“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

Tuesday, April 22, 2014

Goldman Sachs Saves Gold from Falling Apart

Yes, you read that headline correctly, much to the chagrin of the GIAMATT crowd. What am I referring to? Answer - this morning, two analysts from that firm upgraded their recommendation on the precious metals mining sector to "Neutral" from "Sell". They cited " a more responsible use of shareholder wealth". I found that rather interesting to say the least.

What was even more interesting was the headline that the story came down the Dow Jones wire under: " Gold Miners Now Less Likely to Torch Your Money". While it is a serious matter to those who have been so hurt by investing in this sector, I had to chuckle at the caption that the reporter chose. I think it pretty much summed up the sentiment of many toward these miserable things.

It was this upgrade of the miners which kept gold from utterly collapsing below critical chart support centered around the $1280 level. Hedge fund selling leaned on the market early in the session with a couple of approaches to $1280 on decent volume. Price rebounded away from that support but could not manage to make much upward progress. A big push finally took it down through $1280 but with the gold miners refusing to follow, short covering took the price back up again.

Obviously, there is a fierce battle occurring over this chart level. Whichever side blinks first, is going to lose it. As mentioned in recent posts, speculators are becoming more interested in playing gold from the short side, although, I wish to reiterate, they remain net long still. They are selling while bullion banks are buying to cover shorts. Ignore any talk about this being a plot of the bullion banks to take gold lower therefore.

Hedge funds are already net short copper, very close, if not already there now, net short silver, and are reducing their net long exposure to gold. If the gold price cannot find its feet right here, right now, watch for increasing long side liquidation and a new wave of fresh shorting.

Here is a look at the gold chart:

Notice how it is flirting dangerously with that red line that has held it going back to early this month. If it cannot recover quickly, price should move to test $1260, and then $1240 if that were to fail. Again, were it not for that Goldman recommendation on the mining shares, we would not be talking about $1280 at this point but rather whether or not $1260 is going to hold. Those who keep with this non-stop gold is being manipulated lower by Goldman Sachs and JP Morgan talk would do well to thank them at this point for saving their investment account from even worse harm.

There is nothing gold for the bulls as far as any sort of upside potential unless gold were to push past $1320 for starters. We'll have to see how Asia responds to the move lower this evening. Last night was not exactly a stellar endorsement. Maybe picking up the metal another $7 - $10 lower will make a difference.

Incidentally, those Newmont Mining/Barrick merger rumors are continuing today.

It sure did not help gold any today watching crude oil get whacked lower. It is still trading above the $100/barrel level so it is not exactly falling apart but it does appear that the $105 ceiling is still very much intact.

In yesterday's post, I mentioned the planting progress or more properly, the lack thereof, in regards to corn. The "corn is never going to ever get planted this year" guys pounced all over that driving it back up above the $5.00 mark. That pressured beans as traders are concerned more farmers will have to shift to beans instead of corn. You will have to watch the weather forecasts to figure out which way these things will go from here on out.

 Welcome to the start of grain trading season!

By the way, for those who enjoy inflicting pain upon themselves, try trading coffee if you are bored. After imploding early last week, it went flying upward on Thursday last week just about erasing the losses from the two previous trading sessions. It then fell yesterday but decided to rally over 7.5% today. In the process it managed to score a 9 week high. To put that in a bit of perspective - that is an over $4,200 move in a single contract in one day! Maybe tomorrow or Thursday it will give it all back up again. Seriously, unless you really know this particular market, leave it alone. I know a couple of guys who traded that stuff and ended up having it cost them their commodity trading career.

I mention it only as an example of just how wild and unpredictable these commodity futures markets have become on account of the computer generated buying and selling. It is the norm, not the exception. Remember that whenever you are tempted to swallow that "flash crash" nonsense that constantly surfaces whenever gold has a sharp move lower. These sorts of insane price swings are everywhere, in every market anymore.

Let's see how gold fares the rest of today. Perhaps I will post a more updated chart later this evening depending on how things go. Bulls are piggybacking on Goldman's recommendation to keep the price supported for now.

Monday, April 21, 2014

Gold Holds $1280 support; Remains Rangebound

Not much going on in gold today - it ran down to test the bottom of its trading range near $1280 and bounced off of that. Strength in the Dollar and a general sea of red across much of the commodity complex, undercut any reason to get aggressive buying it but enough interest was stirred down near that critical support level to prevent a sharper drop.

Gold shares were of no help for most of the day with the HUI exhibiting general weakness but towards the end of the session many of the share components of that index managed off their worst levels of the session. Gold over at the Comex seemed to come up alongside some of those shares.

I noticed that GG moved higher, gaining over 2% as I type these comments as management has effectively given up on their efforts to acquire Osisko. The market liked that in regards to GG but understood the implications for Osisko with that stock dropping 5.8% as I type this. That effectively clears the way for Yamana and Agnico-Eagle to pick it up. Both of those stocks were hammered lower. Obviously the market thinks they are going to end up paying too much for it given the weak gold price and its rather dubious prospects at this stage.

It will be up to the Asians to prop this thing up tonight here in the West ( in the morning over there in the East ). If they pull back for any reason, gold is in trouble. We'll watch the overnight trade and hopefully be able to see some clues as to their intentions.

The late comeback enabled the HUI to dodge the proverbial bullet today as it was flirting with a key technical chart support level near its session low. The bottom is holding as a result; however, any further strength in the US Dollar will probably see that fail. The currency markets, along with the US interest rate market, are the key drivers for gold right now.

Corn moved lower today, along with wheat which was derailed by talk of rainfall in the parched regions where it is badly needed. Beans were also pressured today although the bulls did their usual ramp job on the close as they came in and bought a bunch of them back. There was also a round of short covering as frustrated bears waiting for the funds to finally get out of these things got impatient and said, "the hell with it" and closed out some trades. Some large specs are convinced that the US is going to run out of beans before we get any of the early harvest from this year's crop coming in and that is why they keep coming back and buying the beans. When this theory/sentiment shifts, we will know it.

This afternoon we got the plantings progress number from the pencil pushers. Corn came in at 6% planted compared to last year's 4% at this time and the 5 year average of 14%. I would remind you that these numbers are not nearly as important as they once were given the significant advancements in the speed at which US farmers can get those seeds in the ground nowadays but old habits seem to die hard in the grain markets and there are some who still view these numbers as if they mean anything this time of the year. They still have enough clout as far as their buying and selling goes that one has to react to this goofiness but it is what it is and traders have to understand that and position accordingly. Both corn and soybeans have built up a nice demand base as prices retreated from all time highs last season. The question is, especially for beans, will that demand base remain intact given the potential for a large bean crop up here in the Northern Hemisphere this growing season. Along that line, any more credit related issues concerning the Chinese and soybean purchases is going to be ONE VERY BIG DEAL.

Cold Storage will be coming out this week so we livestock traders will be watching for that. I enjoy getting the emails and comments from some concerning the sky-high prices that they are seeing for both pork and beef in their local grocery stores. The drama is playing out as expected. What I can tell you is that I am very confident that we will see prices move lower this fall for both but this spring/summer is going to be one which is not going to be a lot of fun for those of us that enjoy bar-b-q. Sadly, this is what happens when we get back to back drought years  in cattle country ( 2011 + 2012) along with record high prices for corn and meal ( some blame goes to that pestilential ethanol crap). One simply cannot do a single thing to change the breeding cycle of bovine bovinus ( that is my pitiful attempt to throw some fancy Latin phrases around to impress the reader ) as it takes time to rebuild a cattle herd.

I hope the readers had an enjoyable Easter weekend. It is back to the sawmill now.

Saturday, April 19, 2014

Weekly Gold Chart

I wanted to take just a short bit of time between firing up the pit smoker and throwing some bovine flesh upon it to put up a quick chart of gold for the readers.

As I mentioned on Thursday, gold is totally at the mercy of events in Ukraine for the time being.

You can see on the chart that the metal has been range bound for some time now ( about one year ). Please keep this is mind when you read more breathless talk about gold being poised for a big move "any time now". How many of these "any time now's" have we read over the last year? Whether it is the GOFO talk or backwardation talk or "Russia is going to dump the Dollar" talk, or whatever.

Technically not a single one of these premises, or others not listed, have changed the technical posture of this market for a year.  If and only if the price breaks out of this range, can we say with certainty that the market has become concerned with these things. For now, it could care less and thus neither should we.

The green rectangle defines the range which is near $1400 on the top side and just below $1200 on the bottom side for a range of some $200. Just last month ( March ) the price had rallied up to the top of the range only to meet with selling. That pushed it back down with it looking likely that it was headed down towards $1200 once more. However, events flared up in Ukraine and gold received some strong bids due to safe haven flows. Those bids came in near $1280.

The circumstances due to these geopolitical concerns have created a new and higher bottom at the $1280 level. However, gold has been unable to push past $1320 for any length of time. That has carved out a new range within the broader range. This is marked on the chart as "Tighter Trading Range".

These two levels are our new boundaries which are confining the price for the time being. If the market senses any lessening of tensions in Ukraine, chances are that $1280 will not hold on the bottom. If not, there is a band of congestion between $1260 - $1240 that will draw it like a magnet should it fail. There is little support between $1240 and $1200 meaning that if $1240 were to fail, $1200 will be tested.

On the upside, only a breach of $1320 would give the bulls the needed impetus to make a run to $1350.

If events in Ukraine fade from traders' minds, the focus will shift back to US economic data with participants looking for clues to the Fed's future actions on in US interest rate front. Any improvements on the jobs front will immediately fan the flames of higher interest rates next spring, which the market continues to waver back and forth on. Higher rates will pressure gold as it should support the US Dollar. Again, we do not know what the economic data will look like and thus that leaves the markets very susceptible to sudden and sharp price swings either way as price responds to changes in expectations or sentiment along those lines.

Lastly, here is the current Commitment of Traders data viewed in chart form as to the positioning of the large hedge funds in comparison to the price of the metal.

There was a rather large shift this week in the positioning of the hedgies as they were both liquidating stale longs and adding new shorts. The combination dropped their current net long position by some 8000 contracts or so. This is the reason for my concern if the $1280 level does not hold - there will be a significant amount of long liquidation among this category of traders if it does not.

In another interesting development, the small traders, the general public, were selling gold this past week as well. Is the bloom coming off the metal for this category? They are net long still but this is the least bullish they have been in five weeks. Sentiment could be changing in the speculative community and that will bear close monitoring.

Happy Easter.

Thursday, April 17, 2014

Geneva Talks Pressure Gold

"She loves me; she loves me not", could be the expression best used to "time" one's entry into or out of the gold market lately. Just look at the headlines I have chosen to employ the last few trading days and you will get the idea. Back and forth they have gone as the mood of the market has been flipping from day to day. Most of gold's recent gains are related to the situation in Ukraine; take that away and the other fundamental factors remain bearish. Gold is therefore ultra sensitive to any sort of swing/change in what is taking place over there.

Today, apparently talks in Geneva ( 6 hours worth ) between the US, Russia and the EU, yielded some fruit, at least in the mind of traders. A framework was agreed upon which it is hoped that tensions could be throttled back. We'll see how that goes but for today, it was negative for gold prices, especially with yields on US Treasuries rising and a stable to firm Dollar. The yield on the Ten Year jumped today to 2.721% as I type these comments from a low near 2.60% earlier this week.

Again, at the risk of beating a dead horse, buying gold based on geopolitical tensions is always tenuous at best because as soon as those tensions are viewed as diminishing, gold is going to come under selling pressure not only from longs who are seeking to book any gains that they might have achieved before those are lost, but also from opportunistic shorts who are hoping for additional long liquidation to take the market down into sell stops that they have been eying.

We got that today in the form of a breach below psychological chart support at the $1300 level. Once gold lost that "13" handle, the stops kicked in and took it down sharply. It did get some buying right above $1290 but the technical damage was done at that point.

Looking at the daily chart, the market looks heavy heading into next week. Keep in mind that we have a long holiday weekend in the West with Easter coming up. That means a lot can happen between now and Sunday evening ( in the West) or Monday morning in Asia. If we do not see any flareups over in Ukraine over the weekend, gold could be in for some more selling come then. Everything is contingent on events meaning the market can go either way.

Back to the chart however...The big move down on Tuesday this week has cast a bearish pall over the market. It did bounce from the support level near $1280 but that was due to events in Ukraine. Two things have happened as a result of this. First, is that the price fell BELOW the 50 day moving average on Tuesday; that is negative. Then today, it fell BELOW the 200 day moving average once again. It should be noted in a trendless market moving averages are notorious for producing whipsaws but nonetheless, technicians keep an eye on these things to try to gauge just who might have the upper hand, bulls or bears.

The support noted is not that far off meaning if tensions lighten up a bit over the weekend, we will more than likely see gold test that support level. If it holds, fine. If it does not, $1260 will be seen in short order followed by a trip to $1240 if that fails to stir up active buying. All of this to say one simple thing - $1280 is shaping up to be a most significant chart technical level. If the bears crash it, watch for them to really pour on new, fresh short positions.

The ADX continues to move lower indicating the trendless feature of this market. The trading range, once between $1400 and so on the top and $1280 on the bottom has now constricted to near $1320 on the top with the bottom remaining the same. Bears are currently in control based on the directional movement lines.

A big contributor to the lack of upside enthusiasm in gold continues to be the poor showing by the gold mining shares. As mentioned yesterday, the market does not like these bidding wars it is seeing among some of the larger firms and is punishing their stock prices as a result. By more importantly, look at the technical price chart of the HUI and you will see what the problem is:

The HUI ended last week on a horrible note and it has been bleeding lower for most of this week. As things now stand, it is precariously perched just on top of chart support near 216 closing in the lower half of today's trading range. If it loses that, there is not much in the way of help until the index would near 211- 210. If 210 were to go, all bets would be off for the gold shares as one could begin to make the case that the index is on course to surrender all of the gains of the year. Let us hope not for the long suffering bulls.

Disgruntled Bulls - Please keep the hate emails and the nasty posts to yourself as I am just relating how things could shape up from a purely technical posture.

The overall commodity sector ( as a whole ) is working higher adding some support to gold but as far as any sort of upside trending move higher, the GSCI is not indicating one at the moment. Instead we see the index continuing to make a series of lower highs and relatively stable lows. Keep in mind something I wrote yesterday - this index is designed to key off of the most active or front months in the commodity futures markets. Currently a goodly number of these markets are showing markets in a backwardation structure. What is important to note about this is that the futures markets are anticipating a comedown in commodity prices as we move deeper into this year. Markets, being forward looking by nature, are discounting any serious threat of upward price pressures later this year. Of course, unforeseen events, especially weather, can always trigger reassessments of such things, but for now, the markets are signaling a break in upward price pressures in the commodity sector towards the third quarter of this year.

Along this line, economic data coming out of China will be closely scrutinized.
There are already rumblings of credit issues in that regards involving Chinese buyers of soybeans. That is not insignificant and will be closely watched due to its implications in the grain markets. Old crop beans seemed a bit nervous about this today although with the way the funds have been buying them, they did not break down all that much. Quite frankly, that soybean market makes me nervous. There remains a large number of farmers who are sitting with last year's beans in their storage bins who apparently will not let go of them. I have no idea what they are waiting for. If the function of the market is to ration demand, it is certainly doing that judging from the export numbers we got this morning. Maybe we need to see another week of poor numbers to convince some of these guys that prices are getting rather lofty. The thing is however, as long as the funds can push them higher without any serious hedge pressures from commercial entities, they are going to do just that. Standing in their path is a quick way to become a "former" commodity trader.

With the markets being closed for Easter, it will be a nice break away from the madness. We Christians celebrate the Resurrection of the Lord Jesus Christ from the grave as the evidence that His sacrifice for our sins was accepted and that they are now atoned for. We also believe that the resurrection is proof that Jesus was who He said He was, namely the Son of God. For those who believe, it is a glorious message!

"I am the resurrection and the life; he who believes in Me, shall live, even if he dies."   ( John 11:25).

Happy Easter! 

Wednesday, April 16, 2014

As Ukraine Heats up so does Gold

Gold is being batted back and forth between two opposing forces at the moment. The negative force continues to be the slowing Chinese economy with traders fearing a slackening of demand from that key consumer. The positive is escalating tensions in the eastern part of Ukraine.

Separatists, or pro-Russian citizens, are continuing to clash with pro-Western citizens with the Ukranian military getting more involved, although there have been reports of defections over to the Russian side from some Ukranian military units.

This is supporting gold, as is the weakness in the US Dollar.

Much is being made in certain gold perma-bull websites about rising meat prices as evidence that inflation is here to stay. Such stories are meant to justify claims that gold should be moving significantly higher in anticipation of even further upward price pressures but such stories are inflammatory and not forward looking.

Wholesale meat prices have already peaked out. My view is that we have seen the highs for this season for both beef and pork prices. As we move further into the year, particularly towards the end of the 3rd quarter and on into the 4th, look for prices to fall significantly from current levels. What is currently being witnessed is the catch up in the retail price of red meat as it takes a while for the more recently killed, higher priced product to make its way into the food distribution channel. By the end of this year, and certainly by the beginning of next year, beef and pork prices will have come down considerably from current sticker-shock price levels.

The same goes for soybean prices ( barring any serious weather event this growing season ). New crop beans are priced a whopping $2.70 below old crop beans as the market is moving on historically tight ending supplies of beans. With record acreage going to beans this growing season, we should also see some relief from these high-priced beans as well, although it will take some time before the market feels comfortable enough to push bean prices lower.

Corn prices are pivoting around the $5.00 level. While they have come off the lows near the $4.00 level, they remain far below the historic peak near $7.75 - $8.00. Wheat is reacting to continued dryness in key growing regions of the Plains but some of its premium is also due to the Ukranian situation. Traders fear supply disruptions from this key wheat-growing region and have bid prices higher in anticipation of possible shipment disruptions associated with the unrest over there.

The GSCI or Goldman Sachs Commodity Index is trading up near the top of its range as several commodity sectors have been moving higher. If it could clear 680, we might have something in the overall sector indicating some strong upward pressure and a breakout but so far the current board structure in many commodity futures markets is not suggesting SUSTAINED higher prices.

If China continues to slacken further, traders are not going to feel comfortable committing large sums of money into the sector in general.

The Dollar is basically going nowhere as it remains trendless. When it weakens, commodities, especially gold, tend to get a bid. When it strengthens, the opposite is generally true.

Nothing has changed in that regard.

We are back to watching geopolitical events and trading around those for the time being.

By the way, China's GDP number was a tad bit better than the market was looking for but even one of their officials said that the double digit growth that had marked it for some time was over. Gold popped a bit higher when the number came out last evening expressing a sigh of relief.

Tuesday, April 15, 2014

China Demand News, Lessening Ukraine Tensions Sink Gold

Last evening I posted the news concerning the World Gold Council's report about Chinese gold demand for 2014. Please see that post for the details.

Also, chatter continues to surface that China's economy is slowing. Now whether or not that is indeed the case can be argued, ( I tend to think that it is because of what is happening with the price of copper )  but many traders are viewing such talk as bearish for the price of the metal. The reason? If the economy slows the thinking is that there will not be as much money around with which to buy gold. Along this line is news out of China that its money supply grew only 12.1% in March compared to the same period the previous year. The People's Bank of China has a target of 13% growth. This is the first time since April 2012 that the target has been missed.

Another way of saying this is that Chinese credit growth is slowing and that has the buyer of both base and precious metals spooked ( palladium and platinum have been running on Ukraine issues ). This is the reason that silver is getting whacked with an ugly stick today and why copper is swooning once again.  

Traders are going to be watching the GDP numbers for China due out overnight here in the US. This will more than likely be a market mover for copper.

Remember, I am just telling you what the market is trading on; I am not saying it is gospel truth so please, gold perma-bulls, keep the nastygrams at a minimum.

Related to this are reports about Chinese use of gold for collateral in financing business deals. Estimates vary about this but the Financial Times reports that the WGC estimates it may be a high as 1,000 metric tons. That is not an insignificant number!

Today, if that were not bad enough for gold, traders interpreted President Putin's call for talks for a diplomatic solution to the situation in the Ukraine as a lessening of tensions. That is taking some of the risk premium out of gold although traders are reluctant to press it down below support at this time as that situation is anything but resolved. Still, any ratcheting down of tensions is negative to gold.

It must be kept in mind by those who buy gold based on geopolitical events that this is perhaps one of the most riskiest of reasons to buy the metal. I have said it before and will repeat it - price rises in gold due to geopolitical events can and will evaporate just as quickly as they began. Remember that when you bet the farm on more "end of the world as we know it" talk coming from the gold bugs.

Most seasoned traders look to sell such rallies knowing that once the event is full priced in, there is no longer any fuel for a further rally unless things worsen beyond what the market has currently priced in. It is the old adage of "buy the rumor and sell the fact".

From a technical perspective, nothing has changed in relation to gold in one iota. It is still in a broad trading range. Our old friend, the $1280 region continues to define the lower portion of the range while the top of the range has been pressed lower towards $1320. To change the complexion, one or the other level must give way. If the bulls can break through this week's high, they should be able to reach $1340 where another test will occur. On the bottom, a breach of $1280 would portend another drop of $20 towards $1260. Support is layered in $20 increments.

Once again the usual claptrap about GOFO and backwardation in gold has surfaced. Ignore it and listen to what the market is saying. Gold is range trading - no more and no less.

By the way, for those of my European friends who trade the yellow metal, Euro gold has support near the 930 level. Resistance is near 960 followed by 980.

A quick look at silver by request.... notice that while the metal has bounced off its initial level of chart support shown by the upper red rectangle, it has as of yet, been unable to move convincingly above it. A close BELOW $19.50 and the odds favor a move down towards $19 once again.

The metal remains below its 50 day moving average, which is bearish. Also, the ADX, while it has been steadily falling indicating the lack of a clearly defined trend is showing some subtle signs that is has stopped falling and may be getting ready to rise. If, and this is a big "if" at the current time, we see it breach $19 and be unable to get back above it, the ADX will be rising indicating the potential for a fresh leg lower in the metal. That would set it on course to fall towards $18.35 - $18.20.

On the grains front - soybeans continue moving higher as that tight old crop carryover situation here in the US has resulted in a bidding war for available supplies, in spite of the fact that the big S. American crop is now workings its way into distribution channels. The market is ensuring a huge acreage number for this season here in the northern hemisphere. Farmers are no doubt going to oblige.

The beans seem to be pulling everything higher including wheat and corn, which is off to a slow planting start this season. I personally have learned to ignore all that talk about "slow plantings" because too many of these newbie traders have never seen a piece of modern farm equipment but the fact is that the market still reacts to this sort of talk so one has to respect it. As mentioned in a previous post, I am hopeful for large and healthy corn and bean crops this season up here as our livestock and poultry producers need a break from this high priced feed.

The Euro failed at 1.39 and has now fallen to 1.38. There is some support on the charts near the 1.37 level. If that fails, we could see the beginning of a trending move lower for the Euro.

One last thing - any of you hog producers out there, please be mindful about what I wrote this weekend about 4th quarter hog prices. Don't let the wildly bullish talk from some who keep talking about how "cheap" 4th quarter hogs are in relation to the summer months beguile you into missing out on locking in some excellent profits. They are cheap for a reason!

Traders - keep in mind that I am speaking about producers who have to manage price risk and can secure good to excellent profits in their expected production with strategically placed hedges. They must take a different approach to markets than we speculators.

There are several option strategies which can be employed. Talk to your broker if you have any questions. One can secure price protection on various percentages of expected marketings while keeping some open as "gambling stocks" in the event of higher prices later this season. Just be careful as a great deal of uncertainty remains in this market and that is causing some wild swings in price. That will continue until the market settles this virus issue one way or the other. If you roll the dice betting on nothing but higher prices, your odds of getting it right are 50-50. I would not want to bet the farm on that especially if I had the opportunity to guarantee myself some good profits and thus sleep well at night.

Monday, April 14, 2014

World Gold Council Report Pressuring Gold

The WGC just laid a heavy weight on the gold market this evening as their report detailing Chinese demand for the metal ( or more properly - its lack thereof ) is getting more circulation.

The reason? They expect demand from China to remain flat in 2014. That is a far cry from what has been the norm since 2002, from whence gold demand has increased every year since.

The report mentions what most of us who follow the gold market closely already knew - namely that Chinese gold demand in 2013 vaulted a remarkable 32%. Of course, that was the result of the very low price to which gold had fallen from its lofty perch up above $1900. China loves a bargain and gold was at bargain prices last year.

Dow Jones cites the managing director for the Far East at the World Gold Council as saying that they expect gold demand for 2014 to be 'on par with 2013'.

Gold began to drop sharply as the report circulated. My own thinking is that were it not for the current escalation in Ukraine tensions, it would have suffered much harder.

If WGC report is indeed accurate, and apparently many are thinking at this hour that it is, gold is going to face yet one more additional headwind. Remember, it has been this strong physical offtake from Asia, especially China, that has tended to bottom gold prices in the past especially in the face of reduced Western investment interest in the metal. If that Chinese buying fades, and if interest rates here in the US begin to perk up, gold could be in trouble.

It is too early to say yet, but bulls had better not blink or they are going to be playing defense. Funds, while still net longs in this market, are beginning to add to their short positions.

Saturday, April 12, 2014

Looking Closer at the Pork Market

Not that long ago I sent up a post about the Quarterly Hogs and Pigs Report issued by the folks over at the USDA. I took issue with some of that data as it conflicted with their own weekly slaughter data. Whether that is here or there no longer matters in terms of the futures market reaction because ultimately, the markets always have the last word on these things.

I have to always laugh at the commentary coming out of gold community when the breathless remarks about flash crashes makes the rounds as if somehow such things are unique to only the gold market. Those who regularly trade the ag markets can vouchsafe for the sharp increases in volatility and extreme intraday swings in price that now, sadly, seem to be the new normal.

The hog market has reached levels of volatility that I have never before witnessed in my entire trading career of nearly 25 years. I remarked the other day that they are much more like the old pork belly contract that some of us cut our trading teeth on. Just this week we went from limit down to limit up in the matter of less than two hours time without the least bit of news. I could blame it on JP Morgan attempting to suppress the price of hogs at the behest of the feds, but alas, that would be as ridiculous as those who continue to regale us with flash crash chatter and 1% mandated price caps in gold.

The reason for all this goes back to that Quarterly Hogs and Pigs Report we got at the end of last month. The simple truth is no one is really quite sure what the true impact from that devastating PED virus has been in the industry. We all know that it has been severe; what we do not know is the actual number of deaths resulting from it. In effect, the industry is still dealing with a huge unknown. That is contributing to the wild swings in price as those who disbelieve the report continue to buy any breaks in price while those who believe the report continue to sell any rallies in price.

One thing appears to be sure - the report has quelled the panic buying that was evident in the product market with wholesale pork prices now coming back down to earth after reaching levels that were unheard of. AT the risk of boring those who are primarily interest in gold, bonds and currencies and not the ag markets, the price of the pork trim that goes into making hot dogs, for example, jumped from near $0.63/pound at the beginning of the year to a eye-popping $1.45/pound earlier this month. That is an increase of over 100% in 4 months' time! I wonder if the folks over at Oscar Meyer and BallPark have recovered from their shock yet!

There is one bit of evidence however that shows, in spite of the impact from the disease, things are not quite as dire as many expected.

Take a look at the following chart. It is the total pork production here in the US for each week of the year. I have included the year 2012 just for a reference point but am primarily interested in this year's production compared to the previous year ( 2013) to gauge the impact from the virus.

The BLUE line is this year's production while the BLACK line is last year's. Notice that we started out the year with pork production exceeding last year's levels as the impact from the virus was not yet becoming evident. In early March the impact then hit and did it ever hit! By the middle of that month, total pork production fell some 32-33 MILLION POUNDS below the level in 2013. The panic then started big time. Prices for wholesale pork, which were already rising in anticipation of a shortage this spring/summer took off in earnest as apocalyptic type predictions began circulating through the industry.

I quipped to one of the news wire reporters that the US hog herd had been completely eradicated by the virus.

Please note that I am in no wise attempting to make fun of the severe impact that those hog producers who have sadly been impacted from this virus have had to contend with. I have the utmost respect for our hog producers who battle regulations and other difficulties associated with feeding us.  We are talking about their livelihood being impacted and that is no joking matter. I am however merely pointing out how news stories take on a life of their own whenever prices start escalating. It was the same thing with gold back when it first cleared $1800 and then $1900 a couple of years ago. Some things never change in the markets, remember that.

Back to the chart however - notice what appears to be happening with that BLUE line however in relation to the BLACK line as the month progresses. For all practical purposes, it is at the same exact level as that from 2013. How to explain this when we have so many pigs being killed by this scourge of a virus?

The answer is in the weight chart shown below. Once again we have the BLUE line for this year ( 2014 ) in comparison to the BLACK line ( 2013 ). Hogs are coming in between  7 - 9 pounds heavier than at the same time last year. The average reader will be tempted to say, " So what?".

Look at it this way, if weekly hog slaughter comes in near the 2 million mark, that is an extra 14 - 18 million more pounds of pork each week. Please note that I am not allowing for waste - this is just for the sake of simplicity. What is happening is that hog producers, especially those who have suffered losses and who do have remaining hogs, are feeding them to heavier weights in an attempt to mitigate some of the impact from the disease.

Hogs, like cattle, are priced by weight. Assuming the quality of the animal is the same, a heavier weight hog or steer is going to fetch more money from the packer for its owner. Now an extra 7 - 9 pounds may not sound like much, but if you are selling a fair number of animals, that extra money from the same animal certainly helps out.

What appears to be happening is that while hog slaughter numbers are currently running below last year's levels, the total amount of pork actually being produced is higher than the losses from the disease would seem to indicate at face value. Heavier hog weights are offsetting a large amount of the reduced slaughter numbers.

The big question that the industry has at this point is whether or not we have seen the worst of the impact from the virus as the recent Quarterly Hogs and Pigs Report indicated we would or if the worse is yet to come this summer. No one knows for sure and that is what is contributing to the volatility in this market.

I will say this however, the fact that total pork production is running pretty close to last year's levels at this point, makes me very suspect that the extremely high prices we are currently seeing in the wholesale pork trade is going to continue for long. As a matter of fact, I am coming around to the opinion that we have now seen the worst ( or best depending on one's perspective ) of the price rises in pork and that this year's peak in prices seen earlier this month are the BEST we are going to see for the remainder of the year. Please note that I am speaking of the entire carcass and not individual cuts which may fluctuate in price as seasonal demand ebbs and flows. Still, in the case of trim for example, how can one justify a price increase of over 100% in 4 months' time when pork production is now running only slightly behind last year's levels? That is pure panic that produced such a thing - it is certainly not based on reality.

Hog producers might want to take notice of this and plan your risk management program accordingly. This industry has had some very difficult times over the last few years with corn prices soaring to all time highs near $8.00 and meal prices out of sight. Many producers have lost money for so long that they think they are hallucinating when they see these stratospheric prices in hogs and relatively cheap - by recent comparison - feed costs. I am glad for them as they are due for a break. However, one of the dangers of a market which is soaring upward and in which sentiment becomes so overwhelmingly bullish is that producers get caught up in the emotion and caution goes out the window. Why? Because they are just sure even higher prices are yet to come.

I would caution them to avoid making the mistake of allowing euphoria and greed to take the place of a sound risk management program. Hogs are at levels, even after the big retreat in price as a result of the Quarterly Report, where producers can lock in some incredibly, perhaps once in a lifetime kind of profits. Could they go higher? Sure they could - markets can do almost anything especially in our modern age of idiocy due to computers making trading decisions instead of human beings. But, they could also go lower, much lower IF, and this is a big IF, USDA's numbers actually get confirmed as being reflective of what is happening on the ground. Why take the chance especially if you can lock in GUARANTEED outstanding margins on some of your expected 2nd and 3rd quarter production. If you want to keep some out as gambling stocks that is fine, but why bet the farm on even higher prices especially seeing that the profits that the Board is currently guaranteeing you are ripe for the picking.

Also consider one more thing and this is from the technical perspective - look at the positioning of the big speculators in this market. Even after a sharp break in price, the big specs, HEDGE FUNDS and OTHER LARGE REPORTABLES, still remain overwhelming bullish on this market. Look at the positioning of the LARGE COMMERCIAL interests however, they are barely off an all time high RECORD SHORT POSITION. They expect lower prices, not higher....

This imbalance is not going to last forever. So far, the big specs have been willing to put their money at risk and defend those massive long positions by eagerly buying up dips in price as they are convinced that the worse of the impact of the PED virus is yet to come. Perhaps it is - perhaps it is not. If it is, then the big specs will have been proven to be correct ( much to the chagrin of the small specs who are siding with the commercials ). If it is not however, a mass exodus of speculative longs from this market would unleash a round of price carnage that would be devastating for any hog producer who did not take some measures to mitigate downside risk for his product.

I am especially worried about 4th quarter hogs as they are trading at levels which still seem rather bubbly to me based on the trend in total pork production that I am seeing. Fourth quarter hogs are still trading way above historical norms in price. I do not know if the current trend in these higher hog weights is going to continue the rest of the year - my guess is that it will as long as corn remains cheap. If it does, and if the expansion efforts that USDA noted in that recent Quarterly report continue, and which caught a lot of industry pundits by surprise I might add, we could see total pork production actually EXCEED last year's levels later this year.

I will admit that there are a lot of, "if's" in this analysis, but I note these things as one who has seen a lot of frenzies over the years of my trading career. They can end as suddenly as they begin with the result being a complete erasure of the entire move higher in a sector as the market moves back more toward historical norms.

One more thing and I am done - so far new crop corn is hovering around the $5.00/bushel mark. Beans remain expensive but that is mainly old crop. Soybean carryover should become more comfortable later this year, especially as market demand shifts to S. America. Let's hope that we have a good growing season for our corn and bean crops up here in the Northern Hemisphere this year with the result that we do not see any extreme price rises in feed costs. Hog producers, along with cattle producers I might add, have dealt with high priced grain long enough. They are due for a season of stable yet affordable prices for their feed. If they can get this, they should be profitable for the foreseeable future and that is good news to a group of extremely dedicated and hard working livestock producers.

Those livestock producers who can secure feed coverage and lock in profitable selling prices should do so knowing that they have secured themselves excellent profits and can sleep at night even while the computers wreak havoc in the futures market. They should also understand that they are not speculators but are producers - leave the betting to the specs.