PM End of Week Market Commentary - 9/28/2013
Gold finished Friday up +12.80 on light volume, and silver was up +0.07 to 21.80 also on light volume. The gold/silver ratio rose +0.39 to 61.33. Gold had a pair of stop-running raids to the upside today starting a few hours before the NY open, eventually touching 1345, hitting another high. Ever since breaking 1332 on Wednesday, gold has delivered a series of higher highs, showing at least some willingness of bulls to chase prices higher. Silver has been mostly flat, trading in a very narrow range.
The dollar was down -0.29 [-0.36%] to 80.35, and it closed the week down -0.26% overall. With no dreadful news from the rest of the world, the buck appears content to just drift lower which overall should support gold prices.
In spite of the move higher in gold, GDX played its now-familiar trick of opening high, and then being sold for most of the day, although it rallied enough at end of day to close up +0.24% on relatively light volume. GDXJ tracked GDX's pattern - it opened up, was sold all day long and closed up +0.24%, but on very light volume. Currently, while the miners appear to have support at GDX 25, they seem to be drifting slowly lower in spite of gold's modest move up.
For the week, gold was up +11.10 [+0.84%] while silver was down -0.13 [-0.60%]. GDX dropped -2.29% while GDXJ rose 0.36%. Its a bunch of mixed messages there. Gold up, silver down is bearish, while GDXJ moving up with GDX dropping is usually bullish.
Overall on the week, the miners look weak, gold is in a modest uptrend, while silver is moving up too but only slightly.
Credit Market Analysis
Every quarter, the Fed releases its data on the US credit market, in a report called the Flow of Funds Accounts of the United States - the Z1. Why do we care? Credit growth causes inflation. Credit contraction causes deflation. This report shows changes in credit in the various sectors of the US economy; it is one of my key tools for looking at inflationary pressures in the US. I like it better than the CPI because I think it is a "more pure" analysis of the root cause of inflation - namely, money creation both public and private.
The chart below is the total US Credit market as a % change year over year, a 30,000 foot view of credit growth. This number approximates the rate of monetary inflation from credit growth. Currently, we are seeing about a 3.5% rate of credit growth per year. Contrast that with what happened during the bubble - an 8-10% overall credit growth rate. That's a big change.
To do a deeper dive on where credit is being created - where money is being printed by the various sectors - we look at the chart below. It describes on a per-quarter basis, how much new money is being created per sector. Values above 0 represent new credit, while values below 0 represent money being paid back or loans being defaulted on. For instance, US corporations (red line) borrowed $201 Billion in new credit during Q2 2013. We can see the red line is responsible for most of the credit growth, at an annualized rate of about 800 Billion. Households are just barely positive, financial industry and non corporate businesses are mildly positive, while the Federal government (likely due to the upcoming debt limit) is actually negative. Conclusion: it's all about big business borrowing.
If you were to put Fed Money Printing on this chart, it would be about 250 billion per quarter, slightly more than corporate borrowing, or about the same as the household sector did for each quarter of the 8 years of the bubble. And unlike household borrowing - which went directly into the economy, buying homes, cars, and consumer products, Fed Money Printing goes and (mostly) sits at the Fed itself as Excess Reserves while pumping up the bond market. Perhaps 30% of it makes it out and inflates prices elsewhere in the economy.
This is why the Fed is unhappy. They'd like households and noncorporate businesses to borrow more, but they just aren't. In every other recovery, the Fed dropping rates would prod consumers and businesses to borrow. But this time, low rates aren't enough. Historically low rates (engineered through Fed bond-buying) are just enough to keep things moving modestly higher. It really does seem to be different this time around.
And if rates start to climb, that will reduce borrowing further - higher rates suppress credit growth, which if borrowing is reduced too much more, it risks dropping the US back into deflation, something the Fed wants to avoid at all costs.
Credit is what the Fed attempts to control. It is their lever, and it has worked for decades. At the moment, it seems to have stopped working. What bad luck to be the Fed Chairman during such a time when the usual methods that have worked for decades have so little effect.
So in spite of Fed money printing, overall tepid credit growth = low monetary inflation. This backdrop suggests no credit-driven recovery, and also no PM-positive inflationary pressures. Unless this credit picture changes, its unlikely monetary inflation will show up to drive PM higher. The low monetary inflation pressures can be seen in the CCI - overall commodity prices have done nothing but drop for the last 28 months.
The next Fed Z1 statement due out Dec 5 2013 covering 3Q 2013.
Physical Supply Indicators
* Gold premiums in Shanghai were down this week -2.63 to $3.68. Shanghai is getting close to having no premium over COMEX.
* The GLD ETF lost -4.20 tons of gold this week, down to 906 tons. In January, GLD had 1350 tons.
* The COMEX gained 0.21 tons of registered gold this week; COMEX registered is at a low level, but has not dropped for 3 weeks now.
* Premium/Discount to NAV: Based on 16:00 EST Friday prices, gold 1336.90 and silver 21.76: CEF 14.77 -5.53% to NAV, PHYS 11.10 -0.56% to NAV, PSLV 8.74 +2.82% to NAV. CEF and PSLV improved, while PHYS discount increased.
It appears the departure of gold from COMEX has stopped for now. Premiums in Shanghai are almost gone, and while gold is still leaving GLD, it is at a much slower pace than during the April-July timeframe. Supply indicators remain positive but it appears the supply pressure continues to decrease.
The COT report for gold which actually covered the Fed announcement last week through Tuesday of this week shows Producers sold off 1600 longs, while Managed Money covered short 6500 contracts and went long 2700. Most of the post-Fed price action appears to have been primarily driven by managed money short covering rather than managed money going long. Silver on the other hand saw Producers increase long exposure but only modestly, while managed money increased their short position.
Producers remain at historically high levels of net long exposure, while managed money has historically low levels of long exposure. This configuration is typically seen at gold market bottoms; in some sense, managed money is waiting on the sidelines for something interesting to happen to encourage them to buy. Until that happens, it will be tough for gold to sustain a strong upward momentum. To me the futures positioning is still quite bullish, but the necessary catalyst that gets managed money off the sidelines causing a sustained upward move has yet to appear.
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 did not change this week, although gold's 20 EMA crossed its 50 MA earlier this week, which is a bearish sign. Gold's price remains below its 50 MA, which will eventually drag it down given time. Silver is also below its 50 MA as well. Price and the moving averages are suggesting that PM's medium term uptrend may be in danger.
While gold has staged a modest recovery and is definitely up perhaps $30 from where it was immediately prior to the Fed meeting, the rest of the PM complex is not looking so positive. Both silver and GDX are both below where they were pre-meeting and this is generally a bearish sign, as is the rising gold/silver ratio, as is the fact both gold and silver prices are below their respective 50 day MAs. During rallies, silver tends to lead gold, and the miners tend to be quite strong. The opposite is true at the moment.
There is support for gold for sure, less so for silver, and GDX looks like it may be ready to seriously break down. The shorts have established a routine: sell GDX in the morning after its daily brief morning rally, and that's a bad sign.
Futures positioning has a strong bullish potential to it, but the catalyst bringing managed money off the sidelines has yet to appear. From the credit report - although it lags by 3 months - it doesn't seem that inflation will be the catalyst. Perhaps it will be something else.
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