PM Daily Market Commentary - 10/22/2015

davefairtex
By davefairtex on Fri, Oct 23, 2015 - 4:32am

Gold fell -0.90 to 1165.90 on moderate volume; silver rose +0.15 to 15.84 on moderate volume also.  Most of the movement today had to do with ECB Chairman Draghi hinting he would print more money come December.  While gold didn't seem to move in USD terms, it jumped 2% over in Europe.

The dollar underwent a truly massive move today, jumping +1.39 [+1.46%] - its a wonder gold in dollars didn't crater.  I write this one up as a strong day for gold, even though gold actually fell slightly.  I believe gold has a strong bid over in Europe.  In dollars, gold remains in a downtrend.

Silver did well today, rising even with the huge dollar move.  Since commodities overall were flat, this one is most likely due to the "monetary metal" component of silver.  Silver is still under that 200 MA, and it remains in a downtrend, but it would not take much to change this posture.  It is hinting that it wants to start trading sideways now, which would be good news.

Miners rose, with GDX up +1.70% on moderately light volume, while GDXJ rose only +0.50 on light volume.  Senior miners broke their downtrend line and are now starting to move sideways.  Declining volume is an issue - given the chart, miners could go either way here.  But the rally today was a strong positive sign; normally miners sell off hard when the dollar rallies.

As mentioned earlier, the USD rocketed higher today on news that ECB Chairman Draghi will revisit the size of his money printing operation.  "Doing more of what has been shown not to work" - oh never mind.  Market just looks at effects rather than passing judgment behind the actions of our policy makers.  The buck took off in the middle of his press conference and never looked back.   Certainly before today the dollar looked weak - I fully expected it to start selling off in a few days.  Is this just a flash in the pan or is this the start of a major new dollar uptrend?  We will have to wait and see if there is follow through in the next few days.

Yesterday it looked like SPX might be starting to tip over - today of course with the ECB news the equity market took off higher.  It jumped off higher at the open and just never looked back, closing up +33.57 [+1.66%] to 2052.51.  That 9 EMA has been strong support for SPX in recent weeks.

Will the 200 MA act as resistance to SPX?  Maybe.  Its an important level to watch.

Why does SPX love money printing?  It won't help US company earnings, right?  My guess is this is just capital flows fleeing Europe.  All that money coming into the buck had to park somewhere.  If the buck continues climbing, my guess is, so will SPX.

JNK fell -0.01%; no JNK rally suggests the SPX rally isn't a return to "risk on", but rather just a flow of capital from outside the US.

Bond ETF rose today, up +0.17% - on a day with a big move higher in SPX, this suggests a money flow effect too.  Bonds normally sell off when equities rise - so when they both go up together and the dollar rises, its probably about a capital flow from outside the country.

The CRB held steady, up +0.01%, a minor miracle given the big dollar move.  It still looks bearish.

WTIC oil rallied today, climbing +0.23 [+0.51%] to 45.49.  (That's about $35 for you shale drillers in the Bakken).  WTIC seems to have found some support on its 50 MA.  Brent is bouncing around the 47.50 level, in dangerous territory.

HAA has 100 oz gold bars right now in NYC at 1198.64/oz [+2.22% over spot], and 1000 oz silver bars in NYC at 16.56/oz [+3.61% over spot].  Eagles in NYC are quoted at 19.45 [+22.84% over spot].  Big bar premiums rose slightly, while Eagle premiums fell.

Gold looked quite strong today, especially if you look at how it did outside the US.  Miners and silver both climbed, which confirms this.  This could be it for the gold correction.  My computer has just turned (cautiously) positive on gold, remains bearish on silver, and has just now become quite positive on the mining shares.  Should be interesting to see how it all plays out.

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4 Comments

timot78's picture
timot78
Status: Member (Offline)
Joined: Sep 18 2010
Posts: 11
Longer term ratios Gold: USD, Gold:SP500, Gold: Copper

Dave,
This is my first post on PP forum, so I might be repeating the already discussed issue regarding Gold and its relative strength to USD Index or SP500 over longer (5+ years) period. If that’s the case, I apologize.

I really appreciate your daily comments re: gold, PM-s, and market conditions. This is daily food for thought.
Want to share some observations related to ratios specified in the title. This is what I discovered for Gold:$USD , Gold:SPY (proxy of SP500), and Gold: Copper ratios, respectively.

 

Fig. 1 $GOLD:$USD @ StockCharts.com
Until EoDec’ 2011 Gold was much stronger than USD Index. It attempted to go w/50MA above 200MA in meaningful way only twice since then (Yellow arrows), but it failed to make a lasting performance. Currently, Gold tries to break w/ 50MA above 200 MA. We will see whether successful.
The Rel. Strength (upper chart) shows multiple break-outs above 50 , but they all had short lives.

Fig. 2 $Gold:SPY @ StockCharts.com
This chart (in retrospect) tells me that gold started continuously underperform SP500 beginning from Feb.2012 till today. During that period the underperformance was in the range of 14.2/5.68 = 2.5 x.
This is a dramatic ratio, and maybe better illustrated by inverse chart below.

Fig.2b. SPY: Gold$ ratio @ StockCharts.com
So, during Feb’2012 to Oct’ 2015 SP500 outperformed Gold 250%. And seems like SPY:Gold MA50 was until now almost always above 200 MA. This chart is revealing to me.

My final check is the relative performance of Gold to Copper (PhD Economy?).

Fig.3 $Gold:$Copper @ StockCharts.com
There is nothing extraordinary in this chart, i.e. the ratio stays in well-defined range (340-535), starting from May’2011. It tells me that Gold – pricewise – was treated by the markets like a standard commodity. There is certain frequency associated with spikes in the chart, i.e. Gold rapidly outperforming Copper. It carries frequency of 6-12 mos , but definitely a longer time series would be needed to see the trend here (FFT would quickly show low frequency content in the chart). I cannot explain this phenomenon.
These charts tell me (I am curious what’s your and others’ opinion) that Gold as investment in 2012-2015 period was a losing proposition. On the other hand, some would call it an opportunity, if they believe Gold will have to be revalued to be in synch with historic M2 (?) money supply curve. Chart 1 (Gold: USD ratio) shows underperformance of Gold vs. USD by up to 200%. And this makes sense, since USD got stronger, while Gold went down in nominal terms. Was that predictable in 2012-2013? I think it was not. Charts 2 and 2b show clear underperformance of Gold vs. SP500 index. The underperformance is even larger, up to 250%. It is very unusual, that from Jan. 2012 till Aug/Sep 2015 Gold was not “allowed” to threaten the dominance of SP500 index (Fig.2).
Compared to Copper (Chart3), Gold shows strength with certain frequency – this is happening right now.
In all the cases, the last 2 months show a potential for Gold to break-out of the pattern but with QE almost being announced by Draghi in EU and today’s China’s interest rate reduction, seems like we are still on the same track of outperformance of SP500 over Gold. Time will tell.
Regards, Peter

 

 

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 772
The peaks of xau:xcu

Peter, I liked your commentary on the price of gold: it seemed pretty reasonable to me. However, you piqued my interest in your analysis of the Xau:xcu graph.

Therefore, I went over to the five-year xau:usd and xcu:usd graphs, and overlaid them. What I saw was that they behaved pretty much the same, with one exception: xau seemed to cycle from its high to low to high on a 6-month basis, while XCU seemed to cycle on a 9-month basis.

That therefore makes me think that there are financing fundamentals of the type of burinesses that invest in each.

I too wonder what they are.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5066
long term charts

Peter-

I liked seeing your long term GOLD:SPX perspective.  I went and took it a step further.  The Monthly 50 MA seems to be a good long term indicator as to the very long term trend.  When price crosses the 50, its a sign of either good things or bad things to come for an extended period of time.  That downturn in 2013 was definitely key just as you say.

I believe the ratio shows the relative direction of money flows - after 2013, money flowed into the stock market in preference to gold.  Certainly that flow made the Fed happy.

After three years of reverse flow, the RSI suggests we might be approaching a low.  Money is slowly switching from SPX to gold - or rather, the momentum of money flowing out of gold in preference to SPX has slowed down substantially.  We just might be at "2000" right now.  As an optimist, that's what I'd like to think anyway!  We'd still have another couple of years to wait for the MA crossover.  A correction in SPX would certainly help.

And here is your gold-copper chart, extended to 1980.  For most of the period, gold and copper traded "roughly" in the same band, just as you pointed out.   For those who understand what this chart is saying, this shows that gold and copper are roughly correlated most of the time.  That says gold has a strong "commodity component" to its price behavior - one that has existed all the way back to 1988.

The upside breakout of the ratio in 2009 was due to deflation in the copper price that wasn't seen in gold.   I believe this is an example of gold's "money-ness" making an appearance.  This puts a floor under the price of gold - it tells us gold will act a lot better than copper during deflation.  And given the price action that has moved gold:copper to the top of its range, that suggests we're moving closer to deflation, roughly speaking.

To play the deflationary breakout, short copper long gold?

I think the chances of gold being revalued on a 1:1 basis with M2 are zero, as long as the current global situation remains in its current state.  Buck is now a strong currency, the safe haven, etc.  Unless some extraordinary geopolitical event occurs, the US will remain the safe haven.  Big money cannot possibly feel secure in the Euro, in the Yen, and certainly not in the RMB.  CAD and AUD are too small - and are tied too closely to China's deflation.  We're left by default.

The issues with the dollar during 2000-2008 were all about money feeling safe enough to flow outside the US looking for yield elsewhere - and there was an echo-boom of that post 2009.  Now that the world isn't so safe anymore starting in about 2014, money is coming back.  I don't see that trend reversing until the world sorts its problems out.

Of course, once THAT happens, and I believe it eventually will, then the chickens will finally come home to roost here in the US.  But I believe that's at least 2 years in the future.  Maybe more.

Then at that point if things get bad enough, gold might have to be used to support the buck.  Wouldn't the debt-holders like that?  A gold-backed currency is grand if you own debt denominated in that currency.  It turns into "golden leg-chains" if you owe debt.  As taxpayers - let's just say we aren't the owners.  Our lords and masters, the debt-holders, will benefit most from a gold-backed currency.

"Now that your debt/GDP is 130% - why don't we gold-back the currency?"

Kind of like what happened in Greece.  That's my concern anyway.  And I think that's actually the plan, too.

timot78's picture
timot78
Status: Member (Offline)
Joined: Sep 18 2010
Posts: 11
Monthly 50 MA in $Gold: $SPX

Dave,
Your long-term $Gold:$SPX chart is very helpful, especially looking at 50 mos MA curve. I agree with you, it looks like we are in year 2000, before a new trend will possibly take place – timing is another issue because things may/may not get accelerated this time. And Rel. Strength indicator, as you mentioned, points in the same direction.
Looking back at 5 yr chart for $SPX:$Gold (I substituted here SPY for SPX), the clear message from the FED and TBTF banks is that they will “do whatever it takes” to keep Gold from crossing its own 200 MA (as stated in some other post), or will NOT allow Gold to go above 200 MA of SPX:Gold ratio. We see this through multiple actions in the past (at least during 2012- 2015 period) leading to Gold price suppression. If I understood this part of big money’s buying algorithms earlier (makes sense), I would have not listened to gold bugs or “pundits” continuously pushing the alarm button on Gold since end of 2012. Well, lesson hard learned.

So now we (or at least I think I do) know that Gold 200 day MA is a critical parameter to watch, and as a another proxy the Gold: SPX 200 MA curve as well. I am speculating, that J. Rogers or M. Faber or other gurus in this space, watch very carefully long term $Gold: Market charts because they are “actionable”.

As you said, downturn in SP500 may push Gold to pierce the 200 MA of $Gold:$SPX ratio. Otherwise, assuming 30% reduction in SP500, we might see an attempt to reduce  Gold price by equivalent , i.e. 30%, level. The question arises, whether in today’s reality is it possible to see SP500 correcting from 2065 to 1445 and Gold from $1170 to $820? SP500 reduction for sure is possible and realistic, Gold down to $820 is not impossible but highly unlikely . If Gold 'cannot' follow SP500 down in the same proportion (China in 2008 did not accumulate Gold yet!), the chances are that a significant downturn in SP500 might mean a new bull market in Gold, or at least a new look at Gold by deep pocket money.
-Peter

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