PM Daily Market Commentary - 7/3/2017

davefairtex
By davefairtex on Tue, Jul 4, 2017 - 2:14pm

Gold plunged -21.90 [-1.76%] to 1219.50 on very heavy volume, and silver dropped -0.52 [-3.10%] to 16.11 on moderate volume. Most of the plunge occurred before the US market opened; it looked as if the Europeans were bailing out of gold, silver, and treasury bonds once again today. The half-day in the US didn't help, as the US traders have been the dip-buyers. As a result, everyone who might have bought the dip was on holiday for the 4th of July holiday in the US, and gold closed almost at its day lows.

The selling in gold was relentless today, making a new low to 1218.00, and the bounce off the day low was almost non-existent. The selling stopped at a prior low/support level for gold at roughly 1220, which dates back to mid-May. Candle print was a bearish strong line, which is probably not a low. Gold's forecaster plunged much deeper into bearish territory, down -0.52 to -0.84. That's pretty unpleasant. If gold loses the 1220 level, the next (USD) support we have is down around 1200.

A fairly strong dollar rally (+0.54) was certainly not helpful either. The falling Euro was keeping USD gold from plunging too rapidly, but that party ended today.  If the buck keeps rallying and they keep selling gold over in Euroland, gold could go a whole lot lower still.

Open interest at COMEX for GC fell -1,529 contracts. I expected more short covering after this move lower.

Rate rise chances (Dec 2017) moved up to 51%.

Silver fell harder than gold, making a new low to 16.07 before bouncing back feebly. The opening black marubozu almost certainly doesn't mark a low here. Silver's 3-day forecaster fell a huge -0.71 points, putting silver deep into a downtrend. If round number 16 doesn't hold, its 15.85, and then round number 15, at least in USD anyways. We see no good news from silver.

Open interest at COMEX for SI rose +4,837 contracts. It sure doesn't seem like the commercials are closing out their shorts. That's not a good sign.

The gold/silver ratio rose +0.64 to 74.88. That's now bearish.

Miners gapped down at the open and then continued selling off, with GDX off -2.72% on moderate volume, and GDXJ down -3.59% on moderate volume also. GDX broke support, and appears to be on course to re-test the May lows. GDXJ is faring somewhat better, but it too is now below all 3 moving averages. Forecaster for GDX fell -0.33 to -0.82, which is about as bearish as it gets, while the GDXJ forecaster dropped -0.43 to -0.72, also quite bearish. GDX's black marubozu was not even slightly bullish, and neither was GDXJ's closing black marubozu.

The GDXJ:GDX ratio fell, as did the GDX:$GOLD ratio. Bearish.

Platinum plunged -2.28% making a new low, palladium rose +0.51%, while copper fell -0.66%. Copper printed a bearish engulfing, but the candle code rates it as neutral, not bearish. Platinum's bear strong line is definitely bearish. Both palladium and platinum remain in downtrends, while copper is still positive, but fading slightly after today's drop.

The buck probably marked a low today with a two-candle swing low: 57% chance of a reversal here according to the candle code. USD closed up +0.54, closing at 95.96. The dollar forecaster isn't quite bullish yet, but it rose by an impressive +0.61 to read -0.13. The Yen had the most difficult day vs. the buck, dropping -0.93% and making a fairly dramatic new low. Something about Abe and losing a local election. 30 years of stagnation is what you get when you do extend-and-pretend forever and don't let the system clean out all the bad debt.

Crude rallied once more today, up +0.75 to 47.08. Crude has rallied for 7 of the last 8 days. Today's candle print was a closing white marbozu, which probably doesn't mark the top. The forecaster didn't move much, but is reading a still-bullish +0.92. This suggests that the rally will now rise at a constant rate – theoretically anyway. Crude remains quite bullish. Two weeks ago things were doom & gloom, and now we get headlines from oilprice.com that read: “crude exports drop in June”, “is the second shale boom grinding to a halt”, and “US gulf, shale output decline spurs 2% gain in oil prices.” Since I don't have a crystal ball, I try to look through the headlines (both positive and negative) by using the COT report, which showed a high concentration of managed money shorts – which I took to be a (contrary) bullish indication. So far, that has worked fairly well in crude.

That strategy didn't work so well in silver, however!

Before, crude was selling off on good news.  That pattern has now reversed.

SPX rose +5.60 to 2429.01, actually rallying much more strongly than that before fading right at end of day. Candle print was a shooting star, but the code thought it was just neutral rather than bearish. Forecaster ticked higher, and now has a neutral reading for SPX. Energy was the leader (XLE:+1.91%), along with financials (XLF:+1.46%), while tech did worst (XLK:-0.69%). This is the first time in a while that energy equities have actually rallied alongside oil. For the past week, energy equities have lagged oil substantially – this was the first day they did well. A look at the XLE chart will tell you why – it has been nothing but a steady ride downhill, with every rally eventually resulting in failure, followed by a new low.

VIX rose +0.04 to 11.22. Puts remain cheap, but the time to buy seems to be when they hit 10.

TLT continued falling, losing -0.53%, but printing an opening black marubozu that the candle code felt was bullish; a 56% chance of marking the low. That's probably because it looked a lot like a hammer. Forecaster remained quite bearish, at -0.86. TLT remains under pressure, probably from Europe.

JNK plunged -0.51%, dropping sharply back below its 50 MA and printing a 2-candle swing high that has a 57% chance of marking the top. I'm not sure why JNK had such a bad day, but its a warning sign that all is not well. JNK remains in a pattern of lower highs and lower lows, which marks a downtrend. JNK is in the early stages of a longer major term trend change. Pulling back to the weekly chart to provide some context, it seems quite clear that JNK has topped out. JNK is our coal mine canary. When it does this sort of thing, that's a clear sign of risk off.

CRB moved higher again today, up +0.79%. 3 of 5 sectors rose, led by agriculture, which has just gone nuts, up +2.65% just today. PM did worst, down -2.01%.

It was a really mixed up day; energy is doing great, tech is faltering, financials are doing great, but junk debt is dropping, as is TLT and gold – sold relentlessly. Utilities have been sold almost every day for the past 2 weeks. Falling liquidity and expectation of higher rates? With a dose of toppy tech offset by a potential rebound in energy whose fundamentals seem completely untethered to the economy.

A good chunk of gold's problem today was the rebound in the buck. The falling dollar hid the full extent of gold's sell-off to the US gold watchers, and now that the buck has rebounded, today's “standard” 1% sell-off of gold in Euros becomes a -1.76% drop for gold in USD. How long will they keep selling over there? Who knows. Until that gold/EUR chart starts to put in some kind of low, its probably best to watch from the sidelines.

I just had a thought. Perhaps the Europeans really loaded up on gold as a hedge against the ECB's negative interest rate regime. A gold bar looks a lot like cash, in that it is not affected by negative interest rates. If Draghi really is expected to get rid of the negative rates, that would explain both dropping treasury bonds, as well as dropping gold – in Europe at least.

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14 Comments

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 81
Gold and Silver Price Drop of 3 July, 2017

As the price dropped, so did the gold basis from -0.2% to -0.4% and silver basis from -0.36% to -0.92%. We see this as an indicator of selling primarily in futures. There wasn't any real change in our fundamental gold price which barely moved from $1,334 to $1,331 and our fundamental silver price was up 9 cents to $17.94. Similar market behavior to what happened on Monday June 26 at 9am London.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5694
gold basis

Bron-

How do you calculate your "fundamental gold price?"

Maybe I want to calculate it too!

Is what you are saying that spot gold moved down $3, while the front-month GC contract dropped $20?

I don't have access to spot gold historical timeseries (presumably at some location), so maybe I'm out of luck.

I'd love to have an indicator that allowed me to differentiate between what the spot market did and what the futures markets did.

PeakGold's picture
PeakGold
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Joined: Jun 3 2017
Posts: 78
Looks like we are still in a

Looks like we are still in a bear market! Hopefully pick up some more $13.50 silver?

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 382
Lol
PeakGold wrote:

Looks like we are still in a bear market! Hopefully pick up some more $13.50 silver?

I'm hoping we get under $10 for silver and get down to Harry Dent's $400-$700 range or so for gold.  Probably will take a while, but all of the calls for higher PMs are just looking silly at this point.  Silver can't go lower than $mid-16s.  It can't go lower than $16!  It can't get down to last year's lows!  It can't drop below the mining costs!  Lol.

Andrew Maguire was talking about a massive move to the upside in PMs 26 days from 26 days ago (which is today. :) ).  Lol.

But we're still in a bull market for PMs.  Lol

But the dollar sinking will be bullish for PMs.  Lol

But there's so much debt.  Long term, everything's bullish for PMs.  Lol

But China and Russia are buying, and when they have what they want, they'll announce their holdings and the prices will drastically reset higher.  Lol

But geopolitically, we're marching toward war on several fronts.  Black swans are everywhere.  Bullish for PMs.  Lol

Down, down, down we go.  Lol

davefairtex's picture
davefairtex
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Posts: 5694
all the reasons

CR-

I'm with you about all those "reasons to buy gold" that are the standard goldbug "it's gonna go nuts any day now" stories that have been used for a decade now.  COMEX default, any moment.

You notice I don't do a lot of saying what PM can't do.  :)

For whatever reason, the bid under gold and silver have more or less vanished.  The shorts seem to be having their way with the metals right now - and I think its something to do with Europe.

My suggestion is, stay away until the bid returns.

Long term, metals are the best hedge against government misconduct, but for right now, faith in the government remains intact.  In fact, with all the central banks talking about exiting QE, it might be nearing the upper end of that "strong faith spectrum."

I can't explain the whys and wherefores of the price moves - but I know it isn't all manipulation.  If the buyers were there, the manipulators wouldn't stand a chance.

We have an FOMC minutes release coming up at 2pm Eastern.  That usually moves prices, but in which direction, I do not know.

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 382
Agree
davefairtex wrote:

CR-

I'm with you about all those "reasons to buy gold" that are the standard goldbug "it's gonna go nuts any day now" stories that have been used for a decade now.  COMEX default, any moment.

You notice I don't do a lot of saying what PM can't do.  :)

For whatever reason, the bid under gold and silver have more or less vanished.  The shorts seem to be having their way with the metals right now - and I think its something to do with Europe.

My suggestion is, stay away until the bid returns.

Long term, metals are the best hedge against government misconduct, but for right now, faith in the government remains intact.  In fact, with all the central banks talking about exiting QE, it might be nearing the upper end of that "strong faith spectrum."

I can't explain the whys and wherefores of the price moves - but I know it isn't all manipulation.  If the buyers were there, the manipulators wouldn't stand a chance.

We have an FOMC minutes release coming up at 2pm Eastern.  That usually moves prices, but in which direction, I do not know.

Yep, all good points, Dave.  My view on the manipulation is that it is done both for profit and to affect sentiment, which obviously plays a role in keeping buyers on the sidelines, particularly buyers in the west.  Confidence still exists in the system, so that is a headwind as well, as you said.

Post-FOMC, the market hasn't moved much either in equities or metals.

And good point about the COMEX defaulting!  How could I have forgotten that oldie but goodie?!  Here's the obligatory LOL for that one:  Lol

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 81
Fundamental gold price

Dave,

Our Fundamental price attempts to back out speculative forces in the gold market (and speculators primarily use futures because of the leverage) to show the underlying spot physical supply and demand picture. The model behind it is pretty complex using gold basis and other data points and is more of a medium/long term indicator. You can check out historical charts of our Fundamental price vs gold price here https://monetary-metals.com/thought-leadership/data-science-charts/gold-...

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Posts: 5694
gold basis

Bron-

First, I'd like to try to understand gold basis calculation.  You take spot, and subtract the front month futures price to get the contango (or backwardation), adjusted (in some way) by the number of days remaining until the contract roll?  Do I have that right?

Second - does your historical evidence show that the COMEX gold price mean-reverts to your fundamental price?  I.e. is the metric useful in trading?

And - does the gold basis align the with COT report, if at all?

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 81
gold basis & fundamental price

Hi Dave,

Yes, the basis (or carry - buy spot, sell future) is the dollar contango or backwardation converted into a per annum figure based on days remaining on the contract. We have charts for the near contract as well as a continuous basis. We also calculate a cobasis, which is a per annum figure for a decarry trade (sell spot, buy futures). The market price can either be at a premium or discount to our calculated fundamental price. The relationship of the basis, cobasis and fundamental price to other market signals is part of our proprietary trading model, so hopefully you understand why we won't comment further on that aspect.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5694
gold basis

Bron-

Thanks for the info, I appreciate it.  Gold basis is intriguing as an indicator.

Next question.  I'd love to get the timeseries!  Do you know where can I find spot prices that have a closing time that lines up with the COMEX closing time?  I can't very well calculate the basis if I'm not comparing spot - future at exactly the same time.  Or maybe someone already has a pre-calculated gold basis timeseries?

The reason I'm so nosy (besides you bringing it up, which suggested you might be willing to share some details) is that I'm always looking for new indicators to toss into my ML machine and see if it helps me to project prices going forward.  Just recently I added in Open Interest  That seemed to help a fair bit, actually.  Gold basis could be just as interesting.  Now I just need to find the timeseries and I'll be all set to try it out.

----

So about your "gold fair value."  I don't expect you to give out any more details about its calculation, you've already been more than generous, but in terms of efficacy as a trading tool, does COMEX gold seem to oscillate around your "fair market value"?

IOW, I'm not asking how you calculate gold fair value, but rather, I'm asking you if it works, and how well?  :)

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 81
Gold Basis Charts

Hi Dave,

No need to do the calculations, we do them and publish charts. You must have missed the link in my earlier comment. See https://monetary-metals.com/thought-leadership/data-science-charts/, we have charts on our fundamental, basis, GOFO/SIFO, & lease rates for both gold and silver.

We do something a bit more complex than just closing prices, we have licensed over 2tb of intraday data from Thomson Reuters with some heave data science to get clean figures, see http://monetary-metals.com/thought-leadership/data-science-charts/about-... for more info.

We do think it works, as we use our figures in our trading model for our hedge fund.

sdot 54's picture
sdot 54
Status: Member (Offline)
Joined: Jul 7 2017
Posts: 1
Gold point arbitrage still

Gold point arbitrage still exists. It's more accurate for FX  than futures or interest rate arbitrage. The aforementioned contracts were really combined into the calculations parity in paper money. Sight" on demand bills of exchange is the key...

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5694
gold fair value

Bron-

Ok, I needed to actually register to get the near-term charts which helped me out a lot.  And you are also right, I just had to explore a little more thoroughly to sort out how it all works.  You guys provide the answers to all the questions I asked.

It sure looks like an interesting trade is setting up based on your data.

I totally understand about calculating daily values using intraday data, as well as the work that's involved.  I was hoping for an easier answer.  I use intraday COMEX data to get my shanghai premium.  I'm sure its not always accurate, based on all the factors you talk about.  That's some nice work you guys did.  Heavy lifting indeed.  I suspect its better than the old GOFO.

It would be really neat to be able to download some of the inputs to your model as csv files.  Is that on your site somewhere?  If so, I didn't see it.

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 81
csv files

At this time we aren't making the data available for download, the license agreement with Reuters doesn't cover that and there would have to be enough (paid subscription) demand to cover the additional costs Reuters would want (as our figures are derived from their data).

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