PM Daily Market Commentary - 8/12/2013

davefairtex
By davefairtex on Tue, Aug 13, 2013 - 3:01am

Gold finished the day up 22.90 on average volume to 1336.40, with silver up a massive 0.86 to 21.37.  The gold/silver ratio dropped to 62.54, another big day for the ratio which is quite bullish for PM.  Silver was the star, with its price movement gapping above the top iof its July 22 high and moving right up to resistance at 21.30-21.50.   Gold seemed to come along for the ride, having a good day on price but with volume that was relatively lackluster.  

The dollar was simply not a factor; while it was up today +0.36%, its movements did not seem to affect PM much if at all.  Likely this was due to the force of silver's breakout.

Miners reflected the performance of the metal; many silver miner names I watch (SLW, PAAS, SSRI, HL, SVM) made new cycle highs on excellent volume, while the gold miners were up but a bit less strongly, and have not yet risen to new highs.  The moving averages of the index ETFs reflect this: SIL (silver mining index ETF) 20 EMA crossed its 50 MA a few weeks back, while GDX 20 EMA is moving up but has yet to make that crossing.

Silver is likely to run into some trouble at 22 resistance, which is the low from the April PM crash.  Likely, there will be a new range established from 20.60 on the bottom to 22 on the top where the market will take some time to decide if it wants to chase silver prices higher.  If silver can push through 22 quickly, it will be a very impressive bullish sign.  Not that things aren't looking good now, but to me that would indicate the buying pressure for silver futures was so large, it was able to absorb all the selling from the large collection of trapped longs at 22 (many of whom just want to get out even) and then move up.

Gold is nearing the top of its trading range - 1275:1350 - and its volume does not look so impressive.  Perhaps its just August and everyone trading futures is off on summer holiday.  I can't account for the light volume in gold, but it disturbs me.  Its the only sour note I see.  But if silver breaks through 22, likely it will drag gold through 1350.

Once PM slows its upward movement, the dollar will begin to be a factor again; a dollar rally remains a risk, although price action-wise I'm not seeing much enthusiasm from the buck.  It is still in a short & medium term downtrend, even though the longer term trend remains up.  The buck moving below its 200 MA was a bearish sign; if the buck resolves this conflict by moving below 80.50, it would add more fuel to the fire for PM.

8 Comments

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
What can we learn from gold stocks vs. S&P inthe last big crash?

Dave, Hrunner, and all, 

Finally, screenshots are posted.

Below is a comparison of the HUI, the XAU, and the S&P 500 from January '08 to June '09.  I am wondering if it can teach us anything about how PM prices and PM stocks might behave in the event of another market crash.  The basic hypothesis I am wondering about is:

In a crash, PMs and PM equities will rise faster than general equities.

The charts:

The HUI from 01 January 2008 - 01 June 2009

 

XAU from 01 January 2008 to 01 June 2009

The S&P 500 from 01 January 2008 to 01 June 2009

Observations:

The HUI and XAU both fell by well over 50% between the July of '08 and their bottom in late October of '08.  The S&P 500 fell by roughly 30% over the same period.

The HUI rose by 81% and the XAU rose by 75% from their lows in October of '08 to  March 9th, 2009.  The S&P 500 fell by another 20% from its low in October of '08 to its low in March 9th, 2009.

Does this suggest that in a time of crisis, people first dump everything to get their hands on cash, and then turn to gold and silver before braving general equities?  Or, was the price behavior of the PM indices  due to another reason altogether?

I am also curious to know what people think about how much further PM prices & PM equities could fall in the event of a market crash, if it is indeed true that mining costs and prices were converging at around 1200 for gold and 19 for silver.  Dave, you have spoken to this briefly already, pointing out that mine supply is not as relevant for gold as for silver and that PM prices could certainly fall a lot more in a general market crash, so maybe that's a question for another post.

Thanks!

Hugh

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Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
HUI, XAU, SP500 and crashes

HughK,

I will take a stab at some thoughts.  With the preface that I have not been an investor in miners because that seems the complicated route to own gold and silver.  But miner fans seem to point to a higher/ faster upside than simple gold and silver prices.

I would just caution from an investing perspective, miners are companies, as in publically traded corporate entities.  In contrast, gold and silver are not companies, they are just gold and silver.

Gold prices may be (I believe clearly are) pushed around to move counterintuitively, because of the big players wanting to make short term profits, generally speaking, gold and silver respond pretty predictably to a manageable number of forces.  Inflation, a falling dollar (which is related to inflation), and as Chris mentions - a negative real interest rate (real interest rate = Nominal Interest Rate - Inflation), again related to inflation. 

If you own miners, you of course have to know that the price of PM drives much of their value, but you have to worry about all of the following, since they can sink a company independently of a falling PM price:  1) good or bad management generally, 2) price of fuel and energy, since these operations require huge amounts of fuel (see http://srsroccoreport.com/ for a detailed analysis of energy costs as they relate to PM miner profits), 3) labor costs, availability or lack there of based on demography, labor strikes etc., 4) ability of the co. to explore and find new deposits, or buy companies for a good price that have untapped mines, 5) governmental restrictions or permissions to mine, 6) mother nature's tendency to mess up your mine (see Kennecott mine accident recently), 7) ability of malicious entities to manipulate your stock price using the same general tactics that are used to manipulate PM price.

So you can see why I find miners a bit scary to buy.  If I were interested in miners, I would give my money to a dedicated funds manager that specializes in this sector only.  Too much for me to track.

That said, let's look at your chart, the one I post below, pulling all 3 together and over a slightly longer time frame.  HUI blue, XAU green, SP red:

To my eye, I see your point about 2008 - 2009 and HUI dropping faster and recovering faster than SP500.  But when you look both before and after this focused area, I see  two more things, illustrated by the above plus the following chart:

HUI, XAU and SP500 seem to have gone through two phases- 1) moves well-correlated from 2003- Jan 2013 (despite some jitteryness in 2008-2009), and 2) movement anti-correlated, 1997 to 2003, and Jan 2013 to the present.  They are now anti-correlated and separating, but if the 1997 trend holds, then they should start to move back to correlated i.e. what happened from 2000 to 2003.  Maybe you or some wise person can explain the exogenous factors that explains or predicts the two phases.  From this simple chart examination, I would expect if the SP500 rolls over, then HUI and XAU will roll the opposite way i.e. up significantly.

Food for thought.

H

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
Dry Powder Advice

Ok sports fans, I have a friend with some dry powder who wants to know whether to buy gold and silver now or wait for a week or two.

I admit I am conflicted and confused about the next 7-14 days and PM direction.  So which is it, silver next week with a 19 handle or a 23 handle?  Same for gold, 1350 handle or 1280 handle?

You have to pick one or the other.

Factors for silver 23/ gold 1350

1)  We seem to have broken out of a bottoming trend and crossing some technicals mainly DMAs (day moving averages), i.e. 10, 20, 50 for silver

2)  Fed has weakened its taper talk and is leaving more uncertainty about how much and when to taper

3)  Oil and inflation in an uptrend.  This could be exacerbated greatly by war/ instability in Egypt, the Middle East- unpredictable, but market-moving if it happens.

4)  Signs of economic uptrend (yes they are weak), GDP growth, U3 headline rate decreasing, deficit decreasing

5)  Of course all the fundamentals I believe in re endless currency destruction via money-printing and deficit spending

6)  Some CoT data that suggest the bully, I mean bullion, banks are now net long in their contracts

Factors for silver 19/ gold 1280

1)  Speculation strong that Bernanke will indeed follow up on his threats and actually taper by 20 billion in bond purchases.  I believe this has not been fully "factor-in" in the market and will lead to similar effect that we say in April, i.e. everything falls as people go to cash and are starved for liquidity (my new favorite word!), perhaps bigger in magnitude.

I also believe this taper will not last long when the Fed sees the reaction to the market, but I believe this is a mini experiment to see what happens, and is designed to give the Fed cover to do as much or more QE.

2)  Flight of money /capital out of the troubled world, into the USD.  China, Japan, EU, some BRICS.  Most of these guys are worse off than we are.  This will tend to strengthen the USD (shortterm), drive up Dollar Index, thus drive down PM prices.

3)  The greed of the PM market manipulators to fleece just a few more spec buyers by driving the price down, and going long even more metal.  I am always underestimating the greed and immorality of the gang.

4)  Tendency of Aug to be a down month historically, and interest doesn't pick up again until Sept.

Please feel free to add any forces that I missed.

Personally, I am going to advise to wait til end of next week if possible, so my bet is silver 19 handle, gold, 1280 handle.  I would be buying again if we saw those numbers again.  I would keep my finger limber for getting in at silver 23 and gold 1350, thinking we run the risk of never seeing those numbers again in our lifetimes if we blow through them strongly, signalling that the commercials are net long and are ready let price roll, perhaps in a "managed ascent".

H

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
Thanksfor the charts, Hrunner

Thanks for the charts, Hrunner.  It's nice to compare all three on the same image.  You also indirectly taught me how to compare charts, as I had never noticed the "compare" button on the Yahoo finance interactive charts menu before.  I was able to recreate the chart you made above just a few minutes ago.   This will be very helpful for me, or at least fun and distracting.  :)

I see your point about the mining indices and the S&P 500 moving in opposite ways a lot of the time.  However, from 2002 to 2007 all three seem to rise together, and in fall of '08 they went down together, and from mid '09 to mid '11 they seem to have risen together, although PM miners more dramatically than the S&P.  That leads me to believe that, at least for a few months, a general fall in markets will entail a fall in PM prices and miners.  However, I have a vague inkling that PM assets will rise earlier and faster than general stocks and bonds.

As far as your dry powder plan, I am in the process of moving a fairly modest retirement fund allocation from a company where I have no leeway as to how it's invested to a company where I have several options, including Zurich Kantonal Bank gold and silver ETFs.  (ZGLD.SW and ZSIL.SW)  This is as close to physical PM as I can get for this retirement money, and as far as I can tell right now, these ETFs actually have at least 95% of the fund capitalization in physical PM.  

Once the funds are transferred, I am considering putting about half of the funds into these ETFs, and leaving the other half in some sort of very conservative cash form as dry powder.  Then, maybe after the traditional market crash season of September/October, I will deploy much of the remaining cash into one of the other funds available at that company, whether the market has crashed or not.

On problem with the forementioned ETFs is that the Swiss banks have drifted very far from their original role as conservative havens, at arm's length from the overall global financial system. UBS and Credit Suisse have invested in all kinds of assets, such as sovereign bonds and mortgage-backed securities that are probably very overvalued - not to mention their derivatives bets - and even the supposedly more conservative cantonal (i.e. state) banks, such as the ZKB, are probably overexposed to noxious global financial products.  So, while I'm hoping that the ZKB really does store the metal as it promises on the fact sheet, I am prepared for a surprise some day as well.  It's very likely that I will not invest in any UBS funds, as I still don't trust that this global bank has properly cleaned up its balance sheet.

Cheers,

Hugh

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
Hugh, Congratulations

Hugh,

Glad the charts helped.  I agree we are in early days of a possible anti-correlation between SP and HUI, but it sure looks like it is heading that way.  The price action over the last few days has only reinforced the move.

Congratulations on taking 'the next step' (heard that one somewhere before...).  And getting your funds under more of your control.

However, as your pen pal, I will say honestly that ETFs make me very nervous.  I really don't trust the U.S.PM ETFs, but admittedly don't know much about the Zurich ones you mention.  You should read the prospectus very carefully to see if the ETF has the option to settle in cash.  I realize that by buying ETFs, you can follow your convictions about the fundamental value of precious metals.

This is not a theoretical issue, but has happened as recently as March 2013 with the Dutch bank ABN AMRO defaulting on delivery of gold to gold certificate holders:

Based on a letter to clients over the weekend, it appears Dutch megabank ABN Amro is changing its precious metals custodian rules and "will no longer allow physical delivery." Have no fear, they reassuringly add, your account will be settled at the bid or offer price in the 'market' and "you need to do nothing" as "we have your investments in precious metals."

more on the story at zerohedge.com

http://www.zerohedge.com/news/2013-03-24/another-gold-shortage-abn-halt-physical-gold-delivery

Thus holding 'paper gold' means you are at the mercy of the custodian, their trustworthiness, and the government re national financial controls.  Apologies, these days my trust of these type entities is very limited.

You may be aware that true PM believers are unyielding about holding 'physical metal' in their possession.  "If you can't hold it, you don't own it".  I realize that may not be a possibility for you.  But it is worth a look, if you are convinced about the value of PM, to look into withdrawing your funds and paying a penalty and possibly taxes on it.

This is the case for 401Ks in the U.S., but many of us are willing to 'take the hit' of penalties for withdrawal for the tradeoff of actually taking physical possession.  Just some more food for thought.

On a separate note, it seems you are from Switzerland.  I have been to Geneva by way of Zurich, and Lausanne and had a great time dining on a resteraunt while traveling across the lake.  Look forward to going back with  my kids.

H

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
Thanks, Hrunner + Swiss gold and Swiss francs

I appreciate the kind words, Hrunner, and the warning.  You certainly seem to be right so far, about your observation that the PM mining indices and the S&P often move in opposite directions.  On the other hand, if there is a big slide in asset prices, I believe that Marc Faber is probably correct in saying that gold will slide along with everything else.  So, both of us may have even more buying opportunities in around October if that is the case.

As far as my pension fund, I can't pull it out as long as I am living in Switzerland - even for a penalty - as the pension laws are very strict here.  So, the best I can do is to move it to the ETFs mentioned above.

I am from Columbia, Missouri, but I have lived in Switzerland since 2006, and the conditions for me staying here are still favorable.  A fun fact about Switzerland for PP-types:  There are no taxes on gold here, neither sales nor capital gains taxes, not at purchase, not at sale.  It's treated as money.  

On the other hand, the Swiss National Bank has followed suit with the other OECD-rich central banks over the last decade or so and sold a lot of its gold.  If my memory serves me correctly, think the SNB even sold a considerable amount at the same time the UK did, when gold was at a low back in the early 2000's.  Yes, I just found it.  The SNB sold over 1100 tons of gold between 1999 and 2005. Doh!  The SNB still has significant gold stocks, assuming the official count is accurate, but a right-wing political party here in Switzerland has successfuly forced a referendum on gold reserves, to be voted on in 2014, which will prohibit future sales.  (Aside:  This one of the things I love about true conservatives; they're careful with money.)  

The SNB also devalued the Franc in 2011, pegging it to the Euro, at a maximum rate of 1.20 CHF to 1 EUR, which was the first time the SNB had devalued since the 70's.  Ski resorts, watch makers, and other exporters were happy, but my friend who was about to buy a car over the border in Germany was not.  So, while the Switzerland has a reputation for fiscal and financial discipline, it has globalized and coordinated with other central banks to the extent that it shares some of the same economic vulnerabilties as other OECD-rich countries.  That means that my purchasing power with Swiss francs may not fall quite as rapidly as USD or EUR purchasing power might, but it is very likely to fall quite a bit as well in a future of higher inflation and higher energy costs.

I live in a small town about 20 km from Lake Geneva, Hrunner, so when you do come back here with your kids, you have a place to stay in the Canton of Vaud.  

Cheers,

Hugh

 

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
Two scenarios

Hugh,

Yes, Faber could be right.  Scenario One is similar to the selloff of everything in April, and I think Chris had it right that this was a rush to gather liquidity, probably to cover margins.  

Scenario Two is the one to watch since it is not a liquidity crisis, with attendant sell off of everything, but if the major players are not margin-called but simply looking for a true safe haven, then I will expect several asset classes, but especially stocks, to fall and for gold to rise.  This scenario has the potential to be explosive, in that the gold market is so small compared with most every other market.  I agree that we should not expect to see this until we are at or near endgame.  As always, we don't when that is.

Sorry to hear about pensions, so you're doing the next best thing.  Think about your strategy- would you rotate out of PM ETF to something else, cash, stocks, REITs depending on relative price action?

FWIW I thought the Swiss Franc was hard-pegged to the Euro at 1.2 to 1? 

Thank you the invitation, I will definitely take you up on that.

H

 

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
Yes and yes

Hi Hrunner,

The Franc can't go below 1.20 per Euro according to current SNB policy, but it can go above that, by which I mean it can be weaker, but not stronger.  All year it has wavered in the 1.22 to 1.25 range against the Euro.  So yes, it's basically a one-sided peg.  When I first got to Switzerlad in 2006, one Euro could buy you 1.55 CHF and one dollar could buy you 1.25 CHF.  Then, in the safe haven bid in summer of 2011, the got really strong: one only needed .78 CHF to buy a dollar and 1.09 to buy a euro.  

As far as rotating out of gold and silver, whether in physical or ETF form, I can use some of that pension fund to buy land and/or a house, so if the ETFs increase in value more rapidly than real estate, then maybe I'll have a chance to buy a modest bit of property here, but as you might imagine, property prices are super high in Switzerland.  That's a ways off still, but that's the goal.  Most likely, I'll try to buy a piece of land and have a rather small and super energy-efficient house built on it.  But, I don't want to make God laugh too loudly, so I have to say that it's all just an aspiration, as opposed to a plan.

Cheers,

Hugh

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