Always an Interesting Read

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Friday, August 1, 2014

Another Day, Another Sharp Fall in Commodity Prices

The Goldman Sachs Commodity Index is currently down 2.4% on the year. Grain and energy prices are continuing their descent. Meat prices are following. As written many times here over the past couple of months, meat prices will be coming down by the time we reach the 4th quarter. They are already breaking down at the wholesale level.

Seriously, I would like any OBJECTIVE reader to take one look at this chart and then tell me, with a straight face, that inflationary pressures are on the rise as it relates to the cost of tangibles.

If that is not enough, here is a chart of the Unleaded Gasoline.

It has retraced exactly 61.8% of the price move made since late November of this year to the peak near $3.15. You’ll notice that it managed to spend about a week consolidating at the half-way or 50% retracement level before it puked lower. If it does not hold here, it should see a further leg lower towards $2.66.

As a consumer at the gasoline pump, I am delighted to see this chart. It means I have more disposable income with which to buy ridiculously high-priced beef for throwing on my pit smoker the rest of this summer. I am however looking for some good bar-b-q methods for caviar since there seems to be little difference in price between fancy fish eggs and brisket.

Quite frankly, if gold is going to get some help for its upside, it had best not be looking at its fellow commodity markets as they are acting as a weight on it. Gold must function as a monetary metal at this point if it is to trek higher and that means it is going to require geopolitical events or currency distress somewhere to get speculators in a mood to chase it. Today’s decent but lower than expected payrolls number, took some of the sense of urgency out of this week’s talk that the Fed was going to move on the interest rate front sooner rather than later. That was shelved by the jobs number today and in conjunction with the breaking of the ridiculous cease-fire in Gaza, along with some further tensions tied to Ukraine, there were some safe haven flows back into gold, and into bonds, I might add, in today’s session.

The Dollar ran into some selling today when the payrolls number came out for the reasons listed above. The weaker than expected reading took some of the “hike in interest rates” premium out of the greenback. It especially allowed the safe haven bid that showed up today to be seen in the Japanese Yen which once again refuses to move in the same direction for any time frame longer than a couple of weeks.

Equities are currently weaker as I type these comments but are off their worst levels of the session. The Russell 2000 is moving back down to the bottom of its recent range trade between 1210 on the top and 1100-1090 on the bottom. The RSI is at a level commensurate with previous recoveries in price. Only if this index does not bounce off of the bottom of the range can we say that a more substantial break in price is underway. Some are already talking bear market but the index would need to fall below 1090-1080 to have experienced a drop of more than 10% off its best level and provide confirmation for that sort of talk. In other words, it is premature to say that a significant correction is underway. Further price and chart action is required for confirmation. Until then, the odds favor a continuation of the existing trend or price action and that has been either higher or range bound.

There are still plenty of equity bulls around who want to buy dips at this point. Price action will have to prove them wrong. So far, they have been right.

I will go over some of the COT stuff later on today. I am especially interested in seeing whether or not the hedge funds are still net long in the corn market, even after the $1.70 decline since May. I find the fact that they were still on the net long side of this market last Friday almost too much to believe. Talk about blowing a call on market direction!

Wheat prices have steadied as harvest pressures subside somewhat with KC wheat leading Chicago. Beans are seeing more pressure as the benign weather and forecasts calling for more of the same, continues. The market is still being supported only by tight old crop supplies but once harvest kicks in and moves north, basis levels are going to fall apart in my view.

More later….