PM Daily Market Commentary - 7/5/2017

davefairtex
By davefairtex on Thu, Jul 6, 2017 - 1:26am

 

Gold rose +7.00 [+0.57%] to 1226.50 on extremely heavy volume, while silver dropped -0.05 [-0.31%] to 16.06 on very heavy volume. Gold and silver sold off during the European trading hours, but bounced back once the US hours started, with buyers more interested in gold than in silver. The FOMC minutes revealed nothing substantial about the Fed's plans to reduce its balance sheet.

Gold's plunge in Europe saw gold make a new low to 1216.50, but once the US session started, buyers bought the dip repeatedly through to the close. The FOMC minutes release resulted in a momentary dip in gold which was bought. Gold ended up closing near the highs for the day. Candle print was a bullish harami, which the candle code felt had a 47% chance of marking a low here. Gold forecaster jumped +0.27 points, but the overall reading remains bearish at -0.56.

The dollar ticked up modestly higher, but the move didn't seem to affect price today.

Open interest at COMEX for GC rose +8,872 contracts. That's a big increase.

Rate rise chances (Dec 2017) remain at 51%.

Silver sold off hard during the European session, making a new low to 15.85. Silver didn't make any real progress back up until after the FOMC minutes were released; then, buyers appeared and pulled silver back up almost into the green. Candle print for silver was a hammer, which the candle code found bullish – a 52% chance of marking the low here. That's pretty good. The silver forecaster wasn't impressed, however, and it actually fell -0.19 on the day, dropping down to a very bearish -0.92. Let's hope the forecaster is wrong.

Open interest at COMEX for SI rose +5,767 contracts. It still doesn't seem like the commercials are closing out their shorts.

The gold/silver ratio rose +0.67 to 76.37. That's bearish.

Miners opened lower because of the initial move lower from gold, rallied sharply in the first hour, then sold off, and then came back once more near the close. GDX moved up +1.30% on moderate volume, while GDXJ climbed +1.15% on moderately light volume. The late-day rally in the miners is a positive sign. Candle print for GDX was a bullish engulfing/confirmed NR7, which the code found quite bullish: a 75% chance of marking the low. The forecaster approved, jumping +0.33 and bringing the forecast to a still-bearish -0.49.

The GDXJ:GDX ratio fell slightly, while the GDX:$GOLD ratio rose. That's probably slightly bullish.

Platinum rose +0.50%, palladium fell -0.73%, while copper dropped -0.95%. Platinum's bullish harami might be a low (52% chance), so might palladium's spinning top (46%), while copper printed a three-candle swing high, which looks bearish. More positive than negative in the other metals, by a slim margin.

The buck moved up slightly, up +0.09 to 96.04. Mostly the buck traded sideways in a narrow range. The spinning top wasn't bearish, and the forecaster thought it was great, rising +0.50 to now read a bullish +0.36. The buck continues to slowly recover after last week's ECB-inspired plunge.

Crude was hammered today, dropping -1.43 to 45.65, after Russia said they were not interested in participating in more OPEC oil production cuts. After market close, the API report came out and provided a bullish surprise, with a 5.8 million crude inventory draw. This was good for about a 50 cent move – which basically took crude from down almost $2 to down about a buck-fifty. Candle print was just a long black candle, which the code found to be bearish – a 45% chance of marking a top here. The crude forecaster dropped -0.41 to a still bullish level of 0.51. Crude remains above its 9 MA, but it may well have reversed here. The EIA report will probably prove decisive, at least regarding direction for the next week.

SPX rose +3.53 to 2432.54, initially selling off hard due to the move down in crude, and then coming back a bit to close more or less flat. Energy was stomped (XLE:-2.03%) while tech did best (XLK:+0.99%). Energy lost all its gains from Monday and then some, printing a swing high. Will this mark yet another energy-equity failed rally – one of a long series of failed rallies in this long energy equity downtrend? It will probably depend on what happens with EIA. In spite of tech's rally today, tech remains looking quite weak.

VIX fell -0.15 to 11.07.

TLT rose +0.02% today, managing to find some buyers right at the confluence of the 200 and the 50 MA. Since TLT did not make a new low today, the candle code had no opinion on direction. The TLT forecaster remains quite bearish, although it did tick up +0.11 to -0.75. At least it didn't sell off further.

JNK fell again today, down -0.14% and continuing lower after the swing high printed on Monday. The long black candle probably does not mark a low. JNK continues to signal risk off.

CRB plunged -1.42%, falling mostly because of the big move down in energy (-3.42%). 3 of 5 sectors fell. CRB printed a swing high. Most likely, its near-term fate depends on that EIA report tomorrow.

We might have a low in PM; it is by no means guaranteed, but both the miners and gold are suggesting a 50-75% chance of a reversal in trend. I suspect it will depend on how much more selling pressure comes from Europe. The one concern I have is the commercials, who have apparently not been closing their shorts as they generally do after a big move down.  The buck also looks as though it remains in an uptrend, and that probably won't help PM very much.

Its probably safest to await confirmation tomorrow before jumping back in.

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27 Comments

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 327
Forecaster and Other Thoughts

Dave,

I am probably not reading it correctly, but if the premise with the Forecaster is to buy with ratings meaningfully over 0 and sell with ratings meaningfully under 0, just looking at the charts you posted, when those parameters are met, we almost always see a reversal in the other directions.  It looks like you'd have more success selling when the Forecaster hits +0.75 rather than buying there, for example.  But it's probably me not getting it.  Hit me up with some knowledge, if you have a moment, please.

Also, it's really interesting to see such meaningful moves lower in the metals lately and the Commercials still bearishly positioned.  Big red flag, IMO.

Also, Andrew Maguire's prediction of huge price moves higher, due to massive buy orders hitting the bid, failed to come true once again yesterday.  Now saying that is delayed.  Well duh.  These kinds of predictions hardly ever work out, but it's cool that people still do it, I guess.  Hey, I have a prediction:  Gold to a million in 2 weeks.  Ok, I'm on the clock....

Lastly, if anyone hasn't watched the latest Steve St. Angelo podcast, def check it out.  Very educational.  One thing I took away around PMs is that CBs, according to Steve, can't/won't really push metals prices too far below the production costs, which are $1100-$1200 for gold and around $16 for silver.  A couple of questions I have around this are:

  1. Do we expect production costs to continue to rise over time?  Since the bulk of the costs are energy related, it looks like lower oil prices allow the production costs to be lower.  So oil headed down into the low $40s/$30s seems like it would lower production costs, thus allowing CBs to push the price lower.  But maybe I'm not thinking about that correctly, though.
  2. What would be the consequences for keeping PM prices at or below production costs for an extended period of time?  My guess would be that production would suffer, as mines shut down/miners go out of business.  You'd probably see significant consolidation across the industry.  Am I missing anything?

Anyway, it was a good interview all around.  It will be interesting to see if his prediction around production costs being a floor for the metals turns out to be true.  If that is the case, sub-$1000 gold and sub-$10 silver is out of the question, barring a brief and massive spike down to those areas.  Also, you'd expect to see commercials start to become positioned less bearish imminently.

That's it for now.  Have a great day, everyone!

 

jtietz79's picture
jtietz79
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I don't get it.

NQ is down 1%. Vix is up 12%. Dollar is down. The best gold can do is green $2?

davefairtex's picture
davefairtex
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forecasters

CR-

The forecaster "buy signal" is when it crosses the 0 line.  Sell signal too.  Within the last 15 months, It actually makes a decent amount of money on both gold and silver, less in crude, and it loses money on SPX.

At the core, its a trend following system.  It is attempting to project the ROI over the next 3 days.  It seems to maintain a fair amount of "momentum" and it tends to be wrong right at at turning points, but correct during most of the trend.  It catches up in about a day or two.

If something is trending sideways, you should ignore the forecaster since the back and forth together with the 1-2 day lag will end up losing you a fair amount of money.  I haven't yet figured out how to train it to ignore side-tracking item.  Believe me, its next on my list of things to do.

It only works well with things that trend strongly.

 

Cold Rain's picture
Cold Rain
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Posts: 327
Makes Sense

Thanks, Dave.  That makes sense.  I appreciate the additional context.

davefairtex's picture
davefairtex
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weak gold

jtietz79-

I agree, things do look pretty weak.  See GLD:$XEU and SLV:$XEU: new lows.  My conclusion is that the selling pressure from Europe isn't done yet.  Maybe PM will rally by end of day in the US, but there still seems to be a fair number of sellers over there.

Dunno why, that's just how it is.

 

pat the rat's picture
pat the rat
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Posts: 100
breaking up

At some point paper gold, and real gold will break up; The price of real gold will go up sharply while the price of paper gold will drop like a rock. This will also be true for silver. I do not know when this will happen I only know that someday it will happen.

thc0655's picture
thc0655
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Cracking up

At some point(s), me and my wife's US currency, municipal pensions and Social Security will plummet in purchasing power and/or get slashed in nominal amount due to government and Central Bank foolishness (most of which has already occured, though more continues to accumulate).  It's already baked into the cake and no reasonably possible set of circumstances is going to change that.  It's just a matter of time and the exact look and sequence of events.  At that time, my gold and silver insurance policies will save my bacon.

And even if I'm totally wrong, I'll live happily ever after in today's paradigm. and pass my insurance policies on to my children.

PeakGold's picture
PeakGold
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hmm

I could see $15.50 coming, but this is pretty impressive...

I guess we know what Australia thinks about silver!

vadim_75's picture
vadim_75
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It's too much even for a

It's too much even for a manipulation.)

Any idea what was that?

PeakGold's picture
PeakGold
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Having hit a session high of

Having hit a session high of $16.18 an ounce in early trade, the spot price fell from $16 an ounce to as low as $14.86 in less than a minute, a decline of over 7%.

 

 

Just as quickly it rebounded, although it still remains down 1% for the session.

A fat finger, algorithmic traders and thin market conditions ahead of the US jobs report may have all been contributing factors behind the sudden flurry of activity.

 

https://www.businessinsider.com.au/silver-just-had-a-flash-crash-2017-7

 

It happened at market open in Australia. I would assume it was the result of trading bots over anything else. The price of silver is headed down, they just made it go a bit faster. 

Cold Rain's picture
Cold Rain
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Posts: 327
Lol

@ fat finger glitch.  That excuse is getting a bit long in the tooth.

davefairtex's picture
davefairtex
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silver 8am (JST) smash

Boy, a 5k contract $1.60 move in 1 minute.  I'm not saying its a new record, but it will mess my charts up.  Looking at my 30-sec bars, I see a two-bar move down.  It wasn't just one trade.  And the bounce back up took another 2.5 minutes.

I don't see this happening in any of the other markets I watch.  Not in copper, or natgas, treasury bonds, or oil.  Not palladium, and not platinum.  Only gold & silver see these sorts of events.  I mean, I know goldbugs tend to feel picked on, but in this way, someone really is picking on us!

From what I see in the Open Interest reports, commercials seem to be increasing their short positions rather than decreasing them as would be more usual at this point in the cycle.  Normally as price declines, open interest declines along with it.  But OI has continued to increase all this week.  To me that's not a good sign.

The previous low in silver, dating back to late 2015, was 13.62.  Day low today was 14.34.

Note to self: next time, make sure to put a bid $1.50 under market so I can collect on the rebound.  That would have made me a cool $7500 for each SI contract.

I need to write a trading bot that lets me cash in on all this wild-west market stupidity, buying after the $1.50 drop, and then automatically selling after things return to normal.  If the exchange is going to continue allowing such ridiculous things to occur, I want to make money on it.

Seems like the more silly things get, the more opportunity there is for people who write code to take advantage of anomalous situations to cash in.  A flash-crash trading bot.

Penny551's picture
Penny551
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re: OI

Normally as price declines, open interest declines along with it. But OI has continued to increase all this week. To me that's not a good sign.

I've been interpreting this as Managed Money piling on the shorts and the commercials taking the other side.  Will be interesting to see the CoT tomorrow! 

 

Luke Moffat's picture
Luke Moffat
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Posts: 364
Liquidity in Markets

DaveF,

Is there a danger that such price spikes will lead to a reduction in market participation that we end up with a liquidity problem? I can’t think of anyone who would go long on margin given last night’s antics – not unless you plan on sleeping anyway.

Does any of your code look at liquidity (which I’m assume is measured by market cap but I don’t actually know)? Another thought, would Commercials even go long themselves after wiping everyone out/destroying the market as there would be no one to re-enter and force prices higher?

Cheers,

Luke

davefairtex's picture
davefairtex
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Posts: 5072
tea leaves

I've been interpreting this as Managed Money piling on the shorts and the commercials taking the other side.  Will be interesting to see the CoT tomorrow!

You're an optimist, sir.  :)

Here's a 10-point correlation vs the 2 COT report data lines: managed money shorts, and commercial shorts shorts look to be relatively uncorrelated - if anything, negatively correlated.

 

davefairtex's picture
davefairtex
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Posts: 5072
liquidity & smashes

Luke-

No, I don't focus on liquidity.

The measure, I suspect, would include how narrow are the spreads, as well as the depth of the order book.  Open interest might be another measure too.  Total number of managed money longs over time, maybe?

Certainly carrying a GC or SI position long overnight would not be much fun, especially if you were on full margin.  $5000 to get in, lose $7500 in 15 seconds.

Luke Moffat's picture
Luke Moffat
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Posts: 364
Trade Volumes and Order Book Depth

Dave,

I’ve copied the below from here. It refers to a ‘volatility event’ in the US Treasury market. You might find the section highlighted in italics of some use.

Bond Market Liquidity and Mutual Fund Investing in 2015 PART 6 OF 10

Analyzing the US Treasury Market Events of October 15, 2014

By David Ashworth | Oct 19, 2015 4:41 pm EDT

Treasury yields

A look at the graph below, which shows the day-end yield levels across maturities on October 15, 2014, should make you wonder about the title of this part of our series. But these events happened intra-day and were important enough for five institutions to issue a “Joint Staff Report: The US Treasury Market on October 15, 2014” in July 2015. It’s also closely connected to our core topic of bond market liquidity.

What happened that day?

According to the report cited above, “in the narrow window between 9:33 and 9:45 AM ET, yields exhibited a significant round-trip without a clear cause, with the ten-year Treasury yield experiencing a 16-basis-point drop and then rebound. For such significant volatility and a large round-trip in prices to occur in so short a time with no obvious catalyst is unprecedented in the recent history of the Treasury market.”

The report further informed that the ten-year benchmark yield witnessed a 37 basis-point trading range on October 15, 2014, even though it closed only six basis points lower than its opening level. Larger intra-day moves have occurred only thrice since 1998.

Another interesting aspect of the move was that it wasn’t driven by any significant indicator release or policy announcement. On the other hand, the other three events mentioned above were influenced by policy announcements.

Findings and causes for worry

Although the report was released nine months after the event, the findings have been considered preliminary—the report doesn’t reach a conclusion. Instead, it states that “in sum, record trade volumes, a decline in order book depth, changes in order flow and liquidity provision, and notable and unusual market activity together provide important insight into the factors that may have contributed to the heightened volatility, decreased liquidity, and round-trip in prices on October 15.”

This event has been a primary driver of worries for market participants who worry that a rate hike—whenever it finally occurs—will strain liquidity from the US Treasury market. A rise in Treasury yields would lead to a fall in the returns of mutual funds like the Prudential Government Income Fund Class A (PGVAX) and the American Funds US Government Securities Fund (AMUSX) due to the inverse relationship between yields and prices.

For me the takeaway points for a spike or round trip are order book depth and record trade volumes. You might even call it a ‘targeted order book assassination’ where record trade volumes are used to screw with prices. Do the big banks get oversight of the order book? Is that even legal?

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

Depth of market data is also known as the order book, since it shows pending orders for a security or currency. This data is available from most exchanges for a fee.

Guess you have to be in the club...

From Investopedia

davefairtex's picture
davefairtex
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Posts: 5072
nonfarm payrolls today!!

I forgot to mention, we have Nonfarm Payrolls today!  Coming up in 5 minutes!

Happy NFP Friday. 

vadim_75's picture
vadim_75
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Posts: 48
very strange

Gold looks suspiciously strong despite flash crash, strong payrolls, falling bonds and yen.

Maybe even it's worth closing the shorts temporary.)) 

 

Luke Moffat's picture
Luke Moffat
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Posts: 364
Relax

Normal service has been resumed

vadim_75's picture
vadim_75
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Posts: 48
Yep, seems so. )) Still i'm

Yep, seems so. )) Still i'm surprised how hard buyers fought considering...

Let's see how it ends today.

Luke Moffat's picture
Luke Moffat
Status: Gold Member (Offline)
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Posts: 364
Indeed, the frustrating thing

Indeed, the frustrating thing is that the RSI(10) on the XAG/GBP and XAG/EUR is just screaming 'buy'. Still, I'm learning to stalk like Tom :)

davefairtex's picture
davefairtex
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Posts: 5072
screaming buy

Yeah that EUR/Silver chart is looking ridiculously oversold at this point.  Of course, it can always drop some more.  Maybe you can convince your countrymen to stop with the selling?  :)

Did you notice how the constant downside pressure in PM stopped as soon as the EU trading session ended?  They must not have liked the NFP report result.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
quick comment on the COT

Looks as though someone was right about the commercials covering and managed money loading up short.  Unfortunately, it wasn't me!

Silver:

Managed Money net position -10.67k.  Its a big move, and it brings us back to Jan 2016 levels.    Managed money is virtually flat (i.e. longs = shorts) for the first time in 18 months.  Bullish.

Commercials had a +10.98k change to their net position, also a big move, also rivaling where they were back in January 2016.  Its bullish.

Gold:

Managed Money Net -39k, same level as it was in Dec 2016 - i.e. our last major low.  Bullish - but not quite as bullish as silver.  The +24k shorts puts the MM short collection clearly in the bullish area.  The snapback from the MM short covering rally should be immense - when it happens.

Commercial net +42.6k, now at levels last seen during the rally in early 2016.  Commercials covered 28.9k shorts.  The short position isn't all that low, but they have more longs than usual right now, +13.7k just this week.

Bottom line: silver is very bullish, gold is mostly bullish.  Silver's MM shorts are at an all time high right now - 60k contracts.  Will the commercials be able to resist again this week?

Perhaps that flush earlier today was in preparation for the grand move in the other direction?

If managed money actually wins this struggle, I will be very surprised.  They are almost net short, which is a massive change from just 3 months ago.

Penny551's picture
Penny551
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Posts: 149
Re: CoT

 

 

 

vadim_75's picture
vadim_75
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Posts: 48
a bearish thesis

I don't believe gold could reverse without stronger yen and lower real interest rates.

Take a look at tips chart, does anyone see a reversal there? Indeed.

Lack of inflation won't help this time since Fed doesn't care, spike of inflation won't help either - will be met with more rapidly rising rates, but i doubt it's very likely considering the oil price.    

Yesterday Kuroda's "whatever it takes" combine with rising rates across the board put huge pressure on yen, and i struggle to see yen higher in the near future.

 

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