PM End of Year Market Commentary - 2018

davefairtex
By davefairtex on Tue, Jan 1, 2019 - 2:37pm

On the last trading day of 2018, gold rose +1.80 [+0.14%] to 1288.15 on light volume, while silver rose +0.11 [+0.71%] to 15.56 on moderately heavy volume. The buck fell -0.26%, while SPX climbed +0.85% and crude rose +1.72%. It was a reasonably happy ending to an eventful Q4.

Sometimes I can get lost in the day-by-day or even week-by-week movements. The monthly metals sector map really brings everything into perspective. This month's metals sector map is very clear: junior miners are leading seniors, miners are leading metal, and silver is leading gold. That's a classic metals bull market configuration. It really doesn't get any better than this.

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Junior Miners GDXJ 13.65% -14.00% rising rising falling rising ema9 on 2018-12-20 2018-12-31
Senior Miners GDX 10.48% -11.46% rising rising falling rising ema9 on 2018-12-31 2018-12-31
Silver $SILVER 9.19% -9.64% rising rising falling rising ma200 on 2018-12-28 2018-12-31
Silver Miners SIL 8.55% -25.49% rising falling falling rising ema9 on 2018-12-28 2018-12-31
Gold $GOLD 4.63% -2.61% rising rising falling rising ema9 on 2018-12-20 2018-12-31
Palladium $PALL 4.37% 10.04% rising rising rising rising ema9 on 2018-12-26 2018-12-31
Gold/Euro $GOLD:$XEU 3.79% 2.54% rising rising rising rising ema9 on 2018-12-20 2018-12-31
Platinum $PLAT 0.02% -15.57% rising falling falling rising ema9 on 2018-12-26 2018-12-31
Copper $COPPER -5.46% -19.52% falling falling falling rising ma50 on 2018-12-17 2018-12-31

Gold rose +60.06 [+4.89%] this month. The white marubozu candle tells us that gold ended the month at its high; it was a bullish continuation. Forecaster issued a buy signal this month. Gold/Euros monthly has been in an uptrend now for 3 months, and it too looked strong this month; gold's rally was mostly not about currency.

While the FOMC raised rates 25 bp at its December meeting, the March 2019 chances are at 2.5%, and the Dec 2019 rate-increase chances are at 16%. There is also an 11% chance of a rate cut projected for December 2019. The market clearly believes the Fed is now done raising rates. This is a big deal.

COMEX GC open interest rose +61k contracts this month; open interest has started to recover after plunging during November.

COT report (see chart below) shows that managed money has a historically small long position (red line) – managed money is underexposed to gold right now, roughly equivalent to where it was during the December 2015 lows – while it has bailed out of maybe half of its short position (black line) at this point, leaving perhaps 70k short contracts left to squeeze. If managed money decides it needs a lot more gold exposure, we could easily see a move up to re-test the 1370 level sometime in Q1 2019.  We might even get a breakout above the previous high at 1370.

Silver rallied +1.31 [+9.19%] this month, snapping out of its 4-month trading range with a breakout above 15 in the last few weeks of the year. December's strong line/swing low candle print was probably a bullish reversal (77%), and forecaster issued a buy signal. Last month's low was clearly a headfake.

The gold/silver ratio plunged -3.50 to 82.68. The drop in gold/silver ratio is quite bullish, and it suggests we may be entering a new PM bull market move. During early 2016, we saw the ratio drop from 83 down to 67, as gold jumped from 1240 to nearly 1400.

COMEX SI open interest fell -10.9k contracts.

The COT report (shown below) shows that managed money has bailed out of perhaps 60% of their formerly-record-high short positions (red line) over the past few months – but that still leaves perhaps 40k “surplus” shorts remaining to be squeezed. Managed money is also underexposed long (black line); while I don't see new highs for silver if PM continues its rally into 2019, the 18 level is not an unreasonable target if the shorts are unwound and managed money jumps in long.

Miners rose +9.62% in December, a strong move, outperforming both gold and silver. The confirmed bullish high wave candle was probably a reversal (80%), with forecaster remaining in an uptrend after signaling a buy last month. While these technical indicators look good, the miners have yet to start screaming higher the way they did in early 2016.

The GDX:$GOLD ratio rose +5.33% while the GDXJ:GDX ratio climbed +2.87%. That's bullish. The juniors seem to be waking up – if just a little.

USD

The buck fell -1.10 [-1.14%] on the month, a moderately large move down. While the short black candle was just mildly bearish (30% reversal), forecaster issued a fairly clear sell signal that seems to to suggest the buck has most likely topped out for now, and could well move lower from here.  This would be supportive of a PM rally next year, assuming the DX downtrend continues.

The big movers vs the buck were JPY [+3.37%], and CAD [-2.65%]. While CAD's drop was about the oil price decline, the rally in JPY is still a bit of a puzzle; BOJ chair Kuroda didn't seem to change very much, but JPY screamed higher after his press conference.

US Equities/SPX

SPX plunged -253.31 [-9.18%], a massive drop. As November closed, it looked as though SPX might just be putting in a low roughly at 2600 but then prices fell for 3 straight weeks. The monthly strong line candle was bearish, and forecaster issued a sell signal – last month's reaction rally now shown to be a head-fake.

The sector map had energy and financials doing worst, while utilities did best. This is a bearish sector map.

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Gold Miners GDX 10.48% -11.46% rising rising falling rising ema9 on 2018-12-31 2018-12-31
Utilities XLU -4.80% 1.40% falling falling rising falling ma200 on 2018-12-27 2018-12-31
Materials XLB -7.49% -17.71% rising falling falling falling ema9 on 2018-12-27 2018-12-31
Cons Discretionary XLY -8.32% -1.18% falling falling falling falling ema9 on 2018-12-27 2018-12-31
Homebuilders XHB -8.42% -26.84% falling falling falling falling ema9 on 2018-12-27 2018-12-31
Technology XLK -8.77% -4.26% falling falling falling falling ema9 on 2018-12-28 2018-12-31
Cons Staples XLP -9.74% -10.19% falling falling falling falling ema9 on 2018-12-31 2018-12-31
Healthcare XLV -9.76% 3.47% falling falling rising falling ema9 on 2018-12-27 2018-12-31
REIT RWR -9.79% -7.92% falling falling falling falling ma50 on 2018-12-17 2018-12-31
Defense ITA -9.97% -8.26% falling falling falling falling ema9 on 2018-12-31 2018-12-31
Industrials XLI -11.21% -15.38% falling falling falling falling ema9 on 2018-12-31 2018-12-31
Telecom XTL -11.26% -9.29% falling falling falling falling ema9 on 2018-12-28 2018-12-31
Financials XLF -11.68% -14.68% falling falling falling falling ema9 on 2018-12-27 2018-12-31
Energy XLE -13.25% -21.92% falling falling falling falling ema9 on 2018-12-31 2018-12-31

Internationally, the US was the worst-performing region, while Latin America and Emerging Asia did best.

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Latin America ILF -4.05% -12.47% rising falling falling falling ema9 on 2018-12-27 2018-12-31
Emerging Asia GMF -5.69% -17.95% falling falling falling rising ma50 on 2018-12-19 2018-12-31
Europe IEV -5.78% -17.78% falling falling falling falling ema9 on 2018-12-28 2018-12-31
Eurozone EZU -5.85% -19.59% falling falling falling falling ema9 on 2018-12-28 2018-12-31
Developed Asia VPL -7.59% -17.49% falling falling falling falling ema9 on 2018-12-04 2018-12-31
United States VTI -9.71% -7.66% falling falling falling falling ema9 on 2018-12-28 2018-12-31

VIX ended the month at 25.42.

Rates & Commodities

Bonds did extremely well; TLT screamed up +5.36%, while TY jumped +1.91%, following through off last month's buy signal. TY remains in a strong uptrend. The 10-year yield plunged -30 bp, dropping from 3.01% down to 2.71%. The US long bond remains a safe haven asset.

The 2-10 spread narrowed just 1 bp this month; money seemed to flow into both the 10 and 2 year bonds about equally (the 2-year yield plunged -29 bp).

JNK plunged -3.28% - and that's including a sizable rebound last week. BAA debt actually saw inflows, with BAA corporates dropping -12 bp to 5.16%. However, that's not as good as what we saw in the 10-year, which means the BAA.AAA ratio moved higher – up +8 bp to 1.14%. That's a breakout above 1.10%, which is a historically-based cutoff point for recession concerns. When the BAA.AAA ratio rises, that is another signal that bad times may be ahead.  Money is voting - it is telling us that it prefers safety over yield right now.

Crude fell another -4.69 [-9.22%]; there was a small bounce following the OPEC meeting, which lasted for a couple of weeks, and then price broke down further. Crude managed to find buyers at 42, a previous low, but the bounce during the last few days of the year wasn't enough to generate a positive candle print: December's long black candle was not a bullish reversal, and forecaster remains in a deep downtrend. This month, dropping crude prices and plunging equity market prices seemed to go hand in hand.  A drop below 42 would probably be devastating for energy equities, and most likely, generate new lows for SPX as well.

Physical Supply Indicators

* The GLD ETF tonnage on hand rose +25.93 tons, with 788 tons in inventory.

* ETF Discount to NAV:

 PHYS 10.31 -1.24% to NAV
 PSLV 5.59 -3.97% to NAV
 CEF 12.54 -3.84% to NAV

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows no premium for gold, and a 2c premium for silver.

* Big bars premiums were: gold [1kg] 1.37%, and silver [COMEX 1000 oz] 3.39%.

Grey Swans & Geopolitics

  • Ebola: case load continues to track sideways; stopping Ebola outbreaks in war zones is difficult. While things seem under control at the moment, this continues to have the potential to be a large-impact black swan if an infected victim manages to get on a plane.  Speaking of which: https://www.upi.com/Top_News/US/2018/12/30/American-doctor-exposed-to-Ebola-transferred-to-US-to-be-monitored/6761546212409/   It is definitely better for the US government to facilitate the transfer by private jet.  What's the alternative?  You force any future possibly-infected individual to try and sneak back into the US without telling anyone because they are afraid of being denied entry.  Its no fun to deal with Ebola in the middle of the "Democratic Republic" of the Congo.  [Related: if you feel the need to add the word "Democratic" to your country's name,  your country almost certainly isn't democratic.]

  • Turkey: the 10-year yield fell to 15.83 – the panic in Turkish bonds from August has been completely unwound. Trump's exit from Syria also removes a bone of contention with Turkey; my sense was, part of Turkey's bond-confidence problem resulted from its estrangement from the US, Europe and NATO over Syria, and the Khashoggi murder somehow managed to right the ship. I think Turkey will be ok, absent any re-emergence of its inflation problem, which also seems to be slowly abating.

  • Migration: it will continue to be a theme moving into 2019. Formerly, big business was able to keep importing cheap labor, while keeping concern over this issue in check using political correctness; this strategy now seems to be failing. Key question: have the mainstream parties completely lost the confidence of voters on this issue? In Italy, the answer is clearly yes. Germany? France? UK? Not yet. The difference: economic performance in each of the regions.

  • China – Tariffs & Debt: While a tariff settlement looks increasingly likely, China's economic stats are clearly tipping over. One region in China was ordered to stop producing ISM numbers – presumably because they were so terrible. Downturns result in debt defaults; either lots of ordinary people will lose a pile of money, or China will bail out the bad debt through printing, and the CNY will be crushed. There is really no third option. If I lived in China, I'd run down to the SGE and load up on gold. This chicken may come home to roost in 2019.

  • Yield Curve Inversion: in December, the 2-10 spread was largely unchanged. That's because the 10-year staged a very strong rally. So far, no inversion. If equities (and crude) continue to fall, money will move into bonds, but so far, big money is not preferring the longer end of the curve. Once that happens...the move by itself may well will cause banks to tighten lending standards, which in and of itself will help to bring about a correction.

  • North Korea: it appears that the trade disagreement with China has put the US-DPRK negotiations on hold for now. While Trump is scheduling another meeting with KJU in January, I suspect that it will require Xi to step in to make any sort of deal happen. Opening up North Korea could be equivalent to the wall coming down in Germany in 1991, at least for the Korean peninsula. I rate this as more likely than not to happen, sometime in 2019, but the economic effects may take years to be felt.

  • Mueller Investigation: in 2018, Mueller made no apparent progress in uncovering any sort of “Russian Collusion” (conspiracy with Russia by Trump to rig the election). Unless something dramatic is uncovered – and this group leaks like crazy - it is unlikely that Mueller will have a material effect on Trump's presidency going forward.  Mueller probably issues his report sometime in Q1 2019.

Summary

Here at end of year, there were some major changes in trend. The Fed has moved from a steady 25 bp increase every other meeting, to – according to the futures markets anyway – no more rate increases in 2019. Oil plunged from near 80 down to 42, bouncing only slightly in the last few days of the year. SPX dropped too, turning what was a fairly positive year for equities into a negative one just in the last month alone. The yield curve has moved close to inversion. Lastly, gold and silver have staged some fairly impressive rallies as equities have plunged. Traders seem to care about gold once more. Recession and global downturn are on everyone's lips.

At the same time, there is no shortage of physical gold, at least none that show up in any of my indicators.

The focus of next year most likely will be the potential for recession. Will the hints of a global downturn end up leading to an actual recession? Currently, my indicators say that one is becoming more likely as time passes. Both INDPRO and PPIACO (a pair of long-lived timeseries) are both signaling a trend change downhill. That's a necessary, but not sufficient condition for recession. Also, plunging oil prices have convinced another recession predictor I have that a recession may be on the way.

Lastly, as of the most recent reading of prices and supply, housing is clearly tipping over and sinking. Months of supply, nationwide, is at 7.4 months, up +0.90 months in October.  That's really bad - especially the supply numbers.  The supply number lags by 2 months, but it is definitely not good news.   How much of that is the recent rise in mortgage rates? What will happen come January when home shoppers return from the holiday break, and they find that mortgage rates have dropped by 40 bp? Will housing prices pick up again?  We'll only know more when we see the response by prospective home buyers in January.

Also, employment and bank credit growth (at least in the US) remains reasonably strong, as does GDP.  That said...the recession-predicting "Part-Time/Economic" employment report is hinting, in 4Q 2018, that it might just be reversing higher.  This would be the first employment-driven sign of an impending recession.  Look at the chart below and you tell me where we are.  Candle analysis suggests we are seeing a quarterly "swing low".  Does this suggest a recession is 6 months out?  3 months?  Or maybe - its just a momentary blip.  Swing lows make me nervous - they're usually pretty strong patterns.

Concern over possible future economic weakness appears to be leading to money flows into gold and silver. The COT report shows that managed money is heavily (almost historically) underinvested in both metals. If managed money decides they need more exposure, we could see a pretty brisk move higher, assuming no official intervention.   Gold could break out above 1400.  That's a King World News type of prediction.  But the COT report - along with recent moves in the metals alongside the plunge in equity prices - suggests this could actually happen.

I conclude from looking at the tea leaves: a recession prediction is premature - at this time.  We aren't there yet.  We might be there in another month or two, but as of right now, things are still going relatively well.

And I do think that trade deal with China is likely within the first 30-60 days of the new year.  I suspect the pressure to settle will ratchet up rapidly if it seems that the economic news for both countries starts to worsen.  Both Trump and Xi will be motivated to stop the bleeding.

And who knows what a 40 bp drop in mortgage rates could do to the housing market.  We just have to watch and see.

Current Trends – Monthly:

Uptrend: Silver, 10-year Treasuries, Gold/Euros, Gold, palladium, miners, BAA corporates.

Downtrend: crude, BAA.AAA ratio, housing, platinum, DJIA, SPX, copper, USD.

Note: If you're reading this and are not yet a member of Peak Prosperity's Gold & Silver Group, please consider joining it now. It's where our active community of precious metals enthusiasts have focused discussions on the developments most likely to impact gold & silver. Simply go here and click the "Join Today" button.

 

5 Comments

Eannao's picture
Eannao
Status: Silver Member (Offline)
Joined: Feb 28 2015
Posts: 182
Goldmoney.com

Hi Dave,

Thanks for a great review. I have an unrelated query, but figured this is the best place to ask it.

I have precious metals and currency with Goldmoney.com but I notice that their share price (XAU.TO) is doing very poorly. Looking at their chart pattern, if it were a bank I'd be considering taking my money out.

Do you have any insights, advice or ideas as to why they are doing so poorly and whether there is a significant risk?

Thanks, E.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5863
goldmoney

Ok, so your homework assignment is to get their 10K, look at the balance sheet, and see if they have a lot of debt, and what their assets look like.  Assets > liabilities?  Next step is to track their last 3 years of earnings.  Are they making money or losing it?

Track revenues.  Have they had a severe drop in revenues recently that matches up with the drop in stock price?  I noticed something about them doing some crypto product...hmm.  This may be it.  Notice the pop XAU.TO in mid-2017, the peak in December 2017, and the plunge through to today, which pretty much mirrors bitcoin's price chart.

I noticed that the CEO bought about 40k shares within the last few months, and that's a reasonably good sign, but as you say the chart looks horrible.  I agree you have a reason to be concerned.

Check out: XAU.TO:$XAU.

That's an 80% drop vs the index over the last 12 months.

If you want to have some fun, chart: DB:$BKX and go back to 2009.

It is possible that XAU was heading for the cellar, was momentarily rescued by bitcoin hope, only to have that hope dashed with bitcoin's plunge.

Might look more closely into their balance sheet.  If it includes a lot of company-owned bitcoin...

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 97
GM

I think generally poor precious metal markets and the crypto bust are factors. Also see https://www.goldmoney.com/corporate/news/goldmoney-inc-provides-corporat...

"the high trading volume in the shares of the Company on December 4, 2018 and November 24, 2018, which were accompanied by a decline in the share price. The Company is of the view that there were forced sales on these two days as a result of margin calls. The Company is unaware of any material change in its operations that would account for the recent market activity"

Snydeman's picture
Snydeman
Status: Platinum Member (Offline)
Joined: Feb 6 2013
Posts: 692
bronsuchecki wrote: I think
bronsuchecki wrote:

I think generally poor precious metal markets and the crypto bust are factors. Also see https://www.goldmoney.com/corporate/news/goldmoney-inc-provides-corporat...

"the high trading volume in the shares of the Company on December 4, 2018 and November 24, 2018, which were accompanied by a decline in the share price. The Company is of the view that there were forced sales on these two days as a result of margin calls. The Company is unaware of any material change in its operations that would account for the recent market activity"

I'm sure you know this, but take that link with a grain of salt. Never trust the mouth telling you things if its connected to the same hand asking you for money, or holding onto the wallet of money you've already given...

barrynilsen's picture
barrynilsen
Status: Member (Offline)
Joined: Sep 28 2012
Posts: 9
Ray Dalio, PMs, Big Debt Crises, knowing the enemy's mind

Has anybody waded through the book(s) "Big Debt Crises" by Ray Dalio.

After hearing him on a couple podcasts, I thought he would be worth a read.  His study of past big debt crises is exhaustive.  Extremely data driven, without too much opinion.  Pretty much just the facts, and the explanation of the justification by Central Banks and Governments for dealing with big debt.  Likely the most comprehensive study of historical debt crises ever from what I can tell.  I'm always on the quest for answering the Deflation/Inflation debate (10 years of dissonance in my head now, and still wondering), and found myself at Ray's book on the kindle.

It has been very difficult for me to swallow his (explanation-of-establishment-) reasoning that, basically, the end justifies the means as the system has ripped off savers to recapitalize wall street. As long as the fed can get away with it without violence in the streets, then all is well!  It is hard to put the moral judgment aside and see things as "they" do, doing "whatever it takes", no matter how immoral. 

Besides being generally tired at the end of the day when I get around to reading it, I found it so offensive, that I would  find myself having to re-read pages many times to swallow what Ray was saying and get past my revulsion.  (Insert Sun Tsu quote about knowing the enemy here)  Nevertheless, I think Ray seems like a pretty good character as he expresses his fear about excessive income inequality and the possible Mad Max scenario.  Ray is also some what a PM guy like most of us here at PP.

Since I couldn't get through it on my phone or Kindle, but thought it was still important to digest, I splurged and bought the expensive paper back on Amazon, and it came today.  I thought was kind of expensive at $33 or so, but it's actually three separate paperback books, in a cardboard shelf organizing box thing.  And just to affirm my prior offense from the attempt at reading it on kindle, there are four (4) testimonials promoting his work on the back of the box by by none other than Bernanke, Summers, Paulson, Geither.

Anyways, I don't recall any discussion here yet about Dalio's book, and thought I would ask y'all what you thought of it.  

Personally over the past 10 years, I have wasted way too much time reading tidbits here and there on blogs instead of digesting worthy books on subjects.  I think this might be one of those important books.

 

 

 

 

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