PM End of Week Market Commentary - 6/6/2014

davefairtex
By davefairtex on Sat, Jun 7, 2014 - 4:15am

On Friday gold closed down -0.80 to 1252.40 on moderately heavy volume - silver was down -0.02 to close at exactly 19.00, also on moderately heavy volume.   There was some modest volatility around the time of the Nonfarm Payrolls report, which came in as expected, and then gold sold off $10 points around the time of the NY open, only to rally back to almost even by the close.  That's a lot of words for - "net-net, nothing really happened today."

Mining shares did a bit better - GDX was only off a penny on light volume, but the star was GDXJ, which broke cleanly above its 20 EMA, closing up +1.61% on moderately heavy volume, rallying sharply into the close.

For the week gold was up +1.90 [+0.15%], silver +0.18 [+0.96%], GDX up +0.62% and GDXJ up +2.35%.

Miners

Last week, miners had a difficult time, breaking down on high volume, then rebounding modestly.  This week saw the senior mining shares (GDX) inch higher, while the juniors (GDXJ) moved back up more strongly, largely reclaiming its losses.  The rally by GDXJ on some noticeably higher volume looks fairly bullish, and GDXJ often gives us clues where PM is headed - or rather, where traders think PM is headed.  And right now, GDXJ is signaling a trend change for PM ahead.

GDXJ breaking up has caused the GDXJ:GDX ratio to also climb sharply, which in the past has been a reasonably good predictive "risk on" signal for PM overall.  Notice how over the past few days, the ratio has blown through its 20 EMA and its 50 MA, the 20 EMA is starting to turn up - it looks like a real trend change is in progress.  You wouldn't see this if you just looked at GDX, or even gold.  That's why the ratios can be useful.  Traders only buy the highly volatile GDXJ when they anticipate a move higher in PM overall.

US Equities/SPX

SPX continued its breakout this week, closing up +26 to yet another new all time high to 1949 up +1.34% this week.  The limited money printing by Draghi appeared to help, and no major bad economic news cropped up this week to derail the move higher.  The VIX continued dropping - it is down to 10.73, a value that you have to go back to Feb 2007 to equal.  The broad US market is quite overbought right now, its RSI-7 coming in at 86.

In addition to the SPX, money flow went into emerging markets equities, small cap stocks, and the Eurozone periphery - it was a "risk on" week.

The USD

The buck was unchanged this week - there was lots of volatility due to the Thursday ECB decision which resulted in a big spike higher that by end of week had completely evaporated.  Its possible this marks the near term high for the buck; if so, that would be good for gold.

Rates & Commodities

TLT closed below its 20 EMA for the first time in months, down -1.95% its yield rising 12 basis points to 3.17%.  No doubt the break higher in the equity market put pressure on the longer dated treasurys.

Commodities were largely unchanged this week, ending a string of 5 straight down weeks.  Perhaps that's one reason we're seeing a modest move higher in PM.

One exception to the neutral commodity price move was copper, which lost -2.49% this week most likely over news from China that the warehouses in Qingdao had rehypothecated the same pile of copper several different times.  A report I particularly liked was the one where two different traders were waving around identical documents that conveyed title to the same pile of copper to each of them.

Wait - a warehouse receipt scheme where the real goods get re-hypothecated, and the slow guy ends up being left out in the cold with a worthless bit of paper?  Say it ain't so!  [Cue stock footage about the COMEX and its inevitable default...3...2...1...].  Kidding aside, this story will most likely play out at some point in the future in gold & silver, and everyone will profess to be shocked, simply shocked, that there isn't enough actual metal for all the receipts that were issued.

The copper chart tells me that traders view this as a serious issue.  In addition, traders are possibly nervous that once the owners are figured out and title is bestowed on the proper institution, the owners of said metal will simply dump it on the market.

A related tidbit came from an article I found at CNBC: http://www.cnbc.com/id/101732802

Apart from impact on the metals prices, it turns out, this could also affect credit creation - i.e. this could end up being seriously deflationary.  The key paragraphs were:

In typical commodity financing deals Chinese companies obtain a letter of credit, use it to import a commodity - copper for instance - sell that commodity in the local market or deploy it as collateral and use that money to invest in higher yielding assets before paying back the original loan.

The practice isn't new but recently came into focus following reports that such deals accounted for one third of China's money supply growth in 2013. Commodity financing drives hot money inflows which can negatively affect the economy, creating a credit boom and driving inflation, while eventual outflows could lead to sharp asset price deflation.

Best I can figure, M2 growth in China was about 12.5 trillion Yuan; divide by 6 to get dollars, divide by 3 gets you 694 billion dollars of credit growth that is at risk of simply vanishing on the unwind as banks decide its too risky to write loans collateralized by multiply-hypothecated piles of copper & iron ore.

Physical Supply Indicators

* Premiums in Shanghai are up this week, rising +2.04 to +2.72 over COMEX.  Having said that, the overall trend in premiums have been disappointing for the goldbugs since mid-March.  Normally a big drop in gold would result in massive buying from the Chinese - but that's not evident in recent months.  The move from 1370 to 1250 has resulted in only a very modest boost in Shanghai premiums.  Premiums are saying, "we're pretty well supplied with gold at these prices, thanks."

* The GLD ETF gained +1.80 tons this week, and has 787.08 tons remaining.

* Registered gold at COMEX rose 4 tons to 29.04 tons.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1253.40 and silver 19.01:

  PHYS 10.37 -0.61% to NAV [unch]
  PSLV 7.56 +2.18% to NAV [down]
  CEF 13.38 -5.77% to NAV [down]
  GTU 44.35 -4.40% to NAV [down]

ETF premiums are mostly down.  Still, its good to see Sprott's fund premiums holding up relatively well considering the downdraft in the metals over the past months.

Futures Positioning

The COT report is as of June 4th.  Managed Money continued selling short COMEX gold this week, up 19.5k contracts to 73k contracts total short.  That's a massive change in two weeks; this is what it took to keep going moving down to 1240.  Producer positioning was largely unchanged.

In silver too, Managed Money upped their short exposure another 4.3k contracts, a big move for the silver market, setting another record for Managed Money short exposure.  Producers were largely unchanged.

While its not a timing tool, Managed Money tends to be the entity that's wrong at the bottoms and the tops; at this point, there is a lot of fuel in the tank for short covering for both gold and silver - but perhaps the biggest potential is for silver.  When the worm finally turns, it will likely be pretty exciting.

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

No change in the moving averages this week.  Trends are all down, and the 200 MA for both gold and silver are both starting to curve lower with a bit more emphasis.

Summary

Gold seems to have found support at 1240, and may have bottomed on the ECB's announcement on Thursday, with silver finding support at 18.75, looking somewhat more positive than gold after it managed to regain a 19 handle after a three day drop to 18.75.

Looking at the various ratios and averages, both gold and silver are in a downtrend in all three timeframes, with the 200 MA downtrend starting to accelerate.  Momentum is clearly down now, and that's bearish.  Gold/silver ratio has actually started to fall, closing below its 50 MA for two straight days, and looking for all the world like it is slowly headed downhill - an early bullish sign for PM.   GDX:$GOLD has moved back up to its 20 EMA, which is also early bullish for PM, and as mentioned before, GDXJ:GDX has broken cleanly above its 20 EMA and its 50 MA, which looks quite bullish.  So while the lagging trend indicators are reminding us momentum is strongly lower, the leading indicators are starting to sing a chorus of "trend change in the offing", with GDXJ:GDX singing the loudest.

The COT reports this week showed Managed Money continuing to load up short both COMEX gold and silver contracts, while producers remain largely unchanged.  Potential energy for short covering is increasing, and at some point, it will provide an accelerant for the rebound once the bounce gets under way.  However, these readings are not as useful as timing indicators.

Shanghai premiums are slightly positive, GLD tonnage rose, the COMEX actually increased registered gold, and ETF premiums were mostly down.  Physical demand seems perhaps neutral, perhaps slightly negative.  Since June is known to be a weak month for gold in general, this is not too surprising.

The price trends in PM are bearish, while more leading indicators are suggesting a reversal may be in the works.  The COT reports show a heavy and increasing concentration of short interest by the  "wrong at both ends" Managed Money traders, and physical premiums are likely not a factor.  We have early indications of a bounce, and now the buyers actually need to show in the rest of the PM complex to back up the hopeful signs in the junior miners and our other leading indicators.  It would probably also help if SPX sold off too, so some money would rotate back into miners and PM.

1 Comment

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Inflation adjusted Gold and silver.

It looks as though silver and gold are good preservers of wealth from these inflation adjusted graphs.

Silver

Palladium

Source

But a perfect correlation? Looks rigged to me.

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