PM Daily Market Commentary - 11/12/2013

davefairtex
By davefairtex on Tue, Nov 12, 2013 - 6:26pm

Gold closed down -15.70 to 1265.40 on moderate volume, while silver closed down -0.59 to 20.69 on heavy volume.  The gold/silver ratio rose +1.17 to 61.17.   Silver underperforming gold especially to this extent is a bearish sign.  Today gold and silver traded sideways (with a brief rally at 0800 EDT) until 1100, when both silver and gold sold off hard, cascading down until bottoming out at 1430 EDT.  The rally back was modest, indicating only light buying interest on the drop, which is a bearish sign.  The chart below shows the intraday activity of COMEX gold futures with the time in EDT.

If you imagine that gold has not done well in the past few weeks, you are right.  Gold is down 9 days out of 10.  Things rarely go straight down without a break, so it is likely that we should see some sort of bounce in the next few days.  It will depend on the enthusiasm of the buyers how far the bounce goes.

At the same time, if gold breaks 1250 and closes below it, my opinion is, we will most likely see a retest of gold 1200.  Something to think about, since we're only 16 points away from that level today.

I am not certain what caused today's drop - news I read suggests Fisher (a hawkish Fed member) said that tapering could begin in December, but if you google "fisher taper" you'll see that he's said this pretty consistently starting back in February 2013.  From all I can tell, the various Fed members are going out on the lecture circuits speaking about their feelings regarding QE, some dovish, some hawkish.

The buck closed flat today - it attempted to rally in asia, only to fail and fall back, closing even at 81.20.  For the past few weeks it appears that the buck drove gold; today however the drop in PM is all due to bearishness in the metal, since the dollar was flat.  Sometimes moves take on a life of their own - selling begets more selling, shorts get more confident, stops get run, and that cycle continues until the price gets so cheap that buyers emerge.  That's the bit we're waiting for now - for the COMEX buyers to emerge.

GDX opened down, rallied back up to even in the first hour, and then sold off for the rest of the day, closing at the low.  GDX is back to its old tricks once again, closing down -2.14% on moderate volume.  GDXJ was off -2.29% on heavy volume.  Yet unlike gold, GDX has not made new lows - it is still within what I might call an accumulation pattern.  That likely won't continue if gold continues to move downhill, but - my guess now - GDX will behave well if gold can manage to just stay even.

Each day I keep waiting for the flush & capitulation (and then the recovery) that would provide me some certainty of a reversal occurring, but all I see is just a long series of lower highs and lower lows that indicates the downtrend is still in place.  And some days - like today - all I get is the flush & capitulation, but no recovery.

 

8 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
10 year JGBs

I've been following JGB 10 year yields now ever since all the fuss back in April/May where various folks suggested Japan was doomed - heck, I believed it too.  But I thought it would be instructive to watch and see what happened next.  Would JGB rates rise - 1%, then 2%, then...SPLAT!  Fly hits the windshield, Japan implodes, and Kyle Bass gets his big payday.  So what happened?

Well what happened next was straightforward: JGB yields plummeted.  Now they're at 0.59%.  For a 10 year bond!

It looks like the fly has avoided the windshield for the time being.

Same thing is happening in Europe too.  Peripheral nation bonds are doing well.

How long can this continue?  I have no idea.  Likely, Kyle is right - about the outcome.  The timing, more problematic.  But this is a good lesson for me: once everyone is talking about "shorting JGBs" it is - most likely - not the best time to go short.

 

charleshughsmith's picture
charleshughsmith
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Posts: 716
head and shoulders pattern

Hi Dave:

Many observers see a head and shoulders pattern in gold which if true would be bearish, as gold is pretty much at the neckline.  Do you have any views on this?  I see the H&S but don't give it as much credence as support/resistance lines--1250 as you note and 1276.  There's a dynamic that's been around all year: when taper talk gets airtime, gold tanks.  When tapering is put off, gold rises, but not sustainably.  maybe this will continue until Yellen confesses QE is a permanent program....

charles

davefairtex's picture
davefairtex
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gold H&S

My gut says the H&S pattern has already been rejected back in mid-October...but maybe this is a Head & Shoulder & Shoulder pattern.  Kind of regardless, that support level at 1250 is what I'm focused on.  That, and there's a longer term pattern on the weekly chart that is a long term downtrend for gold - a descending triangle, that looks pretty unfortunate.  Here, take a look - that red downtrend line - not so good.

We need a move above gold 1335 to break out of it.

charleshughsmith's picture
charleshughsmith
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Posts: 716
wedge/triangle

The positive aspect of that is that it won't take much to break that trendline to the upside,  I also see a major wedge/triangle, the bottom line drawn from the 1179 low to 1260.  Gold is hovering on breaking to the downside but a whiff of fear (and financial grapeshot, to reference Napoleon's famous comment) might just push gold into a breakout of the trendline you've drawn, which is the top line of the wedge.

Hrunner's picture
Hrunner
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Joined: Dec 28 2010
Posts: 256
Good analysis Charles, Dave

Thanks for your chart analysis.  Very thoughtful as usual.

For the record, I don't follow TA because I believe it "works" in any historically-relevant sense.

I don't believe that PM follows any TA fundamentals in the way that TA adherents think they do.

I follow TA because I believe a (potentially market-moving- sized) portion of the market (individual traders, hedge funds, institutional investors) follow TA analysis.  Thus, because these. may I say, sheep, use TA, I use TA.

As I posted earlier, any simple money supply/ PM demand, not to mention a clear-eyed need for insurance for the eventual collapse of currencies worldwide, would put gold at a minimum of $2,200 right now, and it really should be higher.

TA can give stackers a bit of insight into optimal times to buy more physical metal.

(FWIW, I'm getting very close to seeing another one of those "optimal" times, and find it hard to resist another sizeable purchase.)

The only reason that the actual movers of the market, the commercial banks in alliance with central banks, follow TA so they can optimally time manipulative moves, IMHO.

 Keep the TA coming Dave and Charles!

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
JGBs and BOJ

Dave,

Great point, thanks for posting!

I think the simple explanation is that BOJ is buying all of JGBs.

This amazing release by the BOJ has been highly under-noticed, and we should be reminded of this statement over and over again.

"May 30, 2013

Financial Markets Department

Bank of Japan

Outline of Outright Purchases of Japanese Government Bonds

The Bank of Japan decided to conduct the outright purchases of Japanese

government bonds as follows, effective from June 2013.

 

1. Amount to be Purchased

Approximately 7+ trillion yen per month in principle. The Bank takes account of

market conditions and conducts purchases in a flexible manner in order to ensure

that the effects of monetary policy permeate the economy."

Bold emphasis mine.

"purchases in a flexible manner" in my best Japanese translation, means "all JGBs".

http://www.boj.or.jp/en/announcements/release_2013/rel130530b.pdf

and this:

JGBs Declared Dead by Mizuho as Kuroda Hides Risks: Japan Credit (Bloomberg)

http://www.bloomberg.com/news/2013-11-05/jgbs-declared-dead-by-mizuho-as...

My interpretation of "market conditions" is any condition that allows the Japanese Government to continue to run huge deficits at interest rates that don't collapse it due to high interest payments.

This one is going to be fun to watch.

FWIW, I appreciate your posts Dave, and all the good commentary, because I am keeping some dry powder ready for a presumably huge shorting opportunity for JGBs and USTs.  Since I have different fiduciary duties than Kyle Bass, I can be patient on the sidelines until the time is right.  Of course, Kyle can leverage and hedge much more than I, but hey, there's probably room for both of us to make money!

Besides the fact that I think it is immoral and anti-citizen to have central banks destroy the value of money to benefit the banking sector, I do find this one of the most fascinating times in monetary history.

How long can this circular 'sell from myself, to myself' paradigm that all central banks are engaged in, Japan being only the most reckless, continue?

I used to think it would end quickly, as soon as "markets" caught onto this sham, but, as posted earlier, now I am beginning to think it is only when physical systems of production, especially food and energy, collapses is when the sham ends.

Too bad, since that will be very painful indeed.

H

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
gold reversal confirmation, why TA works

So far it looks like we have a confirmation in gold's rebound today.  Once again < 1300 gold looks to be decent support - we always seem to manage to find some catalyst to push gold back up again once it drops down this far.

As for the discussion "does TA work" in any real (fundamental) sense as opposed to the "sheeple" argument, here is some food for thought.

TA is not about magical lines drawn on charts that form pleasing symmetries.  TA is based on emotions of traders, pure and simple.

Have you ever bought a stock, had it drop, seen that "red" in your portfolio for months and months, been thoroughly disgusted by your poor choice, and resolved to sell it as soon as you got back to even?  This is an extremely common emotional state for people to find themselves in.

On the charts, this aggregate emotional state for some percentage of the market, we call "resistance."

Likewise, have you ever had a stock that you wanted to buy (let's apply it to gold) and it took off without you on board.  You resolved to buy it if it ever got back to that level where you missed out.

That aggregate emotional state we call "support".

TA is all about trader emotions.  And emotions tend to guide the vast majority of people in the market.  I certainly feel it, I suspect most of you do as well.

Here's another example.  Let's say you bought a house in 2005.  The price dropped, you had this nasty loan, and ... lets say that price finally rises back to the place where you bought it.  How many people would sell if they could only break even?  Think there might be one or two people out there that feel this way?

That would be resistance.  The selling pressure that arises when a whole bunch of people who were underwater are just about to break even.  The point at which people can feel better about themselves, say "see, I wasn't wrong after all, I didn't make a mistake."  And get the hell out of Dodge while they still can!

And that's why TA works.  Our emotions.

That, and everyone believes that it works too.  But the basis for it is the aggregate emotional states I just described.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
immoral and anti-citizen; who is buying JGBs?

Hrunner-

Besides the fact that I think it is immoral and anti-citizen to have central banks destroy the value of money to benefit the banking sector, I do find this one of the most fascinating times in monetary history.

I feel the same way, about both bits - the fascination from a historical perspective, as well as the moral outrage as a participant/victim.  I also support your comments about how savings should not earn any (real) return unless/until they decide to take risk.  But that point, the risk should be carefully explained - not like today, where most everyone imagines their bank deposits to be 100% safe, but where you are in actuality lending the bank your money and stand as a general creditor in any default.

One chart I remember clearly from the Crash Course was the one that showed the value of money across a swath of 300 years (or so) where it was relatively unchanged, except for wartime periods.  A penny saved really was a penny earned.  Then as soon as the Fed comes around, we get the hockey stick 97% devaluation over 100 years.  Is that due to energy, or fractional reserve banking, or - both perhaps?  Regardless, it's lame - fraud - needs to stop, etc.

I have a quarterly chart on "who are the major holders of JGBs" and while its 3 months old at this moment (and due for an update soon), Hrunner's intuition is exactly right; its BOJ buying them, mostly.  Here's the 2013-06-30 release, with the information coming from a data release by the BOJ itself.  Note the black line represents the JGB holdings of the BOJ, Japan's central bank:

The page where I monitor this is and other Japan-debt related items is:

http://mdbriefing.com/japan-debt.shtml

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