PM Daily Market Commentary - 12/11/2014

davefairtex
By davefairtex on Fri, Dec 12, 2014 - 2:29am

Gold rose +2.10 to 1227.70 on moderate volume, and silver rose +0.02 to 17.09 on light volume.  Gold had a wide trading range but ended up largely unchanged, while silver traded in a narrow trading range.  Gold looks to have a pretty strong bid underneath it right now; dips are being bought, and what's not to like about that?

The dollar rebounded strongly today after being down three days in a row, closing up +0.40 to 88.62, just above its EMA-9.  The buck remains in its strong uptrend.

Given the dollar's strong rise today, PM hanging steady is a fine performance.  Gold in most other currencies continues to rally.  Gold in Rubles is especially strong - that's because the Ruble is still getting crushed vs the dollar.

Here's an interesting correlation: RUB/USD and the price of oil.  Starting in March 2014, the correlation is quite close.  It brings up an interesting trade possibility: once oil stops dropping, perhaps its time to buy some Russian equities?  You can get a currency gain, and you buy stocks that have been absolutely hammered.  That's not a recommendation, it is just an idle thought!

GDX sold off modestly, down -1.12% on light volume, while GDXJ dropped more, down -2.34% on moderate volume.  GDXJ:GDX ratio continues dropping, setting new records with each day.  While gold is doing relatively well, junior gold miners just aren't getting any love these days at all.  I have to hope its just tax loss selling.

Bonds rose again, up +0.41% scoring a new cycle high - up more than 24% this year.  JNK continued dropping, down another -0.63%, making another new low.  Cheap oil is making all those junk bonds uhhappy.  I saw a price quote for a shale driller junk bond today of 60 cents on the dollar.  9.25% coupon, yield to maturity in the 20% range.  No thanks.

SPX tried to rally today and failed, printing a hammer candle, and closing up just +9.19 after being up perhaps 30 points earlier in the day.  The VIX liked the failed rally - it was up +1.55 to 20.08, a big climb over the past four days.  The hammer candle suggests we have some more downside move left in this leg down for SPX.

Commodities dropped slightly, off -0.08% still bouncing around the lows and still heading generally downhill.  WTIC dropped hard again, off -2.07 to 59.15, breaking the 60 mark for the first time since July 2009!  Brent was off a more gentle -0.63 to 63.88.  Oil is amazingly oversold - the weekly RSI-7 is 5.48.  Once the momentum reverses, the bounce should be pretty impressive, but who knows when that will be.

The divergence between gold and oil continues to pique my interest.  I still think it means that something is up.  Oil's drop is so massive and so unusual and it is screaming deflation and the rest of the commodities seem to be in general agreement, and yet gold and silver both are generally moving higher.

Is it Chinese physical buying?  The long-awaited COMEX default?  Some other mysterious cause?  Has gold been declared money somewhere?  Maybe there really are hints of shortages that are now being reflected in the futures markets.  I really don't know.  But it does seem gold bullish.  I'd be more sanguine if the junior miners weren't misbehaving so badly.

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5 Comments

dinastar's picture
dinastar
Status: Member (Offline)
Joined: Nov 13 2014
Posts: 3
Massive D like deflation

It's only deflation, the USD is king for the next two years , and all commodities are going south, oil willl stabilize at 55 but 50 is the real support.

There are only american bigots to be blinded by their own death wish of debt-taxes-debt.Since the USA will once more enjoy their unique privilege of being saved again by the rest of the world US $ getting back to their source in Washington DC and Wall Street. This process was studied long time ago by a french economist , Jacques Rueff , he named it the " double helix " . When deflation grips the rest of the world , the world US $ holders rush to repatriate their US $ back to the USA and therefore the external deficits are erased ., the US currency rises et voilà.

Gold will resume its fall to 1000, Silver will fall to 13 then 10, it's a matter of time and wait. Again there is no inflation, especcially in a globalized economy where it' s so easy to produce goods cheaper everywhere . So Gold becomes useless because it has nothing to hedge again .

I will buy Lukoil when oil will be around 50. 

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2385
Excellent analysis Dave

The divergence between gold and oil continues to pique my interest.  I still think it means that something is up.  Oil's drop is so massive and so unusual and it is screaming deflation and the rest of the commodities seem to be in general agreement, and yet gold and silver both are generally moving higher.

Is it Chinese physical buying?  The long-awaited COMEX default?  Some other mysterious cause?  Has gold been declared money somewhere?  Maybe there really are hints of shortages that are now being reflected in the futures markets.  I really don't know.  But it does seem gold bullish.  I'd be more sanguine if the junior miners weren't misbehaving so badly.

- See more at: http://www.peakprosperity.com/discussion/89715/pm-daily-market-commentar...

 

I think your question about Gold being declared money hits the nail on the head.  Much of the world never stopped considering Gold money, regardless of efforts by Western central banks to make it not so, to paint is as a relic with no intrinsic value.  Here is some interesting commentary from Steve Ellis on the state of the leasing market and the renormalization of GOFO;

https://goldmarketmacro.wordpress.com/2014/12/11/physical-tightness-exte...

The best indicator that the physical market is becoming stressed will be seen in the forward curve for gold.  Over the past week GOFO rates published by the LBMA have all increased indicating fresh supply of gold available on loan, or a reduction in demand to borrow gold.  This has normalised the gold curve out to 12 months.

I read opinion suggesting that this normalisation can’t be trusted because member contributors mis-reported their quotes to avoid highlighting the problem.  I think gold commentators need to avoid calling foul every time the price or other market variable goes against their prediction or desired direction.

Instead by digging a little deeper we can see that this normalisation doesn’t tell us about the rest of the forward curve – beyond 12 months.

As a counterparty to a 5 year lease rate swap agreement with a major bullion bank, I see daily movements in this part of the curve.  Interestingly, even though short dated GOFO has normalised (and therefore short term gold lease rates have fallen) over the past week, the valuation of my lease rate swap agreement (to pay fixed lease rates and receive floating lease rates every 3 months for 5 years) has increased.  This means that over the past week, the market’s view on “average lease rates over the next 5 years” has actually increased – despite the decease in lease rates from 1 month to 12 months.

This means the market’s demand to borrow gold has simply moved further out along the forward curve.  In other words, institutional participants are expecting a tight gold market to persist for years to come, and are taking action to borrow gold now before it’s too late.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
longer term trends

My gut with this GOFO stuff is that gold leasing supply is leaving the market.  It goes along with the central bank buying, with asia physical buying, and with the gold repatriation efforts now being considered or under way.  Leasing gold is just less interesting now because of greater uncertainty overall, so lease rates rise.  And it may also reflect repatriation attempts behind the scenes.  First step in that process: stop leasing the gold.  Just my speculation, of course.

We may not lose the USD as the reserve currency, but the continued constant US misbehavior has definitely eroded trust in our institutions around the world to some degree.  We aren't viewed with suspicion the way China and Russia are, but we are definitely moving toward more of a parity situation faster than we'd like to admit.  Nations that implicitly trusted us because of WW1 and WW2 are now explicitly calling that trust into question.  The further down this path we go, the less trust there will be.

No one thing will end it.  It is death of 1000 cuts.  NSA spying on allies didn't help, neither does our drone program, neither does FATCA, larger fines on foreign banks, etc.

It manifests in gold repatriation, re-implementing SWIFT, de-dollarization in trade - they are all each signs of dropping trust in the US.  The more it happens, the easier it will be for others to jump on board.  You can write off Venezuela because they are governed by nutjobs, but - the Netherlands?  Losing their trust is not a small deal.

Interesting data from Ellis about his lease rates.  It would be nice to see some charts to provide context.

Timeframe on this doesn't seem immediate to me.  It seems like something that will take months to sort out.  But I do look forward to the next repatriation event.  Netherlands seems to suggest that's almost a done deal.  Especially the way the Central Banker in Belgium (h/t Koos Jansen) was talking on that video.  Reading between the lines, it's water cooler conversation over there in Europe.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2385
Next repatriation event...

Timeframe on this doesn't seem immediate to me.  It seems like something that will take months to sort out.  But I do look forward to the next repatriation event.

No need to wait Dave   : )

http://www.zerohedge.com/news/2014-12-12/breaking-austria-considers-repa...

From Bloomberg:

Austrian Central Bank Mulls Relocating London Gold: Standard

The Austrian state audit court says central bank should address concentration risk of storing 80% of its gold reserves with the Bank of England, Standard reports, citing draft audit report. Court advises central bank to diversify storage locations, contract partners.

Austrian central bank reviewing gold storage concept, doesn’t rule out relocating some of its gold from London to Austria: Standard cites unidentified central  ank officials. Austria has 280 tons gold reserves, according to 2013 annual report. Austrian Audit Court Will Review Nation’s Gold Reserves in U.K.

 

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 837
Please explain gold leasing.

if I have gold (I don't), how can I lease it to a bank? And what does the bank need it for?

To be humorous,'Do they somehow use it to cut the grass on their foreclosed properties?'

Because in the end, if gold is being bought up, they can't sell gold the don't own. So what is the point?

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