PM End of Week Market Commentary - 9/21/2013

davefairtex
By davefairtex on Sat, Sep 21, 2013 - 4:14am

Gold finished Friday down $39.30 on moderately heavy volume to 1325.60, with silver down $1.30 to 21.79 on moderately heavy volume.  The gold/silver ratio dropped to 60.83.  Gold and silver both started to slowly drop in asia, moved down more seriously in europe, and then tanked after the NY open.  Silver has now retraced all of its post-Fed meeting move, while gold has retraced 70%.  Both silver and gold closed at the dead lows of the day, with silver resting on its 50 day MA.  Doesn't that sound bearish?  It sure felt that way watching it happen.

Still, silver remains supported by its 50 MA, which is still rising.  That's about as bullish as I can be right now.

Trader Dan suggests the timing of the NY section of the move (about $20) came when James Bullard, a Fed Governor, suggested in a morning Bloomberg interview that tapering might well come in October and that the decision was a close-run thing.

The dollar was up 0.08 [+0.10%] to 80.56, a weak rally after the big move down post-Fed.

For the week, gold was down -2.00 [-0.15%] silver down 0.50 [-2.3%], GDX up +0.51% and GDXJ down -3.15%.  The dollar was off -1.15% for the week as well.

Mining shares were pounded today for the second day post Fed, returning almost back to their starting point.  GDX was off -5.85% on extremely heavy volume, GDXJ was off -9.13% on heavy volume.  Except for a brief attempt to rally in the morning, miners were sold all day long.  OPEX (monthly options expiration) may have had an effect on miner prices - there is sometimes a lot of intraday buying and selling done in order to move prices to suit big banks who may have put on a large long or short options position at the expiration, but its hard to know the specifics being an outsider.  Regardless, for anyone long miners, it wasn't fun to see those No Taper gains vanish over the past two days.

To use the cat analogy once more: the cat is always on the wrong side of the door.  On Wednesday, traders wanted desperately to buy miners, but by Friday, they were trash and traders wanted nothing to do with them at all.  And now we are back to where we started - a high volume mulligan.


 

Physical Supply Indicators

* Gold premiums in Shanghai were down this week $3.89 to $6.17, although close prices for Shanghai were only provided through Wednesday in China (03:30 EST) which missed all the Fed price action.

* The GLD ETF lost -0.93 tons of gold this week, down to 910 tons.  In January, GLD had 1350 tons.

* The COMEX gained 0.23 tons of registered gold this week, and is now at 21.60 tons.  High for the year was 95 tons at COMEX the week before the April crash.

* Premium/Discount to NAV: Based on 16:00 EST Friday prices, gold 1326.60 and silver 21.80: CEF 14.68 -5.76% to NAV, PHYS 11.04 -0.34% to NAV, PSLV 8.74 +2.62% to NAV.  This week's movement: PSLV higher, CEF lower, and PHYS remains about the same.

The gold physical supply picture has loosened modestly from last week, but it remains moderately bullish.

Futures Positioning

The COT report for gold (coverage through Tuesday) has Producers increasing long exposure by (net) 4700 contracts mostly by short covering, while Managed Money increased short exposure by 10,000 contracts.  In silver Producers reduced both long and shorts, while Managed Money reduced long and increased shorts for a net short increase of 3000.

Producers remain bullish, and managed money remains short, which still paints a bullish longer term picture.

GOFO Rates

Gold forward rates are all now positive and climbing; gold lease rates are dropping.  I claim this is because miners are closing and/or delivering against their short positions, which should cause GOFO rates to rise.  A competing explanation is that supply tightness in the gold spot market has been reduced.  To me, this explanation doesn't fit with the other indicators I watch - other indicators of supply tightness appears to have remained about the same over that time period - which is why I like my theory better.

But if you are a believer of negative GOFO as a measure of tight gold supply, you might want to take note of the steady move upwards in the GOFO rates that started towards the end of August.

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

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

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

Moving average directionality remains unchanged from last week, although gold's 50 MA is beginning to flatten.  Gold price has again moved below its 50 MA, which is a bearish sign.  Silver price remains above its 50 MA, but only just barely.

Summary

If the week had ended Wednesday after the No Taper FOMC meeting, I'd have said the 3 week downtrend was over.  However, with gold losing most of those gains and silver losing them all entirely, and what with the mining shares dismal performance Friday, a renewed uptrend is very much in question for me.  The bearish indicators for me are: the gold/silver ratio is pretty clearly trending up, gold once again is below its 50 MA, and the same is true for GDX as well.

The PM market remains extremely volatile and news-driven.  Bernanke doesn't taper one day, and then two days later a Fed governor talks about ... tapering again!  Are we being played?  Almost certainly.  However I don't think PM is the Fed's main target; the real target is long rates and the equity market, and PM is just collateral damage.  My interpretation: the market didn't perform the way Bernanke wanted it to, so his message of Wednesday had to be fine-tuned by a Fed governor on Friday to elicit the proper "free market" response.

"Free Market" indeed.  "We had to destroy the village in order to save it."

Will futures market buyers return?  Based on recent experience, it will depend on the news.  We are most likely back to the Fed Taper Watch, where the market tries to forecast the October Fed decision by examining each economic news release through the lens of What Will Bernanke Do.  Or put a different way, "just when I thought I was out, They Pulled Me Back In!"

However at some point, the Fed will either have to put up or shut up.  Talking tapering and then repeatedly not-tapering will only work for so long until they lose credibility.  And I'm not talking about credibility with you or me, I'm talking about the ability for them to move the market through jawboning.  We must judge the market's view of them by price action; from that viewpoint, they remain credible - although not all markets see things the same way.  The buck was not impressed by Bullard's October Taper threat, but gold and silver sure were, and the equity market looked relatively concerned as well.  Treasurys remain on the fence.

I hate to say it, but: next Fed meeting 29-30 October.  No press conference.

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