PM End of Week Market Commentary - 1/10/2014

davefairtex
By davefairtex on Sat, Jan 11, 2014 - 3:38am

Gold finished Friday up +21.70 to 1248.50 on heavy volume, silver was up +0.62 to 20.16 also on heavy volume.  The gold/silver ratio dropped -0.87 to 61.93.  GDX was up +3.48% on heavy volume, while GDXJ was up +5.18% also on heavy volume.  An unexpectedly bad Nonfarm Payrolls number released at 0830 EST triggered the move, causing the metals and miners to close right up against their respective 50 day MAs.

For the week, gold was up +11.30 [+0.91%], silver down -0.01 [-0.05%], GDX +0.82% and GDXJ +0.15%.  If it weren't for Friday, the metals and especially the miners would have had a down week.  As it was though, the unfortunate NFP number (200k expected, 75k reported) caused a massive spike higher for both gold and silver, bringing back the spectre of No Taper.  The thing I liked best about this move wasn't the initial spike, it was the follow-through.  Not only did gold spike up, it continued to move higher all day long, and it closed right at the high for the day.  Traders actually wanted to take gold home for the weekend.

As you can see in the chart below, gold hasn't been above its 50 MA since last October, and even then it wasn't above it for very long.  In addition, there looks to be strong resistance at 1260.  A break above the 50 MA would be a signal for momentum traders to start considering buying more GLD & COMEX futures, and a move above 1260-1270 would likely cause a bunch of short covering - managed money has a very large short position right now, and things could get quite explosive if some bit of bad economic news caused another upspike.  From the standpoint of longer term traders, the pattern of "lower highs" needs to be broken at a minimum for gold's long downtrend to be over - and that happens on a move above 1265.

Miners

Just looking at price, the gold mining shares are not doing as well as gold is at the moment.  However, if we look at volume, we can see that the days when mining shares drop, volume is low while on days when mining shares are rising, volume is high.  This tells me the selling pressure in miners is relatively low - perhaps everyone who wants to bail out of mining shares has already done so.

In addition, GDX has been in a sideways consolidation for perhaps six weeks, and is right up against its 50 day MA.  A simultaneous breakout from the consolidation and a 50 day MA crossing could lead to a combination of short covering as well as fresh buying by momentum players, which could be quite explosive.  If we pair that with the volume observations, miners look like they're a buy on any break above GDX 22.10 - and likely they're a moderately higher risk buy right now, just based on the odds.

Individual mining shares also have some interesting trading patterns to them.  Some number of them are showing some very tight price consolidations below important moving averages.  Here's a junior miner that has consolidated below its 200 day MA for the past 6 trading sessions.  Any break above this consolidation and the 200 MA at the same time will most likely lead to a big move higher.  When you look at the chart of this junior miner vs the chart of GDXJ, you can also see that it is outperforming its peers. [Note: while the CEO of this miner doesn't draw a paycheck - he owns 14% and has the title "Chief Owner", very unusual in the mining space - this particular junior miner has some moderately serious country risk; if you buy long term, you should understand what you are getting into.  I'm just using this as a trade/chart example.]

The USD

The dollar was down this week -0.29 [-0.36%] to 80.75, most of the loss happening on Friday.  As the poor NFP number was good for gold, it was also bad for the dollar.  Immediately prior to the release, the buck had moved up to 81.30 and looked to be ready to break higher, but the surprising news caused the buck to be hammered.  At this point, the recent upward momentum in the buck that started Dec 31st seems to be at risk.

Its too soon to say that another downtrend has started for the buck, we have to see how things play out.  Likely it will depend on the US economic newsflow and if that newsflow confirms the poor NFP number.

Rates & Commodities

Last week I said that the 10 year treasury rates were looking to move through 3%.  Well it tried, it really did, but it appears that a 3% rate was so attractive, it brought out the buyers of bonds at that level.  No doubt bond shorts were salivating at the prospect of a big rate breakout through 3%, and so when the bad NFP number occurred on Friday, it ended up causing a massive short-covering bond rally, which of course led to a big drop in rates.  We can see that the 10-year dropped 10 basis points (0.1%) which is a big move for one day.

No doubt, the Fed is quite happy.  Rates dropped, and the equity market remained intact (for now).  That's a win-win in their book.

In spite of the rally in gold & silver, the commodity complex is looking ill.  From the viewpoint of an inflation-driven investor, the last two years of commodity prices is one of things moving steadily lower.  Looking at the chart evidence, It appears that the overall complex is vulnerable to a very large move down in commodity prices.  I see a massive descending triangle with the peak starting in 2011, and the apex - maybe in the next month or two.  Descending triangle patterns often end badly - and the bigger they are, the more dramatic the ending.

We did have a modest rally in commodity prices at end of December, but as soon as the new year hit, that rally failed completely.  Oil is a great example: it was $100 in the waning days of December, and is now trading at $92, a large move in a short time for such an important commodity.

Silver tends to be affected more than gold by the commodity complex, but both of them tend to follow the rest of the commodities, so a drop in commodity prices would put significant pressure on PM prices.

This commodity price picture dovetails nicely with the clear monetary deflation in the eurozone (about 7% per year, on average) and the declining growth in total bank credit in the US (currently, its 1%, down from about 5-6% during 2012).

From a commodity price and monetary standpoint - the current trend is clearly deflation.

And the US bank credit growth: 1% is NOT what the Fed wants to see.

Physical Supply Indicators

* Shanghai gold premiums dropped substantially this week; at 1530 CST 2014-01-10 Shanghai physical gold (the Au9999 1-kilo gold contract) closed at a premium of $1.82 to COMEX, with the premium being down -8.43 over last week.  Delivery volumes remain about the same - about 200 tons per week.  [Note: delivery doesn't necessarily mean gold leaving the SGE, it represents unallocated gold changing hands among owners at the exchange]

* The GLD ETF lost only -1.5 tons of gold this week and is down to 794 tons, which is a change from the usual weekly 10-15 ton loss.  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 556 tons.

* Registered gold at COMEX dropped by 2.07 tons this week, dropping the total available to 12.96 tons.  This is a new low for the COMEX.  Things certainly are getting interesting.  While there was no danger of default before, 13 tons is really not much gold.  The Shanghai Gold Exchange delivers that much to their Au9999 holders in one day, and more on the big days.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1246.60 and silver 20.15:

    PHYS 10.35 -0.47% to NAV [up]
    PSLV 7.91 +0.65% to NAV [up]
    CEF 13.53 -6.80% to NAV [down]
    GTU 44.15 -4.47% to NAV [up]

Discounts on the ETFs decreased modestly, except for CEF whose discount rose substantially. 

Physical demand remains positive, but with the increase in the price, appears to be weakening, at least judging by the premiums.

Futures Positioning

The COT report is as of January 7th.  We are starting to see things reverse; Managed Money is starting to cover shorts and go long, while the Producers are beginning to sell off some of their long positions.  This is the way the bottom in gold will occur.  Those Managed Money shorts are the fuel for the rapid spikes higher on news events like we saw Friday, however for the rally to continue there must be new longs coming into the market - typically from Managed Money.

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

No change from last week.  However, both gold and silver have rallied right up to their respective 50 day MAs - if the price crosses the moving average, that's a signal for the longer term buyers that a trend change is occurring, which will most likely lead to more longs entering the market.

Summary

This week saw four days of a fading PM price, with a big rally on Friday off the bad NFP report moving gold up to a new cycle high.  Both gold & silver are up against their 50 day MAs, which is both a logical point for shorts to enter, as well as a big opportunity for a breakout should one occur.  GDX appears to be behaving well, with low volume on the down days and high volume on the up days, and it too is approaching a breakout point.  In one sentence: PM was rescued from a bad week by the NFP report.

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 and are threatening to do so above the 50 MA.  GDXJ:GDX is still trending up (bullish), GDX:$GOLD is trending up more weakly but is still bullish, and the gold/silver ratio is perhaps neutral.  The moving averages and prices look strong short term, while the ratios are perhaps a bit weaker this week over last but are still generally bullish.  Silver is still weaker than it should be in a real bull move - most likely because of the sick commodity complex.

Shanghai premiums have dropped substantially and are almost neutral.  GLD's loss was negligible, ETF buyers are modestly more bullish, and COMEX is definitely running low on gold.  Let's call physical demand as mildly positive at these price levels, with COMEX being an interesting possible wildcard going forward.

In the near term, I believe that if we continue to get a series of unexpectedly bad economic news reports, gold will continue rising.  Enough momentum has built up in the miners and the metal to keep causing short-covering rallies and once prices cross the 50 MA it is likely new speculative money will start rolling in, and that will fan the flames.  The only question is, will the news continue to be bad?

This week, the No Taper gamblers were placing their bets causing gold to rally, but the commodity complex prices don't support this move longer term.  The Fed must be seeing the same thing I'm seeing.  They can't possibly like the deflationary monetary pressures.  If they won't be buying bonds, what could be next?  My guess: they'll drop rates on excess reserves, in an attempt to get that money loaned into the marketplace.  LIkely that will cause gold to really move higher.  This I see in more of a 1-3 month timeframe.

Another serious catalyst for gold could be India reducing the duties on gold.

Longer term, I see a tug-of-war between the monetary/credit growth and commodity pricing fundamentals (driving "inflation expectations" amongst COMEX buyers) and money printing by the Fed.  Indeed, that's the larger conundrum in the overall economy.  Without growing bank credit in the eurozone and the US, monetary inflation is not going to happen, and that's going to be a challenging environment to get traders to continue buying COMEX contracts and shares of GLD.

Near term, I think we've got a good case for a nice move up in PM.  It's the longer term that concerns me; unless we start to see some commodity-price/monetary inflation, its going to be tough to keep gold moving higher, at least at the COMEX anyway.

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5 Comments

Denny Johnson's picture
Denny Johnson
Status: Gold Member (Offline)
Joined: Aug 13 2008
Posts: 348
Thanks Dave

In the physical demand dept, did you see this from Jesse? 83,890 Ounces Redeemed From Sprott Gold

http://jessescrossroadscafe.blogspot.com/2014/01/nav-premiums-for-precious-metal-trusts.html

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5455
sprott gold redemptions

Very cool yes that sure counts.  This should place a floor on the discounts to NAV of PHYS, and its a sign that the gold is actually needed elsewhere.  If PHYS was trading at a premium, I'd say that was an even stronger sign of demand.  The $5 cost per ounce to deliver is equal to about an 0.4% premium.

Note that both funds must sell gold/silver in order to pay Eric Sprott his management fee of 0.4% per year, as soon as they run out of cash, that is.

But that 83k ounce redemption is vastly in excess of that amount...

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 654
Latest SRSrocco Report, with charts

 

Thought the PPers might enjoy this.

 

http://srsroccoreport.com)" rel="noreferrer noopener">SRSrocco Report

 

Big COMEX Gold Withdrawals & New Record Low Dealer Inventory

Posted: 09 Jan 2014 09:27 PM PST

After a brief pause in the decline of Comex Gold inventories, it looks like it has continued once again as there were several big withdrawals over the past few days.  Not only was there a large removal of gold from the Comex today, the Registered (Dealer) inventories are now at a new record low.

Scotia Mocatta had 63,786 oz of gold withdrawn from its Registered category.  This is quite significant as Scotia Mocatta’s total Registered gold inventories fell 41% in one day from 152,409 oz to 88,532 oz.

COMEX GOLD 10914

(click on image to see larger size)

Furthermore, you will notice that the total Registered gold inventories are now down to record low 416,563 oz.  The gold in the Eligible category is held by Customers at the Comex while the Registered inventories are the Dealer stocks.

A day prior to this update, there was 52,539 oz of gold withdrawn from JP Morgan’s Eligible category.

We can see just how much the Registered inventories have fallen since the take-down in the price of gold in April of 2013.  The Comex held nearly 3 million oz of gold in its Registered category, but today it has fallen 86% to 416,563 oz.

Registered Gold Inventories 10914 NEW RECORD LOW

The figures in this chart from 24hGold.com do not reflect the drop of 63,976 oz from the Comex today.  As you can see, the bottom left hand corner of the chart only goes down to 431,530 oz.

According to the 1 month Registered gold inventory chart, there has been a huge draw-down since Dec. 12th.  From a peak of 780,000 oz on Dec. 12th, the Registered inventories have declined 363,437 oz (46%).

1 Month Registered Inventory Chart

In addition, the GLD ETF has shed 1,108,673 oz from its inventories in the same time period which puts the total decline for the Comex & GLD stocks since Dec. 12th, at 1,472,110 oz.

It looks like a great deal of gold is still heading East as the West continues to live on borrowed paper time.

Big Withdrawal From Comex Silver Inventories

It has been a while since we have seen a large withdrawal of silver from the Comex.  Since Sept. 2013, inventories at the Comex have seen a steady build from 161 million oz. to nearly 177 million oz.

However, there were two large and one small withdrawal from the Comex silver inventories today which totaled 1,354,270 oz.

COMEX SILVER 10914

 (click on image to see larger size)

Some analysts see the build in Comex Silver inventories as a bearish outlook for price in the future.  While we have seen a substantial build in total silver inventories at the Comex, the majority of it has been in the Eligible (Customer) category.

From May of 2011 when the price of silver reached its peak, Comex silver inventories hit a low of 86 million.  Today the total is 175 million.

Here are the changes in Comex Silver Inventories:

May 2011 Registered = 26 million oz

Jan 2013 Registered = 50 million oz (increase of 24 million oz)

May 2011 Eligible = 60 million oz

Jan 2013 Eligible = 125 million oz (increase of 65 million oz)

Despite the large build in Comex Silver inventories, this will not be detrimental for the price going forward when we consider upcoming positive factors in the silver market.

This will be discussed in my next article, INSTITUTIONAL BUYING:  The Coming Silver Game-Changer… coming this weekend.

IMPORTANT UPDATE:  In the next few weeks I will be adding a new section to the site called the REPORT PAGE.  On the REPORT PAGE, there will be Free & Paid Reports.

I mentioned a few weeks ago that I was going to put out a BOMB-SHELL that may change many previously held assumptions.  I still plan on putting out that report, however it will be part of a U.S. & GLOBAL COLLAPSE REPORT that will be my first Paid Report.

For those who have been waiting for these Reports… I appreciate your patience.

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kelvinator's picture
kelvinator
Status: Silver Member (Offline)
Joined: Dec 25 2008
Posts: 213
Thanks for the Write-up, Dave

Very nice, balanced write-up and useful perspective putting the PM action in the larger context of the evolution of inflation/deflation in the US and EU, interest rates and what the Fed might pull out of its fiat fantasy fedora next, (eg lower rate on reserves), if/when QE is acknowledged to no longer be floating the economic boat, keeping the Good Ship Lollipop recovery narrative alive.  

The stat that COMEX only has 13 tons of gold ready for delivery, equivalent of one day of Shanghai deliveries is kind of fascinating, and could be taken as a kind of symbolic shorthand demonstrating the difference of faith in paper today in the US versus China -  the US being a country chock full of trillions in bad debt, bad pension funds, etc. that doesn't realize it yet, and China, a country also chock full of trillions in bad debt exploding in its local/shadow banking system that every investor with an eye open already knows the government is desperately trying to wrestle to the ground somehow without killing the economy and country.   Jesse recently reported that the ratio of paper claims on gold to physical gold at COMEX were 80 to 1.  Although high ratios like that can not matter for years, just as 10 to 1 or 40 to 1 leverage in the fractional reserve banking/brokerage system can not matter for years, it seems likely that some day before too long it will.  It's ironic and symbolic of the mass psychosis that paper (actually, electronic) chits are accepted as adequate claim of ownership for precious metals, when the whole point of owning precious metals is to have insurance against those transient chits not being worth the electrons they're written on, and one day wiped clean by a system reboot.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2387
Paper Corn

Thank you Dave.. I really like the fact that we are getting more discussion here on this group and your detailed write-ups are the catalyst for that.  You said;

This week, the No Taper gamblers were placing their bets causing gold to rally, but the commodity complex prices don't support this move longer term.

I can't and won't argue with your point about the commodity complex.. indeed, there is deflation there and we can imagine this being at least in part due to lax demand from all the difficulties in Europe and elsewhere.... there is just not as much stuff being consumed right now.  I think there is good reason to believe though that Gold and Silver will decouple from this trend due to their own supply:demand dynamics.  Their monetary nature will overcome their commodity nature, eventually.  

While there is plenty of speculation regarding the use of the paper market to create long term suppression of Gold and Silver.... I don't see much talk of this regarding other commodities.  I tend to agree with those who speculate that the physical Gold and Silver necessary to keep the price suppression operative is running out.  China demand + other WW demand is well in excess of mining production.. and no entity, other than the ETF's and the Comex, is admitting to dishoarding Gold right now... so, what's going on?

As you know, I think negative GOFO is... well, negative GOFO.. it says that London Good Delivery Gold bars are scarce in the system and that your Gold bars loaned will yield more than dollars loaned, which is pretty good for a, "dead" non-yielding asset like Gold.  Anyway, I appreciate the discussion of PHYS redemptions here, because this is a new signal in the market.  I know PHYS well, have watched it for years, and presently own some.  PHYS is pretty safe in my book... in a non-bank safe storage facility, in Canada, with a redemption mechanism for big holders... what's not to like?  Why would you take the stuff out  unless it was just really hard to get high quality (these are LGD) 400 oz. bars elsewhere?  I put this puzzle piece together in my mind with another puzzle piece that was presented to us recently by Koos Jansen and others;

     http://www.ingoldwetrust.ch/alex-stanczyk-physical-supply-never-been-tig...

…At this Swiss refinery there have been several times this year on which they were unable to source gold, this shocked me. They’re bringing in good delivery bars, scrap and dore from the mines, basically all they can get their hands on. This gentleman has been in the business for 37 years, he was there during the last bull market in the late seventies. I asked him when was the last time this has happened, that he was unable to source gold, he said never. And I clarified it, I asked: let me make sure if I understand what you’re saying to me, in the last 37 years you’ve worked in the gold industry this has never happened? He said: this has never happened.

…There was one other comment that was fascinating, he said sometimes when they get gold in, it’s coming from the back corners of the vaults. He knew this because these were good delivery bars marked in the sixties. This is a huge supply squeeze and its worse than anything that has happened in the last four decades. At some point there is going to be a massive squeeze on the price.

This information is based on an interview with Alex Stanczyk, but I recently heard Jim Rickards, who was on the same trip, independently repeat the same story on an RT.com interview (sorry, can't find the link) so this is pretty solid.  PHYS bars are being redeemed because they can be.. because there is more demand than supply, and the need somewhere is getting pretty dire.  Speculation:  Maybe the bars are being sent to Switzerland or Dubai, remelted into 1 Kg bars, and put in the hands of Indian-national mules who carry them (legally) into India on their persons... let's do the math;  $160/ oz premium x 31 oz/Kg = $4960 per mule... WOW.. that's profitable if you can get the Gold.                

When I follow the breadcrumbs.. and above is just a few of them.. they all lead to the same place;  The current (suppressed) Gold price is part of a much larger picture being painted for us by our friends who run the Matrix.  When you look under the covers, you can see the lies everywhere.  How you react is up to you... for me, I dollar-cost averaged a little more out of cash and into PHYS and miners on Friday.           

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