PM End of Week Market Commentary - 8/17/2018

davefairtex
By davefairtex on Sun, Aug 19, 2018 - 3:31am

On Friday, gold rose +10.91 [+0.92%] to 1192.72 on moderate volume, while silver climbed +0.14 [+0.96%] to 14.78 on heavy volume. The buck plunged -0.58% on Friday – the market unwound some of its safe haven mood; Turkey was apparently rescued by Qatar, and China seems ready to negotiate about tariffs. Is this an everyone-back-in-the-water signal? Let's see what the numbers show.

The metals sector map looks pretty ugly; gold led silver, metals did better than the miners, which is a bearish pattern. Junior miners were down a huge 10%. No doubt about it, it was a bad week for the metals. That said – palladium is showing a break above the 9 MA on Friday. That's a hint of a recovery from a very unpleasant week for the metals.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Palladium $PALL -1.36% -3.85% falling falling falling falling ema9 on 2018-08-17 2018-08-17
Gold/Euro $GOLD:$XEU -2.14% -5.13% falling falling falling falling ema9 on 2018-08-15 2018-08-17
Gold $GOLD -2.25% -7.87% falling falling falling falling ema9 on 2018-08-01 2018-08-17
Copper $COPPER -3.11% -8.61% falling falling falling falling ema9 on 2018-08-10 2018-08-17
Silver $SILVER -3.49% -13.19% falling falling falling falling ema9 on 2018-08-10 2018-08-17
Platinum $PLAT -4.91% -19.38% falling falling falling falling ema9 on 2018-08-10 2018-08-17
Silver Miners SIL -7.58% -26.40% falling falling falling falling ema9 on 2018-07-26 2018-08-17
Senior Miners GDX -8.95% -18.71% falling falling falling falling ema9 on 2018-07-26 2018-08-17
Junior Miners GDXJ -10.16% -17.69% falling falling falling falling ema9 on 2018-07-26 2018-08-17

Gold plunged -27.09 [-2.22%] on the week, making its low on Thursday to 1167 but then bouncing relatively strongly on Friday. Candle print was a swing low, which was a relatively strong (58%) bullish reversal pattern. Forecaster shot up +0.58 to -0.11. The volume on Friday was a bit light, but on balance things look promising.

The September rate-increase chances rose to 94%..

COMEX GC open interest rose +11,215 contracts this week.

The COT commercial net position rose +18k; commercial net is at roughly the same place it was at the lows for gold in December 2015. Commercials covered 8.2k shorts, and bought 10k longs. Managed money net fell -17k to yet another new record; that was almost all about 16k new shorts, with 1k fewer longs. That's incredibly bullish – for the rebound if and when it occurs. Once the shorts start to cover, the move in gold should be pretty exciting.

Silver dropped -0.54 [-3.49%] this week, with the big loss coming on Wednesday, when silver fell -0.63 in one massive plunge. Silver wasn't quite able to print a swing low on Friday, however silver forecaster issued a buy signal, rising +0.37 to +0.03. Daily forecaster thinks this could be the low for silver, but silver remains in a downtrend in the weekly and monthly timeframes.

COMEX SI open interest rose 2,008 contracts.

The COT commercial net position rose by +9.7k, with 5k new longs, and 4.6k shorts covered. Managed money net fell by -8.3k; most of that was 7.4k new shorts, along with 930 fewer longs. Managed money shorts continues to make a new record every week. Silver should be at or near the lows according to the COT.

Miners cratered this week, with XAU dropping -10.76%. A collection of bad earnings reports for many of the miners plus a plunging gold price resulted in a capitulation week; large price moves on very heavy volume. Do the miners do this sort of thing relatively often? Turns out yes, they do. This was only the 29th worst week ever suffered by XAU; that puts it in the top 2% - or the bottom 2%, depending on how you view it - which makes it a fairly unpleasant experience. Miners did recover on Friday, but Friday's bearish harami wasn't all that great: it was just a 34% bullish reversal. Forecaster ticked up just +0.09 to -1.04. It seems that the miners have a lot of work to do before they recover.

GDX:$GOLD plunged -6.88%, and the GDXJ:GDX ratio fell -1.33%. That's quite bearish.

USD

The buck fell -0.26 [-0.27%] to 95.72. The buck did make new highs this week, but topped out on Wednesday, and then corrected on Friday. The falling buck on Friday definitely helped the metals to recover.  As a result, the buck has printed a swing high, and DX forecaster issued a sell signal on Friday also. However, the buck remains in an uptrend in both the weekly and monthly timeframes.

The fall in the buck was mostly about a sharp recovery in USD/TRY.  Even though TRy has recovered, I still maintain that Turkey remains doomed. I believe the true story is being told by the 10 year bond yield, which remains around 21%. There is almost a trillion TRY in government debt, or about $161 billion US. Armstrong has told us that if you hold the bonds, you are long the currency. Thus, bonds and currency cannot diverge for any meaningful amount of time. If there was real hope for Turkey, the yield-starved folks around the world would be lining up for their chance to buy an instrument that yielded 21%. As you can see from the chart below, that is just not happening. Inflation remains at...some calculate 100%...so a 21% yield is still a really bad deal. And Erdogan apparently doesn't believe in rate increases, which is really the only hope Turkey has of containing inflation, which to date has been driven by private debt/money printing. (If people can borrow money at less than the rate of inflation, people will do just that, creating more money, causing more inflation).

Last month, Erdogan appointed his brother in law to head the finance and treasury ministries. This move was straight out of "Rules for Rulers." More specifically, Death and Dynasties: "Put family in high-ranking political or military positions.  Never mind their qualifications.  Being family IS the qualification.  They work with the key supporters so they know where the money comes from, and how it is distributed."  That works great to keep the Erdogan dynasty in power, but it is substantially less great if the goal is to engender confidence in Erdogan's committment to run the economy properly.

So in the chart below, do you believe the $161 billion dollar Turkish sovereign bond market, or the USD/TRY currency pair?  As I said before, I put my faith in the bonds.  I believe that if yields dropped sufficiently (say due to attempted intervention), a large number of current holders would sell, given the market's demonstrated lack of faith in Erdogan.  Of course that's just a guess.  But given how these two series have moved in tandem over the past few years, one of these two indicators is giving off the wrong signal right this moment.

The EU really doesn't want Turkey to explode (causing an EU banking crisis, and/or a sharp increase in the refugee/migrant crisis), so they will probably help however they can – including jawboning, perhaps direct intervention in the currency & gold markets, happy-sounding, supportive (but cost-free) noises from Presidents and Prime Ministers: "that Erdogan fellow, such a clever guy, he has our full support in this crisis", etc.

But Turkey remains an emerging economy.  It can't get away with the stuff that the Fed, the ECB, or the BOJ can do. And the ECB can't materially aid Turkey, the way they can with Italy.  Unless Turkey takes action - raising rates and thus cutting the head off the inflation monster - it is toast. Ultimately, I think this state of serious underlying tension will keep a bid underneath the buck, but the ultimate denouement in Turkey may well take a while to play out, because of all the official intervention that I see coming down the road.

US Equities/SPX

SPX rose +16.85 [+0.59%] to 2850.13. The move higher this week in SPX happened in fits and starts, but finally resulted in a reasonably strong rally on Friday, causing SPX forecaster to issue a buy signal. SPX is back to an uptrend in all 3 timeframes.

The sector map shows REITs and Utilities at the top of the heap, with energy and materials trailing. Tech and financials are mostly unchanged. That looks fairly bearish to me; you never like to see the high-yielders at the top. This week's map is showing clear signs of a commodity-price slowdown, probably driven by reports from China that its economy is beginning to turn lower.

VIX fell -0.54 to 12.62.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
REIT RWR 3.38% 5.19% rising rising rising rising ema9 on 2018-08-15 2018-08-17
Cons Staples XLP 3.34% -0.60% rising rising rising rising ema9 on 2018-08-15 2018-08-17
Utilities XLU 2.89% 0.63% rising rising falling rising ema9 on 2018-08-13 2018-08-17
Healthcare XLV 1.63% 16.25% rising rising rising rising ema9 on 2018-08-14 2018-08-17
Industrials XLI 1.61% 13.14% rising rising rising falling ema9 on 2018-08-16 2018-08-17
Telecom XTL 1.43% 8.15% rising rising rising rising ema9 on 2018-08-16 2018-08-17
Defense ITA 1.32% 24.00% rising rising rising falling ema9 on 2018-08-16 2018-08-17
Financials XLF 0.72% 14.47% falling rising rising falling ema9 on 2018-08-16 2018-08-17
Homebuilders XHB 0.36% 4.50% falling falling falling falling ema9 on 2018-08-17 2018-08-17
Technology XLK 0.16% 28.04% rising rising rising falling ema9 on 2018-08-15 2018-08-17
Cons Discretionary XLY -0.19% 26.86% falling rising rising falling ema9 on 2018-08-15 2018-08-17
Materials XLB -0.43% 8.83% falling falling falling falling ema9 on 2018-08-10 2018-08-17
Energy XLE -3.56% 17.09% falling falling rising falling ma200 on 2018-08-16 2018-08-17
Gold Miners GDX -8.95% -18.71% falling falling falling falling ema9 on 2018-07-26 2018-08-17

Gold in Other Currencies

Gold plunged in every currency this week, and not by a little bit, either.  That gold/JPY chart looks pretty bad.

Rates & Commodities

TLT moved up +0.27% on the week, moving slowly higher, making a new high on Friday. TY looks similar, rising +0.10%, however at end of week, the daily TY forecaster is hovering right on the edge of a sell signal, suggesting that the 3-week move higher in bonds may be running out of steam. TY remains in an uptrend in all 3 timeframes. But in spite of the slowdown in momentum on the daily chart, I'd guess that the situation in Turkey, among other pressures, will keep a bid underneath treasury bonds over the longer term.  My feeling about the treasury market parallels my feeling about the buck.  Both appear to be steadily moving higher.  The 10-year yield rose +1.6 bp to 2.87%.

JNK rose +0.14%, looking as though it might start to move higher once more. Mostly JNK has been chopping sideways for the past month. However viewed from the longer term perspective, the bounce in JNK looks more like just a few months pause in a 6-month downtrend.

Crude fell -1.57 [-2.79%] to 65.04, falling for the first three days, and bouncing back Thursday and Friday. Friday was a weak-looking swing low (52% bullish reversal), and Friday's bounce that confirmed the swing low looked like a failed rally to me – a long upper shadow, with low volume, which wasn't great. Forecaster remains in a downtrend in all 3 timeframes. The EIA report on Wednesday was bearish (crude +6.8m, gasoline: -0.7m, distillates: +3.6m), and the report seemed to propel crude rapidly lower. How much lower will crude fall before the correction runs its course? Well if China really does enter recession, thus killing a significant source of demand, crude might continue dropping for a while. Likewise, Libya is back to pumping 1 mbpd.  On the other hand, shale appears to have peaked out in terms of production, at least for now.  Is it that all the sweet spots have been drilled?  Or perhaps the current pipeline capacity caps the rate at which oil can be pumped and sold.  Its hard to know where the balance of forces lie in the oil market in the near term - there are a lot of moving parts.

Longer term, shale will peak and decline - and the peak and decline will happen relatively rapidly - and that will leave a 2-3 mbpd deficit in global oil production.  That means higher prices for sure, unless we are in the throes of a deep recession at the time.

Physical Supply Indicators

* The GLD ETF tonnage on hand fell -13.84 tons, with 772 tons in inventory.

* ETF Discount to NAV:

 PHYS 9.52 -1.60% to NAV [increase]
 PSLV 5.32 -4.40% to NAV [increase]
 CEF 11.73 -3.86% to NAV [increase]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows a slight discount for gold and no premium for silver – although the spread is more than 1%.

* Big bars premiums were: gold [1kg] 0.91% and silver [1000oz] 3.65%.

Grey Swans & Geopolitics

  • Turkey: The Turkish 10-year yield remains at about 21%, which is nosebleed territory, reflective of the country's extremely high inflation rate. Going forward, I expect to see a lot of “the usual” crisis playbook: jawboning by Turkish and EU government officials, capital controls, restrictions on short selling, forbidding locals to buy dollars, perhaps forcible conversion of USD deposits in Turkish banks into TRY, and other sorts of “rule changes” put in place in a vain attempt to address symptoms in lieu of fixing the basic problem: confidence in government has already snapped because rates were too low, for too long, and Erdogan is unwilling to raise them high enough to cut the head off the inflation snake because he really doesn't want to own the very serious recession that must surely follow.  The market just doesn't believe in Erdogan any longer, so all he has left are the usual games which ultimately all fail in the end.

  • German Government/Migration: Germany concluded a deal with Greece to return migrants to Greece that that initially registered in Greece, but showed up at the German border. The deal is not expected to affect many migrants; only 150 such people have been detected entering trying to enter Germany over the past 2 months.

  • Italy – Migration: Salvini once again is refusing a “migrant sea taxi” boat (run by MSF) permission to offload the 141 migrants it rescued off the coast of Libya. France, who criticized Italy last time around – but never allowed any migrant sea taxi/rescue boats to offload migrants in its ports – isn't saying anything this time. Malta also refused permission (but somehow thats just fine), and Spain says “other ports are closer”.  This latest boatload of African migrants appear to be radioactive.  Ah, the perils of establishment political correctness.

  • China – Tariffs: China and the US are about to restart lower-level trade talks, with the first meetings to be held on Aug 22nd. The goal is to eventually have a summit between Trump and Xi Jinping sometime in November.  So far, news is positive.  China's weakening economy probably acted as a spur to restart the talks, although a genuine compromise is more likely to be reached if the US economy starts to turn down also.  Intransigence often comes from a perceived power differential.

  • China – Debt: China reported surprisingly weak data that showed investment growth has slowed to a record low. Falling economic activity in China means there is less income to meet debt payments.

  • Yield Curve Inversion: the 1-10 spread narrowed 8.3 bp to 42 bp.

  • US Congressional Elections, 2018. The generic ballot shows Democrats 47.7% [+6.8%] vs Republicans 39.9%. Democrat win → impeachment attempt? Interestingly, Trump's support among african-american voters has risen from 19% last year, to 36% this year, according to a Rasmussen poll. Trump won only 8% of the african-american vote in 2016.  Other polls all have lower numbers for Trump.  I now wonder wonder if Trump's support is actually stronger than reported, in much the same way it was in 2016.  Normal people may well be even more shy to say things that go against the media firehose than they were 2 years ago.  https://projects.fivethirtyeight.com/congress-generic-ballot-polls/

  • North Korea: no news this week.

  • Mueller Investigation: Paul Manafort's trial went to the jury on Thursday; no decision yet. Questions from the jury included a request for a definition of “reasonable doubt.”  6 different media organizations (AP, BuzzFeed, NYT, WAPO, NBC, and Politico) have demanded the names and addresses of all the jurors. The judge refused the motion, saying that releasing the information made him uneasy. Gee, ya think? Armed with names and addresses, can you just imagine what the next step by this "media coalition" would be?  Party affiliation is a matter of public record.  Its quite clear that this particular "media coalition" has a laser-like focus on removing Trump from office.  What would they do to any jurors that might be perceived as being supportive of Trump?  Trump is at least somewhat prepared to deal with a relentlessly negative media onslaught.  But how about normal people who were unlucky enough to get called for jury duty?  The mind boggles.  But you have to break a few eggs to make an omelette, right?  All in the service of the greater good.  So what if a few normal Americans are tossed right into the fire if the right thing - Manafort Guilty! - happens at the end of the day?

Summary

Jawboning from the Turkish government, happy and supportive noises from various heads of state in the EU, as well as a $15 billion loan offer from Qatar stopped the bleeding in USD/TRY this week, causing the currency pair to collapse back to its pre-breakout levels. More details are emerging on the re-starting of trade negotiations with China, which all look reasonably positive. This combination of events caused the buck to top out, and the metals to possibly reverse direction at end of week, after first making some dramatic new lows on what could be capitulation for gold, silver, and the miners.

Big bar gold premiums on gold are relatively low, silver's premium is edging higher, and ETF discounts increased. There is no shortage of gold at these prices – at least according to my numbers anyway. At the same time, based on some anecdotal evidence, I expect a surge of physical buying next week driven by the lowest gold prices in two years. We will have to see just how much buy-side activity this will generate in the futures markets.

I did an informal survey on my own; physical buying in my city seemed quite enthusiastic, but I happen to be in an area where gold is still a fairly popular item. I did note that the age of the buyers skewed to the older generation, but that also could also be because they were the ones with the money.

The gold COT report shows yet another record low in the managed money net position, while commercials continue to cover their gold shorts again. At some point gold should explode higher, the only question is when, and what will cause those commercials to flip the big switch.

If gold was priced below production cost last week, this week the discount is even larger.

So is this the low?  I'm still on the "more likely than not" train.  Volume wasn't as high as I'd have liked it to be on the gold swing low, silver couldn't manage to print a swing low, and neither could the miners.   Palladium's swing low was ridiculously strong, gold was medium-strong, while the copper, platinum, and silver rebounds all looked fairly similar and were somewhat weaker.

I suppose this all ties in with the uncertainty about the trade talks with China, as well as the weakening of the Chinese economy.

Here's the PM sector map, sorted by RSI-7 levels.  DId we get a buy signal?  Looks like we did for gold, silver, platinum, and copper.  Miners, not yet.  That split suggests - like the Manafort trial - the jury is still out on the PM rebound.

name symbol last RSI-D RSI-W RSI-M
Palladium PA.V 889.00 50.3 31.2 39.2
Gold/Euro GC.EUR 1045.36 43.1 26.7 33.2
Copper HG.V 2.66 40.7 22.9 30.6
Gold GC.V 1191.80 33.9 9.8 27.3
Junior Miners GDXJ.N 27.49 20.7 10.6 26.6
Senior Miners GDX.N 18.72 25.1 9.3 25.2
Silver SI.V 14.78 37.0 12.7 23.8
Platinum PL.V 788.10 36.1 11.0 23.3
Silver Miners SIL.N 24.51 27.0 9.2 19.6

Weekly trends (in order of strength):

Uptrend: SPX, USD, 10-year treasury, BAA corporates, gold/Euros.

Downtrend: miners, gold, copper, platinum, crude, silver, bitcoin.

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1 Comment

Eannao's picture
Eannao
Status: Silver Member (Offline)
Joined: Feb 28 2015
Posts: 166
One of these is lying to you

Dave,
Loved the "one of these two is lying to you" chart and explanation of the Turkey situation.
Thanks for the great summary!

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