PM Daily Market Commentary - 8/21/2018

davefairtex
By davefairtex on Wed, Aug 22, 2018 - 5:07am

Gold rose +5.58 [+0.47%] to 1203.89 on moderate volume while silver rose +0.03 [+0.17%] to 14.77 on heavy volume. The buck plunged -0.64 [-0.67%], but the falling dollar only provided a small amount of support to gold, and almost none to silver.

Gold struggled in Asia and London, and only took off at 11:15 am after the Euro started to scream higher. Gold did manage to close above 1200 today; the long white candle was a bullish continuation. Gold closed above the 9 MA. Gold remains in a downtrend in the weekly and monthly timeframes.

What to make of the fact that gold rose less than the buck fell? Well, its not good news for gold. Can we blame the paper markets? Open interest continues to rise. I think the answer is yes.

COMEX GC open interest rose 3,808 contracts.

Rate rise chances (September 2018) remains at 94%.


Silver chopped sideways again today, managing to eek out a very slight gain. The short white/NR7 candle was neutral; forecaster plunged -0.23 to +0.05. I hate to say it, but silver looks ready to tip over. Silver remains below its 9 MA, and in a downtrend on both weekly and monthly timeframes.

COMEX SI open interest rose +5,697 contracts. That's a big, 2.3% increase in open interest; 12 days of global production. The shorts are what is keeping silver from moving higher.

The gold/silver ratio rose +0.24 to 81.54. That's bearish.

Miners moved higher along with gold at 11:15 am, managing to crawl slightly higher by end of day. GDX rose +0.69% on moderate volume, while GDXJ climbed +0.83% on heavy volume. XAU was up +1.01%. XAU forecaster was really happy though, jumping +0.88 to +0.28, which is a buy signal for the mining shares, at long last. I'm not sure what caused the excitement. XAU remains in a downtrend in both weekly and monthly timeframes.  On the chart, you can see that XAU remains far below its 9 MA.  It also has yet to print a swing low.  Neither of these are good signs.

The GDXJ:GDX ratio rose +0.13%, while the GDX:$GOLD ratio climbed +0.23%. That's mildly bullish.

Platinum inched up +0.04%, palladium climbed +0.53%, while copper rose +0.77%. The other metals did relatively well, but it was mostly about currency moves. Still, copper and palladium open interest declined (copper: -4,742, -1.8%, palladium: -451, -2.0%) and both of those metals showed reasonable gains, while platinum OI increased (+423, +0.5%) and platinum's price barely moved. The paper markets really do have an effect on price, it would seem.

The buck fell -0.64 [-0.67%] to 94.86. Daily forecaster plunged deep into downtrend, while the weekly issued a sell signal. DX monthly remains in an uptrend. What caused the buck to sell off?

Well at around 11 am, Trump's former lawyer Cohen agreed to plead guilty to paying off Stormy Daniels, tax evasion, and bank fraud, while Manafort was convicted of 5 counts of filing false individual income tax forms (IRS 1040?), 1 count of failing to report his foreign bank accounts (the FBAR form), and 2 counts of bank fraud - which consisted of lying on 2 different loan applications. Did you know that lying on a loan app was a Federal crime? Of course, it was way too difficult to charge any of the senior bankers for anything they did in 2008, but Manafort gets convicted of “bank fraud” for lying on his 2 loan apps. When the machine wants you, boy, those "bank fraud" crimes turn out to be easy to prosecute after all. https://www.vox.com/2018/8/21/17692626/manafort-guilty-charges-verdict

And my guess is, the plunge in the buck (which started around 11:15 am) was due to these two events. I believe that a weakened Trump will lead to a weaker dollar. The US isn't the safe haven anymore if the US risks devolving into an impeachment struggle.

Crude climbed +0.63 [+0.97%] to 65.82. Crude's move higher today was partially about a strong API report (crude: -5.2m, gasoline: 0.9m, distillates: +1.8m) which good for about 25 cents of today's move. Crude forecaster moved up +0.12 to +0.36, which is a stronger uptrend. Crude managed to close above the 9 MA today, which was positive. If crude's rally continues, it is possible for the monthly to retract its sell signal...I suspect the EIA report tomorrow will prove decisive for where prices go over the next week. US production appears to have plateaued around 11 mbpd, while demand growth is projected to fall. A rising dollar makes oil more expensive for the emerging market nations, which crimps demand.

The US is set to release 11m barrels of oil from the SPR, over a 60-day period in October-November, allegedly to cushion the impact of sanctions on Iran. It also happens to coincide with the midterm elections. Hmm. Well with US crude production so fantastic, who needs an SPR anyway?

Lastly – the Trump administration apparently has decided that conserving oil is no longer a national imperative. This is surely the sign of a peak in US oil production – at least according to my contrarian thinking. Of course, if the world tips over into recession in the near future, price might not reflect this event. https://www.theguardian.com/us-news/2018/aug/19/conserving-oil-no-longer-necessary-for-us-says-trump-administration

SPX rose +5.91 [+0.21%] to 2862.96, hitting a new all time high intraday but unable to hang on through the close. The short white candle was a bullish continuation, and forecaster dipped -0.06 to +0.62, which is a strong uptrend. SPX is in an uptrend in all timeframes. Sector map has cyclicals leading (XLY: +0.79%) while utilities did worst (XLU:-0.72%). If not for the poor performance of financials and tech, I'd say this was a bullish map. Let's call it neutral instead.

VIX rose 0.37 to 12.86.

TLT fell -0.34%, printing a swing high – but a weak-looking one. TY also fell, down just -0.09%; its bearish harami was actually just neutral, and TY forecaster was unchanged, remaining in an uptrend. It was a reasonably good performance given the new high in SPX, and the very weak dollar. Bonds remain in an uptrend in all 3 timeframes. The 10-year treasury yield rose +2.1 bp to 2.84%.

JNK rose +0.20%, breaking out to a new intermediate high. This this invalidates the pattern of lower highs and lower lows; is JNK out of its longer term downtrend? Perhaps it is. It seems unlikely, but my longer-term monthly BAA (lower grade corporate) yield charts are also pointing downhill – which is positive for JNK. The BAA monthly issued a sell signal last month; I didn't believe it, but BAA yields have continued to fall, which is a definite sign of risk on. The BAA/AAA ratio charts are also pointing downhill as well. It might just be a temporary respite, but – then again, these particular numbers don't lie. Here's what the BAA yield chart looks like - falling yields = rising junk bond prices.

CRB rose +0.48%, with 3 of 5 sectors rising, led by industrial metals (+0.66%). The 4-day bounce in CRB still looks a bit feeble; the restart of negotiations on tariffs with China really need to bear fruit, otherwise I'm pretty sure we see another leg down in the commodity complex.

So the key event today was the Mueller investigation's success: a guilty plea from Cohen, and a guilty verdict for Manafort.  That drove the buck down hard, which was only of modest help to gold, and no help at all to silver.

As far as I can see, neither establishment party in the US has anything material to offer the former middle class. They are united on globalizing the jobs of the former middle class (CEOs and shareholder win), as well as increasing the take of the harvesting mechanism known as the healthcare system, now at 20% of GDP. Even “medicare for all” just means the government (i.e. the taxpayers) pays that 20% of GDP, instead of people and companies via sickcare insurance.  Sickcare cartel doesn't care who wins elections: they own both sides, so they always win.  If you get the sense that this annoys me greatly, you would be correct.

But I digress.

Bottom line: if Trump is perceived to descend deeper into jeopardy, that will weaken the dollar. Is the move today the start of this process? Its hard to know.  It sure could be.

But we also have all those other grey swans: Turkey's eventual default, Italy's domestic spending increase leading to a Eurozone crisis, a no-deal BRExit (becoming more likely by the day), China's debt overhang mixed together with a recession that's probably happening right now, a possible recession coming to the US in 1st quarter 2019, housing bubbles popping in Canada and Australia - presumably leading to banking crises.  With all of that, it is hard to know which factor will end up dominating prices of currencies and assets.

I mean, this whole story-of-uncertainty does lead to gold eventually, at least as an asset class to hide in for us little people. And that might be happening right now in spite of the weak prices for gold.  Certainly whoever "managed money" is right now can keep on increasing their shorts, but at some point physical buying will exhaust the supply of gold at places willing to sell for the paper price.  It's the old goldbug story, but when something sells at below its cost of production while increasing open interest appears to be keeping prices from rising - the story actually has evidence behind it rather than just being some perennial article of faith.

The below-production-cost price for gold does suggest that the miners are probably not the place to be right now.  They may not be able to stay in business long enough to see the breakout in gold prices that should eventually occur.  Someday.  Once the inventory of gold available at the current price runs out.

Here's that "managed money shorts" chart from last week:

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2 Comments

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 74
Gold Production Cost Curve
"The below-production-cost price for gold does suggest that the miners are probably not the place to be right now. They may not be able to stay in business long enough"
Not much production becomes uneconomic at $1200, cash costs have to get below $800 before real impact on mine production occurs, according to this chart from GFMS:
 
Gold Cost Curve
 
And miners often continue to produce even when prices are below cost if they think the price will revert back, as it can be lower than the cost of putting a mine into care and maintenance.
davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5530
cash costs vs positive cash flow

Bron-

I'm in agreement with you about the cash costs being the "survival level" for the miners.  They can cut exploration, reduce capex, take on more debt, and survive, at least for now.  But that's not the same thing as "cost of production" - which needs to include all the costs required to keep the business afloat in perpetuity, including debt paydown, capex, and the like.  If a company is taking on more debt to stay alive, while its "cash costs" remain well below current prices, then the actual long term cost of production is definitely higher than the "cash costs."

SRS made what I felt to be a compelling video that showed that miners, with last quarter's prices, were just slightly over break-even in terms of free cash flow, which is a good rough measure of overall profitability of a venture or an industry.  Presumably after a $50 drop, they are below break even.

The concept is this: who deploys capital just in order to break even?  Nobody.  There needs to be a positive long term return for the business/industry overall for it to attract capital.  That's why capital is fleeing the mining sector right now: it just has a terrible long term return.  You can see this reflected in equity prices:  the miners were holding up fine until this quarter's earning reports came out.  Then the miners all gave it up, and they haven't really recovered since.

Sure, the individual miners will high grade, load up on debt, stop exploration, and do whatever they can to live on their "cash cost" income - but capital will continue to flee the sector because its just a terrible long term investment right now.

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