PM End of Week Market Commentary - 5/18/2018

davefairtex
By davefairtex on Sat, May 19, 2018 - 10:49pm

On Friday, gold rose +1.70 [+0.13%] to 1291.70 on heavy volume, while silver moved up +0.02 [+0.09%] on light volume. The dollar rallied yet again, up +0.18%, making a new high to 93.27. The metals seem to be ignoring the slowly rising dollar – at least over the last few days anyway.

The PM sector map was a sea of red this week; everything fell, led lower by platinum, which fell 5 days in a row. Miners led gold and silver lower, with juniors and seniors about even. Silver miners did best in the miner group, with SIL down substantially less than GDX. Silver was the best-performing item in the group; it did drop, but it fell the least of all. That's a rare thing to see in a metals downturn. It feels to me that – rather than silver doing well, instead what we're seeing is gold's premium evaporate.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Silver $SILVER -1.44% -0.63% falling falling falling falling ema9 on 2018-05-14 2018-05-18
Copper $COPPER -1.58% 20.94% falling falling rising falling ema9 on 2018-05-18 2018-05-18
Silver Miners SIL -1.98% -14.35% falling rising falling rising ma50 on 2018-05-17 2018-05-18
Gold $GOLD -2.03% 3.60% falling falling rising falling ma200 on 2018-05-15 2018-05-18
Palladium $PALL -2.55% 26.20% falling falling rising falling ma50 on 2018-05-18 2018-05-18
Junior Miners GDXJ -2.98% 0.83% falling rising falling rising ema9 on 2018-05-15 2018-05-18
Senior Miners GDX -3.02% -2.03% falling rising falling rising ma50 on 2018-05-17 2018-05-18
Platinum $PLAT -4.03% -4.95% falling falling falling falling ema9 on 2018-05-14 2018-05-18

Gold fell -26.70 [-2.03%], with almost all the damage happening on Tuesday – the day of the big dollar breakout. And yet – after the big drop on Tuesday, gold stopped moving lower, seeming to find buyers at around 1290. Daily forecaster closed the week at -0.11, which is a substantial recovery over where it was on Tuesday. Still – we did not see any buy signal for gold on the daily chart, and on the weekly and monthly timeframes, gold remains in a downtrend.

The June rate-increase chances jumped back up to 100%.

COMEX GC open interest rose +13,952 contracts this week. That's 43 tons of paper gold, or about 7 days of global production.

This week, I didn't want to wait for the COT section – I thought I'd include it with the gold report. So...

The commercial net position rose +17k contracts, which is 14k new longs, and 2.5k shorts covered. That's a high for commercial longs that dates back to 2014. Managed money net fell -19k contracts, which is 16k new shorts, and 6k longs sold. This takes the managed money long position back to where it was in early 2016. Pretty clearly, the increase in open interest this week was all about managed money going short. And instead of covering on the drops, commercials are going long. This COT report is bullish; we could easily be at a low for gold right now.

Silver fell -0.24 [-1.44%] to 16.46. Silver's losses came on both Monday and Tuesday, while the rest of the week saw silver bounce back – and finally issue a buy signal on Friday. Forecaster ended the week at +0.04, which suggests that the plunge may have reversed. Maybe. While the weekly and monthly charts still show downtrends, they do not look particularly severe (weekly = -0.09, monthly = -0.16).

The gold/silver ratio fell -0.47 to 78.48, which is bullish. This is a pretty amazing result to see during a metals downtrend. Normally, gold/silver ratio rises quickly when the metals drop.

COMEX SI open interest rose +8,509 contracts. That's 1323 tons of paper silver; about 19 days of global production. That's a big increase in open interest. Who was responsible? That brings us to the COT report...

The commercial net position fell -989 contracts: 2.2k shorts added, as well as 1.3k new longs. These are minor changes. Managed money net rose by +2.9k contracts: 1.1k new longs, and 1.7k covered shorts. Silver has moved back away from its historical levels, but remains relatively bullish overall. Managed money remains heavily net short, while the commercials are exactly the opposite – their net short position is quite small, historically speaking.

So who added all that open interest this week? I don't know. It didn't show up on the COT. Some of it was the commercials, but not very much.

Miners fell this week; as with the rest of the metals group, the big losses came on Tuesday. Fortunately, the forecaster issued a sell signal on Monday. If you were listening. The rest of the week, the miners chopped sideways, with Friday showing a small rally. XAU issued a buy signal Friday, closing the week at +0.02; that's not a very enthusiastic buy signal. Weekly XAU is showing a strong downtrend, while monthly remains in an uptrend. That fits with my view of the charts – mostly, the miners have been chopping sideways over the past 18 months.

The GDX:$GOLD ratio fell -1.01%, while the GDXJ:GDX ratio inched higher. That's slightly bearish.

USD

The buck moved strongly higher, up +1.10 [+1.19%] to 93.27. The buck moved higher 5 days out of 5 this week, rallying especially strongly on Tuesday – which caused all sorts of problems for PM on that day. DX is above all 3 moving averages, the forecaster closed the week at +0.49 – a reasonably strong uptrend – and the weekly and monthly forecasters are also in uptrends. Its all good news for the buck; while there are hints from the ECB that – eventually – they'll stop printing money, so far its mostly talk and little action. They did taper their printing operation, but the Fed is actually reducing its balance sheet, and the fed funds rate is 1.69%. US 1-year rates are 2.3%, while German 1-year rates are -0.70%. Yes. You pay Germany to lend them money for a year. That's why the buck is rallying – that interest rate differential. Who wants to lose 3% per year keeping your money in Germany?

US Equities/SPX

SPX fell -14.75 [-0.54%] to 2712.97. This week, SPX printed a relatively harmless-looking swing high, and drifted lower for much of the week. Forecaster also drifted lower, ending the week at +0.04, quite close to a sell signal.

The sector map was a mixed bag; while energy did well along with materials, high-yielding issues (REITs, utilities) fell, along with tech and financials. While the sector map is a bit confused, the XLF chart (financials) looks quite bearish – lower highs, lower lows, with the top back in January. Banks tend to lead, and they look ill right now. That's bearish – at least longer term anyway.

VIX rose +0.77 to 13.42.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Energy XLE 1.80% 16.15% rising rising rising rising ema9 on 2018-05-04 2018-05-18
Materials XLB 1.65% 15.14% rising falling rising falling ma50 on 2018-05-09 2018-05-18
Industrials XLI 0.83% 15.36% rising falling rising falling ma50 on 2018-05-16 2018-05-18
Defense ITA 0.32% 32.00% rising falling rising falling ma50 on 2018-05-18 2018-05-18
Healthcare XLV 0.20% 11.20% rising falling rising falling ma50 on 2018-05-16 2018-05-18
Cons Staples XLP 0.00% -10.01% rising falling falling falling ema9 on 2018-05-16 2018-05-18
Cons Discretionary XLY -0.02% 18.30% rising rising rising falling ema9 on 2018-05-04 2018-05-18
Telecom XTL -0.14% 2.03% falling falling falling falling ema9 on 2018-05-18 2018-05-18
Homebuilders XHB -0.15% 6.24% rising falling rising falling ema9 on 2018-05-18 2018-05-18
Financials XLF -1.10% 20.73% rising falling rising falling ema9 on 2018-05-18 2018-05-18
Technology XLK -1.45% 25.40% rising falling rising falling ema9 on 2018-05-17 2018-05-18
Utilities XLU -2.76% -5.57% falling falling falling rising ma50 on 2018-05-14 2018-05-18
Gold Miners GDX -3.02% -2.03% falling rising falling rising ma50 on 2018-05-17 2018-05-18
REIT RWR -3.61% -4.91% falling rising falling rising ema9 on 2018-05-15 2018-05-18

Gold in Other Currencies

Gold fell in all currencies; it fell in XDR by -18.85.

Rates & Commodities

Bonds plunged on the week, with TLT down -1.69% - and that's even including a strong rally on Friday. TLT issued a sell signal Monday, sold off for much of the week, but the rally (and swing low) on Friday was very strong, with a 69% chance of marking the low. Forecaster snapped back to -0.13; that doesn't sound great, but it rose +0.77 on Friday alone. TY also rallied on Friday – it also printed a swing low (58% chance of a reversal) – but the TY forecaster wasn't nearly as strong, closing at -0.53, which is still a downtrend. TY remains in a downtrend in both weekly and monthly timeframes – however the weekly appears to be improving. The 10-year treasury closed the week at 3.07%, with an interim high to 3.11%.

JNK fell -0.42%, issuing a sell signal on Monday, plunging Tuesday, then chopping sideways for the rest of the week. JNK is hovering just above a multi-month support level; it looks quite vulnerable to a sell-off. BAA rates shot higher this week, up 14 basis points; by contrast, the 10-year moved up 9 bp. On the chart, this appears to have confirmed a double bottom, which suggests we will see a strong move higher in lower-grade interest rates in the future.

BAA-AAA ratio, the bond fear gauge, moved higher this week; its uptrend is strengthening. It is not rising at any sort of dangerous pace just yet, but the move up is one of those distant warning signs.

Crude moved up +0.96 [+1.36%] to 71.45, making a new high again this week, erasing last week's swing high. Forecaster ended the week at +0.08, which suggests the uptrend is getting a bit tired, although the weekly forecaster continues to look strong. Crude remains above all 3 moving averages, and is in an uptrend in all 3 timeframes. The EIA report was bullish this week: crude -1.4m, gasoline -3.8m, and distillates -0.1m. The EIA report seemed to provide most of this week's move higher. I keep thinking that – surely this week – crude will need to retrace. And then it just keeps moving higher. Perhaps I need to focus on the weekly and not the daily signals.

Physical Supply Indicators

* The GLD ETF tonnage on hand fell -2.36, with 855 tons in inventory.

* ETF Discount to NAV:

 PHYS 10.51 -0.51% to NAV [down]
 PSLV 6.07 -1.93% to NAV [down]
 CEF 13.12 -2.37% to NAV [down]

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

* Big bars premiums were: gold [1kg] 1.48% and silver [1000oz] 3.65%.

Grey Swans & Geopolitics

  • Italian Elections – Lega Nord and M5S are hard at work on a contract for their “government of change”: some issues remain undecided, but the process of forming a government is slowly grinding forward. Examples of proposals include: migrant deportations, a whole lot of deficit spending (in violation of EU rules), withdrawing from sanctions on Russia, reversing pension reform, a “citizen income”, and tax reform. This will blow out Italian debt/GDP – but hey, if the ECB is going to buy it all anyway, why not? https://www.thelocal.it/20180517/m5s-league-contract-italy-government-of-change

  • Polls taken since the last Italian election show a changed landscape: M5S 30-32%, Lega Nord 21-25%, PD 17-19%, Forza Italia 12-14%. Now I understand why Berlusconi decided “not to stand in the way” - a new election would see his party crushed, with Lega Nord in an even stronger position. https://en.wikipedia.org/wiki/Opinion_polling_for_the_next_Italian_gener...

  • US Congressional Elections, 2018. The generic ballot shows Democrats 44.6% [+4.6%] vs Republicans 40.0%. The gap continues to narrow. https://projects.fivethirtyeight.com/congress-generic-ballot-polls/

  • North Korea got really upset when John Bolton suggested “the Libya model” was appropriate to use with North Korea; presumably that involved country-wrecking and regime-changing 2 years after denuclearization - along with the usual blowback: chaos, death, and millions of migrants and refugees soon to follow. Trump then walked that back.

  • Mueller Investigation: a Federal judge dismissed Paul Manafort's civil suit, saying that Manafort's concerns about Mueller exceeding his authority would be taken up in the criminal case, where another Federal judge has yet to rule on that issue.

Summary

This week the buck broke out to new highs – this initially caused a big sell-off in PM, especially in gold, but after the initial burst, the selling pressure ebbed. Industrial production was strong, which suggested that the US economy is continuing to perform well (a drop in INDPRO is a leading indicator of recession). The 10-year yield broke convincingly above 3%, but the move didn't seem to affect the rest of the markets very much.

The gold COT appears to be at a bullish reversal point. Commercials have been steadily buying paper gold – they have the highest long position in the past 4 years. Does it mean anything? Its hard to know. Might the wash-and-rinse gold cycle be dead? Certainly, it didn't work so well with silver three weeks ago.

Big bar gold and silver premiums are edging higher, but so far, supply indicators suggest there is no current shortage of physical gold.

We have a new government about to be formed in Italy – polls say that the two parties have widespread support. Once in power, will they take the same path as Syriza in Greece and back down from all their promises? I believe Italian debt would have blown up if not for the ECB buying program; Italy's current debt/GDP: 132%. Eyeballing the charts provided by http://www.eurocrisismonitor.com/, some 450 billion Euros in Italian bank deposits have fled to Germany.

Will the ECB continue to buy Italian debt if the new government violates fiscal discipline? If the ECB decides to stop buying Italian debt in response to actions by the new government, then we will get to see really quickly what price the free market assigns to Italian debt. Yield for 10-year Italian debt is currently 2.23%. If the ECB stops buying – maybe that jumps to 8%? And the move could happen really quickly. Losses for the bondholders would be just insane. Maybe a 40% hit to capital? For “safe 10 year sovereign debt.” The knock-on effects to the Italian banking system would be catastrophic.

If the yields blow out on the Italian debt – debt must be used to fund all these new programs - then the new government must choose between either leaving the Euro (and probably defaulting – taking out their own banking system), or backing down on their commitments to the voters. What will they do?

While the new government is figuring all this out, money will move in anticipation of the worst case event. The buck probably screams higher, US treasury bonds prices scream higher too.

Currently, this is a very slow motion event – I've been tracking it for maybe half a year. However, it has the potential of turning into something interesting very rapidly.

That said – prices tell us that, right now at least, confidence in the system remains intact.

Weekly trends:

Uptrend: USD, crude, SPX, Gold/Euros.

Downtrend: miners, gold, BBB corporates, bitcoin, 10-year treasury, silver, copper.

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5 Comments

Nate's picture
Nate
Status: Platinum Member (Offline)
Joined: May 6 2009
Posts: 587
Armstrong podcast

Near the end of last year, legendary financial and geopolitical analyst Martin Armstrong said the Trump tax cuts were going to be a very positive move for the U.S economy. He was right. What does he say now about the U.S. dollar? Armstrong predicts, “They keep talking about the U.S. debt is $20 trillion. Global sovereign debt is over $200 trillion. The U.S. basically is holding up the whole world, and U.S. debt is why it is the reserve currency. Europe couldn’t make it because they could never consolidate the debt. . . . What you have is a crisis that has been building in emerging markets to sell their debt they issued in dollars. The dollar going up is what breaks the back of the world monetary system. . . . The world monetary system is going to do great if the dollar goes down. Everybody is going to be borrowing more and say this is fantastic. It’s only when the dollar goes up that we get things that break. . . . The U.S. always wants the dollar down, but it’s not going to work that way. . . . The dollar is probably going to go up pretty strong until late 2021 at the latest. . . . The whole thing is going to break. The Federal Reserve has become the central bank of the world by default.”

So, where does Armstrong see big trouble brewing? Look no further than the bond market. Armstrong explains, “The bond market is going down. . . . We’ve already started into it. . . .You have to understand both Japan and Europe have destroyed their bond markets. They have completely and utterly destroyed them. They are the buyers. That’s it. There is no pension fund that can buy 10-year paper at 1.3% when they need 8% to break even. They are locking in a 10 year loss. They can’t do it. We have been helping major funds shift into equities because it is the only place they can go. . . . Once you start seeing the cracks in Europe, you are going to see interest rates rise faster than you have ever contemplated in your life. There is nobody in their right mind that can buy an Italian bond at 1.3%. It’s just not going to happen. Once the ECB is forced to stop, those rates are going to jump to 10% instantaneously. Once it starts to crack, that’s it, it’s gone. What is going to make everyone know it is cracking is when you see rates going up dramatically, and the ECB is at a point it just can’t buy any more.”

Armstrong does not see a big War in the near term, but one is brewing in the Middle East. What Armstrong does see right now is “increasing civil unrest.”

On gold, Armstrong sees the yellow metal “fighting a stronger dollar” but predicts it will have its day sometime after 2020 to 2021.

https://usawatchdog.com/dollar-up-bonds-break-martin-armstrong/

Eannao's picture
Eannao
Status: Silver Member (Offline)
Joined: Feb 28 2015
Posts: 146
What will they do?

The new Italian government will do the same as Syriza... break the promises to the voters and tow the ECB line. It's worked out fine for Syriza. This will be another non event.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5361
syriza

I think the problem with Syriza is that the Greek people largely wanted to stay in the Euro.  I forget what the polls said - something like 60% were in favor of staying.

I looked, but could not find any polls on Italy and leaving the Euro.

Note - the polls I see ask about leaving the EU, but not the Eurozone currency bloc.  They are not the same thing.  There are plenty of countries that are in the EU, but not part of the currency bloc.

sand_puppy's picture
sand_puppy
Status: Diamond Member (Offline)
Joined: Apr 13 2011
Posts: 1854
Swiss Vollgeld Initiative

I would love to hear you finance guys' take on the Swiss Vollgeld initiative.  Does this initiative really return money creation to the government of Switzerland?  Will it really control the use of debts to enslave people to "the system?"

Peter Koenig explains

It’s called “Vollgeld Initiative” – in German, meaning more or less “Referendum for Sovereign Money”. What is “Sovereign Money”? – Its money produced only by the Central Bank, by the “Sovereign”, the government, represented by its central bank.   Money created in accordance with the needs of the economy, as contrasted to the profit and greed motives of the banking oligarchy.

The people of Switzerland are called to vote on 10 June 2018 whether they want to stop the unlimited, unrestrained money-making by the Swiss private banking system, and to return to the “olden days”, when money was made and controlled only by the Central Bank.

Most Swiss and probably most westerners in general don’t even know that the loan or mortgage they get from their bank is no longer backed by the bank’s capital and deposits...

do you know that in Switzerland first mortgages do not have to be amortized? In fact, banks encourage you not to repay [the principle on the] mortgage, but just keep paying interest. Many mortgages are passed on with the related real estate from generation to generation. So, you never really own your house. The bank does. And the bank earns the money on your house, as well as calls the final shots on what is to happen with your real property, in case it is being sold.

Why can the banks just make mortgage loans without requesting amortization? – Because they are afloat with money. Because, of course, they just make money with loans – the 90% which are not central bank made money. And the more loans they have outstanding, the more interest they earn. They earn money for doing absolutely nothing. For a mouse-click. Interest accumulates on its own. And debt is today’s foremost tool to enslave people, nations, entire continents.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5361
switzerland proposal

It is totally true that money, loaned by today's banks, is constructed from thin air.  Deposits are not required - at the point of making the loan - in order for banks to lend money.  [Note: that's not true for credit unions]

However.  Banks must find deposits to match loans, eventually.  So the bank lends the money first, and then rummages around in the marketplace to find deposits to match the loans they've made.  And if they keep the loan on the books, they are on the hook for any losses.  Banks do have a risk position.  In good times, loans are a money-printing machine.  During downturns...the bank can go under.

Here are the steps in banking, currently:

Step 1: Make a loan to Sand Puppy for $500k @ 5% to buy a house.

Step 2: Go out and find deposits equal to $500k.  Pay the depositor next to nothing (0.01%).

Step 3: Make sure Sand Puppy doesn't default.

Step 4: Enjoy the spread between 5% and 0.01%.

Step 5 [optional]: If Sand Puppy defaults, bank must sell the house, and then take a hit to earnings equal to the sale price - $500k.  If earnings go negative, then bank takes a hit to capital.  If there are too many Sand Puppies in step 5, then the bank theoretically goes under.

Banking regulations require Step #2.  Bank is generally encouraged to focus on step #3, although that step was routinely ignored 2004-2008.  Step #5 is ignored during "extend and pretend" situations, for instance Japan 1992-present, Italy 2008-present.

So the question is, if Switzerland changes the rules to require banks to have deposits BEFORE lending money (i.e. you reverse steps 2 and 1), will that change things?

Maybe.  Currently, if there is demand for loans by "the economy" (i.e. borrowers), the money supply grows by itself, endogenously.  If you have the central bank in control, the central bankers might not react fast enough; they will be acting as "central planners", trying to predict how much money people will need.  If there isn't enough money, then interest rates will rise (banks will actually run out of money to lend), and whatever expansion you are in will get choked off by the limits on the amount of money out there.  Theoretically anyway.

So instead of the central bank controlling money supply indirectly via rates (slowing down money creation by raising rates, speeding up creation by lowering rates), the central bankers will control it directly by actually printing money (QE and QT) via buying & selling assets.

Operationally, banks will still collect money on the spread.  And if a loan wasn't amortizing, they'd still be able to collect that spread in perpetuity.  The only thing this proposal will do is reverse steps #1 and #2.

While it definitely seems unfair for the banks to be able to create money from nothing - and then collect interest on it - if current banking regs require them to acquire deposits to match the loans they create relatively soon after the loan is made, there is little effective difference between what exists today, and what is being proposed in Switzerland.

In some sense, the issue boils down to this: do you think central bankers will "behave better" if they are controlling the money supply directly, or indirectly?  That's the only difference here that I see.

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