"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


Friday, September 19, 2014

Speculators Remain Net Long as Gold Drops Lower

I picked the headline because I wanted to add the following: "And are losing money".

I am attaching two charts to this short post. The first is the overall COT positions from today's report.

Take a look at the lines reflecting the positions of the various groups of speculators. Note that all three groups, the Hedge Funds, the Other Large Reportables and the Small Specs or general public, all remain NET LONG in gold. And guess what - they are all losing money.

Also, what concerns me is that based on this Friday's report, there are still more than a considerable amount of these losing positions left to unwind. As of the close of trading business on Tuesday ( the day through which the weekly report covers ) the price of gold was $1236.70. As of the close today, it was $1216.60 or another $20 lower. There is no doubt that the breach of downside chart support levels has taken out more of these spec longs, but the question is how much pain can they endure, especially when margin calls begin mounting?

The next one is a close up of only the Hedge Fund positioning in relation to the gold price.

What stands out to me is the fact that most of the hedge fund longs are now underwater in a bad way. This is the category in particular that can really move markets due to their sheer size and the amount of firepower at this disposal. They are running, of that there is no question. What IS the question is what is their threshold for tolerance of pain.

Some will hold on until or unless $1180 is broken. Some will exit if psychological support near $1200 collapses and gold then changes handles once more from "12" to "11".

Also, I am not taking into consideration that many hedge funds are now moving more to the short side of the market.

Look at how quickly they moved over to the short side of silver and look at what they have inflicted on that metal. They broke it down below $18.60, then $18.00 in no time flat.

Switching gears just a bit... here is the US Dollar index chart. King Dollar is definitely back once again! The greenback put in the BEST WEEKLY CLOSE in more than 4 years, 51 months to be exact!

In looking over the chart, I do not see much in the way of overhead resistance until near the 86.50 region. If the Dollar does not receive some sort of negative news from some quarter, further strength bodes ill for the precious metals.

On a closing note for now, today's Cattle on Feed report was a tad on the negative side with placements coming in a bit higher than the market was looking for. It should be pointed out however that the placements number in and of itself, is the smallest number since 1996. So even though the number was larger than what the market was expecting, we are still not exactly being swamped by an excess of feeders.

Cash trade did break loose this afternoon at $1.59, which was down from last week. That is still higher than October cattle are trading which remain at a discount to the cash markets; however, the lower cash and slightly less friendly COF report might bring a bit of selling into the market early Monday morning. We shall see as trading those reports can be notoriously vexing at times.

One last thing - the weather forecasts out through the end of the upcoming week, show nice, warm, dry weather - excellent for harvest in those areas where the combines are rolling and for finishing the crop up in the more northern latitudes.

New crop corn and beans are already flowing into the pipelines and that is being reflected in the basis in those areas where harvest is ongoing.

Grain Markets coming to Grips with Reality

There are two factors that are now finally becoming begin to seriously take hold among those who kept insisting that grains would experience a bounce higher. The first of these is the sheer size of the upcoming harvest. The latter is the strength in the US Dollar.

Early harvest results are rolling in and they are impressive! With forecasts calling for warm and mostly dry weather, harvest progress will continue as the combines move north. As the actual results are known, traders are realizing the old adage that, " a big crop gets bigger".

All three grains/beans are lower this morning with beans looking like they are accelerating down. I am most interested in seeing this afternoon's COT reports on the corn because I want to see if any of the large specs ( hedge funds and other large reportables) are still net long corn or if they have whittled down those positions any.

My concern for corn is very simple - IF, and this is a big "IF", that just-mentioned group remains as sizeable net longs, corn is in danger of having more downside than many are currently thinking. The reason? Those guys are going to have to get out of those losing longs.

Now, even if they are spread against wheat, and so far that spread has been performing admirably with wheat fundamentals even more poor than those of corn, lifting those spreads entails a lot of corn selling that will be hitting this market at some point.

Here is a picture of the spread:

As you can see, it has been a most profitable strategy. If the spread moves too much in favor of corn however, livestock feeders will switch over to wheat. The spread has not moved much over -$1.20 with some resistance near -$1.40 so one wonders how much more upside this spread has.

Here is the wheat chart: Talk about ugly! It hit a 51 month low this week. Even at that, the thinking is that US wheat prices are still not low enough to attract solid export business due to the global glut and the stronger Dollar.

And now for corn - again, one ugly chart; however, beauty is in the eye of the beholder and for livestock and poultry producers, this chart is a thing of wondrous beauty!

That brings me back to the commodity complex as a whole. This week's FOMC statement and its hawkishly construed message, has sent the Dollar higher and the commodity complex as a whole, lower.

With the index moving lower one can expect to see both copper and silver heading down and that is exactly what both are doing. Copper is clinging to support near and just above the $3.06 level while silver crashed and burned through the $18 level. If silver cannot recapture that level quickly, a test of $17.50 - $17.35 is its next stop. Below that and things get very ugly as it could easily fall below $16.00.

As for gold, as you can see on the chart, it is clinging for dear life to the bottom of the support band noted. Based on what I can see from this chart, there is little in the way of further support until one gets back down to the former double bottom low near $1180. There is only what I view as "psychological" support near round number $1200 but I suspect that will not hold if the Dollar index runs past 85.50. If gold does manage to get down to near $1200, Asian buying will no doubt be active but it will be insufficient to sustain the metal if Western interests become aggressive sellers. Along that line I am closing watching reported GLD holdings and to some extent, the action in the gold mining shares, which incidentally, look very heavy at the moment.

We have a cattle on feed report due out this afternoon which will give us some further insight into the state of the US cattle herd. One wonders how long cattle are going to be able to buck the general selling trend being seen across the rest of the commodity complex, especially with high-priced US beef rapidly pricing itself out of the export markets. Feeder cattle also continue to defy gravity as cheap corn and abundant pasture spurs buyers to pay these outrageously expensive price for available animals. That being said, these kinds of prices, given what the board is showing for spring and summer cattle prices, are essentially guaranteeing losses to feeder buyers. One wonders how long that can continue. For now cattle bulls, especially in the feeders, are vigorously defending their positions. They seem intent on not surrendering and have the money to back up their stance it appears.

A week from today we get the quarterly Snout count or the Hogs and Pigs Report. That is always a lot of fun.

By the way, with the Scottish vote coming in a resounding "NO" in favor of independence, it was interesting watching the action in the British Pound last evening. As the first results started rolling in favoring remaining in the Union, the Pound began to rally. However, after the final vote was tallied the currency began to slowly relinquish its gains and is now firmly lower. This is a matter of "buy the rumor, sell the fact". The forex markets have an uncanny ability to predict election results as the Pound began rallying earlier this week AHEAD of the vote. Currency traders were clearly voting with their pocketbooks that the vote was going to be one of staying in the Union. Once the vote was cast and the results tabulated, there was no other reason to buy the Pound so down it went against King Dollar.  We are firmly back to trading interest rate differentials it would seem.