Dow Jones - UBS Commodity Index Rebalancing

Each year the sponsors/originators of the various commodity sector indices announce a reweighting or rebalancing of their respective commodity index. This is done for assorted reasons but for whatever the reason, those index funds that benchmark to these things, must adjust their portfolio at the onset of the New Year in order to bring them into line with the new weightings.

The Dow Jones/UBS Commodity Index has announced that the target weighting of both gold and silver will be increased in the 2014 index. Silver's new weighting will be 4.1% compared to its current 3.9%. WTI Crude will be lowered to 8.5% from the current 9.2%.

Gold, surprisingly enough, will be raised to 11.5% (the largest weighting) from this year's 10.8%.

I am still looking for the Goldman Sachs Commodity Index reweighting and will try to note the changes in the precious metals, if any.

This will bring in some buying after the first of the year of both gold and silver futures contracts. While this is purely a technical development, it will tend to have a very short term impact on the metals.

I might add that this is not at all friendly towards crude oil which is already seeing large selling pressure.

A lot can happen between now and then, but I did want to note this.

As of today, the commodity complex as a whole is experiencing another strong bout of selling as the Dollar is moving a bit higher and traders continue to have their doubts about the longevity of the "no tapering" policy.

As has been the case, the equity markets could seemingly care less about much of anything. Dips continue to be bought as that bubble grows larger and larger. It really is mind-boggling to me to see this drug-induced march higher and higher in the US equity markets. The disconnect between the US stock market and what is occurring all across Main Street is something to behold. There still does not seem to be any sign that the mania is about to end anytime soon.

Feds Falling out of Love with JP Morgan?

The following story ( click to read the article) caught my eye this morning for reasons that many in the gold community will easily understand. Ask most of those who believe that the feds closely monitor the price of gold and work to tame any price rallies when the metal is in a bullish uptrend, just who are the agents employed to actively short the metal at the Comex and you will always get two names, Goldman Sachs and JP Morgan.

I find the following article both interesting and revealing therefore as it introduces something which I have not heard from any who adhere to this view - namely an apparent falling out between the political authorities and the latter of these two banks, J P Morgan.

I also find it interesting, and have remarked about this many times of late, that the largest stopper of gold during the Comex delivery process in recent times has been JP Morgan for their HOUSE account. In other words, they are LONG gold at the Comex in order to take delivery of the physical metal ( I explained this when I was attempting to debunk the silly notion of bullion bank caused "FLASH CRASHES" that is currently circulating through the halls of the gold community edifice.

It sure does make one wonder does it not what is going on behind the scenes when Morgan is being targeted by federal power? Have the feds lost one of their purported allies in the gold suppression scheme?

Either way it is very interesting reading and certainly lays bare the methodology employed by the current administration which uses tactics of intimidation against all those who dare defy it.

You know that this is brazenly arrogant when even Barney Frank seems to be taken aback by this concerted federal effort being used to harass J P Morgan.

Those of you who have been reading my comments for many years know full well that there is no love  lost between myself and either of these two megabanks. I have seen enough of their antics in the commodity markets over the years to have lost any sympathy for what might happen to either or both of them. Still there is something very unseemly in this episode which smacks more of a government shakedown rather than a pursuit of unbiased justice and fair play.

http://dailycaller.com/2013/11/01/are-the-feds-targeting-jpmorgan-for-criticizing-obama/

Trader Dan interviewed at King World News Markets and Metals Wrap

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

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/11/2_KWN_Weekly_Metals_Wrap.html

More Commodity Weakness

I am monitoring the following chart with a great deal of both concern and interest. Concern because month after month of $85 billion in Bond and MBS buying by the Federal Reserve, deflationary pressures remain undaunted. Interest because the grand experiment in "unconventional" monetary measures by the Fed is proving, thus far, to have little LASTING impact on the US Dollar.

Back in 2008, when I first learned of QE1, I swore up and down that the US Dollar was finished as a result of this. Little did I know then that it would not be long before every Western Central Bank on the planet would be doing the same thing as the Fed!

I learned a valuable lesson and hopefully will be a little less dogmatic when it comes to expectations of market responses as a result. I still believe that in the long run the US Dollar is going to be in serious trouble. No nation that runs deficits and carries a national debt the size that this one does will be able to escape all the consequences of so doing. Then again, I wonder if I will still be alive long enough to see when it comes time to pay the Piper.

So far the modern day alchemists appear to be doing their thing with little consequences. This no doubt will embolden them to do even more should they feel the need (think Janet Yellen and be afraid; be very afraid). As I have stated in some private emails to others - I was shaking in my little boots when I first saw the Balance Sheet of the Federal Reserve approaching the $3 TRILLION mark. Now that it has eclipsed that and is on its way to $4 TRILLION, my attitude is: "Why not just let it go to $5 TRILLION or $6 TRILLION or even higher? Hardly anyone seems to be particularly disturbed by any of this. Certainly the stock market could care less".


Anyway, gold no longer seems to be reacting positively to ideas that the Fed is going to continue QE buying with no abatement for the near term. That is certainly cause for concern if you are a gold bull. The question then becomes, "what is it going to take as a fundamental catalyst to push gold into a sustained trend higher?"

This is the reason that the chart of the commodity sector concerns me - if after $4 trillion + of QE the commodity sector is moving LOWER, and not HIGHER, gold is going to have to find another reason for a rally other than inflation expectations. After all, it is next to impossible to make the case for inflation when the price of tangible commodities is moving down instead of up!

Note that the index below is right on the verge of making one of those important technical developments which sets Technical Analysis geeks such as myself to yapping. What I am referring to is the dreaded "Death Cross". No, this is not when the Death Star crosses in front of the Emperor's Battle Cruiser so that Luke Skywalker and friends can see it, but rather the 50 day moving average crossing down below the 200 day moving average from above.

Such a thing is a big time bearish development and portends, as a general rule, more losses ahead for the complex. In other words, we are looking at falling commodity prices as we move forward, not rising prices. This is obviously great news for the consumer who will benefit as a result but a tougher environment for those whose living deals with these products/commodities.

What this means for farmers is that the banner years that they have enjoyed in recent past are coming to a close, barring any major weather event. It also means that the price of farm land in the Corn Belt is probably as good as it is gonna get.  Farm equipment dealers too are going to get a dose of reality after selling lots of big, shiny, state of the art tractors, planters, combines, etc. As a matter of fact, I would look for the USED farm equipment business to see a boom as a result. Hey, maybe I should move to Iowa and start a used farm equipment business! I can put it right next to Kevin Costner's Field of Dreams!

For the consumer, it means lower gasoline prices at the pump. Yippee! It also means it will be cheaper to heat one's home this winter for those using heating oil. Nat gas prices are well off their lows under $2.00 but remain cheap by historical standards. So perhaps the harm from that abomination known as Obamacare will be offset somewhat for the struggling consumer in the form of lower prices at the grocery store and for energy use.

Maybe, and of course, we can dream, airlines will lower their fares or at least get rid of any fuel surcharges and actually bring us some damned food for free while we sit in their newly scrunched up seats and endure hours of torture merely because we wish to transverse the country and get to another side of it.

I find it perverse that the administration which has never met an energy pipeline it did not hate or a fossil fuel that it did not despise, gets to somehow preside over the greatest energy boom in US history. All this in spite of the obstacles that it places in front of one of the he most innovative industries in the US, the oil and gas industry. Keep in mind that the finds of oil and natural gas have been occurring on PRIVATE LANDS, not government owned lands. Those have been effectively shut to the energy industry except for those where everyone and their dogs knows that there is little to no oil or gas.

Thankfully American know-how and ingenuity continue to help make energy cheap and affordable. As an American who is deeply distressed at what is happening both to and in my nation, I am grateful that at least that is the case. Throw in the fact that the American Farmer is the still the BEST anywhere in the world, and we can be grateful that these two necessities of life, food and energy, remain relatively available and affordable, unlike other places in this world.


As far as the US Dollar and gold goes - It will come down to CONFIDENCE as far as I am concerned. When the game ends and there is the sudden awakening of the investment crowd as to the artificial nature of the entire US financial system, then and only then, will gold find its footing and shoot upward. As to when that will occur or what the catalyst/event/events that will usher in this awareness I am at a loss to say. I can only hope that I can recognize it when it does arrive.

Gold testing Chart Support

Not much to add to my earlier comments about gold from today as well as those of yesterday. A 3.8% drop in the HUI pretty much guaranteed that gold was going nowhere today.

As a matter of fact, very few commodities were in the green today - just about everywhere one looked, it was lots of RED on the screen. The reason - hard to say for certain but with the Dollar up more than 1/2%, it would have taken some pretty firm fundamentals in these individual markets to shrug off the macro-related selling. As it was, any market whose fundamentals were weak, was especially prone to a bout of selling today.

Gold simply had no reason to move higher today against those headwinds. As can be seen on the chart below, it is working its way down into a chart support region. If it holds here, the bulls can claim a sort of moral victory given the strength in the Dollar and the continued weakness in the Commodity Sector, especially the grains and crude oil (think food and energy and then think no inflation issues there).

Tomorrow, Friday, is the usual "no fun" day for gold as it tends to get whacked a lot at the end of the week for some reason. This is however a seasonally strong period for the metal so it might be able to dodge a bullet. We'll see. Right now the short term momentum is with the bears after the failure at chart resistance. The probe lower is meant to uncover whether or not the bulls are hanging around or not.

here is one of the commodity sector - the Goldman Sachs Commodity Index. There is certainly nothing in this chart that would indicate the least bit of fear in regards to rising commodity prices. If you want to know why silver puked today, just study this chart - silver is joined at the hip with the broader sector.

By the way, gold failed to extend much past the 50 day moving average and has instead plunged back below this key level. This is one of the reasons the selling is now coming back in once again. Hedge funds see that failure as another sell signal. It is going to be up to Asia to put a floor in this market once again.

More Bad News for Consumer Spending

As most of you who are regular readers of this site know by now, I am of the opinion that the US economy is extremely weak in spite of the massive bubble in the equity markets. My reason for having this view is that the consumer, the backbone of this debt-based system, is not in a happy mood.

Opinion polls reflect the pessimism of the public at large as the majority believe the US is in decline as a nation and is on the wrong track. Wages are stagnant and as a result of that abomination known euphemistically as the "AFFORDABLE" Care Act ( it is anything but that for the vast majority), many workers have been cut from full time to part time status or have lost their health insurance benefits. That means they will have to foot the bill for that out of their own pockets now. Translation - that leaves less money for discretionary consumer spending.

Now comes the news that as of this Friday, the temporary boost in food-stamp benefits that was passed not all that long ago will expire. Analysts are projecting that will leave 48 million Americans with an estimated $16 billion LESS to spend over the next three years - according to an article from Dow Jones Wire Services this AM.

This will hit low-income shoppers the hardest. That demographic tends to frequent the discounters, dollar stores, mini_marts, etc.

Also, the story relates a fact that I had forgotten but was glad to be reminded of - the temporary payroll tax cut which was enacted but expired some months ago  also leaves consumers with less money to spend.

Perhaps the one saving benefit of these deflationary type pressures has been the drop in crude oil and by consequence gasoline prices and heating oil prices. If we get the type of winter that some of the firms are suggesting, consumers will be thankful for that at least.

Regardless, my take remains the same - there are too many deflationary factors at work from a structural standpoint to allow the Velocity of Money to increase any time soon. That will be a tough headwind for gold to deal with without some sort of other catalyst that cracks the confidence in the Dollar.

I am carefully monitoring interest rates here in the US as that will also have a significant impact on the consumer borrowing and spending issue.

Gold Stuck in the Mud

I wanted to see how gold would settle today before commenting further. As stated in my earlier post, now that the big FOMC non-news event is out of the way, the market is selling the fact. If this is the best that gold can do, it is difficult for me to see what it is going to take to drive it up through resistance. It just hearkens back to the US Dollar as far as I am concerned. If that weakens, gold moves higher; if it strengthens, gold moves lower.

I can say this however, it is not helping the cause of gold to see crude oil going lower. That market has been a very reliable harbinger of shifts in trading sentiments in regards to inflation or the lack thereof. Swelling stocks of the black goo are indicating just how sluggish any "growth" is for the US economy. How inflationary pressures can be anticipated with energy costs moving lower, grains generally weaker and wages stagnant remains a mystery to me.

Now that the US Dollar has held at chart support, I would expect gold to weaken until the Dollar meets some overhead resistance. Could that happen as soon as tomorrow? Sure it could. You name it; just about anything can occur in these convoluted markets anymore.

All that this means is that we need to take each trading day as they come and try not to read too much into any one day's price action. If you get some follow  through from one day to the next, be pleasantly surprised and grateful for any sort of "good behavior" in the market because chances are it will be fleeting.

Here is the thing which continues to stand out for me. The speculative crowd continues to dishoard gold. As long as the reported gold holdings continue to plummet in the biggest gold ETF, GLD, I cannot be bullish towards gold. That does not mean I am necessarily wildly bearish; it simply means that a primary catalyst for a SUSTAINED MOVE HIGHER is not there. It leaves me more neutral until I see something which gives me reason to have a strong conviction in regards to short term price direction.

Here is the chart:

 

By the way, the CFTC is slowly updating the data for the Commitment of Traders data which was impacted by the recent government partial shutdown. It confirms the same thing that the above chart is showing, too wit, that speculators have recently been flirting more and more with playing gold from the short side. They are still net long but are adding more shorts than longs as well as liquidating some existing longs. This tells me that specs are still looking at rallies as opportunities to short the metal.

 

As of October 15, there was a one week shift of a whopping 22,000 contracts reduction in the net long exposure of the gigantic hedge funds. That reporting week period saw them adding 20,000 brand new shorts! That is absolutely astonishing.

 

I have gone back to look at the week in which gold dropped below $1200 in June of this year by way of comparison to see what they did in regards to their shorts. Guess what - this most recent week of data provided by the CFTC shows that the number of fresh short positions added by these hedge funds through October 15 has DWARFED the increase in hedge fund short positions added in a single week even when gold was imploding lower back in June of this year. These large powerful specs are selling gold with a vengeance, at least through Tuesday, October 15th!

 

That is why we get such fierce upmoves when gold rallies of late - it is this hedge fund short covering which is behind that.

 

Also, just some additional FYI stuff - the small spec crowd was selling gold heavily during that week of October 15th as well.

 

We should have the October 22 data before the end of the week and then we will have this Tuesday's (October 29) data very soon so that will bring us up to speed and back to normal.

 

I will say this however - that report of the week of October 15th is a real eye-opener! If the behavior of the hedge fund crowd back then is any indication of what they are doing this week, it is going to be very difficult for gold to rally.

 

That is why I keep saying that it needs a strong catalyst of some sort. Hedgies are selling and until that changes, it is going to take a grossly weaker Dollar to break it up and out past overhead chart resistance.

 

I would also like to make mention of the fact that I have been keeping an eye on the gold delivery process for the month of October. JP Morgan's HOUSE ACCOUNT has been a very big stopper again this month. They are buying and taking delivery.

 

That leads me to something that I need to say in order to deal with what I consider to be erroneous conclusions by some in the gold camp about a new buzz word - FLASH CRASH. (When it comes to gold it seems we are always dealing with the latest thing does it not? First is was Gold Forward Lease Rates, then BACKWARDATION, then this, then that and now it is apparently FLASH CRASHes which are all the rage.

 

Let's just state for the record, Morgan is buying gold and taking delivery. The COT report shows the Producer/User/Merchant category near their SMALLEST NET SHORT position in YEARS. Hedge Funds are adding shorts at a furious pace. Gold holdings in the ETF, GLD, are dropping like flies. So why in the world does the "gold cartel" need to waste time and effort supposedly dropping large sell orders on gold during the thin Asian trading session in an attempt to discredit it?

 

Answer - they don't. Specs are already using rallies to sell the metal.

 

I will say it again - the gold cartel does not attack gold when it is in a bearish trend which it currently is. They attack it when it is in a rising, bullish trend as they seek to slow its rise. During such times, the hedge funds are doing the buying and the bullion banks are doing the selling. Right now, the bullion banks are using selloffs to buy. Morgan is not taking long positions for its house accounts for no reason - they are taking delivery of the metal. How in the hell can they be the ones causing the FLASH CRASH if they are long and are standing for delivery?

 

Anyone who trades futures for a living as I do and has to sit here each and every night and watch the various markets like corn, soybeans, wheat, cattle, and hogs for example, undergo the various machinations that these damned hedge funds or large players inflict on them during the Asian session when there is so little liquidity,  knows from first hand experience how convoluted the price action can become at times. Large orders for that time of the evening, knock price around and drive it in the direction favored by those who have positions in place. Their plan is to take in into stops, either above or below the market and then set off a chain of buy or sells which they can use to profit from. It is all perfectly legal but in my opinion, completely unethical and disgusting. Yet, the exchanges seem more than willing to tolerate this sort of crap as long as they can collect the trade fees.

 

My beef is with the exchanges more so than those who commit this sort of legalized theft. It is all just chalked up to the "price discovery" process and tolerated. The best cure for this happens to be a big player on the other side who one day just eats their lunch and gives them a lesson that they will never forget.

 

For now however, let's forget about the idea of sellers trying to sell futures and maximize their selling price - those selling into thin market conditions are attempting to influence price by moving it in the direction they favor - Right now those are hedge funds or some other large players, not bullion banks. The only way this will stop is for another large player to stuff them. For that to occur, we need to see a shift in sentiment in regards to gold where another category of specs are eager buyers or any price weakness. So far we are not seeing that.

 

Remember, it is MOMENTUM BUYERS which drive our markets nowadays so before that crowd will enter in size, gold will need to clear the various chart hurtles that are necessary to get their attention and more importantly, the attention of their computers.

 

 

 

I leave you with this chart of Gold.... notice where it has run out of steam to the upside. It will have to clear this band of overhead resistance to run out some more shorts and to entice more new longs from the momentum crowd. The indicator is rolling over meaning that bulls need to step up quickly to avoid a setback lower in price.

 

A push past this week's high will be a big deal if it happens as it will allow price to test $1380 and perhaps as high as $1395 or so. If it fails to extend, support comes in first new $1340 - $1335, (It is near there as I type this) and then again down near $1320.

 

If the US Dollar index can clear 80, gold will drop to test $1320 in my view. If the Dollar fades and the Euro in particular can recapture 1.38, we should see gold strengthen. We are back to watching the gyrations in the Forex markets once again it would appear.

 

 



Tea Leaf Reading Time Again

Yes indeed, that honorable profession, that noteworthy use of precious time, that virtuous expenditure of human energy, has once again been called forth by the monthly proclamation of the divine oracles - namely the FOMC.

Ah yes, those dispensers of wisdom from above, of knowledge and insight, have graced us mere mortals with another round of insightful analysis into the workings of the machine we know as the US economy. And pray tell, what did they tell us this month? Not a damn thing that we already did not know!

They held steady - no tapering of the bond buying program - not that anyone out there expected them to announce such a thing - so now it is back to parsing the statement for CLUES into the inner workings of our monetary masters. "Let us see if we can anticipate their next move for in it, lies our fortune", is today's mantra.

For Pete's sake, are as many of you out there as sick and tired as I am of this pathetic routine already? What a nauseating display of groveling by the once dynamic forces of US capitalism - sitting around waiting and licking their lips to see whether their masters will toss them some chew sticks.

Regardless, the initial moves that I am seeing is weakness in gold, strength in the US Dollar and believe it or, downward price action in the US equity markets. This seems to me to be a case of "Buy the rumor; sell the fact". The markets were essentially bid up, (gold and equities) in anticipation of a continuation in the bond buying without any tapering and that is exactly what they got. So now what? Bull markets need to be fed and one has to wonder where the food is supposed to come from next?

Yes, the Fed is on hold probably until next spring at the earliest as far as tapering goes but some are gleaning a - drum roll here please - an early taper in December because  - another drum roll here - the Fed did not seem to be quite as negative on the economy as many were expecting them to sound, especially with so many of the various governors making the rounds right after the government shutdown ended and were sounding like the sky was falling.

this is leading Dollar bears to cover short bets and as such, bringing in selling to the gold market. It is also hitting silver. Interest rates are moving higher as a result. Here we go again....

I have not written much this week mainly because I am trying to spend my time in doing something more constructive than sit here and watch this idiocy all day long, day after day - I have been engaged in carving some pumpkins for Halloween, something much more enjoyable and in the larger scheme of things - much more lasting that the sentiment for each and every trading day. As a matter of fact, I am willing to bet that my carved pumpkins last for at least three days - far longer than the shifting mind sets of traders who seem to have managed to condense the entire business cycle into a 24 hour period instead of 6 months like it used to be.

Let's see where gold settles when the day ends... for now, $1360 has been reinforced as resistance which has held.

The dollar also looks to have found support above critical support near the 79 level on the USDX.

Looks like more range trade ahead which means the HFT crowd will be back to screwing with the markets once again and continuing to plunder the rest of us. I am thinking of making a new video game for Xbox. Instead of Call of Duty, I am going to make the HFT crowd the alien invaders while the "good guy" traders, get points for crushing them and sending them home crying to their mammas. Hey, I can dream can't I?