<Any thoughts on unleaded gas, crude, or any other damn thing?.>
Ok, get ready for a ramble.
You know my theory, there is a very, very large spec position in all these commodities. It's been building up for months, and I've repeatedly pointed out that it's hot money, and has the potential to be blown out. That's why you've seen me sell down from 50% of total holdings to 15% in PMs between Sept-now (*). Much of that was shifted into short sales (hardly a brilliant move yet)and energy (brillant, perfectly timed too), and I then sold 60% (well timed) of my energy holdings in the new year. I mentioned my recent corn sell (well timed) earlier. So three hits in four at bats, including a grand slam (the earlier PM). I'm taking another at bat on the shorts (even though I'm in pain from fouling the last pitch off my ankle), as I think it's about to work in spades.
At any rate, the spec crowd (not given enough attention in these markets, at least where I read and look) tends to head for the exits at the same time. Somebody finally rang a bell I suppose. If the cause of this is just bluster and talk from the world's CBs (and not a real tightening move) then nothing has really changed fundamentally.
However, I have no intention of jumping back in here on yellow and black gold, or commodity plays. I would watch two things first. You would need to see the COTs number coming in with a big reduction in the spec long positions. I can only guess what level would be safe to go back into black and yellow gold, but here are some guidelines that I gleaned from Hightower Report that might be useful, especially given the trend change. They call it "estimated price change per 10,000 contracts change in combined (that would be futures and options) spec net position". The numbers come out Friday afternoon. Tomorrow's won't catch most of this break, so the report on 1/23 will be the one to start really watching.
Gold $2.38 net spec long position on 1/6 was 188,702
Crude oil $0.40 net SL position 1/6 was 121,194
Soybeans 16.80 cents net SL position 1/6 was 88,176
Corn ? net SL position 1/6 was 70,994
I also love to trade corn, Hightower indicated in the last issue that they would put together those numbers too.
Now I determine generally (not rigidly) what might get me back into a long position. Just because gold might have a 50,000 net spec long position (or oil 30,000) remaining after a sell-off, doesn't make it still bearish. In fact if the move down in gold is just bluster, then cleaning out say a 130,000-140,000 (of 189,000) long spec contract will be enough for me. So you can't be rigid using this, but I really take note of extremes, and since we've had an extreme long spec position in gold for nearly four-five months, and the trend has broken down, the potential for a big plunge certainly exists. Doing the math, 140,000 hedge and spec contract sold times Hightower's $2.38, and that would be $33.32 down from last week's price (not today's). So that's a $390 SWAG. Of course this is an emotional market, and the gold long specs seem especially stale (more so than energy).
Personally the only thing I could see that would take this whole spec long position down to zero ($45 plunge or $380 per Hightower guideline), would be not one, but two rate increases in fairly rapid succession. I believe a true, REAL (not phoney)monetary reversal will be gold and commodity negative, and USD positive. Given you think that's virtually impossible, then I'd say you should be gold bullish if only maybe 75,000 spec contracts ($18, or about $405-407, close now, but check for the liquidation first) were sold on this correction. But if it were me, I'd sure hedge it with a short E2, especially at these 1.28% yield levels.
I'm not so sure about $18-$20 being it (again assuming 75,000 were sold per the actual COT report), so I have a second indicator that I'll also track on this. It's not rigid, I'll grope along too, but let's say 100,000 contracts in gold (roughly $24 break or $400) and 75,000 crude oil were sold (roughly $3.00, or$31.50) and the spread between 2 and 10 year USTs was still over 230, and the ED2 (June now) was still under 1.30%. I'd translate that in my mind as still hyper-loose money, just CB bluster and BS. As we know they are very good at that. I'd tend to get bullish on gold and energy again.
They won't be able to bust up these powerful fundamentals with bullshit though, that's important to remember. One rate increase won't stop it either, but will at least get some people's real attention, and change the psychology for a brief period. IMO that's what's being set up. I don't really think the Fed wants to see AMZN at 70, and JNPR at 30 either, despite what they say. They especially don't want to see copper at 1.35, and crude at $40, or gold at $450, and that's what they are facing IMO without acting.
So look for about two-thirds of the current spec positions to liquidate, and if the spreads and rates are still hyper-loose, I'm getting back in for another commodity rally. That would especially be the case if things like the LME were still emptying out (as I've been posting) or the Baltic was still zooming along. In that scenario, the break in gold, oil, and other commodities would be false, and a gift.
You might take note, however that today the 10 UST sold off only 1/32, but the 2 UST sold off 8/32nd, and the E2 and E3 sold off 3 bps. If that spread keeps narrowing, then the market's telling you a tightening is in the offing. Would it be some Fed gov speech ,or an FOMC change? How about a surprise rate hike? The last especially would cool ALL speculators off. If it were me, that's what I'd do, but lucky for you, I'm not running their funny farm. Just the same, I don't think you want to be caught holding gold, energy, commodities, long rate plays and non- USD currencies if a shot across the bow came out of the 1/28 FOMC. Place your bets and take your chances, but you know my thoughts on that one.
(*) And the only reason I still have 20% held is I can't sell my big WTZ position until Feb. 1 because of a restrictions, and I have a big GBU profit that goes LT cap gain in March, so I decided to just wait. I still have some of my position in AGI, that I've just decided to keep (as an investment, not a speculation), to see if they end up being an important mid-tier miner in about two years. |
