PM End of Week Commentary - 12/20/2013

davefairtex
By davefairtex on Sat, Dec 21, 2013 - 5:48am

Gold finished Friday up +15.50 to 1202.60 on moderately heavy volume, silver was up +0.17 to 19.40 on moderate volume.  The gold/silver ratio rose +0.26 to 62.01.  GDX was up +0.15% on light volume, while GDXJ was up +0.90% on moderately heavy volume.  Gold retraced slightly more than 50% of its Thursday losses, but the miners were generally unimpressed with the move.

On the week, gold was down -35.40 [-2.86%], silver down -0.26 [-1.35%], GDX -2.75% and GDXJ -3.14%.  The big news this week was the Fed's decision to taper $10 billion of its monthly bond purchases.  Naturally this news sent the SPX rocketing higher, and gold lower, with day-after-Taper (Thursday) being the day of the latest Big Gold Smash, as they like to call these things over at KWN.  From what I can see from gold's behavior intraday, the longs that showed up two weeks ago at gold 1210 just didn't show up this time, so the shorts took full advantage and hammered gold down close to the June 2013 low.

So this week was bad for PM, no question, with gold making a new cycle low plunging through the 1210 (Dec 8) support level and also through 1200 as well.  However silver looks substantially better; it has not made new lows yet, and its loss this week was less than half of gold's move on a percentage basis.  You can see the difference in the charts below:

What's more, GDX has dropped less than gold, which is also unusual.  Normally miners are leveraged to the gold price and all else being equal, should have dropped substantially more than the metal.  In fact, I predicted that GDX would sell off hard on a break of gold below 1210, but that didn't happen.  What's up with that?  It seems that someone is buying miners in preference to gold, and someone is buying silver in preference to gold as well.  GDX remains (just barely) above that 20.50 low, although it is definitely scraping along the bottom.  No cause for celebration, but it's easy to see that gold has had a breakdown, while GDX remains within its recent trading range.  Unexpected, and at least mildly bullish.

The USD

The dollar was up +0.50 [+0.63%] moving up to 80.71.  On the day of the Taper, it had a big trading range, closing the period flat, but then moving up after hours as well as into Thursday too.  It appears that Tapering has broken the modest dollar downtrend, although it is too soon to say that the buck is now in rally mode.  It has moved above its 50 MA, which is bullish for the buck.  A continued move up in the buck would provide a more difficult environment for gold.

 

Comparison with Metals Index

Sometimes the owners of gold & silver may get the sense that they are being singled out for particular attention by the forces of evil, smashing down the price of their gold holdings because gold is...well you get the idea.  I put together a chart of what the rest of the metals group did during the past few years, and you might notice that all the regular metals - not just gold - have been hammered down during the past two years.  What's more, the metals started moving lower prior to gold's drop.  Gold has actually held up relatively well.

In the chart below, the "Metals Price Index" comes courtesy from the IMF, calculated monthly.  It consists of Copper, Aluminum, Iron Ore, Tin, Nickel, Zinc, Lead, and Uranium.  One might use the whole metals group as a proxy for "metals price inflation" which seems to be - well we don't want to use the term deflation because the orthodoxy is that deflation can't possibly exist because of money printing, just look at charts of BASE that are screaming upwards towards the moon proving hyperinflation is just around the corner - but those base metals prices sure have been dropping since the peak in 2011.

Physical Supply Indicators

* Shanghai gold premiums have risen sharply with the drop in gold; at 1530 CST 2013-12-20 Shanghai physical gold (the Au(T+D) contract) closed at a premium of +9.38 to COMEX, with the premium being up +6.38 over last week.  Chinese gold buyers are buying the dip.

* The GLD ETF lost -13.48 tons of gold this week and is down to 814 tons.  The drop in GLD's inventory has been almost continuous since the beginning of 2013.  In January, GLD had 1350 tons, which is a drop of 536 tons.  The pace of the outflow is accelerating.

* Registered gold at COMEX dropped a big -5.23 tons this week (wow!) down to 13.45 tons, setting a new low for the year.  While this won't lead to a default because Dec deliveries have 11 tons remaining to be delivered, COMEX is definitely running low; it had 92 tons in April, and there are only 13 tons left!  And the drop of 5 tons out of 18 - almost 30%!  And from what I read at Harvey Organ, almost all that gold was absorbed by JPM.  I think JPM is bullish gold - they aren't the ones doing the selling in the futures market.  Dan Norcini thinks the same thing: he makes a technical case, but if you read through it, perhaps you will understand my perspective.  COT report says hedge funds are the shorts, not the bullion banks: http://traderdannorcini.blogspot.com/2013/12/commitment-of-traders.html

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1201.50 and silver 19.34:

  • PHYS 9.95 -0.78% to NAV [up]
  • PSLV 7.62 +0.95% to NAV [up]
  • CEF 13.22 -5.41% to NAV [up]
  • GTU 41.86 -6.11% to NAV [down]

Discounts on the ETFs have largely decreased over the past week, even though the prices of the underlying metals are down.  That's a sign to me of buying on lower prices.

It looks like physical (and physical ETF) buyers are buying the drop in the metals.  Gold is moving out of COMEX and GLD, premiums in Shanghai are rising, and the picture is one of strong physical demand.

Futures Positioning

The COT report shows almost no change from last week.  Positioning is still quite bullish, with both main participants at historic levels that have indicated market turning points in the past.  The "Producer" group specifically remains net long for the first time in the history of the series.  This is one of those situations that happens at market extremes...although to paraphrase a friend of mine, a market extreme can always get even more extreme prior to its eventual reversal.  This futures positioning won't by itself cause a rebound, but like a sentiment indicator, it serves to show how extended the market is in one direction, and it also provides an amount of short-covering fuel for a rebound should one start to occur.

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 bearish.

Summary

This week the Fed Taper Day knocked the COMEX bidders out from under the gold market, causing the shorts to drive gold perilously close to its June 2013 lows.  However, the same thing did not happen to either the miners, or silver, which is surprising and...perhaps even modestly bullish.

Looking at the various ratios and averages, gold and silver both remain in a moving-average downtrend in all three timeframes (bearish),  GDXJ:GDX is flat (neutral), GDX:$GOLD is rising (bullish),  while gold/silver ratio is flat (neutral).  Gold's MACD crossover failed - it crossed down on the Thursday Gold Smash.  However, GDX and silver still remain bullish on MACD.   From all these indicators, it seems that gold has diverged from the rest of the PM complex.  Why that is - what it means - hedge fund capitulation prior to year end, sinister manipulators targeting only gold, who can say.  I like to think that silver and the miners are predicting better times ahead.  Either that, or hedge funds are unwinding their long gold/short silver and long gold/short miner trades prior to the end of the year.

Next week trading should be relatively light, with Christmas happening dead center of the week on Wednesday.

Shanghai premiums have jumped upwards, gold continues to leave GLD and COMEX, ETF buyers have started buying the physical ETFs.  This tells me that physical buying should be supportive of the gold price.

The June 2013 lows are a tempting target for the shorts.  There are a large number of sell-stops hovering just below 1179, and if they can just hammer the market down past 1179, they will get rewarded by a flood of selling from the longs bailing out, pushing prices lower and allowing them to cover (and ring the cash register) with the heavy volume that will cause.  Any close below 1179 will likely lead to a further move down.  However, a spike below 1179 that immediately rebounds back up to its departure point is paradoxically bullish, since it says buyers (and or short-covering) stepped up at those price levels, and it just may mark the low price for gold if the rebound carries on long enough.

The longs need to move gold back up above 1220, and preferably 1260 to get the ball rolling on a rebound.

 

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