PM End of Week Market Commentary - 10/21/2016

davefairtex
By davefairtex on Sat, Oct 22, 2016 - 4:13am

On Friday gold rose +0.40 to 1266.70 on moderately light volume, while silver inched up just +0.01 to 17.53 on light volume.   Gold's performance was actually fairly good, considering the dollar had a relatively strong move higher today.

On the week, gold climbed +14.60 [+1.17%], silver moved up just +0.11 [+0.60%], GDX rose +7.09% and GDXJ was up a big +9.82%.  Platinum fell -0.23%, palladium dropped -4.25%, and copper moved down -0.74%.  Miners were the standout performer this week.

This week, gold managed to avoid retesting its 1242 low and instead broke out above its downtrend line, printing a swing low.  However, gold had no follow-through off the swing low, mostly because of the breakout in the buck following the ECB meeting on Thursday.  Gold ended the week right at its 200 MA.  Its hard to know where it goes from here - the doji candle print on Friday doesn't provide us any sort of a clue.  Perhaps we can say gold did well to avoid dropping given Friday's decent-sized dollar rally, so we'll call gold cautiously positive.

December rate-increase chances was unchanged, at 64%.

This week, open interest rose by +5,158 contracts.

Silver under-performed gold this week; it has formed a pennant pattern, which tend to break in the direction of the previous move - which in this case is down.  While silver remains above its 200 MA, the gold/silver ratio continues to rise, which is also bearish.

Miners

The miners managed to rally sharply this week, with GDX jumping back above both its 200 MA as well as the 9 EMA.  The rally showed decent volume, and the two-day low-volume rest period on Thursday and Friday looked innocuous enough, finding support on the 9 EMA.  Miners are by far the strongest PM component this week.  They look ready to break higher, if only gold and the buck can cooperate.

The USD

The USD climbed for the third straight week, rising +0.68 to 98.64.  This week it was all about the Euro, which sold off following the ECB meeting on Thursday ending the week at 108.86, - this propelled the dollar higher, which of course made trouble for gold.  The buck has cleanly broken higher in both the daily and weekly timeframes, and it appears to be on its way to re-test the highs at 100, last hit back in February 2016.

US Equities/SPX

The US equity market rose +8.18 to 2141.16.  This week SPX managed to avoid breaking lower; SPX appears to be chopping sideways.  On Friday, SPX printed a takuri line candle, which is modestly bullish; a 25-30% chance of printing a low.  Still, the pattern of lower highs and lower lows remains in place, and SPX seems unable to stage any sort of significant rally.  The VIX fell -2.78 to 13.34.

The sector map shows that materials and financials managed a decent rally, while homebuilders brought up the rear.  

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Gold Miners GDX.N 7.09% 52.73% rising falling rising falling ema9 on 2016-10-18 2016-10-21
Materials XLB.N 1.60% 5.40% rising falling rising falling ema9 on 2016-10-18 2016-10-21
Financials XLF.N 1.18% 1.34% rising rising rising falling ma50 on 2016-10-19 2016-10-21
Cons Discretionary XLY.N 0.89% 0.44% rising falling rising falling ema9 on 2016-10-21 2016-10-21
Telecom XTL.N 0.61% 12.51% falling rising rising falling ma50 on 2016-10-20 2016-10-21
Energy XLE.N 0.56% 2.59% falling rising rising falling ema9 on 2016-10-21 2016-10-21
Utilities XLU.N 0.52% 5.75% falling falling rising falling ema9 on 2016-10-21 2016-10-21
Technology XLK.N 0.34% 11.47% rising rising rising falling ema9 on 2016-10-21 2016-10-21
REIT RWR.N 0.31% 0.46% falling falling rising falling ema9 on 2016-10-21 2016-10-21
Healthcare XLV.N 0.13% 2.70% falling falling rising falling ema9 on 2016-10-11 2016-10-21
Cons Staples XLP.N -0.27% 2.77% rising falling rising falling ema9 on 2016-10-21 2016-10-21
Industrials XLI.N -0.42% 4.65% falling falling rising falling ema9 on 2016-10-20 2016-10-21
Homebuilders XHB.N -0.85% -10.11% falling falling rising falling ma200 on 2016-10-11 2016-10-21

Gold in Other Currencies

Gold rose in most currencies this week.  It did especially well in the Euro, and rose in XDR by +17.

Rates & Commodities

TLT rose +1.31%, finally finding support on the 200 MA and printing a swing low.  However, the rebound off the 200 was relatively tepid - having the look perhaps of a dead cat bounce to it.

JNK made a new all time high this week, up +0.71%.  JNK is in a strong uptrend.

CRB was mostly flat, falling -0.04% but making a new high this week.  CRB continues to recover.

Crude rallied up +0.64 to 51.00, moving higher off a bullish petroleum status report which showed an unexpectedly large inventory draw of -5.3 million barrels.  Crude also managed to make a new high to 52.06 after that report, but faded a bit during the strong USD rally on Thursday.   Crude looks to be having a bit of trouble moving through resistance, but it remains above all 3 moving averages and in a reasonably strong uptrend.  One problem I see comes from the COT report, which shows that managed money shorts have moved to a fairly low level, which could indicate a top here at 51.

Physical Supply Indicators

* The Shanghai Au9999 contract is trading at a +2.74 premium to COMEX.

* The GLD ETF tonnage on hand fell -11.87 tons, with 954 tons in inventory.

* ETF Premium/Discount to NAV; gold closing of 1266.70 and silver of 17.53.

 PHYS 10.53 +1.00% to NAV [up]
 PSLV 6.74 +0.90% to NAV [flat]
 CEF 13.24 -3.40% to NAV [up]

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

* Big bar premiums are higher for gold [2.18% for 100 oz bars in NYC], higher for silver [+3.08% for 1000 oz bars in NYC ], and higher for silver eagles at +14.83% [NYC].

Futures Positioning

COT report covers trading up through Tuesday October 18th.

Gold commercials covered -15k shorts, while managed money sold -13k longs and added +5k shorts.  The pace of commercial short covering has dropped significantly, as is the speed at which managed money is bailing out.

Silver commercials covered -1.1k shorts, while managed money sold -3.4k longs and added +1k shorts.  This was a small change this week for silver.

We've had a substantial short covering wave for the commercials, but its hard to know if the current levels represent a "new normal" or if the commercials still want to return to the position sizes they had back at the start of 2016.  If its the latter, we are only about halfway there.

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

Miners are leading, with the juniors out in front.  Silver and platinum are still having problems, but the rest have managed to re-cross the 9 EMA, which is the first sign of recovery.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Junior Miners GDXJ.N 9.82% 90.70% rising falling rising falling ema9 on 2016-10-18 2016-10-21
Silver Miners SIL.N 7.63% 86.64% rising falling rising falling ema9 on 2016-10-18 2016-10-21
Senior Miners GDX.N 7.09% 52.73% rising falling rising falling ema9 on 2016-10-18 2016-10-21
Gold GC.V 1.17% 8.65% rising falling rising falling ema9 on 2016-10-19 2016-10-21
Silver SI.V 0.60% 10.70% falling falling rising falling ema9 on 2016-10-20 2016-10-21
Platinum PL.V -0.23% -7.62% falling falling rising falling ma200 on 2016-10-04 2016-10-21

Gold Manipulation Report

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

Summary

Gold has gone from a sharp drop, to a slow drop, and now to a modest rebound, complete with a flurry of swing lows.  No doubt the short covering by the commercials has helped gold put in a low, but the strong dollar rally is continuing to provide headwinds for PM.   Managed money still looks to be liquidating, although someone certainly is buying the miners at these levels.

The gold/silver ratio rose +0.40 to 72.26, which is bearish - and highlights how poorly silver is doing.  The GDX:$GOLD ratio has recovered fairly dramatically, and has moved into an "early bullish" mode, and the GDXJ:GDX ratio moved higher, and is also moving back into a bullish mode.  The miner ratios look much improved this week; not so much the gold/silver ratio, which has yet to top out.

The gold COT shows the pace of the commercial short-covering has fallen off, as has the long liquidation by managed money.  Silver had some short covering, but not very much.  Maybe that's all we get for this move.

Gold and silver big bar shortage indicators show lessening signs of shortage; Shanghai premiums fell, while the ETF premiums increased somewhat, and GLD's tonnage dropped.

The post-ECB dollar rally didn't hurt gold too much, which is a positive sign, as was the sharp rebound in the mining shares.  However, silver isn't looking so hot, and it should be rallying if we are going to have a sustained rebound in PM.  Moreover, that dollar chart doesn't show any signs of stopping.  While this phase of the PM correction might have run its course, if the buck continues higher, its going to be hard for PM to rally.

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3 Comments

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1222
Musings about oil

Dave,

It may be my growing cynicism with all 'reports' these days but when I see things like what I have bolded below

Crude rallied up +0.64 to 51.00, moving higher off a bullish petroleum status report which showed an unexpectedly large inventory draw of -5.3 million barrels.

some questions come to mind.

1. A 5.3 million barrel draw to where and by whom?

2. How can that big of a draw be 'unexpected' in the information age?

This stuff doesn't just go missing. It either never showed up in the first place (Hurricane Matthew?), was used by someone/thing (anyone...anyone?), or was hidden in a shell game called hide the oil.

Could it have been used? Has anyone heard of a massive uptick in some oil dependent part of the economy? Unless there is a sudden move that should be economically obvious.

Trucking is down.

Rail is down.

That primarily leaves people driving their own vehicles for fun and pleasure.

The miles are up in direct proportion to the price of gas being down so it is not likely to be a driver of new demand, especially as we plow into winter when miles driven drops, and any oil price increases will directly suppress future demand for more gasoline.

But that is just reality and we know that doesn't count for much anymore.

What is really important is the 'verbal stimulus' provided by endless rumor of production cuts that are just around the corner from future meetings of fractious producers. They keep talking cuts but production keeps rising.

One of the things you said that really resonated with what I recently read was:

One problem I see comes from the COT report, which shows that managed money shorts have moved to a fairly low level, which could indicate a top here at 51.

This is because the only real driver of price increases this year seems to be from short squeezes.

The good news is that the price of oil is above where it was this time last year. The bad news is that unless something fundamental changes, the outlook through spring seems to be down.

Do reality or history have any bearing on pricing anymore?

The only thing certain to me is that the prices will eventually have to rise to reflect real world costs of oil production once the glut of current stocks decline. The real problem is that with so little ongoing investment in lining up future oil production, once that turn comes it will likely be with a vengeance as current oil field inexorably decline in productivity. Price will have to be high for quite a while before rising production can bring blunt this trend. Of course the economy may not be in a state to bear the high prices necessary, thereby reducing demand and thus the impetus for investing in production of more oil. Quite the quandary.

In any case, those are my morning musing on oil...

Cheers,

Mark

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5408
swing producer status

Mark-

My main point is that if you look at the surplus over demand, its less than 1 mbpd.  Back when we had our last "oil price difficulty" back in the 90s, the surplus was north of 10 mbpd.

Basically, 1 mbpd is a rounding error.  The Saudis could fix this "problem" all on their own, and that's what they've done over the years.  They just decided to stop doing it this time around for their own reasons.  Hinting they might retake the mantle of swing producer makes the market jump for the simple reason it is trivial for them to do, and it also makes economic sense.  They can produce less, and make more money.

So while we can decry this as "just a short squeeze", its also a real thing.  They have the power to flip one switch, cut production by just 10%, and the oil surplus vanishes overnight.  And the outcome for everyone in OPEC improves instantly - including for Saudi Arabia too.

So it's a will-they-won't-they exercise.  We have a "phantom crisis" and the only question is, will they decide to take action before the decline rates do their job for them?

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1222
Is it that easy?

Dave,

I get your point about the margin difference and the possibility for action making for plausible scenarios but I can't see the outcome moving so easily as you outline.

1. Say Saudi Arabia cuts production by 10%  or 1 mbpd as you say. Yeah, price goes up. If it rises by a little over 10% then there is no impact on their gross income. If it rises more all the better. Unfortunately as soon as price goes up then demand goes down. How much is the question. Let's say that Saudi Arabia will suck it up as the World's swing producer and cut some more production (maybe 1-5%). Problem solved.

2. But as soon as the price goes up so will the production of other countries. Even assuming all of the other countries in the Nov. 30 Vienna agreement stick to their commitments, if it actually happens, we still have Iran.

Today, the rising OPEC discord hit a crescendo when Iran, one of the few nations exempt from the OPEC production freeze agreement, said it plans to boost its oil output from the current 3.89 mmbpd to 4 mmbpd by the end of the year, complicating the producer group’s plan to cut supply in an effort to prop up prices. Shortly thereafter, Oil Minister Bijan Namdar Zanganeh added that new Iranian petroleum contracts are meant to help the country reach an even higher production plateau, somewhere in the 5 million bpd range. (link)

The whole 5 million bpd may be bluster and certainly won't happen too soon but getting to 4 million bpd is in reach and since their real production was estimated at 3.67 million bpd. That could add another 3% to Saudi's need to cut production.

3. Then there are the frackers and their shale oil that will happily raise production back up again into any significant price increase. Is Saudi Arabia going to suck it up again and admit a full surrender in their gambit to stop being the world's swing producer?

Note, I am not saying that your scenario won't play out but that it is not so simple as you outline. Supply may soon be more threatened by rising unrest in Venezuela and is always under threat from problems in the Middle East so Saudi Arabia may not need to do all of the heavy lifting. At some point in the not too distant future production rates are going to fall but I don't know if that 1 or 10 years out. Ultimately they just need to keep the growth of supply lower than the growth of demand and things will start to fall back into line. What does that say about weak demand right now?

What do you make of global demand anyway? GDP everywhere seems to be falling and so the growth rate in oil use should be falling too. It is still growing though, if at a lesser rate. My concern is that if the global economy goes through major convulsions that demand will drop off a cliff for a number of years. Then you are in your 90s scenario again and it gets even harder to line up longer term production of future supplies. Right now it seems to me that we are either in for prices that are too low for producers or oscillations to prices too high for consumers. Hopefully the markets will get back in order sooner rather than later.

Mark

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