PM Daily Market Commentary - 1/9/2017

davefairtex
By davefairtex on Wed, Jan 10, 2018 - 5:41am

Gold fell -7.60 [-0.58%] to 1313.60 on moderately heavy volume, while silver dropped -0.16 [-0.96%] to 17.00 on heavy volume. The buck moved higher, but it rose only +0.17%, so this move didn't account for the drop in PM.

Gold fell steadily during Asia and London trading, bouncing at the US open, but then fading a bit into the close.  The opening black marubozu candle was a bearish continuation, and the gold forecaster fell -0.38 to -0.39. That's a downtrend. While gold has yet to print a swing high, and it remains above its 9 MA, yesterday's sell signal is looking more accurate as time passes.

COMEX GC open interest rose by +9,406 contracts today. Rising open interest alongside a falling price suggests that the commercials are helping to push gold prices lower.

Rate rise chances (March 2018) rose to 67%.

Silver dropped steadily for much of the day, making a new low to 16.94 not long after the US open.  The bounce back was a bit anemic, and silver faded into the close.  Silver printed an opening black marubozu, like gold, which was a bearish continuation. Silver forecaster dropped -0.07 to -0.23. Silver also printed a 4-candle swing high, and dropped below its 9 MA. Those are all signs of a trend change, although the forecasted slope of the downtrend isn't that steep at the moment.  Silver's fall stopped right at the 200 MA.

COMEX SI open interest rose +1,273 contracts today.

The gold/silver ratio rose +0.30 to 77.27. That's bearish.

The miners gapped down at the open; the senior miners bounced back, while the junior miners tried to rally but the rally faded as the day wore on. GDX fell -1.32% on heavy volume while GDXJ dropped -2.00% on moderately heavy volume. XAU forecaster fell -0.11 to -0.36, dropping deeper into a downtrend.  Miners are selling off at this point - but notice the drops are still in the 1-2% range.  Back during the bad old days of 2013-2015, miners would be off 5-6% on days like today.  I think that's an important change in behavior - and speaks towards a longer-term bullish attitude towards the PM sector overall.

Today, the GDXJ:GDX ratio fell, as did the GDX:$GOLD ratio. That's bearish.

Platinum fell -0.64%, palladium rose +0.03%, and copper dropped -0.28%. Platinum printed a swing high (45% bearish reversal), but it remains in an uptrend according to the forecaster (down -0.17 to +0.17). Copper and palladium both remain in uptrends too.  The forecasters take inputs from lots of different places; why is copper forecaster bullish even with 6 of 7 days trading lower?  Copper forecaster even rose today, up +0.10 to +0.19.  I don't know why that is.  The models are too complicated.  Copper's model, for instance, relies on inputs from 5 other commodities, changes in interest rates, a couple of currencies, and 6 different ratios (i.e. gold/copper, SPX/copper, etc).  But when they are all in uptrends, even after the charts look like a trend change has already happened, that suggests strength to me in the overall complex.

The buck moved up +0.16 [+0.17%] to 92.21. The long white candle was a bullish continuation, and the forecaster moved up +0.11 to -0.07. That's pretty close to a buy signal for the buck, which moved back above its 9 MA just today.  Notice how the bearish reversal in PM appears to be aligned with the bullish reversal in the dollar.

Crude shot up +1.54 [+2.49%] to 63.43, breaking out to a new high. The API report after market close was bullish: crude -11.1m, gasoline +4.3m, distillates +4.7m. The crude forecaster jumped +0.38 to +0.58, which is a strong uptrend. What is driving prices? The extreme cold in the US drives heating oil (distillates) consumption, while concerns about Trump renewing sanctions on Iran along with Venezuela's economic collapse are “geopolitical lottery tickets” which are probably supporting prices also. https://oilprice.com/Energy/Oil-Prices/Is-An-Oil-Price-Correction-Overdue.html

SPX rose 3.58 [+0.13%] to 2751.29, another all time high. SPX printed a northern doji candle, which had a 43% chance of marking the top. A large number of candles, when RSI is this high (daily=86, weekly=91) will give off reversal readings like this. Forecaster fell -0.21 to +0.77. That's still a strong uptrend. Sector map shows sickcare did best (XLV:+1.18%) along with financials (XLF:+0.78%) while utilities trailed (XLU:-0.98%). I'm not sure yesterday's swing low in XLU will hold.

VIX rose +0.56 to 10.08.

TLT fell -1.34%, making a new low. TY was also hit hard, falling -0.41%, dropping through support, and looking very bearish. Forecaster fell -0.24 to -0.64, which is a strong downtrend.  The 10-year (TY) is coming up on an important support level: in yield terms, that's 2.60%. Various commentators have opined that a break above 2.60% would be the indicator that the 30 year bond bull market was over. Current 10-year treasury yield is 2.55%, and it rose 0.07% just today. So that's not far away at all.  In the monthly chart below, you can see the 2.6% yield line.

If this level cracks, and traders panic out, it would be a very big deal.  The bond market is immense, and the US 10-year treasury (TY) is the benchmark for yield around the world.  An old trader expression: "Equities are for show, bonds are for dough."  A big drop in the bond market would have the equivalent economic impact of the Fed raising rates - by surprise.

JNK fell -0.24%, printing a swing high which had a 59% chance of marking the top. JNK's forecaster dropped -0.46 to -0.05, which is a sell signal for JNK. It appears that if the great bond bull market is over, JNK will get nailed along with all the other bonds.

CRB rose +0.64%; 3 of 5 sectors rose, led by energy. Just eyeballing the charts, industrial metals, PM, agriculture, and livestock are all correcting a bit at this point. Its not clear how serious a correction this will be.

The buck continues moving slowly higher, and the pace of the selling in the bond market is increasing. We had a relatively important break of support in bonds today on the daily chart which could lead – maybe even this week – to a breakout above the 2.60% yield for the 10-year treasury. Why do we care? Well, with the 260 trillion in debt worldwide, falling bond prices means rising rates - which hits everyone's bottom line directly. What's more, the size of the debt overhang acts as a multiplier for each basis point of rate increase.

The fundamentals are pretty bearish for bonds right now: the Fed is seriously starting to roll off its balance sheet, the US government is looking to borrow more in order to fund tax cuts, while the payrolls report is showing slowly increasing signs of wage inflation. Increasing bond supply, dropping bond demand, rising inflation → sell bonds.

What does this mean for gold? I think it will be lifted higher along with commodity prices. If we assume commodities are entering a new bull market, then gold and silver should follow along, as they did back in 2003-2008. That's the theory anyway.  And all that bond money will have to go somewhere.  Equities, at all time highs?  Or commodities?  My bet is commodities.

This suggests that the corrections we see will (probably) be buying opportunities.  If we start seeing 5-6% daily drops in the miners I'll re-assess, but until then...I think we're in a buy-the-dips mode for PM.

That's not to say buy today; I think this correction probably has further to go.

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9 Comments

Giant Elk's picture
Giant Elk
Status: Member (Offline)
Joined: Dec 13 2014
Posts: 18
Bond Market (or lack of)

 A very big deal indeed. Interesting observation about the miner selloffs.

I wonder, and I haven’t a clue about this, how much will a sell-off in bonds be cushioned by the fact that Central Banks have such a large holding in the market?

I mean, if inflation is posing risks and the free market sells off bonds in response, does there come a point where CBs’ existing holdings keep the demand level from falling enough to cause a price correction of significance? I know they can always come along with QE whatever but as things stand, with no change in policy is there a limit to the scale of a sell-off?

I like to think the free market still has enough power to give pricing effect to risk, whether inflation or political risk (or a change in sentiment).

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5526
holdings vs a bid

Giant Elk-

So if traders panic out of bonds, a "large holding by central banks" won't put a bid underneath the market.

That's because they've already done their buying.  It requires new buyers to absorb a big new bunch of supply.  If the central bankers just stand by and watch, and they don't start buying again, the market could most definitely get hammered, depending on just how enthusiastic the selling got.

Here's one big buyer that is considering not buying: China.  I'm not sure what they'd buy for their forex reserves; Euro bonds with negative yields, perhaps?  If not USD reserves, which currency do they pick?  The Ruble?

https://www.bloomberg.com/news/articles/2018-01-10/china-officials-are-said-to-view-treasuries-as-less-attractive

And here's Bill Gross talking his book: he's short.

https://www.bloomberg.com/news/articles/2018-01-09/u-s-10-year-yield-climbs-as-boj-action-spurs-exit-speculation

Giant Elk's picture
Giant Elk
Status: Member (Offline)
Joined: Dec 13 2014
Posts: 18
That’s good to hear. It is

That’s good to hear. It is entirely logical but there are people who believe that interest rates won’t go up because they won’t be let go up. OK so maybe Central Banks will step in again but their integrity will be gone if they do while CPI inflation ticks up. Their whole policy revolves around inflation targeting. Stimulating the bond market while curtailing inflation are in complete conflict. (Arguably bond buying does not affect CPI but it’s a weak argument, productivity has just been crap in recent years). A bond sell-off with inflation is the perfect storm here. Eurozone must be a risk – if the currency reverses last year’s gains (10+%) inflation’s gotta pick up.

 

Regarding China’s dilemma this comes back to whether bondholders are investors for relative value or for return. Clearly it’s not the latter. Meaning the market is extra sensitive to momentum changes and sentiment changes. Saying that, they did reduce their holdings by nearly 20% in 2016 and didn't cause much stir so there is (was) a bid. Will watch with interest (no pun intended).

Giant Elk's picture
Giant Elk
Status: Member (Offline)
Joined: Dec 13 2014
Posts: 18
China's other option?

Another dumb question. Can China simply pay down it's own debt? I keep reading how she is the most indebted nation on the planet. Would there be a currency effect or something?

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5526
why buy bonds?

PBOC buys treasury bonds as a place to park currency reserves.  So do all the other central banks in the world.  Why?  Central banks holds currency reserves to both deal with trade, as well as a mechanism of stabilizing (manipulating) the currency in one direction or another.  CNY rising too fast?  Accumulate dollar currency reserves (and print CNY to buy them).  CNY falling too fast?  Sell dollar reserves for CNY (and reverse-print).

Given that, what currency should she pick?  What are the options?  Things get more iffy the farther down the list you go:

  • USD
  • Euro
  • Yen
  • Pound
  • Swiss Franc (a tiny market, with negative yields)
  • Canadian Dollar
  • Aussie Dollar
  • India Rupee
  • Russian Ruble

And things just get worse from there. 

That's probably why China is interested in gold - but the gold market is a lot smaller than, say, USD.  And gold doesn't yield anything, unlike treasury bonds.

It is better than the swiss franc, which has a negative yield.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5526
TY reversal?

Depends on what my code shows tomorrow - but using the Mk 1 eyeball, I see a hammer candle (or a doji - depends on how we close) on good volume, which could well be a reversal bar.

Utilities still look sucky (down -1.09%) and for me, they are the tell.  So maybe bonds bounce for a day or two - might make a good short entry point then.

How do you short bonds?  The always-exciting TBT.  It has an unpleasant decay to it, since its a 2x inverse bond fund, so don't hold it too long and/or forget about it.

You can always just short TLT directly too.

Not financial advice, etc.

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 374
davefairtex wrote: Depends
davefairtex wrote:

Depends on what my code shows tomorrow - but using the Mk 1 eyeball, I see a hammer candle (or a doji - depends on how we close) on good volume, which could well be a reversal bar.

Utilities still look sucky (down -1.09%) and for me, they are the tell.  So maybe bonds bounce for a day or two - might make a good short entry point then.

How do you short bonds?  The always-exciting TBT.  It has an unpleasant decay to it, since its a 2x inverse bond fund, so don't hold it too long and/or forget about it.

You can always just short TLT directly too.

Not financial advice, etc.

Of course.  Another big market gets right up to a key technical level and reverses.  What a shock.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5526
no

I don't see things that way.

Bond market is way too big for trickery and bots and whatnot.

Sure this could be PPT or Fed buying.  But they don't have enough surreptitious firepower to keep a real sell-off from happening.  At least that's my operating assumption.

Reading the tea leaves, you have to ask yourself, why did the Fed want this normalization to be so boring it was like watching paint dry - if they had all the power they needed to stop any sell-off?

They are scared of markets.  That's how I read it.  I'm still using XLU as my tell.  Down -1.19% today.

Money is fleeing yield.  Even if PPT (or whomever) has jumped in here, today, it doesn't have enough firepower to stop a real sell-off. 

Think: taper tantrum.

 

charleshughsmith's picture
charleshughsmith
Status: Platinum Member (Offline)
Joined: Aug 15 2010
Posts: 718
$500 B a day in Treasuries alone

ZH had a piece on China's buying/selling of Treasuries that noted China appears to have lightened  $30Billion in Dec, but daily volume of US Treasuries alone is $500B. Add in yen-bonds, euro-bonds etc. and you get a market that trades the whole Fed balance sheet each week.

So to Dave's point: bond market is too big and liquid to be moved for more than a few hours unless a central bank is able to print up $10 trillion in a month or two. IOW central bnk money creation at $200B/month (due to be tapered) isn't near enough to counter a private-sector sell-off, coupled with buyers like China no longer running trade surpluses that needed to be parked in UST.

This could trigger a real cascade lower in stocks...

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