PM Daily Market Commentary - 1/12/2015

davefairtex
By davefairtex on Mon, Jan 12, 2015 - 11:40pm

Gold rose +10.00 to 1233.40 on moderate volume, while silver climbed +0.09 to 16.61 on light volume.  Gold suffered a bit of intraday weakness in Asia due to a dollar rally, but recovered in NY as the dollar weakened, closing near the highs for the day.  Silver followed along, but was less enthusiastic, likely because the commodity index did so poorly.

Gold looks to be on target to close above that 1240 prior high; this milestone would end gold's medium term pattern of lower highs and lower lows.  Right now, gold appears to gain strength from equity market weakness, and equities don't look so hot right now.

The buck opened lower, rallied strongly in Asia, then trailed off into the close in NY, up +0.06 to 92.22.  The dollar may be weakening a bit here, and any dollar weakness does seem to help gold, but the buck remains above its EMA-9, and is still in a strong uptrend.

Mining shares had a good day, with GDX rallying +3.77% on moderately heavy volume, while GDXJ was up +5.31% on moderately heavy volume too.  Both junior and senior miners hit new highs, and the GDX:$GOLD ratio continues to climb at a relatively steep angle.

The main bearish note I see is the GDXJ:GDX ratio, which is only rising slowly and has not yet moved above its 50 MA, while most of the other indicators have climbed well above their 50 two weeks prior.  The underperformance of this ratio suggests that the PM space really hasn't yet returned to a solid "risk on" positioning.  It's a note of caution in anotherwise "early bullish" picture for PM.  My guess is, this reflects the poor performance of commodities right now.  In my opinion, PM won't return to a true bull market until commodities stop plummeting - and that in turn should help silver too.

SPX sold off today, dropping 20 points in the first 30 minutes of trading.  SPX finished the day down -16.55 to 2028.26, moving below its 50 MA and generally looking weak.  A close below 1992 would be a bearish signal for SPX, and I think its more likely than not this will happen, based on the weakness observed recently.  VIX moved up +2.05 to 19.60.  Earnings season started today with Alcoa, which is the first large industrial company to report results for Q4 2014  Alcoa did well, beating expectations, but the market largely ignored the good news - which is not bullish.

Long bond ETF TLT rallied, closing up +0.57% and making a new closing high for the 13-month long bond uptrend.  Equity market weakness is leading to bond market strength.  20 year treasury now yields 2.23%, and the 10-year is at 1.92%.  JNK dropped just -0.10%.  Currently junk is hovering just below its 50 MA - junk is looking a bit stronger than I would have expected, given the continued weakness in oil. 

The overall commodity index ($CRB) broke lower today, dropping a big -2.10%, erasing any hopes that might have been raised by four sideways trading days from last week.  Likely commodities were driven by energy; WTIC dropped -2.50 [-5.19%] to 45.71, making a new low, remaining below its EMA-9, and generally continuing to look bearish.  Gasoline futures are trading at $1.27, levels only seen March 2009.  That's worth a chart:

Oil's march downhill continues, leading to relative underperformance of silver vs gold.  PM is climbing, but it is moving uphill against the falling commodity index and the rising dollar.

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6 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5693
BITC: why you don't "buy the dips" in a downtrend

Mrees asked me the other day if it was a reasonable strategy to "buy the dips" in bitcoin - well, he kind of was asking me this.  Since bitcoin has been in a downtrend for about 13 months, my answer was no.  That is because in a downtrend, it is generally a bad idea to buy the dips.

Why is that?  Unless you have a special power to accurately predict the future, you cannot know a priori if a given "dip" marks a price that is relatively close to the final low of that downtrend.  As an example, back when silver was 27, did anyone predict it would eventually hit $15?

BItcoin gave us a good chart pattern (12 hour chart, taken today) that demonstrates visually why "buy the dips" in a downtrend is risky:

The initial breakdown to 260 got some percentage of new longs worried, especially the ones that "bought the dip" around the $300-310 level back in December - after all, $300 is such a low price for bitcoin, it couldn't possibly go any lower.  And then of course it did.  So the worried December-dip-buyers vowed if price ever got back up to "close to even", they'd sell.  So when the inevitable rally happened and the January-$260-dip-buyers pushed price back up to $300, those worried-December-dip-buyers sold, which resulted in a wave of selling that took price below the first breakdown price - causing a bunch of those $260-January-dip-buyers to panic out as soon as they saw price heading downhill again.

Bottom line: right now, traders are much more ready to sell than they are to buy.  The chart shows this clearly.  Traders who bought previously are looking to get out.  That causes "overhead selling pressure" which caps rallies and so the price chart makes a steady stream of lower highs and lower lows.

One relatively simple way to tell if the bottom is in is by watching moving averages.  When the 20 EMA crosses the 50 MA to the upside, and the 50 MA flattens out and/or even starts to rise, that's a decent sign that the market is giving you that buyers are slowly gaining ascendancy over sellers.  This holds true only after a long bear market - which bitcoin qualifies.  There are other requirements (such as price not behaving in a really volatile manner) but conceptually, things should be moving sideways at least prior to jumping in, and the moving averages provides a discipline so hope doesn't triumph over probability.

A buy under these circumstances is more likely to have a happy ending.  It is not guaranteed, but it is more likely to work out than simply buying the latest price drop "because it is really cheap" and simply hoping for the best.

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 929
I prefer channels

Yes, moving averages DO indicate something, medium-term/short-term sentiment, maybe.

But I prefer to look at pressures that are greater than that.

Now, first I notice 'solid support/resistance'. But in a way, that only indicates the dips. But the first time derivative of the price will indicate the progression, and the way we do that is channels.

So here's my idea: generally speaking, as processes improve in an industry, you will get exponential growth, and the curve can be bubble-like. But the same can happen for bubbles. So to tell the difference, you assume that things should be structured as straight-line channels, and you assume that previous bubble-like behavior actually was bubbles that will deflate later.

So first, don't invest in a downside bubble.

Second, break your long term graph into long term channels, and then see how smaller channels run the price along the top of the channel, the bottom of the channel, or across the channel.

Those channels represent limitations within the industry and the investment crowd.

Now, expect that ALL channels will be maintained, from highest to lowest. So a larger channel can stop the run of a smaller channel.

Now, try to buy on the bottom runs of upward sloping channels. As such, your likely to get at least that minimum support, and possibly might get a run up to much greater support as the price crosses the channel to the upper side.

That, of course, is when you start looking to sell.

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 764
Considering cash and currencies

Hi Dave and all,

I was wondering if you and others would be willing to weigh in on some factors to consider when deciding in which currency to keep one's cash.  If I recall correctly, Chris has advised for one to keep somewhere around 3-9 months of expenses in cash...maybe more.  Obviously, the best choice for such cash would be in one's domestic currency since that's the currency needed to cover domestic expenses in the event of a banking crisis.

But, what about the fact that domestic currencies are not always reliable, as we have seen recently with respect to the Russian ruble, the Venezuelan bolivar and others?

Even the currently booming USD and the historically solid Swiss franc have risks.  For example, I am very exposed to Swiss francs because of mandatory pension savings requirements, my salary is paid in francs, etc, yet the Swiss National Bank is much more leveraged than even the Bank of Japan, the Federal Reserve, the Bank of England, and the ECB, and so it seems quite possible that there is already a lot of inflation in the pipe in Switzerland.

If one accepts hypothesis of deflation in the short run, inflation in the medium to long run, then having some money in cash seems to make sense but can we trust any currency in this great fiat money experiment?

I was considering ordering a modest amount of Singapore dollars or Kuwaiti dinar from my local bank, for example, based on the following factors:

-Lower central bank leverage in those countries

-Big current account surplus economies (exporters)

-Singapore is a rising banking haven in a part of the world with a rising economy.  In spite of China's short term economic problems, it seems likely that the importance of E. Asian currencies and finance as a share of the global total is on the rise, and the Singapore Dollar seems likely to benefit from such changes.

-Kuwait is a big oil exporter and while oil prices could certainly fall lower for a relatively short period of time, it seems unlikely that this will last.  As the price of oil starts climbing again, this will tend to strengthen the Kuwaiti dinar, all else equal.  Also, the KWD is tied to a basket of currencies, whereas most Gulf State currencies are pegged to the USD.  This means that the KWD has fallen more than the Emirati Dihram or the Saudi riyal, which have barely changed at all, due to their dollar peg.  So, at least against the USD, the KWD seems to be at a fairly good price right now.

The goal is not to benefit from a short-term currency trade - I'm not smart enough to try that - but rather to hold some cash in a currency that is likely to be fairly reliable and that is at least somewhat undervalued with respect to the USD.

If anyone has any suggestions for factors to consider when holding cash in foreign currencies, I'd love to hear them.

Of course, I think it makes sense to hold an even more considerable portion of one's assets in PMs than in cash, but I think I might be underweighted in terms of cash and am just thinking about some options.

Thanks,

Hugh

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 929
hugh, maybe good will is the best cash

hugh, just for an example, suppose I delayed a purchase of land I needed, to underwrite the loan for a subordinate who desperately needed a home on short notice (very cheap house).

Do you think that when all came down, I might at least have a place to stay?

Suppose I have opened up my farmette for people to have a community garden, and eat when times are tough: do you think that they might help keep it afloat later, if foreclosure was a possibility?

Maybe, maybe not. Even good will sometimes (often) bombs as an investment. But you have to try something.

If you need to keep cash, keep some in your own currency, and some in the currency of a second-world country where you have family, goodwill, or both. Dollar average the two.

But go heavy on the good will. Sometimes you'll need a friend.

Markhemp's picture
Markhemp
Status: Member (Offline)
Joined: Nov 29 2013
Posts: 21
Cash and Currencies

Great post Hugh,

But isn't this what Gold and silver coins are for, I have to hold the English Pound...Gulp

Cheers

Mark

theordore's picture
theordore
Status: Bronze Member (Offline)
Joined: Aug 29 2013
Posts: 48
Cash and currencies
     Still mourning the death (for all of us not in the 1%) of the once powerful idea that all the capital each us needs is X dollars in bank deposits, which would then provide Y rate of return, to help us spend later life in reasonable comfort, I wish to express my appreciation to Dave for leading this high quality discussion platform and to several others for very helpful commentaries.  
     I am in the camp of those who predict that our fiat money system is going to live on for a few more decades, unless some accident causes a key party to shout "fire in the theatre".  Those who create money out of thin air can easily send us an endless stream of computerized $10,000  "coins" to buy loaves of bread as needed. The issue many of us will face in that world will be the following: who will be lucky to get access to those  "coins" and who will be out of luck.
      If the  forecasting that I have just provided is a reasonable scenario, then one question raised above  is of great and immediate importance.   Across which currencies should we distribute our cash?  I would greatly appreciate more discussion on this question.  
    My two cents on this issue is that a small fraction of this currency should be in the form of bank deposits, now that bail-ins have been officially blessed.  It is perhaps a good thing that neither banks nor the economy need any deposits from us the Little People.

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