PM End of Week Market Commentary - 6/20/2014

davefairtex
By davefairtex on Sat, Jun 21, 2014 - 6:15am
Today gold closed down -5.70 to 1314.80 on heavy volume, while silver was up +0.12 to 20.86 on extremely heavy volume.  While gold took a rest after yesterday's fireworks, silver continued moving higher, at one point touching 20.99 before retreating a bit into the close.

Mining shares were off today, with the senior miners in GDX dropping -1.03% on moderately heavy volume, and the juniors in GDXJ hit for a much larger -4.25% on extremely heavy volume.  It is not surprising that the miners are taking a break after their fantastic move higher this past week.

For the week gold was up +38.20 [+2.99%], silver +1.20 [+6.13%], GDX up +7.09% and GDXJ up +4.54%.  It was a really good week for silver and a pretty good week for the rest of PM.

Context of this Analysis

With the release of the updated Crash Course (and the Reader's Digest version that we can give to our friends with shorter attention spans), I thought it might be a good idea to wrap some context around my analysis in this column.

While we are a diverse group here, I get the sense that a fair number of people here see gold and silver prices as an important metric by which we judge if the rest of the world finally is starting to see the same picture we see.  For most of us, it is lonely being the PP 1%, and we would really like some company.  After all, if others started to see the same things we did, then perhaps we could get some policy change to something that is more likely to have a better outcome, rather than our current set of policies that are headed straight off the cliff at full speed.

So when analyzing the behaviors of the market, one possibility is to look at the gold world through our eyes here, every day asking the question, "are we there yet?"  When gold drops, it suggests we're not there yet (and possibly, governments are involved to try and keep everyone else in the dark, the sneaky bastards).  And when gold rises, we get excited.  Maybe now we're finally here!

Another approach - the one I have selected - is to try and view the gold price through the eyes of the rest of the people in the world.  Mainstream, the normals, the 99%.  The participants making up this 99% include hedge funds, mining companies, bullion bankers, physical buyers, and official buyers/central banks.  Many of them see bits and pieces of the same things we do, but how much do they agree with us?  And where are they taking the price of gold?

From my observations, the rest of the world (ROW) isn't there yet - and in fact they are about as far away from where we are as it is possible to be.  Possibly that's due to hope of return to business as usual, crisis fatigue, etc, etc.  I come to this conclusion by watching prices.  People vote with their currency, and so far, their votes seem to be strictly lined up behind business as usual.  They've actually levered up behind it, from what I can see.

While I report on this state of affairs, I'm not supporting such a worldview.  I'm merely trying to understand it.  The current 99% worldview can run up against the limits of the world only so long until something cracks.  Its my job to try and spot these cracks in near real time, if possible, by looking at prices.  Some here believe that today's prices are totally controlled by the central planners, but I don't think that's true.  We collectively have a much bigger footprint in the marketplace than our central planners ever could have.  We all have our articles of faith we operate under, and that's one of mine.

So why did gold & silver rally this week?  Are we there yet?  I don't think so.  This feels like a downtrend in silver that was pushed as far as it could go, and now that silver is below costs of production for many mining companies, it is finally snapping back in reaction.  Then again, it could be an early sign of something more, too.  I'll keep an eye out for unusual patterns above and beyond the usual price movements in a rebound.  Ultimately I too want us to "be there", so we can start having national policies that start to make sense, but I try not to let my hope interfere with my view on "the 99% market reality" that I see every day.

Anyhow, with that bit of context supplied, on to the rest of this week's story.

 

Silver: Trend Indicator

I've been looking at silver quite closely over the past month or so - ever since it started outperforming.  My thesis is, how silver does will help tend to tell us where PM goes from here on out, at least in the near term anyway.  But to my mind, the key thing to watch isn't how silver performs on the upside.  Its a crazy metal during the short covering phase.  They key is - what happens once the buying subsides?  Does it fall back and lose its gains, or does it find support at higher levels and continue to rise?  That's what I'm going to be watching in the upcoming weeks, since I think it holds the key to the near term future of PM.

We are getting close to the end of this current run, at least in my opinion.  If that doesn't happen - if silver doesn't take a rest - it means something quite out of the ordinary is afoot.  But I don't expect that to happen at this time.

So assuming a normal bullish scenario: after peaking for this run, silver drops for a week or two or three, finds new buying support, and then rallies to new highs.  It needs to clear 22 to end its "weekly chart" downtrend, and I'm not sure it can make it there on this run.  It ended the "daily chart" downtrend on Thursday with its big breakout.

Miners

This week the senior miners in GDX played a bit of catch-up with the juniors.  After a brief consolidation at its 200 MA GDX broke sharply higher on gold's rally Thursday.  We can see the pattern: consolidate, breakout, then consolidate, breakout again.

Will we get another cycle up after a consolidation period, or will we end up giving up some of the gains and enter a correction?  It probably depends on what gold itself does.

GDXJ had a bit of an unpleasantness Friday.  It may be showing signs of fatigue.  After a big rally if we sell off on high volume, that's a bad sign, while a drift lower on light volume is actually a good sign.  Friday's 4% drop on extremely heavy volume was not a good sign.

US Equities/SPX

SPX broke out again to new all time highs this week, closing up +27 [1.38%] to 1263.  Money is flowing into the equity market from somewhere.  Perhaps we'll be able to tell where the money is coming once we get the money supply data from FRED in the next few weeks.  My current suspicion is the excess reserves, since the dropping dollar suggests to me the source must be domestic rather than overseas.  The VIX dropped back down to 10.85, which is about a seven year low.

The USD

The buck dropped -0.21 [-0.26%] to 80.41.  Although it seems a bit in limbo, pulling back to the weekly view, the buck looks like it is still on a downward track, judging from the 50 week MA which is curving slowly lower.

Rates & Commodities

TLT dropped modestly, off -0.31% dropping through its 50 MA on Thursday but then regaining it immediately on Friday.  The series of new all time highs in equities is probably providing some serious headwinds for the long bond.

Commodities were up +0.67%; brent crude was up $2.35, copper was up 9 cents [+2.97%], and of course gold and silver were up even more.  Commodities seem to be back on an upswing once again, which should help provide a tailwind for PM.

Physical Supply Indicators

* Premiums in Shanghai are up slightly this week, +0.66 to +0.80 over COMEX.

* The GLD ETF dropped -4.46 tons of gold, with 782.62 tons remaining.

* Registered gold at COMEX dropped .63 tons, to 28.72 tons.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1277.10 and silver 19.69:

  PHYS 10.91 -0.26% to NAV [up]
  PSLV 8.30 +2.34% to NAV [down]
  CEF 14.43 -4.86% to NAV [up]
  GTU 47.00 -3.37 to NAV [up]

ETF premiums mostly climbed this week; Sprotts PSLV declined only slightly.  Western buying of PM is increasing, albeit slowly.

Futures Positioning

The COT report is as of June 18th.  Managed Money bailed out of gold shorts wholesale - they dropped 13k short positions since the last report.  Producers increased shorts by 4k contracts.

In silver, Managed Money covered a large 9k short contracts, dropping their exposure from 39k down to 30k short.  Once again, Managed Money was most extended to the short side right at the bottom.  Producers increased short positions by 1.8k contracts.

And all this movement is through Tuesday of this week.  Thursday's big move in PM didn't show up on this report, so it is possible that very few shorts remain in silver as of today.

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

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

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

The rally in PM has continued changing the moving averages to a more bullish configuration.  Both silver and gold price are now above all 3 of their moving averages, which puts PM pretty solidly into an early bullish trend.  We need a golden cross (50 crosses 200) to mark a formal trend change.  That is actually much closer with gold than it is with silver.

Summary

After failing to push past 1280 resistance early in the week, gold found support at 1260, rebounded, and followed silver higher blowing past the round number of 1300 as well as taking out the most recent lower high, invalidating gold's short term downtrend.  Silver did even better, rising for 13 of the last 14 days, capping it off with a massive move on Thursday on extremely high volume, most likely blowing most of the remaining shorts out of their positions.

Looking at the various ratios and averages, both gold and silver's EMA 20 has turned up sharply, with silver's 20 EMA crossing the 50, reinforcing the early bullish signal from last week.  Medium term momentum has turned up for silver, and is flat for gold.    Gold/silver ratio has basically fallen off a cliff, with the ratio's RSI-7 down around 5 - a very low value suggesting the pace of the drop is probably not sustainable at its current rate.  The drop is clearly bullish for PM.   GDX:$GOLD has continued moving higher, which continues to be strongly bullish, while GDXJ:GDX has flattened out - giving us our only modest warning signal that perhaps we may be approaching a resting point for this leg higher.

The COT reports this week showed Managed Money was blown out of reasonably large numbers of gold and silver short contracts this week, which didn't include Thursday's massive move higher.  Once we run out of shorts to flush, new buyers will have to appear to keep momentum moving higher.  The COT report will help us see if this is happening, but it will be a week until we get the information.

Shanghai premiums are more or less flat, GLD tonnage is lower, and ETF premiums were mostly up.  Physical demand seems neutral.   June is known to be a weak month for gold.  It looks like this move was entirely due to COMEX.

Trends are early bullish, leading indicators mostly bullish, miners are doing well as is silver, and gold has caught up with silver with Thursday's move.  Juniors suggest we may have a rest coming up, but the rest of the complex looks really solidly bullish.  No long term uptrend has yet been established, but certainly the first steps have been taken.

 

1 Comment

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
andrew maguire & KWN

Hard to believe, but he and I are generally in complete agreement as to what went down over the past few weeks in gold & silver: its all about Managed Money being hosed by the bullion banks.

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2014/6/21_Andrew_Maguire.html

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