PM End Of Week Commentary - 11/09/2013

davefairtex
By davefairtex on Sat, Nov 9, 2013 - 10:26am

Gold finished Friday down -18.20 to 1289.00 on heavy volume, while silver dropped -0.16 to 21.50 also on heavy volume.  The gold/silver ratio dropped -0.40 to 59.95.  Gold traded sideways right up until the Nonfarm Payrolls report at 0830 EDT (unexpectedly good news for payrolls: good economic news = bad news for gold), after which it dropped $25 in 30 minutes eventually touching a low of 1280, cascading lower while the dollar raced higher.  Silver followed gold down, but was not as hard-hit.  Gold rallied modestly at end of day.  GDX was initially hit hard by gold's plunge, but in the afternoon in NY it rallied hard into the close, ending the day up +0.58% on moderately heavy volume.  GDXJ was up +0.73%, on heavy volume.  Mining shares moved in distinct contrast to the metal - GDX buyers most definitely showed up, and chased prices higher.  The metals were bearish, but miners were bullish.

Contrast gold with miners in the following two charts:

 

On the week, gold was down -26.30 [-2.00%], silver down -0.36 [-1.65%], GDX +0.83% and GDXJ -1.10%.  Miners clearly outperformed metal this week and even printed a possible reversal candle on Friday (requiring confirmation by a close above GDX 24.30), which is an interesting change of behavior from last week.  The only piece absent from the possible reversal is heavy volume - GDX volume on Friday was only moderate.  The more pieces that are in place, the more likely the signal is accurate.

Still, when you have two related instruments, and one gets bought while the other is sold, that's a divergence in behavior.  They both can't be right.

The USD

The dollar moved up +0.66% this week.  This was driven primarily by economic news releases, with the buck bought whenever unexpected good news appeared.  This looks similar to last month's pre-Fed taper worries.  Although various polls suggest economists don't think the Fed will taper at this upcoming Fed meeting, the market's reaction to economic news releases suggests the concern over tapering remains.

Dollar buyers have continued to push the buck higher this week, and at the same time, gold has continued falling.  Dollar up, gold down continues to be the paradigm.  Resistance points for the buck include 81.80 (the 200 MA) and 82.70, the most recent high set on Sep 8.  The buck has broken its downtrend pattern of a lower highs with the break above 81, and has now reversed.

Bonds - Rates, Tapering and The Fed

The 20 year treasury was crushed Friday, dropping -2.41% which is a huge move in just one day.  This move blew through its 50 day MA and broke the pattern of lower highs that had characterized the bond rally started late August.  As a result of bond prices dropping, long term interest rates rose (that's just how bonds work).  The 10 year treasury yield (TNX) jumped 13 basis points to 2.74%.  A few more days like this, and we'll see the 10 year rate back up at 3%.

Why do we care?  Gold and silver are both reacting badly to positive economic news likely because of renewed speculation regarding taper/no-taper.  So are treasury bonds.  When gold plummeted on the Nonfarm Payroll report on Friday, at that very moment the 30 year treasury bond futures sold off too.  And while people speculate that the Fed might be beating down gold through some sneaky program in the shadows, the Fed shows its concern for lower bond rates by openly buying $85 billion in bonds every month!

So the Fed cares a great deal about bonds.  And my guess is, if rates continue to climb with every bit of good news because of this "taper possibility", the Fed will - most likely - try and jawbone rates back down again.  In the past, they have sent out a flock of Fed Presidents to accomplish this goal.  They will end up giving talks whose collective message will be, "Oh my no, we are not going to taper at this point."

The impact?  If they are believed by the market, it will lead to a drop in rates.  However, as a side effect, it will most likely provide a lift to gold.  We may not have to wait until the Dec 17-18 Fed meeting to get the answer to the tapering question.

Bonds are why I think "the Fed is in a box."  Every time tapering seems like it might be a possibility, rates rise, which keeps the Fed Finger on the print button.

Physical Supply Indicators

* Earlier in the week, gold premiums in Shanghai rose briefly to flat, and then dropped again to discount by Friday.  Currently Shanghai gold is selling at a discount of -6.02 to COMEX, down -1.64 over last week.

* The GLD ETF gained +2.10 tons of gold this week, rising to 868 tons.  In January, GLD had 1350 tons, which is a drop of 482 tons.

* The COMEX lost -2.15 tons of registered gold this week, and is down to 19.87 tons, a new low for the year.  COMEX registered is down dramatically from its April peak of 92 tons.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1287.40 and silver 21.47:

CEF 14.52 -4.99% to NAV [up]
PHYS 10.70 -0.44% to NAV [up]
PSLV 8.62 2.82% to NAV [up]
GTU 45.35 -4.99% to NAV [up]

Discounts on the ETFs have fallen/premiums have risen - very slightly, but surprisingly.  Normally when PM prices fall, discounts for these ETFs rise, but not this week.  This tells me that PM-savvy ETF buyers are more interested in buying than selling at these levels.  Perhaps - the weak hands that normally get flushed out of the PM ETFs on price drops have already sold?

Physical supply is still a mixed picture.  COMEX registered is still declining, but GLD gained gold with Shanghai in discount.  India is likely a positive.  Let's call it a wash.

Futures Positioning

Finally updated through Nov 5, the COT report shows that Producers decreased their longs and increased shorts substantially.  They are now net 30k short, a drop of 20k contracts from the last time we saw them on October 18th.  The configuration of the Producers futures holdings are still bullish, but less now than before, mostly because of a loss of longside exposure.

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

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

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

There is no change from last week.  Gold and silver trends are down in all three timeframes, with the price of both gold and silver both below all three of their moving averages.  This is a bearish configuration.

Summary

This week saw another leg down for PM - a rising dollar and "good economic news" are causing trouble for gold and silver.  Support for gold is 1280, with resistance at 1320 and 1360.

With no inflation on the horizon (18 months of bank credit deflation in the eurozone, plus continually dropping commodity prices have removed inflation from the equation), this leaves the market with taper/no-taper as the driver for PM prices.  And so with every bit of good news, the market sees increased odds of tapering, which drives gold prices lower.

Gold seems closely linked to the dollar.  And with the dollar in an uptrend, the dollar shorts are bailing out with every unexpectedly positive economic release, while gold is dropping.  If the good economic news keeps coming, the buck will likely keep moving up, and gold will keep moving down.  Trends once set in motion, tend to stay in motion.

Shanghai is trading at a discount to COMEX, gold is returning to GLD, but gold is still leaving COMEX.  I conclude that physical buying pressure appears to be more or less neutral at this time.

Chart-wise, PM is showing no sign of a reversal.  Its in a downtrend in all timeframes, and is showing no signs of stopping its downward move.  Buyers in COMEX futures and GLD shares just haven't showed up enough during the recent set of downside moves.  Silver is doing better than gold, which is bullish, but both price charts show no signs of a reversal, and the last few days have seen heavy volume.

However, this bearish picture for PM is ruined by the price action in the mining shares.  Normally when gold drops, the mining shares have heart failure, roll over and die.  But this week, mining shares actually ended up for the week, during which gold had dropped 2%.  What's more, at end of week, traders actually wanted to take mining shares home over the weekend.  This is bullish, especially given that gold is behaving badly.  We have to wait for Monday to figure out if this is predictive of the gold price, but its an intriguing end to a Taper week.

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5 Comments

debu's picture
debu
Status: Silver Member (Offline)
Joined: Aug 17 2009
Posts: 222
Martin Armstrong

I have been following Martin Armstrong’s take on gold as a counter-balance to the KWN rah-rah crew.  Unfortunately for me, at least, Armstrong’s calls have been the more accurate ones for a couple of years now so I have grudging respect for whatever black box he and his firm use to make these calls.

In a blog post on Friday, however, I was taken aback to see him write “…as the US is emerging as energy self-sufficient…”

If Armstrong has been taken in by the shale gas/oil con this, to my mind, would go some way to invalidating his “model”, however it has been constructed.  While it is possible that he has precious metals right even while having energy wrong, it would seem to me that surely there is a link between the two that demands some internal consistency. 

It is beyond me to fully tease that link out but might it be something to the effect of peak cheap fossil fuels > end of economic growth > failure of financial markets > loss of confidence in fiat currencies > some sort of reset with gold again given a place in a new monetary system (eg. along the lines of the Rickards scenario?)

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5064
armstrong & energy

Debu-

I kind of wondered about Armstrong and energy too.  I'm going to do a deeper dive on the EIA data to sort things out and see what imports vs exports look like.  And note that "energy" is not the same as "petroleum."

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5064
US energy independence

So what does Energy Independence mean?  Well, it depends on what you measure, and what you mean.

The EIA keeps track of all the different sources of energy used by the US.  They are:  Nuclear, Coal, Natural Gas, Renewables, and Petroleum.  EIA measures energy in Quads - quadrillions of BTUs.  A quad is a lot of energy:  1 quad = 252 megatons of TNT, or 8 billion gallons of gasoline, or 36 million tons of coal.

Here is the EIA series "TENIBUS" - primary energy net imports - in quads, as an annual rate.  The US currently consumes about 92 quads of energy per year, and the chart below says we're currently importing 13 quads per year, at the current rate.  Right now, our energy imports are only 40% of what they were just 5 years ago.  If we assume we reduce imports by 3.8 quads per year (the current rate), we will be energy independent within 4 years.

So is America on track to be meaningfully "energy independent?"  Well, we all know you can't swap electricity quads for petroleum quads, but at the 50,000 ft view, extrapolating current trends, it looks good.  And in fact if it weren't for peak everything, I'd say things really were ok.  In this world, we'd all be driving econo-Teslas, Elon Musk will be off snagging asteroids and mining them in orbit, and we'll be back to business as usual.

However, this chart doesn't say what percentage of our national economic effort we're expending to get these quads - that all-important EROEI value.  If we become energy independent and we have an EREOI of 2:1, its likely we won't be doing that well individually.

So why is the net energy import chart dropping?  Here's a chart of TEPRBUS & TETCBUS - total production and consumption, smoothed with a 12 point moving average.  (The unsmoothed data is very choppy).  We can see that the drop in imports is because we are both using less, and producing more.  This chart is in Quads/month, which...might be confusing I suppose.  The 12 point MA makes it lag a bit too, so things are most likely better than this chart shows.

One last chart.  This is the PANIPUS series - petroleum products net imports (i.e. imports - exports).  Now this includes natural gas liquids, so it is most likely exaggerating the degree of our actual liquid fuel independence, but its still pretty impressive.  US imports of petroleum products have been cut in half since 2008.  We're back to where we were in the late 1980s!

So when others say we're on the road to energy independence, this is what they are looking at.  None of thse charts measure EROEI - the percentage of our economy devoted to obtaining this independence - nor do they discuss the sustainability issues.  And the numbers are exaggerated a bit, because it lumps in natural gas liquids along with petroleum.

But in terms of energy produced - they aren't wrong about the trend.

Before diving into this data, I didn't know any of this.  I think its interesting.  I hope you do too.

Mark_BC's picture
Mark_BC
Status: Gold Member (Offline)
Joined: Apr 30 2010
Posts: 429
davefairtex wrote: None of
davefairtex wrote:

None of thse charts measure EROEI - the percentage of our economy devoted to obtaining this independence - nor do they discuss the sustainability issues. 

Nor how much of this increased production is from low interest rate Wall Street ponzi schemes.

http://shalebubble.org/wall-street/

On another note, where is the whole Peak Oil crowd hanging out now that The Oil Drum is gone?

Rik Green's picture
Rik Green
Status: Member (Offline)
Joined: Aug 18 2013
Posts: 6
Thanks for excellent energy data and charts

This is very interesting indeed.  Thanks!

Now one must wonder how the decrease in energy imports has impacted prices at the pump or utility bill in the US.  Certainly, exploding demand from China and developing economies is increasing global energy prices.  And/or perhaps the cost of these new domestic energy sources is much higher - as you allude to.

 

 

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