PM End of Week Market Commentary - 8/3/2013

davefairtex
By davefairtex on Sat, Aug 3, 2013 - 3:25am

Gold finished Friday up $4.00 on heavy volume to 1312.80, with silver up $0.24 to 19.84, also on heavy volume.  The gold/silver ratio dropped to 66.17.  Gold remains below its 50 day moving average. 

Over the week, gold lost $19.10, while silver was down $0.15.

The trading range for gold on Friday was large; in asia trading gold was pounded through 1300, ultimately hitting a low of 1282 before finding support.  Silver followed, its low was 19.18.  Around the time of the employment survey report at 0830 EST, gold started to rise.  Interestingly, it appeared that gold started its move up a few minutes prior to the report's release.  It makes one wonder if it was either anticipation, somehow "somebody knew", or it was all just an excuse to stage a massive head-fake down for PM during asia trading.  But since we weren't at the meeting, we'll never know.  Gold ended up recovering its $30 asia losses within 15 minutes on some pretty big volume.  On the release of the report at 0830, 5250 contracts were traded in one minute - about 16 tons of "paper gold" - representing a large number of shorts running for cover.  The employment survey data also ended up pounding the dollar down also, reversing most of the gains from Thursday - it took only 10 minutes to move the buck down 0.60 (0.73%), with most of the move coming in at 0830 exactly.

From a technical perspective, every time there is a test to the downside, and the shorts don't pile in but rather a recovery occurs, that's usually quite bullish - especially if it is confirmed by a rally and the overall volume is good.  So in absence of anything else, I'll go with the technicals and say I'm cautiously bullish, but I'm awaiting confirmation.  If and when gold moves above 1317, its a buy signal for gold.

The overall downward move in PM this week has ended up taking some of the air out of the miners.  Goldcorp (GG) for instance is back resting on its 50 day moving average, down $3 from its high of two weeks ago.  If gold confirms the low of 1282 and rallies above 1317 next week, then its likely GG would be a decent low-risk buy; certainly it beats the "gap up" entry point of two weeks ago from the standpoint of risk.  However if gold drops further and GG closes below the 50, its best to wait for a better entry point.  We only want to buy if the big guys are buying too, otherwise - too much red in that portfolio makes us all feel uncomfortable.  Its ok for our purposes if GG dips below the 50 intraday, but its bad if it closes below it.  And this stuff isn't perfectly precise - "around" the 50 day moving average is good enough.

There are a small number of miners with similar charts - they have retreated from their highs, and yet still remain above their 50 day moving averages.  Examples: SLW, SSRI, PAAS, IAG.

However some other miners look not as good.  Take NEM (Newmont Mining) for instance.  All during the move down, the 50 day moving average acted as a ceiling, seemingly stopping NEM from going up.  During the rally through 1300 up to 1350, NEM was still unable to rise above the 50 day MA.  This tells me that the big money isn't as fond of NEM as they are of GG; all else being equal, I'd prefer to have GG.

PM Trends

Based on the 20 EMA, 50 MA, and 200 MA:

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

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

The medium and longer term downtrend should still be respected.  Gold shorts have appeared twice recently in the past week, on Wednesday prior to the FOMC and Friday in asia.  Although they appear to have engaged just on an intraday basis, danger to the downside still remains.

Because gold broke 1300 only intraday, the trading range for gold still remains 1300-1350.

I am cautiously bullish, with the short term "buy the dip" signal on gold above 1317 sometime next week.  If gold can't make it above 1317, that will encourage the shorts to pile in, which will likely drive the price down through 1300 once again.  Perhaps the dollar will act as the decider.

Longer Term Fundamentals - Physical Gold Supply

While fundamental issues of physical gold supply and demand won't affect the COMEX price on a day to day basis because about 36 times more paper gold is traded by dollar volume on COMEX than physical gold worldwide, and because the amount of inventory of physical gold to physical demand is about 38:1 (i.e. there is 38 years of physical gold at current annual demand rates), over time physical supply issues will have an effect.  If the paper price ever becomes significantly decoupled from the physical price due to supply issues or perceptions arise in the market that "gold is running out", the effect could be dramatic.

So to try and read the tea leaves on issues of physical gold supply, we look in the following areas:

Gold has continued to flee GLD.  Since July 1, 50 tons has left, and 431 tons (32%) since the peak in December 2012.  This trend continues.  I can only interpret this as gold price positive.gld-tons

Shanghai remains in premium at $9.77.  The premiums have dropped significantly over the past month as gold has rallied, but it is still gold price positive.  Based on the chart below, one might expect Shanghai premiums to disappear if gold reaches $1400 or so.

sge-premium

The gold lease rates at the LBMA are still showing tightness in supply although the shorter term trend in rates is up, which suggests any supply issues are easing somewhat.

lbma-gofo

And although I don't have the underlying data, I note that while the drawdown in COMEX registered gold was perhaps 12 tons at the start of July, it has been basically flat in recent weeks.

COMEX Registered Gold @ www.24hgold.com

From my view of the data, while it does not appear that the COMEX world is about to blow up next week, there do seem to be strains in the physical gold system at current prices.  My guess:  this will be fixed by higher prices, physical demand will decrease, or the strains will continue to increase.

 

2 Comments

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 800
Never really gone
davefairtex wrote:

While fundamental issues of physical gold supply and demand won't affect the COMEX price on a day to day basis because about 36 times more paper gold is traded by dollar volume on COMEX than physical gold worldwide, and because the amount of inventory of physical gold to physical demand is about 38:1 (i.e. there is 38 years of physical gold at current annual demand rates), over time physical supply issues will have an effect.  If the paper price ever becomes significantly decoupled from the physical price due to supply issues or perceptions arise in the market that "gold is running out", the effect could be dramatic.

Dave,

I think I know what you are saying - that there is a huge reserve of gold available for trading compared to the quantity being traded each year. Even though it is traded, it is still available for trading again. Does it ever "run out?"

I know that if the price comes close to a bazillion per ounce, my small mine of extremely high quality ore will suddenly come to market. I imagine that most holders are in the same boat. Price is the balancer between those who hold and those who want to hold. If someone wants to hold my gold, the offered price needs to be much higher (or I need to get much more desperate.)

Do you know of any way to estimate how much would come out of hiding for various price levels? Obviously, the spot price balances supply with demand. Back in April when 400 tons of paper suddenly appeared, the price dropped dramatically to entice buyers. The price stabilized when supply and demand balanced.

Are there any measures to predict the final result? Do the big boyz have information that shows where trailing stops have been set? Do you have this information? With the dramatic movements this week, tight stops got triggered. Was this predictable and exploitable by the big boyz? Other than short term profit, is there any other motive? Does this cause traders to keep stops tighter or looser?

Grover

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
plenty of supply, stop running

Grover -

Yes that's it exactly.  Since oil gets burned, if oil production were to stop (say due to a war) or be embargoed, since inventory is only about 30 days, there could be actual shortages where higher prices would not bring more oil immediately out of hiding.  With gold, massive inventory means higher prices will always bring more gold to the market.  There are never shortages in gold, there are only shortages at current prices.

I have no insight as to how much supply appears at various levels.  Trading theory suggests that resistance levels likely apply - some percentage of people who bought gold bars at $1800 expecting it to go to the moon will likely be waiting to sell when it regains that level.  But I don't know of any real studies.  I'm guessing its true for houses as well; how many regular people who have lost money on home purchases will sell once homes reach their 2005-2006 purchase price?  There is probably massive supply at those price points.  "I just wanna get out without losing money" psychology is the driving factor.

As for stops - I have no evidence, but given our friendly banks have access to data flow from their customers - when I enter a stop, my broker sees the stop go by - I'm guessing that information is utilized by the big banks in their automated trading apps.  At the very least, they can use historical patterns of their own customer order flow to predict where stops will be placed based on the public trades we all see.  They can do some math, and when the profit potential gets high enough, they go off and run the stops.  Its not free money since they have no way of knowing for sure how much buying pressure exists at the various price points, but risk declines on days such as FOMC meetings where traders withdraw their bids temporarily because of the risk of actual market-moving news, or in asia trading where bigger buyers in london and the US have gone home.

And no doubt if/when traders change their stop positioning, the big banks can track that in real time based on the order flow they see.

This is just my speculation, but its how I'd write the code were it my job to do so.  And my gut tells me its all quite possible - I just don't have the data necessary, nor can I take on the big positions required to make it all happen. 

Stop-running has been around forever - perhaps as long as stops have been around.  Its just that computers make it easier to calculate risk & reward, and the ability to take on large positions makes the game just that much easier to execute.

As for motives beyond profit - we definitely have evidence that the Fed in the past has acted to try and control gold prices as they do interest rates.  They do have a motivation to keep gold prices from getting out of hand.  However, do we imagine this motivation translates into actual ability?  Certainly we saw what happened to the 10 year bond when "the market" decided they didn't want them anymore back in May.  Rates jumped from 1.6% to 2.6% in a hurry, and even with the Fed's weekly public intervention, it didn't seem to matter.  I think the same is true for the gold market.  Gold going from $300 to $1300 from 2000-2013 is nobody's idea of a successful outcome of a suppression scheme.  They'd much prefer that 400% gain occur in the stock market, but of course that didn't happen.  What does that say about the Fed's ability to control markets?

 

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