Tag Archives: gold and silver

Weekly Commodity Strategy Review

Tough week in the markets as we generally got continuation where we were looking for rebounds. This led to a a pair of losers in gold and the Canadian Dollar against a winning trade in the stock indices due to their rebound.

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Silver Decline Nearing an End

Our research for TraderPlanet this morning suggests that the decline in silver may be nearing an end which could spring the mother of all short traps. The weekly Commitment of Traders report has shown commercial traders are exceptionally bullish at these prices and the trends on the chart suggest that December silver futures may not reach their downside objective thus forcing many small traders and trend followers to finally exit their short silver positions.

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Weekly Commodity Strategy Review 09/05/2014

This shortened holiday week began with our piece for Equities.com on the coffee futures market and the peculiarities of Coffee Futures Expiration Analysis. We discussed the roll from the July to December contract and the effect we thought it would have on the market as it made new highs for the move.

Our primary piece this week focused on the Live Cattle futures market and the spread between the expiring October and newly liquid December contracts. We noted the difference in the change in open interest and depth of decline between the two contract months and predicted, “One More All-Time High Coming in Cattle.” We also noted the similarities in the technical setup between the current live cattle situation and the False Breakout in Gold and Silver that we wrote about in July. The more often we see the same patterns reflect the same outcomes the easier they are to recognize going forward.

Lastly, the European Central Bank cut their interest rates and moved the overnight rate to negative. This is the same type of Quantitative Easing that our Federal Reserve has used over the last few years to pump money into a deflating economy. This move caught many traders off guard, but we wrote about it last week in, “Hand Quantitative Easing to Germany” as well as discussing how the US can use this our advantage.

Have a wonderful weekend and we’ll be back bright and early Monday morning with a new piece for TraderPlanet.

Sincerely, Andy Waldock.

Coffee Futures Expiration Analysis

Commercial coffee traders take advantage of speculative short covering in the July contract to create new short hedges in the December contract. The strength of their selling clearly states that coffee farmers are thrilled to sell their crops at these prices thus, hedging their forward risk.

negative commercial coffee trader position versus coffee futures market
Heavy commercial selling into July coffee futures expiration.

This is a very similar setup to the False Breakout in Gold and Silver. These are examples of why we track the weekly CFTC Commitment of Traders reports as we have determined that their actions, based on their fundamental sense of value in their own markets are the most consistent predictors of future market movement. Find out more and register for a free 30 day trial at COTSignals.

See the rest of our Coffee Futures Expiration Analysis for Equities.com

Gold’s Precarious Support

The gold market has simply been stagnant for more than a year now. Prices may be higher year to date but virtually any gold traded at $1,300 per ounce over the last year has seen both sides of the ledger. The trading pattern that’s developing continues to consolidate. The tighter this consolidation becomes, the more explosive its breakout should be. This week’s piece will be short because this is one of those instances when a picture really is worth a thousand words.

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Gold and Silver Topping Out

The gold and silver markets have been perking up lately which happens to have coincided with the Fed’s talk of removing stimulus from the domestic economy. Logically, talk of higher interest rates has spurred interest in portfolio re-allocation towards gold and silver as investors attempt to get a jump on the beginning of a structural shift towards inflation. The result of this is that gold has rallied about 11.5% year to date and silver is up nearly 20%. Much of this rally has been technical in nature, as the markets have moved beyond some key chart points. Technical levels are always important in short-term trading. However, the fundamentals suggest that this rally may be petering out.

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Market Reactions to Debt Ceiling Changes

The ongoing budget and debt ceiling issues have arguably become as contentious as the Trayvon Martin case in social media. This is as vocally divided as I’ve seen my social media feeds. The left claims that the Republicans are solely to blame for our issues while the right insists we cannot spend forever what we haven’t got. Personally, I think both sides have their heads shoved very deeply up a warm and dark bodily cavity. While Congress argues about how to spend our money and money we haven’t got, they receive a lifetime’s salary plus benefits for 4-6 years of work yet have the nerve to use the term, “welfare state,” in public.

Whether you agree with the left, right or somewhere in the middle is irrelevant in the world of managing finances and trading. What matters is empirical data, not conjecture. A quick survey clearly shows that the economy is starting to slow due to the government shutdown. Consumer confidence is plummeting along with Congress’ approval rating. Government loans are being stalled for small businesses. Mortgages are stalling because government guarantees can’t be secured. Customs is turning into a choke point for global trade as inspections can’t be done and clearances can’t be granted. These are all quantifiable drags on our economy and will be reflected in lower GDP numbers.

The previous points are all uselessly valid. We don’t trade US Customs volume and our assets aren’t invested in Brazilian oranges left rotting at a dock. Our assets are directly placed in the US financial markets. I’ve spent the last week compiling a spreadsheet of debt ceiling negotiations and raises (there haven’t been any decreases) from the last twenty years and compared it to the most likely assets to be affected: interest rates, the US Dollar, gold and the S&P 500. Professors always say that economic choices are made, “at the margin.” Our philosophy has always been to stay ahead of the margin calls in the first place.

The debt ceiling has been raised 18 times since 1993. I chose this start date because it gives us 20 years worth of data during the most politicized portion of our history. Furthermore, the past twenty years have participated in the boom of the information age where the average person on the street has had more and more access to more and more information than ever. This allows all of us to make investment decisions based on fully formed opinions on events as they unfold. Therefore, the data set should be representative of the current investment climate.

Based on what has happened in the past, how can we best position ourselves for the future? Unfortunately, the data is mixed, at best. Because I’m old school and still do charting and modeling by hand, I chose a simple premise. “Where did the markets close the day before the debt ceiling was raised and where were they trading ten days later?” The range of results varied little by direction. The most predictable asset class is the interest rate sector by using the 10-year Treasury Note as a proxy. Ten year Treasury Notes traded lower (higher yields) 11 out of 18 times. This seems logical as raising the debt ceiling should force us to pay more in future obligations. It is worth noting that the declines in the 10-year Note came against the backdrop of a 25-year bull run in the interest rate sector.

The S&P 500 was the second most bearish market as it was lower ten days after the announcement in 10 out of 18 instances by an average of 1.6%. The S&P also retained its typical character of panic sell-offs. The largest gain was only 4.82% in May of 2003 while there were four occurrences of losses greater than 5%. Two were greater than 10%. The largest 10-day loss was a whopping 22.7%. Therefore, raising the debt ceiling and conducting government business as usual is not always a positive for the stock market.

The lone bull in the markets examined was the US Dollar. The slight bullishness in the US Dollar surprised me. The Dollar was higher in 10 out of 18 instances by an average of 1.3%. This is where multiple types of analysis really work together. Last week, we suggested that the Dollar is setting up for a downward trending run. I stand by that analysis. Monday, October 7th, Trader Planet published a piece I wrote on the counter trend bounce typically found in the US dollar after multiple moves to new 30-day lows. The Dollar situation as a whole confirms this theory. I expect the Dollar to rally short-term but fall over the course of time.

Gold was the final market we went into. I didn’t expect to find much here and I didn’t. Perhaps, the biggest point to be made here is that anyone trying to talk you into buying gold because the government is failing, inflation is coming, the Dollar is dying, etc must have a hidden agenda. The data simply doesn’t support the sales pitch. In fact, the biggest moves in the post debt ceiling adjustments in gold were to the downside. The general direction however remains a coin toss as the gold market moved up and down with equal frequency over the last 18 instances.

Finally, there’s one last point to be made of historical proportion and I have to credit my brilliant nephew, Erik VanDootingh for tipping me off to it ahead of the news curve. The markets are scared. Big, BIG money is scared. This can best be measured by the difference between the interest rates that the US government is paying for loans versus what international banks are charging to borrow from each other. Technically, this is the spread between Treasury Bill rates and LIBOR (London Interbank Overnight Lending Rate). For the first time in history, including the 2008-2009 implosion, our government is being charged a higher interest rate to borrow money than banks are charging each other. Interest rates are based on risk. The higher the risk, the higher the rate charged. Let that sink in awhile as you ponder, “too big to fail.”

Measuring the Metal Markets

The recent selloff in the metal markets has broken the sideways trading range they’ve been in for more than a year. We’ll begin by briefly recapping their recent history back to the 2011 high water marks. Copper was the first market to peak. An expanding Chinese economy and a low interest rate environment drove this market.  This led to large end line consumers purchasing forward contracts to meet future demand. Finally, copper peaked at $4.65 per pound in February of 2011. The silver market peaked in April of 2011 at nearly $50 per ounce. This was by far the most speculative of the metals markets and we’ll get into the ramifications of a speculative rally, shortly. Platinum made its high in August of 2011 at $1,918 per ounce. Gold was the slowest to peak finally reaching $1,923 per ounce in September of 2011.

The recent declines have come amid a backdrop of rising interest rates. The language coming from the Federal Reserve Board suggests that they are looking to tighten money supply and withdraw some of the excess cash that has been pumped into the system beginning in September 2001.

The recent lows mark very important Fibonacci points. The Fibonacci sequence originated in 13th century Italy by Leonardo Pisano, nicknamed Fibonacci. The mathematician found the pattern of 0+1 = 1, 1+1 = 2, 2+1 = 3, 5+3 = 8, 8+5 = 13, etc. This pattern is found throughout nature to include flower seeds, shells, pineapple segments, etc. Their adaptation to trading financial markets came through the use of wave analysis and the energy released in the action and reaction of those waves.

The trading adaptation converts the Fibonacci sequence into ratios. The ratios are then used in conjunction with peak and trough analysis to determine not only potential support and resistance levels but also, the energy required to turn the tide and begin a new sequence in the opposite direction. The two primary Fibonacci ratios used in trading are .38 and .62. These are rounded for the sake of simplicity. A trip to the beach will explain their importance in that wave one and wave two typically encroach upon the beach by a third of normal shoreline measurement while the third wave may advance nearly twice as far prior to its retreat.

Putting these ratios to use in the metal markets we can see that gold, platinum and copper have all retreated by approximately 38% from their all time highs made in 2011. Platinum has retreated by a third, copper by 36% and gold by 39%. Silver, as the outlier has retreated by 63%, almost stopping exactly at the .62 ratio. The depth of silver’s decline also helps it hold its crown as the most speculative and volatile of the metals.

The Fibonacci numbers don’t possess enough voodoo to generate trading action on their own. However, when combined with the considerable commercial buying we’ve seen on this decline these retracements must be viewed in the context of a pullback within a longer term upwards trend. Beginning with the recent biggest loser we see that commercial traders have been net buyers in the silver market for 19 of the last 23 weeks, nearly tripling their net long position within that time. Gold, copper and platinum are also getting strong support by the commercial traders on this decline. Their actions tell us two things. First, they don’t expect the end of cheap money to be the end of strength in the metals markets. Secondly, this decline is a buying opportunity.

Specifically, we view platinum as the most attractive buying opportunity. This is based on its industrial use as well as the escalating mining cost of platinum going forward. Currently, platinum is trading below its cost of forward production. The mining cost is about $1,500 per ounce while the futures market is trading around $1,350. Furthermore, platinum is the primary component in catalytic converters of diesel engines. Diesel engines continue to take market share in Europe, India and China. This leads us to believe that in the wake of the metal markets’ declines; platinum is most likely the safest one to buy.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Using the COT to Buy Gold Futures

The 2013 rally in the metals markets appears to have run its course. The metal markets are now flushing the weak traders out of their positions and, at least for the gold futures and copper futures market, setting up a new bottom to create a summer rally. In the past, we’ve discussed the rotation of money flow through the metal markets. There are four primary U.S. metal markets and the rotation between them hinges on expectations of inflation versus industrial production.

The chain from most industrial to most speculative is as follows; copper, silver, platinum and gold. This is based on the percentage of the metal used, rather than by weight. Otherwise, silver would far surpass platinum. Investor sentiment for all four metal markets can be tracked through the Commitment of Traders (COT) report published each week by the Commodity Futures Trading Commission. This report tracks the amount of investment among the three primary market participants, commercial traders, index traders and small speculators.

Categorizing the markets’ participants and measuring their degree of participation within any market is a primary forecasting tool. We use this in the trading world to track the imbalance of positions between the smart money and the dumb money. Our research quantifiably defines the smart money as the commercial trader category in the COT reports. Index trader participation is neutral so that leaves the dumb money as the small speculator.

Don’t take this personally. Commercial traders have access to the best information, algorithms and intellects. This may include direct physical observation of the markets in question and it certainly includes the research and analysis of a team of highly trained specialists who focus solely on the market they make. We as small traders are at an immediate disadvantage simply due to our commodity trading taking a back seat to our day jobs, families and other obligations that prevent us from putting 40+ hours per week into any single market.

Our trading focus is on the size of the imbalance between commercial traders and small speculators. Commercial traders are, “negative feedback traders.” They have a sense of value for the market they’re trading and the farther away the market gets from their predetermined value area, the larger their position grows. They buy more as their market becomes increasingly undervalued and they sell more as their market becomes increasingly overvalued.

Market turning points occur when the commercial traders’ fundamental sense of value kicks in and the market begins moving back towards the expected value area. The forecasting value lies in tracking this imbalance and preparing for the market’s turn. This is part of what we were discussing five weeks ago in, “Not Quite Time for Gold to Shine.”  We wrote, “The absence of an expected rally in the gold market through the last few weeks leads me to believe that the internals simply don’t support these price levels, yet. Therefore, the market will continue to seek a price low enough to attract new buyers beyond the commercial traders’ value area. Typically, this would lead to a washout of some sort that may force the gold market to test its 2012 lows around $1,540 per ounce before finding a bottom.”

The metals markets as a whole have declined over the last three weeks. Silver has been hit the hardest, currently down more than 12%. Copper has held up the best, down 5.2% and gold and platinum are somewhere in the middle.

Commercial traders are net bullish in both gold and copper. Commercial traders have been net buyers in the copper market for four out of the last five weeks and net buyers in gold for each of the last three weeks. Both of these markets are providing us with exactly the type of setup we look for. Commercial traders are net bullish on the weekly charts while small speculators have cracked the market just enough to create an oversold situation on the daily data.

Our quantitative research shows that we can buy in once the gold market begins to turn higher as long as we place a protective stop loss order at whatever this low turns out to be. This defines the risk so we know how many contracts we can trade. We know we have a 65% chance of being profitable and an average profit of $3,865 vs. an average loss of $1,958. The exceptional aspect of this trade is that we’ll only hold the position for five days. This is about how long the market will take to bounce and define a new value area.

The numbers in the copper market are even more impressive. The same setup applies. Our risk will be to the low of this move and we won’t enter a long position until the market starts to head higher. Our analysis shows that we should win about 75% of the time and our wins are once again more than twice our average loss. Finally, we won’t hold the trade for more than five days.

Trading in line with the commercial traders and using the small speculators to compress our risk allows us to trade with commercial effectiveness on a small speculator budget and time frame.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Utah Now Accepts Gold and Silver

One hundred and fifty years ago Congress passed the Legal
Tender Act, authorizing the use of paper notes to pay government bills. This
week, Utah Governor, Gary Herbert signed into law House Bill157 allowing gold
and silver to be used as currency in place of increasingly worthless paper
notes. Several states have proposed similar bills but Utah’s is the first to
pass. The bill provides for transactions based on the weight of the metals to
determine their value rather than face value. This allows the use of gold and
silver bullion to be used as payment rather than the limited scope of federally
minted precious metal coinage.

There are two distinctly separate issues at work here. The
first issue is the Governor’s expression of his constituents’ voices. There is genuine
concern that the easy money policies in place since September 11th
which includes TARP, Quantitative Easing 1,2 and 3?, Operation Twist and so
forth will seriously devalue the greenback’s worth. This is not tin foil hat,
alarmist conjecture. Our money supply has ballooned over the last 10 years.
Money supply as defined by M1, which is currency plus demand deposits like
checking and savings accounts has mushroomed from $1.25 trillion in April of
’02 to $2.22 trillion, currently. That’s an increase of 77%. Furthermore, the
Federal Reserve forecasts M1 to grow at a 17.4% rate over the next 12 months.
Theoretically, each new dollar printed is worth exponentially less than the one
that preceded it. The dollars you hold in your pocket should be worth 77% less
than the same dollars in your pocket 10 years ago. Clearly, there is a Dollar
devaluing argument to be made.

The second issue is the game changing effect this will have
on the physical gold and silver trade. This could truly be a watershed moment. For
example, let’s say you’ve been ahead of the game and began buying gold and
silver years ago. Good for you. Generally, this meant buying metal from a coin
dealer who charged you a premium above the spot market for your purchase and
then the government charged you sales tax on top of the merchant’s premium. The
end result is that you’ve been overpaying to get in the market. Think of it as
a front end loaded mutual fund.

Now that you’re ready to get out, you find yourself offered
below market prices on your physical holdings and due to your success, you’ll
be issued a capital gains form to pay Uncle Sam his share. The end result is
that being right the market meant you had to pay up a total of four times.

Utah House Bill 157 will now treat precious metal transactions
just like currency exchanges. In other words, if you ask for change for a $100,
you’ll get the entire $100 back. You’ll be able to cash in your precious metal
holdings for fair market prices or, simply use precious metals to make
purchases, payments or deposits. The law states that metals don’t have to be
accepted but, if they are, it will be by weight of the metal and the market
price for it.

Finally, the kicker, as I’ve read it, is Utah will offer a one-time
tax credit to offset capital gains on any metal that is being exchanged for
paper. The capital gains and tax reporting nature of getting out of your
holdings will work like a currency exchange. This eliminates the physical black
market or, shadow market of physical transactions. This will avoid multiple
calls while shopping transaction values and eliminate the tricky conversation
of tax reporting issues. Who’d have thought that seldom mentioned Utah would be
the pioneer of such forward thinking?

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.