PM End of Week Market Commentary - 10/12/2013

davefairtex
By davefairtex on Sat, Oct 12, 2013 - 1:37am

Gold finished Friday down -13.80 on heavy volume, while silver was down -0.35 to 21.33 on moderately heavy volume.  The big move came at 0842 EST, with a massive short attack on gold driving the price down $25 through 1275 support in three minutes with 16,500 contracts traded - really huge volume.  The rebound in gold was tepid, but in silver, more substantial.  Silver continues to have more buy-side interest than gold.  The gold/silver ratio rose +0.33 to 59.66.  PM has dropped four straight days, with increasing volume each day.  Gold is through 1275 support, with the 1200 level next.  Silver remains within its trading range, looking ill but remaining short of a breakdown.  The gold/silver ratio remains in no-mans-land, providing no clues as to direction.

The dollar dropped modestly, down -0.09 [-0.11%] to 80.49, but it closed the week up +0.24 [+0.29%] overall.  While the dollar has found some support at 80, the longer term downtrend remains intact.  The 50 day MA continues to fall, the USD price level remains below the 50 MA, and an overall pattern of lower highs and lower lows remains in place.  The medium-term downtrend in the buck is theoretically supportive of gold, but it has not been much help in recent months.

On the week, gold was off -38.60 [-2.94%] while silver was down -0.42 [-1.91%].  GDX was down -4.71%, and GDXJ dropped -9.51%.  Viewed from the weekly perspective, the picture remains bearish, with the miners leading gold down.

Mining shares - with four days of downside price action in the metal, GDX didn't have a very good week.  The GDX:$GOLD ratio made a new low on Wednesday.  There might be some modest support at GDX 23, with GDX 22 representing the June lows.  A move through 22 would likely lead to more selling.  Junior miners dropping faster than seniors - that's bearish.  New cycle lows for GDX, bearish.  Dropping GDX:GLD ratio, bearish.  Its not a pretty picture right now.  As an article I read asked rhetorically, are miners the single most unloved investment class?  To give you a sense: compared against the S&P 500, GDX is down -63% over the last 52 weeks.  Now that's underperformance on steroids.

And one more thing.  We are not far away from the end of the tax year.  Tax loss selling is likely to start playing a part in the calculus of everyone who is sitting on losses in mining shares and possibly ETF gold as well.  Once we get on the other side of this in the last week of December it means there are likely to be some pretty good bargains, but starting around mid to end of November, the miners could really get hit hard by the remaining owners selling order to offset capital gains in other investments.

Physical Supply Indicators

* Golden Week is over in China: premiums in Shanghai are now $12.42, an increase of +9.87 over last week.  Lower priced gold seem to have brought out Chinese buyers.

* The GLD ETF lost -9 tons of gold this week, down to 891 tons.  In January, GLD had 1350 tons.  Dan Norcini sees GLD's dropping tonnage as a reflection of negative "western sentiment" towards gold - I don't agree with him, but I figured I'd provide a contrary view.  Certainly his view fits in with the price action since April 2013 - something to consider.  However SLV hasn't lost any silver over that time period, which is why I disagree with him.

* The COMEX lost 1.34 tons of registered gold this week, and is down to 22.44 tons.  COMEX registered has tracked sideways for the past few months, but it remains down significantly from its April peak of 92 tons.  We are almost halfway through October, and there remain 296 contracts (0.92 tons) of deliveries remaining.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1287.40 and silver 21.62:

CEF 14.00 -6.97% to NAV [down]
PHYS 10.48 -1.20% to NAV [down]
PSLV 8.43 +1.22% to NAV [down]
GTU 43.83 -6.96% to NAV

I'm beginning to think that the physical ETFs may be a good sentiment indicator for western paper gold investors.  Currently, CEF's discount is as large as I've seen it and that ties in with the lows in GDX:$GOLD and some of the other ratios I watch.

Four down days in gold has resulted in increasing premiums in Shanghai.  At the same time, gold continues to leave GLD.  COMEX looks well supplied through October, but it would seem that physical supply pressure is increasing as the price drops.  This makes sense to me.

Futures Positioning

There was no COT report this week and last week; our friends in the CFTC that produce this report were deemed non-essential by the Executive Branch.

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

No change in trend this week.  Although silver price has dropped below its 50 day MA, it hasn't been long enough for the 50 MA to start falling just yet.  Silver's still-rising 50 MA is further evidence of my claim that silver has been doing substantially better than gold during this downtrend.

Fed Taper/No-Taper: Bank Credit

So here's something I spotted the other day: perhaps one unmentioned reason why the Fed decided not to taper.  In our system, money is created by banks, loaning money to willing borrowers at interest.  When money is repaid faster than it is borrowed, that's deflationary, and if there is one thing the Fed dislikes more than gold, its deflation.  Here's a monthly timeseries from FRED that summarizes what is happening with credit creation across commercial banks in the US.   It shows deflation.  Compare that to what was happening from mid-2011 through early-2013.  As long as this graph points down, I'm going to guess: no taper.

Summary

Gold broke support on Friday.  Whether that's a plot by the Fed or just a bear raid by big money looking to cash in on that descending triangle formation, its impossible to say from the outside looking in.  I certainly wasn't invited to the meeting where it was all planned out.  What is clear is that gold is now below its 1275 support level and that will most likely bring out even more sellers on the COMEX and GLD.  Traders will continue to short the market and sell rallies until that strategy stops working.  And that means, the beatings will most likely continue until the price of gold gets low enough to attract enough buyers in GLD and COMEX to swamp the sellers and drive the price back up.

An alternate scenario is that the buyers in silver at COMEX and SLV, who have appeared a lot more often recently than the gold buyers, decide that silver at 21.33 is so cheap they want to bid it higher.  Silver still maintains a pattern of higher lows and a rising 50 day MA even after two months of downtrend, so it is not beyond the realm of possibility that silver ends up dragging gold back up.

Miners suggest more downside ahead.  There is really no bullish case to be made there at all.  New lows, declining GDX:$GOLD ratio, and a falling GDXJ:GDX ratio all point downhill.  A few miners show accumulation, but the broad cross section of them do not.

Physical gold buying seems to have increased with the price decline.  This will eventually make itself felt in COMEX, but it will take time.

Futures positioning most likely remains bullish (with no COT report, all we can do is guess), yet we must await western hot money interest in order to push prices significantly higher.

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2 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 1548
deposit taxes: because that's where the money is

Making the rounds on the blogosphere is the IMF's report suggesting that a "super tax of 10% on all savings" (google that text, you'll see what I mean) would be an efficient way of restoring central government balance sheets to the status quo ante bubble pop.  One of the key requirements is that it be a surprise.  Naturally.

So on the one hand you have bail-ins targeting depositors, and on the other hand, you have the tax man targeting depositors.  That's because savings and pensions "are where the money is."  Money in the system is starting to look like an increasingly bad bet.

So why is this happening, how soon will it come to us, and how can we see it coming?

Governments are starting to get desperate for money because the growth machine that has allowed them to both pay anti-riot insurance to the underclass, while continuing the giveaways to the cartels that keep them in power is now breaking down.  Deficits based on growth allows governments to deficit-spend using savings that is given up willingly - savers buy government bonds and the government spends that money on the anti-riot insurance and cartel payments.  But once growth is gone (which we know here must inevitably follow from peak everything and population growth that is now upon us) then this willing give-up of surplus by savers will stop eventually.

Naturally, the people in charge don't want to stop playing the deficit-game.  Perhaps they can't, given the current corrupt nature of the system.  So to keep the game going, money must come from the same place, but since in the future it won't be given willingly, it must be acquired through other means.  That boils down to an explicit grab of pensions and savings.

So how and when will this take place?

I believe there is a natural order of events based on the level of outrage and that is tied to the immediacy and easily calculable personal impact of the policy action.  That's a fancy way of saying, first pensions, then savings.

We've already seen in the periphery of Europe that pensions are being raided - in Ireland, Poland, Spain, Portugal to name a few countries.  This has been done to deal with sovereign debt issues.  Pots of real cash are swapped for government promises.  This is accepted by the public for several reasons: faith in government still exists, pensions are less personal than savings, and a pension is something far in the future.  Since the pain is more remote and theoretical, pensions are the first to go.  Savings that used to be willingly lent are now forcibly borrowed by the government.

In Europe, personal deposit accounts haven't been raided yet to address soverign debt issues.  An overall savings tax was proposed in the Cyprus banking crisis but a bail-in was selected instead, likely because of the expected response from the affected people.

So the structure and order of events is starting to become clear.

1) a bank failure will result in deposits and bond holdings being confiscated at that particular bank

2) when the bond market starts to rebel against debt levels (i.e. when rates increase and a sovereign debt crisis occurs), the nation will confiscate pots of money in pension plans and use that money to buy government bonds to keep the game going.

3) when the pension money runs out, which it must, and sovereign debt crisis returns, which it must, depositors will be hit directly by the central government, by surprise, to pay down the debt and keep the game going.

4) these events will move from the periphery to the core.

My sense is, there is no need to panic right now.  There is an order to things; first pensions, then savings accounts, happening first in the periphery and then in the core.

Perhaps most importantly, this might not be the pattern selected by the leaders of a given country or region.  The eurozone and/or Japan might pick this plan, while the US decides to try and print its way out.  At least, that's how things are currently unfolding.

But wherever the pattern I described above is selected by the people in charge, this will most likely lead to an overall deflationary outcome for that region.  When taxes like this are imposed in one place, money will start to run and hide.  It will for sure flee the banking system, which will encourage credit contraction.  With the overall amount of money in the system declining, along with a decline in velocity overall, results in overall monetary deflation by definition.

Here's a chart that shows eurozone-wide deposits and overall bank loans.  A deeper dive shows the household and corporate deposits within the eurozone are staying, while depositors from outside the eurozone are fleeing.  Perhaps outside money is anticipating this very sort of move.

The declining loans in Europe is a huge deal, and it has been happening for more than a year.

Now let's look at America.  Deposits are increasing, while bank credit has peaked and is declining ever so modestly.  It does not appear that money is fleeing the US banking system, even though deflation is just starting to appear here in the US.

westcoastjan's picture
westcoastjan
Status: Gold Member (Offline)
Joined: Jun 4 2012
Posts: 468
parallels to Dimitry Orlov's book

Dave,

What you are describing mirrors that which Dimitry Orlov speaks of in his book the Five Stages of Collapse.

Your paragraph:

But wherever the pattern I described above is selected by the people in charge, this will most likely lead to an overall deflationary outcome for that region.  When taxes like this are imposed in one place, money will start to run and hide.  It will for sure flee the banking system, which will encourage credit contraction.  With the overall amount of money in the system declining, along with a decline in velocity overall, results in overall monetary deflation by definition.

in essence describes the start of stage two, commercial collapse. Credit contraction is the catalyst to commercial collapse, and is one of the things I have tagged as being one of the signposts I am watching for. We came close to commercial collapse in 2008. This time around we won't be able to avoid it when credit markets seize up. While there will be short term deflation, it will morph quickly into hyper-inflation as commodities and the necessities of life start becoming scarce due to systemic breakdowns in infrastructure and transportation. We are extremely vulnerable with our just-in-time inventory way of doing things. In this type of situation, knowledge really is power, and will allow those who are aware to be ahead of the curve with preparations.

This will eventually trigger political collapse - where "Faith that the government will take care of you" will erode. This is the phase we in this community are looking at with our planning for resilience and self-sufficiency. It is also the phase where I believe the weak will perish rather quickly in what is sure to be a short term period of mass confusion and chaos.

I think you are correct with your assessment of how this will play out, including working its way in from the periphery. We have the gift of time to see this happening from afar, and make the necessary adjustments to our assets and lifestyles.

This aspect of the financial game needs close observation. Financial collapse is the trigger for the commercial collapse.

Jan

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