PM End of Week Market Commentary

davefairtex
By davefairtex on Sat, Feb 3, 2018 - 3:30pm

On Friday gold plunged -16.70 [-1.24%] on heavy volume and silver was smashed -0.66 [-3.81%] to 16.55 on extremely heavy volume. The nonfarm payrolls report set the move in motion; the buck rallied sharply/the Euro sold off, and that's all the commercials needed to start hammering the price of the metals lower.

At least, that's what I think happened; on Friday gold's open interest rose +1,676 and silver's OI rose a massive +6,935 – 1078 tons of paper silver. From my observation when prices fall “organically” the commercials cover, ringing the cash register, which results in falling open interest. That's not what happened Friday, and that's why I think PM was helped in its move lower.

This week the PM sector map is a sea of red; juniors led seniors down, silver led gold down. Everything is below the 9 MA, and more than half the items are below the 50. Silver and the junior miners are even below the 200 MA. The hints of correction last week turned into the real deal this week.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Copper $COPPER -0.56% 18.62% falling rising rising falling ema9 on 2018-02-02 2018-02-02
Gold $GOLD -1.00% 9.67% rising rising rising rising ema9 on 2018-02-02 2018-02-02
Platinum $PLAT -1.73% -0.68% falling rising rising rising ema9 on 2018-02-02 2018-02-02
Palladium $PALL -3.87% 37.61% falling rising rising falling ma50 on 2018-01-31 2018-02-02
Silver $SILVER -4.80% -5.32% falling falling falling rising ma50 on 2018-02-02 2018-02-02
Senior Miners GDX -5.91% -6.03% falling rising falling rising ma50 on 2018-02-02 2018-02-02
Silver Miners SIL -6.82% -21.11% falling rising falling rising ma50 on 2018-02-02 2018-02-02
Junior Miners GDXJ -7.19% -17.03% falling rising falling rising ma50 on 2018-02-02 2018-02-02

Gold fell -13.50 [-1.00%] on the week, which made it the best performing asset in the PM group. All the damage happened on Friday following payrolls. Friday's bearish engulfing was in fact bearish (42%), and it was also a lower high, which signals the start of a longer-term downtrend. Gold also ended the week below its 9 MA, which is bearish. Gold's forecaster plunged -0.87 to -0.43, which was a sell signal for gold. While gold's weekly forecaster remains in an uptrend – barely – the preliminary monthly (February) forecaster is now in a downtrend.

The March rate-increase chances rose to 78%.

COMEX GC open interest fell by -14,582 contracts this week.

Silver plunged -0.84 [-4.80%] to 16.55, with most of the pain happening Friday following payrolls. Silver smashed through all 3 moving averages, retracing almost 40% of the December-January rally in one day. Silver's forecaster dropped -0.71 to -0.82. The move also yanked both the weekly and monthly forecasters back into downtrends. It is all bad news for silver.

The gold/silver ratio rose +2.10 to 80.65, which is very bearish.

COMEX SI open interest rose +7,940 contracts. Someone is going short; that's 1,234 tons of new paper silver.

The miners had a very bad week; the foreshadowing was a sell-off on Monday that took XAU through its 9 MA, and then on Friday XAU smashed through the other 2 moving averages, ending the week in a steep downtrend. XAU forecaster closed the week at -0.59. Both ETFs printed opening black marubozu candles which had a 44-46% chance of being a low. Sometimes a downtrend just stops after such a bad day. XAU weekly and monthly forecasters are both in downtrends.

The GDX:$GOLD ratio plunged -4.87%, while the GDXJ:GDX ratio fell -1.35%. That's very bearish.

USD

The buck spent most of the week moving lower; it waited until Friday to make its move, closing up +0.11 [+0.12%] to 88.89. Friday's bullish engulfing pattern had a 46% chance of marking the low; the forecaster ended the week at -0.06, which is right on the edge of a reversal. The buck has yet to cross its 9 MA, but it is quite close. Both weekly and monthly forecasters remain in downtrends.

US Equities/SPX

SPX plunged -110.74 [-3.85%] to 2762.13. Half of the damage happened on Friday [-59.85] following payrolls. Friday's candle print was a rare bearish strong line – which does not mark a low. Forecaster issued a sell signal for SPX on Tuesday, and ended the week at -0.79, which is a strong downtrend. Weekly forecaster issued a sell signal this week as well, while the monthly remains in an uptrend. For now anyway.

Sector map saw most every sector down at least 3%, with homebuilders and energy down almost 6%. XOM reported bad earnings, which caused the rest of the energy market to sell off too. Homebuilders definitely didn't like the rise in the 10-year (+19bp this week alone), but most of the other sectors were down hard too. Although the proximate cause seemed to be the payrolls report, I don't actually think it was payrolls that caused the trouble. It just felt as though the market wanted to drop. I'm going to blame the rise in the 10-year for that. The move higher in long rates has been both unexpected, and very strong. Strong moves like this act just like a surprise Fed rate increase.

VIX screamed higher, up +6.23 to 17.31. That's the highest VIX value in 15 months.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Telecom XTL -1.24% -1.34% falling rising falling rising ema9 on 2018-02-02 2018-02-02
Utilities XLU -2.27% 2.13% falling falling falling falling ema9 on 2018-02-01 2018-02-02
Financials XLF -2.68% 26.28% falling rising rising rising ema9 on 2018-02-02 2018-02-02
Cons Discretionary XLY -3.13% 24.81% falling rising rising rising ema9 on 2018-02-01 2018-02-02
REIT RWR -3.26% -5.56% falling falling falling falling ema9 on 2018-02-01 2018-02-02
Industrials XLI -3.31% 23.50% falling rising rising rising ema9 on 2018-01-30 2018-02-02
Cons Staples XLP -3.82% 7.24% falling rising rising rising ma50 on 2018-02-02 2018-02-02
Technology XLK -3.92% 32.01% falling rising rising falling ema9 on 2018-02-02 2018-02-02
Healthcare XLV -5.08% 22.19% falling rising rising rising ema9 on 2018-01-30 2018-02-02
Materials XLB -5.66% 16.29% falling rising rising falling ma50 on 2018-02-02 2018-02-02
Gold Miners GDX -5.91% -6.03% falling rising falling rising ma50 on 2018-02-02 2018-02-02
Energy XLE -6.52% -0.43% falling rising rising rising ma50 on 2018-02-02 2018-02-02
Homebuilders XHB -6.78% 25.79% falling rising rising falling ma50 on 2018-02-02 2018-02-02

Gold in Other Currencies

Gold fell in every currency except the Yen, dropping -13.32 in XDR.

Rates & Commodities

Bonds were at the center of the action this week. TLT was absolutely smashed, dropping -3.24%, making dramatic new lows on Thursday and Friday. Forecaster ended the week at -0.66, which is a strong downtrend. TY fell also, dropping 4 days out of 5, down -1.10%, making new lows. TNX (10-year yield) shot up 19 bp to 2.85%. Another week of this, we'll be through the psychologically important 3% level for the 10-year. If we break that, things could get very disorderly in the bond market. Any leveraged bond player is probably getting very nervous right about now.

Martin Armstrong likes to say that a stock market crash causes a recession, but a bond market crash causes a depression. That's because the bond market is so much larger – so a crash causes a great deal more damage.  Note in the chart below, the last "month" bar (February) is only 2 days.  If it continues at this rate, how big will that bar be?

JNK was hammered too, dropping -1.76% and making a new low that dates back to early 2017. The BAA weekly and monthly forecasters screamed higher, with the weekly chart looking particularly worried rising +0.65 to +1.02. That said, the IEF:JNK ratio hasn't turned down yet; the selling in bonds is not yet emphasizing dumping the junkier versions, so “risk off” isn't as pronounced as it might appear.

CRB fell -1.54%, with 3 of 5 sectors dropping, led by energy (-2.33%). Natgas was the big loser, falling -10.36% this week alone. Natgas doesn't like warm weather, and apparently that's what the near-term weather forecasts are calling for.

Crude fell -1.22 [-1.84%] to 65.02. Mostly it looked as though crude chopped sideways; there was some concern following a bearish API report on Tuesday, but Wednesday's EIA report wasn't quite as bad (crude +6.8m, gasoline -2m, distillates -1.9m) and that got the market to bounce back and erase its losses. Friday crude sold off along with everything else, ending the week below its 9 MA. Forecaster was back and forth all week, issuing a sell signal on Friday, closing the week at -0.14. The weekly forecaster also issued a sell signal.

Physical Supply Indicators

* SGE premiums over COMEX are at +0.59.

* The GLD ETF tonnage on hand fell -6.79 tons, with 841 tons in inventory.

* ETF Premium/Discount to NAV:

 PHYS 10.83 -0.65% to NAV [down]
 PSLV 6.13 -2.24% to NAV [down]
 CEF 13.30 -3.49% to NAV [up]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows no premium for gold and a 1-2% premium for silver.

* Big bars premiums were: gold [1kg] 1.13% and silver [1000oz] 3.56%.

Futures Positioning/COT

In gold, the commercial net position rose 9.5k contracts, which is a small change. That was 16k fewer shorts, and 6.7k fewer longs. Managed money net fell by 2k contracts, which was 5.4k fewer longs, and 3.4k fewer shorts. There are certainly enough commercial shorts to mark a COT top – and perhaps enough managed money longs to rinse out as well.

In silver, the commercial net fell by 5.8k, which was 2k new shorts, and 3.8k fewer longs. Managed money net rose by 2.8k, which was 6.5k fewer shorts and 3.7k fewer longs. I can't figure out what is going on with silver; there aren't that many managed money longs to rinse, and not so many commercial shorts to cover. It shouldn't be a top.

Gold Manipulation Report

No after hours spikes this week.

Grey Swan Status

  • Italian Elections: Anti-Euro M5S (28.15%) is leading vs the PD (23.17%), with M5S increasing its lead this week. A combination of FI + LN (both semi-anti-Euro parties) are at 29.85%. There are 4 more weeks until the elections.

  • In Germany, the SPD moves closer to a deal with the CDU (apparently by caving in on the migration cap of 220,000 per year: https://www.reuters.com/article/us-germany-politics/german-parties-edge-closer-to-coalition-with-migration-deal-idUSKBN1FM1N3), but a new poll shows the SPD at 18%, which is a 2% drop over their recent election results. The left appears to be disintegrating: http://www.dw.com/en/is-germanys-political-left-coming-apart-at-the-seams/a-42144612 which calls into question just how long the Grand Coalition can govern the country.

  • Mueller Investigation: Republican memos, Democrat counter-memos – where does the truth lie? How much chicanery was used to wiretap Trump's campaign worker using a FISA warrant – renewed 3 times by Comey, whom Trump eventually fired? If the FISA warrant really was a scam run by top people in the Obama FBI (many of whom remain in place today), does that mean the whole collusion case goes away? Probably not – it has too much momentum. Armstrong believes that impeachment is the biggest black swan for the US equity market.

Summary

It looked to me that bonds were the source of all the troubles this week; the large losses in long-dated treasury bonds (TLT:-3.24%) should remind us that long-duration bonds are not “safe assets” at all - unless they are held to maturity, and even then, there is both currency and default risk. You will always get your money back, unless of course there is a default, or a forced maturity extension. In the meantime, the longer the duration, the more current pain you will take.

I was wondering what would pop the equity market bubble; it looks like the falling bond market did just that. After hinting at a downtrend earlier in the week, it all finally caught up with the market on Friday: everything was sold – gold, silver, miners, copper, platinum, oil, equities, and bonds of course too.

Gold in Euros continues to fall, and since the buck is moving sideways, that means gold gets sold every time the buck threatens to rally.

Gold and silver big bar shortage indicators are showing no sign of shortage; premiums on big-bar gold and silver are normal, GLD tonnage fell, while ETF discounts mostly increased. Shanghai premium vanished.

The gold COT report saw almost no change this week. The commercial shorts are in place for a COT top, but managed money longs are not. Silver is not there, and did not change much from last week.

For the PM group, the miners were the tell for what was going to happen this week.  They sold off Monday and issued a sell signal, and after that, it was down she went.

So my next question is, why did the buck rally in this circumstance?  Presumably those foreigners were selling US treasury bonds as well as dollars.  Well, if you look at equity markets globally, you will see that almost every country's equity market sold off this week. Just looking at the regions, the US wasn't even hit worst – that award went to “Emerging Asia” which plunged -5.52% (vs the US drop of -3.79%). So perhaps the USD move on Friday was safe-haven in nature. Not into US treasury bonds, mind you, but into US bank deposits. I'm guessing.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Eurozone EZU -3.69% 27.84% falling rising rising rising ema9 on 2018-01-30 2018-02-02
United States VTI -3.79% 20.22% falling rising rising rising ema9 on 2018-01-30 2018-02-02
Developed Asia VPL -3.83% 21.94% falling rising rising falling ema9 on 2018-01-30 2018-02-02
Latin America ILF -3.90% 23.89% rising rising rising rising ema9 on 2018-02-02 2018-02-02
Europe IEV -3.94% 21.99% falling rising rising rising ema9 on 2018-01-30 2018-02-02
Emerging Asia GMF -5.52% 36.61% falling rising rising falling ema9 on 2018-01-30 2018-02-02

So how much further will bonds drop? That's the $64k question. The 10-year is at 2.83%, heading rapidly towards 3%. People love their round numbers, and if the 10-year cracks 3%, will the selling intensify?  Definitely that's the risk. Traders are used to buying dips, but if they think that the secular forces that are pushing bond prices lower are going to remain in place, there won't be dip buying, there will be panic selling. After all, the first rule of trading is: don't panic. The second rule: if a panic is going to happen, make damn sure you panic first.

So why does a bond market panic affect equities? Because a panic in the bond market acts just like a surprise Fed rate increase. Working through that mechanism: a rate increase slows the economy by making debt more expensive to carry. Not only does it make companies less likely to borrow (slowing the rate of credit creation), but it is also a tax on profits. We are, right now, at the highest debt levels ever seen, so every basis point of rate increase from the bond market panic has an outsized impact on future corporate earnings. While the real-world impact isn't instant, traders are always eyeing future earnings, and the future earnings of indebted companies will end up being hurt by the higher rates.  A rapid shift in rates => a rapid reassessment of future earnings.

When traders see that future earnings will be lower, they will not pay such a high P/E multiple for the companies. So forward earnings will drop, and then the multiple traders are willing to pay will drop too. That's a double-whammy, and so - presto - a rapid increase in rates results in a rapid repricing of equity prices to the downside. A.k.a, a crash.

What then, for gold and silver? Well, gold did best of all the PM group. During “safe haven” times, this is how gold acts. My guess is - and this is just a guess - if the bond market continues to sell off, gold won't be sold for very long. After Friday's shock sell-off, traders are going to be doing the math over the weekend to figure out where to hide. My guess is, some of them will emerge deciding to buy gold. There will also be those who will want to buy the dip in equities too – but that won't persist if bonds continue to be sold. Dip-buying will turn into rally-selling.

I suppose I'm seeing a dollar rally, gold managing to hold its own, and equities continuing to sell off – if bonds continue to fall.

So how long until the Fed starts trying to jawbone the bond market back up again? “You know, we could always stop unwinding our balance sheet if things get bad enough.” I see a lot of volatility ahead. I'm cautiously positive on gold – I'm much less sure about silver and the mining shares.

Forecasting code – weekly – says:

Uptrend: gold, copper.

Downtrend: silver, miners, crude, 10-year treasuries, BAA-grade debt, SPX, USD.

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4 Comments

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

Great post, Dave.  I always enjoy reading these.  Your commentary is literally one of the first two commentaries that I read in the morning.  Don’t say it enough, but thanks for putting these out daily.

Wonder how low mining shares are going to eventually go?  Ever since the big breakout in early-mid 2016, The have just been losing steam....at least many of the ones I follow.  That’s a long time to really do nothing, if the PM market is really back in a bull market, like many commentators suggest.  I’m not so sure about that, though.  It’s not acting very bull market-ish.

Giant Elk's picture
Giant Elk
Status: Member (Offline)
Joined: Dec 13 2014
Posts: 16
Money flow trend
Agreed, great post. Thanks for the international bond table - that's a pattern worth tracking. I think you may be right that money flows were the greater force in the dollar rally on Friday. Despite the strong NFP, equities barely moved but sold off later in the day. Everything was down except for the dollar.
 
So I guess a case of investors thinking the US has the best economic prospects but bonds and equities are overpriced so we'll put our money there on deposit and wait it out for a while. It will be interesting to see if this trend continues.
 
Volume in US bonds was elevated this week so the sell-off is certainly hotting up - on the ETFs I am looking at anyway. I also see that volume on gold rose during the rally from mid-Dec to end-Jan but hasn't been as large in the last week. Bodes well.
 
Thanks also for your insight on panics. Had a good LOL with that one. And also the bond market 101 summary, that's gotta be the major risk now. It is not uncommon knowledge, but the QE naysayers have been pretty much silenced at this stage so while the MSM is giving coverage to the bond sell-off, there doesn't seem to be too much concern around the bond bubble.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5058
thanks

Thanks guys.

Armstrong had something to say about bonds & stocks - he said that rising rates will hurt stocks at first, but then they will rise.  That doesn't match my logic, but he's been around a lot longer than I have.  And maybe his timeframe is longer than mine.

https://www.armstrongeconomics.com/markets-by-sector/precious-metals/gold/can-the-stocks-bonds-crash-only-gold-rises/

My correlations (monthly timeframe, from 1-9 months out) say that 10 year rates and stock prices are inversely correlated.  That means, when rates rise, SPX price drops.  Increases in short rates (1yr) hurt less than increases in long rates (10yr).  Increasing junk bond rates (BAA) really hurts stocks, and when the BAA-AAA spread widens, that hurts also.

So max pain is when the 1y, 10y, BAA, and BAA-AAA rates rise.

Right now we're seeing both 1y and 10y increases, but junk debt remains relatively all right.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5058
an interesting day

Well now, SPX down 4.7%, that's a day to be remembered.  Charles won his VXX bet, which is a pretty amazing thing, given just how many times VXX has disappointed its buyers.  You not only have to be right about the move, you have to be right about the timing too, and Charles got both within a few days of making his trade.  Even though my SPX forecaster basically signaled "sell" for SPX last Monday, I didn't take the trade, because I was tired of being wrong.  That - of course - is why it worked out.

SPX unwound literally 2 months of gains in 2 days.  Escalator up, elevator down.

And - its even more interesting that gold did fairly well, in spite of a medium-sized dollar rally.  Buck remains the safe haven.  Euro printed a swing high.

Gold staged a $10 rally in Euro terms.  GDXJ was one of the best performing sectors in my sector map - which is to say, it was flat.

And bonds finally saw a rally.  TLT +1.08%.  Looks like US treasury bonds remain a safe haven too.  We'll see if its a reversal.  I'm not sure I trust it.  JNK plunged -0.68%, another bad day.

I expect there will be some dip-buying in equities tomorrow.

Wow.  After market close, the e-minis have dropped another 50 points.  ES down -5.41% for the day.  The attempted end-of-day rally at 3:15 was sold pretty hard.  This is your "run, don't walk..." day for equities.

Last thought.  Is bitcoin a safe haven?  Not if today is any clue.  Of course it has been in a downtrend for weeks, so it may just be marching to the beat of its own drummer, but the wave of money fleeing equities didn't wash over bitcoin, which dropped 12% today - and it did flood into treasury bonds.

Treasury bonds, gold = safe haven.

Bitcoin, not so much.  According to today's price moves anyway.

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