PM Daily Market Commentary - 12/10/2013

By davefairtex on Tue, Dec 10, 2013 - 11:22pm

Gold closed up +21.60 to 1261.30 on moderately heavy volume, while silver closed up +0.59 to 20.41 also on moderately heavy volume.  The gold/silver ratio continued its drop, and was down -0.75 to 61.80.  Gold rallied gently in asia, accelerated in europe, and broke out above 1250 at 0807, eventually closing near its highs.  Silver followed suit, but closed at its high.

Gold is through its 8 EMA, through its 20 EMA, and is up three days in a row, up $50 off the 1210 lows.  Silver, if anything, looks even stronger.  From my perspective, those two spikes down to 1210 and the subsequent strong rallies off those spike lows were the "tell".  They don't always signal a low when they appear, but coming at the end of a long downtrend, they often do.  Now we see if COMEX buyers are willing to push prices higher.

The dollar continued moving lower, off -0.18 [-0.22%] to 79.96.  The dollar is now well into its downtrend, seemingly on its way to test 79.  On the other side of the currency fence, the Euro has moved to 137.60, within easy distance of its previous high of 138.  A breakout of the euro above 138 could see it move into the early 140s with the euro short-covering that would likely happen.  That would move the buck through 79, and would be supportive of gold.

GDX was up +3.87% on heavy volume, while GDXJ was up +4.08% on very heavy volume.   With gold rallying sharply prior to the NY open, miners gapped up on the open, but then didn't move much all day long.  This smacks a bit of distribution - big money selling.  "Oh my gosh miners are up, quick let's cash out."  That's not so bullish.  It suggests to me that at least for the mining shares, the bottom may not be a rocket-ship off the lows, but rather a back-and-forth that tries to flush out new longs before moving higher.

So while we definitely have our reversal in PM, and the indicators are all starting to line up ($GOLD:$SILVER dropping, GDX:$GOLD rising, the dollar dropping, MACD for gold and silver have turned up sharply) my guess is it might be a bit of a struggle to get the miners to believe in the rally.  If gold doesn't rally tomorrow, I would not be surprised to see the miners sell off, perhaps even moving down to yesterday's close, in an attempt to shake out anyone who bought today.

If that happens and you are so inclined, that might be a decent buying opportunity.

Market Halts & COMEX

There was no announcement or spark for the rally in gold today that I could see - just buyers showing up pushing prices higher, and eventually someone decided to pull the buy-trigger as the price level approached 1250 at 0807 EST.  As Chris detailed, this caused a violent move higher, a $10 move on 4500 contracts traded in one minute, tripping short-side stops and triggering a brief market halt.  My guess is applying a market halt is an attempt by the exchange to put a lid on the ability of the algorithm traders to move the market vast distances in milliseconds - in other words it's an attempt to do something good, but its also a sign that automated trading can and will cause markets to move much faster to their eventual destination than they did in the past.  This is something we already knew, but we are noticing it happening more frequently these days.

It also suggests that if the same behavior is applied to the more-liquid equity market, and everyone wants out at once, there may well be a whole series of "no bid" trading halts if and when a large enough number of the current equity market players decide they would prefer to cash out rather than continue to play the current game, and the algorithms all follow them downhill.  The only strategy in that case would simply be not to be in the market when it happened, since related instruments (SPY, puts, etc) would likely have their spreads blow out in response to this event and there really would be no way out.

Naturally the same thing could happen to the gold futures market if something untoward were to happen to the COMEX.  Some writers I've read have suggested a COMEX default would result in COMEX futures declining severely, along with other more iffy sources of gold, while the more dependable sources would skyrocket in price.  This bifurcated-market outcome makes sense to me.  However, until it happens, COMEX will continue to set/reflect the price for gold.

What's the prognosis for COMEX?  Well, the fact that the large banks are net long suggests to me that it remains in their interest to keep COMEX functioning, else why not simply bail out completely?  I believe the intent of the big guys is to keep COMEX alive and barring some massive black swan, I believe they will likely succeed.  I don't think COMEX will fail because it simply runs out of gold, for instance.

That said, if there is an Unpleasant Event, the outcome could well be out of their control.  And so I think for us small fry, its probably best to play in the physical arena where if you end up guessing right, you aren't trumped by a well-connected player who ends up walking away with the marbles simply because they can, as happened at MF Global.


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