PM End of Week Market Commentary - 11/6/2015

davefairtex
By davefairtex on Sat, Nov 7, 2015 - 1:21am

On Friday, gold fell -14.10 to 1088.90 on very heavy volume, and silver fell -0.20 to 14.74 on heavy volume.  Both metals endured a large spike down at the time of the Nonfarm Payrolls release at 08:30 Eastern from which they never recovered.

On the week, gold fell -52.80 [-4.62%], silver dropped -0.80 [-5.12%], GDX plummeted -10.03%, and GDXJ was down -7.62%.  Platinum fell -4.46%, while palladium dropped -8.05%.  Every PM element had a terrible week.

The Nonfarm payrolls report convinced the market that a rate rise by the Fed is most likely going to happen at the next Fed meeting.  This resulted in a large dollar rally, and a sell-off in most everything else.  I am not sure the low for gold is in.  We know that bad things sometimes happen to gold on Sunday night before the Tokyo market open, when gold is near support.  That is the situation today.  As a result, I believe the chances of a large spike down through the previous low of 1075 prior to market open in Tokyo to be quite high.  There was almost no bounce off the lows on Friday.

Once again silver sold off right alongside gold, this time closing just below its uptrend line.  That said, silver is relatively far away from its previous low; if gold does encounter an assault Sunday, the previous low might just hold.  75 cents is a long distance to move in just one day.

Miners

Miners were holding up relatively well through Wednesday, but lost it on Thursday and Friday after losing support at the 50 MA.  If gold is smashed through the previous low, I'd say its a 50/50 shot that the previous miner low at 12.62 holds.  Then again, we could see a 10% down day in the mining shares and total capitulation.  I think risk is quite high right now.

The USD

The dollar raced higher this week, rising +2.24 to 99.26, with half of the gains coming right after the Nonfarm Payrolls release on Friday.  To provide context, I had to pull back to the weekly chart.  You can see that the buck blew through the previous high at 98.42, and is now on course for a re-test of the 100.72 high set back in March.  The strong move higher in the buck caused most everything else to sell off.

Here is the dollar vs the DXY basket.  You can see that the buck rose against every other currency in the list, and the Euro suffered the worst, with the moves being quite large.  Given the Euro decline, gold in Euros actually doesn't look all that bad.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Euro USD.EUR 2.49% 15.25% rising rising falling rising ma50 on 2015-10-22 2015-11-06
Swedish Kroner USD.SEK 2.18% 17.32% rising rising rising rising ma50 on 2015-10-22 2015-11-06
Japanese Yen USD.JPY 2.11% 6.86% rising rising rising rising ma200 on 2015-11-04 2015-11-06
Swiss Franc USD.CHF 1.83% 3.41% rising rising rising rising ema9 on 2015-10-25 2015-11-06
Canadian Dollar USD.CAD 1.68% 16.45% rising rising rising falling ema9 on 2015-11-04 2015-11-06
Pound Sterling USD.GBP 1.64% 4.95% rising rising falling rising ema9 on 2015-11-05 2015-11-06

US Equities/SPX

SPX rose on the week, climbing +19.84 to 2099.20.  This is six straight weeks the equity market has gone up.  On Friday it looked as though the market might sell off, and in fact the market did drop momentarily through the 9 EMA, but the dip was bought.  I'm not sure this can continue; there are several short term technical indicators that suggest the market is ready to move lower.  What's more, the strong dollar rally did not help equities this time around.  When the Fed raises rates, it is the universal signal that "the loose money party is over."  Longer term, this will be bad for equities.  It just may take them some time to realize this.

Still, VIX dropped -0.74 on the week to 14.33.

The US market did fairly well compared with the other regions, but equities in general were not stellar performers this week.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Latin America ILF 1.73% -30.61% falling falling falling rising ema9 on 2015-11-06 2015-11-06
United States VTI 1.26% 4.02% rising rising rising rising ma200 on 2015-11-02 2015-11-06
Emerging Asia GMF 1.11% -5.95% falling rising falling rising ema9 on 2015-11-06 2015-11-06
Developed Asia VPL 0.14% -1.04% falling rising rising rising ema9 on 2015-11-06 2015-11-06
Eurozone EZU -0.05% 0.60% falling rising rising rising ema9 on 2015-11-04 2015-11-06
Europe IEV -0.62% -2.96% falling rising falling rising ema9 on 2015-11-04 2015-11-06

Gold in Other Currencies

Gold fell in every currency this week.  Gold in XDR dropped -53.40, which approximates the move in USD.  Although the dollar rallied sharply on the week, gold's move lower was mostly not a currency effect.


 

Rates & Commodities

Bonds (TLT) fell -2.87% on the week, most of those losses coming on Friday following that Nonfarm Payrolls report.  Bonds do not like the prospect of rising rates.  Bonds are now in a clear downtrend.

Junk bonds (JNK) fell -0.48% on the week, with JNK dropping below its 50 MA on Friday.  JNK did not appreciate the drop in oil, nor is it looking "risk on" after FOMC last week or Nonfarm Payrolls this week.  I believe weakening price in JNK may be hinting at a move lower in equities.

The CRB (commodity index) dropped -2.34%, an understandable move given the strength in the buck.    Commodities made a new cycle low this week.

WTIC fell -1.87 [-4.03%] to 44.52 this week; the selling in oil started following Wednesday's Petroleum Status Report and it just didn't stop until the market closed on Friday.  Oil did manage to bounce off 44 support, but other than that bit of very modest good news, oil looked weak, with the rally up to 48 now looking like a head fake.  Oil equities are doing far better than oil itself, staging a strong rally this week which managed to survive the sell-off in the commodity itself.

My computer is back to being short oil.

Physical Supply Indicators

* I did not get any data from Shanghai this week.

* The GLD ETF tonnage on hand fell a big -23.17 tons, with 669.09 tons remaining

* Gold is not in backwardation at COMEX; the front two contracts are trading at the same price.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on Nov 6th) of 1088.90 and silver 14.74.

 PHYS 8.96 -0.49% to NAV [up]
 PSLV 5.74 +1.14% to NAV [up]
 CEF 10.56 -9.93% to NAV [down]
 GTU 38.80 -2.64% to NAV [down]

Sprott ETF premiums were up, the others were down.

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows about a 1% premium for silver, but none for gold.

* HAA big bar premiums are lower for gold [2.21% for 100 oz bars in NYC], and for silver [3.86% for 1000 oz bars in NYC].  Silver Eagle premiums dropped too [18.66% in NYC].

Futures Positioning

The COT report covered trading through Nov 3rd, when gold closed at 1106.60 and silver 15.25.

Gold commercials closed -33.3k short positions this week, putting us 1/3 of the way towards forming a low for gold.  It was a big change, but commercials still have a large short position left to liquidate.   This suggests we have more downside left for gold.  Managed Money bailed out of 31k longs, and added 15k shorts.  This does get rid of a good chunk of Managed Money's long gold contracts, which is a positive sign for a low.  Perhaps we're halfway there overall.

In silver, commercials covered -1.7k shorts, hardly any change at all.  Commercial net short position remains at very high levels.  Managed Money dropped -4.7k longs, but barely dented the Managed Money long holdings.  Both sides are largely holding their positions in silver.  This is remarkable, but the lack of capitulation from Managed Money in silver is probably responsible for silver's relatively strong performance vs gold.  Had the standard "Managed Money capitulation" scenario played out, silver would probably be below 14 at this point.

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

Any trace of an uptrend is gone.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Platinum COMEX.Platinum -4.48% -21.31% falling falling falling rising ma50 on 2015-11-03 2015-11-06
Gold COMEX.Gold -4.71% -4.83% falling falling falling rising ma50 on 2015-10-30 2015-11-06
Silver COMEX.Silver -5.09% -4.48% falling rising falling rising ma50 on 2015-11-04 2015-11-06
Senior Miners GDX -6.01% -14.57% falling rising falling rising ma50 on 2015-11-05 2015-11-06
Silver Miners SIL -7.51% -24.71% falling falling falling rising ma50 on 2015-11-04 2015-11-06
Junior Miners GDXJ -7.58% -18.60% falling falling falling rising ma50 on 2015-10-29 2015-11-06

Gold Manipulation Report

I'm going to hold off on this report until after Sunday evening.  I believe we are at a high risk of an event this Sunday, based on my analysis of previous events that took place under conditions remarkably similar to the one we are in today.  If an event doesn't happen, that will be great, but - if you are looking to buy gold, I strongly suggest you wait until early next week to do so.  You might save yourself $50/oz.  Or more.

Summary

Follow-through from the FOMC announcement continued to drive PM prices lower, with another dose of bearish news coming from the unexpectedly strong Nonfarm Payrolls report on Friday.  Everything in the PM complex did poorly, without exception.  While gold is very oversold (RSI-7 of 9.71 = "very oversold") and by that metric should be ready to rally any time now, we may well see one more move lower before the rebound occurs.

The gold/silver ratio rose slightly this week, gaining +0.38 to 73.87, a very slight rise given gold's big move lower.  Silver is hanging tough.  The GDX:$GOLD suffered another big loss this week, and is bearish, while GDXJ:GDX rose and is actually starting to look bullish again.  The juniors, very oddly, are faring better during downtrends than the seniors.

The COT reports are showing short covering by the commercials in gold, and long liquidation by Managed Money, the typical pattern during a downtrend, but the process has not yet completed for gold, indicating there may be more downside ahead.  In silver, managed money is mostly hanging tough with their net long position, and the commercials have yet to cover.

Gold and silver big-bar physical shortage indicators are unchanged; in the west, ETF premiums were mixed, while GLD tonnage had a large drop.   Big bar premiums at HAA fell, as did silver coin premiums.  I'm not seeing any signs of a shortage of PM.

Buyers for gold at COMEX remain elusive.  Even after the big move lower on Friday, no buyers appeared.  Best case, some shorts were ringing the cash register.  I had hoped a negative Nonfarm Payrolls report would provide the trigger for a rebound in PM; clearly, that just didn't happen.  Instead, gold has fallen quite close to its previous low of 1075, and I believe there is a significant chance gold will be pounded through that price level this Sunday in one of the sporadic but massive COMEX gold assaults that happen under exactly these conditions.

Consider this a "gold manipulation warning" for this weekend.  If you are in the PM market, be extra careful out there.

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7 Comments

Penny551's picture
Penny551
Status: Silver Member (Offline)
Joined: Nov 8 2012
Posts: 149
COT

Thx Dave!

Keep in mind, the CoT data is taken on Tues, so hopefully the commercials covered more shorts and MM added.  Even so, it does still look like there's plenty of room for improvement in the CoT structure.

From a trading standpoint, I'm kinda hoping for a complete washout low that will provide a nice opportunity to add some calls.

Steve

 

 

khuber's picture
khuber
Status: Member (Offline)
Joined: Apr 20 2009
Posts: 17
Gold, Silver & Armstrong's Timing Models

Marty's models show a yearly low in December 2015, with an intraday low in March, followed by a 7 year bull market. Other markets also are lining up for these lows, so he's quite confident and expects all the "bugs" to be washed out at new low prices. The extreme provides the fuel for the bull to follow.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
armstrong timing models

Khuber-

That's some great information.

Do you have an estimate of the yearly low for 2015 - or is it just the timing he's sure about, while the price remains dependent on circumstance?

Definitely his price target requirement for 1187 being the required reversal to the upside for gold was fascinating to behold.  We went right up to that price level, went through it intraday for two days in a row, and then promptly sold off.  Who knows if the commercials read his stuff, or that's the place they picked to jump in short because they sensed the longs were running out of gas.

 

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

No assault this Monday before the Tokyo open.  That's good news.  Now we get to see if gold is ready to bounce.  It is severely oversold, and should bounce any day now.

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 760
Price elasticity of supply, debt, and theory over data

Dave and all,

I fear that I may have let my beliefs about the importance of debt cloud my teaching of economics the other day, but I wanted to ask you, Gillbilly (if you're out there) and others here, in hopes that there may have at least been a grain of truth in what I claimed to my students.  Here's what happened:

We were looking at price elasticity of supply (PES) of commodities.  The mainstream theory states that commodities tend to have a fairly inelastic PES, when compared to manufactured goods, meaning that when the price rises or falls by a large amount, suppliers are unable to change quantity supplied by very much. (Example link here)

The typical reasons why the theory states that this is true include:

  • time period constraints: it takes longer to increase or decrease supply of primary commodities (e.g. agricultural planting & harvests are relatively slow, opening up/closing down oilfields or mines is a slow process)
  • storage problems: most agricultural products are at least somewhat perishable, the stock to flow ratio of oil and coal is very low, so there's simply not enough space to store a lot of commodities (PMs are an exception due to their high value for relatively small quantities)
  • lack of mobility of factors of production (the land and capital needed to make primary commodities is very specialized and can't be used to produce other items)

In class, however, I deviated from the script by also saying that many commodities producers could not easily reduce supply/production when prices were low because of the need to make debt payments. Since most primary commodity production is very capital-intensive (and land-intensive) commodities producers typically incur high debts in order to pay for the land and capital up front and need to continue to produce when prices for their commodities are low in order to service these debts, and therefore avoid foreclosure. After having watched the PM & oil industries continue to produce at low prices, I thought there was something to this debt service argument, so I felt as if my practical awareness of these issues, thanks to PP, to a great extent, enhanced the standard economics fare in this case.

However, later I fact-checked myself and while I expected the debt-to-equity ratio of primary commodities producers to be higher than many other industries, it turns out that it's not. According to CSI Market, for example, the debt-to-equity industry average for energy is 0.43 and it's 1.07 for basic materials, but it's 1.58 for consumer discretionary (i.e. manufactured goods, mostly), and 1.28 for services.

I will certainly have to correct my error today (or tomorrow...) but I'm hoping that there's a little more merit to the argument than the statistics above suggest.

Does anyone think there is any value to the debt-service argument for the relative price inelasticity of supply for commodities, or do I just need to do a full and unqualified mea culpa?

Thanks,

Hugh

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

I don't know how significant it is in the scheme of things but Bitcoin miners are on a roll. 

https://blockchain.info/charts

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

Not all commodity production is the same.  Supply of crops like corn and wheat can change relatively quickly - farmer plants a different crop next year - versus a copper mine that has a mine life of 18 years.

Getting a mine operational is expensive.  To do this, you raise money - either through debt or equity.  Once operational, to keep the business running, you just need to meet your cash costs - which could include debt service if you chose debt as a funding source.  From an accounting standpoint, factoring in the depreciation of your capital spending, you could be losing money on the project, but you can remain in business as long as you are cash flow positive.

Starting a new mine won't happen because the project won't be profitable, but existing mines will keep running even if they aren't "making money" from an accounting standpoint.

And the annoying thing is, a copper mine can't turn around and produce, say, gold, if the price of copper drops.  That's not true for corn, wheat, and soybeans.  Once you have a copper mine, copper comes out of it every year.  More or less.  That's why the supply is inelastic.  Time to create a mine is measured in years, mine life is 10-20 years, and once in place, cash costs determine whether or not the mine stays open, not overall project profitability.

Debt service cost is a part of the cash costs, of course, but I believe its the long mine life, large initial capital spend, and the inability to "produce something else" when the price of the product drops that drives inelasticity.

Once the cabbage patch baby fad dies away, you can sell pet rocks if you're in retail.  That's not true of a copper mine.  Once in place - it pretty much just produces copper.

Why on earth would anyone get into such a crazy business?

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