PM End of Week Market Commentary - 1/30/2015

davefairtex
By davefairtex on Sat, Jan 31, 2015 - 1:20pm

On Friday gold rose +25.00 to 1283.70 on moderately heavy volume, while silver climbed +0.31 to 17.25 on moderate volume.  Gold traded mostly sideways until slightly after 1000 EST, when the pattern of activity in the market changed significantly - buyers appeared and bid gold steadily higher for the whole rest of the day, right into the close.  By the end of the day, all the losses from the Thursday sell-off had been wiped out.  Silver followed, but managed to recover only a fraction of Thursday's big drop.

What changed at around 1000 EST to cause this?  There was no report that I saw.  But on the charts, it was like someone threw a switch.  There was no grand spike higher, it was more of a grind, a few dollars at a time, slowly and steadily right into the close.  Rather than the usual game of trying to rapidly move price, it looked like someone wanted to accumulate contracts.  At least that's what I interpreted anyway.

This week, gold retreated from the 1300 round number high and corrected down to the 200 MA, where it found support and promptly rebounded strongly off that support.  This is a pattern I haven't seen often - a big red candle down followed immediately by another, equal-sized candle right back up again.  It makes me think Friday's move was newsflow-related.

Silver had a bad week; after failing to move through its 200 MA after four separate attempts, silver sold off hard Thursday only to have a weak rebound Friday.

You can see the difference between the two metals by comparing price vs their moving averages.  In gold, traders pushed gold well above its 200 MA, and when the inevitable correction came, the 200 MA provided support.  In silver, traders were not able to push price above the 200 MA, and then silver promptly sold off, and the rebound was weak.

This is a clear message from the market: traders find gold much more interesting than silver.

Miners rallied on Friday, with GDX closing up +3.24% on moderate volume, while GDXJ rose +4.32% also on moderate volume.  The strong rebound in gold on Friday helped the miners to recover, although miners are still lagging gold overall.

For the week, gold fell -10.40 [-0.80%], silver was hammered -1.07 [-5.84%], GDX rose +2.53%, and GDXJ was up +0.43%. 

The USD

The buck scored a new high this week and then retreated slightly, falling -0.28 [-0.29%].  On the daily chart, the buck remains above its EMA-9 and still looks quite bullish.  On the weekly chart, the buck's near vertical move looks like it may need a rest.  If the buck were to correct back to the weekly EMA-9, it could drop down to 92 and still remain in a strong (weekly) uptrend.

However, its not clear that events in Europe will allow the buck to correct; the Euro weekly chart is not giving off any signs of strength.  The Euro weekly chart is showing a failed rally, which suggests to me we have more lows ahead.  If true, that dollar correction may well just not happen.

Lots of movement in currencies these days, Canadian dollar is looking almost as bad as the Euro; it is off 16% since June 2014, and dropped -2.22% just this week, with its losses accelerating.  The Loonie doesn't like low oil prices much at all.

Swiss Franc has sold off - after its massive move up vs the Euro, it dropped around 5%; EUR/CHF is back up to 1.038, from 0.977 at the beginning of this week.

Ruble had a bad week also, losing another 9.5% to close at 70.05.  We know what this means for gold in Rubles: it is probably our star performer this week.

Miners

The miners outperformed gold just slightly this week.

GDX chopped sideways, forming a trading range.  The big gold sell-off on Thursday didn't cause the senior miners much grief, which is a positive, and the rebound Friday brought them back above the EMA-9.  Viewing PM through senior miners, I'm cautiously optimistic - mostly because of the performance on Thursday.

Junior miners don't look nearly as healthy; they made new lows on Thursday, and didn't quite manage to regain the EMA-9 on the Friday rally.  I've been beating the "junior miners look terrible" drum for a while now.  Here's a weekly chart showing why.  Then GDXJ:GDX ratio made new lows this week, and in fact the new lows were also all-time lows.

So how do I interpret the falling junior miner ratio chart?  Its not positive.  It tells me that traders don't feel the current gold uptrend is based on something that's fundamentally sustainable - its more about safe haven flows than it is about overall economic trends.  Traders buy junior miners with the expectation that seniors will be snapping them up for prices substantially higher than the market; juniors get bid up to absurd levels when optimism is high in the mining industry.

Right now, that's just not happening.

US Equities/SPX

SPX chopped lower this week, losing -56.83 [-2.77%] to close at 1994.99.  SPX looks to be testing the lower bound of its recent trading range; a break below the range (about 1983) would likely lead to a serious sell-off.

RIght now it is earnings season; some companies are doing well, others are not.  The chatter is that the strong dollar will be weighing on earnings - which should have surprised exactly nobody.

Money appears to be flowing from stocks to bonds.

Gold in Other Currencies

This week gold was down in most currencies - except of course for the Ruble, where gold screamed higher again this week, rising $208.  That's because the Ruble fell against the USD by about 8%.  Gold has almost been a double in Ruble terms over the past four months.

Rates & Commodities

Bonds (TLT) had a great week, up +2.60%, making yet another new high for this long long-bond rally.  How long?  So far, it has lasted 13 months, for a 38% move, at least for TLT.  And don't forget the 2.04% annual yield you get for loaning your money to Uncle Sam for 20 years.

As a contrast, JNK rose only very modestly this week, up +0.26%.  One would have expected those junk bonds to rally given the move in oil - but one would be wrong.  JNK just chopped sideways this week, and are not looking all that strong.

The CRB rose this week, climbing +1.03%, printing a bullish hammer candle on its weekly chart.   All the excitement happened on Friday, which saw CRB rise a big +2.92% and closing just above its EMA-9.  Mostly this is due to industrial metals, precious metals, and energy.

WTIC had a really good week, and it all came on Friday.  After marking a new low and printing a doji candle Thursday, oil confirmed Thursday's (bullish reversal) doji with some very strong action Friday, moving up +3.26 on heavy volume, closing well above the EMA-9.  You can see below how previous moves through this moving average have been relatively weak; Friday's move stands in stark contrast.

On a technical basis, it looks like we've marked a low in oil.  That said, I will wait for Monday, to see the Saudi response to oil's rally over the weekend, and the oil market's reaction.  We may just start moving sideways from here, its hard to say.

Brent's chart pattern looks different, but bullish too - it was a breakout after a three week consolidation.  If anything, I'd say Brent's pattern looks even more bullish than WTIC.

On the week, WTIC closed up +2.56 [+5.65%] to 47.85, the strongest week for oil in maybe six months.

Physical Supply Indicators

* Premiums in Shanghai vs COMEX fell -3.01 to -3.07 over COMEX.  Shanghai has moved deeper into discount.

* The GLD ETF rose +16.72 tons of gold, and it has 758.37 tons remaining.

* GC futures are not in backwardation (Feb 15 - April 15: spread is +0.70)

* ETF Premium/Discount to NAV; gold closing (15:59 close price on January 30) of 1285.10 and silver 17.22:

  OUNZ 12.79 -0.19% to NAV [down]
  PSLV 6.89 3.29% to NAV [up]
  PHYS 10.69 0.27% to NAV [up]
  CEF 13.23 -4.34% to NAV [up]
  GTU 44.82 -5.52% to NAV [up]

ETF premiums mostly increased; PSLV and CEF both had dramatic improvement.

Futures Positioning

The COT report was through Jan 27, when gold was trading at 1291.70 and silver 18.07.

In gold, Managed Money added +17.5k longs and covered -6.3k shorts.  That's a positive sign for the longer term, although when we start to run low on shorts, the market often corrects.  Still, over the past year it seems that managed money is gradually increasing long exposure, and that's bullish.

In silver, Managed Money increased +1.7k longs and covered -4.2k shorts.  Like last week, silver's move higher during the coverage period was more about short covering than it was about funds wanting more long exposure.  As with gold, once we run out of shorts, the market often corrects.  Perhaps this is why we had that nasty silver sell-off on Thursday.

You can see from the COT report why gold is outperforming silver: Managed Money is going long gold, but they are mostly just covering short in silver.

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

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

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

Drop in PM this week moved gold's 200 MA down again, as well as silver's 20 EMA too.

Summary

This week gold sold off, retreating from the failure to cross round number 1300 back to the 200 MA, where it found support.  Then on Friday, it unexpectedly rebounded strongly, erasing most of its losses on the week.

Moving averages for both metals took a hit this week.  Gold's 200 MA turned down, as did silver's 20 EMA.    The gold/silver ratio shot higher on Thursday's silver smash, rising +3.78 to 74.40, moving back into bearish territory.  GDX:$GOLD recovered and is looking a bit bullish, while GDXJ:GDX is looking quite bearish and actually made a new all time low this week.  There's a strong divergence occurring - gold and senior miners are doing well, while silver and the juniors are being left behind.  That's generally bearish, although I believe gold can definitely continue moving higher given the uncertainty in Europe.

The COT report underlines the divergence of silver and gold; over the past few weeks, gold has attracted a lot of new longs, while silver's moves are generally more short covering. 

Physical demand is neutral this week; while Shanghai premiums are negative, ETF premiums are generally strengthening.  Western gold buyers look somewhat more enthusiastic than eastern ones right now.

Commodity prices may have put in a low this week - although after such a long decline, I want to see some follow through before I start celebrating.  Oil too may have put in a low.  Theoretically this should help silver.

The new Greek government came out throwing bombs - from the standpoint of Brussels anyway - by saying they won't deal with the Troika administrators, they don't want a continuation of the bailout, and nor will they continue to sell off Greek government assets at fire sale prices.

It all makes sense to me, but for this to happen, someone will have to absorb the 250 billion Euro loss, and Brussels is desperate that it not be them.  From the start, it was clear that Greece had to be shot "pour encourager les autres" (c.f. Admiral John Byng, and the Battle of Minorca).

My sense is that gold on Friday was probably responding to this situation, although that's just a guess.  How far will the new Greek government really go?  Nobody really knows.  The new Greek finance minister wrote a book on Game Theory.  It will be very interesting to see if he can successfully apply his own wisdom to the situation he now faces as minister.  To those who observe that these people have never been in government before - neither had Hitler until he seized power.  Don't underestimate the motivated novice.  They figure things out quickly enough.

But we must remember with all this geo-political analysis, that it is not the news itself, it is the market's reaction to the news that counts, and I believe gold is reacting positively to the uncertainty out of Europe.  Traders clearly wanted to be long gold going into the weekend.  As a market observer, I must interpret that as positive.

Near term, if gold can close above Friday's high, that will confirm the low made Thursday, and more likely than not we go up from here.  Longer term, its all about the issue of too much debt, which will have to be resolved somehow.  As always.

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8 Comments

Denny Johnson's picture
Denny Johnson
Status: Gold Member (Offline)
Joined: Aug 13 2008
Posts: 348
Made me think of Dave

Hi Dave,

In case you haven't seen this, made me think of you, a lot 'not your usual' chart analysis.

http://goldsilverworlds.com/investing/gold-gets-safe-haven-bids-but-comex-has-stopping-power/

Thanks again for your thick skinned, gentle, and humorous persistence and continuing effort to offer informed opinion.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5455
COT commercial short positions

Steve-

I started scanning in the old-style aggregated COT reports (the ones with history that dates back to 1986).  I did some experimenting, and found that I really like the particular report you mentioned: commercial short positions.

My goal was to run the data through a transformation that would produce an absolute level that would indicate a a "danger zone" - here's what I came up with.  COT Commercial Shorts, run through a 3 point MA, followed by a 7 point RSI, which ends up looking like this:

[Note it also does reasonably well predicting lows too - when the RSI drops below 20 (ish), that's the sign of a possible low coming soon.  Only time that didn't work so well was the 2013 gold smash.]

Same chart, minus MA3, zoomed in: looks like the 70 level is decent for shorter term highs, while the 30 level is decent for the lows.  Its not perfect, but it does look pretty reasonable - minus how it did during the gold smash in 2013, of course.  Another tool in the toolbox.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5455
thanks Denny

Yeah those guys are really not going to do so well - no hype to speak of ("pulse never rises above resting level"), no talk of COMEX defaults, not one use of the word "fiat" or "paper" (oh the shame), just a lot of boring charts that show how everything fits together.

Resistance zones that they show (nicely too) are "trapped longs that will sell once they get back to even."  It takes a lot of buyers to work through that resistance.  Together with the increase in Commercial short positions, its clear why gold took a rest after failing to move through 1300.

Then again, perhaps that's why the commercials went short...all that resistance at 1300-1320.

I liked their phrase "inter-market analysis" - much better sounding than "ratio analysis" which is what I call it.  SPY:TLT was nifty and graphically shows what has been my sense for a while.   Maybe I'll have to add that one in my weekly report.  :-)

I do think news has the potential to blast gold through resistance, however.  All we need is a sign that the Greeks are definitively bailing out of their bail-out (and/or Brussels relents and approves a debt reduction), and I think we pop through 1300 in short order.

Penny551's picture
Penny551
Status: Silver Member (Offline)
Joined: Nov 8 2012
Posts: 154
Commercial Ne Shortt Posn's, www.Save-In-Silver.com

Thanks Dave!  That's exactly how I use the COTs; to determine "Buy Zones" and "Warning Areas". 

I use  a program at www.Save-In-Silver.com to buy just a little physical metal day ($25 or so) when we're clearly in the "buy zone" (Low Commercial Net Short) and build cash when the COTs show JPM/etc have large bets on lower prices (High Net Short).  Of course I don't go solely off of these indicators, but i find them pretty useful. 

Also, sorry for the shameless plug of www.Save-In-Silver.com ... I'm an affiliate w/ them ;) 

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5455
attempts at rational behavior

Steve-

There are lots of systems for accumulation - some people just buy blindly every month, other people buy with the herd, right at Peak Hype.  You describe a basic attempt to buy low and sell high with discipline imposed by some kind of technical analysis, alongside "the smartest guys in the room" (a.k.a. the evil banksters).  I'm guessing it works reasonably well.

Approach 1: "OMG the Head Cheerleader told me that - for sure - the silver market will collapse by December!!  Get out of my way, I'm off to the coin shop to buy now before the COMEX defaults and all the silver is gone!!  I don't want to be left out!!"

Approach 2: "I see that JPM has closed out a good chunk of their short position.  Price has been declining for a while too.  Perhaps price is nearing a cycle low - time for a visit to the coin shop."

Or in your case, your Shameless Plug Site.

[I realize your approach is more complicated than what I described - but I'd sure take approach #2 over approach #1 any day of the week...]

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5455
Steve Keen & FinMin Varoufakis

Boy, it just doesn't get any better than this.  Steve Keen is friends with my new favorite FinMin and knows him well, totally reinforcing my assessment of the man's rationality and good sense.

Is it possible that common sense is now starting to slowly make its way into government?

I'm probably jumping the gun.  But a guy can hope, can't he?

http://www.forbes.com/sites/stevekeen/2015/01/31/my-friend-yanis-the-greek-minister-of-finance/

I first met Yanis Varoufakis when he was a senior lecturer (the 3rd step in the 5-tiered Australian system, equivalent to a Professor in the USA) at Sydney University in the late 1980s, and I was a tutor (the 1st step) at the University of New South Wales. We’ve been friends ever since, and now he has become globally prominent as the Finance Minister of the most troubled and high profile economy on the planet, Greece.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2387
Interesting article on Varoufakis Dave..

Worth reading.. especially the comments regarding how the Keynesian dogma perpetuates, as I mentioned in my recent article on fiat money vs. Gold;

At that first meeting I also I perceived a kindred intellectual spirit in Yanis because he, like me, was a critic of the conventional beliefs in economics who was well trained in mathematics (Yanis’s formal qualifications in mathematics are an MSc in Mathematical Statistics from Birmingham University). The easy career option for an economist with a strong mathematical foundation is to use those skills to reach conclusions that mainstream economists like: that way you are likely to get published in the “best journals” and to have a successful career. Yanis had chosen the far harder route of using those skills to expose the fallacies in mainstream thinking.\

And his expertise in game theory,

His speciality, when he arrived in Sydney, was debunking a branch of economics known as game theory—which is still a popular pastime for economists today.

The "game" is pretty obvious at this point...  Greece is going to default on some level, they are threatening to take down the Euro or the Euro-zone banks and derivatives.. and they are using the possibility of a pivot to Russia as their ace in the hole.  Well played Greece;

.     http://www.zerohedge.com/news/2015-02-01/tide-turning-obama-expresses-sympathy-greece-lazard-says-50-greek-haircut-reasonable

“There is a range of possible solutions: extending the maturities, lowering interests rates, and the much more radical solution, the haircut. If we could cut the debt by 50 percent” he said, “it would allow Greece to return to a reasonable debt to GDP ratio.”

And just like that the "bogey" for the Greek debt haircut has been set, and at this point it is only a matter of finding where the bid and ask of the two negotiating parties end up crossing several days, or hours before the clock strikes midnight on February 28.

Sovereign debt Jubilee!

 

.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5455
greece: next installment

According to the articles I read, Greece is saying how they totally promise to repay all that debt, no problem.

My guess:

All part of the strategy.

They start out looking like crazy people, throw some bombs, shock everyone and lay out all their options (we could veto the Russian sanctions, we could simply repudiate the debt, lookie here, bank stocks dropped 60% in one day - and we just don't care - we're communists, after all).  Bloomberg gets whiny, Germans bristle and stake out their position: no modification at all, etc, etc.

But now, only a few days later, the Greeks are sounding super reasonable.

"Oh no, we didn't mean that, why of course we'll repay the debt."  Huh?

Meanwhile, Greek FinMin is meeting with everyone besides Germany.  Germany pretends that they are isolating the Greeks, but its really the other way around.  As Mish pointed out, there are eight Eurozone countries who will have debts larger than 100% of GDP, two of them being France and Spain.  These nations are built-in supporters of Greece's plan - as long as it doesn't involve a debt default.  Debt default is a no-go.  Third-rail stuff.

So, the riddle is, how do you default on your debt without engaging in a debt default?

Here's my theory:

Greece will "in theory" promise to pay off all the debt.  However in practice under the new agreement, Greece will only be liable for payments when there is growth in Greek GDP.  As a practical matter, the ECB will buy all the outstanding Greek bonds and bury them on the balance sheet, where most of them will sit in a state of peace and tranquility for decades to come.  Greeks will make occasional payments when they have a good year, but in practice decades of modest inflation will make most of the payments, not Greece.

But Germany will have won because, you know, Greece has promised to pay - as long as there is growth, of course - so its not like they actually defaulted.  Yay Germany!

But in practice, those bonds will go to the ECB to die.  The only way they'll be paid off is if the ECB engineers a 2% inflation rate for the next 100 years.  Then Greece can pay them off (100 years later) out of petty cash.

Hollande in France is looking at a massive loss at the next election, so is Rajoy in Spain - they are politicians desperate for a way out.

Prime Minister Manuel Valls of France, who also met with Mr. Varoufakis, said: “Everyone understands that the punitive policies of austerity can no longer be a project for the European Union.” He added: “We must continue to convince others that our ideas, which are also defended by President François Hollande, are indispensable” for Europe to escape “weak growth and unemployment that is dramatically too high.”

These politicians dare not anger Germany, but as Varoufakis makes the rounds, he's basically showing all these other FinMins that he's willing to deal, that he's got a face-saving plan for Germany, that he's a credible guy and not crazy after all (whew!), that they're all in this together, that they need to help each other to overcome the debt issue, and that we can all win if we pull in the same direction.  Most importantly, he's offering embattled politicians facing angry people and a sure electoral defeat a path towards political survival, and he's offering to be the cats paw/bad guy and do all the heavy lifting with Germany.  No lose for them; Valls just said "OMG Yes!"

Greek FinMin is building a coalition of countries who are desperate for a solution, the same time providing  Germany with a fig-leaf proposal that involves no actual debt default, but will as a practical matter end up sending half the debt of the Eurozone off to die at the ECB balance sheet via inflation over the next 100 years.

Gold positive?  Gee, ya think?

I don't think the market has figured the game out just yet, however.   Right now, they're actually believing that Greece has signed up to repay all its debt under the current terms.  Which of course is not gonna happen.

That's my current thinking anyway.

I can't wait for the next installment of this show.

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