PM End of Week Market Commentary - 7/18/2014

davefairtex
By davefairtex on Sat, Jul 19, 2014 - 6:22am

On Friday gold closed down -7.30 to 1311.40 on moderate volume, while silver was down -0.26 to 20.93 on relatively light volume.  Silver lost most of its gains from Thursday's rally, while gold did a bit better.

For the week gold was down -28.60 [-2.13%], silver -0.57 [-2.63%], GDX -1.39% and GDXJ -4.02%.  We finally got a correction; so far it has been relatively mild, at least partially short-circuited by geopolitical turbulence.

Miners

This week mining shares dipped down and broke below its 20 EMA briefly, suffering a number of distribution days.  Just looking at the chart, it appears that GDX is still engaged in a correction, albeit one that is not simply going straight down.  I say that mainly because of the distribution, rather than the price action.  Thursday's rally helped, but Friday did not look particularly strong - although the mining shares outperformed gold.

However, take a look at the GDX:$GOLD ratio in the chart below.  It still looks quite strong - no hint of correction anywhere.  In fact, we got a new closing high on the ratio just this Friday.  When this ratio is rising, it is a bullish sign for PM.  A rising ratio implies traders are preferring mining shares to gold, which is a sign of "risk on" for the PM complex overall.

This is why I feel the uptrend is currently still in place, and we are just engaged in a correction within the overall uptrend.

US Equities/SPX

This week, SPX was up +11 to 1978, up +0.54%.  Although SPX had a bad day on Thursday, losing 23 points, it rebounded +20 points on Friday, almost completely wiping out the losses and moving back above its 20 EMA.   The modest bearish signal we had (a move below the 20 EMA) is now gone and we are back to being within one percent of yet another all time closing high.

The USD

The buck was strong this week, closing up +0.39 [+0.48%].  This is primarily about a weakening euro, which briefly tested the waters below 135 on Friday before rebounding.  The last time it was below 135 was back in early February 2014.  If the euro breaks below 135, we will see a stronger dollar in the near term.  Likely the buck would break above 81, and that would put some pressure on gold prices.

Longer term, the buck still looks weak, although a move above 81 would start to change that picture somewhat.

Rates & Commodities

Bonds were up again this week, with TLT up +0.83% breaking out to a new cycle high this week.  Whether you look at the daily or the weekly timeframe, TLT is giving you a bullish picture.  The yield this week dropped to 3.03% for the 20 year, and 2.50% for the 10 year.  The 10 year chart (IEF) isn't looking quite as bullish as TLT, but it is close.

Commodities continued falling, dropping -0.59%.  Most of this has been because of dropping agricultural prices, which have been dropping like a rock in ever since a positive crop report (positive for consumers, not for farmers) came out in early May.  The industrial metals index is actually doing relatively well.  I don't have the various sub-indices in my system, or I'd show you a chart.  Precious metals seem to be taking a middle road between industrial metals, and overall commodity prices.

Physical Supply Indicators

* Premiums in Shanghai dropped -3.02 this week and have now become discounts; Shanghai gold is now trading at -2.17 vs COMEX.

* The GLD ETF gained +5.09 tons, with 805.14 tons total holdings.

* Registered gold at COMEX is up +0.45 tons to 29.01 tons total.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on July 11) of 1311.20 and silver 20.91:

  OUNZ 13.37 -0.02% to NAV [up]
  PSLV 8.39 +3.26% to NAV [down]
  PHYS 10.95 +0.42% to NAV [up]
  CEF 14.34 -5.37% to NAV [down]
  GTU 46.69 -3.71% to NAV [down]

ETF premiums were mixed, but mostly down.  PSLV lost 2% in premium this week.

Futures Positioning

The COT report is as of July 15th.  Gold Managed Money shorts reappeared this week, increasing short exposure by +6.2k contracts, ditching longs by -5.5k contracts.  Producers changed only modestly.  Most of the excitement right now seems to be driven by Managed Money.

In silver the picture is different - Managed Money actually dropped -2.2k short contracts, while the Producers increased their short exposure by the same amount.  This explains why the drop in silver looked a lot less serious than the drop in gold.

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

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

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

Both gold and silver remain above their 20 EMA - although after this week's correction, just barely - with the short and medium term averages pointing up.  The long term 200 MA for silver resumed dropping.  The picture is still largely bullish from a moving average viewpoint, although less so than last week.

Summary

The long-awaited correction finally appeared, with silver dropping more than gold, and GDXJ dropping more than GDX. 

Looking at the moving averages, the picture is a bit more mixed than last week, with silver's 200 MA resuming its drop, and the prices for both silver and gold are right at their respective 20 EMAs.  Things are not as strong, which is to be expected given the correction in play.  The gold/silver ratio rose +0.32, a modest rise but not enough change the bullish picture for gold/silver ratio.  GDX:$GOLD remains strongly bullish, scoring a new cycle high just this Friday.   GDXJ:GDX has retreated, but still remains bullish.  In general, the picture remains largely still risk on.

The COT reports this week continued showing Managed Money dropping gold longs and increasing shorts, while still continuing to cover short in silver.   The changes in gold exposure were appreciable, which would seem to explain the 45 point drop we saw Monday and Tuesday: a bunch of new Managed Money shorts got about the same number of Managed Money longs to bail out.

Shanghai premiums have drifted negative, GLD tonnage has continued moving up,  ETF premiums are mixed.  Physical demand seems mildly negative.  COMEX and western (paper) gold buying turned to selling this week.

The picture this week is one of a correction in the context of an uptrend.  Ratios remain strong even though prices have dropped.  Traders seem to be mostly retaining their more risky miner positions even in the face of a correction in PM itself.  However, the geopolitical turbulence is cluttering up the read for me a bit; I can't tell if the correction is just about over, or if it needs another few weeks of back and forth before the bottom appears.

 

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