"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, February 25, 2014

A Wee Bit of Commodity Weakness

Finally - a sign that some of the commodity markets have seen a brief respite from the recent buying orgy that has dominated the sector for this month. As said in a previous post - so much for the famed February Break this year. Either we missed it or maybe it is going to be renamed the March Break. Then again, maybe it will not come at all this year. As long as the US Dollar continues to lose friends, and some investors are feeling uneasy about the very high level of the US equity markets, commodities are attracting some diversification money flows.

Coffee backed off a bit today as did sugar. Unleaded gasoline is about 6 cents off its recent high. The most active natural gas contract has lost $1.70 from its best level. Cotton puked today and copper continues to slide. Silver could not hold above $22.00 but gold is still getting a bid, especially after the US consumer confidence numbers suggested that sentiment among this all important group faded somewhat. That lousy number led to pretty good buying in the bond market today, especially on the long end with the result that interest rates fell some more. The yield on the Ten Year is now near 2.70%. It was over 3% to start this year.

Take a look at the GSCI ( Goldman Sachs Commodity Index). It is having a bit of trouble moving higher after hitting some fairly hefty overhead resistance noted by the shaded rectangle. One of the indicators is showing some signs of rolling over. My own view is that the overall sector has come too far, too fast, given the very tepid rate of growth across the overall global economy but as I have told others many times before, my opinion, as well as that of any other pundit, is inconsequential as far as the charts are concerned. Right now they are merely showing a pause in the move higher but have not yet indicated a sector-wide turn lower.

Never mind though, that is not going to stop the "gold is always manipulated all the time" crowd from their usual drivel about nefarious forces capping gold once again and preventing it from soaring higher. Sorry - but the older I get the more I cannot seem to resist attacking this nonsense. After a while it is so superficial, so droll, so predictable as to be utterly disdainful.

Look, no market ever goes straight up without a pause at some point. As to when that is going to occur and at what level, we can attempt to locate such potential reversal or pause points by studying the price charts. But merely because a market pauses, does not mean it is under attack. It takes time for buyers of the physical product that underlies the commodity futures market to become accustomed to the new and higher price level. Sometimes those buyers will pull back refusing to chase the price higher if they believe they can buy it lower at some point in the future. Sometimes those same buyers might happen to panic and chase price higher. Sometimes specs are piling in driving prices higher and higher not so much because of strong buying but rather because of a lack of willing sellers at the lower price levels. They can push prices higher because they have no resistance to their buying so they are going to keep pressing until they do get some resistance. When the price moves high enough, those formerly reluctant sellers will begin to let go some of the product that they are holding. It all is just part of the price discovery process.

Some more thoughts on gold however -

As long as US interest rates are not rising and investors/traders are of the opinion that the Yellen-led Fed is not going to hike interest rates anytime soon, the Dollar is going to have some trouble and that means gold should continue to see rather good support on dips in price. The big key will be any economic data that comes out on the strong side - that will put a firm bid back into the Dollar almost immediately and should pressure gold so anyone trading this stuff will need to pay close attention to nearly every single important economic data release.

I am going to be especially interested in watching the payrolls data once the weather disruption issues go away and we can get a better glimpse into the reality of what is taking place. I suspect that the Obamacare issue is going to continue to be a lead anchor on the jobs market and that Yellen and her crew are going to have to avoid putting a heavy-foot on the liquidity hose at the risk of crimping what little growth there already is.

The thing about this however is that there remains two ways of looking at the same glass. If the economy is that sluggish and growth is languishing to that extent, then why would we expect commodity prices to surge in that kind of slow growth environment? After all, that is what have essentially had for some time now and until just recently, commodities have been essentially moving lower.

The flip side is that this same sluggish growth means near zero interest rates for an extended period and that means a Dollar that should have trouble finding a lot of friends. That of course feeds into the carry trade in which the weak Dollar spurs all manner of tangible asset buying by assorted hedge funds and index funds, which exist to provide investors some broad exposure to the overall commodity sector.

Thus one can make a bull case or a bear case for commodities, merely based on how they want to view the same glass.

I personally find it difficult to grasp the bullish case for the overall sector.
That does not mean I am not bullish some sectors or particular commodities within the sector. It does mean however that I am leaning more towards the deflationary aspect at this time unless I see some sort of economic data that tells me that growth is actually really picking up and more importantly that hirings are increasing. After all, if $4trillion + of QE has not managed to turn around growth or generate any serious sustained inflationary pressures in tangible assets, why would another dose do the trick?

IN the meantime, some of these commodity markets are actually moving as they respond to weather or other factors that impact their particular and unique supply/demand scenario. Coffee for example has soared higher on drought fears in Brazil during a crucial growing period. Natural gas had recently been going parabolic due to an extreme weather event known as the Polar Vortex, which has brought an unusually prolonger and bitterly cold spell to nearly the entire Eastern half of the country. Weather events generally get factored into price in a relatively short period of time however and unless the forecasts continue to be the same, once the weather has been factored in, there is not much left after that to support the higher prices for much longer unless the weather pattern remains around longer than originally expected.

In the meantime, try not to lose your sanity over the price action across many of these various markets. computers are doing what computers will do.