PM Daily Market Commentary - 8/14/2018

davefairtex
By davefairtex on Wed, Aug 15, 2018 - 3:26am

Gold moved up +0.71 [+0.06%] to 1201.91 on moderate volume, while silver climbed +0.05 [+0.43%] to 15.05 on moderate volume. The buck rose +0.36% - mostly because of an -0.58% drop in the Euro, which continues to suffer from capital flight because of the situation in Turkey. 

Here's something I've noticed about these crises and how they function. First a major problem gets created. It bubbles for a while, steadily getting worse. Presumably, those in power hope the problem fixes itself, but of course, that doesn't happen. Then at one point, something triggers an explosion. This causes the central planners to tell everyone they're going to fix it (but often, they don't say how - or the fix just amounts to rearranging the deck chairs as the Titanic settles lower in the water), and the market reacts positively (causing the shorts to cover in a panic) but then things don't really get fixed, the market figures this out, and then prices take another leg down.

So today the Turkish central bank cut reserve requirements, thus providing liquidity to the Turkish banks. Turkey’s central bank pledged to provide “all the liquidity the banks need”. It added: “[We] will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary.” And there were talks about Erdogan moving closer to Russia.  And other stuff too.  https://www.theguardian.com/world/2018/aug/13/turkey-financial-crisis-lira-plunges-again-amid-contagion-fears

So of course the Lira bounced back – but not the Euro, which continued plunging today. The Euro is cleanly through 115 support to 113.44, and there is quite a bit of air between 115 and the previous low of 104.

Can anything “fix” Turkey? Well, "more liquidity to Turkish banks” is not going to do it. Over the past 3 years, inflation in Turkey was ranging from 10-15% per year. During that time, the central bank kept rates at 7.25%, far below the rate of inflation.  So if you can borrow at 7.25%, and inflation is 10-15%...everyone borrows as much as they can, because its a guaranteed rate of return. Duh. Its not a mystery where the problem came from: Erdogan wanted to pump his economy prior to the election using ultra-low rates.  It worked, and he won, but now he has a currency crisis. After 3 years of ultra low rates, inflation is at 16%. And this is government-measured inflation.  If the central bank raises rates high enough to really stop inflation (a la Volcker in 1980) it will cause a massive recession, which Erdogan gets to own since he's been in power for 15 years.

What's more, the price charts suggest its too late anyway. Confidence has already snapped. So Erdogan is forced to make this about a plot by the West to undermine his government. Maybe there is such a plan but its also a massive, self-inflicted wound due to an irresponsibly loose monetary policy over the last 3 years. Imagine if the Fed kept rates at 0%, when inflation ranged from 3-10% per year? That's what Erdogan did in Turkey for three full years.  The resulting spurt of inflation got him elected, but now he's paying the price.

And now we get to see how Turkey's collapse ends up affecting Europe.  Syrian migrants?  Turkish migrants fleeing hyperinflation (see Venezuela)?  Capital controls?  Defaults on external debt?  Western banks hosed by the various games Erdogan will play trying to make everyone else pay for the troubles he himself caused?  What happens to Incirlik air base?  Will Erdogan arrest US soldiers and airmen, constructing an external enemy to distract from his domestic economic crisis?  Will China jump in?  (Can they, given their weakening economy?). How about Russia?  Does Russia have enough spare cash?  I predict: things will just get more and more interesting.  There will be lots and lots of actions taken in the hopes it will be enough.  But ultimately I am reminded of a fish-out-of-water: there is a whole lot of flopping around for a surprising amount of time, but the end state is pretty much guaranteed.

Supposedly there is a fix: a "currency board" - the solution proposed by a guy who...might just be looking for a consultant position establishing such a board in Turkey.  But that means Erdogan must relinquish his ability to pull the economic and monetary levers in his economy - and it guarantees that recession, just like the US had in 1980.  If you were Erdogan, why on earth would you choose to do that, when you can continue to blame everyone else and attempt to make all of them pay for it while you remain in power?  https://www.cnbc.com/2018/08/14/turkey-annual-inflation-rate-is-running-at-an-estimated-101-percent.html

Gold basically chopped sideways today, managing to resist falling even though the Euro fell fairly hard. The doji candle was not rated – it was an inside day – and trading range was narrow. Gold forecaster fell -0.11 to -0.38, which suggests the downtrend is getting a bit more intense. If one day you see a big plunge, and the next day, the bounce is anemic to nonexistent, that's not a good sign. Gold remains in a downtrend in all 3 timeframes, while gold/Euros is in an uptrend in the daily and weekly timeframe. Given the Euro's plunge, they are having to work overtime to keep gold from rallying too strongly across the pond.

COMEX GC open interest rose 2,211 contracts. No big increase in shorts = no move lower in price.

Rate rise chances (September 2018) remains at 96%.

Silver bounced back slightly – it managed to avoid following copper downhill as the dip-buyers appeared. Trading range was narrow; the short white candle was unrated as it was an inside day. Forecaster was unchanged, but still in a strong downtrend. How long can silver avoid the pull of falling copper prices? Silver remains in a downtrend in all 3 timeframes.  Today's bounce did not suggest any real dip-buying, which looks a bit bearish to me.

COMEX SI open interest fell -1,242 contracts. Interesting. A slight reduction in OI, and silver rallies.

The gold/silver ratio fell -0.30 to 79.86. That's somewhat bullish.

Miners rallied briefly in the morning, and then sold off for the rest of the day. GDX fell -1.05% on moderate volume, while GDXJ dropped -0.74% on moderate volume also. XAU dropped -1.30%, worse than both ETFs. New lows all around, all the candle prints were bearish continuations, forecaster remains in a strong downtrend. Miners appear to be in free-fall right now.

The GDXJ:GDX ratio rose +0.31%, while the GDX:$GOLD ratio fell -1.11%. That's bearish.

Platinum fell -0.22%, palladium rose +0.67%, while copper dropped -1.85%, heading for a re-test of the lows set back in July. The move lower in copper was about China, of course; China's economy is slowing down, and copper always pays the price. So even with the palladium rally today, we have palladium: downtrend, platinum: downtrend, copper: downtrend. How silver managed to avoid selling off given copper's move down is anyone's guess.  How long can it do this?  I think: not very long.

Crude fell -0.76 [-1.14%] to 65.79, with most of the damage happening after the API report (crude: 3.7m, gasoline: -1.6m, distillates: +1.9m) came in unexpectedly bearish. The plunge was enough to flip the forecaster back into a sell (-0.61 to -0.34); it looks like the Goldman-promised “tight oil market” has yet to materialize. Surprise, surprise. Oil has now moved into downtrend in all 3 timeframes; today's drop was enough to cause the monthly to issue a sell signal – assuming we close the month at these prices.

SPX rose +18.03 [+0.64%] to 2839.96. This caused SPX to move back to just under its 9 MA. Cyclicals did best (XLY:+0.97%) along with financials (XLF:+0.94%) while utilities did worst (XLU:-0.21%). It was a reasonably bullish sector map.

VIX fell -1.47 to 13.31.

TLT fell -0.22%, selling off slowly for most of the day. TY also fell, losing -0.12%, printing a weak-looking swing high (38% bearish reversal). TY forecaster remains in an uptrend, however. It looks as though bonds are taking a bit of rest after bouncing hard last week. The 10-year treasury yield rose +1.8 bp to 2.90.

JNK rallied +0.14%, managing to recover some of the recent losses, but JNK remains in a downtrend, at least for now.

CRB rose +0.07%, with 3 of 5 sectors moving higher, led by agriculture (+1.10%). Industrial metals did worst (-1.36%); that's China again.

So now to add to the Turkey issue, there is an apparent slowdown happening in China. If its not one thing, its another. I don't think Turkey gets fixed; any rate increase from the Turkish central bank will come too late, since the bankers are not in control – Erdogan is, and for him to stay in power, he can't possibly shoulder the blame for the follow-on recession that is a necessary consequence of the horribly loose monetary policy he put in place to get himself re-elected.   So instead of taking responsibility, he is going to blame whomever he can. The US, Russia, Europe, Syria. Whomever. Rate policy will stay loose to avoid that recession, and instead his policy will be to arrest people who post any disloyal “lira is falling” tweets, and he'll try to get his supporters to sell their inflation hedges so he can remain in power. Man. Gotta love sociopathy: shoot any potential messengers, and sacrifice your supporters savings on the altar of remaining in power.

I'm going to close with an interesting, short video from Martin Armstrong.  He said something in this that I haven't heard before.  He said: "when you buy bonds, your are basically deciding you want to be long the currency.  When you buy assets, you are basically shorting the currency.  That's your choice."  This, from the perspective of overseas investors.  A mix of stocks and bonds presumably means you are neutral.

That's why, during hyperinflation (or Turkey's leading-to-hyperinflation), you want to be long assets, and short the currency.  Get out of bonds, and buy equities.  Assuming those are your two choices, of course.  Its also the reason why Fed money printing leads to an equity market rally.  Money moves from currency to assets.  It's not about PE ratios, or value - its just about where to park the money.

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14 Comments

davefairtex's picture
davefairtex
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platinum cratering again

Platinum is cratering again, down -3.18% after yesterday's close.  Copper too, down -2.59%.  This has dragged down silver (-1.61% to 14.81) and gold (-0.76% to 1191.60) also.  Given the drop in copper - which plunged through its previous low today - I'm assuming this move is more economic-related than the platinum-only-pounding that took place on Monday.

New lows for most everything today, including the Euro: 113.10.

I'm guessing the miners are going to have a terrible day.  Feels like capitulation is coming soon.

 

Cold Rain's picture
Cold Rain
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Posts: 377
Obliteration

PM space just annihilated.  I can't wait to see the spin from King World News.  I guess it'll be a long time before miners are a good investment again.

debu's picture
debu
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Thank you, Cold Rain!

Love your trolling, CR! It never gets old...

davefairtex's picture
davefairtex
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capitulation

That's what you are feeling right now.  You never want to see a miner, ever again.

That goes along with GDX RSI-7=8, GDXJ RSI-7=6.  It doesn't get much more depressing than this.

In fact, looking over the history of GDX, it has happened exactly once, on July 20, 2015.

This is what the technicals are for.  To tell you, "gosh, this really is pretty unpleasant, you aren't just imagining things."

Some thoughts:

1) perhaps Erdogan is selling his gold reserves to preserve his position.

2) That solid platinum asteroid is approaching earth orbit.

 

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
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Posts: 377
Thanks
debu wrote:

Love your trolling, CR! It never gets old...

Thanks!  Not really trolling, though.  Just commenting on the action.  We’ve heard so much since 2015 about how the world is coming apart at the seams (and it is), and how gold is going nowhere but up and how the mining shares are going to go up and how stocks are extremely overvalued and due for a crash, and the very opposite of all of that is playing out (except for the world coming apart — it is).  Most of the alt media and goldbug community has been all over this.  I think they’ll eventually be right, but nothing seems to be according to the general consensus view at it pertains to price action.  Now, it looks like things in the PM space are on the verge of really breaking down.  It seems like it’s going to be a long wait.

Anyway, was there something you’d rather talk about?  You choose the next topic.  I don’t want to be rude and overwhelm all of the other posts here with comments about the metals space.

Cold Rain's picture
Cold Rain
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The Solid Platinum Asteroid Theory
davefairtex wrote:

That's what you are feeling right now.  You never want to see a miner, ever again.

That goes along with GDX RSI-7=8, GDXJ RSI-7=6.  It doesn't get much more depressing than this.

In fact, looking over the history of GDX, it has happened exactly once, on July 20, 2015.

This is what the technicals are for.  To tell you, "gosh, this really is pretty unpleasant, you aren't just imagining things."

Some thoughts:

1) perhaps Erdogan is selling his gold reserves to preserve his position.

2) That solid platinum asteroid is approaching earth orbit.

 

I like that theory, Dave.  Let's go with that.  Probably just as realistic as gold being a safe haven/banking crisis/global collapse hedge these days.  Ha!

Many of the miners I follow were a lot lower leading into 2016 than they are now.  So if gold and silver continue to fall back toward those levels, I don't see why some of those miners can't go back and retest those levels...or get close.  Could get a lot worse, even though it feels bad and is bad right now.

Michael_Rudmin's picture
Michael_Rudmin
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Posts: 913
Or... maybe

... maybe Sand Puppy's post-- the organized CARBANAK crime gang that robbed the spanish/Japanese banks of over $1B and are (according to the FBI) about to pull off a worldwide heist, just are using that first billion to short the PMs, and drive people into banks just before the heist.

Then they can buy the PMs cheap, as people run for cover..

You know, we really DON'T know what's going on.

sand_puppy's picture
sand_puppy
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sand_puppy's picture
sand_puppy
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Petey1's picture
Petey1
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Posts: 69
Hard to stay loyal

It’s getting really hard to believe precious metals will bounce back before I get to work less (retirement looks like a dream now).

nedyne's picture
nedyne
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Posts: 72
Silver

ZH says that the silver continuous contract is at a 9 year low, but according to BullionVault silver spot hit a low of 13.65 in January 2016, so it's still safely above that 3-year low for. https://www.bullionvault.com/silver-price-chart.do

But platinum... hasn't been this low since 2003! Not even in the depths of the 2008 depression did it get to this level.

nedyne's picture
nedyne
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Petey1 wrote: It’s getting
Petey1 wrote:

It’s getting really hard to believe precious metals will bounce back before I get to work less (retirement looks like a dream now).

The US can't run trillion dollar deficits forever and gold stay down forever. One day deficits will matter.

thc0655's picture
thc0655
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Posts: 1698
Capitulation?

You guys and your despairing comments are making me think we’re at or approaching a psychological bottom in the PM markets (capitulation). So Friday I’m going to go to my local dealer and convert some worthless Federal Reserve Notes into a couple ounces of gold. The last time gold was this low I didn’t convert anything because I was hoping to see a low below $1,150 before I did anything. Now I think I’ll get a couple of ounces periodically as it slides downward toward and hopefully below $1,150, that way I won’t be left with nothing when the price rebounds. You do know that late summer is usually a short term weak season in gold prices and September typically is one of the strongest months, right? I’m hoping to see $1,400 by year end (but that’s not why I’m buying).  I think this is what they mean by “buying when there’s blood in the streets.” Lucky for me, I still have time on my investment horizon. Until events conspire to rob my wife and I of our conventional retirement income sources (municipal pensions and Social Security) we won’t need to cash in our gold and silver insurance policies. 

I know. I know. I’m either crazy or brilliant. 

“Welcome to the Hunger Games. And may the odds be ever in your favor.”

davefairtex's picture
davefairtex
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Posts: 5655
capitulation

Tom-

You guys and your despairing comments are making me think we’re at or approaching a psychological bottom in the PM markets (capitulation). So Friday I’m going to go to my local dealer and convert some worthless Federal Reserve Notes into a couple ounces of gold...

Exactly right.  No guarantee this is THE LOW, but it is certainly a whole lot better to buy now than it was to buy, say, 4 months ago when everyone was happy.  Yes?  And our emotions are such great indicators of what capitulation feels like...and it sure feels like we are pretty darned close.

And we're below the cost of production.  And that's always a decent time, yes?

As for worthless FRNs, please send me any extra worthless FRNs you have lying around.  I can find a use for them doing something.

I hate to scream BUY to everyone because if it drops more, everyone will be really unhappy.  But it really is a good time.

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