COMMODITIES ESSENTIAL The resource for what matters

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Oliver Nash
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1 COMMODITIES ESSENTIAL The resource for what matters Futures Forecast, p2 Moving near-term Neutral on crude oil as the Commitment of Traders spec positioning suggests a turning point may be near. My intermediate-term target for crude remains unchanged for now: about $104 per barrel. Main Article, p2thru6 What the Federal Reserve means for gold... now. Mainstream skepticism over Fed economic efficacy could add a missing element to help gold reconnect with risk appetite correlations. A breakdown in the US dollar index could be a more likely catalyst for an immediate move higher in gold. Also noteworthy: Should skepticism over the Fed s economic efficacy spook investors, it could create a risk off environment that hurts risk appetite and helps the US dollar. In that case, the likely direction for gold is down. But should investors flee other currencies in a risk-off move, namely the euro on renewed Eurozone crisis concerns, that money could seek out gold as an alternative safe-haven to the US dollar, thereby supporting gold prices. Trade Essentials, p6 No new recommendations or adjustments at this time. Still closely watching for a signal to get long gold and/or silver by using ETFs like IAU, SLV, AGQ and DGP. Also considering adding a long position in CORN and/or DBA (PowerShares DB Agriculture Fund). Positioning, p6 Four open positions: Long JJC, UCO, CNX, CCJ. 31 January 2013 ******

2 2 What the Federal Reserve means for gold... now. I ve seen it asked many times over the last year: Considering central bank quantitative easing policies as far as the eye can see why isn t gold doing better? It s been bouncing around in a $300 range. The easy explanation is a needed and necessary consolidation within the context of a longer-term bull market. But it s still tough juxtaposing the last five months of surging stock markets with a stagnant gold price. Commodity Futures 2-3 Week Forecast Last Price Direction Target ΔT Gold Neutral 1680 Silver Neutral 3100 Copper Long 380 Corn Long 781 Soybeans Long 1525 Wheat Neutral 800 Crude Oil Neutral 96 Natural Gas Short 2.76 Click on the hyperlink to view the audio/visual chart analysis. Bold denotes change from last week. Perhaps the underperformance has come from vigilantes. That is: perhaps the smart money realizes there is no inflationary spiral right around the corner despite the so-called money printing. Without inflation, gold loses a modicum of its inflation-hedge appeal. I agree that hyperinflation will not arrive in the near future. On the contrary, you ve probably heard of the ubiquitous bond vigilantes, who have throughout the US market s history pushed interest rates up as inflation expectations rose. Such bond vigilantes may be in operation now, slowly pushing bond prices lower and interest rates higher. We ve seen that dynamic in the last two months. Naturally, falling bond prices and rising yields is negative for gold since the yellow metal loses appeal when investors demand yield. Gold offers no yield or dividend. So why hold gold in an environment of rising yields? Well, I m just not sure the move can last much longer without a notable uptick in growth and/or the reported inflation data. Something leads me to believe the bond vigilantes will return to their secret hideouts soon. And when they do, yields will sink again and gold s relative appeal will resurface. But gold s appeal will also grow for another reason. Mainstream skepticism of the Federal Reserve We know not to fight the Fed. But we can sure be skeptical.

3 3 Sure, market professionals and commentators have been skeptical of the Fed for the last 10 years... or maybe the last ten decades, actually. But we may start to see recent skepticism come to a head and actually influence markets negatively. If you didn t see the fourth quarter US GDP number just reported, let me tell you it stunk. The economy actually contracted. The -0.1% quarterly figure fell well short of the +1.1% expected. The fine print, however, showed some mixed indicators. A drop in defense spending cut deeply into government spending and, thus, the final GDP number. But increases in income and consumer spending were relatively strong. A reason for optimism? Hardly. It s obvious that the Federal Reserve hopes to spur actual economic growth. And everyone agrees that it fails on that count but succeeds in supporting asset prices. Another success if you will has been the increase in consumer spending. Stimulus and monetary policy has always tried to spur demand to restart economic growth. But of course there s that saying about leading a horse to water. Anyway... The real driver behind consumer spending demand is very much due to the kneejerk rebound in sentiment after a sharp, sizeable private sector deleveraging. In a way, the Fed can take some credit, via the wealth effect concept, as consumer sentiment tends to be dictated by the stock market. The problem with relying on growth in consumer spending is the timing of this recent strength. The fourth quarter saw an increase in non-taxable transfer income likely pushed forward from 2013 into 2012 in order to avoid the pending fiscal cliff tax cut expirations et al. More income means more spending. So perhaps a meaningful amount of spending was also brought forward into It will make sense to watch for evidence that this support to GDP might crack. Income is the likely place to focus. There s not much to suggest income will make any meaningful strides in an economy that s sputtering under mountainous public debt, contentious fiscal spending reforms and growing tax burdens. Nonfarm payrolls for the month of January will be reported tomorrow. Yesterday and today offered a mixed forecast ADP private sector jobs grew by more than expected while the weekly jobless claims number also grew by more than expected. The employment situation, obviously, factors critically into income growth trends. And it s been said the US economy will need to achieve several consecutive quarters of 3% GDP growth in order for unemployment to drop to the Fed s target levels. That, and a long list of other things, means the Fed won t be abandoning QEInfinity, as it s called, for quite some time still.

4 But that doesn t mean the investing consensus won t grow concerned by the Fed s continued failure to drive actual economic growth with QE. There are only so many false-starts investors can handle before they get spooked. If the first quarter doesn t bring about a sufficient recovery to yesterday s -0.1% GDP print, then the spook could come rather quickly and bring a correction that tests the resolve of monetary policy-driven risk takers. So even though the Federal Reserve s policy may not change for several quarters still, mainstream skepticism of the Fed s economic efficacy might serve to bring about a sizeable correction in risk appetite. But what does that mean for gold? Well, ongoing quantitative easing PLUS skepticism about the Fed s efficacy could easily jumpstart gold. Gold has lost its correlation with risk appetite. But it could easily reconnect with that correlation. The thing that sets gold apart: it s a hard, relatively scarce yet enduring asset underpinned by the faith and goodwill of its investors and consumers. As such it has served as an unofficial alternative for investors who want to reduce their exposure to fiat currencies. And THAT may be the best explanation for gold s underperformance. Despite the recent hype devoted to currency wars, specifically the Federal Reserve s implicit policy to devalue the dollar, the greenback has not meaningfully declined. Actually, since gold peaked in September 2011, the US dollar index has appreciated by almost 6 percent: 4

5 5 And here is a chart of the US dollar index suggesting it could break sharply lower in the near-term: So let me wrap this up: Mainstream skepticism over Fed economic efficacy could add a missing element to help gold reconnect with risk appetite correlations.

6 6 A breakdown in the US dollar index could be a more likely catalyst for an immediate move higher in gold. Also noteworthy: Should skepticism over the Fed s economic efficacy spook investors, it could create a risk off environment that hurts risk appetite and helps the US dollar. In that case, the likely direction for gold is down. But should investors flee other currencies in a risk-off move, namely the euro on renewed Eurozone crisis concerns, that money could seek out gold as an alternative safe-haven to the US dollar, thereby supporting gold prices. All that said, I am still considering a new recommendation to get long gold and/or silver using ETFs. I am waiting for technical confirmation before acting. It could very well occur early next week. Stay tuned for that recommendation. Trade Essentials. No new recommendations or adjustments at this time. Still closely watching for a signal to get long gold and/or silver by using ETFs like IAU, SLV, AGQ and DGP. Also considering adding a long position in CORN and/or DBA (PowerShares DB Agriculture Fund). May also look to tighten up the stop-loss on UCO the crude oil futures spec positioning suggests a turning point may be near. Positioning Position Date Ticker Direction Entry Stop Last Target Return Notes ipath Copper TR 1/10/2013 JJC Long TBD 0.64% Buy up to $46.78 PS Ultra Crude Oil 1/10/2013 UCO Long TBD 5.38% Buy up to $30.85 CONSOL Energy 1/16/2013 CNX Long TBD 2.79% Hold. Cameco 1/16/2013 CCJ Long TBD 1.51% Buy up to $21.23 Click on the hyperlink to view the audio/visual chart analysis. Bold denotes change. JR Crooks

COMMODITIES ESSENTIAL The resource for what matters

COMMODITIES ESSENTIAL The resource for what matters Main Article, p2thru6 Australia, Metals News and Weekly Charts... I talk about China a lot. But the other side of that coin is Australia (among others.)