PM End of Week Market Commentary - 1/17/2014

davefairtex
By davefairtex on Sat, Jan 18, 2014 - 3:56am

Gold finished Friday up +11.30 to 1253.50 on moderate volume, silver was up +0.23 to 20.31 also on moderate volume.  The gold/silver ratio dropped -0.13 to 61.72.  GDX was up +3.14% on moderately heavy volume, while GDXJ was up +5.91% on truly massive volume.  Miners, and especially juniors were the star of the show, gapping up, and driving higher, trapped shorts covering, closing at or near the highs of the day.

For the week, gold was up +5.00 [+0.40%], silver up +0.15 [+0.74%], GDX +6.00% and GDXJ +11.87%.  After the long downtrend in gold, people might have wondered, why on earth would anyone want to own gold mining shares?  This week you finally have your answer.  If on the way down they suck, on the way back up, they are the stars.  Just look at the performance of the junior miners over the past week: 11.87%.  In one week!  They may have lost 79% of their value over the past three years (which means they need to be a five-bagger just to break even!), but on the way up they sure do climb rapidly.

By comparison, the moves in gold have been a bit ho-hum.  Unlike the miners, gold has not yet made new highs.  It has broken through its 50 MA - mostly because the 50 is still sinking - and has closed comfortably above it, but it still remains below the key 1265 level, which would indicate the end of the 5 month medium term gold downtrend.  Still, it has closed within a few dollars of the previous cycle high of 1255.30, and a break above that level might provide enough short-covering fuel to drive gold through its 1260-65 resistance zone.  Silver looks much the same, perhaps slightly more bullish, coiling above its 50 MA and needing to close above 20.50 on some good volume to get the party going.

Miners

What a change from last week.  Last week, miners were lagging gold, but this week the miners, and especially the juniors, broke out in a big way, and on heavy volume.  I suggested a break above the 50 might be explosive for GDX and GDXJ, and it sure was.

Volume is a good indicator of the relative seriousness of the move.  In the chart below, you can see a series of GDXJ breakouts above previous congestion areas.  Each breakout has been on increasing volume, which is a distinctly bullish configuration.  You might also notice that after each breakout, there was a period of retracement, sometimes even back to the original breakout point before the next breakout occurred.  Two steps forward, one step back.  That's not always the case, but it often is.  The retracements can be good entry points - better entry points than buying (say) at the end of Friday.

Senior mining shares haven't been nearly as explosive as the juniors.  Perhaps the reason for the success in the junior miners is because of Goldcorp's buyout offer for Osisko Mining - which Osisko has rejected as too low.

http://www.rttnews.com/2251889/osisko-mining-says-goldcorp-s-buyout-offer-very-low-and-price-opportunistic.aspx

Regardless of the outcome of this particular buyout, it is my guess that traders are seeing this as the opening gun in a race for seniors to acquire attractively-priced junior miners.  As mentioned earlier, juniors have declined collectively almost 80% over three years.  They are on sale, and it looks like the seniors are starting to be in a shopping mood.

Likely, traders are also concerned that the seniors will end up overpaying - Goldcorp's stock was definitely hammered for a few days after the buyout offer was announced.  In past years, senior miner management did not shop wisely, and seriously overpaid for what they got.  We'll see if this happens again.

This is an interesting fundamental signal the market is giving us.  If the senior miners are seeing value at these levels, perhaps we should too.  Not all junior miners are created equal, however, so its very important to pick and choose.  Mine grades, how close to production they are, how much cash & debt, and what jurisdiction are they in - all things to consider when rolling the dice with junior miners.

The USD

The dollar was up this week +0.62 [+0.77%] to 81.37.  On Friday, the buck broke out of its recent trading range, and seems to be targeting 81.50 and its 200 day MA.  Last week the bad Nonfarm Payrolls number caused the buck to tank, but it seems to have shrugged that off and climbed higher.  At this point it looks quite strong, most likely because the economic news in the US continues to be relatively good.

The euro has definitely weakened - it is now clearly below its 50 MA, and has broken below 1.36 support and it appears to be heading lower.  Lower euro = higher dollar.  The commodity currencies (Canadian & Australian Dollar) are making new lows too.

Still, the higher dollar hasn't seemed to harm gold all that much.

Rates & Commodities

The 10 year rates continued dropping this week but the drop was much more modest.  Still, $TNX closed just barely below its 50 MA.  The long bonds did even better, with 20 year bond yields clearly through the 50 MA and dropping hard.  And of course when rates drop, bonds rally.  Those expecting the bond vigilantes to take away the Fed's printing press have to wait a bit longer, it would seem.

While the longer term commodity chart still looks quite unfortunate, on the daily chart commodities have improved overall this week, regaining the ground the lost last week.  Can they continue rallying in the face of the set of deflationary monetary trends now in place?

There are some signs in some of the Fed surveys that suggest producers are now paying higher prices for their inputs, which hints at possibly higher prices going forward.  But there really needs to be a sustained rally in the commodity complex to get prices to break out of that long term descending triangle they've been in for the past three years.  If we get a breakout to the upside in commodity prices, this will likely be gold and especially silver positive.

Physical Supply Indicators

* Shanghai gold premiums rose substantially this week; at 1530 CST 2014-01-17 Shanghai physical gold (the Au9999 1-kilo gold contract) closed at a premium of $12.30 to COMEX, with the premium up +10.52 over last week.  Delivery volumes are generally lower, while AuTD compensation has been paid to longs ever since the New Year (more longs want to take delivery than shorts are willing to deliver).  Rising premiums + falling delivery volume + compensation paid to longs all week = shortages in Shanghai.

* The GLD ETF gained +3.93 tons of gold this week and is back up to 797.  Weekly gains in GLD holdings have been rare during the past 12 months.  It will be interesting to see if this pattern continues.

* Registered gold at COMEX continued to sink; it dropped by 1.45 tons this week, reducing the total available to 11.51 tons.  This is yet another new low for the COMEX.  At this rate, COMEX registered will be gone in two months!

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1253.50 and silver 20.285:

    PHYS 10.43 -0.24% to NAV [up]
    PSLV 8.06 [NA] to NAV [NA]
    CEF 13.82 -5.37% to NAV [up]
    GTU 43.96 -5.39% to NAV [down]

Discounts on the ETFs were a mixed bag, with some increasing and others decreasing.

Physical demand remains positive - quite positive in Shanghai, and gold continues to leave COMEX.  Gold's return to GLD is interesting, but it could just be a one-week blip.  Overall physical demand looks strong, which I take as a bullish signal, especially given the rising price of gold.

Futures Positioning

The COT report is as of January 14th.  Managed Money increased their net long position this week by 4k contracts mostly through increasing their long exposure, and surprisingly the Producer category also increased net long exposure by 3k.  This is surprising to me, since normally Producers tend to go short and/or reduce long exposure when prices rise.

Futures positioning still looks historically bullish, with Managed Money still at historic levels of short exposure.  You can see in the chart below (black line) that at end of 2012 Managed Money was short about 10k contracts and that was pretty much true throughout the gold bull move of 2008-2011.  Managed Money is now short 76k contracts, while their long exposure hasn't been this low since the start of 2009.  This is not a guarantee that the price of gold will go up, but it can be thought of as "unburnt fuel" for short-covering rallies.  Should the gold price move higher quickly, perhaps 66k of "excess short" COMEX futures contracts will be rapidly closed out.  If gold gets any catalyst at all, it could be a lot of fun to watch.  To give you a sense, we have only burned through 7.7k worth of Managed Money shorts during the recent move from 1180-1253.

Now all those money managers need is that catalyst.  Janet?  How about those Excess Reserves?

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 crossed their respective 50 day MAs, which is a signal for longer term traders that the bottom for gold (at least in the medium term) may be in.  These signals encourage these more disciplined traders to increase their gold exposure, and is generally a bullish signal.

Summary

This week we saw mining shares and especially junior miners explode higher, crossing the 50 day MA with volume and large price gains.  Both gold & silver have crossed their 50 day MAs too.  While no horrible economic news has appeared, it seems that miners don't particularly care - money came into the mining shares in a big way, and seemingly gold followed along behind.  That's typical in a bull move in PM - mining shares lead, and gold follows.

Looking at the various ratios and averages, gold and silver both remain in a moving-average downtrend in  medium and long term timeframes.  GDXJ:GDX is still trending up (bullish), GDX:$GOLD is trending up  (bullish), and the gold/silver ratio continues to chop sideways (neutral).  The moving averages and prices look strong short term, and with the miner breakout the ratios look very bullish, but gold's medium-term downtrend won't be broken until gold closes above 1265.

Shanghai appears to have shortages of gold - premiums jumped substantially this week, and COMEX registered dropped yet again, making a new low.  On the other hand, GLD's tonnage actually increased, and the ETF buyers were perhaps neutral.  Given how much physical gold trading happens in China, I'll score physical demand as quite positive, and COMEX remains something to watch, with only 8 weeks of gold left at current delivery rates.

Technically, things seem aligned for a continued move higher in the PM complex.  That said, after large moves like we've seen in the miners, its customary for the market to take a break for a bit.  It is during these "breaks" that we will see just how much selling appears.  Will traders want to ring the cash register after gaining 11% in their junior miner positions?  Or will they hang on and buy the dips?  Low volume sell-offs after a high volume rally is normal in a bull move, and in fact is a bullish sign.  On the other hand, if the sell-offs are high volume, that's trouble, and will likely result in a declining metal price going forward.

We have the ever-popular FOMC meeting coming up in 12 days, on January 29th.  This will be the first meeting with Janet Yellen in command.  What will she do?  Likely, the well-connected already know; perhaps that's why the miners are doing so well.  In the past, the Fed has floated "trial balloons" to the major banks regarding possible policy moves.  Wouldn't you love it if you were invited to one of those meetings?  It might help push your trading success rate a bit higher.

 

7 Comments

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 654
Junior Miners

Thanks Dave, once again.  You said look to: a) mine grades, b) how close to production, c) how much cash and debt, d) what jurisdiction they are in.  Excellent!!  But who has time to review the hundreds, if not thousands, of junior miners?  For people like me, trying to get a Set of Targets (or invest NOW), neophytes at this game, isn't there some way to get HELP from our Community about SPECIFIC juniors.  I keep asking why we do not offer our Community assistance on this, but hardly get any in-depth suggestions.  WHY?  And who can you trust  if they SELL information about this topic.

Any help from anyone--or am I barking up the wrong tree?????

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5456
looking for a fish

Ken-

But who has time to review the hundreds, if not thousands, of junior miners?

Indeed. 

Ken, I get the sense you're looking to be handed a fish.

Be the solution.  Contribute the analysis you are looking for to the community.  Learn to fish yourself.

Otherwise if you sit around waiting for someone to throw you a fish...you might be waiting for a while.  Especially if you want free fish!

You can always buy into someone's junior gold miner analysis letter and use them as an initial filter, then do the analysis yourself.  Don't you want to learn how to fish?  Or are you content to just get tossed fish by others for the reminder of your life?  :-)

 

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 654
Well Said

Guess I need to go fishing.  Get out my rod and play.  If I catch anything, I'll let you all know.

However, sometimes my neighbor in Costa Rica brings over a few fish he caught in the Pacific.

Nice guy:  FREE fish.  

 

Oh well, I keep trying--maybe just too busy with other things.

Thanks for the pep talk.

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
Thanks, Dave

Thanks, as always, for the informative commentary, Dave!  Your summaries are an important part of why the benefit of being a paying member of Peak Prosperity outweighs the opportunity cost of 4 ounces of silver foregone this quarter.

Cheers,

Hugh

Cornelius999's picture
Cornelius999
Status: Gold Member (Offline)
Joined: Oct 17 2008
Posts: 379
Ken,I have found Gold Stock

Ken,I have found Gold Stock Analyst(John Doody) good in the past and Chris has interviewed him but but I've never seen him mention declining oil supply, so though competent, I have to assume selling his tips is his first priority

Cornelius999

 

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2387
Odd signal.. Gold down, (some) Miners up hard

Very odd in my recent experience - Gold got slammed this morning, but some miners doing well nonetheless;

As of this writing;

Gold    - 1.08%

SA      + 2.3%

MUX   + 3.2%

GDXJ  + 1.5%

TGD  + 2.6%

Miners leading Gold now? 

Almost like some big boy slammed Gold on the futures in order to create a small, short term sale on some of the miners.. if you look at the charts, miners like MUX started the day negative... and then were accrued from there.  

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5456
creating a sale using futures

JimH-

Almost like some big boy slammed Gold on the futures in order to create a small, short term sale on some of the miners.. if you look at the charts, miners like MUX started the day negative... and then were accrued from there.

Yes.  I've seen this happen before.  Its a nice choreography.  Gold gets hammered right up to the NY open, miners dutifully sell off - and maybe even suck in some new shorts - but the shares find a bid.  Gold also finds a bid but to a lesser extent (the selling pressure is removed) and then "someone" buys the miners hard.

Check out the GDX:GLD ratio.  It has done nothing but rally since early December.  Its a bullish sign for sure.  Same with GDXJ:GDX.  Believe the ratios, they're right more often than not.

MUX has been doing especially well since it broke through the 200 MA.  Its feeling a little bit vertical right now, but likely the shorts are being squeezed.

Its choreography.  Short term manipulation to achieve an objective - buying miners on the cheap.  But you can only see it if you watch miners at the same time gold gets hit, to see if they get an unusually strong bid.

But the normal goldbug will only look at "gold getting hammered by the banksters" - because in his world, bankers only ever want PM-related things to drop - and will then miss out on the interesting nuance you just spotted.

 

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