PM End of Week Market Commentary - 1/04/2014

By davefairtex on Sat, Jan 4, 2014 - 7:37am

Gold finished Friday up +14.90 to 1237.20 on moderate volume, silver was up +0.17 to 20.17 on light volume.  The gold/silver ratio rose +0.22 to 61.34.  GDX was down -0.91% on light volume, while GDXJ was down -0.15% on average volume.  Gold moved higher on a series of short-covering spikes, closing near the high.  Silver did the same, with a bit less vigor.

On the holiday-shortened week, gold was up +23.50 [+1.94%], silver +0.09 [+0.42%], GDX +2.73% and GDXJ +6.28%.  The big news of the week for me was the test of 1180 support on the last day of 2013.  I place a fair amount of emphasis on occasional intraday phenomena such as this, placed in an overall context.  When a raid happens, after a long move down, and it gets bought hard, it is my observation this often heralds a trend change.  It isn't guaranteed, but from what I have seen it happens more often than not in the PM market.

In the chart below you can see the anatomy of the past two weeks of price movement.  This is my read on what happened:

The anemic rally from last week to 1215 showed that the bulls weren't confident that the bottom was in, especially after such a long downtrend.  The shorts jumped all over the market when the weak rally failed at 1215.  They were targeting the 1180 lows - if they could break that price level, it would be a real moneymaker for them.  So gold was sold hard for 1.5 days, down to 1180 at which point buyers emerged.  I don't have the tick data, but the buying there must have been quite solid for the shorts to retreat.  At that point, the shorts gave up their assault as a bad bet, covered their short positions, and price rallied strongly above the original point of assault.  With the bottom established, this emboldened the previously tentative longs to jump on board - with the low now established, gold selling at a big discount suddenly looked quite attractive.  Longs previously tentative now were no longer afraid that even lower prices might come soon.  So they jumped on board, and now we're back up to 1237 with three solid days of buying.

And it was all set up by that successful test of 1180.

As observers we can't know ahead of time if a given support level will hold.  All we can do is observe what happens when that support level gets tested.  If volume is high, the test is seen as authentic, and usually a rally will result from such a strong test of support.


For the past month or so the miners have been steadily hanging onto support while gold itself was making new lows.  At this time, the GDX is right at the top of its consolidation range, looking like it wants to break higher.  It was unable to break out on Friday even with gold rallying sharply, which isn't a great sign, but volume was light which says to me the profit-taking wasn't severe.


The dollar was up this week +0.54 [+0.67%] to 81.04.  It appears that the euro's failed breakout on the day after Christmas has resulted in a four-day euro selloff - this often happens when a breakout fails.  Traders who were "buying the breakout" end up selling, which causes the decline that follows.  The USD has broken through 81 and now looks headed to test the top of the trading range at 81.50.

Why is this happening?  Perhaps Bloomberg can come up with some bit of news, but then again, sometimes rallys just run out of steam - the last euro buyer gets in, and there's just nobody left to keep moving prices higher.

While higher USD prices have traditionally made it difficult for gold to advance, that's clearly not a problem right now.  Money right now is flowing out of the euro, and into the USD and gold.

Rates & Commodities

For the 10-year treasury, getting through 3% is proving to be more difficult.  TNX spent the week knocking on the door of 3%, at times closing above it, and at times retreating back below.  10 Year treasury yields closed the week at 2.995%.  My guess: if the equity market resumes its upward climb, rates will rise.  If the equity market drops, then 3% will hold.

Commodities chose this week to sell off, especially oil.  Oil plunged $5 on the week, and is back in the mid 90s, erasing a month's worth of price gains in three days.  The rest of the commodity complex has fallen too, though not quite as dramatically.  Perhaps this was the reason silver has been underperforming gold for the past few days.

Physical Supply Indicators

* Shanghai gold premiums are still elevated but have fallen with the rising gold price; at 1530 CST 2014-01-03 Shanghai physical gold (the Au9999 1-kilo gold contract) closed at a premium of $5.77 to COMEX, with the premium being down -4.92 over last week.  Curiously, the AuTD premium is down only -2.22 to $10.10 - its not often that the AuTD premium is higher than Au9999.  Deliveries of gold on the AuTD contract have jumped in recent days, perhaps that's why.

* The GLD ETF lost -6.6 tons of gold this week and is down to 795 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 555 tons.

* Registered gold at COMEX increased by 0.29 tons, raising the total available to 14.94 tons.  However the big story at the COMEX is that JP Morgan took delivery of 96% of total deliveries for the month of December, more than 20 tons of gold.  This lends credence to the story that JPM is now seriously net long gold.  Ted Butler calls it "a corner on the gold market."  How does this work with the goldbug storyline "the bullion banks control the price of gold at the Fed's behest?"  To me, it doesn't.  To me, its more likely that the banks engage in these games to make money, and JPM bought gold because it thinks gold is cheap, and it believes it will be able to make a great deal of money on the trade in some way.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1236.40 and silver 20.175:

    PHYS 10.24 -0.73% to NAV [down]
    PSLV 7.91 +0.51% to NAV [up]
    CEF 13.78 -4.68% to NAV [down]
    GTU 43.41 -5.31% to NAV [down]

Discounts on the ETFs increased modestly, except for PSLV whose premium rose somewhat.  It looks like a mixed bag for the ETFs.

Physical demand is a bit mixed now, but still positive.  If we read directionality into JPM's taking delivery of most of the COMEX gold delivered this month - perhaps we should change that to "quite positive."

Futures Positioning

The COT report is as of Dec 27.  At that time, the Producers category of traders are still net long (first time in history) and Managed Money having record low long positions remains, and is quite bullish.  Producers increased their long exposure, while managed money decreased theirs, extending the trend further.  While this positioning is not a guarantee of anything, and cannot be used as a timing indicator, as a "sentiment indicator" it suggests the market overall is significantly overbearish at this time and is ripe for a rebound.  Furthermore, it also suggests that there is plenty of fuel on the short side for a large short-covering rally if the ball gets rolling to the upside in any serious way.

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

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

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

There is a change from last week; gold's price moved above its 20 EMA, which caused the 20 EMA to start rising.  This is modestly bullish.


This week saw a sell off, a test of support at 1180, and a brisk rebound rally off the lows.  Gold moved above 1220 resistance and its 20 EMA.  Silver also tested its lows and closed above 20 and its 20 EMA as well.  GDX looked set to break out of its box, and GDXJ has already done so and is poised right below its 50 day MA.

Looking at the various ratios and averages, gold and silver both remain in a moving-average downtrend in  medium and long term timeframes but both now have risen above the 20 EMA.  GDXJ:GDX has moved up strongly (bullish), GDX:$GOLD is rising (bullish), gold/silver ratio is has retraced a bit (neutral).  Except for the gold/silver ratio which is now having problems - possibly due to the drop in the commodity complex - ratios and averages are bullish for PM.

Next week everyone returns from vacation.

Shanghai premiums have dropped a but but remain elevated, gold continues to leave GLD, ETF buyers are selling a bit more than they're buying, and JPM bought almost all of the gold delivered at COMEX for December.  I'll call it gold price positive.

Silver's problems are a bit concerning to me, but apart from that, the move off the test of the lows looks strong.  We will know more when all the traders return from vacation on Monday as to whether or not solid buying will continue to appear in the mining shares and in gold.  GDX needs a close above 22, gold needs one above 1260 (which also happens to be the 50 MA), and silver needs a close above 20.50, which is also its 50 MA.  If all or any of that happens, we may be off to the races next week...


davefairtex's picture
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Posts: 5739
JGB yields rising: 0.74%

JGBs are now up to 0.74%, a rise of only 16 basis points since November, but with rates down that low, small basis point moves result in large percentagewise moves.  At this rate, by next month we could be seeing JGBs back to near 1%.  A break above the previous high (0.94%) would likely set off some serious alarms around the world.  And this is with the BOJ buying treasuries in its own large QE program.

During this same period of time, the yen is off 7%.  This tells me people are selling JGB's, and selling Yen too.  I can't quite figure out where the money is going - possibly some is going to the Nikkei which is rising, but as for the money leaving the country, I am not certain.

It could be Japanese money (among others) is causing the US market to rise.  Armstrong constantly points out how if we just look at the movements of individual markets in isolation, and we ignore global capital flows, we are missing a very important part of why prices move the way they do.

Hrunner's picture
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
Japanese flows

Good pickup, Dave.

Gold longs were up 4,000 contracts last report.  Maybe this is where Japanese money is going?

I'm getting an itchy trigger finger to short yen.


cmartenson's picture
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Posts: 6030
A Paradigm Shift In Japanese Pension System
davefairtex wrote:

It could be Japanese money (among others) is causing the US market to rise.  Armstrong constantly points out how if we just look at the movements of individual markets in isolation, and we ignore global capital flows, we are missing a very important part of why prices move the way they do.

There was a major shift in the Japanese pension system beginning last November...they are now going to shift away from JGB (bonds) and towards equities (the Nikkei).

I suspect a bit of bond front running (selling) happened as a result of these meetings and decisions.

One report:

Dec  10, 2013

Stocks in Japan are abnormally cheap. The earnings yield is 7% and dividend yield is 1.7% while Japanese government bonds yield 0.6% and bank deposits have no yield at all. This was caused mainly by (1) the Bank of Japan which decided to allow deflation to continue and (2) investors in Japan (pension funds, insurance companies, banks and individuals) who had an extreme aversion to risk with the belief that deflation will never end.

A major shift in the Bank of Japan’s deflation stance occurred in April when Governor Haruhiko Kuroda initiated new quantitative easing. Nevertheless, Japanese investors still retain a negative posture. As a result, the recent surge in stock prices in Japan has been fueled entirely by overseas investors.

However, we are about to see a dramatic change in the investment policy for public-sector pension funds by the Government Pension Investment Fund (GPIF), which is the world’s largest institutional investor with holdings of ¥124 trillion. Making this change will probably spark a massive shift in the sentiment of Japanese investors who have been clinging to the belief that more deflation equates to avoiding risk.

At the end of November, a panel of experts held a meeting to discuss using more sophisticated methods for investing public and semi-public funds and managing the associated risks.

The gathering resulted in two suggestions. First is to reexamine the current portfolio that is heavily weighted toward Japanese bonds and make new investments in assets with risk. Second is to enact reforms at the GPIF. Most people believe that these recommendations will receive the strong support of Prime Minister Abe. This will probably make it impossible for the managers of GPIF to oppose the reforms.

Consequently, the GPIF is likely to undergo several changes: (1) a revision in weighting based on the current basic portfolio guidelines; (2) a major reexamination of the basic portfolio; and (3) reforms involving its organizational structure.


It's not very hard to de-code this statement.  "Make new investments in assets with risk" is stocks, plain and simple.  And the nod towards Abe tying the hands of the pension managers says political weight is behind the move, and it pretty much looks like the massive pension system will hold fewer JGBs and more stocks.  I assume that's mainly the Nikkei but I wouldn't count out foreign equities.

So seeing bonds fall while the Nikkei rises makes sense, especially if Prime Minister Abe has managed to convince the Japanese pension managers to go along with his plan. Makes sense to me. 

However, I cannot help but view this decision through gapped fingers held over my eyes.  Seems like the worst possible timing and involves massive risk, given where we are in this ultra-weak recovery cycle and where Japan specifically is with an eroding current account.

We'll see.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Gold versus Food.

It keeps occurring to me that any country that buys up gold ends up with all their Capital tied up in an inert substance that is worth whatever people are prepared to pay for it.

If people value food more than gold surely the price of gold will decrease?

Edit: Or, more generally, energy of any sort.

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