PM End of Week Market Commentary - 8/31/2013

davefairtex
By davefairtex on Sat, Aug 31, 2013 - 6:35am

Gold finished Friday down $10.60 on average volume to 1396.20, with silver down $0.35 to 23.56 also on average volume.  The gold/silver ratio rose to 59.26.  It appears that the correction from seriously overbought silver is proceeding apace, although the lack of particularly strong volume on the down-days I interpret as a bullish sign overall - that the uptrend remains in place even though PM prices are now correcting.

The three day correction in gold and silver has relieved the overbought condition in both metals.  Looking at the charts, gold 1380 and gold 1350 should act as good support, and I see silver 23 as good support also.  Those are not "red lines" or anything, just prices at which traders will be more likely to buy the dip.

For the week gold was down $0.10 [-0.11%] while silver was off $0.49 [-2.02%].

The dollar this week rebounded, up 0.69 [0.85%] to 82.10.  The buck appears to have broken out of its medium term downtrend.  It is not clear if the dollar will move dramatically higher, but as it has been in a rough trading range with 80.50 on the bottom ane 85 on the top, it is not unthinkable that another move towards the top of its trading range is in store.  If this occurs, it is likely to encourage further moves lower in PM.  It seems that the euro weakness is the reason for the strength in the buck.

The gold/silver ratio has rebounded this week, in line with the correction currently under way in PM.  Gold is suffering less during the correction than silver, but a rising GSR is a bearish sign.

Mining shares were down on Friday; GDX -1.44%, and GDXJ -1.71%, with the juniors underperforming.   Volume was heavy in GDX, although less so than the past three days.  Declining volume on corrections is generally a positive thing, although mining shares closed at the lower end of the days trading range which being the end of the week, suggests traders don't want to hold risk over the weekend - perhaps understandable in the middle of a correction given Monday is a holiday.

Intraday it appears that traders really do want to buy miners, but any weakness in PM tends to short-circuit any upward momentum that develops.

Physical Supply Indicators

* Gold premiums in Shanghai were up this week $0.51 to $4.89.

* The GLD ETF gained +0.90 tons of gold this week.

* The COMEX lost -2.08 tons of registered gold this week, and is now down to 22.58 tons.

* Premium/Discount to NAV: Based on 16:00 EST Friday prices, gold 1394.50 and silver 23.50, CEF 16.203 -2.07%, PHYS 11.81 +1.43%, PSLV 9.57 +4.26%. Premiums are up across the board, especially PSLV.

It would appear that western ETF buyers are back, especially in silver; CEF is lagging somewhat.  Gold demand in China is still positive even with $1400 gold, but GLD ETF is no longer losing gold.  COMEX registered gold is still dropping; the supply situation, especially at COMEX still appears constrained. Given India's 10% tax and a virtual halt on gold imports, this has to be interpreted as generally positive for gold prices.

Futures Positioning

The COT report for gold shows some big changes; Managed Money closed 20k short gold contracts (38% of the total Managed Money short) just this week, while Producers decreased longs and increased shorts by a more sedate 8k contracts net total.  Smart money continues to take profits and managed money shorts continue fleeing.  To provide context: Managed Money had 81k short contracts on July 12; now they only have 36k remaining.

Overall, positioning is still bullish, but growing steadily less so.  As the weeks pass fewer managed money shorts remain to cover, and at the moment it does not seem that Managed Money in either gold or silver wants to go long.  The short squeeze isn't quite over yet, but it is getting lower on fuel.  At some point not far in the future, the shorts will largely be gone and additional buying from speculative money will need to come in to push prices higher if the uptrend in gold is to be maintained.

Moving Average Trends [20 EMA, 50 MA, 200 MA]

Gold: short term UP, medium term UP, long term DOWN

Silver: short term UP, medium term UP, long term DOWN

Gold this week moved from medium-term neutral to up.  Both gold and silver prices remain above both the 50 MA and the 20 EMA, which is bullish.

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5 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 1229
PM asia update; is gold a safe haven?

While you were sleeping...

PM suffered a Monday-morning dawn assault this AM in asia; silver dropped to 23.11 on light volume and gold to 1373.60 on heavier volume.  It does not look like many long-side stops were actually hit in silver, but a moderate number of gold longs were flushed.  Interestingly, the dip in both metals was bought, and 3 hours later silver broke out on some decent volume, as the new silver shorts were stopped out.  Upward momentum continued, and now silver is trading at 24.17 +0.65 [+2.82%] up substantially from Friday's close.  Gold is lagging - it has only moved back close to even.

Likely this move washed out the last of the PM "safe haven" traders from last week.

One famous trader saying is, "its not the story that matters, its the reaction of the market to the story that counts."  Watching last week, I was unable to see any particularly strong upside pressure in the futures markets in response to the whole alleged Syria/Safe Haven trade.  At the same time, PM was becoming seriously overbought, which is a dangerous point to start entering long.  So - a limited market reaction = "safe haven" isn't a big force, either on the upside or the downside.  This was confirmed today for me when the "safe haven failure" selling got bought.

So - is gold viewed by the marketplace as a safe haven?  My opinion: not currently in the west, and thus not by the futures markets.  And don't shoot the messenger here.  I just read the tea leaves, I don't control what the market does.  And before anyone explodes, no I'm still not working for the banks.

Now I certainly consider gold to be one of my own personal insurance policies against currency issues.  It is one of my safe havens.  That's my internal storyline, and I believe that will most likely play out at some point in the 5-20 year timeframe.  And it may happen sooner than that due to something I cannot see coming.  But from what I can tell, the futures markets (and likely Managed Money) do not currently see things my way.  I'm ok with this.  As a result, I keep my core position based on my internal storyline, but I do not "load up" on futures or gold mining equities when I see the marketplace doesn't currently agree with this storyline.

It is normal for people to trade their storylines and not watch how the vast majority of managed money behaves.  This makes sense for long term strategy, such as buying PM for your core position.  But paradoxically, it is quite counterproductive when trying to actually trade the markets in the nearer term.  So for my futures, options, and equity trades, I watch the marketplace and I don't try and emotionally "impose my will" on it, growing angry when the marketplace doesn't follow my storyline on a week-by-week basis.

So.  Gold.  Safe haven?  Not in the west, and thus not in the futures markets.

Now then if I lived in India, I'd likely have a larger-than-normal-sized core position in PM.  It would need to be physical in order to avoid government repression in the other instruments.  Would I be loading up on futures and/or equities with gold at rupee 91,000/ounce?  Probably not.  I'd probably be a seller here.  After such a dramatic move down in the currency, with the whole world conscious of the issue, it is likely at or near a near term market peak, similar to what happened in the Yen and/or JGBs a few months back.  The rupee could still break lower, but when I hear about "biggest downside moves on record" I always imagine capitulation, and that's never a great time to be going short.

Speaking of which, does anyone know the 10 year JGB is now at 0.73%, down from its peak of 0.94% hit at end of June?  Note I'm not suggesting Japan will finish with a happy ending, just that markets move in cycles, and typically don't move in straight lines - and that near term peaks often coincide with peaks in popular interest, resulting in short-term "crowded trade" situations that usually end up retracing at least to some degree once traders realize the world isn't going to end tomorrow and bail out.  Which is why I try not to trade newsflow.

I might consider shorting JGBs *now*, after the move down from 0.94 to 0.73, after Japan has fallen out of the headlines - but where the problems all still remain.  But I have no position.

So to sum up my point:

* Owning insurance against a black swan and/or grey swan with uncertain future timing = strategic decision

* Ignoring marketplace signals while trading shorter term on that very same belief system = Dumb Money

dfunghi's picture
dfunghi
Status: Member (Offline)
Joined: Jun 16 2013
Posts: 4
Re Post

My first post. I am new to PMs but have been a Martenson reader for a couple of years now by way of Richard Russell. I found this board a few weeks back and have now joined. I will look forward to entering conversations and hope they remain civil and intelligent, unlike the majority of message boards on the internet. Thank you for allowing me to join with the rest of you. My first post to follow:

Dave,

I see where there seems to be this running thread where you say less than stellar things about the PM complex under the guise of simply calling it like you see it, while others claim you have a bias.

I have read your weekly round up only a few times but would like to offer up an observation that may help shed light on why some may think you are less than simply non biased and objective. 

You wrote: "Gold demand in China is still positive even with $1400 gold" You did not write "Gold demand in China is positive especially with $1400 gold" The addition of the words "still" and "even" imply there is something about the buying strength from China that lacks bullishness. Your editorial choices of how you word your opinions paints a picture. I would think you chose your words carefully so I imagine they are designed to help shape the tone of your piece. That tone says to me you see weakness and a less then secure base driving the PM prices north. Your tone conveys a lack of faith in the bull and a wary eye towards any positive developments. Anything positive is either not to be given too much credit, is destined to be short lived, has yet to prove itself as accurate and in general does not align with the underlying market dynamics. Just saying each week "I own a core position so I am a bull" belies your actual wrap ups of the week. 

You seem to underwhelm anything positive and the above example is but one. Your choice of words have made it clear to me you are indeed biased. Why is China buying at $1400 not a reflection of the discount? You imply that China buying should slow as prices rise, yet $1400 is well below the peak. In addition I will add that China's people do not watch the daily price like Westerners do and they have decided to accumulate physical gold. The cheaper it is the more than can buy. The over all amount of money spent is less static than the volumes of metal taken. If someone wants to buy $10K worth of widgets they obviously will buy many more widgets the cheaper they are until they spend the $10K.  Certainly the deep discounts from $1800 have sent buyers flocking into the stores if we believe what we read in regards to physical demand world wide.

I have no dog in that race, however I do think your writing is slanted and reads negative, not positive, on gold and silver as the underlying tone. Everyone spins, there is no shame in it.  If I am off base and you have not carefully chosen the words you use you may wish to have a third party read before you hit send to gauge their view of the tone. A word or two here or there can change an entire pieces message. Such as "Gold demand in China is still positive even with $1400 gold" which implies demand in China should not remain positive and the price is why. Many people would see the demand in China because the price is $1400. 

Lastly I want to add my own $0.02 which is that buying PMs for safety (peak prosperity type of safety) should not be driven by the daily price as much as how much can I afford. Simply looking at ounces, instead of dollars, is how I am building my gold stash to go with other steps taken to prepare for what may happen. The worldwide creation of "new" money will have to have consequences at some point. Unless all economic theory and law is now defunct. The value held in the $USD came from its (relative) scarcity and by decree. As the former disappears the latter comes into question. In the event that the world's Central Bankers never again use restraint the paper they issue is destined for the dust bin. As we all know all paper money eventually shifts into t new version or disappears altogether. That event can be hastened or hurried. The seeming lack of concern from issuers that this is even possible frightens me. A 425 pound man living on Big Macs and donuts thinks "I did not have a heart attack yesterday, so I must be OK" is delusional. As is a bank that keeps printing money with no discipline. There is no plan or course of action to the printing, other than to print whatever we want as long as we want. The only seeming end to this will be when need subsides. That will never happen. Clearly there is no amount of "wealth" a nation and its people consider "enough". Why else do we keep adding zeros to the end of balance sheets? Why is $30B better than $15B if both represent an amount well above what is needed? Ego? 

 
davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 1229
underwhelming the positive shanghai premiums

dfunghi-

You wrote: "Gold demand in China is still positive even with $1400 gold"

You seem to underwhelm anything positive and the above example is but one. Your choice of words have made it clear to me you are indeed biased. Why is China buying at $1400 not a reflection of the discount? You imply that China buying should slow as prices rise, yet $1400 is well below the peak

I appreciate your desire to help me out with communication.  I definitely don't have any ulterior motives, but I most certainly do have my own outlook.  I'd like to think its based on current market action, but perhaps it isn't.  I'm open to your observations.

So...what was I thinking when I wrote about the premiums?  Premiums in China have been steadily declining as the price has risen.  A premium still exists (and premiums are always gold price positive, in my eyes) but it is now small, the premium even went to zero briefly when gold hit $1430 last week, and so I expect it to ultimately move into discount if the price continues to rise.  And for what its worth, back in March 2013 when gold was at $1600, gold actually was trading at a discount of $12-15 in shanghai.

So I think you read me correctly.  I believe that China buying should slow as prices rise.  And I base this on observed premium/discount behavior.  I don't think that's a bias, its just a conclusion I drew based on the evidence I have.  Given I have drawn this conclusion, how should I write it to more effectively communicate?  It sure sounds like you got my intent accurately!

I understand you just picked one out of many comments you found biased; is it possible we just have a different outlook on what these various indicators mean - for the short term?

In addition I will add that China's people do not watch the daily price like Westerners do and they have decided to accumulate physical gold

I don't think you're right about that.  On what do you base your conclusion?  I live in Asia (but not China), and the gold culture here is very strong.  From my interaction with asians (both friends, and sometimes just strangers in gold shops) who buy and sell gold, they are keenly aware of the current price in the local currency, with some knowing the price in USD.  Even the occasional jewelry buyers have a clue, and they know (and pay attention to) where the price is.  Each gold shop has the current bid/ask spread in local currency painted on its window every morning, and there are gold shops all around town.  And when the price drops, the gold shops are mobbed by people with bags full of cash that come out to "buy the dip."

What's more, from what I can tell attitudes towards gold in asia are completely unlike views in the US.  In asia, gold is a mainstream savings vehicle, perfectly respectable.  In polite dinner conversation, if you make a comment about the price of gold, its not surprising for the other people to have informed opinions, and to listen to yours as well.  When I once mentioned that I traded gold, a friend of mine shrugged and said "oh my grandmother does that too."  Yawn.  And when its time to buy the new iPhone, sometimes the gold neckchain/savings account gets sold to pay for it.  Of course in the west, gold is not mainstream at all.  We seem to have either have the more mainstream goldbugs for whom there is never a wrong time to buy gold, or the rest of the culture that buys only during the mania phases and ignores it as "only for crazy people" the rest of the time.

So my experience (together with my Shanghai chart that shows both premiums and discounts that relate strongly to underlying COMEX price movement) tells me, your assessment that price doesn't drive Chinese gold buying and selling is likely incorrect.  Its neither a quasi-religious artifact, nor a thing only for crazy people.  Its a savings account, and when its on sale, they buy.  When the price moves up, they sell.

Here's that chart; it may take some time for it to appear.

Lastly I want to add my own $0.02 which is that buying PMs for safety (peak prosperity type of safety) should not be driven by the daily price as much as how much can I afford.

I respect that philosophy, given the scenario you think will unfold in the timeframe you are looking at.  I diverge slightly from both you and Chris in that I think other possibilities have a reasonable chance of occurring, so my allocation is therefore different.  I prefer a diversified portfolio that includes both gold and cash (in various forms) in case an interim bout of severe deflation occurs between where we are now and the ultimate reflation event.  My position won't perform as well as yours if no deflation occurs, of course, but I'm ok taking that risk.

Just saying each week "I own a core position so I am a bull" belies your actual wrap ups of the week

I agree with you.  Sometimes in the short or medium term, I'm definitely not bullish.  (A question: should I have been bullish all through the move down from $1800 to $1180 this past year?)  This is one of the communication issues I wrestle with.  Since the focus of my writings are shorter term, ideally I'd like to communicate caution when I think its warranted, and bullish enthusiasm when I think its warranted, while reminding people that over the long term I am aligned with Chris and will be retaining my insurance policy regardless of the short term moves.

Perhaps I should just say that?  Any suggestions you have are welcome.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 1229
unannounced missile tests during crisis situations

So in this afternoon in asia trading I saw a decent-sized spike in gold, silver and oil.  Rooting around in the news headlines, I saw a flash headline that said: "Russia detects ballistic object launch in Eastern Med" - words to that effect.  Then another from Israel that said they had no idea what was happening.  And no word from the US.

Then, much later, an article suggesting it was all just a test.

I'm not so sure this was a good time for an unannounced "joint missile test."  Let me rephrase: it would seem to be an extremely poor time for such a test.  Is that just me?

http://www.reuters.com/article/2013/09/03/us-syria-crisis-russia-defence-idUSBRE9820AC20130903

(Reuters) - Russia raised the alarm on Tuesday after detecting the launch of two ballistic "objects" in the Mediterranean Sea but Israel later said it had carried out a joint missile test with the United States.

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 3415
Really bad time for an "unannounced missile test"

davefairtex wrote:

Then, much later, an article suggesting it was all just a test.

I'm not so sure this was a good time for an unannounced "joint missile test."  Let me rephrase: it would seem to be an extremely poor time for such a test.  Is that just me?

http://www.reuters.com/article/2013/09/03/us-syria-crisis-russia-defence-idUSBRE9820AC20130903

(Reuters) - Russia raised the alarm on Tuesday after detecting the launch of two ballistic "objects" in the Mediterranean Sea but Israel later said it had carried out a joint missile test with the United States.

If it were funny, this would humorously remind me of that scene in Iron Man where they explain a whole lot of military action and the loss of a fighter as a "training exercise."

Given the edginess in the region, you can be 99.99% sure that there were no actual tests being performed, training or otherwise.

Missiles were launched for some reason, and then came the lame excuse that it was a joint, unannounced exercise.  I'd bet a lot of money on that.

My guess is that with the tensions so high, someone caught something on radar and responded with a shoot your defensive missiles first and ask questions later launch.

In this world of supersonic offensive weapons and the tiny operating theater of the Mediterranian, there really isn't a lot of time to process things...so I understand why these things happen.

The key takeaway from this is that things are tense enough that such a thing could happen.  To the placid market herbivores buying every dip, I might say, be careful, things are not nearly as calm as being painted in the MSM press right now.

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