PM End of Week Market Commentary - 3/27/2015

davefairtex
By davefairtex on Sat, Mar 28, 2015 - 4:52pm

On Friday gold fell -5.30 to 1198.30 on moderately heavy volume; silver dropped -0.13 to 16.97 on moderate volume.  Gold sold off today but managed to recover some of its losses; it as a result it has yet to mark a swing high, and it remains clearly above its 9 EMA.  This tells me that the two-week gold rally is still very much alive, in spite of the ugly hammer candle on Thursday.

Silver too remains in its two week old uptrend; it too avoided marking a swing high, and silver remains above both 9 EMA and 50 MA.  Silver's chart looks better than gold.  Staying above that 50 MA makes silver look better to those disciplined traders awaiting a trend change in PM.  Hey, do I see silver's 50 MA actually rising?

Miners sold off on Friday, with GDX dropping -1.21% on moderately light volume, and GDXJ was down -1.63% on moderately light volume also.  Both miner ETFs have now dropped below their 9 EMA lines, and that is bearish.

On the week, gold rallied +16.60 [+1.40%], silver rose +0.24 [+1.46%], GDX fell -2.53%, and GDXJ dropped -2.16%.  Things look a bit confused right now; either the miners will be leading gold back down, or it is just a brief profit-taking rest on the way to higher levels for gold.  My sense: the dollar will tell us which way things will end up breaking.

The USD

The buck continued dropping this week, losing -0.65 [-0.66%] to 97.52.

On the weekly chart, support for the buck looks to be provided by the weekly 9 EMA.  My sense: for the dollar trend to break down more conclusively, we need to see a close below that 9 EMA - below 96.30 or so.

There are a bunch of forces in play right now in the buck.  First, will she or won't she - will Yellen raise rates?  If economic news is bad in the US, the buck will probably fall further, since it suggests the chances of a near term rate rise are slimmer.  My sense is, economic news will probably worsen given the deflationary effects of our amazing dollar rally take time to make themselves felt, and the close of Q1 2015 is just about the right time for the bad news to hit.

Secondly, there's Greece and the Euro.  Greece is now reportedly "one minute from midnight" in terms of running out of money.  And the Eurozone powers seem to be doing everything to "keep Greece on the Troika Reservation" so to speak.  Scant ELA support, no money for Greek safety net programs, and so on.  France gets a pass on balancing her budget (wait?  No austerity for them?), but Greece needs to maintain its primary surplus.  Ukraine gets to default (and apparently has the full support of the EU in doing so) but Greece?  Oh no.  A contract is a contract.  Greece will probably blow up, but quietly.  My current favorite scenario: "payment moratorium" on Greek debts - i.e. a "temporary" default within the Eurozone, end of ECB ELA support leads to imposition of capital controls, and a parallel currency - Greek government pays its expenses in IOUs (i.e. we don't call it the Drachma, but its the Drachma).  That's Euro negative, of course, but it avoids a massive Target2 bill and an equally massive EFSF bill for a Greek default resulting from actually expelling Greece from the EZ.  Can-kicking, but with a twist.  Call it mildly Euro-negative.  This is the "minimum pain outcome" for everyone, and that's why its my favorite scenario.

Lastly - and here's a bit of a surprise late entry: we have credit growth in the Eurozone!  Nations where credit is expanding include: Germany, France, Belgium, Netherlands, Finland, Italy (!), Slovakia, and...Cyprus!

Credit contraction remains in : Austria, Spain, Ireland, Portugal, Slovenia, Latvia.

Greece, as of Jan 31, looked to be recovering, but I'm just guessing that data point has been overtaken by events.

So what does credit growth mean?  Potential end of the 30-month deflation wave (and ECB money printing hadn't even started yet!?) in Europe.  Euro-positive?  I think maybe so.  It might even outweigh the negative impact of the Greek quasi-default.  And if Yellen won't raise rates - Euro may even rally.

And commodities and gold will definitely welcome an end to Eurozone deflation.  Then we just have to deal with deflation in China...if its not one thing, its another...

Miners

This week we saw miners started to fall as soon as the dollar appeared to stop descending.  Now then, a normal correction is not unexpected in an uptrend.  The only question is - is GDX leading PM lower, or is this just the normal profit-taking - a pause that refreshes.  If GDX can regain its 9 EMA in the next few days, my vote is for "a pause".  If not - that's bearish for miners and PM overall.

US Equities/SPX

SPX dropped this week, falling -47.08 [-2.23%] to close at 2061.02.  SPX maybe in the process of forming a lower high, which will occur if SPX manages to close below 2035.  A lower high is a relatively big deal, since it generally indicates a trend change to the downside.

Now this "lower high" event has happened before during this long 5 year rally to no permanent ill effect.  However, I'm seeing a relatively steady diet of bad economic reports, and they are no longer leading to rallies - they are leading to price drops.  SPX is currently below its 50 MA, it printed a "swing high" earlier this week, and I'm not seeing a lot of buy-side enthusiasm.

For those who watch the economic reports, it is probably best to ignore "payroll" reports - since they tend to be the last indicator that tips over.  From my analysis, the leading indicators tend to be the "manufacturing" reports, as well as margin loan data.  Sometimes credit data leads too.

My guess is, we will see a correction, and relatively soon too.  This is from my market read, as well as my overall sense of where the market-leading macro indicators are heading, and finally the gradually increasing deflationary influence from the recent big dollar rally.  [FD: I bought puts.  I'll bail out of them if SPX breaks above the most recent high, however.]

Note: a correction is not a crash.  Still - things could get ugly faster than we might expect if traders get nervous and decide the party has come to an end and they need to move to cash.  We haven't had a real correction in three years. 

Gold in Other Currencies

Gold rallied in USD terms this week, and in most other currencies as well.  Check out gold in BRL: we know from this that the currency must really be having troubles.  The Ruble on the other hand seem to be recovering from its December/January beatings.

Goldbugs in Russia: "manipulators are thoroughly in control of the gold price; they are intervening big time in order to suppress gold's rally to its natural level of $2950."  Or the whole move could just be a currency effect.  Sometimes if you only see prices viewed through the lens of your own currency, you can come to the wrong conclusion.

Look at the black line at the bottom of the chart.  That's gold in dollars, neck in neck with gold in CNY.  Strong currency = poorly performing gold.  Its really pretty simple.  So - manipulation?  Or currency effect?  You tell me.

Rates & Commodities

Bonds (TLT) retreated on the week, dropping -0.34%.  TLT remains above its 50 MA, which is bullish.  The daily chart looks a bit confused, but the weekly chart looks more bullish.

Junk bonds (JNK) were unchanged on the week.

The CRB (commodity index) sold off hard on Friday, spoiling what was a pretty good week for the index.  This resulted in a bearish inverted hammer candle on the weekly chart, which looks pretty disagreeable for commodities.  At the same time, the momentum indicators suggest we are close to a low.  I'm not sure which way this goes right now.

WTIC also had troubles; although it rose +1.98 on the week, a big $2.57 sell-off on Friday turned an awesome week into an ok week.  Oil on the weekly chart printed an bearish-looking inverted hammer candle, although the oil chart looks a bit healthier than the overall commodity index.  Perhaps the comparatively small drop in rig counts this week (nationally, only off -20, vs previous weeks where they dropped by 70 or more) didn't help.

Physical Supply Indicators

* Shanghai premiums dropped -0.48 to +3.07 over COMEX.

* The GLD ETF lost -6.56 tons of gold, with 743.21 tons remaining.

* GC futures moved out of backwardation on Friday; spread of the first two month contracts is 0.0.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on March 27th) of 1197.70 and silver 16.94:

 PHYS 9.89 -0.41% to NAV [down]
 PSLV 6.67 1.80% to NAV [up]
 CEF 12.04 -8.51% to NAV [down]
 GTU 40.70 -7.99% to NAV [down]

ETF premiums were mostly down, with only PSLV rising on the week.

Futures Positioning

The COT report was through Mar 24, when gold was trading at 1191.70 and silver 16.96.

Managed Money increased short positions by +8.7k contracts - curious behavior, in the face of a rising gold price.  Normally Managed Money covers as gold rises in price.  This is more fuel for gold to continue rising, which is bullish for gold.  At the same time, it likely slowed down the pace of the gold rally.  Perhaps Managed Money is betting on a continued move higher in the buck.

In silver, Managed Money covered short on the big rally through the 50 MA.  This is more the typical behavior than what we saw in gold - perhaps that's why silver outperformed gold on the week.  In silver, the shorts bailed out, boosting the velocity of the silver rally.

Moving Average Trends [9 EMA, 50 MA, 200 MA]

The moving average picture has darkened somewhat; the metals still look "early bullish" but the miners have fallen back below the EMA 9.  That's a danger sign.  If it continues into next week, it may end up dragging gold and silver lower, since miners tend to lead rallies as well as corrections in PM.

Name Chart Change 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Silver COMEX.Silver -0.41% -13.40% rising rising falling rising ma50 on 2015-03-20 2015-03-27
Gold COMEX.Gold -0.44% -7.33% rising falling falling falling ema9 on 2015-03-19 2015-03-27
Silver Miners SIL -0.68% -30.81% falling falling falling falling ema9 on 2015-03-27 2015-03-27
Platinum COMEX.Platinum -0.90% -18.08% rising falling falling falling ema9 on 2015-03-19 2015-03-27
Senior Miners GDX -1.21% -20.37% falling falling falling falling ema9 on 2015-03-26 2015-03-27
Junior Miners GDXJ -1.63% -35.99% falling falling falling falling ema9 on 2015-03-27 2015-03-27

Summary

The dollar stopped its descent this week and has been tracking sideways for last four days.  As a result, the PM rally has slowed, and the miners have started to sell off.

The gold/silver ratio is more or less unchanged, and remains bullish.  GDX:$GOLD sold off sharply and now looks bearish.  GDXJ:GDX ratio looks slightly improved, and may be at a turning point - neither bearish nor bullish.  Do we believe gold/silver ratio, or GDX:$GOLD?  Its hard to say.  Long term, PM remains in its multi-year downtrend.  Its probably a good idea to remember this - not that its likely anyone here has forgotten.

The COT report shows a further increase in shorts by Managed Money, right as the gold price started rising.  That's unusual - provides more fuel for a short-covering rally - but it also indicates that Managed Money isn't onboard with the gold rally.  From what I can see, it was the commercials covering short that caused gold to rise.

Physical demand is perhaps neutral - in the west, ETF premiums changes were mostly bearish, but COMEX gold almost-backwardation is a positive sign.  Premiums in Shanghai dropped slightly, but remain modestly positive.

Commodities are having trouble rallying.  Oil too suffers from this, although at this point, not as heavily as the rest of the commodity group does.  Silver is a standout, from that standpoint.  Its strong rally has set it apart from oil and the rest of the commodity index, and that may indicate something of longer term importance.  It is something to watch closely in the following weeks.  If silver can break above that old high at 18.50, we could see something pretty exciting start to happen.

Last thing.  NN is not reporting any bearish reversals - not in oil, gold, silver, or the miners.  That doesn't mean we won't get one - it doesn't spot them all, just the ones that are more dramatic than most.  And the paint is still drying on the code, so...take it all with a grain of salt.

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