Is the Dollar King Once More?

It sure looks like it is. It all comes down to interest rate differentials in my view. The US, out of the big three, the Euro Zone and Japan, is the only economy where we are even talking about higher interest rates. The other two are not there yet as growth is stagnant at best in those economies. Please do not misunderstand what I am saying here - I am not saying that interest rates here are going to rise anytime soon. I am saying however that if and when rates finally do begin to rise, traders are convinced that they will do so FIRST here in the US.

Today's Construction data reminded currency traders of that fact.

Yesterday I mentioned that stubborn band of overhead chart resistance that has served to keep the Dollar's upward progress in check. Today it finally blew right through that!

The ramifications for the commodity complex in general are all too well known by anyone who has been watching the markets over the last few years. Higher Dollar tends to equal Lower Commodity prices overall.

We are seeing that in the Goldman Sachs Commodity Index which continues to get pummeled lower. It just missed setting a fresh TWO YEAR LOW in today's session especially with crude oil being obliterated. Crude has not been at these levels this year since the third week of January!

I think it bears repeating - were it not for geopolitical tensions in Ukraine, it is highly doubtful gold would be able to withstand this outside pressure. Gold needs an environment in which REAL rates are either flat or negative as there is very little opportunity cost to hold the metal under such circumstances. However, in an environment in which interest rates are likely to rise, and rise at a clip that will keep them above any incipient rate of inflation, gold is going to experience obstacles to a rise in its price level. Investors/traders are not going to lock up precious capital in an asset that throws off no yield and one that many do not see as necessary given the current lack of inflationary pressures.

Gold bulls will need to be cautious therefore and alert to any signs that geopolitical tensions surrounding Ukraine might be lessening. So far we are not seeing any drastic outflows from the GLD, ( not that its current levels of holdings are anything to be the least bit excited about ) but if we do begin to see such an occurrence, it will not augur well for a stronger gold price moving forward.

Based on the current data that we have, gold demand has been dropping off somewhat from last year's torrid pace. If investors begin to more largely embrace the higher interest rate scenario, that is not going to help it.

On the grain side of things - traders knocked the new crop beans lower today as news of the improvement in the crop conditions ratings from USDA yesterday became more widespread. Also aiding the downward progress was reports from the Pro Farmer crop tour of very strong yields in the fields that the tour surveyed.

The tour will be moving to a different location today and will be reporting its findings from that area.

Bean bulls are still playing up that "tight old crop stocks" situation however. My guess is that is going to continue until about the time that the combines begin rolling more heavily in the southern part of the country. That coincides pretty closely with the delivery process for the September contract so that should prove to be rather interesting to say the least.

The livestock markets were hit with another wave of selling after a brief respite  from the carnage that was unleashed in there on the heels of the Russian ban. The change in market sentiment in this sector has been remarkable for its rapidity. We have gone from euphoria to panic in a mind-boggling short period of time. We are going to have to see how the ban impacts the beef and pork markets especially once the buying for Labor Day wraps up this week.

One good thing about this for we meat lovers is that it has brought back to earth the stratospheric prices that we have been both seeing and unfortunately, paying, for our necessary vice.

Silver looks like it is back on course to test the $19.00 level once more. Copper has thus far shrugged off the strong construction data and is testing chart support near last week's low at $3.08. If the red metal were to fail there, odds are that the grey metal will see $19.00.

Sugar prices hit a six month low today while Cotton prices continue to languish below $0.65/pound.

Inflation Expectations Declining

Take a look at the following chart of the TIPS spread and note the sharp plunge in the spread that has been occurring over the last few weeks. It is now at the lowest level in 9 weeks. Clearly, there has been a change in the market's expectations regarding any onslaught of inflation pressures.

I think it no coincidence that this revised evaluation has taken place even as the commodity sector is plumbing new depths.

Just today, the GSCI scored a brand new, 16 month low!

I should also point out that interest rates have been moving steadily LOWER since the first of the year. The yield was near 3.0% when the year began. Today it ended 2.387%. That is most interesting given the Fed's steady march to wind down the Quantitative Easing program. Many pundits, traders, and investors ( including yours truly here ) believed that interest rates would begin a steady march higher once the market became convinced that the Fed was serious about this. While geopolitical tensions can produce money flows into bonds as safe havens, knocking rates lower in the process, there is obviously more at work here since the steady move lower in long term rates cannot be solely attributed to those geopolitical events.

USDA Crop Conditions

USDA released their weekly report today.

I am a bit surprised to see that the overall soybean conditions rating actually improved. I had expected that we might see a tad of deterioration ( nothing of significance ) but even that did not happen.

The percentage of the crop that is rated in the Good/Excellent category bumped up 1% from 70% to 71%. More specifically, 54% is rated Good while 17% is Excellent, which is unchanged from last week.

In going over the 18 states and their average, I can see only two states that showed any deterioration in the condition of the crop. Every other state remained unchanged from the previous week or improved. The two states showing some deterioration of the crop were Iowa and Kansas. Iowa lost one point while Kansas lost one as well.

Nationally, the crop remains ahead of last year's progress. 95% of the crop is blooming compared to 91% last year at this time and the 5 year average of 95%. 83% of the crop is setting pods compared to only 70% last year and the 5 year average of 79%.

With the regular, timely rains we have been getting, and with more rain in the forecast at times, any heat at this point will be very welcome by the bean plants. As long as they have sufficient moisture, beans like heat when setting pods. That leads to bigger individual beans and better filling.

I am hard-pressed to find anything bullish about the conditions report especially given the current forecast.

When it comes to corn, there was some slight deterioration in the crop nationally. A mere 72% ( this is said with tongue in cheek) of the crop is rated Good/Excellent with 21% Excellent and 51% Good. That is down from 73% last week.

Iowa dropped to a paltry 75% rated Good/Excellent down from 76% last week. Illinois dropped to 80% Good/Excellent from 82% last week. Indiana improved to 73% Good/Excellent compared to 72% last week.

Progress-wise corn is 70% in the Dough stage compared to 49% last year and the 5 year average of 63%. The crop nationally is 22% in the Dent stage compared to last year's 10% and the 5 year average of 27% ( something which I will admit I am confused about).

Again, heat, as long as there is sufficient moisture in the soil, will be very welcome by farmers.

The forecasts are calling for some heat through the mid-West later this week but then cooling off again by the weekend. If those forecasts hold, and the scattered rains show up as predicted, that will be ideal for these crops.

The same guys who were buying the August beans on the tight old crop supplies, are now doing the same, as expected, in the September bean contract. I am not sure what it will take for farmers to let go of some of those old crop beans that are still sitting in storage but at some point those are going to have to be moved to make room for what more and more appears to be a bin-buster.

About the only thing I can see that the bulls have that they can play at this point is talk of an early freeze. I find it interesting to read some of the bullish stories especially by some who are still holding back old crop supplies hoping for higher prices. First they talk up the heat as being stressful on the crop. Then, nearly in the same breath, they talk up an early frost. The heat ( as long as we are not talking big High Pressure Ridge ) is what the crop needs at this point to hurry it along. I should point out that both crops are generally ahead of the 5 year average in key categories ( with the exception of corn being in the dent state which is rather confusing given the earlier than normal condition in other categories).

We are probably going to have to wait until the combines start rolling to see the beans react to the size of the expected crop. In the interim, the "tight old-crop" supplies story will be repeated over and over again. It really is a tale of Two Cities ( I mean Crops).

One other thing, I will have to do some digging when I can spare a bit of time and see what kinds of margins ethanol producers have right now, especially with unleaded gasoline prices continuing their disappearing act. Unleaded scored a 6 month LOW today! Ethanol producers lose profitability as gasoline prices erode although with corn as cheap as it currently is, they can still afford to buy the stuff and turn it into fuel. Note - I HATE ETHANOL....

The idea of burning our food supply in our gas tanks is madness. I know farmers love it but I think it is a price-distorting waste of a valuable food item. If ethanol was such a good thing that it could stand in the marketplace on its own two feet, without the federal government subsiding the stuff, it would be one thing. But it is not.

Dollar Back up; Euro Back down

It does seem to be a pattern of late does it not? The Dollar keeps knocking on the door of overhead chart resistance while the Euro keeps knocking on the door leading to the cellar of downside chart support. Neither one has been able to mount a clear breakout either above or below their respective chart resistance or support levels.

In looking over the charts one has to stay with the technical indicators and go with those as far as favoring the odds for the next move. It appears that the Dollar is basing for a move higher while the Euro is basing for a move lower.

I say that because of the reading that the RSI is currently giving. Here are the charts with the first one being that of the Euro:

Note the consolidation or coiling type of pattern within the lines noted on the chart. The currency is hovering just above the 1.3350 level. Selling is coming in near 1.34 and above while buyers are evident from 1.3350 on down. Neither side currently has a distinct advantage.

However, the RSI has been tracking between near the 60 level and just above the 20 level for nearly three months now. That this indicator has been unable to get above 65 tells me that this market is weak. One would have to therefore go with the notion that the next move will be for the Euro to breakdown and test support at 1.3300. Below that is 1.3250. Personally I believe that the European monetary authorities, ( and exporters for that matter ) will not mind seeing this happen. If the market were able to clear 1.3450, we will have to revisit this thinking.

Here is the Dollar chart:

Almost the mirror opposite of the Euro is it not? Note how it is stuck just below the 81.80 level but is grinding slightly higher above the 81.40 level. The RSI has been tracking between 80 and 40 indicating a market that has internal strength.

Again, if one bases their analysis solely off of the charts, the next move in the Dollar should be higher but that means we will need to see a breach of 81.80 that is convincing from a technical analysis perspective.

Should both of these markets move accordingly, I would suspect gold will see move selling pressure. Again, geopolitical events are supporting gold ( as well as confounding currency traders ) but if that support does fade for any reason, a stronger Dollar will tend to favor weaker gold prices.

Let's see what Mr. Market gives us next.

Copper Signals and Silver

Some of the regular readers of this site will remember that the battle royale occurring in the copper market between the two groups of the largest speculators in the market has been an unending source of interest to me. To see the powerful hedge funds arrayed on one side of the market ( LONG ) while the other Large Reportables ( big pit locals, CTA's, CPO's, etc. ) are on the other ( SHORT) is not something that one sees all that often in the commodity futures markets, especially in this day and age of computerized system trading.

In looking over the chart of the price and the chart of the positioning of these large traders ( COT ), one can readily see that each side has inflicted some wounds upon the other based on the rise beginning in the middle of June and then on the fall since last July.

As things now stand, we are back to a near perfect equilibrium between the two sides with their respective net long and net short positions being nearly equally balanced.

The reason I am fascinated by this is because it reflects the continued lack of consensus among the big speculators as to the true state of the global economy.

Those that are bullish and positioned on the net long side ( hedgies ) are playing the inflation genie and a slowly improving economy with increased demand for industrial type metals such as copper.

Those that are bearish are playing the "deflation genie" and a deteriorating global economy accompanied by falling commodity prices along with a strong US dollar.

It is this shifting sentiment which is wreaking havoc among some of the trend following systems and has sent some of the individual commodity markets into their current range trade or sideways pattern.

Clearly, investors/traders are looking at some signs of economic improvement but they are also seeing geopolitical events and other factors which are making them second guess themselves. There is no clear cut conviction outside of the equity market traders as to which way things are going.

One cannot dispute however that the overall commodity sector has been under severe pressure of late. A simple glance at the Goldman Sachs Commodity Index tells the story there. Copper has been effectively taking its cues from this index of late.

Along this line, do you not find it rather bizarre that in spite of the severe downdraft occurring in the commodity sector, in spite of the sharp selloff that has been occurring in copper and in spite of the fact that the US Dollar has been rather resilient of late, we are still being regaled with articles decrying the "Blatant attacks on Silver" ,etc.

I cannot help but wonder about some of these folks who are evidently blind to the fact that everything else around the metal is sinking lower. Yet, for some strange, inexplicable reason, they somehow expect silver to be rocketing higher. It is somewhat akin to watching a wild hog digging around for edible roots. The poor thing cannot see that well to begin with but it is so focused on what is right in front of its nose, that it does not bother to see anything outside of that area of small focus. Such are those who keep talking silver manipulation while the entire commodity complex is now down strongly on the year.

Take a look at the Silver COT chart and you can easily see what is taking place. There is nothing sinister here but rather the dawning realization on the part of some hedge funds ( perhaps some of the same that were long copper) that they are on the wrong side of the trade and are now getting out.

Look at the size of that big bet the hedge funds had made on higher silver prices beginning back in June. They built that net long position up to the largest in 4 years only to have the metal careen back to earth after the entire commodity complex began to swoon. Simply put - the hedge funds were playing the "inflation genie" and surging global economy theme and just flat out missed it. Now they are abandoning ship. As they head for the exits, the price is coming back down after making an advance of about 3 Dollars since early June. It has given back $2.00 of that as the hedge funds exit.

By the way, this is an opportunity to once again point out the folly and absurdity of too many of these self-anointed Commitment of Traders "expert analysts" and other sundry, assorted charlatans who had assured us all that a spectacular silver short squeeze was just around the corner because "their analysis of the COT data informed them that the big swap dealers were positioned on the net long side and that implied a big short squeeze coming". Of course we all know how accurate that worthless "analysis" was.

I have said it many times before and will say it again - extrapolating future market movements from the COT data alone is an exercise for fools. Only by studying a broad array of factors, such as the other similar markets, the Dollar, interest rate expectations, and then key technical chart patterns and resistance and support areas, can the COT data be used to any sort of trading advantage. Taken in isolation, as so many of these novices and would-be somebodies seem to do, it is great for selling newsletters and subscription-based web sites, but for real life trading strategy, it is utterly and completely worthless. I have to shake my head that some would part with their hard-earned money to pay for the kind of "analysis" that they are getting. It is quite tragic to be honest.

Take a look at the following chart in which Silver is being compared to Copper. Pay not so much attention as to the general price levels but rather the overall price patterns of the two metals. Notice how similar their movements are and have been. They both tend to fall in unison and sink in unison.  Yes, there is not a one for one or a perfect symmetry between the two but the similarities are quite remarkable are they not?

The point is simple - markets do not trade in isolation. Anyone who claims that he or she knows what is coming next because they have examined the Commitment of Traders data and therefore can dogmatically assert "such and such must follow" is fooling not only you, but themselves as well. When one puts real money on the line and takes a position in the market, they should do so not on the soothsaying of some short-sighted "expert on the COT" but rather through diligent study of the charts.

Lastly for now, here is that TIPS spread chart that I post every so often. It has been updated through yesterday. Notice the line of the TIPS spread which has been falling of late. This is an indication that inflation expectations are receding, not growing.

It is also the reason that I of the view that without support from these geopolitical tensions, gold would be following the broader commodity sector lower. Traders are buying gold as a safe haven against geopolitical turmoil and NOT against inflation. That warns us to be careful with gold for if the events which have led to this rise in a desire for a safe haven do recede for any reason, gold is vulnerable.

This is not meant to be a bias against gold nor is it meant to be a bias for gold. It is a simple observation that fundamental factors argue for a lower gold price while geopolitical factors are pushing it higher. We all saw today ( Friday ) how swiftly the metal will sink if those geopolitical factors are removed. It was only the reviving of fears over in Ukraine which saved the metal from falling even more sharply. Those who are buying it need to understand this. My own personal preference is to not buy gold during periods of geopolitical unrest but rather during times of relative quiet into levels of chart support and only as much as one needs for insurance or diversification purposes. Buying gold and chasing it higher when it is being event driven as it is right now, usually ends up burning those who do. One never knows if the event can indeed spiral out of control so if you do not own any, acquiring some is prudent. But if you are buying it during times like these, just understand that it can plummet back to earth as quickly, if not more swiftly, than it rose.

I will get something up on the corn and bean markets regarding the charts and the COT data as time permits tomorrow. have a nice weekend....

Ukrainian Events not Only impacting Gold but Wheat as well

Geopolitical events have a way of roiling markets and giving credence to the reason why so many traders/investors will not touch commodities. We were reminded of this by the wild price action occurring in the gold market, and, to the surprise of some ( but not grain traders ) the wheat markets.

Gold had been pressured earlier in the session on De-escalation of tensions over in Ukraine. Yesterday it was fears that a Russian humanitarian relief column was a Trojan horse which would foment war. Earlier today when it became clear that there were no weapons, troops, etc., in the convey, gold promptly sold off. Then around mid-morning, up went the yellow metal, recapturing the $1300 level as reports filtered into the market that Russian forces had crossed the Ukrainian border and been engaged by their troops.

Wheat, which had also been under pressure earlier in the session, immediately shot higher as panicked bears began running for cover. Ukraine is a major wheat producer and traders are nervous over any impact that military tensions might produce as far as wheat exports from that country go. Last I saw, Ukrainian wheat ( which is shipped from Black Sea ports ) is priced below US wheat.

Now the market has to sort through the news and see what has actually taken place.  Suffice it to say for now, safe havens which were ignominiously thrown out and discarded early in the session, are suddenly now all the rage once again. Who knows by the end of the session they could all be jettisoned...

Never a dull moment....

Good Riddance to August Beans

Finally - the August soybean contract has gone the way of history and is outta there, finished, etc. This contract has been the playground for those looking to create some shenanigans in the bean pit for some time now. In the face of a record, bin-busting crop, those who have been holders of old crop beans, have refused to let them go, forcing a huge short squeeze in that particular month that has tended to create all manner of volatility in the soybean market. The dichotomy between an incredibly tight old crop carryover situation and the potential for a massive new crop harvest, has resulted in increased volatility in a pit that is already known for its seemingly random movements.

All of these shenanigans managed to do is to guarantee that S. American farmers are going to move to beans this planting season which will be underway come late September - October. American farmers watching the squeeze occurring in the old crop August beans, have gotten bulled up at precisely the wrong time. It is very difficult to price expected harvest when you are sitting there watching a screen in which the nearby month is soaring in price. The fact is however that we are dealing with two distinct harvests - one from last year and one expected this year. There is a world of difference between the two and farmers here had best be cautious about formulating marketing plans based off of the antics of some large crushers.

Now that the August is off the board, I have to wonder if these same entities are going to try the same game with the September.

My concern is that this game playing is going to move the needle firmly in favor of increased acreage going to beans in S. America at precisely the same time a huge harvest of beans is expected here. If that is the case, the supply of beans could expand quite rapidly driving prices even lower as end users lose the urgency to chase supplies and opt instead of buying hand to mouth as they wait for prices to work lower.

We'll see how this plays out in the days/weeks ahead.

The livestock markets appear to have experienced some heavy short covering today after having been beaten with the proverbial ugly stick. Even at that, the overall weakness across the energy complex, ( gasoline prices are down more than 8 cents a gallon as I type this ) has dragged the GSCI to a BRAND NEW LOW for the current year. As a matter of fact, the index has not been at these levels since  APRIL 2013! We are talking a 68 WEEK LOW!

 

The US Dollar Index continues knocking on the door of that stubborn band of overhead chart resistance. It has thus far been unable to mount two, consecutive daily closes ABOVE that 8155 - 81.60 level but look like it might just be able to do it today. If so, one could expect to see the bulls try to push it out past 81.80 and accelerate it higher.

 

This is why I continue to be concerned over the future fortunes of gold. With the commodity sector swooning lower and with the Dollar firm and threatening an upside breakout, gold is going to encounter headwinds to its upward progress.

 

 

 

Not only that, but the level of nervousness seen in the equity markets is subsiding once more. Here is a  look at the VIX or the Volatility Index. I prefer to call it the Complacency Index.

 

It had been rising over fears/nervousness associated with the Ukrainian mess and other various geopolitical factors but has begun trailing back down once again.

These are all factors which can be considered negative for gold. I mentioned the other day the drop off in reported GLD holdings which now bring the total level of gold held in that ETF to below last year's ending number. In other words, it is now down on the year.

In spite of these negative factors, the price of gold is holding well as are the mining shares, which seem to have found some strong sponsors. Gold however cannot manage to overcome the selling hitting near $1320.

From my perspective, gold is simply not a good trade right now. It is too much of a crap shoot. Chasing it higher given the above-mentioned negatives does not make sense while selling it aggressively is also not easy given the strength in the miners. It is in a sort of no-man's land at the moment and that range bound chart pattern is evidence of this. I for one would prefer to see it break out convincingly one way or the other. For the time being, short-term oriented traders can play that range trade.

Also, along this line, look at the Gold Volatility Index - it is moving lower once again indicating the current sentiment that the range trade is more of what is in store for gold rather than any sort of sharp breakout either way.

Take a look at one more chart... unleaded gasoline. I for one am quite happy to see this!

Bloodbath Continuing in the Livestock Complex

Red meat lovers, take a look at the following charts and rejoice... relief from record high meat prices is on the way.

The Russian food ban from the US and Canada ( among other nations) seems to have gotten the ball rolling in earnest but now technical aspects have taken over with margin calls and forced liquidation dominating trade. Producers who were prudent enough to hedge and secure some downside price protection are sitting pretty right now. Those who did not, have let some enormous profits get away from them.

As mentioned previously, those of us who enjoy good Bar-B-Q have suffered through sky-high meat prices so far this year, but relief is on the way!

Combine falling livestock prices with a large crop coming this fall, and energy prices which have taken a dive recently, and one can see the impact on the overall commodity sector as evidenced by the Goldman Sachs Commodity Index.

It was this weakness across the commodity sector today which weighed on copper prices and helped pull silver lower even though gold was able to buck the trend and move slightly higher.

The extent of the collapse in commodity prices over the last six weeks has been stunning. Here is the chart.

It looks like gold is caught in a sort of tug of war between forces springing from the overall sector and upward pressures coming from the mining section.

The HUI is currently quite strong on the charts. As you can see from the chart below, it is flirting with strong overhead resistance near the 250 level. A closing push past this should allow the index to target further resistance near 260. Above 260, there is not much until one gets to 280 or so.

Here is another negative factor:

According to the most recent updated information, GLD holdings have now fallen below the starting level of this year. They were at 798.22 tons at the end of the year and as of yesterday stood at 795.86.

So what to make of this? I think one can make the argument that the gold shares have been the leaders of the gold price both on the way down and on the way up. So far, if I had to pick between following falling commodity prices and falling reported GLD tonnage and the mining shares, I would have to side with the miners. Their track record is very good at predicting future price action in the underlying metal.

That being said, with the negative factors of falling commodity prices, falling GLD tonnage and a stable to rising Dollar, the HUI needs to break out to the upside sooner rather than later to convince enough traders that the move higher in gold is more than a momentary flash. Many of the larger players are obviously moving into the mining shares based on the price action because they apparently feel that the downside is rather limited from this point. However it is difficult to see why some big specs would want to chase gold significantly higher given the above-cited negatives. If the Dollar does finally manage to breakout above that stubborn level of resistance near 81.60 basis the USDX, gold will have to overcome even more headwinds.

The jury is still out therefore. As you can see from the price chart, the level near $1320 is proving to be formidable overhead resistance. Also, the ADX continues to move lower indicating that a trending move is not yet underway but rather that the market continues to move in a range trade. $1280 is the bottom and $1320 is the top within a broader range of $1240 - $1340. Let's see what the next few days bring us.