PM End of Week Market Commentary - 7/19/2013

davefairtex
By davefairtex on Sat, Jul 20, 2013 - 4:50am

Week In Review

For the week gold was up 11.60 to 1295, silver was down 0.46 to 19.41, placing the gold/silver ratio at a new cycle high of 66.72.  Silver remains the poor stepchild, while gold is positioned within easy striking distance of $1300, and from my observation from intraday price action, remains relatively well-bid.   Dips are bought in gold, which is a welcome change.  The tight trading range from 1265-1300 and especially the past few days showing an ascending triangle formation intraday (a series of higher lows capped by resistance at 1300) suggests to me says the odds favor a breakthrough of $1300, especially now that Bernanke's market-moving testimony is out of the way.  Silver looks much less promising - I can't tell you why.  Perhaps those people in Shanghai don't care about silver the way they care about gold.

The gold mining index GDX was up 6.1%, strongly outperforming gold, while the junior gold mining index GDXJ was up only 3.3%.  This is a bit of a warning sign - it's good that GDX popped so dramatically, but GDXJ should by all rights be leading GDX in a real trend change.

The dollar was down 0.46% during the week which is generally supportive of commodity prices, while copper was flat, oil up $1.92 to 108.16, platinum up $17 to 1424.  Overall the commodity complex was up 1.05%.  Usually silver will follow the commodity complex and oil as well - but those links seem to be broken right now.  Oil up, commodites up, and silver down - that tells me something odd is happening.  Something to watch.

Gold/Silver Trends & Moving Averages

From a technical perspective, gold for the first time since early April closed over its 20 EMA.  See the chart below.  The green line is the 20 day EMA, which has acted more or less like a "ceiling" for every rally in gold since April.

Moving averages of varying "lengths" are used to identify trends in a way that helps us to be more emotion-free about our analysis.  We all hope gold will go up, but moving averages don't care about hope, or stories, or emotion.  They just are.  They also allows us to compare two instruments with a consistent yardstick.  And, it doesn't matter how great the story is, if the price hasn't moved above its moving average, the downtrend (over that time period) is still in place, and caution should be exercised in going long.  "There are old traders, and there are bold traders - but there are no old-bold traders."

The three moving averages in the chart above - the 200 day, the 50 day, and the 20 day all are used to look at price trends in three timeframes: long, medium, and short.  So when the EMA 20 is rising, the short term trend is up.  We're not quite there yet, but we are very close.  Medium term (blue line) the trend is down, as is the long term trend (red line).

Trends are important because professionals - big money - use them to bias their activities.  In a downtrend, shorts are braver and will jump on opportunities to sell rallies as well as breakdowns.  In an uptrend, longs are braver, and will jump on opportunities to buy both dips and breakouts.  That's why trends tend to go for a while - once an object is in motion it tends to stay in motion.  Once a psychology of direction is established, traders will push that trend until it becomes apparent it doesn't work anymore.  The milking will continue until the cow is dry!

When price crossing a moving average, that's an early indication of a possible trend change.  That's because if price stays above a moving average long enough, the moving average will be "dragged up" and start rising.

So Friday we saw the price of gold close above the 20 EMA.  That's good.  Next step - break through 1300 and close above the 50 MA (currently 1338).  A close above the 50 MA is something that hasn't happened since Dec 2012.  That would get the attention of leveraged long traders and possibly turn into a sustained uptrend, where dips get bought instead of rallies sold, while sending the shorts scampering for cover.  Most professionals don't want to take risk and guess at where the bottom is (i.e. 1525 - crash, 1321 - crash, 1261 - crash, that will get you fired, never mind not getting a bonus) but they're more than happy to jump on the trend after it has been established by someone else.

In the chart below, compare gold's performance to silver.  Notice how silver is still below its 20 EMA, and looks to be languishing a bit at the bottom of its trading range.  Additionally, the trading range is larger, and the past two days has seen silver close at or near its lows, after attempting to rally and fail.  These are all bad signs.  "Nobody cares" is my conclusion.  I don't know why, but that's what the chart is telling me.

In the trading world, if something isn't performing well, there is usually a reason, but most of the time we  aren't let in on the secret.  MSM reports on causes which may or may not have anything to do with what is actually going on.  Silver appears a bit sick for some reason, my conclusion: best to trade something else that is performing better, where other people appear to want to help the price move up.

So to summarize:

Gold is trending down in the long and medium timeframes, with short term trend flat

Silver is trending down in all 3 timeframes

Scenarios

Rather than making predictions, I like to talk about if-then scenarios, and my vague gut feel on how likely each scenario is to be "the one" that plays out.  I see 3 basic ones on gold.

1) 20% - $1300 breakout and continue.  Gold blows through $1300 and just keeps on going, likely finding resistance at 1350, where it stalls out the same way it did at $1300.

2) 45% - $1300 breakout to 1320 resistance, a retracement back to $1300 that gets all the new longs to ditch their positions, followed by a steady move back towards 1350.

3) 35% - Clear rejection at $1300 (a close below 1265 on high volume after testing 1300 again).  Gold retests the low at $1200/1180.  If gold retests 1180 even if it successfully holds there, silver likely makes new lows.

Based on the price action alone, I think scenario #3 is not so likely, but with the downtrend still in place, I have to honor it and be careful accordingly.  As Jim said, those shorts could come out of nowhere and hammer gold.  They're brave, because the longs are still a bit scared since the 50 day MA/medium term trend remains down.

Gold Miners

Now that you've seen gold and silver, let's take a look at one of more popular companies for the big players to buy - Goldcorp.

First thing we see is GG closed above the 50 MA (blue line) four days ago, consolidated for a few days, and then moved off the 50 using it as support.  This looks pretty good - it is dragging the 20 EMA up, and it is likely the 20 EMA will cross the 50 if GG just moves sideways.  There was ok volume on Friday, and GG closed at the high, up 3.68% on a day with gold up about 1%.  We can also see that most of the time GG's up days (the white bars) have higher volume than the down days (red bars).  That is also a good sign.

We can also see that GG is outperforming gold.  Its above the 50 MA, while gold is only above the 20 EMA.  And GG's 20 EMA is itself moving up, which confirms for us that GG is in a short term uptrend.

Next step for GG is to break above that high on Wednesday - around 27.75.  If gold breaks $1300, goldcorp should be trading in the 28-30 range, unless some horrible company-specific news comes out about the company itself.

Relative Performance via Ratios

Ratios allow me to find outperforming stocks.  Charting a stock against its index is particularly useful.  Let's take our previous example GG and see how its doing against its index GDX.

My overall impression is clearly that GG is doing better than its peers since at least February.  Since all miners have been hammered since February, this is not fantastic news, but if you are going to own a miner, its probably better to own one that isn't one of the dogs.  You will lose less money.  (FD: I'm long GG, thanks to some puts I wrote months ago - I was tricked by that long consolidation at 33, and didn't bail out the way I should have after the breakdown).

We can also see that since gold's rebound since the lows of June 28th, GG has up moved more dramatically off its lows than its peers.

Just seeing how the ratio has stayed largely above that 20 EMA says to me that GG the stock is consistently outperforming its peers over this timeframe.  Peers include NEM (Newmont), ABX (Barrick), and possibly KGC (Kinross).  A number of these companies acquired junior gold miners and overpaid for them, resulting in subsequent writedowns and hits to earnings.  Goldcorp didn't do this - or at least not to the same extent, and this seems to show up in the ratio chart.

Well that's it for the introduction to moving averages, trends, and relative performance.  You can go to stockcharts.com which is my favorite charting place on the web and run these ratios yourself.  Some I like to follow include:

GDX:$GOLD [major gold miners vs price of gold; up = "risk on"]

SIL:$SILVER [silver miners vs price of silver; up = "risk on"]

$GOLD:$SILVER [gold/silver ratio; up = "risk off"]

GDXJ:GDX [junior gold miners vs senior gold miners: up = "risk on"]

Note that sometimes these ratios give conflicting signals.  That's just part of the fun.  If it were easy it would be called "collecting money" rather than "trading."

Well that's it for this week!

 

9 Comments

Doug's picture
Doug
Status: Diamond Member (Offline)
Joined: Oct 1 2008
Posts: 3124
Dave

I'd like to get your reactions to two stories Adam posted yesterday:

http://jessescrossroadscafe.blogspot.com/2013/07/comex-registered-gold-fall-to-another.html

http://news.goldseek.com/GoldSeek/1374261184.php

These two stories add up to a continuation of a now established trend.  China (and probably India too) are buying ever greater quantities of physical gold while gold is disappearing in the west, particularly from the Comex and GLD.

To me this has to impact the global price of gold at some point.  Physical has to mean something, particularly given the disappointing (to some) reaction in China to introduction of their etfs.  There is a clear and voracious appetite for physical gold.

Does this play into your investment calculus at all or are they just more stories?

Thanks,

Doug

Oh, you can add this to the list of articles with the same theme:

http://www.zerohedge.com/news/2013-07-19/jpm-eligible-gold-plummets-66-one-day-total-gold-fresh-all-time-low

Quote:

JPM Eligible Gold Plummets By 66% In One Day To Just Over 1 Tonne, Total Gold At Fresh All Time Low

Nate's picture
Nate
Status: Platinum Member (Offline)
Joined: May 5 2009
Posts: 573
great post

Dave,

Thanks for taking the time to post an easy-to-understand synopsis of the PM metal and equity markets.  Very well done.

Nate
 

 

 

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Posts: 5059
west-to-east, gold production, LBMA defaults and golden swans

Doug -

From what I can see with all my tea-leaf reading, there really is a diminution of interest in the leveraged long community here in the west.  The headliner motivation for buying gold was hyperinflation, and that just hasn't materialized.  Compared to inflation measured two years ago, we're seeing squat on the hyperinflation front, and gold's holders (and GLD too) have suffered as a result.  Money printing != hyperinflation.  Who would have guessed?  Not me, certainly.  I was sucked in by the story just like everyone else, and it took me a lot of research to figure out why its not going to happen at current printing rates.  This failure of hyperinflation to appear hammered the price.  Perhaps it was even kicked on the way out the door by parties unknown to push it through 1525 in order to make truckloads of money.  However the downtrend primarily responsible for the move down started prior to April 2013.  And once things get into a downtrend, those shorts get all excited...

Selling futures and GLD is easy and fast.  A huge amount of gold can be dumped in seconds.  Managed money over the past six months dumped perhaps 500 tons of gold futures, and I have no idea how much GLD.  Based on the COT reports, managed money fled gold in the west.

Given my experience in asia, I'm not at all surprised that a paper futures market is uninteresting to asians.  They like their gold tucked away in safe deposit boxes, worn around necks, wrists, and fingers.  And asians are a lot more clever about gold value than westerners; an asian (or at least, a Thai) will not pay more than 3-5% over melt value for gold jewelry, and less than 1% over melt for gold bullion.  As asia gets more wealthy, I would expect more gold to appear in asia.  A sign of asia's increasing wealth: Thai citizens are now able to visit Japan and receive a 15-day tourist visa on arrival.  Apparently, the Japanese are interested in getting middle class Thai tourist money, of which there is an increasing amount every year.  As Thai, and Vietnamese, and other southeast asian people improve their wealth, some chunk of it will definitely go into gold, and some large percentage of that will be held in person.

I totally believe the transfer of gold from west to east is a real thing.  However physical buying is a relatively slower process than buying futures products.  In some sense, the sales in the west over the failure of hyperinflation to show up happened very quickly.  Its easy to sell futures and GLD.  The replacement physical buying in the east will happen more slowly, since it isn't leveraged, and it takes time for people to actually decide to plunk down the cash.  But I see that process ongoing, and likely over time the physical buying in the east will absorb the leveraged sales in the west.

COMEX Default & JPM

Regarding JPM and the COMEX: 1 million ounces = 31 metric tons.  GLD, even in its reduced state, has 930 tons remaining - 30 million ounces.  For some perspective, as a percentage of total above-ground supply, GLD owns 0.5% - point-five percent.  So if JPM needs gold at COMEX, it would seem to be a simple matter to fetch it from GLD.  I don't see COMEX failing this month or next - my gut tells me there is no need to breathlessly check harvey organ every day to see if JPM is about to default.  Long ago there were rumors that GLD had no gold, yet now people are suggesting that GLD's gold is fleeing to asia.  That sort of goldbug story changes so fast, its hard to keep up.  My guess is, GLD contains gold.  Perhaps there is some scrambling around to pry it out of the various seat cushions it is stuck in, but I think it does exist.  If it doesn't, premiums in the other ETFs will likely explode.  Traders change jobs at these banks often; there's little likelihood that a situation like this would remain hidden for long, especially when taking advantage of the issue would make that trader a truckload of money.

Does actual gold exist in the western central bank vaults?  That one's above my pay grade.  My gut says that some of it is gone, but I don't know how much.  The whole Bundesbank issue definitely makes me go hmmm.

At some point if the level of buying in asia continues at its current pace and the asian market doesn't get saturated (which is a possiblity - you can't necessarily project current buying rates indefinitely into the future), supplies will get ever tighter.  At that point, one would expect price to solve the problem - the gold price will steadily rise, and the buying will (most likely) slow down.

That's bullish for price, but given the relatively slow pace of physical buying (in comparison to the ability to buy or sell large amounts via futures and/or GLD), we should be able to see it coming, reflected as a steady bid under the current price of gold.  In other words, price & volume analysis still applies.  These physical buyers will appear as another force in our existing markets.

In the current environment, I'm not expecting any switch to flip signaling the end of COMEX or the end of LBMA over some weekend where physical gold simply becomes unavailable at any price.

Of course if premiums start to mysteriously blow out on PHYS/PSLV or the other gold-related ETFs, I definitely reserve the right to change my mind.  Remember, during the crash, it was that sort of mysterious activity which gave us clues that the banks were in trouble.  Credit default swaps blowing out were a big clue of problems in the offing.  Clues are available to those paying attention.

Mine Production

Gold is a funny beast.  Most commodity prices are driven by production/consumption balance. 

Take oil.  Oil production is around 90mbpd, while total commercial inventory is 2,655 mb - 30 days supply.  Any shortfall in production will be felt relatively quickly on the consumption side, and if oil production were to cease, the world would grind to a halt in 30 days, because the oil inventory would run out.

Gold mines produce 2.5 ktons/year, with existing inventory being 174 ktons.  Yet gold isn't burned, and most of it doesn't change hands - perhaps demand is 4.6 ktons/year, or 12 tons/day.  If you compare it to oil, gold has 37 years of above ground supply relative to annual gold demand.

In other words, gold production doesn't matter the way it does with oil.  Production reductions won't drive the price of gold in the same way as it would oil, since there is so much inventory already in place.  If every mine suddenly closed down, seriously, we'd have 37 years of gold supply relative to current demand.

[Data from the world gold council]

That doesn't mean gold is trash.  Its a store of wealth because people believe its a store of wealth.  Unlike ice cream cones, people get just as much value from gold bar #20 as they did from gold bar #1.  There's some utility equation that talks about that, but I forget what it is.  Depending on events and perception, they're willing to increase their gold holdings and decrease their cash, and vice versa.  But at the end of the day, events, perception, and wealth drives the gold price.  It is primarily existing inventory that changes hands - and production over the 1-2 year timeframe just doesn't matter.

So rating things based on "current mine production" is, to my mind, meaningless.  Its a metric, sure, but mine supply doesn't drive gold price the way it does for oil.

LBMA Defaults & Golden Swans

At the end of the day, I'm keeping an eye on the Golden Swan of LBMA/COMEX/physical default via premiums on the closed-end funds that are known to have supply.  Currently I'm not getting any indication of something like that in the offing.

It just doesn't make sense to me that the worldwide gold market would cause LBMA alone to default, without turning over the other seat cushions for other sources of gold supply.  If LBMA defaults, there is a truckload of money to be made if you can get gold from PHYS.  Goldbugs are not the only participants in the market that realize this.  We have to assume that greed still functions, and that insiders would be bidding up alternative sources of gold - just like they did during the crash with the CDS - if things start to get sticky.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
Regarding GDXJ vs. GDX signal

DaveF - while I agree that historically one would expect the GDXJ (juniors) to lead.. the fact that they did not lead this time, at least not as a group, may be because some of the weaker of them are actually having to shut down since the "price" of Gold and Silver is less than all-in extraction costs - here is one example.  

    http://www.mineweb.com/mineweb/content/en/mineweb-junior-mining?oid=1981...

U.S. Silver & Gold announced the layoff of one-third of its employees at its Galena Mining Complex near Wallace, Idaho, as part of a third-quarter cost-cutting Small Mine Plan.

As a result of the plan, the company’s 2013 silver guidance has been reduced to 2.1 million to 2.2 million ounces. Originally forecast at 2.7 million to 3 million ounces at cash costs of $17 to $19 per ounce, the 2013 guidance was previously revised downward in May to 2.6 million to 3 million ounces at $16 to $18 per ounce.

Production at U.S. Silver & Gold’s Drumlummon Mine was discontinued at the end of May pending an improvement in gold and silver prices.

My SA and IAG positions were up strong on Friday.. my tiny speculative position in BRIZF was down hard, - 7.1 %.  I will be leaning toward the better capitalized miners for now if/when I buy more.... maybe some GG next.         

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5059
thats a good point Jim

You know, I think you're right about the juniors.  Now that I think about it, I remember reading that some number of relatively undercapitalized juniors are going to end up on the ash-heap of history, and that in this environment its important to pick and choose rather than simply buy the index.

The divergence between some of the juniors I follow - MUX, RBY, and PVG - is dramatic.  PVG is doing awesome, while MUX and RBY are to put it kindly languishing.  Perhaps we have to toss out the whole "GDXJ leads" thing, at least for now.  Not all juniors will survive this period, assuming it lasts more than about six months.

I also get the sense that seniors aren't particularly looking for acquisitions.  They're more focused on "bringing value to shareholders" rather than overspending for some purchase, which no doubt will have impact on junior valuations.

I also agree that the high cost mines will be shut down for the time being, until the price of gold recovers.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5059
breakout!!

Just in case you aren't watching early morning trading in asia, 14 minutes after market open in Japan (0714 JST) gold broke through 1300 with an initial 1-minute 11.70 point spike, and is now trading at 1314.  Initial high was 1319.30, and the initial pair of spikes broke 3459 contracts loose from shorts who were stopped out by the price action.

So far gold has held much of its breakout above 1300, but trading in asia these days tends to have an upward bias to it.  Trading in London and NY on Monday will give us more information, but the break above this important resistance level is great news for the bulls.  If the market holds these gains through the close in NY, gold mining stocks will likely have an excellent day.  A number of them are positioned for breakouts and if gold remains above 1300 prior to NY open, gold mining stocks will likely gap up, sending shorts running for cover.

Never let it be said that the sneaky bullion banks/big leveraged players, who like to operate in the thinly traded times to conduct operations against heavy resistance/support, never did anything for you!

Silver remains below 20 - it spiked as well, but is now trading at only 19.83.  The fact that it closed too far out of range of 20 on Friday meant that it has yet to move above its important resistance level.

Now we have 3 breakout scenarios:

1) continued move up to 1350 resistance, where gold stalls and consolidates

2) retracement to 1300, washing out all of the new longs who got on board 1310-1320, followed by a renewed move up to 1350.  [my favorite scenario - market tries to hose everyone]

3) failed breakout; market drops back below 1300; not enough longs buy the breakout and the downtrend continues.

 

 

Rob P's picture
Rob P
Status: Bronze Member (Offline)
Joined: Oct 8 2008
Posts: 85
very Buoyant

It's now Monday at 11:30.  I wonder how much short covering is going on.

janb's picture
janb
Status: Bronze Member (Offline)
Joined: Mar 11 2008
Posts: 61
good time to buy?

Does this mean it's a good time to buy GDX, but not GDXJ?   Jan B

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
JanB

The move in Gold today has been so strong that it has reignited interest in the more speculative, less well capitalized miners.. my Brazil Resources is up 15.5% as of this writing.  GDXJ up 9% today, GDX up 7%.  You might split between the two of them if you want to invest.  I wish I could tell you with some assurance that this is the beginning of the big upmove in PM's... but you just never know.  For that reason I still have about 2/3 of my cash left undeployed.. I will either buy into the ongoing bull run next leg, or buy the dips going forward during the ongoing bottoming process.  Not clear to me how this will evolve... but all signs are good at present.           

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