higher yields but to wait for their October report before getting too optimistic.

Boy howdy was that NOT the case!

In the case of soybeans, USDA left both planted and harvested acreage unchanged from their August report (84.8 million and 84.1 million respectively) but it was the big jump in yields that caught many off guard. They found another 1.2 bushels per acre of yield from the August number of 45.4 to an astounding 46.6!

The result - a massive crop of 3.913 billion bushels, well up from last months 3.816 billion. Combine that with imports of 15 million bushels and the total supply jumped to 4.058 billion bushels of beans. I am still reeling when looking at that number!

USDA increased both crushings and exports from August bringing total usage to 3.583 billion bushels. That leaves a carryover of 475 million bushels, more than THREE TIMES Larger than the past marketing year number of 130 million.

Beans wasted no time in adjusting to the new numbers and are sharply lower as I type these comments.

When it comes to corn, they did the same thing as they did with beans on the planted and harvested acreage -= they left them unchanged at 91.6 million and 83.8 million respectively.

The kicker was a huge leap in yield coming in way above what most in the trade were expecting at this stage of USDA reporting. Last month's yield estimate was 167.4 bushels per acre. That in itself is phenomenal. This month, they moved that number up to an eye-popping 171.7 bushels per acre! WOW!

the result is a total production number of 14.395 billion bushels, well up from last month's already incredible number of 14.032 billion.

USDA increased feed usage slightly ( I am not quite sure why they are doing that unless it is coming from ideas of increased poultry and hog production). Exports were increased by only 25 million bushels. Ethanol production will consume an additional 50 million bushels compared to last month's estimate.

Even with the increase in usage, carryover will end up at over 2 billion bushels of corn, not quite more than double that of last year's crop.

What is even more astonishing to me as a trader is the fact that this is occurring against a backdrop in which the hedge fund community and the large reportables are overwhelming on the NET LONG side of this market. Talk about a recipe for a trading disaster! Rarely have I seen this group get a market so wrong! My concern is that their compounding and significant losses on their positions are going to engender even more selling in the corn market!

One thing I can definitely say - if this crop manages to get to harvest without any serious frost issues ( and it is running a bit behind normal maturity), hog, cattle and chicken producers are going to be in "hog heaven".

It is about time for those guys to get a break and this is a big one. They deserve some much needed profitability, especially in the hog industry where PED virus has negatively impacted so many.

By the way, as an important corollary connected to my post last evening comparing the S&P 500 to the overall commodity sector. The GSCI did another swan dive today with these sharply lower grain prices adding more to the bearish environment for commodities in general.

Silver is looking like it is going to crack major support near $18.60 especially with soybeans swooning like they are.

Gold has lost critical support at $1240 as I hurriedly try to type these comments. It is hovering just above the bottom of a band of support extending from $1240-$1235. If it loses that, $1200 looks like it is coming.