PM Daily Market Commentary - 1/21/2014

By davefairtex on Wed, Jan 22, 2014 - 1:39am

Gold closed down -13.00 to 1240.50 on heavy volume, while silver dropped -0.45 to 19.86 also on heavy volume.  The gold/silver ratio moved up +0.74 to 62.46.  Gold started downhill in London trading, and bottomed immediately before the NY open, wiping out Friday's gains by the close.  Silver did worse, losing more and closing below its 50 MA for the first time in a week.

The USD made a new high at 81.52 almost to its 200 MA, after which it sold off, closing down -0.14 to 81.24.  The dollar seems to be moving in tandem with the US equity market - when the dollar rises, so does the SPX, and vice versa.  I'm not sure why the correlation is there - or how long it will last but it was something interesting I saw today.

In line with gold's plummet prior to the NY open, GDX opened down, but was bid up enthusiastically for the whole morning session.  GDX then traded sideways in the afternoon, closing up +1.59% making a new cycle high on moderately heavy volume.  GDXJ behaved quite similarly, except its move for the day was +3.83% and the trading volume was massive - 3-4 times normal.  Bullish, all of it.

Contrast this almost-crazy-good performance of the mining shares on a down day for gold with what we saw in 2013.  During the long gold market downtrend of 2013, whenever gold would drop, the mining shares would simply tip over and sink.  The slightest little problem in PM and mining shares would have a really bad day.  Back then, there was no news good enough to get the mining shares to rally for longer than a few days.

Now the reverse is happening.  It almost doesn't seem to matter what gold is doing, the mining shares are going up.  Why?  Who knows.  I'm not on the conference calls with the big guy's prop trading desks.  And from one perspective, our job is not to wait until we can figure out the fundamental reasons why the big money is moving into the shares right now.  Money is being dumped into mining shares, that's all we need to know.  If this continues, the proper response is to buy the dips.  Gold price will most likely follow.

Ratio charts help give me perspective.  How they are moving relative relative to the underlying metal provides more information, and lets us pick up the trend changes earlier.  Here is GDX:$GOLD.  You can see the rising trend in the ratio started early December.  This bullish sign occurred about a month prior to anything truly bullish happening in the mining shares themselves.  And if and when this trend starts to reverse, we will be able to see that too.

Now here's GDX:$GOLD over the course of the last few years.  We can see that mining shares have been underperforming gold for most of this period, except for a small time during late 2012.  This paralleled the drop in commodities during that same period, as well as the drop in the CPI, as well as deflation in the eurozone.  If you were watching, the GDX:$GOLD ratio (weekly) gave you a clear picture of an overall falling PM market.

This is why rising GDX:$GOLD is something that's exciting for me to see.  It potentially changes a trend that has been in place for three years.  We are still early yet, but if GDX:$GOLD can cross its 50 MA, that will be a sign to me that something important could be happening in the PM market overall.

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