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

davefairtex
By davefairtex on Sat, Aug 9, 2014 - 5:18am

On Friday gold was down -3.90 at 1310.60 on heavy volume, while silver was off -0.07 to 19.92 also on heavy volume.  Gold tried rallying in Asia and London and at one point hit 1324, but sold off an hour before the NY open, producing a wide trading range, some heavy volume, and printing a possible reversal candle.

Mining shares rallied initially but reversed on gold's weakness, with GDX up just +0.07% on light volume; GDXJ was down -1.25% on moderate volume.

For the week gold was up +15.40 [+1.19%], silver was down -0.42 [-2.07%],  GDX +2.21%, and GDXJ -0.76%.  PM appears to be in a "risk off" mode, with gold outperforming silver, and GDX outperforming GDXJ.  Having said that, usual "risk off" behavior involves PM dropping overall, with gold dropping less than silver.  However currently, gold and senior miners are actually rising, while silver and junior miners are falling.

Miners

The mining share ETFs have diverged from one another; GDX has rallied back above its 20 EMA, while GDXJ dropped further below its own 20 EMA.  On Tuesday there was a moment where it looked like GDXJ would break down much more significantly.  Fortunately buyers appeared and GDXJ was able to regain its footing.  However, it still looks weaker than its cousin GDX.

Silver miners, which I usually don't follow as a group on a daily basis, have done quite well, especially considering how terribly the metal itself has done recently.  The ETF "SIL" tracks silver miners, and so the ratio SIL:$SILVER can provide us a sense as to the strength of the silver miners vs. the underlying metal.  This strength can also be seen in many silver mining charts: SLW, BVN, AG, SSRI, EXK - these are examples of miners that have either tracked sideways or broken higher, even though silver remains in a downtrend.  This shows money is flowing into silver miners in preference to silver itself.

US Equities/SPX

SPX closed up +6 to close at 1925 this week, with the big move up happening on Friday.  Low was marked on Friday at 1890 on the e-mini futures at 0350 EDT, and from there it rallied more than 30 points resulting in a +22 up day for SPX.  VIX was down -1.26 to 15.77.

Next week, I will be watching to see if the rally continues, and where it might stall out.  One obvious resistance point is the 50 MA, currently at 1955.  Based on a bunch of different technical indicators, I think the more likely direction (overall) of the equity market is lower going forward, but as always the market gets to decide direction, not me.

I have noticed recently that when SPX drops, gold tends to rise - not in lock step, but gold appears to be the beneficiary to some degree when money flows out of equities.  The reverse is true as well; Friday's equity rally may have encouraged gold to sell off.  The markets are all interconnected - currencies, equities, bonds, commodities - and money flows between them according to sentiment.  The relationships are constantly changing.  Over the past few weeks, it appears gold and equities tend to move in opposite directions.  If you imagine equities are likely to fall and this relationship continues to hold, gold should benefit from the drop.

The USD

The dollar was showing signs of fatigue this week - USD closed up +0.03 to 81.46.  Momentum appears to have slowed significantly; either USD is consolidating at this level preparing to move higher, or we will start to see some sort of correction.  Money has been flowing out of emerging markets, Europe, and Japan into the dollar for a while now.  It appears to be a flight to safety: Brazilian Real down -2.19%, Canadian dollar -1.00%, Yen -0.51%, Pound -0.41%, Euro -0.29%, but as you can see in the chart below momentum has definitely slowed.  Theory is, a dropping dollar should help gold and silver, while a rising dollar does not.

Rates & Commodities

Bonds moved higher this week with TLT up +0.84%.  A more clear flight to safety emerged this week, and bonds were the beneficiary.  TLT squeezed out another cycle high, and 20 year rates closed at 2.97%.

Commodities continued to fall, dropping -0.27%, however the speed of the drop is slowing down.  Dropping commodity prices are not supportive for PM.  If we can get commodities to bounce, that should help - silver expecially.

Physical Supply Indicators

* Premiums in Shanghai were down -0.10 this week but remain positive; Shanghai gold is now trading at +1.37 over COMEX.

* The GLD ETF lost -5.98 tons of gold, with 795.86 tons total holdings.

* Registered gold at COMEX is up 3.12 tons to 32.25 tons total.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on Aug 8) of 1312.80 and silver 19.99:

  OUNZ 13.11 -0.04% to NAV [down]
  PSLV 8.02 +3.27% to NAV [down]
  PHYS 10.88 -0.32% to NAV [up]
  CEF 13.95 -6.27% to NAV [down]
  GTU 46.10 -5.01% to NAV [up]

ETF premiums were mixed, with no clear trend.

Futures Positioning

The COT report is as of August 5th, when gold was trading around 1290.  Gold Managed Money shorts added 6k contracts and bailed out of 12k long contracts - a decent sized change, similar to last week, and bearish.  Producers closed out 11k shorts, about 14% of their total short position.  Producers remain relatively bullish.

In silver, Managed Money bailed out of 6k long contracts, added 5.9k shorts - percentagewise, a larger move than what happened in gold - while Producers reduced shorts and increased longs by about 2k contracts net, a modest change.

The moves these days are mostly about Managed Money and mostly its about Managed Money both selling longs and going short - at least through Tuesday anyway.

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

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

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

Gold's sharp rally in the last part of the week pushed its 20 and 50 MAs to both point up, and gold's price is now above all 3 moving averages.  Silver executed its bullish golden cross (50 MA crossing the 200 MA to the upside) as a delayed reaction to June's silver rally, but this week silver continued dropping, moving silver below all 3 of its moving averages.

Summary

The PM market bifurcated this week, with silver very strongly underperforming gold.  Gold broke up sharply out of its downtrend and managed to rise above its previous lower high, while silver continued downhill, moving below all 3 of its moving averages and remaining in a clear downtrend.

From the moving average perspective, gold's rally caused its 20 and 50 MAs to turn bullish.  Gold is now above all 3 of its moving averages, another bullish indication.  Silver's moving averages remain mostly bearish, and silver's drop moved it below its 3 moving averages.  Silver's divergence from gold has caused the gold/silver ratio to moved into clearly bearish territory, up a big 2.12 points to 65.81.  GDX:$GOLD is more clearly bullish now, while GDXJ:GDX now looks modestly bearish.  SIL:$SILVER is the most bullish of all the ratios.

The COT reports this week saw more long liquidation in gold and silver by Managed Money.  Since the gold rally was after the COT report coverage, we didn't get to see the impact on Managed Money of the gold rally on Wednesday and Thursday.

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

The buck may have hit an interim peak this week; a falling dollar should help gold, although with the whole "flight to safety" trade currently playing out, that's not a sure thing.  Continually falling commodity prices are definitely not good for PM - hopefully they can find a bottom as well.

Senior miners, silver miners, and gold have been the place to be, consistently attracting bids over the past few weeks.  Gold snapped its downtrend, while silver cannot seem to find buyers.  Silver miners, on the other hand, continue to get bids.  Its all a bit confusing, and how this all resolves itself - who can say?  With rising gold, dropping silver, but rising silver miners, it is hard to tell what will happen next.  I go to the magic 8-ball, shake, and up comes my favorite answer: "reply hazy, try again."  Sometimes the signals can show you what is happening, but overall provide no clear answer as to direction.

http://en.wikipedia.org/wiki/Magic_8-Ball

 

2 Comments

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
What to do?

Thanks Dave.

To me it seems a though gold is beginning to reflect the value of money as the economy tanks.

Silver has an industrial aspect to it so I am guessing that the downturn in the velocity of money weighs on its price. (Demand destruction from industry)

Even so, the gold/silver ratio is compelling. (Silver is cheap when priced in gold). I am tempted to go shopping.

What to do? What to do?

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
what to do

Arthur-

I'm reluctant to attribute anything truly long term or widespread to our recent move in gold.  I'd guess most of the move comes from Managed Money buying at the COMEX - which my sense is, is a bunch of hedge funds.  If the move lasts for a number of weeks to months and forms a longer term trend, I'd be more enthusiastic.

Silver is getting cheaper for sure relative to gold.  One simple trade: Long silver, short gold.  That's only if you think the gold/silver ratio will drop.

 

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