“Mr. Market” is starting to show clear signs of split personality disorder.

On the one hand, certain areas of the market – the ones much favored in the big run-up – have started to wilt and fade as the much-lauded “green shoots” turn brown. On the other hand, other areas of the market – which didn’t participate so much in the rally at first – have started showing signs of life.

Take the grain markets for example. Foodstuffs like corn, wheat, soybeans and sugar have been red-hot in recent days.

We can see this in the Powershares DB Agriculture Fund (DBA:NYSE), which Macro Trader has been long for a number of weeks. (We took partial profits earlier this week, and continue to ride the move with the remainder of our position.)

DBA, which is NOT built around “total return swaps” like other inverse/leveraged funds, is essentially a basket of futures contracts – primarily wheat, corn and soybeans, with sugar thrown in for good measure.

Commodity after commodity has roared back to life, thanks to a combination of renewed inflation expectations, a cratering U.S. dollar, and newly bullish fundamentals. Let’s take a closer look at some of DBA’s components to see what I mean.

Prices as High as an Elephant’s Eye

“Corn prices surged to a six-month high,” Bloombergreported earlier this week, “after the U.S. government said domestic demand will exceed production for the third time in four years, slashing reserves by 28 percent.”

Corn inventories are expected to fall even as the various demand sources for corn – food, livestock and fuel – rise an estimated 3.5% next year.

Soybean prices, meanwhile, recently hit seven-month highs on the CBOT (Chicago Board of Trade) after U.S. stockpile forecasts dropped. Beans were also boosted by word that the Brazilian National Agriculture Confederation, a major farm lobbying group in Brazil, would press for limited soybean acreage in the coming planting season to help keep prices firm.

And finally Sugar, not to be outdone, recently hit 34-month highs – their highest level in nearly three years – on “poor crops and robust demand,” according to the Financial Times. A failure of India’s local sugar crop was seen as a big price booster. “Swings in Indian sugar output, which move the country back and forth from exporter to importer, are a critical factor in global prices,” the FT reports.

Wheat is the one area with potential for disappointment, relating to large India stockpiles that could be released onto the market later this summer – hence Macro Trader’s willingness to take some gains off the table and watch closely as further developments unfold.

Reflation and Stagnation

Agriculture is thus one area where the market is doing well. Other foodstuffs not mentioned, like cotton and coffee, have also seen big gains in recent weeks. On top of that, various agriculture-related equities have been performing well and look to have strong potential upside in the coming months.

Along with base metals, ag has been showing signs that the “reflation trade” is on. There is a new and aggressively bullish stance emerging on hard assets and inflation-themed plays, including everything from base metals, to gold and silver, to crude oil and natural gas… and well-run companies related to all the above.

China, too, has had a hand in pumping up the reflation trade with its aggressive stockpiling of base metals. (A few weeks back we wondered aloud in these pages if good Dr. Copper, the “metal with a PhD in economics,” was being goosed by China buying. That hunch was more or less correct, as Beijing doubles down on industrial inflation hedges with a vengeance.)

But all is not rosy and cheery for the recovery-minded bulls, as other, weaker areas of the market can attest. At the same time that inflation-linked themes are hopping, other econ-related data points are dropping.

“U.S. railroad freight traffic is running about a fifth lower than a year ago,” The Wall Street Journal reports, adding that the news “is one of several less-obvious indicators that all isn’t well, despite the financial-market rally since early March.”

The underlying reality, as the dismal freight numbers point out, is that a change from “bad” to “less bad” on the economic data front doesn’t mean things are necessarily getting better. It only means we aren’t free-falling quite as fast as we were.

Think of the skydiver hurtling towards the Earth at an astonishing rate. A few thousand feet above the ground he pulls the ripcord and – hooray! – his rate of descent has been arrested, to the point where he is pleasantly drifting rather than free-falling now. But in which direction is he still headed? And where exactly is he going to land? (Let’s hope it’s not an alligator swamp…)

The budding hope that U.S. consumers would come bouncing back with wallet intact also took a hard knock this week. April retail sales were down for the second month in a row, coming in below expectations and breaking the bulls’ happy winning string of positive upside surprises.

Brian Bethune, chief U.S. economist at IHS Global Insight in Lexington, Mass., believes the “green shoots” talk was premature. “There are some preliminary signs (of improvement) in certain areas of the financial markets,” Bethune tells Reuters, “but in terms of the real economy, we are still a long ways off.”

To which we try (and fail) to resist the temptation to say: “Well, duh.”

A Classic Combo

The environment we are headed into – and the view Mr. Market seems to (perhaps) be acknowledging now – is a classic combo of wearisome economic stagnation and creeping paper-fueled inflation. One acts as a fearsome headwind, blowing in the face of consumer-oriented names reliant on economic recovery to justify their newly bid-up valuations. The other acts as a powerful tailwind, further bidding up the price of inflation hedges and hard assets.

The main worry that has wracked markets these past few months, a relentless deflationary downward spiral leading to Great Depression 2.0, has now more or less been put to bed (at least in the mind of investors at large). Upon coming to the realization that we’re not all going to die, a massive post-apocalypse bear market rally ensued as investors audibly exhaled and the “green shoots” meme excited suggestible minds far and wide.

But now the follow-on reality is slowly sinking in that, while we may not be dead ducks, we’re still far (quite far) from being out of the woods. And that means an unpleasant combo of debt-hobbled economic growth, budget-busting government deficits, and persistent fiat currency erosion as far as the eye can see.

Macro Trader’s special recipe for an environment such as this is two-pronged. We are scanning the landscape for bearish trading opportunities in overhyped and overinflated consumer discretionary-type names, still pumped up from the short-covering aspects of rally and vulnerable to fresh disappointment, while simultaneously ferreting out bullish opportunities to play the “reflation trade” (in everything from ag to energy to metals) on the long side.

Source: Reflation and Stagnation – Welcome to What’s Next

If I had been writing it, I would have titled it “Not All Of The People In The World Are Stupid!” with the subhead, “There are lots of smart people who are buying gold to capitalize on the sheer stupidity of governments abusing fiat currencies so that inflation in prices will soar as inflation in the money supply soars, until gold-owning people, giddy with greedy glee, will say, ‘The Mogambo was right! Whee! This investing stuff is easy!’”

But I am not here to show off how good I am at coming up with boffo headlines with the subtle undertones so that they offer me a job, at a fabulous salary, to write headline gems like this one; this is about how “On Tuesday morning, gold derivatives dealers, who had sold short in the face of a fast rising gold price, faced a serious predicament. Some 27,000+ contracts, representing about 15% of the April COMEX gold futures contracts remained open” indicating that, as holders of those long gold contracts, they “demanded” delivery of the physical gold “by holding futures contracts past the expiration date.”

The big problem belongs to the short-sellers of gold, who are finding, suddenly, that “long buyers were demanding in droves” – demanding physical gold bars, when, apparently, there were not enough.

Since I am confused as to what all of this means, Mr. Goodman correctly interprets the blank look on my face as puzzlement – if not outright befuddlement – and patiently explains that to keep things in perspective, history has shown that people investing in COMEX futures don’t necessarily want physical gold, and that they are merely speculators, as, “In normal times, very few people do this. Only about 1% or less of gold contracts must be delivered. The lack of delivery demand allows the casino-like world of paper gold futures contracts to operate. Very few short sellers actually expect or intend to deliver real gold. They are, mostly, merely playing with paper” which is the basis of the alleged gold and silver scams, as GATA.org and Ted Butler have long exposed, which gets us talking about how corrupt regulators are these days, as everything is else corrupted these days, which is, of course, just what you would expect at the end of long monetary booms, which doesn’t make it any more palatable.

But back to our story of the almost-default at COMEX… Fortunately, at the last minute, Deutsche Bank delivered “a massive 850,000 ounces, or 8500 contracts worth of the yellow metal.”

This is where I kind of lost interest, as this kind of thing is like blood in the water to sharks, who will soon be looking at the low price of gold and the complete lack of supply of bullion, and they will be hatching plots to squeeze this disparity and make a lot of money, and I was soon fantasizing about how my tiny little stash of gold will soar and everybody else who doesn’t own gold will be busted out, now that the scam has been busted, and there will be people, like cute college coeds, who will be so desperate that they will say they are willing to do anything for money, and I will say, “Anything?” and then they will quickly affirm, “Anything!”, and so I again ask, but with a rakishly raised eyebrow and licking my lips in a lascivious manner, “Anything?” and they gulp and say, but without their former enthusiasm, “Anything”… So you can see how I was distracted.

And anyway, somewhere along the line he admits that it is “circumstantial evidence” that Deutsche Bank was a major holder of short positions, or that “the gold used by Deutsche Bank to deliver and fulfill its COMEX obligations, came directly or indirectly, from the ECB”, which gets back to the headline “Did the ECB Save COMEX from Gold Default?” that we were discussing previously.

All of this, of course, is fraudulently criminal in many, many ways, breaks a lot of regulations in those and other ways, and he calls for investigations and indictments and all of that stuff, which won’t happen because the amount of corruption at the end of long monetary booms is so pandemic that it won’t be allowed.

Now, before I go off ranting and raving about how another bunch of scumbags perpetrated another scam with compliance from government scumbags, let’s concentrate on the important fact that not only are a bunch of guys buying gold and demanding delivery of the actual metal, but now increasing demand has swamped supply! Amazing!

In conclusion, let me say that if people don’t buy gold, in spite of the overwhelming historical evidence to do so when the money supply is set to double (and then double again and again!), in spite of gold’s gains for the last decade, in spite of the sight of people suddenly taking delivery of physical gold in unprecedented amounts, and in spite of me telling them right to their faces to buy gold, then there is something very, very wrong with them, which ought to give them something to think about as they are idly scratching around in the dirt looking for bugs to eat, because this economic mess caused by a Congress constantly deficit-spending and a Federal Reserve constantly creating the money for them to do so is going to get Really, Really Nasty (RRN), and I am scared for me and for them.

But I am not as scared when I have gold, so at least I have that going for me! Whee!

Source: Golden Shorts in an Economic Winter

There has been a lot of talk lately about the gold-to-oil and gold-to-silver ratios. This is understandable, as both ratios are further out of whack than they have been for a long time.

The gold-to-oil ratio, for one, is now at ten-year highs.

The gold-to-silver ratio is similarly extended, though not by nearly as much as gold-to-oil.

For gold-to-silver, the 200-month moving average is 57 and the current value (as of this writing) is a touch above 69 – meaning a single ounce of gold is worth 69 ounces of silver.

The 200-month simple moving average tells us that 57 is closer to the norm. So that puts a better than 20% premium on the price of gold versus silver (based on U.S. exchange-traded futures contracts).

Analysts have looked at these relationships and come to some interesting conclusions. Some feel strongly that it’s time to buy oil (or silver). Others feel – quite foolishly in my opinion – that it’s time to short gold.

Let me expand on a few key points here so you can come to your own conclusions.

First of all, many investors and traders have gotten into the habit of throwing gold, oil and silver all into the same bucket – the “inflation expectations” bucket. Reason being, when inflation comes roaring back, all this stuff should come roaring back too (as the value of paper currencies plunges).

That’s the basic theory. But it’s also a bit simplistic. We need to remember that all three of these commodities lead “double lives,” so to speak. There is more to the equation than just inflation expectations.

Oil’s Industrial Role

Oil, remember, is an industrial good. We use it to power nearly everything that moves (and a lot of stuff that sits still).

During oil’s run-up to $147 a barrel, the world was barreling ahead (no pun intended) at full steam. A global economic boom was under way, and the supply/demand balance for oil was very tight.

When the global economy fell into recession, though, global oil demand fell too. That slip in demand at the margins was enough to send oil prices crashing through the floor.

Remember that the demand for commodities (and most everything come to think of it) is determined at the margins. The price is set by the most desperate buyer (or anxious seller).

So when there was very little daylight between supply and demand, the price of crude just kept marching higher. But it didn’t take much of a drop-off in demand before, suddenly, the world had excess oil on its hands, as we were no longer burning up every last drop of the 86.4 million barrels being pumped out each day.

When the price of oil went into freefall, sharp-eyed traders saw a chance to store the stuff in tankers and wait for higher prices to return. But eventually most of the storage facilities filled up, and the stuff just kept coming. And so crude continued to fall.

Peak oil is still in effect, mind you. It’s just a long-term type phenomenon that needs a rising global demand trend to really have effect.

When the global economy gets back on track, oil demand will relentlessly tick back up. Think of long-term oil demand as the needle on a dial: At some point growth will take us back to 86 million barrels per day… 86.5 million… 87 million and beyond…

When those days come back, oil will be expensive again as we run headlong into a production ceiling. For now, though, oil is cheap.

The Golden Thermometer

Gold has a “double life” too. Or maybe two double lives, if you count jewelry and ceremonial demand. The double life we’re going to talk about here is gold’s role as a general anxiety barometer – a sort of thermometer for how the world is doing.

Gold is the ultimate safe haven asset. It’s the thing you buy when nothing else can be trusted.

Furthermore, gold has earned its safe haven reputation over a history of thousands of years, whereas the present-day fiat currency experiment is less than 40 years old (dating back to Nixon’s shutting of the gold window in 1971). Four decades versus multiple millennia… hmm, is there any wonder people are flocking to gold in this time of great upheaval?

The other wild thing about gold is the supply/demand picture. We just talked about the ugly supply picture for crude oil right now – how the stuff is overflowing because the world isn’t burning it.

With gold the opposite is true. There just isn’t enough gold in the world to even begin to satisfy total demand right now.

Consider that the total dollar value of all the gold ever mined, at present prices, is something like 4 trillion to 4.5 trillion dollars.

Four trillion bucks is a drop in the bucket. Foreign central banks already hold at least $3 trillion worth of U.S. Treasury securities, with trillions more set to be issued in 2009. The Federal Reserve alone has nearly 2 trillion dollars on its balance sheet – one entity with paper assets and obligations totaling close to half the worth of all the gold in the world!

Central banks around the globe would probably love to own lots more gold. But they know that they can’t buy it in size, because if they tried to they would run the price into the stratosphere.

That’s why, even now, countries like China, India, Russia and Japan have 3% or less of their total reserve holdings in gold. If they made a concerted effort to ditch dollar-denominated assets and up that total, the price of gold would explode.

Supply, Demand and Anxiety

In light of this information, the extreme highs of the gold-to-oil ratio make perfect sense.

Oil is in a deep funk right now due to the supply/demand situation and the prospect for a continued slump in global economic activity. While there is reason to be long-term bullish crude, there is little reason to expect a higher oil price until global demand trends show signs of returning to form.

Gold, on the other hand, is in high demand right now as a safety blanket – a salve for the general anxieties brought on by flailing governments, out-of-control printing presses, and mass “stimulus” schemes that get bigger by the day. There is not enough gold to go around right now. Hunger for the yellow metal is waxing, not waning.

As for the gold-to-silver ratio, gold’s 20% premium isn’t hard to understand there either. While silver is a bona fide “precious” metal, it is also an industrial metal… and silver has less psychological traction as an anxiety barometer.

There will come a day when the price of silver could explode, and perhaps even rocket past gold like it was standing still in percentage performance terms. But we will need to enter a mania phase for that to happen, and we are far from seeing that just yet. People are buying precious metals more out of a safety motive than a speculative one at this point, and so silver waits.

A Word on Economic Revival

There is another point that is important to address. Some pundits in the “sell” camp argue that gold will be ripe for a fall when economic recovery starts to take hold. When the sun begins to shine again, they reason, investors will come back to traditional equities and hoary old gold will go back in the closet.

I don’t think so, and here is why – the U.S. Fed and Treasury would consider the return of serious inflation a “win” at this point. Right now, Ben Bernanke and his global counterparts are doing everything they can to fight a deflationary death spiral. Inflation is a mosquito bite in comparison.

And so, in a dangerously deflationary world – the one we inhabit at this present moment – noticeable and persistent inflation pressures must take hold in order for us to have clear assurance that the Fed and Treasury’s rescue policies have worked.

And because mass stimulation is a highly inexact science, we won’t get to choose the amount of inflation we get. When you dynamite the deflationary dam, so to speak, you don’t get a say in whether it’s a trickle or a flood that results. The same goes for the Fed’s reflation efforts.

This leads to the odd conclusion that, in the event we see signs of recovery accompanied by signs of inflation, gold’s upside movement could actually accelerate.

But it’s really not so odd, when you think about it, because the price of gold is anticipating a future outburst of inflation here. Either that, or the debasement of all paper currencies into oblivion. One’s as good as the other as far as gold bulls are concerned.

Runaway Train?

In conclusion, I would argue that the extraordinary nature of the gold-to-oil ratio at this point is merely a reflection of extraordinary times.

We have seen a global deflationary bust knock down the price of oil, even as general anxiety and currency debasement fears have sent the price of gold rocketing higher. We are also seeing a marked divergence in the supply/demand picture, with plenty of oil to go round but not nearly enough of the yellow stuff.

I am chomping at the bit to go long oil and gas at some point in the coming year, but not as a currency debasement play. I’ll wait for global demand to show signs of life before getting on that train.

As for the gold train… if the $900 level holds, we could see another blast of upside movement soon as all the “wait for a pullback” folks get nervous and pile in.

And silver, which is still very much playing second fiddle at this point, will likely start going nuts once we hit the true “mania” phase – which we are nowhere near as of yet.

Source: The Gold-to-Oil and Gold-to-Silver Ratios – What are they saying?

Not only can silver provide a hedge provide a hedge against inflation, it also helps you add asset allocation and diversification to your portfolio, owning silver is easy, convenient and affordable, and thanks to the US governments pro-inflation policies, it’s going to be much more valuable in the near future.

This from Investors Daily Edges’  Ted Peroulakis:

I’m bullish on precious metals in general and silver is a nice compliment to your gold holdings.

Now keep in mind that silver can be quite volatile as industrial demand fluctuates. Silver often tracks gold prices although the ratio can vary.

I suggest you hold silver in your portfolio and here are some common ways to invest in silver:

Buy Silver Bars

An established way of investing in silver is by purchasing actual bullion bars. Physical silver can be stored in your home safe or at a bank safety deposit box. You can even have a dealer store your silver for you.

Buy Silver Coins

Buying silver coins is another easy way of physically holding silver. For instance, you can just buy American Silver Eagle bullion coins or Canadian Silver Maple Leaf coins.

Buy Options and Futures Contracts on Silver

Silver options and futures, currently trade on a number of exchanges around the world. Using options and futures as an investment strategy is usually reserved for the more experienced investor because this type of trading is quite speculative. You could multiply your potential profit several fold, giving you huge leverage on silver by investing in options and futures.

Buy Silver Mining Companies

Many investors buy silver mining stocks. Silver mining companies are leveraged to the price of silver and since they have millions of ounces of silver, every time the price of silver goes up, the value of their reserves increases. As the price of silver rises, the stock price should rise along with it. Some investors prefer to diversify by investing in precious metal mining mutual funds.

Buy Silver Exchange-Traded Funds

Silver Exchange-Traded Funds represent a quick and easy way for an investor to invest in silver. ETFs are a liquid, cost effective and a secure way to invest in silver. My favorite is the iShares Silver Trust (SLV). I see tremendous upside with this silver investment.

Source: Invest in Silver!

Why a Jim Morrison market? Because the future’s uncertain and the end is always near.

(I thought that was too good not to share. For those of you who aren’t fans of The Doors, we’ll move right along…)

Something’s Happening Here…

Something very strange is going on with the price of oil. Not just in terms of straight-up price, but in regard to the huge discrepancy between the near-month and far-month futures contracts.

As I write, the going price for near-month West Texas Intermediate crude is $36.51 per barrel. The December 2009 contract, on the other hand, is trading at $55.13.

That is a monster spread. We’re talking a difference of more than $18 a barrel between spot crude – the stuff you can buy in the cash market – and crude slated for delivery at the end of this year.

The technical name for this situation is contango. That’s what they call it when a forward-month commodity contract is trading at a higher price than the near month. (You don’t really need to know this right now, but the opposite of contango, when near-term prices are higher than the back months, is backwardation.)

The reason this is strange is because of the massive profit opportunity embedded in the crude market.

Assuming you had the means, you could go out right now and sell millions of dollars worth of December crude contracts at $55 dollars a barrel… buy the equivalent amount in the cash market for $37 a barrel or less… and then just wait until it’s time to deliver the oil (and lock in your $18 profit).

The only hitch in the deal is finding a place to store the stuff. If you were to buy crude on the cheap now, you would have to take delivery and store it until late November (or whatever month your delivery date rolls in, when you close the trade and take your locked-in profit).

A number of big, savvy players are making exactly the trade I just described. They are selling millions of barrels worth of expensive far-month futures contracts, buying the equivalent amount of cheap oil in the cash market, and storing that oil in huge supertankers moored off the coast of Scotland and the Gulf of Mexico.

Storage and financing are counted as part of the trade, of course, and those big tankers don’t come cheap. Costs can run as high as $68,000 per day to keep one sitting idle.

But when you can lock in $18 a barrel, who cares? When the outlays are spread over millions of barrels – and a single ship can hold 2 million barrels of crude – there is still an obscene amount of profit left in the trade.

Frontline Limited (FRO:NYSE), the world’s biggest owner of supertankers according to Bloomberg, estimated last week that 80 million barrels worth of oil are being “stored” this way – the most they’ve seen in 20 years.

Not only are some big Wall Street players making this trade (Citigroup, Morgan Stanley, etc), big oil exporters are doing it too. Iran is filling up tankers with crude, no doubt waiting for the opportunity to sell at higher prices.

What It Is Ain’t Exactly Clear…

The puzzling question is why the anomaly persists. Why has the spread not come in?

Remember that once the far-month contracts are sold, price risk is removed from the equation. If you’ve entered into a deal to sell 2MM barrels of crude at $55 after buying at $37, you don’t have to worry about where prices go between now and your delivery date. You can just sit and wait.

When a no-brainer opportunity like this comes along, Wall Street normally jumps all over it. Traders exploit the anomaly in size until it disappears.

If markets weren’t so out of whack, you would gradually see the spread between near-month and far-month crude contracts get smaller and smaller as more and more players piled in. The profit in the spread would be reduced to the point where putting on the trade no longer made sense.

Two constraints that keep this from happening now are financing and storage.

First the finance angle: This is a trade that requires a serious cash outlay (or a major line of credit) to pull off. To fill up a supertanker with crude and sit on it for a year, you’re talking $50 million to $100 million as table stakes. The big Wall Street houses have been so bruised and battered, it’s hard for them to come up with that kind of dough – even for slam-dunk opportunities.

The other major constraint to the trade is storage. Such huge volumes of cash market crude are being held off the market now, traders are literally running out of places to put it. (It’s not like you can just pop into the local EZ-storage or stash a million barrels of oil in the shed.)

Curiouser and Curiouser

The storage issue is also creating headaches for the New York Mercantile Exchange (NYMEX) as traders question the pricing of West Texas Intermediate (WTI crude). The Financial Times reports:

The surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, has depressed its value not only against other global benchmarks, such as Brent, but also against other domestic US crudes.

Julius Walker, an oil market analyst at the International Energy Agency in Paris, said there was “anecdotal evidence” of traders moving away from WTI and “doing deals based on other US oil benchmarks.”

In other words, we’ve got oil coming out of our ears in the short-term… but the price of oil is still head-scratchingly higher – much, much higher – in the longer term.

So what does all this mean for us small-fry traders, i.e., those of us who can’t dial 1-800-TANKERS-R-US like the big boys?

I can think of at least a few takeaways worthy of food for thought:

• Why aren’t the big oil exporters all over this trade? Iran has locked up a few tankers, and it’s likely Russia and Venezuela etc. have too. But these guys are supposed to have lots of oil in the ground… and OPEC just made a big fuss of capacity cuts…. so why aren’t they selling the hell out of the far-month crude contracts, locking in $18 a barrel, and bringing the spread back in with their size? Could it be capacity constraint? Could it be these guys don’t actually have all the spare capacity they’re letting on?
• Why are the drillers and oil service names so depressed? Stock markets are supposed to discount the future, not the past. Equity valuations are supposed to be forward looking. And yet, at current multiples, most of the high-quality drillers and oil service names are trading as if oil were headed to $20, not back to $60. Yet the December crude contract says otherwise… and the huge spread between near-month and far-month contracts persists. What gives?
• Could Wall Street still be “broken” in the aftermath of 2008? After the year we just went through, anyone who still believes in perfectly efficient markets should have their head examined. Markets operate in a range from “mostly efficient” to “wildly, insanely INefficient.” When credit mechanisms and normal channels break down, things just stop making sense. Could the huge disconnect between forward-month oil contracts and insanely cheap oil service names be yet another example of Wall Street not making sense?
• Could December crude contracts be expressing an opinion on the inflationary effects of U.S. debt monetization…. or rebound possibilities for emerging markets…. or both? It’s widely recognized that the U.S. Fed and Treasury are embarking on a “great experiment” now that has never before been tried – one that could be summed up as, “Print like crazy and see what happens.” Some observers, like Joachim Fels of Morgan Stanley’s Global Economics Team, further believe that emerging markets could outperform in 2009 due to better internals than they get credit for. Could the persistent crude spread be reflecting both views?

Yep, no question… something’s happening here. I’ll stay on top of things and keep you posted. If an opportunity arises in the drillers or the oil service names, or in crude itself, you can be sure we’ll be exploiting it to the fullest via Macro Trader.

And by the way, another great thing about Taipan Daily is the largely untapped resource of reader knowledge… so if you have any ideas or insights on this “crude conundrum,” I’d love to hear from you: justice@taipandaily.com.

Source: Something’s Happening Here with the Price of Oil

Facts: The open interest in futures contracts on the Comex has fallen to its lowest level since summer 2005, breaking a general uptrend in place since 2001. From a contrarian standpoint, the short-term bottoms in these data tend to favor the buyers over the sellers. However, the statistic went into orbit during the last half of 2007 — it broke away from the upper channel on the charts, creating a bubble in appearance. The current extremity could simply be a symmetrical reaction to that extreme.

Nevertheless, this is a bearish fact, technically speaking, if it represents a lasting new trend.

It is tempting to suggest that the threat of a raid in futures contracts is causing a short squeeze.

It is true that the commercials are liquidating their short positions promptly. But the funds are increasing their short bets, and the liquidation of longs is such that the net short ratio has hardly budged off its mid-September low — which, incidentally, is a level that has coincided with strategic buying points at seven other junctures since the bull cycle began in 2001.

However, the record of this statistic in gold is unique in that during bear markets, the commercials tend to be net long (wrong) most of the time.

So the fact that they are covering their short interests on net does not necessarily presage a rally if a bear market has set in. A bear market would mean that gold prices could fall as far back as US$500.

Fundamentally, the conditions just don’t look ripe for a bear.

I don’t believe the COTs (Commitment of Traders report published by CFTC) have any real predictive value. They tell us only whether the market is too much extended one way or another; they don’t tell us how long those conditions will last. Right now, the structure of the market is healthy. The commercials are covering their shorts, the funds are getting short and the numbers basically favor the bulls. The contraction in open interest worries me a little, but it could be explained in terms of a collapse in spread trades linked to various index products.

In its most recent report on gold demand, the World Gold Council said as much in trying to explain the drop in the gold price in the context of soaring physical demand. In its third-quarter report on gold demand, the WGC noted growth in both jewelry and investment demand across the spectrum relative to both the last quarter and the year-ago quarter. I don’t want to go into a critique of the method here, except to point out that it chronically understates investment demand and overstates jewelry demand.

The inclusion of ETFs all but proves the point.

In just one year, investment demand has grown in importance from under 15% to over 30% of total gold demand, causing the deficit (supply shortfall) to grow nearly tenfold. The WGC interprets this deficit as supply coming from speculative sources, like futures trading or changes in inventories at the various exchanges — like at Comex. Thus, it calls it “inferred investment.” Formerly, it called this the “balance.” But as it grew, the WGC decided it meant something. What is causing it to grow, aside from growing demand in general, is that while the WGC is “identifying” new kinds of demand, it has not kept up with the various sources of supply. Gold bugs have argued for years that the supply of gold is not limited to mine production, officialdom or scrap… that it is not like other consumable commodities.

It is more useful to assume that most of the gold ever produced is held as a reserve, or store, aboveground. And if this is true, then investment demand must be much larger than the WGC calculates, or the price would, frankly, never go up. If the WGC is smart enough to include producer hedging (or dehedging) in the equation, it should also include a measure of demand that expresses itself through all the exchanges and bring itself up to speed on all the sources that supply the market. It assumes that jewelry demand dominates the market, which is incorrect, but even if it were, it still has the wrong idea.

Jewelry demand may be price sensitive in the short term, yet it has grown every year, at successively higher prices, since the bull market began. Despite my objections, however, I am in total agreement with the council’s explanation why gold prices have fallen despite the evidence of soaring gold demand:

“Notably, the selling captured by the [inferred] investment category was mainly by investors with a short-term focus. It largely reflects the fact that gold was caught in the downdraft of other commodities and other assets — it does not reflect a questioning of gold’s value or role as a safe haven. The strong buying in the ETF and bar and coin markets during the quarter, which reflects investors with largely a longer-term focus, suggests that investor belief in gold’s role as a safe haven and store of value is stronger than ever.”

Morgan & Citigroup Gold Analysts Bullish on Gold Regardless of Dollar

No wonder the commercials are covering. The establishment is getting hot for gold.

PMorgan’s gold analysts “urged” investors to stock up on gold this month, citing counterparty risk and tight supplies. See the article here.

Citigroup’s foreign exchange group also put out a bullish tout.

Well, that’s an understatement, actually. “[Gold] continues to look like a bull market to us. We continue to believe that a move of similar percentage to that seen in the 1976-1980 bull market can be seen, which would suggest a price north of $2,000,” Citigroup’s FX group said last week.

What I found particularly intriguing, besides the timing of these calls, was that they both discounted the dollar. That is, they noted, as I have in the past, that the foreign exchange value of the dollar may not be important at this stage. Morgan said, “It is not an absolute given that a rally in gold means a falling U.S. dollar,” while Citigroup (NYSE:C) pointed out, as I also have, examples of just such a situation during the 1970s.

Anyway, it’s not a sure thing yet, and it all makes great fodder for the bull market in gold.

Source: Bulls Rev up for Comex Raid, Commercials Exit Stage Left

The WTI futures market is now in “contango” – a highly extraordinary situation.

And it’s yet another bullish sign for the oil price. I’ll tell you how to best profit from this in just a moment.

First though, what is contango? I’ll explain…

It is where the price of a commodity for future delivery is higher than the spot price – i.e. how much it’s trading for at this precise moment in time.

What normally happens is the opposite. Longer-term futures are usually lower than near-term.

This tells us one crucial thing: that fears for future supply are high.

You see, major oil companies don’t use the latest futures contracts to plan their budgets… they use the futures strip price which is the average value of the next 12 contracts.

And right now, that’s more than what oil trading for.

What’s also unprecedented is the speed with which this change in the curve has happened.

The WTI contract for delivery in December 2016 has surged $17.08 (a staggering 14%) in just three trading days. Not only that, crude for delivery in July this year rose just 1.9% over the same three-day period.

So, what’s going on..?

This price action in the derivative markets could mean one of three things:

1. The market expects near-term demand to slump.
2. Fuel-reliant businesses such as airlines, cruise operators and logistics companies are hedging against significant price rises.
3. The market expects future oil supply will not meet future oil demand.

Now, nothing in this world is caused by just one event, a combination of factors entwine to cause a reaction. However, I think we can discount a near-term slump in oil consumption as the reason for the curve shift.

All the headlines in the US are about how high fuel prices are affecting people’s lives.

But with most of the developing world subsidising their fuel, WTI price rises do not affect demand in these countries. It just puts more strain on their treasury departments.

Take the recent demand figures from China…

The country’s consumption hit a record high in the first quarter of this year. The China Petroleum and Chemical Industry Association said consumption of gasoline, diesel and kerosene rose by 16.5% year-on-year in the first three months of 2008. Crude oil consumption rose by 8%.

This scenario is being repeated all across Asia.

Demand for oil is 2 million barrels higher than current supply

The second point, about hedging, is very pertinent indeed.

I believe that the Goldman Sachs forecast that oil would hit $141 in the second half of the year must have caused finance directors at all the major airlines to turn a whiter shade of pale. This, I reckon, is the cause of a significant amount of the gains.

However, I think the most important reason is concerns about future supplies.

When T. Boone Pickens parroted Goldman’s view on Tuesday (he said oil would hit $150 in the second half) he said it was because supply wasn’t keeping up with demand.

Opec expects demand this year to be 87m barrels per day (bpd). The world is only pumping 85m bpd – leaving an expected deficit of 2m bpd.

The combination of Goldman’s warnings with Pickens comments has sent the futures market higher. This has made its way into spot prices (which hit a record just below $130 yesterday).

These type of comments are almost becoming self-fulfilling prophesies. Goldman (which has been best at calling the oil spike) says something will happen so futures are dragged higher. This pulls up the spot price.

Great news for one under-valued oil play…

These events are manna from heaven for our Smart Commodities UK oil play.

If analysts other than Goldman don’t raise their oil-price forecasts, then it is almost certain that it will beat consensus expectations in the next quarter and its shares will be re-rated.

If other brokers do actually raise their expectations, then the whole sector will need to be re-rated because the forward price-earnings multiple would fall to a ridiculous level.

Even after recent gains, my recommendation is trading on a price-earnings multiple of around 8.

This is an utterly ridiculous rating for a company selling a vital product in a contango market.

If you’d like to access this company’s details, you can do so here.

Review my service

Regards,

Garry White
Editor
Smart Commodities UK

Source: An Unusual Oil Glitch Is Set to Make One Stock Soar