PM Daily Market Commentary - 6/5/2014

By davefairtex on Thu, Jun 5, 2014 - 9:25pm

Gold closed up +9.50 to 1253.20 on moderately heavy volume, while silver closed up +0.24 to 19.02 on heavy volume.  Both metals traded sideways into the ECB interest rate decision at 0745 EDT, and upon the release of the rate decision PM sold off, threatening to make new lows.  However they soon rallied back and once the ECB press conference got underway, about mid-way through (0847 EDT) both gold and silver spiked higher, with gold hitting 1258 and silver hitting 19.15 with a huge number of shorts stopped out on the spike.  Both silver and gold retained much of their gains going into the close.

Of the two metals, silver looked the best today - not only was its gain higher on a percentage basis, but it also managed to move significantly closer to its 20 EMA, while gold remains far away from crossing anything.  It would not take much to flip the short term momentum to positive for silver: a crossing of that 20 EMA is only 14 cents away, and following that, the 50 MA is 47 cents.  A move above 19.50 might start really scaring the shorts.  And as we know from the COT report, there are a lot of shorts to scare...the unwind of their short positions hasn't happened yet - you'll know it when you see it.

Now we just need the market to cooperate - we need those COMEX silver buyers to show up.

The best I can tell by looking at the press conference timeline, PM wasn't impressed with the rate cut, or the negative interest rates.  The thing it liked was that the decision was unanimous (i.e. the Germans were finally on board with money printing) and additionally, the details of the LTRO: commercial banks can combine their small business loans into a new security, and sell that on to the ECB.  Furthermore, it also seemed to like the fact that the free money for banks cannot be used to buy sovereign bonds, but rather only used to fund loans to real people and businesses.  I came to this conclusion about "what PM liked" by looking at the timeline of the conference, and noting that prices took off after Draghi started speaking about particular subjects.  Of course, PM could have triggered off moves in the currency market, since the euro started to more seriously recover right around the time PM broke out.  Its hard to say as an outside observer what really moved the market.

Regarding the LTRO - the ECB intends to enforce this "lending to business" goal by allowing banks to borrow up to 7% of their total loan book that is devoted to business from the ECB - so if a bank has no loans to business, there is no ability to get free money.

Initially, the rate cut caused the euro to sink like a stone, dropping a full point after the rate release and at the start of the press conference.  But as the press conference continued, the euro started to recover; after two hours, it had regained all its losses, and by the end of the day the euro closed up +0.45 after a really massive trading range.  It appears that the initial move downward was "the flush", the buyers showed up pushing prices higher, and the outcome at the end of the day is a bullish one.  And I believe this is bullish for gold as well.

The buck did the inverse of the euro - it rose to 81.06 right at the start of the press conference, only to sell off steadily, closing down -0.41% by end of day, dropping below its 200 day MA and looking like it has put in a pretty convincing top at this point.  A dropping dollar should be good for gold.

GDX broke above its trading range and closed up +1.66% on moderate volume, while GDXJ was up +2.56% on moderately heavy volume.  Miners did well today, and while prices definitely closed above their breakout points (GDX closed at 22.65, clearly above the breakout point of 22.50) volume was a bit underwhelming and the price action was a bit lackluster.  Compare the move in GDX with the move you saw in the Euro above and you can see what I mean.  Bullish, but a bit less enthusiastic than one might wish.  GDX didn't even close at its high.

SPX had an initially poor reaction to the press conference - it sold off perhaps 10 points, but then as the buck dropped SPX started to rebound - it ramped higher finally closing +13 to yet another all time high of 1946.  Volume was good on the day.  VIX dropped to 11.68. 

High fliers are still down but are climbing slowly back up; Biotech (IBB) has retraced about half its losses, although the crazy social media stocks (SOCL) are still in the toilet - they seem unable to rise above their falling 50 MA.  But industrials and especially transports look strong.  The bubble stocks may be left behind, but the rest are making new highs.

I'm not certain that Draghi particularly wanted the euro to actually rally on his announcement, but that's what it did.  A great deal of uncertainty was removed from a number of markets today, and my guess is, the euro traders were worried that Draghi was going to *really* print money.  Now they know - his printing operation is not as dramatic as they had feared.

So the question is, will momentum in PM and the miners continue sustainably going forward, giving us a new trend?  That's a real question for me.  If I were to judge from the mining shares performance today, I'd say no - volume was just moderate, and price action was ho-hum.  But silver has this outside shot.  I think its the thing to watch for clues as to where we end up going.

One last point - but its an important point.  I am reminded by Chris's "vision of what's really happening" post today - gotta love the nuclear bomb photo - that my market analysis is really just a window onto the thinking of the mainstream, rather than an advice column telling YOU where to put your money.  I bet Jim wishes I would put this caveat at the end of every one of the pieces I write!  And perhaps he has a point.

Currently, what I see is that the mainstream is quite satisfied with paper.  The reaction of the markets today tells me faith in central banking remains completely intact, and their expectations for the future are basically that the ECB (and their cousins at the Fed) are on top of the problem, and they fully expect that the central planners will be able to contain any issue that crops up.  Or at least, they have so far.  "On most days, the world doesn't end."  Again, that's what the markets are saying.  We here know this has to break down at some point - exponential issues colliding with peak resources & what happens when expectations of limitless growth suddenly shifts into expectations of resource decline - but as of right now when you look at how the market is reacting, any thought of such a breakdown seems quite remote.

The biggest danger the mainstream sees is bail-ins in europe, but that seems to be just an undercurrent right now, not the dominant theme.

So if there is a change in this sense of the mainstream, we'll be able to spot it in the numbers and the prices. I have confidence of that.  My article of faith is that Mr Market is far larger than the central planners, and once it decides to go somewhere, it goes there regardless of all the wishes to the contrary.  But so far, it's All Quiet on the Western Front.

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