PM End of Week Market Commentary - 1/9/2015

davefairtex
By davefairtex on Sat, Jan 10, 2015 - 9:44am

On Friday gold rose +14.50 to 1223.40 on moderately heavy volume, while silver was up +0.15 to 16.52 on moderately light volume.  Gold rose steadily all day long, encountering some volatility at the time of the Nonfarm Payrolls report at 0830 EST, eventually closing quite near the highs for the day.  Gold made a new cycle closing high, just barely closing above the old high at 1223.30.

Gold needs a close above its previous high at 1240 to signal an end to the medium term downtrend.  It is currently on track to do just that.  FWIW, a close around 1400 is required to end the long term downtrend in gold.

Silver rallied strongly, moving above its 50 MA on Tuesday.  Silver's 20 EMA crossed the 50 MA on Friday - the first time it has done that since August 2014.  Things are slowly improving in the metals.

Gold was encouraged Friday by a falling US dollar, which dropped -0.41 to close at 92.16.  The dollar's drop formed a "swing high" in the buck, which indicates a technical possibility that the dollar may finally be ready to take a rest from its relentless six-month move higher.

Mining shares rose right along with gold, with GDX up +4.65% on moderately heavy volume.  GDXJ rose only +4.41% also on moderately heavy volume, underperforming the senior miners.  The senior miners made a new cycle closing high by the thinnest of margins in the last two minutes of the trading day.

For the week, gold rose +33.60 [+2.82%], silver was up +0.74 [+4.66%], GDX rose +9.35% and GDXJ +10.10%.  It looks like the miners continue to pull the metal higher, and silver is outperforming gold.  That's bullish.

The USD

Once again the USD moved up this week rising +0.73 [+0.79%] this week, in spite of the fall on Friday.  However, the dollar marked a swing high on Friday, which brings up the possibility that the dollar may take a rest from its astonishing 6 month rally.

If you look at a bunch of other currencies, they support the thesis; the Euro marked a swing low today (+0.42%), so did the Pound (+0.49%), the Yen did so 3 weeks ago and has been tracking sideways ever since, and the Aussie Dollar marked its low on Wednesday and rallied strongly today (+1.01%).

A top in the buck would be even more helpful for commodities and PM.  The fact that PM has managed to move above its 50 MA even with the strength in the buck remains a bullish sign.

Miners

The miners have definitely started to attract some interest, rising strongly this week after the close above the 50 MA last week.  Just on the daily chart, I see four bullish indicators: a break above the old high from November 2013, which ends the pattern of "lower highs and lower lows" that have been in place since August 2013, the EMA-9 has crossed the 50 MA which was the sell signal back in August, price continues to pull the EMA-9 higher, and the up-day volume is exceeding the down-day volume indicating more buying interest than selling.

The ratios also continue to improve, with GDX:$GOLD performing best.  Like GDX, it managed to move above its previous high, which signals an end to the August downtrend.  The GDXJ:GDX chart is not looking as good - juniors are not being bought in preference to seniors right now - and the GDXJ:GDX ratio is more or less unchanged on the week.  The GDXJ:GDX ratio is the only sour note I see in the ratios.  The gold/silver ratio is slowly falling - which is bullish.

US Equities/SPX

The US equity market fell on Friday, dropping -17.33 to 2044.81.  VIX rose +0.54 to 17.55.  On the week, SPX fell -13.39 [-0.65%], printing a doji candle on the week.  I might normally interpret this as a bullish reversal, but the bearish behavior of SPX on Friday after a positive Nonfarm Payrolls report has me cautious.  Also, looking at the daily chart, I note that the last three rebounds were relatively uninterrupted moves higher, and Friday's sell-off suggests the market is having more trouble moving higher this time around.  Perhaps it is just taking a pause, it's hard to say, but I wouldn't interpret this as bullish.

There was some modestly bearish news on inventories (inventories were rising in November - and rising inventories is a sign of slow sales) reported at 1000 EST - around the same time SPX started to sell off.  In my opinion, SPX bears watching more closely.  With all the analysts predicting new highs for SPX in 2015, and the general enthusiasm to "get out before the market turns", if this dip fails to make a new high (and if price drops below that recent low of 1990), I believe it will lead to a whole lot of selling.

In short, overbullish sentiment has been here for quite a while, but now I'm seeing some technical hesitation off a low by SPX.  If the buck tops out here too, we might get quite a brisk correction in SPX - and at least recently, bad days for SPX have resulted in good days for PM.

Gold in Other Currencies

This week, gold rose in every currency I monitor, but hands down the winner is Rubles, once again.  The Ruble fell vs the USD by about 5% this week, which meant gold in Rubles shot up even higher, around 7.3%.  You can also see that gold in Euros did well too, up +3.2%.

Moral of the story: if your currency starts having problems, gold is a great place to be.

Rates & Commodities

Bonds (TLT) had a good week, breaking out and rising +2.95% to another new high.  Yields for 20 year treasury bonds are now 2.29%.  US long bonds continue to benefit from equity market weakness, and equity market strength doesn't result in much selling for bonds.  To me, bonds continue looking stronger than equities.

Fundamentally, it probably just boils down to a risk-reward comparison: would you rather have a 10-year US treasury at 1.98%, or a 10-year Spanish treasury at 1.73%?  Especially with that potential Grexit on deck.  Someone bought a lot of Spanish bonds, I don't know who, but my suspicion is they are non-economic buyers, because that spread just doesn't make sense.

JNK rallied this week, up +0.59% and appears almost ready to break the "lower highs" pattern in place since September.  Its a decent short entry opportunity, with the falling 50 MA providing resistance.  Will JNK continue to rally?  I have to think that bad news from the shale space (which is almost guaranteed to appear during the next earnings cycle - due out early February) will drive JNK lower, so the higher it goes, the better the opportunity to jump on short.

The CRB dropped again, falling -1.24% on the week.  Commodities are dreadfully oversold, and they have tracked sideways for the past four days, hinting at a possible low.  Tracking sideways is a first step towards a bounce - but traders actually need to show up and push prices higher, at a minimum moving CRB above its falling EMA-9.

WTIC dropped on the week too, falling -4.60 [-8.71%] to 48.21.  Oil in the high 40s (actual realized price for shale producers could be the high 30s) makes all US shale uneconomic.  Simply by refusing to be the "swing producer", Saudi Arabia can keep prices at this level for at least a year under current supply/demand conditions.  Saudi Arabia has 2.5 mbpd of capacity that it is currently not producing; simply by slowly turning on that production, it can keep prices here a lot longer than the shale operators can stay in business now that everyone knows the score about shale profitability.  I believe they will do exactly that.

What oil price is "low enough" to please the Saudis?  That I don't know.  The drop this week happened on Monday and Tuesday, with oil tracking sideways for the rest of the week, possibly putting in a low on Wednesday that has yet to be confirmed.  Perhaps oil at 48 is good enough for their purposes.  Then again, maybe they really want prices down in the 30s.

Oil equities remain well bid, in comparison to oil.  In contrast to oil, there are lots of buyers out there for "oil in the ground."  If you want to lock in low oil prices, you can buy a Dec 2016 crude oil futures contract for $60.86 per bbl (current front month contract: $48.21 = contango of $12.65).  That's only $60,860 per contract; margin requirement a low $4,450.  If oil jumps to $90, your $4450 turns into $30k.  Isn't leverage great?  Note: this is NOT a recommendation - provided for entertainment purposes only!  Don't complain to me when you get a margin call!

http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html

Physical Supply Indicators

* Premiums in Shanghai vs COMEX are +5.87 over COMEX as of Jan 9, 2014.  That's a good sign, given the move higher in gold; usually price increases wipe out premiums in Shanghai.

* The GLD ETF lost -1.2 tons of gold, and has 707.82 tons remaining.

* GC futures are not in backwardation (Feb 15 - April 15: spread is +0.80)

* ETF Premium/Discount to NAV; gold closing (15:59 close price on January 9) of 1220.80 and silver 16.465:

  OUNZ 12.17 -0.05% to NAV [down]
  PSLV 6.46 +1.27% to NAV [up]
  PHYS 10.08 -0.51% to NAV [down]
  CEF 12.12 -8.08% to NAV [up]
  GTU 41.96 -6.97% to NAV [up]

ETF premiums were mixed, with the non-delivery ETFs gaining the most ground.

Futures Positioning

The COT report was through Jan 6, when gold was trading at 1219.40 and silver 16.60.

In gold, Managed Money increased +5.2k longs and covered -6.8k shorts.  Producers increased +9.5k shorts and also bought +733 longs.  Managed Money's short position is mostly gone (was 100k, now about 34k); any serious moves higher in gold will need to come more from fresh new long exposure from Managed Money than by short covering.

In silver, Managed Money increased +1.8k longs and covered -2.7k shorts.  Producers increased +2.2k shorts and +1.3k longs.  As with gold, the Managed Money short position has decreased substantially (46k down to 20k); the bulk of the gains in silver going forward will probably have to come from new long exposure.

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

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

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

Rallies in both gold and silver have caused the short term moving averages to flip to UP.

Summary

Last week I expressed hope that the rising miners would help pull gold and silver above their 50 MA.  They did just that.  Gold and silver had a great week, finally catching up with the rising mining shares.  Both metals were up significantly, performing well in the face of a continued strong dollar and falling commodity prices.  If it were just gold rallying, I might chalk it up to safe haven moves, but with silver outperforming gold, it is more than that.  Perhaps the metal prices below costs of production have finally become too tempting to resist.

For both metals, the short term moving averages have now flipped to positive - short term bullish.  The gold/silver ratio dropped -1.32 to 74.06; still in an uptrend - which is bearish - but falling slowly.    GDX:$GOLD continued to rise this week, looking quite bullish.  GDXJ:GDX tracked sideways, is looking ambivalent and remains in a downtrend.  Things are looking up and largely improving, but the iffy GDXJ:GDX ratio injects a note of caution.

Physical demand is positive.  Its the time of year in Shanghai when Chinese people like to buy gold.

Miners marked the end of their August downtrend this week by breaking above the recent lower high, which is bullish; hopefully they will lead gold to do the same next week.

Trends remain in place: falling commodity prices, rising dollar, rising bonds.  Equities continue to hover near their highs but are looking a bit tentative.  If equities tip over, that will likely help PM.  Likewise, if the dollar stops rising, or if commodities stop dropping, that should help PM too.

Gold remains in a medium-to-long term downtrend, although the longer price stays above the 50 MA, that will change in time.  A close of gold above 1240 will put an end to the medium term downtrend, and flip gold to "neutral" (and/or "early bullish").  Perhaps we will see gold above 1240 next week.

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