PM End of Week Market Commentary - 10/2/2015

davefairtex
By davefairtex on Sat, Oct 3, 2015 - 5:10am

On Friday, gold rose +24.90 to  to 1137.60 on very heavy volume, while silver shot up +0.74 to 15.23 on very heavy volume as well.  Most of the price move took place immediately after the Nonfarm Payrolls report, which was released at 08:30 Eastern.  The report came in substantially weaker than expected.  Econoday reported:

http://global.econoday.com/byshoweventfull.asp?fid=467001&cust=global-premium

Forget about an October rate hike and maybe forget about a December one too. The September employment report came in weaker than expected on all scores with nonfarm payroll at 142,000, well under the low estimate for 180,000. To seal the matter, downward revisions to the two prior months total 59,000. Average hourly earnings also came in below the low end estimate, at an unchanged reading and a year-on-year rate of 2.2 percent which is also unchanged. And the labor market is shrinking! The labor participation fell 2 tenths to a nearly 40 year low of 62.4 percent.

It doesn't get much worse than this, at least relative to expectations. This is a shock that however has been hinted at by reports such as Empire State or the Kansas City Manufacturing survey. There will have to be a big bounce in next month's October report to make a rate hike a real possibility at the December FOMC.

On the week, gold fell -7.90 [-0.69%], silver rose +0.14 [+0.93%], GDX climbed +3.65% and GDXJ moved up +1.84%.  Platinum dropped -3.78% and made a new low, while palladium raced up +5.45%.  Something has lit a fire under palladium - that's 4 straight weeks up.

Gold dropped for the first four days of the week, and on Friday it looked to me as though gold was headed through 1100; indeed before the Nonfarm Payrolls report was released, gold had wandered down to 1103 and was flirting with a breakdown.  The rally on Friday pushed gold back up above its 50 MA; gold's uptrend remains alive but it is still not out of the woods yet.  Gold needs a close above 1157 to keep the trend moving higher.  Will the enthusiasm from Nonfarm Payrolls extend into next week or is this a one-day move?

Silver's move on Friday wiped out two weeks of losses in one day, moving silver quite close to a breakout above 15.50 resistance.  Silver is back above its 50 MA, 9 EMA, and changed the picture from weakness to strength in just one day.

Miners

Miners had a good week, with both the juniors and the seniors vaulting over the 50 MA in a convincing move on heavy volume.    Senior miners even managed to squeak above the downtrend line, which is the first step towards reversing its six month medium term downtrend.  I'm also starting to notice a pattern of high volume up days in the past few weeks that are much stronger than the down days that surrounded them.  It suggests there is actual buy-side interest in the mining shares, which is something we haven't seen for a while.

There are hints - more than hints - of a turnaround in the miners.  Senior miners need a close above 16.25 to mark a double bottom, and we see hints of a possible cup & handle breakout in the near term.

The USD

The dollar fell on the week, losing -0.47 to 95.97.  After the Nonfarm Payrolls report the buck was down a full point, but traders came and bought the dip erasing almost 2/3 the losses on the day.

US Equities/SPX

SPX rose +20.02 [+1.04%] to 1951.36 on the week, marking a clear swing low on Wednesday.  My computer confirms the daily (bullish) reversal for Tuesday/Wednesday, but I have no projection on how high the rally will go.  SPX is now back above its 9 EMA.

While the market may move higher in the short term, the longer term trend is still down.  A good short entry point is after the current momentum starts to fade.

Whenever I look for signs of "official intervention" I look for evidence that a given market is behaving out of sync with the others.  Equity markets tend to rally alongside each other.  That's what happened Friday; every equity market I track in the world was up on the day.  Was the Fed buying e-mini futures contracts at 09:30?  They might have done so, but if so, it was unnecessary.  There was an initial reaction lower out of the NFP release, but then the global equity market rally dragged SPX higher all on its own.  The rising dollar, copper, and oil prices all contributed to a positive feeling post-NFP release - emerging markets are safe for now.  Bad news is still good news.  That's my read, anyway.  Its not futures-buying, its a different sort of intervention: no rate rise.

VIX dropped -2.68 to 20.94.

Gold in Other Currencies

Gold fell in all currencies except for the Real - Brazil is having a tough time right now.  Gold in XDR was off $12 this week.


 

Rates & Commodities

Bonds (TLT) had a surprisingly good week this week; even though SPX rose, so did TLT which was up +2.70% on the week.  TLT has managed to close above its 200 MA for three days now, which is a positive sign.  The sense I had of overhead selling pressure on bonds now seems to be gone.

Junk bonds (JNK) fell -1.65%, making a new low that dates back to 2013.  It tried to form a low on Tuesday, the same day that SPX made its low, but JNK encountered more selling later in the week.  JNK is looking quite feeble, especially when you compare it against other risk assets, most of whom rallied today.

The CRB (commodity index) dropped -0.82% on the week, continuing its slow move downhill.

WTIC tracked sideways this week, rising +0.32 [+0.71%] to 45.66.  There was a fair amount of movement, but all within the usual trading range of 44-48.  WTIC closed above its 50 MA, mostly because the falling 50 MA has dropped to within the trading range rather than because of any rally in oil.

Physical Supply Indicators

* Premiums in Shanghai over spot are now at +1.66 over COMEX, down vs last week.

* The GLD ETF tonnage on hand increased +5.06 tons this week, with 689.20 tons remaining

* GC increased its backwardation, with the current two-front-month spread at -0.50.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on Oct 2nd) of 1137.00 and silver 15.23:

 PHYS 9.35 -0.59% to NAV [down]
 PSLV 5.90 +0.54% to NAV [down]
 CEF 10.97 -10.14% to NAV [down]
 GTU 40.35 -3.14% to NAV [down]

ETF premiums were down across the board.

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows no significant premium for gold or silver.

* HAA big bar premiums are higher for gold [2.43% for 100 oz bars in NYC], and lower for silver [3.60% for 1000 oz bars in NYC].  Silver Eagle premiums fell a bit [37.68% in NYC].

Futures Positioning

The COT report covered trading through Sep 29th, when gold closed at 1126.80 and silver 14.57; of course, the big rally on Friday was not covered.

Gold commercials increased their shorts by 16.4k, as they usually do when price rises.  Gold commercial shorts are still relatively near the lows.  Managed money covered 14.6k shorts this week - a decent amount, but I'd estimate another 50k contracts remain before the shorts "run out."

In silver, commercial positions were unchanged, while Managed Money increased by 5.3k shorts.  The weakness in silver this week and last was caused by Managed Money going short.

It will be interesting to see what next week's report brings, given Friday's big rally.

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

The 50 MA for miners, gold, and silver is now starting to rise.  The Friday rally helped a great deal.

Name Chart Change 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Senior Miners GDX 8.05% -32.54% rising rising falling rising ema9 on 2015-10-02 2015-10-02
Silver Miners SIL 7.38% -34.98% rising rising falling rising ema9 on 2015-10-02 2015-10-02
Junior Miners GDXJ 6.62% -38.78% rising rising falling rising ema9 on 2015-10-02 2015-10-02
Silver COMEX.Silver 5.18% -10.47% rising rising falling rising ema9 on 2015-10-02 2015-10-02
Gold COMEX.Gold 2.06% -6.46% rising rising falling rising ema9 on 2015-10-02 2015-10-02
Platinum COMEX.Platinum 0.23% -28.58% falling falling falling falling ema9 on 2015-09-21 2015-10-02

Summary

The Nonfarm Payrolls report really changed the character of the market.  Silver is now outperforming gold, and the miners are doing well also.  If the effects from the report continue, we could see some breakouts in PM next week.

The gold/silver ratio fell this week, dropping -1.22 to 74.67.  The GDX:$GOLD is now breaking higher; it closed convincingly above its 50 MA for the first time in months.  That's (short term) bullish.  GDXJ:GDX fell again this week - it has dropped for 3 straight weeks and is now looking a bit bearish.

The COT reports show there is still plenty of fuel left for a nice short-covering rally - the kind we saw on Friday.  If we can get the buyers at COMEX to keep pushing the prices higher, we could have another three big days like the one we just had.  At this moment, bad news is good news for gold.

Gold and silver big-bar physical shortage indicators are largely unchanged; in the west, ETF premiums were down, GLD tonnage rose, and gold futures increased backwardation at COMEX.  In the east, premiums in Shanghai moved down slightly.   Big bar premiums at HAA were more or less holding steady.

I am happy to see silver and the miners leading the charge higher, finally.  It suggests a more normal PM bullish impulse.  It gives me more hope that the sentiment can continue into next week - if a rate rise is truly off the table (and, more importantly, the market believes this) then going forward each new bit of bad news could potentially help gold, as it would continue to keep our "data driven Fed" from raising rates.

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10 Comments

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1216
Where did the money come from?

Dave,

On the strength (i.e. weakness) of the disastrous NFP report all markets, including PMs, plus bonds (except JNK) screamed higher? So basically everyone raided their piggy banks of cash to pour into the system because cash is suddenly a worse place to be? For everything to rise at the same time doesn't that mean that cash flows were in to the markets on this news? Are half the people betting new QE (equities) while the other half are betting market collapse (bonds and PMs)? How much money was needed to raise both at the same time? Was there enough volume in the markets on Friday to warrant such a massive reversal? Is there a twisted logic to explain this up is down and bad is good market behavior?

Sorry for the blitz of questions but I find this stuff endlessly confusing which is why intervention increasingly seems to be the only reasonable explanation for increasingly bizarre behavior.

Mark

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
where did the money come from?

Mark-

I think a big chunk of the COMEX PM "money" was shorts closing out their positions.  We'll find out more next Friday with the COT report.  I'm not sure how much of the move in the different markets involved short covering, but I'd be willing to bet it was a fair amount.  The amount of negative sentiment out there is immense, and often everyone gets all on one side of the boat and then something happens to wrong-foot them all and then they all rush to bail out.

A lot of the sharp snap-back rallies during bear markets involve waves of short-covering.  That price action doesn't "make sense" in that the companies and markets being shorted aren't suddenly all better, there is no economic recovery, and so on - it's just waves of emotion rippling through the market.  Markets are extremely emotional, irrational, and so stuff happens that doesn't lend itself to easy rational explanation.

Yesterday all the world equity markets rallied.  That's the most likely proximate cause of the US market's rise yesterday.  Dollar rallied at the same time, copper and oil rallied also.  Some of the sectors that rallied the hardest were basic materials.  A bunch of stuff moved higher as a result of a perceived lower chance of a rate-rise.  Could also be traders unwilling to be short over the weekend.  There's always that, too.

What happens next week?  We might have a few more days of a rising market, only to have it fade...and then tumble again.  We're in a downtrend.  We probably move lower.

 

SailAway's picture
SailAway
Status: Gold Member (Offline)
Joined: Aug 11 2010
Posts: 404
CEF

Dave,

Any idea why CEF discount is so big -10% ? Is it perceived  as riskier than the other ones?

Thank you for contributions on this site. 

Fred

 

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
Last Working Day: gold and silver manipulations?

So ever since Jim posted some articles from one of his goldbug sources on "first notice day" gold hammerings, I have been curious to see if in fact these have any basis in fact.  Does gold routinely get hammered on first notice day?  Failing that, are there particular days when gold fares more poorly?

I asked Jim what he thought, and then taking his input I wrote some code and poked around. I didn't see any smoking gun on first notice days.  However I did discover something else.  In 2013 and 2014, gold routinely dropped fairly substantially on the last working day of the month.  In 2014, on average gold dropped $8 on the last working day.  (Gold also doesn't like Tuesdays, for some reason.  Since the gold bull market started in 2000, gold has dropped an average of -0.41 on Tuesdays; this during a time when gold itself went from $250 to $1150).  Anyhow, you can see that an $8 average drop on the last day of the month is pretty dramatic.

Interestingly, during gold's bullish period, it did pretty well on the last working day.  During the bearish period, it has done really poorly.

I'm not sure what the takeaway is here; it might be the gold cartel trying to shoo away people from taking delivery by hammering price right before first notice day.  Or maybe some options expire at end of month, and our friendly bankers want to hose their customers by driving down the price.  That $8 average for 2014 is really pretty dramatic.  How does that explain gold doing well on LWD during the bull market, though?

I admit to being a bit puzzled.  Perhaps some of you have theories.

So although having only 12 sample points per year is a bit statistically weak (I'm not a stats guy, but it feels weak) but ... certainly if you are going to buy gold, its probably best to do it after the end of the month.  You might end up saving yourself $8/ounce!

Interestingly, the same pattern is also there in silver.  30 cents is a really big daily move for silver, and on average, that's what we saw on the last working day of each month of 2014.

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1216
Short covering?

Dave,

I understand the idea but doesn't short covering usually mean that something else has to be sold quickly, often at a loss, to cover those frequently leveraged shorts? Unless money was poured into the markets I don't see how both stocks and bonds went up on bad news. Damn near everything went up. Was it all done on heavy leverage?

Mark

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 772
Google “MFQD extractor"

One of my favorite investment books is “The incredible secret Money Machine" by Don Lancaster.

One of the things he talks about at the end of the book is investments. (That should get your attention: it's an investment book that only talks about investments at the last chapter? Well, it's all about running a cash-free microbusiness. Which animal is perhaps one of the BEST investments an investor could make.)

So anyhow, on the issue of stocks, he advocates the MFQD extractor. That's a fancy way of saying, look at the input signal, and figure out how to extract money from it.

Thing is, there are lots of day traders who do exactly that. Therefore, I'm going to guess that if there are options that expire at the end of each month, then it isn't the banks so much as various day traders, that are harvesting their neighbors' crops.

I guess that this is one area where I'm not goin, to presume conspiracy, even if I really ought to.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
how shorts and covering works

Mark-

When you go short, you borrow stock from "someone else" and then sell it into the open market.  You receive the cash for the sale.  So you have both cash (you are long cash), and the stock debt (short stock).

When you cover, you use your new cash to buy the stock - and you then return the stock you just bought to wipe out your stock debt, and you are flat once again.

If you've made money on your short, you don't need to sell anything else to cover short.  In fact, you use your big cash pile to cover, and you keep whatever profit you made.  When I say the shorts are "ringing the cash register" it means just that - they are trading the pile of cash they have for whatever they borrowed, returning the borrowed item, and locking in their profits.

So right around the lows, it is usually the shorts that are doing the buying.  Not "investors" - shorts.  Everyone else is too scared to buy, since they are all afraid things will just keep going down.  Shorts are afraid things won't keep going down, so they cash out and cause the bottom.

Same thing if you own puts. After a big move down, you are the one selling puts down there at the lows, gleefully cashing out, rubbing your hands with delight and laughing all the way to the bank.  Etc.  (And through some complicated management, a put-buy ends up with someone shorting the underlying in order to hedge the trade, so the selling of the put at or near the low results in a short being covered).

I'm not sure all of that is clear.  But bottom line, no.  The cash is already there to cover short.  Its only when the market really rockets higher that the shorts end up having to sell other stuff to raise the cash to cover.  And the exchange makes sure that if there is starting to be not enough money to cover, they will actually cover for you, taking you out of your position.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
CEF discount

I really don't know why CEF has such a big discount.  There is no mechanism for people to take delivery and thus eliminate the discount as there is with PHYS and PSLV.  I have noticed that during the gold bull market CEF was in premium, and during the bear market, CEF has been in discount.

http://performance.morningstar.com/funds/etf/performance-price.action?t=XASE:CEF&region=usa&culture=en-US&cur=

My sense is, CEF is a reasonable fund with real gold and silver in a vault in canada.  And if/when gold comes out of its bear market, buying CEF now means you get a 10% discount.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Making Money.

If gold or any commodity or share behaved predictably there would be someone out there making easy money from the moves.

SailAway's picture
SailAway
Status: Gold Member (Offline)
Joined: Aug 11 2010
Posts: 404
Re: CEF discount

Thank you Dave

It looks like for a close fund without any arbitrage to the rest of the market, its share value can go anywhere.

Fred

 

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