Gold’s “Commercial” Traders Are Different…

By Steve Saville

Gold’s “Commercial” Traders Are Different Because Gold is Different

[biiwii comment:  From Back to Our Regularly Scheduled (de) Programming“While there are some quality people out there writing and speaking about gold, others peddle simple answers for other people to consume. Their business is drama, not managing financial markets.”  Saville’s post is both simple and undramatic.  But that doesn’t sell as well, now does it?

In a typical commodity market the traders known as “commercials” are usually hedging their exposure to the physical commodity when they buy or sell futures contracts. For example, in the oil market the most important “commercials” include oil producers, who are naturally ‘long’ the physical commodity and often sell futures contracts to hedge this exposure, and manufacturers of oil-based products, who are effectively ‘short’ the physical commodity (by virtue of the fact that oil is one of their biggest costs) and often buy futures contracts to hedge this exposure. However, the gold market is different.

Some of the commercial traders operating in the gold market are traditional hedgers. Mining companies and jewellery manufacturers, for example. But given that the existing aboveground stock of gold dwarfs the annual supply of new gold and that the amount of gold that changes hands for store-of-value, investment and speculative purposes dwarfs the amount of gold bought/sold for more traditional commercial uses such as fashion jewellery and electronics, a reasonable and knowledgeable person would expect that traditional commercial traders would play a relatively small role in the gold market. A reasonable and knowledgeable person would be right.

In the gold market the dominant commercials are not traditional hedgers. They are also not speculators, in that they rarely take positions that rely on the gold price moving in a particular direction. They are spread traders, meaning that they make their profits by trading the differences in price between the physical and futures markets.

For example, if speculative buying of gold futures causes the futures price to rise relative to the spot price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to sell the futures and buy the physical, and if speculative selling of gold futures causes the futures price to fall relative to the spot price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to buy the futures and sell the physical. For another example, if gold buying by hoarders of physical gold causes the cash (physical) price to rise relative to the futures price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to sell the physical and buy the futures, and if the ‘dishoarding’ of physical gold causes the cash (physical) price to fall relative to the futures price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to buy the physical and sell the futures. In other words, commercial trading in the gold market is mostly about arbitrage.

The difference between commercial trading in the gold market and commercial trading in all other commodity markets is tied to gold’s long history as money. Strangely, many gold ‘experts’ assert that gold is different due to its dominant monetary and store-of-value roles, but then insist on applying a traditional commodity-style method of supply-demand analysis. Unsurprisingly, the result is a pile of hogwash.

Housing Starts – Lumber’s Message

By Tom McClellan

Housing Starts – Lumber’s Message

Housing starts follow lumber prices, tom mcclellan
November 19, 2015

There are a lot of leading economic indicators in use these days, but the one I like the best is lumber futures prices.  Perhaps this is because almost no one else seems to pay attention to them as an economic gauge.  Lumber prices tell us pretty reliably and ahead of time about what is going to happen to real estate prices and activity, plus interest rates.  They can even tell us about what unemployment is going to do.

Continue reading Housing Starts – Lumber’s Message

Pivotal Events

By Bob Hoye


pivotal events by bob hoye
Pivotal Events from Bob Hoye, click for full PDF

One of These Things is Not Like the Others…

By Biiwii

I just got done with an extensive multi-market subscriber update over at, concluding with this…

“Very generally, for a real (as opposed to a day trader’s) positive view we’d look forward to the prospect of gold topping out vs. silver and the gold-silver ratio’s fellow Horseman, the USD capping its mega rally for a correction.  I think these things are coming but too many people have been calling for a commodity rally and inflation.  The deflation story is very long in the tooth, but it could end in some fireworks as opposed to just gently expiring in favor of a new inflationary backdrop.”

So being on watch for the end of the deflation backdrop that has held sway since 2011’s ingenious inflation sanitizer, Operation Twist, this article at Bloomberg caught my eye.

Everything Except Headline Inflation Is Saying the Same Thing About Inflation

As a point of reference, they provided this chart.

bloomberg graph, inflation

I noted this effect some time ago after having my garbage hauler increase prices despite utterly bombed out oil prices.  He cited rising administrative costs, fees, etc. in the chain.  We note each month the firm upward trend in healthcare services and increasingly now, other services, like the oh so vital hospitality and leisure.  From Bloomberg…

“The carnage in the commodities complex is putting a large amount of downward pressure on the headline inflation rate. Other measures of inflation that remove outliers or food and energy prices are considerably higher, thanks to the pace of price increases in medical care services and shelter.”

They include a graphic of some rising prices to make the point.  With each employment report, we review and break down the Payrolls data to see an economy servicing itself now.  Strong dollars buy a hell of a lot of energy and food right now.  But there is an elephant in the room and his name is Services.  Here again is the most recent payrolls (by industry) breakdown from the wonderful

payrolls by industry

As much as I poke fun at them, the Fed is not stupid.  Its various members know full well that there is a price to pay for the 24/7, 365 inflationary fire hose routine.  Sophisticated market players see this as well, but sometimes their brains work more efficiently than the markets, which are chugging along at their own pace.

Watch the Gold-Silver ratio folks.  It still has upside likely, which means it does not yet look like time to go into an inflation trade.  But when the GSR blows out, put your thinking caps on.

Using Elliott Waves: Simple as A-B-C

By Elliott Wave International

Two resources from Elliott Wave International can help you get started

When Ralph Nelson Elliott discovered the Wave Principle nearly 70 years ago, he explained how social (or crowd) behavior trends and reverses in recognizable patterns. You can learn to identify these patterns as they unfold in the financial markets, and use them to help anticipate where prices will go next. Elliott Wave International has developed a free comprehensive online course — The Elliott Wave Tutorial: 10 Lessons on the Wave Principle — which describes these patterns and explains how they relate to one another.

To use the Wave Principle as you analyze the markets, you need a basic understanding of the Elliott method — the rules and guidelines, the literal shape of individual waves, even when the larger trend may turn.

To get you started, we’ve included an excerpt from the free Elliott Wave Tutorial, adapted from Elliott Wave Principle by Frost and Prechter, and a short video clip from the live presentation, Tips from a Pro.

Here is your quick lesson excerpted from The Elliott Wave Tutorial:

Continue reading Using Elliott Waves: Simple as A-B-C

Japan’s Recession and US Consumers

By Jeffrey Snider @ Alhambra

Japan’s Continual Recession Reveals Something Important About US Consumers

Japan fell back into recession again in Q3, expected this time, which is actually being charitable to Abenomics and especially QQE. To even believe that this monetary insanity has produced even marginal benefits, it has to be given “credit” of at least mini-recoveries in between these “technical recessions.” It is a problem far worse than that, as even a technical recession exists only in the media. By all that truly counts, Japan has never left its QQE-induced hysteria, and thus the Japanese economy has remained distinctly subdued throughout.

Japan’s economy contracted in the third quarter as business investment fell, confirming what many economists had predicted: The nation fell into its second recession since Prime Minister Shinzo Abe took office in December 2012.

Gross domestic product declined an annualized 0.8 percent in the three months ended Sept. 30, following a revised 0.7 percent drop in the second quarter, meeting the common definition of a recession. Economists had estimated a 0.2 percent decline for the third quarter.

Going back all the way to the fourth quarter of 2013, not long after QQE began, Japan’s GDP has averaged a very slightly negative rate. Owing to compounding effects and time, Japan’s real GDP level in Q3 2015 is actually slightly above what it was when QQE began. In other words, where even GDP has not grown for more than two years you can count that as a single and ongoing recession with variation in between that does not change the overall trajectory. The fact that the quarterly levels appear highly unstable only produces the common QE element, one which, as everyone should appreciate, is being reproduced by the US and Europe.

Continue reading Japan’s Recession and US Consumers

Doctor Copper’s House call @ 150 Misery Lane

By Biiwii

More and more it looks like our long-term target for Copper is going to come about.  That is and has for years now, been a buck 50 a pound.  That level, which has seemed coded into what eventually became a global deflationary situation, could be the house call needed for players to finally anticipate an ‘inflation trade’ bounce or cyclical bull market.

copper monthly chart

Along with this hysterical bottom in the inflation trade (top in deflation) we’d expect to see things like Silver start to out perform Gold (Gold-Silver ratio has higher to go along with Uncle Buck, first) Palladium and Platinum shore up, Agriculture to bottom and of course, Energy as well.  Very interesting times out ahead; maybe weeks, maybe months still.  But coming.  Cu 1.50 awaits.

US Dollar Big Picture

By Biiwii

Here is a monthly chart of USD we have used in NFTRH.  The bull market began back in 2011 as the last inflation hysteria blew out.  The key rally came in spring/summer of 2014 when a majority were still touting the death of the dollar and the rise of the euro.  At that time I had targeted the euro to extinguish at around 140 +/- (it topped at 139.93 in early 2014, close enough for government work) using monthly charts but had no idea how strong the dollar would then become.

We charted its early rally by daily charts and then made kind of a big deal about it when it broke out above the first support level (then resistance) noted below.   This went hand in hand with strengthening signals in the economy.  USD has since gone on to establish new support levels and currently targets 105 (+/-) by holding support levels to its big breakout pattern.  All good, yeh?

us dollar monthly chart

Yeh.  Except that the economy is now ‘servicing itself’ as we have shown that health services, leisure and entertainment services and various other services, i.e. the back end of the economy, are doing all the lifting now.  Manufacturing is flagging, exports too.  The question is how long can this be sustained?

Under a certain scenario, the US dollar will run with the gold sector.  That is why, while maintaining a bearish stance on the sector, I certainly do not fear the strong dollar as a gold bug.  We are in the process of weeding out the charlatans, the easy answer brigade, the “Chindian Love Trade” promo and all the other noise.  When the relentlessly strong USD wears at the economy and stock market, the right scenario will be in play.  Here is a cute little chart we showed in NFTRH 369…

gold-silver ratio and us dollar

As gold rises vs. silver amid global economic stress, the US dollar is naturally supported because it is after all, the other Horseman.

Draw your conclusions.  I’ve already rambled beyond what I thought would be a quickie chart update.  Dinner’s ready.


By Michael Ashton

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…sign up to receive notice when my book is published! The title of the book is What’s Wrong with Money?: The Biggest Bubble of All, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to [email protected]. You can also pre-order online.

  • +0.2% on core CPI…as expected…waiting for breakdown
  • With Median CPI running 2.5% as of last month, we should be expecting 0.2% as the “normal” core going fwd.
  • 20% was core to 2 decimal places. 1.91% y/y. [ed note: mistweeted as 0.19% first]
  • Note that the next two months, we roll off +0.08% and +0.06% from last year. This means core will be about 2.2% by dec CPI.
  • (Though there’s some evidence of missed seasonality in core CPI these days, through airfares e.g.)
  • Primary Rents 3.74% vs 3.71%. OER unch at 3.09%. So Housing roughly unch at 2.12% y/y
  • Medicinal drugs 2.95%, up a bit, but Hospital Services 4.87% vs 3.28% and Health Insurance 2.99% vs 1.74%.
  • No big surprise that there’s a jump in medical care services if you’ve looked at your bills recently! Probably not temporary.
  • core services at +2.8% mainly due to medical; core goods -0.7%, weakest since Jan.
  • Apparel -1.91% vs -1.37%, a non-negligible part of core goods.
  • New vehicles also soft: +0.14% from +0.47%. Some will say this is a VW effect, but also a general dollar effect.
  • The dollar effect, overall, is very small but in a few categories like Apparel it is large and in cars it is measurable.
  • First cut at Median, looks to me like ~0.21%, unchanged at 2.5% y/y. That’s the number that matters but not due out for hours.
  • I think I mistweeted the core to 2 decimal places…was 0.20%, not 0.19%. still 1.91% y/y, I just typoed. Why? It’s a mistwee. [ed note: har har!]
  • Summary is there’s still no sign of deflation! The pop in medical services inflation joins housing as concerns to the upside.
  • The rise in Medical care will also tend to make PCE catch back up with core, since it has 3x the weight in PCE as in CPI.
  • I don’t care about PCE, but the Fed does.

Continue reading Post-CPI