PM End of Week Market Commentary - 2018-07-06

davefairtex
By davefairtex on Sun, Jul 8, 2018 - 3:27am

On Friday, gold fell -2.90 [-0.23%] on moderate volume, while silver edged down -0.02 [-0.12%] to 16.07 on moderately light volume. The buck fell -0.49% - a large move down, and the drop did not seem to help the metals at all.

Viewed from the weekly timeframe, the metals sector map once more shows just how well the miners have been doing. Juniors are leading seniors, and the miner group is doing better than the metals. Gold stayed flat, while silver and copper both continue to have problems – with copper really doing poorly. Copper's terrible performance points directly at China and concern over the potential economic impact of tariffs on China's economy.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Junior Miners GDXJ 2.45% 4.62% rising rising falling rising ema9 on 2018-07-03 2018-07-06
Silver Miners SIL 1.97% -8.94% rising falling falling falling ema9 on 2018-07-03 2018-07-06
Senior Miners GDX 1.34% 5.21% rising rising falling rising ma200 on 2018-07-05 2018-07-06
Gold $GOLD 0.14% 2.55% falling falling falling falling ema9 on 2018-07-05 2018-07-06
Palladium $PALL -0.28% 13.91% falling falling rising falling ema9 on 2018-07-06 2018-07-06
Gold/Euro $GOLD:$XEU -0.54% -0.52% falling falling falling falling ma200 on 2018-06-25 2018-07-06
Silver $SILVER -0.56% 0.34% falling falling falling falling ema9 on 2018-06-15 2018-07-06
Platinum $PLAT -1.16% -7.12% falling falling falling falling ema9 on 2018-06-15 2018-07-06
Copper $COPPER -4.89% 5.86% falling falling falling falling ma50 on 2018-06-19 2018-07-06

Gold rose +1.70 [+0.14%] this week, which is essentially no change. Gold staged a strong rally on Wednesday along with platinum, and printed a swing low Thursday. Daily is back in an uptrend, although a relatively mild one. Weekly remains in a downtrend, but monthly suggests we'd see a buy signal if we closed the month here today.  Forecaster supports this also, moving up +0.23 to -0.21, which is not enough to reverse direction just yet.  I suspect it will be tough for gold to reverse if copper continues to plunge.

The September rate-increase chances rose to 78%.

COMEX GC open interest rose 23,427 contracts this week.  That's 8 days of global production. 

Because of the 4th of July holiday, there is no COT report this week.

Silver fell -0.09 [-0.56%] on the week, making a low on Tuesday to 15.94, then rebounding on Wednesday when platinum made its dramatic low. Forecaster issued a buy signal on Thursday. Even with the rally, silver was not able to regain its 9 MA, and the weekly and monthly forecasters remain in downtrends.  My guess: silver will continue to do poorly if copper continues to fall.

The gold/silver ratio rose +0.54 to 78.15. That's bearish.

COMEX SI open interest fell -4,691 contracts. That's 10 days of global production.

Miners rose +2.65% on the week, with most of that move happening on Tuesday. XAU closed the week well above all 3 moving averages. The gains this week caused the XAU weekly to issue a buy signal, which brings XAU into an uptrend in all 3 timeframes.  Weekly candle print was a swing low, which was a 81% bullish reversal - I have weekly candle code working, and this was a particularly strong one.  All through the recent correction XAU monthly has steadfastly remained in an uptrend – perhaps it knew something I didn't.

The GDX:$GOLD ratio rose +1.21%, and the GDXJ:GDX ratio climbed +1.09%. That's bullish.


Futures Open Interest vs Production

To provide some insight into the paper market's influence over price, I took a look at the current open interest levels vs current annual production for each item.  I ordered the items by percent of total production that the paper markets had as OI.  Platinum was the most interesting case - it has seen a 5x increase in OI over the last 10 years, and a 60% price drop.  Now certainly I cherry-picked the top, but the plunge in platinum has been quite remarkable - and it has happened right alongside the immense rise in OI.  Platinum used to look like copper in terms of OI as a percentage of mine production (about 15-20%), but now it is at 75%.

Just FYI, copper declined in price 56% from 2011-present, but the rise in copper OI as a percentage of global production during the period of decline was unchanged.

Silver: 204,460 contracts (@ 5k oz/contract), or 130% annual production (27,551 tons-2017)

Platinum: 82,607 contracts (@ 50 oz/contract), or 73.4% annual production (183 tons-2016)

Gold: 500,867 contracts (@ 100 oz/contract), or 47% of annual gold production (3,150 tons-2017)

Palladium: 22,128 contracts (@ 100 oz/contract), or 34.2% annual production (201 tons-2017)

Copper:  268,841 contracts (@ 9.3 t/contract), or 13.4% annual production (24.6 tons-2016)

WTI Crude: 2.496m contracts (@ 1k bbl/contract), or 8.3% annual production (29.8B bbl-2018)

USD

The buck fell -0.61 [-0.65%] to 93.73 this week, with a sell signal Monday, and a sharp drop on Friday. It appears that the hints of a potential agreement with the EU on auto tariffs was Euro-positive, as was the saving of Merkel's government – for at least another week anyway. Weekly and monthly forecasters both remain in uptrends; the weekly remains in a reasonably strong uptrend.  This suggests momentum remains higher for the buck in spite of this week's decline.

US Equities/SPX

SPX rose +41.45 [+1.52%] to 2759.82, rallying for 3 out of 4 days. Forecaster issued a buy signal on Thursday, with Friday's move accounting for more than half of the week's gains. Daily and monthly forecasters are now in uptrends, with the weekly still pointing lower.  I think this week's move had to do with a potential settlement of the US-EU tariff dispute, but I'm not sure we've actually reversed trend just yet; the banks still look pretty unhappy.

Weekly sector map shows telecom & sickcare in the lead, with energy and financials trailing. I'm not sure what that means – I look for financials and tech to lead; financials are near the bottom, while tech is closer to the top, so let's call that a relatively neutral map.

VIX fell -2.72 to 13.37.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Telecom XTL 3.50% 7.54% rising rising rising rising ema9 on 2018-07-02 2018-07-06
Healthcare XLV 3.06% 9.12% rising rising rising rising ema9 on 2018-07-03 2018-07-06
Utilities XLU 2.33% 3.34% rising rising falling rising ma200 on 2018-06-27 2018-07-06
Technology XLK 2.29% 30.67% rising rising rising rising ema9 on 2018-07-05 2018-07-06
Homebuilders XHB 1.74% 5.73% rising rising rising rising ma50 on 2018-07-05 2018-07-06
REIT RWR 1.42% 4.51% rising rising rising rising ema9 on 2018-06-20 2018-07-06
Gold Miners GDX 1.34% 5.21% rising rising falling rising ma200 on 2018-07-05 2018-07-06
Cons Staples XLP 1.34% -4.25% rising rising falling rising ema9 on 2018-07-05 2018-07-06
Cons Discretionary XLY 0.91% 24.76% falling rising rising rising ema9 on 2018-07-05 2018-07-06
Industrials XLI 0.74% 5.92% falling falling rising falling ema9 on 2018-07-05 2018-07-06
Materials XLB 0.65% 8.52% falling rising rising rising ema9 on 2018-07-05 2018-07-06
Defense ITA 0.60% 22.03% falling falling rising falling ema9 on 2018-07-02 2018-07-06
Financials XLF 0.30% 7.19% falling falling rising falling ema9 on 2018-07-06 2018-07-06
Energy XLE -0.36% 18.03% rising rising rising falling ema9 on 2018-07-03 2018-07-06

Gold in Other Currencies

Gold rose in most currencies; it fell in Euro and GBP. The moves were not that significant.

Rates & Commodities

TLT rose +0.85% for the week, moving higher in spite of the equity market rally and the decline of the dollar. TY more or less confirms the move, rising +0.20%. TY issued a buy signal, putting it back into an uptrend in all 3 timeframes. It looks as though money is moving towards the long end of the curve. The 10-year yield dropped -1.8 bp to 2.83%.

JNK rose +0.23% for the week, plunging hard on Monday, but then getting it all back over the next 3 days plus a little extra. This roughly corresponds to the rally in equities. More or less. JNK seems to be sensitive to the tariff issue.

Crude fell -1.06 [-1.435] this week, falling back a bit after last week's big move higher. Most of the damage came on Thursday, following a somewhat bearish-looking EIA report (crude: +1.2m, gasoline: -1.5m, distillates: +0.1m). The report wasn't really all that bad, but I think the market had expected better. Friday saw a brisk selloff which ended up being bought; while the daily forecaster remains in a downtrend, weekly and monthly both remain in uptrends. I think we should pay more attention to the monthly here; shale is running into pipeline limitations resulting in US crude production topping out, Libya declared force majeure (yet more fallout from “we came, we saw, he died” - we might consider not bombing places that produce oil), Canada is having issues with its syncrude, Venezuela is in an oil-production death spiral, and Trump wants to cut Iran off completely. To use a bitcoin metaphor: HODL.  [Of course, I'm biased; I'm long]

Physical Supply Indicators

* The GLD ETF tonnage on hand fell -16.80 tons on the week, with 802 tons in inventory.

* ETF Discount to NAV:

 PHYS 10.19 -0.51% to NAV [decrease]
 PSLV 5.85 -3.00% to NAV [decrease]
 CEF 12.54 -3.89% to NAV [increase]

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

* Big bars premiums were: gold [1kg] 1.26% and silver [1000oz] 3.27%.

Grey Swans & Geopolitics

  • German Government/Migration: 5 days after the summit on migration which rescued Merkel's government, German Interior Minister Seehofer said in an interview that “Germany will have to go its own way on immigration if it cannot get other European Union states to sign up to migrant return deals.” Seehofer will blow up Shengen if Greece and Italy don't accept all those migrants back – and of course that won't work for Salvini in Italy. It sounds as though Seehofer wasn't satisfied by the summit, and he has an election coming up in 4 months – and a province full of migrants, which has led directly to a bunch of cranky German voters who are ready to vote in the AfD. Seehofer needs to make those migrants go away to stay in power – or if he can't manage that, at least he needs to be seen to make such efforts.

  • China – Tariffs & Debt: the imposition of tariffs on China has resulted in copper dropping 15% over 4 weeks. In addition, the SSEC (Shanghai Composite) has dropped 24% since the highs in February. These big moves are clues that unpleasant things may be in the offing for China's economy. If China's national income ends up dropping substantially as a result of the tariffs, some subset of the heavily indebted Chinese companies will not be able to make their interest payments, and this could lead to a rash of defaults...causing a banking crisis. This could end up being a really big problem.

  • Yield Curve Inversion: I did a rough study that showed a recession usually followed “soon after” (average: 15 months) the 1 year treasury yield rose above the 10-year treasury yield. The current 10-1 yield differential (2.84% - 2.32%) is 0.53%. Fed effectively controls the 1-year yield via rate policy. Inversion will happen by December 2018 if rates are hiked twice, as expected, with a recession to follow (87% chance) 8-24 months later.  [I composed the chart below before doing the math]

    • 2006-Jan inversion; 2008-Jan recession starts [24 m]

    • 2000-Apr inversion; 2001-Apr recession starts [12m]

    • 1989-Feb inversion; 1990-Aug recession starts [18m]

    • 1978-Sep inversion; 1980-Feb recession starts [17 m]

    • 1973-Mar inversion; 1973-Dec recession starts [9 m]

    • 1968-Apr inversion; 1970-Jan recession starts [21 m]

    • 1965-Dec inversion; no recession

    • 1959-Sep inversion; 1960-May recession starts [8 m]

  • US Congressional Elections, 2018. The generic ballot shows Democrats 46.8% [+8.3%] vs Republicans 38.5%. Democrat win → impeachment attempt? https://projects.fivethirtyeight.com/congress-generic-ballot-polls/

  • North Korea: The Atlantic published an interview with the South Korean Ambassador to the US, where Ambassador Cho suggests more patience, and that the summit was a good start. Trump points out that there have been no new missile launches, and no new nuclear tests.  CIA isn't happy, of course, and so neither is much of their captive media - the following article was an exception. https://www.theatlantic.com/international/archive/2018/07/ambassador-cho-south-north-korea/564359/

  • Mueller Investigation: Giuliani, acting as Trump's attorney, has stated that Mueller cannot interview Trump unless he presents evidence that Trump has committed a crime. DOJ guidance has said that a sitting President cannot be indicted.

Summary

Good news for Europe this week: not only was Merkel's government rescued (for at least a week!), but there were hints of an agreement on a no-tariff policy for auto imports between the US and the EU. Now that wasn't so hard, was it? Equities and the Euro liked that outcome. China has proven to be less flexible, and copper and the SSEC continue to suffer as a result. The metals mostly went nowhere, with silver dragged down by copper's plunge. Miners were the winner in the metals group.  Did I mention that the miners did well?

No COT report this week because of the holiday.

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

To my mind, nothing at all has been settled with migration in Europe. Italy wants migrant processing camps, preferably everywhere, and they want everyone in the EU to agree to split up the refugee burden, and they don't want any migrants returned to Italy.  France is fine with camps – but not in France of course, while Germany/CSU/Seehofer wants to send migrants back to Greece and Italy, which Italy won't accept, Eastern Europe isn't interested in taking any refugees at all, while Merkel just wants to survive for another week. This pretty much has to blow up given the irreconcilable differences – the question is when. Euro will tank when that happens.

Even with the equity market rallying, and money leaving the US (via USD decline), there was still enough juice left to move the long bond higher. That was a bit surprising; perhaps big money is worried about a recession. According to the FOMC minutes, the surprisingly-hawkish Fed seems dead set on raising rates another two times this year; so dead-set that they decided to get rid of “the inverted yield curve” as a metric. (Raising rates will eventually bring about this yield curve inversion – by December - as long as the 10-year rate stays the same - and presumably the Fed doesn't want some indicator to cause an economic-nocebo-effect which could bring about a recession just by talking about it). https://wolfstreet.com/2018/07/05/as-the-yield-curve-flattens-threatens-to-invert-the-fed-discards-it-as-recession-indicator/

If China continues to hold out against Trump's tariff plan, there is a real risk that they could have a debt crisis, as a result of their companies not being able to make interest payments driven by a tariff-driven economic slowdown. That could end up being a really big deal. It might take a while for that to play out, it all depends on how fast the tariffs act.

Meanwhile, the metals are still captive to copper and the concerns about tariffs.

Weekly trends (in order of strength):

Uptrend: crude, USD, 10-year treasury, miners.

Downtrend: copper, silver, gold, gold/Euros, BBB corporates, bitcoin.

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3 Comments

Wantingtoretire's picture
Wantingtoretire
Status: Member (Offline)
Joined: Oct 14 2011
Posts: 11
Full Employment - Tightening Labor Market

Full Employment - Tightening Labor Market have been indicators of recessions. We are now seeing this.

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

Looks like we're going to have some sweet shooting star prints by eod with gold and silver.

New_Life's picture
New_Life
Status: Gold Member (Offline)
Joined: Apr 18 2011
Posts: 366
Shooters
Cold Rain wrote:

Looks like we're going to have some sweet shooting star prints by eod with gold and silver.

how far do you see this going

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