Australian Reserve Bank Director issues sobering warning

A reader from New Zealand sends us an article from down that way reporting on a speech given by  Australian Reserve Bank Director Warwick McKibbon. I am including the link here as it needs to be read in full. I find the contrast between his sobering assessment of things and that of the many of the US financial authorities quite remarkable. By the way, I must mention that I have always found the RBA to be one of the more sensible and solid Central Banks.

The article is entitled:

"GLOBAL 'TRAIN WRECK' COMING". That pretty much says it all.

Here is the link.

http://www.stuff.co.nz/business/world/5218159/Global-train-wreck-coming

USDA Shocker

The widely anticipated USDA Crop report came out this AM and stunned the grain world with its much larger than expected corn acreage number. Widespread flooding in combination with much cooler than normal weather across the northern tier of the country had resulted in major planting delays due to excessive ponding and water-logged soils. Farmers simply could not get into their fields to plant in numerous regions. That is what makes the number given to us by the USDA this morning so incredulous. Either way, the corn market was absolutely devastated as it was swamped with orders from panicked longs trying to get out. The front month July contract, which is in its delivery period is trading without price limits and is currently down over $0.70/bushel while the most active December contract (the new crop) has more than 200K orders to sell at the limit price. This massive sell off in corn has taken down wheat (over $0.50 as I write this) and soybeans and led to sharply lower prices across the cattle and hog markets. The result has been to take the CCI (Continuous Commodity Index) lower in spite of the fact that the RISK TRADES are back on again today with the Dollar moving lower. Were it not for the USDA shock numbers, I believe we would have seen strength across the entire commodity complex. As it is, the selling in the grains is leading to margin related selling across some of the other commodity markets this morning which is putting pressure on the entire sector as a whole. This is coming in spite of the fact that the long bond market continues its recent collapse as trader euphoria over the Greek bailout continues to produce what can only be described as more "irrational exuberance" among the equity market bulls. Traders are acting as if inflation is back in the cards and are jettisoning bonds after stampeding into them for the last two months. ( I might note here that the bonds are moving off their worst levels of the session as I write this so perhaps the selling in there is beginning to dry up somewhat - we will have to see how they close today). Personally I think the rally in stocks borders on insanity but the shorts are all being systematically squeezed out (AGAIN). The short term effect of the political release of oil from the SPR has totally evaporated with the crude oil market higher in price than when the news was released. GAsoline prices have jumped nearly $0.30/gallon off the recent low and are back above $3.00 at the wholesale level on the NYMEX. Clearly energy prices are stubbornly refusing to stay down for long. If that were not enough, Jobless claims numbers came in at 428,000 for the week, well over analyst expectations of 420,000. That makes 12 straight weeks of reading above 400K, not exactly the thing that signals the economy is improving. Consumer confidence readings continue to weaken. Yet, we get a huge rally from off the critical technical chart support level of 1250 in the S&P, which has gone straight up for 4 days in a row based on what? Greece?  It is now trading above the 50 day moving average after having fallen down below that important average only a short month ago. Try as I can I do not see anything of note on the data front that suggests anything has improved to the point of pushing a 50+ point rally in the S&P. Must be a national security issue to keep the stock market levitated. Then again, what else would Goldman and Morgan be doing with their spare time if not propping up the US equity markets. Either way, the big rally in equities is having the effect of pushing money back into the mining sector shares as those ratio spread trades have seen some unwinding at the expense of the actual metals. I am therefore very hesitant to read too much into the action of the miners since they are currently joined at the hip with the broader equity markets. The downtrending 50 day moving average has been the lid on both the HUI and the XAU since late April of this year. Only if the bulls can push both indices solidly above this level will we be able to conclusively say that the miners have a shot at beginning a trend higher. For the HUI that comes in near 533 and for the XAU the level is near 203. The XAU looks the firmer of the two as the large cap miners are holding better than the juniors in general. The indices have a bottom in near 490 on the HUI and 190 on the XAU which continues to hold firm but that is a far cry from meaning we are going to see an uptrend develop. That will take more conclusive technical price action. Gold ran into selling near $1515 as it was unable to get back above $1520. As long as it is unable to climb over its 50 day moving average, rallies will be sold. Lingering worries about sovereign debt issues in the Euro zone coupled with concerns over the US Dollar's fortunes are keeping safe haven flows into the metal but not of sufficient size at this point to flip the technicals to a bit more friendly posture. As was the case yesterday, for starters, gold needs a solid pit session close over $1520 to turn the chart picture more friendly. Downside support in the market remains near this week's low of $1490. The US Dollar continues to play Yo-Yo with its 50 day moving average, first popping over it back last month, then dropping below it, then moving back above it the middle of this month, and now caving in and losing that level day. Trying to read where it is going next is hopeless for the immediate time being. Basically it is the "picture worth 1000 words" to demonstrate the fickle nature of the hedge fund community and the boy wonders who manage them. I cannot even imagine what some of those guys would come up with were they forced to take one of those ink blot tests. Oh, one last thing - the Peoples Republic of California just managed to run Amazon out of its borders as the leftists in charge of that place just decided to tax internet sales. Yep - that should really help create some more jobs out there. I am waiting for the day when they begin regulating what color socks and underwear are permitted.

Gold-Silver Ratio reflects trader views towards "risk"

To get a decent indicator of whether the risk trades are on or are back off once again, this ratio is as good an indicator as anything. During times when risk is in, silver has been leading gold to the upside or not dropping as hard as the yellow metal to the downside. In other words, it outperforms gold when the hedge funds are in love with risk. This will be reflected by a ratio moving lower on the chart.

When risk trades are out of vogue and risk aversion is the play, then gold outperforms silver as it is viewed as a more substantive safe haven than the gray metal. This will be reflected in a widening of the ratio.

One can see the concerns over the Greek debt situation through the price action of this ratio chart. As traders became convinced the last few days that Greece will get the bailout and their government will approve the austerity program, the ratio has moved lower with silver outperforming gold.

Lingering fears however concerning the well-being of several other Euro-zone countries, is keeping safe haven buying coming into gold and that has kept the ratio from dropping too severely right now.

I would watch to see the 40 level to see whether it holds or not. A break through this level accompanied by a sharp move lower in the long bond would indicate a shift back towards inflation fears on the part of traders/investors. Discerning any clear trend in these extremely volatile and illiquid markets at this time is an exercise in futility given the erratic price action.

Gold - 4 Hour & Daily chart update

Following below is a daily chart showing the current negative posture of the gold market from a technical perspective as it remains below the 50 day moving average which is also flattening out and attempting to turn down. This level needs to be regained to put a more friendly face on the daily chart. Note also the longer term 100 day moving average which continues to rise and above which gold remains. That brings added technical significance to the $1470 level which closely corresponds to the horizontal support level noted on the chart.

Momentum is currently bearish and will need to break above the steeper downtrending red line to give evidence that some hedge fund type buying is picking up.

Yesterday it was Global Slowdown fears and deflation - today it is Inflation fears

Yesterday the hedge funds were busy jettisoning commodities across the board ( We don't need no stinkin' commodities); today they are back in love with them (Alas, we love thee, we surely do).

The difference is that most are expecting the Greek bailout to go through and make everything well with the world once again. That is why I keep stating not to read too much into one day's price action. Tomorrow? Draw a straw or throw a dart - you are just as likely to come up with the prevailing sentiment for that trading day as a chimpanzee. In psychological terms they call this manic depression but it now passes for hedge fund trading "strategy".

Take a look at the Daily CCI chart. Note the hedge fund selling orgy that occured last Friday and continued into yesterday's session. Risk was out and so were commodities. Today, risk is back in and so are commodities.

If you note however, the CCI is negative for the year as it is trading below last year's closing price. In other words, backing away a bit from the very short-sighted near term price action, commodities as a whole have fallen out of favor for the time being as traders fear a slowdown in the overall global economy. The Fed's refusal thus far to hand out more goodies in terms of another round of Quantitative Easing has ruined the commodity party as rallies are getting sold. The hedgies are off looking elsewhere for greener pastures. They are having huge trouble finding one however. As soon as they think there might be the faintest hope of discovering one, all of them go plowing everything that they have into that asset class or sector as they make fools of themselves by their undisciplined trading patterns.

As mentioned in my radio interview on KWN this past weekend, I am looking to see what level it is on this chart at which buying will surface that indicates a solid bottom has emerged in the sector overall. This has not yet occurred especially with the weekly trend moving lower at present.

My own view at the current time is that the bottom in the CCI will coincide with a confirmed top in the long bond market. That has not yet occurred as it will take a solid close below the double bottom near 123^23 to confirm such an event.

Given the state of flux and the uncertainty reigning over the markets, the bonds are totally capable of reversing to the upside and negating any downside signals should the papering over of Greece's problems fail to stem the bleeding or should any of this spread to Spain, Portugal, Italy or Ireland. I have said this about the bonds previously - they can reverse to the upside on a moment's notice with all the cross currents and headwinds facing the global economy.

One has to keep in mind that in spite of today's "euphoria" and schizophrenic move higher in the equities, the Consumer Confidence level just hit a 7 month low here in the US. Perhaps some are looking at the price of gasoline which has come down off its peak levels helped by an obvious politically motivated release of crude oil from the SPR and thinking that consumers are going to run right out now that they can fill up their cars a bit cheaper and start stocking up on LED TV's, cool 4 wheelers, new jet skis and boats or even some nice new SUV's or crossovers.

Whatever the thinking, the bloom is off of the bond rose for today as the safe haven flow into that asset class is being reversed with traders loading the boats back up with equities and commodities. It does appear to me however that without some sort of fundamental sea change, rallies in the commodities and equities are going to be sold without a definitive announcement of some sort of further monetary accomodation forthcoming from the Fed. There simply is little hiring take place and the housing market is not yet showing any signs that it is ready to work higher and reverse the current trend that is entrenched. QE has not given any evidence that it has worked to generate job creation and that is the Achilles heel preventing any significant economic improvement. It is one thing to muddle along the bottom and not get worse; it is quite another thing to see actual solid economic growth. That takes a change in policy and is not something that we can expect to see from the anti-business Obama administration.

Gold is reacting higher today and has been able to climb back above psychologically important $1,500. It is fading off its best levels of the session however as we near the end of pit session trading. It needs to recapture $1520 to give the chart a bit better looking perspective however. Right now it looks weak. Given the fragile nature of things economically, the market has buying beneath it but any market trading below its 50 day moving average, as gold currently is, cannot be said to be in a bullish posture. That is why it needs to climb above $1520 to turn its chart picture a bit more friendly in the short term. Remember that this level was also the bottom of its recent trading range and had been serving as a floor of buying support before it gave way last week. It is now serving as selling resistance and the bulls are going to have to absorb any offers there if they hope to take it back towards $1550 once again.

Random Thoughts on the Passing Scene

In some private emails I have received some of the writers have expressed fears of a 2008 type meltdown in the precious metals whenever they see me use the word, "deflation". Let me try to address this somewhat here on the website so as to avoid having to make an individual response repeatedly.

First of all, when I use the word, "deflation", I am talking more about the symptoms rather than the causes. My understanding of the actual word is a reduction in the money supply evidenced by falling prices. It is the latter part of that sentence I am particularly interested in. For comparison's sake, when I use the word, "inflation", I am also more interested in the symptoms, i.e. rising prices, rather than the causes behind it which is an increase in the money supply not matched by an increase in productivity.

Regardless, the point I am making when talking about the forces of deflation battling it out against the forces of inflation, is one which means a period of falling prices versus a period of rising prices.

As you aware of by now, the Fed has been at war with the forces of deflation ever since the credit crisis erupted with the failure of Lehman Brothers back in the summer of 2008. Lehman was not the cause; it was merely the first victim. The result was a massive unwinding of highly leveraged speculative positions which drove asset prices lower across the board. Whether it was equities or commodities, it did not matter. They were all taken down hard as the Yen carry trade was unwound and money flowed back into the carry currency (the Yen) and into the Dollar as those short positions were lifted.

Enter the Fed into the fray. They began round one of QE which consisted of buying up the Mortgage Backed Securities and other alphabet-named securities which were plummeting in value and threatening to wipe out the balance sheets of the big banks who were greedy enough to buy and sell those things. That combined with the TARP program provided an enormous surge of liquidity into the markets which lifted both equities and commodities across the board. You had a classic example of the Fed ramping up the money supply in order to stave off deflationary forces. The policy was deliberately inflationary and had its intended affect. It also drove the Dollar sharply lower.

When QE1 began winding down, both the commodity markets and the equity markets began fading off their peak levels. With the economy showing that it lacked sufficient traction on its own to be able to grow at a sufficient pace to generate new hiring or one that made policy makers feel comfortable, QE2 was announced and then implemented. That had the immediate effect of unleashing inflationary forces into the economy in the sense that the liquidity it produced through the increase in the money supply shoved equity and commodity prices higher once again. Once again the forces of deflation (falling asset prices) were beaten back and once again the Dollar moved lower.

Now that QE2 is ending and the economy still shows no signs that it is growing at a pace strong enough to turn the labor markets around, prices of assets are dropping once again. Both commodity and equity markets are moving lower. In other words, this is a deflationary environment although it must be pointed out that the move lower in prices is starting from a very high level in the commodity sector as a whole. Gold is near $1500, crude oil is closer to $90, and corn is close to $7.00. None of these price levels can be considered cheap. So please keep this in mind when I use the word, "deflation", that I am not saying corn is headed back to $3.50, crude oil to $35-$40 or gold to $680 - $700. I am merely saying without the Fed created liquidity to goose up the money supply, prices are responding to the decreasing liquidity and are moving lower, albeit from a higher level. Eventually this will show up at the retail or consumer level but there will be at least a 3-4 month lag, if not a bit more. Prices will come down but will still remain high by historical standards.

This is one the reasons that I believe we will see another round of QE if Bernanke and the Fed feel it is warranted, even though they will face criticism should they do so. You will recall that throughout the rise in commodity prices, the Chairman repeatedly stressed in his testimonies before Congress and in his speeches that the rise in commodity prices was moderate and was temporary. I disagreed then and still do now that the rise was moderate (a move from below 400 in the CCI to near 680 in the CCI is not "moderate") but we all must admit that the index has come down lately and so have the prices of most commodities at the various commodity futures markets.

Having set a benchmark with these extremely high prices, any move lower in commodity prices will be measured against that new benchmark. Should the stock market take out a major downside support level and the economic data turn from bad to worse, Bernanke could rightfully argue that he has "upside room" for another round of QE in terms of commodity prices seeing that they are off recent highs. In other words, the public has now been conditioned with a spike to high prices and any move down from those levels will be seen as relief even if the price stabilizes at a new, permanently higher price level. When corn moves from $3.50 to nearly $8.00, a drop down towards $6.50 will be seen as a bargain even though the price is now $3.00/bushel higher than it was a mere 3 years ago. Same goes for crude oil. A drop from $120 towards $90, or even $80 or $70 will make the stuff look dirt cheap even though it will be trading at twice the price it was back in 2008. The list could go on and on.

What we are seeing then is a sort of three steps forward, two steps back in the commodity markets in terms of prices. The public, whether it realizes it or not, has now been conditioned to accepting the new and permanently higher price levels some of which are tied directly to the loss of purchasing power of the US Dollar. The new NORMAL is higher prices. When another round of QE comes our way, the drive to the former peak will be seen as inflationary but the impact will not be as psychologically devastating as was the first surge to these record highs. The next time it will be met with more of a yawn unless prices surge past these old peaks. Then the cries of inflation will arise once again, the Fed will face another round of criticism and the cycle will be repeated as they back off from stimulus yet again.

In such a fashion will the battle between the forces of deflation and inflation play out with the loser being the middle class and those who do not realize what is happening to their way of life.

Trader Dan interviewed at King World News

Please click on the following link to listen to my regular weekly radio interview with Eric King on the King World News Weekly Metals Wrap.

http://tinyurl.com/6xnq226

Continuous Commodity Index signaling Deflationary Forces are in the Ascendancy

Those of us who have nothing better to do with our lives than to sit in front of computer screens watching prices change have been watching the battle being waged between the forces of Deflation and the forces of Inflation ever since the credit crisis erupted back in the summer of 2008.

On the one hand is the relentless and merciless pressure from excessive Debt and all the issues arising from that; on the other hand has been the Federal Reserve and its monetary stimulus programs, aka, Quantitative Easing or QE for short. When the Fed has entered the Fray, the forces of deflation have been routed and run off the field. When the Fed withdraws, the opponents regather and send out their war parties to hack and slice once again.

This battle can be seen through the chart detailing the price action of the commodity sector as a whole, namely the Continuous Commodity Index or CCI. As the Fed wins ground, the index rises; as the Deflation forces triumph, this index falls. Right now it is falling and falling in a big way as once again it is threatening to put in a major top on its longer term weekly chart.

Take a look at the two red support levels shown on the chart. The upper red line was the previous bottom made in the index earlier in the year which was broken early last month as traders began suspecting that the Fed was going to indeed end the QE2 program at the end of June. However, they began second guessing that notion with the result that prices were able to rebound and move back above this level and push towards 660. However, as economic data continued to deteriorate and fears of an overall global slowdown increased, the index has now dropped lower through the upper line and are pressing into the lower red line confirming that a double top in indeed in place for the overall commodity sector. The price action is indicative of a market in which a "SELL THE RALLY" mentality has replaced one of BUYING DIPS. In other words, traders are looking for lower commodity prices ahead as they anticipate deflation and not inflation. Only if prices are able to immediately move back above the upper red line will one be able to say authoritatively that inflationary forces are rising in the minds of investors.

If you will also note the particular technical indicator I have chosen to overlay on this price chart, the Directional Movement Indicator, you will see that the solid black line, or ADX, which began rising in July 2010, and accompanied the rise in the index all through February of this year (indicating a STRONG TREND HIGHER) turned down at that point indicating a pause in the ongoing higher trend. The blue line or Positive Directional movement indicator has been trending lower since December of last year while the Negative Directional Movement Indicator, or red line, has begun trending higher since February of this year. What this indicator is telling us is the trend toward higher commodity prices is over for the time being. The upside crossover of the Negative Directional Indicator ABOVE the Positive Directional Indicator, is BEARISH.While the index has not yet fallen through the lower of the two red support lines on the chart, it is signaling that weakness in the sector lies ahead.

The last line of defense will be the rising 50 week moving average what comes in near the 600 level. This level now takes on increasing significance as we move forward. You will note how it held back in April/May 2010 when talk began surfacing that the Fed was going to come up with some sort of additional stimulus to take the place of the then expiring QE1 program. Once that QE2 was announced, the index accelerated higher. Now that the end of QE2 is here and there yet appears to be no improvement in the overall economy nor any concrete steps for a QE3 or some further stimulus from the Fed, the index is breaking down once again. Should it move towards 600 and fail there, we will be entering a deflationary period.

Mr. Bernanke left the door open for further stimulus from the Fed should the economy not respond and economic data continue to reflect deterioration. One suspects that the market is going to force the hand of the Fed sooner rather than later. Again, this Fed has signaled clearly that it is deathly afraid of deflation and will do whatever is necessary to stave it off.

Additional proof of the deflationary mindset taking hold has been the relentless move higher in the bond market which is moving in a manner suggestive of global slowdown fears. While the Fed enjoys the lower long term interest rates (as does the US government which is keeping its exorbitant borrowing costs lower), they do not want a rally in the bond market of the nature that would see money exiting stocks and other assets.