PM Daily Market Commentary - 12/24/2013

davefairtex
By davefairtex on Wed, Dec 25, 2013 - 1:33am

Gold closed up +6.90 to 1204.40 on very light volume, silver closed +0.03 to 19.48 also on very light volume.  The gold/silver ratio rose +0.24 to 61.84.  Today although trading was light and markets closed early, gold rallied into the close and closed at its day high for the first time in a while.

The dollar moved up modestly, +0.11 [+0.13] to 80.68.  Trading range for the buck is 79.80 to 81.50.

GDX was up +3.14% on average volume (with only a half-day of trading right before Christmas!), and GDXJ too was up +3.85% on above average volume.  Miners were bid from the open through to the close, closing at the high for the day.  We have clear breaks through the 8 EMA of many mining shares, and of the GDX itself, as well as the GDXJ.  With today's very bullish price & volume action in the miners, I conclude that tax loss selling season has - finally - most likely ended.

Bonds were hammered hard today, with TLT (20 year treasurys) down -0.88%.  The 10 year treasury yield is at 2.983%, closing on 3% in a very clear uptrend.  If the 10 year treasury breaks 3% with any force, this could bring on a great deal of selling of the 10-year, moving rates higher.  This is definitely something the Fed doesn't want to see.  I think if rates continue rising, the Fed will find it difficult to continue tapering.

The financial markets are like a spider's web - each instrument is connected to the others by money flows.  You can't just control one without affecting the others.  In this case, the rise in the equity market combined with Fed tapering leads to pressure on the bond market, resulting in rising yields - all else being equal.

So why did rates jump between March and September of this year?  Foreigners stopped buying treasurys.

 

9 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5456
Shanghai physical gold supply/demand imbalance chart

So Shanghai has a "physical gold trading instrument" called AuT+D.  Each day, at 1515 CST, Shanghai traders can register their intent if they are either long, or short an AuT+D Contract.  Shorts can register "intent to deliver" while longs can register "intent to take delivery."  Shorts must actually have the gold on deposit, and practically speaking, they must be chinese bullion banks.

At 1530 CST shorts are matched to longs, and the leftovers (the unmet supply or demand) are calculated.  If there are more shorts than longs, there is a gold surplus.  If there are more longs than shorts, there is a gold deficit.  In a surplus situation, the longs send small amounts of money to the shorts.  In a deficit situation, the shorts send money to the longs.

In addition, this supply condition (surplus/deficit) is noted by the exchange at the end of each trading day.

Here is a chart of the surplus/deficit situation over the period since the April crash.  The red line is surplus/deficit, with the lower values meaning surplus, and the higher values meaning deficit.  Notice the area during the crash - Shanghai had a gold deficit for literally 5 months after the crash.

The situation right now is more deficit than not, but its not as clear cut as it was back in April-August.  Note: this could just mean SGE is now well-supplied with gold, as opposed to indicating an actual drop in overall Chinese gold demand.

This does appear to me that Chinese gold buyers do sell the peaks and buy the dips, mostly anyway.  They aren't just a "buy only" group.  They're happy to sell (and/or demand slackens) when the price rises.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2387
A somewhat different interpretation

would be that the action in this contract, since it is more Comex-like than the other purely physical contracts on SGE, invites those traders who want to participate in the chasing of momentum with leverage.  Surely traders in China see the late night (US-time) dumps and know that there are opportunities to piggyback on these for shortside profits.  I guess my point is this;  I personally would not use data associated with this contract as a direct gauge for the general willingness of China market participants to "sell" physical Gold.  China's demand for physical Gold remains at all time highs, with 50.4 tons delivered between Dec. 9 - 13 (link below)

http://www.ingoldwetrust.ch/sge-physical-delivery-2073-tons-ytd 

Be well Dave. 

 

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5456
SGE contracts and gold supply/demand imbalance

...would be that the action in this contract, since it is more Comex-like than the other purely physical contracts on SGE, invites those traders who want to participate in the chasing of momentum with leverage.  Surely traders in China see the late night (US-time) dumps and know that there are opportunities to piggyback on these for shortside profits.  I guess my point is this;  I personally would not use data associated with this contract as a direct gauge for the general willingness of China market participants to "sell" physical Gold

Jim, your different interpretation is based on incorrect information.  The Au(T+D) contract - the one I am talking about, the one my chart is based on - is the only gold contract on the SGE that involves physical delivery.  The others are just cash-settled.

See the column on the following page that talks about delivery volume?  Note that the Au(T+D) is the only gold contract with such a column.  The Ag(T+D) also has delivery volume - but that's for silver.

http://www.sge.sh/publish/sgeen/sge_price/sge_price_daily/11063.htm

Whats's more, my supply/demand imbalance is derived from scanning exactly one line at the bottom of the page.  The line reads:

 Paying Direction of Deferred Compensation Fees: Au(T+D)--Short to Long; Ag(T+D)-- Long to Short.

Notice that this line only refers to the Au(T+D) contract, and none of the others.  On this day, the market is shown as undersupplied - the shorts had to pay a fee to the longs because not enough shorts were providing product, resulting in a supply deficit that day.  Christmas 2013, actually.

Nobody else I've seen has done this analysis.  Perhaps because parsing the data at this site is incredibly painful.  It appears that the data at SGE is hand-entered rather than machine-generated.  (I'm not whining at you, but rather at the people at SGE who cooked up these pages).  But I digress.

Here's some more detail from another site that says essentially the same thing.

http://jessescrossroadscafe.blogspot.com/2013/08/some-local-color-on-shanghai-gold.html

Au9999 and Au9995 are cash products. Au9999 is 1 kg of gold 99.99% pure and Au9995 is 1 kg of gold 99.95% pure. You just trade them like trading stocks.



Au (T+D) (the contract size is 1kg of gold no less than 99.95% pure) is similar to futures contracts but it does NOT have a specific delivery month. Delivery can take place every trading day. Between 15:00-15:30 (Beijing time, GMT+8) of every trading day, all the longs/shorts can submit their intentions to take/make delivery.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2387
That is different than what my research has led me to believe

Dave,  Thanks for the reply.  I have always read that the SGE was first a purely physical exchange, and that the contract you are referring to is in fact their version of a futures contract.  Here is one reference (note that I am not supporting all the editorial content of this linked post..);

http://lcn.freedgold.com/2013/07/the-shanghai-gold-exchange-interminable...

The SGE since its establishment in 2002 had been offering only Physical Gold contracts (and at very low size- certainly 3kg,1 kg, and maybe even 500g):   Au99.99 and Au99.95
 
In Nov 2012, the Exchange began to trade OTC on the interbank, and a number of foreign banks -the usual suspects- are now conducting OTC with the SGE 'home' members. A new contract, not purely Physical, the Au(T+D) was offered, essentially a futures/derivatives contract, mirroring Comex futures.
You see how this writer is making essentially the same statement that I made? 
 
As well I found this reference;
http://news.goldseek.com/GoldSeek/1373551320.php
It is most practical to compare the New York closing price with the Au (T+D) as this is the one most similar to the COMEX’s dominant 100oz contract.
I thought that the other contracts, Au99.99, etc, were pure phys., i.e. 100% delivery..    this reference leads me to believe that these contracts do deliver;
 

http://www.cbex.cn/article/PoliciesDownloads/201002/20100200000321.shtmlh

Chapter 2 Delivery Principle
IV. SGE takes the principle of "choosing depositing and delivery warehouses ". Members of SGE could choose depositing and delivery warehouses freely. But bullion is stocked and delivered in Shanghai temporarily.
V. Gold traded in SGE is gold which is suitable with qualified standard for bullion and bar gold and produced by corporations identified by SGE or LMBA.
VI. Initial trade commodity of SGE are bar gold with standard weight of 1 kilogram and alloy not less than Au99.95, bar gold with standard weight of 3 kilogram and alloy not less than Au99.95, bullion with standard weight of 50 gram and alloy is Au99.99 and bullion with standard weight of 100 gram and alloy is Au99.99.
VII. Before spot trade, bidder should deposit RMB equable to the valuation of trade gold into assigned account; asker should deposit all asking gold to assigned delivery warehouse.
VIII. Bar gold producing corporation identified by SGE should fulfill <Registration for appointed staff for member of Shanghai Gold Exchange> to backup, ensure the information of corporation and inform of alteration timely.
IX. SGE conducts commodity ownership transaction after trade is closed. Bidder's gold ownership is calculated in his account. Delivery only points to net trade volume. Delivery volume should be integer times on 3 kilogram. The fewest delivery volume is 6 kilogram.

So, I am sorry if this seems argumentative on my first attempt at trying to work together with you in this discovery process Dave...   maybe I am misunderstanding what they mean when they say, "physical"
 contracts and delivery... I think this is transfer of rights to deposited Gold, and I realize it may not mean Gold leaving the warehouse.  
 
     
robie robinson's picture
robie robinson
Status: Diamond Member (Online)
Joined: Aug 25 2009
Posts: 1190
too wierd

for Jim and Dave to work together. We'll be learning more with two bright and earnest folk hounding information.

 

robie  (it may not be as entertaining)

 

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5456
perhaps we are both right?

Hmm.  I'm beginning to think that we're both right.  It seems the comment I read that said the other contracts were cash-settled was wrong - all SGE gold contracts involve delivery.  The other contracts deliver same-day, and the Au(T+D) is the right to demand delivery along with a fee that you earn if the supply/demand balance is mismatched in your favor.

In some sense, Au(T+D) is the right to demand delivery at some later date; you get your price set at date of purchase, and then every day they figure out that you need to either pay money (if supply is greater than demand) or you receive money (if demand is greater than supply) until such time as you either close the position or receive delivery.  And you can do this on a 10% margin.

Delivery, in all contracts, seems to mean you receive a gold credit (a warehouse receipt) in an unallocated account.

http://www.bankofbeijing.com.cn/en2011/international/zj-huangjin2.shtml

You can take actual physical delivery on any of your gold credits, but there is a fee, and you also can't sell that physical gold back through the SGE again.

The "delivery volume" stat for Au(T+D) is the subset of contracts of Au(T+D) that actually demanded (and received) delivery that day.  Presumably, the volume on the other contracts are all physical delivery (swapping ownership of unallocated gold between participants).

So...what then is the price of physical gold in Shanghai?  What's the price that best represents how much it costs to get yourself a kilo of gold in China?  I don't know anymore.

http://www.sge.sh/publish/sgeen/sge_price/sge_price_daily/11072.htm

Today's action (Dec 26, 2013):

Au9995: 7,642kg @ 239.02

Au9999: 9,437kg @ 239.29

Au(T+D): 6,318kg @ 238.75 (with traded volume 12,252kg, and OI of 178,672kg)

You might say the closing price on Au9999 - 239.29 - but what about all the people that got delivery on Au(T+D) for 238.75?

Here's a comment that tries to help sort this all out, apparently from someone who trades the SGE in China.

http://truthingold.blogspot.com/2013/08/physical-demand-for-gold-will-fuel.html?showComment=1377146589647#c1656588587215680406

I think I'll go off and chart the differences between the contracts and see if something interesting surfaces.  I don't really want to have 3 different values.

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5456
AuTD Delivery volumes - scarce gold detector?

So from what I can see, in normal times there is only a very marginal difference between the contract premiums.  However, every now and then, the difference becomes large - such as immediately after the April crash.  In May/June, premiums on Au9999 were $20-$40, while AuTD had premiums of only $10-$15.

I just did some investigation, and I found out that during these times, when the premiums of Au9999 vs AuTD jump, the delivery volumes on AuTD dropped to zero.  Sometimes, it seems that Shanghai runs out of gold, and the guys that get stiffed (for a time anyway) are the AuTD contract holders.  Perhaps this delivery volume indicator is our "scarce gold" canary in the coal mine.

Check this chart out - especially the big spike down mid-May.  I've been looking for this chart forever, but...without you it wouldn't have happened.  Let's credit this to your new philosophy - from what I can tell its already paying big dividends!.

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5456
Gold breakout - 1215, silver to $20

No news that I could see - just a technical breakout causing short covering.

If we can close above gold 1220...we may just have something here.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2387
Excellent Dave!

Very interesting sleuthing...  I was seeing differences earlier this year between the premiums you were calculating off the T+D contracts and those which Koos Jansen was publishing off the cash contracts, but we were never able to make much of it due to my negativity.  I really think that there might be a signal in there in terms of the SGE contract premium differentials, as well as the delivery patterns correlation you are seeing.  Cool stuff!

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments