PM End of Week Market Commentary - 1/16/2015

davefairtex
By davefairtex on Sat, Jan 17, 2015 - 4:18am

On Friday gold rose +17.70 to 1280.30 on heavy volume, while silver moved up a huge +0.83 to 17.78 also on heavy volume.  Metals traded sideways until just after 0800 EST, at which point both metals started to rally.  The rally didn't stop until about mid-day.  I didn't see any particular trigger for the move higher.  Both metals closed relatively near their highs of the day.

Volume continues to be strong, and silver is now catching up to gold; the gold/silver ratio dropped a big -2.07 this week to 71.99.

This week, gold snapped the medium term downtrend pattern of lower highs and lower lows, in place since August 2014, with its close above 1240.  Gold wasn't content with that - it also closed above its 200 MA for the first time since August.  What's more, gold's 50 MA has started rising.  Three new bullish milestones in one week; it was a good week for the yellow metal.

Mining shares rose too, with GDX up +3.13% on moderately heavy volume, while GDXJ rose only +1.08% on light volume.  The stark underperformance of the junior mining shares is a bit of a warning sign to me; it underscores the safe haven nature of the move in PM this week.

For the week, gold rose +56.90 [+4.65%], silver was up +1.26 [+7.66%], GDX rose +7.00% and GDXJ +5.13%.  In spite of the higher percentage gains in the other components in recent weeks, gold is looking the strongest - you can tell this from the moving averages, as gold is the only component that has crossed its 200 day MA.  The other items have underperformed for months, and they have a lot of catching up to do.

The USD

This week the USD moved up +0.83 [+0.90%] to 92.99, mostly because of the drop in the Euro which fell vs the buck by -2.39%.  This Euro drop (and the rise in gold this week) was due to the Swiss National Bank de-pegging their currency vs the Euro, which caused widespread mayhem among retail forex traders who were busily picking up nickels in front of the steamroller and finally got caught and smashed by the surprise move by the SNB.  Entire companies went out of business due to the magnitude of the move.

Reading the commentary in the mainstream financial press, it seems like traders and CEOs blame the SNB for the abruptness of the move and the chaos it caused - to me, that's like blaming your credit card company for finally cutting you off after you've been overspending for years.  There are definite winners and losers with a currency peg; of course those who benefit will complain bitterly when it ends, but the policy effectively steals money from savers in order to keep the manufacturers happy.

These sorts of things are why Martin Armstrong says you can't manipulate the trend; you actually can for a while, until the price tag of doing so becomes higher than you are willing to pay.

The US found this out when trying to maintain the peg of $35 to 1 oz of gold.  Given that gold was trading internationally at $43/oz, France kept exchanging dollars for US gold until Nixon finally chose to drop the peg in August 1971.  (His other choice was to let the Fed raise interest rates and cool down the economy in the year before his re-election campaign of 1972).

In the chart below you can see how Switzerland's foreign currency reserves rose dramatically over the period of intervention: from perhaps 50B in 2009 to about 480B in November 2014.  The initial interventions took place at 1.50, and the SNB kept buying, fighting the market all the way down to 1.05.  Thats when they announced unlimited buying of Euros.  This pledge lasted until Thursday, when they decided to abandon the program and the market promptly pushed EUR/CHF down below 1.00.

Clearly, the SNB was willing to "do whatever it takes" to keep EUR/CHF at 1.20...right up to the point when the price tag became too high.  Now there are 430 billion dollars worth of new CHF floating around, and the SNB has a huge number of Euros to show for it, all purchased at prices well above the current 1.00.  Swiss manufacturers benefit, while SNB takes the Eurozone breakup risk.  A whole bunch of Euro-holders were able to exchange Euros for CHF at a higher-than-market price for years, and Swiss savers get to pay for the whole mess.  The SNB policy picked winners and losers, paying dearly to hold back the tide, right up until they just couldn't do it any longer.

Miners

The miners are continuing their rally from last week, making a new cycle high.  This has caused the miner's 50 MA to start rising, which is a bullish sign.  However, if you compare gold's performance with the mining shares, you will see gold above its 200 MA, while the miners remain below their 200 MA.  The miner underperformance has me somewhat concerned about the longevity of this rally.

The ratios are mixed; GDX:$GOLD is up modestly on the week, but GDXJ:GDX actually fell.  This is a warning sign; it suggests to me that traders do not believe this gold rally has longevity.  Notice that the GDXJ:GDX ratio has been unable to cross its 50 MA.  That's a distinct sign of weakness.  The junior miner price chart looks ok on its own, since they continue to make new highs, but compared to other charts in the PM sector, the junior miner's progress looks quite sluggish.  My concern is, they will be sold hard in any correction.

US Equities/SPX

After dropping for 4 straight days, the US equity market rebounded on Friday, rising +26.75 to 2019.42.  VIX fell -1.44 to 20.95.   On the week, SPX fell -25.39 [-1.24%].

In spite of the rally, in the short term market direction remains lower.  Price is below the 50 MA, the 20 EMA has crossed the the 50, and the 50 has started to fall.  These are all bearish signs, and while this combination of events has happened before in the long multi-year rally, it has not happened all that often.

What's more, momentum indicators on the very long term monthly chart indicates momentum is definitely slowing.  No turning point has yet been reached, but it would not take much of a move lower to cause the MACD to turn bearish.  SPX needs to make new highs to avoid this fate.

As of right now, moves higher in the dollar are no longer leading to equity market rallies.

Gold in Other Currencies

Gold had a great week in all currencies - once again, gold in Rubles was the star, up +259; Ruble dropped -4.87% vs the buck this week, that's why.  Euro was second best; gold has broken out in Euros and is racing skyward, helped greatly this week by the SNB's Euro-CHF currency unpeg.

Rates & Commodities

Bonds (TLT) had another good week, up +1.62% making another new high.  20 year treasury rates are at 2.12%, last seen in 2012 when the Eurozone looked like it was about to break up.  On the weekly chart, US treasurys are starting to "go vertical" - meaning the velocity of the bond move higher is accelerating.

JNK fell this week dropping -0.72%, looking like it marked a lower high after touching its 50 MA.

The CRB fell this week, dropping -0.59% -1.24% on the week.  However, much of the week was spent chopping sideways, and the rally on Friday of +1.73% managed to push the index back up over its EMA-9 for the first time in six weeks.  This is a very modest positive sign.

WTIC rallied on the week, closing up +0.70 [+1.45%] to 48.91.  It too managed to squeak above its EMA-9, and it also printed a doji on the weekly chart with accompanying high volume.  WTIC fell as low as 44.20 this week before rebounding.  These are positive signs for oil, but we have seen hints of a low before.  Let's see how the market reacts the next time a Saudi oil minister tries to jawbone the price lower.

Physical Supply Indicators

* Premiums in Shanghai vs COMEX are up +1.00 to +6.87 over COMEX as of Jan 16, 2014.  Buying in Shanghai is quite strong right now - Chinese people historically buy a lot of gold immediately prior to the lunar new year, and they sure seem to be buying right now.  Given gold's move higher, the fact that premiums increased this week is even more impressive.

* The GLD ETF rose a huge +23.07 tons of gold, and has 730.89 tons remaining.

* GC futures are not in backwardation (Feb 15 - April 15: spread is +0.40)

* ETF Premium/Discount to NAV; gold closing (15:59 close price on January 16) of 1275.90 and silver 17.73:

  OUNZ 12.72 -0.03% to NAV [up]
  PSLV 7.00 +1.92% to NAV [up]
  PHYS 10.59 +0.03% to NAV [up]
  CEF 12.92 -7.22% to NAV [up]
  GTU 44.68 -5.17% to NAV [up]

ETF premiums were up across the board; the non-delivery ETFs are gaining the most ground.  For instance, GTU gained an additional 2% from the dropping discount.

Futures Positioning

The COT report was through Jan 13, when gold was trading at 1234.40 and silver 17.12.

In gold, Managed Money increased +3.9k longs and covered -3.9k shorts.  Producers increased +7.3k shorts and also bought +1.9k longs.  A balance of short covering and new longs helped gold move higher, although the vast bulk of gold's gains this week happened after the reporting period.

In silver, Managed Money increased +2.8k longs and covered -3.5k shorts.  Producers increased +2.3k shorts and dropped -301 longs.  Silver's move was more due to short covering than it was new long exposure, likely due to the breakout that happened on Tuesday.

The fun stuff this week happened on Thursday & Friday, so we'll have to wait until next week to figure out what happened to whom after the SNB Euro de-peg.  Longs or shorts, that's my question.  Shorts fleeing for cover is not nearly as exciting for me as is fresh new longs coming into the market.

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

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

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

Rallies in both gold and silver have caused the medium term moving averages to flip to UP.  If gold can remain above its 200 MA, that will eventually turn higher as well.

Summary

In the first part of the week it looked as though the gold rally might be petering out; then came Thursday and the SNB and its surprise decision to de-peg the CHF from the Euro.  Traders immediately ran for safety, looking to hide anywhere other than in the continually falling Euro, which was given a massive No Confidence vote by the SNB.  Gold was a beneficiary, and once oil and commodities started to rally on Friday, silver rocketed higher too.

For both metals, the medium term moving averages have now flipped to positive: medium term bullish.  The gold/silver ratio dropped -2.07 to 71.99, crossing below the ratio's 50 MA which also looks medium term bullish.  GDX:$GOLD moved modestly higher, retaining its bullish momentum, but GDXJ:GDX fell signficantly on the week.  Everything else looks good, but the GDXJ:GDX ratio is flashing a strong sign of caution.  Something must be wrong with the overall picture if the junior miners can't rally when gold is charging higher.

Physical demand is positive - western ETF gold buyers are now joining the Chinese.

We are starting to see very early hints of a possible low in commodity prices and oil.  Green shoots, if you will.  Perhaps just a single, small green shoot!  This seems to have helped silver.

Equities are weakening, the bond rally is accelerating, the Euro continues to be in deep trouble, and gold is clearly acting as a safe haven.  Gold has ended its medium term downtrend, price is above the 200 MA, and it is quite firmly in the "early bullish" category.  My sense is, traders will keep pushing gold higher if money continues fleeing the Eurozone.  Its a strange thing, seeing a strong gold rally during a strong dollar rally.  This just tells me that gold is really on a tear everywhere else.

On Thursday of next week, we have the ECB's money printing announcement, and next Sunday we have Greek elections.  I suspect next week there will be a lot of volatility and a flurry of propaganda issued by Brussels, the ECB, the IMF, and you-name-it to try and get the markets and the people of Greece to do their bidding.  Politicians see markets as something to be jawboned, convinced and persuaded; left to their own devices, markets never seem to do the right thing.

It will be interesting to see how it works out.  Remember, its always the market's reaction to the news that matters, not the news itself.  If the Euro sells off on the ECB announcement, I think we're clearly on the downside of Peak Faith in Central Banking - at least in the Old World, anyways.

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3 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5064
gold-colored glasses

Koos Jansen had a guest poster with an interesting take on why SNB de-pegged the Euro.  According to Mystery Guest, it was all about gold.  MG presents an interesting technical (as in, chart-technical) argument, that gold-in-CHF had broken out, and that he alleges that, for reasons unknown, SNB had a massive gold short position, and they needed to cover the short position, and so they snapped the peg in order to do that.

https://www.bullionstar.com/blog/koos-jansen/guest-post-i-have-a-theory-on-the-swiss-franc/

I think the chart analysis is accurate - we see a big drop in 2013, a long consolidation, followed by a clear breakout higher, followed rapidly by the dropping of the Euro peg and the fall in gold-in-CHF by 17%.  Anyone long gold in CHF became really unhappy the day the peg was snapped - loss of 17% in one day!

Only problem is, according to the following news article, SNB was net long gold, at least during 2014.  They recorded a 4B CHF valuation gain on their gold portfolio, and another 34 Billion CHF profit from foreign currencies.  (That's 4,625 per citizen!  Holy cow!)  But how could they make money on gold if they were net short?

http://www.bloomberg.com/news/2015-01-09/snb-sees-2014-profit-of-38-billion-francs-resumes-dividend.html

Answer: they couldn't.  But it doesn't matter, if you view the world through gold colored glasses.  :-)

Time2help's picture
Time2help
Status: Diamond Member (Offline)
Joined: Jun 9 2011
Posts: 2766
Exter's Pyramid

Interesting article on Exter's Pyramid from the Hedge:

http://www.zerohedge.com/news/2015-01-18/exter%E2%80%99s-pyramid-%E2%80%...

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
PSLV vs. Silver spot price

BIG action today in terms of premium on real (brokerage account accessible) vs. fake paper Silver (SLV).

At this hour;

Spot Silver Kitco   + 0.65%

SLV    + 1.20 %  (????)

PSLV    + 2.14 %

Interesting.....

 

 

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