Caution ahead of the Fed

With all the hype preceding this week's Fed meeting, not to mention the usual circus atmosphere surrounding some potential action from the ECB, my advice to both gold and silver traders is to be EXTREMELY CAUTIOUS. The market has worked itself into a tizzy in my view as it salivates at the further prospect of additional liquidity measures being undertaken by both Central Banks.

When markets are in this state of mind, you will end up either being a HERO or a ZERO. In other words, you are now in the precarious position of having your fate determined by the roll of the dice. If you get it right, and the Central Banks act when you expect them to, you will be a hero. If you get it wrong, and the Central Banks disappoint, you are dead meat. Frankly, that is not the way to be a long term survivor in these markets. Yes, you may hit it big and congratulate yourself but what happens if you miss???

Personally I do not believe Bernanke has the appetite to go with another round of QE at this time. Maybe in September but not now. Why? Simple - look at the current yield on the Ten Year:

Do you really think that the problem with the economy is that longer term yields are not low enough to stimulate borrowing? How much lower do you think that the Fed might be able to drive this yield by launching another round of bond buying? Perversely enough, if the Fed were to actually pull the trigger, the market will probably do the exact opposite with Yields moving HIGHER instead. After all, yields are moving lower or stuck near historic lows because the market fears the fallout from excessive amounts of debt in the system which is weighing on global and domestic growth. If the psychology were to somehow shift to fears of inflation, yields on this Ten Year will start moving higher. That would actually short circuit any attempt by the Fed to push yields lower so as to stimulate new borrowing.

My own view is why mess with bond buying programs if the market is already doing the work for you on its own?

Then there is the level of the S&P 500. Does this look remotely like a market that is serious trouble??? While we technicians can pour over our indicators and study the internals of this market like the soothsayers of old studied the entrails of slaughtered sheep, the average Joe looks at his stock portfolio and basically yawns. Now, if the S&P 500 were flirting with the 1000 level, this would be a different story; however, as with the yields on Treasuries, why mess with things if the market is doing what you want it to do without taking any additional steps such as another round of bond buying?

Keep in mind that Central Bankers will ALWAYS RESORT TO VERBAL INTERVENTION first to see if that can accomplish their intentions without having to resort to the actual intervention. The latter will proceed only if the market calls their bluff on the former. At that point, in order to preserve their credibility, the CB's will then act.

Think about what the Fed has managed to do thus far (and we might add the ECB which is now getting into the game). They have driven yields down to historic lows and the stock market to not far from its all time high without having to engage in another round of politically toxic Quantitative Easing. Why should they proceed this month with plans to start another round forthwith?

My view is that they will do nothing except more of the same - namely - tell the markets that they are monitoring the economy closely and stand ready to act should the conditions warrant. That is what is so perverse about this stock market rally - the disconnect from stocks and the actual economic conditions is becoming more and more strained with the passing of each week.

As the economy continues to slow the stock market has continued to shrug off each new release of economic data confirming the slowdown. The entire rally has been predicated on the supposition that the rotten economic data will surely force the hand of the Fed to act. But put yourself in Bernanke's place and try to see it through his eyes.

WHo is calling the shots here - the market or the Fed? If the Fed is seen as nothing else but an errand boy of the markets, acquiescing to its demands come hell or high water, then what good is the Fed? After all, if the market determines Central Bank responses, then why have a Central Bank at all? Why not merely take a poll among the investor/hedge fund camp and see what they want and just have it implemented by the Fed? Basically we end up with the situation where the markets say "JUMP" and the Fed responds by saying "HOW HIGH?" Personally I do not think Bernanke is going to allow this to happen.

Now, if the market were to suddenly collapse and a selling rout occur across all asset classes, then the Fed would act.

Of course, the Fed could surprise everyone and announce this week another round of QE which would have serious implications as far as food prices would go. With grains being devastated by the drought and reaching historic highs, a new round of bond buying would send more hot money flows into the commodity sector in an even larger way and would drive prices even higher for a short time. I suspect that it would also shut off demand but for the very short term, it would send shock waves through the food supply chain.

I have said all this to merely emphasize the point, gold traders and silver traders for that matter, be careful out there. It is not the time to play reckless. The market will always be there tomorrow should you miss a move today. Remember that.

Trader Dan on King World News Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Markets and Metals Wrap.

http://tinyurl.com/czua7fl

 

 

Gold Chart and Comments

ECB President Draghi apparently has developed a severe case of loose lips as he cannot seemingly keep his mouth from issuing words into the atmosphere fast enough of late. The man has decided to initiate a round of verbal intervention directed at his stinking currency and as a collateral note, the global equity markets.

Yesterday it was: "we will save the Euro at all costs". Today it is "let's propose another round of bond buying and lower interest rates".

Just like that, it was music to the ears of the hedge fund community which wasted no time dutifully responding like the obedient lemmings that they are, jamming the S&P 500 higher, jamming nearly every single commodity market higher, and dumping the Dollar whilst simultaneously falling in love with the rotten Euro. Voila''!  Problem solved - all is right with the world once again as the candy store will now be open.

A point of interest in all this Central Bank madness - the extremely commodity sector-sensitive Australian Dollar has been staging quite a rally on the back of all this bond buying hype. Based on what I am seeing occur in these markets, the hedge funds are now repositioning on the long side of the commodity sector in glorious anticipation of the now "no way it is not going to happen" round of QE that is coming practically tomorrow as far as they are concerned. With this much anticipation, if the Fed disappoints, heaven help us all for these brain-dead funds will annihilate the commodity sector as they all rush to the exits simultaneously.

One has to wonder if a great deal of this has now become captive to the US political election season with Bernanke doing what he can do to keep his boss in office.

As I have stated many times already, we are now witnessing a metamorphosis of the US financial system from one which takes its signals from fundamentals and supply/demand factors to one which is nothing but a product of Central Bank activity or inactivity. The entire house of cards is being held together by liquidity infusions - if the market doesn't get its fix, it promptly sells off until it so unnerves its masters, that they have no choice but to feed the habit for fear of a huge withdrawal symptom manifesting itself.

That brings us to gold upon which none of this madness is being lost. The yellow metal has been behaving quite strongly on the charts this week ever since the first solid hint of an upcoming QE hit the wires. Note that while it has continued within the consolidation range on the chart that I have noted as "NEWEST CONGESTION ZONE", the lows over the last couple of weeks have been occuring at a slightly higher level. In other words, the buyers are coming in sooner instead of waiting for price to drop back to the bottom of the range. They seem actually more worried that they are NOT GOING TO BE ABLE TO BUY THE METAL LOWER and as a result are stepping up to the plate sooner rather than later.

This has put a bit of an uptrend on the chart over the last two weeks and while the metal is still not decisively through the top of the range, it is sure as heck looking like it is only a matter of time before it does so. A push through the $1640 level that maintains that height on any subsequent retreat in price, will then set it up for a push through $1650 and a test of $1665 and then $1680. If the Fed does indeed launch another round of QE, so too will gold launch. If they fail to act, the metal will drift lower again to see if it can keep its important handle of "16" in front  of the price.

It is no coincidence that the gold price is moving higher when one looks at the weekly chart of the US DOllar, which has put in a massive outside reversal signal. This is what will happen to the Dollar, particularly with all those hedge funds positioned on the long side, if the QE comes. It will be obliterated.

A brief note on silver - Silver actually was struggling today until the news hit the wire that Draghi was going to propose another round of bond buying and lower interest rates. That was enough to rattle the shorts who promptly raced to the exits and push it back off the lows and closer to solid resistance near the $28 level. If it can clear this level next week, it should move to $29 relatively easily.

First - Smithfield - Now - Pilgrims' Pride

With the grain markets the center of the commodity universe this year on account of the fierce drought that has gripped the midWest for what now seems like an eternity, commodity firms have been reaping a bonanza pushing the "buy those grains" theme for new speculators.

What has happened however is that corn prices have reached a point where the market is doing what it is supposed to be doing, namely shutting off demand.

First we learned that Smithfield, the nations' largest pork producer, began importing corn from Brazil. Even with the shipping costs to the EAst Coast, South American corn was still cheaper than US corn at the Gulf.

Now we learn today that Pilgrim's Pride, the world's second largest chicken producer, is working on an agreement to also import corn from Brazil.

While this does not signal an end to the bull run, it is a third warning shot across the bow, the first being shrinking ethanol margins, the second being Smithfield.

By the way, for those of you who might have missed it, check out my written interview with Eric King of King World News on the action in the gold market yesterday.

http://tinyurl.com/d88o3pw

Gold Clears $1600 - Psychological Boost to Bulls

The abillity of the gold market to push a "16" handle on the price can be considered a minor victory for the bulls. You can see from the chart below, that within its broader consolidation pattern, gold had been experiencing a somewhat tightening or constricting of its range. The upper boundary of that "mini-pattern" has been the $1600 level. The ability of the bulls to take it through this region gives them a very slight advantage over the bears in the immediate term and provides the possibility of a push towards more stubborn resistance beginning near the $1620 level.

Keep in mind that every bit of today's move higher was predicated on the notion being floated that the Fed is going to ease and provide additional stimulus measures as soon as next month. What the Fed giveth, the Fed can taketh away in a real hurry. What this means is that as long as traders feel fairly confident that the stimulus is coming sooner rather than later, gold will attract dip buyers. On the other hand, if anything comes along to disabuse them of this notion, the market will drop back down towards the bottom of the recent range where the big Asian buyers are lurking.

I have stated many times that I believe any additional bond buying programs are an enormous waste of time which will do absolutely nothing to deal with the underlying problems in the US economy, which are structural in nature. Simply put - there is already too much debt in the system. Trying to lower interest rates even further in order to encourage additional borrowing is a fool's exercise.

For Pete's sake, the yield on the Ten Year note is at 1.406% today. Speaking sarcastically here I am sure that all those fence sitters out there just itching to spend money they do not have will immediately launch forward with those plans if the Fed manages to push the yield down to 1.25%.

They can do all they want to entice banks to lend instead of holding money at the Fed and earning interest but if consumers are afraid of sinking further into debt in this jobless economy, what good will conjuring up more attempts to entice lending do?

Also do not forget - the Fed has spent a minimum of $2.5 Trillion between QE1 and QE2. What lasting good did any of that do??? Answer - nothing.

QE3 Timetable Moves Up to August

The market is abuzz this morning with chatter that the Fed is going to open the candy store next month instead of waiting until September as many had come to believe.

That is all you need to know to understand why nearly every commodity on the Board is moving higher today as well as equities.

Welcome to the brave new world of "investing".

As I mentioned in my post yesterday, if the Fed succumbs to this madness, hold onto your hats for food prices are going to shoot directly to the moon. The entire grain complex is putting back on a large portion of what it took off yesterday. If the Fed does indeed pull the trigger on another round of this idiotic bond buying, hedge fund algorithms are going to jam food prices due north.

Interestingly enough, about the only segment of the commodity complex not moving higher today is the energy complex. The current data releases continue to confirm slow demand due to the poor economic conditions.

Smithfield Importing Brazilian Corn

I mentioned in my morning piece today that some of the pressure in the corn market was tied to news that Smithfield, the largest US pork producer, was sourcing corn from Brazil instead of domestically here in the US. That is big news as it indicates how tight current supplies are and how the rise in price is already beginning to do its job of rationing demand.

According to a consultant at Brazil's Safra & Mercado, reported by Dow JOnes which has been all over this story, corn at Brazilian ports is currently fetching $290/ton compared to US corn at the Gulf of Mexico which is closer to $345.  It costs anywhere from $30 - $40 ton to ship the grain to the US.

There is no doubt that the meteoric rise in the grains this summer on account of the severe drought is going to impact all of us at the grocery store in the near future. My concern in all this is what might happen should the Fed foolishly choose to go forward with another round of QE. Keep in mind that the rise in the grains has been fundamentally driven. In other words, there are legitimate supply/demand fears pushing the price higher.

If the Fed does indeed begin another round of bond buying in order to prop up the US equity markets, a huge amount of hedge fund speculative money is going to flow directly into the commodity sector in a very crude fashion. Think of it as a shotgun instead of a sniper's rifle. They will blast everything in sight higher.

In the grains this will have the immediate effect of pushing prices even higher further exacerbating the impact of the drought. The problem will occur because the money flows can be so huge that even deep-pocketed commercial sellers will have difficulty standing in front of such a torrent of buying. I shudder to think what might happen if their computers drive the price of corn to $9.00!

Remember those food riots that began a while back in Algeria and the spread across parts of Northern Africa and the Middle East? Some, including myself, believe that those riots were the catalyst for what have now become rather euphemistically known as the Arab Spring. When food prices begin soaring, they impact the poor first and when a large enough segment of society becomes restless, it is always a safe bet that further instability soon follows. While Bernanke tried deflecting the entire blame for the surge in wheat prices back then on the weather, the truth, as we pointed out at the time, was that the entire commodity sector, including wheat and the rest of the grains, began moving higher at the exact same time as QE I commenced. QE2 just made matters even worse.

It is bad enough dealing with the devastation coming from a drought - it is entirely another matter dealing with the potential devastation coming from a bunch of meddlers in the economy.

These monetary masters and their utterly useless strategy of buying bonds are playing with fire.

Precious Metals Succumbing to Deflationary Forces Today

Both Gold and Silver are under selling pressure today as the sell off in the grains seems to have pushed a large amount of hot money out of the commodity sector. Soybeans are currently locked at limit down as is the front month corn contract. Talk that Smithfield is importing corn from Brazil has sent supply side bulls scurrying for cover and demand side bears are pressing their case. The pool in the July was 112K at one time and is now down to 26K currently. In the November Beans, the pool is at 37K as I write this.

Traders had been bidding up commodities in general of late as evidenced by the recent climb in the CCI (Continuous Commodity Index) but apparently the onset of some rain in the Corn Belt combined with continued Dollar strength and nervousness surrounding Spain and other European nations, is too much for some of the new longs to handle. They are heading to the exits today in both commodities and in equities.

One of the results of this has been to push the yield on the Ten Year Note down to an amazing 1.411 as I write this. Clearly interest rates continue to plummet globally as traders rush for anything that they feel can provide some sort of shelter. It is an astonishing thing to see yields in Denmark actually go negative!

The Dollar has also pushed into a new 52 week high today and is currently trading over the key 84 level on the USDX. It looks poised to head higher at this point. that is going to give us some extra headwinds for the precious metals do deal with, particularly silver.

For the last two weeks, every time silver has pushed below the $27 level, it has always popped back above that level before the session has closed. That has indicated the presence of strong buying. If these buyers do not surface before the end of today's trading session, silver will very likely head lower and retest the key $26 level. It must hold that level to prevent another round of long liquidation and fresh short selling by hedge funds playing the "slowing global economy" theme. Weakness in the mining shares is not aiding the cause of the bulls right now.

Gold coin sales are apparently slowing compared to the same period last year as reported by Dow Jones this morning.

Here is the short blurb:

The US Mint's sales of gold coins have been "unusually low" in
July, even when adjusted for the seasonal summer lull in gold coin demand, says
HSBC. With 17,500 troy ounces of gold sold as of July 23, the Mint is far
behind the 65,500 troy ounces it sold in the same month of 2011.

Again, with inflation fears being trumped by slowing growth fears, gold is catching fresh short selling as well as long liquidation. However, it is once again down into the region that has seen strong buying based out of Asia emerge. From here down towards $1525, strong hands have been accumulating. We will watch to see if they are still making their presence felt.

The Complacency Index or the VIX as others properly call it, is finally waking up. Maybe, just maybe, we are finally seeing some of these numbed, see no evil traders begin to get nervous. Hard to see what more they could need to rattle their cages but they apparently have a great deal more confidence in Central Bankers and monetary officials than I do.

The HUI chart has turned ugly once again and is now threatening to close in on the May low near the 370 level. Pressure on the mining shares has been very strong. Some of this is manipulative in nature; some of it is related to the ratio spread trade with hedge funds buying the bullion and shorting selective shares and profiting from the spread between the two. Notice how effective the Fibonacci retracement levels have been when analyzing the price action of this index.

The S&P 500 is flirting with its 50 day moving average, a key technical level on the price charts. Notice how it bounced off of this level earlier this month and proceeded to maka a run back towards what might be a double top forming near 1375. Support is layered under this market as noted on the chart. A breach of 1300 could get things mighty ugly very quickly. We will see if the usual suspects arrive just in time to once again "miraculously" revive the index and prevent it from inflicting technical damage on the charts as they have done so often this year.