PM End of Week Market Commentary - 12/19/2014

By davefairtex on Sat, Dec 20, 2014 - 8:49pm

On Friday gold dropped -3.70 to 1194.50 on light volume, and silver rose +0.19 to 16.07 also on light volume.  This actually looks like a good day to me, as the dollar rose +0.38 to a new high of 89.84.

Mining shares faded a bit, with GDX down -1.23% on moderately light volume, while GDXJ dropped -2.58% on moderately heavy volume.  Mining shares remain above their EMA 9, and after two strong rally days some selling can be expected.

For the week, gold was down -27.60 [-2.26%], silver off -0.97 [-5.66%], GDX -0.64% and GDXJ +0.46%.  The mining shares strongly outperformed the metal once the Fed meeting had concluded.


This week the USD drove higher, with the gains coming after the Fed swapped out the words "considerable time" for the word "patience."  The USD was up a big +1.50 to close at 89.84, making a new multi-year high.  Each time the dollar looks to perhaps be forming a top, something happens to drive it higher.  The weekly EMA-9 seems to be acting as support - which indicates just how steep (and strong) this rally is right now.

What is causing the dollar to rally?  Factors include emerging market companies seeking dollars to repay their dollar-denominated loans, the end of QE, and the overall positive tone provided by the prospects for anemic growth in the US when the rest of the world is either in recession or quite close.

Debt repayment is a big deal, and it is deflationary.  Back when the Fed was flooding the markets with money, it was very cheap for companies to borrow money in USD, and perhaps all these borrowers believed in the meme that the buck was going right into the toilet.  Now, with China slowing, Japan printing huge sums, the Eurozone economy sputtering, and US QE ending, the dollar now looks great, and those dollar loans are looking more and more expensive every day.

Here is why: let's say you ran a Russian company and borrowed in 2010 when the Ruble was at 30 when borrowing in dollars was cheap.  Your income is in Rubles, while your payments are in dollars, but as long as the Ruble stays at 30, its no big deal.  Each month, you convert 30 Rubles into one Dollar to make make your payments.  Fast forward to today - with the Ruble at 59, you must convert 59 Rubles to get one Dollar - your loan principal has doubled as have your payments!  This loan is no longer cheap, its killing your company!  As a result, you want to refinance, so you scramble to drege up enough Rubles, sell them on the international market for Dollars, and repay your debt.  This act of selling Rubles for Dollars drives down the Ruble even further, and pushes the Dollar higher.  Rinse, repeat, and we have ourselves a Ruble currency crisis driving a Russian company debt crisis.

Multiply this Russian company's experience by "the entire emerging market" and you can get an idea of why there is such a bid under the buck these days once the USD-denominated assets are seen as a more attractive place to park your money.  All these companies are scrambling to repay those formerly-cheap USD loans that are getting more expensive by the day.

Having said all that, the chart of the USD/RUB suggests that the top may be in.  The currency pair printed a massive gravestone doji candle, which is a reversal sign, which needs confirmation by a close below the lows of 58.  My sense is, if oil can rally even a bit, the Ruble will strengthen.


The miners finally broke out of their slump, putting in a flat week in the face of a drop in the price of gold and a strongly rallying USD.  While the miners are back to outperforming the metal in the short term which is definitely a bullish outcome, the senior miners are fast approaching their recent nemesis - the 50 MA, which has proved a great short entry point over the last month or so.  If GDX can close above the 50 (on Friday, it was 19.26) that would be a bullish sign.

The junior miner chart is still underperforming, although it is slowly improving.  The best-looking chart is the GDX:$GOLD daily, which shows a rapidly rising miner/gold ratio that moved above its EMA-9 - a rising ratio is a clear sign of "risk on" in the PM space.

US Equities/SPX

The US equity market rallied Friday, closing up +9.42 to 2070.65, a few points short of another all time high.

The SPX was another beneficiary of post Fed meeting excitement, ending the week up +68.32 [+3.41%] and conclusively ending its recent dip.  As a result the VIX dropped -4.59 to 16.49.  Just based on the enthusiasm, the dollar breakout, and the widespread expectations of a "santa claus rally" based on front-running the "January Effect" ( I think we likely make new highs sometime next week.

Gold in Other Currencies

Gold was down in most currencies, but it sold off hardest in USD, as you can see from the chart below.  Gold performed the best in the Euro, since the Euro dropped -1.92% to 122.29 vs the buck and made new lows.

Rates & Commodities

Bonds (TLT) dropped slightly this week, losing -0.34% and printing a weekly doji candle, which could be the sign of a top.  Still, bonds look strong, and they are easily outperforming equities on the year.

Junk bonds rebounded after being stomped last week, closing up +3.35%.  I believe they benefitted from the leveling off of oil prices.

Commodities continued lower, off -1.43%.  Oil on the other hand managed to stay more or less even, dropping -0.58 [-1.01%] and printing a doji candle on the week.  Now we just need to see that candle confirmed, by a close above 60.  Oil is extremely oversold - in the history of the series dating back to 1980, oil has never been this oversold (rather than a percentage drop, the "oversold" indicator is simply a measure of the steadiness of the losses rather than the magnitude of the losses overall).  Downtrends never last forever, and the odds go up for a rebound with each passing week.

All during the week, oil flirted with a rebound only to repeatedly sell off, so mostly oil ended up just chopping sideways.  Still, buyers showed up in the futures markets every time oil dropped below 55.  Perhaps it is oil companies closing hedge books, maybe it is hedge funds, its hard to say, but there does seem to be a bid under oil at 55.

Physical Supply Indicators

* Premiums in Shanghai vs COMEX rose +8.19 to +6.20 to COMEX.  With the drop in gold, Shanghai is now back in premium.  Deliveries in China remain quite strong.

* The GLD ETF lost -1.24 tons of gold, and has 724.55 remaining.

* ETF Premium/Discount to NAV; gold closing (12:59 close price on December 19) of 1195.20 and silver 16.05:

  OUNZ 11.93 +0.06% to NAV [down]
  PSLV 6.19 -0.51% to NAV [down]
  PHYS 9.88 -0.48% to NAV [unknown]
  CEF 11.73 -8.94% to NAV [up]
  GTU 40.84 -7.56% to NAV [up]

ETFs were mixed this week - the non-delivery funds shrank their discounts by a fair amount.

Futures Positioning

The COT data is valid through Dec 16, 2014, when gold was trading at 1193.90 and silver was trading at 15.71.  During the reporting period, gold and silver dropped fairly significantly.

During this time, Managed Money bailed out of both shorts and longs, losing -4.2k longs and -3.1k shorts.  Producers increased shorts by +5.5k and longs by +1.1k.  No major changes in position took place.

In silver, Managed Money added +3.7k shorts while losing -529 longs; Producers increased +2.5k shorts and +3.3k longs.

This week, not much changed from the COT perspective.  It would seem that whoever pushed prices lower went and covered their shorts after the move happened.  That, and/or new longs appeared for all those that were stopped out.

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

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

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

Gold and silver's big drop on Monday dragged its moving averages all back to DOWN.


Gold and silver dropped on Monday, dropping back through their 50 MAs.  Perhaps it was a combination of pre-Fed jitters alongside falling commodity prices that dragged PM lower, its hard to say.  The rally towards the end of the week was mild.  Miner strength is a significant new positive factor, but dollar strength remains an issue, and the longer term (6-month) trend in gold remains down.

From a ratio & averages perspective, the PM drop on Monday/Tuesday dropped both EMA-20 to negative, and pulled both MA 50 to negative too.  The gold/silver ratio rose this week +2.59 to 74.33, back above its EMA-9, which is bearish.  However, the rally in the mining shares has pulled the GDX:$GOLD ratio higher, which could be described as "early bullish", as is the GDXJ:GDX ratio.  After a one-month break, there is once again a flicker of interest in the mining shares.  If they can close above that 50 MA, that should help tremendously.

Physical demand is back; those Chinese in Shanghai sure like to buy the dips.

The trend in the dollar is up, and has been for months now.  Every time the dollar looks a bit weak, something happens to cause it to rally again.  This makes it harder for gold to rise in USD terms.  Harder, but not impossible.  The wave of deflation from all the efforts by emerging market companies to repay USD debt must be endured.  Once it passes, the buck should peak and fall back.  Who knows how long this wave will last - there is a lot of debt out there.

If commodities and oil ever bottom out and start to rise, that should help gold and silver; its tough to make an inflation case when the overall commodity index is screaming deflation.  The inflation thesis tends to drive western COMEX gold buyers and the holders of GLD.

Lastly, there remains an undercurrent of tightness in the market.  GOFO rates are negative, repatriation seems to be a theme in Europe, there could be stuff happening behind the scenes - its all very mysterious.  Nothing looks ready to break at the moment, but after a few more gold repatriations, who knows?

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Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Hope and Confusion

Multiply this Russian company's experience by "the entire emerging market" and you can get an idea of why there is such a bid under the buck these days once the USD-denominated assets are seen as a more attractive place to park your money.

Are you telling us that the FED does know what they are doing? This will take some time to absorb. Over on ZH they are discussing the crisis in the developing economies and I hear tell that the US is not in any mood to forgive any debt.

Could this be the subjugation of the periphery?  The bus could be taking us to a very different destination than the one advertised.

Very interesting.

I still hold hope that 16kg of silver is the historical price of a 3 bedroom house. But as Friedrich says

Hope in reality is the worst of all evils because it prolongs the torments of man.

davefairtex's picture
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5693
plans vs accidents


Are you telling us that the FED does know what they are doing?

Well I don't recall saying that.  I think these guys do a lot of stuff by accident - they only figure out after the fact what the unintended consequences of their actions were.

They have just a few very blunt instruments, and the world economy is a spider web where everything is delicately interconnected.  They blunder around poking the web with their stick and hoping for the best, but all they do is distort distant parts of the web they did not even intend to affect.

Money printing was supposed to cause inflation in the local economy.  Half of the money was parked right back at the Fed, depressing interest rates.  The other half ran around inflating asset prices.  And, as a side effect, the low rates facilitated dollar loans to emerging markets which promptly caused inflation over there.  Now the end of money printing is causing deflation in those same emerging markets.  Think the Fed meant for that to happen?  I don't.  They just aren't that clever.

I also think they'd prefer to have the dollar drop rather than appreciate, all things being equal.

As for the US forgiving debt - emerging market companies and countries default all the time.  The old saying comes to mind: "If you owe the bank $100 dollars, that's your problem; if you owe the bank $100 million dollars, that's the bank's problem."


budwood's picture
Status: Member (Offline)
Joined: Dec 22 2011
Posts: 13
In a limited sense, yes, they know.

In a limited sense, yes, the USA Fed knows what it is doing.  The problem as I see it is that there are folks who have difficulty in relating cause and effect.  Typically, such people can be found in positions of governmental power simply because being there is more rewarding than is being effective.  Hence, the Fed probably embraces the status quo as an answer to all the ills of the economy.

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