PM Daily Market Commentary - 9/11/2014

davefairtex
By davefairtex on Fri, Sep 12, 2014 - 12:04am

Gold closed down -8.80 to 1241.10 on heavy volume, while silver was hit for -0.27 closing at 18.71 on very heavy volume.  Both metals were hammered lower prior to the US market open, and rallied modestly towards the end of the US trading session.  Importantly, both metals broke support, driving below their previous lows set back in June, stopping out a number of longs, and calling into question the 2014 PM rally.

From a chart perspective, once an instrument breaks the pattern of higher lows, it invalidates the uptrend.  For gold, the "higher low" was 1240, and for silver, 18.60.  Even though gold and silver both closed above those support points, the intraday break below support was meaningful for chart followers.

What's the rationale behind this?  Well take silver.  If there weren't enough dip-buyers stepping forward to buy silver in the 18.60-70 range, its a bearish sign.  Theoretically, if there is a bullish uptrend in place, support should be the time where buyers should come out of the woodwork to buy at a discount.  If that doesn't happen - or it doesn't happen as much as it needed to in order to support price, that suggests something has changed in the market sentiment overall.  And that's bearish.

If you put your faith in the "gold price trends are controlled/manipulated" philosophy, that can provide you some reassurance that you are still right about your near term outlook in spite of support breaks, but it comes at the expense of a potentially useful understanding for how markets correlate.   For instance, if gold is manipulated and thats your explanation for why it broke support, how do we explain falling commodity prices, falling oil prices, falling copper prices, and the rising dollar that happened at the same time as gold's "manipulation"?  From "the market" perspective, the whole orchestra of commodities are playing a bearish piece more or less in unison, and gold does not appear to be singled out for special punishment.

The dollar moved up again, closing +0.11 to 84.35.  The dollar is flirting with another breakout; as always, a continued move higher will encourage Managed Money to keep pounding on gold and the rest of the commodity complex.

Miners looked strong today - GDX was up +0.71% on moderate volume, while GDXJ was up +2.37% on extremely heavy volume.  Traders like miners, its just that simple; when miners rise while gold and silver drop, the market isn't whispering in your ear, it's yelling at you!  As much as Managed Money is pounding on PM and commodities, traders are definitely stepping up to buy PM miners whenever they trade at a discount.

SPX was up +1 to 1997.45.  SPX was off earlier in the day but once again rallied and closed at its high, meager though it was.  VIX dropped slightly to 12.80.  If during this period of relative deleveraging and "flight to safety" we only drop 10 points in SPX, that suggests when the pressure abates, SPX is likely to move higher, absent any dramatic change in sentiment.  Its certainly not what I'd expect based on all the topping factors we all know so well, but that is what prices are telling me.

Long term treasuries (TLT) dropped again, off -0.33% closing below its 50 MA.  The 10-year treasury is also through its 50 MA.  Both bond ETFs still retain their pattern of "higher lows" so the uptrend remains intact, for now.  If buyers do not appear and the long bond breaks down further, we will get a trend change in the long bond, buy-the-dip will turn into sell-the-rally, that will drive long rates higher, and that will not make the Fed happy.  But that has yet to happen.

Like a broken record, commodities dropped again today, off -0.67%.  That's about the same percentage that gold dropped, FWIW.  Commodities overall are now trading below the depths they reached back in December of 2013, when gold had bottomed at 1175.  So vs the rest of the complex, gold is actually doing relatively well.

Oil may be starting to diverge - it has quite possibly put in a low.  WTIC was down more than a buck early in the day along with the rest of the commodity complex, but rallied to close up +1.37 to 93.08.  Brent didn't look quite as strong but managed to print a perfectly respectable doji, +0.04 to 98.08.  News out of Saudi Arabia that they would curtail production in order to "defend oil at $100/barrel" likely helped a lot.

Which brings me to $100 oil.  Chris said during one of his podcasts that we face a very simple barrier to returning to business as usual: "too much debt, and $100 oil."  That's the shortest and best explanation for where we are I've heard to date.  So taking the longer view, if Saudi is defending $100 oil, and collectively we certainly don't seem to be doing anything about debt (except encourage people to get into more of it), what does that say about the longer term future?   We can all decide for ourselves what that means for PM prices but with Saudi defending $100 oil, it seems unlikely the world will return to real growth.

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3 Comments

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1447
Another Explanation Regarding Gold Price

If America is the economic engine of the world and its GDP is > 4%, then commodities should not be going lower.  If the GDP is not such, then faith is put in the stock market.  To support this Gold must be hammered to shift psychology.  As for gold buyers, they have seen this market behavior too many times and will wait on the side lines until the shorts run out of steam.  Of course the insiders trade the market up and down but that does not change the fundamental forces affecting Gold.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
shorts run out of steam

Kugs-

As for gold buyers, they have seen this market behavior too many times and will wait on the side lines until the shorts run out of steam.

I heartily applaud your strategy.  Wait for the shorts to run out of steam (i.e. for the balance of forces to swing towards the buyers) and then step up to the plate.

That's just smart trading, and that's what technical analysis is all about.  It attempts (more art than science) to assess what the balance of forces are, and to see if the balance is starting to shift, causing a trend change.

But until those other buyers appear in force, there is no sense in putting your hand in the meatgrinder.

You call the shorts "manipulators" and I call them Managed Money.  You imagine they have fell motives, while I just think they are looking to make their quarterly bonus.  Whoever they are, they produce an outcome that looks (over the last 3 years) quite well correlated with the price action in Copper.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Dancing with the Fairies.

It is my impression that the Central Bank created computer digits are just not interested in PMs at the moment.

The Left (model making) Brain is more interested in models of Reality than any tangible reality like gold and silver.

Copper is more interesting as it is a good analogue of the real economy of things. It is used in all electrical appliances.

The correlation of gold and copper is probably caused by a third factor- everyones' obsession  with representations of wealth. They are not interested in copper or gold as they are not esoteric enough.

Society and the economy are certifiably insane- they are off with the fairies. Think I exaggerate? Let us get a professionals opinion. Dr Iain McGilChrist at the Schumacher College.

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