PM Daily Market Commentary - 2/19/2019

davefairtex
By davefairtex on Wed, Feb 20, 2019 - 4:27am

Breakout!!

Gold shot up +19.88 [+1.50%] to 1346.60 on extremely heavy volume, while silver moved up +0.21 [+1.33%] on the highest volume in six months. The buck plunged -0.40%, a reasonably large move, while the other metals all staged strong rallies. SPX and JNK went nowhere, while bonds moved higher [+TLT +0.25%].

So what caused the big rally in gold today? Honestly I have no idea. Technically, gold broke above its previous high (1333) at around 8 am, and once it did so, it did not look back. However the move was not a massive spike higher – the kind that the big guys use to run the stops of the shorts – rather it was more of a steady move higher which suggested to me that traders were buying the breakout and/or steadily trying to bail out of their short positions, rather than this being some game run by the commercials.

There was also a very interesting jump in open interest. OI rose +25,862 contracts; that was about 12 days of global gold production in new paper, dumped onto the market today. What might gold have done without this deluge of new paper? Maybe a $40 move? Its hard to say. This was a very large change in OI. How big? Well, there have been 11,064 trading days – or about 44 years - for the GC contract. Only 20 days have seen OI changes of more than 25k.  So it was a lot of new paper.

Again, why so much new paper on a day when nothing actually happened?  I mean, there were no news items I saw that might have triggered the gold rally.  If you are trying to suppress the gold price, that's terrible news; gold rallying so strongly on no news is a very bad sign.  Maybe it was all just about US traders coming in from the long weekend, and deciding to load up on the various forms of gold.  Paper gold, in this case.

Gold's candle print was a white marubozu, which was a bullish continuation. Forecaster jumped higher, and is now in a very strong uptrend. Gold is not far from the previous high of 1371, set back in April 2018. Gold remains in an uptrend in all timeframes, and also in Euros as well.

Futures are showing a 1% chance of a cut in March, and a 10% chance of a cut by December, 2019. The market no longer believes in any more rate increases. Perhaps that had something to do with gold's rally.

Silver rallied also, but the move wasn't anywhere close to as strong as gold's move; silver did not make a new high, the percentage gain was actually less (which is very unusual in a normal PM uptrend), and the real rally for silver started around 10 am, well after gold's breakout. The closing white marubozu was a bullish continuation, and forecaster jumped higher into a strong uptrend – causing a buy signal for both the daily and weekly timeframes. Today's chart shows an exceptionally heavy volume; certainly part of that is because its the sum of both Monday and Tuesday – silver traded during President's day holiday, and that volume (although it was relatively low) was aggregated into today's volume bar. Silver is now in an uptrend in all 3 timeframes.

COMEX SI open interest rose +3,684 contracts, or about 8 days of global production in new paper.

The gold/silver ratio rose +0.14 to 83.90. That's slightly bearish.

Miners gapped up at the open, and proceeded to rally for the remainder of the day, closing at the highs. GDX rose +3.17% on extremely heavy volume, while GDXJ shot up +4.22% on very heavy volume. XAU rallied +4.20% (oh, Elon), gapping up at the open, and then blasting higher with most of the gains happening in the first 90 minutes of trading. The strong line candle was a bullish continuation, and forecaster jumped into a very strong uptrend. XAU remains in an uptrend in all 3 timeframes.

Was it another buying-panic, or did the shorts panic out? Maybe both, its hard to know. It was a very strong day for the mining shares, with one of the issues I follow being up more than 10%.

The GDX:$GOLD ratio rose +1.64%, and the GDXJ:GDX ratio climbed +1.02%. That's quite bullish.

Platinum rose +1.61%, palladium jumped a huge +3.27%, and copper rallied +2.08%. The other metals did extremely well today; copper broke out to a new high, finally breaking out above its 6-month trading range, palladium made another, dramatic new all time high, and even lame old platinum managed a respectable rally today. This all suggests good US-China trade news – and in fact Trump has become more emphatic in saying that the March 2nd deadline for the 25% tariffs is not a “magical date” - meaning he's flexible.

I can't help but note that the same gang who were ridiculing Trump for going down this path are now worried that he won't get a good enough deal. I know, I've said this before, but I keep seeing new evidence of this every day. For instance, CNBC complained yesterday that “Beijing may get what it wants”. https://www.cnbc.com/2019/02/18/a-us-china-trade-deal-nears-beijing-may-get-what-it-wants-commentary.html

Anyone remember what CNBC said about Trump's approach last year? “China holds all the Aces.” https://www.cnbc.com/2018/06/15/why-china-holds-all-the-aces-in-a-full-blown-us-china-trade-war.html

The Subtext: if Trump is doing it, it is a terrible idea, it will never, ever work, and even if it does, then he will have screwed the pooch somehow in a really obvious way that anyone could have seen coming.

Why would I bother listening to these people? They spin things so hard that anyone who happens to have a functioning memory would not assign their “analysis” any weight at all. Why are they so feckless? They aren't.  They are doing exactly what they are paid to do. Trump had to fight his way through the pro-globalization business lobby which shrieked in panic at the thought that their Chinese workforce might not be as cheap as it is today, and they might have to employ Americans to create products for their American customers.

The buck plunged -0.39 [-0.40%] to 95.96. The plunge in the buck roughly mirrored the rise in gold, but given the magnitude of gold's rally [+1.60%] vs the dollar decline, it is clear that gold's move was not just a currency effect. The buck made a new low today, dropping below the 9 MA. The long black candle was a bearish continuation, and forecaster dropped hard, resulting in a sell signal on the daily forecaster. This puts the buck in a downtrend in both the daily and monthly timeframes.

The big moves in currency were: GBP [+1.36%], and Euro [+0.46%]. Presumably the GBP rally was about May heading over to Brussels in the hopes that the bureaucrats will cough up some more concessions. History suggests this is about as likely as Hitler giving up Poland, but … who knows. Maybe she will return with Peace in Our Time.

Meanwhile, it is looking more and more likely that the Tory party - and possibly Labor too – could well be ripped in half by the issue. That's my prediction anyway: Globalization rips the UK (politically) in half, while Migration does the same thing to Germany. At its core, both issues are a reflection of 30 years of continual harvesting of the middle class by globalized capital. Both issues are also in play in the US; they are already hard at work transforming the Republicans from the Big Business Party to the Former Middle Class Party, much to the chagrin of the Republican Old Guard.  Interesting times.  Dems = Identity Politics Party, Reps = The Very Conflicted Labor Party.

https://www.bbc.com/news/uk-politics-47294386

Crude rose +0.24 [+0.42%] to 56.76. Trading range was narrow today; crude did make a new high, and the short white/spinning top was a bullish continuation, but forecaster drifted lower while remaining in an uptrend. It was fairly quiet in crude today. Crude remains in an uptrend in all 3 timeframes.

SPX inched up +4.16 [+0.15%] to 2779.76. SPX did manage to make a new high, but a last-hour sell-off chopped 10 points from today's move. The long white candle was a bullish continuation, while forecaster moved down somewhat, but remains in an uptrend. SPX remains in an uptrend in all 3 timeframes.

Materials led (XLB:+0.62%) along with utilities (XLU:+0.59%) while sickcare (XLV:-0.24%) and industrials (XLI:-0.04%) did worst. That's a pretty odd day; call it neutral.

VIX fell -0.03 to 14.88. VIX continues to slowly decline.

TLT rose +0.25%, making a new high; the move was enough to cause a buy signal for TLT. TY climbed +0.21%, a fairly strong move; TY remains in an uptrend in all 3 timeframes. The 10-year treasury fell -1.9 bp to 2.65%. Money continues to seep into the bond market regardless of the continuing move higher in equities.

JNK rose +0.03%; it was another new high, but like SPX, JNK is now inching higher. It remains in a shallow uptrend. No danger signals yet from junky debt.

CRB climbed +0.50%, making a new high by a slim margin. 3 of 5 sectors rose, led by PM (+1.69%). Both energy and PM groups have now broken out to new highs; both look fairly strong.

In today's summary, I want to talk about the mining shares.

While today's rally was really nice, even after the recent rally, the mining shares remain well below where they were the last time gold hit $1370 back in mid-2016. If you believe that things will generally revert to their mean, this suggests a possible near-term outcome: the miners have a lot – a LOT – of catching up to do. If gold conclusively breaks $1370, the miners could absolutely scream higher – perhaps a 40-50% gain in a very short span of time. This sounds like King World News-speak, but hey, even a stopped clock is right twice a day, yes?  :)  Kidding, kidding.  Mostly.

Here is the evidence.  The chart below tells you that the miners still do not fully believe that gold will break above 1370. Today's rally suggests that traders are just starting to admit this is possible. Ok, I'm long the miners, so I'm talking my book, but – just look at the gap in the chart below: for the math-impaired, it would take a 44% move by the miners to fill this gap.

What's the timing on this move? I don't know. Gold could break out tomorrow, or we could have happy news of some sort from the tariff negotiations which might send gold lower. Right now the near term is highly uncertain. Longer term, gold is in a strong uptrend, and on track to break 1370 at some point, perhaps soon. Gold appears to be rallying as the economic news worsens. If this trend continues, and we move into recession...what do you think gold will do?

If/when gold does break 1370 conclusively, the miners could get completely out of control.  They are a small group, and there's a lot of money looking for a place to land.

Last point.  Gold moved $20 today.  Gold is about $20 away from the previous high at $1370.

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10 Comments

MGRS's picture
MGRS
Status: Bronze Member (Offline)
Joined: Feb 28 2013
Posts: 34
Realigning political parties.

At its core, both issues are a reflection of 30 years of continual harvesting of the middle class by globalized capital. Both issues are also in play in the US; they are already hard at work transforming the Republicans from the Big Business Party to the Former Middle Class Party, much to the chagrin of the Republican Old Guard.  Interesting times.  Dems = Identity Politics Party, Reps = The Very Conflicted Labor Party.

Thanks for this, Dave.  I've had a general sense of this, but you clarified it all very succinctly here.  Do you know anyone who's really exploring this transformation in writing or podcasts?  Especially the transformation of the Republican side - the Democrat transformation into the identity politics party seems to be fairly well explored by the likes of Dave Rubin and others, so maybe I'm just not aware of the similar analysis of the Republican transformation. 

Seems like something Chris, Charles Hugh Smith, or Jim Kunstler (or Dave!) would be well suited to.  Maybe they already have. 

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 392
PM OI

Dave (or anyone),

I have a question if you have a moment.  I guess I don't really understand how to properly think about the daily rises/falls in OI for PMs.  Let's start with this:  My general sense is that +numbers = some entity going short (more contracts being sold into the marketplace), whereas -numbers = some entity going long (buying/removing contracts from the marketplace).  If that thinking is not right, please correct me.

Assuming I'm understanding that first piece correctly, then the next question is who is buying/covering and/or who is selling/dumping?  Could be either managed money or commercials.  I think I understand all of your comments around this:  First, usually commercials end up being right and mm ends up taking the bath.  Second, the net commercial data doesn't provide an immediate signal (extremely long, for example, doesn't mean the price of the metal will rise tomorrow).

Lastly, this is the part I'm struggling with:  If the price continues to accelerate higher, for example, and OI continues to grow bigly, it would seem that eventually, all of that shorting, resulting in the massive increases in OI, would be forced to cover, driving the price even higher and in a hurry....like fuel for a fire.  On its face, it seems like the process of adding contracts into the market would drive the price lower, at which point one would cover and make money.  But often, we see OI increase dramatically while the price is moving higher.  I guess my question is:  Does it never get to the point where all of that OI results in forced covering?  Maybe, it's that there are truly just an ulimited amount of contracts that can be created until the price rise eventually runs out of steam and then declines.  I get the strategy that adding contracts soaks up buying pressure, and eventually the buying pressure runs out, so the price declines.  But it just seems like at some point, that would be a losing strategy if the price took a long time to stop going up, and buyers kept showing up.  I don't know.

cmartenson's picture
cmartenson
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Posts: 6110
My understanding of PM OI
Cold Rain wrote:

Dave (or anyone),

 My general sense is that +numbers = some entity going short (more contracts being sold into the marketplace), whereas -numbers = some entity going long (buying/removing contracts from the marketplace).  If that thinking is not right, please correct me.

The futures market is a zero sum arena.  

For every long there's a short.  The accounting identity is (Longs - Shorts) = 0

It's easy to understand, let's say you want to buy a gold controact.  That's a long position.  Unless you aquire one from someone who already has one, your only hope for getting one is from someone selling a short position.

So let's take the futures market back to it's very beginning when there are no positions at all.  If someone want's to buy (go long) a contract, what's necessary here?

That's right, someone else has to be willing to sell one first.  And if you were the seller of that short, what would be required for you to close that position out?  That's right, you'd have to buy one (long position) from someonw who already had one.  When you 'issued' the short position open interest went up by 1, because it is the combination of those two sides, the long and the short, that comprise "one contract."

In other words, the open interest is completely driven by the entities willingness to open up new short positions or to close them out.

If the shorts are buying up long positions they are "closing out contracts" and the OI is falling.  If more (net) shorts are being issued the OI is rising.

Here's a handy table to interpret OI.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5860
republican party transition

Well, this may shock you, but Tucker Carlson is actually doing a fairly decent job of this.  Not every time, and not for every show, but it is definitely a theme.

Here's a particularly good show.  He sounds a whole lot like Bernie Sanders.  No joke.

Romney spent the bulk of his busness career at a firm called Bain Capital.  Bain Capital all but invented what is now a familiar business strategy: take over an existing company for a short period of time.  Cut costs by firing the employees.  Run up the debt, extract the wealth, and move on, sometimes leaving retirees without their earned pensions.  Romney became fantastically rich while doing this.  Meanwhile, a remarkable number of the companies are now bankrupt or extinct.  This is the 'private equity model.  Our ruling class sees nothing wrong with it.

Ruling class?  Say what?  What happened to the insipid "job creators" crap I had grown used to seeing at Fox?

He goes on from there.

What transformed him?  This question: why did America elect Donald Trump?  (Hint: it wasn't Putin).  He talks more extensively about his own journey in uncovering the answer in the following speech.  Parts of it are quite good.

One key thing he's missing: the decline of net energy as a causal agent in the decline he has witnessed.  Of course, since I don't know him, I can't introduce him to the concept, but somebody probably should.

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 392
Thanks
cmartenson wrote:
Cold Rain wrote:

Dave (or anyone),

 My general sense is that +numbers = some entity going short (more contracts being sold into the marketplace), whereas -numbers = some entity going long (buying/removing contracts from the marketplace).  If that thinking is not right, please correct me.

The futures market is a zero sum arena.  

For every long there's a short.  The accounting identity is (Longs - Shorts) = 0

It's easy to understand, let's say you want to buy a gold controact.  That's a long position.  Unless you aquire one from someone who already has one, your only hope for getting one is from someone selling a short position.

So let's take the futures market back to it's very beginning when there are no positions at all.  If someone want's to buy (go long) a contract, what's necessary here?

That's right, someone else has to be willing to sell one first.  And if you were the seller of that short, what would be required for you to close that position out?  That's right, you'd have to buy one (long position) from someonw who already had one.  When you 'issued' the short position open interest went up by 1, because it is the combination of those two sides, the long and the short, that comprise "one contract."

In other words, the open interest is completely driven by the entities willingness to open up new short positions or to close them out.

If the shorts are buying up long positions they are "closing out contracts" and the OI is falling.  If more (net) shorts are being issued the OI is rising.

Here's a handy table to interpret OI.

 

Thanks, Chris.  Makes sense.  Appreciate the response.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5860
wash & rinse cycle

You've got a good handle on the wash & rinse cycle, I think.

The normal cycle is, commercials short into the rally, and then cover during the inevitable decline.  This is usually a money-maker.  I mean, almost always its a money-maker.  Except - when it isn't.  Like in silver in 2011.   You can see the commercials panicked twice...the rally was too strong, they got rattled, and COVERED into the rally.  Which helped to move prices very rapidly higher.  And it also made the dips very shallow too.

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 392
Good Illustration

Thanks, Dave.  One of these days we might see that again.  Not sure what was wrong in the Fed minutes that gold and silver didn't like, but I guess the commercials can go ahead and start covering now.  Straight down with furious selling.  Going to be a nice shooting star candle top. :(

phusg's picture
phusg
Status: Bronze Member (Offline)
Joined: Jul 16 2014
Posts: 62
trends

Right now the near term is highly uncertain. Longer term, gold is in a strong uptrend, and on track to break 1370 at some point, perhaps soon.

From 2016 in a strong uptrend but looking further back, does the downtrend from 2011-2012 still have any strength left in it after all these years of chopping sideways?

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5860
longer term chart

Here's a quarterly gold chart.  It looks reasonably strong to me.  A break above 1382 and we could be off to the races.  Will the breakout happen?

Gold has tried perhaps 4 times to break out - my understanding is, the more shots it takes, the higher likelihood it has of actually executing successfully.  We look to be approaching shot #5.

Macro context: We are approaching a recession, most likely.  The Fed will stop raising rates.  They will stop rolling off the balance sheet.  News about both of these actions by the Fed, whenever they hit, seem to drive money into gold.

As a result of this setup, I think a breakout this year is likely.  This week?  I have no idea.

 

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 97
Naked shorting vs hedged shorting
cmartenson wrote:

For every long there's a short.  The accounting identity is (Longs - Shorts) = 0

So let's take the futures market back to it's very beginning when there are no positions at all.  If someone want's to buy (go long) a contract, what's necessary here? That's right, someone else has to be willing to sell one first.  ... In other words, the open interest is completely driven by the entities willingness to open up new short positions or to close them out.

I disagree with this focus on the short side only. If longs have to equal shorts, then the following is equally true:

"So let's take the futures market back to it's very beginning when there are no positions at all.  If someone want's to sell (go short) a contract, what's necessary here? That's right, someone else has to be willing to buy one first.  ... In other words, the open interest is completely driven by the entities willingness to open up new long positions or to close them out."

There is also an assumption that all shorts are naked, ie exposed to the price, when some of the OI is composed of entities which are hedged, eg:

1. Industry. Say the price is rising, then business is good for bullion dealers and they will be increasing their working inventories (stock in transit from mints and going to customers, and general stock in their store/warehouses). As they increase (buy) more stock they will look to short futures to hedge themselves, so OI increase could be because bullion is selling well.

2. Market Makers. If the gap between futures prices and spot prices is big enough, a market maker will take the other side on a fully hedged basis. Say spot gold is trading in London for $1000 and a big bank can borrow cash at 1% and people are desperate to go long gold for 12 months and are bidding $1015 on Comex. This is what a bullion bank would do:

  • Borrow $1000 @ 1% - cost $10
  • Buy physical gold @ $1000 spot - cost $1000
  • Sell futures @ $1015 - revenue $1015

If the bank sits on that they will make a guaranteed $5 profit no matter what the price does. Do bullion banks take proprietary trading positions in futures? Yes, but no one knows how much of their activity is hedged market making or trading positions.

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