PM End of Week Market Commentary - 9/16/2016

davefairtex
By davefairtex on Sat, Sep 17, 2016 - 6:43am

On Friday gold fell -6.10 to 1310.00 on light volume, while silver dropped -0.23 to 18.79 on light volume also.  The CPI report, released at 08:30, seemed to show stronger "core inflation" - this triggered a huge dollar rally.  The buck rose +0.84, which ended up pulling down the price of gold and silver.  As always, a strong dollar is generally bad for PM.

On the week, gold fell -17.80 [-1.34%], silver fell -0.26 [-1.36%], GDX dropped -1.70% while GDXJ lost -1.17%.   Platinum fell -4.32%, palladium fell -1.04%, and copper actually rose +3.37%.  The copper rally was the sole piece of good news in the metals this week.

This week gold appeared to follow through on the concerns over a rate rise, despite the speech by the 3 Fed governors on Monday that signaled they were not so enthusiastic about raising rates.  The speeches seemed to keep the equity market from cratering further, but for some reason they were not enough to keep the buck from rallying - or gold from slowly falling.

On the chart, we see gold approaching 1300 support - it is only $10 away.  A break below 1300 could lead to a more general breakdown in gold.  With FOMC scheduled for next Wednesday, it would probably take a Fed rate increase to cause this breakdown to occur - my guess anyway.  I think its more likely we'll get a relief rally in PM following FOMC, assuming they do not raise rates.

Volume right now isn't particularly heavy, but it is slowly increasing as price drops.  On Friday, gold made a new low, and printed a "long black candle" which is not a reversal bar.  Gold is just starting to approach "oversold" conditions, but is not quite there just yet.

This week, open interest fell by -22,070 contracts.

While gold moved steadily lower, silver seemed to more or less chop sideways after first making a new low on Monday.  That Monday low is still in play; a close above 19.04 will print a swing low for silver.  Previous low is at 18.41.  Given how silver has been acting recently, even if gold breaks 1300, its not clear silver will be dragged below 18.41.

Miners

The miners moved steadily lower this week - the Monday rally was quickly erased by a series of new lows.  On Friday, gold printed a spinning top - one of four spinning tops this week.  This one is mildly bullish - 23-28% chance of a low.  Even so, I think we might have a bit more to fall before the FOMC announcement on Wednesday.  Will 25 support hold?  Maybe.  We could have a brief dip below 25 that ends up being a reversal bar.  Of course if the Fed does the unthinkable and raises rates into a weakening economy, we'll probably blow through 25 in a heartbeat, but miners will probably have a whole lot of company in their move lower.

The USD

The USD rose +0.80 [+0.84%] to 96.05, with all of those gains coming on Friday following the unexpectedly high CPI reading.  As noted by a PP member, this increased CPI "inflation" we are seeing right now is due to rising healthcare costs rather than any kind of general monetary inflation; do you think if the Fed raises rates, they can control healthcare costs?  All the Fed can do is try to influence the amount of money supply out there - by reducing or increasing the number of bank loans made.  I'm not sure how that would affect the 10%-per-year sickcare juggernaut.  But the market seemed scared that the high CPI reading would encourage the Fed to raise - so up the buck went, probably aided by the overall nervousness leading up to FOMC.  That's as best I can figure, anyway.  The spike happened at 08:30, the time of the CPI release, and the buck just continued to climb for the rest of the day.

US Equities/SPX

The US equity market rallied +11.35 [+0.53%],  but in truth the week's action consisted of a whole lot of back and forth; up one day, down the next.  Support at 2120 held, but SPX was not able to close back above its 9 EMA at end of week.  Equities still look a bit ill.  However, the crash everyone was concerned about was avoided, and so the VIX fell -2.13 to 15.37.

The sector map flipped - last week's losers were this week's winners.  Tech led, pulled higher by AAPL which rose by an astonishing 12% on the week.  Dividend-paying telecom and utilities also rebounded, while financials and energy brought up the rear.  DB had a particularly bad week, off -12% on the DOJ's "offer" for a 13 billion dollar settlement in the housing bubble mortgage fraud prosecution, which is vastly in excess of the amount DB has reserved for legal settlements.

The sector map suggests rate-worry fears have abated, which leaves us with a bit of a puzzle: why then is the buck rallying so strongly?  And why are treasury bonds dropping?  Maybe there is something else going on?  Something to watch, if it continues.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Technology XLK 2.27% 18.07% rising rising rising rising ema9 on 2016-09-15 2016-09-16
Utilities XLU 1.65% 19.04% rising falling rising falling ema9 on 2016-09-16 2016-09-16
Telecom XTL 1.42% 16.71% rising rising rising rising ema9 on 2016-09-14 2016-09-16
Healthcare XLV 0.84% 1.33% falling falling rising falling ma50 on 2016-08-25 2016-09-16
Cons Staples XLP 0.19% 12.63% falling falling rising falling ema9 on 2016-09-07 2016-09-16
Cons Discretionary XLY 0.10% 3.58% falling falling falling falling ema9 on 2016-09-08 2016-09-16
Industrials XLI -0.89% 10.70% falling rising rising falling ma50 on 2016-09-09 2016-09-16
Homebuilders XHB -1.31% -9.42% falling falling falling rising ma50 on 2016-09-09 2016-09-16
REIT RWR -1.43% 14.31% falling falling rising falling ema9 on 2016-09-08 2016-09-16
Materials XLB -1.43% 11.05% falling rising rising rising ma50 on 2016-09-09 2016-09-16
Gold Miners GDX -1.70% 83.48% falling falling rising falling ema9 on 2016-09-09 2016-09-16
Financials XLF -1.75% 3.98% falling rising falling rising ma50 on 2016-09-13 2016-09-16
Energy XLE -3.23% 6.48% falling rising rising rising ma50 on 2016-09-13 2016-09-16

Gold in Other Currencies

Gold fell in every currency this week; gold in XDR was off -20.89.

Rates & Commodities

TLT fell again this week, losing -0.57% but managing to print a swing low on Friday.  The candle code gave this particular pattern an extremely low rating - only a 22% chance of printing a low.  That's worse than some spinning tops I've seen.  The poor performance in bonds contrasts with the dividend-payer rally in equities.  There definitely seems to be something up with the long bond, and it's not something positive.

JNK was flat this week, dropping just -0.03%.  In spite of the big sell-off in crude, JNK managed to find support on its 50 MA.  JNK appears to be immune to whatever pressures are affecting the treasury market.

CRB fell -0.96%, dragged lower by the large drop in crude prices this week.  CRB appears to have found support just above its 200 MA, which is a positive sign.  Agricultural products and industrial metals were a positive influence on CRB this week, counteracting crude's drop to some extent.

Crude suffered a big drop, losing -2.38 [-5.21%] to 43.33.  The big loss for crude came following a petroleum status report that looked bullish to me (showing a draw of 1.4 million barrels), but the market didn't agree with my assessment, selling off hard shortly afterwards.  Oil made a new low this week to 42.91, set on Friday.  Oil's candle print on Friday was an opening black marubozu, a little like a hammer candle with a small lower shadow.  Code gives it a 11-15% chance of marking the low.  Ouch.  I guess we go lower still.  Oil equities were smashed (XLE:-3.23%).

Physical Supply Indicators

* Shanghai closed at a +0.77 premium to COMEX.

* The GLD ETF tonnage on hand rose +2.67 tons, with 943 tons in inventory.

* ETF Premium/Discount to NAV; gold closing of 1310 and silver 18.79.

 PHYS 10.87 +0.78% to NAV [up]
 PSLV 7.21 +0.66% to NAV [up]
 CEF 13.62 -5.21% to NAV [up]

* 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 [2.19% for 100 oz bars in NYC], lower for silver [+3.13% for 1000 oz bars], and higher for silver eagles at +13.73%.

Futures Positioning

COT report covers trading up through Tuesday September 13th.

Gold commercials covered -12k shorts and added +6k longs, while managed money sold -20k longs and added +6k shorts.  This week's drop in gold looks to be managed money bailing out and/or reversing position.  Still, the overall positions remain very extended and are down only slightly from the highs.

In silver, commercials closed -3.4k shorts, while managed money sold -5.2k longs and added +3.9k shorts.  The managed money short position is starting to look a bit more substantial; its hard to say where "enough" might be - perhaps we're halfway there?

It was really nice to see copper price actually respond to the COT positions from last week; this week's massive rally in copper coincided with a huge position in managed money shorts last week.  Managed money is still heavily short this week - this suggests we have more room to the upside for copper.  Theoretically that helps silver.

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

PM downtrend continues; junior miners are doing surprisingly well and even the seniors appear to have stopped plummeting quite so rapidly.  It looks like the selling has abated.

Junior Miners GDXJ -1.17% 109.07% falling falling rising falling ema9 on 2016-09-13 2016-09-16
Gold GC.CW -1.34% 15.83% falling falling rising falling ema9 on 2016-09-09 2016-09-16
Silver SI.CW -1.36% 24.44% falling falling rising falling ema9 on 2016-09-09 2016-09-16
Senior Miners GDX -1.70% 83.48% falling falling rising falling ema9 on 2016-09-09 2016-09-16
Silver Miners SIL -3.49% 111.53% falling falling rising falling ema9 on 2016-09-09 2016-09-16
Platinum PL.CW -4.32% 3.54% falling falling rising falling ema9 on 2016-09-09 2016-09-16

Gold Manipulation Report

There were no meaningful after-hours spikes for PM this week; there was one gold spike, but it was in the context of a downtrend and appeared to be just a support break.

Summary

The potential market crash that I had been concerned about over the weekend never materialized.  Everyone ended up waiting to hear what Fed Governor Brainard was going to say - and she was dovish, as were the other two governors that spoke that same day.  Crash avoided, rate-rise panic successfully walked back by the Fed.  PM continued lower as we head into the FOMC meeting next week, but the pace of the decline was relatively sedate.  The pace of the miner sell-off slowed significantly.

The gold/silver ratio rose +0.56, which is bearish. The GDX:$GOLD ratio was flat and looks bearish, while the GDXJ:GDX ratio moved up slightly, and it looks generally bullish.  Mixed bag, with a shading towards bearish.

The COT reversed course again week; commercials were covering, while managed money went short.  Silver is slowly moving back to a more neutral position, while gold remains closer to the extremes.  Copper's COT worked out perfectly; copper rallied strongly after managed money went heavily short.  If only I traded copper...

Gold and silver big bar shortage indicators show no signs of shortage; popularity of paper gold appears undiminished at the moment.  Shanghai moved from discount to premium.

In spite of Fed governor overload on Monday, confidence has not returned to the equity market, and the treasury long bond looks downright ill.  Crude fell a lot, PM fell a little, we got a nice bounce in tech because of Iphone 8, but oil equities were crushed.

Next week we have both the BOJ and the FOMC on Wednesday.  I suspect the general expectation for FOMC is for a "no rate rise" followed dutifully by an equity market relief rally.  Futures market assessment: 12% chance of a rate increase.  If that's how it plays out, gold will probably rally.  BOJ is the wildcard.  One of PM Abe's aides suggested that negative rates are helpful; is that a signal that even more negative rates await?  If  help is good, even more help should be better, right?  That should be gold positive too, and that's early Wednesday morning - wee hours - 02:30 Eastern.

Without a major equity market correction, I don't see a major gold (deleveraging) move.  While gold and silver both remain in a downtrend, at some point lower prices will drag the buyers out of hibernation.

Roll of the dice: buy Tuesday afternoon, perhaps, betting on the no-rate-rise Fed and a potential BOJ negative-rate extravaganza?  I don't think a Fed decision will substantively reverse the trend for PM - but if the BOJ does something exciting alongside the Fed, that might.

Current view from the computer:

  • Uptrend: copper, natgas, SPX, DJIA, treasury bonds (!), USD.
  • Downtrend: gold, silver, crude, miners.

I think that treasury bond call is a bug!

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4 Comments

dreinmund's picture
dreinmund
Status: Member (Offline)
Joined: Mar 20 2011
Posts: 23
Thanks, Dave. Always

Thanks, Dave. Always appreciate your commentaries. Keep 'em coming.

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 841
Types of Inflation

In the 9/15/2016 PM Market Commentary comment #7 ...

dryam2000 wrote:

CPI is mainly up because of higher healthcare & health insurance price increases.  This reflects anything but a strong economy & rising wages.  The price increases come directly from the government's own (misguided) mandated healthcare polices.  This rise in CPI has absolutely nothing to do with true growth or anything remotely close to it.  Only the MSM spin machines can argue the Fed's low interest rates are somehow responsible for this higher CPI number & that this somehow supports higher rate expectations & a bid for the USD.

Smoke, mirrors, & misdirection.  At least it makes for some good feeding for the sheeple.

I agree with dryam2000. Too many sins can get hidden in simple metrics. We need to plunge into the reports and analyze the source - in this case, the driver for the CPI increase. The FOMC has stated that they want to see inflation, but is all inflation created equal? If I had to guess, I'd suppose the FOMC would prefer the "animal spirits" type of inflation where people feel confident enough in their situation that they choose to go further in debt to purchase their wants/needs. That type of inflation seems to be the most controllable with interest rates - which is what the FOMC has some control over.

To some extent, we've had their nudgings with the ultra low interest rate policy that the FOMC continues to support. I'm astonished at the number of newish cars and heavy duty pickups pulling travel trailers that I see on the road. I assume that most of those buyers bought on credit because the low interest rates made the purchase affordable. They'll be paying for these items long into the future. Buying these products on credit brings forward demand (temporarily inflationary,) but paying for the loan reduces the amount of future discretionary money. That is deflationary.

Unless wages go up to cover the higher rent/housing costs, healthcare costs, food costs, and debt support, hard choices have to be made by the consumer. It boils down to get more income, take on debt, or cut expenses. I suppose that gifts from grandma, Uncle Sam, or Aunt Janet (Yellen) would be a short term option. Uncle Sam can mandate minimum wages or rebate taxes or ??? Can Janet fly Bernanke's helicopter?

Businesses can't just raise wages without raising prices, cutting expenses, increasing productivity, taking on debt, or reducing profitability. Businesses would love to pass the costs onto the consumers, but if the consumers are already making tough choices, are they going to be able to afford it? Cutting expenses includes laying off their people. Increasing productivity without cutting expenses means that there is more product on the market. Can the market absorb the extra amount or will it drive prices down? Why would a company take on debt to improve operations or just limp along unless they saw great opportunities around the bend?

Because individuals, businesses, and governments are so saturated with debt, is there any real possibility that the "animal spirits" inflation will occur? It is more likely that increased prices will result in a decrease in consumption causing the beginning of recession/depression. The debt levels need to be sufficiently lowered before animal spirits can take hold. Paying debt off is deflationary. Forgiving debt hurts owners of debt such as pensions.

I don't know if there is any "good" inflation, but inflation caused by government mandates is worse than "animal spirits" inflation. Can Federal Reserve interest rate policy actually combat this type of inflation?

Grover

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5417
inflation

Grover-

Yeah I agree with dryam too.  I think the Fed is hoping for monetary inflation, driven by the expansion of money supply (new private or government debt) and/or an increase in money velocity.  That's what you call "animal spirits" and I'd call "general monetary inflation."  What they got was rising healthcare costs due to extractive and arbitrary epi-pen-like price raises - versus fantastic new healthcare drugs and services that make all of our lives astonishingly better.

We are at peak debt, and this "good inflation" that the Fed wants to see probably won't happen.  I posted this a while ago, but I'll do it again because its relevant here:

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.”

The Fed hoping for a CPI increase is their forlorn hope that they can get one more impulse out of the debt growth model.

Trump's tax cut (financed with borrowed money) is just another attempt to resurrect the debt growth model.  Same thing with infrastructure spending.  "If the consumer won't borrow, then we'll get the government to do it."

But eventually the government will run out of balance sheet room - if it hasn't already.  Unless there are some really useful projects that will end up paying for themselves over time (perhaps electric rail, maybe, or solar power generation), its just a can-kicking exercise.

True "good growth" comes from increased productivity, and that's in short supply these days.

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 841
The Real Cause of Inflation

Dave,

We're in agreement. I guess what I was trying to say is that there are several factors involved with prices rising. If we just focus on prices rising (CPI,) the factors that are driving those price increases get hidden.

I'm not sure there is any good inflation, but there are worse causes of inflation. My "animal spirits" is a more organic form where people have pent up demand and feel confident enough to go deeper in debt to fund these desires. It results in "general monetary inflation" and lifts more boats than the other types.

I see lots of head winds to this type of inflation driver. There's too much debt, the demographics are not supportive of it, net energy isn't as lucrative, automation (which increases productivity) is causing "good paying" jobs to disappear to be replaced by lower paying jobs, and the current political climate doesn't exactly promote confidence to go deeper in debt (although people do and it keeps the system limping along.)

Strauss and Howe's The Fourth Turning predicted an economic winter. The howling winds are getting increasingly chillier. Their predicted winter season has been delayed by the shenanigans of the Fed, our government, and the banks who own them. All these entities lose without inflation. They will do (and have done) anything so that they don't lose. Anything!

I'm frustrated that people don't see it for what it is. By the same token, I don't have a solution other than isolation from the conglomerate of systems. Even that isn't much of a solution.

Grover

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