**UPDATED Quarterly Overview**
- Not many changes in stocks – The VIX falls
- Bonds edged higher over the past two weeks
- Bitcoin and Ethereum explode higher – Precious metals and copper prices rebound, posting substantial gains since September 29
- Across-the-board gains continue in energy as crude oil, oil products, crack spreads, natural gas, and coal move to new highs over the past two weeks
- Soybeans and corn move lower in post WASDE trading – Wheat moved higher since the past report-Cattle higher while hogs fall – FCOJ falls, while coffee, cotton, sugar, and cocoa post gains – Lumber explodes higher
- A marginal new high in the dollar index over the past two weeks, which edged lower since September 29
TechnoMental System Update
The TechnoMental System provides subscribers with eight separate potential trend following portfolios in all of the sectors covered in the weekly report including:
- Stocks and Bonds
- Precious metals
- Base Metals
- Grains and Meats
- Soft Commodities
Subscribers can use any of the portfolios, all of them, or select the ones they wish to use for investment and trading purposes. Automatic execution is available for all of the portfolios for subscribers. The benefit of automatic execution is that buy and sell orders are compiled and executed as soon as the signals come out.
See PDF for the results of the futures portfolio and ETF portfolio as of the close of business on October 8.
Watch for daily emails on rolls and reversals.
On Thursday, September 30, Q3 ended. The market paid more attention to events in Washington DC as the debt ceiling, infrastructure package, and budget took the center of the stage, and window dressing was pushed to the back seat. The NASDAQ dropped 0.44%, while the DJIA fell 1.59%. The S&P 500 was down 1.19%, and the Russell 2000 moved 0.73% to the downside. The December 30-Year Treasury bond futures were 0-11 higher to the 159-14 level. The dollar index reached a new high at 94.52 before closing at 94.24, down 0.113 on the session. CBOT wheat rallied, but corn and soybean prices fell. November crude oil moved high to settle at just over $75 per barrel. Oil products posted gains and marginally outperformed oil, pushing crack spreads higher. November natural gas rallied 39.0 cents to settle at $5.867 per MMBtu. Gold, silver, platinum, and palladium posted gains.
Meanwhile, December copper futures fell 11.0 cents to settle at $4.0890 per pound. Live and feeder cattle prices fell on the December and November contracts. December lean hog futures continued to move to the upside, posting a 1.80 cents gain and settling at 85.40 cents per pound. Sugar, coffee, and cocoa were higher, while FCOJ futures continued to decline. Cotton continued to hold the bullish baton, rising to a new high at $1.0593 and settling at $1.0580 per pound, another new decade high. Lumber was at the $637 level, up $30.50 per 1,000 board feet. Bitcoin was just below $44,000, up over $2,700 per token. Ethereum gained over $215 to the $3,035 per token level. On Friday, stocks moved higher on the first day of Q4, with the Russell 2000 rising 1.69%, the DJIA posting a 1.43% gain, the S&P 500 up 1.15%, and the NASDAQ rising 0.82%. The December US 30-Year Treasury bond futures rallied 1-04 to 160-11. The December dollar index futures contract fell 0.193 to settle at 94.047. Grain prices were mixed, as soybeans declined, corn edged higher, and wheat exploded higher to over $7.55 per bushel on the December CBOT futures contract. November NYMEX crude oil futures rose 85.0 cents to settle at $75.88. Product prices moved even higher, pushing crack spreads to the upside. November natural gas futures fell 24.8 cents to settle at $5.619 per MMBtu.
Gold, silver, platinum, palladium, and copper prices moved higher. December live cattle and November feeder cattle futures edged lower along with December lean hog futures. Sugar and cotton futures declined, but coffee, cocoa, and FCOJ prices moved higher. Coffee rallied back over the $2 per pound level. November lumber was $2.40 lower to settle at $625.10 per 1,000 board feet. Bitcoin and Ethereum surged. Bitcoin was over $4,600 per token higher to the $48,220 level. Ethereum surged over $300 to the $3,320 level. On Monday, October 4, stocks moved lower, with the technology stocks leading the way on the downside after Sunday night’s exposé on Facebook on 60 Minutes. The NASDAQ dropped 2.14% while the S&P 500 fell 1.30%. The DJIA was down 0.94%, and the Russell 2000 declined by 1.28%. The VIX was over the 23.50 level. December 30-Year US Treasury bonds were down 0-9 to 160-02.
The December dollar index futures contract settled at 93.780, down 0.267 on the session. Wheat edged marginally higher, while corn and soybean futures slipped slightly lower. OPEC+ refused to increase production above the tapering level, which pushed crude oil higher. NYMEX November crude oil futures rose to a new continuous contract high for 2021 at $78.38 and settled at $77.62, the highest price since 2014. Gasoline and heating oil prices moved higher, outperformed crude oil, pushing refining spreads higher.
Gold, silver, and copper posted gains, while platinum and palladium prices dropped. December live cattle futures rallied along with November feeder cattle. December lean hogs fell as pork prices reversed lower with beef higher. Sugar and coffee futures fell, but cotton, cocoa, and FCOJ moved to the upside. Cocoa rose to a new high for 2021 at just below the $2,800 per ton level.
November lumber futures drifted around $4.50 higher to just below the $630 per 1,000 board feet level. Bitcoin was $1,300 higher and was flirting with the $50,000 level at over $49,700. Ethereum gained nearly $120 to $3,440 per token level. On Tuesday, stocks turned higher, with the market recovering from Monday’s losses and on a bumpy road to nowhere until trends emerge. The NASDAQ was 1.25% higher, and the S&P 500 rose 1.05%. The DJIA rose 0.92%, and the Russell 2000 posted a 0.57% gain. US December 30-Year Treasury bond futures moved 0-30 lower to the 159-07 level as the long bond was flirting with the recent 158-22 low, the lowest level since late June. The December dollar index futures contract moved 0.187 higher to settle at 93.967. Soybeans recovered, while corn edged lower and wheat prices moved lower. November NYMEX crude oil futures rose to a new multiyear high at $79.58 per barrel and closed at $78.93, $1.31 higher on the session. Gasoline and heating oil futures rallied and outperformed crude oil, pushing crack spreads higher. Natural gas exploded to a new high at $6.392 per MMBtu and settled at $6.312, up 54.6 cents on Tuesday. Natural gas is closing in on the February 2014 $6.493 per MMBtu high. Gold, silver, platinum, and copper prices declined. Palladium posted a gain but remained just below the $1,900 per ounce level.
December live cattle futures edged lower, but the November feeders rose as corn prices declined. December lean hogs edged lower to just over the 82.5 cents per pound level. March sugar was marginally higher, while coffee futures fell sharply and below the $2 per pound level. Cocoa edged higher, and cotton rose to a new high at $1.0893, up the 4.0 cents limit on the session as the parabolic price action continued. November FCOJ fell 4.90 cents to settle at $1.31 per pound. Lumber for November delivery was $9.70 higher to $642.50 per 1,000 board feet. Bitcoin exploded $1,950 higher to the $51,800 level. Ethereum was around $85 higher to the $3,530 level. On Wednesday, the Russell 2000 fell 0.64%, but the other indices posted gains. The NASDAQ moved 0.47%, and the S&P 500 gained 0.41%. The DJIA moved 0.30% to the upside. The VIX fell only 0.24 to the 21.06 level after a choppy session. The December US 30-Year Treasury Bond futures edged 0-10 higher to the 159-015 level.
The December dollar index futures contract rose 0.305 to settle at the 94.272 level. The index traded to a high of 94.455 on Wednesday as it moves towards a challenge of the recent 94.52 high, the highest level in 2021. In the grain sector, soybean and corn prices moved lower, while wheat posted a marginal gain. NYMEX November crude oil futures made a new high at $79.78 before turning lower and settling at $77.43 per barrel, putting in a bearish reversal on the daily chart. The latest API and EIA inventory data were bearish for the energy commodity. Gasoline and heating oil futures made new highs and turned lower, with gasoline futures putting in a bearish reversal. Gasoline cracks were slightly higher, while distillate cracks edged lower on the session. Natural gas also put in a bearish reversal. After rising to a new high at $6.466 per MMBtu, the price dropped to close at $5.675 on November futures, down 63.7 cents on the session. The energy commodity “put in” the reversal on the back of comments from Russian President Putin, who told Europe Russia is ready to supply gas to alleviate the shortages.
Gold edged higher while silver posted a marginal loss. Platinum was higher, while palladium moved lower. Copper fell 4.50 cents to settle at $4.1475 on the December COMEX futures contract. December live cattle and November feeder cattle futures rallied, while December lean hogs edged lower. March sugar futures drifted lower, cocoa fell, and FCOJ posted a marginal loss. Cotton rose to a new high at $1.1393 and settled at $1.1106 per pound. Coffee futures were 1.55 cents higher to settle at $1.9345 per pound. November lumber was down $5.80 to $634.70 per 1,000 board feet. Cryptocurrencies took off on the upside. Bitcoin was around $4,200 higher to over the $55,800 level. Ethereum futures gained around $100 to over $3,620 per token.
On Thursday, a compromise and settlement over the debt ceiling lifted stocks. The Russell 2000 rose 1.47%, and the NASDAQ moved 1.05% higher. The DJIA rallied 0.98%, and the S&P 500 gained 0.83%. The VIX dropped below the 20 level. The December US 30-Year Treasury bond futures fell 1-02 to the 158-13 level after making a lower low on Wednesday at 158-06. The December dollar index futures contract edged only 0.051 lower to settle at 94.221. Soybeans and corn futures edged higher, while wheat posted a marginal loss on the session. NYMEX November crude oil futures rallied $0.87 to settle at $78.30 but moved higher in the aftermarket. Gasoline and heating oil futures rose, but crack spreads edged lower as the products underperformed the raw energy commodity. The EIA reported a 118 bcf increase in natural gas inventories for the week ending on October 1. November futures were only 0.20 cents higher to settle at $5.677 per MMBtu.
Gold edged lower, while silver posted a marginal gain. Platinum and palladium prices rallied, with palladium leading the way on the upside with an $87.20 gain to the $1,955 per ounce level. Copper moved 9.60 cents per pound higher to settle at $4.2435 on the December COMEX futures contract. December live cattle and November feeders posted impressive gains, with the feeders leading the way higher. Live cattle closed just over the $1.30 level, with the feeders above the $1.60 per pound level. December lean hogs edged marginally higher to settle at just over 82 cents per pound.
March sugar edged higher, December coffee rallied to near the $1.98 level, cocoa was a touch higher, and cotton was up 0.55 cents to settle at $1.1161 per pound. FCOJ futures for November delivery fell 2.50 cents to settle at $1.2840 per pound. November lumber was $42 higher to $676.70 per 1,000 board feet. Bitcoin futures were $1,150 lower to $54,550, and Ethereum was under $10 higher to the $3,625 level.
On Friday, the latest jobs report was disappointing as the labor department reported 194,000 new jobs compared to market expectations for a rise of 500,000. Stocks moved to the downside, with the Russell 2000 falling 0.76% and the NASDAQ edging 0.51% lower. The DJIA was down only 0.19 %, and the S&P 500 posted a 0.19% loss. The December US 30-Year bond futures moved 0-25 lower to 157-21. The December dollar index was at the 94.079 level, down 0.142. Soybeans, corn, and wheat futures edged lower on Friday. Nearby NYMEX crude oil future probed above the $80 level for the first time since 2014, with the contract closing at $79.35 per barrel, up $1.05. Products moved higher, with gasoline cracks moving to the upside and heating oil cracks edging lower.
Natural gas futures for November delivery fell 11.2 cents to settle at $5.565 per MMBtu. Gold edged lower, silver edged higher, while platinum and palladium roared higher. Platinum moved back over the $1,000 level for the first time since early August, and palladium futures gained $118, pushing the price over the $2,080 level. December copper futures rose 3.20 cents to settle at $4.2755 per pound. December live cattle edged higher, while November feeders posted a marginal loss. Lean hogs fell a bit over a half a cent to settle at 81.50 cents per pound. March sugar futures rallied to over the 20 cents level, while December coffee futures were 3.45 cents higher to settle at $2.0135 per pound. December cocoa was $24 higher to $2,750, and FCOJ posted a marginal gain. December cotton fell 1.01 cents after making a new high at $1.1648. The explosive fluffy fiber settled at $1.1060 per pound. Lumber moved $42.40 higher to $719.19, moving over the $700 level for the first time since mid-July. Bitcoin futures close to unchanged at the $54,355 level. Ethereum fell around $50 to $3,571.75 per token.
On Monday, stocks moved lower, with the Russell 2000 falling 0.51%. The DJIA fell 0.72%, the S&P 500 was down 0.69%, and the NASDAQ declined 0.64%. The VIX moved 1.08 higher to 19.85The December US 30-Year Treasury bond futures fell 0-09 to 157-15 after falling to a lower low at 157-03. The December dollar index moved 0.247 higher to settle at 94.236. Soybeans continued to decline, while corn edged higher and wheat lower. Corn found support from energy prices. November crude oil continued to rally, reaching a new multi-year high at $82.18 per barrel and settling at $80.52. Product prices moved higher, but crack spreads reflected seasonal factors as gasoline refining spreads fell and distillate processing margins rose. Natural gas declined 22.0 cents to settle at $5.345 per MMBtu in volatile trading.
Gold and silver edged marginally lower. Platinum fell, but the price remained above the $1,000 per ounce level. Palladium rose $46.50 to settle at $2,119.50 per ounce. December COMEX copper futures moved 9.10 cents higher to settle at $4.3665 per pound. December live cattle edged lower, while November feeders posted a slight gain. December lean hogs fell to the 80 cents per pound level. March sugar futures edged higher, and coffee rallied. Cocoa, cotton, and FCOJ futures declined on Monday. November lumber continued to move higher, with the contract around the $760 per 1,000 board feet level, up around d $40 on the session. Bitcoin gained nearly $3,000 to over $58,000 per token. Ethereum futures were down around $85 to the $3,575 level.
On Tuesday, stocks did not move all that much, but the Russell 2000 led the way with a 0.57% gain. The NASDAQ was down 0.14%, and the S&P 500 edged 0.24% lower. The DJIA slipped 0.34%. The December US 30-Year Treasury bond futures recovered, moving 1-12 higher to 158-27. The dollar index moved 0.174 higher to the 94.500 level after reaching a new high for 2021 at 94.570. The USDA released its October WASDE report. The full details of the monthly agricultural fundamentals are available through this link. A summary was:
Soybeans and corn fell in the aftermath of the WASDE, and wheat prices edged higher. November beans fell below $12 per bushel for the first time since March 31. Corn declined, while wheat edged only marginally higher.
Crude oil moved 12.0 cents higher on the NYMEX November contract, with products on either side of unchanged. Cracks were little changed on the session.
November natural gas was up 15.0 cents to settle at $5.4950 per MMBtu. Gold edged higher, silver lower, and platinum moved slightly higher to remain above the $1,000 level. Palladium fell $71.70 to settle at $2,047.80 per ounce. COMEX copper for December delivery fell 4.10 cents to $4.3255 per pound. December live cattle edged lower, while November feeders posted a marginal gain. December lean hogs dropped 2.0 cents to settle below 80 cents at 78.175 cents per pound.
March sugar fell but remained just above the 20 cents level. Coffee roared 8.90 cents higher to settle at $2.1315 per pound. December cocoa slipped to the $2,675 level, and cotton dropped 3.41 cents to settle at $1.0638 per pound. FCOJ futures gained 1.55 cents after recent losses to settle at the $1.2710 per pound level. November lumber fell around $30 to the $730 per 1,000 board feet level. Bitcoin was $1,800 lower to around $56,200 per token. Ethereum, futures were $30 lower to just over the $3,500 level.
On Wednesday, stocks moved mostly higher. The NASDAQ led the way on the upside with a 0.73% gain, and the Russell 2000 was up 0.34%. The S&P 500 gained 0.30%, while the DJIA was unchanged. December US Treasury bond futures rose 1-08 to the 159-26 level. The dollar index fell 0.439 to settle at 94.080. Soybeans continued to move lower, closing below the $12 level on November futures. December corn and CBOT wheat futures declined. November NYMEX crude oil futures edged 20.0 cents lower to settle at $80.44 per barrel. Gasoline and heating oil futures moved higher, outperformed crude oil, pushing crack spreads higher. November natural gas futures were 8.50 cents higher to the $5.590 per MMBtu level.
Gold, silver, and palladium posted impressive gains on the session. Platinum edged higher to just below the $1,025 per ounce level. Copper exploded 19.05 cents higher to settle at $4.5160 per pound in the December COMEX futures contract. December live cattle and November feeders edged lower, while December lean hogs posted a marginal loss. March sugar fell below the 20 cents level, coffee, cotton, cocoa, and FCOJ futures all moved to the downside. The rally continued in the lumber arena, with November futures settling at $758.30 per 1,000 board feet, up $27.70. Bitcoin was at $57,470, up over $1,600, while Ethereum gained around $130 to the $3,620 level. The CPI data was inflationary with a 5.4% gain. The Fed minutes showed the central bank is ready to begin tapering QE. Inflation is not transitory based on the most recent CPI data.
Stocks and Bonds
Stocks were on either side of unchanged in choppy trading since September 29 while the long bond edged higher after reaching a new low. The stock market got nervous over the impasse surrounding the debt ceiling, but an agreement to fund the government until early December eased fears. The bonds made a lower low, which is typically bearish for stocks. The rise in energy prices has stoked inflationary fears, marking the return of the bond market vigilantes who appear to be pushing bonds lower and interest rates higher further out along the yield curve. QE tapering looks ready to begin before the end of 2021, but the jury is still out on who will be running the Federal Reserve in early 2022 when Chairman Powell’s first term expires. The latest CPI data is another sign that inflation is far from “transitory.” Over the past two weeks, the S&P 500 rose 0.10%. The
NASDAQ moved 0.41% higher, while the DJIA posted a 0.04% loss. The VIX was at the 18.61 level, 19.09% below the level on September 29, as the stock market experienced ups and downs but turned higher since October 1. We are in a seasonally challenging period for the stocks market at the beginning of the fourth quarter, but stocks were stabilizing as of October 13. The bond market fell to new medium-term lows over the past two weeks before recovering. Falling bonds have yet to significantly weigh on equity prices yet.
President Biden continued to ponder if he will reappoint Chairman Powell to another term as the Fed Chairman. Treasury Secretary Janet Yellen supports another term and continuity at the central bank. Progressive Democrats want a Fed chief that is far more on their page regarding climate change and social equity initiatives. At the most recent FOMC meeting, the Fed Chairman told reporters the markets should prepare for tapering to begin at the next FOMC meeting and suggested that it would be complete in mid-2022. He also set the stage for liftoff from a zero percent Fed Funds rate in late 2022, with three or four rate hikes on the agenda for 2023. However, last week’s employment report that shows 194,000 new jobs compared with an expected 500,000 in September was not good economic news. The Fed’s mandate is stable prices and full employment. While the unemployment rate fell to 4.8%, it is still well above optimal levels that could revise the Fed’s monetary policy plans. Inflation in the CPI is a reason for the Fed to move towards action.
Congress kicked the debt ceiling issue down the road to the beginning of December, and eleven Republicans joined with Democrats to provide another $480 billion to the cap, a short-term fix. The issue will come up again over the coming weeks, which could cause volatility in markets. Each 25-basis point hike would cost an additional $75 billion in debt servicing costs with the debt at the $30 trillion level. The Fed is caught between a rock and a hard place when it comes to increasing the Funds rate. Progressives will push the President to put a more dovish economist in the Chairman’s seat. Perhaps the most significant factor against a reappointment is that former President Trump put Jerome Powell in his current role.
I expect that another Fed chief will cause the market to expect higher inflationary pressures, which could be bullish for stocks and commodity prices. Senator Elizabeth Warren called Chairman Powell “dangerous,” increasing the pressure on the administration to replace him with a progressive economist. Another term for the current Chairman would likely lead to a more hawkish approach to monetary policy along the lines of the plans laid out at the September FOMC meeting.
Weakness in the Chinese stock market took a little break last week as President Xi and President Biden spoke and agreed to adhere to the status quo on Taiwan. However, the Chinese leader continues to advocate for reunification. Late last week, Charlie Munger bought Alibaba shares, in a sign that the stock declined to a level where value investors are bargain hunting. The latest DIDI IPO that reached a high of $18.01 on June 30 and was trading at the $8.30 level on Wednesday. DIDI rose 52.0 cents from the level on September 29 after the stock has made higher lows at $7.16 on July 26, $7.18 on August 19, and $7.26 on October 4. The FXI recovered from a new low and outperformed US stocks since the last report.
The China Large-Cap ETF product (FXI) settled at the $40.50 level on Wednesday, as it rose 5.03% since September 29. Technical support is at the October 4 $37.45 new low, the lowest level since May 2020. The FXI product remains far below the all-time peak at $73.19 back in 2007, while US stocks have made a string of record highs. The high in 2021 came on February 17 at $54.52, the technical resistance level that continues to fade into the distance. China is the demand side of the equation for commodities as it is the world’s second wealthiest and most populous nation.
As I have been writing:
“Chinese stocks carry significant political risk given the government’s heavy hand and role in business and international investments.”
Charlie Munger’s Alibaba (BABA) purchase is a signal that value investors are now accumulating Chinese shares at bargain prices compared to US shares.
December US 30-Year bonds edged higher since September 29. The bond market faces opposing forces as inflation increases, and the Fed continues to purchase $120 billion in debt securities each month. While tapering may begin at the next FOMC meeting, the central bank will continue to buy bonds. The Fed Funds rate remains between 0% and 0.25%, but the central bank only determines short-term rates. Medium and long-term interest rates are a function of the supply and demand for bonds. The quantitative easing program attempts to push bond prices higher, but rising inflationary pressures have had more effect, pushing bonds lower and interest rates higher.
The trend in the bond market and technical break on the downside was a sign that the Fed was losing control of the market on longer-term interest rates. The bonds broke lower over the past weeks after rising since March, running out of upside steam in July and August, consolidating in September, and making lower lows since late last month. Rising rates could eventually ignite selling in stocks and create another crisis for the central bank, which is between a rock and a harder place. The government stimulus under the Biden administration will continue to flow. Even if the Fed moves towards a slightly more hawkish stand on monetary policy, fiscal initiatives remain unprecedently dovish. A more dovish Fed chief could cause a battle between the bonds and the central bank.
Consumers are not exempt from rising food and energy prices, so the core CPI measure is a bit of a fantasy. Higher prices continue to take a significant bite out of consumers’ paychecks. Time will tell how quickly and decisively the Fed is willing to act. Last year the central bank changed its inflation target from 2% to an average of 2% in August. They got more than they bargained for with the CPI data in 2021. The central bank is now ready to taper, but a new Fed Chief could shift monetary policy over the coming weeks. Chairman Powell’s term will end in early 2022.
Even the most aggressive tax hikes in history will not pay for the trillion in stimulus and other initiatives over the past year and those coming before Congress in the immediate future. The US Treasury Secretary is worked with other nations to establish a 15% minimum corporate tax structure. The initiative pushes the US towards economic globalism.
On Wednesday, October 13, the December long bond futures contract was at the 159-26 level as it moved 0.31% higher over the past two weeks. The December 30-Year Treasury bonds futures made a low at 157-03 on October 11. The bonds broke below the first level of support, and technical support is at the 153-29 level, the continuous contract low from the week of March 29. Short-term technical resistance is at 160-20, the October 4 high on the December futures contract. Upward pressure on rates further out on the yield curve over the past year has been an inflationary signal for markets. With Chairman Jerome Powell at the head of the central bank and former Chair Janet Yellen, the Treasury Secretary, the doves have their hands firmly on the wheel of the US financial system. However, the situation could get even more dovish if progressive Democrats get their way and push the President to replace Chairman Powell. The bond market vigilantes appear to be back in the bond market, pushing prices lower and yields higher.
The Fed was encouraging inflation, but up until recently, it ignored the evidence in raw material markets and other asset markets that could lead to a far larger dose of the economic condition than it is bargaining for over the coming months. Once a ball begins rolling, it could pick up momentum and becomes more challenging to stop. The current concerns are over inflation or stagflation, which could be even worse for the economy.
Energy, agricultural, metal, and mineral prices had been trending higher over the past months. Bull markets rarely move in a straight line. Commodities can be highly volatile; they rise higher than most believe possible, and corrections can take prices far lower than logical levels. However, the trends since the 2020 lows remain very bullish despite the recent corrections over the past weeks. The most recent commodities to take the bullish torch had been coal, natural gas, and cotton, which rose to multi-year highs over the past two weeks.
Many commodities moved substantially higher over the past months. April and May were bullish months in the commodities sector, with more than a handful of raw materials rising to new multi-year highs and some reaching record levels. While many commodity prices have stabilized and moved lower since reaching highs, they remain far above the levels at the 2020 lows. The bullish price action has been like a relay race; while some commodities pull back, others have rallied to new highs. In July, coffee had the bullish baton. In August, it handed off to the sugar market, which probed above the 20 cents per pound level for the first time since 2017. Natural gas futures rose to the highest price since February 2014, when it reached $6.466 on October 6. Crude oil is back on the staircase at the highest price since 2014. The November contract made a new high over the past week at over the $82 per barrel level. Cotton traded at nearly $1.1650 over the past two weeks, the highest price since 2011.
The tidal wave of liquidity and tsunami of stimulus comes with a price tag that will not be satisfied with a gradual shift towards tightening monetary policy. The stock market’s rise over the past year could be a mirage as it may reflect a decline in money’s purchasing power instead of bullish fundamentals for many companies. Meanwhile, even the most aggressive bull markets rarely move in a straight line. Periodic severe selloffs are the norm, not the exception. Bull market corrections can be sudden and brutal, as witnessed in more than a few markets. The overall trend in raw materials and other asset prices, including stocks and cryptocurrencies, remains higher, a clear sign of inflationary or stagflationary pressures.
However, we are now at a time of the year when the stock market has a habit of correcting. October can be a challenging month for the stock market, adding to the uncertainty. However, stock prices have been surprisingly stable in October after two bouts of selling in October. The final months of 2021 could be a volatile rollercoaster in the stock market. Taxes are going to increase, and corporations are likely to pass along hikes to consumers, adding to inflationary pressures. Global tax agreements are a move towards supranational governing.
A capital gains tax hike could eventually cause selling in the stock market as investors cash in on significant profits and need to sell more shares to pay the government more at tax time. Moreover, higher corporate taxes trickle down to the consumer, so all Americans from rich to poor will be paying more to the government either directly or indirectly. Higher inheritance taxes could increase selling. Over the past years, retirement accounts have provided the stock market with consistent and natural buying, making the path of least resistance for stocks higher. Rising taxes could interfere with the phenomenon and balance buying and selling or even create periods where selling overwhelms buying, adding to stock market volatility and creating more significant downdrafts. US government remains divided even though Democrats have majorities in the House of Representatives and the Senate.
However, the majorities are razor-thin, and the midterm elections are coming closer each day. An agreement on infrastructure rebuilding will create more stimulus and stoke inflationary flames. The 2022 midterm elections will increase the partisan divide. The administration’s support has slipped in the polls because of the continuation of the pandemic, a hasty and problematic departure from Afghanistan, and other issues.
Compromise on the infrastructure and budget initiatives are likely to cause the spending to drop, which could divide Democrats along moderate and progressive lines. We will likely see the reductions come from cutting the spending timeline, which would set upcoming elections in 2022 and 2024 as referendums for the initiatives. Open interest in the E-Mini S&P 500 futures contracts fell 2.21% since September 28. Open interest in the long bond futures moved 1.02% lower over the period. Over the long term, fighting the Fed has been a losing battle, but the last year remains an exception. The bond market lined up with the Fed’s plans to tighten credit in late 2022, but the jury is still deliberating as it is unclear who will be running the central bank in 2022.
The VIX at 18.61 on October 13 was 19.09% lower since September 29. Taxes and regulations will increase, which is not bullish for the stock market.
As I wrote in the recent reports:
“I expect price variance in the stock and bond market to accelerate. The coming weeks are critical as they are historically the time of the year for speedbumps in the stock market. I have been buying VIX-related products as they fall and selling them on rallies, trading for small profits while adjusting risk-reward expectations according to market conditions.”
I continue to favor trading the VIX and related products from the long side on price weakness. However, VIX-related products are not for long term investments. They are instruments to buy on dips and take profits on rallies. Commodities and bonds have been significant barometers of inflationary pressures over the past year. In 2021, the bond market told us that the Fed policies have significant inflationary side effects. A correction in stocks could cause the bonds to turn higher.
Meanwhile, China is a substantial holder of US debt. As the tensions between Washington and Beijing remain elevated, any Chinese selling could push rates much higher further out along the yield curve. Financing the US debt through the bond market could cause the Treasury to issue bonds with longer maturities to pay for the trillions in stimulus packages, but they better hurry. Even though yields have increased, they remain historically low. Higher yields over the coming months and years could close a window of opportunity for fifty or one-hundred-year US debt securities to fund the deficit, which makes sense at today’s rates.
The administration is looking to raise tax rates and take advantage of the growing wealth. Markets remain more than bubblicious. We are either in a bubble, or fiat currencies are losing value at an accelerating pace. Higher interest rates and rising taxes are not a bullish cocktail for the stock market. However, TINA or there is no alternative to stocks for capital growth, and taxadvantaged retirement accounts continue to push money into the stock market. As of October 13, the bullish stock market continues to look a bit shaky. The trend in bonds was bearish as they fell well below the 161-01 level, which was a support level.
As I wrote over the past weeks, hedging stock portfolios at or near all-time highs could be the optimal approach given the uncertain future of markets. Markets reflect the economic and political landscapes, creating high odds for lots of volatility over the coming months. I believe a very volatile period is on the horizon, and we will see lots of two-way price action in markets across all asset classes sooner rather than later.
Be cautious in the stock and bond market, as they could become highly volatile over the coming weeks. We could see increased price ranges.
Substantial sell offs and corrections tend to arrive when the market least expects them. The market seemed to expect a correction after moving lower in late September, which could be why it has yet to occur. Expect the unexpected in stocks, bonds, and all markets over the coming weeks as markets face more than a few issues that could trigger significant price moves. I continue to favor the downside, but I am cautious as the long-term trend remains bullish for stocks.
The December dollar index futures contract edged lower over the past two weeks. The December futures fell 0.29% since September 29. The continuous dollar index contract reached a new high on October 12 at 94.570, the highest level since early September 2020. The dollar had been working its way higher since late May. The dollar index broke a bearish trend that had been in place since March 2020 in August, with the move above the 2021 93.47 continuous contract high.
Technical support on December futures is at 93.68, the October 4 low. Below there, it is at 91.78, 89.165, and 88.150, the continuous contract low from February 2018. The high at 94.795 in September 2020 on the continuous contract is now a technical target and resistance level. Above there, the June 2020 high at 97.810 is the next target. Open interest in the dollar index futures contract rose 13.57% over the past week. The prospects for higher US interest rates put upward pressure on the dollar’s value versus other leading world currencies throughout 2021. Dovish monetary policy and stimulus that increase the money supply would be a bearish factor.
Daily historical volatility in the dollar index was 4.06% on Wednesday, lower than on September 229. The weekly volatility measure stood at 4.42% on Wednesday, over a full percent lower than the level from the last report. Selling in the stock market and other asset classes or rising US interest rates would likely lift the dollar as the US currency is the world’s reserve foreign exchange instrument and a haven for safety in troubled times. The QE tapering schedule lifted the dollar to a new high for 2021. Stalling any tightening would likely push the index lower if historical patterns remain intact.
The December euro currency was 0.13% lower against the dollar. The euro is the other world reserve currency and accounts for 57.6% of the dollar index. Open interest in the euro futures moved 4.08% higher from September 28. The euro versus the dollar currency relationship was at the $1.16030 level on the active December futures. Support is at $1.15375, the October 12 low with resistance at $1.17750, the September 22 high.
Increasing energy prices across Europe likely weighed on the euro’s value.
The September pound rose 1.55% against the dollar since the previous report as the pound outperformed the dollar and the euro over the past two weeks. Open interest in the pound futures moved 0.62% higher over the past week. Europe is far more dependent on Russian gas and oil, and the UK is a producer of energy commodities, which could have caused the strength in the pound versus the euro and US dollar.
The dollar had been falling since March 2020, but the recent price action ended the technical bearish pattern. Currency markets rarely move in a straight line. Trends can continue for years with plenty of rebounds in bear markets or dips in bull markets. Governments manage the currency market via coordinated intervention to provide “stability.” Price spikes are rare, but trends can last for long periods.
A correction in stocks and other markets could cause the dollar to move higher over the coming weeks and months. Treasury Secretary Yellen is likely to follow a strong dollar policy in a departure from the former administration. The short-term trend in the dollar index is higher. The medium-term trend is also bullish. Meanwhile, the long-term trend dating back to 2008 is bullish. The dollar index is not likely to run away on the upside or the downside as intervention will keep the currency market stable.
Bitcoin exploded higher to $57,035.47 on October 13 despite China’s move to ban transactions and an increase in calls for US regulation. The leading digital currency moved 38.33% higher over the past two weeks in an explosive move from the higher low at just over the $40,000 level in late September.
Christine Lagarde, the President of the European Central Bank, and Janet Yellen, the US Treasury Secretary, continue to express concerns about the nefarious uses of cryptocurrencies. However, both are most likely more concerned about Bitcoin and the other digital currencies because they reflect a rejection of central banks and governments’ control of the global money supply. Expect concerns to rise with Bitcoin’s price and the asset class’s market cap. Government action is likely to have a high correlation with the value growth of cryptocurrencies. On May 3, the CME rolled out a new micro Bitcoin futures contract that is one-tenth the size of one token. The margin requirement for a micro Bitcoin future is around the $2,500 level. The micro could increase interest and trading in the Bitcoin futures arena as the volatility is a magnet for speculative interest. The larger standard contract experienced a substantial 55.11% increase in open interest over the past two weeks, while the metric in the micros also exploded higher. Rising open interest and increasing price is a technical validation of a bullish trend in futures markets. Bitcoin and other cryptos are now on a path to challenge the all-time highs from earlier this year.
COIN was trading at $246.78 on Wednesday, up $21.50 since September 29. The platform’s stock reached a low of $208 on May 19, well below the pre-listing $250 per share reference price. COIN traded to a high of $429.54 on its April 14 listing day. COIN is likely to reflect the ups and downs in the cryptocurrency asset class as it could become a proxy for the asset class’s market cap until other products emerge. COIN will profit from trading volume rather than prices. While bull markets tend to increase interest in markets, wild price swings can also lead to more speculative participation.
In the previous reports, I wrote:
“I view COIN as a pick-and-shovel play on the asset class and will look to buy shares on a scale down basis below the $230 level.”
COIN shares slipped below the reference level over the past weeks before recovering; I continue to rate the stock a hold at the current level.
ETF products would increase the addressable market for the asset class, which could push prices to even higher highs. Futures on Bitcoin and Ethereum caused rallies in the cryptos. As the access to the market expands, the price action has been bullish. ETFs would likely turbocharge the asset class. Coinbase’s listing as the leading crypto exchange and future ETFs are likely to open the door for regulations, which would be a compromise between the asset class and the European and US governments. The US and Europe are likely to increase efforts to roll out digital dollars and euros, given China’s plans for a digital yuan.
However, national digital currencies will still be different than the cryptocurrencies that embrace defi or decentralized finance. The ideological divide is a stumbling block for regulators looking to strike a balance for the asset class. The volatile digital currency asset class’s market cap moved higher over the past two weeks. Ethereum moved 24.88% lower since September 29. Ethereum made a new all-time high at $4,406.50 on May 12. Ethereum was at $3,515.93 per token on October 13. The market cap of the entire asset class rose 27.34% over the past week. Bitcoin outperformed while Ethereum marginally performed the asset class since the previous report. Ethereum is a faster and more efficient protocol which led to the recent outperformance compared to Bitcoin over the past months. Bitcoin has done better than Ethereum over the past weeks.
Market participants had been looking for the next Bitcoin, Ethereum, or other tokens that have provided spectacular rewards. However, many will wind up as dust collectors in those wallets in cyberspace. The number of tokens increased by 482 to 12,679 since the previous report, as the market remains hot. Some analysts believe the next milestone for Bitcoin is the $100,000 level or higher, while others were looking for it to drop to $10,000 or lower. The bulls seem to be in control as the price moved back to the $57,000 level. Parabolic markets can reach highs few believe possible, but gravity is a potent force once the furious buying stops and sellers become more aggressive, as we learned in May. As we witnessed in April, Bitcoin’s risk rose with its price. It seems that Bitcoin reached a bottom below the $29,000 level.
On Wednesday, the market cap was around $2.332 trillion. The market cap means a severe selloff is unlikely to cause any systemic disturbance to markets, but that may not be the case over the coming years if it continues to grow at an exponential rate. Short-term technical support for October Bitcoin futures is at $40,205, the September 21 low, with resistance at around the $58,335 level, the high from October 11 on the October futures chart. Continue to expect volatility in digital currencies, and you will not be disappointed.
A robust US-based ETF product that addresses custody would continue to add even more bullish fuel to the asset class. The higher the Bitcoin price and market cap of the asset class rises, the more likely governments will seek to regulate and control or even ban the cryptos, which is the leading risk for digital currencies.
Governments control the money supply, and digital currencies threaten that power, a warning and potential stumbling block after the recent explosive price action. Fighting an aggressive bull or bear has left more than a few market participants trampled over history. Be careful in the digital currency arena that has been one of the most aggressive bull markets in history. The asset class offers lots of opportunities, but risk is always a function of potential rewards. While the prices have moved higher with each innovation, we should expect events that trigger massive selling in the blink of an eye, so caution is critical when approaching the asset class. Only invest capital that you are willing to lose as risk is always a function of potential rewards.
Moreover, the decline in confidence in governments is another reason the asset class could continue to move towards the record highs from earlier this year. The trend in cryptos is higher, but it has been more than a bumpy ride. Be careful, as Ray Dalio said, governments have the power to “kill” the asset class.
The December Canadian dollar futures contract moved 2.52% higher since September 29. Open interest rose 8.27% over the past week. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that produces significant quantities of energy and agricultural products. Keep an eye on the oil and grain futures market for clues about the Canadian dollar, as it often acts as a proxy for commodity prices. Rising oil and gas prices likely pushed the C$ higher, bucking the trend in the euro versus the US dollar.
The December Australian dollar is also a commodity-based currency futures contract with a high degree of sensitivity to China’s economy. The A$ was up 2.66% since September 29. Open interest in the A$ futures was 1.65% lower since September 28. The geographical proximity to China makes the Australian dollar sensitive to events in China. The A$ is a proxy for both China and raw material prices. Economic strength or weakness in China often determines the path of the Australian economy. Australia has had a rough time with vaccinations as the country did not secure enough earlier this year. The government shutdown continues to weigh on Australia’s economy along with Chinese economic weakness. However, commodity production is a reason for the bullish price action in the A$.
In the long-term, the stimulus is bullish for commodities prices and both the Australian and Canadian currencies. Over the coming months and years, we could see significant gains in the C$ and A$ as commodity prices rise because of inflationary pressures caused by the increase in the global money supply. I believe the price action in 2020 in all markets was similar to 2008. In the years that followed, commodity prices soared because of the stimulus, taking the Australian and Canadian currencies appreciably higher against the US dollar because of their sensitivity to raw material prices. Over the long term, buying the A$ and C$ during periods of weakness could prove to be the optimal strategy. I have expressed a bullish opinion for the two currencies that I view as proxies for commodities prices over the past year.
I had been writing:
“I believe that any price weakness is a buying opportunity for the A$, and C$ over the coming weeks and months.”
I continue to favor the commodity-sensitive currencies because of their implied backing by natural resources. While fiat currencies are likely to continue losing value, I view the A$ and C$ as unique cases. They have implied backing from raw materials produced in Australia and Canada and exported to the world. The two nations produce far more commodities than they need to sustain their citizens. As such, they are supermarkets to the world and should reflect the bullish trend in commodity markets. The A$ has Chinese risk exposure and problems with the virus, accounting for its lagging the C$ in appreciation over the past months.
Over the past week, the volatile November Brazilian real futures contract fell 1.31% against the US dollar. The November Brazilian currency was trading at the
$0.180900 level. The real is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are sensitive to changes in the direction of the Brazilian real. Brazil has seen a significant number of infections and fatalities because of coronavirus, which could weigh on its currency value. I am bullish for the real because of Brazil’s commodity production. The nation is a supermarket to the world for many products, just like Australia and Canada.
However, Brazil has a far less stable political system and a poor economic track record given the many scandals over the past years and decades. The Brazilian currency is likely to continue to be far more volatile than the A$ and C$, but the same principles apply as raw material production underpins the value of the leading South American currency.
Meanwhile, the US’s political shift should put pressure on the Bolsonaro government, which will find itself isolated from other countries because of policy and ideological differences. President Bolsonaro is up for reelection in 2022. He could face formidable opposition given the suffering created by COVID-19. Brazil’s response to the pandemic has been criticized because of the President’s controversial leadership. The number of virus fatalities in Brazil moved above the 600,000 level over the past week. The President recently said that he would either continue to be the President after the upcoming election or be in jail or dead. Expect lots of volatility in Brazil based on those comments.
Weather in Brazil caused lots of price action in coffee in July as a frost threatened the crop and frozen concentrated orange juice futures rose to a new high. In August, sugar’s price exploded to a new multi-year high, and FCOJ moved even higher. All three corrected from the highs over the past weeks but remain at elevated levels. Coffee moved close to the recent high over the past week.
In the aftermath of the global pandemic, the price tag for liquidity and stimulus could cause inflationary conditions that would provide support for the A$, C$, and the Brazilian real. A rise in commodity prices helps to bolster the value of the real. I am a buyer of the real on weakness against the US dollar. Technical resistance is at $0.2073, the June 2020 continuous contract high, which is a critical target that could be a technical launchpad for the real. A change in the government could lift the Brazilian currency. Some market participants believe Brazil will follow El Salvador and adopt a cryptocurrency as its means of exchange. However, I doubt that will occur as supranational institutions like the World Bank and IMF do not favor using cryptocurrencies as national means of exchange, which would impact loan availability and funding protocols.
The dollar index broke out to the upside from a technical perspective. Currency trends tend to be slow as governments manage the level of their foreign exchange instruments using coordinated intervention. Meanwhile, I continue to believe that all fiat currencies are losing value. Watching one currency against another often masks the strength or weakness of the currencies that derive value from the faith and credit of the countries that issue legal tender. The dollar rose to a level making it the best horse in the glue factory in 2021.
Governments intervene and coordinate buying and selling in the currency markets to achieve stability, making the currency arena a highly manipulated asset class. The growing US national debt erodes the dollar’s value and position as the world’s reserve currency. Digital currencies and Fintech are likely to change the global nature of the foreign exchange market. However, regulators and governments will not capitulate until cybersecurity, custody, money supply, and carbon issues are addressed. I think we will eventually see a bifurcation that separates cryptocurrencies from digital currencies and stable coins.
Meanwhile, that may be a long way down the road. Bullish and bearish factors face the dollar index, but it is not likely to run away on the down or the upside. Cryptocurrencies staged an impressive rally over the past two weeks, increasing calls for new highs by the end of 2021.
Precious metals prices rose over the past week, with the most significant moves coming in silver, platinum, and palladium as they recovered from their recent declines. Gold and rhodium were up over 4% since September 23.
Palladium led the way higher over the past two weeks, with platinum also posting a substantial gain. Palladium moved back over the $2,100 level, and platinum eclipsed the $1,020 per ounce level since reaching lows in September. Silver recovered, and gold posted a gain since the last report. Rhodium prices moved higher along with the other precious metals.
December gold settled at $1,794.70 on October 13, up 4.17% since September 29. December futures traded down to a low of $1,677.90 on August 9, which had some hallmarks of a blow-off low. A flash crash caused by liquidation and sell stops was likely responsible for the Sunday night, August 8, fast and furious decline in the two leading precious metals. Over the past weeks, gold fell to $1,721.10 on September 29, as the dollar index reached a new high for 2021. Technical resistance for December gold is at $1,810.60 per ounce level, the September 14 high. Support is at $1,721.10, the September 29 low. Gold had made lower highs and lower lows from August 2020 through March 2021, but the lows have been higher over the past seven months. Support for December silver is at $21.410, the September 29 low, with resistance at $24.00 per ounce, the September 16 high. December silver settled at $23.17 on October 13, 7.84% above the price on September 29. Silver made a new low for 2021 at $22.41 at the end of September.
Gold and silver mining shares turned higher and outperformed the precious metals over the past two weeks, in a bullish sign for the commodities. The mining stocks tend to underperform the metals on the downside and outperform during rallies. Over the past weeks, mining shares have underperformed the metals, but that mostly reversed so far in early Q4. The GDX was 11.21% higher, and the GDXJ moved 15.31% to the upside. The SIL and SILJ silver mining ETF products that hold portfolios of producing companies moved 10.16% higher and 13.33% to the upside, respectively, since September 29. The action in the mining stocks support the metal prices as of October 13.
Gold underperformed silver since the previous report, pushing the silver-gold ratio lower after recent gains. The ratio reached a new modern-day high as risk-off selling hit the silver market in March 2020, taking the price below the $12 per ounce level. I will continue to trade leveraged derivatives and mining stocks on a short-term basis with tight stops. While gold mining stocks and derivatives follow the price of gold, they are not the metal and could experience significant periods of price deviation if risk-off conditions return to the stock market. I hold long core positions but will employ tight stops on any new positions that increase exposure to the two leading precious metals.
December platinum was 81.5% higher since September 29 and was at the $1,024.20 level. I pointed out that platinum put in a bullish key reversal pattern on the weekly chart in the previous report.
The chart shows that platinum followed through on the upside after the bullish technical patter, rising the highest price since early August over the recent trading sessions.
The Biden administration’s green agenda is supportive of platinum as its high melting point makes it a perfect metal for catalysts, but platinum fell in sympathy with the PGMs over the past week. The critical level on the upside stood at the August 2016 peak at $1,199.50. The move above that level sent continuous platinum futures to a high of $1,348.20 on February 16. Platinum corrected since the mid-February high. Support on the December platinum futures contract is now at $939.10 per ounce, the October 6 low. Short-term resistance is at $1,041.70, the October 8 high. Platinum has the potential to explode if it follows the patterns in the palladium and rhodium markets over the past years.
Rhodium is a byproduct of platinum, and the price of the metal had been in a bull market since early 2016. The highly volatile rhodium price was sitting at a midpoint price of $13,950 per ounce on October 13, up $550 or 4.10% since the previous report. December palladium exploded 15.07% higher since the previous report after falling to a new 2021 low over the past weeks. Palladium reached a new record high at $3,019 per ounce on May 4. Support is now at $1,825.50, the September 29 low, with resistance at $2,500, the August 30 high. December palladium settled at the $2,106.10 per ounce level on Wednesday, October 13.
Open interest in the gold futures market moved 1.32% lower over the past two weeks. The metric moved 5.13% lower in platinum. The total number of open long and short positions was 1.52% lower in the palladium futures market. Silver open interest fell 1.94% since September 28.
The silver-gold ratio moved higher over the past two weeks as gold underperformed silver.
The daily chart of the price of December gold divided by December silver futures shows that the ratio was at 77.64 on Wednesday, down 2.59 from the 80.23 level on September 29. The ratio fell to a low of 64.03:1 on February 22 and rose to 80.23 on September 29.
The ratio traded to over the 125:1 level on the high in March 2020. The long-term average for the price relationship is around the 55:1 level. The ratio rose to the highest level since futures began trading in 1974 as the price of silver tanked in mid-March. The move lower since then has been a supportive factor for the two metals. In 2008, the ratio peaked during the risk-off selling and then fell steadily until 2011.
As I wrote in the past reports:
“The ratio moved over the 70:1 level for the first time since late January, which could be another bearish sign for the precious metals. The ratio tends to move lower during bullish periods in the gold and silver markets.”
The price action in the ratio since March 2020 is historically a bullish factor for the precious metals. However, the recent selling had pushed the relationship higher and to a new high for 2021 at 80.23. The trend in the ratio had been a bearish factor for the gold and silver futures markets as it has made higher lows and higher highs since February 2021. The recent decline could finally be a bullish sign.
Platinum moved 8.15% higher, while palladium rose 15.07% over the past week. December Palladium was trading at a premium over October platinum, with the differential at the $1,081.90 per ounce level on October 13, which widened since the last report.
A slowdown in automobile manufacturing and substituting palladium with platinum in automobile catalytic converters likely impacted prices. October platinum was trading at a $770.50 discount to December gold at the settlement prices, which slightly narrowed since the previous report based on settlement prices.
The price of rhodium, which does not trade on the futures market, rose $550 or 3.36% since last week at the $13,950 per ounce level. Rhodium is a byproduct of platinum production. Rhodium was highly volatile in 2020 and moved at a new record high in early 2021. The price moved higher from a low at $575 per ounce in 2016 and reached the $30,000 level in 2021. The bid-offer spread in Rhodium remained at $2,000 per ounce. The spread is at a level that makes any investment in the metal irrational. Rhodium is an untradeable commodity, but it can provide clues about the price path of the other PGMs.
I continue to favor buying physical platinum as well as gold and silver during corrective periods. In gold and silver, the GLD, IAU, BAR, and SLV ETF products hold physical bullion and are acceptable proxies for the coins and bars. In platinum, PPLT and PLTM are the proxies. Leave buying scales wide during the current sell-off as it is impossible to pick bottoms. Since a NYMEX platinum futures contract contains 50 ounces of metal, purchasing a nearby futures contract on NYMEX and standing for delivery is a way to avoid significant premiums for the metal. At $1,024.20 per ounce, a contract on NYMEX has a value of $51,210. Platinum continues to offer the most compelling value in the precious metals sector. Platinum has been underperforming all other precious metals for over half a decade.
As I wrote over the past weeks:
“Platinum remains a compelling value when it trades below the $1,000 level for physical purchases.”
The value proposition did not mean the price could not fall further. The bullish reversal on the weekly chart could turn out to be a significant event for the platinum market.
The GLTR ETF product holds a portfolio of physical gold, silver, platinum, and palladium for those looking for diversified precious metals exposure. I continue to believe that gold will head a lot higher, but the route will not be in a straight line. The stimulus in the US and Europe continues to be highly supportive of gold and silver prices. Platinum is inexpensive from a historical perspective compared to gold and palladium. Palladium and rhodium continue to trade in bullish patterns, but both are sensitive to global economic conditions. We should continue to see volatility in all of the precious metals with a bias to the upside. I continue to favor investing in physical gold, silver, and platinum on price weakness. I hold long core positions. When it comes to trading, I am going with the flow.
As I have written in the past, the long-term ascent of gold marks the descent of fiat currencies that rely on the full faith and credit of the governments that print legal tender. Central banks and governments worldwide continue to hold and be net buyers of gold, which is the ultimate currency. According to the World Gold Council, Thailand, Hungry, and Brazil, along with other countries, have been buyers over the past months. The most bullish factor for precious metals is the loss of purchasing power for fiat currencies.
While countries can print legal tender to their heart’s content, the gold stock can only increase by extracting more from the crust of the earth. If 2020 turns out to be anything like 2008, even higher highs in gold are on the horizon, and the precious metal has the potential to surprise and even shock market participants on the upside in the coming months and years. Gold moved to a record high in dollar terms, and it reached new highs in virtually all other currencies over the past two years. Silver broke a four-year resistance level over the past months. The price action in silver had been explosive after the metal created a blow-off low below $12 per ounce in March 2020. The longer-term trend remains higher in the precious metals.
I have been writing:
“The odds of significant corrections rise with the prices, so be careful and remember to take some profits on the way up. I am a buyer on dips but would leave plenty of room as price swings could be wide.”
We are currently in the midst of an extended corrective period. I continue to purchase physical metals but remain short in trend following portfolios.
The Fed and other central banks’ approach to monetary policy continue to weigh on currency values. As the value of the dollar, euro, and other currencies decline, it creates an almost perfect bullish storm for the world’s oldest means of exchange, gold and silver.
The economic impact of the coronavirus is prompting the Fed to add even more liquidity to the financial system and will encourage the US government is putting new stimulus programs in place. The increasing money supply is bullish for precious metals prices. The falling bond market had weighed on gold.
Platinum was at a critical level at below $1,000 per ounce and seems to have survived. Production from South Africa declined because of platinum’s poor price performance over the past years.
As I have written over the past months:
“I continue to believe platinum is the metal that has the highest odds of a shocking price move to the upside.”
I expect the precious metals bull to eventually charge higher, but it is likely to be a bumpy road, as we witnessed over the past weeks. The bull market in gold began at the start of this century and continues as we are in its twenty-first year. However, there have been long periods of price consolidations and occasional downdrafts. Bull markets often suffer severe selloffs on the route to higher prices. Silver is the barometer for investment demand as it attracts the most speculators, as we witnessed recently. Meanwhile, demand from electronics and solar panels for silver and green technologies for PGMs continues to provide industrial support for the prices.
We have seen significant price appreciation in the digital currency asset class. Many “experts” believe that Bitcoin and other digital currencies are attracting investors that would typically purchase gold and silver. I continue to think that this is a short-term phenomenon. The sudden sentiment shift could produce rallies in the leading precious metals. Gold and silver have been a means of exchange for thousands of years, while cryptocurrencies have only been around for the past decade.
Moreover, since the digital currency asset class threatens the central bank and governmental control of the money supply, the risk of investing in many of these products is elevated given the recent parabolic gains. While I believe in the future of digital currencies, they are likely to experience lots of volatility as central bankers like Christine Lagarde’s call for regulation to stop the “speculative” price action. US Treasury Secretary Janet Yellen’s comments are also cautionary for the asset class. In an environment where the faith in governments is declining along with creditworthiness, gold and silver are likely to continue to attract investment demand. PGMs clean toxins from the air. A greener policy path in the US and worldwide to address climate change increases the demand for platinum and palladium. I continue to hold precious metals and add to physical positions on price weakness. Look to buy on weakness and avoid paying up for the metals during rallies.
Critical support for gold is all the way down at the $1,450.90 level, the 2020 low. I believe the long-term bull market trend will reawaken the gold and silver markets over the coming months.
Over the past weeks, I wrote:
“I have begun buying more gold mining stocks via GDX and GDXJ as I believe they will eventually outperform gold when the price of the metal begins to climb. I am using wide scales but believe we will see gold and silver at higher prices over the coming weeks and months.”
I remain bullish on precious metals, given the inflationary environment in markets across all asset classes. However, I will continue to use very wide scales over the coming sessions. Every significant dip in gold has been a buying opportunity over the past two decades. I remain a committed and cautious precious metals bull. I continue to buy and add to physical long positions on price weakness.
I continue to favor precious metals. The recent price action had been more than disappointing. Buying on weakness has been the optimal approach for years, and I expect that to continue. Inflation is ultimately bullish for gold and precious metals, and other commodities continue to signal that the economic condition is rising in September 2021.
The short-term bearish trends could be reversing. Precious metals were the worst-performing commodity market sector in Q3. Very often, the worst becomes the best in subsequent periods. I believe the relay race in commodities to higher highs will eventually pass the bullish baton back to gold and silver and that platinum will move higher. Palladium and rhodium corrected from lofty levels but seem to have found bottoms. I will trade with the trends and continue to add to long physical positions on periods of price weakness. Buying when the precious metals look the worst has been a winning approach for years, and I expect that to continue. Precious metals had been frustrating for the bulls. We could see a shift given the recent price action.
Energy commodities posted across the board gains since two weeks ago as energy shortages in Europe and Asia, inflationary pressures, and robust demand continued to lift prices of fossil fuels. Crude oil rose to new highs on the active month contracts. Oil products and crack spreads posted impressive gains. Natural gas exploded higher came down but still moved higher, and coal reached a new record high before correcting. Ethanol swaps also moved to the upside since September 29. November NYMEX crude oil futures rose 7.50% since September 29 to settle at $80.44 per barrel, after making a new high for the November contract over the past week at $82.18. NYMEX crude oil has been making higher lows and higher highs since April 2020.
Oil took an elevator lower in August before the price put in a bullish reversal on the daily chart on August 23 and the weekly chart at the end of that week. Over the past weeks, the price probed above the $80 per barrel level.
As I have been writing for months:
“OPEC and Russia are the prime beneficiaries of changes in the US regulatory environment. OPEC’s mission is to optimize returns for petroleum producers, which is bullish for the global petroleum markets. As I had been warning, the pricing power in the crude oil market has passed from the US to the oil ministers and Russia as the shift in US energy policy means less output from the country that was the world’s leading producer. The changes in global petroleum dynamics are a significant event with ramifications for the coming years. Rising tensions between President Biden and the Russians and Saudis only add to OPEC+’s desire to extract as much as possible from US consumers. The potential for much higher prices remains a clear and present danger. The administration’s request for OPEC+ to increase output would be comical if it weren’t tragic. At the latest OPEC+ meeting on September 1, the cartel officially denied the request, leaving production policy unchanged from the last meeting. The oil-producing nations basically spit in the US administration’s face in another policy disaster following on the heels of the Afghanistan debacle.
An inflationary environment increases the potential for higher oil prices. The administration ended oil and gas leases on federal lands in Alaska, which is not bearish for the prices of the traditional energy commodities. The move below $65 threatened crude oil’s bullish trend since April 2020.”
Crude oil continued to power higher over the past two weeks, reaching the highest price since 2014. Technical support sits at $74.96, the October 7 low, with resistance at $82.18, the high from October 11. The crude oil market rallied after the Biden administration said it was ready to release crude oil from the strategic petroleum reserve. The market moved higher after OPEC+ ignored US pleas for increase output. The price action was bullish over the past two weeks.
December Brent futures underperformed the NYMEX WTI futures as they moved 6.52% higher since September 22. The next technical resistance levels in December Brent is now at $84.60, the October 11 peak, and $86.74, the 2018 high. Brent for December delivery was trading at the $83.18 level on Wednesday, the highest price since 2018. Support is at $79.08, the October 7 low.
November gasoline rose 10.60% to the $2.4055 per gallon level after reaching $2.4186 on October 13. The gasoline processing spread in November rose by 23.85% since the previous report. The active month November gasoline crack spread was at $20.51 per barrel after the continuous contract traded to a high of $27.76 on August 9. Gasoline crack spreads tend to exhibit strength during the summer driving season in the US and weakness during the fall and winter months. The futures market is now in the offseason for gasoline demand during the winter months, but the energy commodity continued to ignore any seasonality because of developing shortages. November heating oil futures moved 9.39% higher since the last report. The active month November heating oil crack spread was 15.41% above the September 29 level. Heating oil is a proxy for other distillates such as jet and diesel fuels. Economic growth and increasing air travel demand boosted distillate prices over the past months. The November distillate crack spread closed on Wednesday at $25.39 per barrel after the continuous contract reached a high at $26.43 on October 6. Distillates received support from increased demand for air travel over the past months. The crack spreads are a real-time indicator of demand for crude oil as well as barometers for the earnings of refining companies that process raw crude oil into oil products.
I pointed out that:
“The crack spreads could be a significant indicator of demand over the coming weeks and months.”
Vaccines are bullish for energy demand the latest outbreaks were bearish. A cold spell over the coming weeks and months could ignite the energy commodities and push prices to higher highs in the US. Meanwhile, crude oil tends to take the elevator to the downside. On August 23, the selling stopped dead when the crude oil futures market put in a bullish reversal. By the end of the week, it put in a bullish reversal on the weekly chart. Crude oil and product prices suffered sharp pullbacks in mid-March but bounced back to make new and higher highs. OPEC+ and US energy policy are not bearish for the crude oil market. The measure of daily historical volatility in NYMEX crude oil was at 23.89% on October 13, higher than the level on September 22. The price variance metric was at over 64% in March when the market corrected. Since crude oil tends to take the stairs higher and an elevator lower, volatility tends to move lower during bullish periods and vice versa, which was a reason for caution in late July when it rose to over the 50% level. Daily historical volatility peaked at 50.43% on July 22. The metric is still at an elevated level compared to in June, when it briefly fell below 10% as the energy commodity was taking the stairs higher. Explosive price action has lifted the price variance measure as daily ranges expanded.
US energy policy is the most significant factor in the oil market in 2021. Daily production reached an all-time peak of 13.1 mbpd in March 2020. A more restrictive regulatory environment is likely to make that peak unattainable over the coming months and years. As the vaccines create herd immunity to the coronavirus, the demand for crude oil is likely to rise. OPEC and Russia are in a more influential position when it comes to supplies. Worsening US-Saudi relations that push the KSA towards Russia could exacerbate the rift and drive oil prices higher. Goldman Sachs reiterated that it was looking for higher highs and the $80 level over the coming months. They got their price and more over the past week. Crude oil posted gains over the past six consecutive quarters. The close over $73.46 tomorrow, on September 30, extended the streak to six quarters. Nearby futures have not traded below $50 since January 6. The price fell below $60 in March, and the level had become a pivot point for the energy commodity. In August, we moved back towards a test of the $60 previous pivot point and bounced appreciably higher to new highs in early October.
Meanwhile, the Middle East remains a potential flashpoint for the crude oil market. The area is home to more than half the world’s crude oil reserves. Any hostilities that cause supply concerns could send the price of crude oil for nearby delivery appreciably higher in the blink of an eye. The Middle East could provide surprises to the oil market, but global demand remains the primary factor for the price over the coming weeks. Iran remains a turbulent factor in the area that is home to over half the world’s crude oil reserves. Even though the Biden administration seeks to move back into the nuclear nonproliferation treaty with Iran, tensions between the two nations remain high. The dramatic shift in US production policy increases OPEC and Russia’s influence in the crude oil market, which is ultimately bullish for the price of the energy commodity. The situation in Afghanistan is weakening the US’s negotiating position in the Middle East and could open the possibility of hostile acts from enemies. Crude oil open interest moved 2.58% higher over the past week. NYMEX crude oil moved 7.50% higher since the previous report. The energy shares slightly underperformed crude oil since September 29. The XLE rose 6.56% since last week. When it comes to the energy-related shares, we should continue to see consolidation in the oil business over the coming months.
In previous reports, I wrote:
“I would only consider those with the most robust balance sheets like XOM and CVX in the US. Exxon and Chevron could stand to pick up lots of production assets at bargain-basement prices over the coming months as the number of bankruptcies rises in the oil and gas sectors. Both companies pay substantial dividends and have yet to cut or eliminate payments to shareholders. XOM and CVX are the two leading US integrated oil companies. I would only purchase these companies during corrective periods using wide scales.”
After buying the leading companies on weakness, I had taken profits on a scale-up basis. I added to long position positions over the past weeks during periods of price weakness.
The spread between Brent and WTI crude oil futures in December edged lower to the $3.36 per barrel level with a premium for Brent on October 13, down 17.0 cents since the previous report. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. However, in the first months of 2020, it was the carnage in the price of WTI futures that drove the spread to higher levels. Brent crude can travel by ocean vessel to consumers around the globe, while WTI is a landlocked crude oil. The lack of storage capacity was responsible for the price action in the spread and outright prices in late April 2020 that took nearby NYMEX futures into negative territory. Meanwhile, any problems with Iran could cause the Brent premium to spike higher. The US failure in Afghanistan could have an impact in the Middle East, which would cause increased volatility in the oil futures arena.
A decline in US production could cause significant volatility in the Brent-WTI spread. Before 2010, WTI often traded at a $2 to $4 premium to Brent. The WTI grade has a lower sulfur content making it the preferable crude oil for processing into gasoline, the world’s most ubiquitous fuel. If US output continues to decline significantly and demand returns to the market, we could see it impact the Brent-WTI differential and cause periods where WTI returns to a premium to the Brent, which is better suited for refining into distillate products. The spread also reflects the political risk in the Middle
East as the region uses the Brent price for its output. The USO and BNO ETF products replicate the short-term price action in WTI and Brent futures, respectively.
While both do an adequate job tracking the futures in the short-term, neither are particularly effective for medium or long-term positions because of the volatility of the forward curves in both crude oil benchmarks. The path of least resistance of the oil market will be a function of the ups and downs of the global pandemic and the stock market over the coming months. Iran and the pandemic continue to be factors that could prompt price volatility. Term structure in the oil market experienced a significant shift as the price of crude oil tanked in March and April 2020. The flip from backwardation to contango in the spread reflected the flood of supplies in the crude oil market. Oil traders filled tanks and storage all over the world to take advantage of the wide contango with financing rates at historic lows.
Cash and carry trades in the oil market became one of the only profitable areas of the market as demand evaporated back in February through April. The cash and carry trade put upward pressure on freight and storage rates. The forward curve had moved to the widest contango in years. The contango caused the price of May futures to plunge to an incredible low of negative $40.32 per barrel. As prices moved higher since late April 2020, the contango declined and moved into backwardation.
Since September 29, crude oil for delivery in November 2022, minus November 2021, moved from a backwardation of $6.75 to a backwardation of $8.32 over the period, tightening by $1.57 per barrel over the period. The backwardation traded at a new $8.32 high on October 13. In 2021, the November-November one-year spread had been in backwardation in a range from a $2.72 to $8.32 premium for the nearby contract. The backwardation widened to a new peak over the past week. Rising contango is a sign of a glut in the oil market while falling contango and backwardation signifies tighter supplies. Falling production causes the spread to tighten. Any problems in the Middle East could cause lots of volatility in the term structure for crude oil as they would likely push nearby prices higher compared to deferred levels. Over the past week, the backwardation in the November-November spread widened, which is a sign of tight supplies.
The number of rigs operating in the US was up twelve over the past two weeks. According to Baker Hughes, on October 8, the number of rigs in operation was at 433, 240 above the level last year at the same time. The rig count dropped during the storm that gripped the Gulf Coast states. While US energy policy will cause drilling activities to decline, the number of rigs operating dropped precipitously last year as the pandemic caused industrial activity, mining, and drilling to grind to a halt. Higher prices are causing rig counts to rise in the US, but not at the same rate they would given the regulatory environment under the Biden administration.
US daily production stood at 11.30 million barrels per day of output as of October 1, according to the Energy Information Administration, up 200,000 bpd since the previous week as production recovered after Hurricane Ida. As of October 1, the API reported a rise of 951,000 barrels of crude oil stockpiles, while the EIA said they increased by 2.30 million barrels for the same week. The API reported a rose of 3.682 million barrels of gasoline stocks and said distillate inventories increased by 345,000 barrels as of October 1. The EIA reported that gasoline stocks rose by 3.30 million barrels and said distillate stockpiles moved 400,000 barrels lower. The inventory data was bearish for the crude oil market. but that did not stop the price from rising. As of October 1, US production dropped by 1.80 million barrels per day or 13.7% since the March 2020 record high in output.
OIH and VLO shares surged since September 29. OIH was 9.06% higher, while VLO moved 11.14% to the upside over the period. OIH was trading at $217.30 per share level on Wednesday. I am holding a small position in OIH. We are long three units of VLO at an average of $63.81 per share. VLO was trading at $78.14 per share on Wednesday. The shares should follow the crude oil and stock market over the coming days and weeks. I am cautiously bullish on both and added to long positions on the recent dip, increasing the holdings.
November NYMEX natural gas has a wild two weeks, with the price reaching a new high at $6.466 per MMBtu on October 6, then correcting to $5.168 per MMBtu.
Meanwhile, natural gas was steady at the $5.59 level on October 13 as the winter months will begin in a few short weeks. Natural gas futures moved 2.06% higher than the price on September 29 after rising to a new high at $6.466 on October 6.
Support in November natural gas futures is at $5.168 per MMBtu, the October 12 low. Technical resistance is at $6.466 and $6.493, the February 2014 high. Natural gas put in a bullish reversal on the weekly chart on the week of June 21 and exploded on the upside. Natural gas had not traded above the $6 level in September since 2008.
Natural gas prices in Europe and Asia reached record highs over the past two weeks.
The EIA said stocks rose by 118 bcf to 3.288 tcf for the week ending on October 1. Stocks were 13.9% below last year and 5.1% below the five-year average. The EIA will report inventory data for the week ending on October 8 on Thursday, October 14. The market expects a 110 bcf injection into storage.
Stockpiles peaked at 3.958 tcf before the beginning of last year’s peak season. Baker Hughes reported that a total of 99 natural gas rigs were operating in the US as of October 8, unchanged from two weeks ago and 26 above last year’s level. LNG shipments to destinations outside the US are an expanding demand vertical for the natural gas market, pushing the number of operating rigs higher. However, US energy policy that increases regulations on fracking could weigh on further increases and supplies and support the price of the energy commodity. At the end of the 2019/2020 withdrawal season, stocks reached a low of 1.986 tcf. We declined below that level on February 19, 2020. The low in the 2020/2021 withdrawal season was 1.750 tcf, 236 bcf lower than the 1.986 tcf at the start of last year’s injection season.
If production declines because of the regulatory environment in Washington, DC, we should expect injections to continue to flow into storage at a slower pace in 2021 than in 2020, which has put upward pressure on the natural gas price. We have seen that trend develop over the past months throughout the injection season. Increased demand because of hot weather and a booming LNG export market is only feeding the bullish natural gas futures market. Cheniere’s CEO recently told CNBC that his company, the leading US LNG company, was sold out of LNG for the next twenty years because of rising Asian demand for the energy product.
Two weeks ago, Mark Fischer, a long-term successful natural gas trader on NYMEX, said that natural gas prices could explode to $12 if the weather is cold during December based on the price action in Europe and Asia. Open interest moved 3.63% lower in natural gas over the past week. Price momentum and relative strength on the daily chart were on either side of neutral readings and trending higher on Wednesday after the recent price volatility, move to new highs, and bearish reversal. I continue to expect the natural gas market to reflect the shift away from fossil fuel production under the Biden administration. Lower production could lead to higher base prices for the energy commodity. The shift in US energy policy is clearly bullish for oil and gas. The risk of a correction increased with the volatile price, but the trend remains bullish. We have been bullish on natural gas for more than one year and see no reason to change that view.
However, the rally will eventually end abruptly. Day trading natural gas offers many opportunities, but make sure you approach the market with a risk-reward plan and stick to it no matter what. Natural gas has destroyed more stubborn market participants than almost all other markets. Do not be one of the statistics.
November Chicago-swap ethanol prices were 10.26% higher since September 29, with the price at $2.0950 per gallon wholesale. The price of November thermal coal futures for delivery in Rotterdam surged 16.41% since last week after significant gains in previous reports. The demand for metallurgical coal for steel making had been robust over the past months. Thermal coal for delivery in Rotterdam is trading at the highest level since July 2008 at $230.50 per ton. The record peak in nearby coal futures was at $224 in July 2008. Over the past two weeks, coal hit a new record high at $286.05 per ton. On Wednesday, October 13, the API reported that crude oil inventories rose by 5.213 million barrels for the week ending on October 8. The API said gasoline stockpiles fell by 4.575 million barrels, and distillates decreased by 2.707 million barrels for the week. The EIA will report on inventories for the week ending on October 8 on Thursday, October 14 because of Monday’s federal holiday. The API report was mixed for the price of the energy commodity as the fall in product stocks offset the rise in crude oil inventories.
Weather, US energy policy, geopolitical events, the stock market, and the US dollar will guide the price action in the crude oil market over the coming weeks and months. Natural gas is in the injection season.
While natural gas typically displays weakness during the injection season, changes in US energy policy supported the price. US relations with Iran and Saudi Arabia could add to price volatility in the oil market over the coming months and years.
I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, I have been using the BOIL and KOLD products, which offer some leverage on the long and short sides. We are holding a long position in PBR, Petroleo Brasileiro SA. At $11.05 per share, PBR moved 6.46% higher since September 29. I have a small position that I will hold as a long-term investment.
As I wrote when the shares dropped below the $8 level:
“I believe PBR is at a level that offers compelling value at below $8 per share.”
Tight stops continue to be the key when approaching energy commodities in the futures or ETF arena. I am only bought the top companies and ETFs, including XLE, CVX, XOM, OIH, VLO, TOT, BP, RDS-B, and PBR. As of October 13, my position was around 88% the level as when we moved towards the early July high, and I took profits.
Energy powers the world, and demand is critical throughout the rest of 2020. A sudden drop in the US stock market would likely weigh on crude oil prices. I am trading natural gas from both sides of the market with very tight stops. I have only been trading in the crude oil and natural gas markets with very tight stops on futures and ETF products. I have been a buyer of leading oil companies. Keep an eye on events surrounding Iran as they could cause sudden price spikes. When taking risk positions home overnight or over weekends, keep the potential for Iranian provocations in mind. The theocracy in Teheran may want to further test the US as they look for an edge in nuclear talks and sense weakness because of the events in Afghanistan in late August.
Meanwhile, the move below $65 threatened the short-term trend. Crude oil held the $60 level and eclipsed the $80 level over the past week. In natural gas, US energy policy could be the most influential factor in 2021. Warren Buffet made a $10 billion investment in natural gas infrastructure in mid-2020, which was a vote of confidence for the future price action. Natural gas more than quadrupled from its price at the June 2020 low at $1.432 per MMBtu at the most recent high. I believe the base price for natural gas will continue rise over the coming months and years. In the short term, the risk of a correction rises with the price.
Expect the unexpected in the energy sector. Crude oil will be watching the developments surrounding COVID-19 variants and the Chinese economy, along with the many other issues impacting the US and global economies. If the Fed stalls on tapering QE, we could see the dollar fall, which would support oil prices that are heading for a test of the early July peak. Brent and WTI have already moved to higher levels over the $80 per barrel this week.
Natural gas corrected from an explosive bullish trend and came storming back to make a new high in explosive fashion before correcting again. Ethanol reached a short-term peak and moved lower over the past weeks but stabilized and moved back over $2 per gallon. Coal reached a new record peak. Bull markets rarely move in straight lines. Corrections have found higher lows in the energy sector. Energy-related companies are making huge profits, and no new companies are coming into the US markets because of the path of energy policy.
While alternative fuels are the future, hydrocarbons remain the present. Consumers will pay higher prices as the cartel now has control. I agreed with Goldman Sachs that we would see the $80 level and higher sooner rather than later. Some analysts are calling for $90, but triple-digit levels could be on the horizon. Nothing changed my opinion of the energy sector over the past week. We may be coming into a seasonally weak time of the year in gasoline, but US energy policy could be the most bullish factor for oil, natural gas, and coal as the fundamental equation continues to favor higher prices. The trend is always your best friend, and it remains bullish in the energy sector. The risks rise with the prices. Be cautious. Protect capital on profitable positions in the energy sector, but the trend has been our friend.
Wheat prices moved higher, while corn and soybeans declined over the past two weeks. The 2021 harvest season will be wrapping up over the coming weeks as we head into the winter months. The focus now shifts below the equator at the beginning of the 2021/2022 crop year. The cost of production has risen dramatically, weighing on profit margins for farmers that feel they are in a now in situation after years of lower price levels. Energy, fertilizer and equipment prices have moved appreciably higher. The USDA released its October World Agricultural Supply and Demand Estimates report on Tuesday, October 12. The full text of the monthly report is available via this link.
I reached out to Sal Gilberte, the founder of the Teucrium family of CORN, SOYB, and WEAT ETF products for his take on the October WASDE report. Sal told me:
It looks like the USDA has found more beans than the markets expected for the second time in as many weeks. The soybean balance sheet is loosening but has a long way to go before supplies approach the levels we had only two years ago. At current price levels, corn is penciling as a more profitable crop for farmers to plant next season, which could keep soybean supplies somewhat restrained from here. That said, soybeans may gain favor with farmers as the price of fertilizer keeps rising, which will affect corn planting and fertilization rates in the coming season, and that could provide more soybean supply. Markets are in a general state of equilibrium right now but will likely test downside price levels a bit during this time of seasonal price weakness due to the Northern Hemisphere’s peak harvest in October, but overall higher price ranges are benefiting farmers around the world which should incent more planting of all crops, if the weather cooperates. Wheat’s balance sheet continues to tighten, with robust demand and inconsistent weather patterns affecting supply in various places around the globe. Wheat prices are firm post report, soybean prices are testing six-month lows, but are still far above year ago price levels.
November soybean futures fell 6.89% since September 29 and were at $11.9525 per bushel on October 13. The price of new crop soybeans reached a high of $14.80 on June 7. The continuous contract reached $16.7725 in May, an over eight-year high. Support on November futures now stands at $11.8400, the March 31 low. Technical resistance is at $12.6250, the October 8 high.
Technical resistance at $12.6250, $13.08, $14.80, $16.7725, and $17.9475 per bushel, the all-time 2012 high. Soybeans are now in the 2021 harvest season. Open interest in the soybean futures market moved 10.61% higher since September 28. Daily price momentum and relative strength indicators were at oversold readings on Wednesday. The USDA told the soybean market:
“U.S. oilseed production for 2021/22 is forecast at 130.8 million tons, up 1.5 million from last month with higher soybean production partly offset by lower forecasts for sunflowerseed, canola, peanuts, and cottonseed. Soybean production is forecast at 4.4 billion bushels, up 74 million on higher yields. Harvested area is unchanged at 86.4 million acres. The soybean yield is projected at 51.5 bushels per acre, up 0.9 bushels from the September forecast. The largest production changes are for Iowa, Minnesota, and Nebraska. Soybean supplies for 2021/22 are projected at 4.7 billion bushels, up 145 million on higher production and beginning stocks. With higher crush and unchanged exports, 2021/22 ending stocks are projected at 320 million bushels, up 135 million from last month. The U.S. season-average soybean price for 2021/22 is forecast at $12.35 per bushel, down 55 cents reflecting larger supplies. The soybean meal price is forecast at $325.00 per short ton, down $35.00. The soybean oil price forecast is unchanged at 65 cents per pound. Foreign 2021/22 oilseed production is lowered 2.4 million tons to 497.4 million on lower soybean, sunflowerseed, and rapeseed output. Soybean production is lowered for Argentina, India, and the EU. Argentina’s production is lowered 1.0 million tons to 51.0 million on lower harvested area. Sunflowerseed production is lowered for Ukraine and Russia on recent harvest results. Canola production for Canada is lowered 1.0 million tons to 13.0 million, reflecting reports by Statistics Canada. Global soybean supply and demand forecasts for 2021/22 include higher beginning stocks, lower crush, and higher ending stocks. Higher beginning stocks reflect increases for the United States, Argentina, and China. Argentina’s beginning stocks are raised on a downward revision to 2020/21 crush. The 2021/22 crush for Argentina is also lowered, leading to lower exports of meal and oil. China’s 2020/21 crush is lowered 1.0 million tons to 93.0 million based on end of year data. Global soybean ending stocks for 2021/22 are increased 5.7 million tons to 104.6 million, with higher stocks for the United States, Argentina, and China.”
Source: USDA October WASDE report
As Sal said, the USA “found” more beans, pushing inventories higher and prices lower to under the $12 per bushel level.
The December synthetic soybean crush spread moved 43.00 cents higher since September 29 to $1.46. The December crush reached a high of $1.5025 on June 30 and made a new low for 2021 on September 10 as it fell below the previous January 19, 2021, 91.25 cents low to 80 cents. Volatile conditions in soybean futures translated to high price variance in the crush spread over the past months. Keep an eye on the processing spread as it is a barometer of demand for soybean products. Port and logistical issues in Brazil caused supply shortages. Chinese demand for soybeans and soybean products remains robust. The rally in the crush spread could be an eventual bullish sign for the soybean futures that are searching for a bottom. At low prices, China could accelerate purchases.
December corn futures were trading at $5.1225 per bushel on October 13, which was 4.96% lower since the previous report. The continuous corn futures contract rose to a new high of $7.75, which is the chart point for the coarse grain. Open interest in the corn futures market moved 0.46% higher since September 28. Corn’s high at $7.75 on May 7 was the highest price since October 2012. While the weather had been the primary factor driving corn prices, energy prices are a significant input for corn as it is the primary ingredient in US ethanol production. Rising oil, gas, and biofuel prices are bullish for corn.
Technical metrics were below neutral territory and falling in the corn futures market as of Wednesday. Support on December corn futures is at the $4.9750 level, the September 10 low. Resistance is at $5.4850, the September 30 high. The USDA told the corn market:
“This month’s 2021/22 U.S. corn outlook is for slightly higher production, increased exports, lower feed and residual use, and larger ending stocks. Corn production is forecast at 15.019 billion bushels, up 23 million on a marginal increase in yield to 176.5 bushels per acre. Corn supplies are forecast up 72 million bushels from last month, on slightly higher production and increased beginning stocks based on the September 30 Grain Stocks report. Exports are raised 25 million bushels reflecting larger supplies and expectations of reduced competition from other major exporters. Projected feed and residual use is lowered 50 million bushels based on indicated disappearance during 2020/21. With supply rising and use falling, corn ending stocks for 2021/22 are raised 92 million bushels. The season-average corn price received by producers is unchanged at $5.45 per bushel. WASDE-617-2 Grain sorghum production is forecast higher from last month, with a 2.6-bushel per acre increase in yield to 72.3 bushels per acre. Barley and oat production estimates are updated based on the September 30 Small Grains Summary report. Global coarse grain production for 2021/22 is forecast down 2.9 million tons to 1,494.0 million. The 2021/22 foreign coarse grain outlook is for lower production, virtually unchanged trade, and larger stocks relative to last month. Foreign corn production is forecast essentially unchanged as increases for the EU, Canada, Venezuela, and Serbia are largely offset by declines for Ukraine, Russia, and Guatemala. EU corn production is raised reflecting increases for Poland and Romania more than offset declines for France and Bulgaria. Corn production in Canada is higher reflecting favorable yield prospects for Ontario. Projected corn yields for Russia and Ukraine are lowered based on reported harvest results to date. Corn exports are raised for India, the United States, and the EU, with partly offsetting reductions for Ukraine, Russia, and Vietnam. For 2020/21, corn exports for Brazil are lowered for the local marketing year beginning March 2021, based on shipments through the month of September. For 2021/22, corn imports are lowered for Vietnam, Chile, Algeria, Israel, Lebanon, and Saudi Arabia, but raised for Bangladesh. Foreign corn ending stocks are higher, mostly reflecting increases for China and Mexico, with a partly offsetting reduction for Ukraine. Global corn stocks, at 301.7 million, are up 4.1 million.”
Source: USDA October WASDE report
Corn stocks and production were higher, weighing on prices.
Corn will continue to be sensitive to the price path of gasoline. Ethanol production in the US accounts for approximately 30% of the annual corn crop. The price of the illiquid November ethanol swaps moved 12.90% higher over the past week to the $2.0950 per gallon level. The spread between November gasoline and November ethanol swaps was at 31.05 cents per gallon on Wednesday, with gasoline at a premium to ethanol. The spread moved 3.55 cents higher since September 29 as gasoline rose more than ethanol over the past week on a percentage basis. The prospects for ethanol prices are a function of gasoline, crude oil, and corn prices over the coming weeks. Energy gains support the corn futures market.
Nearby CBOT wheat futures rose to a new high at $7.7475 per bushel on August 13, the highest price since February 2013. December CBOT wheat futures moved 1.20% higher since September 29. The December futures were trading at the $7.1875 level on October 13. Open interest increased by 7.41% over the period in CBOT wheat futures.
Technical resistance on December is at $7.6350 per bushel, the October 4 high, $7.7475, and $9.4725, the 2012 peak. Support is at $7.0125, the September 30 low. Price momentum and relative strength in CBOT wheat were above neutral readings and trending lower on Wednesday.
The USDA told the wheat market:
“The outlook for 2021/22 U.S. wheat this month is for reduced supplies, lower domestic use, unchanged exports, and decreased ending stocks. Supplies are reduced primarily on lower production from the NASS Small Grains Summary, issued September 30. Supplies are also lowered on reduced imports, down 10 million bushels, to 125 million on the import pace. Annual feed and residual use is lowered 25 million bushels to 135 million despite the NASS Grain Stocks report indicating greater disappearance in the first quarter compared to last year. Significantly reduced supplies of Hard Red Spring, Durum, and White wheat for 2021/22 are expected to curtail feed and residual use for the remainder of 2021/22 along with the continued large price premium of wheat over corn. Exports are unchanged at 875 million bushels but there are offsetting by class changes. Projected 2021/22 ending stocks are reduced 35 million bushels to 580 million, which are the lowest U.S. ending stocks since 2007/08. The projected 2021/22 season-average farm price is raised $0.10 per bushel to $6.70 on reported NASS prices to date and price expectations for the remainder of 2021/22. The global wheat outlook for 2021/22 is for reduced supplies, lower consumption, nearly unchanged trade, and smaller ending stocks. Supplies are projected falling by 8.6 million tons to 1,064.2 million, primarily on the combination of reduced beginning stocks for Iran and reduced production for Canada, Iran, and the United States. Iran’s 2021/22 beginning stocks are lowered 3.6 million, the result of a multi-year production revision from 2017/18 onward. Iran’s 2021/22 production is lowered 1.5 million tons to 13.5 million, based on indications of greater 2021/22 imports driven by reduced domestic supplies. Canada’s production is reduced 2.0 million tons to 21.0 million on reduced harvested area as increased abandonment is expected from the severe drought affecting the Prairie Provinces this past summer. Projected 2021/22 world consumption is lowered 2.6 million tons to 787.1 million with the majority of the reduction for food, seed, and industrial use in India and Canada and feed and residual use for the United States. Projected 2021/22 global trade is fractionally lower at 199.6 million tons on lower exports by Canada that are nearly offset by higher exports by Australia, the EU, and India. Projected 2021/22 world ending stocks are reduced 6.0 million tons to 277.2 million and are the lowest since 2016/17 with Iran, the United States, and Australia accounting for most of the reduction.”
Source: USDA October WASDE report
US and global wheat stocks declined, supporting prices of the primary ingredient in bread.
As of October 13, the KCBT-CBOT spread in December was trading at a 3.0 cents per bushel premium, with KCBT higher than CBOT wheat futures in the December contracts. The spread moved 1.50 cents higher since September 29. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers.
As I had been writing:
“at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”
The spread had not traded at a premium for KCBT wheat in years, which was a sign that consumer hedging was increasing as wheat prices continue to make higher highs making them nervous. The potential for a continuation of even higher prices could cause consumers to increase hedging their requirements. Consumers tend to panic when the price moves higher. The KCBT-CBOT spread moved marginally towards the long-term norm over the past week, and the trend over the past weeks remains bullish. Keep an eye on the spread as it could be an excellent barometer of hedging activity and panic buying by consumers over the coming weeks and months. Deteriorating US-Russian relations could also impact the wheat market over the coming months.
Spring MGE wheat was at $9.4875 per bushel on the December contract on October 13, up 45.25 cents over the past two weeks. The spring wheat suffered from adverse weather conditions, creating shortages. I expect elevated volatility to continue over the coming weeks as the 2021 crop year heads towards the fall harvest. I had been a buyer of grains in the futures and ETF markets over the past months.
Over the past months, I have written:
“From the 2008/2009 lows through 2012, the prices exploded higher in the aftermath of the global financial crisis, which could be a model for 2020 and the coming years.”
As always, the weather conditions determine supplies and are the most significant fundamental factor each year. Bull market corrections can be severe. I will be following trends in the grain sector during the harvest.
As the chart of soybeans for delivery in November 2022 divided by corn for delivery in December 2022 shows, the ratio is near the average at the 2.35:1 level. Keep an eye on the spread over the coming weeks and months as it is an excellent value indicator telling is if beans or corn are historically expensive or cheap.
As I have written over the past weeks:
“The grain and oilseed price action continues to tell us that food prices will remain elevated into 2022.”
Prices remain appreciably higher in October 2021 than they were in October 2021. It costs a lot more to eat this year, and the demand is likely to rise with the population, which is not bearish even at the current price levels.
Base Metals & Industrial Commodities
Lumber led the way higher in the industrial commodities over the past week, with the Baltic Dry Index, a barometer for freight rates, also posting a significant gain. On the London Metals Exchange, all of the nonferrous metals moved higher, with zinc leading on the upside, followed by aluminum, nickel, copper, lead, and tin forwards. The closing prices were as of October 12, and copper exploded higher on October 13. COMEX copper was up over 7.50% from the price on September 29. Iron ore prices rebounded, while physical uranium moved lower over the past two weeks. Uranium stocks posted impressive gains since the previous report. December COMEX copper moved 7.55% higher since September 29. The red metal hit a new all-time peak on May 10 as the continuous contract reached $4.8985.
December futures settled at $4.5160 per pound on October 13 after trading to a high of $4.8705 on May 10 and a low of $3.9665 on August 19. Three-month LME copper rose 2.12% to $9,465.00 per ton on October 12. Open interest in the COMEX futures contracts was 5.31% higher over the past two weeks. Short-term technical support for the December copper futures contract is at $4.1140, the October 6 low. The next significant level on the downside is at $3.9615, the continuous contract low from mid-August. Technical resistance for December futures sits at $4.5860, the July 27 high. Copper exploded over 19.0 cents higher on October 13.
Chinese demand and output from South American producers will continue to be the most significant factors in the path of the price of copper over the coming weeks and months. Meanwhile, increased demand from green technologies is increasing copper requirements while supplies are not keeping pace. It takes nearly a decade to bring a new copper mining project online. A US infrastructure program will increase copper demand. The trend in copper remains bullish, but as I wrote, when copper was on the way up, the risk of a correction rose with the red metal’s price. Goldman Sachs expects copper to rise to a new all-time high calling the metal the “new oil.” Jeff Currie, Goldman’s commodity analyst, pointed out that the inflation-adjusted high in the LME copper forward market came in the 1960s at over $14,000 per ton. Goldman expects the price to rise to the $15,000 per ton level in 2025. The investment firm’s 2011 target was the $11,000 per ton level. Copper rose to over $10,700 per ton at the May 10 high. Other analysts are calling for even higher prices for the red metal. Bull markets can take prices higher a lot faster than analysts believe possible, but they also suffer periodic corrections, which can be brutal.
Meanwhile, the US infrastructure rebuilding package that will put the world’s leading economy on a green path should support copper demand. China has attempted to cool the bullish price action in the market. On September 1, China auctioned 150,000 tons of copper, aluminum, and zinc from strategic stockpiles, which was the third auction sale since early July, attempting to temper the market’s bullish price action. The market had expected the sales.
Copper rallied to the highest level since early August on September 13, with many other base metals following the red metal higher. Since then, prices have retreated. Copper made a higher low on September 21. The Chinese auction to cool off the rally put 80,000 tons of copper, 210,00 tons of aluminum, and 130,000 tons of zinc into the market since early. Since the day of the first auction, copper, aluminum, and zinc prices all posted gains. Imagine where prices might be if China did not sell from its strategic stocks. In early October, China auctioned the fourth round of base metals lifting the total sales to 570,000 metric tons. Copper posted an explosive gain after the auction.
Copper is a leader in the base metals and industrial sector. The red metal is also a barometer for the global and Chinese economies. Copper’s ascent to new highs in May was a sign for all commodity prices. Inflationary pressures are bullish for the red metal and the asset class. Copper made higher lows and higher highs since March 2020. However, increasing interest rates makes the cost of carrying inventories higher and can weigh on the red metal’s price. Inflation is bullish for the red metal.
Inventories of copper on the LME moved lower over the past week. On COMEX, they moved higher, but the net was a substantial decline. LME stocks stand at under 200,000 tons after recently rising to over 255,000 tons.
As I wrote over the past weeks:
“Expect lots of volatility in the copper futures arena over the coming weeks and months. I remain bullish on the base metals and shares of producing companies for the medium to long term. Copper has been consolidating over the past months after correcting and probing below the $4 per pound level in mid-August.”
Copper has made higher lows since the mid-August low.
The LME lead price rose 1.96% to $2,211.50 per ton on October 12. The rise in demand for electric automobiles around the world had been supportive of lead in the long term as the metal is a requirement for batteries. Since late April 2020, the prices of crude oil, gasoline, and lead moved higher. Meanwhile, a lead surplus has been building in China, but the price was rising because of the magnetic impact of copper and the other base metals that trade on the LME. $2,000 per ton was a pivot point for the three-month lead price. The price remains well above that level.
The price of nickel forwards moved 2.23% higher since the previous report as the price drifted back towards the $19,000 level. Elon Musk encouraged nickel production as he issued a plea to “any mining company in the world to mine more nickel.” The message turned out to be a very bullish message for the volatile metal over the past months. Mr. Musk, one of the world’s wealthiest people, continues to search for supplies of “clean” nickel.
Do not discount the potential for him to purchase a nickel producer to guarantee supplies for his business as his Tesla and other franchises, including SpaceX and the
Boring Company, grow. SpaceX received a contract from NASA. The nickel price continues to trend higher, but it is a highly volatile base metal. Growing nickel demand for both stainless steel and batteries is likely to continue to underpin the price of the nonferrous metal.
Tin was 1.87% higher since September 28, after reaching another new record high over the past weeks. Aluminum moved 4.19% to the upside since the previous report as of October 12 to over $3,000 per ton, a new multi-year high. The price of zinc moved 5.98% higher since September 28. Zinc was at the $3,263.00 per ton level on October 12. The Chinese auctions did not hold the prices down.
November lumber futures were trading at the $758.30 level on October 13, 25.03% higher since the previous report, after plunging from a new record high at $1,711.20 per 1,000 board feet on the continuous contract on May 10. The nearby lumber price ran out of upside steam at over the $1,700 level, plunged, with the price moving to less than one-third the value at the May high. Lumber can be a leading economic indicator at times. Lumber began falling before selling hit other commodity markets. The potential for an infrastructure building project by the US government could support gains in lumber futures. Home improvement projects during the shutdown contributed to higher demand and prices for wood. Supplies have been a problem because of mill closures. The lumber futures market suffers from minimal liquidity, which makes it a highly volatile commodity. Lumber is often a leader and barometer for the commodities asset class. I never trade lumber but watch the price action like a hawk as it is a valuable guide for trends and trend reversals in the industrial commodity asset class. The winter months tend to be a weak period for the lumber market as construction activity declines, lowering the demand for wood. Lumber was very strong throughout the last winter season. The US infrastructure rebuilding package will likely support wood’s price. Lumber had been explosive until it peaked in May and became implosive. Before 2018, the all-time peak was $493.50. November lumber fell to a low at $448 in late August. Technical support is at $596, the September 30 low. Resistance stands at the July 7 $819.50 high. Lumber has been trending higher since the mid-August low.
The price of uranium fell since September 29 to $41.25 per pound, down 4.07% from the level on September 29. Meanwhile, Yellowcake PLC’s price rose to $370.00, up 12.81%, over the past two weeks. CCJ shares closed at the $25.64 level, up 24.59% since September 29.
In recent reports, I had been writing:
“I continue to believe CCJ shares offer value and rate the stock as a buy at the current price level.”
I rate the stock a hold. The volatile Baltic Dry Index continued to power higher, moving 8.38% to the upside since the previous report. The BDI was at the 5,378 level on October 13. Higher fuel prices, strains and bottlenecks in the supply chain, and a container shortage have taken the freight index higher over the past months. December iron ore futures recovered by 4.65% compared to the price on September 29. After probing below $100 per ton, they moved back to $119.30 per ton.
Supply shortages of iron ore from Brazil have supported the price for more than a year. Rising iron ore and metallurgical coal prices had been a sign of strength in the global economy, but the market ran out of upside steam over the past weeks, and the price corrected as production increased and demand slowed. Open interest in the thinly traded lumber futures market rose 13.50% since the previous report. The illiquid markets like lumber can become roach motels when a trend reverses, creating gaps that can cause significant financial pain for those on the wrong side of a move. Never trade lumber, just watch the price action. The rise in lumber was a sign of demand for framing wood, a primary ingredient in new home construction. The plans for rebuilding infrastructure will increase lumber demand. The price plunge is the result of illiquidity. The Fed and others are pointing to lumber’s plunge as validation that inflation is “transitory.” What they do not cite is lumber’s liquidity makes the price volatility wild.
As I wrote in previous reports:
“I expect lumber to find a bottom and turn higher sooner rather than later. The $448 level looks like it could be a bottom for some time.”
Lumber has been powering higher over the past weeks.
LME copper inventories fell 13.84% over the past two weeks after double-digit percentage increases over the past months. LME stocks of the red metal stood at 195,250 tons as of October 12 and were 31,375 metric tons below the September 28 level. LME copper inventories had been steadily declining until they reached bottom below the 75,000-ton level and began to climb. They peaked at the 255,000 tons level. Copper stocks are often manipulated by dominant market participants. Since a Chinese company owns and operates the LME, the potential for manipulation to achieve price goals is always a factor for the red metal. I always view substantial and sudden changes in inventory data with a grain of salt. Strategic reserve sales are likely boosting LME copper stockpiles. COMEX copper stocks were 7.01% higher since September 28 and stood at 56,545 tons on October 12. China’s sales of copper from strategic inventories, the prospects for increasing interest rates, and a stronger dollar have pushed copper stocks in LME and COMEX warehouses higher over the past months. The net decline over the past two weeks is a positive sign for the copper price. Copper had been trading in a range from around $4.00 to around $4.40 per pound since early August and broke out to the upside on October 13.
Lead stockpiles on the LME fell 5.97% over the past two weeks. Lead experienced huge inventory builds in March, but stocks have been falling over the past weeks. Aluminum stocks were 9.45% lower compared to September 28. Aluminum LME warehouse stocks stood at the 1,137,675-ton level on October 12. Higher energy prices are boosting aluminum production costs as is addressing climate change by reducing emissions. The energy sector is weighing on aluminum supplies and boosting prices.
Zinc stocks moved 10.65% lower since September 28 to 191,500 tons. Zinc inventories have been volatile as they dropped to the 200,000 tons level before increasing over the past weeks and then turning lower again and below 200,000. Tin inventories were 105 tons or 9.46% lower since September 28 at 1,005 metric tons. Nickel inventories were 7.77% lower compared to the level on September 28. Infrastructure rebuilding in the US and Chinese economic growth support the base metals. Stockpile data can reveal supply and demand trends, but traders often use the inventories to influence perception and prices. Rising interest rates could attract more metal into exchange warehouses and put pressure on prices. The recovery in base metals reflects the rising demand for industrial commodities.
FXC moved higher since the previous report and was trading at $35.82 on Wednesday, up $2.71 per share or 8.19% since the previous report. I continue to maintain a long position in FCX shares. FCX tends to move higher and lower with the price of copper. FCX reached the highest price since February 2012, when it traded to $46.10.
As I have been writing:
“I remain long FCX at $11.37 and will use a stop on close above that level to protect capital. I would increase the level of the stop as FCX moves higher to protect profits.”
This position is up over 215%, so I would move stops higher to guarantee a substantial profit while riding the trend higher for the potential of more gains. There is nothing wrong with selling half the position and riding the balance for free with no capital risk.
Keep stops tight on all positions in this sector that is highly sensitive to macroeconomic trends. In the medium to longer term, the stimulus and potential for a US infrastructure rebuilding program are bullish for industrial commodities. Short-term bouts of risk-off periods could cause sharp selloffs. A falling dollar is likely to support higher prices; a rising greenback has the opposite effect.
We are long PICK, the metals and mining ETF product. We bought PICK at the $23.38 per share level, and it was trading at $42.87 on October 13, up $2.44 or 6.04% over the past two weeks. PICK hit a new high of $52.39 on May 10, the highest level since February 2012.
I continue to rate this metals and mining ETF that holds shares in the leading producing companies in the world a long-term hold. I would raise stops to guarantee a profit if a correction occurs as PICK has moved over 83% higher. Base metals and industrial commodities prices should continue to follow crude oil and stocks over the coming weeks. The strength in industrial commodity prices over the past months is a sign of inflationary pressures on the global economy.
Keep those stops tight on short-term positions. Do not allow a short-term foray into the market to become a long-term investment. More stimulus early this year, and the potential for an infrastructure project in the US is bullish for industrial commodity prices. Protect profitable long positions with stops. Industrial commodity prices had been on bullish fire since March 2020 in a sign of rising inflationary pressures. After the dramatic rallies, there was room for corrections that do not alter the long-term trends established over the past months. I remain bullish on the sector, but we could experience a bumpy ride over the coming weeks and months. It is impossible to pick tops or bottoms in markets. Approach all risk positions with a plan for risk and rewards and stick to it! The summer has ended, and base metals prices appear to be breaking out of their consolidation after correcting from highs in May.
The overall tone of the base metals and industrial commodities sector remains bullish as copper and lumber exploded higher from their lows. Uranium stocks were on fired over the past two weeks.
Lean hog futures declined since September 29 but live, and feeder cattle prices moved higher. The USDA’s latest October World Agricultural Supply and Demand Estimates report told the animal protein sector:
“The forecast for 2021 total red meat and poultry production is lowered from last month as lower pork, broiler, and turkey forecasts more than offset a higher beef forecast. Beef production is raised from the previous month as lower expected steer and heifer slaughter are more than offset by higher cow slaughter and heavier average carcass weights. The pork production forecast is reduced on lower expected fourth quarter hog slaughter. For 2022, the total red meat and poultry forecast is reduced from the previous month. Although higher expected placements of cattle in second half 2021 are expected to support higher early-year supplies of fed cattle, placements in the first half of 2022 are lowered and fed cattle supplies in the second half or 2022 are expected to be tighter. USDA’s Quarterly Hogs and Pigs report, released on September 24, estimated a lower pig crop for June-August and lower farrowing intentions for September/November. This supports lower hog slaughter expectations for first half 2022. Slower expected growth in pigs per litter during 2022 resulted in lower expected hog supplies in the second half of the year. For 2021 and 2022, beef import forecasts are raised reflecting continued strength in demand while the export forecasts are unchanged. The pork import forecasts are raised on increased supplies of pork on the global market. The pork export forecast for 2021 is reduced on weaker expected demand from China and increased competition in global markets; however, exports are increased for 2022 as growth in several key markets recovers. Fed cattle prices for 2021 are lowered on current price movements and relatively large supplies of fed cattle. However, the 2022 price forecast is raised on tighter expected supplies of cattle. The 2021 and 2022 hog price forecasts are raised on lower expected hog supplies.”
Source: USDA October WASDE report
The picture for beef and pork prices was mostly bullish during the offseason for demand.
December live cattle futures were at $1.2900 per pound level, up 1.54% from September 29. Technical resistance is at $1.30600 per pound on the December contract, the October 8 high. Technical support is at $1.2500 per pound level, the October 1 low. Daily price momentum and relative strength indicators turned higher from oversold readings and were rising above neutral territory on Wednesday. Open interest in the live cattle futures market moved 3.37% lower since the last report. The disconnect between cattle prices in the futures market and consumer prices at the supermarket created dislocations in the market in 2020. Beef and pork markets are now officially in the offseason.
Live cattle made higher lows and higher highs from October 2020, reaching a higher high on August 24 when prices turned lower, reflecting seasonal forces. They have been rallying since October 1.
November feeder cattle futures moved higher since September 29, rallying 3.67%. November feeder cattle futures were trading at the $1.609750 per pound level with support at $1.52000, the September 30 low, and resistance at the $1.624750 per pound level, the high from October 12. Open interest in feeder cattle futures moved 6.94% lower since the previous report. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs. Price momentum and relative strength metrics were rising towards overbought readings on the daily chart on Wednesday. Feeders will be sensitive to corn prices over the coming weeks as feed impacts production costs. Lower corn over the past two weeks supported the feeder cattle futures. December lean hog futures fell to 78.150 cents per pound on October 13, which was 6.52% below the level in the previous report. Price momentum and the relative strength index turned lower from overbought readings and were below neutral territory on October 13. Short-term support on December hogs is at the September 24, 77.200 cents high. Technical resistance on the December futures contract is at 85.675 cents, the September 30 high. Open interest rose 6.84% since September 28. Hogs and cattle prices are mostly strong a little over one month into the offseason for demand.
African Swine Fever continues to be a concern in China. If ASF continues to kill Chinese pigs, we could see an increase in the demand for US pork, which would push lean hog futures higher over the coming weeks and months. China is the world’s leading pork-consuming nation. At the last G-7 meeting, leaders put additional pressure on the Chinese, which only exacerbated tensions with the US. The Chinese own the leading US hog processing company, Smithfield Foods. A Chinese company purchased the Virginia-based company in 2013. Smithfield could divert some of its pork and pork products to China if shortages develop over the coming weeks and months. China has faced substantial challenges with pork supplies over the past years. Rumors of AFS cases in China continue to support pork prices as we enter the offseason for demand in the US. Meanwhile, bottlenecks at supply plants caused by COVID-19’s delta variant could cause price distortions as supplies of live animals rise, and meat available for consumers falls.
The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. The December spread moved lower towards the long-term average over the past week as live cattle far underperformed the lean hog futures.
Based on settlement prices, the spread was at 1.65070:1 compared to 1.51970:1 in the previous report. The spread rose 13.10 cents as live cattle moved higher, and lean hog futures fell over the past two weeks. The spread moved away from the long-term average of 1.40 over the past week, which is the historical fair value level for the meats. The December cattle-hog spread hit the high at 1.9475 in August 2020. The spread made a low at 1.4474:1 on June 10, 2021. As we are now in the offseason for demand, the spread is above the historical norm.
Cattle are historically more expensive than hogs on the December contracts as the spread is above the 1.4:1 level. Soybean and corn prices will continue to impact cattle and hogs over the coming weeks and months as they are the main ingredients in animal feed products.
The COW ETN is illiquid but can be an acceptable substitute for those who do not venture into the futures arena. I remain neutral on the meats, but bullish and bearish factors pull them in opposite directions. Meat prices tend to decline in the fall, but nothing is ordinary about 2022, given the inflationary pressures and rising number of delta variant cases that threaten to cause new supply chain bottlenecks. The October WASDE report was not bearish for meat prices, but seasonality is bearish. I will follow the developing trends over the coming weeks and months.
FCOJ futures fell over the past week, while cotton, cocoa, coffee, and sugar posted gains, with coffee leading the way on the upside. Soft commodities were the best performing sector in Q3, and the prices of four of the five sector members continue to rise in early Q4.
March sugar futures rose 0.71% since September 29. The March futures settled at 19.86 cents per pound on October 13. The high in March futures in 2021 came on August 17 at 20.94 cents, the highest price since February 2017. Coffee, sugar, and FCOJ all moved to multi-year highs over in July and August. Frost conditions in Brazil over the past months and the pandemic are impacting supplies, which is not bearish for the sweet commodity’s price. Higher energy prices also support sugar as it is the main input in Brazilian ethanol production. Two of the three Brazilian soft commodities moved higher over the past week, while FCOJ declined. The Brazilian real moved lower since September 29. Sugar and coffee rallied despite the weaker Brazilian currency.
After reaching a continuous contract low of 9.05 cents in April 2020, the price over doubled at the most recent peak. Technical resistance on March futures is at 20.61 cents, the October 11 high. Technical support is at 19.31 cents, the September 13 low. A significant upside target on the monthly chart stands at the October 2016 peak of 23.90 cents per pound. In 2011, sugar reached a high of 36.08 cents. Sugar could not close above 15.50 on March 31, ending the streak of quarterly gains at three.
However, the price moved aggressively higher throughout April and into early May and rose in Q2. In June, sugar posted a marginal gain, and in July, the price moved higher. In August, sugar futures rose to a new high for 2021. Over the past weeks, the price had been trading on either side of the 20 cents per pound level, a multi-year high.
Sugar prices can be sensitive to the exchange rate between the US dollar and the Brazilian real. The value of the November Brazilian real against the US dollar was at the $0.18090 level against the US dollar on Wednesday, down 1.31% since the previous report. The real futures traded to a low of $0.17030 on March 29 but had recovered and made higher lows and highs but failed above the $0.20 level in late July and early August. The real has been crawling back towards that level. Brazil leads in the production of sugar, coffee, and FCOJ. The soft commodity futures could follow the Brazilian currency if it makes a substantial move. Meanwhile, Brazil remains a hotspot of the global pandemic, which could lead to supply chain problems for sugar, coffee, and oranges, as well as the other commodities produced by South America’s most populous nation and leading economy.
Price momentum and relative strength on the daily sugar chart were just below neutral readings on October 13. The metrics on the monthly chart were still bullish. The quarterly chart is well above a neutral condition and is also rising. The low at the April 2020 continuous contract low of 9.05 sugar fell to the lowest price for sugar since way back in 2007. In 2007, the price of sugar fell to a low of 8.36 cents before the price exploded to over 36 cents per pound in 2011. At that time, a secular rally in commodity prices helped push the sweet commodity to the highest price since 1980. If the central bank and government stimulus result in inflationary pressures, we could see a repeat performance in the price action in the commodities asset class that followed the 2008 financial crisis. Sugar could become a lot sweeter when it comes to the price of the soft commodity in a secular bull market caused by a decrease in the purchasing power of currencies around the world.
Meanwhile, since Brazil is a leading commodity producer, rising raw material prices could push the real’s value higher, leading to gains in the world sugar futures market. The action from late March in crude oil, gasoline, and most significantly, ethanol prices, are supporting sugar prices. Sugar faced weakness in the oil market as the price of the energy commodity slipped below the $65 level for the first time since May on August 18 and moved to a low of $61.74 per barrel on the October NYMEX contract over the past week. However, the recovery to over the $80 level is bullish for sugar. Open interest in sugar futures moved 0.20% higher since the previous report. Open interest had been gently rising as the sugar price rose over the past year, which is a technical validation of the bullish price action. Sugar can be a highly volatile soft commodity. I took some small profits above the 20 cents level; did some buying below 19.50 cents and continue to hold a long position in sugar. My long position is around 75% of the level at the high.
December coffee futures rose 7.89% since September 29 after reaching the highest price since October 2014 on July 26. Nearby coffee futures rose to a high of $2.1520 on the back of frost conditions in Brazil that threaten the Arabica crop. Time will tell if the price action on July 26 was a blow-off top in the coffee futures market or a new goal for futures rallies.
Over the past week, it looked a lot like a target that will give way to higher prices. December futures were trading at the $2.08650 per pound level on October 13. The short-term technical level on the downside is at the $1.9130 level on the December futures contract, the October 5 low. Below there, support is at around $1.8235 and $1.4705 on the continuous futures contract. Technical resistance is at the $2.1520 high, and at $2.2550 the October 2014 peak. After putting in a bullish reversal on the monthly chart in November 2020, coffee’s price posted gains in December but was lower in January. Coffee soared higher in February.
In March, it gave back February’s gains. In April, the price exploded to a new and higher high. In May, the price moved even higher. After a new high in early June, the price closed last month lower than the May closing price. In July, coffee exploded higher. In August, coffee’s price moved higher. In September, the price corrected lower and had been consolidating until coffee rallied late in the month. JO was trading at $57.33 on Wednesday. I took profits on 30% of my JO position. I would move the stop higher or take some profits on the ETN. Open interest in the coffee futures market rose by 3.70% over the past week. From a trend-following perspective, I remain long coffee.
Daily price momentum and relative strength were above neutral readings and mostly rising as of October 13. On the monthly chart, the price action was at overbought readings. The quarterly picture was rising and near overbought territory. Coffee can be a wild bucking bronco when it comes to the price volatility of the soft commodity. I expect volatility in coffee to continue, and I will look to trade on a short-term basis with a bias to the long side. Any new positions should have tight stops and defined and specific profit objectives. Coffee reached a marginally lower high at $2.1515 on October 12. The price of cocoa futures rose over the past week. On Wednesday, December cocoa futures were at the $2,602 per ton level, 0.50% higher since the previous report. Open interest was 9.71% higher since September 28. Relative strength and price momentum were below neutral readings and falling as of October 13.
The cocoa market tends to display lots of volatility during roll periods because of deliveries. Avoiding the West African $400 per ton surcharge has caused some consumers to turn to the futures market for supply requirements. The trend is likely to continue to add volatility to the futures market so long as the Ivory Coast and Ghana impose the premium for their beans. The two countries supply over 60% of the world’s cocoa annually. We are long the NIB ETN product. NIB closed at $30.69 on Wednesday, October 13. The levels to watch on the upside are at $2,792 and $3,054 per ton. On the downside, technical support levels are at $2,537, and $2,232 per ton on the continuous contract. The long-term target on the upside is at $3,826 per ton, the peak from 2011. I continue to favor the upside in the cocoa market. We are likely to see continued volatility in the cocoa futures arena in 2021. Cocoa prices can become very volatile as the weather and political conditions in West Africa are the most significant factor for the primary ingredient in chocolate confectionery products. The soft commodity always has the potential for wide price variance because of the weather and conditions in West Africa.
December cotton futures moved 1.88% higher since September 29. December cotton was trading at $1.0386 per pound on October 13 after reaching a high at $1.1648 on October 8, the highest price since 2011. Cotton took the elevator lower on September 20, reaching a low of 88.95 before taking off like a rocket over the past week. The USDA told the cotton market:
“The 2021/22 U.S. cotton supply and demand estimates show lower production, lower ending stocks, and a higher price compared with last month. Production is lowered 3 percent, to 18.0 million bales as projected yields in Texas are reduced. With domestic mill use and exports unchanged, ending stocks are 500,000 bales lower. At 3.2 million bales, U.S. ending stocks in 2021/22 are projected at 18 percent of use, compared with 17 percent in 2020/21. The 2021/22 season-average farm price for upland cotton is forecast at a record-high 90.0 cents per pound, 6 cents higher than last month and nearly 2 percent above the previous record of 88.3 cents in 2011/12. The global cotton 2021/22 balance sheet shows lower consumption, higher production, and higher ending stocks compared with last month. During the first weeks of October 2021, world cotton prices have averaged over 115 cents per pound, up at least 40 percent from both years earlier and long-run levels. While world income growth and spending on goods are expected to remain high during 2021/22, projected annual world cotton consumption growth is now 2.9 percent, compared with 3.8 percent in September. China’s consumption is reduced 1 million bales as, in addition to high prices, lagging energy production there cuts into industrial capacity. Consumption is also lower this month in Vietnam, but higher in Pakistan and Turkey. World production is 700,000 million bales higher, largely due to an increase in Pakistan. Production is also higher in Turkey, but lower in India as well as the United States. World ending stocks in 2021/22 are projected 450,000 bales higher than in September, but 3.2 million bales below 2020/21.”
Source: USDA October WASDE report
The report was mostly bullish but not as bullish as the market expected and cotton futures dropped in the aftermath of the release.
On the downside, support is at $1.03500, 89.79, 77.12, and then at 48.35 cents per pound. Resistance stands at $1.1648, the October 8 high. Open interest in the cotton futures market moved 1.22% higher since September 28. Daily price momentum and relative strength metrics were above neutral territory and falling on Wednesday. Cotton reached a bottom at the 77.12 cents level on the continuous futures contract in March. The trading pattern remains bullish as cotton continues to make higher lows and higher highs.
I had been optimistic about the prospects for the price of cotton since the 50 cents per pound level. I would continue to use tight stops on any long positions and a reward-risk ratio of at least 2:1. We are long two units of the BAL ETN at $39.91 and $35.88 per share. At $57.23 on October 13 the risk positions have profits of 52.5% and 69.6%. I have taken profits on 70% of the BAL position and suggest selling some or setting a stop that guarantees a profit. A decline in production and stimulative policies by central banks took cotton from the bottom end of its pricing cycle twelve years ago to an all-time high of $2.27 per pound in 2011. Cotton can be a highly volatile soft commodity that takes the stairs higher and elevator to the downside during corrections. The risk of another selloff has risen with the price.
November FCOJ futures were trading at $1.2340 per pound, down 8.46% since September 29. Short-term support is at the $1.2140 level, the June 18 low. Technical resistance is at $1.3640 per pound, the October 4 peak. Open interest rose by 4.33% since September 28. Price momentum and relative strength indicators were at deeply oversold readings on Wednesday. FCOJ futures likely experienced the same Brazilian weather issues as coffee and sugar. I am a scale-down buyer of FCOJ futures.
I have been slowly taking some profits. Soft commodities have been bullish beasts over the past months. Bull markets rarely move in straight lines. Taking profits allows us to take advantage of price weakness in overall bullish trends.
A Final Note
Many issues continue to face markets across all asset classes as we head into the final months of 2021. Cryptocurrencies have turned higher. The energy and soft commodity bull markets continue to move to higher highs. The Fed may call inflation “transitory,” but raw material prices and the latest CPI are telling us that the value of money continues to erode. Fiscal stimulus will continue to provide a tidal wave of government funds into markets. We may still be in the early innings of the commodity bull market. If the period from 2008-2012 is a model, the commodity bull could continue to roar until at least 2024.
I favor many of the markets that have not performed well over the past months. Precious metals could eventually take the bullish baton as gold and silver are inflation barometers. Look for opportunities to buy on dips but approach all markets with a risk-reward plan. As volatility rises, widen your risk-reward parameters to reflect market conditions.
Stocks face rising interest rates and taxes, which could make for a bumpy ride over the coming weeks and months. The bond market is telling us that inflation continues to rise. The latest employment report was a sign that the Fed cannot get overly zealous when it comes to tightening credit. CPI sent the opposite message. The big question is who will be in charge at the Fed in 2022? Will it be another term for Chairman Powell, or will it be a more dovish economist that takes the seat? Senator Warren’s characterization as “dangerous” could take on new meaning if the doves soar at higher levels in the current environment.
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Please keep safe and healthy in this environment.
Until next week,
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.