PM Daily Market Commentary - 8/28/2013

davefairtex
By davefairtex on Wed, Aug 28, 2013 - 10:39pm

Gold finished the day up $1.80 on moderate volume to 1417.50, with silver down $0.14 to 24.36 on  heavy volume.  The gold/silver ratio rose to 58.18  Both gold and silver made new highs again today, gold touching 1434 and silver reaching 25.16, but they both closed well off the highs, which is not a good sign.  Gold printed a doji (almost a gravestone doji), and silver - call it a shooting star, which are both not things you want to see in an uptrend.  They are both bearish reversal candles, and require confirmation tomorrow.  Confirmation is gold closing below 1411, and silver below 24.26.  This should not be difficult to do.  Traders all know what that means - and the shorts have been waiting for this kind of thing to happen - so I'm kind of expecting it to play out to the downside.  Perhaps its too obvious a move, but for certain the shorts will give it a try.

Some dramatic bad-news-is-good-news might rescue the situation here, but short of that, the technicals look bad and we appear to be set up for a PM correction.  Tomorrow we have a GDP report, a jobless claims report, corporate profits release, and 7-year bond auction.  Of those, I'd expect jobless claims to be the fun one; we will get a sense of how fragile PM is by its response to the report.

The dollar was was up today, +0.32 [+0.39%] to 81.46.  Once again the dollar tried to rise above its 20 EMA and was rejected.  The dollar appears to be strengthening a bit - not strong, perhaps, but maybe it has found support at 81.  A close above 82 would confirm a dollar rebound for me, which would likely provide some additional headwinds for PM, especially in its current state.

Gold mining shares had another down day today confirming the Bearish Engulfing candle from yesterday, with GDX off -2.54% and GDXJ down -1.59%.  The volume was heavy on GDX, but not quite as dramatic as yesterday.  Given that gold scored another high today, mining shares opened up in NY but GDX and most mining names closed near the lows for the day.  Most of the losses took place in the afternoon.  All in all, its not a good sign.  Given that PM was only off gently, I am left to wonder what would happen to mining shares if gold suffered a 2% down day.  Looking back over the past 8 days of activity, it appears that the "tell" was the fact the miners could not break out even though gold did.  When things don't fit together, its usually the sign of big money intervening - in this case, the big guys cashing in their chips at the top.  It takes them days to get out because their positions are large, and they don't want the market to drop while they are selling.

The market is telling me its not interested in buying mining shares just yet.  So neither am I.  I only want to buy when the big money starts buying - otherwise, I get to see all that red in my position, and I don't like red very much.  In the meantime we watch prices; they tell us what to do, and not the other way around.

10 Comments

davefairtex's picture
davefairtex
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oil technical outlook

So this isn't strictly about PM, but the candlestick print today in oil was pretty impressive.  It had a big $3 trading range, and it closed right near the dead lows of the range today, printing something close to a gravestone doji, on relatively heavy volume.  The candle, the volume, and the size of the trading range all caught my eye.

The gravestone doji is both ominous sounding, and a reversal signal.  Oil tried to break out to new highs, and in fact there was likely a lot of short covering, but then the sellers came in and it found itself back at its starting point for the day.  A move back down below the base of the doji would confirm, not such a difficult thing to do.

I'd say a move down at this point was more likely than a move up.  Naturally this is subject to the whims of geopolitics, but from a technical perspective, oil isn't looking set to move higher.

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davefairtex
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GOFO, Bullion Banks, LIBOR, and trust

Something that came up recently:

GOFO, like LIBOR, is a self-reported rate constructed daily by the 7 members of the LBMA, better known as the Bullion Banks - the darlings of the mainstream goldbug press.  The fact that GOFO is self-reported means it is not based on actual trades and/or forward contracts signed by those banks, but is something they made up themselves.

The rate-setters include: ScotiaMocatta, Barclays Bank, Deutsche Bank, HSBC, Goldman Sachs, JP Morgan, Société Générale, and UBS.

http://www.lbma.org.uk/pages/index.cfm?page_id=5

Now we know that LIBOR is manipulated in order to make the LIBOR reporting banks money.

And if we are to assume that the daily construction of the GOFO number operates in exactly the same way, then we should also assume that it is to the Bullion Bank's advantage to have GOFO be negative.  Somehow, these guys make more money if GOFO is negative, or else they most likely wouldn't report it this way.  Unless of course you trust the Bullion Banks to do something against their own interests.  It would not require a big tweak to move GOFO rates above zero.

Again, there are only 7 of these guys doing the reporting, with the high quote and the low quote being discarded, the remaining 5 are averaged.  As a result, it takes far fewer Bullion Banks to collude successfully than it did for LIBOR.  Interestingly, 4 of the 7 are also members of the LIBOR self-reporting club.

Is it just me, or does it strike anyone else here as odd that the mainstream goldbug press implicitly trusts the legitimacy of the GOFO number reported by the bullion banks, while at the same time claiming that these same banks are the tools of Fed intervention, instruments of evil, dreadful manipulators, and all-around bad guys.  What's more, 4 of these 7 have already participated in the well-known LIBOR manipulation!

And still we trust this GOFO number to be legitimate?

Just perhaps, it doesn't mean what we think it means.  Maybe its just another tool for the Bullion Banks to get rich.  And in the meantime, it causes heads to spin all across the Internet, for months now.

Its just a thought.

 

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Grover
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Is it safe to come out?

Dave,

Thanks for all the information on GLR, GOFO, and LIBOR. My original question about the GLR sure precipitated a shitstorm here. ;-) I read elsewhere that GOFO was self reported by many of the same banks that were responsible for reporting the LIBOR rate. As you pointed out, GLR is an abstract calculated from these data points. It might mean something at the 30,000' view, but not at the microscopic level. I wouldn't put it past these fine folks to manipulate the system for their own profit. With LIBOR as low as it is, it wouldn't take much truth stretching to change the + to a - sign.

That raises another hypothetical question. Assuming these folks are not interested in the well being of others' bank accounts, could this be a bull trap setup? You mentioned on another thread that shorts want to be in position before a big takedown. Granted, that would be the most profitable. Have there been cases where the short interest was low and a selling run commenced anyway? Would there be any indicators you track that support/refute this scenario?

Grover

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Jim H
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You guys are insane.

Now negative GOFO, which means that Gold is yielding more than dollars, is a purposeful invention of the bankers and not an indicator of tightness in the physical market.  I am leaving you guys to yourselves... good luck to all. 

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davefairtex
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is it safe?

Grover-

Your question reminds me of the movie, The Marathon Man.  "Is it safe?"

I haven't made a detailed study of all the historical situations regarding COT positioning - hmm, might be an interesting thing to do.  I observe that the evil bullion banks are now likely still net long.  The trend in PM is still up.  I would be (am) buying dips at corrections here, rather than shorting rallies.

As for creating a stir with your question - Grover, don't blame yourself!  (I get the sense you are quite concerned and wracked with guilt!)  We all love to talk about the 30,000 ft level, but as Dan Norcini has wisely observed, none of it truly matters (not the COT reports, not GOFO, not premiums in Shanghai) until speculative buying shows up in the futures markets and moves prices.  And even then, we won't know what really caused the buying in aggregate so there's no sense either taking a victory lap or agonizing over defeat.

In some sense, all the "other stuff" we all love to talk about just forms the backdrop.  It sets the stage and suggests to us that something interesting may be happening.  COT report was "bullish" for months before the bottom hit.  Traders who bought that COT report prior to spec buying showing up got burned, and maybe are only breaking even right now.

So what are prices telling us?  Uptrend.  PM is in an uptrend.  What does one do in an uptrend?  Buy corrections.  Until the trend changes.

So there you go.  Until the trend changes, we buy.  If we are active traders, we might sell the swing highs and reduce risk, and then buy back those positions during the corrections.  If we are more longer term focused, just buy corrections until your position is "large enough" and then hang on until the longer term trend change occurs.  Again, until prices tell us differently, the trend is still up, no matter what premiums in Shanghai do, no matter what the COT report shows, and no matter whether or not GOFO is negative or positive.

This is a different philosophy than most people have.  It freaks some people out.  People call you crazy - and other things too.  It takes a while to really understand.  That's because most people latch on to a particular fundamental storyline and then get angry when prices don't follow the storyline.  This used to be me.  When prices didn't follow the storyline I had selected, I would get very angry, yell at the screen - it was really unhealthy.  Storylines are great, I definitely have mine (I like the "bullish COT report" best), but they only alert us to the potential for direction.  In reality trend changes only happen at the price/volume level.  Where rubber meets road.  When the whole market finally comes to accept your storyline.

This is why trading is an art.  You must keep the storylines you like in mind as your long term guide, but not be emotionally affected when prices don't follow your storyline - and sometimes run directly counter to them for weeks and months and maybe years at a time.  And there is never, ever, perfect information.  Technical analysis helps keep us (relatively) emotion-free when news stories bombard our emotions making us doubt the uptrend, or make us want to ignore the downtrend.  (And its more evil than that - the big guys are deliberately bombarding our emotions with storylines of their own, calculated to get us to act in ways contrary to our interests, contrary to the trend, at critical points).

One way of thinking about it is - "has the market accepted my storyline yet?"  (look at prices)  "No, not yet."  Shrug.  Go on with your day.  Its not that easy of course, it never is because we are all emotional creatures.  But that's the goal.

So there you go.  Buy the uptrend - not because of the COT report storyline I happen to like is still in place, but because price and volume is telling us, we're in a freaking uptrend so buy!  You can buy dips, or you can buy breakout patterns, its up to you.

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How can you be so sure?

Jim,

Remember back in April when the big boyz magically pulled 500 tonnes out of thin air? (You noted that it was about 1/340th of all the gold that has ever been mined.)) They were rewarded handsomely for taking that calculated risk. Did you see it coming ahead of time? Do you consider that to be manipulation? I didn't see it coming and I still think it is manipulation. So, how much does it cost the big boyz to trick the gold bugs into thinking that the physical market is really tight? They set both LIBOR and GOFO based on what - their honesty?

I didn't see the takedown in April coming. It wouldn't have mattered. I wouldn't sell my core because there would be a small chance that I wouldn't get it back. Not worth it. Now, we have strange happenings in the gold market that I frankly don't understand. Could the negative GOFO be legitimate? It sure could be. Could it be another manipulation? It sure could be. Dave may be able to see footprints in the price and volume data that you and I don't.

When I look at the stock market's valuations, I can't help but think it is generally overpriced. It is especially overpriced if interest rates increase (as they've been doing the last few months.) We're entering the September-October time frame when big market crashes have occurred in the past. If a market crash occurs, will gold be taken down with it? If margin calls are tripped, anything and everything will be sold to get the cash to cover the margins. Falling prices will trigger stops which will add more supply to the market. Who will be buying when the knife falleth?

I was reading the comments in Trader Dan Norcini's blog http://traderdannorcini.blogspot.com/. These guys impress me as being small traders. They might play with a few to a few dozen ounces of gold. In the big boyz world, they're mosquitoes. Some get swatted, but enough survive to make a swarm. They may have tight stops or they may have loose ones, but they will try to sell their position at some predefined point in case the trade goes against them. If it weren't for these traders, the 500 tonnes in April wouldn't have had the effect that it did. The big boyz had to know that would happen.

So, are the big boyz up to their usual shenanigans? Are they manipulating the market upwards so they can pull the floor boards out again? It wouldn't surprise me in the slightest. If Dave has insight, I'm all ears.

Grover

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Grover
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Marathon Man
davefairtex wrote:

Your question reminds me of the movie, The Marathon Man.  "Is it safe?"

Dave,

I was thinking the same thing when I wrote that title.

I started writing my response to Jim a few hours ago and was called away to help with a chore. I just posted and saw that you responded. Thanks.

I don't have a trader's view. I've played with trading on spreadsheets where no money is at risk and generally lose more than I make. Rather than play with real money, I'm happy to sleep soundly. For me, that means buying at a price I think is a long term investment/speculation and then sitting on it for the long term. I still believe that PMs are a safer long bet than fiat currency. Although I would like to be good enough to buy at the low price, I know I'll only get there on luck. The last time I bought was at $1680. Knowing what I knew then, I'd do it again. I don't kick myself after the fact.

I'm expecting a stock market crash this fall and I think gold will be temporarily dragged down as a result. At some point, I'll bite the bullet and pick up a few more ounces. I rather doubt it will be at the bottom. If I'm wrong, I'll still buy some, but at a much higher price. In the long run, it won't matter that much.

Grover

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davefairtex
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Grover's forecast

I have to say, if we have a crash, I too think its likely that the price of gold will suffer.

I say that, but as always, I reserve the right to change my mind if prices say differently.  Currently, starting Aug 1 the SPX has moved down from 1700 to its current 1638 level, yet all the while gold and miners have both rallied.  Cursory analysis would suggest money is rotating out of standard equities and into PM and miners.  If the "crash" is one of these slow-motion affairs where the market just grinds downhill, this rotation could actually continue and gold and miners may advance.

But if the crash is more abrupt and your scenario comes to pass and there is some credit/margin issue, then likely anything associated with futures gets thrown right under the bus, as will the associated equities.

So basically we have to watch.

FWIW I totally saw the potential for that assault back in April.  The downtrend was clear, and the support was quite near, I was watching and and as soon as it happened I assumed we'd be going down hard.  Were I a more gutsy sort I would have gone short.  I think today I would go short, just to hedge the core position.  We all change with experience.

I like your philosophy.  It is most important to know yourself, and do what lets you sleep at night.  Hey, life is to be enjoyed, yes?

 

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Grover
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Posts: 800
I like to watch
davefairtex wrote:

FWIW I totally saw the potential for that assault back in April.  The downtrend was clear, and the support was quite near, I was watching and and as soon as it happened I assumed we'd be going down hard.  Were I a more gutsy sort I would have gone short.  I think today I would go short, just to hedge the core position.  We all change with experience.

Dave,

When you say you would have gone short to hedge your core position, would you actually sell your core position ... or would you sell futures or some kind of put? How much selling did you think it would take to drive prices through resistance levels? If someone only brought half as much (250 tonnes of futures,) could you predict where prices would have equalized?

There must be something in the charts that you can now recognize as a unique signature. I'm intrigued, but not enough to learn all the techniques. I get more enjoyment watching poker than playing it. As good as I am at poker (and TA trading,) it is much cheaper to just watch. ;-)

I checked Kitco in late June and the gold price was $1184. The price was cratering at the time. Looking back, it went down another $4 was all. Part of me was saying, "buy" and part was saying that it was going to drop much further. Later in the day, Bernanke did an about face concerning the tapering that the FOMC minutes alluded a few weeks earlier. To me, that marked the near term bottom.

At the time, my purchase would have crossed into the double digit coin realm. It wasn't enough for me to worry about. I figured if the book-talking analysts (Goldman, etc.) were right, the price could drop below a grand. If so, I could get a few more coins. If it went the other way, I'd get fewer.

Chris has been predicting a market crash this fall. I'm willing to gamble that he is right. (Since no one can know the future, there are no guarantees.) I understand that stock leverage is quite high. That is a recipe for margin calls and selling unrelated things to generate liquidity to cover the margins. Traders with stops will unwittingly exacerbate the movement (and end up in a potentially better situation.) I'm betting that gold/silver will have some pretty violent whipsaws coming up. Implicitly, I'm betting we don't attack Syria before a stock market rout.

There isn't any deep analysis beyond what I just laid out. I'm willing to gamble based on what my gut tells me. I really don't know what will happen, but I've got price points set just in case. As soon as the price drops below $1150, I'll buy with half the money. If it drops to $1000, I'll spend the other half. If it never gets to $1000, I'll watch until the price gets back to $1150 and then buy with the remaining cash.

If I'm wrong and the price just keeps melting upwards from here, I may buy some when it hits $1680 for nostalgic significance. I'm not sure. I'll burn that bridge when I get to it. Right now, I'm just happy being there.

Grover

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davefairtex
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hedging the core

Because futures are both easy and cheap to execute on, and they trade 23.5 hours/day, I'd use them.  1 GC contract is enough to hedge 100 oz of physical gold.  1 SI contract is enough to hedge 5000 oz of silver.  Another way to think about it: 1 GC = $1000 per $10 move in gold.  A $100 day in gold = $10k move in the GC contract.  For silver, each $1 move = $5000 move in SI.  So those $5 down days in silver = $25k.  Given the GC margin is $8k and the SI margin is $12k...you can see why the big down days cause margin calls.  $8k gives you control over $140,000 of gold, and $12k gives you control over $125k of silver.

You can also use mini gold and mini-silver, which are a bit less daunting.  Less liquid though, so bid/ask spreads are typically wider.

Every now and then I'll hedge my miners and CEF by using an SLV short.  I actually did that during the April crash, but the SLV short I used ... wasn't really big enough to help that much.  I needed about triple that size to have really protected myself.  Some people use the double ETFs but they have such horrid decay properties that I try and avoid them.  Puts don't cost much, but they have time decay, so you really need to be right about your timeframe for them to be useful.

During the 2008 crash I was short either 2 or 4 e-mini contracts to protect my equity positions for quite a while.  The daily movements were a bit daunting, but that's back when I didn't track things quite so closely.  Sometimes not watching things ends up being easier.  :-)

From what I recall I got mom a large SH position in her IRA to hedge her equities.  That worked out too.

I have no intricate knowledge about how much selling was required to break support or anything like that.  But if you watched the intraday charts, you could kind of tell what was going on with the trading pattern of price moves and volume - brief rallies getting sold hard, breaking support, and then sometimes just one $10 or $20 move in 1 minute, with huge volume spikes.  Its hard to explain.  From watching the daily chart, you could see the pattern of lower highs, where support was, and what happened when support broke.  And you knew where final support was, and you could just imagine what would happen when that broke.  And then it all came true.  And all of us (trading) watched it happen in slow motion, and then quickly all at once.  I recall listening to Dan Norcini that Friday.  He sounded so wiped out.

So who buys when prices are cratering like that?  The shorts.  They cover.  They are the only ones brave enough to do so.  After buying and then getting stopped out enough times, you stop buying.  And then you remind yourself, best to buy with the trend, rather than trying to pick the bottom just because you think the price is cheap...because there are a *LOT* of "bottoms" on the way to the real one, and each one looks cheap, right up until the market makes yet another new low, and then THAT bottom looks cheap, etc.

Best wait for the trend change, and buy that.  Its easier to sleep at night that way!

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