PM Daily Market Commentary - 7/25/2013

By davefairtex on Thu, Jul 25, 2013 - 12:00am

Gold finished the day down $26 on reasonable volume to 1322, while silver was down $0.33 to 20.15, a relatively smaller move.  Gold/silver ratio moved down slightly to 65.61.  Gold's move today took it back below the important 50 day moving average, but it still remains within a generally positive 1310-1350 trading range.  Possibly some new gold buyers were flushed out of the market by today's price action.

Much of the commodity complex was also down: oil off -1.92%, copper -0.81%; the $CCI overall was off -0.68%.  Even the S&P 500 dropped somewhat - off 0.38%.  In fact, it would seem that most everything was sold except the US Dollar, which was up 0.33%.  After a multi-week move down from 85 to 82, its possible the US dollar has found a bottom and will reverse for a time.  If this occurs, it will make a continued move up in the commodity complex and gold & silver substantially more difficult.

After a month-long run up, gold mining stocks sold off hard all day on heavy volume.  There was some reasonably heavy buying right at the close that helped mitigate the losses - perhaps short covering.  My guess: after only one day of success, mining shorts don't want to go home exposed to a continued move up in the miners.  However another couple of down days will probably produce a different reaction.

As has been the case now for weeks, silver mining stocks performed relatively better than their gold mining peers, even though silver is generally underperforming gold.  This is a curious thing.  In my technical analysis I don't address the fundamental cases, but when an anomaly occurs consistently, I look for a fundamental explanation.  Most here understand that above-ground silver supplies are dramatically smaller than above-ground supplies of gold.  Perhaps the silver miners are reflecting this, although its a bit of a puzzle why the metal is not.

If your view is that gold mining shares have made a bottom - I think that is likely true, as long as the price of gold doesn't make new lows - buying the dips is a good strategy to minimize your risk.  A couple of days ago gold mining stocks gapped up on big volume and today erased the gains of the last two days, although the gap appears to have provided support.

Let's use GG as an example again (not a recommendation, just an example).  Assuming you wanted to buy, a good point would be at or near the 50 day moving average - but numbers don't need to be exact, anything down around the 27ish level would qualify.  Tomorrow morning we might see a continued downward move in gold and/or mining stocks during the first hour of trading, often called "amateur hour."  A brisk morning sell-off could be just the thing to drag one of the miners you've been looking at back down to a support level, where you could pick it up for a bit of a discount.  It also might take a couple of days for this to occur.  Of course, if the price of GG were to close significantly below the 50 day moving average, then the "lower risk buy" would be invalidated.  Its important to watch and see how the stock performs as it approaches what might be a support level in order to minimize your risk.

If you buy prior to GG's arrival at 27 - which may of course never happen - the buy isn't "bad", its just higher risk.  This whole thing is more art than science, but perhaps you can see now that buying "greed" at yesterday's high because you were "afraid of missing out" tends to be higher risk because of the frequent pullbacks that often occur during rallies.  A buy at any point Tuesday would be underwater now.

This sort of price action is what we mean when we say, "the market never moves in a straight line."

While gold has benefitted from the month-long dollar drop, now gold and the entire commodity complex is a bit vulnerable to moves higher in the dollar.  Gold likely has decent support at 1300, but a close below 1300 would indicate to me that our short term rally may be in a bit of difficulty.

Gold Trend: short term UP, medium term DOWN, long term DOWN

Silver Trend: short term UP, medium term DOWN, long term DOWN

Note:  I do my best to read what supply & demand looks like viewed from the perspective of the gold and silver futures markets.  My daily commentary reflects my assessment of that futures supply/demand situation.  As with any market, its price and volume behavior may diverge significantly from our understanding of the real world for extended periods of time.  However since the futures markets currently set the prices for gold and silver (and thus indirectly PM mining shares as well), if we can work to understand what the trends are and what moves prices in those futures markets, we may be able to use this information to our advantage, and acquire PM mining shares and solid precious metals ETFs or physical metal at lower prices and with more confidence than we might otherwise obtain without such knowledge.

That's the theory anyway.


Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Offline)
Joined: May 26 2009
Posts: 2934
How Comex eligible/registered inventories are managed

Given the recent buzz around depleting Comex stores, Miguel Perez-Santalla of BullionVault writes this clarifying primer to help readers understand how the bullion inventory at the Comex warehouses is managed.

His general takeaway is that the Comex is not (yet, at least) approaching a dire physical shortage of metal. I share this because the team at BullionVault is level-headed in my experience, and if they believed we were approaching an inventory crunch, it would be in the self-interest of their business to be shouting loudly about it.

Important reading for those following this situation. An excerpt: 

The higher gold prices go, in short, the more people want to own it. So the more metal there will be held in warehouses on behalf of investors. And when prices fall, as they have in the last nine months and more, some owners of metal will find better-rewarded uses elsewhere, outside Western investment stockpiles, and converted for instance into the smaller kilobar products favored by Asian investors currently paying $20 per ounce over international prices in China.
As you can see, there's little urgency or importance in the 2013 plunge in Comex warehouse gold stocks. Gross quantities are lower, but they are greater than any period prior to 2005. Just looking at the level of warehouse stocks, it is difficult and presumptuous to extrapolate market fundamentals from the holdings of eligible or registered gold at any one time. There is still plenty of metal, and there are hundreds of millions of dollars of gold traded every day off of the Comex, for hundreds of different reasons. So this aspect of the market is only a part of a very much larger puzzle.

There are lots of good reasons to buy gold today, I believe. But misunderstanding the basics of what is in truth a simple aspect of the global market shouldn’t be one of them.

Read the full article here

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

I don't buy parts of this explanation Adam.  For instance, I don't think that the signficant premium difference being paid in Asia has anything to do with the type/size of bars..rather it is a vestige of the "gravity" being created by the drainage of Gold (acknowledged in this story) from West --> East and the overall shortage of physical, as signalled by negative GOFO, rising lease rates, etc.  He shows the total Comex inventory in his charts instead of deliverable... the view is much more dicey from a Comex deliverable inventory perspective.  As well, he says that Comex is the biggest exchange in the world.. but this is a statement which regards paper contracts traded, as opposed to physical ounces delivered.  SGE delivers much, much more Gold than Comex, and all contracts end with delivery (this is important!).  I think this guy is a bit of an apologist for the system... and I think the view below from a coin dealer is more accurate;

The COMEX bonded warehouses store gold for two different purposes.  Gold bars can be “registered” on the COMEX, which means that the gold is specifically being held for physical delivery to a customer holding a maturing contract.  Sometimes investors will use the convenience of COMEX storage but not commit their holdings for delivery against COMEX contracts.  Such inventories are classified as “eligible,” which means they could be used to deliver on a maturing COMEX contract, but only if the owner decides to make it available for that purpose.  While total COMEX inventories are important, the key figure is only the registered quantities, because only they can be called upon to fulfill maturing contracts.

Total COMEX gold inventories have declined by more than one-third since the beginning of 2013.  Registered inventories are now below one million ounces and declining quickly.  Many analysts, including me, believe that the significant decline in exchange traded fund gold holdings this year was caused by major gold dealers cashing in shares.  The probable reason they have done this is to obtain physical gold to deliver to maturing COMEX contract holders who wanted to take physical possession.

gold thumb3 Will COMEX Gold Market Fail Within 90 Days?If the COMEX inventories get too low, especially when you consider that there are open COMEX contracts representing a liability of well over 40 million ounces of physical gold, the COMEX allows contracts to be settled by cash payment instead of physical metal.  At the rate the registered warehouse inventories are being depleted, there is the very real possibility that all gold contracts may have to be settled for cash before the end of 2013.

At the same time that the influence of the COMEX on the price of physical metals is on the brink of disappearing, activity on the Shanghai Gold Exchange is soaring.  The Shanghai Gold Exchange does not deal in paper contracts.  Instead, every contract is to be fulfilled by delivering physical gold.  For the first six months of 2013, a total of 35 million ounces of physical gold was delivered on this exchange, which is close to 100% of worldwide newly mined gold over that time.

The Shanghai Gold Exchange, by far, delivers the largest amount of physical gold of any market in the world.  The London and the New York COMEX markets may trade much larger amounts, but they are almost exclusively dealing in paper contracts.

It probably would not surprise you to know that the gold price on the Shanghai exchange trades at a premium to prices in the London and New York markets.  If the Shanghai market was actively traded during the same hours as London and New York, I think it would be supplanting those markets as the reference point used for trading all physical gold.  As the COMEX turns largely into a paper and cash market in the coming months, I would not be at all surprised to see the Shanghai Gold Exchange becoming THE market used for pricing physical gold around the world.

More on the signals of a very tight physical Gold market;

The numbers are small, but the trends are intriguing. The one-month gold leasing rate rose from 0.12% in early June to 0.3% in early July. That’s a 150% rate rise in one month! It’s the highest gold lease rate since 2009, although still well below the peaks of previous eras.

In 2008, during the stock market crash — when people sold anything that would attract a bid — one-month gold leasing rates rose as high as 2.7%. Further back in 1999, toward the end of the 1990s decade of golden doldrums, gold lease rates were an eye-popping 9.9%. Back then, it barely paid to lease gold… hold that thought.

A Strange Way to ‘Borrow’ Something…

What’s going on? First, if you’re not familiar with the gold leasing market, there’s a good reason for that. You’re not supposed to know much about it. Gold leasing is a niche activity, and largely the preserve of a few big banks (Goldman Sachs, JP Morgan, etc.) and central banks. Gold leasing is virtually off-limits to retail investors.

Big banks ‘borrow’ gold — it’s what it sounds like — from physical gold holders like…oh, gee…central banks. After that, things get shadowy. Still, let’s think of ‘borrowing’ gold as kind of like renting a car. You get a nice, clean car with a full tank of gas. You drive away, and eventually the rental agency wants its car back.

With ‘leased’ gold, the banks take the metal, but then they sell it to industrial users, or perhaps to investors who want physical delivery (unless you’re the University of Texas and want a billion dollars’ worth of the stuff).

The idea is that, eventually, the gold borrower will obtain more gold from another source — let’s say a mine or gold refinery — and return gold that they borrowed from the central bank.

In practice, much of the ‘leased’ gold goes out for terms of many months, if not years. Many of those gold ‘leases’ have been extended multiple times, up to many years.

This leased Gold... and it could be a fairly large number - in the thousands of tonnes, if commentators like Eric Sprott are correct, is one large segment of the Gold that people or entities think they own that they will later find they don't when the game of derivatized, leased, rehypothecated, and unallocated paper Gold musical  chairs finally gets exposed for what it is.   

davefairtex's picture
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5064
gold outflows and a COMEX default


I agree in general with you here.  I think there's a pony in there somewhere.  It may be a bit premature, but my charts show me that both COMEX registered gold and GLD inventory continues to decline at a more or less constant rate even though the price of gold has rebounded for a month now.

Even if its true that gold in GLD is vanishing in order to get turned into kilo bars in asia because of premiums there (and indeed, this does make sense - $20/$30 ounce of free money is a motivator), we have to ask ourselves the question: why does Shanghai have a premium in the first place?  And why has the 400+ tons of gold from GLD and COMEX gold not resulted in this premium vanishing?

My answer: low prices in asia have resulted in increased, rather than decreased buying.  In addition, the Chinese market is relatively new, and so it has an adoption factor growth rate.  As people become more comfortable and trust increases in the marketplace, so will volumes increase also.  Also, it appears that Chinese view this as a sale, rather than as the end of the gold bull move.  Lastly, the Chinese rationale for buying gold isn't the same as ours.  Since their reason for buying wasn't "Fed money printing will lead to hyperinflation", the lack of hyperinflation in the west doesn't affect their decisionmaking.  There are likely more factors, but that's my simplistic 10,000 ft view.

Again, my eye is on the trend here, and with GLD, the trend is down at a rate of about 70 tons per month.  At the COMEX, its about 18 tons per month.  If the outflow of gold continues in the face of a futures-market gold price rebound, and the premiums in Shanghai remain, there's only one way for this to end: a price increase for gold.

That said, I do not think the COMEX will end up running dry of gold - a large enough price increase should bring more gold out of hiding.  COMEX has perhaps 30 tons of registered gold - 90 tons at its peak, and there are 174 kilotons of gold floating around the world.  Plus, if you are conspiracy-minded, you would imagine that

a) the evil bullion banks would never want their primary suppression/manipulation vehicle to be put out of commission

b) a COMEX default runs the risk of causing a "gold run on the bank" and a wholesale abandonment of the COMEX to other gold exchanges by exposing their warehouse receipt business for the fraud that it is,

so c) they will never let it happen.  Even if price has to rise, and/or they have to dig around in the seat cushions to find a few extra tons to continue perpetuating the COMEX fraud, and

d) they're net long anyway, so...

Again, that's not - entirely - my belief system, but its the argument I'd make if I believed 100% in a regularly organized suppression scheme/conspiracy.

From a less conspiracy-minded viewpoint: every organization wants to survive, COMEX included.  They'll do what they need to in order to find the gold to continue operating.  Its risky for them to simply abandon delivery and turn COMEX into a cash-settled only marketplace, especially when there is competition out there that still provides actual gold.  They could do it, but it would be a real dice roll.  And those bullion banks don't want COMEX to go away or be reduced in influence.  Its way too profitable for them.

Here's a conspiracy theory I'd tend to support.  If a suppresion scheme is operating now, it may be simply to keep mining share prices down so that the banks can accumulate shares at a cheap price.  Then when they finally let the price of gold appreciate, their big collection of mining shares will rocket up in value, the public will forget about the recent 50% drop and they will get all excited after a steady stream of mining share upgrades (from the banks, of course but only after 50% gains), and after perhaps a year or two, the banks will sell all those mining shares right at the top of the market to an over-enthusiastic public, all while the pundits on TV are explaining how gold can do nothing but go up.  And very intelligent but not-street-smart Bernanke (Dr. John, in Nick Taleb parlance) can only muse wonderingly about how "nobody can predict what gold will do next."

This theory has a lot more to do with money and quarterly bonuses than it does about anything else.  Interestingly, the actions end up being the same (at least over the medium term), but I think it explains why gold goes down AND up - the market (and public) is manipulated in both directions in order for the big banks to ring the cash register.  How else can they skim 5% of GDP each year?  My philosophy: "the manipulators" can't change the trend, but they can for sure reinforce it, make more money from it, and cause it to move further and longer than it otherwise would have gone on its own.  And they do - both up, and down.  Thus - it pays to watch and respect the trend.  If the elephants are stampeding, either stand aside or follow along, but do NOT stand in the way.

I think we need to watch the inventory levels and the premiums in Shanghai and then see what the market will reveal to us in the months ahead.  This is one of those gold-positive influences, like uber-bearish sentiment, and COT reports showing producers net long and very low managed money holdings.  Similar to "insider buying" in equities, its not a good timing indicator, but over the medium term timeframe (2-6 months) taken all together it should result in a higher gold price.

That doesn't mean gold can't suffer a reverse in the short term on a dollar rally though, so...Stay alert!  Trust no one!  Keep your laser handy!


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