“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

Friday, August 22, 2014

Agressive Hedge Fund Selling Plagues Silver

One look at the intermediate term chart for Silver is all it takes to realize that the metal has distinctly fallen out of favor with the hedge fund community.

Oddly enough, the hedgies made a big push into silver in early June of this year so much so that they managed to build the largest net long position that they have had in nearly 4 years.

The large Swap Dealers were more than happy to sell to them however with the result that once the "inflation is coming" sentiment ran out of steam, the hedge funds had no one left to sell to when they had to bail out.

Look at the collapse in those net long positions of the hedge funds and compare that to the above price chart in the second week of July of this year. Out they went and as they did, down went the price of silver. As said many times here - large speculators drive markets.

Don't worry however because we are assured from various precious  metal dealer commercials that a certain billionaire fund manager has predicted that silver prices "go north of $50 this year because China and India are trying to corner the silver market".

All I can say to that is it is one tall order! With 4 four months left in the year, inflation expectations had better change in one big hurry! Again, it is so tragic that people will run out and spend their hard-earned money and precious investment capital on investments touted by those talking their book instead of doing some hard-nosed, objective analysis of the markets.

When one looks at the various commodity sector indices ( I am currently using the Goldman Sachs Commodity Index) they are hard-pressed to find the least bit of inflation in tangibles. With the Dollar beginning to surge higher, and with the entire commodity complex under selling pressure, making the case for sharply higher silver prices is a fool's errand at the moment.

Can things change in that regards? Sure they can! The one thing about markets is that they are always changing. For the time being however, one must respect the charts and right now the charts are saying  that the notion of $50 silver before 2014 comes to an end is a  quaint fairy tale, without some sort of stupendous event occurring. Such claims may work to sell silver to the naïve and unsuspecting while enriching those whose main source of income is derived from ties to the metal, but they do nothing but discredit such carnival barkers in the eyes of objective observers.

I do not have the words to properly describe the disdain I feel when hearing these ridiculous commercials or when reading articles advocating heavy investment into the grey metal. The same people have been singing from the same song book for nearly 3 1/2 years now and have been utterly and completely wrong. One would think that shame and embarrassment would be enough to silence them but no, it goes on and on and on, hardly skipping a beat.

Here's the prognosis from the chart and let's leave it at that for now:

The metal is making a series of lower highs on the weekly chart while continuing to find buyers between $18.50 and $18.00. So far that support is intact. If one is inclined to own physical silver, it would make sense to look for opportunities to acquire the metal if it revisits those levels again. However, be prepared to sit on those holdings for some time without much in the way of overhead gains UNLESS the metal can burst through the $24 level and stay there at the end of a trading week. That would be the first sign that things might be changing in regards to silver sentiment.

 Keep in mind that markets can often sit for long periods of time in trading ranges, moving back and forth, or up and down and essentially going nowhere as they mark time. Silver could be carving out a range along those lines or the metal could fall through its lower support level and actually begin another leg lower. I honestly do not know what it will do in the future - guess what? Neither does anyone else. They can talk confidently about it but the simple truth is that unless they can foresee conditions across a broad variety of inputs a year out from now ( or a month or two years or whatever), they are just guessing, no matter how dogmatic that they might be about it.

Watch the charts instead. They are your friend and will let you know what the metal wants to do. Ignore the carnival barkers, the hucksters, the flim-flam artists with the extravagant headlines meant to regale you and think for yourself. Trading/investment is hard and demanding work - it requires a tremendous dedication to your craft and endless hours researching, comparing, back-testing, analyzing, etc. to be successful. Ignore the impulse to rush out and throw your money into some investment because someone with some sort of reputation is touting it at the moment. Do your own homework and then trust your own judgment.

So what if you make a mistake! Learn from it and if the chart tells you that the trade was not a good one at the moment, get out of it and try another asset class or another time. The market is not going to disappear. It will be there tomorrow giving you another opportunity to be successful but only if you learn from mistakes and learn to ignore the carnival barkers. The truth is that few ( if any ) of them are going to be there to take care of your family or loved ones for you. If you fail, what harm have you done to them? But you will have harmed yourself or your investment goals if you blindly follow these people. No one cares more about your investment goals and your personal success than YOU! Remember that!

Processors Still Chasing Old Crop Beans

The show must go on! The show I am speaking of is the continued squeeze of the shorts in first, the July, and then the August and now finally the September bean contract. Processors are trying to pull enough beans out of the hands of those who still own them to keep them supplied while they eagerly wait for the new crop to start flooding in.

The storyline of Feast vs. Famine or better, Famine vs. Feast, has perhaps never been more aptly illustrated in the soybean market than by the price action between the two crop years. As the 2013-2014 marketing year winds to a close, the tight carryover has resulted in a lack of deliveries as tight-fisted holders of the beans try to squeeze every last nickel out what they still own while the rest of the market braces itself for a massive harvest. This has sent the spreads widening out once more and made for a September bean contract which is pulling the entire grain floor higher as short-term oriented technical-based traders come in and buy.

ProFarmer was out with their usual news about how "disappointing" corn yields are going to be in Iowa this year, compared to what USDA is projecting but nothing that comes out of Pro-Farmer ever surprises me. That is putting a bid under the corn market as well.

I suspect we will see the game in the September bean contract continue as we head into the delivery process ( I believe FND is next Friday). It will be interesting to see if we have the same lack of deliveries that allowed the August to soar prior to expiration or if the holders of these beans finally decide to get rid of them while they can still fetch some of these stratospheric prices prior to harvest pressure commencing. The combines will be doing their thing in the Delta sooner rather than later at this stage. Expect some pretty wicked volatility in this contract as the days progress.

There is some heat coming into parts of the Midwest today and through the weekend but that has been preceded by fairly decent rains. Temps should fall off somewhat early next week. In my view, this is a very good scenario for the crops. With sufficient moisture in most areas, heat will work to speed development. It is one thing to have very hot temps without moisture; it is altogether another issue to have heat and moisture, especially when corn is through its pollination stage and beans are mainly setting pods or in the process of filling them.

Gold is hanging above support just above $1270. The support zone is noted on the chart. It extends from $1280 - $1270. A downside breach of this zone will send the market down towards $1240. Right now the only thing gold has going for it is geopolitical in nature. Ukraine, Gaza, ISIS, etc. From what I can tell at this point, large traders are selling rallies; however, there is enough interest coming in from those buying it for a safe haven from geopolitical unrest that it is not falling sharply. Range trade is still the name of the game in there. Some are squawking about Russia sending a humanitarian relief column into Ukraine without asking permission and that is firming the metal somewhat today after it was pressured early in the session.

Fed Chair Janet Yellen's remarks in Jackson Hole today were considered not friendly for gold as they were construed along the same line as the FOMC minutes released this week, namely, hawkish. Still, the decision to move on the interest rate front will be data dependent as it has been for some time now.

The Dollar is definitely on the move. The double from the FOMC and from Yellen's remarks this AM, combined with some decent economic data this week, has sent it moving strongly higher on the charts. The breakout from that band of congestion is impressive. There does not look to be much in the way of overhead resistance until one nears the 82.60 level. Resistance in the USDX seems to be coming in near the ".50" levels. ( 82.50, 83.50, 84.50, etc.).


In retrospect, it is now obvious that Draghi ( urged by Euro zone exporters) has gotten exactly what he wanted for, namely, a weaker Euro. Whether the 1.40 will prove to be a MAJOR LONG TERM HIGH in the Euro is yet unclear but it certainly is a Intermediate term high. With the Fed talking interest rate hikes and with some bemoaning "Europe's lost decade", higher interest rates are not coming to the Eurozone any time soon.

With the Euro perched precariously just above another downside support layer near 1.3200, any violation of that will allow the currency to drop another 100 points towards 1.3100. The RSI demonstrates how weak this market has been for some time now.

The way things are looking right now, homeowners in the US Northeast are going to catch a nice break this winter on their heating costs. Heating oil prices have been steadily moving lower throughout this year, but especially over the last few weeks. Price is approaching what appears to be a pretty strong level of support near $2.80 - $2.72 however. That might hold it. However, if we see crude prices continue to weaken, heating oil will likely melt right through this support zone. I want to keep a close eye on this market as we approach the 3rd quarter and begin to move towards the colder weather later this year.

Gold stocks continue their range trade as well. You can see the two large, well-defined ranges drawn on the weekly chart. Until price can break out from one or both of these ranges, they are going nowhere. The good news for the long-suffering gold stock bulls, is at least they have stopped going down! There is some steady accumulation taking place by those with a much longer investment time frame horizon but for those looking for momentum-based movers, this sector is certainly not "it".

Wednesday, August 20, 2014

New Crop Beans Set New Low

Excellent growing weather for the month of August ( ample rains and no excessive hot temps) are leading to ideal finishing conditions for the bean crop. Reports from the field indicate a big crop which is probably going to get bigger as USDA revises its regular updates as we move closer into the harvest season.

It has been the same old story about tight carryover stocks from the 2013-2014 crop that has kept this market supported but even that now appears to be giving way to reality.

Today's move lower in the November contract has set a new low for this extended bear market not only in terms of the low made but also the closing price.

At this stage, bulls have little to bolster their argument for higher prices except to pray for an early September hard freeze.

Is that possible? Sure it is - anything is possible when one talks about weather but farmers with new crop who have not secured anything in the way of downside price protection are literally playing with fire at this point.

Today's FOMC minutes definitely took on a more hawkish tone with even the doves moving more to the center. That is how it should be when a consensus begins to slowly emerge among those with some differing opinions. More and more it is looking as if the Fed is going to be moving on the interest rate front sooner rather than later. Again, this is not to suggest that we are going to see longer term interest rates spike; what it means is that barring any sort of economic downturn, these ultra low rates are a thing of the past at this point. So enjoy them while you can.

Geopolitical events could still induce safe haven flows into bonds and that will work to lessen any severe upside rate movements but it does appear at this point as if the die is cast.

I came away from reading those FOMC minutes with the view that the Fed is anxious to get back to a more normal monetary policy stance.

If this is indeed true, it is hard to make the case for a weaker Dollar given the weakness in the Euro Zone and in Japan when contrasting the overall economic footing of the three respective zones.

In such an environment, commodity prices are going to struggle as an asset class. Individual markets will then have to rely on their own specific set of fundamentals to move higher, but that is how it should be. These macro plays where hedge funds and other large investors buy blindly across the entire gamut of commodity markets tend to greatly distort prices. That eventually leads to an oversupply as those sectors respond to the higher (speculative induced) prices by increasing production. The result is a sort of Boom/Bust cycle that takes place. I think we are seeing some of that right now.

Euro falls below 1.3300

Here is the weekly chart of the Euro...

There is support near 1.3250. If that were to fail, it could easily lose another full point.

We might see some volatility when the FOMC minutes hit the wires later today.

The weekly trend however is down.

And now the Chart of the Dollar:

The weekly trend is higher. It has some light resistance near 82.50 with stronger resistance just shy of the 83 level.

Unless we get some sort of surprise out of the FOMC minutes or Yellen's testimony this coming Friday, it seems that the most likely price action in the Dollar is more of a steady grind higher. I do not see anything on the chart which might be suggestive of a sharp surge higher. That could change however if the market believes that higher rates are coming here in the US sooner rather than later. I for one would be surprised to see such a line of thinking but one never knows.

Suffice it to say for now, a stronger Dollar is not conducive to rising commodity prices in general.

Along that line, the GSCI moved higher earlier in the session on the back of higher crude oil prices but has now surrendered most of those early gains as crude fades somewhat and as grains and livestock work lower.

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.

Monday, August 18, 2014

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.