PM End of Week Market Commentary - 3/1/2014

davefairtex
By davefairtex on Sat, Mar 1, 2014 - 6:42pm

Gold fell -3.10 to 1328.60 on moderately heavy volume, while silver fell -0.04 to 21.26 on relatively light volume.  Senior mining ETF GDX was off -0.35% on light volume, while the GDXJ was up +0.41% on  moderate volume.  PM traded with a downward bias during most of the day, but it moved up going into the close.

For the week, gold was up +2.60 [+0.20%], silver down -0.57 [-2.61%], GDX -2.45%, and GDXJ down -3.66%.  This week was a week of mild risk-off - juniors and silver dropping more than GDX and gold.

Overall, the down-day volume on gold is starting to pick up which is bearish, while silver's volume has been more variable.

US Equities/SPX

The US equity market decided to break higher this week, closing Friday at a new all time high of 1859 to the great consternation of all the bears who continue wondering just how long this bull market can last.  Volume on the breakout was decent but not spectacular, and the dow industrials and transports are lagging SPX substantially.  Yet this is all cold comfort to anyone short the SPX, many of whom should probably have been stopped out on Friday's rally.

I did notice that as SPX broke out, PM sagged.  I interpret that as a money flow thing - traders sold their gold, and bought the SPX breakout.

Miners

Mining shares moved lower this week on declining volume.  If we are to see a drop in the mining shares, it is actually bullish for the correction to be a low volume correction.  I interpret this to mean that dip-buyers are waiting in the wings to see how far the correction will go and once it stops, I would anticipate them coming back into the market to accumulate more shares.

During the current rally, the 20 EMA has acted as support for GDX.  The chart below is a bit busy -  it attempts to show the 20 EMA support (green line) for each of the three corrections we've had, along with the declining volume that has attended each correction.  If the 20 EMA holds, it could be an excellent entry point for a prospective dip-buyer.

The GDXJ chart continues to look similar to GDX, except that GDXJ has already corrected down to its 20 EMA support.

Note that the 20 EMA isn't some magic thing - sometimes these moving averages work, and sometimes they don't.  Different averages fit different instruments, and for some reason the 20 seems to be doing a good job in analyzing the movements of mining shares.  Moving averages often act as support during uptrends, and as resistance during downtrends.

The USD

The USD was crushed on Friday, closing down -0.65% in one day, a really big move.  The move was euro-driven, the euro rising +0.66% on a news release that the eurozone inflation numbers managed to stay positive, which seems to indicate that the eurozone is somehow staying out of deflation.

Looking at total bank loans, we can see that credit in the eurozone has been shrinking pretty dramatically (about 5-6% annualized) since mid 2012.  Perhaps the euro spike on Friday was also due to the modest rise in total bank loans that appeared on Friday in an ECB statistics release.

It is interesting that the big move in the dollar didn't seem to affect PM prices at all.

Rates & Commodities

The 10 year treasury rates ticked lower this week, dropping 3 basis points to yield 2.65%.  This caused bonds to rally, with 20 year treasuries gaining +1.78%, a nice move.  This is interesting, since the equity market also rallied.  Money is clearly flowing into both stocks and longer term bonds, but generally out of the USD.  This is definitely unusual, since its not clear where the money is coming from.

Commodities tracked sideways this week, taking a break from its big rally, only up +0.13%.  Commodities are still dreadfully overbought.  Overbought conditions can be worked off either through time and sideways movement, or a dip back down as traders take profits.

A falling commodity index will likely pressure gold, and especially silver.

Physical Supply Indicators

* Shanghai premiums on the Au9999 contract were up +4.27 on the week and is now trading at a +3.63 premium over COMEX.  Deliveries are still strong, but compensation continues to oscillate between short and long.  It looks mildly positive in Shanghai.

* The GLD ETF gained +5.39 tons of gold this week, and is back up to 804 tons.

* Registered gold at COMEX dropped -0.35 tons, to 19.83 of gold.  The registered gold at COMEX is now about where it was in November 2013.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1323.80 and silver 21.81:

    PHYS 11.05 0.18% to NAV [up]
    PSLV 8.58 +4.05% to NAV [neutral]
    CEF 14.72 -3.99% to NAV [up]
    GTU 46.88 -4.34% to NAV [down]

ETF premiums were all over the map directionally, but the changes were modest.

Shanghai premiums have risen even though COMEX prices have not corrected much, COMEX registered dropped a bit, GLD gained gold, and the ETF buyers are mixed.  Let's give Shanghai the deciding vote and say the physical picture is mildly positive.

Futures Positioning

The COT report is as of February 25th.  There were some huge changes in Managed Money - they covered short (23.5k contracts) and increased long (4k contracts), a net change of 27.5k contracts.  This leaves only 31k contracts short for Managed Money to cover...43% of the total short position was wiped out by last week's price action.  Producers did the converse but with a bit less volume - they added to shorts +6k contracts and sold longs -4k contracts.

At this point, we are getting towards the end of the "free ride" from Managed Money short covering.  We might get one or two more spikes higher from short covering, but after that, further moves higher in gold will require the Managed Money gang to actually go long.

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 UP, long term DOWN

No change this week in the moving averages.  Prices still remain above all three moving averages for both silver and gold.

Summary

PM is continuing its consolidation on declining volume, which is as expected in an uptrend.  Silver took a big hit on Wednesday which drove the gold/silver ratio back up, while the miner prices have faded on light volume selling.

Looking at the various ratios and averages, gold and silver remains in an uptrend for both short and medium term timeframes (mostly bullish).  Prices on the metals remained above the 20, 50, and 200 day moving averages (bullish).  The rising 50 MA is approaching the 200 MA.  GDXJ:GDX has dropped a bit (neutral), and GDX:$GOLD has also corrected but still remains just barely in its uptrend (bullish).  The gold/silver ratio rose to 62.48 after silver's big dip this week and is now in no-mans-land (neutral).

The big change in Managed Money short positions tells me that the days of the massive short squeezes are nearing an end, and further moves higher in PM are going to require commitment of fresh money on the long side.

Shanghai is back in premium, COMEX registered dropped slightly and the physical ETFs were mixed.  GLD tonnage rose.  All in all, it looks like physical demand is somewhat positive.

So far things seem aligned around the story of a correction within an uptrend.  If volume remains light on the sell days for miners, that is my signal that the PM uptrend remains intact.  The wildcard is the commodity index: if commodities correct significantly, we could get a more rapid move lower in PM.

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