The Hightower Report

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OUTSIDE MARKET DEVELOPMENTS: While the UK saw a rise in nationwide home prices overnight, there doesn’t appear to be a definitively up beat view toward the global economy in place this morning. In fact, the market saw lower Euro zone price readings, softer German retail sales figures and a sharp slide in Japanese housing starts and that would seem to leave a slightly less up beat macro economic view in place than was present in the prior trading session. However, the Dollar action wasn’t definitive and therefore the impact on gold and silver prices from the currency markets early this morning is mostly limited. The market is seeing weaker initial equity prices and that might be considered a slight negative to the precious metals markets. The US will present Personal Income and Personal Spending readings this morning and the expectations for those readings are relatively benign. The trade will also see an important inflation reading from the US PCE index but with expectations calling for only a half percent gain in that reading, the metals markets probably won’t come away from the news with a huge inflation reaction. There are also some regional purchasing manager’s reports out later in the morning trade today, but the overall expectation today seems to be that the US numbers aren’t going to offer up anything impressive or surprising.

GOLD MARKET FUNDAMENTALS: While the direction of gold prices recently has seemingly been trained on the outlook for the US and global economies, the gold trade continues to see ongoing developments from an anticipated minor sale of Russian gold. The trade also saw a series of higher gold production figures from some key miners overnight, but that news doesn’t appear to be applying distinct pressure to gold prices. On the other hand, if the outlook toward the economy deteriorates again it is possible that the bear camp might try to play up the news of rising physical gold production. Clearly gold has behaved like a physical commodity this week, by falling sharply in the face of weak numbers and weak equities at the start of the week. However, the gold market did manage to rise sharply yesterday in the wake of favorable US numbers and very favorable equity market action. On the other hand, choppy to weak international equity market action overnight and somewhat slack international data flow overnight might serve to increase the importance of the US number flow later this morning.

SILVER MARKET FUNDAMENTALS: The bulls will tout December silver’s capacity to rise above the prior session’s high, while the bear camp will suggest that the silver market was unable to hold that pulse up attempt. With equities showing initial weakness and copper prices also under a bit of early pressure, the bear camp would seem to have an edge in the outside markets category. However, the Dollar action is mostly nondescript and unless the US numbers manage to offer up something slightly better than expected, it would not appear that the broad based economic optimism that was seen in the prior trading session will become a dominating view today. Nonetheless, the sharp recovery move in the prior trading session probably took away some of the bear’s confidence, that was built into the silver market early in the week. For the time being, the direction of silver prices might be largely influenced by the direction of US equities, as the scheduled US data today isn’t first tier data and the expectations for the data are pretty nondescript.

PLATINUM: Like gold and silver prices, it would seem like platinum over reacted to the favorable shift in economic sentiment. While we don’t expect to see an aggressive slide in platinum prices today, the path of least resistance might be set to point downward in the wake of nondescript US data and initially weak equity prices. In short, without a surprise bullish economic development, we see a bit of back and fill action in the platinum market today.

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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has pulled back from overnight highs after making an initial push above $80. Some of the profit taking in oil is likely tied to a steady Dollar/weaker equity trade overnight while lingering demand doubts could also be holding the market back. To a certain extent, the 3.5% gain in 3rd quarter GDP with the economy growing at the fastest pace in two years has helped to revive macro economic optimism that had been undermined earlier in the week by the soft readings in consumer sentiment and new home sales. Seeing US jobless claims fall has also helped to ease macro economic doubts and improve oil market sentiment a bit. But this week’s EIA report did show builds in gasoline and crude oil stocks and continuing evidence of weak fuel demand seems to have left the bull camp’s confidence a bit shaky. In fact, the global oil demand outlook may have been undermined by news that Japan’s oil product sales fell 5.9% last month due to weak industrial fuel use and low gas sales raising doubts that the strength in China’s oil demand can lead to global oil growth. Major oil companies have also reported poor corporate results due to weak fuel demand and that has also been creating some doubt among oil traders. Since pulling back from the high reached earlier in the month, December crude oil has had a hard time recapturing price levels above $80. But in order for the oil market to completely push aside internal supply/demand concerns and further raise macro economic expectations for a recovery in oil demand will likely require seeing good readings in today’s reports on consumer sentiment and Chicago PMI. A good portion of yesterday’s gains were also tied to the sell off in the Dollar which creates a bullish environment for commodities and raises the investment appeal of oil as an inflation hedge. After failing at a key chart level in yesterday’s trade, we suspect the Dollar could soon start a new leg down. But given the weak early price action in crude oil, the Dollar will need to build on yesterday’s losses in order for the oil market to regain its footing. Yesterday’s rally in crude oil was impressive, but technical indicators still show the market to be overbought and that could be another factor weighing on prices this morning. Therefore, in order for the oil market to completely shake off oil demand doubts and overcome its technical condition we suspect a very bullish outcome will need to be seen in today’s economic reports that triggers a strong positive reaction in equities and a break in the Dollar. End of the month position adjustments and the expiration of the November product contracts could also play a role in today’s trade that adds volatility in the session.

GASOLINE: December gasoline has started to pull back in the early overnight action as apparently the trade may want to see more evidence of a macro economic recovery before pushing the market to higher price levels. The rise in gasoline stocks and generally weak oil demand data have pulled the rug from under the bull camp this week. Yesterday’s strong GDP reading helped to restore some of the macro economic optimism that has faded this week, but we suspect stronger than expected readings in today’s scheduled reports will be necessary to further convince the trade that the economic momentum seen in the 3rd quarter is continuing in this quarter. Despite the sell off this week, December gasoline still looks a bit short-term overbought and for the market to overcome its technical condition will also likely require price support from bullish outside market influences. The technical action in the Dollar yesterday looked as if the recent corrective bounce in the currency had been completed and Dollar ready to resume its downtrend. But the Dollar has held fairly steady overnight and unless the currency starts to back peddle, we suspect gasoline could give back a portion of yesterday’s gains. Support for December gasoline comes in between $2.01 and $2.00 and below there at $1.9690, with resistance at $2.0441 then $2.085. A volatile trade could be seen due to end of the month profit taking and the expiration of the November gasoline contract.

HEATING OIL: December heating oil has backed away from yesterday’s highs in the overnight trade as a lack of follow through weakness in the Dollar and a soft equity market trade seems to have inspired some traders to book profits following yesterday’s price gains. While the GDP reading seemed to restore some macro economic optimism that had been lost earlier in the week, apparently the trade needs more economic convincing before lifting December heating oil back over the $2.10 resistance level. Certainly the fundamentals for this market remain bearish with distillate stocks high, a mild temperature outlook keeping heating demand low and industrial fuel use still weak. Technical indicators still show heating oil to be overbought and that condition is likely another factor weighing on the market. Therefore, the trade will need to see a combination of strong economic news and a sell off in the Dollar in order for the bull camp to reclaim control and make a run at yesterday’s highs. Otherwise, December heating oil could end up giving back a good portion of yesterday’s gains.

TODAY’S ENERGY MARKET GUIDANCE: Bearish outside market influences and some lingering fuel demand doubts are giving the bear camp the early edge. Therefore, in order to shift control back to the bull camp today’s economic reports will need to trigger a sharp sell off in the Dollar.

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December cocoa continued to retreat from 30 year highs on Wednesday and given the extent of the market’s overbought condition, a deeper correction back below $3,200 could be seen. The combination of bearish outside market forces and economic news that seemed to sour demand expectations a bit appear to be the main factors weighing on cocoa this week. The recent strength in the Dollar as the currency recovers from 14 month lows has also been undermining cocoa by lowering investor risk appetite for alternative assets. In fact, the selling in cocoa yesterday seemed to be part of a broad liquidation wave in a number of physical commodity markets that have risen sharply on Dollar weakness and are now being pressured by Dollar strength. The initial break in the Pound yesterday may have added an element of arbitrage related selling of NY cocoa into the mix. But waning macro economic sentiment tied to weaker than expected readings in consumer confidence and new home sales has also applied some pressure to cocoa prices. Part of the price gains in cocoa during the July through August timeframe were based on the idea that world economic conditions were recovering and with economic doubt surfacing again, it isn’t surprising to see cocoa give back some gains. In fact, cocoa prices up at these levels could acutely cut off cocoa demand from manufacturers. With investment demand for cocoa also tied closely to recent equity market gains, the sell off in the stock market this week is giving investors another reason to book cocoa profits.

TODAY’S GUIDANCE: The steep rally in December cocoa this month had clearly taken the market to an overbought extreme. The key reversal from the contract high last Friday suggests a near-term top has been set and a deeper correction is likely. But so far the selling in cocoa has been tempered and it’s a bit surprising there hasn’t been a more significant break given the bearish action in outside markets and weak macro economic news. But we suspect it will be hard for the market to ignore for too long news that Ivory Coast port arrivals are running about 97% above last season’s pace. While the general outlook is for cocoa production in the Ivory Coast to be below last season, this tight supply side view may start to fade if port arrival rates continue to show high deliveries of cocoa beans.

TODAY’S MARKET IDEAS: While buying on price dips in cocoa has trimmed losses this week, the technical setup leaves the market vulnerable to a more significant price correction. Stay on the short side of cocoa for now as we suspect harvest supply could apply some added price pressure and if today’s US GDP comes in below +3.3% cocoa could be further undermined by weakening demand expectations.

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December coffee pulled back to support near 133.00 and bounced yesterday which may be seen as a short-term positive development. The market has been pressured with the 5-day bounce in the US dollar which setback overnight and might help to provide some support today. December coffee closed moderately lower on the session yesterday as another solid gain in the US dollar and another sharp break in global equity markets helped to pressure. Lower interest rates and speculative long liquidation selling were seen as other reasons for the sell-off with December coffee moving to the lowest level since October 6th. Commercial sellers and buyers appeared to be on the sidelines but traders are nervous that a continued slide in world equity markets could be seen as reason to suspect less than robust world demand and could also spark more selling from producers. Keep in mind; some coffee from Brazil may stay off of the market this year after government put programs which will have producers selling the coffee to the government and then the government moving the coffee into storage. Traders await results of the flowering period in Brazil as agronomist can get a better feel for the potential for next year’s production depending on the success or failure of trees to flower during this period. Current estimates seem to range from 47-55 million bags and this range will narrow considerably in the months just ahead. Daily ICE certified deliverable coffee stocks were down 5,893 bags to 3.292 million with 10,075 bags pending review. Open interest fell slightly to 122,873 contracts but still up from 98,248 on October 1st.

TODAY’S GUIDANCE: Chart support for December coffee is near 133.00 with uptrend channel support today at 132.10. Resistance comes in at 137.70 and 139.15.

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Unless there is significant damage from the crop in the delta for the rains of the next two days, the cotton looks vulnerable to a significant set-back in prices in the next few weeks. Absorbing the harvest and searching for a price level which is low enough to stimulate export demand are factors which may weigh on the market. Traders are looking for cotton weekly export sales near 50,000 bales from 72,600 bales last week for this mornings USDA weekly sales update before the opening. We need 149,000 bales per week to reach the USDA projection and total usage estimates from the USDA are already at a 24 year low so these are not pumped up projections. December cotton closed slightly lower on the session yesterday but well off of the early lows. The market experienced a successful test of Tuesday’s lows before finding support just above the lows and the late rally was impressive in the face of a strong dollar and negative action for equity and energy markets. News of heavy rains in the forecast for the delta into the weekend helped to support as quality issues could re-emerge due to the slow harvest. Cotton has also followed the stock market recently and the sharp break in the US stock market could begin to pressure.

TODAY’S GUIDANCE: A move under 66.10 for December cotton could be enough to spark some increased long liquidation selling from fund traders. Open interest is up 40,000 contracts on the rally this month alone so a move under this level could spark increased selling with support at 65.05 and 63.98. Close in resistance is at 67.35. The short-term trend looks down unless the market sees significant help from outside market forces.

TODAY’S MARKET IDEAS: It would take a close back over 68.20 to turn the trend higher.

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A set-back in the US dollar after a 5-day rally was enough to spark some buying overnight. Ideas that the market is oversold after the recent weakness helped to support but it will take a move over 23.16 to penetrate the steep downtrend channel for March sugar and do any damage to the bearish pattern. The break off of the October 19th highs has been significant but chart support at 21.81 mostly held on the sell-off yesterday and this may be seen as somewhat positive. The break has attracted some interest from end users and this may also be seen as somewhat positive. Traders believe that India is close to increasing duty-free white sugar imports by another 1 million tonnes. Thailand is expected to start the 2009/10 crushing season a little earlier than normal on November 20th. Sugar production is expected to be near 7.1 million tonnes which was recently revised from near 7.6 million expected and compares with 7.14 million last year. March sugar pushed sharply lower on the session yesterday and saw aggressive selling pressure from a continued trend of long liquidation from speculators and funds. A continued rally in the US dollar and a sharp break in the US stock market had traders a little less interested in higher risk investments like commodities and helped to pressure. Talk of drier weather into the middle of next week helped to provide some additional selling pressure as harvest in Brazil can proceed more quickly. Ideas that the recent set-back in prices is attracting more interest from end users helped to provide some underlying support. A US food and beverage trade group is urging the USDA to expand import quotas by an additional 850,000-1.0 million short tonnes this year. Indonesia and Bangladesh may also be in the market for sugar soon. While there are many traders who believe the highs are in place, the world stocks/usage is extremely tight and some trade houses are comparing the tightness to the mid-1970′s and the early 1980′s when prices topped near 66 cents and near 45 cents respectively.

TODAY’S GUIDANCE: The short-term technical action is negative but the market has been able to hold support and it should not take much in the way of export news to turn the minor trend back up. Fundamentals look bullish into early 2010.

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• Will the current volatility continue in the gold market?
• How have the fundamentals of the gold market changed?
• How do central banks affect the gold market?
• Has the influx of investor affected the gold market?

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Dave Hightower discussing the precious metals markets. Topics include:

• Is gold a form of currency?
• Are there correlations between gold and other markets?
• Have we already reached an important inflection point?

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Below is a sample of our Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

DOLLAR: The Dollar action surprised and shocked some of the trade in the prior trading session, as the bounce wasn’t definitively tied to a credible theme. The bulls will suggest that the prospect of the US exiting the aggressive stimulus posture was behind the bounce, especially since the US Treasury markets were bordering on two month lows on their charts yesterday. While the markets might like to see the Fed clarify their position on interest rates in a statement, the markets could get a sense at mid session today if the Fed is starting its unwinding process as Treasury prices are poised at a breakout point and the large auction today is a large enough event that the Fed probably needs to artificially support the auction for it to go off favorably today. In other words, the Fed will probably have to support the auction today or rate hike expectations will be lifted further. We think it is still premature to think that the Fed is going to let the economy fend for itself and that they will attempt to support the auction today. A 7 month old down trend channel resistance line is seen at 76.25 this morning and that could be seen as an extremely critical pivot point. We think that the dollar might actually rise above that level in the wake of the early Case-Shiller home price survey reading this morning but that the Dollar will fail in the face of the Treasury auction results just ahead of 12:00 central time.

EURO: The Euro was clearly undermined as a result of the miss timed assumption of rising US interest rates. However, the Euro bulls will probably wait until after the auction results today before gaining enough confidence to re-enter the long side of the Euro. On the other hand, holding the Euro back from some near term gains is the fact that the Euro zone money supply figures (and private lending) slowed in the most recent reporting period but that news was partially offset by a rise in French Consumer Confidence readings. In the short term, the direction of the Euro isn’t going to be determined by Euro zone growth expectations, as the direction of the Euro looks to be determined by the views of the Dollar. We don’t think that the Euro up trend has run its course yet, as the US still wants and needs a lower US Dollar. While up trend channel support isn’t seen until the 147.35 level this morning and that trend support rises to 147.50 on Wednesday, we suspect that the market will generally hold above 148.40 this morning, before catching a bid just ahead of 12:00 central time window.

YEN: The Yen did see another fresh new low for the move today but it has managed to reject that initial probe. We suspect that the Yen is now poised for a recovery bounce, especially if the Dollar falls in the aftermath of the US Treasury auction at mid session. However, the overall trend in the Yen looks to remain down, with down trend channel resistance in the December Yen seen up at 108.60 today. Sell a mid day rally today in the December Yen.

SWISS: Up trend channel support in the December Swiss is seen today at 97.93 and we see no reason for the up trend pattern in the Swiss to come to an end. However, favorable US home price readings early in the trading session might put the Swiss under some minor additional pressure before the US Fed steps up to support the Treasuries at mid session. Seeing the US Fed indicate that rates are going to be held down longer in the face of a large auction today, should rekindle buying interest in the Swiss later in the trading session.

POUND: The Pound seems to be poised to mount a bit of a recovery bounce, but it would not seem like the bounce is the result of a solid fundamental development. However, it is possible that the Pound is attempting to pre-position ahead of a resumption of Dollar selling, later in the Tuesday US action. Some might suggest that the Pound is rising off talk of favorable BOE recovery views, while others are suggesting that a rise in US home prices might reverse some of the negative sentiment lobbed at the US home builders yesterday. We don’t agree with the upward bias in the Pound, but there might be little resistance until the 165.00 level in the December Pound today.

CANADIAN DOLLAR: The Canadian Dollar remains under pressure in the wake of a noted Dollar bounce that in turn sparked a broad based liquidation in key Canadian commodities. However, we think that the US Fed will have to step up and support US Treasuries, which in turn should tamp down the idea that US interest rates are poised to rise. Therefore, aggressive traders should buy the Canadian today looking for a recovery bounce ahead.

TODAY’S MARKET IDEAS: It is too early for the Dollar to recover, unless the Fed lacks the capacity to control US interest rate expectations.