PM End of Week Market Commentary - 2/13/2015

By davefairtex on Sat, Feb 14, 2015 - 4:47pm

On Friday gold rose +6.20 closing at 1222.50 on moderately light volume, while silver jumped +0.49 to 17.32 on moderately heavy volume.  Silver traded more or less sideways until 0835 in NY trading, when it suddenly spiked higher, eventually hitting 17.43 as its day high, and retaining most of that into the close.  Gold followed, but did not perform as well.  Significantly, silver broke its 3-week downtrend line, which is quite bullish, especially after holding the support of the 50 MA for the last week.  The gold/silver ratio dropped -1.67 and is now looking downright bullish.

I attribute this improvement in silver to the bottoming of commodities and oil.  Hopefully, silver can perform its customary role of leading gold higher in the coming weeks.

Gold is currently struggling to rally back above its 50 MA.  So far, it has failed to do so.  That's not a great sign, and we can only hope that a rising silver price will help gold to regain the 50 MA.

Miners rose slightly, with GDX up +0.52% on very light volume, while GDXJ rose +1.43% on light volume.  Miners rose more strongly in the first few hours of trading, but ended up selling off steadily for most of the rest of the day.  Both GDX and GDXJ printed small gravestone dojis, indicating a failed rally.  Given how low the volume was, it doesn't seem too significant - other than to suggest neither buyers nor sellers are particularly enthusiastic.

On the week, gold fell -5.40 [-0.44%], silver rose +0.60 [+3.62%], GDX dropped -0.33%, and GDXJ climbed +1.35%.  Silver and GDXJ outperformed gold and the senior miners.  That's bullish in general for PM, although its pretty rare for silver to rise and gold to fall in the same week.


The buck fell -0.54 to 94.22, remaining within its three-week trading range.  The other currencies look like they are trying to form a low; right now they appear driven by both China, commodity prices including oil, and expectations of what will happen with Greece.  Right now, it appears as though traders are cautiously optimistic that some sort of settlement will be reached regarding Greece.

On the chart, USD remains in a strong uptrend; it is still above its steeply rising weekly EMA-9.


On the week, miners were more or less unchanged.  Senior miners made a new low, dipping briefly below their recent trading range only to bounce back up by end of week, while the junior miners managed to avoid making a new low and appear to be right on the edge of breaking their own downtrend line.

A breakout of GDXJ above its downtrend line would be bullish for miners and for PM overall, as junior miners usually lead the seniors in both a rising and a falling market.

As a result, the GDX:$GOLD ratio was largely unchanged and remain generally bullish, while the GDXJ:GDX ratio continued rising off its all time lows for the second week in a row, and is now starting to give off some modestly positive bullish hints having crossed its EMA-9 for the first time in four weeks.

US Equities/SPX

SPX rallied again this week, up +41.52 [+2.02%] to 2096.99, breaking out of its five-week trading range, invalidating the swing high marked earlier in the week, and actually setting a new all time closing high.  I am not really sure what propelled SPX to its breakout - looking at the sectors, the top recent leading sectors are cyclicals, basic materials, technology, and energy.  Perhaps it was the continuing recovery in oil prices - the move of SPX off its recent 1980 low on Feb 1 did largely coincide with the rebound in oil and commodity prices.

The VIX closed the week down -2.60 to 14.69, still somewhat elevated given that SPX made a new all time closing high, but it did mark the lowest level the VIX has recorded for all of 2015.

Gold in Other Currencies

Gold corrected in all currencies this week.  Once again, the Ruble did well, and so gold lost the most in Rubles - it was off more than 5%.

Rates & Commodities

Bonds (TLT) sold off again this week, driving through their 50 MA and losing -2.12% which is a pretty big move especially coming on the heels of last week's drop.  Bonds have not been below their 50 MA since back in September of 2014, which suggest that this correction is starting to become somewhat serious.  The drop in bonds coincided with the recent rally in SPX - money appears to be moving strongly from bonds to equities.

Junk bonds (JNK) continued higher, up +0.51% on the week, inching higher probably on the continued improvement in oil prices.

The CRB (commodity index) had a good week, rising +1.93% and is on the verge of moving through its weekly EMA-9 - something last seen back in June 2014 when the Jan-June 2014 commodity rally came to an end.  This is the third straight week that the commodity index has risen.

WTIC rose only slightly, up +0.33 to 52.67, although it had a wide trading range on the week, at one point dropping as low as 48.  The EMA-9 has provided resistance for the past two weeks, and volume on the week was almost as heavy as last week.  This tells me there is a war going on in the oil futures market.  It is hard to say where WTIC goes from here.

The BHI US Land Rig Count dropped by 100 rigs to 1306 rigs total, a loss of 7.66% on the week, the largest drop in rigs in the history of the time series which dates back to January 2000.  With the largest drop in US land rig count ever, oil rose only very modestly.  This suggests to me that we will probably need to see actual production drops to get oil prices to move higher.  So far, production continues to increase.  Not surprisingly, production lags rig counts.

Last data point for oil: it is being reported that oil storage in Cushing, OK is becoming full; traders are busy renting storage tanks for oil and filling them with oil today, since they are able to sell it forward 12 months for a guaranteed profit of more than $10/bbl.  As long as they can pay for the one year of storage, the "contango" in the futures markets guarantees them a profit.  Buy today, store for a year, sell at a guaranteed profit of $10/bbl.  This works, until Cushing runs out of storage.  If and when storage fills up, the bid underneath WTIC may disappear, and we could see the low of 44 re-tested.

Brent oil is much stronger right now than WTIC, having rallied sharply through its 50 MA, closing this week up +3.46 to 61.58.  Perhaps there are more options to store Brent than there are for WTIC.  Geography matters, especially since the US prohibits oil exports.  [Interesting.  Just imagine if Russia did that too!]

Physical Supply Indicators

* Premiums in Shanghai vs COMEX rose +3.28 to 6.97 over COMEX.  Chinese really do like falling gold prices.

* The GLD ETF fell -5.05 tons of gold, and it has 768.26 tons remaining.

* GC futures are not quite in backwardation, but spread of the first two month contracts is down to even: 0.00.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on February 13) of 1228.30 and silver 17.27:

  OUNZ 12.26 0.12% to NAV [up]
  PSLV 6.89 3.05% to NAV [down]
  PHYS 10.19 0.01% to NAV [down]
  CEF 12.58 -6.58% to NAV [down]
  GTU 42.78 -5.70% to NAV [down]

ETF premiums decreased more or less across the board, except for OUNZ.

Futures Positioning

The COT report was through Feb 10, when gold was trading at 1231.60 and silver 16.87.

In gold, Managed Money dropped -26.5k longs and added +2.3k shorts.  That's a lot of longs bailing out in just one week.  My sense is, a bunch of longs were liquidated on the drop from 1270 to 1230 last Friday - all the new longs that came in on the de-peg of the SNB to Euro.

In silver, there was very little change in positioning.  A few more shorts were added, but that's about it.

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

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

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

The rally in silver on Friday pushed the short and medium term moving averages to up.  Silver is now above both its 50 MA and its 20 EMA, a nice improvement and the most positive development in PM this week.


This week gold continued lower, breaking below its 50 MA, then tried to rally back and failed.  Silver chopped sideways until Friday, when it broke out sharply, rising above its downtrend line.  Gold is looking weak, while silver looks strong.

Gold's moving averages continue to look mostly bearish, while silver short and medium term are looking bullish.  The gold/silver ratio fell substantially, dropping -2.89 to 70.24, at the low end of its trading range over the past 5 months.  GDX:$GOLD continues to do reasonably well, while GDXJ:GDX has improved and is perhaps showing an early sign of recovery.

The COT report shows a massive drop in Managed Money longs in gold, likely a result of the sell-off last Friday.  My sense is, the new longs that jumped on board the gold train right after Switzerland de-pegged from the Euro have now been rinsed out of their positions.  Silver on the other hand shows little change; likely that's why silver hasn't corrected nearly as strongly as gold.

Physical demand is relatively positive; Shanghai premiums are positive, but Western gold buyers have grown a bit less enthusiastic, since most ETF premiums dropped this week.

Commodity prices have continued to rally strongly; WTIC oil is slowing down, while Brent oil is continuing to drive higher.  Perhaps the bifurcation has to do with Cushing OK running low on storage.  I believe the continued commodity recovery has helped silver to recover also.

The US equity market decided against dropping; instead, it broke to new highs, confounding all those put-buyers, all the US companies reporting missed earnings due to a stronger dollar, and me.  I really thought it had a good chance of tipping over this time.  Weakness in equities tends to help PM.

Volume in PM trading continues to be low.  I believe the center of gravity for gold remains in Europe, and the sense I have right now is that there will be some near-term compromise in the Greek debt saga.  It seems that someone noticed 11 billion Euros lying around in a Greek Bank stabilization fund, which might be repurposed to help provide Greece with a bridge loan over the next few months to give time for a new debt pact to be negotiated between Greece and its creditors.  Greece has also signaled that it is willing to improve tax collection from the elites and address corruption - a matter on which the new left-wing government appears to have more credibility than the previous governments who appeared completely captured.  Improved tax collection would delight the Germans, so - perhaps there is a deal to be made in there somewhere.  The only sticky situation remaining is the debt writedown.  That's probably the biggest issue, but a decision on that has no time urgency - a 6 month can-kicking is all that's required right now, and apparently the 11 billion euros will cover that nicely.

A European Union official told reporters on Friday that talks on extending the bailout would not be needed if a new agreement is secured. Kathimerini understands that European officials are examining the possibility of a new program being built around the 11 billion euros Greece has left in the Hellenic Financial Stability Facility (HFSF), which would mean Athens could meet its goal of not borrowing any further funds from its partners and the eurozone could also avoid the politically sensitive subject of having to provide more loans to the Greek government.

There is another Eurogroup meeting on Monday where the Greek issue will be front and center.  Work continued Friday and Saturday trying to sort through where agreement could be found, and where the parties were still apart.  Ultimately, regardless of what is said, I believe that Brussels is desperate to avoid Greece leaving.  Big surprise there.  Ignore what they say, and watch what they do.

I am not sure this outcome will be gold-positive near term.  It is possible that gold could move higher alongside a general commodity rally - pulled higher by a rising silver price.  In some sense that's a healthier rally than one driven by safe-haven flows, since it is more sustainable.  Right now, gold remains in both a short and a long term downtrend, and gold's medium term uptrend is starting to weaken.  Still, the correction has gone on for a while, and gold may be due for a bounce.

We will have to see how PM market reacts to the news out of the Eurogroup on Monday.

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davefairtex's picture
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Varoufakis NYT Op Ed: No Time For Games in Europe

Relatively short piece.  Reductively, "austerity is bad."  He leaves unsaid whether or not one of his red lines includes that de-facto debt writedown (i.e. those GDP-linked bonds and the perpetual bonds on the books of the ECB).

As finance minister of a small, fiscally stressed nation lacking its own central bank and seen by many of our partners as a problem debtor, I am convinced that we have one option only: to shun any temptation to treat this pivotal moment as an experiment in strategizing and, instead, to present honestly the facts concerning Greece’s social economy, table our proposals for regrowing Greece, explain why these are in Europe’s interest, and reveal the red lines beyond which logic and duty prevent us from going.


One may think that this retreat from game theory is motivated by some radical-left agenda. Not so. The major influence here is Immanuel Kant, the German philosopher who taught us that the rational and the free escape the empire of expediency by doing what is right.

How do we know that our modest policy agenda, which constitutes our red line, is right in Kant’s terms? We know by looking into the eyes of the hungry in the streets of our cities or contemplating our stressed middle class, or considering the interests of hard-working people in every European village and city within our monetary union. After all, Europe will only regain its soul when it regains the people’s trust by putting their interests center-stage.


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ECB has veto power over domestic bank appointments

Apparently, the local government isn't allowed to install its own choice for new management during a bank nationalization process without ECB approval of each appointee.  Its one thing to require certain standards and processes, and quite another to have veto power over the people put in place.

The EU really is heavy-handed these days.  Local sovereignty is apparently to be ignored whenever it becomes inconvenient.

The European Central Bank (ECB) has issued a terse warning to Greek banks, and particularly to the government in Athens, via its Single Supervisory Mechanism (SSM), over plans to overhaul lenders’ management. In a letter to Greek banks, the SSM stressed that any changes to their management can be implemented only after receiving the SSM’s approval.

The letter emphasized that all candidates for the top position in each bank would have to go through an interview before the SSM can give its approval.

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2014 FT article on ECB's heavy handedness in Ireland
davefairtex wrote:

The EU really is heavy-handed these days.

I was just wondering where to post a link to the article below, and it seems to be on the same topic as Dave's post.  Perhaps many PP readers have seen this before.  It may have even been posted at PP last year, although I couldn't find it. 

This also connects to a recent Off The Cuff, in which Chris pointed out that back in 2010 Ireland's leadership approved the ECB's terms, apparently under intense pressure, a move he contrasted with Iceland's non-compliance.

From the Financial Times, 6 Nov. 2014, with a few paragraphs included:

ECB threatened to end funding unless Ireland sought bailout

Ireland’s banking crisis returned to centre stage after the European Central Bank released letters showing that its president threatened to cut off emergency funding unless Dublin agreed to apply for a bailout.

There has been a widespread view in Ireland that Jean-Claude Trichet, in effect, forced Dublin to seek a bailout in late 2010 when he was ECB president. The central bank on Thursday published an exchange of letters between Brian Lenihan, Ireland’s finance minister at the time, and Mr Trichet.  


In the crucial letter, written on November 19 2010, Mr Trichet said the ECB would extend more emergency lending to the Irish banks only if “the Irish government shall send a request for financial support to the eurogroup [eurozone finance ministers]”.  

Two days later, Dublin formally applied for a bailout, a 67 billion Euro package funded by the International Monetary Fund, the European Commission, and the ECB....

It seems that this was a new precedent, as I guess that the ECB had not previously made IMF-style economic demands as part of the conditions for a loan.  However, after this 2010 arm twisting, it seems that the ECB made similar demands on Italy, Spain and Cyprus.


Apparently, even some members of the ECB board disagreed with this level of intervention in national economies.  From the last paragraph of the article:


The practice was not only controversial in national capitals that received the letters. Within the ECB board, a handful of members were strongly opposed, arguing that it was improper for central bankers to be dictating economic and fiscal policy to sovereign governments. After the August 2011 letters were sent to Rome and Madrid, Jürgen Stark, then a member of the ECB’s executive board, informed Mr Trichet that he intended to resign over the practice.

I'd be interested to hear the thoughts of others who have more insight into the changing nature of the ECB's role in Europe's national economies.
davefairtex's picture
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peak complacency

It looks like the Northern Europeans are determined to force the Greeks to accept the current bailout without any changes in terms, and that's at odds with what the rest of the EU bureaucracy is thinking.  This internal conflict torpedoed the Monday meeting of the Eurogroup:

Talks in Brussels ended abruptly and Greek Finance Minister Yanis Varoufakis claimed a bait-and-switch, saying Juncker’s commission offered a path forward that finance ministers then refused to put on the table. Instead, Dutch Finance Minister Jeroen Dijsselbloem offered a different statement tying Greece to its current agreement. Varoufakis rejected that proposal out of hand, and the euro weakened on the impasse.

And yet the markets appear to be unmoved at the sight of all this messy sausage-making.  According to the market, the possibility of a Greek default seems to be almost at zero right now.  The dollar is selling off, gold is selling off, its as if the market already knows that a deal is imminent.  Whether the market is correct about this - that I have no idea.  At some point, they will be wrong, some country will leave the EU, and then we'll get to see a whole lot of excitement in a hurry.

“Investors and analysts seem to be quite complacent and are still expecting a positive outcome,” said Christian Lenk, a fixed-income analyst at DZ Bank AG in Frankfurt. “The market seems to be confident in terms of the two parties finding a solution in upcoming days. What’s interesting is the quite relaxed attitude investors have to the periphery. The domino effect everybody had been fearing is much weaker now.”

My sense is, the new Greek administration probably goes to the mat on this one.  The only question is, will Germany relent or not.

All this fuss is over 11 billion Euros.  Clearly, its not the money.  It appears to me that someone may be trying to teach somebody else a lesson: Greece gets the hard line, so Spain and Italy stay the course.  "Greece may well have to leave the Euro in order to teach the Italian government to be responsible..."

And yet the market remains unconcerned.  Its all very interesting.

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HughK , It's been well known

HughK , It's been well known here in Ireland for quite a while that Trichet twisted our Finance Minister's arm into accepting an EU bailout. To add insult to injury he has recently refused to attend at our Banking Inquiry which is currently sitting. During our banking crisis, the government foolishly guaranteed subordinate bondholders, with the result that we now have a national debt of about 123% of GNP.

davefairtex's picture
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Greek banking deadline: end of week

Greek banks may be shut out of the ELA by end of week.

The chief executive officer of one of Greece's top four banks said late on Monday that he expected deposit outflows to speed up as a result of the impasse.

Outflows have been running at around 500 million euros a day, which prompted the ECB to agree an increase in its ELA funding last week, running until Wednesday.

"If the Greek authorities do not take up the Eurogroup's offer this week, ELA would likely be shut down,"  Barclay's said.

"This likely would precipitate the need to set up capital controls to avoid capital flight out of Greece, and Greek banks likely would have to introduce limits to cash withdrawals."

If the analyst from Barclays is correct, this would be a big deal.  If the ECB shuts down the ELA for the Greek banks, that means the Greek banks will no longer have the ability to handle their ongoing bank run, and capital controls & withdrawal limits will have to be imposed simply because the Greek banks won't have the cash to hand to depositors.  (ECB right now is allowing Greek banks to hand them assets, and giving the Greek bank Euros in return, so those Greek banks can return cash to depositors that are pulling money out of the banks.  That's the job of a Central Bank.  Once the ELA gets turned off, Greece effectively no longer has a central bank.).

Will the ECB actually pull the plug?  If they did, it would be a very big deal.

"If there is going to be a panic, make sure you panic first."

Why anyone still has savings in Greek banks is beyond me.

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CrLaan's picture
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€ is a social contract:

€ is a social contract: Duisenberg.


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