PM Daily Market Commentary - 8/26/2013

davefairtex
By davefairtex on Tue, Aug 27, 2013 - 4:19am

Gold finished Friday up $8.40 on light volume to 1404.70, with silver up $0.26 to 24.31 on relatively heavy volume.  The gold/silver ratio dropped again to 57.78.  Both gold and silver made new highs, and closed the day relatively near to the day highs, which is a continued bullish signal.

The story continues to be about silver.

The dollar was was largely neutral again, up 0.05 [0.06%] to 81.31.  The dollar remains in a medium term downtrend; its continued inability to move above its 20 EMA leads me to think it will retest support at 80.50, which will be largely gold price positive.

Gold miners once again are underperforming the metal, at least from a chart perspective.  Volume was relatively heavy, and GDX tried to break out today and failed; it ended up printing a doji candlestick which in an uptrend is not a particuarly good thing to see, especially with some decent volume attached.  If gold continues moving up, the doji won't matter but if gold falters, I'd expect to see a significant selloff in the miners.

Did I mention the story was about silver?  I was looking at the silver COT report from last Friday, and I noticed that the managed money group had dramatically reduced their silver short futures contracts.  Over the past 2 weeks, Managed Money has dropped 10,000 silver shorts (from 23k contracts to 13k) - a really vast amount given the size of the silver market - and at the same time went long by 2000 contracts.  A similar thing happened with Managed Money in gold, but to a much lesser extent relative to the size of the market.  That helps explain why silver has been on fire on heavy volume, with gold playing catch-up on much lower volume.  Its too bad the COT report isn't real time, but then again, information translates into both money and power and there's no sense giving Dumb Money like us any information that might possibly help us diagnose market price movement.

To give you a sense, the net long position (longs - shorts) of managed money ranged between 25-30k silver contracts at the start of 2013.  Managed money had its smallest long position of -657 contracts a few weeks prior to the bottom in June.  Currently, managed money is net long about 16k contracts.  Might this be a clue as to how much further the silver rally has to go?  If managed money returns to a 25-30k net long contract position, might that mark the extent of the rebound?

Currently however, the high volume continues in silver - folded in with the information we got from one-week-delayed COT report, this says the shorts are continuing to cover and to some extent go long.  The short covering move appears to be about 60% complete.  But as long as price and volume are positive, its likely the move will continue up.

 

6 Comments

davefairtex's picture
davefairtex
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Posts: 5063
something new: gold leads

In asia trading today, gold staged a breakout on one of those volume spikes that had silver scrambling to catch up.  This is something new.  What does it mean?  Perhaps managed money covering their shorts in gold prior to breaking 1425 resistance.  Perhaps new longs piling in.

Why now?  We are getting precariously close to a major breakout at the 1425 level (June's high point) which if we could close and hold above there, would signal a rebound in gold in the "monthly" timeframe.

Thats a bunch of tech speak that boils down to scaring the bejeezus out of the computers responsible for deciding whether or not to retain longer term short gold positions.

Is this about Syria?  About physical shortages?  About an imminent COMEX default?  Who can say.  Furthermore, we don't really care.

Honestly, my guess is, something started to scare the silver shorts two weeks ago - they started covering left and right, dragging gold higher.  As a result, now gold has moved within easy striking distance of a scary level for the longer term gold shorts.  This has whetted the appetites of the gold longs, who are now piling on with the intent of forcing gold above the 1425 level and cashing in on the expected burst of short covering.

But that's just a guess.

 

Jim H's picture
Jim H
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Posts: 2379
It's Syria

http://www.zerohedge.com/news/2013-08-27/war-drums-push-gold-bull-market...

Otherwise, as options expiration day, one could have expected last nights beatdown to continue into today. 

Jim H's picture
Jim H
Status: Diamond Member (Offline)
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Posts: 2379
Bitcoin market signalling stress today as well

http://bitcoincharts.com/charts/mtgoxUSD#rg10ztgSzm1g10zm2g25zv

davefairtex's picture
davefairtex
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Posts: 5063
what does distribution look like?

Miners today.  Gold opens in NY +25, miners open up, then sell off all day long on heavy volume.

That is the footprint of big money dumping stock.  Yes, SPX was off big today as well, but with gold and silver up so significantly, the miners should not be selling off this hard.

Example: SSRI opened at 10, now trading at 9.25.  That's a price move of 8%; even though its down only -4.25%, the total move in the day is 8%.  That's a massive move down, hidden by the gap open caused by the pre-open bounce in PM.  The candle being formed now is called a Bearish Engulfing, which is not one of those happy candles you want to see during an uptrend, especially with some volume attached to it.

http://candlesticker.com/Pattern.aspx?lang=en&Pattern=2201

This is a warning sign.  When the big guys distribute, you might think about what might come next.  Often the "top" is days in the making; it can take a while for big money to liquidate the shares they own.  They need big volume to do it.  But days like this are clues - and should probably not be ignored.

I'm not suggesting PM will now tip over and sink to 1180.  But this might well be the warning signs of a an impending correction.  Gold 1425 could well be the high for a while.  It all depends on the plan that the big money has; since we aren't invited to the meeting, all we can do is watch the price & volume and go with the odds.

Watch the close - see if traders take the miners home or if they close at the lows.  Last half hour is always key.

HughK's picture
HughK
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Posts: 760
Thanks for the update, Dave

I was wondering what was going on with the miners.  Wasn't sure if they were getting sucked into the general market selling today, but as of now, the mining indices are off signifcantly more than the S&P:

^GSPC:  -1.54%

^XAU: -3.21%

^HUI: -2.06%

GDX: -3.03%

GDXJ:  -4.02%

I wonder what the reason is, on a day that both gold and silver are up a bit...

I will watch the close, but it looks like a bit of retreat for the miners today.

A flatter gold/silver price for a little while would be OK with me, as it gives me yet another month to stack a bit in the low 1400's.

I appreciate your updates.

Hugh

P.S. Ouch...10 minutes after writing this, the rout is accelerating.

cmartenson's picture
cmartenson
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Posts: 5569
DaveF, the miners and PMs

DaveFairTex wrote:

[Falling miners with rising PM prices] is a warning sign.  When the big guys distribute, you might think about what might come next.  Often the "top" is days in the making; it can take a while for big money to liquidate the shares they own.  They need big volume to do it.  But days like this are clues - and should probably not be ignored.

I'm not suggesting PM will now tip over and sink to 1180.  But this might well be the warning signs of a an impending correction.  Gold 1425 could well be the high for a while.  It all depends on the plan that the big money has; since we aren't invited to the meeting, all we can do is watch the price & volume and go with the odds.

Watch the close - see if traders take the miners home or if they close at the lows.  Last half hour is always key.

I totally concur with this...the miners should be rallying here, and they are, instead, weaker than the general market.

When I was trading gold and silver futures, this was nearly always my sure-fire sign to go short the metals.  Or, I would go flat my long positions if I was carrying gold or silver contracts on the long side.

I never traded gold and/or silver futures without having live charts of the miners plastered all over one of my trading screens.  Never.  They always seemed to "know" where the price of gold/silver were headed before the metals themselves.

I have not been close enough to the trading action since then to be 100% sure if that is still true, but I strongly suspect it is.... 

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