• Unprecedented moves in markets
  • Substantial price corrections in all of the precious metals
  • Crude oil falls to $20 per barrel, the lowest price since 2002, natural gas reached $1.555 the lowest since 1995
  • Copper falls to the lowest price since 2016
  • Be safe- The answer to the global meltdown is in the hands of scientists

 

I have stopped out of many positions during the current price carnage. The weekly spreadsheet is attached below.

We have witnessed vast value destruction in all asset classes. When it comes to holdings that are showing significant losses, I am holding positions, and not adding in the current environment. There will be plenty of time to add at higher or lower levels in the future once the threat of the virus declines. I support buying physical gold and silver using broad scales. I would avoid all derivatives. Existing positions are not worth liquidating at the current price levels, but I will not add to any for the foreseeable future. I continue to trade, but only on an intraday basis with very tight stops. I will not take positions home overnight in the current environment, given the wild price swings in all markets. Fundamental analysis and technical signals all go out the window during black swan events. The one is a whale. Remember, markets can remain irrational for far longer than most of us can stay solvent. Please be careful there will be plenty of time for trading and investing when the dust clears. I would only look to buy stocks that have solid capital bases and businesses in the current environment. Remember, companies may survive with bailouts, but equity holders could see their capital wiped out. Be selective and only look for bargains in companies that can thrive in this environment. Online services that provide the requirements for survival are likely to survive and thrive over the coming months and years. Commodities are global assets. People will need to eat, live in shelters, and power their lives. However, demand destruction can make price action illogical. Tight stops on any risk-positions are critical. Do not allow short-term forays into the market become long-term investment positions. Current positions that are deep out-of-funds are worth holding, but the potential for even more losses is high in this ugly environment. 

 

Summary and highlights:

 

On Thursday, March 12, the rising fear over the Coronavirus global pandemic continued to send prices reeling on the downside. The NCAA canceled March Madness, the NHL and MLB postponed the seasons, and cities declared states of emergency. The DJIA experienced its worst point drop ever as it dropped 2,352.60 points or 9.99% on Thursday. The S&P 500 and NASDAQ declined by 9.51% and 9.43%, respectively. The Russell 2000 fell 11.18% on the session. The VIX rose to a high of 76.83 and was trading at 75.47 at the end of the day, the highest level since 2008, and close to an all-time peak. Soybean, corn, and wheat prices fell on the session. Crude oil and oil prices moved to the downside with the worst loss coming in gasoline. Natural gas fell in sympathy with oil. The EIA reported that stockpiles fell 48 bcf as of March 6, which was an afterthought considering the events in all markets. Ethanol fell to a new low. All precious metals prices tanked. Gold was over $70 lower late in the day, silver moved over $1 to the downside, platinum dropped over $100, and palladium was almost $500 per ounce lower. All of the meats moved down the limit on the session. Soft commodities and lumber all posted significant losses. The 30-Year Treasury was 0-21 lower to 179-28, and the dollar index rose to 97.464. ECB President Lagarde disappointed markets with her response sending the euro lower. US President Donald Trump’s address to the nation did not stabilize markets. The Fed blasted the market with a massive injection of liquidity, but until there is better news on the virus, monetary policy accommodation cannot address the fear and uncertainty that has gripped markets, and the world. The Fed’s last two bullet have been blanks. In past market meltdowns, assets were in jeopardy of being wiped out. This time, lives are at stake.

On Friday, stocks exploded higher in a recovery that took all of the three leading indices between 9% and 10% higher. President Trump held a press conference on Coronavirus, declared a state of emergency in the US, and presented a plan together with business leaders in the country to address testing for the virus, medical treatments, and supply chain considerations. The declaration made $50 billion in federal funds available to deal with the crisis. Stocks rose during the press conference, which came during the final hour of trading. However, markets will continue to move higher and lower with the daily number of fatalities and cases as the virus spreads across the US and the world. The dollar index moved over a big figure to close at 98.904. The index reversed from the lows earlier in the week as the market rejected the ECB and President Lagarde’s approach to the crisis. However, it is possible that the ECB got what it wanted as it ended the risk-off unwind of the cash and carry trade between the dollar and the euro currency, for now. 30-Year US Treasury bonds fell 2-15 to 176-17 to end a volatile week on the downside as stocks rebounded. Soybeans fell 10.75 cents in the final session of the week, but corn was unchanged and what was down only 1.25 cents per bushel. Crude oil, oil products, natural gas, and ethanol all edged higher after a week of carnage in oil. Natural gas had a positive week as risk-off in the energy commodity likely translated to short-covering. The precious metals sector took the ugly baton on Friday. Gold fell $73.60, silver was $1.50 per ounce lower, platinum fell $37.90 to the lowest level since 2003, and palladium lost over $400 per ounce to close just over $1500 per ounce. Rhodium fell back to the $10,000 level after trading at $13,000 per ounce earlier in the week. Price carnage hit the precious metals on Friday. Copper fell to a low of $2.40 per pound but recovered to close at the $2.4640 level. The move in crude oil could turn out to be an omen for copper where long-term technical support stands at the early 2016 low at $1.9355 per pound. The meats melted with limit down moves across the board. April live cattle were below 96 cents per pound, feeder cattle were at $1.1260 on the April contract, and 60 cents per pound gave way in the nearby lean hog futures, which settled at 56.375 cents per pound. Cotton, FCOJ, sugar, and lumber edged higher, but coffee and cocoa prices declined. Bitcoin closed the week at $5330, down $680 per token after trading to a low of $4210 during the session. When it comes to stocks, Carl Icahn told CNBC stocks have declined to “giveaway prices,” but that does not mean that the selling will not continue as the Coronavirus crisis unfolds.

On Sunday night, March 15, the US Federal Reserve did not wait for its scheduled meeting as the central bank slashed the Fed Funds rate by 100 basis points to zero to 0.25% and restarted the quantitative easing program. Like the virus that is spreading around the world, the risk-off declines in markets did not respond to the treatment in the form of a massive injection of liquidity. The liquidity did little to stem the risk-off activity in markets on March 16. Stocks continued to fall precipitously with losses of 12.93% in the DJIA, 11.98% in the S&P 500, and 12.32% in the NASDAQ. The Russell 2000 fell 14.26%. Price destruction in the stock market reflects the rising fear and uncertainty that has gripped all aspects of life in the United States and around the globe. The 30-Year US Treasury bond futures moved 4-04 higher to 180.25, while the dollar index fell ton 98.152 on the June futures contract. Grains fell in sympathy with all markets as soybeans were 27 cents lower, corn declined by 11 cents, and wheat moved 8 cents per bushel to the downside. Energy commodity continued to plunge with across the board losses. Crude oil was around $3 lower on WTI to below the $29 level with Brent futures closing over $4 to below $30 per barrel. Oil products moved lower, with the price of gasoline down below 70 cents per gallon, the lowest price since 2002. The gasoline crack spread fell into negative territory, which was another short of bad news for refiners. Ethanol futures declined to new lows at $1.03 per gallon. Natural gas was around the $1.80 per MMBtu, down six cents on the session, but one of the few markets that recovered in the current environment. Gold traded in a $125 range but closed with a loss on the session. Late in the day, gold was around the $1500 level. Silver plunged to a low of $11.77, the lowest price level since 2009, silver was trading at around the $12.70 level late in the day. Platinum did even worse as the price declined to $562, the lowest level since 2002. June palladium futures dropped to a low of $1355.10 and was at the $1480 level late in the session. Meat prices continued to melt with live cattle at just below the 92 cents level on April futures, down 3.725 cents. Feeder cattle declined 4.50 cents, and lean hogs posted a 2.4 cents per pound loss to below 54 cents per pound. FCOJ was marginally higher, but cotton, coffee, sugar, cocoa, and lumber prices all fell amid the brutal selling in all markets. Bitcoin dropped $400 per token to $4930. The current crisis reached a level that was worse than in 2008. Stocks suffered their worst day since the 1987 crash. Repeated liquidity injections from the US Fed did nothing to stop the losses. The market is telling us that the virus is a game changer for the US and global economies. Fiscal policy and science are the only treatments that could stop the bleeding in markets.

On Tuesday, Europe closed its borders in an attempt to slow the spread of Coronavirus. Risk-off conditions continue to impact markets as each day brings reports of new cases, deaths, and government moves that have lifted fear and uncertainty in markets and all aspects of our lives. For border closings to social distancing to bans on leaving homes, the world has changed as it battles a faceless enemy. The current situation is a reminder of just how precious life is and how people can work together when it comes to survival. News that the administration and Congress are working together on a fiscal package that will alleviate some of the financial stress on individuals lifted the stock market, at least temporarily. The DJIA rose by 5.2% with gains of 6% and 6.23% in the S&P500 and NASDAQ indices. The Russell 2000 moved 6.68% higher on the session. The June US 30-Year Treasury Bond futures contract declined sharply to the 171-31 level. The June dollar index exploded higher, traded at a new high of 100.075, and settled at 99.804 on a very quiet St. Patrick’s Day. Corn fell sharply with energy markets as the price of the grain for May delivery was 10.75 cents per bushel lower. Soybeans were 2.5 cents higher, and wheat gained 1.25 cents on the session. Crude oil fell to a new low as nearby NYMEX futures closed below $27 per barrel. Gasoline ticked a bit higher, but heating oil futures fell. Natural gas was 8.6 cents per MMBtu lower to just over the $1.70 level. Gold moved just under $40 higher, silver fell 32.1 cents, platinum was marginally higher after yesterday’s price carnage, and palladium was only $4.50 per ounce lower. Copper fell to a new low at $2.3020 on the May contract and settled near the lows of the day. Live cattle and lean hog futures rebounded by 4.50 cents on the April contracts; feeder cattle gained 2.775 cents per pound. FCOJ futures were 2.10 cents higher, but cotton, coffee, sugar, cocoa, and lumber all posted declined. Bitcoin was $450 higher to $5380 per token.

On Wednesday, hedge fund manager Bill Ackman spooked the market on CNBC calling for a thirty day “Spring Break” shutdown of everything in the US. The stock market fell to new lows during his interview, but he did say he was buying stocks in the current environment. The market recovered a bit at the end of the day as the fiscal policy programs are working through Congress. The DJIA finished 6.3% lower, the S&P 500 fell 5.18%, and NASDAQ was down 4.70%. the Russell 2000 plunged a scary 10.42% on Wednesday. US 30-Year Treasury bond futures fell 3-14 to 170-06 in volatile, dislocated trading. The dollar index continued to move higher, which was more a comment on weak currencies around the world. The index rose to its highest point since early 2017 when it traded to 102.04 and settled at 101.543. Corn continued to decline on the back of plunging energy prices. Soybeans and wheat prices moved higher on the session. Crude oil fell to its lowest price since 2002 as the $26.05 support level gave way. Nearby NYMEX futures reached a low of $20.06 with Brent May futures falling to $24.51 per barrel. Gasoline and heating oil futures declined to new lows. Natural gas fell through the $1.60 level and reached $1.555 before recovering back to over the $1.60 at the end of the day. Natural gas had not traded to the low level since 1995. All precious metals prices fell in risk-off trading conditions. Gold was below $1500 with silver under $12 per ounce. Platinum was near $600 on the low and palladium fell. Copper plunged to a low of $2.1110 per pound as the price approaches the early 2016 low at $1.9355. Live cattle futures declined by over four cents on the session. Feeder cattle and hogs declined by smaller margins. Coffee futures posted a gain, but cotton, FCOJ, sugar, cocoa, and lumber prices all fell. Bitcoin was $40 lower to $5340 per token.

 

Weekly Spreadsheet:

Copy of Spreadsheets for the The Hecht Commodity Report March 18, 2020 Copy of Spreadsheets for the The Hecht Commodity Report March 18, 2020

Stocks and Bonds

A continuation of risk-off conditions in markets across all asset classes pushed the prices of stocks and bonds substantially lower over the past week. While the percentage moves were far smaller than last week, markets have been swinging back and forth in a frenzy. A national state of emergency in the US will have far-reaching consequences for corporate earnings and everyday life. The Coronavirus crisis is a global event, which will weigh on the economy for the coming months if not years. It is a time for extreme caution. Wide trading ranges make trading with tight stops the optimal approach, but sudden news stories will continue to cause markets to change direction, which creates treacherous risk conditions. The numbers were staggering over the past week.

 

The S&P 500 fell 12.52% over the past week after a 12.42% loss last week. The NASDAQ was 12.10% lower; last week, it fell 11.82%. The DJIA posted a 15.52% loss after losing 13.06% last week. We should expect volatility to continue, and even increase over the coming days and weeks. Chinese stocks moved lower with US indices. China was ground zero for Coronavirus, but the epicenter shifted to Europe and the US. The Chinese stock market is not the best guide for conditions in the world’s most populous nation as it could be propped up by government intervention in the current environment.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $33.97 level on Wednesday, which was 12.45% lower than the closing level on March 11. Technical support at $35.30 per share gave way. The FXI will continue to move lower or higher, depending on developments on the spread of the virus in the current environment as all equities are under siege.

US 30-Year bonds fell sharply over the past week as dislocations are the norm in all markets. On Wednesday, March 18, the June long bond futures contract was at the 170-06 level, down 5.52%. Bonds have traded in a wide range. The volatility in the bond market is unprecedented. June bonds traded to a new high at 191-22 on March 9. The continuous contract traded to a peak of 193-06.

The Fed did not wait for the March FOMC meeting scheduled for March 18 to lower the short-term Fed Funds rate to zero percent. The Fed resumed quantitative easing with a bazooka. The central bank made room over recent years by reducing its balance sheet through quantitative tightening, which ended on July 31, 2019, as the program cut the holdings to a far lower level than in 2015 when government ownership of debt securities was at a peak level. The world’s monetary authorities are addicted to low rates of interest and asset purchases to stimulate conditions by inhibiting saving and encouraging borrowing and spending. Central banks continue to use accommodative monetary policy to address sluggish economic growth and crisis situations. However, in the current case, economic events are a symptom of a much more substantial threat, which is the health and wellbeing of the world. Each crisis has a different root cause, but the results in markets tend to be similar.

Short-term US rates stood at 1.50%-1.75% after three rate cuts in 2019. On March 3, the Fed cut the Fed Funds rate to 1.00% to 1.25% in an emergency move as market volatility surged. This week, rates moved back to zero percent in the US as the President declared a national state of emergency. The Fed stands prepared to add unprecedented liquidity to the system throughout the crisis. They will purchase corporate as well as government debt issues. Meanwhile, there is not much room to cut rates further in the US without going into negative territory. Since the Fed controls short-term rates and market forces dictate levels of interest rates further out along the yield curve, it is possible that longer-term rates could move into negative territory as the flight to quality buying could overwhelm the bond market. Instability in the debt markets is a problem for markets as volatility continues and worsens. It is a time for an unprecedented response to the spread of the virus, and the impact on markets is unique.

Open interest in the E-Mini S&P 500 futures contracts rose by 24.5% since March 10 after an over 10% gain last week. Open interest in the long bond futures fell by 4.60% over the past week. The VIX continued to reflect the wild price swings during the week as the volatility index was at the 76.45 level on March 18, 41.84% higher over the period after the massive move to the upside over the recent weeks. The VIX traded to a high of 85.47 on March 18, the highest level since 2008. During the height of the 2008 crisis, the VIX reached 89.53.

I had been advocating buying the VIX and VIX-related products when volatility is low, and the stock market was making new highs. Buying volatility on dips and taking profits on rallies had been the optimal approach over the past months. I have only traded these products from the long-side and sold all positions after the explosive move in the VIX. The gains in the volatility instruments covered many losses in other markets over the recent sessions. At the 76.45 level, the VIX is not at a level that offers any value and is in the sell than the buy zone, but I would not go short the VIX in this environment. I took profits on VIX-related instruments on a scale-up basis. The level of the VIX also tells us that options offer more opportunities from the sell than the buy side, which involves too much risk in this market. The VIX reflects the implied volatilities of put and call options on the S&P 500 stocks. The higher VIX reflects more demand for options, which are price insurance. Insurance premiums rise when risk increases. The volatility in the market will remain elevated for the coming weeks barring a miracle. The stock market is likely to move higher and lower with daily reports on the number of fatalities and cases of Coronavirus in the US, Europe, and around the world. We could be in for a prolonged period of price variance and risk-off conditions. The virus is a faceless enemy facing the world. The last time we faced a health crisis of this magnitude was in 1918 when the Spanish flu claimed many victims. Scientists and medical professionals are working diligently on a vaccine and treatments for the sick. It is possible that markets could close for a time if the national emergency continues, and the number of cases rises dramatically. The answer is in the hands of science rather than finance or politics.

 

The dollar and digital currencies

The dollar index exploded by 5.25% since the previous report as substantial volatility hit the currency arena. Most currencies fell sharply against the dollar, but the euro did better than most. Since the euro accounts for 57.6% of the dollar index. The market’s reaction to the ECB meeting caused the euro to fall as President Lagarde did not provide comfort to the markets. However, it is possible that the ECB was cautious not to provoke a continuation of the unwind of the cash and carry trade between the dollar and the euro currency. A massive carry trade where market participants were long dollars and short euros because of interest rate differentials and the strength of the dollar in the currency pair is contributing to volatility in the foreign exchange markets. The Fed’s move to push US rates to zero percent and begin quantitative easing to push rates lower further out along the yield curve could reignite a period of weakness in the dollar and strength in the euro in the environment of incredible volatility.

The June dollar index traded to a new low of 94.53 on March 9, which was the lowest level since October 2018. The dollar index then put in a bullish reversal on the daily chart last week.

Source: CQG

The weekly chart highlights the reversal and the spike in daily historical volatility in the dollar index that translated to wider price variance in all currencies over the past weeks.

Technical resistance on the continuous contract stands at the 103.815 level with support at the recent low of 94.61 on the weekly chart. The dollar index was at 101.543 on March 18 after exploding from the recent low. Below there, the monthly chart has support at 93.395. Open interest in the dollar index futures contract plunged by almost 44% over the past week.

Coronavirus, the carnage in crude oil, and the US election are causing lots of volatility in the currency markets, and that could continue over the coming weeks and months. The emergency 50 basis point cut in the Fed Funds rate on March 3 did little to stabilize markets; it was like a gunshot into the ocean. On Sunday night the Fed cut rates to zero percent and began quantitative easing. Falling interest rates will not do much to address fears associated with the spreading virus. Slashing interest rates and pushing rates lower by buying debt securities, or quantitative easing has become the go-to tool for central banks in the post-2008 financial crisis environment. Fiscal stimulus from governments, as have seen over the past week, is necessary as risk-off is coming from a health rather than a financial crisis. However, science is now the most significant factor, and the answer are not coming soon enough.

The euro currency was 3.42% lower against the dollar since March 11 on the May futures contract. I expect lots of volatility in the dollar versus the euro currency pair. The pound plunged 9.54% lower against the US currency after the Bank of England cut interest rates, and the number of cases of Coronavirus rose in the UK. Last weekend, the US extended the European travel ban to include the UK. Since then, countries all over the world are closing borders. Technical support in the pound was at the $1.1965 level against the dollar, which gave way. The break to the downside in the pound was because of the increasing number of cases of the virus. Falling interest rates in the UK do not help the pound and caused it to decline to the lowest level since October 2019 when the UK faced a hard Brexit. Coronavirus has turned out to be a far more significant threat to the world than Brexit, the trade war, or any other issues over the past years.

 

Bitcoin and the digital currency asset class tanked over the past week. Cryptocurrencies have been falling over the recent weeks in sympathy with risk-off conditions. Bitcoin was trading at the $5,236.85 level as of March 18, as it fell 33% compared to the value on March 11 after declines in recent weeks. The cryptocurrency failed at over the $10,000 level, as all asset prices dropped. Ethereum moved lower by 39.94% and was at $113.97 per token on Wednesday. The market cap of the entire asset class moved 31.74% lower as it slightly outperformed the price action in Bitcoin. The number of tokens increased by 41 to 5224 tokens since March 11. T is incredible that new issues continue to roll out. The rise in the number of digital currencies over the past year continues to dilute the asset class. In late 2017 the overall market cap was at over $800 billion with a fraction of the number of tokens available today. On Wednesday, the market cap stood at around $150.444 billion. Open interest in the CME Bitcoin futures rose by 2.37% since last week. Open interest had been moving higher during rallies and lower during dips in the Bitcoin futures market, which tends to be a bullish sign in a futures market. However, as I wrote last week, all logic and traditional relationship can go out the window during periods of turmoil in markets.

The Canadian dollar dropped 5.23% since last week on the back of the falling knife in oil. Open interest in C$ futures rose by 4.52% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of energy and agricultural products. Weakness in commodities prices accounted for the decline in the C$ over recent weeks.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ tanked by 10.83% since the March 11 report. The geographical proximity to China makes the Australian dollar sensitive to the Coronavirus and accounts for its decline. Australia has experienced an outbreak of the virus.

The decline of 9.54% in the British pound since the previous report reflects the current global health crisis and the rise in the number of Coronavirus cases in the UK.

The Brazilian real hit new lows against the dollar, as it fell 8.60% since last week. The April Brazilian currency was trading at the $0.192350 level after falling to a new low at $0.19035 during the week. Emerging market currencies have plunged during the risk-off period in markets. 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 likely to move higher or lower with any significant changes in the direction of the Brazilian real over the coming weeks. Emerging market currencies can gap as we witnessed with the Argentine peso in 2019.

 

Precious metals prices moved sharply lower as they were not immune to risk-off conditions in markets across all asset classes over the past week. As long as Coronavirus spreads, we should expect a deflationary impact that causes all asset prices to decline.

 

Precious Metals

Lower interest rates are typically bullish for gold and silver prices, but in the current environment, they have not been immune from selling. As market participants move to the sidelines and pay attention to health concerns, liquidation has been ubiquitous in all markets, and precious metals are no exception. Platinum and palladium prices moved substantially lower. Platinum fell to its lowest level since way back in 2003. Silver fell to its low since 2009.

Gold fell 10.01% since last week even though interest rate declines are typically bullish fuel for the yellow metal, but these are anything but typical times. Silver tanked as the price fell by 29.83% since March 11. April gold futures were at $1477.90 per ounce level on Wednesday, while March silver was $11.772 per ounce. Gold put in a bearish reversal on the weekly chart last week, and the silver market plunged in the risk-off environment. In 2008, the price of gold fell from over $1000 to a low of $641, and silver moved from over $21 per ounce to a bottom of $8.40 in an example of how brutal a risk-off period can become. Since Coronavirus has developed into what could be a more significant risk-off period, moving to the sidelines on risk positions is a prudent approach given the current circumstances.

April gold futures reached a new peak at $1704.30 on March 9 as fear gripped the oil markets, and the energy commodity became a falling knife. The yellow metal declined by $200 by the end of last week. May silver rose to $19.005 on February 24 before the price suffered a substantial correction sending it to a low of $11.64 per ounce. Silver never challenged the July 2016 high at $21.095, while gold remains above its former resistance level at $1377.50.  Gold continued to outperform silver over the past week sending the silver-gold ratio to a new modern-day high as it blew through the previous peak like a hot knife goes through butter. We learned from the gold-platinum and platinum-palladium spreads that there are no rules when it comes to deviations from long term means in price relationships. I have been bullish on precious metals over the past months, but the current situation requires risk-management. I will continue to add to long physical positions in gold, silver, and platinum, but will use wide scales and avoid all derivatives and mining stocks over the coming weeks.

The price of April platinum plunged by 30.43% since March 11, after significant declines over past weeks.  Platinum continues to be the laggard in the precious metals sector as it fell to its lowest price level in seventeen years. April futures were at the $605 per ounce level on March 18. The level of technical resistance is now at $700 on the April futures contract. Support in platinum is now at $562 per ounce, last week’s low. Rhodium is a byproduct of platinum, and the price of the metal had been in a bull market since early 2016. The price of rhodium evaporated over the past week to a midpoint price of $4,750 per ounce on March 18, down $7,300 or 60.58% from the level on March 11. Palladium, the best performing precious metal that trades on the futures exchange, soured last week with a 35.83% loss since the previous report. The price traded to a new peak at $2815.50 on February 27 on the nearby futures contract. June palladium settled at the $1449.90 per ounce level on Wednesday. As I had been writing over recent weeks, “The risk of significant volatility in palladium and rhodium rises with the prices of the metals, and we should expect a continuation of wide price ranges over the coming weeks.” The chickens came home to roost in the palladium and rhodium markets.

Open interest in the gold futures market moved 9.40% lower over the past week. The metric moved 12.82% lower in platinum after significant declines in recent weeks as longs exited positions. The total number of open long and short positions fell 21.74% in the palladium futures market after substantial declines over the past two weeks. Silver open interest declined 10.89% over the period after significant declines over the past weeks. The decline in open interest reflects risk-off conditions.

The silver-gold ratio exploded to a new record level since March 11.

Source: CQG

The daily chart of the price of April gold divided by May silver futures shows that the ratio was at 124.07 on Wednesday, up 26.38 from the level on March 11. 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.

We were long the gold mining stock ETF products GDX and GDXJ, which had been underperforming the price action in gold and followed the volatility in the stock market over the past weeks. I liquidated these positions in the risk-off environment and would only purchase gold and silver bullion on a scale down basis.

Gold moved fell 10.01%, while the GDX was 21.81% lower since March 11, and GDXJ fell by 25.73% since the previous report. I moved to the sideline in these products as the mining stocks have moved with the stock market rather than gold. I’d rather own the yellow metal on a scale-down basis.

We were also long SLV, the silver ETF product, which posted a 28.28% loss since March 11, which marginally outperformed the percentage loss in the silver futures market. I liquidated this position to make room to purchase physical silver using a wide scale.

Platinum and palladium prices plunged since March 11. June Palladium was trading at a premium over April platinum with the differential at the $844.90 per ounce level on Wednesday, which almost halved since the last report. April platinum was trading at a $872.90 discount to April gold at the settlement prices on March 18, which widened by around $100 since the previous report.

The price of rhodium, which does not trade on the futures market, plunged to $4,750 per ounce on Wednesday, down $7,300 per ounce or 60.58% on the week. Rhodium is a byproduct of platinum production. The low price of platinum has caused a decline in output in South African mines, creating a shortage in the rhodium market. The price moved higher from a low at $575 per ounce in 2016. Rhodium evaporated and the bid offer spread moved to an incredible $2500 per ounce.

We were long the PPLT platinum ETF product, which moved 27.83% lower since March 11 as it outperformed the price action in the futures. I liquidated the ETF position to concentrate on purchases of physical platinum bars and coins. Purchasing a nearby futures contract on NYMEX and standing for delivery is a way to avoid significant premiums for the metal. At $605 per ounce, a contract on NYMEX has a value of $30,250, the lowest since 2003.

We were long the ETFMG Prime Junior Silver ETF (SILJ). SILJ was at $5.95 on March 18, down 21.50% since the last report as mining shares substantially underperformed the silver futures market. I also liquidated this position as I would rather accumulate more silver bullion in the current environment.

Falling rates are bullish fuel for the gold and silver markets. Risk-off threatens to send the price of the precious metals significantly lower, as we witnessed in 2008. I will be using wide scales on bullion and coin purchases. I remain bullish on gold, silver, and platinum, but protecting capital during an unprecedented risk-off period is now the prudent approach. I would only buy the metals on price weakness and leave scales wide until the situation calms.

 

Energy Commodities

All of the energy commodities except for Rotterdam coal experienced price ugly declines over the past week. Demand destruction because of Coronavirus in crude oil, together with a flood of supplies from Saud Arabia and the other OPEC members and Russia, continued to weigh on oil and product prices. Natural gas fell to a new and lower low after a recovery rally failed to take the price over $2 per MMBtu. Ethanol declined to below the $1.00 per gallon level, but coal posted a small gain compared to the closing price on March 11. Coal likely rallied as the health situation in China improved. The spread of the virus continued to weigh on the demand of most members of the sector over the past week.

April NYMEX crude oil futures plunged 38.24% after last week’s 29.50% plunge. After putting in a bearish reversal on the monthly chart in January, the price has made lower lows. Barring a miracle, the market will put in a bearish reversal on the quarterly chart as a close below $50.99 per barrel on NYMEX futures at the end of March is almost a sure thing. The price was just over $20 per barrel on Wednesday, under one-third the price on January 8.

May Brent futures outperformed NYMEX WTI futures and were 32.29% lower since March 11, adding to the recent losses. Selling from Middle Eastern and Russian producers continued to weigh on the price of Brent. April gasoline plunged 42.57%, and the processing spread in April posted a 60.3% loss after last week’s 28.61% decline. April heating oil futures moved 22.92% lower from the last report moving the heating oil crack spread 1.11% higher since last week. The decision by OPEC to abandon production quotas at a time when the global economy grinds to a halt wreaked havoc on the price of crude oil and oil products. Demand destruction and a flood of supplies was the most potent bearish cocktail I ever observed.

Technical resistance in the April NYMEX crude oil futures contract is at $36.35 per barrel level with support at the February 2016 low at the $20 level on the continuous contract. In 2001, the price of NYMEX futures fell to $16.70, which is the next technical level on the downside.  Crude oil open interest fell by 3.0% over the period. The bears have been in control since January 8. Iran continues to stand as a potential problem in the Middle East when it comes to supplies, but Coronavirus has trumped any impact on the oil market. Iran is dealing with a tragic outbreak of the virus. As risk-off conditions continue to grip markets across all asset classes, energy had been hit the hardest. The oil-related stocks in the US turned out to be a harbinger of the price destruction in the energy commodity. Oil equities did not move higher with the price of crude oil in 2019 and at the start of 2020, and they plunged with the price of petroleum over the past week. The potential for bankruptcies of debt-laden companies in the oil and oil-related sector continues to send share prices lower.

Over half the world’s crude oil reserves are in the Middle East. Political instability in the region always has the potential to impact the price of the energy commodity. Meanwhile, technological advances and regulatory reforms in the US has made the world’s leading economy independent when it comes to energy supplies. With 13.10 million barrels per day of output, the US produces more oil than either Saudi Arabia or Russia. The Trump administration has encouraged oil and gas production over the past four years. However, the 2020 Presidential election will be a referendum on the future of energy policy as the opposition party has embraced the “Green New Deal” that would reduce fracking and energy output when it comes to fossil fuels. The potential for a dramatic shift in US energy policy could cause lots of price volatility in the oil and gas market during the second half of 2020 as the prices could begin to move higher and lower with the political polls in the US. In November, the world’s largest energy-producing nation will decide if it continues to produce or if new regulations cause a sudden decline in output beginning in 2021. The price action over the past weeks may have taken the issue off the table.

Meanwhile, at the new price level in the low $20s, US output is likely to drop like a stone as oil companies cannot survive. US politics could play a role in the oil market later in the year, but we are now at a price level that creates an emergency for oil producers in the US. On Friday, March 13, President Trump said that his administration would be buying crude oil to increase the Strategic Petroleum Reserve significantly at current prices. I am sure the administration would like to turn back the clock to January 8 when the price of WTI and Brent rose to $65.65 and $71.99 per barrel, respectively. At the time tensions between the US and Iran rose to a boiling point, the President said he was ready to sell oil from the SPR to prevent any supply problems in the world. Had they acted in early 2008, there would be far more room to support the price of the energy commodity in the current environment. If the administration and the Congress view the survival of the US oil and gas industry as a matter of national security, we could see some bailouts of the debt-laden companies in the sector. However, that would do little to help equity holders who have seen their investments washed away by a tidal wave of selling.

Crude oil has gone through significant price declines over the past years but has always found a way to rebound. If the falling price of oil begins to impact Russia in a meaningful way, we could see a production cut in the coming weeks or months. However, the Saudis, Russians, and other oil-producing countries view the current environment as an opportunity to flood the market with the energy commodity to force US producers into bankruptcy and reduce US production. It is a tense time in the oil business, which could have a significant impact on the US economy and the employment picture over the coming months.  Energy may play a role in the upcoming election if a recession in the US because of job losses in the oil and gas sectors begin to rise. OPEC and Russia may have decided that weakness in US oil companies that sit on a mountain of debt and the spread of Coronavirus causing risk-off conditions in markets across all asset classes was a perfect opportunity to push the oil price to the lowest level in years. If US producers exit the business, it will return power to the oil cartel led by the Saudis and Russians. The ability to succeed will depend on KSA and Russia’s ability to withstand the economic pressure from lost revenues. When it comes to Russia, the low level of the ruble lowers domestic production costs, which could give them staying power. In Saudi Arabia, which has a breakeven price of over $80 per barrel to keep its economy going, the ability to withstand a prolonged period of low prices could be more of a challenge. Saudi Arabia will need to sell more oil at lower prices to keep its economy going. At the same time, there is always a potential for the US, KSA, and Russia to quietly agree to stabilize the price in the current environment with some production agreement. When it comes to the geopolitical state of the oil market, I would not rule any surprises out with the price near the $20 per barrel level, which is too low for all of the three leading producers. However, they all face the same problem, which is falling demand as the global economy is facing its most severe shock in decades. The lower the price falls, the more Russia and the Saudis may regret their decision.

The spread between Brent and WTI crude oil futures in May rose to the $3.39 per barrel level for Brent, which was $1.01 above the level on March 11. The May spread moved to a high of $5.40 in early January as tensions between the US and Iran flared in the Middle East. The most recent peak was at $5.15 on February 19. On March 16, the spread moved briefly to a 17 cents per barrel premium for NYMEX WTI futures over ICE Brent futures for May delivery. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. While Brent has traded at a premium to WTI since the Arab Spring in 2010, the low price that could lead to US production declines as the Saudis and Russians increase output could lead to a premium for WTI. Over the long-term, WTI had traded at a $2 to $4 premium to the Brent benchmark.

Term structure in the oil market experienced a significant shift as the price of crude oil tanked. The flip from backwardation to contango in the spread reflects the flood of supplies in the crude oil market. Oil traders will be filling 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 are now one of the only profitable areas of the market. The cash and carry trade will lift freight and storage rates. The forward curve in crude oil highlights the current state of contango.

Over the past week, the June 2021, minus June 2020 moved from a contango of $5.95 to the $9.07, a rise of $3.12 per barrel. In early January, the spread traded to a backwardation of $6.03, over $15 per barrel tighter than the level on March 18. With interest rates at almost zero, buying nearby oil, storing and insuring it, and selling forward will be the most popular oil trade. Expect storage around the world to fill up quickly in the current environment pushing freight and storage rates to skyrocket. If Coronavirus continues to weigh on demand, we are likely to see idle ships and tankers become storage facilities for oil. At the same time, contango can continue to move higher, as we witnessed in early 2016, so be cautious with synthetic trades to take advantage of the cash and carry trade. The plunge in the price of oil turned the fundamentals around. A flood of crude oil from Saudi Arabia, Russia, and other oil-producing nations at a time when demand is falling will continue to push contango in both WTI and Brent futures markets higher. Rising contango is a sign of a glut in the oil market. However, it is also a sign that the market expects production to fall significantly. The well-capitalized market participants that build cash and carry positions will receive a massive bonus if the market shifts back to backwardation during the life of their trades. A return of any tightness would allow them to sell their nearby oil in storage at a higher price than it costs to cover deferred short positions. With Iran lurking in the background as a hostile agitator in the Middle East, that scenario is possible.

US daily production was at the record high with 13.1 million barrels per day of output as of March 13, according to the Energy Information Administration. The level of output was 100,000 barrels above the previous week. As of March 6, the API reported an increase of 6.407 million barrels of crude oil stockpiles, while the EIA said they rose by 7.70 million barrels for the same week. The API reported a decline of 3.09 million barrels of gasoline stocks and said distillate inventories fell by 4.679 million barrels as of March 6. The EIA reported a decrease in gasoline stocks of 5.0 million barrels and a drop in distillates of 6.40 million barrels. Rig counts, as reported by Baker Hughes, rose by one last week to 683 rigs in operations as of March 13, which is 150 below the level operating last year at this time. The inventory data from both the API and EIA took a backseat to risk-off conditions in markets over the past week. We are likely to see inventories rise and the number of rigs operating in the US decline over the coming weeks and months as the economy takes a hit from Coronavirus.

OIH and VLO shares continued to plunge with the stock market since March 11, OIH declined by 27.72%, and VLO moved 35.65% to the downside since last week. Eventual strength in crack spreads would be supportive of the price of VLO stock. We are long two units of the OIH ETF product. OIH was trading at $3.39 per share level on Wednesday. I am holding a small position in OIH. The price is too low at this point to liquidate the position. I will hold the ETF as a long-term position and will look to double it or more if the conditions warrant.

We are short the May $80 put option on VLO at $3.65 per share.

https://finance.yahoo.com/quote/VLO200515P00080000?p=VLO200515P00080000

 

If the shares are below the $80 level, we will assume a long position in VLO shares at $76.35.

We are short the May $70 put option for the same expiration at $6.28. A link to the option is below:

https://finance.yahoo.com/quote/VLO200515P00070000?p=VLO200515P00070000

 

If the price of VLO shares is below $70 on May 15, we will be long the stock at $63.72 per share on this position, and an average of $70.04 per share on the two positions. VLO was trading lower at $35.02 per share on Wednesday. As I wrote, “If you are not comfortable assuming this level of risk, please do not follow this recommendation.” We are coming into a time of the year where gasoline demand tends to rise, putting upward pressure on refining spreads. The position in VLO is not a long position on crude oil or gasoline, but on the margin for processing the energy commodity into oil products.
Please remember that when selling these puts, you must be prepared to purchase the stock on the expiration day at the strike prices of the put options. The net purchase price is the strike price minus the premium received. I suggested starting with a very small position, and will consider adding, but have widened my scale given the price action in the oil sector.

 

I have stayed away from the ERX product over the past week and will continue to only trade on an intraday basis in any oil-related instruments. At $0.61 per share, we are likely to see a reverse split in the leveraged product. I would only entertain a long position with a very tight stop in this environment.

April natural gas futures fell to the lowest level in a century on March 9 when the price reached $1.61 per MMBtu, the 1998 low. However, an overabundance of short positions caused short covering that lifted the price to just shy of $2 per MMBtu as the price ran out of buying at $1.998 per MMBtu. On March 18, the price fell to a new low of $1.555, the lowest since 1995. Nearby April futures were at $1.6040 on March 18, which was 14.59% lower than on March 11. The April futures contract traded to a high of $2.447 on November 5 and has made lower highs and lower lows throughout the winter months. Support now stands at $1.335, the 1995 bottom. While technical and fundamental factors continue to favor lower prices, but wild market conditions could cause significant price swings.

Natural gas followed through on the downside after putting in a bearish reversal trading pattern on the weekly chart during the week of January 13. Every attempt at a recovery ran out of buying throughout the winter season. There are only around one or two weeks left until the 2020 injection season begins in late March, and the price has reflected injection season trading conditions throughout the entirety of the peak season. Natural gas is still vulnerable on the downside, but speculative shorts may decide to be a lot more cautious in the current environment, which could save the commodity from continuing lower.

Source: EIA

The EIA reported a withdrawal of 48 bcf, bringing the total inventories to 2.043 tcf as of March 6. Stocks were 63.8% above last year’s level and 12.5% above the five-year average for this time of the year. Last week’s report was bearish, from a fundamental perspective. Natural gas stocks fell to a low of 1.107 tcf in March 2019. Stocks could wind up at a low of above 2.0 tcf. This week the consensus expectations are that the EIA will report a withdrawal of 13 bcf from storage for the week ending on March 13. The EIA will release its next report on Thursday, March 19, 2020.  Fundamentals say lower in natural gas, but we are at a time of the year when the energy commodity tends to make seasonal lows, which we may have seen at $1.555 on March 18, time will tell.

Open interest fell by 8.05% in natural gas over the past week. Technical resistance is now at $1.998 per MMBtu level on the April futures contract with support at $1.555 per MMBtu, the low from Wednesday, which stands as technical support on the continuous futures contract. The next level on the downside is at $1.335. Price momentum and relative strength on the daily chart were falling below neutral conditions as of Wednesday after making another lower low. The price action continues to suggest that sellers are lurking above looking to take advantage of any attempts at a price recovery as we move towards the injection season. However, risk-off conditions could cause additional short covering if speculators decide to move to the sidelines.

April ethanol prices moved 21.44% lower over the past week on the back of weakness in all energy prices. Open interest in the thinly traded ethanol futures market moved 15.52% higher over the past week. With only 454 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product fell 17.19% compared to its price on March 11. The price of April coal futures in Rotterdam moved 4.71% higher over the past week, which could be a sign of Chinese buying.

On Tuesday, March 17, the API reported a 421,000barrel decline in crude oil inventories for the week ending on March 13. Gasoline stocks fell by 7.834 million barrels, while distillate stockpiles fell 3.625 million barrels over the period. The EIA said crude oil stocks rose 2.0 million barrels. Gasoline inventories were 6.20 million barrels lower, while distillate stocks fell 2.90 million barrels. The API and EIA inventory reports id nothing to support the price of the energy commodity. The slowdown in the US and global economy could cause inventories to continue to rise, but lower US output in the face of falling prices should slow the flow of the energy commodity into storage. At the same time, the cash and carry trade could begin to impact inventory data. The oil futures market did not care about the stock numbers this week.

In natural gas, the price fell to the lowest level since 1995 at $1.555 per MMBtu.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the price at $1.604 in April on the settlement price on March 18, was 27.4 cents per MMBtu lower than on March 11. The price bounced a bit late Wednesday. The price is in contango where deferred prices are higher than levels for nearby delivery, reflecting the condition of oversupply and high level of inventories compared to past years as we head into the 2020 injection season. Natural gas stockpiles will start the 2020 injection season at a level where a build to over four trillion billion cubic feet and a new record high is possible in November, which could keep the price from running away on the upside in the leadup to the winter of 2020/2021.

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, UGAZ and DGAZ attract lots of volume and are excellent short-term proxies for natural gas futures. I will not take positions in leveraged products overnight and will only day trade, given the volatility in the markets.

We are holding a long position in PBR, Petroleo Brasileiro SA. PBR shares tanked with oil and the Brazilian real and were 37.08% lower over the past week at $4.31 per share. The shares of the company are too low to sell at the current price. I have a small position that I will hold as a long-term investment and look to double up or more when the market conditions warrant.

I expect lots of volatility in the oil and natural gas markets throughout the rest of 2020. The US election will stand as a referendum on the future of US energy policy. If the Democrats unseat President Trump, the Green New Deal would likely lead to less oil and gas production. However, the price action has already taken care of that potential minimizing the issue. At the same time, flooding the market with crude oil depends on the staying power of Russia and Saudi Arabia when it comes to accepting far less revenue for their oil sales. Iran continues to be a factor in the Middle East that could turn the oil market on a dime if hostilities interrupt the flow of the energy commodity to world consumers. The impact of Coronavirus has been devastating, and the damage continues. It is impossible to call a bottom in any market, and crude oil and natural gas are both vulnerable to lower lows. However, any surprises will now come on the upside, as the markets are decidedly bearish. Time will tell if Putin and MbS bit off more than they can chew when it comes to the decision not to cut production.

 

Grains                                                             

Grain prices fell in sympathy with risk-off selling in markets across all asset classes. While grain prices moved to the downside, we are now in the season of uncertainty when it comes to the 2020 crop that will feed the world. Coronavirus will not stop people from eating, but it could interfere with planting and the supply chain for farm-related products. At the same time, the weather across the fertile plains of the US and other growing regions around the world will determine if supplies are adequate to meet global nutritional requirements.

While Coronavirus is causing sickness and death, the global population will continue to rise. I continue to believe that the growing demand for food will limit the downside potential for prices. Any supply shortages could cause significant price appreciation in the soybean, corn, and wheat futures markets over the coming months.

 

 

May soybean futures fell by 5.47% over the past week and was at $8.2550 per bushel on March 18. Open interest in the soybean futures market fell by 2.48% since last week. Price momentum and relative strength indicators were falling at oversold readings on Wednesday in the daily chart.

The May synthetic soybean crush spread rose over the past week and was at the $1.1875 per bushel level on March 11, up 25.75 cents since March 11, which I view as a bullish signal. The crush spread is a real-time indicator of demand for soybean meal and oil. Therefore, price trends in the crush spreads can cause buying or selling in the raw oilseeds at times. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures. The decline in the crush spread since late January was a confirmation of the recent bearish trend. However, the spring planting season is right around the corner now that we are in February, and it is the wrong time of the year to become overly bearish in soybeans or any of the grain markets. As I have written in previous reports, I believe soybean futures are in the buy-zone at prices below $9 per bushel, but risk-off has pushed the price lower. The rise in the crush spread was a bullish sign for bean prices.

May corn was trading at $3.3525 per bushel on March 18, which was 10.48% lower on the week on the back of plunging energy prices. Open interest in the corn futures market fell by 2.03% since March 11. Technical metrics were falling and at oversold readings in the corn futures market on the daily chart as of Wednesday. The price of April ethanol futures fell by 21.44% since the previous report on the back of crude oil and gasoline prices. April ethanol futures were at 96 cents per gallon on March 18. The spread between May gasoline and May ethanol futures was substantially lower at 32.48 cents per gallon on March 18 with ethanol at a premium to gasoline. The spread was down 45.39 cents since last week as gasoline prices plunged.

May CBOT wheat futures were 0.88% lower since last week. The May futures were trading $5.0825 level on March 18. Open interest fell by 9.21% over the past week in CBOT wheat futures. We should expect to see open interest rise in all of the grain markets over the coming weeks as farmers hedge the 2020 crops. However, risk-off in markets is causing hedging activity to grind to a halt. As Coronavirus rages, we could see it impact production. Technical metrics in CBOT wheat were at oversold readings on Wednesday but were crossing higher. March wheat traded to a high of $5.925 on January 22, just one-half cent below the technical resistance on the longer-term charts, but the price failed, leading to the correction over the past weeks. The first level of support is now at the $4.9175 per bushel level, the recent low.

As of Wednesday, the KCBT-CBOT spread in May was trading at a 61.75 cents per bushel discount with KCBT lower than CBOT wheat futures in the May contracts. The spread narrowed by 15.5 cents since March 11. 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 have 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 continues to be at a level that is bearish for the wheat market. Any sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts. However, the spread moved towards the long-term average over the past week.

I will continue to build long core positions in futures and the CORN, WEAT, and SOYB ETF products over the coming weeks on price weakness. The trade deal resulting in a de-escalation of the trade war is supportive of the prices of grains. The outbreak of the Coronavirus has been a bearish factor for the grain markets, but less so than in other markets. The uncertainty of the 2020 crop year could add volatility to the market as the spring planting season gets underway. I am a scale-down buyer of beans, corn, and wheat on price weakness, leaving plenty of room to average down by using wide scales in the current environment. I believe grains have the best upside potential over the coming weeks and months as the growing world demand for food limits the downside.

The long-term average for the corn-soybean spread is around the 2.4 bushels of corn value in each bushel of soybean value level. When the spread is higher, farmers tend to plant more beans than corn, and when it is lower than the 2.4:1 average, they tend to plant more corn than soybeans on their acreage.  Farmers are now preparing how best to utilize their acreage during the upcoming 2020 planting season.

Source: CQG

The chart of the November 2020 soybean futures divided by December 2020 corn futures shows that the ratio moved lower over the past week and was at the 2.3482:1 level on March 18, down 0.0104 since last week. The ratio is below the long-term norm. On March 18, the spread was at a level where farmers will plant a bit more corn than soybean crops when it comes to the planting season in the early spring at under the 2.4:1 level. Fewer soybeans could lead to a shortage and higher prices for the oilseed. A combination of the rise of the crush spread and the decline in the corn-soybean ratio could be a bullish sign and a reason to add to soybean longs on price weakness at this time of the year.

The uncertainty of the 2020 crop year is likely to add price variance to the grain futures markets over the coming weeks. I will look to build long positions during periods of price weakness. The deal with China should limit any downside until the 2020 growing season during the summer months. However, Coronavirus has weighed on the prices over the past weeks. Lower price levels could be creating a buying opportunity in the agricultural products that feed the world for the coming weeks and months. I continue to believe that the demand side of the fundamental equation for grains will limit any selloffs. At the same time, the uncertainty of the weather during the coming crop year could create the ideal conditions for sudden sharp rallies. I believe that any weakness in grains could offer some of the most compelling buying opportunities in the commodities asset class over the coming weeks. Nothing has changed since last week when it comes to my view of the grain markets.

Each year is a new adventure in the agricultural commodities that feed the world. The beginning of spring is the time of the year when uncertainty can lead to increased price variance. I view the current price levels as areas to establish long positions, leaving room to add on further price weakness. With wild conditions in all markets these days, grains could wind up being the safest sector as people will still require food. Keep those scales wide in wild markets.

 

Copper, Metals, and Minerals

Base metal prices all moved lower over the last week in sympathy with risk-off conditions over Coronavirus. The one-day delay on LME prices did not reflect the selling on March 18.  The metals are still vulnerable to significant losses in the current environment. Copper, aluminum, nickel, lead, and zinc prices all fell since March 11. Iron ore posted a modest gain, but the Baltic Dry Index, lumber and uranium prices declined with the prices of the nonferrous metals over the past week.

Copper fell 14.10% on COMEX, while the red metal posted a 6.98% loss as of March 17 on the LME since the last report. Open interest in the COMEX futures market moved 5.00% lower since March 10. May copper was trading at $2.1510 per pound level on Wednesday after hitting a low of $2.1110. Copper is a leading barometer for the overall health and wellbeing of the Chinese and global economies. Over the past week, LME stockpiles suddenly moved higher.

Just as in the crude oil market, copper put in a bearish reversal on the monthly chart in January. A close below $2.5150 per pound at the end of March would put in the same bearish price reversal pattern on the quarterly chart. Copper was far below the level that would create bearish reversal on the long-term chart on Wednesday. The target on the downside in the copper market is at the early 2016 low of $1.9355 per pound. As the price of oil declined to a multiyear low, it began to weigh on copper and other base metals as energy is a significant input in the production process. However, Chinese demand will continue to be the most significant factor when it comes to the path of the price of copper and other base metals and industrial commodities over the coming weeks and months.

The LME lead price moved lower by 6.87% since March 10. The rise in demand for electric automobiles around the world is supportive of lead in the long term as the metal is a requirement for batteries. The price of nickel moved 7.54% lower over the past week. The export ban in Indonesia began on January 1, 2020 but has had little impact on the price of the nonferrous metal so far this year. Tin fell 14.39% since the previous report. Aluminum was 3.51% lower since the last report. The price of zinc fell by 5.25% since March 10. Zinc was just above the $1900 level on March 17. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China. The US dollar index exploded higher over the past week, which likely put additional pressure on the prices of the metals. The rising number of cases of Coronavirus in the UK could also impact the operations of the London Metals Exchange over the coming days and weeks.

May lumber futures were at the $303.40 level, down 13.07% since the previous report. Interest rates in the US will influence the price of lumber. The US Fed slashed the Fed Funds rate by 50 basis points on March 3 in an emergency move. Last week, the Fed cut the short-term rate to zero percent and will start asset purchases. Lumber is a requirement for new home construction, which is a function of the level of interest rates. Low rates are likely to support the price of wood in 2020. The current environment forced the Fed’s hand and pushed rates lower despite the election year. Lumber fell on the back of panic conditions in the US as consumers are more interested in stockpiling water, hand sanitizer, canned goods, and toilet paper than buying new homes in the current environment. Record low interest rates are a mixed blessing for the lumber market. Falling mortgage rates are bullish for new home construction, while the reason for falling rates is the slowdown of the US and global economies on the back of Coronavirus. The bottom line is that the current environment is not supportive of increasing home sales in the US, for now. However, rates will remain low to stimulate the economy once the fears of the virus pass and the rates of infection begin to decline, which would support the construction and demand for new homes. The price of uranium for April delivery was down 0.83% at $24.00 per pound. The volatile Baltic Dry Index fell 2.39% since March 11 to the 612 level after significant losses throughout the winter months. June iron ore futures were 1.64% higher compared to the price on March 11. Open interest in the thinly traded lumber futures market fell 16.41% after significant consecutive losses over the past three weeks. Risk-off conditions continued to weigh on the price of lumber futures.

LME copper inventories moved 15.70% higher to 220,325 metric tons since last week. COMEX copper stocks fell by 0.54% from March 10 to 27,673 tons. Lead stockpiles on the LME were up 0.96%, while aluminum stocks were 3.66% lower. Aluminum stocks fell below one million tons to the 973,050-ton level. Zinc stocks fell by 0.74% since the last report. Zinc stockpiles experienced a significant rise in inventories in recent weeks. Tin inventories fell by 9.55% since March 10 to 6,585 tons. Nickel inventories were 1.03% lower compared to the level on March 10.

The dollar, US interest rates, trade, and the overall direction of the global economy are the primary factors when it comes to base metal prices. Trade, Coronavirus, and the Chinese economy will have the most significant impact on the path of least resistance for the nonferrous metals. The trade deal provided some support for the sector but fears and economic destruction over Coronavirus have overwhelmed the markets over the past weeks and caused risk-off conditions in industrial commodities and markets across all asset classes until some light buying stabilized prices. The rise in the dollar weighed on base metals prices over the past week, but risk-off was the most significant factor for the sector.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 21 cents on March 18, unchanged since last week. The details for the call option are here:

https://finance.yahoo.com/quote/X210115C00015000?p=X210115C00015000

 

US Steel shares were at $4.90 per share and moved 18.2% lower since last week.

We own two units of FCX shares. The stock was trading at $7.53 on Wednesday, $2.81 lower since the previous report. I continue to maintain a small long position in FCX shares. I will not sell the stock at this level , but I am on the sidelines when it comes to adding to the position.

The base metals and other industrial commodities are likely to move higher and lower based on the news cycle on Coronavirus, and trade between the US and China over the coming months. However, the most significant factor will continue to be the progress of Coronavirus and its impact on the global economy.

I would widen out any buying scales in the current environment, given the potential for extreme levels of price volatility. The lower price of oil causes output costs to decline, which takes a toll on prices. Volatility in the currency markets could also impact prices. I am concerned that we could see a similar move in copper, so I am sitting on the sidelines aside from some small positions and am only day trading with tight stops. In 2008, the price of copper dropped to $1.2475 per pound. We could see a closure of the London Metals Exchange and other markets around the world as cases of Coronavirus rise over the coming days and weeks. I would keep all risk positions at minimal levels in the current environment.

 

Animal Proteins

Lean hog and cattle prices tanked over the past week in sympathy with other markets as risk-off conditions pushed prices to the lowest levels in years. The grilling season, which is the time of the year for peak demand in the meats, begins at the end of May on the Memorial Day weekend in the US. With grain prices lower, feed prices are down. Even though shoppers are filling their freezers with meats in the current environment, prices are plunging. Coronavirus is creating supply chain bottlenecks that may be weighing on prices.

April live cattle futures were at 92.100 cents per pound level down 10.65% from March 11 after an over 7% decline last week. Technical resistance is now at $1.00 per pound. Technical support stands at around 85.00 cents per pound level. Price momentum and relative strength indicators were at deeply oversold readings on Wednesday. Open interest in the live cattle futures market moved 10.03% lower since the last report.

April feeder cattle futures underperformed live cattle as they declined by 11.25% since last week after an almost 9% drop last week. April feeder cattle futures were trading at the $1.09625 per pound level with support at $1.0850 and resistance at $1.2000 per pound level. Open interest in feeder cattle futures fell by 15.46% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs.

Lean hog futures outperformed the live cattle futures since the previous report. The active month April lean hogs were at 58.15 cents on March 18, which was 8.96% lower from the level on March 11. Price momentum and the relative strength index were at oversold readings and falling on Wednesday. Support is at 52.125 cents with technical resistance on the April futures contract at 60.00 cents per pound level.

The forward curve in live cattle is in backwardation from April 2020 until June 2020, and the market shifts to contango from June 2020 through April 2021. Backwardation returns until August 2021. The Feeder cattle forward curve is in a slight backwardation from March through May and then shifts to contango from May through November 2020. There is a backwardation from November 2020 through January 2021. The shift in the forward curves for beef reflects weak demand and potential supply bottlenecks in the coming months.

In the lean hog futures arena, there is contango from April 2020 until August 2020. From August 2020 through December 2020, the curve is in backwardation, but contango returns from December 2020 through June 2021 when a slight backwardation returns until July 2021. The price action and forward curves reflect abundant supplies and anticipation of weak demand for the animal proteins.

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. Over the past week, the spread between the two in the April futures contracts moved a touch higher as the price of live cattle underperformed lean hogs on a percentage basis.

Source: CQG

Based on settlement prices, the spread was at 1.58380:1 compared to 1.61370:1 in the previous report. The spread decreased by 2.99 cents as live cattle declined more than lean hogs over the past week. The spread moved towards the historical norm on the April futures contracts.  However, the June spread was around the 1.27:1 level as backwardation in cattle and contango in lean hogs make pork more expensive than beef at the beginning of the peak grilling season in 2020 from a historical perspective.

Soon the markets will turn their focus to the upcoming 2020 grilling season of peak demand in the US, which begins in late May and runs through early September. However, risk-off conditions in all markets are weighing on prices and overshadow seasonal trends. Falling currencies in the emerging markets are weighing in the prices of animal proteins. Both Argentina and Brazil are significant cattle producers, and the falling peso and real are bearish for the price of meats as they cause production prices to decline and exports from the two South American countries more competitive in global markets. At the same time, grain prices have slipped and weighed on the prices of the meats. While it is always a challenge to pick a bottom in markets, cattle and hog prices are at the lowest levels in years going into the grilling season in the US.

I continue to believe we will eventually see recoveries in cattle and hog prices, and the COW ETN product, as we move closer to the season of peak demand. The trade agreement between the US and China could boost US exports of beef and pork to China. The March WASDE report was not bullish for the meat markets, but it did not account for Chinese demand for US exports. Any significant further price weakness could offer an opportunity for some bargains in the beef and pork markets. I would continue to use wide scales for any buying to leave lots of room on the downside. I have the same view of the meat markets as last week. I am on the sidelines waiting for the dust to settle in all markets. Prices fell to surprisingly low levels over the past week.

 

Soft Commodities

FCOJ posted a marginal loss since March 11, but all of the other members of the soft commodities sector moved to the downside in risk off price action. The most significant losses came in the cocoa and sugar futures markets, followed by cotton and coffee.

May sugar futures declined 12.97% since March 11, falling over recent weeks, as the price of the sweet commodity was around the 10.67 cents per pound level on the active month futures contract. Technical resistance is at 12.00 cents with support at 9.83 cents. Sugar made a new high at 15.90 cents on February 12 on the continuous contract, but the price collapsed on the back of risk-off conditions. The decline in the price of crude oil and ethanol weighed on sugar as the primary ingredient in ethanol in Brazil is sugarcane. The value of the January Brazilian real against the US dollar continued to fall over the past week and was at the $0.192350 level against the US dollar on the March contract, 8.6% lower over the period. The Brazilian currency recently fell below its multiyear lows, which is a factor for the price of sugar and other commodities where Brazil is a leading producer and exporter. The currency fell to a new low of $0.19035 as the slow descent continued to eat away at the value of Brazil’s currency. Coronavirus has weighed heavily on all emerging markets. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real. Price momentum and relative strength on the daily sugar chart were in deeply oversold territory as of March 18. The metrics on the monthly chart crossed lower, but the quarterly chart was still at an oversold condition. Sugar made a new high above its 2019 peak before the recent correction. Risk-off conditions stopped the rally. Open interest in sugar futures was 6.99% lower since last week. Open interest had been rising with the price, which was a bullish technical factor; the decline with the falling price is not technically bearish. Sugar rallied to new highs as drought conditions in Thailand created the supply concerns that lifted the price of sugar futures. The recent correction in sympathy with the risk-off conditions in markets across all asset classes, which likely chased any speculative longs from the market.

May coffee futures moved 2.99% lower since March 11. May futures were trading at the $1.0870 per pound level. The first level to watch on the downside is $1.0140. Below there, support is at around 97.40 cents on the continuous futures contract. Resistance is at $1.2245 on the nearby May contract. I continue to favor coffee on the long side, but coffee can be a highly volatile commodity in the futures market, as we have witnessed over the past weeks and months. Our stop on the long position in JO is at $27.99, but in the current conditions, I would increase the stop and exercise extreme caution. JO was trading at $34.21 on Wednesday. Open interest in the coffee futures market was 4.67% lower since last week. As I wrote last week, “I started selling on a scale-up basis at around $1.10 but will continue to hold a very small core long position. I have not added to replace length during the most recent price decline in light of risk-off conditions.” I am working a tight stop as I would prefer to be on the sidelines, given the current market conditions.

Supply concerns over Brazilian production in the off-year for crops had been supportive of the price of the soft commodity from mid-October through December. The ICO has warned that a deficit between supply and demand could be in the cards for the market because of the 2019/2020 crop year. However, those fears subsided, causing the price of the soft commodity to decline to a level where buying returned to the market. Coffee had made higher lows since reaching 86.35 cents in mid-April. The ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength were below neutral levels on Wednesday. On the monthly and quarterly charts, the price action was neutral. As I wrote in previous reports, “The risk rises with the price in the volatile coffee futures market. We should expect wide intraday trading ranges in the coffee futures market.”  Coffee can be a wild bucking bronco when it comes to the price volatility of the soft commodity. Last week I warned that risk-off conditions could impact the coffee market if they continue. The decline in the soft commodity is another in a long series of corrective moves. Coronavirus could weigh on the demand for coffee as shops like Starbucks and others are seeing declining demand around the world.

The price of cocoa futures fell over the past week. On Wednesday, May cocoa futures were at the $2284 per ton level, 12.99% lower than on March 11. Open interest fell by 10.73%. Relative strength and price momentum were in oversold territory on March 18. The price of cocoa futures rose to a new peak and the highest price since September 2016 at $2998 per ton on the March contract on February 13. We are long the NIB ETN product. NIB closed at $26.50 on Wednesday, March 18. I am using a very tight stop as market volatility has been wild. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their exports of cocoa beans, it should provide support to the cocoa market on price dips. The level to watch on the upside above the recent high is now at $3000 per ton. On the downside, short-term technical support now stands at $2188 per ton. The potential for Coronavirus to disrupt production in West Africa is high, which could lead to shortages of beans over the coming months. By using a tight stop, it would clear the way to pick up some cheap cocoa futures or NIB on a price downdraft over the coming days or weeks.

May cotton futures fell 7.98% over the past week after recent declines on the back of continued concerns about the Chinese and global economies. May cotton was trading at 56.64 cents on March 11. On the downside, support is at 55.00 cents per pound, the recent low. Resistance stands at 60.00 cents per pound. Open interest in the cotton futures market rose by 0.22% since March 10. Price momentum and relative strength metrics were in oversold territory on Wednesday.

The “phase one” trade agreement between the US and China was a bullish factor for the price of the fiber futures, but Coronavirus cuts the other way. Cotton is coming into a time of the year when the price tends to peak. However, news out of China will determine the path of the fiber futures over the coming weeks, and that news has been problematic for the cotton market. As the Chinese economy ground to a halt, the demand for cotton suffered. The spread of the virus continues to weigh on the price of the fiber.

May FCOJ futures posted a marginal loss since last week making it the best-performer in the sector. On Wednesday, the price of May futures was trading around 97.20 cents per pound. FCOJ nearby futures moved 0.72% lower over the past week as OJ continues to struggle with the $1 per pound level. Support is at 92.15 cents level. Technical resistance is at $1.0150 per pound. There is a double top formation on the daily chart at $1.0275 per pound. Open interest fell 9.08% since March 10. The Brazilian currency is weighing on the FCOJ futures. $1 per pound continues to be a critical point for the OJ futures.

Soft commodities can exhibit wild volatility at times. It is not unusual for them to double, triple, or halve in price. In the current environment, I suggest short-term positions with very tight stops for anyone looking to trade in any of these markets.

 

A final note

Last week I wrote, “We should expect unprecedented volatility across all asset classes to continue to grip markets over the coming weeks. The current environment is a lot different than during the 2008 financial crisis, which centered around money and assets. This time, the world faces an outbreak of a disease, which has the potential to take lives and is more like a natural disaster than an economic event. However, the global economy will suffer the effects of Coronavirus, which is a reminder of how markets reflect geopolitical, economic factors as well as acts of God or nature. Keep stops tight on any new positions, and only approach markets with a risk-reward plan. Look for bargains in the current environment when it comes to long-term investments. History has taught us that risk-off periods are the best times to acquire stocks and other assets when they fall to irrational prices. The continuation of monetary policy accommodation by the world’s central banks continues to weigh on the value of all fiat currencies, which is likely to keep the bullish trend in gold going as it moves towards a challenge of the 2011 record peak in US dollars at $1920.70 per ounce.  However, risk-off can cause sudden and violent selloffs.” Over the past week, the situation has become far more volatile, with the US declaring a national state of emergency, lockdowns in Italy, France, and Spain, as well as in some states in the US. The situation could get worse before it gets better for all markets as fear rises with the number of cases. As the US begins testing, the numbers could become shocking. Markets are likely to reflect the daily tallies, and we could see them shut down for a while. I would not be surprised to see a period where markets and businesses other than those that provide essential services and food supplies close down to limit the spread of the insidious virus. Nothing is off the table in the current environment.

Meanwhile, wild price swing can create a paradise of trading opportunities for traders. Approach markets with a plan for risk and reward. Avoid holding risk positions overnight in case markets close for a period. Take care of your health and that of your loved ones and friends, especially those in the high-risk category. Be careful out there over the coming week.

I am optimistic that science and medical professionals will find effective treatments and a preventative vaccine, but that takes time. We may not have seen the worst of Coronavirus, but the situation will improve, and life and markets will eventually get back to a new normal. Each crisis changes the world a bit. The impact of the current environment will remain with markets and our behaviors long after it has ended.

 

As I wrote over the past weeks, I plan to increase the price of The Hecht Commodity Report soon. However, all of my current loyal subscribers will never experience an increase in their monthly or annual subscription rates. I will grandfather all subscribers at their current rates for as long as they maintain their subscriptions. Thank you for your support.

 

Please keep safe and healthy in this environment.

 

 

 

Until next week,

 

Andy Hecht

 

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.