PM End of Week Market Commentary - 10/17/2014

davefairtex
By davefairtex on Sat, Oct 18, 2014 - 1:10pm

On Friday gold dropped -0.60 to 1238.50 on moderate volume, while silver was down -0.08 to 17.27 on light volume.  Gold traded sideways for most of the trading day, except for a three-hour visit to the 1231 level starting around 10:00 EDT with a rebound at around 13:00.  Silver just slowly sold off all day long.

After five days straight of failed rallies in the mining shares, they finally tipped over and sank hard on Friday; GDX was down -3.14% on heavy volume, while GDXJ was off a smaller -2.34% on moderate volume.  The only thing I can point to as a possible cause was a rising dollar (up +0.26 to 85.29).  It is interesting that gold has managed to hold steady, while the miners just rolled over on heavy volume.

For the week, gold was up +15.20 [+1.24%], silver down -0.11 [-0.66%], GDX -0.39% and GDXJ unchanged.  Gold is outperforming everything else in the PM complex, which is generally a bearish situation.

The USD

This week the dollar continued dropping, closing off -0.76 [-0.88%].  There was a lot of volatility during the week, with the buck hitting 84.50 at one point, but a pattern of lower lows is starting to emerge, which marks a downtrend in the buck.  Likely, this has helped gold over the past week.  The fact that the dollar has continued moving lower in the face of a renewed crisis in Greece suggests this move lower might have some legs to it.

Miners

Mining shares look ill, failing to rally for five straight days.   Despite gold performing well this week, mining shares were just not able to find buyers, and eventually slammed through its EMA-9 on heavy volume.  Unless buyers appear soon, GDX will break support at the previous low just above GDX 20, and that will probably lead to another rash of heavy selling.  GDXJ looks a bit better than GDX, but it too has been unable to close significantly above its EMA-9.

US Equities/SPX

US equities continued lower this week, dropping -19.37 [-1.02%] to 1886.76 on heavy volume.  Wednesday was a big down day where prices hit 1820, but by end of day SPX had rallied back 40 points.  So while appears that SPX has marked an interim low on Wednesday, from a technical standpoint, SPX has now formed a pattern of lower lows - which is bearish and suggests a downtrend is now in place.

Once this sort of technical pattern emerges, instead of "buy the dips", traders will be looking to sell rallies.  A good point for traders to start thinking about selling (or entering short) are the various resistance points.  Usually these are previous support levels, like 1905 (previous low, plus the 200 MA) as well as the falling 50 MA at 1967.  So if you decide to go short, you will probably have some allies - as well as some longer term traders who are now looking to get out of their long positions and will also be selling the rallies.

Rates & Commodities

Bonds rose this week, with TLT up +0.85% hitting another new cycle high for the long bond.  However, the volatility in bonds was extreme this week, as bonds just went nuts on Wednesday on a massive short-covering spike higher that was eventually entirely retraced.  The resulting weekly candle looks suspiciously like a short-capitulation top, especially when viewed in context of a 10-month rally in the long bond.  A close next week below TLT 120 will confirm the top in bonds.  If bonds peak, and equities remain in a downtrend - that suggests either the buck will weaken, or money will be dropped into bank accounts.  It will be interesting to see what happens.

JNK had a wild week, but ended up +1.32% on heavy volume.  It seems to be a good risk indicator, and right now after a big two-day bounce it looks to be heading higher.  However it too has formed a pattern of lower lows, which is bearish.

Commodities were off -0.54%, but avoided making new lows.  Oil on the other hand did make new lows, with WTIC down -2.60 to 82.92, and Brent down -4.42 to 86.16.  Oil bounced strongly on Thursday  - but neither WTIC nor Brent have closed above their EMA-9 for a while, so until that happens and/or the pattern of lower lows is broken, oil remains in a downtrend - and that will continue to put pressure on silver.

Physical Supply Indicators

* Premiums in Shanghai vs COMEX dropped -2.29 to +2.65 vs COMEX.  Delivery volume remains quite strong, but dropping premiums suggest supplies of gold in Shanghai remain sufficient to meet demand.

* The GLD ETF gained +1.49 tons, with 760.93 tons remaining.

* Registered gold at COMEX remains at 29.40 tons.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on October 17) of 1238.10 and silver 17.28:

  OUNZ 12.22 +0.08% to NAV [up]
  PSLV 7.02 +4.67% to NAV [up]
  PHYS 10.24 -0.46% to NAV [up]
  CEF 12.54 -7.51% to NAV [up]
  GTU 42.19 -7.83% to NAV [up]

ETF premiums were up across the board.

Futures Positioning

The COT report is as of October 14th, when gold was trading around 1241 and silver around 17.45.

In gold, Managed Money increased longs by +13.5k contracts, and also increased shorts by only +1.2k contracts, no doubt helping gold to rise on the week.  Producers increased longs (+2.8k) and shorts (+4.4k), resulting in a relatively small increase in short exposure.  We need to see continued buying from Managed Money to keep gold moving higher.

Silver saw little change on the week - Managed Money decreased net long exposure by -1.8k contracts, while Producers leaned long by a net +513 contracts.  Producers remain historically long and Managed Money is close to historically low net long exposure - which is bullish - but this situation can continue indefinitely until some catalyst encourages prices to move higher.  Once the catalyst occurs, the short unwind from Managed Money will cause a rocket-ship move; perhaps when oil prices stop dropping, we'll finally see our silver rebound.

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

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

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

Gold's 20 EMA has moved to UP this week and the 200 MA has moved to FLAT, driven by gold's continued rally to 1238 off the 1181 lows.

Summary

Gold continued its second week moving higher off the 1181 lows, with gold's EMA-9 seeming to act as support every time gold looked like it might weaken.  Silver on the other hand had trouble staying above its EMA-9, and is now back below it once again at end of week, having experienced a number of failed rallies.

There has been continued modest improvement in the ratios.  Gold's 20 EMA is now pointing up, and the 200 MA is now flat, which is modestly positive.  However, the gold/silver ratio rose +1.35 to 71.71, a new high, which is bearish overall for PM.  GDX:$GOLD is bearish and dropped further this week on continued miner weakness, and GDXJ:GDX was flat, while SIL:$SILVER rallied strongly.  Its a mix of bullish and bearish and so there are is strong signal right now to give us a firm sense of where things will head next.

The COT reports show an improvement in Managed Money interest in gold.  For silver, there is an almost-historic amount of fuel for a short-covering rally, but it awaits a catalyst.

Shanghai premiums are down further this week but remains positive, and delivery volumes of spot gold in China remain strong.  ETF premiums are up across the board.  Physical demand remains strong this week, but supply appears to be sufficient to meet demand.

The dollar has continued lower this week, making a new "lower low" which provides more evidence of a bearish trend change in the buck.  A continued move lower in the dollar will help gold - and possibly silver too.

The technical indicators from last week provided solid guidance - gold's strong move above its EMA-9 was followed up by a continuing rally in the yellow metal, while silver's failure to cross its own EMA-9 led to weakness and an eventual drop in the price of silver.  Oil's continued fall likely contributes to silver's weakness, as do lower commodity prices.  Lastly, miners look quite weak - buyers had better show up soon or else we will see new lows in the mining shares.

Overall, dropping silver prices will lead to poor performance in the PM space, even if gold manages to avoid selling off.  We need to see rising silver before PM overall will move sharply higher; over time, we can see that a rising gold/silver ratio is just not good for PM.

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1 Comment

jbengfort's picture
jbengfort
Status: Member (Offline)
Joined: Apr 22 2011
Posts: 3
Overall, dropping silver prices will lead to poor performance in

I know alchemy is not your forte, but how odd to see continued slippage in the price--especially silver--when it has reached a price at which miners hold on to the mined product--or don't profit from the mining.

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