PM Daily Market Commentary - 12/14/2016

davefairtex
By davefairtex on Thu, Dec 15, 2016 - 3:17am

 

Gold plunged -15.50 to 1144.60 on moderately heavy volume, while silver dropped just -0.07 to 16.89 on heavy volume.  Gold's major move came immediately following the FOMC announcement; the buck shot higher, and both gold and silver fell, with gold performing worst.

Today was all about the FOMC; while the Fed raised rates by the expected 25 basis points, the Fed did have a surprise which involved forward guidance: Yellen is now projecting three rate increases in 2017. Going into the meeting, the market expected maybe one and a half rate increases. As a result of this surprise, the buck shot higher, to a new multi-decade (intraday) high of 102.29, which drove the Euro through 105 to a new low of 104.60.

When it was all said and done, the buck ended the day up +0.73 to 101.72, having retreated somewhat from the new high but still retaining a respectably large move higher. Candle print was just a “long white” candle, which probably does not mark the high (sub-10% chance).

The big move in the buck had the usual effect on gold: gold sold off hard immediately after the FOMC announcement at 14:00, eventually making a new low to 1140.00 before managing to rebound slightly into the close. The -1.34% drop in gold significantly outpaced the +0.72% rise in the buck – this tells us the drop in gold was more than just a currency effect. Candle print today was a simple “long black” candle, which is not a reversal bar at all. Gold remains in a downtrend.

Rate rise chances (May 2017) are at 34%.

Gold open interest at COMEX rose +614 contracts.

Silver rallied fairly strongly ahead of the FOMC announcement, but then tipped over and sank immediately following, managing to lose all of the gains from its rally and a little bit more. Candle print was a “high wave” which does apparently does not mark a top (sub-10% chance). Although silver is looking a whole lot better than gold, and the gold/silver ratio actually fell by -0.61 to 67.77, silver is now back below its 9 EMA. Theoretically a falling gold/silver ratio should be bullish for PM, but so far, that hasn't been the case.

Miners cratered, with GDX off -5.47 on very heavy volume, while GDXJ plunged -6.40% on extremely heavy volume. Miners had actually rallied into the FOMC announcement along with silver, but precisely at 14:00 miners started selling off, and the selling didn't stop until market close. Candle print was a “bear strong line” (also an opening black marubozu) which is quite bearish. Unless gold can recover quickly, I would expect more selling tomorrow and possibly Friday. The break of support, the close at the dead lows, the extreme volume - that all signals that big money is bailing out hand over fist and there is likely to be follow-on selling tomorrow.

Platinum fell -1.16%, palladium rose +0.42% and copper rose +0.17%.

Crude was hammered too, falling -1.63 [-3.10%] to 50.87; crude fell in Asia, then rallied on a bullish petroleum status report which showed an inventory draw of -2.6 million barrels, and then fell some more, with the final insult coming immediately after the FOMC announcement which pushed crude down another 75 cents. Crude printed a swing high with today's move, and it ended the day below the 9 EMA for the first time since the OPEC meeting. Today's candle print: closing black marubozu, which is seldom a low, and almost certainly not in this case.

SPX fell hard, dropping -18.44 to 2253.28, with all of the losses coming immediately following the FOMC announcement at 14:00. Utilities (XLU:-2.06%) and energy (XLE:-2.00%) did worst, with tech (XLK:-0.35%) falling the least. Utilities, it seems, do not like the prospect of a rate increase.  SPX printed a two-candle swing high, which has an 89% of marking the top.  VIX moved up +0.47 to 13.19.

TLT rallied going into FOMC, but plunged along with gold following the announcement, dropping -1.12%, bringing TLT to within just a few pennies of a new low. Three potential rate increases are not a good environment for bonds.

JNK also fell hard, losing -0.85%, plunging through its 9 EMA and printing a swing high. Were the losses energy-related or bond-duration-related? Its hard to say. JNK fell over right at 14:00, along with TLT, gold, and crude.

CRB fell -0.86%, coming to rest right at its 9 EMA. 3 of 5 sectors fell today, led by energy.

The FOMC succeeded in surprising the market; while Chair Yellen insisted that a potential 3 rate increase for 2017 was only a very modest change from previous guidance, the market saw things differently. Unless the Fed walks this back, we'll probably get some more serious follow-through from the buck – and if the Euro drops conclusively below 104, the follow-through could be fairly dramatic. Gold and especially the miners are vulnerable to a continuing move higher in the dollar; we probably get another 10% drop in the mining shares if the dollar continues to strengthen.

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8 Comments

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 321
Who Was Surprised?

I don't get who was surprised by what the Fed did or by their outlook for rate hikes, unless they've been sleepwalking through at least the last two years.  Did we not go through this exact same scenario last year?  Sure we have a new president elect, but the economic data is still paltry.  Anyway, PMs were going to keep heading down regardless of what the Fed did or said.  This entire "bull market" rally in gold and silver is about to be wiped out in what looks to have been a pretty dramatic head-fake within a continuing multi-year decline in PMs.  Miners haven't given it all back yet, but that looks pretty likely in the not-to-distant future.  Good news is, we will be able to get in much cheaper in the months ahead.  In the meantime, maybe we should back the truck up on DUST or DGLD.  Seems to be the easiest trade on the planet.

MJB's picture
MJB
Status: Silver Member (Offline)
Joined: Jan 5 2016
Posts: 117
Hammered!

Looking fwd to Dave's commentary for 12/15.. I bet he uses the word hammered :)

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5061
surprised

CR-

Well...I won't be shy, I'll step up and say I was surprised.   I admit it, I figured the Fed would tread more lightly than they did.

Euro has broken the 104.60 support level, and now has a 103 handle.  I did not think the Fed would actually want this breakdown to happen, but here we are.

Full points to you for your correct viewpoint - next time, please do us the honor of contributing it prior to the denouement, so we can have a discussion about it and hopefully we can all benefit from your wisdom.  :)

Double points if you take your victory lap prior to the event itself.

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 321
Wow

Gotta say I didn't expect that response.  I didn't in any way intend any of my comments personally toward you.  On the contrary, one of the main reasons I visit this site is to read your daily analysis.  It seems, though, that I offended you and your work.  So for that, I sincerely apologize.  When I wrote that earlier, I was thinking about the big money players/market movers.  A rate hike was a lock, just as you've been pointing out for days.  So, any surprise would come from the outlook...an outlook that routinely shifts from one meeting to the next.  Is anybody out there still really making trading/investing decisions around what the Fed does?  I mean, I would expect some volatility for a few hours or a couple of days maybe, but we know pretty well that the Fed really can't go on a huge normalization cycle without the support of a healthy and growing economy.  This is supported by their actions over the last decade.  So, are the big players going to run from gold, for example, because they were surprised by what they heard yesterday?  I doubt it.  In fact, pretty much all the trends that were in place before the announcement are still in place: Stocks up, PMs down, Dollar up, Bonds down, etc.  That tells me that there wasn't much shock and awe in the big money world.

My prediction is that if we see bond yields continue to run away, the Fed will have to move.  However, if we see them come back in, and we continue to see meager economic data, I would expect no more than one or two hikes next year, unless they want to crash the whole thing.  And if we get to the end of the next year at a similar economic state, I would expect the message from the Fed to be similar to the one we just heard.

If we run hot economically, then it becomes a different story.  Anyway, sorry again. If I offended you .  It was not my intention.

dragonfishy's picture
dragonfishy
Status: Member (Offline)
Joined: Jan 1 2011
Posts: 3
East - West, Paper physical arbitrage

Dave, love your work.

I have recently found a website that tracks the spread between the Western (paper) and Eastern (physical) price of gold and silver:  

didthesystemcollapse.com

As I write this, the spread has blown out to an all time : gold difference $51.14 and Silver $1.97.

I feel like this may be a useful metric to watch. My question is what do you think of the price differences the chart creator used to indicate "caution", which we are approaching for gold, and the level for "danger"  which silver is fast approaching?  Thanks

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5061
not offended

CR-

Noooooo, I was absolutely not offended.  Just read what I said straight out and you'll have the truth of it.  At most, I was teasing you a little bit.  At least that was the intent, which it seems may have gone a bit awry.

My main point was, if you had a sense that the Fed would surprise with forward guidance, I'd like to hear about that in advance, rather than after the fact!  Don't be keeping things like that from me!  :)

I do think people still trade based on what the Fed says.  My sense was, gold was set for a bounce until the forward guidance surprised.  I say this because gold and bonds rallied into FOMC, and then cratered immediately after.  If you look at the 5 minute charts leading in - XLU, TLT, GDX - you'll see what I mean.

I just don't think the market expected the Fed to be talking about 3 rate increases.  Neither did I.

I do appreciate your kind words though!

Will gold retrace its entire 2016 rally?  Boy, I sure hope not.  But that's what Armstrong has been saying.  And so far, that's what seems to be playing out.

I should probably write about that today.  :)

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5061
SGE premium vs COMEX

dragon-

Yes, I calculate the same thing, but I suspect my data isn't quite as accurate since my RMB quote is end of day...but I digress.

I think the difference between the COMEX price and the SGE price is an important indicator.  In the past, when the SGE premium over COMEX gets high enough, it "sometimes" has signaled a low for gold - call it 50% of the time.  We're well into that territory right now.

I don't agree with the site about "system collapse."  If that's the only place that is in premium, I believe it puts pressure on the western physical markets that, over time, will cause gold prices to rise, but that's about it.

If I saw substantial premiums in both the SGE and the west, that would be my signal for impending doom.

Otherwise, you just have gold leaving GLD, heading to Switzerland to be turned into kilo bars, and then sent off to Shanghai, and that flow will take place until either the premium goes away - or premiums start appearing in the West.

Premiums in one place = shortage of gold at that location.

Premiums everywhere = shortage of gold everywhere = time to buckle up.

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 321
Gotcha

I'm tracking with ya now, Dave.  I thought you thought I was being cocky or critical or something, which I didn't intend.  Anyway, I hear you on the gold and treasuries.  I think we're talking about two different time frames, maybe?  I agree with you that gold and treasuries were rallying somewhat into the Fed, and I think gold was due for a technical bounce.  But I guess I was observing that the longer term trend for both has been down for a while now, and the trend for stocks has been up.  All of those trends remain seemingly intact after the Fed, at least right now.  Armstrong seems pretty convinced the dollar is going much higher, along with equities, while gold breaks under $1000.  I don't know his longer term analysis for gold....if you have any insight here, I'd love to hear it.  He seems to have been spot on so far.

Here's a question for you or anyone who might know:  re: mining stocks, if the paper price of gold drops, but if premiums to buy gold rise substantially, do the mining shares still sink as hard as they would if there were no premiums?  In other words, do mining shares pretty much track with only the paper price, or are other factors involved, like any premiums for the metal? ...if that makes sense.  That may be a dumb question, but I'm not afraid to ask dumb questions.  I'll just ask for forgiveness in advance! :)

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