PM End of Week Market Commentary - 8/22/2014

davefairtex
By davefairtex on Sat, Aug 23, 2014 - 5:57am

On Friday gold was up +4.50 1281.80 on moderate volume, while silver was down -0.02 to 19.40 on moderately heavy volume.  Gold and silver both rallied modestly today; gold held onto its small gain into the close, while silver did not.  After five straight down days and a loss of $35, a tepid $4 rally is not a great "buy the dip" showing for gold.

Gold joined silver in the general PM move lower this week, breaking down below all three of its moving averages on high volume.  Trader Dan last week opined that gold was likely only holding up because of international concerns, and would probably move down to test 1280 if things calmed down.  It looks like his assessment was accurate.  Thursday's break below 1280 confirmed a pattern of lower highs in gold.  That's bearish.

Mining shares were mixed Friday - GDX was up +0.12% while GDXJ was off -0.61%.

For the week gold was down -23.70 [-1.82%], silver dropped -0.15 [-0.77%], GDX down -2.68% and GDXJ -3.22%.  Silver didn't underpform this week for the first time in a while - perhaps the silver-sellers are exhausted after six straight weekly declines.  Or maybe its an early signal of a trend change about to occur.  Its too early to say, but the gold/silver ratio is probably good to watch for clues.

Miners

Following the failed breakout from last week, senior miners continued falling, closing below their 50 MA for two days in a row - a bad sign - but they managed to avoid dropping through support.  Volume is starting to look more bearish in the miners, with down-day volume larger than up-day volume, and two closes below that 50 MA is definitely not a good sign.  Gold's plunge through 1280 on Thursday definitely caused the miners some heartburn, but did not result in a general collapse in prices.

Junior miners look weaker than the seniors - rather than a horizontal trading range as in GDX, the juniors look to be tracing out a more bearish-looking descending triangle pattern.  As a result, I believe the GDXJ (and junior miners in general) are at a higher risk of major losses if gold continues moving lower.

US Equities/SPX

SPX took a rest on Friday, closing down -4 points to close at 1988.40.  After a straight-line move higher over 11 trading days, it is to be expected.  Surprisingly, the VIX moved lower on Friday as well, closing at 11.47.  Traders weren't interested in buying puts to cover them over the weekend.  I'd say that's bullish for SPX.  On the week, SPX was up +33 points [+1.78%].

The chart below shows that the VIX is has retreated to I would call "highly complacent" levels, but has not yet reached the "supremely complacent" levels of May-July.  Note that during 2013, VIX levels below 12.5 were relatively rare.

The USD

The dollar was up a big +0.93 [+1.15%] on the week, breaking to new highs and looking quite strong.  The move started on the heels of the FOMC minutes release on Tuesday, and has just kept on going since then.  The market appears convinced that the Fed really will stop printing money, and the next thing to follow is a rate increase "sooner than the market expects", and this along with the superior US overall economic performance (compared to Europe and Japan) seems to have caused a strong move into the dollar.  I'm just guessing about the whys, of course.

Money has been flowing into USD - both equities and bonds have been the beneficiary.  Gold has suffered; who wants gold when you can get at least some yield out of stocks and bonds and more importantly, the trend happens to be in your favor?  Plus, increases in the dollar often result in gold having trouble.

Rates & Commodities

Bonds dropped slightly this week, closing down -0.36%.  Bonds were initially unhappy with the FOMC meeting minutes, but have recovered a bit since then.  TLT remains above its up-trending 20 EMA, and still looks quite bullish in spite of this week's dip lower.

Commodities continued dropping once again, down -0.67% this week.  They have been down for 9 straight weeks - which is not helpful at all for gold & silver.  Its much more difficult to make an inflation case to Managed Money that they should buy silver & gold futures when commodities are in such a clear downtrend.

Physical Supply Indicators

* Premiums in Shanghai were up +1.63 this week; Shanghai gold is now trading at +3.53 over COMEX.

* The GLD ETF gained +4.48 tons of gold, with 800.08 tons total holdings.

* Registered gold at COMEX is up 0.68 tons to 36.04 tons total.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on Aug 22) of 1281.40 and silver 19.45:

  OUNZ 12.80 +0.00% to NAV [down]
  PSLV 7.85 +3.90% to NAV [down]
  PHYS 10.60 -0.50% to NAV [down]
  CEF 13.70 -5.58% to NAV [down]
  GTU 45.29 -4.42% to NAV [down]

ETF premiums were down across the board.

Futures Positioning

The COT report is as of August 18th, when gold was trading around 1297.  Gold Managed Money added 3.3k contracts short and dumped 10k longs - and this was before the big move down on Thursday.  Producers were largely unchanged - they went net long by 1.3k contracts.  Managed money is still causing the moves in gold.

In silver, Managed Money added 5.4k shorts, and bailed out of 0.6k longs, while the producers went long and covered short - but only a net of 2.4k contracts.  Managed money is moving the market here too.

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 DOWN, medium term UP, long term DOWN.

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

Gold's drop this week dragged its 20 EMA lower, and is now pointing down.  Only the 50 MA of gold looks remotely positive, and that won't last if gold remains below 1300 for any length of time.

Summary

This week gold joined silver in breaking down, setting a new cycle low, and selling off relatively hard.  Miners followed, although not as horribly as I thought they might.  So far this doesn't look to be a repeat of 2013, at least for the mining shares.  It seems that silver was the right indicator to watch - over time, it has led PM lower.  The related gold/silver ratio is thus probably important to watch as well, as an early indicator of where PM might be going in the future.

From the moving average perspective, gold has turned short term bearish, while silver remains neutral or bearish in all timeframes.  The gold:silver ratio dropped this week to 66.07; its hard to say if this new relative strength in silver is a trend change or just a blip, but it is a positive sign.  GDX:$GOLD remains positive but is slowly moving less bullish, while GDXJ:GDX remains largely unchanged, slightly bearish. SIL:$SILVER sold off and is now looking more like GDX:$GOLD.  Except for the drop in the gold/silver ratio, all the changes in the ratios and averages this week were bearish.

The COT reports this week saw increased shorting and long liquidation by Managed Money, more in gold than in silver.  Producer positions remain largely unchanged, although as usual they tend to cover short as prices drop.  COT report paints a picture of PM in a downtrend, with Managed Money doing the heavy lifting, however the COT does not show us to be at any sort of inflection point.

Shanghai premiums have continued to increase, GLD tonnage rose, and the ETF premiums dropped.  Let's call physical demand somewhat positive this week.  I put more weight on Shanghai than on most of the other indicators.

The buck broke out strongly.  This hurt gold.  If it continues, it will likely be hard for gold to find buyers.

Right now, money is flowing back into SPX, bonds, and the USD, and away from PM as commodities continue to decline.  Miners are clinging on to their June-July gains which is a dramatic change from how badly they behaved in 2012-2013, but if gold continues dropping, I believe it will eventually lead to some serious selling even in the resilient mining shares, with the juniors being hit the hardest.

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