PM Daily Market Commentary - 2/03/2014

davefairtex
By davefairtex on Tue, Feb 4, 2014 - 12:15am

Gold closed up +12.60 to 1257.00 on moderate volume, silver up +0.11 to 19.30 on moderately heavy volume.  Gold/silver ratio rose again, +0.27 to 65.13, yet another cycle high for the GSR.  Gold was trading modestly higher until a poor ISM report was released at 10:00 EST, after which it spiked up $16 in a single one minute high-volume move, dragging silver up along with it. 

Gold held onto more than half of its intraday move by the close, while silver seemed lucky to remain positive - silver once again looking weak even on a good day.

The $16 one-minute spike higher in gold involved 6,000 contracts changing hands at the time of the ISM report - some of those managed money shorts likely threw in the towel today.  If you read my end of week summary, you would know that managed money had 62,000 contracts short at the COMEX as of last Tuesday.  Likely we lost a bunch of them in that spike today.  Who on earth buys 18 tons of paper gold in such a fashion?  You certainly don't do that if you want to get the best price!  It must be market-rigging!  Yes, kind of - the big-bank COMEX longs are likely stop-gunning those managed money shorts, looking to make a quick buck and using the ISM report as the trigger.  Its a shark-pit out there at COMEX, and today it was the shorts that were bitten.

The big news was in bonds and US equities - bonds had a terrific day, with TLT breaking above resistance up +1.22% on massive volume, and its cousin the 10 year rate down 8.7 basis points to 2.58%.  The other side of the ledger saw SPX off 41 points or -2.28%, blowing through two resistance levels on massive volume, all of the action triggered by that horrid ISM report at 10:00 EST.  However, unlike with gold, that report only caused a 6 point drop [-0.3%] in SPX at the moment of release - the vast majority of the move was an orderly sell-off following the release that saw prices drive lower and lower as the day wore on.  Below is an intraday chart of the S&P 500 futures contract which shows the action:

So in retrospect, we can't really blame that report for all the equity market price action.  While it seemed to be the trigger, the overall equity market was definitely moving lower prior to today.  I noted a large number of distribution days over the past few weeks, and so I'd say the market was definitely "leaning lower" and it just needed a catalyst to push it over the cliff.  I believe the ISM report was just the first catalyst to come along.

In the good old days (say, December) bad news would have been interpreted by the market to cause the Fed to Not-Taper, and thus would have led to a rally in equities.  (Remember how much fun that was?)  These days, bad news actually seems to be leading to markets going down - at least in the equity market.  What a difference a second taper event makes!

Gold, on the other hand, seems to be benefiting from bad news.  It could be a flight to safety, it could be a rotation of money out of equities and into gold, it could be an expectation of eventually more Fed largesse in the offing - we'd need a poll of all the COMEX buyers to actually answer the whys accurately, but as observers all we can really say is, "gold seems to like bad news."

Not so much silver, which seems to have split its personality between copper and gold.  Copper continued lower today, down -0.45% - this makes 9 red days in a row.  However, the overall commodity complex actually rallied today, it was up +0.47%, which is generally a positive influence on PM.  Coffee for instance was up 8.6% today - a massive move, bad news for you coffee drinkers!  Fortunately for me I drink tea: Dragon Well (or Long Jing as they call it in China).  I don't see any tea futures - although who knows, perhaps China has them.  But I digress.

The USD dropped -0.24 [-0.29%] to close at 81.14, pulling back a bit from the 81.40 level.  The buck also didn't like the ISM report, but its drop was more mild and there was no follow-through sell-off in the buck the way there was in equities.  The bad news in manufacturing hasn't led to an overall sale of USD assets, it would seem - just the ones in the equity market.

GDX closed down -0.77% on moderate volume, while GDXJ was flat on heavy volume.  Mining shares initially rallied along with gold at 10:00, and then encountered selling for the rest of the day, following the SPX lower.  Ordinarily I'd say this was a bad sign, except that of all the sectors in the equity market I track, GDX performed the best - even better than the "safe haven" utilities, which were down -0.79% and typically do quite well on an equity market smash like this.  Plus, sell-day volume on GDX was quite modest.  It may be funny to think of a down-day as bullish, but this one was, at least to me.

That's because on a big down day in equities, the senior miners (who are also members of other indexes) are sold right along with everything else.  Its normally quite hard for GDX to do well on a big equity market down day - it is hard for any equity prices to rise when the falling tide is dragging down all boats.  But if we look at the ratio GDX:SPX we can see the truth: GDX has been outperforming the overall S&P 500 since New Years Day, and it outperformed SPX today by +1.55%.  Ratios win again.

However for all the people who are eager to go short the equity market after a day like today, a note of caution.  The market is oversold at this moment, and we should expect some sort of bounce coming soon.  How high will it bounce and with what volume - that should be our guide to how the market is likely to behave going forward.  But the concept is - short the bounces.  Just remember how it worked last year with the mining shares.  Lots of down days, followed by a brief 1-2 day bounce, and then more down days.

2 Comments

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
Some Guys in China

Coming from, among others, the PBOC, I think this is kind of an important statement.  I'd be curious to know if Dave thinks these are also "just some guys from China"

A Communication On How We Should Help Develop The Gold Market.

The Opinions From:

 

People’s Bank of China (PBOC)

National Development and Reform Commission (NDRC)

Ministry of Industry and Info Technology of the PRC (MITT)

Ministry of Finance (MOF)

State Administration of Taxation of the PRC (SAT)

China Securities Regulatory Commission (CSRC)

  To various bodies including and not limited to:

 To: PBOC Shanghai HQ, branches, provincial capital city center branches, sub-provincial city center branches, provincial development and reform committees, CSRC, national inland revenue, SGE, SHFE, State owned banks, share-ownership commercial banks etc.

 2012-03-07

[excerpt 1]

"1. The importance of understanding a healthy development of the gold market

 The gold market is an important component in the make up of financial markets. Gold has both financial and commodity attachments. Good efforts to develop the gold market will enable it to play a unique function not found in other financial assets, complementing and helping the other markets in finance, completing our financial system helping in both breadth and depth, raising our market’s competitiveness and readiness to respond to crises, contributing to stability and security of our finances."

[excerpt 2]

"2. Next-step clarification of the positioning of the gold market development

 After replacing the previous collective-buying practice policy, our gold market has developed speedily; the coordinated development of the gold industry supply chain have started to form, with the contribution in the business developments of the Shanghai Gold Exchange and the commercial banks and the Shanghai Futures Exchange. The gold markets should be developed to serve wide-scope gold-related industries, with the goal of raising the competitiveness of our financial markets, letting the gold market play the important part of making our financial markets whole. We need to facilitate and encourage communications and coordination, and establish such mechanism especially between the SGE and SHFE. We also need to be more innovative developing RMB-denominated gold derivative products, increasing the diversity of product types, enabling the market function to perform better with depth, improve regulation and openness at the same time, building a multi-faceted, multi-level market system."

Full release here:

http://www.ingoldwetrust.ch/the-chinese-governements-gold-policy-from-the-horses-mouth

 

 

Hmmmmm.  "We also need to be more innovative developing RMB-denominated gold derivative products".  Sounds almost like a gold-backed currency, no?

It seems PBOC disagrees a bit with Mr. "gold is a historical asset" Bernanke and Mr. "gold is a barbarous relic" Buffet.

Coming from the PBOC, I find this actually kind of a shocking statement and another important signal in the ongoing propaganda war between increasingly gold-rich China and likely gold poor U.S.

But I guess we shouldn't focus too much about these statements, and conspiratorial theories about new gold backed currency, since they are from a bunch of guys in China, right Mr. Dave?

H

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5416
sounds almost like a gold-backed currency

Hrunner-

As is often the case between you and I, these things are a matter of interpretation.  When you read this, you see this as a yet another bit of evidence of China's ultimate goal of a gold-backed currency.

When I read it - especially when I read the entire document - I conclude that the Chinese want to develop all the bits and pieces of an Chinese-controlled version of the LBMA combined with the COMEX, all denominated in RMB.  They want to be a big dog in the gold trading world - like London - and this is their roadmap of how they want to get there.

I believe they view a gold exchange in Shanghai as a strategic asset - much as the gold exchange in London is a strategic asset for England - or a vulnerability (and/or a pressure point) for those other countries who have their gold stored there.  "That's an awfully nice pile of gold you have there.  You wouldn't want anything to happen to it, now would you?"

This goes along with China wanting trade to be in RMB as well.  It appears that they believe that as much bilateral trade that can be done in RMB should be done in RMB, in order to eliminate as many strategic pressure points the US could bring to bear on them as possible.  As a strategic view, it makes sense, especially given what we did to Iran.

Hmmmmm.  "We also need to be more innovative developing RMB-denominated gold derivative products".  Sounds almost like a gold-backed currency, no?

Gold derivative products are futures and options.  If you read section #4, they talk at length about hedging, among other things.  As in:

In order to help guide commercial banks to develop RMB-quoted gold derivatives trading, working with SGE’s price quoting system infrastructure, work to allow commercial banks that are developing RMB-denominated gold derivatives to be able to hedge on-shore gold trading margin with off-shore position without actual gold import-export business operations.

Is this more complete paragraph a smoking gun for a gold backed currency in the offing?  It sounds like paper gold hedging to me.  In other areas they talk about gold leasing too.  That doesn't sound like a gold-backed currency either.  Again - the whole document, when read in context - sounds more like LBMA meets COMEX.

Could China be working on a gold-backed RMB?  Maybe.  Is this a smoking gun?  Not to me.  I believe your claim is jumping substantially beyond the evidence, and I'm not comfortable doing that.

But I guess we shouldn't focus too much about these statements, and conspiratorial theories about new gold backed currency, since they are from a bunch of guys in China, right Mr. Dave?

Whoa, I don't remember saying that about these being "a bunch of guys in China."  Oh right - that's because I didn't.  Why must you make stuff up like this?

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