"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


Tuesday, August 19, 2014

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.