PM Daily Market Commentary - 2/11/2016

davefairtex
By davefairtex on Fri, Feb 12, 2016 - 2:31am

Gold screamed higher today, up +49.60 [+4.14%] to 1247.00 on exceptional volume; silver climbed +0.50 [+3.27%] to 15.80 on very heavy volume.  Gold spiked through its previous high early in Asia trading and just never looked back; silver followed gold, underperforming but still doing fairly well.

For those who dislike the "wee hours of the morning" moves, we had one of those today.  That is, before the poor Japanese traders were even awake but after the US markets had closed, "someone" decided to spike gold above its previous high - "someone" bought 6.2 tons of (paper) gold in 1 minute at 19:14 Eastern, clearly attempting to drive price higher.   This move kicked off today's great gold rally; once above $1202, gold just kept rising in a series of spikes higher, at one point hitting a high of $1263.90 before retreating into the close.

What drove gold today?  Apart from that nasty manipulative upside spike in Asia, I felt it was a combination of things.  Mostly, weak oil prices that drove down equity prices along with the buck - it seemed that every time oil fell and equities dropped, gold rose.   Once oil bottomed out for the day at 26.05 and rebounded, equities slowly recovered as well, and then gold declined into the close.

In essence, it was primarily fear.  News flow right now is terrible; according to the news, banks in Europe are about to close their doors and bail-in their depositors, starting with DB, the largest bank in Germany.  Call me a bit of a cynic.  I came out of the 2008 crisis with a strong sense of the "crisis cycle."  Fear would spike, officials would react, fear would abate for a time and the market would rally.  So we are deep in the current fear cycle; we have yet to see an official reaction other than the opening gambit: "there are no problems here" - the "Official Denial" that serves to confirm the bad news.  I think we might get an official reaction this weekend.  I'm also seeing DB stock trading sideways on extremely high volume.  These guys haven't even begun to start playing their tricks; the most basic "manufacturing a short squeeze" trick hasn't even appeared yet.

Yesterday I wrote on the chart, "is this our gold correction?"  It turned out, yesterday's dip-that-was-bought was our clue pointing at breakout.  Gold simply refused to drop yesterday, even though it was very overbought.  My guess: the previous rally to the $1202 price level was not high enough above the 1192 high to have cause enough of the managed money shorts to bail out.   I'm betting after today's move, they are mostly gone now.

The usual danger with assessing the gold market through the eyes of the gold promoters is that they treat every large upside move as proof positive that - finally - "the physical markets are taking over", proof that "gold is finally running out", "the manipulators are on the run" in a "managed retreat" because "gold is moving from east to west" and "if not for constant paper gold selling, gold would be at $5000 today."

(See, I can be a gold promoter too)

Ok, so is there any evidence of a big-bar shortage?  HAA has 400 oz bars for 1.87% above spot in NYC, and 1000 oz silver bars for 3.37% above spot.  No.  No big bar shortage.  Silver eagles?  18.7% above spot.  No retail shortage either, although YMMV.  Gold isn't running out - at least not today.

There is no evidence that this is a "gold has run out" price cycle.  It appears to be a normal gold cycle driven by (my guess) Japanese and European buyers who are concerned about negative rates and their impact on the banking system, as well as US buyers who are worried about the impact of low oil prices on energy debt owned by the banking system.  Once again, the common denominator is banks.  I'm sure that the usual managed-money-short crush-fest put on by the commercials is abetting the strong move higher - never let a rally go to waste - just as those same commercials are now probably jumping in short at the 1240-1250 price level.  Banks again!

That said, I do believe the long four year downtrend for gold has ended - and ended fairly conclusively.   On the monthly chart below, we can see a clear breakout above the downtrend line.  The chart is an indication that the world markets may have awoken to the following: central banks, if they can't use negative rates without hosing their banking system, are fresh out of tricks.  Confirmation of this is seen in the big recent changes to the dollar-yen rate immediately following the imposition of negative rates by the BOJ.

So if the market has finally started to realize that the central banks can't fix the problem - where does the big money run and hide?  Turn out, its gold and core nation sovereign bonds.  And right now at least paper gold still counts as a safe haven.

When it comes to silver I'm still a "glass half empty" sort - silver can't even keep up with gold on a percentagewise basis, which is a pretty pathetic showing for silver during an uptrend.  Half of silver's price is industrial metal, and the other half is about money.  The "money" part is doing well, but the industrial part is pulled lower by falling oil and copper prices.  As a result, even on the good days, silver lags.  The gold/silver ratio jumped higher today, to 78.95.  That gives you a sense.

Gold was up around $40 by the time the US market opened; this caused the miners to gap up at the open.  During the day, the miners traded in a range, but ended up closing where they opened, printing a doji candle.  A high volume doji after a long rally is not the most bullish candle print.  (In fact, its a bit of a warning).  This tells me there was plenty of selling happening today - after the gap open, buyers and sellers were equally balanced.  GDX was up a huge +7.18% on extremely high volume, while GDXJ was up +8.79% on heavy volume but as I said, the entire gain today happened as a gap up rather than from new buyers pushing prices higher.

Platinum rose +2.75%, palladium climbed +0.30%, and copper edged lower, losing -0.20%.

The buck continued to fall today, losing -0.32 to 95.62.  The continued drop in the buck is keeping equities weak and is adding a bit of strength to gold.   The currently critical USD/JPY rate continued to fall, losing -1.03 to 112.45.  Dollar/yen is down around 8% since the BOJ went negative.  Money is basically fleeing back to Japan - and this seems to be helping gold too.

SPX had another bad day, losing -22.78 [-1.23%] to 1829.08, making a new low for this cycle.  Financials did the worst, with XLF down -3.06%.  Everyone now is officially worried about US banks and the effect that low oil prices will have on loan defaults at those banks.  All the stuff Chris and others were writing about shale and debt back in 2014 is now accepted as mainstream truth.  "But who could have possibly seen that coming?"  VIX rose +1.85 to 28.14, the highest close for the VIX since the August 2015 equity market plunge.

JNK fell -0.69%, making a new low for this cycle.  JNK has been the most regular performer during this downtrend, with each rally being sold in an almost picture-perfect cyclical downtrend.  Continued risk off signal from JNK.

TLT is now starting to go vertical, although not as dramatically as gold.  TLT rose +0.70% and made a new cycle high; it was up more than 2% early in the day but those big gains didn't last very long.  TLT is also signaling risk off, but like gold, it is also very overbought.

CRB fell yet again, down -0.89% and setting a new closing low for this multi-year commodity downtrend.

WTIC spent most of the day deep in negative territory, falling to hit 26.05 right near the "pit close" at 14:30 Eastern.  After the close, oil promptly took off, rallying almost $1.20 in about five minutes.  Eventually, oil closed almost even, down just -0.03 to 27.30.  Oil printed a dragonfly doji (doesn't that sound nice?) on heavy volume; thats a reversal bar, and it suggests oil might have actually put in a low today.  Even a modest rise in prices tomorrow will serve to print a swing low for oil.  Brent oil actually rallied on the day.

If oil bottoms soon, my guess is, so will equities, so will the buck, even those US bank stocks might bounce, and that will also - most likely - encourage gold to put in a top for this cycle.  When prices get very extended, they usually snap back after a time.  And right now, prices for gold and long bonds across the world are both quite extended and are thus ready to snap back.  Like any living thing, the market breathes in, and then out again.

So even though - long term - our central banker friends are now seen by the market to be out of standard tricks, that doesn't mean the markets will go on a one-way trip in a given direction.  Price will reverse for a time, for a variety of reasons - not the least of which is that the shorts want to ring the cash register on their big gains.  As Armstrong says, they are the only ones with the guts to buy at the bottom - because for them, its not about guts, its about gleefully ringing the cash register while laughing all the way to the bank.

Well maybe not the bank these days.  :-)

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5 Comments

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 764
The greatest trade that never was

I wonder if shorting the Yen via YCS is starting to become attractive again.  I've watched JGBD* (a Japanese government bond shorting ETF) and it never seemed to be any good.  Maybe now it's worth checking again.

*I just realized that JGBD is a Deutsche Bank product.  Maybe not the best time to jump in that one with both feet...

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5681
oil rally

Looks like yesterday's pop in oil has carried through to today.  Oil is up nicely, and that seems to be dragging the financial stocks up off yesterday's lows and putting some pressure on gold.

We'll end up printing a swing low for oil, SPX, JNK, and XLF if we close at these levels, as well as a swing high for TLT.   But with oil these days, you just never know.  It could all sell off in the last 30 minutes and all the moves could come unraveled.

Will the shorts want to remain short over the weekend?  Or might they be concerned about some sort of weekend surprise by our central planners?

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5681
JGBD: 3x ETFs

Hugh-

1) Those 2x and 3x ETFs are poison if you hold them for longer than a couple of weeks.

2) They contain swaps where a bank is your counterparty.  If that counterparty is DB, your JGBD may end up with big fat load of nothing if DB ends up being bailed-in.  Who knows where these swaps are on the creditor list.

3) There is barely any volume for JGBD.

newsbuoy's picture
newsbuoy
Status: Gold Member (Offline)
Joined: Dec 10 2013
Posts: 324
Caution Again

Be absolutely sure, that is absolute knowledge and understanding of, these inverse ETF's even holding them just afew weeks can get you into a hole and then you better be able to swallow. 

Test question: how and when do these reset?

If you don't know the answer stay away. 

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

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