PM End of Week Market Commentary - 8/1/2014

davefairtex
By davefairtex on Sat, Aug 2, 2014 - 5:33am

On Friday gold closed up +12.10 to 1295.20 on moderately heavy volume; silver was down -0.09 also on moderately heavy volume.  After breaking lower Thursday, gold found support at around 1280 and retraced most of its losses, while silver is in the process of deciding whether to break lower, closing just above the confluence of both its 50 and 200 MA.

Mining shares traded up Friday, with GDX up +1.12% on moderate volume, while GDXJ moved up +1.32% also on moderately heavy volume.  Both miners opened higher, but traded sideways within a range during the day.

For the week gold was down -13.30 [-1.02%], silver down -0.46 [-2.21%], GDX -2.31%, and GDXJ -1.73%.  Last week I observed gold hanging tough while silver had a more difficult time attracting buyers - this pattern appears to have continued into this week as well.

Miners

The mining shares are now below their 20 EMA which is an early bearish sign, however they remain within their recent trading range.  In other words, while no longer completely bullish, the miners are showing support as they track sideways within the range.  Price on the miners still looks medium and longer term bullish, as shown by the rising 50 and 200 MA.  Still, I do not like so much the red volume bars in the last few days.  It suggests that distribution is slowly growing, which is another bearish sign.

US Equities/SPX

SPX was off -2.69% or -53 points to close at 1925 this week, with the big move happening on Thursday.  We haven't had a 40 point down day in SPX for quite some time.  One important sentiment change happened on Wednesday: GDP was said to have grown by +4.0%, and yet traders sold the rally.  When the market behavior changes from "buy good news or bad news" to "sell good news", its usually a sign that rough waters are ahead.

How will the SPX correction affect PM?  If the market is moving to a "general risk off" sentiment, everything gets sold - oil, gold, silver, the other commodities, stocks, junk bonds, while the dollar typically rises and emerging market currencies fall.  Mining stocks tend to get hit pretty hard too.  So far we haven't seen mining shares get hit hard, and the sell-off in oil is more dramatic than in gold.  So for me, the jury is still out.

From the longer term perspective, SPX is only a few percentage points away from its all time high, as seen in the weekly chart below.  If we break below the 20W MA, we can expect to see some support at the 50W MA as we did back in 2012.  Seeing how the market reacts to each support level gives us a sense as to what the market is feeling. We can see in the two previous moves lower, it took perhaps 6-8 weeks to drop down to the 50W MA.  A faster drop = more bearish sentiment.  If a support level fails to hold = more bearish sentiment.

The USD

The dollar was up again this week - USD closed up +0.28 to 81.43, continuing its recent bull move.  On the daily chart, all moving averages are pointing up showing its strong near term bullishness.  On the weekly chart, USD has managed to pull out of its longer term descending triangle, avoiding a breakdown that looked worrisome back in early May.  However from a PM perspective, a continued dollar rally will make it harder for gold and silver to break out of the correction.

Rates & Commodities

Bonds were down this week, TLT dropping -0.70% with most of the drop happening Wednesday and Thursday.  The situation looks a bit confused - there is not a straightforward move from equities into bonds happening right now.

Commodities were hammered this week, dropping -1.79%.  Commodities have moved steadily lower over the past three months, almost wiping out the big move up in commodities during February/March of this year.  Gold tends to follow commodities - falling commodity prices are not great for gold.

Physical Supply Indicators

* Premiums in Shanghai were down -0.46 this week; Shanghai gold is now trading at +1.47 over COMEX.

* The GLD ETF was unchanged this week, remaining at 801.84 tons total holdings.

* Registered gold at COMEX is down -0.13 tons to 29.12 tons total.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on July 25) of 1294.10 and silver 20.37:

  OUNZ 12.93 +0.00% to NAV [down]
  PSLV 8.18 +3.38% to NAV [up]
  PHYS 10.71 -0.47% to NAV [flat]
  CEF 14.05 -5.52% to NAV [up]
  GTU 45.36 -5.20% to NAV [down]

ETF premiums were mixed, but more up than down; CEF managed to recover 1.5% of premium and PSLV rose as well.

Futures Positioning

The COT report is as of July 29th.  Gold Managed Money shorts added 4.7k shorts and bailed out of -12.4k long contracts - a reasonably large change, and bearish.  Producers closed out 2.5k shorts, a modest change.  Producers remain relatively bullish.

In silver, Managed Money bailed out of -4.8k long contracts, while Producers hardly changed their positions at all.

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

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

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

Not much changed on the moving averages.  Silver, for all its recent troubles, is about to execute a "golden cross" although it won't stay golden too long if price can't remain above its 50 day MA.

Summary

The PM correction continued this week, with silver underperforming again.  Both gold and silver made new lows, while the mining shares managed to avoid doing so.   Gold seemed to find support at 1280, while silver seems unsure if it wants to break down further or not.

From the moving average perspective, the picture is more or less unchanged - early bearish.  The gold/silver ratio has moved into bearish territory, up +0.77 to 63.69.  GDX:$GOLD is bullish but just barely so, as is GDXJ:GDX.  Moving averages and gold/silver ratio are bearish, while the ratios remain bullish.

The COT reports this week saw some long liquidation in gold and silver by Managed Money.  To move prices higher, we need buying from Managed Money, rather than selling.

Shanghai premiums remain positive but are quite modest.  GLD tonnage is unchanged, and the ETF premiums were mixed this week.  Let's call physical demand neutral.

The rising dollar has also been causing problems for PM, as has the general drop in commodity prices.

Miners continue to find buyers, while gold and silver slowly move lower.  While gold bounced off 1280, if it cannot move back above 1300 next week, the downtrend will likely continue.  The PM complex is slowly starting to look more bearish.  A continued move higher in the buck, falling commodity prices, and a general move to "risk off" in the global markets will likely push PM lower still.  If any of those trends reverse, we could see a meaningful rally in the PM complex - likely with the miners leading the way higher.

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