PM End of Week Market Commentary - 10/10/2014

davefairtex
By davefairtex on Sat, Oct 11, 2014 - 4:07am

On Friday gold dropped -0.60 to 1223.30 on moderate volume, while silver was up +0.05 to 17.39 on light volume.  PM traded in a relatively narrow range, dropping modestly in the middle of the trading day but then recovering its losses by end of day in spite of a decent-sized dollar rally.

Mining shares were not nearly as happy, with GDX off -2.12% on moderately heavy volume, and GDXJ down -1.22% on moderate volume.  Miners did not like the rising dollar one bit.

For the week, gold was up +32.20 [+2.70%], silver +0.54 [+3.21%], GDX +0.68% and GDXJ +3.63%.  Gold possibly marked a low on Monday at 1182 on the back of a huge drop in the buck that same day, but after a week of moving higher, PM is now trying to figure out if it wants to continue moving higher, with the senior miners remaining in a state of limbo.

The USD

This week the dollar appeared to put in a high, dropping -0.75 to 86.06.  During the first part of the week the buck dropped as low as 85.01, but rebounded sharply on Thursday and Friday, calling into question the high.  Where do we go from here?  I'm on the fence - I think it could go either way.  Draghi seems to be losing credibility among traders on the whole "whatever it takes" pledge he made - the market now seems to be suggesting that while Draghi's spirit is willing, his actual ability to execute is substantially weaker than it needs to be.  Weakness at the ECB lends strength to the buck.

Is this weakness all a game to drive the euro lower?  Nobody invited me to the Big Secret Meeting, so all I can do is watch the price charts.  Even after the bounce this week, the Euro still looks like it might have further to go on the downside.

Miners

Mining shares closed pretty much unchanged on the week, but the interim volatility and volume was quite large.  On Wednesday, mining shares had an incredibly strong rally on high volume following the dollar's drop through its own EMA-9 which signaled a technical top for the buck, but then the miners were sold hard for the next two days as the dollar rebounded

I recall seeing this sort of behavior in late 2008 as markets struggled to find a low.  During that time, traders stampeded out of equities one day, only to stampede right back in the next, all on massive volume.  In situations like this where direction is uncertain, traders seem to be cats who are "always on the wrong side of the door".

Mining shares continue to be strongly driven by movements in dollar; Friday, for instance, gold held relatively steady for most of the day, while mining shares reacted quite negatively to the dollar rally.

US Equities/SPX

Equities also moved violently on heavy volume, ending the week down -61.77 [-3.14%], closing on Friday right at support at 1905, which happens to be both the 200 MA as well as the previous low.  The drop in equities caused the VIX to scream higher, jumping +6.69 to 21.24, the highest level for the VIX since February.  The momentum in equities right now is definitely lower.  On Friday, it was clear that traders did not want to be long going into the holiday weekend, and so SPX sold off right into the close.  Over the last two days selling was heavy, with volume increasing as prices dropped.  This looks like a bearish picture to me.  If 1905 support fails to hold, selling should intensify.  Losing that 200 MA plus establishing a new low - that's bearish for SPX, if it happens.

Rates & Commodities

Bonds rose this week, with TLT up +2.00% hitting a new cycle high for the long bond.  It was a good week, but only for the high quality issues.  Junk bonds (JNK) cratered, especially in the last two days, driving below the previous low on heavy volume.  That's worth a picture, isn't it?

Ouch!  When JNK drops while TLT (and IEF) move higher, that says "flight to safety" as clear as anything.

Commodities tried rallying this week, closing up +1.28%.  Commodities rallied strongly on Monday right along with gold, but have sold off since then.

Oil had another bad week.  WTIC dropped -4.19 to 85.52, dropping as low as 83 before rebounding Friday.  Brent fared slightly better, closing down "only" -2.42 to 89.89.  Dropping oil prices - is it supply?  Economic issues in Europe and Japan?  Or perhaps the (predictable, yet apparently surprising) rash of Ebola cases that have started to spring up everywhere?  Its hard to say.

Physical Supply Indicators

* Premiums in Shanghai vs COMEX were down -0.72 to +4.93 vs COMEX.

* The GLD ETF lost -8.03 tons, with 759.44 tons remaining.

* Registered gold at COMEX dropped -0.47 tons, with 29.40 tons remaining.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on October 10) of 1223.40 and silver 17.36:

  OUNZ 12.22 +0.04% to NAV [up]
  PSLV 7.03 +4.35% to NAV [up]
  PHYS 10.11 -0.56% to NAV [up]
  CEF 12.32 -8.62% to NAV [down]
  GTU 41.56 -8.13% to NAV [down]

ETF premiums were up for the Sprott funds, and down for the other funds that don't provide delivery options.   Market is clearly favoring the ability to retrieve your metal.  I wonder if this will drive changes in the structure of the other funds at some point.

Futures Positioning

The COT report is as of October 7th, when gold was trading around 1208 and silver around 17.20.

In gold, Managed Money was virtually unchanged - they sold about 1k longs, and they remain quite heavily net short on a historical basis.  Producers didn't change much either, increasing both longs and shorts for a net change of perhaps 800 contracts.

Silver saw little change in Managed Money too, with a decrease in net long exposure of only -365 contracts.   Producers bailed out of both longs and shorts, with a net change of +687 long exposure.  Producers remain historically net long silver, which is a bullish indication long term.  Short term, anything can happen of course.

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

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

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

Gold's 20 EMA has moved to flat this week, driven by gold's rebound off the 1181 low.

Summary

Gold drove down to its multi-year low at 1181 early Monday, but was then rescued by a big drop in the dollar, which sold off hard for three days, encouraging gold to rise well above 1200 where it has been ever since.  Silver followed along, while the miners have oscillated violently but without moving all that much higher.

There has been some modest improvement in the ratios.  Gold's 20 EMA has flattened in response to gold's bounce off 1181, and gold is now right at that 20 EMA.  Gold/silver ratio dropped -0.34 to 70.37, a modest move but at least its a positive one.  GDX:$GOLD continued dropping, GDXJ:GDX rose, while SIL:$SILVER dropped.  There are a few hints of a trend change, but right now they are just hints.  And the miners still appear ill.

The COT reports once again shows not much change.  There is plenty of fuel for a short-covering rally at this point, especially in silver where Managed Money remains close to historically short levels.

Shanghai premiums are down a bit this week but remain positive, delivery volumes of spot gold in China have dropped off but remain strong, GLD tonnage fell again, while ETF premiums are mixed.  Physical demand remains strong.

The move in the dollar this week first signaled a technical reversal when the buck moved through its EMA-9, only to reverse again at end of week.  Where to from here is anyone's guess.  Miners seem especially sensitive to dollar moves, while gold and silver seem more resilient.

Ultimately however, I need to stick to my discipline: gold crossed its EMA-9 on Wednesday, and my sense is, it is a reasonable idea to be long gold based on that moving average crossing.  Silver is more iffy - it still hasn't closed above its EMA-8, so its future is more uncertain - and all the "risk off" signals we are seeing (JNK cratering, SPX selling off, oil tanking hard) support those concerns about silver.

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1 Comment

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 653
Fascinating DEBATE

 

To my mind we need more of this type of debate.  Not just interviews where the folks talking are almost in agreement, like Chris and Mish, etc.  I found this to be quite enlightening and just wished it would not have ended.

Comments?   Zen

 

 

 

ENM_Header.gif

ECONOMY & MARKETS | 10.12.2014

Dear Kenneth,

What happens when you put two almost diametrically opposed forecasters into the same room together?

The result may surprise you. 

It did me when I invited rogue economist, Harry Dent, and award-winning editor ofForecasts & Strategies, Mark Skousen, to sit down in a room together to hash out their different views of the markets and the economy.

At the beginning of the session, these two men disagreed on whether the markets were in a bubble or not… whether gold is a good investment or not… whether real estate is recovering or heading for another collapse…

But by the end of the recording, called Clash of Two Titans: Harry Dent and Mark Skousen Debate the Future of Markets, Real Estate, Interest Rates, Inflation, and Gold, they agreed on some surprisingly insightful investment positions that you can implement immediately.

That’s why I’d like you to watch this complimentary video. Simply click on the image below.

Before you do though, make sure you have a pen and paper handy as you’re going to want to take notes of what Harry and Mark reveal.

 

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