Last week, the Federal Reserve released the minutes from its March 18 Federal Open Market Committee (FOMC) meeting. At that meeting, the Fed cut the fed funds rate by 75 basis points to the current level of 2.25 percent. The FOMCs post-meeting statement said, Downside risks to growth remain. [The] outlook for economic activity has weakened further.
The FOMC statement contained a special paragraph dealing with inflation concerns: Inflation has been elevated, and some indicators of inflation expectations have risen. Uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.
This raises the following question: If inflation is such a real concern, why would you lower rates?
Lowering rates weakens the dollar and has the opposite effect: Its inflationary. When inflation heated up in the early 80s, the remedy from then-Fed Chairman Volcker was to raise rates substantially, not lower them. This successful dose of tough love caused some short-term pain but ultimately resulted in nearly 20 years of prosperity.
Bottom line: The Feds recent actions support the bullish case for gold and a host of commodities going forward. However, the gold market has exhibited mixed signals.
The dollar hit a new low against the euro last week, and oil reached a new high. Yet gold remains well under the March 17 high of $1,039. This isnt particularly healthy relative action. Also, the June gold futures remain below its 50-day moving average (represented by the green line on the chart below).
Technically, at the very least, Id like to see a two- to three-day close above this average to confirm the major gold trend has officially turned back up. Gold should have a glittering future; the plan now will be to watch for market action confirmation.
In contrast, heres a market that firmed last week and did manage to close above its 50-day average Friday, April 11.
For the week, cocoa gained $285 a ton, while many other commodities appeared range bound. If you need a reason for the recent strength, the European Cocoa Association reported the first quarter cocoa grind was up nearly 5 percent. The major reason I require is that the market is currently trending up. This is one of the best reasons to buy July cocoa.
And although were on the subject of the 50-day moving average--an indicator used by numerous trading funds--as of close Friday, April 11, heres how the following markets traded in relation to it.
Above the 50-day: cocoa, copper, corn, cotton, crude oil, euro, gasoline, natural gas, Treasury bonds and Japanese yen.
Below the 50-day: Canadian dollar, cattle, cotton, Dow Jones Industrial Average, gold, S&P 500, silver, soybeans, sugar and wheat.
The stock market indexes (the Dow Jones and S&P 500), precipitated by GEs poor earnings, turned below Friday.
Commodities trading below the 50-day but very close to turning above include May cotton, gold and soybeans. Note that cotton appears in both categories. The reason is the old crop (May) futures were trading just under the 50-day at press time, while the new crop (December) was trading well above. Theres no coincidence here.
May Cotton (old crop)
December Cotton (new crop)
The cotton market is vulnerable to the sharp drop in planted acreage. Because of the high prices of competing crops such as soybeans and wheat, the projected planted acreage for cotton will be less than 9.5 million, the smallest number in 20 years.
As a result, with absolutely no room for any adversity, the market will be very focused on weather this growing season. The recent break above the 50-day moving average for December cotton is a manifestation of a market transitioning into a bullish configuration.
To clarify, Im not suggesting solely relying on the 50-day moving average. A trader should never rely on just one indicator. Trading is complex, and prices are determined by innumerable variables.
However, at any one point in time, the market price is a consensus of all buyers and sellers. And the 50-day moving average is one quick-and-dirty means of trend determination.
Good luck, and good trading.