PM End of Week Market Commentary - 8/15/2014

davefairtex
By davefairtex on Sat, Aug 16, 2014 - 2:34am

On Friday gold was down -8.40 to 1305.50 on extremely heavy volume, while silver was off -0.31 to 19.55  on heavy volume.  Gold sold off $20 prior to market open in NY, but then mostly recovered on the news about Ukraine artillery shelling a Russian armored column.  Silver sold off as well, but failed to recover, closing near the lows of the day.

Silver: another week, another breakdown.  We could easily hit 19 at this rate without too much trouble.  Before stepping up to the plate, its probably a good idea to wait for Managed Money to appear and start buying.  Right now, they aren't - they are selling and going short.  You can see the distribution pattern in the collection of red down-day volume sticks that are larger than the gray up-day sticks.  Until that pattern reverses, silver will continue to drop.

Mining shares did surprisingly well Friday given the unpleasantness with gold; GDX was off only -1.14% on moderate volume, while GDXJ was actually up +0.74% also on moderate volume.

For the week gold was down -5.10 [-0.39%], silver dropped -0.37 [-1.83%], GDX up +0.15% and GDXJ +1.12%.  Silver continues to be beaten like a rented mule breaking support once again, while the rest of the complex is managing to more or less move sideways albeit with some volatility.

Miners

Senior miners tried breaking higher this week but then fell back - we call that a failed breakout.  The juniors struggled to stay above their 20 EMA and just barely succeeded.  The senior miner chart still looks better than the junior miner chart.

A number of mining companies have reported earnings this week and several have failed to impress investors: PAAS and SLW each lost about 5% on the day they reported.

A common thread among mining share news releases is the focus on cost reduction.  All miners are working on reducing their AISC - all-in sustaining costs, with varying degrees of success.  Most seem to be doing a good job.

US Equities/SPX

SPX had a bit of a wild day on Friday, dropping as much as 20 points on the news from Ukraine, only to rallly back to flat by end of day.  I interpret this to be bullish for SPX.  Prior to the news, SPX was up 5 points.

For the week, SPX closed up +23 to 1955 ending just below its 50 MA.  The VIX dropped -2.62 points closing at 13.15.  VIX is now back to where it was three weeks ago, prior to the drop in SPX.

The USD

The dollar tried moving higher this week and failed - the USD closed flat at 81.46, with a drop of -0.18 happening just on Friday.  Momentum appears to have stalled, at least for now.  The euro appears to be trying to find a low, although the jury is still out on whether or not it can.  The news out of the eurozone is steadily bad.  We could interpret a failure of the euro to drop even further even with the bad news to be a mildly bullish sign.

Rates & Commodities

Bonds had a great week, with a breakout Thursday and Friday; TLT was up +1.90%.  Rates collapsed, with the 20 year now yielding 2.86%.  20 year bonds: up 18% on the year.  The world loves the US long bond!  At least this year anyway.

Junk bonds have staged a multi-week rally, up sharply over the past couple of weeks.  After a month of selling, they are once again finding bids.

Commodities continued dropping, down -0.62% this week.  PM was actually off less than most; most hard hit were energy [-2.07%] and livestock [-2.33%].  Dropping commodity prices causes problems for PM, especially silver.

Physical Supply Indicators

* Premiums in Shanghai were up +1.27 this week; Shanghai gold is now trading at +1.89 over COMEX.

* The GLD ETF lost -0.26 tons of gold, with 795.60 tons total holdings.

* Registered gold at COMEX is up 3.11 tons to 35.36 tons total.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on Aug 15) of 1305.20 and silver 19.61

  OUNZ 13.05 +0.09% to NAV [up]
  PSLV 7.96 +4.49% to NAV [up]
  PHYS 10.80 -0.47% to NAV [down]
  CEF 13.93 -5.35% to NAV [up]
  GTU 46.20 -4.25% to NAV [up]

ETF premiums were mostly up, with PSLV up more than 1%.

Futures Positioning

The COT report is as of August 12th, when gold was trading around 1310.  Gold Managed Money shorts closed out 11k contracts and bought 14k long contracts, no doubt during the two day rally off the 1290 low in gold last week.  It was a large change.  Producers closed out 6k shorts during that same period.

In silver, Managed Money bailed out of 1.5k long contracts, added 5k shorts.  Managed Money doesn't seem to be interested in silver, which correlates well with the dropping silver prices.  However the short interest isn't at record levels, so I can't say we're at an inflection point just yet, at least from the COT report viewpoint.

Once again the story is all about Managed Money - bullish for gold, bearish for silver.

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

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

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

While the shorter term moving averages for gold still point up, the longer term average is now pointing slightly downhill.  Silver's drop now has its 50 MA moving sideways.  The picture is looking increasingly bearish, especially for silver.

Summary

This week saw silver continuing to underperform gold; while gold fell slightly, silver dropped a whole lot more.  Mining shares largely moved sideways.

From the moving average perspective, gold still looks short term bullish, while turning slightly bearish longer term.  Silver's moving averages remain mostly bearish.  The gold:silver ratio is up +0.97 this week to 66.78, bearish, and moving almost to the multi-year high set this May.  GDX:$GOLD remains bullish, GDXJ:GDX has improved slightly - perhaps we could call it bearish-recovering.  SIL:$SILVER remains the most bullish of all the ratios: collapsing silver prices have not materially affected the mining shares.

The COT reports this week saw increased shorting in silver but strong buying in gold by Managed Money.  Given the continued underperformance of silver, this suggests that Managed Money is the cause.

Shanghai premiums have increased a bit, GLD tonnage is about the same, and the ETF premiums were higher.  Let's call physical demand mildly positive this week.

The buck stalled for a second week.  If it actually starts dropping, that should help gold - although I have anticipated a dollar drop for a few weeks now, and so far at least, no dropping has happened.

Miners are still doing relatively well, with senior miners and silver miners performing the best.  It appears that miner cost reductions have dropped price of production to break-even at these price levels for both gold and silver.  Gold around 1300 is being supported by geopolitical events, while silver remains in a downtrend breaking steadily lower, with no bottom yet in sight.

 

2 Comments

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 772
Gold, Silver, Platinum, Palladium part 2

In this end-of-the-week update, you indicate that you are short-term bullish on gold, longer term slightly bearish on gold.  I had indicated in text the reasons why I am just plain bearish on Gold.  Yes, I *could* indicate that we will have a couple more upstroke cycles, but the magnitude of the cycles is likely to be small. At least for someone in my situation, buys would not cover the cost of the transaction. 

But below is why I think gold is going down.  Elliott waves do not always apply, and when they don't apply, you can't force them.  But Gold appears to me to be heavily elliott right now. 

So what I see is that from the peak, we had a drop, an almost full retrace, then a larger drop, and then a horizontal narrowing cone.   That cone has neither a solid bottom or top, but narrows on both top and bottom.  Moreover, from what I am seeing, the cone is not likely to be broken, until it is completely shattered.  When it is, it looks to me like it is likely to be broken downwards.  I say on the graphic, 900-1100; it might be as small a drop as down to (say) 1150.

https://plus.google.com/100878744216713640609/about#100878744216713640609/posts/DUwi5nezyAv?pid=6048896246867209634&oid=100878744216713640609

 

To my way of thinking about market fundamentals, I also think the fundamentals support a significant downstroke.  As I said before, I think that the main downward fundamental is government bailouts of the stock market and/or war (which pumps stocks).  I deplore war, and would rather have stocks crash and gold skyrocket than have war, but I don't make those decisions.

This is not advice to anybody to buy or sell; it is simply what I see, and I am not a professional financial anything, nor do I have significant assets to invest in metals.  I am, and have long been, a dirt-poor worker.  The value of my work has been good, but getting paid for my work is not something I'm good at, and I've always done badly at investing.  So take anything I say with a grain of salt, but as with all financial transactions, past performance is not an indication of future results (Yay! I can say that and grin).

 

Arthur2014's picture
Arthur2014
Status: Bronze Member (Offline)
Joined: Jul 17 2014
Posts: 56
Gold: contango versus backwardation -2-

Dear Dave,

Dear all,

 

last Friday and today I tried three times in vain to post this request in the group “Gold and Silver”.

Each time I created a new discussion in that group. Saving my post I got no error message.

 Rather I got the confirmation: Groups » Gold & Silver

Discussion Gold: contango versus backwardation -2- has been created.

Gold: contango versus backwardation -2-

Gold & Silver

By Arthur2014 on Fri, Aug 15, 2014 - 9:20am”

So I could not figure out what the problem is.

Therefore I send my post now as a comment to Dave’s weekly market commentary.

I’m very sorry for my technical incapacity and I beg your pardon.

 

Nine days ago (on Saturday August 09) I posted some questions in the thread http://www.peakprosperity.com/discussion/86174/pm-daily-market-commentar....

May be that that thread is so old that nobody follows it / reads it anymore. Therefore I send my original post again. Meanwhile I have some additional questions.

I would be glad if anyone might answer.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Gold: contango versus backwardation

davefairtex wrote:

1) Do you know what a stop is, and how it works?

2) Do you know where stops are generally placed?

3) Do you know who places these stops, and why?

4) Do you know what "stop-gunning" is, who does it, how it works, and why?

5) Do you have a sense of just how long the techniques regarding (4) have been happening in markets?

Some optional questions:

1) do you know what resistance is, what it is caused by, and how it manifests?

2) do you know what support is, what it is caused by, and how it manifests?

3) do you understand what happens when support - or resistance - breaks?

Dear Dave,

I cannot answer any of these questions. Where can I learn about the topic? Could you recommend me any book?

By chance I came across the peakprosperity website and I read some of your daily commentaries which I appreciate very much.

I am not an economist but I am working in analytic philosophy. Among other I am interested in questions about rational decision making under uncertainty / under incomplete information.

Traders are persons regularly taking risk.

Do you pay any attention to the aspects of contango versus backwardation concerning the price of gold?

Is the price of gold currently in backwardation?

For an explication of the two notions I read the following articles:

http://en.wikipedia.org/wiki/Contango

http://en.wikipedia.org/wiki/Normal_backwardation

Do you agree that backwardation indicates scarcity of the physical supply of gold?

There seems to be at least one proponent of a gold standard who takes (potential) backwardation of gold very serious: the 1932 born former professor of mathematics Antal Fekete.

(http://www.professorfekete.com/articles.asp)

I have no personal opinion about the topic.

As usual, things in the world are a little bit more complicate than one thinks at the beginning they were. Apparently one should not mix up the spot market price of gold in backwardation with a negative Gold Forward Offered Rate (GOFO)

For an explication of GOFO I read:

http://seekingalpha.com/article/1542652-what-gofo-is-and-why-its-now-very-bullish-for-gold

At least I found an article written by Brad Zigler in November 2008 who states:

“A negative forward rate does not automatically create a backwardation in the Gold Price

His article is available via the following hyperlink:

http://goldnews.bullionvault.com/gold_forward_rates_backwardation_112620083

title: Gold in Backwardation?

published: Wednesday, 11/26/2008

“Did Gold Prices just go into backwardation? What is a gold forward rate anyway...?”

I would like to hint to some non-fiction books for laymen from which I learned quite amazing things about aspects of our world I had never thought about before:

Aaron Brown:

The Poker Face of Wall Street; 2006

ISBN-10: 0471770574

ISBN-13: 978-0471770572

Daniel Kahnemann:

Thinking, Fast and Slow; 2012

ISBN-10: 0374533555

ISBN-13: 978-0374533557

William Poundstone:

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street; 2006

ISBN-10: 0809045990

ISBN-13: 978-0809045990

Didier Sornette:

Why Stock Markets Crash: Critical Events in Complex Financial Systems; 2004

ISBN-10: 0691118507

ISBN-13: 978-0691118505

Nassim Taleb:

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets; 2005

ISBN-10: 0812975219

ISBN-13: 978-0812975215

Nassim Taleb:

Antifragile: Things That Gain from Disorder, 2012

ISBN-10: 0812979680

ISBN-13: 978-0812979688

and finally a rather scientific collection of and papers:

John Smithin (editor):

What is Money? (Routledge International Studies in Money and Banking); 1999

ISBN-10: 0415407079

ISBN-13: 978-0415407076

Please understand my bibliographic hints as an attempt to contribute something to this thread.

Best regards

 

  • - - - - - - - - - - - - - - - - - - - - - -

 

Meanwhile I found a website publishing among other statistics updated gold lease rates:

http://www.mdbriefing.com/gold-rumors.shtml

But I don’t really know how to interpret the charts.

Example:

The first chart “GLD tons versus COMEX gold [2014-08-14]” plots the price of one ounce of gold in US$ and the GLD gold holdings over the period from 2012 to today.

What does follow from that?

Are we entitled to infer that one parameter is the cause and the other is the effect? (If x happens then y is the effect)

Which one is the cause and which one is the effect?

Normally the so called causal nexus (the linkage between cause and effect) is covered by a law in nature in the realm of nature. A cause inevitably / necessarily brings about its effect.

Or is the relation between tons of gold in the GLD versus the gold price at the COMEX just a correlation? That would be a much weaker relation than a causal nexus.

 

http://www.mdbriefing.com/gold-rumors.shtml writes:

“There are always rumors surrounding gold. One current one has to do with a drop in the number of tons of gold in GLD indicating a "gold bank run" in progress. First chart is price vs tons in GLD over the past year or so, second chart provides more historical perspective.

Gold Price vs Tons of GLD

Next is the number of tons of gold inside the GLD ETF, compared to the tons inside the SLV ETF. The theory is, GLD has been raided for gold in order to repay central bank gold leases. The counter-argument is, people have lost interest in GLD, so the number of tons have decreased on their own. If the counter-argument is true, then SLV and GLD should see relatively similar moves in their inventory tonnages.

A shortage indicator is the current premium or discount over COMEX of gold sold on the Shanghai Gold Exchange.

Another indicator are gold lease rates as well as the gold forward rates.

LBMA GOFO Rates

Next is the famous Commitment of Traders report; these charts show the net long/short position of the particular group (managed money, producers, swap dealers, other reportables) vs the price of gold. Producers tend to be net short (to hedge production) and managed money tends to be net long.

COMEX Gold COT Report (Net) - vs Gold Price

COMEX Silver COT Report (Net) - vs Silver Price

The gold/silver ratio is one decent indicator of the trend in PM. That's because when PM is climbing, silver is usually doing so faster than gold. Average gold/silver ratio in modern times is about 60; at the 2011 silver peak, it was 30, and at the trough during the 2008 crash, it was 80.

Last is Central Bank buying, mostly Russia and Turkey. This information comes from the IMF, and does not include China. …“

Best regards

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