PM End of Week Market Commentary - 2/07/2014

davefairtex
By davefairtex on Sat, Feb 8, 2014 - 4:01am

Gold finished Friday up +8.90 to 1267.00 on moderately heavy volume, silver was up +0.07 to 20.01 on heavy volume.  The gold/silver ratio rose +0.22 to 63.32.  GDX was up +3.10% on heavy volume, while GDXJ rose +5.13% on massive volume.  Both PM and the mining shares rose steadily all day long, with some substantial volatility at the time of the Nonfarm Payrolls report at 0830 EST.

For the week, gold was up +22.60 [+1.82%], silver up +0.83 [+4.30%], GDX +1.83%, and GDXJ up +8.36%.  Junior miners did particularly well, moving to a new cycle high on big volume Friday.  Senior miners lagged a bit, and silver finally started catching up to gold.

US Equities/SPX

Up until Friday, it seemed that US equity prices and PM were moving inversely to each other, but that pattern broke when both US equities, PM, and the mining shares rallied Friday.

US equities rallied strongly Friday, up +1.33% plowing through 1770-1775 resistance up to the last "lower high" of 1800.  Next resistance is 1809, the 50 day MA.  At current velocity, however, it looks like the dip buyers will most likely push prices through those levels as well.

At the time of the Nonfarm Payrolls report, the e-mini (S&P 500) futures first jumped briefly higher, then it was slammed lower by 30 points - one of those "patient heart attack EKG" charts that are typical these days following important news releases.  However, the market then started bidding the price rapidly higher, and by the time of the NY open, prices were clearly green and moved higher for the rest of the day.

This whole event gave us some clues as to what the market is thinking.  From a fundamental viewpoint, the Nonfarm Payrolls report was disappointing - the expected number was 125k-270k, and we only saw a 113k increase, and likely that drove the initial direction of the price movement.  Once down at 1760, the market surprisingly started rallying even in the face of the (modestly) bad news.  As I have said before, when the market rallies on bad news, that's a bullish sign.

Is this the work of the Plunge Protection Team, or is this simply a very long habit by traders of buying the dips after a 5 year bull market?  When the train starts to rumble down the track, it doesn't matter if the conductor is evilly intentioned or simply not watching - its probably best to get out of the way until the train shows signs of stopping.

Miners

Senior miners have remained in a sideways consolidation for the past 3 weeks, with GDX ranging from 22.80-24.  During that time, GDX has shown a pattern of higher up-volume days and lower down-volume days, which is bullish, and it appears to be setting up for a breakout, closing just below the 24 level at 23.91.

GDXJ is forming a "cup & handle" breakout pattern, which is usually bullish.  Often you see a series of these breakout patterns during a bull market move, as traders repeatedly "buy the dip" resulting in a series of cup & handle breakouts to higher price levels.  A move of GDXJ through the 200 MA - which is likely if we get the breakout - will be quite bullish for GDXJ.

 

The USD

The USD fell steadily this week dropping four days out of five, losing -0.64 [-0.78%] to 80.74.   The buck has fallen back to its 50 MA, towards the lower end of its recent trading range.  It has yet to establish a firm trend, but if it continues moving lower, it should support PM prices.

Rates & Commodities

The 10 year treasury rates may be trying to find a bottom, rising slightly to 2.67%.  The 20 year rates are also up slightly to 3.39%.  As the equity market has rallied, bonds have fallen off a bit, and this has led to the modest rise in rates.

Commodities overall rose sharply this week, up +2.08%, breaking the longer term downtrend line that has been in place since late 2011.  Even copper may have found a bottom, up +1.63%, which most likely helped silver to start catching up with gold.  Oil was up too, +2.71 to close at 100.17.

Rising commodity prices tend to be a positive influence on PM.

Physical Supply Indicators

* Shanghai Gold Exchange is still closed this week for Chinese New Year.

* The GLD ETF gained +3.89 tons of gold this week, and is back up to 797 tons.  After dropping pretty consistently since the April gold crash, GLD ETF is now slowly gaining gold.  It will be interesting to see if GLD continues to gain gold when Shanghai reopens.

* Registered gold at COMEX rose 6.13 tons, to 19.80 tons of gold - a big improvement over last week.  Rising gold at COMEX seems to suggest we're not going to see a default this February.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1267.00 and silver 20.02:

    PHYS 10.54 -0.22% to NAV [down]
    PSLV 8.05 +3.15% to NAV [up]
    CEF 13.97 -4.38% to NAV [up]
    GTU 44.65 -4.89% to NAV [up]

Discounts on the ETFs mostly decreased, with some big improvements in PSLV, GTU, and especially CEF.  PHYS was the exception where premiums decreased modestly.

With Shanghai closed, we can only judge by COMEX and GLD, which suggest gold is not in short supply.  The physical ETFs disagree, with premiums mostly increasing.

Futures Positioning

The COT report is as of February 4th.  Not much changed this week - Managed Money increased their short positions slightly, while Producers decreased short exposure, but only by a few thousand contracts each.

Producers are no longer net long but still look quite bullish, while Managed Money short exposure remains high - 64k contracts that should provide fuel for the short-covering rallies should gold continue moving higher.

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

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

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

This week saw some significant changes.  For the first time since August 2013, gold is now in an uptrend in both short and medium term timeframes - although gold's uptrend in the 50 MA requires a magnifying glass to see clearly.  Silver's 20 EMA turned positive too, while silver's 50 MA is now neutral.  And both silver and gold are above their respective 50 MA.  All of these changes are bullish.

Summary

This week the star performer was the junior miners, moving right to the edge of a breakout to new highs on some great volume.  Close behind was silver, finally pulling out of its three week death-spiral at last, rising five days out of five on decent volume.

Looking at the various ratios and averages, gold is now in an uptrend for both short and medium term timeframes, while silver is now in an uptrend over the short term, and neutral over the medium term.  This is a big change from last week, and suggests PM may be at an inflection point.  GDXJ:GDX is in an uptrend (bullish), as is GDX:$GOLD (bullish).  The gold/silver ratio fell significantly this week, but even so it remains in an uptrend (bearish).

With Shanghai closed, COMEX registered rose substantially, and GLD's tonnage has risen as well.  ETF buyers were generally positive this week.  Physical demand is mildly negative.

Led by the junior mining shares, the PM uptrend is mostly back on track.  Is this because of the equity market smash this week?  Or is it due to the rise in overall commodity prices?  Or perhaps its safe haven buying from the emerging markets problems?  Right now the overall macro picture is a bit confused, but if we just look at the ratios to clear out the fog, the PM complex seems to be regaining its upward momentum.

 

3 Comments

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
upward PM momentum vs. a sideways whipsaw

Dave and all,

In your end of week commentary, you conclude by saying the technicals suggest that the the "PM complex seems to be regaining upward momentum."  In his latest blog post Trader Dan Norcini seems to be withholding judgment on commodities in general, with statements such as:

 

This looks like the usual lemming-like reaction to the idea that the Fed will be reluctant to taper thus providing more downside pressure on the US Dollar which in turn will feed through in higher prices for commodities due to currency weakness...

...Where this goes is anyone's guess right now but suffice it to say that many commodity markets are now entering those kind of patterns that are notorious for whipsawing traders mercilessly.  Trending markets are bread and butter for traders - sideways markets can be notorious...Truth be told markets moving into those sorts of patterns are graveyards for would-be professional traders...Stay out of them or trade them very small in size!  Forget about how much you can make - worry more about how much you are going to lose...

...Emerging market concerns are also aiding gold while serving to undercut silver strength....Gold too remains rangebound as it nears the upper boundary of that pattern.  The HUI cannot clear 225 and thus is not contributing much, if any, support to the metal...

...I wonder of the famed February Break is yet to occur this year or if it came last month in January.  It tends to be pretty reliable but getting the timing down can be tricky.  If it has yet to occur, we can expect to see selling pressure re-emerge across the commodity sector later this month...

My general sense when I compare your commentary to Trader Dan's is that you're sticking to TA and he's mixing TA and some broader beliefs/experience regarding markets, such as his misgivings about buying commodities on the possibility of a disappointing jobs report leading to a taper of the taper, and his experience with the February Break.  Also I realize you and he may not be calling things differently, but simply emphasizing different time-frames, as Trader Dan also says:

From a technical analysis standpoint, the hedge fund computers are now back to buying across the sector again and those guys will buy and buy and buy until the market stops going higher.

So, would it be fair to say that while Trader Dan has his doubts about the wisdom of bidding up commodities right now, he acknowledges that we are in a pattern where that is happening, whereas you make no normative comments at all, and instead are just saying that the market seems to be heading upward, based on your reading of the technical data?  Now that I look at that statement, I am not completely satisfied with it, since Trader Dan also spoke about this market seeming to have no clear trend, that it was a dangerous whipsaw.

Cheers,

Hugh

 

 

 

 

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5463
trader dan

I read Trader Dan's commentary too.  Like him, I'm not sure why commodities are rising, all I know is that they are.  Perhaps after 3 years of downside movement, the market is just ready to go up.  Or maybe its all that money that has left excess reserves recently.  Or maybe its just a big head-fake.

In the past I have been unsuccessful using my macro view to predict market prices, so I have learned over time to spend more time watching what the prices of things do, and try not to let my macro view interfere overmuch with my analysis of where the market seems to be headed.

I do have a more favorable opinion of the PM market than he does, and I'm basing that on my ratio analysis - GDXJ leading GDX, and GDX leading gold.  Both ratios are above their 20 EMAs on the shorter term daily charts, which is a bullish configuration, as is gold itself.  These indicators aren't perfect, but had we paid attention to them, you would have noticed the move down in PM sooner back in 2011.

Here, look at this weekly chart.  The 50w MA was a pretty good long term gauge on when to exit PM back in 2011.  It nailed the top within a month of the high.  It is now quite close to a buy signal.  It might be a headfake, like the other two prior almost-signals...or maybe its the real deal.  I use the daily ratio chart to watch things more granularly so I know when to bail out or load up.

Again, I try and focus more on the technicals so I don't start confusing myself with my macro view, which tends to trick me into (generally speaking) being more downbeat at the lows because of newsflow and lagging indicators.

Denny Johnson's picture
Denny Johnson
Status: Gold Member (Offline)
Joined: Aug 13 2008
Posts: 348
Interview with Jim Rickards: Gold Set for Massive Rally

Interview with Jim Rickards: Gold Set for Massive Rally

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