PM Daily Market Commentary - 8/30/2016

davefairtex
By davefairtex on Wed, Aug 31, 2016 - 4:20am

Gold fell -12.60 to 1310.50 on moderately light volume, while silver dropped -0.30 to 18.59 on moderate volume.  A slow but relentless dollar rally took down both gold and silver, with gold making a new low on the day.

There was no particular event or spike that caused gold to fall today, it was just a slow and steady sell-off that ended with gold closing quite near the day low.  The dollar looked like a rough mirror image - it rose steadily all day long, closing near the highs.

On the chart, we see that gold closed right at 1310 - which it turns out, is actually below support, because of my roll rules that attempt to smooth out the contango which gold now finds itself in.  Gold is now in dangerous territory - the commercials are desperate for force prices lower, it is the summer time when many traders are on vacation, and the Fed is talking about raising rates - and more importantly, the market seems to be buying what the Fed is selling, at least to some degree.  This would be the ideal time for the commercials to jump on gold to force it convincingly through the 1310 level which would allow those commercials to close out their shorts and make a profit.

If the buck continues to rise, we could see a whole lot of selling by managed money bailing out at the COMEX.

Gold open interest at COMEX grew by +13,739 contracts.

Silver is actually starting to look fairly strong, relatively speaking.  It avoided making a new low, today's "down-day" volume bar was lighter than yesterday's up-day bar, and over the last few days the gold/silver ratio has started to retreat a bit.  The relatively more bullish volume picture combined with the apparent consolidation at around 18.50 suggests silver could be forming a low here. If gold falls out of bed going through 1310, silver will probably follow, but on its own, silver is actually behaving fairly well.  Maybe its all due to commercials covering like mad, its hard to know.

Today the miners just gave it up, with GDX off -4.92% on heavy volume, and GDXJ down -5.50% on very heavy volume.  My concerns from last week that the selling was not yet over in the miners was validated today; the relentless selling in gold had traders throwing their miner shares right off the lifeboat.  Miners closed relatively close to the day low.

The new low, the heavy volume, and the disagreeable close all suggest we probably have more selling ahead of us.  Today's candle print was a nameless long black candle - to my eye, its not a reversal bar.

Platinum fell -1.94% making a new low, palladium dropped -3.01% making a new low also, while copper dropped just -0.48%.  Copper made a new low also, but copper's candle print didn't look all that bad; it appears to be trying to put in a low around 2.07.  The chart pattern for copper looks pretty similar to that of silver - with copper looking a bit weaker.  If copper avoids selling off further, that likely helps out silver to some degree.

The USD rallied strongly today, up +0.49 to 95.99, closing convincingly above its 50 MA.  Here is the follow-through from the Fed jawboning on Friday.  The Yen was particularly hard-hit, dropping -1.03% on the day.  The buck is the near-term key for many things, because its a measure of the market's assessment of the chances for a near term rate increase.  Right now, it appears that the market believes the Fed might just raise in September.

Crude fell -0.69 [-1.47%] to 46.26, making a new low today.  Crude was doing fine right up until about 10:05 Eastern when it decided to start selling off hard.  Most of crude's losses came in that hour.  I didn't see any news items - but I could have missed something.  It wasn't about the API report or the dollar move - there was just one hour where price sold off fairly hard and that's it.  Oil closed at its low, dropped through its 9 EMA, and now looks to be more formally entering a downtrend.  Oil really needs some positive news from the petroleum status report tomorrow at 10:30 to rescue it from a likely brisk move lower.

SPX fell -4.26 to 2176.12, with utilities (XLU:-1.05%) leading the way lower, while financials (XLF:+0.90%) rallied.  This all screams "rate increase trade" to me - financials benefit, utilities suffer when rates rise.  Utilities have had a difficult month this month, down perhaps 5%.  That's almost double their annual yield.  Risk-free yield: mission impossible.  VIX rose +0.18 to 13.12.

TLT fell -0.39%, coming down a bit from their recent rally.  Bonds remain in a sideways-moving trading range.

JNK fell just -0.03%, remaining within a few pennies of their 52-week high.  No change.

CRB fell hard, dropping -0.87%, with 4 of 5 commodity sectors plunging.  CRB remains above its 200 MA, at least for now anyways.   Ag products look particularly weak right now, dropping 6 days out of the last 6.

The move in the miners today is why I always like to see a strong reversal bar before jumping in.  It isn't a guarantee of a good outcome, but I think it does increase the odds.  Right now the miner chart looks bearish, and while I think something gold-positive could well happen this Friday, attempts at predicting the payrolls report haven't worked out so well for me in the past.  I do believe PM prices should stabilize on Thursday, and if we do see a decent reversal bar forming in the miners on Thursday, I will probably try to roll the dice and pick up some shares of my favorite miners.

I'm guessing that a lot of the selling pressure in the miners will have been wrung out by Thursday, so the downside "should" be minimal even if payrolls are good.  A neutral payrolls report might even be a "buy the news" event for the miners, and of course an unexpectedly bad payrolls report will cause everything in the PM space to scream madly higher.

The opposite view - a strong payrolls report could see the commercials jumping all over gold and giving it a really bad day.  As in, a $30 drop at 08:30-08:35.  All they need is some event that causes the buyers to pull their bids, and then they get to do whatever they want.

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8 Comments

sand_puppy's picture
sand_puppy
Status: Diamond Member (Offline)
Joined: Apr 13 2011
Posts: 1758
What are you financial guys making of DB refusing to deliver?

Deutsch Bank Refuses To Deliver Physical Gold on Demand

...[A] troubling report emerged in a German gold analysis website, according to which Deutsche Bank was unable to satisfy a gold delivery request when asked to do so by a client of Germany's Xetra-Gold service.

Xetra-Gold is an ETF that advertises that it is backed by physical gold and ETF owners may take physical gold delivery.

According to its website, the publicly traded company "provides investors with an efficient instrument to participate in the performance of the gold market. Xetra-Gold’s combination of features – cost-efficient trading and the right for physical delivery of gold - makes it an attractive product."

Redemption for gold: Investors always have the possibility of demanding delivery of the securitised amount of gold per bearer note against the issuer. ...

Since the introduction of Xetra-Gold in 2007, investors have exercised this right [of physical delivery] 900 times, with a total of 4.5 tons of gold delivered."

However, something appears to have changed.

As Oliver Baron reports, those who ask for gold delivery at this moment, "could encounter difficulties." The reason is that according to Baron, a reader of GodmodeTrader "sought physical delivery of his holdings of Xetra-Gold. For this he approached, as instructed by the German Borse document, his principal bank, Deutsche Bank."

At that point then he encountered a big surprise: the Deutsche Bank account executive informed the investor that "the service", is no longer offered, namely exercising physical delivery at Xetra-Gold, for "reasons of business policy" ...

 

davefairtex's picture
davefairtex
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Joined: Sep 3 2008
Posts: 5065
no storage fees

My initial read on the "Xetra-Gold" story is this.

If I saw a physical gold ETF which didn't charge any storage fees, it would make me nervous.  Presumably, you have to store the gold, and that costs money.  Right?  So why no storage fees?

There is something happening behind the scenes that enables them not to have to charge storage fees, and that probably means they don't actually have title to the gold.

Or perhaps they were piggy-backing off something else DB was doing that had to do with gold, and now DB isn't doing that thing anymore.

If all the other things in the market that are (theoretically) backed by physical gold charge storage fees, and this one doesn't - when they stop delivering gold on demand, we should ultimately not be surprised.

No free lunch, caveat emptor, etc.

Not to sound like an advertisement or anything but - PHYS now trades at a slight discount to NAV.  And my sense is, they really do have the gold.  Sprott may be a gold marketeer, but I ultimately believe he won't default on his gold delivery promise.

http://stockcharts.com/h-sc/ui?s=%21PHYSPREM&p=D&b=5&g=0&id=p17218798470

The lack of a premium on PHYS suggests there is no shortage of gold right now.

Jim H's picture
Jim H
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Posts: 2379
PHYS premium

A couple of points regarding this comment from Dave;

The lack of a premium on PHYS suggests there is no shortage of gold right now.

First off, in my view of the world, there is ALWAYS a huge Gold shortage... i.e. the gap between all the world's paper Gold;  rehypothecated, leased with multiple, "owners", ponzi ETF's (like GLD), and the hugest of all, London unallocated Gold.  This Gold does not for the most part exist in real form, and the main, un awake market participants just have not figured this out yet   It is certainly my belief that when this gap comes to light, holders of brokerage accounts, including IRA's, will flock to PHYS, sending it's premium flying.  PHYS is not a Gold price tracking vehicle like GLD.. it is more like a stock that is simply subject to supply vs demand for shares.  To the extent that traders use PHYS as a vehicle for short term trading of Gold (vs. hardcore long term holders like me) this can and will happen (negative premium).  

Secondly, I don't think that the lack of a premium is necessarily a signal that there is not a shortage of Gold.. for now it just reflects a pause in the Gold bull market - a bull precipitated at least in part by the persistent negative interest rate regime.  The amount of actual Gold that has been pulled out of Sprott's PHYS has been small.

It is not costless to pull Gold out of PHYS.. there are fees to Sprott, and other costs associated with moving the Gold out yet keeping it's London Good Delivery status intact.  If you lose this status, which would happen if you as a PHYS holder wanted to simply take the bars from the Canadian Mint and put them in the trunk of your car (your right if you so choose) then you would literally have to have the bars re-melted and re-certified to get them back into the system.  For these reasons, I don't consider a slight negative premium as meaning there is not high demand for Gold - the premium would need to be pretty deeply negative, say a few % or more, before this started to become an arbitrage target.

I very much think that the Xerta Gold story is an early warning sign that those parties who know, namely banks like DB, are girding for the Gold rush they know is already here behind the scenes.  
 

davefairtex's picture
davefairtex
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Posts: 5065
huge shortages

JimH-

I understand what you are saying.  If traders were to reject paper gold in all its forms, there would be a huge shortage of gold, premiums would spike up dramatically, and within a short time, gold would be selling at a much higher price.

People specifically would prefer to own PHYS vs a COMEX futures contract, or shares of GLD.

That situation may well happen at some point in the future.  Or, it may never happen at all.

In the present, given what everyone feels today (especially the part where traders are perfectly happy with paper gold), there is no current shortage of gold, as measured by premiums.

I get the sense that a fair number of goldbugs tend to live in a world that has not yet come to pass.  That's why they say things that do not quite match up with what is going on in the here and now.

"There's a huge shortage of gold!"

"How can that be?  There are no premiums."

"Well, if there were to be a COMEX default, and then people stopped accepting LBMA paper as a substitute for gold, there would be a huge shortage!"

"Uh yes, that's true.  But today, since that hasn't come to pass just yet, there is no shortage, right?"

"There's a HUUUUUGE shortage of gold you <expletive deleted> <banker shill>!!"

:)

I very much think that the Xerta Gold story is an early warning sign that those parties who know, namely banks like DB, are girding for the Gold rush they know is already here behind the scenes.

Could be.  Or DB may just be bailing out of every business that isn't adding immediate income to their bottom line, since they are in deep doo doo right now.  Everything not cash-flow positive gets thrown right off the lifeboat.

Either way you slice it, its a good lesson, assuming we still needed one: don't trust the freaking bankers with your little gold bars.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
Premiums, market reality, etc.

Dave,  your answer was reasonable, but there is one thing I want to point to;

I get the sense that a fair number of goldbugs tend to live in a world that has not yet come to pass

Isn't this what we are all about here at PP.com?  We are really looking at the future with a lot of concern about the unsustainability of current practices.  It doesn't matter if we are talking about energy, factory farming, fishing, mining.. whatever... we are all here focused on various aspects of a future that, at least in the eyes of many still asleep, has not yet come to pass.  Those of us not asleep can see the warning signs... and when it comes to the Gold market, I described many of them in my previous post and posts.

We really differ on one important point;

I understand what you are saying.  If traders were to reject paper gold in all its forms, there would be a huge shortage of gold, premiums would spike up dramatically, and within a short time, gold would be selling at a much higher price.

People specifically would prefer to own PHYS vs a COMEX futures contract, or shares of GLD.

That situation may well happen at some point in the future.  Or, it may never happen at all.

Based on monetary history, including the long term chart of inflation vs. deflation (see link below) which really tells the story of a continuous bent toward debt expansion/money printing/money dilution in the modern money era.. I believe that there is no way it can't happen.   

http://www.advisorperspectives.com/dshort/charts/inflation/inflation-since-1872.html?inflation-1872-present.gif

 

   

 

thc0655's picture
thc0655
Status: Diamond Member (Offline)
Joined: Apr 27 2010
Posts: 1513
DB in trouble

I see the issue as primarily one indicating the "deep doo doo" that we've all known DB is in.  If we see a couple other banks/custodians do the same thing, then maybe we're at the beginning of The Awakening in which the truth of the gold market comes out and things start to rebalance (with a very big BANG).

In the meantime, "nobody cares" (TM by Grant Williams) or nearly nobody.  That's fine with me.  I'm still accumulating and have nothing in my near or medium term that will require me to sell.  The longer I think about this presentation, the more genius it seems to me:

https://www.youtube.com/watch?time_continue=1&v=qnZHMmCjpQ8

And I'm with you, Jim: "it" can't NOT happen, eventually.  I'm not so sure what "it" will look like and how it will unfold, but I'm sure "it's" coming: the greatest wealth transfer in human history (TM by Mike Maloney).  And for the first time in my adult life, I'm paying attention to economics and well-positioned.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5065
living in the future

JimH-

I suggested that many goldbugs tend to live in a world that has not come to pass.  You said:

Isn't this what we are all about here at PP.com?  We are really looking at the future with a lot of concern about the unsustainability of current practices.

I'm totally in agreement with you here.  But projecting a possible future, and mentally living in a place that has not yet come to pass are two different things.

Take for instance all the people that decided to "live" in the "inevitable" hyperinflationary future described by some goldbugs.  How did that work out for them during the recent bouts of deflation we've experienced?  (Peter Schiff comes to mind)  They were so stuck in the mental "general monetary inflation" world that existed from 1960-2008, they were so sure about the "inevitable" hyperinflation and the imminent destruction of the dollar, that they simply could not see any other possible outcome, even when it was biting them hard right in the ass.  The dollar rally during 2014 comes to mind.  I think mainstream goldbugs are still in shock over that one.  Shock (and diplaced anger): the penalty for having no humility.

By being too certain about an outcome that has not yet occurred, you sometimes miss some really big things that are happening right in front of your nose.  Thank heavens for the gang at Automatic Earth.  They kept pointing me at the potential for deflation and a dollar rally, so I could see alternate outcomes - and so when deflation appeared, I was actually able to recognize it.

Same thing for the peak oilers.  This latest dip to $27 shocked the hell out of anyone who chose to "live" in the peak oil future.   I include myself in this group.  No way did I ever expect this to happen.  And yet it did.  I can either rationalize it all away and come up with a bunch of excuses, or I can decide to be a little bit more humble and acknowledge that I screwed up by living in a future that hasn't yet happened, and thus admit that I really don't know exactly how everything will play out.  "Probably" we will have peak oil, but the road between here and there - that remains a mystery.  And there's always the wildcard of LENR too.

So my strategy is: mentally allow for many possible futures, spend the most energy on planning for the outcomes I think are most likely, but at all times, live in the present and see what is actually going on right this moment.

And that's why I choose not to say "we have a shortage of gold" at the moment.  I don't want to get mentally trapped in a future that has not yet come to pass.

Its a kind of mental self-discipline I am using.  I know it makes you upset, but especially after my "oil" failure, I'm just not 100% sure of how anything will play out - and I'd like it keep it that way, so my vision can remain clear as to what is actually going on right now.

@Tom-

Yes I agree with your perspective, and your attitude.  A great wealth transfer, but the mechanism and the timing for the transfer is not yet apparent.  And Grant Williams hit the nail dead center as far as I was concerned too.  "Nobody cares."  Except they are caring a bit more now than they used to.  But the market cycles have not gone away.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5065
GDX vs Google Trends: "gold mining shares"

Here's an update to Jim Grant's presentation which included a chart of the google trends "gold mining shares" search term frequency.

Awesome presentation, btw.  Fun to watch eight months later.

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