PM End of Week Market Commentary - 5/25/2018

davefairtex
By davefairtex on Sun, May 27, 2018 - 9:34am

On Friday, gold fell -2.90 [-0.22%] to 1301.20 on heavy volume, while silver dropped -0.16 [-0.99%] to 16.52 on moderately heavy volume. The buck staged a strong rally, up +0.45%, breaking out to a new closing high. The currency move definitely pulled metals prices lower, with gold dropping least of all the items in the group.

The PM sector map showed some signs of recovery, with half of the items moving back above the 9 MA, and a few above the 50. Gold led silver, and senior miners led the juniors – that has more of a safe-haven feel to it versus some nascent PM price recovery. It looks as though gold's premium is returning. I added gold/Euros to the PM map this week; interestingly, gold in Euros is above all 3 moving averages, and it also executed a golden cross just this week. This is substantially more bullish than I had expected.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Gold/Euro $GOLD:$XEU 1.66% -0.33% rising rising rising rising ema9 on 2018-05-23 2018-05-25
Platinum $PLAT 1.56% -5.09% falling falling falling falling ema9 on 2018-05-22 2018-05-25
Palladium $PALL 1.47% 26.65% falling falling rising falling ema9 on 2018-05-23 2018-05-25
Gold $GOLD 0.74% 3.66% falling falling rising falling ema9 on 2018-05-24 2018-05-25
Senior Miners GDX 0.54% -1.76% falling rising falling rising ma50 on 2018-05-25 2018-05-25
Copper $COPPER 0.51% 18.69% falling falling rising falling ema9 on 2018-05-25 2018-05-25
Silver $SILVER 0.36% -3.65% falling rising falling rising ma50 on 2018-05-25 2018-05-25
Junior Miners GDXJ 0.15% 3.62% falling rising rising rising ema9 on 2018-05-25 2018-05-25
Silver Miners SIL -0.26% -14.21% falling rising falling rising ema9 on 2018-05-25 2018-05-25

Gold rose +9.60 [+0.74%], with the big move happening on Thursday. It felt as though this was about the new Italian government – a safe haven move – given the relative movements of all the other items that happened on that day. Daily forecaster issued a buy signal on Wednesday, and ended the week at +0.71, which is a strong uptrend. Weekly and monthly timeframes both remain in a downtrend.

The June rate-increase chances dropped down to 90%.

COMEX GC open interest plunged -36,597 contracts this week. That's a huge drop; 113 tons of paper gold disappeared - about 16 days of global production.

The commercial net position rose +2514 contracts, which is 7.1k new longs, and 4.7k new shorts. That's another new high for the commercial long position, this time dating back to 2013. Commercial net position is consistent with a bullish reversal in gold. Managed money net dropped -2467 contracts, which was 11.8k fewer longs, and 9.4k fewer shorts. That's another new low for managed money longs, dating back to January 2016. Managed money net is consistent with a bullish reversal in gold too – the managed money position is perhaps more strongly bullish than the commercials.

Silver rose +0.06 [+0.36%], with a strong rally on Thursday almost entirely offset by a plunge Friday. Silver daily forecaster issued several buy and sell signals this week – which suggests there is no clear short term trend, ending the week at -0.20. The silver weekly echoes this, as it has been in a shallow downtrend for the past 5 weeks.  Silver monthly is in a modest downtrend too.

The gold/silver ratio rose +0.29 to 78.77, which is somewhat bearish. As I said in the PM map review, this feels more like a gold safe-haven move than anything specifically bearish for silver.

COMEX SI open interest rose +7,458 contracts. That's 1159 tons of paper silver; about 17 days of global production. That's another big increase.

The commercial net position fell -13.7k contracts, which was 11.4k new shorts, and 1.9k fewer longs. Commercials went heavily short this past week. Managed money net rose by +16k contract, which was 7.3k new longs, and 8.7k shorts covered. These were also some big changes. Silver is moving farther away from any sort of COT low.  Commercials are going heavily short.

Miners rose this week; they rallied right up to a breakout point on Thursday, but were not able to push above the previous high. GDXJ printed a bearish tasuki line (48% bearish reversal) to end the week on Friday. XAU forecaster ended the week at +0.11, which is a slowing uptrend. XAU remains mixed; a downtrend on the weekly timeframe, and an uptrend on the monthly. That has been the situation for the past four weeks now.

The GDX:$GOLD ratio fell -0.19%, and the GDXJ:GDX ratio fell -0.39%. That's slightly bearish.

USD

The buck moved higher, up +0.53 [+0.57%] to 93.80. The pace of the uptrend slowed this week, with the buck moving higher 3 days out of 5. Forecaster ended the week at +0.20, which is a relatively slow uptrend. Weekly and monthly charts show the buck remains in an uptrend, although momentum is now slowing on the weekly chart. Money continues to flow into the buck; Trump seems to be moving slowly out of the woods with Mueller, Italy is now back as a clear worry (EUR/USD fell -0.92%). My read is, the world appears to be getting used to Trump's style – in Korea, China, tariffs, and the like. Markets don't react nearly as strongly as they used to. This, combined with high relative US rates, makes the buck a more attractive place for money to be.

US Equities/SPX

SPX rose +8.36 [+0.31%]. Mostly, SPX chopped sideways, but with a downward bias. Forecaster issued 3 signals this week (indicating indecision) but ended the week at -0.37, which is a medium-strong downtrend. SPX is in an uptrend in both the weekly and monthly timeframes.

The sector map was relatively bearish this week. Utilities and REITs led, which usually isn't a great sign, while energy, materials and financials did worst. But tech and consumer discretionary did well, which is generally positive – so we can call it a mixed bag, perhaps.

VIX fell -0.20 to 13.22.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Utilities XLU 3.08% -5.43% rising rising falling rising ma50 on 2018-05-24 2018-05-25
REIT RWR 2.98% -3.71% rising rising falling rising ema9 on 2018-05-22 2018-05-25
Technology XLK 1.28% 23.65% falling falling rising falling ema9 on 2018-05-23 2018-05-25
Cons Discretionary XLY 1.20% 17.31% rising rising rising falling ema9 on 2018-05-04 2018-05-25
Defense ITA 1.07% 27.71% rising rising rising falling ma50 on 2018-05-18 2018-05-25
Cons Staples XLP 0.69% -11.39% rising falling falling falling ema9 on 2018-05-16 2018-05-25
Telecom XTL 0.62% 0.16% rising falling rising falling ema9 on 2018-05-25 2018-05-25
Gold Miners GDX 0.54% -1.76% falling rising falling rising ma50 on 2018-05-25 2018-05-25
Homebuilders XHB 0.50% 5.90% rising falling rising falling ema9 on 2018-05-23 2018-05-25
Industrials XLI 0.48% 12.42% rising falling rising falling ma50 on 2018-05-16 2018-05-25
Healthcare XLV -0.31% 9.09% falling falling rising falling ema9 on 2018-05-24 2018-05-25
Financials XLF -0.36% 17.91% falling falling rising falling ema9 on 2018-05-23 2018-05-25
Materials XLB -1.42% 11.70% falling falling rising falling ema9 on 2018-05-24 2018-05-25
Energy XLE -4.52% 12.15% falling rising rising rising ema9 on 2018-05-24 2018-05-25

Gold in Other Currencies

Gold moved higher in most currencies; it rose in XDR by +2.38.

 

Rates & Commodities

Bonds did extremely well this week, with TLT up +2.06%. Forecaster issued a buy signal on Monday, and then rallied hard for the latter half of the week. TY had a slightly different pattern, but also did quite well, up +0.92%. TY daily forecaster ended the week at +0.71, which is a strong uptrend. TY weekly issued a buy signal, and TY monthly is right on the edge of doing so. This was a clear sign to me of a flight to safety, probably related to the new Italian government. I'd guess that money is fleeing low-yielding (and now dangerous-looking) Eurozone sovereign debt for the higher-yielding safety of the US 10-20 year bonds. If the Eurozone blows up, it appears as though longer-dated US debt will act as a safe haven. The 10-year bond yield ended the week at 2.93%, down 14 bp. I covered my bond short last week.

JNK rose +0.11%, inching higher in spite of a huge sell-off in crude oil, which usually has some influence on the price of junk debt. However it also did not benefit from the strong rally in the long bond.  JNK continues to chop sideways – at the moment, it is blissfully unaffected by either good or bad news. BAA rates fell 5 bp; forecaster is edging towards a sell signal, but remains in an uptrend for now.

BAA-AAA ratio, the bond fear gauge, edged lower this week, after issuing a minor buy signal last week. Right now things look pretty calm in the bond market.

Crude was hit hard, dropping -3.95 [-5.53%] to 67.50, moving lower 4 days out of 5. Crude printed a swing high (and a sell signal) on Thursday, with most of the losses coming on Friday with a 3.17 point plunge. Forecaster ended the week at -0.74, which is a strong downtrend. Crude weekly also issued a sell signal, and the monthly will likely do so as well. What caused all the fuss? There were reports that Russia and Saudi Arabia are considering increasing their production by as much as 1 mbpd, in response to Venezuela's production collapse which has pulled OPEC oil production well below its target level. The production increase could happen as soon as next month. https://www.reuters.com/article/us-oil-opec-exclusive/exclusive-opec-non-opec-discuss-around-1-mln-bpd-oil-output-rise-sources-idUSKCN1IQ0Q6

Physical Supply Indicators

* The GLD ETF tonnage on hand fell -6.78, with 849 tons in inventory.

* ETF Discount to NAV:

 PHYS 10.30 -0.30% to NAV [decrease]
 PSLV 6.08 -2.16% to NAV [increase]
 CEF 13.23 -2.12% to NAV [decrease]

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

* Big bars premiums were: gold [1kg] 1.37% and silver [1000oz] 3.81%.

Grey Swans & Geopolitics

  • Ebola: it has returned. There are 57 suspected cases in the DRC (formerly Zaire, more formerly the Belgian Congo). Good news: there is a vaccine, which in field testing appears to have 100% efficacy. Bad news: this time, two highly contagious infected people escaped quarantine and ran loose for a time in Mbandaka, a million-plus-person city, then died. The WHO emergency response chief said: "We are on the epidemiological knife edge. The next few weeks will really tell if this outbreak is going to expand to urban areas or if we are going to be able to keep it under control.” Translation: “expanding to urban areas” could lead to hundreds of thousands of deaths, a surge of panic-migration, and a high likelihood it spreads internationally. If this happens, first regional, then international travel restrictions are the very least we can expect, along with a large economic impact. We'll know more in two weeks. This situation should be on everyone's radar screen. You can see situation reports here (with a 2-day lag time): http://www.who.int/ebola/situation-reports/drc-2018/en/ as well as an informative article here: https://www.cnbc.com/2018/05/25/ebola-outbreak-could-spread-through-these-flight-patterns-group-says.html And of course there's a trade: MRK, the vaccine manufacturer. [No position]

  • Italian Government: Lega Nord and M5S selected their PM, a “political novice” - an M5S party member, whose qualification appears to be not-Salvini and not-de Maio. Rough survey of MSM news articles are negative. CNN stood out: “Some believe that Italy's election result means that the "modern barbarians" are literally at the gate of Rome.” That's an old trick: saying that “some believe” is inspired by the Fox News editorializing technique called “some people say.” While US press are just cheerleaders, Germany has skin in the game, and appears worried. Spiegel says: bad news for Italian finances and terrible news for the Eurozone.” From the German perspective, the problems of Italy have mysterious causes – certainly not due to the Euro itself, of course. Italy is a “problem child”, much like Greece, and Italian populism is now threatening to upset the European applecart. http://www.spiegel.de/international/europe/the-risks-posed-by-the-new-government-in-italy-a-1209566.html The big question is, will the new Italian government actually execute on their promises? I rate the chances as, “more likely than not, they will.” There's a trade there too: short Italian government debt. If you can find a way to do it.

  • US Congressional Elections, 2018. The generic ballot shows Democrats 45.6% [+5.9%] vs Republicans 39.7%. https://projects.fivethirtyeight.com/congress-generic-ballot-polls/

  • North Korea: Trump cancelled the talks with North Korea scheduled for June 12 ostensibly because the chatter from North Korea had become harsh; North Korea then made much nicer-sounding noises, and Trump responded with nice noises of his own. It seems to be all part of the dance – I'm not sure MSM understands, because this is a very different paradigm from the carefully stage-managed events they are used to seeing, and also because they are self-conditioned to view everything that Trump does as either bumbling, or evil. I suspect we'll eventually get a deal, because that's what Trump does – he makes deals. And North Korea definitely seems to want a deal. That should be a positive outcome, if it happens; conversely, if it turns sour, it could turn really sour.

  • Mueller Investigation: Mueller has moved to sentence low-level campaign worker Papadopoulous for lying to the FBI; this could be signaling either that his investigation is coming to a close, or Papadopoulous hasn't been of much use. If Mueller does conclude his investigation, I believe that would be dollar-positive. Certainly the leak-prone investigation isn't hinting that some world-ending conclusion is in the offing – and I suspect that's part of the reason why the buck has done so well over the past 6 weeks. https://www.politico.com/story/2018/05/23/mueller-russia-probe-george-papadopoulos-filing-sentencing-605153

Summary

This week the buck broke out to new highs again, bonds rallied quite sharply, gold moved higher as well – it was a flight to safety probably caused by the new Italian government which appears determined to spend large amounts of money in violation of the spirit if not the letter of the Eurozone rules against deficits.

The gold COT moved deeper into bullish-reversal territory, with commercials continuing to load up long on paper gold. Silver, on the other hand, is moving farther away from a reversal.

Big bar gold and silver premiums are mostly unchanged; my supply indicators suggest there is no current shortage of physical gold.

Money is moving in anticipation of a spend-fest by the new Italian government. US treasury bonds appear to be a safe haven; demand from money fleeing Europe appears to be swamping the new supply from the Fed and the US government. Most likely, a whole bunch of short-covering is also helping to super-charge the rebound in bonds.

Ebola isn't officially a thing just yet, North Korea is still making happy noises, Iran is making nice with the EU, and I suspect that the markets have figured out Trump is talking auto tariffs in order to get a better deal for the US. (We charge 2.5%, they charge 25%, and Trump thinks that is bad. Trump gets to call this a “military necessity” until something shifts.)

But confidence in the system might just be fraying around the edges across the pond, currently because of the new Italian government. Gold in Euros has broken out on the daily timeframe, and it has also just executed a golden cross, which is a long-term bullish sign. Gold/EUR is in an uptrend in both daily and weekly timeframes. When gold rallies in Euros, that serves to insulate gold somewhat from currency moves, as well as sending the messages that a) gold remains a safe haven, and b) the safe-haven trade is now in play.

Weekly trends (in order of strength):

Uptrend: USD, SPX, 10-year treasury, Gold/Euros, copper.

Downtrend: crude, miners, gold, bitcoin, BBB corporates, silver.

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3 Comments

phusg's picture
phusg
Status: Bronze Member (Offline)
Joined: Jul 16 2014
Posts: 56
SLV and SIL alternatives for locked out Europeans

Hi all,

Europeans are locked out of many ETFs by the new PRIIPs legislation.

I was looking to invest some Dollars I had already bought into SLV and SIL, figuring they had good liquidity, limited downside potential from here and pretty good upside potential the coming years with solid industrial demand, dwindling supplies and the possibility of inflation with huge oversupply of fiat currencies.

Would Dave or others care to comment on what would be a good non-ETF alternative to a 50-50 investment in SLV and SIL?

My basic internet research came up with a 3 way split amoung: WPM (Wheaton streaming), HP (Hecla mining) and AG (First Majestic mining).

I'd prefer to not invest in more than 3 companies to minimize fees and portfolio complexity and shy away from the added risk of south American based companies.

Any comments welcome, thanks!

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5584
eurozone crisis II: its here!

Italian 10 year bond yields screamed up 48 basis points today on prospects of a new election in Italy.  The Italian President (a holdover appointee from the PD) rejected the new LN/M5S finance minister over the weekend, and now the wheels are coming off the wagon.

https://tradingeconomics.com/bonds

It seems as though this was expected by Salvini - the selection of this particular minister candidate may have been his strategy to bring about a new election.  If polls are any guide, M5S and LN will stand to substantially improve their position when new elections occur.

Armstrong has said for a long time now that the ECB's bond-buying policy has destroyed the bond market in Europe, and as a result, there will be (is, now) a "no bid" situation when the market turns.  A 48 basis point move in yield is a truly massive jump in a major economy's 10-year bond.

Gold is flat in USD terms, but up 1% in Euros - EUR/USD is down 1% to 115.40, which is below Armstrong's "monthly bearish reversal" - which if triggered (we'll have to wait until Thursday to find that out), suggests that the Eurozone crisis we've all been waiting for may be upon us.

Bonds of all the PIGS are also selling off.

US 10-year rates plunged 11 basis points - TLT is up 1.67%.  US bonds are a safe haven.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5584
more trades

Wolf Richter wrote an article last week that laid out which banks in Europe which had large holdings of Italian sovereign debt.  Why do we care?

When the prices of the debt drops, those banks must take a mark-to-market loss on their debt holdings - which is a hit to capital.  Enough hits, and they (theoretically) go under.  Certainly, if there is any sort of bail-out (or bail-in) the equity holders are the ones left holding the bag.  Equity generally goes to zero.

I'm guessing its a feeding frenzy in the equity of these banks right now - there is too much on my plate to go into it, but I'd be willing to bet there are double-digit percentage point losses in these banks just today.  DB is down 6.89%.  It is almost certainly too late to get in on this move; once awareness percolates up to our level, the money has (usually) already been made.

https://wolfstreet.com/2018/05/27/which-banks-are-most-exposed-to-italys-sovereign-debt-other-than-the-horribly-exposed-italian-banks/

I'm guessing there will be a whole lot of back and forth on the way to the Euro grave.  Only play in these markets with money you can afford to lose.  I remember 2008 all too well.  Someone gets in front of a camera, says something, and a short-covering rally occurs that just rips a hole in your "sure thing" trade, at least for the moment anyway.

Its probably safest to wait for those sorts of bounces occur - and then jump in short.

 

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