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Executive summary:

  • The recent strength in natural gas is most likely to be short term in nature.
  • Short-term weather events and speculation have driven natural gas higher.
  • Gold is nearing its 200dma and facing headwinds in an improving equity market, increasing interest rates and increasing production from China.
  • Gold is being supported by "technical" factors and buying from China.
  • Increasing corn prices may impact ethanol margins, and boost the margins for biodiesel through the EPA's RFS2 RIN system.

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Recently I wrote an article about natural gas. The whole thesis was that winters setting cold temperature records being caused by global warming are almost certain to be a temporary phenomenon. At the time I wrote the article natural gas was breaking $5 MMBtu. As I write this, natural gas is popping back above $5 MMBtu with the most recent arctic cold blast. Clearly natural gas is tied to the weather, or should I say "climate change." The "theory" goes global warming causes record cold temperatures which causes an increases in demand for natural gas at a time when the Federal Government and EPA are doing everything possible to block the increase in supply of natural gas and other fossil fuels. The predictable result is a higher price for natural gas. This predictable behavior has not gone unnoticed. As this Bloomberg video highlights, speculative interest is heating up in the natural gas market.

What makes me skeptical about the natural gas performance is that the recent cold spell was the catalyst to punch natural gas through long-term resistance. The recent cold spell doesn't fundamentally change the long-term outlook for natural gas. I would want to see a more significant fundamental/structural change causing the break-out. Cold winters aren't long-term phenomenon, they are temporary transient events, at least I hope. For that reason I would look more to short natural gas at these levels than to go long.

The real long-term impact the recent cold spell may have is to weaken the public's support for climate change legislation. The real risk that has always threatened societies isn't warming, it is freezing. Societies and life thrive and grow during the warm interglacial periods, they die off during ice ages. What this record setting cold winter has done is awakened society to the real risks it faces. The American South and even Northeast have been caught completely unprepared for global cooling. While everyone has been building wind and solar farms, and blocking the development of proven energy sources like petroleum, natural gas and coal, this recent polar vortex has demonstrated the folly of that approach. Solar panels don't work when they are covered in 2 feet of snow, and turbines don't turn when ice has frozen them still. In fact they become a safety hazard if the blades start to throw off the ice they accumulate when stalled.

Facts are, as the public becomes aware of how completely ineffective and dangerous it is for a society to rely upon uncompetitive, unproven, unreliable and unpromising "alternative" energy sources they will turn back to the proven energy sources. Right now there is a shortage of natural gas in California, the Northeast, and the South. During a life or death crisis our society doesn't turn to wind and solar, it turns to proven fossil fuels. Some voters are sure to start to understand that.

Already support for climate change legislation has fallen in the EU and Japan, and it is only a matter of time before that happens here in the US. Already cracks are beginning the form. The EPA backed away from their higher volume mandates for Ethanol and the State Dept is supporting the construction of the Keystone Pipeline. If the Republicans can successfully make this a campaign issue I would imagine natural gas production will surge in the future, and its price will plummet.

What could move gold? Bloomberg is reporting a change in "sentiment" may be driving gold. After a bad 2013, Chinese buying and an increase in the money supply in the US may be driving gold higher. They also mention currency crises in the emerging markets may also drive the demand for gold. To me, that is a temporary phenomenon and not likely to change the longer-term dynamics of gold. Chinese central bank buying is also a double-edged sword. When the Chinese Central Bank buys gold, it increases the supply of yuan. That weakens the value of the yuan relative to the US dollar. A stronger US dollar relative to the yuan will help keep inflation low in the US, and drive inflation higher in China. Higher inflation in China may force the Chinese Central Bank to sell their gold holdings to cool their economy. Only time will tell how that dynamic will work out.

To me, the real story isn't Chinese demand, it is Chinese production of gold. Chinese production of gold has been surging. Other factors playing into the gold market is that gold is about to run into the 200dma at $1,312, the 10-year rates are bouncing off their 200dma and headed higher and equities are headed higher. Higher interest rates should pull the US dollar higher which has been struggling with its 200dma. To me, it looks like gold has many headwinds, and only "technical" factors and Chinese buying support its recent move. I doubt it will be able to hold its gains or penetrate the 200dma average unless rates, equities and the US Dollar all head south.

Lastly is corn. I'm not really interested in corn, but I am interested in its impact on ethanol. Lower corn prices have resulted in abnormally high profit margins for ethanol producers like Green Plains Renewable Energy (NASDAQ:GPRE). Higher corn prices may harm those margins. The reason I say "may" is because ethanol is part of the EPA's RFS2 program and things are a little funny in that program. Right now D6 ethanol RINs are driving the price of D5 Biomass Based Diesel RINS and D5 Advanced Biofuels RINs higher. If higher corn prices squeeze the profit margins of ethanol, it may drive D6 RINs higher, which in turn will encourage biodiesel production through the D4 and D5 RINs. Welcome to the wonderful world of the EPA's RFS2. Only time will tell how that dynamic will work out.

Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

Source: Gold, Natural Gas, Corn And Some Musing

Additional disclosure: I also have calls on GLL and REGI