PM End of Week Market Commentary - 5/30/2014

davefairtex
By davefairtex on Sat, May 31, 2014 - 2:26am

On Friday gold closed down -4.10 to 1251.40 on moderately heavy volume - silver was down -0.21 to 18.82 also on moderately heavy volume.  Gold tried rallying in Asia, but by the start of the London session the shorts started in, hammering gold down repeatedly through support to touch 1242.  It rebounded into the close, leaving the loss for the day only modest.  Silver was not so fortunate; although it remained above 19 for a while, at around 0930 EDT it started to sell off right along with copper, and by the afternoon silver had plunged to a low of 18.61 before rallying into the close.

Gold hasn't had an up-day for 5 days, and while velocity doesn't seem high right now and perhaps a case could be made for some modest support at 1240, the trend is quite clearly down.  For a time silver looked stronger than gold - and might have had a chance to put in some sort of a rebound right up until it started that selloff after 930 on Friday.  Now, it has dropped below 19 support and is flirting dangerously on the edge of a  potentially much larger breakdown.

Miners on Friday tell a very different story from metals.  GDX was up +1.17% on heavy volume, while GDXJ was up +2.13% on heavy volume as well, finally confirming the rebound from Wednesday.  Mining shares dropped early, started to rebound gently around mid-day, and then rallied extremely hard for the last 45 minutes of the trading day - in fact GDXJ went vertical in the last minute of trading, good for 40 cents - about 1.2%!!  What on earth does this crazy last-hour performance mean?  Well certainly traders did NOT want to be short miners over the weekend, that much is clear.  It could be short covering, but it might be more than that too.

For the week gold was down -42.50 [-3.29%], silver -0.65 [-3.34%], GDX off -3.47% and GDXJ down -2.29%.

Miners

Last week we saw miners dropping slowly on low volume.  This week - miners were slammed hard on high volume, breaking below support.   Yet in the last two days, miners have rallied back, putting in what traders call a "swing low" on some decent volume.

In addition, GDX did this under conditions when gold itself was still dropping, which makes the swing low possibly more significant.  GDX outperformance of gold has made the GDX:$GOLD ratio look quite a bit better than GDX - we can't say GDX:$GOLD is bullish just yet, but on the chart below you can see much clearer signs of a swing low.  And since GDX:$GOLD tends to be a leading indicator for PM overall, this is a good sign.

I didn't mean to ignore GDXJ - which made up for its tepid performance Thursday by putting in a clear confirmation today of its own swing low with that strong last-45-minutes move into the close.  GDXJ actually looks better than GDX.

US Equities/SPX

SPX continued higher this week, breaking out to a new all time weekly closing high of 1924, up +23 [+1.21%] for the week.  What about the GDP contraction of -1% for Q1 2014?  Never mind that!  The VIX remains around 11.40, signaling all is well.

QQQ also broke out to new highs, but the small caps still lagged, up +0.74%.  Money seems to want to flow into large cap stocks, and has mostly deserted the high fliers and small caps - some of which have done all right, but more have stalled out this week.  Money is targeting dividends and stability over growth & speculation.  Tech is also doing quite well.

The USD

The buck was unchanged this week, rallying briefly above its 200 MA and then dropping back down below it to close at 80.43.  It is looking a bit tired, and may be ready for a correction.  A correction in the buck should help gold recover.  Assuming gold wants to recover, that is.

Rates & Commodities

TLT broke out to a new high this week, up +1.24%, driving the yield on the 20 year down to 3.05%.  The 10 year didn't rally quite as strongly, but its yield dropped too, now at 2.48%.  Life is good if you own bonds.

So let's see now.  The Fed is tapering, and yet bonds are rallying.  Does this make sense to anyone?  Well it does if you see things as more than just domestic players in the marketplace.  My guess: foreigners see US treasury bonds as being better than the eurozone bonds - they yield more, and they aren't likely to have Russian T-72 tanks appearing near their issuer's borders anytime soon.  Oh excuse me, "Russian Tourists."  And there's no worry about a natural gas shortage in the US, either.  Does Europe even have an army anymore?

Commodities fell briskly this week, down -1.26%.  That likely didn't help PM.

Physical Supply Indicators

* Premiums in Shanghai dropped again, falling -0.78 to +0.68 over COMEX.  This isn't a good sign, what with the price of gold falling.  Normally those Shanghai gold traders would rush to buy, but not this time.

* The GLD ETF gained +8.39 tons this week, and has 785.28 tons remaining.

* Registered gold at COMEX remains at 25.15 tons.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1293.10 and silver 19.35:

  PHYS 10.35 -0.61% to NAV [down]
  PSLV 7.53 +2.92% to NAV [up]
  CEF 13.29 -5.87% to NAV [down]
  GTU 44.73 -3.39% to NAV [up]

ETF premiums are mixed this week, with GTU climbing a surprising amount.  It is surprising to see PSLV's premium increase with silver doing so poorly.  That seems bullish.  Premiums on the sprott funds seem to have held up quite well lately.

Futures Positioning

The COT report is as of May 27th.  Managed Money dramatically increased their short positions in COMEX gold this week, up 22k contracts to 53k contracts total short.  That's a massive change, and includes the big day Tuesday when gold dropped $30.  Now we know who was responsible - Managed Money.

Producers covered 22k short positions (no doubt cashing in on positions taken at higher levels), and also sold 11k long positions for a net change of +11k.  Producers are not quite net long, but another week of this, and they'll be close.

While I don't normally look at the silver COT report, I was curious to see how it compared to gold.  Turns out, its pretty astonishing: Managed Money have the largest short positions in the history of the timeseries just this week in silver, and they further increased their short exposure this week.

"Shortest position ever!"  And that's no bit of hyperbole either.

Now then, this is NOT a timing indicator or any sort of a sure thing predictor.  But what it does suggest is that the fuel is there for a massive short covering rally.  What's more, these guys are often (but not always) leaning short "near" the local low points throughout the history of the timeseries.  Here is what I mean:

Gold's COT report is not this dramatic, or I'd show you a chart of that too.

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

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

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

The moving averages are all saying the same thing now - DOWN.   But you knew that without even looking, didn't you?

Summary

Gold broke dramatically out of its 5-week wedge formation dropping $45 in four days.  Silver looked just as bad, dropping through 19 and making a new cycle low of 18.61 - the only lower point for silver in the past 4 years was set on June 2013, when silver hit 18.17 after the big gold crash.  Silver - not happy right now, and likely below costs of production for most miners at this point.

Looking at the various ratios and averages, both gold and silver are in a downtrend in all three timeframes.  That's bearish.  Gold/silver ratio is looking toppy, but remains bullish - which is bearish for PM.  GDX:$GOLD is a bright spot, having rallied strongly for two days running and may be signaling a low, and GDXJ:GDX is also looking good, having moved above its 50 MA which might be even more bullish than GDX:$GOLD.  Our trend indicators are saying "down", but the leading ratio indicators that tend to show trend changes in advance are strongly hinting that a reversal could be at hand.

The gold COT report this week was a smoking gun, pointing the finger for the Tuesday Gold Smash right at Managed Money who dramatically increased their short positions.  At the same time Producers covered short, leaning more bullish.  What's more, silver's COT report shows Managed Money at all time highs in their short exposure.  Literally, they have never this short before, ever.  While this doesn't mean silver can't go lower - these are the guys usually wrong when the trends change.  And when the trend change comes, likely it will be quite violent.

Shanghai premiums are basically flat, GLD tonnage rose, and ETF premiums were mixed.  Physical demand seems neutral.

Trends in PM are bad, while leading indicators suggest a reversal may be in the offing, the COT report (especially for silver) show an increasing possibility we are at the lows, and premiums are mostly flat.  I'd expect at least a modest bounce sometimes soon.  We are definitely oversold and due for a rally.  I'd be happier if those Chinese physical buyers were to reappear.  And with silver, any sort of modest bounce might turn into a tornado if the right conditions materialize.

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4 Comments

Wildlife Tracker's picture
Wildlife Tracker
Status: Gold Member (Offline)
Joined: Jan 14 2012
Posts: 403
EVERY fundamental is screaming bottom

I especially love Belangp's oil indicator chart that he posted here...

 A pretty nice indicator chart IMO.

However I think we should brace ourselves for the possibility of  $13 silver. A brief 1 month to 2 month price spike lower to reflect the 2011 highs. 

 

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1469
Markets are nonsense

Outlier events will drive gold prices.  If the FED pauses taper at July meeting and 2nd qtr comes in weaker than expected, how will gold keep going down?

Regarding the Brussels T-Bond buy, is there data on if FED swaps have increased that enabled this offset to reduced FED buying without affecting the FED balance sheet because the SWAP is off balance sheet?

It is very negative that HELOC is increasing while Retail Sales flat line.   Imagine another housing price crash of 20%...Hollow it out Elites!

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5685
EIA crude projections

Read the executive summary of the latest EIA Annual Energy Outlook (dated May 7) and noticed this fun chart, which is the EIA's best guess at what 3 different outcomes of US crude production might look like going forward 30 years.

http://www.eia.gov/forecasts/aeo/executive_summary.cfm?src=Petroleum-b1

Note we should start to get a better handle on which case we're going to see sometime around 2017, but that the "reference case" suggests a US production peak in 2020 with a drop-off through 2040.

And this is the EIA.  Even they don't see "oil independence" except in the "high oil & gas resource case."  Given their record for overly optimistic projections of oil production, one might be more focused on that reference case, or even the low oil & gas resource case.

Shale has been a nice boon, but it won't last.  Even the EIA sees this as the likely outcome.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5685
gold/oil ratio

WT-

I've seen & done the whole gold/oil ratio, and it makes a certain amount of sense to me.

Trade: long gold short oil.

As for that drop-off down to 13: could be.  I was looking more at 15.  It certainly would be unpleasant for all those silver mining companies.  But those descending triangle charts do tend to break down.

Only issue: the silver COT report has all the hedge funds already leaning heavily short.  They tend to be wrong at turning points.

 

 

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