PM End of Week Market Commentary - 9/2/2016

davefairtex
By davefairtex on Sat, Sep 3, 2016 - 1:01pm

On Friday gold rose +11.90 to 1324.90 on moderately heavy volume, while silver climbed +0.55 to 19.44 on moderately heavy volume also.  A disappointing Nonfarm Payrolls report was the cause for the rally; it affected not only gold and silver, but crude oil and US equities as well.  By the end of the day, the odds of a Fed rate rise (as estimated by the market) had fallen to 21%.

http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

On the week, gold rose +4.25 [+0.32%], silver climbed +0.80 [+4.29%], GDX was up just +0.63% while GDXJ rose +2.55%.   Platinum fell -0.95%, palladium fell -2.20%, and copper dropped -0.48%.  Silver did especially well; since silver tends to lead, that is a good sign.  The rest of the metals were a mixed bag.

This week, gold dropped through 1310 support, printed a low on Thursday, and then a swing low on Friday following the payrolls report.  Friday's swing low was a 42-58% chance of marking the low.  Gold is now back above its 9 EMA.  All of that looks pretty good.

This week, open interest rose by a big +18,624 contracts.

Silver strongly out-performed gold this week.  While gold was breaking support, silver was chopping sideways.  Then silver marked its swing low a day earlier than gold, and broke sharply above its recent consolidation area on Friday immediately after the payrolls report was released.  Silver closed at the highs for the day on Friday.  The "closing white marubozu" candle on Friday very seldom marks a high.

Miners

Last week I suggested we'd probably see new lows for the miners, and they did not disappoint, breaking support on Tuesday and following through on Wednesday.  However, on Thursday we saw a sharp rally after the weak ISM report, and Friday GDX printed a highly rated two-candle swing low - a 62-82% chance of being the low.  The huge volume no doubt contributed to the high rating given by the candle code.

GDX is now back above its 9 EMA; the miners appear to have resumed their uptrend after a three week correction.

The USD

The USD moved up +0.29 to 95.79, managing to put in a positive week in spite of the bad economic news that hit on Thursday and Friday.  In fact, the hammer candle (39-45%) on Friday was a definite surprise to me; a weak payrolls report "should have" resulted in a dollar sell-off, and in fact we did see the buck tank, but the sell off was bought relatively quickly.  It makes me wonder which indicator is right - rising gold prices, or this dollar rebound.  Perhaps we will learn more on Monday; US markets will be closed for labor day, but the rest of the world still gets to vote on whether they think the Fed will raise in spite of weakening economic conditions.

US Equities/SPX

The US equity market rose +10.94 [+0.50%] to 2179.98, printing a two-candle swing low on Friday (38-57%) after the bearish-looking payrolls report.  Its quite the world - bad US economic news results in an SPX rally, because...less chance of a rate rise gooses equities these days.  Remember, prices move with capital flows, period.  More money comes into the market, prices go up.  In the old days, fundamentals tended to drive capital flows more often than not, although...anyone remember dotcom?  But now, the flow comes from central banks, desperate pension funds, companies executing buybacks, and foreigners looking for yield.  VIX fell -1.67 to 11.98.

In the sector map, we can see telecom and financials at the top; those financials rallied because of the prospects of a rate rise, and even Friday's payrolls report didn't derail their rally all that much.   Sickcare was the worst-performing sector; I suspect that MYL wasn't able to defuse public anger by cutting the obscene $600 price tag down to a still-ridiculous $300.  People may be getting tired of being harvested.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Telecom XTL 2.25% 15.74% rising rising rising rising ema9 on 2016-08-29 2016-09-02
Financials XLF 1.91% 8.09% rising rising rising rising ema9 on 2016-08-03 2016-09-02
REIT RWR 1.53% 24.38% rising rising rising rising ema9 on 2016-09-02 2016-09-02
Materials XLB 1.07% 16.71% rising rising rising falling ema9 on 2016-09-02 2016-09-02
Utilities XLU 0.98% 22.80% rising falling rising falling ema9 on 2016-09-02 2016-09-02
Cons Staples XLP 0.94% 18.13% rising rising rising falling ema9 on 2016-09-02 2016-09-02
Technology XLK 0.64% 20.38% rising rising rising rising ema9 on 2016-09-01 2016-09-02
Gold Miners GDX 0.63% 106.16% rising rising rising falling ema9 on 2016-09-02 2016-09-02
Homebuilders XHB 0.47% -0.64% rising rising rising rising ema9 on 2016-09-02 2016-09-02
Industrials XLI 0.46% 17.32% rising rising rising rising ema9 on 2016-09-02 2016-09-02
Cons Discretionary XLY -0.07% 9.65% falling rising rising rising ema9 on 2016-08-24 2016-09-02
Energy XLE -0.43% 9.04% falling rising rising falling ema9 on 2016-08-30 2016-09-02
Healthcare XLV -0.57% 5.66% falling rising rising rising ma50 on 2016-08-25 2016-09-02

Gold in Other Currencies

Gold was mostly higher in foreign currencies, doing best in JPY because of the drop in the Yen (XJY:-1.87%).  Perhaps the movements of the Yen are a plot to keep gold prices suppressed.  "All you gotta do is control the movements of a major industrialized nation's currency, and presto - this effectively controls the price of gold!"  Control a larger market in order to affect prices in a smaller market?  Hmm.  Gold in XDR was up +8.13.

Rates & Commodities

TLT continues to chop sideways, up +0.38% on the week.  It might be moving with a slightly upward bias, but its hard to know for sure.  Computer says TLT is in an uptrend, but its a fairly faint one.

JNK jumped +0.78%, making a new high this week, which also happens to be a new all time high.  Risk on.  Hard to see equities crashing when junk bonds make new all time highs.

CRB dropped -3.29% on the week, a big drop, and that's with Friday's rebound pulling the CRB back up +1.00%.  CRB is hovering close to its 200 MA, and a close below the 200 would signal to longer term traders that a commodity rebound is likely to be postponed for a while.

Crude dropped -3.09 [-6.53%] to 44.20, which took crude below the 9 EMA and the 50 MA.  The drop came after a bearish-looking petroleum status report showed an inventory build, and a smaller than expected gasoline draw.  Friday saw crude bounce back after the payrolls report, printing a bullish harami - which was mid-ranked, but yielded only a 29-36% chance of being the low.  Crude is still looking relatively weak; I'd want to see a swing low before turning bullish on crude again.

Physical Supply Indicators

* Gold at Shanghai is trading at a -0.30 discount to COMEX.

* The GLD ETF tonnage on hand dropped -18.7 tons with 938 tons in inventory.

* ETF Premium/Discount to NAV; gold closing of 1329.30 and silver 19.48.

 PHYS 10.99 +0.39% to NAV [unch]
 PSLV 7.44 +0.18% to NAV [down]
 CEF 13.96 -5.04% to NAV [down]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) showed no premium for gold or silver.

* Big bar premiums are lower for gold [1.93% for 100 oz bars in NYC], lower for silver [+3.05% for 1000 oz bars], and lower for silver eagles at +13.30%.

Futures Positioning

COT report covers trading up through Tuesday Aug 30th.

Gold commercials closed -15k shorts, while managed money bailed out of -17k longs and added +4k shorts.  There was a bit more reduction in the commercial short positions this week, but I'd like to see another 100k commercial shorts closed before we get back to something approaching neutral.

In silver, commercials covered -5.6k shorts, while managed money sold -3.8k longs.  Managed money continues to reduce long exposure, and the commercials are also reducing their shorts.   I suppose if the "new normal" for the commercial shorts are in the 140k range instead of the 80k range then perhaps we are closer to a reversal than I thought.  Hmm.

Moving Average Trends [9 EMA, 50 MA, 200 MA]

We see early signs of a trend reversal in PM this week; most items are back above their 9 EMA lines, and silver is in the lead - both positive indicators.  Next step is a 50 MA crossing.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Silver SI.CW 4.29% 32.70% rising rising rising rising ema9 on 2016-09-01 2016-09-02
Junior Miners GDXJ 2.55% 142.80% rising rising rising falling ema9 on 2016-09-02 2016-09-02
Silver Miners SIL 1.00% 140.89% rising rising rising rising ema9 on 2016-09-02 2016-09-02
Senior Miners GDX 0.63% 106.16% rising rising rising falling ema9 on 2016-09-02 2016-09-02
Gold GC.CW 0.32% 17.86% rising rising rising rising ema9 on 2016-09-02 2016-09-02
Platinum PL.CW -0.95% 6.01% falling rising rising rising ma50 on 2016-08-24 2016-09-02

Gold Manipulation Report

There were no meaningful after-hours spikes for PM this week.

Summary

Two bearish economic reports have helped PM to rebound this week, one of them being the critical nonfarm payrolls report.  Both together suggest that the Fed is increasingly unlikely to raise rates at their upcoming meeting scheduled for three weeks from now - assuming of course that they really are "data driven."

The gold/silver ratio fell -2.23 to 68.51, which is bullish.  The GDX:$GOLD ratio was flat and remains somewhat "early bearish", while the GDXJ:GDX ratio rose, which looks bullish .  Ratios are much improved over last week.

There was a bit more change in the COT report this week; short covering by the commercials has increased, but unless "normal levels" of short positions has ratcheted up quite a bit higher, its tough to call for a trend change based just on the COT report at the current levels.

Gold and silver big bar shortage indicators show no signs of shortage.  (As a nod to JimH, big bars will be in an instant state of shortage if paper gold is ever repudiated by traders, but that repudiation is an event that has yet to occur.)

The numbers say, we've most probably executed a gold, silver and especially a gold miner trend change, as well as (probably) one for the equity market too.  Trend for oil remains in doubt, as is the trend for the buck.  It feels to me as though the payrolls report was a big sword of Damocles hanging over the PM market, and with that removed, we might have another week of relative calm prior to the worry starting over the FOMC meeting.  We'll have to see how gold performs when it approaches the 50 MA, because that's a logical place where the shorts might choose to attack.

Next major market-moving event: FOMC announcement, September 21st, at 14:00 Eastern.

Current view from the computer:

  • Uptrend: gold, silver, miners, SPX, USD, US treasury.
  • Downtrend: crude, natgas, platinum.

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11 Comments

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1227
That's the ticket....

Dave Fairtex wrote:

Remember, prices move with capital flows, period.  More money comes into the market, prices go up.

I believe you. However, since Central Banks are now directly or indirectly flooding the markets with at least $180 billion a month, how much of the levitation of the stock markets is simply coming from this money from nowhere? In the last three months the S&P has gone up by about 60 points.  Now I am not sure how much of the $540 billion of Central Bank largesse entered the S&P but a at a minimum it is largely subsidizing the market, at worst it is covering the retreat of many large entities as they extract themselves from the house of cards.

Add the widespread stock buy backs by companies to the Central Bank purchases of global markets and it is hard to see what 'new' money from the 'real' market is really doing. Interestingly, now that the Central Banks are directly buying equities and becoming controlling interests in more and more companies, the stock buy back scheme has a new twist. I have cynically thought of it as no more than a process of inflating values to bolster CEO bonuses but it could now also be seen as a defense mechanism to keep Central Banks from buying controlling interests in a company. Couldn't it? I still think greed trumps self preservation as a motivation though.

We are all passengers on the Ship of Fools...

 

Wantingtoretire's picture
Wantingtoretire
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Posts: 13
That's the Ticket

All money floating around the US economy comes from nowhere. It is simply incorrect to think otherwise. All money floating around the world economy comes from nowhere. It is simply incorrect to think otherwise.

davefairtex's picture
davefairtex
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Posts: 5687
buybacks, money flows

Mark-

Stock buybacks don't protect the company from a takeover by a central bank.  The company retires the shares, they don't get to vote them at the next shareholder meeting.  I definitely think that CEO greed explains some of the buybacks - another chunk might be due to "activist shareholders" that demand cash be distributed to them (i.e. greedy shareholders).

In some sense my talk about money flows is just an attempt to keep us from going short just because "the fundamentals" tell us the market is overpriced.  Using fundamentals to trigger a short entry is not wise - assuming people remember what happened back in the 90s and dotcom.  Prices can keep going up long after the fundamentals indicate prices are "too high."

Even prior to all the crazy stuff happening today, fundamentals have never, ever controlled price - they just influenced money flows, and the amount of influence they had varied depending on where we were in the cycle.  And so today, if money keeps flowing in, regardless if its  "thin air money" printed by central banks or money saved via a lot of hard work, it doesn't matter how overpriced the market is, prices will still keep going up.

That doesn't mean you should buy - we have no idea how long these flows will last - but it probably does mean you shouldn't go short.

davefairtex's picture
davefairtex
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Joined: Sep 3 2008
Posts: 5687
how asians view gold

Well this is just one anecdote:

Friend of mine in asia recently graduated from nursing school, is now working full time.  We had never talked about gold before, but I was curious to see how much a regular college grad knew about gold.

So I asked the question, "do you know what the price of gold is?"

My friend thought for a moment, and gave me a price that was within about 1% of Friday's close.  I was very surprised, and said, "wow, that's really good.  How do you know the price so accurately?"

"Well, I used to own some gold."  (A college student??)

"But you don't anymore?"

"No."

"Why not?"

"Well, when gold goes up, you sell." (implying my friend knew the trend as well as the price)

"But you still watch the price?"

"Sure.  If it drops again, I'll buy."

(The last: spoken in a tone that hinted my question was a little silly - after all, doesn't everyone do it that way?)

 

davefairtex's picture
davefairtex
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Posts: 5687
ISM Non-MFG Index: big miss

The ISM Non-Manufacturing Index took an unexpectedly big dip this morning; it was expected to turn in a reading of 54-56, and the actual was 51.4, barely above contraction.

Buck dropped -0.61, which predictably caused gold and silver to jump higher; gold now up +16, silver up +0.45.

Equity market didn't like the report, but its only down -5 points, at least so far.  Utilities up, financials down.  That's the "no rate rise" pattern we've come to expect.  Someday a bad economic report will cause equities to roll over hard.  Not today, apparently.

This index is about services, which have done fairly well during the year.  If services are going into the toilet, there's zero chance Fed will raise rates.  Fedwatch has the chance at 18%, down from 27% earlier.  If the trend continues, that's no December rate rise either.  Services are a really big deal.

"Everything is going according to plan..."

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Posts: 5687
for those who don't like the banks...

"No rate rise" will be bad news for our friendly bankers.

While I don't think shorting the overall market is necessarily the best idea, I don't mind picking on stuff that is weaker than average.

KBE is a standard ETF, holding a bunch of bank stocks.  On the weekly chart, we can see its underperforming the broader market.  That's a good sign if you want to go short.

More tactically, after a fairly long rally, KBE appears to be printing a swing high and a nasty bearish engulfing candle pattern, and has also crossed its 9 EMA.

For those who like more movement, there's always FAZ, but...those things just eat your money over the long haul. 

I'm now short KBE.

 

Mark Cochrane's picture
Mark Cochrane
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Posts: 1227
Time to trot out another Fed mouthpiece...

Dave,

Thanks for the endless interpretation of the markets for what looks like a bad LSD trip to many of us. Given the collapsing faith in the Fed raising rates...

It seems that somebody from the Fed stable has to come out soon and tell us why this really isn't as bad as the markets think it is. In any case since markets (algorithms) have the memory of a goldfish, how long until the next planted headline somewhere or smittance of not horrible real news turns the 'odds' around again?

Regardless, I was wondering if you can give people a rough cheat sheet of what is supposed to happen or likely to happen if the Fed does or doesn't raise rates in September? Last time they did the markets did their minicrash worrying that the QE global might slow down which was good for PMs. On the other hand, if they don't raise rates that says the economy is weak (crap?) which should send the markets down but likely sends them up since QE-eternity rolls on and may ramp up, which would seem good for PMs at least in the mid-long term if not the short term slam.

Thoughts?

davefairtex's picture
davefairtex
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Posts: 5687
Data-Driven Fed, Debt Growth Model Over

Mark-

Understand this is all more or less "mainstream viewpoint" here - which at this point drives prices, since kind of by definition mainstream viewpoint is where the bulk of the money is concentrated.

I think the Fed is trapped by their own previous statements.  If they are truly data driven, which they have been saying all along, and the data don't look so good, then they will be unable to come out and say "gosh, we aren't data driven after all" without losing a whole lot of credibility.

I don't think they'll do that.  If they do, that might drive a longer term loss of confidence in the Fed.  "If you aren't data driven - what exactly does drive your decision making process anyway?"

ISM and payrolls are two huge reports.  I am pretty sure we're done for September.  If the Fed raises in spite of the weak data...that could well crash the market.  The Fed has taken great pains to be very, very predictable.  I don't think their pals would appreciate a major correction sparked by some new move to apparently-random decision making.

Earlier in the year gold appeared to be driven first from Europe and negative rates - probably from Japan also, and then by BRExit.  Once the fuss from BRExit was over, gold ran out of near-term catalysts, and so price started to fixate on fed rate policy and the buck as the "swing effect" on the price;  that's where we are now.

ECB and BOJ are both on deck now.   ECB has a meeting scheduled to end Thursday Sept 8 (announcement @ 07:45, Dragi press conf at 08:30 Eastern).  Banks are starting to be more vocal about negative rate policy.  Could he move deeper into negative rates?  Buy more bonds than he already is?  I don't know.  If so, it would probably cause gold to break to new highs.

The chorus of "this isn't working" is getting louder, and slowly more mainstream.  Central bankers are still saying "this stuff works, no problem, we have it under control", but mainstream confidence is visibly starting to crack.  Armstrong thinks it cracks for real in 2017.

Ultimately, I think that what matters here.  Once the mainstream fully believes that "this isn't working", they will absolutely have to try something else.  Its a confidence game - they know it - and if there's no confidence, the game is up.

Here's a curious quote from Schauble, from the G20 meeting back in February.  CAF referred to this; she thinks its a huge deal.  They've spent six years trying to restart the debt-growth model, it hasn't worked, and now Germany's finance minister has just acknowledged reality.  Where to from here?  A new monetary system?  If the debt-growth model is done, what do we do with all that debt?

Last point.  If ECB and/or BOJ back away from negative rates WITHOUT seeing any improvement, that alone could crack confidence in central banking from the standpoint of desire to take risk.  If the market started looking even the slightest bit shaky after such an event, my reaction would be to load up on puts.  Once confidence cracks, the volatility swings could become really, really intense.

https://www.ft.com/content/f1583f3e-dc5b-11e5-a72f-1e7744c66818

“The debt-financed growth model has reached its limits,” Wolfgang Schäuble, German finance minister, said on the sidelines of a two-day G20 meeting in Shanghai. “We therefore do not agree with a G20 fiscal package as some argue … There are no short-cuts that aren’t reforms.”

Mr Schäuble also expressed his scepticism about further monetary easing in the eurozone, saying policy was “extremely accommodative to the point that it may even be counterproductive in terms of negative side effects on banks, policies and growth”.

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
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Posts: 1227
As predicted...

Dave,

Thanks for the insights. I see that the Fed did indeed trot out a mouthpiece last night... Then this morning we get the 'unexpectedly' higher than ever JOLTS report... Smoke and mirrors.

Fed's Williams still backs rate hike "sooner rather than later"

 

Published: Sept 6, 2016 9:15 p.m. ET

WASHINGTON (MarketWatch) - Strong consumer spending, a strengthening labor market and an improved household balance sheet add up to a "solid domestic economy with good momentum going forward," said San Francisco Fed President John Williams on Tuesday.

 

 

davefairtex's picture
davefairtex
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Joined: Sep 3 2008
Posts: 5687
they really want to

Mark-

Wow, they really do want to raise rates.  They're sounding really desperate.  And the JOLTS data did cause gold to tip over and sink.  But the dollar rally was a bit feeble, especially compared to what happened yesterday.

And that pesky fedwatch is up just 3% - now the chances are 18%, not 15%.  I think we need the chorus line of Fed officials to do one of those high leg kicking dance numbers, all in unison.  "We're going to raise rates."

http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

If they can't get the market to agree with them by meeting time, I just don't think it will happen.  That's a total guess.  They may do it anyway, damn the torpedoes and all that.  Maybe a modest put-buy in advance of the meeting would be prudent.

Good call on the Fed official appearance jawbone.  I underestimated their desire. 

Still - google "john williams history rate raise" - his desire to raise goes back several months.  They may not all be on the same page.

EDIT:

XLU:+0.05%, TLT:+0.14%, XLF:+0.04%.

Market isn't showing any sort of real support for the rate rise theory.  If it did, we'd see a better move out of the financials, and we'd see utilities selling off.

So far, anyway.

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1227
Relevance

Dave,

Yeah, I am a bit more cynical. The Fed seems to trot out a hawk or a dove from their stable of mouthpieces as needed to try to control market expectations, where control basically means keeping everyone guessing until the last minute. I think that their biggest fear is becoming irrelevant. They have painted themselves into a corner and have been relying on jawboning as a primary strategy for quite a while now. The only thing with less credibility than economic forecasts are Fed mouthpiece statements. If they truly are 'data driven' there is no way to raise rates in September. If the markets know this then the Fed is an empty suit until maybe December. If the Fed has no control, the markets, 'gasp', could do anything they want. If the Fed wants to prove to the world that they are still unpredictable then they will have to raise rates in September and prove that they are stupid as well as oddly relevant. Not sure that will help their credibility issues. I think that right now they are desperately trying to find a way to make people think that they just might actually raise rates in September so that at the very last minute they can use some random databit to justify holding off, yet again. BUT they will almost definitely raise rates before the end of the year, maybe by 0.5 once this temporary instability passes...

 

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