PM End of Week Market Commentary - 5/2/2014

davefairtex
By davefairtex on Sat, May 3, 2014 - 3:09pm

On Friday gold closed up +16 to 1300.70 on very heavy volume - silver was up +0.48 to 19.52 on moderately heavy volume.  At the time of the nonfarm payrolls report (0830 EDT) PM dropped hard, with gold hitting 1272 and a huge 7500 contracts were traded in one minute - longs being liquidated.  But about two hours later, PM rallied hard in the opposite direction a few minutes after Reuters reported Ukranian combat losses including two helicopters shot down at 1013 EDT.

Trader Dan Norcini thinks that particular news release was the proximate cause of the PM rally - and indeed, the relatively coincident rally of a large number of instruments across the board.

http://traderdannorcini.blogspot.com/2014/05/ukraine-stirs-safe-haven-plays.html

Do you see the pattern on all three charts? It is the same isn't it? At nearly the same time or very close to the same time, all three markets reversed course after moving lower on the payrolls number as the market's attention shifted almost immediately to the wire reports of the Ukraine conflict and that downed helicopter.

For the week gold was down -2.90 [-0.22%] silver -0.20 [-1.01%] GDX -0.57% and GDXJ -2.19%.

Silver was particularly badly behaved this week, making a new low to 18.68; the modest drop in silver this week conceals a pretty dreadful performance Monday-Thursday.  The two-day bounce last week was unable to rise above the 20 EMA, which tells me the COMEX longs were not so enthusiastic.

In fact, the chart below shows that silver has been unable to close above its 20 EMA for the past few months.  The big rally Friday would seem to confirm the low of 18.68 on the rebound on Thursday, but I remain wary until silver can at least close above that 20 EMA.

US Equities/SPX

SPX moved up again this week, +18 to 1881, a mere 9 points from yet another all time high.  Yet the Nasdaq remains below its 50 MA, and the former market leaders are still not looking so great - banks look ill, biotechs too, techs look ok, but all of them are still underperforming SPX.

Interestingly, downside insurance (the VIX) has dropped to 13, even lower than last week.

One macro sign of a possible issue is the NYSE Margin Loan position, which dropped -15.4 billion this past month (reporting date 2014-03-31).  Sadly, NYSE reports this data with a one-month lag.  One wonders why its not real time.  Margin loan data is often predictive of stock market direction, so a drop in margin credit outstanding is a serious danger signal - even though it lags by a month.  Margin credit dropping = deflation!  At least in stock market asset prices anyway.

Another macro sign was the GDP print, which came in at +0.1%.  Still positive, as long as you assume a low inflation number: BEA assumed inflation in Q1 was 1.3% while the BLS CPI-U came in at 1.8%.  Why did BEA pick that 1.3% inflation number?  Simple: the 1.8% inflation number would have meant GDP would have been -0.4%.  And that would have been bad.  The "billion prices project" recorded inflation at 3.91% for Q1; this number makes sense to me, given how commodities prices jumped during that period.  How about using that 3.91% inflation figure for GDP?  That would give us a GDP rating of -2.5%!!

The guys at Consumer Metrics Institute do a good job deconstructing GDP data, and they were quite negative on this particular report.  They concluded their report (http://www.consumerindexes.com) with the following:

Enjoy this (barely) positive headline number while it lasts. Even if it survives the next two months of revisions, the economic momentum signaled by the past two quarters will likely carry the headline number into the red in the very near future. 

Fed tapering, a weakening global economy, a bad GDP print for Q1, rising consumer prices, a decline in margin credit outstanding, a flattening yield curve, and yet the US equity market is within literally 8 points of an all time high with a VIX of 13.  It is a very curious picture right now.

Miners

Miners traded sideways-to-down this week, only rescued from a moderately bad performance by that downed Ukranian helicopter that pushed mining shares up along with PM on Friday.  GDXJ managed to extricate itself from trouble Friday, but was unable to push above its 20 EMA.  It still looks bearish - to get something moving again it needs to move above the recent high at 37.50, which would start to make the shorts nervous.

GDX looks somewhat better than GDXJ, but it too has yet to surpass last week's high.

The USD

The buck dropped most of the week again this week, closing down -0.27 to 79.56.  It tried rallying on Friday off the Nonfarm Payrolls report, but was then sold hard after the news from Ukraine.  I was surprised by this outcome - I'd have expected the dollar to rise and the euro to fall.

Rates & Commodities

TLT did it again, up +1.49% breaking out to new highs Thursday and Friday.  20 year rates are now 3.12% and are steadily dropping week by week.  The US 20 year bond has returned 12% since January 1 2014.  It is curious that the long bond rallies while the buck drops.  It does look like money is moving from 3-5 year notes to 20 year bonds.  They call that "flattening the yield curve" which is generally a sign of impending economic distress.

Commodities were off -0.59%.  The chart still looks strong.  Copper dropped this week but rebounded along with silver on Friday.

Physical Supply Indicators

* Shanghai premiums on the Au9999 contract were up again week, +6.67 to 22.43, although the SGE was closed Thursday and Friday for Labor Day.  Delivery volumes were off a bit.  The premiums in Shanghai are very high right now; it will be interesting to see if they continue to be so elevated when the market opens May 5.

* The GLD ETF dropped -6.59 tons this week to 785.55 tons, a new low.

* Registered gold at COMEX rose +0.46 tons to 25.10.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1302.30 and silver 19.70:

    PHYS 10.78 -0.29% to NAV [up]
    PSLV 7.78 +2.50% to NAV [down]
    CEF 13.83 -5.60% to NAV [down]
    GTU 46.42 -3.39% to NAV [up]

ETF premiums are mixed, but GTU and PSLV are up big this week.

Futures Positioning

The COT report is as of April 29th.  Managed Money was more or less unchanged, while producers increased their short position by a net 1k contracts.  Producers remain historically low on their short exposure, which I interpret to be a bullish sign longer term.

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

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

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

The moving averages are at inflection points right now, so it is easy for price changes to move them around. Gold is right at its 200 MA, while silver remains below all 3 of its moving averages - and that's bearish.

Summary

Gold held 1280 support this week, while silver made a new low of 18.68.  The gold/silver ratio peaked out at 67.50, a new multi-year high.  Silver is seriously misbehaving, although the rally on Friday shows some promise of a possible reversal.

Looking at the various ratios and averages, gold's moving averages are either flat or slightly negative, while silver's averages are flat and more seriously negative.  The GDX:$GOLD is looking modestly bearish, and GDXJ:GDX is more bearish than that.  The ratios and averages point to gold just managing to hold its own with a downward bias, while silver remains in a serious downtrend.

Producers remain at all-time low short positions, which is usually a sign that we're relatively near to a low point.  This is a bullish signal, but its not as good of a timing indicator the way the ratio charts can be.

Shanghai premiums continued moving up this week, but the SGE was closed Thursday and Friday.  GLD tonnage dropped, ETF premiums mostly rose.  Physical demand looks quite strong right now.  All we need is for India to lower those tarrifs and we'll have the complete picture.  Shanghai premiums are also pointing to a near term low in gold.

The trend indicators look relatively weak, the premiums & futures positioning are signaling a low "should be" near - my only concern is that gold's performance seems linked to trouble in the Ukraine.  If "peace breaks out suddenly" where will we be?

 

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