PM End of Week Market Commentary - 10/26/2013

By davefairtex on Sat, Oct 26, 2013 - 3:40am

Gold finished Friday up +6.20 to 1352.50 on moderate volume, while silver dropped -0.12 to 22.59 also on moderate volume.  The gold/silver ratio rose +0.59 to 59.87.  After being sold in asia down to 1335, gold rallied during the NY session to a new high of 1356.40, which it mostly held into the close.  Silver during that same timeframe dropped much more significantly, and didn't rally back as strongly.  While both gold and silver closed above their 50 day moving averages, silver was definitely looking weaker overall.  Miners were down early, and then rallied as gold made its new high.  GDX was up +0.73% on light volume, and GDXJ +0.83% on moderate volume.

Gold has risen 3 of the last 5 days, with low volume on the down days, and higher volume on the up days.  That's a bullish picture.  It has now closed two days in a row above its 50 day MA, and is parked right under resistance at 1352 after breaking through momentarily on Friday.

On the week, gold was up +36.40 [+2.77%], silver up +0.67 [+3.03%], GDX +7.96% and GDXJ +12.44%.  You can see from the relative percentages that the GDX:$GOLD ratio is climbing (GDX up more strongly percentagewise than gold) as is the GDXJ:GDX ratio.  Both of these are bullish indicators.  The gold/silver ratio is down slightly [-0.16] on the week, providing us no signal.

On the longer term weekly chart, GDX may have possibly put in a double bottom, although for that signal to be valid it requires confirmation, which would be a breakout of GDX above  31.  If that breakout occurs, it could generate a great deal of buy-side interest from the longer term trader group.  We're a ways away from that yet, and it would likely require gold to break above 1425 to move GDX above the 31 level.

Miners are getting a bit more respect this week, with traders seeming to be more willing to hold mining shares overnight.  When sentiment changes from "selling the rallies" to "being afraid of missing out on next day's upside move", that's a good sign.  That said, continued happy upward progress on GDX depends entirely on gold.  A modest move down in gold on Wednesday led to a flurry of high volume selling in GDX.  Just looking at the percentages, a 2.77% move in gold netted a 7.96% move in GDX.  That works in reverse as well.  Miners are high-risk high-reward, the junior miners even more so.

Goldcorp, Mining Costs, and Mine Supply

A big mining company, Goldcorp, reported earnings on Thursday.  They are seen as one of the better large gold producers in the world, so I use them as a baseline for how mining is doing overall.  Realized gold prices for 3Q 2013 were $1339/oz (down 26% from 3Q 2012), all-in sustaining costs are $992/oz (up 24% from 3Q 2012), and gold sales are up 5.5%.  Going forward, they see all-in sustaining costs ranging from $1050 to $1100/oz (up 6-11%).

If we project this more widely across the industry, it says the industry paid a lot in terms of margin in order to expand production modestly.  With gold down significantly, that's unlikely to be repeated.  Gold will cost about $1100/oz to mine next year, with cost inflation being at least 6-11% per year.  If price drops below $1100/oz, then gold production will steadily decrease over time as exploration projects are cut, and as higher cost gold mines are put on care & maintenance.  I have read about that happening now, actually; what were profitable mines at $1600 gold are losing money at $1350.

Goldcorp also reported that the Mexican royalty on mining could push their tax bracket in Mexico to the mid 40% range.  It wouldn't lead them to close any mines, but it would make them think twice about developing new ones.  Opening a new mine requires a time horizon of 15-20 years; if you imagine taxes are just going to keep going up and up, why spend your shareholder dollars opening a mine in such a place?  Argentina is another such country where taxes and policies are making the mining companies think twice about expansion.  Project this across countries and mining companies worldwide.  As countries search for new sources of income to fund their various spending plans, this will end up decreasing supply.

So rising taxes at the same time with declining ore grades - if you are a buy-and-hold investor, it would seem to be critical to pick a gold mine in a location that won't be apt to raise taxes on your mine.  As to where that might be - don't ask me!  Canada might be ok, but everywhere else?   My gut tells me, gold mining is becoming increasingly high risk from a tax perspective.  If you resent being a Real Estate Tax Donkey because of property taxes, just imagine being the owner of a gold mine.  Your "mine property tax" just went up to 10% per year; have a nice day!

Long term, this state of affairs can't help but be bullish for the price of gold, but substantially less bullish for mining companies depending on where the gold mines are located.  And that mining cost inflation; how much is due to declining ore grades?  That I don't know.  The cost inflation number is likely a mix of labor, energy, and ore grade, but its not a modest rate, projected forward 10 years.

So looking 5-10 years ahead, I don't think the big play is in gold mines, given the trends we know will play out over time.  Mines are just too subject to confiscation/tax policy changes by government, and too dependent on energy.  Sure confiscation policies kill off future exploration, but it seizes money today for hungry governments unwilling to consider cutting the spending that gets them elected.  And as we know, governments are all about staying in power today.

However in the shorter term, owning mining shares will most likely lead to 100-200% gains if gold regains 1800, so for me they are hard to ignore.


The dollar dropped -0.52% this week to 79.26, moving ever closer to the 78-79 support zone.  It is approaching a critical juncture.  A violent move through 78-79 would most likely push gold above 1425.  I believe at this point, the dollar and gold are relatively closely connected - perhaps not from the standpoint of intraday charts and algo bots buying gold when USD drops, but from an overall "dollar concern provides impetus for COMEX/GLD gold buying."  That heavy dollar sell-off/gold rally immediately after the resolution of the government shutdown really sticks in my mind as a key turning point.

The USD is now trending down in all three MA timeframes; 20 EMA, 50 MA, and just this week, the 200 MA started turning down.  USD remains below its 20 EMA.

Trends in motion tend to stay in motion, but within that medium-term (daily chart/6 month) dollar downtrend we can expect to have short term multi-week rallies.  I would expect at least a brief rally on or near 79.  Most likely, traders will start to buy the buck at that level, but if their buying is not sufficient to cause that bounce and the dollar plows through the 78-79 zone, it is quite bearish.

Of course, that would put the euro into the 140s; the EUR/USD closed the week at 138.03.

Again, just like gold, the buck needs the buyers to show up in order to stem its multi-month downtrend.  With the Fed seemingly engaged in No Taper through March, will buyers appear?  Will the Europeans help with some ... well-timed banking bail-in/resolution issue?  All we can do is watch.  But if the buck rallies, I suspect gold will correct.

Physical Supply Indicators

* Gold moving above 1350 has pushed Shanghai premiums to negative values - gold in Shanghai is now trading at $-7.27 under COMEX, down -9.24 this week.

* The GLD ETF lost -10.21 tons of gold this week, dropping down to 872 tons.  In January, GLD had 1350 tons.  At this loss rate, assuming GLD contains all the gold it claims to have, GLD will be empty of gold in about 18 months.

* The COMEX lost  0.72 tons of registered gold this week, and is down to 21.99 tons.  COMEX registered has tracked sideways for the past few months, but it remains down significantly from its April peak of 92 tons.

There are allegations that some of the gold delivered to COMEX is not in fact gold but paper or some other kind of non-gold-fraudulent deposit, the evidence being "a round number of ounces" showing up in the delivery reports.  Gold bars always vary in size, so a round number of ounces delivered would certainly seem to be a suspicious event.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1351.60 and silver 22.54:

CEF 15.26 -4.40% to NAV [up]
PHYS 11.23 -0.44% to NAV [up]
PSLV 9.01 2.41% to NAV [up]
GTU 48.04 -4.09% to NAV [up]

Premiums have risen/discounts have shrunk, some substantially.  Both GTU and CEF have reduced discounts by at least 2%, and PSLV premium is up by about 1%.  During rallies, premiums expand/discounts drop.  The opposite happens during downtrends.  If you want some gold price exposure, a paper gold ETF with a deep discount to NAV is one nice way of getting $100 of gold for $94.  Of course if you buy when there's a premium, you're paying more than $100 for $100 in gold, which seems less good.

* More stories this week on Indian gold premiums - smuggled gold is selling at a $50 premium, shops don't have gold to sell to their customers, gold coins are being melted down to resell as (higher margin) jewelry, kilos of gold found in an airplane bathroom on a plane bound for India, and so on.  No hard data but a lot of anecdotes.

Physical supply is a mixed picture.  By my calculations (using the SGE Au+TD contract requiring delivery, and COMEX gold prices as of 0330 EST) Shanghai has moved significantly into discount, as one might expect given the rising gold price and the historical chart pattern.  COMEX registered is tracking sideways.  GLD lost gold even with Shanghai in discount.  That surprises me a bit, and makes me wonder where that gold is going.  India comes to mind.  So China pressure is off, India is most likely up - from smuggling - and COMEX looks low but not getting any worse, at least officially.  Here's a chart of Gold & Shanghai Premiums, with Shanghai premium in red:

Futures Positioning

As of this writing, there was no COT report available.  The next one should be quite the event.

Moving Average Trends [20 EMA, 50 MA, 200 MA]

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

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

Gold this week moved from medium term DOWN to NEUTRAL, and the gold price has now closed above its 50 day MA for two days in a row.  These are both bullish signs.

If we are feeling particularly bullish this week, we could imagine if trends continue, a modestly-rising 50 day MA would cross the falling 200 day MA sometime in late December/early January.  That would be a big deal from a technical standpoint - that crossing is called a "golden cross" and is a signal for the longer term buyers to jump into the water.  This would provide more buying pressure from longer term disciplined western COMEX/GLD buyers.  However, price needs to stay near or above the 50 MA for this to happen.


COMEX/GLD gold buying continued this week fairly steadily, only mild selling occurred, and that was at low volume.  Somewhat poor economic news contributed to the overall feeling of "No Taper" post shutdown resolution.  Gold and silver are both above their 50 day moving averages.  Silver is starting to underperform gold.

Those who imagine "gold manipulators could strike at any moment" to the downside ignore history; such assaults happen most often when the price of gold is in a downtrend, not in an uptrend.  In my experience, when gold is in an uptrend, the reverse usually happens: the sudden moves tend to be in the up direction.  And in an uptrend, any "assault" that gets bought is yet another confirmation of the trend.  So if you want to trade, its probably best to focus only on trends and prices and not so much on theories that tend to induce fear.  Fear paralyzes decision making, and tends to make you doubt the signals when they do show up. 

Mining share sentiment seems to be fragile-but-improving; mining shares are no longer closing near the lows and/or selling off after an initial rally.  GDX closing the week near the high was a good sign.  Perhaps it negates the alarming selloff that happened on Wednesday.

Physical gold buying is a mixed bag - in China it has turned to selling, while in India, buying seems quite strong.  Let's assume GLD is the tie-breaker; with gold leaving GLD, physical buying is likely a positive influence on price.

Futures positioning most likely remains bullish but with no COT report, all we can do is guess.

Last week I asked: "will futures buyers chase gold higher?"  They did just that.  Next week I'm watching the dollar.  I believe that a continued move downhill in the buck most likely leads to higher gold prices.  In some sense, I think gold right now is about dollar sentiment & confidence, as expressed in exchange rates with other currencies.

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SingleSpeak's picture
Status: Platinum Member (Offline)
Joined: Nov 30 2008
Posts: 509
Thanks Dave..

for the comprehensive report.


Oliveoilguy's picture
Status: Platinum Member (Offline)
Joined: Jun 29 2012
Posts: 578

Oliveoilguy's picture
Status: Platinum Member (Offline)
Joined: Jun 29 2012
Posts: 578

Thanks Dave for a thorough report. I especially liked your commentary after the data. For me and perhaps others who don't do technical analysis this helps to bring the data into perspective. And I appreciate your personal interpretation, cause when you are dealing with less than honest data it's almost an art to bring some sense to the discussion.

I think that the -4.4% NAV of CEF means that it is selling at a discount right now. Is that correct. Some day if you have a moment I'd really like to hear your thoughts on CEF and how it fit's into the bullion space. How it differs from Eric Sprott's fund, and especially how it differs from GLD and SLV.

Thanks again for all the work you put into the report.

davefairtex's picture
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5739
CEF, GTU, PSLV, PHYS - discounts


Thanks for telling me what you like in my reports...I'll try to keep remembering to explain what the various data bits actually mean.  :-)

-4.4% discount to NAV for CEF says $100 in gold & silver can be bought for $95.60.  CEF and GTU have a bunch of bars sitting in a Canadian bank, and since the fund is closed-end, the number of bars don't increase or decrease, unless they end up doing a secondary offering.  However, there is no way to convert your shares of CEF or GTU into bars of gold & silver.

The Sprott funds are similar - they are closed end funds - but their tax treatment is different (I forget why) and you can, if you provide Sprott enough shares, turn shares into gold/silver bars, for a fee.

The market says, they like Sprott's funds more than CEF - its either the better tax treatment, or the ability to convert.

I have noticed that when gold is seriously rallying - most of the time over the past 10 years - CEF moves into premium.  During the 2010-2011 moves, CEF was trading at +5% to NAV.

Sprotts funds did this as well, but the premiums there went astronomical - something like 20% or more for PSLV, if I recall correctly.  Yes.  You could buy $16 in silver for $20 back in 2011.  And when Sprott did a repeated set of secondary offerings, that premium eventually vanished, netting anyone who bought during that time a -20% return.  Moral: avoid buying PSLV/PHYS at a serious premium.  The secondary offering will end up hosing you.

If we imagine gold will rally once again (i.e. target price $2500 or so), right now is a pretty good opportunity to pick up some paper gold at a discount.  If you have money in an IRA and don't want to go the physical route, simply buying when CEF discount moves to -6% (on the moves down, it has done that), that should net you a clean 10% over and above the actual physical price move when gold starts to really move back up again.

Even if that takes a couple of years, 10% is nothing to sneeze at.  Try getting that at a bank.

And try buying physical gold at a discount.  Not Gonna Happen!

And CEF is seen by the community as a reliable holder of gold.  IOW they really do have gold, and Canada is seen as a relatively safe jurisdiction in terms of confiscation, etc.  I think its a good way to get non-leveraged exposure to the price of gold and silver, backed by actual bars, at a discount.

Of course if gold & silver prices moves down, that discount can always get bigger.  No free lunch, as they say.

I'm long CEF, FWIW.


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