PM Daily Market Commentary - 11/23/2016

davefairtex
By davefairtex on Thu, Nov 24, 2016 - 5:14am

Gold fell -21.70 to 1190.30 on very heavy volume, while silver dropped -0.30 to 16.43 on heavy volume.   A strong dollar rally through the previous high of 101.54 was the probable proximate cause of gold’s tumble today; the buck ended up +0.64 to 101.66, but hit a multi-decade high of 101.86 intraday.

The drop in gold/the dollar rally started right around the time of the Durable Goods report at 08:30, which showed an unexpectedly strong new order reading; new orders being the forward-looking reading of how durable capital goods are projected to be in the near future.  My guess is, the commercials took full advantage of the dollar rally to pound gold; the “nobody cares” sense in the west probably caused the recent dip-buyers to panic out.

On the daily chart we see gold plunging through 1200 support; the 1200 level was a very important level to hold, and the close below this level suggests a much more intense decline is potentially ahead.  If the Euro loses the 105 level, that strongly suggests a crisis in the Eurozone, and that projects a much stronger dollar rally and/or a further large drop in the Euro.  Weaker Euro = stronger dollar = weaker gold.  That’s how things stack up right now anyway.

Candle print today is a two candle swing high, which the candle code says is quite bearish: 92% chance of this marking a high.

Rate rise chances have risen to 98%.

Gold open interest at COMEX fell a huge -21,654 contracts.  Commercials are covering, I suspect.

Here’s the weekly chart for gold, to provide some perspective as to why I said the 1200 level was a critical one.   Note that after we lost 1200, all we can see on the chart is a whole lot of air between where we are and the previous low at 1045.  That’s not to say we immediately head there, but that’s where the price will probably go if a new catalyst for gold doesn’t appear, and/or the Euro cracks 105 and the dollar continues to rally.

Silver’s chart doesn’t appear to be quite as bad, but it too broke below the previous low set last week, and it also printed a two-candle swing high/“confirmed bearish high wave” - that second pattern just means a high wave that prints a new high within a 3-candle range, followed by a nasty red candle.   It all adds up to a 95% chance of this marking the high for silver.  That sounds pretty bad, but silver does have some chart support at 16, and then again at around 14.50-15.00.  That, plus the gold/silver ratio actually fell today, dropping -0.27 to 72.56.


The miners gapped down big, sold off hard, and then managed to rebound somewhat; GDX fell -4.92% on heavy volume, while GDXJ dropped -5.59% on very heavy volume.  Miners did manage to find support at the previous low - unlike both silver and gold, the miners avoided making a new low, which is a somewhat positive sign, especially compared with gold and silver which both made new lows.  The candle print was a spinning top, which the candle code gave as only a 10% chance of printing a low.  Hmm.  That’s not very optimistic.  More likely than not, we go lower.  If the miners crack the previous low, the selling could prove very intense.  As in, another 8-10% down day as traders panic out.

Platinum fell -0.76%, palladium fell -0.83%, and copper was up +2.80%.  Unbelievably, copper is continuing to move higher, closing at 2.62 today, up 52 cents (25%!) off the lows set just one month ago.  COT says the commercials continue to go short; they’ll eventually be right, I suspect, but when?

Crude was more or less unchanged, rising +0.04 to 47.94.  Today’s candle print was a doji, which in this context provides no directional information at all.  Crude is above all 3 moving averages, which puts it in a near-term uptrend.  The petroleum status report showed a -1.3 million barrel crude inventory draw, which is bullish, and a 2.3 million barrel gasoline inventory build, which is bearish.  The upcoming OPEC meeting, which starts on Nov 30th, will probably decide ultimately what happens with oil in the medium term.  One wildcard: Trump has vowed to tear up the Iran nuclear deal on day 1; if the US reimposes sanctions and gets everyone to go along (China?) then that could knock a few million barrels of production offline.  It could also raise the geopolitical premium for oil also.  That would be unquestionably bullish for oil.  What Trump will actually do, on the other hand, is much less certain.

http://oilprice.com/Energy/Crude-Oil/What-Happens-To-Oil-If-Trump-Tears-Up-Iran-Nuclear-Deal.html

SPX rose just +1.78 to 2204.72, squeezing out another new all time closing high.  DJIA and RUT both made new highs also.  Industrials (XLI:+0.74%) led, while utilities (XLU:-1.00%) trailed.   SPX is starting to become reasonably overbought, but so far, shows no real signs of topping out.   VIX rose +0.02 to 12.43.

TLT dropped once more, falling -0.39%, making a new low.  Candle print was a “spinning top/short white” candle, which the candle code assigns a surprisingly high 58% chance of marking a low.  Might we have an intermediate low for bonds?  This puts the 20 year rate at 2.71%, which is a full 100 basis points higher than the all-time low set back in early July.  What did that do to TLT?  That's a 20% drop in value; from 142 down to 120.  Ouch.  A 1% increase in yield resulted in a 20% loss to capital.  Now just imagine this happens another 2 times.  That gets long rates back where they were in 2008.

JNK dropped -0.44%, dropping back below its 50 MA.  The outperformance of JNK might be nearing an end; JNK:IEF is showing signs of topping out.

CRB moved up +0.07%, the industrial metal rally offsetting the plunge in PM.

Yesterday I said that if the buck broke above 101.54, gold would probably snap the 1200 support level.  Now that gold is through 1200, it is at a high risk of a much more substantial decline.  If you thought we had been punished too much and the beatings were about to end…go back and look at that weekly chart.  The pro traders see that sort of chart breakdown, and they head for the exits.  That, or they load up short.  Trend is down, support gets broken = run, don’t walk, until the situation changes.

My sense is, the only way gold puts in a low here is if the Euro holds 105, and/or the buck immediately tops out and starts to decline.  With the Italian referendum coming up Dec 4th - Europe just doesn't look very good right now.  If you were the BOJ or the PBOC, would you be buying Euros here?  If you lived in Europe, would you be loading up on Euro sovereign debt, or would you be eyeing the exits?

And if this all weren’t gold-unfriendly enough, there is talk that India might ban gold imports entirely.  Gold would still be smuggled into India, of course, and the government would not get the tax revenue from the import duty, but if Modi is really serious about a war on cash - gold definitely acts like cash, and so this would be a logical next step.  Of course, gold sellers in India profit from people who panic-buy in this situation, so its hard to know if this is just a scam run by the Indian gold sellers to pump up premiums, or if its a real thing.  If it does happen, COMEX gold probably gets sold hard in response.  That’s the common view, and I agree with it.  Will it happen?  That’s much harder to know.  An Indian gold ban might take gold down to $1100 - aided no doubt by the enthusiastic commercials, which would probably take the opportunity to ring the cash register and cover.

Right now, there’s a lot of downside risk to gold - from the super-strong buck, mostly, and from India at least to some degree.  Armstrong suggests gold may break $1000 sometime in 2017, probably driven lower by the currency moves I’ve already talked about.

We could see a rally back up to 1200 in the near term, but if it isn’t accompanied by the buck putting in a convincing swing high, I’d sell the rally, not buy it.

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14 Comments

davefairtex's picture
davefairtex
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fun bond yield chart

Here's a chart of the 20 year treasury yield since 1991.  The 50 month moving average has acted (roughly) as resistance during that time.  Its imperfect, but at least since 2008 the 20 year yield hasn't moved above that 50 for very long.

If it manages to do so this time, we might have a real trend change on our hands.  A move back to 2006 yields means about a 2.7% increase in yield vs where we are today, which would result in (perhaps) a 40-50% drop in the value of any 20 year bonds you happen to own.

Remember, a stock market crash leads to a recession; a bond market crash results in a depression, because so much value gets destroyed.  You can bet I'll be watching how this unfolds.

New_Life's picture
New_Life
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Posts: 395
Silver price on the dashboard showing Sept?

On the home page still says $19 for silver....

 

reflector's picture
reflector
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Posts: 279
widget stuck
ScubaRoo wrote:

On the home page still says $19 for silver....

 

yes it's been stuck at 19.06 for a month.

reflector's picture
reflector
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value?
davefairtex wrote:

Remember, a stock market crash leads to a recession; a bond market crash results in a depression, because so much value gets destroyed. 

"value" gets destroyed?

when a forest fire happens, it burns away the deadwood and other crap, and brings new life to the forest. it's not value being destroyed, but rather the detritus that the forest is better off without.

the depression does not happen as a result of value being destroyed.

as john mill put it:

"Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works."

lending money to a bankrupt federal government so that they can carry out unprecedented wars of aggression halfway around the world, and prop up failing banks, is indeed something i'd consider unproductive works.

as doug casey says, those who foolishly loaned money to the federal government will get what they deserve, and they will get it good and hard.

davefairtex's picture
davefairtex
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depression results from value destruction

the depression does not happen as a result of value being destroyed.

Ok, let's get down to basics.  When a person takes $10,000 in savings, uses it to buy a 20 year bond, and then interest rates rise, and then the treasury drops in value down to $5,000, that person experiences a destruction-of-value event.  Do you dispute this?  Please don't quote some economic-philosopher, speak directly to the real human's emotional experience of seeing a $10,000 bond turn into a $5,000 bond, and try to explain why they will not actually experience the emotion of loss.

when a forest fire happens, it burns away the deadwood and other crap, and brings new life to the forest. it's not value being destroyed, but rather the detritus that the forest is better off without.

Regardless of how "morally necessary" you believe it is to "burn away the deadwood", I believe that the widespread destruction-of-value event that will take place in a bond market crash will end up causing a depression because of the emotional impact across the real human beings that comprise the economy.

There are exactly zero humans who currently hold 20 year treasury bonds that, if they drop 50% in value, will view this as a salutary burning-away of detritus.  Humans just don't work that way.  Instead, they will see their savings melt away, and they will react as any normal human would: with great dismay.

as doug casey says, those who foolishly loaned money to the federal government will get what they deserve, and they will get it good and hard.

Oh sure, you can take your victory lap and laugh at all the idiots who ended up losing, but the nation will still be in a depression because of the mass emotional impact of the large loss-of-value event.

I'll leave the victory-lapping and schadenfreude to you.  My goal is only to figure out the systemic effects.

And I still maintain: a mass loss-of-value event in the bond market will lead to a depression.

stevejermy's picture
stevejermy
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VALUE ...

Dave,

This is to me a really interesting conversation, but can I offer an alternative view? Goes back to the fundamental idea that money and currency are both calls on value, but not value themselves. This goes against the common idea that money is a store of value. It is not, it a means of purchasing and trading value, over time. This is key. 

Real value is in the food we eat, the energy we consume, the shelter we live in, and all the other forms of physical capital that we use in our daily lives.

It seems to me that currency inflation and bond crashes do not result in a destruction of value but, rather, in a destruction of the holder's ability to purchase future value as a result of his or her efforts in the past. Yes, the loss in trading value of the currency or bond will result in a huge emotional shock for the holder. But the value still exists out there, he or she no longer has the means of purchasing it. There has, as Chris often says, been a transfer of wealth, that is a transfer of the ability to purchase value.

It's difficult to work out how the overall stock of human value changes, but it seems intuitively clear to me that it is through the consumption of energy that we increase it and that otherwise it probably depletes as a result of value depreciation, wear and tear and so on. There must come a time, perhaps its already here, where the reduction in energy supplies is such that our ability to create new value is outweighed by the depletion of existing value through depreciation.

If so, then the overall stock of human value is at best static, and perhaps even declining. And yet the volume of the means that we use for trading value - currency and currency look alikes such as debt and bonds - are actually increasing, and exponentially thanks in no small part to Western economic policy and, more fundamentally and as Hubbert recognized, the simple problem of compound interest.

It surely follows that, if the stock of value is static or decreasing and the stock of currency and its lookalikes is increasing exponentially then the value purchasing power of the latter must decline. Inflation initially, hyperinflation eventually.

The $64,000 question for me is not whether we will see this destruction of purchasing power in the fiat currencies - that's obvious and its simply a question of time - but much more subtly whether we will also see this destruction of value purchasing power in the money that we here, at this site, hold dear, i.e. gold and silver.

Answers on a post card ...

Steve Jermy

jtietz79's picture
jtietz79
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Gold Price Drop - India?

Do you think the price plunge also has to do with the rumors in India of them banning imports? If this rumor holds, how does it affect price of gold going forward?

http://www.zerohedge.com/news/2016-11-24/reason-why-gold-prices-are-plun...

Thanks.

 

 

reflector's picture
reflector
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Posts: 279
value
davefairtex wrote:

Ok, let's get down to basics.  When a person takes $10,000 in savings, uses it to buy a 20 year bond, and then interest rates rise, and then the treasury drops in value down to $5,000, that person experiences a destruction-of-value event.  Do you dispute this?  Please don't quote some economic-philosopher, speak directly to the real human's emotional experience of seeing a $10,000 bond turn into a $5,000 bond, and try to explain why they will not actually experience the emotion of loss.

ah. the emotion of loss. you want to talk about feelings, then. yes, i'm sure that special snowflake will feel sad that other market participants did not agree with their estimation of value.

 

i don't know why you have an issue with the john mill quote, but it's appropriate - it's not the market crash that kills the value. the value was lost previously when the mal-investment occurred. it just took a while for the market to price in the mal-investment.

 

davefairtex wrote:

 

There are exactly zero humans who currently hold 20 year treasury bonds that, if they drop 50% in value, will view this as a salutary burning-away of detritus.  Humans just don't work that way.  Instead, they will see their savings melt away, and they will react as any normal human would: with great dismay.

i agree with you, people who buy such shoddy investments will no doubt feel that way.

but hopefully they will also reflect, will learn from their mistakes, and not trust the federal government with their money again.

 

davefairtex wrote:

 

Oh sure, you can take your victory lap and laugh at all the idiots who ended up losing, but the nation will still be in a depression because of the mass emotional impact of the large loss-of-value event.

I'll leave the victory-lapping and schadenfreude to you.  My goal is only to figure out the systemic effects.

And I still maintain: a mass loss-of-value event in the bond market will lead to a depression.

dave, the depression is already here, even if phony government statistics don't reflect it.

the mass loss of value event you mention has already happened, when the funds were given to the government which then squandered those funds and then proceeded to rack up a bunch more debt.

the so called market may take a while to price in such realities, and yes it won't be pretty when it happens

 

Doug's picture
Doug
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value of cash

I've never understood the argument over whether value rests in cash or equivalents, or in actual useful things.  On a purely superficial level, the value of cash is precisely what you can exchange it for at any given moment.  Plus a premium for its liquidity as a medium of exchange.

Of course the value of cash is subject to the whims of inflation or deflation, but so is everything else.  I tend to think in concrete terms, so tractors and land strike me as things that retain value.  Land value varies tremendously depending on other values like fertility, proximity to development, access to water, vistas and the presence of toxic waste.  Each of those values in turn can vary tremendously also.  The value of a tractor is, to some extent, inversely related to energy availability and directly related to its usefulness in producing other kinds of value like food, shelter or water, or in modifying the landscape.

Of these assets only cash retains the liquidity value.  Without that we are reduced to a barter economy.  Can I buy your land with my tractor?  Only if we have coincident needs.  But if I have enough cash, I can probably buy both your land and your tractors because you value cash.  Isn't that what value, at least in a monetary sense, is all about?

As far as destruction or enhancement of value, isn't that always measured in cash terms?  If the value of your bond goes from $10,000 to $5,000 haven't you lost real value in everything the cash value could be used for?  The whole argument seems to be analogous to angels dancing on the head of a pin.  Am I missing something important?

Cold Rain's picture
Cold Rain
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Reality

The concept of value is a nice, fun thought experiment for academia, but for the man on the street or a company who is watching the value, worth, price (or whatever label you want to place on it) of their assets get slashed, whether the initial value was justified or not, they simply don't care about economic theory.  It will cause a rapid behavior change that will have very adverse and wide-ranging effects, which will be detrimental to all of us.

davefairtex's picture
davefairtex
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special snowflakes

reflector-

ah. the emotion of loss. you want to talk about feelings, then. yes, i'm sure that special snowflake will feel sad that other market participants did not agree with their estimation of value.

You are still missing the point.

The aggregate emotions of the market participants are critical to economic analysis, because emotions in aggregate drives markets and economies.  When lots of people take big losses in value, the systemic effects of the resulting group emotional shock will cause a depression that will make what we're experiencing right now seem like Really Good Times.  Velocity of money will sink like a stone.

You imagine we're in a depression now, papered over by "government stats."  You won't have to imagine it when the bond market crashes.   Things will get vastly worse.  And it will all happen as a result of the aggregate emotional shock from the widespread value loss.

I encourage you to stop focusing on special snowflakes.  Instead, focus on the upcoming avalanche.

Mr Cold Rain has it right:

...for the man on the street or a company who is watching the value, worth, price (or whatever label you want to place on it) of their assets get slashed, whether the initial value was justified or not, they simply don't care about economic theory.  It will cause a rapid behavior change that will have very adverse and wide-ranging effects, which will be detrimental to all of us.

Yeah.  What he said.

And then Doug:

As far as destruction or enhancement of value, isn't that always measured in cash terms?  If the value of your bond goes from $10,000 to $5,000 haven't you lost real value in everything the cash value could be used for?  The whole argument seems to be analogous to angels dancing on the head of a pin.  Am I missing something important?

No, you're not missing anything important.  That's how I look at things too.  As long as there is a liquid market for an item, then its current bid/ask in dollars is existential truth, and the gain or loss in that item, measured in dollars, is the change in value.  Its just accounting.

Of course, current price might be the result of a mistaken understanding of what the future holds, but if you can actually sell your item at the bid, then that's reality at that moment.

davefairtex's picture
davefairtex
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overall stock of human value

Steve-

I'm not so sure the overall stock of human value is actually declining.  It might be.  But it also might not be.  In the computer industry, we're seeing amazing things happening in just the last 5 years.   Can more computing power solve energy issues?  To a point, I think it can.  Self-driving cars and other AI applications could help us use what we've got a whole lot more efficiently - maybe even long enough to get cheap-enough solar that can create liquid fuels through electricity.

A sharing economy enabled by AI means we don't have to replace the entire auto fleet; we can just replace 10M cars and we're 80% there.  AI-enabled sharing makes carpooling a ton easier; if we really do have a fuel crisis, mandating it also suddenly becomes a matter of an OTA software upgrade rather than a large manufacturing effort.  To cross the Bay Bridge, you suddenly are *required* to have a passenger, or you pay a $20 toll.  Ooops.  Send your car to pick up your passenger first - he lives nearby, located by your AI - and then your car picks you up and then your leave for work.

It surely follows that, if the stock of value is static or decreasing and the stock of currency and its lookalikes is increasing exponentially then the value purchasing power of the latter must decline. Inflation initially, hyperinflation eventually.

So lets assume the stock of value is decreasing.  My model says, increase in debt drives increase in money supply, which (in general) drives inflation.  That's what we've seen since the 1930s.  Debt eventually maxes out (Minsky's Financial instability Hypothesis), and the result is a a debt deflation - not a hyperinflation.

People expecting hyperinflation are fighting the last (inflationary) war.  Again, inflation is an artifact of debt increase.  If we're at peak debt, and declining net energy makes the debt impossible to pay down, then the logical next step is a deflationary crash.

Debt owners are the rich people, and they definitely don't want hyperinflation.  If it happens, it will be a total accident.  That's why we've had the limited money printing - debt holders don't want defaults, but neither do they want hyperinflation.

------

My work with AI tells me things won't play out the way we (at PP) thought they would back in 2007.  Things really have changed that much.  Stuff that simply wasn't possible in 2007, now, with multi-teraflop GPUs, is suddenly within our grasp.

I can buy a 9 teraflop GPU for $600.  A teraflop of computing power was a crazy wet dream back in the 80s.  "Anything" could be solved with teraflop computing.  And now it turns out, we have it.  I'm running a simulation right now, with my "antique" 3 teraflop card, which still totally kicks ass vs. my quad core i7.  This is what I'm getting next: from 3 teraflops to 9 teraflops, for $600.

http://www.pcgamer.com/nvidia-gtx-1080/

 

Eannao's picture
Eannao
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Posts: 165
No 'Poom'?

Dave,

you wrote:

"People expecting hyperinflation are fighting the last (inflationary) war.  Again, inflation is an artifact of debt increase.  If we're at peak debt, and declining net energy makes the debt impossible to pay down, then the logical next step is a deflationary crash."

Two questions:

  1. Does this mean you don't agree with the 'Ka-Poom' theory? i.e. are you envisioning the 'Ka' and then no inflationary 'Poom'?
  2. Are we really at peak debt? If Govs & CBs double-down on monetary & fiscal stimulus due to the next recession/crisis/deflation, won't they succeed in creating the inflation that they need?

Thanks, E.

 

Eannao's picture
Eannao
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Posts: 165
Debt-owners vs Governments

Dave, further thoughts...

you wrote:

'Debt owners are the rich people, and they definitely don't want hyperinflation.  If it happens, it will be a total accident.  That's why we've had the limited money printing - debt holders don't want defaults, but neither do they want hyperinflation.'

Two more questions:

 

  1. Do you really think what we have had (and currently have) is 'limited money printing'? Surely 'unprecedented money printing' would be more accurate and has been at the limits of what was politically acceptable?
  2. Your comment suggests that it is the debt-owners who are calling the shots. I always thought that it is the governments calling the shots, and as they are hugely indebted, they cannot tolerate deflation. Who are the debt-owners?

Thanks again, E.

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