The Energies Review October 24, 2011

By Daniel Cronin

What a crazy week it was in the energy markets as crude rallied in the early part of the week to the resistance of $89.50 but fell big on economic uncertainty to $85 along with the stunning news of Qaddafi's death. The flat price is now higher on the Sunday night session to over $85 in Dec CL as this market just does not want to give up. Every time it gets knocked down it keeps getting back up and the $89.50 level is in jeopardy this week. The Euro/USD is looking to creep back up and break the resistance of $1.39 and if it does I believe Crude will try and test $90. The equities markets have broken the old high of 1225 and I believe this could have more to run on the upside. The DOE numbers will be very interesting so look for these coming out on Wednesday. For right now crude is stuck in a bit of range but I believe the price will have look to try and climb higher with all of the major resistances being breached.

Source: Pitguru.com

who Has Gold

News outlets have been all abuzz with the gold acquisitions of countries like China and Iran, and speculation over the size of Libya’s gold reserves. The potential motivation for buying gold, as well as the possibilities over what to spend it on, fuel stories that range on hot button topics. Is the US dollar so weak that oil producing nations are moving to precious metals as currencies? Will the availability of gold prolong the crisis in Libya and give Gaddafi a lifeline? Moreover, who else has gold in significant quantities?

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

The global recession appears to have brought another round of exploration of gold as an alternative asset, however, the official purchases of gold for central bank reserves have remained somewhat muted. The idea behind a limited gold holding is that other assets are a better investment, offering interest payments over time. To put it blandly, gold holdings take up space, are clumsy and awkward to hold and move easily, and don’t offer interest payments. Creative ideas like leasing gold may offer some returns, but usually not at the rate some banks are pursuing.

So which countries were holding the most metric tons of gold heading into the close of 2010? According to the World Gold Council, the United States led the pack with over 8,100 tons. Germany came in with over 3,401 tons. The rest of the notable holdings are shown in the following chart:

Prior to the civil rebellion, Libya was holding a reported 143.8 tons of the shiny stuff. And the trick with gold holdings is that they cannot be seized or frozen by foreign entities. If they could be sold, the Financial Times is estimating that the gold holdings in Libya could fetch over $6 billion, and pay a private army or mercenaries for “months or even years.” Unlike other central banks that may hold their gold in international vaults in New York, London, or Switzerland, the bullion of Libya is reportedly in country, and available to the embattled leader. The other boon seen for Gaddafi is the same that other investors strive for – gold’s value cannot be set by other governments, and its appeal is universal. Of course, like other investors, moving nearly 150 tons of gold would not be an easy task. If the International Monetary Fund reports on transactions as small as 10 tons, can someone quietly buy upwards of $6 billion worth of gold without anyone noticing?

If nothing else, current unrest and persistent economic troubles have highlighted the opportunities in precious metals as asset preservation, in times of uncertainty as well as potential inflationary hedges. The latter is sought when it appears that central banks are pushing the envelope with stimulus programs. Iran is another news focus, allegedly adding to their gold reserves in an effort to protect their holdings and shift financial assets away from the US dollar. Unfortunately, the same table from the IMF doesn’t show Iran’s holdings. The basis for many news stories about these transactions appears to be from a Bank of England official and a note on Wikileaks.

Iran would not be alone in increasing holdings, potentially as a movement of assets away from the US dollar. Since the first part of the year 2000, several nations have added to their coffers rather than emptying them. Russia has added 366 tons. India picked up 200. China loaded up on 659 additional tons. Saudi Arabia squeezed in 180 more. Switzerland, France, IMF, and the Netherlands were among the ones shedding tonnage over the last decade.

Summary

Besides central banks, ETFs and other investment holdings have increased since the onset of the financial crisis in 2008. So potentially Gaddafi, Iran, China, Russia, and other countries are feeling the same thing that other investors are. Gold can be a good idea to add to your holdings when things get shaky. Precious metals appear to be an even better idea when things get messy. Governments can’t manipulate them. Central banks can’t add more at will. And if fiat currencies continue to weaken or you are placed in a situation where a universal currency is required, gold seems to fit the potential bill. It isn’t unusual then to see that a variety of buyers exist for gold.

Financials Review on Feb 22, 2011

Trouble overseas and the question is, what will happen to the global production of oil? Libya is seeing air force pilots defect and New Zealand had a large earthquake which has negatively affected the country's currency. Let's talk numbers so it is easier to see why traders might be fearful this morning. Libya creates an estimated 1.8 million barrels of crude a day which is 2% of the world global output. The other kicker is Libya sits on the biggest oil reserves in Africa. Investors may become concerned due to raw materials growing and of course the word some are fearing, inflation. When consumers have to pay more at the gas pump they have less money to spend on essentials. The U.S. Dollar Index and gold could see buy orders over the next few days if the events overseas worsen. This could put pressure on the stock market today. (1)

Over the past 21 months Wal-Mart has posted drops in sales and is blaming dollar stores as to why they are losing money. Sales overall have risen 2.5% to $115.6 billion which did not meet the expectations of Wall Street.(2) Home Depot beat sales and quarterly profit estimates as more and more people took on maintenance improvements. Net income rose over $240 million from last year at this point. (3)

Today the Case-Shiller 20-city Index is forecasted to come in at -2.2% and consumer confidence is expected to grow from 65.6 to 67.0. Wednesday existing home sales are forecast to be 5.40m which is up from the last announcement of 5.28m. Thursday initial claims will be announced and are forecast to be the same as the last announcement of 410k. Durable orders are forecast to grow to 3.6% which is revised from -2.5%. New home sales are expected to be 310k and forecasts might come in higher at 335k. Friday, there will be a GDP estimate that is expected to be raised by 0.2% to 3.4%. Michigan sentiment is forecasted to 75.5 up from 75.1 when last announced. (4)

- Frank LaMantia, Financials Guru

1 http://finance.yahoo.com/news/Libyan-turmoil-hits-stocks-as-apf-1471605558.html?x=0&sec=topStories&pos=main&asset=&ccode=
2 http://www.cnbc.com/id/41702728
3 http://www.cnbc.com/id/41702997
4 http://biz.yahoo.com/c/e.html

Grains Review on Jan 13th

Calls: Following WASDE the beans and corn trades touched limit twice before backing off slightly on the close. There was plenty of selling into the rally early with front end corn vol dropping by a whopping 18% to 34% basis Feb. March dropped by 6.5% on the day due to a lack of follow though once we touched limit. Also, this report offered a great exit for entrenched longs looking for an exit early in the year. The report offered no momentum for wheat after raising world stocks leaving the trade in the dust as compared with row crops. Outside momentum helped all session with talk of an Argentine farm sector strike starting on Jan 17th and running for 7 days. This is in protest of changing export parameters for corn and wheat. This is another brilliant political move by Kirchner that I think will blow up in her face. Bull spreads carried the day in corn and beans with the N/Z and N/X (beans) widening on the day. Paper was an aggressive seller of the N/Z 100p CSO for 20-cents. This is a bullish play commercials should love. Overall it was a day of many exits with few fresh positions put on. The strangest and most interesting one was in Beans with ADM buying 3,000 SN 23.00 calls for 8-cents. This smells of fund business going through a commercial. Heading into the afternoon, the trade is waiting for further word concerning the Argentine strike possibilities with confirmation seen late in the day. The strike is a no selling stance by farmers for corn, beans and wheat between Jan 17th-24th. This helped the market into the overnight with corn continuing to lead the way with oil losing to meal but this looks short lived due to production problems in Malaysia and India looking to eliminate their palm import tax. Heading into the day session export sales were nothing to get excited about and macros are having only a minor impact so far with both the Euro and crude chopping on either side of unchanged. This is a big pullback for the Euro so watch this factor closely.

Beans are called 6-8 Higher to start moving above the daily contract high and into no man's land on the weekly chart. The only comparative year is 2008 but I think the market actually has a major world production and consumptive problem. Indicators on the weekly chart remain in the upper end of the range with no overt signs of weakness. Corn is called 8-10 Higher breaking above contract highs with indicators turning positive following a week long pullback. A perfect picture for bulls, I think. Wheat is called 6-8 Higher holding the most upside ground to gain. There is nothing to stop the wheat except a lack of excitement. I favor KC and Minni over Chicago and ride this horse all season long. Meal is called 2-3 dollars Higher breaking above contract highs yesterday and continuing this overnight. There is no reason to be bearish from a technical standpoint. Indicators are at the upper end but they have been for weeks. Oil is called Flat/Mixed looking for momentum for crude and palm oil. A break above 59.10 is needed to spark fresh interest.


Fundamental: Argentine weather is looking at bit wetter through the weekend with the southern and central regions favored over the far northern regions. BA and surrounding areas look to receive .50-1.00" with 70% coverage through Monday. This will help overall prospects but the north remains too dry for anyone to be comfortable. Brazil remains in good shape overall with only the far south of any concern at the moment.

Open interest shifted as follows: Corn +27277, Beans +12701, Wheat +3633, Meal +8310 and oil +9485. Rebalancing is a major factor right? I feel the population of new ETF's and fresh allocations from CTAs is the major factor. Add commercial fund money and this looks to continue, not abate. Commodities are a hot topic that will continue to garner media attention potentially pulling more money into the trade. It's a beautiful circle.

China bought 40 TMT US bean oil yesterday for second quarter delivery.

Pakistan has sold between 200-2500 TMT of wheat to Bangladesh and Myanmar. This is their first sales in three years due to floods and drought ravaged crops. This is a mildly bearish impact but Pakistan will not export to anyone not abutting the country so the world impact is minimal.


The 6-10 day maps continue to show below average temps in the Midwest but there is ample coverage following the recent snows to cause no worry. The worry still lies in the HRW regions with no precipitation expected with the current 3-4-days system moving through the northern half of the US. This only adds to woes for farmers in that region. The trade impact is minimal today due to this being a known factor but it offers no relief for shorts nor any threat to those long KC versus CHI.

Jordan tendered for 100 TMT Hard milling wheat. Bad timing I think.

Following yesterday's WASDE report the corn stocks to use ratio is down to 5.5% (Thanks MaryAnn). This is shockingly low forcing more and more corn users to sweat against shorts July forward. If Argentina continues to show problems I believe corn has no choice but move higher due to world supply concerns. The corn carryout at 745 million is the lowest in 15 years...want to get short this? I don't.

Palm oil traded 44 Higher overnight on production concerns. Couple this with India talking of eliminating their palm import tariff and you can start to paint the tight world situation that I talked about in the preWASDE report. The US is swimming in oil but the world is not, the world will win.

Talk has Chinese crush margins back to even and possibly turning positive shortly. This is a major swing from the talked about 20/tonne loss just a month ago.

Export sales came in as follows: Corn 439.2 10/11 and 68.3 11/12 with 613.7 TMT shipped. Beans 495 10/11 and 180 11/12 with 950.2 TMT shipped. Most of the sales and shipments were, of course, to China. Wheat 147.3 10/11 with 27.9 11/12 with 613.7 shipped. Meal 26.2 TMT sold with 278.2 shipped (none to China) Oil 7.5 TMT sold and 57.2 TMT shipped with 29 TMT heading to China.

Overall disappointing but the trade was still in holiday mode. I look for these numbers to pick up dramatically in the coming weeks.

Options: Yesterday the market learned how volatile cereal options can be with an amazing drop of 18% in CG options. This was due to a lack of follow through following WASDE with March taking a 6% hit now sitting at 39%. May was down 3% lower with deferreds down about 2%. This is a solid drop but still expensive enough to make buying it scary but I would not sell any vol. If you want to own vol, look to beans. Following yesterday's drop, SH vol is down to a scary low level of 31%. This is 8% under corn or wheat in March with July sitting at only 32%. I like looking at owning upside calls in beans and straddles with vol ownership advised. Corn bulls may want to simply buy calls or invert 1X2 call spreads looking for an explosion. There is no slope so buying call spreads is not advised.

The following chart includes my observations:

***chart courtesy Gecko Software
Past performance is not indicative of future results.

MACROS:Are mixed but support from a surging Euro following good bond sales in Spain and Italy helps the upside momentum. Crude remains choppy with metals on the sideline so far. Cotton is 200 higher with sugar inching its way higher helping even more.

Gold is trading 4.20 Higher sitting at 1,390.00.
Crude is trading .20 Lower sitting at 91.66 as of 8:25 CST.
The Euro is .0148 Higher against the USD trading at 1.3276.
The Yen is .22 Lower against the USD trading at 82.74.

Daily Wisdom: A peace is of the nature of a conquest; for then both parties nobly are subdued, and neither party loser. - William Shakespeare

- Matthew Pierce, Grains Guru

James Mound’s Weekend Commodities Review

Financials

The S&P500 has developed an interesting multi-pronged technical setup on a daily chart that indicates a strong decline to 1203, possibly as low as 1184 in the near term. I believe the stock market rallied based on the Obama extensions of the Bush tax cuts, but overall the market will find weakness in global economic concerns and a reversal in premature bond selling. As money migrates back into the U.S. dollar from a continued exodus in Europe it is more likely funds will pour into bonds than an overbought stock market. Expect a dollar run to 83, a 3-5% drop in stock prices, and a decent bond retracement to 126 over a relatively short time frame. The euro and pound remain sells with the Canadian and Aussie dollar worthy of long term shorts. The Japanese yen remains a bull bright spot amid a sea of bearish foreign currency plays, with money moving to Japan as it leaves Europe and investors lack alternatives. I continue to stand by my forecast that:

Grains

Corn, wheat and soybeans have all developed congestion patterns near the highs, not altogether a bearish indicator but rather a suggestion that momentum and upside volatility have subsided. My expectations for declines in the stock market and energy sector are likely to hit the grain sector as well, given the lack of fundamental influences in grains this time of year and the overall psychology that global economic weakness means declining grain demand. Put plays are recommended across the board.

Past performance is not indicative of future results.

**Chart courtesy of Gecko Software's TracknTrade

Meats

Cattle is testing key trend line support and should fail this week. Hogs remain choppy and avoidable for the time being.

Metals

Gold and silver remain near the highs with choppy intermittently volatile trade lacking clear near term direction. Get short heading into the last few weeks of 2010 as a liquidation event is expected in both markets in the near term. Copper offers a fundamental long term sell ahead of a China slowdown causing panic selling in that market.

Softs

A short covering rally in coffee appears underway, however this move (possibly to 230) is expected to be short-lived and worthy of a put play on a further move up. Cocoa has established a likely near term top and is a sell with straight long puts. Cotton is attempting to pull off the miraculous feat of new highs after such a dramatic collapse. This is unlikely to occur, mainly on a technical level as it is very rare to see epic highs followed by an extreme retracement followed by a rapid return to the highs. Instead, look at this as the market setting a secondary top for a less volatile selloff ahead. OJ is a short with puts. Sugar is a sell using bear put spreads. Lumber remains a cycle buy on dips.

Soybeans Futures History

Although there are several claims to the origin of soybeans, most believe its roots can be traced back to Asia. More specifically, the history of soybean use for human consumption goes back at least 5,000 years in the Chinese culture. Soybeans were proclaimed as a “sacred plant” by Chinese Emperor Shennong. If anyone was to claim a particular crop as sacred it’s Shennong. His name directly translates to “divine farmer” and he’s often referred to as the Emperor of Five Grains for his contribution to Chinese agriculture.

Fast forward a few thousand years to the early part of the 1930s; the U.S. is recovering from the Great Depression and the droughts of the Dust Bowl. At the time, Ford was doing more than building cars. A little known fact about Henry Ford is that he was one of the biggest proponents of soybeans’ uses. His financial contributions to the research of soybean applications directly assisted in the development of products like soymilk and soy-based fibers. Soybean markets were growing, and a proper place to trade them was becoming a growing need.

In 1936, the Chicago Board of Trade (CBOT), the first formal futures exchange in the United States, launched its futures contracts for trading soybeans; the first of its kind. Another product of 1936 was the Commodities Exchange Act that banned futures trading on non-designated exchanges. By consolidating soybean trading under one roof, the soybean futures market grew. These developments solved two large issues facing producers and consumers of soybeans. Having a futures exchange allowed for buyers and sellers of soybeans to meet and trade their goods resulting in proper price discovery. The futures market gave an accurate price reference for those who needed one. The other major issue that existed before exchanges was the lack of accurate supply and demand data. This resulted in supply gluts and shortages because producers weren’t able to properly assess demand needs. Formalized futures exchanges not only consolidated trading, but they also consolidated market data.

15 years after trading soybean futures markets began, the CBOT introduced futures on the soybean complex: soybean oil and soybean meal. Options on soybean futures products were released in 1984. These different products have all developed and grown in their own rights. They are widely used by spreaders, hedgers, speculators, and commercials. The historic development of futures markets are the reason that people trading soybean markets today have the versatility and choice to pick which financial vehicle suits them best.

(Soybean. Columbia Encyclopedia, Sixth Edition. 2001-07. Accessed Feb.25, 2009)

(Jane Reynolds, Phil Gates, and Gaden Robinson (1994). 365 Days of Nature and Discovery. Harry N. Adams, Inc., New York. p. 44. ISBN 0-8109-3876-6. )

(CBOT: About CBOT: History)

Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.

The Bullion Report : The Gold-Silver Ratio

The gold-silver ratio is among the many tools and topics that investors take a hard look at when it comes to precious metals. There are several moments in time that the ratio was made a permanent force by government decree. Even in modern trading, the ratio has a home in certain trading strategies. With both markets playing with record highs, it is worth explaining and exploring the ratio between these two markets.


Past performance is not indicative of future results.
***chart courtesy Gecko Software’s Track n’ Trade Pro


Past performance is not indicative of future results.
***chart courtesy Gecko Software’s Track n’ Trade Pro

The gold-silver ratio is pretty straightforward math – to determine the ratio, look at how many ounces of silver it takes to buy a single ounce of gold. If gold were trading around $1,000 an ounce and silver around $20 an ounce, the ratio would be 1,000 over 20 or 50:1. The result is that a higher ratio is seen as a signal for cheaper silver versus gold and a high ratio signals more expensive silver. Older references regarding the mining resources for silver suggest that there is roughly 16 times more silver to be mined than gold, which sets up the older ratio valuations from countries like France, the US, and Great Britain. Today, the values for both metals are obviously constantly changing, but adherents to trade strategies based on this ratio look at historical references for potential trading opportunities.

Coinage acts in the United States during the 18th and 19th centuries placed the gold-silver ratio in the neighborhood of 1:15 or 1:16. When the bimetal standard was dropped, this shifted and the ratio has drifted high and low in subsequent generations. Events like the Great Depression, the implementation of Bretton-Woods, post-war prosperity, dropping of the gold standard, the Hunt Brother’s manipulation, and other price extremes in precious metals have been cited as significant shifts in the ratio.

Trading strategies based on the gold-silver ratio look at these previous ratio levels as possibilities for extremes which might present opportunities. Basically, if it takes fifty ounces of silver to buy one ounce of gold at one point, an investor who thinks the ratio may expand would look to sell or be short silver-related assets. There is still a substantial level of risk in the trade, and it would be based on the ability to correctly identify an opportunity in the ratio and the potential for a future shift. Trading the ratio can be done through various investment outlets. Some bullion bugs trading the ratio may do so without regard to the actual prices. In the same example, if an investor believed the ratio would expand from 50:1, they could convert 50 ounces of silver to one ounce of gold. If the silver price dropped and the ratio grew to 100:1, the same investor could convert that ounce of gold to 100 ounces of silver.

Using an average price for each precious metal, a chart of the gold-silver ratio over time might look a little like this:

Past performance is not indicative of future results.

To ratio traders, the suggestion of this chart is that extremes run the gamut from around 16:1 to nearly 100:1. The last decade has frequently produced numbers around 50:1 or 60:1. Therefore, any divergence from this could be viewed as a potential trade.

Summary

The gold-silver ratio is obviously another tool that can be employed by investors looking for particular signals when trading precious metals. The current analysis suggests that when compared to the rest of the decade, a ratio above 50:1 means greater opportunities in long silver positions. However, the extreme volatility seen as of late might mean the ratio has room to expand. There are also the recent lawsuits regarding silver price manipulation to consider. Most importantly, the current recession has yet to push towards a tangible recovery. This means that silver could still be highly susceptible to larger price movements to the downside as it is used in both industry and investment. The precious metals investment expansion could still see strong demand this year and next. The manufacturing industry might not. That means there is a possibility of a fundamental weakness in silver markets that needs to be accounted for when looking at the gold-silver ratio. If gold can retain its strength or outperform silver at any time, the downside pressure in the silver market might easily deliver another spike in the gold-silver ratio.

For your FREE gold trading kit, call (866)258-5997.

It means that the silver coins of the United States at whatever ratio is fixed, and I want the present ratio that we have now, 16 to 1, maintained precisely as it is. -Richard Parks Bland

Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results. © 2010 Berkshire Asset Management, LLC