PM Daily Market Commentary - 8/27/2013

davefairtex
By davefairtex on Tue, Aug 27, 2013 - 5:39pm

Gold finished the day up $20.30 on moderate volume to 1415, with silver up $0.46 to 24.48 on heavy volume.  The gold/silver ratio remained where it was at 57.80.  Both gold and silver made new highs again today, but they both closed off the highs printing a "spinning top" candle, a neutral result.  Gold, and especially silver, are quite extended; the trading term is "overbought" which provides traders a sense as to how extended things are.  Silver is very overbought.

The dollar was was down today, off -0.27 [-0.33%] to 81.17.  The dollar tried to move above its 20 EMA today but failed.  It continues in its medium term downtrend, headed for near term support at 81, and then  at 80.50.  The dollar looks generally weak, but it is not moving down all that rapidly.

The overall US equity market today was down hard, off -26.30 [-1.59%] making a new cycle low.  Volume was moderate.  This likely hurt mining shares.  Oil went nuts, up $3.00 likely on Syria, moving to a new cycle high of 109.32.  The 20 year treasury closed above its 20 EMA today for the first time since May.  This could represent the start of a new rally in bonds, although given that bonds are in a downtrend in all three timeframes (short, medium, long) its not clear just how far the rally will go.  Downtrends in motion tend to stay in motion.  I only mention these things because they all contribute to the picture - there was lots of money moving around today.

Gold mining shares were down today on very heavy volume; GDX down -4.31%, GDXJ down -5.20%.  Both ETFs closed at their lows.  What's more, the trading range for GDX was actually 7.7% from top to bottom, since GDX opened +3% due to the rally in PM before the NY open.  This made for a very ugly red candle.  If you recall, GDX printed a doji yesterday, and that gave me some cause for concern.  The large red candle today, called a Bearish Engulfing Candle, triples that concern, especially given the very heavy volume.  This day was the highest volume day in a week or two for most of the mining shares I follow.  For the price to move this much, with this much volume, with that bearish engulfing candle - well its just bad.

I have seen this sort of thing happen before.  PM would rise premarket, causing miners to open +2-3%, and then they were sold all day long.  Its almost like a big bank had this large inventory of mining shares they wanted to unload at the top, and boosted PM before the open in order to get top dollar.  No doubt they lost money on the PM purchase, but they made it all back by selling off their mining shares at higher prices than they would have otherwise received.  And once those shares are all gone - you think they'll be continuing to keep PM prices propped up here in overbought territory?

If they are especially evil, we might even get some really gold-positive news articles about how well the metal and the shares are doing, how its acting as a "safe haven" in the Syrian crisis, blah blah, in order to get the dumb money public buying here; that's why trading news flow is a really bad idea.  Big money controls the news flow, that's one way they manipulate by playing on your emotions.  Watch price volume, and ignore newsflow if you can.

Of course this is all just speculation based on today's price action in the miners.  It might not play out like this.  Or it may take a couple of days to a week to play out completely.  But price/volume just sent us a warning, and these sorts of strong signals don't come that often.  Looking at the metals in isolation, all appears well.  However, the whole picture taken all together makes me feel like it's time to reduce some risk.

Just as a fun aside - I ran a calculation of the Shanghai premiums this afternoon after China closed.  They are almost gone, currently at $0.38.  Rising prices have eliminated the Shanghai premiums almost completely with gold at 1420.  I love it when a plan comes together.

 

5 Comments

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2385
Gold buyers as Dumb money

This statement has the look and feel of, in my opinion, a carefully crafted piece of propaganda, which leaves the reader with the thought that buying Gold as a safe haven play makes said buyer the, "dumb money", while giving the author plausible deniability of it being such based on its context;

If they are especially evil, we might even get some really gold-positive news articles about how well the metal and the shares are doing, how its acting as a "safe haven" in the Syrian crisis, blah blah, in order to get the dumb money public buying here.

In the long run, Gold is always a safe haven purchase.  It's possible that Dave is just baiting me at this point.. but whatever.   

Anyhow, I will counter with some good reporting by Bill Holter that helps the reader understand the bigger picture, and how the chart I posted recently showing the receding Gold OI is indicative of loss of faith in, and relevance of, the Comex;

http://blog.milesfranklin.com/permanent-backwardation-the-two-tier-market

Professor Antal Fekete wrote into Mineweb last week regarding the concept of “permanent backwardation” where gold will “tend to infinity and paper to zero.”  Mr. Fekete’s piece was commented on here by Lawrence Williams.  This viewpoint is one from the “academic” side and is exactly the same thing that Jim Sinclair has been saying.  Namely that the metals “exchanges” will go to 100% margin and end up as cash and carry transactions.

Let me try to simplify this view (and one that I believe to be 100% on the mark).  The current backwardation is the result of enough market participants finally figuring out what has been happening for years now.  Central banks have leased gold out yet still kept that gold on their books.  The result was that “supply” and availability appeared to be far larger than it truly was.  Gold was leased and then sold into the market. It was still shown on the books of the central banks and ALSO on its new owner’s books.  We also have seen “pooled” accounts and ETF’s where the metal turned out not to be there and may (probably) never have been purchased in the first place.  The same ounce of gold was “sold” time after time and over and over.  Gold was here…there…and everywhere.  As the author so aptly points out, people started to wake up when Germany was told to wait 7 years for their small amount of gold to be delivered.  (As a side note, please also remember that when physical gold is sold, 70% of it gets melted down and becomes either jewelry or is “used” in products so that it is no longer in deliverable form).

The above said, investors are now wondering “Where is the gold?” and they don’t like the answers they are getting.  They are “voting” with their financial transactions.  Investors are going to “cash and carry” on their own.  They are buying physical metal and asking for delivery, they are also either buying less or outright selling “paper” gold products.  This is creating a “two tier” market where the price of REAL gold is higher than “paper” which represents gold.  THIS in essence is backwardation in itself and “premiums” paid for physical metal was an early warning.  Investors want gold NOW and in hand because they either do not trust or believe that promises of future gold can or will be kept.  This by the way is a self-fulfilling prophecy because there is only so much gold that can be had.  The higher that current demand goes, the more those inventories will be depleted.  The more that inventories are depleted the faster new demand to get it “now” becomes.  Basically the recipe for a buying panic is evolving.  This has taken far longer than I believed it would but it can be likened to the “flat Earther’s” viewpoint holding sway until Magellan (looked into empty vaults) and circumnavigated the globe.

I mentioned above that this process would become “self-fulfilling,” you are watching that happen in real time right now.  More and more there are “light bulbs” getting turned on all over the world.  More and more investors know that “something just ain’t right,” too many things don’t make sense and investors are reacting with their feet (money).  This eventually had to happen as gold is a finite money and takes capital, labor and equipment to “create” while fiat currency whether they be Dollars, Euro’s, Pounds or Yen can be created at will, in any amounts…and for FREE!

I will ask you this, how could it ever be possible for any of these currencies to appreciate in the long term versus gold?  For a “time” the illusion of appreciation can be maintained and it was from 1980-1999.  “Pressure valves” were invented (ETF’s, unallocated holdings and pooled accounts, futures, etc.) and used to create the “tops” which were pointed at as talking points of proof.  “Proof” that the bull market was over and the time to exit gold and “come back into the system” had arrived.

This worked in 1980 and for 20 years after.  We still had the ability to lever up anything and everything not nailed down, the “paper” products were still yet to come on the scene and central banks still had the ability to lease the family jewels.  These tactics have come, been tried, used and abused.  Now we face “permanent backwardation” where gold in hand is valued higher than gold “in the future.”  Simply put…a two tier market where real gold is worth more than the “promise” of gold in the future and worth more than any piece of paper representation of gold.  While this is still just emerging, it will become more and more noticeable in price.  …And the more noticeable it becomes…the faster it will happen.  Like I said above…the recipe for a buying panic!  …please remember that “supply” is absolutely finite in a world where demand can be virtually infinite so “guessing” at a price…any price…is at best a “guess.”

One final thought, if there was no gold to be had at the mint or from refineries, if the mines just sat on and held their production, if your coin dealer could not source metal and no one was offering gold for sale either privately or over the internet, what would an ounce of gold be worth?  The answer is “a lot.”  How much exactly no one knows but during a reset of price there will be no trading…until a new price balances out and coaxes enough sellers out of hiding to meet the buyers.  You MUST be in position before this happens.  5 years, 6 months or even 1 second too late will equate to the rest of your lifetime!

When Bill talks about how unimaginable it is for fiat currencies to actually appreciate against Gold... (I will ask you this, how could it ever be possible for any of these currencies to appreciate in the long term versus gold?).. it is a thought that I can really relate to.  Hugo Salinas Price put a really nice chart in one of his recent pieces that basically shows the dramatic, clearly exponential growth of WW fiat reserves since the closing of the Gold window by the US in 1971;

 

reserves2013.png

  source:  http://www.plata.com.mx/mplata/articulos/articlesFilt.asp?fiidarticulo=216

Really.. it takes no math.  Just ponder that chart and think about the finite nature, the scarcity integrity, of Gold

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
dumb money/the crowd/trading techniques

Jim -

This particular story isn't about you Jim!   Or about someone who buys gold!  You are masterful at finding things that don't exist - like my non-existent evil intent to vilify or dissuade gold buyers when I myself hold a core position in gold, and have stated this in almost every post I make.

We all want to buy low and sell high.  So does the big money, but they need volume to get in and out.  Thus, they need to engineer situations so that the crowd/dumb money panic-sells at the bottom, and panic-buys at the tops so they can move in and out without moving the market prices too much.  They do this through engineered newsflow.

Does this sound familiar:  after a long run down in, say, gold, you start to read really horrid stories about gold never recovering, ever, about it plunging to $600, right when gold is trading at $1230, after it has already lost perhaps $500.  Everyone holding gold feels terrible.  And then you read about miner downgrades, after 50% drops.  MIners will go out of business, nobody will survive, blah blah blah.  NEM downgraded to sell by (say) Goldman Sachs after it has gone from $60 down to $25.  There is one last leg down, a big volume capitulation that has the effect of flushing the last remaining people out of both gold & shares that generates big volume right at the bottom so that the big money is able to buy.  What I would call engineered capitulation - through planted news stories, downgrades, and price action.

The same thing happens at the tops - be they "intermediate" tops or ultimate tops.  Right now, I believe we may be at or near an intermediate top, based on price/volume action today in the mining shares.  I could be wrong, but the price action today has me fully on guard.  Now its about time for the big money planted news stories that get dumb money/the crowd to buy mining shares here, now, at this moment, so big money will have someone to sell to prior to the correction.  Bagholders.  Also known as the endless cycle of the market.  After big money transfers their stock to the bagholders, the inevitable correction occurs, the latecomers that bought at the (intermediate) top are flushed out, they capitulate to the big money, who buys the dip and starts the cycle all over again.

My whole point being, trading based on newsflow is really dangerous.  We are herd animals, we like reassurance, and big money knows this.  Gold may well be a safe haven, but if you start reading about that very subject in Bloomberg or the WSJ or the "Financial-Entertainment TV" in conjunction with the Story of the Day (i.e. Syria) after a long run up, seriously - grab for your wallet.  You may be in the process of being emotionally set up to be a bagholder for big money.

Once you start to realize this, you start to look for these stories.  I specifically was hoping to see a big batch of gold mining company downgrades after the long run down in shares during the crash.  That would be my (contrary) indicator that a low was to be coming soon.  Even though my own emotions were definitely affected by the long move down, the trader part of me was excited to see the downgrades, because it meant the low was not far off.  "Its not a major bottom in the shares until all the big [mining] companies have been downgraded to sell." - Me.

Of course, my scenario might not play out, PM might continue up for another few weeks, who can say.  But price action today was quite suspicious, and I am on guard.  I retain my core position (that's why its the core position) but I'm reducing risk.  That's because I'm a trader though, rather than an investor.

See I totally believe the market is manipulated, but it is usually the people who are the ones who are manipulated through their emotions - by the stuff they read or watch on TV, planted at strategic moments, to get some percentage of the uninformed public (dumb money/the crowd) to do what the big money wants them to do, at exactly the wrong times.

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
Thanks Dave and Chris, and whither PMs in a general crash?

Dave and Chris,

Thanks to both of you for your perspective and your alerts on the price movement in the miners.   Chris, really I appreciate you taking the time to share your experience in yesterday's market commentary thread

 I am  an investor, not a trader, but in late July I could not resist the temptation to buy a few call options on gold and silver miners.  These contracts lost value for about a week, and then have done pretty well over the last three weeks or so.  The expiration dates range from Dec. 2013 to Jan. 2015, and this morning I will most likely cash in on some of the contracts for the nearer-term expiration dates, and sit tight on the longer-term contracts.  The greedy bastard in me wants to wait for even more gains, but the chicken in me says that it's time to take a few chips off of the table.

All of this goes back to the question I asked a few weeks ago, which is, assuming there is a major downturn in equity and (possibly) bond markets this fall, as Chris has forecast, how much lower might the PMs go and how much lower can the miners go?  My gut tells me that the PMs could fall somewhat from these levels in that event,  but not very far, as I do think that the all-in cost of production matters in terms of the gold supply, and that number is somewhere between $1000 and $1200 per ounce, I think.  Dave, if I am not mistaken, you hold that mining supply and cost of production is not such an important factor, due to fact that the vast majority of gold available for markets is not from this year's mine supply.  

Of course, maybe PMs will rise from these levels during a big crash, as people see them as a safe haven.  There do seem to be a lot of signs that in the short to medium term, PM prices should rise.  Both here at PP, and elsewhere, I have read that JP Morgan is now net long on gold futures, which, if true means that at least one of the big guys is trading in the direction of higher PM prices.

I am a neophyte in all of this, especially mining stocks, but so far it seems that mining stocks are really volatile and that they could fall quite a bit in the event of a general market crash.  Certainly, the experience of mining stocks over the last two years has made a lot of people wary of this sector.  But, since I believe what I believe about monetary debasement and precious metals, in the long term, mining stocks seem like the best sector within equities markets in order to preserve/increase wealth in the current economic climate.  In the short term, however, I don't have a lot of clarity.

I'd be grateful to hear from anyone out there regarding the question of how far can PMs, and PM miners are likely to fare in the event of a major, general downturn in markets.  I know that none of us can be sure of the answer, but I'd love to hear from anyone and everyone who might have something to say on that question.  Also, I am very open to being corrected regarding my statements and beliefs regarding PM prices and markets, because, like I said, I'm very much a newbie just trying to understand more.

Cheers,

Hugh

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
miners, PM, downturns, peripheral nations, defaults

Hugh -

... assuming there is a major downturn in equity and (possibly) bond markets this fall, as Chris has forecast, how much lower might the PMs go and how much lower can the miners go

It kind of all depends on where the downturn comes from.  If this is a US-based downturn, meaning the US economy is having problems and this hits corporate earnings, and that causes SPX to dive, that's one sort of beast.

If the downturn is due to Europe imploding and - say Spain leaving the eurozone, causing a ripple of bank defaults and associated derivative issues and bail-ins which will generate massive deflation and a big credit crunch, that's quite another.

Over the past 2 years, PM equities have been the hothouse flowers of the equity market.  Equity market sneezes, and PM equities simply catch their death of pnemonia.  That seems to have changed after the PM crash.  Now, there seems to be a rotation of money from general equities into PM equities.  Will this continue?  It bears watching.  You can track this relationship by the pair GDX:SPY.  You can see that GDX has outperformed SPY since early August.

Nobody really knows where the bottom is.  Clearly, there will be support for gold at the 1180 lows.  Whether that holds or not in a significant downturn - who can say.  I think it depends a lot on the scenario. I don't think costs of mining will provide any support at all in the short term.  Like the whole physical buying effect, it operates slowly and over a 1-3 month timeframe.

Any serious credit crunch will likely send the commodity complex into a spin, which will more than likely drag down PM along with it.  However, there are some additional wrinkles to this.

I think physical PM will do really well in selected peripheral nations.  India is our first prime example.  The rupee is getting killed because money is fleeing India, and gold priced in rupees is doing fantastic compared with gold in USD.  India has completely recovered from the gold crash.  This is one place where gold really is acting as a safe haven...and not just because Indians like gold for weddings.  It's because the currency is turning into trash before their eyes, and in those circumstances, gold is at its best.  Portable concentrated wealth you can smuggle across a border into Nepal!  Perfect insurance against a government that tries to channel your money into low yielding investments and restrict exit so they can retain power.  What's not to like?

That same thing will likely occur in other nations in the periphery if and when they start to have serious currency issues.  Likely, the governments there will resent their people going into gold and they'll try and stop it - which is why physical for those people is a must, while they still can.

I think gold import/sales restrictions and/or taxes will become more commonplace in the periphery as gold is seen as a peripheral nation safe haven.  If any of the eurozone nations actually leave the euro, physical gold in those areas will likely be in very high demand, which to me says "premiums."  How this affects the worldwide price - well clearly its positive, but will it outweigh the credit crunch that is the likely result of a eurozone breakup?  That's harder to say.  It will also likely drive physical gold buying in other peripheral nations who think they might be next.  This could be the trigger for an unallocated gold/warehouse receipt default situation - perhaps at LBMA.  Also, the first time a government confiscates gold held in banks and/or funds, the jig will be up; trust in central repositories will simply evaporate.

All that said, the US is not the same as the periphery.  Our experience currency-wise will most likely be different.  Peripheral failure means - most likely - a run to the buck.  So our currency will get stronger, and as we know a strong buck tends to hit the price of gold.  And yet - the default potential could easily counterbalance that effect.  It really all depends on what scenario ends up playing out, which ends up being policy & politics.

It would seem that acquiring a physical position is basically required if you live in the periphery.  And if you live in the core, its likely a good idea to acquire a physical position prior to a major peripheral failure and/or eurozone exit.

Me, I hold my core position; there are just too many variables and too many scenarios that could occur for me to "play with the rent money" in that way.  If the miners start to show weakness, half of them get tossed off the island, the dividend stocks I just hang on to, and I look for a re-entry point.  I will likely hold my short puts, since they were written at or near the lows.  Unless miners start to really crater vs SPX in which case they go too.

One serious bit of country risk with the miners: if gold ever again threatens to become a legal monetary metal, peripheral nations may well simply nationalize goldmines within their borders.  This would likely be gold price positive, but it would suck if it was your goldmine that was nationalized.

Final advice: have a plan, watch prices and when they confirm the plan, act.

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
Thanks, Dave. I stuck to my plan

Thanks, a lot, Dave.  I did indeed stick to my plan, and took some gains off of the table today.  I will put about 1/3 of those gains towards paying off a recent credit card purchase and another 1/3 towards adding to my PM bullion core in the form of a few silver eagles.

Cheers,  Hugh

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