PM End of Week Commentary - 11/16/2013

davefairtex
By davefairtex on Sat, Nov 16, 2013 - 11:20am

Gold finished Friday up +2.80 to 1289.60 on light volume,  silver was up +0.02 to 20.77 on light volume.  The gold/silver ratio rose +0.02 to 62.09.  Gold traded down slightly in europe but rallied modestly in NY and climbed higher into the close.  Silver followed gold, but looked weaker.  GDX sold off all day, dropping -1.71% on moderate volume, losing most of the gains from Thursday's rally.  GDXJ was down a bit less, -1.21%, on light volume.

On the week, gold was mostly unchanged +0.60 [+0.05%], silver down -0.73 [-3.40%], GDX -0.62% and GDXJ -0.06%.  In this picture silver is seriously lagging - the outlier - perhaps it was the bad influence of copper (off -2.7% on the week) which broke support and is looking unhappy.  Copper is an industrial metal, silver has a split personality (half industrial, half monetary), while gold is almost entirely monetary.  So when copper has a bad week, it sometimes drags silver down along with it.  And when copper drops, its definitely not a sign of inflation.

The USD

The dollar retreated this week, closing down -0.49% to 80.88.  Apparently Janet Yellen's announced desire to continue the QE program was only mildly dollar negative.  Certainly the USD didn't sell off too dramatically after hearing what she had to say - it would seem that most of her testimony was already baked into the cake.

The dollar right now seems to be less of a factor in gold.  Its retreat from 81.50 may be providing modest support for gold, but it certainly isn't driving PM prices the way it was over the past few weeks.

Its too soon to say if the buck has topped out, but it is possible.  On the weekly chart, the buck appears to have run into resistance at the 50 week MA.  If it can't move above that, then it will likely turn back downhill.  After all, the medium term trend in the buck is still down.  And if it drops, it will likely be gold-price positive.  And a break below 79 would likely be quite positive.

Excess Reserves

One of the intriguing things Janet Yellen talked about at her hearing was the possibility of lowering the rate the Fed pays banks on their Excess Reserves - the place where most of the QE money goes to hide after it is used to buy bonds from the bankers.  If that rate were lowered far enough, the bankers might actually have some incentive to move that money elsewhere.  Where might they move it?

Most likely it would run to something else that looks like reserves - like short term treasury bonds, bank deposits at another bank, or it might even be used to pay down debt.  Might the banks actually lend it out to consumers?  I suppose if consumers wanted loans, they might.  But if consumers wanted loans right now, there's nothing stopping the banks from lending it to them.  I get the sense that the Fed itself doesn't really know what will happen, that they see this as yet another lever they could pull, they are flying by the seat of their pants, and that we'll all get to figure out together what happens once they decide to try this latest experiment.

My belief is that most likely, it will further lower short rates.  Perhaps 3-month treasurys will drop to 0.00% or maybe even negative values rather than  yielding 0.08%.  I doubt it will result in more loans in the real economy.  How will it affect gold?  My guess: if it affects gold, it will be positive.

Physical Supply Indicators

* Shanghai gold premiums have risen vs last week; currently Shanghai gold is selling at a discount of -0.85 to COMEX, up +3.57 over last week.

* The GLD ETF lost -2.71 tons of gold this week, dropping back down to 865 tons.  In January, GLD had 1350 tons, which is a drop of 485 tons.

* The COMEX lost -1.61 tons of registered gold this week, and is down to 18.26 tons, a new low for the year.  COMEX registered is down dramatically from its April peak of 92 tons - down 80%.  The December COMEX contract is about two weeks away from first notice day and there are 166k contracts active.  Typically 1% of contracts ask for delivery, which is about 1660 contracts or about 5.16 tons of gold.  Assuming "the normal thing" happens in the upcoming delivery months, at this rate the COMEX will be empty of gold in about 3 delivery months - perhaps 6 months from now.  Of course, if more than 1% stand for delivery, it could happen a lot sooner than that.  That's something to keep an eye on.

* I'm working on getting historical closing prices for the Indian gold futures market (the MCX) - hopefully by next week - which should let me chart the Indian premium to COMEX.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1287.50 and silver 20.75:

CEF 14.10 -5.87% to NAV [down]
PHYS 10.67 -0.71% to NAV [down]
PSLV 8.33 +2.82% to NAV [unchanged]
GTU 44.76 -6.23% to NAV [down]

Discounts on the ETFs have mostly dropped, some significantly.  Sprotts funds haven't changed much, but CEF and GTU have dropped more substantially.

Physical demand is a mostly positive picture.  COMEX registered declined yet again, GLD lost some gold, and Shanghai is more or less flat.  India is a positive.  Looks like there is modest pressure from physical demand.

Futures Positioning

This week's COT report shows a massive increase in Managed Money short positions.  The shorts increased by 27,730 contracts, doubling the total MM short exposure to 54k contracts.  This is really a huge increase.  Something similar happened in silver too - Managed Money increased short exposure by 7k contracts, up almost 40%.  Likely this helps explain the big move down in both metals.  Producers remain quite bullish.

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 gold largely unchanged.  1280 support failed, but gold found support at 1260 and rebounded.  Volume on the bounce was below average for a rebound, which is not supportive of a continued move up.

With Janet Yellen apparently less interested in tapering than Ben Bernanke, one would assume tapering is off the table, but it does not seem that gold is convinced of this.  Either that, or tapering is only part of what was driving the COMEX traders to sell and/or go short.

The buck retreated from 81.50, and that led the bounce in gold by a couple of days.  Continued dollar weakness should help gold, and most likely the path of least resistance is down, given the dollar remains in a medium term downtrend.

With Shanghai flat and gold leaving the various repositories and India importing even with all the taxes, I conclude that physical buying pressure appears to be positive right now.

Gold and silver both remain in a downtrend in all timeframes.  While gold has bounced off 1260, silver is now apparently being dragged down by copper, and the gold/silver ratio has risen sharply over the last week.  Silver weakness and the pressure from the PM downtrend that is currently in place is bearish.

The mining shares are continuing to show signs of accumulation; Friday was a bad day, but by and large miners have done better than gold and silver in recent weeks by a modest amount.  This I would interpret as cautiously bullish.

Overall - it looks like there are forces pulling gold in both directions at the moment.  While one might expect a dovish Fed Chairman to be seriously positive for gold, the response from the market has been modest, seemingly barely able to counteract the forces of the current downtrend.  As a result, we might well end up with a market that chops along support here for a time while it figures out where it will go in the longer term.

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