PM Daily Market Commentary - 11/27/2018

davefairtex
By davefairtex on Wed, Nov 28, 2018 - 6:53am

Gold fell -7.94 [-0.65%] to 1220.80 on extremely heavy volume, while silver dropped -0.08 [-0.56%] to 14.24 on extremely heavy volume also. The buck jumped +0.31%, which definitely affected metals prices today; the Euro moved lower, and that seemed to drag prices of most of the metals group down.

Gold fell fairly hard today; the long black candle was a bearish continuation, and gold forecaster dropped -0.34 to -0.22, which is a sell signal for gold. Gold/weekly will also issue a sell signal if we close here by end of week. Gold also fell below the 9 MA, coming to rest right at the 50 MA. Gold in Euros still looks reasonable (it is still above all 3 moving averages), but gold in USD is now in a downtrend in all 3 timeframes.

COMEX GC open interest fell -8,245 contracts. All of the large changes in open interest may be related to the upcoming first notice date of the Dec 2018 gold contract.

Rate rise chances (December 2018) remains at 79%.

While silver had a volume-weighted contract roll (adding 15c to price at market close) intraday silver had a bad day, dropping -0.14. With calendar weighting, we can call the move -0.08. The long black candle was a bearish continuation, and silver's calendar-weighted forecaster fell -0.08 to -0.30. Silve remains in a downtrend on the daily, but an uptrend on the weekly and monthly timeframes.  The contract roll will confuse the charts for a few days.

COMEX SI open interest plunged -906 contracts.

The gold/silver ratio fell -0.08 to 85.73. That's slightly bullish. The gold/silver ratio remains at multi-decade highs – that usually happens around a low for PM.

Miners fell, with GDX dropping -2.02% on heavy volume, while GDXJ fell -1.93% on moderate volume. XAU lost -1.83%; the opening black marubozu was a bearish continuation, and forecaster plunged -0.67 to -0.67. XAU is in a downtrend in both daily and weekly timeframes, and appears to be headed for a retest of its recent lows.

The GDX:$GOLD ratio fell -1.39%, and the GDXJ:GDX ratio rose +0.10%. That's bearish.

Platinum fell -1.22%, palladium rose +0.28%, while copper fell -0.82%. Platinum appears to have decided on downtrend for its direction right along with copper, while palladium is hanging on quite close to its recent all time high.

The buck rose +0.30 [+0.31%] to 96.87. The long white candle was a bullish continuation, and DX forecaster rose +0.64 to +0.85. That's a very strong uptrend; the buck appears to be headed for a retest of the recent high at 97.18. The buck remains in an uptrend in all 3 timeframes.

The move in the buck was all about the Euro (-0.47%) and the Pound (-0.64%). Hours after Salvini hinted that flexibility in the budget was possible, the Italian government walked that bank - they have returned to the “no changes” position. The May BRExit follies continue; May is off to Scotland to try and sell it, while at least one former official suggests the plan is “doomed.” A key thorny issue: Northern Ireland doesn't want a hard border with Ireland, but that's very difficult to arrange if Northern Ireland remains within the UK, and Ireland remains within the EU, and BRExit occurs.

Crude rose +0.57 [+1.10%] to 52.31. This marks the second positive day for oil – only mildly positive, to be sure. The spinning top candle was neutral, while CL forecaster jumped +0.61 to -0.02. That's almost enough for a reversal. Still, oil has teased us this way, with forecaster reversing four different times during this downtrend. Armstrong calls these relatively feeble 2-3 day rallies “reaction rallies” which often occur during sustained downtrends – meaning, we have to see more than 3 days of a move before we can be more certain it is a legitimate reversal. After market close, API report was mildly bearish (crude: +3.6m, gasoline: -2.6m, distillates: +1.2m), which was good for a 30 cent rally at end of day.  Perhaps it wasn't as bad as traders had feared.  EIA report tomorrow.  Crude remains in a downtrend in all 3 timeframes.

SPX rose +8.75 [+0.33%] to 2682.20. Given the much larger moves last week, this was a pretty feeble rally. The long white candle was neutral, while forecaster moved up +0.05 to -0.16. SPX remains below all 3 moving averages, and in a downtrend in all 3 timeframes.

Sector map has staples (XLP:+0.89%) and utilities (XLU:+0.75%) leading, with materials (XLB:-1.22%) doing worst. This was a somewhat bearish sector map.

VIX rose +0.12 to 19.02.

TLT rose +0.11%; TY actually fell, dropping -0.04%, however TY forecaster actually moved up +0.15 to +0.14, which is a buy signal for TY. TY remains above both the 9 and 50 MA lines, and is now in an uptrend on both the daily and weekly timeframes. It feels as though bonds are searching for shorter-term direction, although longer term, the direction remains down. The 10-year yield fell -1.7 bp to 3.05%.

JNK was unchanged today; it isn't giving us any clues as to direction right now. JNK has not broken conclusively higher, but it is above its lows to some degree.

CRB fell -0.21%; all 5 sectors dropped, led by industrial metals (-1.23%). Overall, commodities are providing a fairly bearish economic message right now. I have a recession predictor based partially on commodity prices, and it is showing an uptick in recession chances. We really need that G-20 rescue from Trump and Xi.

Gold tipped over and sank today, joining silver and the miners in the downhill move. The contract roll will rescue price to some degree over the next several days. First Notice Day for the big Dec contract is almost upon us, and I think this is causing some of the trouble. In order to dissuade longs from standing for delivery, the shorts sometimes pound prices immediately prior to First Notice Day in order to encourage the longs to bail out, in order to limit the amount of metal that the shorts might need to provide. Once the need for these delivery-reduction shenanigans are past, my guess is that gold will recover its losses. That's just a guess though.

SPX had no follow-through from yesterday's big rally. That's not a great sign if you are betting on the rebound. The strong dollar move was mostly about falling Euro & Pound: driven by resurgent Italian budget worries, and the (my guess) growing likelihood of rejection of May's EU-friendly BRExit deal by the UK Parliament.

Crude's possibly-dead-cat bounce has extended to a second day. OPEC meeting isn't until Dec 6th, however, so there might be time for one more dip – into the 40s – prior to the meeting where, presumably, OPEC will cut production in an attempt to prevent a replay of 2014.  Or maybe this is the low.  Its hard to say.

Coming up: FOMC minutes from the most recent meeting at 2pm.

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8 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5685
Powell suggests rates are "just below neutral"

Powell's speech at 12 noon turned out to be pretty exciting, as these things go.  Last I heard, the Fed was still projecting 3 rate hikes, but now we hear from Powell that rates are just below neutral, which suggests that we may get one more rate increase and then we're done.

This caused SPX, gold, and silver to jump higher.

https://www.bloomberg.com/news/articles/2018-11-28/powell-sees-solid-economic-outlook-as-rates-just-below-neutral

Snydeman's picture
Snydeman
Status: Platinum Member (Offline)
Joined: Feb 6 2013
Posts: 593
That's...

That's a capitulation, in my eyes. Very likely he's seen the writing on the wall, or been "made" to see that writing. This, more than anything, convinces me that the boy screaming that there are no leaks in the dike is running out of fingers to plug them...

 

/says in an Al Capone voice: "Take away the punch bowl, and you too will be found outside of a building with multiple blunt force injuries, attributed of course to "suicide," Mr. Powell."

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5685
capitulation

Well, all the recent fuss in the equity markets might have his attention.  Likewise the slowdown in the housing market, which appears to be tipping over even as we speak.  And the massive plunge in oil prices.  All this stuff signals that there might be trouble ahead.  Raising rates into the teeth of of that might be seen, even without "encouragement", as problematic.

If his goal was to pop the complacency bubble, he's surely done that.

We also have the ongoing QT effort.  Even without the rate increases, 50 billion per month eventually adds up to real money.

Snydeman's picture
Snydeman
Status: Platinum Member (Offline)
Joined: Feb 6 2013
Posts: 593
true

Good points. I suppose I'm worried this could represent a reversal, and return to the liquidity taps being opened once more. 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5685
liquidity taps

So right now the liquidity taps are in the process of being closed.  Powell's statement today suggests that those taps will be closed a bit less enthusiastically going forward.

I think this is a big deal.  The Fed slowing down its rate increases will be a risk on influence.  The move today in equities was quite strong.  Euro jumped too, +0.62%.  It was all about Powell.

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 81
Pounding first notice day

"In order to dissuade longs from standing for delivery, the shorts sometimes pound prices immediately prior to First Notice Day in order to encourage the longs to bail out, in order to limit the amount of metal that the shorts might need to provide."

The alternative explanation is that generally as most people use futures for the leverage, and thus do not have the full money or metal to see the contract out. Hence it becomes a game of who is more desperate to exit their position and/or (and I think it is usually an "and") roll into the next contract. As per this article https://monetary-metals.com/thoughtful-disagreement-with-ted-butler/ (on which I crunched the numbers for Keith) and the chart from it below "the fact that all but a handful of contracts plummet is strong evidence that long speculators" are the one that are more desperate to get out, and thus any falling price is likely due to them pressing the bid.

falling silver basis

When you consider the possibility that the bullion banks are primarily acting as arbitraguers, taking the short side on a hedged basis then they can sit back and wait for the longs to rush the exit. If you think the bullion banks are naked short, the shorts are the ones who choose the timing of when to make delivery within the month and guess who has the bigger balance sheet to sit out the delivery month and wait for the longs to panic? No desperate need for the shorts to dissuade the longs, they will do it themselves.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5685
FND and basis

Bron-

I'm not sure I completely understand your basis chart for silver.  It seems to be saying that there is basically free money sitting around if I can scrape together enough cash to take delivery.  That the front month contract, with 30 days left to expiration, is often selling at a substantial discount to spot.

Is that true?  It sure looks as though I can make between 4-12% if I just take delivery, and then sell the silver I get on the spot market.

Or am I misunderstanding the concept of basis?  Or am I missing something?

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 81
Free Money

You can only make that discount if you buy the future and immediately sell spot, as that is the only way to lock in the discount. If you "sell the silver I get" from standing for delivery of the future contract later, the spot price may have moved down by then and you lose. Basis is about trading spreads across two things at a single point in time, what you describe is trading a single thing's price across two points of time. To make money from this trade, you have to already have physical silver to sell now at spot + margin to cover buying the futures contract.

Secondly, the % in the chart are per annum, so a 2% discount on $15 silver over two month, say, equals $0.05. And that is the gross profit from carrying, which is buy at spot ask and selling at future bid. The trade you describe to take advantage of the discount is decarry, selling at spot bid and buying at future ask. Given the bid-ask spread on both spot and futures it is possible for the basis (carry) to be at a discount but cobasis (decarry) to be also negative (ie no profit). When you add in transaction costs you need the basis to be in a large discount (ie backwardation) before arbitraging it with a decarry trade is profitable. This is why the basis discount can manifest and be sustained and not arbitraged away.

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