ECB President Draghi Talks Down the Euro

Apologies for the lateness of the comments. It has been a busy day.

The big market movement today was in the Euro as Mario Draghi went out to meet reporters following the ECB's meeting. As many of us suspected, he apparently has been getting an earful from disgruntled European exporters and manufacturing interests and proceeded to waste no time in affirming that the ECB would be willing to take action to stave off deflationary pressures in the Eurozone, if necessary, in their June meeting.

Inflation pressures have been persistently low there and that has the Central Bankers concerned. ( Personally I think it is a great thing but I am not a Central Banker ).

That was all that was needed to see the Euro get kicked in the teeth and down she went. I am constantly amazed in this world of fiat currencies, how easy it is for Central Bankers to move their currencies around by just opening their mouths and uttering some words. It is almost like watching a magician utter some magical phrase before he levitates a beautiful assistant into the air.

The Euro, which had been knocking on the door of the key 1.40 level, was bashed lower falling through 1.39 in the process and below 1.385 before managing to bounce somewhat.

Whether Draghi's comments are enough to reverse its uptrend remains unclear for now but for the short term, at least for today, he accomplished what he wanted. If the Euro falls as low as 1.38, it is going to be interesting to see whether or not bulls will come in and buy it there or whether they are convinced that the ECB is going to come in with either an interest rate cut next month or something more potent, such as their own version of QE. The sense I am getting at this point is that it is going to take some economic data releases which show some sort of constriction in the Eurozone due to currency strength before the ECB gets too aggressive. Time will of course tell.

I put up the Euro chart to show the currency's resistance zone which begins near 1.395 and extends towards 1.40. Downside support is slightly above the 1.38 level with another support zone closer to 1.375.

The fall in the currency sparked a bit better reaction to the upside in Euro gold which moved up 0.51% today compared to a mediocre 0.05% gain in Dollar gold.

Gold was rather comatose the entire session, as were the shares. The strength in the Dollar kept it from moving sharply higher but lingering concerns out of Ukraine continue to support it.

Silver did not fare too well as it works closer down to key support near $19 once again.

Friday's have been anything but calm in the precious metals complex as how traders view the geopolitical situation in Ukraine has been the factor that either generates a strong wave of short covering ahead of the weekend or a wave of long liquidation. Neither bull nor bears seem to want to push their luck with that mess going on over there and with neither side knowing for certain whether things are calming down or heating up. I guess it will continue this way until perhaps later in May when we get that vote although Russia seems to be trying to have that postponed or put off to ratchet down the tensions there.

The big mover tomorrow will be in the grains when USDA comes out with another of their reports which are notorious for producing wild price swings across the entire sector. That is due out at 11:00 AM CDT.  We will know what the market thinks of the report about 30 minutes after it is released when the algos are through playing with them. I will give a report on the grains tomorrow.

There is not much else for me to say today so I will leave it at that except to say "Go Spurs".

I don't have a dog in the hunt between the Nets and the Heat.

Yellen Speaks - Gold Breaks

Fed Chairwoman Janet Yellen was out today and sounded an upbeat assessment on the US economy, faulting the severely cold winter months earlier this year on the spate of poor economic numbers for much of Q1. Traders took that as a clear sign that the Fed is going to continue winding down its QE program, bringing it to an end later this year. She did however emphasize that it would be " a considerable time" before any interest rate hikes would occur after QE ends.

In other words, while the Fed may be slowly turning off the liquidity spigot, they do not see the economy strong enough to handle higher interest rates. Yellen also stated that most of her fellow Fed officials expected to normalize monetary policy in 2015 or 2016. That still is quite a ways off and a lot can happen between now and then.

Regardless, gold moved lower as once again investors opted to view the testimony as further evidence that one of the supporting factors behind a higher gold price is going to be eventually removed. Apparently the equity markets did not like that either, at least the S&P 500 did not seem to as it continues to waver back and forth between slight losses on the day and slight gains at this point in the session.


You'll note on the gold chart that once again gold has failed to penetrate an overhead resistance level and is now retreating lower. It continues to remain mired in this range trade. The ceiling is now just shy of $1320 with the floor near $1280 and extending down towards $1265 or so. Any CLOSING BREACH of $1280 and the odds will favor a new leg lower in gold. Bulls are once again on the ropes and will need some flare up over in Ukraine to bail them out.

Traders/Investors continue to closely scrutinize Chinese economic data for confirmation of slowing growth. Generally speaking, when they get that, they look to sell copper and of course, silver. Copper prices are thus highly sensitive to any data coming out of China with copper bulls very nervous about getting too aggressive in the face of any suspected slowdowns in the Asian giant's economy.

Speaking of Chinese data, the China Gold Association reported that Q1 gold demand was essentially flat compared to last year when total gold consumption there rose 32%.  The sum total demand for the January - March period was up 0.8% at 323 metric tons. Gold jewelry demand remains strong but it was bar demand that got hit - it fell 44%. Dow Jones made an interesting note that the Association's report was very much in line with the World Gold Council's recent April report which suggested flat demand for gold from China this year. Keep in mind that while gold demand is not soaring, 323 tons in the first quarter is not exactly a trifle.

Still, the takeaway, at least for me, is that without geopolitical-event related support, gold is going to new more than a few new friends among Western-based investors. Asian demand has always been the key to producing bottoms in the gold price but even more importantly, it has been helping to offset reduced Western-investment based demand for the metal. Some feel that the drain on the giant gold ETF, GLD, has been the source of a great deal of this Asian-based demand. If that demand falters, or better yet, if the RATE OF INCREASE slows, then that is not conducive to higher gold prices.

I note with great interest that GOLD BAR demand dropped significantly compared to the same period last year. There have been rumblings that China is supposedly going to increase its official gold holdings in preparation for making the Renminbi ( Yuan ) more widely accepted in international trade. etc. This morning's data would suggest otherwise, at least for now. Of course China is not going to telegraph in advance that they might want to buy large quantities of gold. All that would do is make them pay a heck of a lot more for it. Still, that drop in gold bar demand is noteworthy and should not be ignored especially with GLD reported holdings heading south. The Laws of economics still apply to gold - falling demand without a decrease in supply means lower prices. Either supply must shrink or demand must increase, or a combination of both must occur, to move the price higher.

Oil prices moved higher today as the government reported a drop in inventories of crude when traders were expecting a build. The 1.8 million barrel drawdown is the first in a month long series of builds. Sadly for we consumers, that kicked unleaded gasoline prices up a bit breaking the string of daily lower closes.

Soybeans are back to playing their yo-yo games. After plunging early in the session, bulls managed to take them back up nearly erasing the losses. Within minutes, back down they went again. By the way, this is one of the reasons I continue to mock those who advance the thesis that any sharp move lower in gold  ( aka 'Flash Crash' ) is evidence of the government-sanctioned bullion bank ransacking of the gold price. The sheer ferocity of these insane plunges in price and then equally violent rebounds higher in so many of our commodity markets on an almost daily basis is the new normal, thanks to the maddening proliferation of computers doing the "thinking" for hedge fund managers, whom by the way, if the data is accurate, and I have no reason to doubt it, are not exactly making a killing in the markets these days.

Many of them are losing money which is to be expected when they cannot find a market with a trend. Their computers are too stupid to understand how to trade markets in a range making them vulnerable to constant whipsaws and compounding their losses. Chalk up for one us old dinosaurs also known as "discretionary traders" meaning that we actually analyze and think before we initiate a trade and not just blindly follow some damned machine. I have said it many times here that it does not take much in the way of trading skill to pile on huge positions in a market that is trending when you know that all the rest of the computers out there are going to be sending the same signal at the same time. All that is then required is to then push prices higher or lower, knowing that the rest of your industry will be doing likewise with the result that it makes one look like an investing/trading genius.

The US Dollar managed to blip higher today on the heels of Yellen's comments. I am reading this slight firming as traders interpreting her comments as evidence that rates will rise here in the US well before they do elsewhere in Europe, Britain or Japan. Still, the Dollar is flirting with some important downside chart support. I still believe that were to Euro to somehow reach 1.40, all manner of bloody hell is going to be let loose among Eurozone manufacturing and exporting interests. They do not want a Euro that strong but for now, the ECB, other than saying a few things about that, are apparently content to tolerate the currency near current levels.

Look at the gold price in terms of the Euro and you can see that it too is going nowhere. It is however perched just above a key chart support level near 920. Will it bounce or will it break through? That remains to be seen. If it does fall through this level, it would more than likely occur simultaneously with a downside breach of $1280 in Dollar terms for gold which would push the market into the stronger potential for a trending move lower. The jury is still out however.

The jury does seem to have come in however on the mining shares based on the HUI. The index has fallen through chart support near 220. The day is not finished yet so the possibility exists that the index could rebound prior to the closing bell. However, if it does not, it would tend to augur further losses ahead for both the shares and the metal. There is a band of light support near 218; if that fails to force a rebound higher in the shares, then 216 comes into play.

Silver once again failed to reach $20, much less penetrate that level. It looks as if it is back to testing the $19 region, which has thus far been able to hold it except for a brief penetration before the price rebounded. I am curious to see if copper prices can hold above $3.00 and am wondering what might happen to silver can it not.

Hogs got whacked with an ugly stick today as traders bleed out some of the premium in those summer months. I keep urging hog producers out there to secure some 4th quarter hedge coverage. Do not let those good profits get away from you. Lock in some expected 4th quarter production. Gamble if you must but not without securing a portion of protection. Specs - I am speaking to producers here who are bona fide hedgers, not you.

Let's see how the dust settles today and how time constraints are for me. Perhaps I can post some additional comments depending on what happens later.

Consumer Gift - Falling Gasoline Prices

The chart says it all - consumers are getting a nice gift in the form of lower gasoline prices here in the US. Let's see how long it continues....

Strong European PMI data boosts the Euro

What seemed the set the tone in the Forex markets today was the various European PMI numbers that were released very earling in the morning our time. The composite PMI ( both services and manufacturing) came in at 54 but it was the individual countries which sparked the Euro. Spain registered a 56.5, up from 54.0 in March. Italy showed a 51.1 reading compared to 49.5 in March. UK services scored a 58.7 compared to 57.6 in March.

Once those numbers hit the wires, the Euro shot through 1.39, a technical resistance level which has been containing the upside for the Euro for some time now.

If that wasn't bad enough for the US Dollar, the Canadian Dollar jumped when Canada's trade data was released. Even the Yen was higher today. The problem that the Dollar is currently having is that the Fed, while continuing to taper and reduce the amount of bond buying, has laid out its forward guidance in a manner that suggests that there are not going to be any interest rate hikes for perhaps a full year out. When traders look at that, and they see general economic improvement elsewhere, they are bypassing the Dollar. It does not seem to be a case of aggressive Dollar selling but rather one in which it is being passed over - in other words, more an absence of strong and eager buyers. Markets follow the path of least resistance and without any dedicated buyers, that means down for the Dollar, for now.

There is a lot of guessing taking place as to what the ECB is going to do there because complaints about the strength in the Euro are increasing among some European manufacturing interests. That, and the fact that Eurozone inflation remains very subdued, too subdued in the minds of some. They of course are blaming that on the strong currency.

If the ECB were to surprise the market ( which currently is not expecting them to do so ) by an early rate cut, instead of waiting until June as the market broadly expects, that could be expected to weaken the currency but for now, traders are chasing it higher as the technical chart breakout is bringing in momentum buying.

When one looks at the events in Ukraine, and realizes that Europe is the especial region where the impact from any serious escalation of events over there would impact, watching the Euro move higher like this is rather interesting to say the least. Traders are obviously putting that on the back burner today and focusing on the PMI numbers.

One thing that the stronger Euro is succeeding in doing is to drive the price of gold in Euros down at a faster clip than gold priced in US Dollars today.

Euro gold is stuck in a range trade just like its Dollar-priced counterpart. The ADX shows a trendless market but one in which bearish forces are currently dominating. You can see both the resistance zone and the support zone I have noted. For the potential to trend to occur, one of these zones will need to be convincingly taken out.

This is the same problem that gold has been encountering for some time now. With economic data improving, and with gold throwing off no yield, it is taking geopolitical issues to keep it supported. Otherwise, traders/investors are opting for higher-yielding assets. That is keeping the market trapped within a range.

The one plus for this is that silver is actually a bit higher as a result of the strong European economic data. Even copper managed to firm.

Hard Red Winter Wheat is leading the grain complex today as beans succumb to talk of increasing imports from S. America. Drought and heat are hurting yield in key growing regions for the KC wheat and traders are pushing prices higher. Also aiding the move higher is that unrest in Ukraine, a key wheat growing region.

I will try to get more up a bit later... wanted to give a short update as to why the Dollar was moving lower today.

Today's Comments

Last Friday's move higher in gold continued overnight when Asian trade resumed and is continuing in today's trading session. On moderate volume last Friday, open interest rose but rather insignificantly considering the extent of the volume, indicating strong short covering was behind the move higher on Friday. That confirms the move lower in reported holdings from GLD.  Also, spreaders seemed to be active as well. Ukraine events are making it tough on hedge fund computers which are being whipsawed as fears rise and fall.

A couple of things are worth noting in today's session. First, there were safe haven flows into gold and back into the yen today, but the yen's gains were rather mediocre and bonds actually dropped today with a corresponding slight uptick in interest rates on the long end. Stocks also moved off of their worst levels. I am watching this closely to see whether or not the market has "baked into the cake" the current events in Ukraine. Events over there are driving gold at the moment meaning that the situation will need to continue to worsen in order to keep driving the price of gold higher and higher. That is entirely possible as the market waits for a presidential election later this month.

That is the nature of a market responding to geopolitical events. It is also the same nature as the grain markets reacting to a weather forecast. Price will move higher accounting for the events/ forecast and then stabilize while traders take a "wait and see" attitude and attempt to anticipate whether things will go from better to worse or vice versa.

Copper was once again tripped up by weak Chinese factory activity data. HSBC China Manufacturing Purchasing Managers' Index came in at 48.1 in April. That was essentially unchanged from March which registered a 48. To understand what this means, a reading under the 50 level indicates contraction. Copper prices seem to have found a bottom but lack an upside catalyst at the moment. It is going to continue to track Chinese data very closely. Some of this weakness in copper is impacting silver which continues to struggle and cannot yet get firmly above the $20 level.

The Dow initially reacted to poor earning news from Pfizer and JP Morgan Chase. Investors seem to have one eye on Ukraine, as fears that the conflicts there could widen out are keeping them nervous, with the other eye on earnings reports. Price rebounded around mid-session however as some bargain buying showed up. Some money managers are using equity weakness related to Ukraine fears as opportunities to buy on a pullback.

Currency traders are not expecting much in the way of action from the ECB although they are nervously eyeing the lack of inflation in the Euro Zone to see if the ECB is going to eventually move to their own version of QE. The consensus at this point is that nothing is going to happen on that front until next month. No one is expecting a rate move in May. We'll see soon enough.

Something that has been fascinating for me to watch has been the reaction of the bond market to the Fed tapering plans. The thinking was that once the Fed began to back out of the $85 billion per month bond buying program ( split almost evenly between MBS and Treasury purchases) that long term yields would spike higher. The reason for that line of thinking was that "no one was going to be left to buy US Treasuries".

Well, that has not turned out to be the case at all. Either the current Fed has become the greatest bond traders to ever exist or they have gotten extremely lucky with their timing. Who would have thought that safe haven buyers would show up to pick up the slack in their Treasury buying? I mean, what could have been more timely than to have a geopolitical event take place during a period of reduced Fed activity in the Treasury markets? Damn, are these guys/gals good or what? 

The flip side to the bond markets this morning has been  the April ISM Service Sector number. It came in at 55.2 against an expected 54.1 reading and against a 53.1 recorded for March. That served to take some of the safe haven bid out of the bond market as traders viewed the improvement as further confirmation of last Friday's surprisingly strong payrolls number.

All I can tell you as a trader is that the interest rate markets are chewing up a lot of guys right now who are getting whipsawed left and right in there as well. It is not just gold - it is a lot of different markets right now that are shredding traders and investors alike. That is why I keep saying that good traders do not always need to be in the market. Sometimes sitting on the sidelines is the best part of wisdom. Besides, there are lots of different markets out there that are well behaved right now and offer better opportunities.


On the grain side of things - Dryness issues are keeping wheat supported at the moment. Soybean inspection numbers released this AM reflect the impact of these sky high old crop bean prices - they are lousy once again. Old crops beans reacted by moving lower. Corn inspections continue to run above expectations and that is putting a strong bid into corn. Farmers are still sitting on large stocks of last year's harvest however and I am not sure what it is going to take to get them to let go of them. When they do, things could get dicey depending the weather for this year's crop.

Coffee continues to act like a yo-yo. The worst nightmare I ever had as a trader was a dream in which I was trapped in a small room with no exit and forced to trade nothing but coffee for a living. I remember waking up in a cold sweat just as I was about to stick my finger in the electrical socket to end my misery. Seriously - who trades this stuff but more importantly, why????

If the Protestant Reformation had not taken place and penitents were required to abuse themselves like the flagellants once did to atone for their own sins, trading coffee futures would have been right up there with that for the top penance.

Here is the short term chart for gold: Gold continues within its range trade. It has managed to recapture the "13" handle and looks as if it might want to try to test the first level of resistance noted near $1320. Above that lies $1330. Support remains intact near $1280.

If events in Ukraine worsen, gold will more than likely take out $1330. That would set up a challenge of tough resistance between $1350 - $1360.

The ADX is turning down after having begun to rise meaning that the potential trending move LOWER has been aborted and we are back to ranging. The short term buy signal from the stochastics indicator can be seen on the chart.


The HUI gapped higher this morning on the opening of US equity trading but so far in the session, that has been the best level. The gap remains open but the index is not adding to gains and is currently below the opening level. That bears close attention. The session is young however.

U S Interest Rates Driving Gold Price ( along with Ukraine )

Sorting out the movements in the price of gold recently has been like guessing at the weather forecast. Geopolitical concerns, ( Ukraine ) are keeping a firm bid underneath gold as safe haven buying is focused on the potential for further escalations in those simmering tensions. Other factors are working to pressure it lower.

Having said this, I do want to post up a chart for those who are traders and are tracking fundamental factors driving the price of the metal.

I have mentioned many times now that I am of the view that US interest rates, and more accurately, interest rate outlooks, are either providing support to the metal or are working to add to headwinds.

Look at the chart below in which a comparison is made to the yield on the Ten Year Treasury Note and to the gold price over at the Comex  ( RED LINE ).

Go back to November of last year and notice that as the yield on the Ten Year rose, gold headed lower. When the yield on the Ten Year fell, gold tended to rise. The relationship had not been that close prior to November. If you look at the July - mid-October time frame, you can see that the two markets tended to actually rise and fall in harmony for a while.

Clearly in November the market shifted in its perceptions and began looking at interest rates more closely in determining whether or not to allocate capital into gold. For nearly three months, the markets moved in a near perfect inverse manner.

In early February of this year, that began to change  and while the yield on the Ten Year moved sideways, gold prices rose. Then in mid-March interest rates began to rise and gold prices resumed their inverse relationship and moved lower once again. In early April, Ukranian events erupted and that brought about a safe haven bid into bonds knocking interest rates lower. Gold responded by moving higher. Then as fears subsided interest rates moved back up again and gold moved lower. So far in May, interest rates have continued moving lower as safe haven plays are still around due to Ukraine and gold has moved back above $1300 as a result.

Here is my point in all this - the wild card for gold prices at this time are the events in Ukraine. As long as investors are worried over events there, interest rates are going to stay low due to safe haven flows pushing bond prices higher and thus interest rates lower.

If Ukraine events do subside ( and right now that does not seem to be the immediate case ) I would look for interest rates to start rising again meaning that gold will come under renewed selling pressure.

Here is the takeaway from all this - as long as US interest rates stay subdued, the US Dollar is going to have trouble rallying and that should tend to support the gold price. Take away any safe haven buying for any reason, and rising interest rates should bring a bid into the US Dollar and that will pressure the metal.

What do we get next? Who knows? The truth is no one does. Remember that when the predictions start up again. The market's opinion is the only one that matters.

Further Drawdowns in GLD

The reported holdings of GLD, the big gold ETF, are updated as of the close of trading this past Friday ( 5-2-2014) and they showed another reduction.

For the week, GLD showed a drop of 10 tons in gold holdings. Friday alone brought a drop of 2.7 tons, which I find rather remarkable considering the fact that gold over at the Comex shot up sharply when news hit the wires about the first of two helicopters being shot down over in Ukraine.

I have mentioned previously, that many in the West are looking at rallies in gold as selling opportunities. This seems to be the case with GLD. One might have thoughts that with the safe haven plays that we witnessed across the futures market on Friday ( Yen higher, gold higher, and bonds higher ) , that GLD would register an increase in gold holdings. That was not the case.

Western sentiment towards gold remains dubious therefore. Since the beginning of the year, GLD has dropped 16 tons of gold. Total holdings are now reported at 782.85 tons, a 64 month low!

I put a lot of credence in this big ETF as a gauge of Western-oriented investment gold demand. When gold was in a strong bullish uptrend, reported holdings rose along with the trend. When gold entered its current bear market, reported holdings began to drop alongside the move lower in price. Demand from Western-based investors has thus ebbed and flowed along with price which is as it should be.

When we see these sorts of divergences, with the Comex gold price going one way and the reported holdings of GLD going the other, it indicates that the move higher in price was being primarily driven by short covering over in the futures market. Short covering rallies are often quite spectacular and can be very compelling because they can drastically change the chart picture in a short time, but one needs to exercise caution because they can flame out just as rapidly as they flamed on, especially when the move is due to a geopolitical event. Such things are notorious for generating many wild swings in price.

Traders therefore need to be cautious and remain flexible. If GLD holdings begin to rise alongside of a rising gold price, that will be a friendly development. For the time being however, that is not what is happening.

Let's see how events over in Ukraine fare the rest of the weekend and what the opening of trade in Asia on Sunday evening here in the West brings our way.

CME Fines Ontario Teachers' Pension Board over Hog Futures Trading

That is the headline that came down a Dow Jones wire story this afternoon. It seems that the good teachers pension board had too many piggies in its portfolio. In other words, they exceeded exchange position limits.

CME fined the Board $15,000 and ordered them to return the nearly $18,000 profit they made in lean hogs back in March 2013 according to the story.

Hey, I wonder if some of that $18,000 happens to be my money?

How do I get a refund?

Seriously however, I do wonder what these exchanges do with that money that they collect, not as a fine, but rather as profits. The teachers' board had to take it out of someone else's pockets to earn it as this is a zero sum game.

I think I will fill out an application and see if that works! Then again, the report does not say whether they made those profits from being on the short side or on the long side. I will have to go back and see where I was positioned back then. I know I was in that market at the time. What would be a bummer would be if I happened to be on the same side as they were. Then what? do all of us traders who are positioned likewise have to hand over our earnings to the CME?

Obviously I am kidding here but it does go to show that these position limits are a big deal. I am of the view that if the exchanges really want to tame some of these broken markets, that instead of fooling around with raising price limits, they should instead deal with position limits and REDUCE them, not increase them like they have been more prone to doing.