PM End of Week Market Commentary - 2/17/2017

davefairtex
By davefairtex on Sun, Feb 19, 2017 - 3:01am

On Friday gold fell -4.10 to 1236.00 on moderately light volume, and silver fell -0.11 to 18.05 on moderate volume. The dollar bounced back from yesterday's sell-off; gold and silver initially resisted falling, but by end of day PM eventually succumbed to the pull of the rising buck.

This week, we see silver leading gold, but the miner ETFs both lost ground, with the silver miners bringing up the rear. Many of the PM items have fallen below their 9 EMA lines, and there are also a number of bearish MACD crossovers too. Miners typically lead, and so the falling miners are a bearish sign.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Silver $SILVER 0.53% 16.60% rising rising rising rising ma200 on 2017-02-14 2017-02-17
Gold $GOLD 0.11% 0.27% rising rising falling rising ema9 on 2017-02-14 2017-02-17
Platinum $PLAT -0.78% 6.40% falling rising falling rising ema9 on 2017-02-17 2017-02-17
Palladium $PALL -0.91% 54.46% falling rising rising falling ema9 on 2017-02-17 2017-02-17
Junior Miners GDXJ -1.34% 61.57% rising rising rising rising ma200 on 2017-02-06 2017-02-17
Senior Miners GDX -1.98% 31.16% falling rising rising rising ema9 on 2017-02-17 2017-02-17
Copper $COPPER -2.05% 30.90% falling rising rising falling ema9 on 2017-02-17 2017-02-17
Silver Miners SIL -2.68% 70.81% falling rising rising rising ema9 on 2017-02-17 2017-02-17

Gold actually managed to squeak out a gain this week, rising +1.30 to close at 1236.00. It took a brief dip below its 9 EMA on Monday, but by the end of the week gold had recovered all its losses. Friday's candle print was a “closing black marubozu/NR7”; normally a black candle would be bearish, but the candle code rates this one as unusually bullish. An NR7 print occurs when there is a relatively narrow trading range; this trading-range pattern sometimes results in a large move either up or down, and in this case, candle code predicts a rally. Gold remains above its 9 EMA, but momentum for gold seems to be slowing down.

The May rate-increase chances rose to 38%.

COMEX GC open interest rose +27,021 contracts.

Silver did best of all the PM elements; it broke out to new highs on Thursday, and although it sold off Friday, it still managed to gain +0.10 to 18.05 on the week. Friday's candle print was a “black marubozu/NR7” which the candle code finds to be neutral. The breakout above the 200 MA is bullish as is the close above round number 18.  The gold/silver ratio fell, losing -0.29 to 68.48. That's mildly bullish. Silver remains above its 9 EMA.

Miners fell on the week; GDX dropped -1.63%, while GDXJ fell -2.07%. Miners are doing worse than the metal, and the juniors fell more than the seniors. Both of these outcomes are bearish. GDX fell below its 9 EMA and the 200 MA too. That's bearish also. GDX also executed a bearish crossover for the MACD. Candle print on Friday: bearish engulfing, which is somewhat bearish: 38% chance of a top here. Do you get the sense the miners are sending a bearish signal?

USD

The buck rose +0.15 to 100.89, printing a swing high on Thursday, but rallying back Friday. Friday's candle print was a white marubozu, which the candle code thinks is bullish. Between the swing high and the bullish white marubozu, its hard to know the real direction for the buck. The buck has only rallied for two weeks. Trump wants a weaker dollar while Yellen seems to be looking to raise rates, and inflation is definitely heating up. The CPI print on Wednesday was a warm 2.5% y/y, and a hot 0.6% m/m increase - and that's the ridiculously understated government calculation. The election season in Europe is just starting, and Flynn resigned because of the CIA's ongoing war with Trump. There are lots of forces pulling in different directions, and how it ends up...well I certainly don't have a clear sense. There are just too many black swans flapping around out there to make any sort of prediction.

This appears to be a "news driven market."  Which is another way of saying, where things go, I just can't say.

US Equities/SPX

The US equity market continued higher, up +35.06 [+1.51%] to 2351.16, closing at yet another new all time high on Friday. SPX is very overbought, with an RSI7=87; this is a great example of the statement: “overbought can get over-boughter”...and then it just goes up some more. Going short during this move is just not a good idea. We need to wait for a signal, and so far, I haven't seen one. Candle print for Friday was a closing white marubozu, which says that SPX closed at its highs. Candle code says that's neither bullish nor bearish. VIX rose +0.64 to 11.49.

This week, sector map has financials and sickcare in the lead; the rising expectations for a rate increase along with Trump's apparent desire to rip up large chunks of Dodd-Frank has the banking sector in a happy mood.  Energy and the miners did worst – the only two sectors to fall this week. vEnergy tried rallying this week, but sold off hard on Thursday.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Financials XLF 2.90% 43.63% rising rising rising falling ema9 on 2017-02-09 2017-02-17
Healthcare XLV 2.50% 11.61% rising rising rising rising ma200 on 2017-02-03 2017-02-17
Telecom XTL 1.83% 42.43% rising rising rising rising ema9 on 2017-02-08 2017-02-17
Industrials XLI 1.79% 28.14% rising rising rising rising ema9 on 2017-02-03 2017-02-17
Technology XLK 1.70% 28.45% rising rising rising rising ema9 on 2017-02-01 2017-02-17
Cons Staples XLP 1.57% 7.29% rising rising rising rising ma200 on 2017-02-07 2017-02-17
Cons Discretionary XLY 1.03% 19.40% rising rising rising rising ema9 on 2017-02-08 2017-02-17
Utilities XLU 0.57% 6.58% rising rising rising rising ema9 on 2017-02-16 2017-02-17
Homebuilders XHB 0.54% 18.43% rising rising rising rising ema9 on 2017-02-09 2017-02-17
Materials XLB 0.38% 26.85% rising rising rising rising ema9 on 2017-02-10 2017-02-17
REIT RWR 0.09% 10.26% rising rising falling rising ema9 on 2017-02-16 2017-02-17
Energy XLE -1.79% 26.40% falling falling rising falling ema9 on 2017-02-16 2017-02-17
Gold Miners GDX -1.98% 31.16% falling rising rising rising ema9 on 2017-02-17 2017-02-17

Gold in Other Currencies

Gold rallied in 4 of the 6 currencies I track, falling in CNY and JPY. Gold in XDR was up +2.61, which is more or less no change at all.

Rates & Commodities

TLT fell -0.36% this week, making a low on Wednesday but then bouncing back on Thursday and Friday. TLT is more or less chopping sideways, spending much of its time just above its 50 MA. It appears to have put in a low back in December, but so far the buyers have been thin on the ground. One bullish sign is a weekly MACD crossover which happened this week. Inflation is starting to heat up, which is negative for bonds, but some people have observed that the “short bond” trade is quite crowded. Another positive sign is that bonds have not sold off much even though SPX has repeatedly made new highs. My guess is that bonds will rally, but it will require an equity market correction to kick off the move.

JNK rose +0.16%, a slight move higher. JNK is more or less moving sideways right now, quite near to the high.  I'm watching JNK carefully for hints of weakness; selling in JNK could foretell weakness in equities.

CRB fell -0.99%, ending the week below its 50 MA. CRB is starting to head slowly lower; it printed a high in mid January and has slowly meandered lower over the past five weeks. CRB remains in a longer term uptrend, and on a y/y basis, CRB is up about 20% from the lows hit in Feb 2016.

Crude fell -0.41 to 53.65. Crude has been chopping sideways just below 54 resistance which has held strong for the past 9 weeks. Both sides on this battle in the oil futures markets seem to be continuing to load up; just this week alone, the commercials sold 72k contracts – 72 million paper barrels of oil, roughly what Saudi Arabia would produce over that same time period. I'm not sure who will win this battle; when the break finally does happen, it should be a pretty big move.  I'd guess $10 in either direction. 

Physical Supply Indicators

* SGE premium to COMEX rose to +14.95.

* The GLD ETF tonnage on hand rose +4.45 tons, with 841 tons in inventory.

* ETF Premium/Discount to NAV; gold closing of 1236.00 and silver closing of 18.05:

 PHYS 10.15 -0.25% to NAV [up]
 PSLV 6.84 -0.31% to NAV [down]
 CEF 12.51 -8.5% to NAV [down]

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

* Big bar premiums are lower for gold [2.18% for 100 oz bars in NYC], lower for silver [+2.77% for 1000 oz bars in NYC], and lower for silver eagles at +17.12% [NYC].

Futures Positioning

COT report covers trading through Tuesday February 14th, when gold closed at 1229.20 and silver 17.95.

In gold, commercials closed -6.7k contracts, while managed money sold -6.8k longs. There was not much change in positioning this week. Managed money shorts remain at 72k contracts, which probably does not mark a top from the COT perspective.

In silver, commercials added +4.9k shorts, bringing the commercial shorts to 148k total. The high from last year is about 160k – which we are getting uncomfortably close to reaching. Two more weeks like this and I'm going to call the top in silver, at least from the COT report perspective. Managed money longs rose by +6k, but they remain well below the highs set last June. Managed money shorts have already sunk to a level where we could be nearing a top for silver.

Gold Manipulation Report

There were no after-hours spikes seen this week.

Summary

The buck printed a swing high this week, but its ultimate near-term direction remains uncertain. PM is showing some signs of uncertainty too – the miners look a bit ill, while silver continues to make new highs, and gold is somewhere in the middle. The rapidly rising equity market is probably attracting a fair amount of money right now; risk on in equities usually doesn't spell risk on for gold.

Gold COT still looks bullish – in fact its unchanged, with managed money owning 72k short contracts. The silver commercial short position continues to rise; we are probably two weeks away from possibly marking a top for silver.

Gold and silver big bar shortage indicators still show no signs of shortage in the west; ETF premiums were mixed, and GLD tonnage rose. In Shanghai, premiums climbed. Is China limiting the amount of gold that can be imported into the country? That would explain the persistent premium. That, or there just aren't enough bars in kilo form to satisfy Chinese demand.

Short term, it feels to me like both the dollar and PM direction is a coin flip; my trend-following code is currently is short gold, long silver, short the miners, and short the buck. How's that for confused?

Longer term, we have a large number of issues that, if one of them surfaces in a meaningful way, could easily wreak havoc on the status quo. Most of these would cause chaos that would probably be gold-positive.

Here are the things I'm watching.  I've grouped them into three categories: chickens [coming home to roost - at a time certain], bombs [which will explode at some point in the future], and pressure [a predicament without a currently-visible solution].

  • [bomb] Chinese banking system/debt growth model end/RMB weakness

  • [bomb] Trump-CIA conflict

  • [bomb] Japanese bond market/debt bubble

  • [bomb] Off-exchange derivatives in the US banking system

  • [pressure] Peak debt; makes true growth impossible

  • [pressure] Peak cheap oil, falling EROEI - ditto w.r.t. growth

  • [pressure] Climate change

  • [chicken] elections in Netherlands, France, Germany, and (at some point) Italy

  • [chicken] BRExit execution/EU attempts at punishment

  • [bomb] 92-month US economic expansion; at some point, it will end.

  • [bomb] US debt bubble: TCMDO/GDP of 351%;

  • [bomb] Underfunded US pensions; at equity-market all time highs!

  • [bomb] Italian banking system; non-performing loan problems

  • [bomb] Greece (still!)

  • [pressure] neocon-supplied Refugees & Migrants

Maybe you can think of others. As I look at the list, I'm reminded that it is probably a good idea to have assets outside the banking system.  Over the next six months, I think its a crapshoot if we'll see either gold $1000 or a breakout to $1500.  Say 40/60.

 

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8 Comments

Luke Moffat's picture
Luke Moffat
Status: Gold Member (Offline)
Joined: Jan 25 2014
Posts: 364
Nice Summary

Dave,

Thanks for the context of "chickens, pressure and bombs". Given all of the issues that are hiding in the shadows I'm still amazed that almost everybody else seems to be 'keeping the faith'.

All the best,

Luke

Luke Moffat's picture
Luke Moffat
Status: Gold Member (Offline)
Joined: Jan 25 2014
Posts: 364
Yuan and US Equities

Rickards has an interesting take on the Yuan and US equities relationship. His point is that a devaluation in the Yuan leads to a crash/correction in US equities. The theory goes that China needs to devalue to boost its economy via exports but doing so increases volatility in commodity prices causing equities to sell off. The first overnight 3% Yuan devaluation on 10th August 2015 led to a two week sell off in US equities. The second gradual Yuan devaluation beginning December 2015 and ending early January 2016 led to the second sell off in US equities starting 29th December 2015 and lasting until 19th January 2016. The audio interview is below and the relevant section is 29:00 - 38:30;

Looking on the weekly USD/CNH (Off-shore Yuan) chart it's looking like the Yuan devaluation is once again accelerating although it has been fairly steady since the new year...

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5070
CNY/USD vs SPX

Its an interesting idea, and it looks to be true about half the time.  During late 2015 and early 2016 he was right.  But the big moves in mid 2016 and late 2016 did not lead to a major correction - there were some blips but they weren't meaningful.

Nevertheless, I think that spike in mid-2015 is definitely a clue.  China is the source for all the growth in the world today, as we know by now, and it sure seems like once they suck it up and fix their banking system, their debt-funded growth model will be put on hold for a time.  That probably leads directly to an SPX correction, based on the mid-2015 case.  I'd also guess that the bigger the spike, the larger the correction.

I'd also guess the oil market would be the biggest casualty when this event finally takes place; oil hit its low in early 2016 off that 2nd RMB jump.

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1428
Re: Yuan And US Equities

Since so many international companies are in China, the real driver is feared inflation.  If Yuan materially devalues then input cost go up for all companies including S&P 500 ones.  Bullish for Gold!

I see a contradiction in Rickards analysis: on the one hand Rickards says China is importing mega gold because it wants a strong currency but then predicts a mega devaluation.   

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5070
devaluation, timeframes

If the CNY devalues, input costs for our companies should drop.  (Everything from China becomes cheaper from our point of view).  They say that China will be exporting deflation.  Competing with the Chinese companies will be quite difficult, though.

I think Rickards makes sense if you add a timeframe to each phase.

China is importing gold with an eye towards having a strong currency in the long term.

China is preparing for a devaluation to fix their banking problem - in the short term.

So, the trade is, short RMB now, and once China fixes their banking problem, close your short and then go long, because at that point, RMB = gold.

That's the Rickards theory anyway, as I understand it.

TomBlackstone's picture
TomBlackstone
Status: Member (Offline)
Joined: Dec 19 2016
Posts: 2
Rickards' Prediction

For the life of me, I can't understand why Rickards keeps claiming that the PBoC is going to run out of reserves unless it devalues the Yuan.

Before the financial crash, China only had about $2 trillion in reserves. Why weren't analysts saying that the sky was falling at that time?

After the financial crash, the U.S. implemented QE. This resulted in massive amounts of money flowing out of the U.S. and into China as investors chased yield. This threatened the Chinese peg to the dollar because it put pressure on the Yuan to appreciate.

The PBoC responded to this by printing Yuan and using it to buy up lots of dollars. It's reserves doubled, from $2 trillion to $4 trillion. This kept the Yuan from appreciating but left the PBoC with a bunch of toxic dollar assets lying around.

Luckily for them, the Fed eventually ended QE and the dollar appreciated. So it didn't really hurt the PBoC.

But now, the dollar appears to be topping out. So why should the PBoC hang on to a bunch of dollars that are only going to fall in value? Shouldn't they spend the dollars to buy back their own currency so that the Yuan stays strong?

Why is there a problem here?

When I hear Rickards talk about this, he seems to think that China is going to keep burning through its dollars until it gets well below the $2 trillion it had before QE. But I just don't see how that's going to happen. The dollar will collapse in value long before then. And at that point, China will be fighting deflation, not inflation.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5070
the buck topping out

Tom-

Money is fleeing China right now.  The Chinese people themselves are voting with their RMB.  I trust the judgment of the people on the ground, and they are bailing out - likely in advance of the Chinese banking system cleanup event which is coming either this year, or next year.  My guess: Chinese leadership will wait for some unpleasant global catastrophe to strike, then they will blame their banking system problems on that global catastrophe, and at that point they'll pay the price and do what's necessary to recapitalize their banks.  The money printing they'll need to do to fund that recapitalization will almost certainly result in a massive, overnight depreciation of CNY/USD.  CNY down, dollar up.

I also disagree with your "dollar is topping out" thesis.  When the EU breaks up, which I believe is a likely near term event, the buck will scream higher.  We'll probably see a 20% move; USD=120.  If you are placing short-dollar trades based on your dollar-is-confetti thesis, I really hope you aren't using leverage.  I believe that what happened with GBP during BRExit is very likely to occur with EUR/USD.  If such an event occurs, stops will not help.

I do agree that the dollar will turn into confetti at some point, but only after all the other major currencies go through their respective trips through the valley of death.

The only risk to my prediction: civil war in the US. I didn't think this was even a possibility last year, but with the CIA now actively trying to remove Trump from power, I've changed my mind.  Its possible, although in my opinion, less likely than an EU breakup.

Luke Moffat's picture
Luke Moffat
Status: Gold Member (Offline)
Joined: Jan 25 2014
Posts: 364
Devaluation
davefairtex wrote:

I think Rickards makes sense if you add a timeframe to each phase.

China is importing gold with an eye towards having a strong currency in the long term.

China is preparing for a devaluation to fix their banking problem - in the short term.

Yep, that was my take on it as well. As to the actual devaluation you're probably right - wait for a disaster to strike elsewhere then announce the 'response'.

Regarding the 'but not here' indication on your chart I suspect all that movement was Brexit related. But I take the point, the correction wasn't as deep as the first two. 

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