PM End of Week Market Commentary - 10/5/2013

davefairtex
By davefairtex on Sat, Oct 5, 2013 - 5:29am

Gold finished Friday down -5.50 on light volume, while silver was up +0.06 to 21.75 also on light volume. The gold/silver ratio dropped -0.41to 60.30.  While silver appears to be back to moving sideways within its trading range, both gold and silver remain below their 50 day MAs.  The light volume, the drift sideways-to-down suggests no real interest in the metals.

If we look at the price trend on the daily chart, gold looks to be forming a large descending triangle formation which is a generally bearish pattern.  If 1275 breaks, my guess is we'll see 1200 before we see 1425.  Gold really needs to close above that downsloping trendline - which looks to be perhaps 1330-1335 for the clear pattern of lower highs to be broken.

The dollar rallied strongly today, +0.38 [+0.47%] to 80.25, and it closed the week down -0.12% overall.  Just looking at the chart, it would appear that the dollar may have found support just below 80.  If the buck continues to rally it could prove difficult for gold and silver, although today it didn't seem to have much of an effect - a bit surprising, since 0.47% is a pretty big move.

The way I assess correlation between the buck and gold is by watching the movement of both instruments.  If it seems like they move in tandem - dollar up, gold down - then I say that they are affecting one another, and since the market for the buck is huge and gold much smaller, I say its the dollar affecting gold.  This relationship used to be pretty tight, but that linkage appears to be broken right now.

GDX played a variant of its usual trick - it opened up, sold off, rallied, and then ended up the day down slightly.  GDX was down -0.29% on light volume, GDXJ was down -2.57% on moderately heavy volume.  Its a good day when GDX isn't off by 1% or more, so I guess that makes today a good one.  GDX continues to drift lower - perhaps GDX 24 provided a modicum of support today.

For the week, gold was down -25.50 [-1.91%] while silver was down -0.05 [-0.23%].  GDX dropped -3.89% while GDXJ was down -7.04%.  Junior miners dropping faster than seniors is a classic bearish signal, while silver's relative outperformance is bullish.  Something is holding silver up, and I'll say that's just about the only bullish thing I see in the PM complex right now.  But if gold tanks, it will most likely drag silver right along with it.

Physical Supply Indicators

* The SGE (Shanghai Gold Exchange) has not updated their daily closing prices since 9/30 - Monday - when the premium over COMEX was $2.55.

* The GLD ETF lost -6 tons of gold this week, down to 900 tons.  In January, GLD had 1350 tons.

* The COMEX gained 2.88 tons of registered gold this week.  COMEX registered has modestly improved, at 23.78 tons, although it is down significantly from its April peak of 92 tons.

* ETF Premium/Discount to NAV: Based on 16:00 EST Friday prices, gold 1310.30 and silver 21.74: CEF 14.40 -6.76% to NAV, PHYS 10.89 -0.47% to NAV, PSLV 8.71 +2.57% to NAV.  CEF moved deeper into discount; lower end of the range for CEF is around -7%, which is not that far away.

Gold now appears to be flowing back into COMEX.   Premiums in Shanghai are almost gone - although the data is four days old - and while gold is still leaving GLD, it is at a slower pace than during the April-July timeframe.  Supply pressure seems to be decreasing.

Harvey Organ wonders how the folks at the COMEX will possibly meet the upcoming December delivery, but they seem to have dodged every bullet since the ominous predictions of COMEX demise fueled by excitement over negative GOFO rates started in June/July.  That COMEX default always seems to be just one or two delivery months away.  It reminds me of the cliff-hanger Batman TV episodes where the Caped Crusader always manages to escape from certain death - each and every week.  "Tune in next week when..."

Futures Positioning

There was no COT report this week; I guess our friends in the CFTC that produce this report were deemed non-essential.  I'll show you a chart from last week to keep you occupied.

While the current gold, silver and miner price charts and the miners are looking somewhat bearish, bearish, and bearish respectively, the single positive longer term bit of evidence I focus on is how the producers have positioned themselves in the futures markets.  Last time they were this net-long was during the 2008 crash when gold was at $700.  However, to get gold to actually move up instead of down, we still require a catalyst to bring the managed money off the sidelines, which so far hasn't happened.

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

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

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

Gold has spent the past 3 1/2 weeks below its 50 day MA and that finally caused the 50 MA to start moving down.  Gold is back in a downtrend now in all three timeframes.  While gold bounced off support at 1275, each incremental bit of evidence of gold's downtrend will embolden the shorts.  The picture for gold is looking increasingly negative, even though it remains today above 1300.

Summary

For gold, the moving averages have confirmed that descending triangle formation on the first chart.  If you are looking to buy gold, its probably best to wait until the market shows you it is not going any lower; that means waiting for a breakout rather than buying today just because "the prices are really low."  Low prices can always go lower, and a trend in motion tends to stay that way.  And make no mistake, we are back to a downtrend in gold.  Price levels to watch are 1300 and then 1275 on the downside, and 1330-1335 on the upside.

For silver things are a bit less clear.  Silver has more or less moved sideways for the past three weeks - with a big headfake up post Fed, and a smaller headfake down this past Tuesday.  Silver's chart is showing symptoms of that same descending triangle as gold, but enough sideways movement will break that pattern in another week.  It remains a bit of a mystery.

The physical metrics I watch appear to be reasonably well in balance.  COMEX is still low on gold, but my money is on the banks to somehow extricate themselves from disaster yet again, especially given all the other indicators which show reduced pressure.

Futures positioning remains extremely bullish, and yet only an untapped potential at this point, because the catalyst bringing managed money off the sidelines has yet to appear.  We can speculate on taper/no-taper, government shutdowns, safe haven money flows and all that, but until buyers step forward, gold will most likely remain in its downtrend.

3 Comments

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 507
davefairtex wrote: It reminds

davefairtex wrote:

It reminds me of the cliff-hanger Batman TV episodes where the Caped Crusader always manages to escape from certain death - each and every week.  "Tune in next week when..."

Dave,

Remember that the bad guys may get cornered at the end of each episode, but they always managed to escape to cause mayhem at a later date. You don't want to have to create too many "good" villans.

If I squint just right while looking at the gold chart you posted, I see what looks like a truncated head and shoulders pattern. The left shoulder peaks at about 1350 in late July, the head peaks at about 1425 in late August, and the right shoulder is developing (looks more like a shrug.) Could you comment on the implications of this pattern? What does a pure TA view predict as an expected outcome and what is the closing price level that would trigger this outcome? Does a shrugging right shoulder help or hinder the clarity?

Grover

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 1406
gold H&S pattern

Grover-

Yes that could be a H&S pattern just looking at price action, although I'm not seeing the volume pattern that typically goes along with the H&S pattern.  The pattern doesn't have to be perfect (i.e. "shrugs" are fine).

If it were a H&S, price drop would be the distance between neckline and peak, which is about $150, drawn from right shoulder down.  In other words, retest of 1180 and then some: 1275-150 = 1125.

It looks more like a descending triangle though, simply because the volume isn't there for the H&S.  Often descending triangle patterns end in tears too.  That's the same pattern that led to the April gold crash, although the pattern was much larger so the move down was large as well.

The logic behind a H&S pattern is, there is a failure to form a new high after a clear pattern of higher highs.  After that failure, the instrument sells off.  Any way you slice it, buyers don't seem to want to chase prices higher - interest flags - and so the guys who jumped on during the rally decide to jump off after the failure.

Logic behind a descending triangle pattern is, repeated rallies happen off a support level, but each rally reaches a lower high - along the slope of the downtrend line.

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 507
Heavy Markets

Thanks Dave. I'm not in tune to all the ins and outs like you are. I see a H&S and/or a downward triangle. Either way, the markets aren't looking as if rallies are going to happen unless something comes out of left field. I'm keeping my powder dry for now.

Grover

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