PM End of Week Market Commentary - 6/27/2014

davefairtex
By davefairtex on Sat, Jun 28, 2014 - 9:30am
Today gold closed down -1.80 to 1316.80 on moderate volume, while silver was off -0.22 to 20.91 on moderately heavy volume.  Silver hit a new high of 21.25 in asia trading, but sold off into the close in NY.  Gold was a bit less volatile, with no new high, but with a stronger close.

Mining shares were mixed, with GDX up just +0.12% on light volume, while GDXJ was down -1.74% on moderately heavy volume.  With GDXJ and silver both dropping today, that is suggesting PM may be starting to correct.

For the week gold was up +1.20 [+0.09%], silver +0.04 [+0.19%], GDX up +0.62% and GDXJ down -1.70%.  It was largely a week of rest for PM.

Miners

This week was a week of consolidation in the senior miners, with a brisk high volume sell-off on Tuesday that did not see any follow-through.  During this period gold traded mostly sideways, and so our senior miners are suggesting there is pretty reasonable buying interest even at these higher price levels.  [Higher, of course, is a matter of timeframe; in the weekly timeframe, things don't look all that much "higher" at all]

GDXJ is not looking nearly as strong; while it is not necessarily ready to sell off just yet, it is likely to be the biggest casualty if we do have a correction.   The GDXJ:GDX ratio has definitely been showing signs of (relative) weakness over the past two weeks, and over the past week has even been showing some small signs of distribution.

US Equities/SPX

Ronald Reagan was called "the Teflon President" because even though many bad things happened during his time in office, nothing stuck to him personally.  SPX seems like the Teflon Equity Market at the moment.  A massive -2.9% loss for GDP last quarter?  No problem.  SPX this week was down ever so slightly, off -2 to 1961, just a hair off the all time high.  There are no signs of distribution, the Nasdaq is back to outperforming SPX again, and while the frothy social networking stocks aren't completely back, they are recovering.

Anyone remember the equity market of late 1999-2000?  I couldn't bear to be in those dotcom stocks, they just didn't make any sense to me.  And Cisco at a $500 billion valuation?  Well things make just as much sense now as they did then.  Sometimes there is no explaining the madness of the crowd.

My only explanation: things are as they are.

The USD

The buck dropped on Friday -0.21 to 80.07, and for the week it was off -0.42%.  The dollar seems to be dropping more steadily now, closing below its 50 MA on Friday.  A continued move lower should help gold, but if the buck starts to recover, that might help trigger the correction in PM I keep talking about.  It just depends on if the dollar is just correcting a bit on its way higher, or if the buck is actually on its way below 79 support.  Right now its really hard to say.

Rates & Commodities

TLT spent all week climbing higher, closing up +1.29%, pushing 20 year bond rates to 3.10%.  On the longer-term weekly chart, bonds still look quite strong, with TLT above all three of its moving averages and climbing steadily. 

Commodities were down -1.29% this week, erasing the gains from the previous week.  Brent crude lost -1.51 closing at 113.30, and copper was up 3 cents to 3.15.  From the market's viewpoint, it seems that the Chinese warehouse problem is mostly under control (although the whole Chinese economic situation is still in question), while there is still some serious concern about oil and Iraq.

Physical Supply Indicators

* Premiums in Shanghai are down -2.88, to a discount of -2.08 over COMEX.

* The GLD ETF gained +2.40 tons, with 785.02 tons remaining.

* Registered gold at COMEX dropped .33 tons, to 28.38 tons.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1316.90 and silver 21.04:

  PHYS 10.91 -0.41% to NAV [down]
  PSLV 8.46 +3.43% to NAV [up]
  CEF 14.37 -5.68% to NAV [down]
  GTU 47.27 -2.96 to NAV [up]

ETF premiums were mixed this week, with PSLV and GTU doing particularly well.

Futures Positioning

The COT report is as of June 25th.  That massive breakout last Tuesday drove Managed Money shorts to cover in an equally massive way - they dropped 25k short positions, and went long by +21k contracts.  This is a really large change.  The new longs were perhaps as important as the shorts that fled.  Producers increased shorts by 18k contracts.

In silver, Managed Money covered another 12.4k short contracts, and went long by +5.9k contracts, for a net change of 18.3k.   To give you a sense, Managed Money went from 43k shorts three weeks ago to only 17k shorts now.  Producers increased shorts by 4.4k contracts.

Once again, Managed Money was heavily short at an important low.  I think "someone" got played.  In the chart below you can see the points don't exactly line up - this COT "number of shorts" signal is not a perfect timing mechanism - but the correlation looks pretty darned strong.

Some shorts still remain, which is a good thing.  You can see that they provide admirable fuel for big short-covering rallies.  What's not to like about that?

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

Trends are unchanged from last week.   Things still look "early bullish", with the 20 EMA of both silver and gold continuing to rise steeply while the slower-moving 50 MA is taking longer to react.

Summary

After the big breakout last week, gold tracked sideways this week, while silver continued climbing slowly higher.  Its unclear going forward if we're going to have a correction, or simply a sideways consolidation prior to any move higher.

Looking at the various ratios and averages, the moving average relationships are unchanged, still showing an "early bullish" configuration from our lagging trend indicators - the 20 EMA is crossing the 50 and 200 for gold, and approaching the 200 for silver.   We have yet to see a golden cross from the 50/200 pair.  Gold/silver ratio is more or less unchanged vs last week, but still bullish for PM.  GDX:$GOLD is also unchanged, and still bullish, while GDXJ:GDX has dropped, revealing a relative weakness in the junior miners that is also visible on the price charts.

The COT reports this week showed Managed Money was blown out of a large number of gold and silver short contracts this week and last.  Some shorts remain, but the majority have been sent to short-heaven by the big spike up last week.  Equally as important, there was a lot of buying by that same Managed Money group.  Once the shorts are gone, only buying from our friends in Managed Money will push prices higher.

Shanghai premiums are now discounts,  GLD tonnage is slightly higher, while ETF premiums are mixed.  Physical demand seems slightly negative.  COMEX looks to be carrying the market at the moment.

Trends remain early bullish, PM more or less took a rest this week but most indicators remain bullish.  Juniors are lagging a bit now and silver ticked down on Friday, but the rest of the complex still looks strong.

 

16 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Posts: 5418
crude oil & silver

I read an article which basically said, "crude oil will tell you where silver will go next."  So I looked at the data.  Here are the charts I saw:

As a trader, this wasn't compelling.  Take a look at the move from 2000 - 2008.  If I felt crude was going to the moon, would I buy silver?  No.  I'd buy crude.  Crude was a 7-bagger, while silver - only 4.  But then after 2009, silver went from $10 to $50, while crude went from $30 to $110.  Silver was the better bet at that point.  Clearly the linkage is there, but its anything but perfect.

My sense is, if you think crude will rise by a lot, then buy crude oil (futures contracts).  Don't buy silver.  Crude is no magic crystal ball for where silver will go next.

Now here's another chart - it answers the question, "how many barrels of oil will once ounce of silver buy?"  Or more generally, is silver overpriced or not?  So check out 2011.  One ounce of silver buys 0.52 barrels of oil.  The message?  Sell silver, buy crude! 

Conclusion: this chart looks like a decent "silver is overpriced" indicator.

So is silver overpriced now?  Definitely not, it is at the lower end of its range.  Still, since the range is pretty broad, from 1/10 barrel to 1/2 oz per barrel, and right now we're only at 0.20.  It could still drop by 50% and remain within the trading range!  And one more thing: silver bought about 0.10-0.13 barrels of oil for about 9 years from 2001-2009.  This tells me, the silver-crude ratio can stay depressed for a very long time.

So is the crude-silver ratio a good trade timing indicator?  No.  It gives you a basic sense: silver is probably relatively underpriced right now, but it can stay underpriced for nine years at a time.

So when people opine about this ratio or that ratio saying something important, I always go back to the charts, to see what they have to say.

Goldbug Mythbusters says: "interesting, but definitely not conclusive of a buy signal right now."

I think I'll continue to rely on my trend indicators and price/volume.  They seem much more reliable.

Just my opinion.

Wildlife Tracker's picture
Wildlife Tracker
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Posts: 403
Disagree!

Oil should certainly not be ignored Dave,

Without a question,oil has a strong relationship with silver price. It all has to do with production costs. Crude oil has risen over 400% in the last 10 years, and as a result the break-even price for my group of silver producers has gone up that much and more. 

Silver price and break-even/production costs are relatively cyclical, but we already know that as I have posted these charts before.... 

We happen to be in a red period right right now which has indicated in the past that a green period comes shortly after....

Here is a chart showing just how predictive oil price is to silver price. Same dates 2004-2013 as I don't have earlier prices for these commodities. In that period, silver and oil have been 71% correlated. 71% accuracy is not bad at all for a predictive model. Far from perfect, but still very predictive. A few events really skewed the model. Remove 2008, and oil prices would be a very good predictor of silver prices.

Certainly, as the article mentioned, gold price is a much better predictor of silver price. 90% accuracy is great. 

Wildlife Tracker's picture
Wildlife Tracker
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Oh wait!

I made an error. The silver/crude plot is wrong. I was using my calculated break-even prices and not silver spot. Sorry about that.

I unfortunately don't have monthly averages for crude and my database is organized in such a way that calculating that would be tricky (hard to explain).

Maybe I will put that together tomorrow....

Arthur Robey's picture
Arthur Robey
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True value.(Emergy)

Why bother with the spot price in a tightly controlled market?

Both the price of silver and the price of the dollar are off with the fairies.

Here is a good video by Finance and Liberty that explains the role of energy in breakeven.

Wildlife Tracker's picture
Wildlife Tracker
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Posts: 403
Arthur

If the price of silver goes down on Sunday/Monday, it's not because the "powers that be" decided to smash the price of silver, it's because the trading pattern last week indicated a failure to cross an important resistance price point, and now the price of silver needs to find support.

(not my chart, borrowing it for JustAnotherLurker at TFmetalsreport. It's missing important support lines, but still nicely done.)

The last candle stick is indicating a drop in price. Hopefully we find support at $20.30ish or $20.00ish.

The point here is, I'm extremely skeptical about the extent of price manipulation because I am struggling to the see the evidence. I've read all the articles and the opinions of individuals so much more qualified than me. Still, logic and intuition are my guiding forces on this, and until i see the evidence in the price, I am unconvinced.

Statistics are a great tool to begin to prove points.

 

Wildlife Tracker's picture
Wildlife Tracker
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Belangp

That's Belangp that made that video. I've seen all of his videos. He's my "go to man" on gold and opinions on my metal analyses.

davefairtex's picture
davefairtex
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oil shouldn't be ignored

WT-

Oil should certainly not be ignored Dave...

Wasn't saying it should be ignored, however they don't move in lock step, and at its current ratio, the lower bound that the oil/silver ratio is providing says that "silver can't go below $11."

From 2000-2008, that ratio was in a trading range that at the lower end, had one ounce of silver buying 0.1 barrels of oil.  So for an oil price of $110, that puts silver right around $11 - at the lower end.

From the ratio standpoint, oil does help provide some bounds: at current crude prices of around $110, it says silver can't drop below $11, and it probably won't move much above $55.  But oil & silver don't move in lock step.  Each $1 added to oil won't necessarily result in an immediate rise in silver of $0.10.  Maybe its a lot more, and maybe its a lot less.

Certainly if oil jumps to $500, then silver will likely jump too - lower end case to $50.  If oil drops to $30, silver could drop as low as $3.

That's not according to any profit calculation, its just about the historical ratio's lower bound.  Which may be the same thing, at the end of the day.

People make all kinds of claims; often when you look under the covers, the claims don't stand up.  I just wanted to explore the historical relationship between oil and silver and my conclusion is, historically one ounce of silver has bought anywhere between 0.1 barrel and 0.5 barrels.  That's a pretty wide range.  To me, that puts a ceiling and a floor on silver.  If silver is buying 0.1 barrels, it seems like silver would be a buy.  If it is buying 0.5 barrels, it's probably a sell.  It seems risky to make any other claim.

Right now, "silver is moderately underpriced" relative to oil, at one ounce buying 0.2 barrels.  That's about as far as I'd go, since the historical ratio suggests silver could still drop in half before reaching that lower bound of one ounce buying 0.1 barrels.

 

Wildlife Tracker's picture
Wildlife Tracker
Status: Gold Member (Offline)
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That's making the assumption

That's making the assumption that the oil-silver ratio can't change which is a dangerous. Factor in more variables like production rates, yield rates, or whatever and you have a moving target. What might have been optimal yesterday could be different today because the other variables altered the relationship. 

For example, in theory, the cost of producing silver should be rising more than oil price because of decreasing trophic efficiency which can be applied to the oil pyramid. https://www.boundless.com/biology/ecosystems/energy-flow-through-ecosyst...

I know we are on the same page that oil/silver are not a perfect relationship, but I would also argue that oil price might have the strongest pull on where silver price will be tomorrow, just like oil has that relationship with everything. Oil is the driving force behind capital expenses, which reflect silver prices, therefore oil is the driving force behind silver prices.

I have an idea for an interesting chart describing oil and silver that I hopefully can put together later today.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Posts: 5418
making assumptions

WT-

Sure, it could all change tomorrow.  But I'll go with the odds though - a ratio that has held this long is likely to stay in place, more likely than not.

Wildlife Tracker's picture
Wildlife Tracker
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So I'm actually trying to

So I'm actually trying to figure out what that guy did when he made the oil/silver ratio chart... If you look at this chart above you can see that the ratio is changing.

Did that person do an inflation adjustment? That would not be useful in this case, so I'm confused why it looks flat in that chart? I realize that person also did the inverse of this chart, which is also a weird decision because it would make more sense to present it this way.

I woke up a little hung over, so maybe somebody I'm missing something.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
chart flipping, uber-long-term view

Your chart answers the question, "how many ounces of silver can I get from one barrel of oil?"  If in fact this is steadily rising over time, it means silver is dropping in value vs. oil.  "I used to only get 3 ounces per barrel, but now I can get 5.  Woohoo!"  Perhaps each barrel is used more productively.  Or maybe we just care more about oil than we do about silver.

Any way you slice it, it sounds like oil is the thing to buy, not silver.

Since I think of silver as a kind of money, I like to ask the question, "how many barrels of oil can I get for my ounce of silver."  If my silver buys lots of oil - perhaps time to trade that silver for oil.  If my silver doesn't buy much oil at all, maybe time to buy some silver and sell the oil.

Here is "barrels per ounce" going back to 1900 - prices are annual and average, using USGS data.

Looked at on this chart, if the June 2014 value is 0.20, that does look pretty attractive - from a silver point of view on the uber-long-term-chart.  Sell oil buy silver!  As long as we understand it could drop down to 0.10 worst case.

But long term - is the trend down or up, in terms of barrels per ounce?

Wildlife Tracker's picture
Wildlife Tracker
Status: Gold Member (Offline)
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Posts: 403
Long term the trend is down

Long term the trend is down because it's the inverse. Can't argue with a 100+ year trend.

Not sure what to make of it yet.

is mdbriefing.com your website?

 

 

hammer6166's picture
hammer6166
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Joined: Apr 30 2010
Posts: 26
Digital photography

The drop in silver/oil price ratio to its lows in early 2000 can likely be attributed to digital photography.  Although other uses have been found for silver (PV panels, renewed investment demand), the overall demand for silver is well below the 1990's levels.  The lower range is likely the new normal until something compelling drives consumption.  Much longer term, the three E's will drive up the price.

http://goldnews.bullionvault.com/silver-bullion-photographic-demand-062120133

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Posts: 5418
photography

hammer6166-

Yes I think that's it exactly!  Digital photography hurt silver demand.  I remember someone mentioning it to me long ago, but somehow managed to forget it!  :-)  And I agree with all the rest of the stuff you brought up as well.

 

Wildlife Tracker's picture
Wildlife Tracker
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Joined: Jan 14 2012
Posts: 403
Photography is somewhere mixed in the industrial block...

 

Ready's picture
Ready
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Posts: 917
Silver Halide in film

My Mom retired from Sabin Metal Corp a little over a decade ago. 

http://sabinmetal.com

They are located outside Rochester NY, and one of their primary businesses for many many years was to recover silver from film that they got from Kodak. That business is now gone, and they barely do anything with silver any more since there are no mines in the area. I don't know the number of tons per year they were doing in their heyday, but it got carried out on very long railroad cars, not a small amount for sure.

Digital photography, digital X-rays, and tons of other imaging equipment (mostly medical) has really depressed silver demand.

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