“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput






Wednesday, October 22, 2014

HUI to Gold Ratio Collapsing


There is only one comment that I can make based off of what I see from this chart; either the gold mining stocks are tremendously UNDERVALUED compared to the price of the metal or the gold price is way too high.


This ratio just touched a level last seen in DECEMBER 2000! That is FOURTEEN YEARS AGO!

Perhaps some more of these gold miners need to head to bankruptcy but with the ratio at current levels, and with the HUI itself trading at a SIX YEAR LOW this month ( refer to that chart I posted previously today) I am leaning to the view that the gold price is too high.

Talk about a disaster....


Gold Mining Stocks Continue to Sink

Please review the following two charts.

The first is an index of the junior mining stocks, the GDXJ. Note well that it has completely given up all of its gains for the year and is essentially where it began the year on the first trading day of January 2014.


The second chart is one of the HUI. Notice that this chart is even worse than the former! The index is off 6.6% from its starting level at the beginning of this year.
 
As we are approaching the end of the month, I thought it might benefit the reader to take a long term view of this sector's performance. To say it has been, "poor" would be a huge understatement.
 
Notice that at its current level, the index is on course for the LOWEST MONTHLY CLOSE since May 2005! That is NINE YEARS AGO! As it now stands, the index is at levels last seen 6 years ago, during the height of the credit crisis.
 
 
The reason for the charts is simple - the mining shares still tend to lead the price of gold. They did it on the way up during the bull market phase of gold, and they did it on the way down during the current bear market in the metal.
 
So far gold has been able to stay above $1240, which is constructive for the bullish cause but failure to hold this key level will embolden bears, especially given the abysmal charts of the mining shares, not to mention the plunge in reported holdings of GLD ( more on that later).
 
As mentioned yesterday, if the price falls through $1240 and cannot immediately recover, it will moves towards $1220. Below that is $1200.
 
Here is an updated chart of GLD. Once again, the reported holdings dropped. This time it was a reduction of 2.11 tons, bringing the total reported holdings to 749.87 tons, down 48.35 tons since the beginning of the year.
 
 
 
This is the lowest level since November 2008.
 
Bulls - fear not however since we are assured that this gold is being "drained" to head to meet soaring Asian demand.
 
Let's add this new bullish spin to our long list of bullish theories propounded by the gold permabull crowd.
 
To refresh your memory, here are some of them.
 
1.) Backwardation - Bullish for gold prices
2.) Negative GOFO rates - Bullish for gold prices
3.) J P Morgan long side corner on gold - Bullish for gold prices
4.) Chinese warehouse doubling counting of gold - Bullish for gold prices
5.) Big hedge fund short position - Bullish for gold prices
6.) False Taper - Treasury buying US bonds out of Belgium - Bullish for gold prices.
7.) Big gold buying underneath the market as reported by "Mr. gold insider/whistleblower" - Bullish for gold prices
8.) GLD being drained to meet Asian demand - Bullish for gold prices.
 
Here is my response and that which any objective trader/investor should greet these fabrications with:
 
 YAWN!
 
With crude oil plunging to near $80 this week ( it actually put a "7" handle in front of it last week for a brief moment) and with the TIPS spread showing deflation is the fear of the market, not inflation, not hyperinflation, gold is going to need some very strong fundamental spark to keep it afloat.
 
I am especially interested in what the VIX is doing this week as gold will draw support if the VIX moves higher. It is the "fear trade" that is supporting the metal at the moment.
 
Incidentally, the Dollar had a nice move higher today with the Euro continuing to move lower once more.
 

As long as the Dollar can maintain a weekly close above the bottom of its short term range ( 87 - 85), it looks like it is basing for another leg higher. A failure to hold 85 on the downside by the end of this week, will negate that view. For the next leg higher to commence, 87 needs to fall to the bulls.
 
 
Switching a bit to the ags - Feeder cattle finally had a day in which they did NOT make a limit move. Packers have been able to push the beef higher to end users and that caused bulls to rush back in to buy back what they were throwing away in that complex yesterday. Perhaps the falling unleaded gasoline prices are allowing consumers to afford that insanely high beef for the moment but cheap pork and cheap chicken are going to soon undercut that in my view.
 
Meal looks like it might have run out of upside steam in today's session. If so, the beans will follow as it is the meal which has been dragging the beans, and the corn I might add, higher.
 
Expect to start seeing stories dealing with the difficulty in moving/storing this year's harvest surfacing soon.
 
 

Tuesday, October 21, 2014

Gold Stalling Out?

Gold has had a nice rally off what is now a TRIPLE BOTTOM ( which amazingly held) near $1180. In the process it has managed to clear two resistance zones; the first near $1220 and the second near $1240. It has subsequently been unable to best the 50 Day Moving Average however and has set back after some early session buying popped it above that key technical level.



The HUI, in spite of an extremely powerful rally in the broader equity markets ( the S&P 500 is up over 2% today) has been comatose which is worrisome if one is a bull.

I mentioned in yesterday's post that if the equity markets rally and especially if the VIX moves lower, gold was going to encounter some selling pressure. That it is doing at the moment. It does however remain higher on the day although well off the best levels reached earlier in the session.

Tomorrow will therefore be important for the short term future of the yellow metal. If it does indeed set back from here, how it handles itself if price does fall towards $1240 will be key in deciphering its next move. Failure there and it will drop back to $1220 as discouraged bulls and emboldened bears will assert themselves.

If the metal manages to attract enough dip buyers to keep it afloat above $1240, the action will be more indicative of a pause or rest in a market that wants to make a run towards $1280. Thus the jury is out at this point.



Buying has been good out of Asia ( what else is new ) but Western-based investment demand is miserable as witnessed by the plunging reported holdings in GLD.

Some want to make some sort of big deal out of this claiming that the "GLD is being "drained" or "raided" to meet demand from the East" but that is an explanation looking for an argument. Who cares who is buying it? No one in the perma gold bull camp seemed to care when the reported holdings were soaring several years back now were they? We could turn the latest theory on its head and say the following:

"Western-based investment demand is pulling gold from all corners of the world to meet it". The simple truth is that for every buyer there is a seller. Some act as if once this gold is bought by some nebulous "East" that it will never be sold again. That is pure rubbish! Gold is bought and sold every day in China as well as in India or Vietnam or anywhere else in the nations that comprise the "East".

Western-based money managers chase yield. If they feel that gold is going to put in a good performance or if they require a safe haven asset in which to park some excess funds, they will buy the metal. If they do not, they will not buy it.

I am on record here as stating that I believe falling reported holdings in GLD is not bullish. If was bullish on the way up for gold way back when, then it is bearish on the way down. One cannot have it both ways.

That is why I am watching this rally with some skepticism. For now, the bulls are in technical control of the market with the chart in their favor.

Let's see what we get tomorrow.

By the way, the Euro plunged on the ECB potential corporate bond buying news.



It stalled out exactly at the former support zone near 1.2800 which is now serving as overhead resistance. The recent bump higher has relieved the oversold reading on the weekly chart so perhaps the currency is reading to resume its move lower. We shall see on that as well.

Lastly for now, the soybean meal market which I noted earlier today, posted a very strong close above the $340 level. It continues to pull the soybeans, AND THE CORN higher.

Wheat was pulled higher by talk of planting delays for the soft winter wheat crop in the Eastern portion of the Corn Belt. It popped above $5.20 which is a big level but failed to CLOSE above that line. Wheat bulls can expect to see $5.40 if they can dislodge the bears near this level.

There has been a rather significant amount of short covering by the funds in this market but that is the reason why one has to closely watch these resistance levels. The stronger hands, who have not been squeezed out, are still looking for a level against which to sell. For now they seem to have found it near $5.20. This is shaping up to be an interesting battle.




Nearby Meal Tightness Driving Beans Higher

It is the same story that it has been for much of this past year, the tight carryover from last year's bean harvest is meeting up with a reduced current year harvest pace and that has processors scrambling to secure enough beans to produce meal, which seems to be experiencing some tightness right now. That has the meal moving higher on the charts which is pulling both the beans and even the corn higher.

Take a look at this chart and as you do, keep in mind that we are on our way to one of the largest bean harvests ever with a huge expected carryover.



That dark line is the 50 day moving average. Yes, believe it or not, in the face of a massive upcoming harvest, the meal is over that key technical indicator. That is why the funds are buying. Remember, none of that group gives a hoot about fundamentals.

Meal has gone up nearly vertical some $44/ton since the beginning of this month and is trading at levels last seen in early September as traders began to get a true sense of the whopping harvest that was on the way.

I am closing watching its performance near this level however to see if it is going to fade. Farmers continue to be tight-fisted sellers of this year's crop, ( a huge mistake in my view ) as they cannot bring themselves to sell at current levels after being spoiled by years of sharply higher prices for their production. IF ( and I do not know ) meal is going to fail, it will fail near this level.

What makes me extremely nervous about this market is that once the panic selling begins among farmers, it is all going to come at once. The big question a trader has is exactly when that is going to be. I have the utmost respect for farmers who work long hours and deal with a multitude of obstacles at times. However, as marketers of the crops which they so proficiently grow, they suck! They turn bullish at exactly the worst time and become excessively bearish at the wrong time. In other words, they tend not to sell when they should and sell when they ought not to be selling!

By the way, the feeder cattle market hit limit down this morning. It was limit down on Tuesday and Wednesday of last week. Then it hit limit down Thursday early in the session only to move higher and close at limit up that day. It then went limit down on Friday and closed there only to start off this week ( MOnday) by closing Limit up. Let's see now, that is SEVEN CONSECUTIVE TRADING DAYS in which this market has either closed limit down or limit up.

And someone tell me that our markets are not utterly broken! I have been trading cattle for many, many years and have never seen them do this, ever! This is also the reason I strongly advise many would-be traders from NOT trading livestock unless you know exactly what you are doing.

ECB Planning a Corporate QE?

The wire services are reporting this morning that the European Central Bank is considering a plan to purchase corporate debt as part of a response to the Eurozone's sluggish growth. That has pushed the Euro sharply lower and the Dollar higher by consequence but commodity buying is being seen regardless.

Copper, silver and gold are all higher and even crude oil has firmed. Equities of course love that news. Even the grains are moving higher.

More volatility, more uncertainty and more factors for traders/investors to now digest.

Hold onto your hats.... don't you love our monetary masters? They have such a "calming influence" on the markets.

Monday, October 20, 2014

USDA Harvest Progress Reports

Here are the latest numbers on the harvest from USDA.

Corn -

93% of the crop is mature compared to 87% last week and 93% last year at this time. The five year average is 94%.

31% of the crop is in the bin compared to 24% last week and 38% last year at this time. The five-year average is 53%.

Soybeans -

95% of the crop is dropping leaves compared to 91% last week and 93% last year at this time. The five-year average is 97%.

53% of the harvest is done compared to 40% last week and 61% last year at this time. The five-year average is 66%.

The weather looks very conducive to rapid harvest progress this week so expect to see some pretty strong progress by the time next Monday rolls around and we get more of these numbers from the USDA. As of now, skies should be clear with lots of sunshine through Sunday at least.

There is some fund buying in these grains for some reason that I cannot seem to put a finger on. Might be some more of that supposed rotation out of stocks and into what is viewed as "cheap" ags but that still seems a rather irrational reason for professional funds to throw money into a market. That big down day we had in the Dollar last week threw the macro trades into some convulsions and I suspect we are still encountering some residual fallout from that move in the currencies for mere technical reasons.

There is apparently a contingent of large speculators who seem to enjoy buying the grains nearly ever evening in the Asian session as they go stop hunting after shorts in the market. Whomever it is that has been doing this, has been at it for some time now. We are seeing more of it this evening as I type these comments.

I should note that guys like me who trade the livestock markets heavily have been complaining to the CME for several years about the antics occurring in that sector during the thinly traded Asian hours. After getting an earful from the industry participants as well, many who got sick and tired of watching their hedges get blown all to kingdom come for no apparent reason other than specs moving the markets around because they can do so, CME finally has moved to end the Asian trading of livestock. As of next week, FREEDOM is the new word for we long-suffering livestock traders.

Perhaps enough of the grain market participants can begin to make some noise about this same thing and maybe get the exchange officials to cut these insanely long grain trading hours back to size as well. I have to give credit to the exchange - it took them a long time but they did listen and they responded!
Hey guys - take a look at the grains now and let's shorten these trading hours. All we are getting in the Asian trade is hedge fund games.

By the way, for those who happen to keep an eye on cattle every now and then. They were limit up today. Limit down, limit up, limit down, limit up... I am having difficulty recalling ever seeing anything quite like this in the cattle.

Some quick comments on gold... the chart is showing the bulls currently in control of the market as they have been able to take price through two resistance zones on the chart. The first was near $1220; the next was near $1240. Just above the latter resistance zone, the 50 day moving average comes in near $1246. From a purely technical analysis aspect, bulls have a shot at making a run to near $1280 if they can manage to post two consecutive closes above that 50 DMA. The reason is because of the internal structure of the market with a fairly good sized contingent of hedge funds on the short side of the market.



The problem with this market for someone such as myself who likes to view a range of inputs in markets I am analyzing, is that fundamentally, the case for gold is not compelling. I am not alone in this view as the GLD continues to rapidly bleed out gold. The latest reported holdings out of that ETF, showed a sharp FALL in gold holdings of more than 9 tons from Friday! Clearly rallies in gold are being viewed as selling opportunities by some very big entities.

Total tonnage is now down 46.26 tons from the start of the year and is the lowest reported level of holdings since early November 2008! Think about that - it was only a month or so after the news of QE 1 was announced that the amount of gold was anywhere near current levels being reported in GLD.


In spite of this, gold over at the Comex continues to squirt higher. We also have the VIX coming down somewhat indicating a lessening of fears over equities, at least for the moment.




Here is the most current TIPS spread chart... notice that gold has been moving higher and inversely to the spread for the last week or so - something out of the normal pattern we have come to see over the last few months. This is suggestive of gold functioning as a safe haven, NOT from inflation ( which the market is not the least bit concerned about ) but rather as a place to park some funds for those who have been getting nervous over the wild price movements in the equity arena.




What this suggests to me is that any sign of stability in equities and/or a falling in the VIX, is going to spur selling in gold once more. Falling tonnage in GLD, a falling TIPS spread and a falling VIX do not bode well for gold. If one could tell me what these three things just mentioned will do the next day, or the next or the next, I think I would have a pretty good idea what to expect from gold but since none of us know for certain what we are going to get, especially in the way of stock market moves, the jury is out on gold with the short term technical dictating the price action at the moment.

Also, the Dollar is back down near the low end of its 85-87 range. What it does will also determine what gold will do. Tell me what the Dollar will do tomorrow, and I will tell you what gold does. In other word, short term technical will rule this market while traders wait for other fundamental inputs to plan their next approach to the metal.



Today's Comments Delayed.

Please check back later for some comments, especially on the grains, that I will get up. Busy afternoon today...

Saturday, October 18, 2014

S&P 500 Performance Compared to Federal Reserve Balance Sheet

A couple of charts for your weekend reading.

The first compares the S&P 500 to the overall size of the Fed's Balance Sheet.

The next compares the overall rate of growth of that same Balance Sheet on an annualized basis. Note that slowdown in the RATE OF INCREASE in the Fed's Balance Sheet.

This is important to note - the Fed's balance sheet is still expanding, albeit at a declining rate of growth over a 52 week look-back period.

The Fed, of course, threw the markets are curve ball last week when their minutes announced that the "disinflationary impact" of the strong US Dollar was forcing them to revisit their previous plan of hiking interest rates. Essentially the stronger Dollar has been working at cross purposes to the Fed's goal ( a goal that of the rest of the Western Central Banks also share I might add ) of inducing a 2% annual rate of inflation.

The markets readjusted to that new information by effectively stalling the sharp climb in the greenback. The Dollar chart has not however turned bearish - rather it has merely halted the uptrend for a while.

Traders and investors are going to continue closely monitoring economic data releases, especially the payrolls, to see if there is enough strength to allow the Fed to move back towards a mid 2015 hike or if the data is simply too weak. Right now no where knows for sure thus the most likely path of many markets is one of consolidation or sideways trading. Uncertainty has been injected once more by the Monetary Masters.

The easy money might be over in some of these markets for the time being as trendless markets have a nasty habit of whipsawing traders mercilessly. Lots of hedge funds can and will be chopped to shreds in such an environment because their computers are too damned dumb to trade ranging markets. They are great at making their owners look like geniuses when a strong trend is underway; when the trend dies or halts and the markets take on more of an aimless or bouncing behavior, they cannot trade them. Many will go the sidelines understanding the limitations of their mindless machines.

Trading range bound markets requires real skill, and real finesse in accurately reading a market - as just the time the computers get all bulled up, the market reverses on them. Same thing goes in reverse when the markets look most vulnerable to dropping lower - they reverse higher leaving everyone who sold them having sold into a hole.

Traders - tread lightly out there and do not be reckless right now.