PM End of Week Market Commentary - 3/21/2014

davefairtex
By davefairtex on Sat, Mar 22, 2014 - 2:21pm

Gold rose +6.40 on heavy volume to 1334.50 with silver up +0.01 to 20.29 on light volume.  GDX was up +0.20% on light volume while GDXJ was down -0.13% also on light volume.  After a series of big high-volume move down days, the very modest moves up along with the light volume in most instruments are bearish, suggesting that buying interest at COMEX and the mining shares is low.

For the week, gold was down -48.00 [-3.47%], silver down -1.17 [-5.45%], GDX off -7.97% and GDXJ down -10.69%.  This is the very picture of a bear move in PM: silver leading gold, and GDXJ leading GDX - all to the downside.

US Equities/SPX

The US equity market rallied off last week's dip and tried to make a new high this week but failed, closing up +1.38% but ending the week on a bit of a sour note.  Volume on Friday was huge - my guess is that a lot of shorts were stopped out by an initial bullish spike Friday morning, and then the big guys went and sold off a bunch of their holdings when the breakout didn't happen.

The big volume on an otherwise unremarkable day gets my attention.  Similar volume spikes were visible on the DJIA as well as the Dow Transports.  This was a big distribution day across the board, and this is what tells me the big guys are unloading their inventory - right at the top, to the usual bagholders.  [That's you and me, at least metaphorically speaking.  If its all going according to the usual script, there should have been some breathless chatter on FE TV about another all time high, bullish market, etc, to spur buying by the excited public right at the top.  But I don't know, since I don't watch.]

Miners

Mining shares had a bad week.  While last week they broke higher, this week they lost all those gains, and kept moving lower past the previous consolidation box.  Breaking the 20 EMA which was last crossed Dec 31 2013 was also another bad sign.  Lastly, down day volume has been big, and up-day volume small, which is a clear sign of distribution.  If you're thinking of buying the miners at a discount, I'd probably wait until we see some good up-day volume return.  Of course - the buyers could return tomorrow, you never know, so watch things with an open mind.

GDXJ looks pretty similar to GDX.

The USD

Perhaps the most important movements came from the USD this week, on Wednesday after the FOMC press release.  The USD screamed higher after that release; apparently the dollar bears were surprised by something.  Still, at end of week, the 50 MA seemed to be acting as resistance for the buck, so we need to watch and see if dollar strength is just a flash in the pan, or it is actually the start of a new trend.  A break above the 50 will likely lead to lower prices for PM and the rest of the commodity index.

Rates & Commodities

The 10 year treasury rates rose this week, up 10 basis points to yield 2.75%.  Bonds are trading within a range - down one week, up the next.  This week: rates rose, so bonds fell.  I can't see any sort of trend at the moment.  Likely its all about the equity market, with money flowing back and forth until the equity market picks a direction to go in.

Commodities pulled back this week, down -1.16%.  This is all still within the bounds of "normal correction within an uptrend" for commodities, but a strengthening dollar will likely encourage commodities to drop further.

On the weekly chart, copper appears to have put in a low, but to me the jury is still out, and it depends on what happens in China with their debt default issues.  If copper breaks lower, it is my sign that China is getting worse and that will likely affect the rest of the world too.  And if that happens, I expect silver to drop further also.  Next strong support for silver is at 19.

Physical Supply Indicators

* Shanghai premiums on the Au9999 contract screamed higher this week, up +11.60 to 8.56 above COMEX.  This seems to happen every time: Shanghai goes progressively more into discount as gold rises higher and higher, and then returns to premium when the price of gold drops.

* The GLD ETF gained +0.38 tons of gold this week, and is up to 817 tons.

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

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1333.80 and silver 20.30:

    PHYS 11.09 -0.18% to NAV [down]
    PSLV 8.06 1.92% to NAV [down]
    CEF 14.36 -5.13% 1to NAV [down]
    GTU 46.90 -5.00% to NAV [down]

As the PM prices dropped, ETF discounts increased, PSLV by a full two percent.  (You can see this effect in the PSLV:$silver chart).  Western silver bugs are selling.

Isn't it interesting how Shanghai premiums increase when the price drops, but the ETF premiums fall?  Western goldbug ETF buyers are definitely NOT into buying the dips in the same way the traders in Shanghai do.

Futures Positioning

The COT report is as of March 17th.  There were some big moves in the COT report this week, although as usual it only covers through Tuesday.  I suspect a big chunk of the movement in the futures came from last week's gold breakout.  Anyhow - managed money increased net long positions by +14k contracts, covering short 5k and going long by +9k.  At the same time, producers increased their shorts by a big +15k - perhaps these were miners locking in what they saw as good prices for them.

Managed Money is now down to 16k short contracts.  Short covering by Managed Money is (largely) over.  The good news is, Managed Money actually did increase their long exposure, which shows a willingness to buy.  They need to keep doing this to keep the COMEX prices rising.

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

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

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

The PM correction this week led to the short term moving averages to turn down for both gold and silver.  Medium term the trend remains up.  That said, silver's price is below all 3 moving averages, and gold is now below its 20 EMA.  Gold is a day or two away from its golden cross (50 MA crossing 200 MA) and if buyers begin to show up for gold, it could lead to some good things.

I'm less optimistic about silver.

Summary

Silver is leading the entire PM complex lower, with gold performing the best and GDXJ performing worst.  Copper's failure to rally has led to continuing weakness, and the dollar's rally after FOMC has added fuel to the downside fire.

Looking at the various ratios and averages, only the 50 MA is rising for both gold and silver; the other averages are dropping.  Gold is below its 20 EMA, but above the 50 and 200.  Silver is below all three, effectively dragging them all down.  That all adds up to "somewhat bearish" - but it could still be seen as a correction within an uptrend, since the 50 MAs are still rising.  GDX:$GOLD has dropped into a neutral stance, while GDXJ:GDX is now slightly bearish.  Gold/silver ratio of 65.77 is quite bearish, and is at a new cycle high.

Managed Money started actually going long during this COT report, but some of the important big move days weren't covered by the report, so the information is a bit stale.  Only 16k shorts remain for Managed Money, which suggests our days of short covering fun are at an end.

Shanghai has moved back into premium, COMEX registered is unchanged, the physical ETF premiums dropped, and GLD tonnage rose.  Let's use Shanghai as the tiebreaker and call physical signals as somewhat positive.

The rising dollar caused problems this week for PM and commodities.  If it continues up, I expect PM to drop further.  Dropping commodity prices won't help either, nor will China debt defaults.  Once again I'm watching copper for clues.  My suggestion: wait for buy-side volume to return before jumping in long.  And if China starts to improve, silver will likely be a rocketship.  I mean, I don't expect China to improve, but this is politics and intervention, so you just never know.

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