PM Daily Market Commentary - 9/4/2014

davefairtex
By davefairtex on Fri, Sep 5, 2014 - 12:01am

Gold closed down -8.30 on heavy volume, while silver was down -0.12 on moderately heavy volume.  Metals were looking mildly positive up until the ECB announced it was going to print money and drop deposit rates to -0.2%; PM first bounced higher, and then steadily sold off into the close.  Gold made new lows, as did silver.

Gold longs in the US may be wondering how its possible that the ECB can print money, and gold sells off.  Is it manipulation by the central banks?  Well, gold's action today depends on what currency you are viewing gold in.

Gold priced in euros actually did pretty well.  While gold in dollars dropped -0.65% today, the euro itself dropped a massive -1.60%.  That nets out to a rise of gold by +9 euro (or +0.96%), a pretty decent move.  If you live in euro-land, gold bumped up to the high end of its trading range, more or less what you'd expect.

Given the euro dropped -1.6%, the dollar went nuts today, jumping +0.93 to close at 83.80.  Coming after such a long and steady move higher, this rally in the buck/breakdown in the euro is quite the dramatic move.  It suggests the market was definitely surprised by Draghi's actions at the ECB, and traders panicked out of the euro and ended up running to the dollar.

This rise in the buck during situations like this was predicted by deflationists for two reasons: 1) the dollar still acts as a safe haven, and 2) there is a large amount of dollar-denominated debt out there, and when the forces of deflation take hold, borrowers start reducing debt across the board.  This process of dollar-debt paydown results in a scramble for dollars to repay debt, which drives the buck higher.  The tendency is, during these phases, everything gets sold in order to raise dollars and pay down debt.  This includes gold, and risk assets of all sorts.

Mining shares had a bad day - they finally broke below support which had held for two months.  This break of support resulted in massive selling, with GDX off -3.50% on heavy volume, while GDXJ was down -5.47% on extremely heavy volume.  Once prices break support the way they did today, disciplined traders throw everything off the lifeboat, and that usually results in several days of increased selling pressure as a number of big guys exit their positions.  The related GDX:$GOLD ratio also suffered a breakdown and has started looking bearish for the first time in months.

SPX made another intraday all time high today - it was initially driven higher by the news from Europe, but it did not hold its gains and sold off into the close, off -3 to 1998.  VIX rose +0.28 to 12.64.  Down-day volume is starting to pick up a bit in SPX.  In recent months, moves higher in the buck have resulted in gains for SPX, but that didn't happen today.

Long term treasuries (TLT) had an even worse day, with its price also driven by the ECB news.  TLT closed down -1.22%, below its 20 EMA.

WIth the massive move higher in the buck, and US assets also dropping in price, this suggests to me money is either going to repay debt or sitting in US dollar bank accounts.  The moves today seem less about reaching for yield, and a lot more about fleeing to safety - and/or fleeing out of perceived danger in the eurozone.  Today looked "risk off" to me.

If the buck continues higher, gold looks predestined to test 1240, and silver 18.75.

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