Filed under: Trader Dan Norcini
Dear CIGAs,
There seemed to be a general reflation type of trade back in play today although it was mixed in the sense that the bonds were a bit higher which generally does not comport with the return of risk trades. Copper was lower as well which sent off a mixed signal.
The grains however were very strong with beans leading the charge and corn right on their heels. Crude oil moved higher on news of a drop off in oil moving through the Trans Alaska Pipeline due to a discovered leak near Prudhoe Bay.
The Dollar was slightly lower and equities were a tad lower leading to some conflicting short term signals for traders to sort through.
In response to a private email, I suggested while the US Dollar is going to continue exerting a strong influence on the overall level of commodity prices, I am not so sure that we are going to see a direct link reassert itself to the degree where we have nearly every tick higher in the Dollar followed by a tick lower in commodities. There are certain commodity markets which have a set of fundamentals that are strongly bullish. While those markets are indeed influenced by inflows of hot money flows and would tend to move lower while the Dollar moves higher, the fundamentals are so strong that downdrafts are going to be bought, Dollar or no Dollar. Those markets which are more bubbles associated with only hot money flows buying commodities across the board, and which do not have the supportive fundamentals, could see deeper retracements in price should the Dollar continue to strengthen but I do not believe we can any longer make the statement: “Dollar UP, Commodities down”.
The reason in my view is the nature of the so-called “economic recovery” in the US. While recent economic data has given proponents of an improving economy some reason to support their view, the fact is that job creation is practically non-existent. Even those jobs which are being created are not sufficient to keep up with just the increase in the numbers of job seekers due to population growth, much less put a solid dent in the rising number of unemployed or underemployed. I believe the market is looking past the various data releases and more focused on the fact that this critical aspect of any true recovery, jobs, remains weak and will remain sluggish for the foreseeable future. Fed Chairman Bernanke as much as said the same in his comments last week.
Translation – the market expects that the QE policy is not going to go away and is convinced that inflation is in its future. That means the bullish trend in commodities as a whole will continue until or unless there is a CLEAR SIGNAL that the number of jobs being created is of sufficient size that QE will no longer be necessary. The price action of the overall sector as indicated by the CCI is reflecting this view as it is more suggestive of a lull in buying rather than the beginning of a sustained downtrend. I think we are seeing this reflected in the gold market which while it cannot yet manage to climb back above $1400 and reassert another leg in its long term uptrend, does not appear to want to break sharply lower either.
We will know whether this is indeed the case if the Dollar manages to punch through the 82 level on the USDX and closes there on a weekly basis. We will have to stay tuned and watch developments in real time to see where we head next.
In regards to the Dollar strength, let me suggest it is not a function of improving fundamentals in the US as much as it is an aversion to the Euro based on the lingering woes associated with the problems of some of the various member states of the EU. We can call the Dollar strength the more appropriate, “It’s not the Euro” trade. There is also a bit of support that comes in from the idea that floats to the surface that QE is going to be withdrawn sooner than anticipated whenever the US economic data releases come in better than expected.
Short term the markets are giving off mixed signals which is indicative of uncertainty on the part of traders. Some are moving to the sidelines or lightening up a bit as they wait to gauge future direction. In addition, we are still going to be dealing with index fund rebalancing which further clouds the analysis. I expect this to continue until we get enough data to buttress the opposing arguments one way or the other but even at that, the long term damage associated with a $14 Trillion national debt is not going to go away nor are the effects of what can only be called unlimited money printing by the Fed.
I do want to point out that I continue to monitor the price of gold in various major currencies to see how traders around the globe are viewing the market. Gold priced in Euro terms is very strong hanging in there at a mere 15 euros below its recent all time high.
A quick note on silver – its move away from support near $28.50 is encouraging but I would want to see it close back above $30 to get an “all clear” for the bulls. The shorter term moving averages are still moving lower but it has been able to move back up and away from both the 40 day and 50 day moving averages, which is constructive.
The HUI is what it is, a playground for the hedge funds and their ratio spread trades which seem to come back on during periods of indecision in the market. It needs to get above 560 to get something going to the upside.
Bonds are trading mixed gaining a bit of support from the lower equity markets but encountering selling as the CCI moves higher. They too are in a wait and see mode.
DAN'S CHART:
http://jsmineset.com/wp-content/uploads/2011/01/January1011Gold.pdf
There seemed to be a general reflation type of trade back in play today although it was mixed in the sense that the bonds were a bit higher which generally does not comport with the return of risk trades. Copper was lower as well which sent off a mixed signal.
The grains however were very strong with beans leading the charge and corn right on their heels. Crude oil moved higher on news of a drop off in oil moving through the Trans Alaska Pipeline due to a discovered leak near Prudhoe Bay.
The Dollar was slightly lower and equities were a tad lower leading to some conflicting short term signals for traders to sort through.
In response to a private email, I suggested while the US Dollar is going to continue exerting a strong influence on the overall level of commodity prices, I am not so sure that we are going to see a direct link reassert itself to the degree where we have nearly every tick higher in the Dollar followed by a tick lower in commodities. There are certain commodity markets which have a set of fundamentals that are strongly bullish. While those markets are indeed influenced by inflows of hot money flows and would tend to move lower while the Dollar moves higher, the fundamentals are so strong that downdrafts are going to be bought, Dollar or no Dollar. Those markets which are more bubbles associated with only hot money flows buying commodities across the board, and which do not have the supportive fundamentals, could see deeper retracements in price should the Dollar continue to strengthen but I do not believe we can any longer make the statement: “Dollar UP, Commodities down”.
The reason in my view is the nature of the so-called “economic recovery” in the US. While recent economic data has given proponents of an improving economy some reason to support their view, the fact is that job creation is practically non-existent. Even those jobs which are being created are not sufficient to keep up with just the increase in the numbers of job seekers due to population growth, much less put a solid dent in the rising number of unemployed or underemployed. I believe the market is looking past the various data releases and more focused on the fact that this critical aspect of any true recovery, jobs, remains weak and will remain sluggish for the foreseeable future. Fed Chairman Bernanke as much as said the same in his comments last week.
Translation – the market expects that the QE policy is not going to go away and is convinced that inflation is in its future. That means the bullish trend in commodities as a whole will continue until or unless there is a CLEAR SIGNAL that the number of jobs being created is of sufficient size that QE will no longer be necessary. The price action of the overall sector as indicated by the CCI is reflecting this view as it is more suggestive of a lull in buying rather than the beginning of a sustained downtrend. I think we are seeing this reflected in the gold market which while it cannot yet manage to climb back above $1400 and reassert another leg in its long term uptrend, does not appear to want to break sharply lower either.
We will know whether this is indeed the case if the Dollar manages to punch through the 82 level on the USDX and closes there on a weekly basis. We will have to stay tuned and watch developments in real time to see where we head next.
In regards to the Dollar strength, let me suggest it is not a function of improving fundamentals in the US as much as it is an aversion to the Euro based on the lingering woes associated with the problems of some of the various member states of the EU. We can call the Dollar strength the more appropriate, “It’s not the Euro” trade. There is also a bit of support that comes in from the idea that floats to the surface that QE is going to be withdrawn sooner than anticipated whenever the US economic data releases come in better than expected.
Short term the markets are giving off mixed signals which is indicative of uncertainty on the part of traders. Some are moving to the sidelines or lightening up a bit as they wait to gauge future direction. In addition, we are still going to be dealing with index fund rebalancing which further clouds the analysis. I expect this to continue until we get enough data to buttress the opposing arguments one way or the other but even at that, the long term damage associated with a $14 Trillion national debt is not going to go away nor are the effects of what can only be called unlimited money printing by the Fed.
I do want to point out that I continue to monitor the price of gold in various major currencies to see how traders around the globe are viewing the market. Gold priced in Euro terms is very strong hanging in there at a mere 15 euros below its recent all time high.
A quick note on silver – its move away from support near $28.50 is encouraging but I would want to see it close back above $30 to get an “all clear” for the bulls. The shorter term moving averages are still moving lower but it has been able to move back up and away from both the 40 day and 50 day moving averages, which is constructive.
The HUI is what it is, a playground for the hedge funds and their ratio spread trades which seem to come back on during periods of indecision in the market. It needs to get above 560 to get something going to the upside.
Bonds are trading mixed gaining a bit of support from the lower equity markets but encountering selling as the CCI moves higher. They too are in a wait and see mode.
DAN'S CHART:
http://jsmineset.com/wp-content/uploads/2011/01/January1011Gold.pdf
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