PM Daily Market Commentary - 12/17/2014

davefairtex
By davefairtex on Wed, Dec 17, 2014 - 11:25pm

True to form, the FOMC provided lots of volatility; gold closed down -6.10 to 1189.20 on moderately heavy volume, while silver rose +0.03 to 15.75 on moderate volume.  The publication of the meeting statement caused gold to oscillate in a $30 price band before deciding to close lower.  Silver did somewhat better, having a more positive bias going into the meeting.

One big beneficiary of the meeting was the USD.  USD traded higher in anticipation of the press release at 1400 EST, sold off a bit on release, and then screamed higher once the press conference started.  USD closed up a huge +1.13 [+1.28%] to 89.24.  Other currencies sold off hard as a result, with the Euro down -1.34%, the Yen down -1.88%, and the Pound down -1.11%.   The buck narrowly avoided making a new high, but my experience is that once USD screams higher like this after an FOMC press conference, momentum usually carries it to new highs.

Mining shares finally showed some life today.  At first they pushed strongly higher immediately post-release at 1400, then they weakened as gold sold off in response to the huge dollar rally.  However in the last hour of trading, buyers appeared and bid the shares strongly higher into the close.  During this time, gold did more or less nothing - this end-of-day rally was entirely about traders buying mining shares.  GDX was up +5.15% on heavy volume, while GDXJ rose +7.13% also on heavy volume.  The mining share rally today is really good news for PM, in my opinion: traders finally stepped up to buy.  Perhaps the recent miner weakness was just pre-FOMC meeting jitters mixed with tax loss selling.

In response to the miner rally, GDX:$GOLD rallied quite strongly, possibly marking a low in the ratio.

The other big beneficiary of the FOMC meeting day was the US equity market.  However instead of moving as a direct result of some bit of meeting data release, it seemed that SPX was just generally pulled higher all day long, probably helped by the rising dollar.  SPX closed up +40.15, closing at 2012.89, and appearing to put in a reversal.  VIX dropped -4.13 to 19.44.

Once again, the FOMC meeting was quite bullish for the USD, and for equities.  What specific minor nuance change caused this (removing the words "considerable time" and replacing them with "patience", perhaps?) is unknown.  Econoday summarized the Chair press conference in the following way:

http://mam.econoday.com/byshoweventfull.asp?fid=460577&cust=mam&year=2014&lid=0&prev=/byweek.asp#top

The bottom line is that the Fed appears to continue loose monetary policy unless economic data start coming in stronger than expected.  And rate hikes are likely to start in 2015 but likely be slow.

Bonds sold off today, with TLT closing down -0.90%.  Bonds still remain in a strong uptrend, comfortably above their EMA-9.   JNK rebounded strongly, up a big +1.90% and definitely marking a reversal.  My sense is this has more to do with price action in oil than with the FOMC.

Commodities rose today, with the $CRB closing up +0.48%.  It is not a bottom yet, only the hints of a possible low.  WTIC had an exciting day at one point rallying almost $4, but managed to lose most of its gains, closing up +0.30 to 55.81.  Because of the lame close, it did not confirm the low from yesterday.  Still, the doji candle is a whole lot better than the steady $2 daily declines that WTIC has been having for the past two weeks.  Related oil equities took this as massive encouragement - stolid oil majors rallied a big 4-5%, and the shale drillers were up 10-15%, confirming lows made yesterday.

So, no low in oil, but oil equities are rallying, as are the mining shares.  Could this be the start of an early santa claus rally in oil and the miners?

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2 Comments

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Gold/SDR Ratio

Hi Dave,

Thank you for the effort you put into these commentaries. My suggestion is that you use the SDR to value the gold because of the distortions brought into the picture by the $US privileged position. (Not to mention the capital flows into and out of the USA due to the carry trade.)

At the moment you are measuring the inverse of the value of the $US.

The SDR is a basket of fiat currencies.

The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets—gold and the U.S. dollar—proved inadequate for supporting the expansion of word trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.

From the IMF's website.

It is interesting that if a country has more SDRs than allocated it earns interest on them and if it has less SDRs than allocated it pays interest on the shortfall- thereby making SDRs valuable. (From the video whose link I was unable to capture)

Here is an XL spreadsheet of the value of the SDR. I do not have Excell program loaded or I would interrogate it for the formulae used to ascertain the output.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5459
gold in XDR

Arthur-

Interesting idea.  Here is gold in XDR, with the index starting in Jan 2013.  You can really see the buck start to get stronger in August 2014.  I'll add it to the list of currencies I track on a weekly basis!

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