PM End of Week Market Commentary - 3/8/2014

davefairtex
By davefairtex on Sat, Mar 8, 2014 - 2:07pm

Gold dropped -10.50 on very heavy volume to 1339.90 with silver down -0.58 to 20.90 on heavy volume.  GDX was off -2.28% on moderate volume while GDXJ was down -2.41% on moderately heavy volume.  PM was hit hard at 0830, the time of the nonfarm payrolls report, which beat expectations.  The shorts took gold down a total of -25 points on a couple of big volume spikes, but gold recovered most of its losses by the close.  Silver was not so fortunate, closing relatively near its lows of the day.

For the week, gold was up +11.30 [+0.85%], silver down -0.37 [-1.74%], GDX up +1.16%, and GDXJ up +2.81%.  This week saw gold and silver diverge, while the miners tracked mostly sideways within their consolidation zone.

Silver punched through its 200 MA on Friday, breaking through 21 support at the same time.  Next (strong) support level for silver is 20.50.

US Equities/SPX

The US equity market continued up this week, closing up +18 to yet another all time high of 1878 [+1.0%].  While volume remains modest, money continues flowing into the equity market.  On Friday SPX actually did not rally on the nominally bullish news from the NFP report, which has me looking more closely - one would have expected a rally on good news.  Initially SPX did spike up, but quickly lost its gains printing a doji on the day.  If the (bearish) doji is confirmed Monday by a close below Friday's low, perhaps we'll see some selling in equities.

Miners

Mining shares more or less tracked sideways this week, with a modest upward bias, but remaining within their respective consolidation zones.   Both remain above their 20 EMA, which is bullish.

The USD

The USD moved modestly lower this week, closing down -0.06% on the week to 79.73.  The buck was hurt by a breakout in the euro, which was up +0.61% on non-news from ECB chairman Dragi - no money printing or rate-lowering will be forthcoming in the eurozone.

During the week, drops in the dollar seemed to help gold fairly substantially.  If the euro can keep rallying, it should help gold.

Rates & Commodities

The 10 year treasury rates jumped higher this week, up +13 basis points to yield 2.79%.  And of course when rates rise, bond prices fall - the 20 year treasury was off -2.23% on the week, losing all of its gains from last week and then some.  Money is flowing out of bonds and into equities.

Commodities broke higher again, continuing their improbable move higher, up +2.77% for the week.  Copper is diverging dramatically from the rest of the pack; it was off -4.27% on Friday alone, a massive selloff.  According to Dan Norcini, copper was hammered due to credit-related fears from China.  A Chinese solar company signaled it would default on its debts, and it appears that there will be no rescue this time.  Likely copper's troubles affected silver.  Those two metals are often linked.

If you just read the goldbug press, you will hear stories about how there are shortages of silver, how it's going to outperform gold, and so silver's weakness might be confusing - you might imagine there is "manipulation in the silver market" and so on.

But if you actually watch prices, you will notice a linkage between silver and copper, and also that copper prices and expectations of Chinese economic performance are also strongly linked.  While all the shortage tales may eventually come true, in the meantime if you are trading it may be unwise to ignore what prices are actually saying.  From what I have seen, when copper is getting hammered, its hard for silver to do well.  By extension, if China has debt default issues, how do we think silver will perform?  Most likely, it will underperform.

Physical Supply Indicators

* Shanghai premiums on the Au9999 contract were down -5.68, now trading at a discount of -2.05 below COMEX.  Deliveries were lower this week, but compensation was mostly short-to-long, presenting a mixed picture.  Call Shanghai neutral this week.

* The GLD ETF gained +1.5 tons of gold this week, and is up to 805 tons.

* Registered gold at COMEX dropped -0.04 tons, to 19.83 of gold.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1339.30 and silver 20.89:

   PHYS 11.16 0.02% to NAV [down]
    PSLV 8.47 +4.07% to NAV [neutral]
    CEF 14.77 -4.18% to NAV [down
    GTU 47.23 -4.72% to NAV [down]

ETF premiums were mostly down, but the changes were modest.

Futures Positioning

The COT report is as of March 3rd.  Managed Money continued increasing net long exposure, once again mostly by covering their short positions, but the changes were modest: shorts covered by -3.8k contracts, longs increased by +1k.  Managed money has covered 2/3 of their short position at this point.

Producers decreased their long exposure, mostly by going short.  Producers added +5k short contracts, and sold -1.4k long contracts.

Note that this only covers Tuesday - no doubt the huge downside volume we saw on Friday will show up in next week's COT report as Managed Money dumping their long exposure after that positive Nonfarm Payrolls report.

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, with the 50 MA for both silver and gold continuing to rise towards the 200 MA, and the 200 MA for both starting to flatten.  However, silver has dropped below its 200 MA, which is bearish.

Summary

Gold and silver have started diverging again, most likely because of fears of debt defaults in China.  Silver was hammered Friday along with copper, while gold dropped and then recovered.

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, and 50 day moving averages, and gold remains above its 200 day MA while silver has dropped below (mostly bullish).  GDXJ:GDX is still climbing (bullish), and GDX:$GOLD is climbing as well (bullish).  The gold/silver ratio has climbed to 64.13, and is clearly bearish.

Managed Money continued covering short, but is now down 2/3 from its high point in December, and its not far from a more "normal" positioning.  We need accelerated buying from Managed Money longs to keep the momentum moving higher.

Shanghai is in discount, COMEX registered is basically unchanged, the physical ETF premiums dropped, and GLD tonnage rose.  All in all, it looks like physical demand is somewhat negative.

Trends still seem to be up, but the China story has me a bit concerned.  The miners and gold are holding up so far, but silver is starting to look like a problem child once again.  Perhaps its still all up to the commodity index, which continues to climb, improbably, into "extremely overbought" levels.

4 Comments

hammer6166's picture
hammer6166
Status: Bronze Member (Offline)
Joined: Apr 30 2010
Posts: 26
Defaults in China

Hi Dave,

"From what I have seen, when copper is getting hammered, its hard for silver to do well.  By extension, if China has debt default issues, how do we think silver will perform?  Most likely, it will underperform."

If defaults continue to happen in China, what do you think the affect will be on the prices and demand for gold in China?  On the surface, it would seem to be negative for price and demand.

Brian

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5408
defaults in china: effects on gold

Brian-

My initial feeling is the same as yours - debt defaults would lead to deflation, which (at least during the US depression) dropped the price of the entire commodity index, which should tank gold too.  Apparently a lot of commodity-buying in China was debt-funded, and/or commodities are used as collateral for debt.  The unwind of that may lead to a nasty move lower in commodity prices.

At the same time, it could go the other way.  If debt starts to be seen as high risk, they might well decide to buy gold bars because at least they don't default.  That, and gold is a universal currency accepted everywhere, while the CNY is not - useful for a billionaire fleeing the jurisdiction in a plane with his wealth intact.

In other words, I can see arguments for both sides!  That doesn't help much I know.  But I do think gold will perform better than silver in such a case.

As the defaults start to occur in China, we'll be able to tell which way things are going by watching gold delivery volumes as well as premiums/discounts at Shanghai.  I think our best bet is to just watch the prices, and not try and project too much of our own forecasting onto the data coming out.

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
Copper's fall continues

Hi Dave and all,

Here is an update from CNBC on this morning's fall in the copper price in Shanghai.

Copper's 'fall out of bed' underscores China woes

It looks like zerohedge is following the story as well:

Celebrating China's first bond default: Copper limits down, Yuan crashes most in six years

Like Doug, I was impressed by this article:

China is crashing..as predicted

It looks like there are some pretty important headwinds against copper, and therefore, silver.

Dave, I would be very interested in any comments you have regarding the data coming out of China.

Thanks,

Hugh

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5408
china, copper, and silver

So on a monthly basis, the copper chart is at a do-or-die point.   This monthly chart clearly shows copper's descending triangle since mid-2011 which is quite similar to the chart that most of the rest of the commodities had prior to our big 5-week commodity rally that started in early February.  Copper did not participate and in fact is looking perilously close to a breakdown.

A decisive break through 3 could suck silver right down into the vortex, and perhaps gold too if things got bad enough.  It likely also depends on the rest of the commodities.

Its hard to parse what's really going on in all that newsflow out of China - is it real, or propaganda - is it just the big banks planting stories to try and get us to sell?  The China debt story makes sense, but it has made sense for years now and nothing has happened.  Every time a bankruptcy comes up that might cause trouble, the Chinese government steps in to make the problem go away.

So when in doubt, I watch the prices - and copper is really my only proxy, and it is telling me that all is not well.  Intraday, copper bounced off 3 earlier this evening, but the downside velocity of the last few days price action looks really strong.  Perhaps this really is it.  If copper blows through 3 with some force, that's the way I'll be leaning...

 

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