PM End of Week Market Commentary - 7/27/2018

davefairtex
By davefairtex on Sat, Jul 28, 2018 - 12:06pm

On Friday, gold rose +0.10 [+0.01%] to 1222.20 on very heavy volume, while silver climbed +0.12 [+0.78%] on moderate volume. The buck moved lower, off -0.09 to 94.31. Currency influenced the track taken by gold, silver, and platinum, but did not drive it.

The GDP report came out on Friday, which showed the US economy grew by 4.1%. More importantly, the GDP price index was 3% (annualized), which is inflationary even by government standards. Inventories actually shrank; this subtracted 1% from GDP growth, so if we factor out inventories, GDP actually grew at 5.1% in Q2. Ignoring inventories, nominal GDP grew by 7.2%. This pretty much locks in the case for more Fed rate increases. Trump does get the credit, kind of: those tax cuts paid for using all that borrowed money are probably responsible for the massive "growth" in the economy.

The metals sector map improved somewhat this week, with the industrial metals leading higher. While silver led gold, and junior miners led seniors, the miners are seriously trailing the metals, which is bearish overall. It appears that the tariff-related (and China-stimulus-related) bounce in industrial metals this week didn't really help PM move all that much. Last Friday's rally had no follow-through, at least not when it came to gold, silver, or the miners.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Palladium $PALL 3.47% 5.09% rising falling falling falling ema9 on 2018-07-25 2018-07-27
Copper $COPPER 1.65% -2.49% rising falling falling falling ema9 on 2018-07-24 2018-07-27
Platinum $PLAT 0.42% -10.19% rising falling falling falling ema9 on 2018-07-27 2018-07-27
Silver $SILVER -0.23% -6.34% falling falling falling falling ema9 on 2018-07-27 2018-07-27
Gold/Euro $GOLD:$XEU -0.37% -2.84% falling falling falling falling ema9 on 2018-07-26 2018-07-27
Junior Miners GDXJ -0.53% -3.07% falling falling falling falling ema9 on 2018-07-26 2018-07-27
Gold $GOLD -0.79% -2.90% falling falling falling falling ema9 on 2018-07-26 2018-07-27
Silver Miners SIL -1.99% -19.15% falling falling falling falling ema9 on 2018-07-26 2018-07-27
Senior Miners GDX -2.11% -5.54% falling falling falling falling ema9 on 2018-07-26 2018-07-27

Gold fell -9.70 [-0.79%] this week, with a buy signal Tuesday, and then a sell signal Friday. Gold appears to be heading down to re-test the 1210 lows. There is a bit of positive news from Gold/Euros, however; forecaster on Friday issued a buy signal. The chart of GC.EUR does look a bit better; if the selling pressure from Europe is largely at an end, that would help gold from making any dramatic new lows. Gold is in a downtrend in all 3 timeframes; GC.EUR is in a downtrend in both weekly and monthly timeframes.

The September rate-increase chances rose to 90%. There doesn't not seem to be any bad economic news right now. Well, except in the housing market.

COMEX GC open interest fell -48,254 contracts this week. This was a very large drop in open interest; -18k of it came on Friday. Are the commercials covering short in preparation for something? Maybe.

The COT commercial net position rose +8k this week, which was 27k fewer shorts, but also 19k fewer longs. Commercial shorts continue to vanish, and are down to 1-year lows at this point; commercial net is 2-year highs. That's all pretty bullish. Managed money net fell -10k, which was 12k new shorts, and 2k more longs. The managed money net position is the lowest on record, as is the managed money short position. That's as bullish as it gets.

Silver fell -0.04 [-0.23%] on the week, more or less chopping sideways; buy signal Wednesday, sell signal Thursday, with forecaster ending the week at -0.01. Daily forecaster has no idea where silver goes next. Interestingly, the weekly forecaster issued a buy signal, rising +0.24 to +0.01. That does suggest the downtrend has stopped, at least for now anyways. Monthly remains in a downtrend. This picture is far more bullish than I expected it to be, given the buildup in short interest I was seeing all week long.

The gold/silver ratio fell -0.45 to 78.78. That's bullish.

COMEX SI open interest rose 3.544 contracts. Once again, silver OI increased, while the gold OI dropped. It looks like managed money is continuing to load up short in silver.

The COT commercial net position rose by +5k, with 1.1k new longs, and 3.9k shorts covered. Roughly speaking, commercial net is at a “routine” COT high, versus gold's multi-year COT high. The managed money net position fell -4k, which was 6k new shorts, and 2k new longs. While the net position is at a “routine” COT low (routine = “roughly around where lows have happened in the recent past”), the managed money short position is the largest on record. This suggests to me that the decline in silver price has a lot to do with managed money loading up short. We also see this effect in the rising open interest whenever there are rallies. Of course, this is a great deal of short-covering fuel for whenever silver actually bounces and the shorts start to become scared – I predict $0.50 to $1.00 rally days when that happens.  Who knows when that will happen, but with a record number of managed money shorts in place, we can be sure that – at some point – it will happen. The commercials just won't be able to resist doing this to managed money.

Miners fell -3.49% on the week; forecaster did not issue a buy signal, correctly predicting the new low in the miners. XAU has now dropped below the previous low set back in February. There is still one more low before a more general miner collapse would occur, dating back to Dec 2017. Still, the selling pressure in the mining shares is increasing. Miners are in a downtrend in all 3 timeframes.  You can see in the chart below - not a hint of a reversal.

The GDX:$GOLD ratio fell -1.34%, while the GDXJ:GDX ratio rose +1.62%. While normally a junior miner outperformance would be bullish, I suspect this occurred as a result of several senior miners reporting bad earnings: Goldcorp down 8%, Barrick down 9%, Agnico Eagle down 9%, and New Gold plunged a massive 34%. Since juniors generally don't have production, they don't suffer from bad earnings reports. I'm not going to call this behavior “bullish”.

USD

The buck rose +0.20 [+0.21%] to 94.31. Mostly the buck moved sideways, flipping back and forth between buy and sell signals all week long. Forecaster ended the week at +0.05, which is an uptrend, but not a strong one. Weekly timeframe: +0.02, also a very weak uptrend. Monthly looks a bit better at +0.21, so let's say the longer term uptrend remains in place. Currency-moving events this week included a possible settlement in the US/EU tariff fight (Euro-positive), and an ECB meeting where Draghi once again said he would see negative rates until the cows return home (i.e. his departure from the ECB in October, 2019 (Euro-negative). These offsetting influences is probably why the buck went nowhere.

US Equities/SPX

SPX rose +16.99 [+0.61%] to 2818.82. It was a pretty good week right up until Friday, when SPX plunged -18.62; tech led the market lower, with some bad earnings from Intel. Biggest news on the week was the cratering Facebook, down 17% after issuing slower guidance than the market had apparently expected. All this wasn't enough to drag SPX into a downtrend; it remains pointing higher in all 3 timeframes, although both daily and weekly are looking fairly weak. SPX ended the week right at the 9 MA.

Weekly sector map shows energy and industrials in the lead, with financials doing fairly well also Trailing are the homebuilders; home sales numbers have been consistently bearish for the past three months, with both existing home sales (Monday) and new home sales (Wednesday) reports looking weak. It is a somewhat bullish sector map this week, although its less bullish if you look at what happened to tech, and especially the NASDAQ (-0.73%).

VIX rose +0.17 to 13.03.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Energy XLE 2.32% 15.15% rising falling rising falling ma50 on 2018-07-25 2018-07-27
Industrials XLI 2.11% 11.39% rising rising rising rising ma200 on 2018-07-25 2018-07-27
Financials XLF 2.07% 12.93% rising falling rising falling ma200 on 2018-07-23 2018-07-27
Materials XLB 1.73% 7.31% rising falling rising falling ma200 on 2018-07-27 2018-07-27
Healthcare XLV 1.38% 10.56% rising rising rising rising ema9 on 2018-07-24 2018-07-27
Cons Staples XLP 0.98% -4.35% rising rising falling rising ema9 on 2018-07-24 2018-07-27
Utilities XLU 0.67% -0.90% rising rising falling rising ema9 on 2018-07-26 2018-07-27
Defense ITA 0.35% 24.02% rising rising rising rising ma50 on 2018-07-12 2018-07-27
Cons Discretionary XLY -0.45% 21.23% falling rising rising rising ema9 on 2018-07-26 2018-07-27
REIT RWR -0.84% -1.97% falling rising falling rising ema9 on 2018-07-27 2018-07-27
Technology XLK -0.96% 24.96% falling rising rising falling ema9 on 2018-07-27 2018-07-27
Telecom XTL -1.90% -2.22% falling rising rising rising ma50 on 2018-07-23 2018-07-27
Gold Miners GDX -2.11% -5.54% falling falling falling falling ema9 on 2018-07-26 2018-07-27
Homebuilders XHB -4.46% 1.21% falling rising falling rising ma50 on 2018-07-24 2018-07-27

Gold in Other Currencies

Gold fell in every currency this week. Gold did best in Euros.

Rates & Commodities

TLT fell -1.08% on the week, with all of the damage happening on Monday. The week looked like a cluster of red candles, which says that there was a lot of selling pressure even though price didn't move very much after the big drop on Monday. TY confirms the drop, losing -0.44%, although it did rally on Friday. TY is now below all 3 moving averages. TY weekly forecaster also issued a sell signal this week, which puts TY in a downtrend in both daily and weekly timeframes. TY monthly remains in an uptrend. The 10-year yield rose +6.5 bp to 2.96%.

JNK rose +0.36% on the week, charging higher in the face of the downdraft in treasury bonds. This suggests a risk on move in the bond market – traders are moving from high quality to crap. While JNK did sell off a bit on Friday, it wasn't a very large move.

Crude rose +0.90 [+1.32%] on the week, moving higher in fits and starts. Friday saw a small sell-off (-0.50) which resulted in a sell signal for crude, which means crude is now in a downtrend in both daily and weekly timeframes. Crude remains in a strong uptrend on the monthly. The EIA report was bullish (crude: -6.1m, gasoline -2.3m, distillates: -0.1m), which resulted in a modest rally on Wednesday. Crude ended the week back above all 3 moving averages, which is a bullish sign.

Physical Supply Indicators

* The GLD ETF tonnage on hand rose +2.07 tons, with 800 tons in inventory.

* ETF Discount to NAV:

 PHYS 9.90 -0.89% to NAV [decrease]
 PSLV 5.66 -2.84% to NAV [decrease]
 CEF 12.24 -3.51% to NAV [decrease]

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

* Big bars premiums were: gold [1kg] 1.52% and silver [1000oz] 3.29%.

Grey Swans & Geopolitics

  • German Government/Migration: No news this week.

  • Italy – Migration: Brussels has proposed offering 6000 Euros per migrant for any country that voluntarily establishes a “secure processing center” for migrants rescued from the Frontex naval mission. Salvini rejected the amount, stating that it cost Italy more than 40,000 Euros per migrant, but he agreed to keep accepting migrants for the next 5 weeks while negotiations take place. To date, no EU nation has agreed to open such a center, and the EU has been unable to convince any African nations to open such a center either. Perhaps the incentives need to increase?

  • China – Tariffs: Juncker came to Washington ready to make a deal, and it appears one was made.  Te US and EU have agreed to form a working group to sort out trade and tariff issues, to put any new tariffs on hold, and perhaps more importantly, the two countries agreed to work together on the mutual issues we have with China. Meanwhile, the CNY/USD continues to rise, from 6.40 to 6.78 in 6 weeks, effectively making all Chinese goods 5% cheaper to US consumers.

  • China – Debt: China decided to speed up $200 billion in infrastructure spending – an act of debt-funded stimulus. In June, defaults of “platforms” in the China's P2P lending market jumped from 67 to 150 over the last 7 weeks – that's 8% of the total number of platforms. Millions of investors are at risk; the government converted two sports stadiums into “customer-service centers” to deal with the volume of complaints. From all accounts there has been massive fraud in this industry. (Fraud occurs with unregulated lending; who knew?) Events like this are always deflationary, as they impact confidence. https://www.businessinsider.com.au/chinese-authorities-turned-two-sports-stadiums-into-complaints-centres-to-deal-with-growing-problems-with-p2p-lending-2018-7

  • Yield Curve Inversion: the 1-10 spread widened 7.4 bp to 55.4 bp. Inversion went backwards again this week because the 10-year rate shot higher, and the 1-year rate fell slightly.

  • US Congressional Elections, 2018. The generic ballot shows Democrats 47.8% [+7.7%] vs Republicans 40.1%. Democrat win → impeachment attempt? https://projects.fivethirtyeight.com/congress-generic-ballot-polls/

  • North Korea: North Korea returned the remains of 55 US servicemen killed and missing since the Korean War, fulfilling a pledge that KJU made during his summit with President Trump. North Korea has also begun to dismantle a missile test site, something KJU also promised at the summit. Some small steps forward.

  • Mueller Investigation: CNN alleges that “sources with knowledge” claim that Cohen, Trump's old attorney, is now alleging that Trump knew ahead of time about a meeting with Russians in Trump Tower, and that Trump approved going ahead with the meeting. Alan Dershowitz has maintained that there is nothing illegal about meeting with Russians, or even about accepting dirt from the Russians, “as long as you didn't have anything to do with the illegal nature of obtaining the information.” But we're all being programmed to gasp when Trump is alleged to have knowledge of a meeting where said dirt was supposedly presented. https://www.realclearpolitics.com/video/2017/07/12/alan_dershowitz_i_dont_see_a_crime_with_don_jr_meeting.html

Summary

The metals bounced, but not very high, with the bounce noticeably fading on Friday.  Trump and Juncker more or less declared a truce in the US/EU tariff war, and established a working group to sort out a settlement.  China is seeing a rash of defaults after finally cracking own on a collection of $200 billion in wild-west, unregulated p2p lending websites.  An unknown, but probably large number of depositors have suffered losses.  Stadiums are being used to process complaints.

Big bar gold and silver premiums inched higher, and ETF discounts fell. My supply indicators suggest there is no current shortage of physical gold.

The gold COT report shows managed money net positions have fallen below levels last seen in December 2015, and the commercial net continues to climb. We remain at a COT low for gold. Gold open interest also dropped this week, which tells us that (commercial) short covering in gold has continued. Silver COT also looks bullish, but more moderately – except for the short position that managed money has, which is an all-time high for that series. And it appears that managed money continued to add to their short positions this week – OI in silver continues to increase. This is a large amount of fuel for a rally, if and when one ever occurs.

While the charts really don't look all that great, and the miners look particularly bad, when viewed through the lens of the COT report, it all seems to be a setup by the commercials to hose managed money after they've piled in short. It is just that the commercials are taking their sweet time about pulling the trigger.

And yet, what will the trigger be? Armstrong says we need a crisis of confidence in government in order to convince people to buy gold. Certainly it doesn't seem as though inflation is going to be a trigger this time around. After all, the Q2 GDP had the deflator at 3%, which is a pretty hot reading for government-measured inflation. Gold did move higher off the announcement – a whole $5.  Woohoo.

So I don't know. The US/EU tariff-detente didn't do it. Neither did a hot GDP/inflation rating. I suppose we just have to watch and wait. It is possible we are in the middle of a “bottoming process”. The first sign of a change in sentiment might just be a $0.50 move in silver, as the commercials smash the market higher, terrifying managed money shorts which have all piled to one side of the boat after having been lulled into a false sense of security. (Enough metaphors mixed together yet?)  When that happens is anyone's guess.  If it even happens that way. We might need to make a new low to do it, just to hose all the new longs.

Alternatively, if the buck takes off, we could go down a long way before we hit bottom.

I definitely liked seeing all the short-covering in gold on Friday.  It didn't really show up in prices - it probably means that the commercials are covering as fast as managed money is going short.  That's a positive sign.

Weekly trends (in order of strength):

Uptrend: DJIA, bitcoin, SPX, USD, silver.

Downtrend: gold, miners, crude, gold/Euros, 10-year treasury, NASDAQ, copper.

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2 Comments

sand_puppy's picture
sand_puppy
Status: Diamond Member (Offline)
Joined: Apr 13 2011
Posts: 2014
More hedge funds shorting gold

I really don't get this.  Who is this and what do they think is about to happen?

Source

Uncletommy's picture
Uncletommy
Status: Platinum Member (Offline)
Joined: May 3 2014
Posts: 620
The game's afoot

"Something is rotten in the state of Denmark". Hamlet - Marcellus, Act 1, scene 4;

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