PM End of Week Market Commentary - 3/14/2014

davefairtex
By davefairtex on Sat, Mar 15, 2014 - 7:08pm

Gold rose +11.70 on very heavy volume to 1382.50 with silver up +0.28 to 21.46 on moderately heavy volume.  GDX was up +0.36% on moderate volume while GDXJ was down -0.47% on heavy volume.  Buying in both gold and silver was steady for most of the day; an attempted breakout occurred around the time of the NY open, but did not hold.  Gold once again looked stronger than silver.

For the week, gold was up a solid +42.60 [+3.18%], silver up +0.56 [+2.70%], GDX up +5.92%, and GDXJ up +4.99%.  Gold again outperformed silver, and the miners broke out of their consolidation zone.

US Equities/SPX

The US equity market topped and fell this week, down -36 points [-2%].  As we know markets move in waves, and it looks like this most recent 5-week wave just peaked and is now falling back.  I'm watching the various moving averages to see if they act as support - as they normally would if the dip-buyers come in the way they have done for the past 5 years.

We can blame the Ukraine, China, or even the missing plane (where does one hide a triple-7 anyway?) but sometimes a market just gets tired of going up and it needs a rest.

For those inclined to go short, if the SPX tries to rally, encounters resistance and the rally stops, or if it starts reacting poorly to good news - its time to load up short.  Otherwise - Dave's Macro Data isn't showing any sign of a top just yet.

Miners

Mining shares broke out pretty convincingly this week, making good gains on some pretty nice volume.  Friday the mining shares took a bit of a rest - although gold continued higher, mining shares were a bit tired.

Miners have started to catch up to gold.

One last thing.  On the chart below, the blue line (50 MA) is just a few days away from crossing the red line (200 MA).  Short of a general crash of the mining shares, we'll soon be seeing a golden cross, which is the signal for "everyone in the water" for the longer term traders.  We can also see that the 200 MA is seriously flattening too.  It will be interesting to see if the mainstream media starts picking up this story.

We aren't hearing so much about "gold 700" anymore, are we?

The USD

The USD moved lower again this week, closing down -0.36% to 79.44.  The USD looks to be heading down to test resistance at 79.  The buck is in a long term descending triangle, and any break below 79 might lead to some pretty sharp drops in the buck, because there are not a lot of support levels once 79 goes.

A move through 79 would likely result in new cycle highs for gold.

Rates & Commodities

The 10 year treasury rates dropped this week, off -14 basis points to yield 2.64%.  Last week's move higher in rates was wiped out.  When equities drop, bonds tend to rise and rates fall, and that's what seems to be happening now.  If equities continue to drop, bonds will likely keep moving higher.

Commodities took a rest this week, down -0.37%.  They still appear dreadfully overbought on the weekly chart, but on the daily chart the pressure has come off a bit.  If the dollar continues moving lower, perhaps the commodity index will continue to rise.

Copper, the critical industrial commodity that is often linked with economic activity in China, broke a key long term support level this week, dropping below 3 on some pretty big volume.  It has stabilized a bit below 3 but I do not think it is out of trouble yet.  A common breakdown pattern is to drop below support, retrace back right up to it again, and then crash hard right after.  If that happens to copper, silver will probably get whacked.

Physical Supply Indicators

* Shanghai premiums on the Au9999 contract were down -0.99, now trading at a discount of -3.05 below COMEX.  Deliveries were somewhat higher this week, but compensation was long-to-short, presenting a picture of a Shanghai market in slight surplus.  Still, premiums haven't fallen apart, and with gold up $50 this week I think that's actually positive.

* The GLD ETF gained +6 tons of gold this week, and is up to 811 tons.  Can gold still be flowing from west to east when GLD is gaining gold - which it has been doing now for the past four weeks?

* Registered gold at COMEX remains unchanged, at 19.83 tons of gold.

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

    PHYS 11.5 -0.05% to NAV [down]
    PSLV 8.67 3.87% to NAV [down]
    CEF 15.11 -4.35% 1to NAV [down
    GTU 48.62 -4.88% to NAV [down]

ETF discounts increased - not much its true, but having the discount increase is a bit strange.  In the past, when gold rose, discounts would shrink and eventually even turn to premium but that's not happening right now.  This suggests to me the western mainstream goldbugs are not buying into this whole move higher.

Futures Positioning

The COT report is as of March 10th.  Managed Money dropped another 5.4k short contracts, reducing their short exposure down to 21.8k contracts.  The "normal level" during a bull move in gold is about 5-10k contracts short.

Given this week's price action and the break above 1360, my guess is Managed Money has cleared out of all but 10k shorts by now.  Any further move up in gold will need to come from additional long exposure.  So far, Managed Money has not been a big buyer of COMEX gold.

Producers remained relatively flat, closing both shorts and longs.  Producers still remain uncharacteristically bullish, with a historically low level of short interest.

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

Gold: short term UP, medium term UP, long term NEUTRAL.

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

This week gold's 200 day MA went from DOWN to NEUTRAL - something a very long time in the making.  Since gold's price is 82 points above its 200 MA, we can expect gold's 200 MA to start rising in the near future.  This is yet another bullish waypoint.  Gold's "golden cross" (50 MA crossing 200 MA) is also not far away.

Silver price is once again above its 200 MA, however as we can see from the moving averages, it is not doing as well as gold.  It is odd to have a bull move in gold without silver leading; the way I read this is, this PM uptrend is a monetary/government trust move rather than something that is inflation-related.

Summary

Miners are once again leading gold higher, with silver being dragged along reluctantly.  Copper's high volume plunge through 3 has weakened silver, which in turn has moved the gold/silver ratio to 64.42.

Looking at the various ratios and averages, gold and silver remains in an uptrend for both short and medium term timeframes, and gold's long term trend is now neutral (mostly bullish).  Prices on the metals are once again above the 20, 50, and 200 day moving averages (bullish).  GDXJ:GDX is somewhat improved (somewhat bullish), and GDX:$GOLD is much improved (bullish).  The gold/silver ratio has climbed further to 64.42, and remains bearish.  The trend data remains positive and is getting more so as time passes.

Managed Money continued covering short, and my guess is after this week's price move, is probably down to 10k shorts - there is little if any pent-up short covering fuel for further rallies.   We now need buying from Managed Money longs to keep the momentum moving higher.

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

Gold has remained strong throughout all the fuss - in spite of copper and its correlation with silver.  What's more, the miners are back leading prices higher.  The gold bull remains intact; perhaps this is a dollar story as much as anything else.  A declining dollar is helping gold, but my key question is, will Managed Money start actually buying COMEX contracts?  If not, without those premiums in Shanghai, can gold continue to rise?

Perhaps its time for India to repeal their tax on gold imports.  Wouldn't that be nice?

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2 Comments

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
Gold Calls

Another concise but comprehensive write-up, Sir Dave.

I think you have a typo above, you may have meant gold flowing "west to east" not "east to west". [Note from Admin:  Agreed and changed.]

And to answer your question, yes, gold is still flowing from West to East.  With the instability in the Ukraine, the threatened economic war by the U.S. and allies on Russia, if anything the motivation for loading up on gold in case this ridiculous foreign policy by Obama gets out of hand, well I would want to be holding as much gold as possible and as few dollars as possible if I were Russia, China, just about anyone.

Recall the quote by Mr. Rob Kirby, "as surely as water flows from mountaintops to valleys, gold flows from countries with trade deficits to countries with trade surpluses".

That said, I think the immediate term price of gold is mixed and uncertain.  The charts you aptly describe seem to be poised for breakout higher.  However, something smells fishy to me right now.  I know that is not a scientific position. 

In times of instability, and I believe we are entering a high instability phase at present, the Fed goes into overdrive to stabilize by whatever means, including driving down the price of gold with naked paper- you know, the stuff you like because it provides "liquidity".

As a side commentary, I have noticed that a lot of very bad and immoral things are being done in the name of "liquidity".  Did some Harvard professor coin the term "liquidity" to justify all the crap that is going on in our financial sector?  High frequency trading, naked commodity futures, Fed's quantitative easing.  I translate "liquidity" into "a huge amount of digital currency that a small group of people are creating to steal and transfer wealth from honest workers"... but that's perhaps a topic for an economic thesis on aggregate demand versus organic demand.

Forces for gold going down: A stock market correction i.e. deflationary push with the need for institutions to liquidate gold to cover losses, China economy rolling over triggering a global recessionary pulse- also deflationary, a short erm positive GOFO rate that reversed into positivity on March 11th so we'll have to see if it continues to move more positive. 

http://www.lbma.org.uk/pages/?page_id=55&title=gold_forwards&show=2014

It seems to me that rapidly some physical supply of gold has suddenly entered the market- that would explain GOFO and the GLD inputs you mention- is the Fed having a firesale of more of U.S. taxpayers gold, perhaps?

I am not so worried about all the China fears that many analysts are now raising.  I could be wrong.  But mMy opinion (just an opinion, like everyone else), is that yes, China has a fragile and screwed up overleveraged banking system, shadow and non-shadow, but we still have no concept of how much command and control the Chinese government has over the economy, including the banking system.  While I don't support the Chinese communo-capitalistic system, I do think it can very rapidly respond to shocks, and temporarily quell bank runs, currency runs, etc.  And overall, China has done many things right- buy gold, buy resources, develop your manufacturing base, develop your domestic economy.

Gold forces positive- continued instability in Ukraine, as mentioned above continued threats by U.S. and allies for economic sanctions, some unanticipated results of the economic wargaming like dumping of UST by China and Russia causing bond i.e. dollar collapse.  I'm quite sure the immediate response will be the Fed "emergency" buying i.e. monetizing all UST dumped, but this would drive the dollar even lower, perhaps triggering a run, and driving Euro and haven currencies like Australian dollar/ NZD higher.

All that said, I have a simple question, if gold is breaking out to the upside, i.e. the upside forces win, and someone had some dry powder to play in the Comex casino, do you have a gold call price target for the next few months?  Apologies if you covered this in an earlier post.

Hrunner

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5063
flowing gold, calls for prices

Hrunner-

[Oops - yes west to east, not east to west.  My lame editor didn't catch that one.  :-)]

I have to disagree with you on the flow - my indicators suggest people in Shanghai are showing a preference to liquidate rather than accumulate, given the current price.  How long this lasts - I don't know - but I've noticed Chinese people are pretty decent at looking at market cyclicality, and they typically liquidate after a strong rally.  (Buy low sell high - imagine that?)  That's what my "premium" charts show anyway.  Of course if Shanghai moves into premium as price rises, that's quite bullish, but that's not what we're seeing.

Likewise, I'm also guessing that Chinese gold buying will be influenced to the liquidity provided by the Chinese banking system.  If China starts moving towards debt deflation, and/or their trade surplus starts to dry up (it had an "issue" this past month), gold sales could start to pick up.  They will have to sell their gold in order to retain their debt-encumbered assets.  We'll see that in the premiums though, and I don't think we're seeing that now.

So that suggests to me that so far, I think you're right on China.  Where is Peak Debt for China?  I'm guessing it hasn't been hit yet, so if the BOC wants to goose private borrowing, they most likely still can, unlike the Fed.  It all seems absurd but I think they still have room to maneuver.  And most likely they will.  But between here and there I think copper is going to take some more hits.

As for the supply of gold that has hit the market, my thought is, supply has emerged because the price has risen.  Some chunk of people who bought at 1200 are now seeing $182 of gain in two months (whoa, 15%!) and thinking "boy, I want to cash in."  And trapped longs who bought on the way down and have waited this long to bail out and have just now broken even - they're selling too.  Higher prices usually brings out supply.  There's no need to postulate some Dark Fed Plot dumping Fort Knox Gold on the market in secret when you have higher prices to explain it.  Adam Smith, How Markets Work, Occam's Razor and all that.

As for Russia - so far there hasn't been any (net) selling of treasury bonds.  In fact rates have dropped across the board. There is a net selling of dollars, but its not massive and I believe its more related to the Eurozone deflation (and the resulting rise of the euro) than anything else.  I don't think any Russian attempt to dump their 139B in treasury bonds will have much more than a temporary effect.

As for calling gold prices, I've stopped doing that!  I watch and see how the market is responding week by week and decide then how to react.  I assume the uptrend will remain in place, because trends once in place have that lovely momentum behind them, and it takes quite a bit to stop the train.  I look for serious selling/distribution and at that point, I'll point it out and suggest a trend change may be occurring.  And then I look to see if there is dip-buying that happens, all the hallmarks of "how the trend is doing" analysis.  Honestly, I don't look at too much more than I write about.

All those mainstream goldbug types who have target prices for gold are just fooling themselves, in my opinion.

I do like to look at various price levels and see how the market reacts when it gets there.  Next price to watch is of course 1437, the 2013 summer high.  This most recent 1360-1370 resistance didn't hold very long; if we move through 1437 as easily, then we're looking (in my opinion) at 1525 as the next interesting level.

 

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