PM End of Week Market Commentary - 12/27/2013

davefairtex
By davefairtex on Sat, Dec 28, 2013 - 11:31pm

Gold finished Friday up +3.40 to 1213.70 on light volume, silver was up +0.30 to 20.08 on light volume.  The gold/silver ratio dropped -0.76 to 60.43.  GDX was up +0.95% on light volume, while GDXJ was up +2.57% on moderately heavy volume.  In the PM complex, silver and the miners continue outpacing gold, which is generally bullish.

On the holiday-shortened week, gold was up +11.10 [+0.92%], silver +0.69 [+3.56%], GDX +4.48% and GDXJ +4.92%, with the volume being light across the board.  It appears that tax-loss selling has abated, although there remains some overhead selling pressure on the mining shares.  Likewise, while gold has been moving up (3 of the last 4 days are positive) gold's price action has been a bit lackluster.  Key resistance at 1220 (an old support level) needs to be overcome before any rebound can be said to be occurring.  You can see too in the chart below that all 3 moving averages are still pointing down.

Unlike gold, which is struggling to regain 1220, GDX has remained above support, and has moved steadily higher this week.  A GDX break above 21.80 should signal a more medium-term rally for the miners.  Likely this breakout only happens if gold can keep it together and continue moving up.

The USD

The dollar was off this week -0.21 [-0.26%] closing at 80.50, however the breakout of the euro above 138 caused the buck to tank hard.  At one point Friday it was off almost 1%, but it eventually rebounded to close almost back to even.  This I'd interpret as a possible bullish signal, but it still requires confirmation, a move above 80.75 or so would mean the buck is likely to keep going up.  Rising dollar: bearish for gold.

Rates & Commodities

This week the bond market had a bit of an issue: the TLT was off -2.02%.  Apparently with the Fed buying fewer bonds, traders are worried and are preparing to bail out.  10 year rates broke above 3% for the first time since June 2011.  Treasury rates are close to a serious breakout, which would most likely lead to some fairly dramatic rate increases.  The easy money for banks until now has been to get free money from depositors and turn around and buy longer term treasurys and collect the spread.  That works, until falling bond prices wipes out the gains from the rate differential.  Selling in treasury bonds has been strongest in the 5-10 year issues.

Earlier in 2013, rates went from 1.7% to almost 3% over a 4 month period (from May to September).  That move hit the banks for 60 billion in losses - they moved from a +40B unrealized profits position to -20B in unrealized losses.  And it looks like that same thing is getting ready to happen again.  Think the banks might be motivated to sell even faster this time around?

Copper broke higher, up +2.44%, and oil is now back above 100.  SPX made new highs (of course) and equity market bullish sentiment is at multi-year peaks.

Commodities are moving higher, as are interest rates.  This combination of moves sounds like the market is seeing possible inflation in the works.  While the longer term chart of CCI (commodity index) still remains in a downtrend, the month of December has seen commodity prices rally.  Last time that happened was back in July/August, and that was positive for gold.  It appears to be happening again.

Physical Supply Indicators

* Shanghai gold premiums are still elevated; at 1530 CST 2013-12-27 Shanghai physical gold (the Au9999 1-kilo gold contract) closed at a premium of +9.20 to COMEX, with the premium being up +0.49 over last week.  Note that I am changing my indicator for physical gold at the SGE from AuTD to Au9999, after a discussion on which contract best represents physical demand.  [Thanks JimH]

* Shanghai AuTD delivery volume - a new indicator - reflects no serious shortage of gold in Shanghai.  When deliveries on AuTD contracts drop to zero, it means there are no shorts willing to deliver gold to the longs, which I interpret to mean gold is in short supply at SGE.  This happened for one month after the April crash.  The indicator doesn't signal an immediate turn in price, but it does give a sense as to how well supplied Shanghai is at the moment.

* The GLD ETF lost -12.90 tons of gold this week and is down to 801 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 549 tons.

* Registered gold at COMEX increased by 1.92 tons, raising the total available to 15.38 tons.  The big December delivery month is almost over.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1213.70 and silver 20.02:

    PHYS 10.06 -0.67% to NAV [down]
    PSLV 7.82 +0.12% to NAV [down]
    CEF 13.60 -4.65% to NAV [up]
    GTU 42.87 -4.79% to NAV [up]

Discounts on the ETFs rose for PHYS/PSLV, and shrank for CEF/GTU.

Physical demand still seems strong.

Futures Positioning

The COT report is delayed until Monday, Dec 30th due to the Christmas holiday.

Moving Average Trends [20 EMA, 50 MA, 200 MA]

Gold: short term DOWN, medium term DOWN, long term DOWN

Silver: short term UP, medium term DOWN, long term DOWN

There is a change from last week; silver's price moved above its 20 EMA, which caused the 20 EMA to start rising.  This is modestly bullish, but for silver only.  Gold still remains in a downtrend, and below all of its 3 moving averages.

Summary

This week saw a slow cautious recovery in gold, and a more energetic one in silver.  Silver particularly regained a 20 handle, and a move above 20.50 would likely cause a reasonable amount of short covering among the silver traders.  Miners (GDX, GDXJ) were a tad less bullish than silver, but were just starting to move above their respective 20 day EMAs.

Looking at the various ratios and averages, gold and silver both remain in a moving-average downtrend in  medium and long term timeframes however silver has turned short-term bullish just on Friday,  GDXJ:GDX is moving up (bullish), GDX:$GOLD is rising (bullish), gold/silver ratio is falling (bullish).  That gold/silver ratio was particularly bullish-looking this week.  Ratios and averages are signaling a possible turn in the market.

Next week is a short week, with New Years arriving on Wednesday.

Shanghai premiums remain elevated, gold continues to leave GLD, ETF buyers have started buying more CEF/GTU but less PSLV/PHYS.  This tells me that physical buying should remain supportive of the gold price, but I am not sure what the different behavior in the physical ETF buying patterns means.

Overall, this feels like a tug of war between silver and the miners, which are trying to drag PM higher, and gold that seems to be reluctantly coming along for the ride.  Were I a short, I would see the 1215-1220 price level as a perfect place to resume hammering gold, since the rally off the 1186 low has been weak and unimpressive.  Silver looks much less vulnerable, and a move of silver above 20.50 - not far away - would most likely surge the momentum in the other direction for PM.  It remains to be seen which will emerge the stronger force in the coming week.

I'm cautiously bullish, putting my money on silver, miners, and the ratios to indicate a trend change.
 

8 Comments

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 653
Dave: silver, miners and ratios

Which miners, and why?

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5064
which miners

Ken -

It was a figure of speech.  :-)

Ratios I've explained in my summary.  They're pointing bullish, as are the miners overall, by outperforming gold itself.

I do happen to be long PAAS and SSRI, but I've been long them for a while now.  Core position and all, sadly quite underwater.  I do like their current charts, however.  Not a recommendation, etc.

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 653
Thanks Dave, finally a response to my

posts.  In Off the Cuff: Self-Mastery, Dec 12th, we found the following:

Recommended: 1) mining companies with gold/silver IN GROUND; 2) energy companies with IN GROUND product; 3) agricultural companies; and, 4) LAND (emphasis by Martenson)

In trying to create a "SET OF TARGETS," one needs SPECIFIC information and not just overall chatting about trends, theories, etc.  I've been begging for help in this regard but nothing till now by Dave (Thank you! and Mish too!)  Not that I expect exact guaranteed stocks but at least some discussion about how to find information about 1-4 above. Or experiences by some of our Community that assists all of us. Once collapse or major correction, WHERE do we put cash?  SRRocco's Report was useful--see my prior emails of the last few days.  

Am I asking too much/?        Is this too difficult to talk about?       Are folks afraid of making recommendations for fear of loss?

So, HOW DOES ONE CREATE THAT SET OF TARGETS???

Regarding LAND, try my www.AwarenessCenters.com and click onto Costa Rica Retreat, and then onto 3 Communities, and then onto Finca Mira Piedras for SPECIFIC information where to buy CHEAP, quality lots, along with a great trustworthy builder, Dennia Garber.  For those of you looking for part-time or full-time changes in your life-style, especially for when TSHTF, please examine what may be of use to you.

I do NOT stand to make a penny from this information!!!!!!  Just want to create "community," with sustainability, and mutual support.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
Mining companies... and boltholes

Kenneth,  Thank you for posting your info on Costa Rica .. I would be interested in your opinions regarding Costa Rica vs. Panama as a place to escape to?  I think you are ahead of many of us here in your planning in this respect.   

With regard to Gold in the ground, I do think this is an important metric that will help to identify miners that have the most opportunity for increasing in value when Gold goes back up in $ price.  Although this is a subscription site, they will allow you to see the chart and even run a few "clicks" before they cut you off and ask you to subscribe.  Here is the link;

http://www.24hgold.com/english/listcompanies.aspx?fundamental=datas&data...

For example, you will see that one of the companies with the most total resource equivalents (take note of the definitions for these resource determinations )   is Harmony Gold.  The company that I see a lot of potential for, that is also high on this list, and actually has a lower market cap/oz on known reserves is Seabridge Gold (SA).  One can note that one of the few Gold miners going up today is in fact HMY  : )

Note Robert Fitzsimmon's take on the broader resource sector - he believes that it has taken a turn (certainly this is the case with Copper, and the rare earth's)... so can Gold and Silver be far behind?  We shall see;

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/12/29_E...          

 

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5064
doing the work

Ken-

I already do a fair amount of work at the macro level.  Where "fair" is actually a lot.  So diving down into the particulars of mining company analysis - too much work for me personally.

However I'm happy to give you my thoughts in how to accomplish this work yourself.

For me, a mining company has several attributes that some actual digging through company 10-K reports will unearth:

* mine location: assess country risk, and willingness (and history) of country changing the rules of the game when it starts to need money.  [e.g. venezuela, argentina, mexico]

* reserves in the ground (both measured & indicated, as well as inferred, as well as the ore grade cut-offs)

* the average ore grades of those reserves, in grams/ton

* all-in sustaining costs, and the cash costs net of by products

* total ounces of production, last 5 years, gold and silver

* cash in the bank and/or debt

* expected mine life

All this fundamental information is useful to give you a good overview.  I'd certainly like to have it.  Perhaps - a google docs spreadsheet that you could update.  Perhaps it takes a 2-3 hours to dig this out of the 10-K for each company.  Maybe there are 10 interesting senior miners.

Stock performancewise, however, if you are expecting gold to really pop higher in the near term, it makes more sense to buy the trashy (low ore grade, high debt) miners.  They will turn into rocketships, because they've been beaten down so low.  However, if gold doesn't rocket higher, then these same stocks will be the first ones out of business.  Its all about risk/reward.

My only point: just don't be annoyed when your "high grade Canadian gold miner that's profitable at gold $1200" doesn't pop nearly as much as the super trashy high debt low grade pit miner in some unstable place in Africa if/when gold moves back to $1500.  I mean, the trashy stocks could be 10 baggers while the solid miners end up being a double.

The market can be a funny place.

For the longer term buy & hold person, the high grade safe jurisdiction miner is probably the better play.  Less reward, but also less risk.

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 653
I could kiss you, Dave!!

Yes, this is just what I had hoped I would hear from the community.  Lots of work for sure but at least a STARTING point, along with good advice.

I'll summarize a few stocks that you folks (Dave, Jim, SRRocco, Jim Rogers, Mish) have passed on to me, for whatever it's worth.

1. PAAS (Pan American Silver)  2. SSRI (Silver Standard)  3. AG (First Majestic)  4. EXK (Endeavour Silver)     

5. HMY (Harmony Gold)   6. SA (Seabridge Gold)  7. PHYS/PSLV   8. Jim Rogers: MGPHF  (I bought this at

0.4295 two weeks ago and today: 0.956 (121% up)  Graphite is the name of the future game, so says Rogers!!

I think I' ready to jump in with these as my base, after my core physical. I do not believe these will collapse or go out of business and they must be near the bottom, no?  A day earlier better than one late.

Any comments, suggestions, insights, contrary opinions????

P.S. How about agricultural companies??  I know NOTHING about these?   Help.

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5064
no kissing

Please Ken no kissing :)

So one set of words that you should never utter are the following:

...I do not believe these will collapse or go out of business and they must be near the bottom...

Paraphrasing Peter Lynch: "its always darkest before the dawn...yet at the same time, its always darkest right before it goes completely pitch black."

In other words, these miners could collapse.  They could go out of business.  And they aren't necessarily near the bottom.  All this stuff is guesswork.  If gold falls another $100 (and don't say it couldn't - did anyone guess gold would be sub-1200 back in March 2013?) these miners will drop even further.  And if gold stays down for long enough, some of them will go out of business.

Honestly I'd wait for a sign of a bid in gold before loading up the core position for any of the miners, but that's just me.  Don't get me wrong, my trading position is expecting a rebound, but if it doesn't materialize, those miners get thrown right out the window, I go back to cash, and I wait for my next buying opportunity.

You don't need to catch the very bottom for you to have grand success.  Waiting for a breakout of the mining shares out of their current trading range (a GDX move above 22, and above its 20 EMA at a minimum) is probably most prudent.  Rather than guessing "this is the bottom", waiting for the market to show you is safest, especially for that long term position.

Watching gold continue downhill in asia just serves to reinforce my thoughts.

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 653
No Kisses, just HUGS

Thanks again Dave. So, watching CDX above 22 and above its 20 EMA sounds good.  Wish I saw your info BEFORE jumping in yesterday but not really bad for one day:

AG  up 4.37

EXK up 7.72

HMY up 2.43

SSRI up 4.80

Now the question is: hold and wait or sell and wait to see the CDX.  Please tell me a little more about the CDX and why it's so important--I'm a neophite at this stuff--just a Ph.D in sociology, beginning cattle rancher in Costa Rica, new age freak, looking for "enlightenment," (whatever the hell that is!), and still need more suggestions about AGRICULTURAL COMPANIES to invest in.  Slowly my SET of TARGETS are getting aligned--many thanks to folks here like you.

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