PM End of Month Commentary - August 2018

davefairtex
By davefairtex on Sun, Sep 2, 2018 - 10:44am

On Friday, gold rose +1.06 [+0.09%] to 1208.49 on moderate volume, while silver fell -0.02 [-0.14%] to 14.57 on light volume. The buck mvoed sharply higher, up +0.43%, probably putting in a low, driven higher by the falling Euro [-0.59%].

This week happens to be end-of-month, so my charts will be monthly charts, just for fun, as will the maps. A little long term perspective can't hurt every now and then.

The monthly metals sector map is clearly bearish; silver is leading gold lower, and the miners are leading the metals lower. Most items are below all 3 moving averages – palladium is the only item to be in positive territory, with gold as well as gold/Euros managing to remain above the 9 MA. Why is palladium doing so well? Primary use for palladium is in catalytic converters for cars.

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Palladium $PALL 4.24% 3.86% rising rising falling rising ma50 on 2018-08-24 2018-08-31
Gold/Euro $GOLD:$XEU -1.16% -6.72% falling falling falling falling ema9 on 2018-08-31 2018-08-31
Gold $GOLD -2.11% -9.02% rising falling falling falling ema9 on 2018-08-24 2018-08-31
Copper $COPPER -6.16% -14.13% falling falling falling falling ema9 on 2018-08-30 2018-08-31
Silver $SILVER -6.24% -17.40% falling falling falling falling ema9 on 2018-08-30 2018-08-31
Platinum $PLAT -6.34% -21.43% falling falling falling falling ema9 on 2018-08-30 2018-08-31
Silver Miners SIL -11.03% -29.57% falling falling falling falling ema9 on 2018-08-30 2018-08-31
Senior Miners GDX -12.83% -24.96% falling falling falling falling ema9 on 2018-08-30 2018-08-31
Junior Miners GDXJ -12.86% -23.39% falling falling falling falling ema9 on 2018-08-30 2018-08-31

Gold fell -24.61 [-2.00%] this month, making a new low to 1167.91, and then bouncing back; the monthly candle was a spinning top – almost a hammer. Forecaster dipped -0.08 to -0.28, which means gold remains in a downtrend. Gold has fallen for 5 straight months. Is this the low for gold? Its hard to say. Gold/Euros looks substantially better – it has dropped only 3 months in a row, but this month's candle is a spinning top, and so it is providing less guidance than gold/USD. Gold is in an uptrend in the daily timeframe, but in a downtrend on both the weekly and monthly.

The September rate-increase chances remains at 98%.

COMEX GC open interest rose +25,647 contracts this month.

Silver plunged -1.02 [-6.54%] on the month, re-testing the 14.35 low set back in July 2017. Silver has fallen in 5 of the last 7 months, and the downtrend in silver is accelerating. Forecaster fell -0.03 to -0.41, which is a fairly strong downtrend. If the 14.35 low does not hold, the next low is at 13.62, set back in December 2015. Could this happen? Certainly this month's candle doesn't look particularly bullish, and with no settlement on the China/tariff front, you have to respect the current trend, which is down. Silver is in a downtrend in all 3 timeframes.

COMEX SI open interest fell -6,133 contracts this month.

Miners were hit hard this month, plunging -14.31%, breaking below the previous low set back in December 2016. XAU's opening black marubozu looks bearish, and forecaster concurs, falling -0.33 to -0.52, which is a strong downtrend. Miners have dropped 3 months in a row. Part of the problem could be the liquidation of that Vanguard gold fund; the miners had a terrible month, while gold didn't do all that badly. At this point, there is no support on the chart until 38.36, set back in January 2016. If that is re-tested, that's a 42% drop from here, which would be a really unpleasant outcome for anyone holding the mining shares. Once again, the candle looks bad, there is no chart support, the forecaster is negative, and so we have to respect the downtrend. XAU is in a downtrend in all 3 timeframes.

GDX:$GOLD fell -11.05%, while the GDXJ:GDX ratio dropped -0.04%. That's quite bearish.

USD

The buck rose +0.67 [+0.71%] to 94.76. The buck did make a new high to 94.85, mostly on the strength of the flight to safety from the near-collapse of the TRY – down 33% in just one month! Candle print was a shooting star, which looks as though it could be a bearish reversal. Forecaster dipped -0.07 to +0.12, which is telling us that the momentum is slowing, but the buck remains in an uptrend. DX is in an uptrend in both the daily and monthly timeframes.

US Equities/SPX

SPX rose +85.23 [+3.03%] to 2901.52, breaking out above the high set back in January, and closing at a new all time high. The long white candle is a bullish continuation, and forecaster jumped +0.23 to +0.60, which is a strong uptrend for SPX, which is in an uptrend in all 3 timeframes.

The sector map shows telecom, tech and discretionary in the lead, while energy and materials bring up the rear. That's a strong sector map; the falling materials sector has to do with China and tariffs, I suspect.

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Telecom XTL 7.95% 9.64% rising rising rising rising ema9 on 2018-08-16 2018-08-31
Technology XLK 6.60% 28.51% rising rising rising rising ema9 on 2018-08-21 2018-08-31
Cons Discretionary XLY 5.10% 30.44% rising rising rising falling ema9 on 2018-08-20 2018-08-31
Healthcare XLV 4.33% 14.13% rising rising rising rising ema9 on 2018-08-14 2018-08-31
REIT RWR 2.99% 4.33% falling rising rising rising ema9 on 2018-08-28 2018-08-31
Financials XLF 1.36% 14.70% rising rising rising rising ema9 on 2018-08-30 2018-08-31
Utilities XLU 1.29% -2.73% falling rising falling rising ema9 on 2018-08-31 2018-08-31
Homebuilders XHB 1.01% 4.82% rising falling falling rising ema9 on 2018-08-30 2018-08-31
Defense ITA 0.79% 21.36% rising rising rising rising ema9 on 2018-08-31 2018-08-31
Cons Staples XLP 0.39% -1.70% falling rising falling rising ema9 on 2018-08-23 2018-08-31
Industrials XLI 0.23% 12.62% rising rising rising rising ema9 on 2018-08-30 2018-08-31
Materials XLB -0.77% 7.63% rising rising rising rising ema9 on 2018-08-31 2018-08-31
Energy XLE -3.48% 18.22% rising rising rising falling ema9 on 2018-08-31 2018-08-31
Gold Miners GDX -12.83% -24.96% falling falling falling falling ema9 on 2018-08-30 2018-08-31

Globally, the US was the only region that was positive this month; Latin America had major problems, and Europe wasn't so happy either.

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
United States VTI 3.43% 18.18% rising rising rising rising ema9 on 2018-08-16 2018-08-31
Developed Asia VPL -0.95% 3.17% rising falling falling falling ma50 on 2018-08-27 2018-08-31
Emerging Asia GMF -2.00% 0.37% rising falling falling falling ema9 on 2018-08-30 2018-08-31
Europe IEV -3.11% -1.23% rising rising falling rising ema9 on 2018-08-31 2018-08-31
Eurozone EZU -3.17% -1.46% rising rising falling rising ema9 on 2018-08-31 2018-08-31
Latin America ILF -8.32% -12.60% falling rising falling rising ema9 on 2018-08-30 2018-08-31

VIX ended the month at 12.86. Nobody seems too worried about what will happen in September, which is typically a poor month for equities.

Rates & Commodities

TLT climbed +1.08% on the month; TLT has been trendless for the past 7 months, and this month's rally changes nothing about that situation. TY also moved higher, up +0.79%, which more than erases the drop suffered last month. The long white candle was neutral, and the TY forecaster was unchanged at +0.19. TY is in an uptrend in both the weekly and monthly timeframes - the monthly forecaster is suggesting that TY is in a bottoming process right now.  The 10-year yield fell -10 bp to 2.86%.

JNK rose +0.17%, moving higher for the second month in a row. While SPX is making new highs, JNK appears to be struggling to inch higher; money is flowing into risk equity assets, but not into risky debt. BAA corporate yields have topped out; BAA issued a sell signal last month and continued to move slowly lower this month. That's a risk-on signal. We also see the same thing in the BAA/AAA ratio – it is heading lower now too.  Its a bit surprising, with all the crazy stuff happening in the emerging markets, but, this is USD-denominated low-quality debt, not emerging-markets debt, so perhaps this is more about currency (i.e. a buy signal for USD) and less about quality.

Crude rose +2.13 [+3.16%] to 69.47, making a new low to 63.74, but then rebounding. The spinning top candle looks quite a bit like a bullish hammer, but forecaster moved down -0.12 to +0.27. Crude remains in an uptrend on the weekly and monthly timeframes, but crude daily issued a sell signal on Friday. The major news of the month was that sanctions on Iran, while not yet fully implemented, are starting to bite, with exports dropping unexpectedly, down 1 mbpd.

Physical Supply Indicators

* The GLD ETF tonnage on hand fell -45.04 tons, with 755 tons in inventory.

* ETF Discount to NAV:

 PHYS 9.65 -1.26% to NAV [increase]
 PSLV 5.25 -3.93% to NAV [decrease]
 CEF 11.75 -4.02% to NAV [increase]

* Bullion Vault gold (https://www.bul lionvault.com/gold_market.do#!/orderboard) shows a $7 discount for gold and maybe a 20c premium for silver.

* Big bars premiums were: gold [1kg] 0.86% and silver [1000oz] 3.33%.

Grey Swans & Geopolitics

  • Ebola: total cases 116, with 77 deaths. The number of new cases has slowed, but some of those new cases did not come from people on the “contacts” list, which means there is a collection of sick people out there they don't know about, and whose contacts have not yet been identified – much less vaccinated. WHO says the outbreak is at a “key juncture.” http://www.who.int/csr/don/31-august-2018-ebola-drc/en/

  • Turkey: The Turkish 10-year yield rose +278 bp to 20.70% this month; USD/TRY jumped 33% (in one month!) from 4.92 to 6.55 – this move has the air of panic about it. While the month high was 7.13 and TRY did pull back somewhat from the highs mid-month after some jawboning by Erdogan and some EU officials, TRY now appears to be moving back up to re-test the peak. Erdogan will apparently not allow the central bank to raise rates, which is the only action that has any hope of bringing inflation under control. Rumor is that Turkey is selling its gold hoard in order to deal with the crisis – if true, that could explain gold's terrible performance over the last month or so.

  • German Government/Migration: while progress is apparently being made on an agreement with Italy to return migrants that have previously applied for asylum there, a fatal stabbing of a German citizen allegedly committed by 2 migrants from Iraq and Syria led to an impromptu neo-Nazi-led 8000 person mob which reportedly chased down and attacked migrants. The next day, 1000 Antifa “activists” showed up to counter-protest. This is happening when the economy is doing well. My prediction: during the next recession, AfD could well jump from 16% to 30%, just as Lega did in Italy. If AfD becomes the largest party, it might be difficult to keep them out of government.  Small numbers of migrants from a wildly different culture are easily handled; large numbers over a short period of time will always end up causing trouble. https://www.nytimes.com/2018/08/30/world/europe/germany-neo-nazi-protests-chemnitz.html

  • Italy – Migration: Salvini is now apparently being investigated for “illegal confinement, arrest, and abuse of power” for his recent actions in temporarily preventing a group of migrants from disembarking from an Italian coast guard ship.

  • China – Tariffs: Trump is apparently ready to impose tariffs on $200 billion more in Chinese imports after the comment period ends on September 6th, although the timing of when they will be imposed is still up in the air.

  • China – Debt: Bloomberg did an analysis on debt default recoveries in China since 2014: the bagholders (excuse me, bondholders) saw a 17% recovery rate on $12 billion in defaulted debt. That compares with a 50% recovery rate on average for senior unsecured bondholders worldwide. But the “average” in China is deceptive; 16 defaulted issues saw a 100% recovery rate because they were bailed out by the government, while most of the other issues didn't have any recovery at all.

  • Yield Curve Inversion: the 1-10 spread narrowed this month from 11 bp from 52 bp to 41 bp.

  • US Congressional Elections, 2018. The generic ballot shows Democrats 48.8% [+9.4%] vs Republicans 39.4%. Democrat win → impeachment attempt? It looks as though all the impeachment chatter from last week has boosted the Democrats edge significantly.

  • North Korea: Trump believes that the lack of progress on North Korean de-nuking is an artifact of the US-China trade struggle. As a result, Trump has indicated he will not re-start military exercises with South Korea for now.

  • Mueller Investigation: no news.

Summary

This month, no progress on the US-China tariff situation, the US-Mexico agreement appears almost ready for signing, while Canada has yet to come on board.  Turkey's currency is in the process of collapse which resulted in money flowing in to the US as a safe-haven move. Mueller added two more non-Russia-collusion scalps to add to his collection (thus ratcheting up the "impeachment" talk), and this seemed to weaken the buck.  Silver and the miners fell hard, while gold appears to have found some support.

Big bar gold premiums on gold remain low, silver's premium is slowly moving higher, and ETF discounts remain relatively large. There is no shortage of gold at these prices – at least according to my numbers.  Perhaps that's due to Turkey selling off its gold reserves in a vain attempt to head off a currency crisis. Well that's the rumor anyways.

The gold COT report shows: commercial shorts at or near record lows, and managed money shorts near record highs - although strong short-covering this week by managed money has pulled the total shorts off the highs.  Silver COT report; commercial net is at record highs - in positive territory for the first time ever, with managed money shorts at record highs also.

The monthly charts for silver and especially the miners look as though they have not yet hit bottom, while gold is looking substantially better.  If the buck ends up reversing lower - if that shooting star ends up being a real reversal - we could see gold reverse more strongly.  Otherwise, if worries about the emerging markets gets worse, and the buck resumes its uptrend, silver and the miners will almost certainly make new lows, and gold may have a tough time avoiding following them down.

Will September bring a correction in equities?  If that happens, bonds should do quite well.  Bonds look poised to bounce here.

The wildcard is Mueller.  Without him, I'd confidently predict that the buck will charge inexorably higher as money flees emerging markets and the Euro for the safe haven of the US.  But every time the impeachment chatter picks up, the buck weakens.  This could easily keep the buck from moving too much higher - will that be good for gold or not?  Its hard to say.  Probably, it will.  Certainly, if things get more serious politically, there will be no safe haven other than gold.

The Democrats are hungering for a re-run of the Nixon impeachment hearings from 1973-1974.  I've been reviewing the history of that period to get a perspective.  Today, Mueller and crew are trying to execute on the game plan from that time period: obstruction of justice, abuse of power, and once they get control of the House, they'll add contempt of Congress - by filing subpoenas for anything and everything, hoping he'll refuse.

Here's a fun factoid for you: someone fairly well-known worked for the House Judiciary Committee's Impeachment Inquiry in 1974.  My guess is, this person used valuable lessons learned from that time to set up the situation that is now ripping the country in half.

Her name back then was Hillary Rodham.

Right now, times are good.  Just think what happens when economy turns down.  My guess is that Trump will look like a paragon of virtue, sanity, and self-control compared to whomever follows him.  In 2008, we were united as a people, so we dealt with the downturn relatively well.  In 2020, what will the country look like after 2 more years of this?

Maybe the price for that oft-predicted $5000 gold is a red-blue civil war, the end of the USD as reserve currency, and the eventual breakup of the US, as an unintended consequence of HRC's campaign of revenge against Trump.  She destroyed Libya, then Syria, unleashing a flood of migrants on Europe as the unintended consequence.  Perhaps now it is the turn of the United States to suffer.  Armstrong has long predicted the transfer of the world financial capital to China by 2032.  Maybe this is how it happens.

Again, it's not about Trump or HRC.  The Hitlers and Mussolinis of the world appear during the bad times.  Trump has complied with every court order issued by the judiciary.  Whomever follows him after the next recession may well simply ignore court orders.  The country, after 2 more years of being ripped apart, may not survive its next recession.

One more thing.  Shale peaks out around then too.

So all that is gold-positive.  And you might consider looking ahead to see what sort of state you'd like to live in during the time of turbulence to come.  Red or Blue?  Something to think about.

Monthly trends (in order of strength):

Uptrend: SPX, BAA corporates, crude, 10-year treasury, palladium, USD.

Downtrend: miners, silver, copper, gold, gold/Euros, platinum.

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7 Comments

Eannao's picture
Eannao
Status: Silver Member (Offline)
Joined: Feb 28 2015
Posts: 164
Nixon

Dave,

I recommend the movie 'Nixon' staring Anthony Hopkins. He's an odd choice to play Nixon, but overall the movie is very good and I was really struck by the parallels between then and now. All the more interesting to learn that Hillary Clinton was involved at that time. 

I was also stuck by the tumult and division in the US at that time, which I would argue was similar or maybe even worse than it is now, so perhaps you are overestimating the risks of civil war?

Thanks, Enda.

MGRS's picture
MGRS
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Joined: Feb 28 2013
Posts: 12
Perspective

Really enjoy the longer perspective of the monthly and weekly write-ups, Dave, as well as your commentary. Thanks for another good one!

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5653
perspective

MGRS-

Yeah I like writing the longer perspective more too.  Everything I write really helps me out too.  The daily stuff tends to be a bit in the weeds.

@eanno

Perhaps you are right that the divisions now and then are at similar levels, and if we survived that, we will make it through today.  Its tough though; on my facebook feed, people were openly talking about California splitting off from the rest of the country.  I'm not sure they studied much about what happened the last time a state tried seccession.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5653
silver: new low 14.21

Falling Euro has resulted in a new low for silver (to 14.21) and a drop in gold (to 1197).  Copper is also down fairly briskly, but no new lows just yet.

At the same time, oil is up a full buck, to 71.14.

At this rate, I'm not sure silver holds 13.65.  If copper keeps dropping, and silver keeps tracking copper...I'm really not sure how low it will drop.

Someday silver will be an incredibly good trade...but between now and that day, really anything could happen.

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 913
Does Ag/Au "bullish" indicator mean anything?

Dave, there's a way to find out if such things as the gold-silver ratio can forecast ups and downs.

Here's how it goes: if the gold ups correlate or anticorellate with the AU/AG ratio, then they will show similar frequency patterns.

So to determine that, I'm pretty sure you do the following:

1)Take your AG/AU ratio data over the last ten years.
2) Run a FFT on the data, with a scale of 1-day, 2-day, 4-day, 8-day, 16-day, 32-day, 64-, 128- , 256-, 512-, 1024-day. That's a fairly small FFT, and it gives you a spectrum frequency curve.
3) Do the same for your gold prices.
4) Now correlate the two: integrate the product of the two frequency curves over the range, and divide by the length, to determine if they correlate.

If a correlation is determined, then at each frequency you can determine a corellation constant -- the ratio of the response of one to the input at the other, plus a probability constant.

Now, you do that at each frequency, and for other indicators in which you believe it possible that one will lead the other. You end up with a whole bunch of indicators, and a "sureness" indicator. When you see a really strong sureness, then the buy/sell indicator might be worth listening to.

The FFT is on wikipedia, along with C code, pseudocode, and C# code.

Looking at Wikipedia, under "autocorellation", I see that I'm not far off. That article gives a pretty good overview of what I was thinking of.

Which is another thing: if you want to find out if the "sell in May and go away" proverb is true, you check the autocorrellation of gold at 12 months time delay.

Chris, weren't you a mathematician?

Oh... addendum.

Take a look at www.cs.princeton.edu/~wayne/cs423/lectures/fft-4up.pdf for a pretty good FFT tutorial.

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 913
For best forecasts

What you really want to do is run a correllation of each commodity against itself (autocorrellation) and each other commodity on many time delays, and for each commodity pick the best correllations or anticorrellations, saving the response curve of the data.

That tells you if one commodity leads another, giving you a clue to how the led commodity is likely to behave.

So now for Pb:Au, you have a correlation coefficient function as a result of time delay curve; also for Cu:Au, and Pd:Au, and Ag/Au:Au, USD:Au, and so on. You can also run this on other items.

The strong correllations, then, are what you want to train your forecaster on.

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5653
ratios

For weekly silver, there are 4 ratios that are most important:

platinum/silver, copper/silver, gold/silver, and DJI/silver.

Many of the things I talk about day to day are important inputs into the different models, in one way or another.  Usually if I mention something, it is because I found it to be useful in resolving a model.

One exception is the COT report.  It hasn't been around long enough.  Same thing with GDX & GDXJ.  They are too new to be useful as inputs.

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