PM End of Week Market Commentary - 2/19/2016

davefairtex
By davefairtex on Sat, Feb 20, 2016 - 4:52am

On Friday, gold fell -4.70 to 1226.60 on moderately heavy volume, and silver dropped -0.07 to 15.35 on heavy volume.  PM basically went nowhere, a very quiet end to an eventful week.

On the week, gold fell -11.90 [-0.96%], silver dropped -0.44 [-2.75%], GDX lost -2.44%, and GDXJ dropped -0.88%.  Platinum was down -1.79% and palladium fell -4.55% while copper rose +2.29%.  It was a week of retracement for PM.

Gold made no progress this week, and in fact spent much of the week recovering from a sell-off.  In looking at the weekly chart, I was struck by a similarity in a topping pattern that occurrred last year around the same time.  A high, followed by a red hammer candle, which led to a six week sell-off.  Last week we saw the top, this week the red hammer candle.  Will next week bring the large sell-off?  Its a real risk, especially given the extended weekly RSI-7 value of 76.

Like everything else, gold moves in cycles.  I wouldn't be going long here.  I'm sure there are a hundred reasons why we're just about to run out of gold (it's moving from west to east, you know, and there are only fifteen ounces left at COMEX, etc) but when I look at the chart, it just looks toppy.  If we close our ears and ignore "mainstream goldbug news" with all the emotion they bring and instead we just look at prices, doesn't it look toppy to you?

No progress for silver this week either; in fact, silver has fallen substantially from its high.  Still, silver is clinging to a spot just above its 9 EMA, so it still remains in a nominally bullish position.  However the chart just does not look as though it is setting up for anything positive.  In looking at how the previous rally collapsed, the signal was a close below the 9 EMA.  The first drop below 9 EMA was a warning, and the next led to a seven-week selloff.  Since silver has been unable to make a new high during the course of this rally, I suspect it will lead us lower this time around.  Silver has yet to change trend, unlike gold.

Miners

As fantastically as the miners have done over the past five weeks, the momentum in the mining shares appears to be fading.  This week there was a whole lot of volume and some big price moves, but by end of week, the miners closed lower than they did last week.  The RSI is telling us a story: even though we had a higher close this week, the momentum has definitely slowed way down, and this "bearish divergence" sometimes appears at a top.

The 9 EMA has provided support all during the strongly-trending five week miner rally.  I'm guessing that a close below the 9 will signal a miner correction.  This is not to be confused with a minor correction.

The USD

The buck rose +0.62 to 96.60, but it was unable to move back above any of its moving averages, and on Friday it dropped -0.36 and printed an inverted hammer candle after making a new high.  This looks relatively disagreeable if you are long the buck.  Longer term, the trend for the buck is down.  If it continues lower, that should help gold.

For those that imagine the dollar/yen rate determines the price of gold, note that the Yen climbed +0.57% this week, while gold fell -0.96%.  The correlation is there sometimes, and its not there other times.

US Equities/SPX

US equities did well this week, rising +53.00 [+2.84%] to 1917.78 and printing a weekly swing low.  The equity market could be in the process of forming a double bottom; to confirm, it needs a close above the previous high of 1947.20.  The close on Friday was relatively bullish; SPX sold off early, rallying back within a few hours and retaining those gains into the close, printing a bullish-looking dragonfly doji.  The bank stock index actually closed green.

VIX fell -4.87 to 20.53.

What are the sectors telling us?  If you look at the sort order, it looks like somewhat of a return to risk.  Financials are still lagging, but homebuilders and discretionary are near the top of the list.  But from the standpoint of the moving averages, it looks like a rally during a downtrend.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Telecom XTL 6.12% -12.81% rising falling falling falling ema9 on 2016-02-12 2016-02-19
REIT RWR 4.47% -8.06% rising falling falling falling ema9 on 2016-02-17 2016-02-19
Cons Discretionary XLY 4.23% -2.57% rising falling falling falling ema9 on 2016-02-16 2016-02-19
Homebuilders XHB 4.18% -17.80% rising falling falling falling ema9 on 2016-02-16 2016-02-19
Technology XLK 3.54% -4.76% rising falling falling falling ema9 on 2016-02-16 2016-02-19
Industrials XLI 3.32% -10.61% rising falling falling falling ma50 on 2016-02-17 2016-02-19
Energy XLE 2.77% -29.32% rising falling falling rising ema9 on 2016-02-12 2016-02-19
Healthcare XLV 2.42% -7.44% rising falling falling falling ema9 on 2016-02-16 2016-02-19
Financials XLF 2.39% -13.20% rising falling falling falling ema9 on 2016-02-16 2016-02-19
Materials XLB 2.03% -21.00% rising falling falling falling ma50 on 2016-02-19 2016-02-19
Cons Staples XLP 1.54% 3.42% rising rising rising falling ema9 on 2016-02-12 2016-02-19
Utilities XLU 1.40% 1.94% rising rising rising rising ema9 on 2016-02-18 2016-02-19
Gold Miners GDX -2.44% -10.52% rising rising falling rising ma200 on 2016-02-04 2016-02-19

Gold in Other Currencies

Gold retreated slightly in most currencies this week, but the move lower was quite modest.  Gold in XDR fell just -2.53.

Rates & Commodities

Bonds (TLT) fell this week, down -0.38%, a relatively modest loss given the sharp rise in equity prices.  That's because TLT executed a reversal on Thursday, rallying sharply.  Still, the future of bond prices probably depends on that possible double bottom in SPX.  Right now, I'd rate TLT as giving off "no signal" in terms of risk.

JNK rose +1.19% this week and printed a weekly swing low. JNK is signaling risk on, at least right now, however I do not take the swing low very seriously.  JNK has printed one perhaps five or six times in the past year which has led to nothing.  I need to see a close above the weekly 9 EMA before I start to think about a rebound in junk bonds.

The CRB (commodity index) fell -0.45% on the week; commodities are more or less bouncing along the bottom, and they remain in a downtrend.

WTIC continued moving higher this week, rising +2.94 [+10.13%] to 31.96.  That sounds pretty exciting, except that $2.20 of that gain came from the monthly contract roll from March futures to April.  With futures in steep contango, its a little harder to determine just how much price moves in the week that a roll occurs.  To fix this, I'll show a chart of March crude rather than $WTIC, which is stockcharts symbol ^CLH16: CL = "WTIC light sweet crude oil future", H16 = "contract expires in March, 2016."  You can see that march oil has yet to break above its downtrend line, but it is seeing a "bullish divergence" in the RSI, which means downside momentum has slowed substantially, and that sometimes happens at the lows.   You can also see that volume in CLH16 has almost vanished; that's why the contract roll happened.  Open interest and most of the active trading has moved to April.  March (CLH16): $29.72.  April (CLJ16): $31.96.

As always, if oil can put in a low - or even chop sideways - SPX will probably continue moving higher, so will JNK, and that will probably hurt PM.

The oil low depends on a political decision by Saudi Arabia.  You may imagine that "price charts can't predict political decisions" but that is only true if the information doesn't leak out.  If you had foreknowledge of such a decision, you - or your deep state organization - could make a killing if you bought the right things in advance of such a decision.  And those pre-decision buys show up in price charts.

The short term open interest in crude - just for the WTIC contract - is a billion barrels.  Thats a billion dollars per $1 move.  That's a fair amount of money, but it is dwarfed by the oil major equities, which are maybe another couple trillion dollars in market cap.  That's where the real money is.  Scoop up 10% of these equities, and you make 50-100 billion in gains if you get the timing right.

Actions of the deep state show up in price charts.  At least that's my belief anyway.

Physical Supply Indicators

* Shanghai is back, and gold is at a premium there: +2.79 over COMEX. 

* The GLD ETF tonnage on hand rose a big +22.01 tons, with 732.96 tons remaining.

* Gold remains in backwardation, with the spread in the first two contracts at -0.10.

* ETF Premium/Discount to NAV; gold closing of 1238.50 and silver 15.75.

 PHYS 10.125 -0.26% to NAV [down]
 PSLV 6.04 +2.24% to NAV [up]
 CEF 11.96 -6.87% to NAV [unch]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows no particular premiums for gold, but a 2% premium for silver in Toronto.

* HAA big bar premiums are lower for gold [2.02% for 100 oz bars in NYC], lower for silver [3.59% for 1000 oz bars in NYC].  Silver Eagle premiums rose [19.77% in NYC].

Futures Positioning

COT report covers trading up through February 16th.

During the coverage period, the gold commercials added +33.5k shorts and also added +6.4k longs.  Based on this rate of accumulation, we have another week or two until the commercials are fully loaded short. Managed money dropped -15k shorts and added +5.1k longs; the big $50 rally last week was mostly short covering by managed money.  Managed money is not quite in their danger zone either; they are probably a week and/or one more short-covering burst away.

In silver, commercials added +8.6k shorts, putting silver commercial well within the danger zone.  Sell!!!  Seriously, this current positioning of the commercials in silver looks quite ominous.  We can talk about "costs of production" until we're blue in the face, but if those commercials load up short, that's historically a terrible sign for price over the next few months.  And remember, some chunk of the "commercials" are actually mining companies hedging production.

Managed Money closed -6.1k shorts, and added +1.8k longs.  This brings managed money positions into their danger zone for silver also.

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

Moving averages show a happy picture.  Silver still lagging, but what's up with platinum?  It has been unable to rise above its 200 MA - and looking at its chart, it looks ready to correct.  On the positive side, a golden cross for gold is just a few weeks away.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Silver Miners SIL 2.98% -21.32% rising rising falling rising ma200 on 2016-02-17 2016-02-19
Gold COMEX.Gold -0.70% 1.93% rising rising rising rising ma200 on 2016-02-03 2016-02-19
Junior Miners GDXJ -0.88% -5.94% rising rising falling rising ma200 on 2016-02-05 2016-02-19
Platinum COMEX.Platinum -1.33% -19.63% rising rising falling rising ema9 on 2016-02-03 2016-02-19
Senior Miners GDX -2.44% -10.52% rising rising falling rising ma200 on 2016-02-04 2016-02-19
Silver COMEX.Silver -2.64% -6.15% rising rising falling rising ma200 on 2016-02-08 2016-02-19

Gold Manipulation Report

There were no meaningful "after-hours" spikes to report.

Summary

The reversals in many risk assets last Friday had some decent follow through all this week.  Oil struggled higher, SPX had less of a struggle and it too moved higher, junk debt staged a small recovery, and PM suffered.  SPX now looks poised to confirm a double bottom reversal pattern, which would be bullish for US equities.  It currently still looks like a bear market bounce, but if the market confirms the double bottom, that will look substantially better.

The gold/silver ratio rose again, closing up +1.45 to 79.88, the highest weekly close since the 2008 crash.     GDX:$GOLD faded a bit but still looks bullish.  GDXJ:GDX rose, and now looks a bit less bearish.  Overall the miners show slowing momentum, which is not ideal.

COT report shows that gold is perhaps a week away from an outright danger zone, while silver is there right now.  If things work out to the advantage of the commercials, then we should see one or two choppy weeks, with a final set of spikes higher to really hose the gold managed money shorts, followed by a decline thereafter.  Based on the COT picture, silver leads gold lower.  One confirmation of this story: last week's big gold rally was all about managed money short covering rather than managed money going long.

Gold and silver big-bar physical shortage indicators show a mixed bag again; in the west, ETF premiums were mixed, GLD tonnage rose, and gold remained backwardation at COMEX.  Big bar premiums for gold at HAA were lower.  Premiums were observed in Shanghai; about $3.  Overall, big bar gold does not look to be in short supply - at its current price anyway.

Here are the pressures I see:

  • COT report projects a top for PM in the near future; left to its own devices, the gold cycle tops out soon.
  • Oil low is inevitable, probably happens in the relatively near term,  but the timing is unpredictable.  A low in oil will cause an equity market rally, a junk bond rally, relief in the banking system, and it would reinforce a cycle top in PM.
  • European banking system is fragile, and the price signals we are getting from some bank equities are not at all reassuring.  If serious trouble occurs - and they may depend more on NPL-related issues - gold screams higher regardless of COT or oil.  "Bad Bank ECB" may ride to the rescue there.

And just for fun, I'll add in the end-of-week advice from my computer: long gold, short silver, long copper, long USD, long SPX/DJIA, long crude, short miners.

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23 Comments

Arthur Robey's picture
Arthur Robey
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The Origins of an Obsession.

Tellinger tells the tale.

 

http://www.gaia.com/seeking-truth#topic2

davefairtex's picture
davefairtex
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armstrong: near term gold

Armstrong is predicting the following:

https://www.armstrongeconomics.com/markets-by-sector/precious-metals/gold/gold-update-february-16th-2016/

Gold appears to be setting up to extend the counter-trend reaction into the first week of March. With back-to-back Directional Changes for the weeks of 02/08 and 02/15, the typical outcome is one of a choppy trend. Last week we got the high and this week may produce the reaction low. [It did.]  If this proves to be the case, then we should extend the rally into the week of the 29th. Overall, volatility should begin to rise over the next three weeks. So stay nimble and objective. If we rally into the end of the month, then we can still see a test of the 1309 area.

Put more simply - Armstrong says there is further upside for gold in the current move.

Woohoo!  :-)

But he also said that none of the price action so far has negated his call for one last move for gold sub $1000 before the eventual rocketship move happens in gold.

In other words, he sees the current rally in gold as a "counter trend rally" rather than a true change in trend.  Basically its a head-fake.  That's somewhat less of a woo-hoo.  I'm not sure what to think.  If its a head-fake, its a really big one.  But it certainly would serve the purpose of demoralizing almost everyone - first, the gold shorts, and then the gold longs - which is something the market seems to delight in doing.

mememonkey's picture
mememonkey
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Seems counterintuitive to me

I'm no  expert on chart voodoo, but it seems like the recent gold moves are pretty strongly correlated to the risk/volatility of late, and It doesn't appear to me that trend is likely to reverse given the direction things are headed.  Hard to imagine a near term scenario, where gold dips that far back down.

mememonkey

thc0655's picture
thc0655
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Itchy trigger finger

I'm lurking in the high grass waiting for gold at $1,020 and silver at $13.25. Never thought I'd be rooting for low prices in gold/silver. Also never thought I would've been able to accumulate so much before TSHTF.

davefairtex's picture
davefairtex
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how about this scenario

Step 1) Saudis and Russians get together and each cut 5% from oil production.  This happens immediately after CHK declares bankruptcy.

Step 2) ECB steps up to the plate and decides to act as a "bad bank"; Germans decide its a good idea to go along - to the shock of literally everyone - because it turns out, DB really, really needs a bad bank.

What do you think happens to gold?  It sure ain't gold positive, that much I know.  I could see gold 1100 about fifteen seconds after those two announcements.

Certainly its a temporary fix - we still have way too much debt, and China's big KaBoom is waiting to happen, but if both those things happen, the can will have been kicked quite a ways down the road.

CHS and I both like to quote Star Wars - in this case, Yoda:

  • "Do NOT underestimate the power of the Emperor, or suffer your father's fate, you will!"

We might imagine they have no bullets left.  I say, don't underestimate their creativity and willingness to double-down.

mememonkey's picture
mememonkey
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Thoughts on your scenario

Dave

Your overall point of not discounting the power of the 'emperor' is  of course a good one.  I've been re learning that lesson each year for the last eight years!   

That said, I would be very surprised to see a coordinated oil cut back 'rapprochement' between Saudi's and Russia given the existential stakes in the ME for the Saudi's around the Russian/, Shia alliance.  and the general Prisoner's dilemma that defines the  equation there.     More likely scenario for OIl to go higher, would be further war escalation, which would probably be net positive for gold on the risk factor.

As for step 2,  It feels like Central authorities  acknowledging the problem  with dramatic remedies  will do more to heighten angst around the viability of the system than it would  assuage fears.  Certainly it would make the problems more visible to the public at large, which largely seem somewhat oblivious still.

On a side note,  your scenario illustrates for me the problem I have integrating technical analysis as a predictive pricing tool other than within a narrow band of 'normalcy;  as the exogenous, political factors seem inherently unpredictable and outsized in their influence.

 

mememonkey

 

davefairtex's picture
davefairtex
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problems at different levels

If I had to guess, I'd guess that Russia's economy was more diverse than Saudi.  Which is to say, Saudi's influence and power stems almost exclusively from its oil.  A higher oil price is a bigger force multiplier for Saudi than it is for Russia.

So while they are currently at odds right now, I'd say that oil income trumps the scrap in Syria for them.  The stake in the struggle that Saudi has in Syria isn't existential, while continued low oil revenue is.

Again, its just a political decision.  Oil prices will jump higher, its just a matter of time.  And when it does, the pressure on the US banking system will be relaxed.  If the event happens at a time and place of the Saudi's choosing, they can make a whole lot more money off their side bets than if they simply let events take their natural course.

As for the second part, prices tell me that faith in central banking still exists in Europe.  (Its a bit wobbly in Japan).  You are only guessing that monetizing NPLs would heighten angst.  If you are wrong, gold tumbles.  It all depends on confidence.  Look at the Euro right now: its in a rough, medium term uptrend.  If the confidence issue was ECB-related, people would be fleeing the Euro, rather than just selling bank stocks and buying Bunds.  Price evidence is on my side on this one, I believe.

The scenario is a real one, and I actually give it relatively high odds of something like it happening.  We here at PP have a terrible record for assuming "the end is nigh" - me included - so now I'm trying to see what the guys on the other side of the hill are doing.  In a change from my analysis in prior years, I no longer assume things will simply proceed to their inevitable (and near term) doom without effective counter-measure attempts by our friends at Central Planning.

I think we have a big countermeasure spike on the way; it won't be helicopter money, but it will be something between standard QE and helicopter money.  Something that puts teeth in "Do everything it takes" - as long as DB benefits, the Germans will (probably) be behind it.

I just don't know the timing of when it will happen.  The more trouble DB gets in, the sooner it will take place - my guess anyway.

mememonkey's picture
mememonkey
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existential timing
davefairtex wrote:

If I had to guess, I'd guess that Russia's economy was more diverse than Saudi.  Which is to say, Saudi's influence and power stems almost exclusively from its oil.  A higher oil price is a bigger force multiplier for Saudi than it is for Russia.

So while they are currently at odds right now, I'd say that oil income trumps the scrap in Syria for them.  The stake in the struggle that Saudi has in Syria isn't existential, while continued low oil revenue is.

Dave,

I agree with your analytical philosophy here not discounting counter measures under the assumption things proceed unchecked.   And of course everything is about timing.  Malthus had the basic equation right but the timing wrong.

I disagree, that the issue for the Saudi's is not existential, You are correct, that they don't face imminent implosion but the 'scrap' in Syria with Russia,  is a key milestone, in the realignment of Shia and Sunni power. 

Last time I checked most of the Saudi Oil is in areas dominated by Shia populations.  The Saudi's are now actively fighting a two front war in Yemen and Syria, to control Iranian influence of Saudi based Shiadom. 

They are vulnerable to revolution, even more so as a consequence of  low revenues

I don't think you can discount the near term importance of a Shia ascent in the region   Russia is making this possible.

 

mememonkey

Mark Cochrane's picture
Mark Cochrane
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Low gold scenario

I though the standard last spike lower on gold scenario was when the system implodes again, say if DB or the Italian banks go under or any of a number of other financial disasters set off the derivatives bomb. Suddenly there is the mother of all margin calls and gold gets sold, not because banks and such don't want it but because they need capital 'now'. Price spikes down and then rockets higher because the fear factor really kicks in and everyone buys gold. Good luck trying to get any physical at those prices without paying a massive premium (though I would be trying!). Does Armstrong say it will go low gently or for a significant period of time?

Penny551's picture
Penny551
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"Imminent Collapse"

We here at PP have a terrible record for assuming "the end is nigh" - me included - so now I'm trying to see what the guys on the other side of the hill are doing.  In a change from my analysis in prior years, I no longer assume things will simply proceed to their inevitable (and near term) doom without effective counter-measure attempts by our friends at Central Planning.

Admittedly, I've been guilty of being in the "Imminent Collapse" crowd for enough years to -unfortunately- lose a good deal of credibility w/ some less informed friends/family.  I think a lot of us have underestimated the influence of TPTB to affect "markets" and keep the ponzi going.  We all know here that it WILL come to an end, but timing it seems to be a fools errand.  

More recently, my solution has been to keep the majority of assets positioned for the "big reset" and speculate w/ a small percentage of the rest based on the clear patterns we've seen over the past few yrs.  So based on more recent precedent, they probably will come up w/ another "can kick" and smack the metals lower and rally the "markets" a little in the short term. So short term, I'm using a little spec money (that I can afford to lose) to short the metals/GDX and be long a few stocks.  Several yrs ago I would have thought that was blasphemy, but have learned to take the emotion out of it put the extra earned "fiat" into the other forms of capital Adam/Chris talk about.

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davefairtex
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shia = Iran

http://www.pewforum.org/2009/10/07/mapping-the-global-muslim-population/

Iran is 95% Shia, Iraq 70%, and Yemen is 40%.

Saudi Arabia is 15%, Syria 20%, Turkey 15%.  Ultimately, the Shiites will not be able to govern Syria regardless of what Russia does, any more than the Sunnis could hold Iraq once Saddam fell.

I still don't see Syria as existential for Saudi Arabia.  That viewpoint sounds a little like the old "domino theory" reason for fighting in Vietnam.  The issue for SA is SA itself, and the price it gets for its oil.  The rest of the stuff is just a "would be nice" outcome.  If and when shale is destroyed, SA will be more than happy to bring oil prices back up again.

And a revolution in SA will not be a Shia revolution, not with only 15% of the population.  And I think US territorial guarantees for SA are still good, so Iran isn't really a threat to "carve off" the Shia population.  Plus the Pakistani nuclear weapons program that the Saudis paid for.  They're still good too.  Pakistan is Sunni, 85%.

Its all about oil, and its price.  And at some point, near term, it will bounce, unless we have some massive banking disaster in the meantime.  (And - would that be in the Saudi interest?)

It is possible that WW3 will start in the gulf with Russia and Turkey and SA and Iran all mixed up in there.  I think the more likely outcome is a bounce in oil, and an attempted rescue (somehow) of the DB and the Italian banks.

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davefairtex
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deleveraging gold

Mark-

Yeah, that dropping gold price is the "2008 replay" scenario.  That would be true for most commodities that are traded on a futures exchange, at least theoretically.  Glencore, DB, and/or other banks in trouble are potential candidates for causing this to happen.

In looking back at the charts, there were two distinct cycles of falling gold prices, once when the wave of commodity prices peaked in July 2008, and another that seemed to start in early October that led to a $200 drop in gold prices in just 10 trading days.  The deleveraging period was this second phase, I believe.

Gold actually spiked higher on the Lehman bankruptcy - from 750 to 900.  In looking back, I'm not exactly sure there was a specific driver for the October sell-off in gold.  Certainly everything else was selling off at the same time, and it did appear that gold bottomed long before most other things.  My guess: a whole bunch of banks were in deep doo doo at the time, so they were all selling whatever they could to raise cash.

Here's a pretty good timeline for the 2008 crisis: http://lauder.wharton.upenn.edu/wp-content/uploads/2015/06/Chronology_Economic_Financial_Crisis.pdf

 

mememonkey's picture
mememonkey
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Iran = shia

For SA. Syria, like Yemen,  is all about Iran,

Perhaps were talking about different time scales, but what I see is  a potential 'state' change, in the (liquid to gas sense) not domino theory.  Syria is critical to that. Furthermore, regardless of Assad's continued presence post 'peace' the Iranian influence will remain with whomever the nominal successor Russian client is.

I don't dispute the sectarian distribution numbers, I would argue that for SA the goal is to roll back Iran  who is credibly  vying to be the regional hedgemon,   it's about the Shia Crescent and the empowerment of the the disenfranchised Shia relative to the legacy power structures in the Mid East. and yes ultimately that is about Oil.

By your strict distribution numbers logic, Saddam could not have used the Sunni minority to rule over Iraq's Shia majority and the Assad's, a tiny Shia offshoot sect in minority Shia Syria, could not have held power all those years there.

It's about power, control, influence and the changing balance.  

Having said, that I don't disagree, that a revolution in SA is not the 'Shia taking over' per se,  The vulnerability is more analogous to the Arab Spring,  with  a variety of, constituencies, young people, radical Sunni Islamist including Al Qaida, and other flavors.

But a revolution is a revolution, and the strategic and geographic significance of the Shia there and in nearby Bahrain is important.  I could easily see the Shia obtaining autonomy  in the East if the Kingdom goes down to revolution.

Saudi Arabia's foreign adventures and stoking the fires of sectarianism  is aimed as much at their internal Sunni  foes, in attempt at diverting attention, co opting these constituencies  'negative energy' to retain control  domestically.  losing the fights they picked  would not play well domestically and could be a proximate trigger for internal revolt.

Iran has the potential to help foment and exacerbate that revolution.  Were not talking about Iran invading SA here. 

As to the territorial guarantees of the US  relative to an internal revolution. they would have about the same efficacy as our support of the Sha of Iran did relative to their revolution.   Likewise the nuclear option doesn't work as domestic crowd control. 

I'm curious since you brought up shale patch  being destroyed as a factor in turning down the pumps in SA,  do you reject Chris's take that due to the difference in Crude's and refining capabilities, the two grades are not actually competitive?  Or does the fundamental fungilbity of energy trump that distinction?

Having said all of that,  I don't dispute that at some point oil price may well jump, It is a relatively small marginal surplus.  Not sure if that will ultimately save the Saudis nor am I convinced that will save the banks either. Especially in light of the deflationary wave that just seems to have started.

mememonkey

 

 

 

davefairtex's picture
davefairtex
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XLF 2008 timeline

Trend is down in the US equity market, and in the economy, so that's what we have to look forward to going forward.  But in re-reading the 2008 timeline, I am reminded of just how dreadful the series of events were that happened during that period.

Its worth re-reading, just to remind us all how relentless all the bad news was during that time.

Compare it against what is happening right now.  Our central banker friends have not yet really even started trying.  I do think the pacing of this thing is a little faster, but if you look at how price has moved, we haven't even seen a "Bear Stearns" event yet.

XLF is off about 25% from its peak.  That has taken 7 months.  In 2008, that same thing took 9 months.  I've drawn in where that might be on the 2008 timeline and the performance of XLF - financial company ETF.

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davefairtex
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point by point

Perhaps were talking about different time scales, but what I see is  a potential 'state' change, in the (liquid to gas sense) not domino theory.  Syria is critical to that.

Yes.  I'm not talking grand strategy that plays out over the next 5-10 years, I'm talking what happens in the next few months.

Having said, that I don't disagree, that a revolution in SA is not the 'Shia taking over' per se,  The vulnerability is more analogous to the Arab Spring,  with  a variety of, constituencies, young people, radical Sunni Islamist including Al Qaida, and other flavors.

Right, ok.  My sense: SA's greatest protection against an internal Sunni Arab Spring are higher oil prices.  With oil profits, they can buy off their "variety of constituencies" as they always have.  Low oil prices are therefore the existential threat to the House of Saud - far more than some distant Sunni-Shia struggle in Syria.

Saudi Arabia's foreign adventures and stoking the fires of sectarianism  is aimed as much at their internal Sunni  foes, in attempt at diverting attention, co opting these constituencies  'negative energy' to retain control  domestically.  losing the fights they picked  would not play well domestically and could be a proximate trigger for internal revolt.

Sure, that's a theory.  Can you state a historical case where "losing the fights they picked" resulted in revolution?  Perhaps Bolshevik revolution?  That was after a 3 year war where lots and lots of soldiers died.  Current case is a pale shadow.  A counter-case is US in Vietnam: in America, as you no doubt recall, it was remaining in that war that caused internal revolt and it was the retreat from Vietnam that brought internal peace.  If they "declare victory and go home" as we did, it might all end happily.  Who can say?

Having said all of that,  I don't dispute that at some point oil price may well jump, It is a relatively small marginal surplus.  Not sure if that will ultimately save the Saudis nor am I convinced that will save the banks either. Especially in light of the deflationary wave that just seems to have started.

Again, planning the grand sweep of history - financial and geopolitical - is not my goal.  Who gets saved is irrelevant.  Whether SA can succeed is irrelevant.  I'm looking at a set of near term actions that taken together would spike gold down to 1000 in the next few months.  Actions taken would be believed to be in the near-term best interests of the players involved.  That's my case.  What actually happens, and what the ultimate success of the policy happens to be, is "above my pay grade" and outside the scope of the case I'm trying to make.

Saudi could decide to turn off the oil spigot for a variety of reasons.  Central planners could (and probably will) put forth a short-term plan to try and save DB and the Italian banks.  The two, together, might well bring a temporary semblance of calm to the marketplace that would cause a counter-reaction to the big gold spike higher we've just seen.  It happened three or four times during the 2008 crash.

It is possible - in fact, the more I write, the more I'd rate "something happening" in those two areas as probable - it just remains to see how those actions will end up affecting price of gold.

Armstrong has gold possibly topping out end of Febrary/early March.  That's the timeframe I'm talking about.

If such a thing transpired, I'd definitely "buy the dip" to 1000, much as Tom is preparing to do.  As to why he's hiding in tall grass - it's not like the little gold coins will flee in panic if they spot his approach.  :-)

FWIW, I sold my GC contract before market close on Friday.  Price action didn't look great.  I meant to go short silver, but somehow...trade didn't execute, much to my chagrin when I woke up today and saw it down.  That COT report definitely got me nervous.

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Silver below support: off -0.34 to 15.03

Silver has dropped below its "previous low" at 15.11...its dangerous when it drops below support like this...

 

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mememonkey
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final thoughts

One final thought on timing. 

We stand on the cusp of a potential  and imminent Saudi/Turkish invasion in Syria, that would in all likelyhood spike oil prices, even as it spikes gold. 

Even in the absence of an actual invasion, I don't see how you can entertain a 'near term'  pumping slowdown rapprochement scenario between Saudi's and Russia, in light of those recent developments.

Also  I am still curious about your position on Shale oil market share  as competitive to Saudi Oil market share  vis a vie Chris' position on the subject?

 

Ok with that  I'm going to take my geopolitical grand strategy crystal ball and go back home to the Neo Con thread before I start to feel too much like the proverbial geopolitical turd in the gold trader's punch bowl.

Thanks for playing though!

 

mememonkey

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Stalking gold $1,000

Like you say, you've got to try to take the emotion out of it.  I'm being stealthy, alert and most of all patient.  If I'm not, all I'll end up with is $1,190 gold or maybe a whole lot of nothing.  And, yes, I DO think the prey has seen my approach and scampered away up the price chart.  Most recently, I gave away my position to silver at $13.80 when I twitched and almost bought some.  I have to apologize to everyone here for scaring those little coins back up over $15.00.  Here's me stalking $1,020 gold and $13.25 silver:

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sphere of influence

Pretty clearly, Syria is within the Turkish sphere of influence, and quite outside the Russian sphere of influence.  Much as Russia claimed the Ukraine region as their backyard, so Syria is Turkey's backyard, and all those same arguments apply.  Turkey cares far more about the outcome there than Russia, and so they have more motivation to end up going to the wall for their objectives.  Is Russia equally as motivated?  Ultimately, I don't think so.

The case I would cite that I believe is on point is China & Korea, vs America and Korea.  China cared a whole lot more than we did; even though they didn't have the bomb, they were willing to go to the mat when the US invaded North Korea.  Presto: a shooting war between America and China on Korean soil.

However: the world did not come to an end.  America retreated, a compromise was struck, and then all was well, more or less.  (My reductive description of the Korean War).

So, nothing world-ending, AND SA and Russia definitely have a shared interest in higher oil prices, regardless of the other stuff going on.  US and Russia had tens of thousands of warheads pointed at each other, but managed to come to agreement on matters of common interest.

Regarding Bakken oil - what does google say?

Question
What is the API gravity of Bakken crude oil? Explain its relative quality.
Answer

Bakken crude oil gravity ranges from 36 to 44 degrees API. The quality of this oil is excellent, almost identical to WTI. The benchmark crude oil is West Texas Intermediate, which is 40 degrees API sweet crude. It is the benchmark because it requires the least amount of processing in a modern refinery to make the most valuable products, unleaded gasoline and diesel fuel.

Most of it sounds like the good stuff; no discount for light sweet crude.  All the refineries are happy to take that, supposedly.

There is a grade of oil called North Dakota Sour, but my reading of the articles suggest that the sour oil is in the minority.

There is limited pipeline capacity out of the region, and so the oil has to be shipped by rail.  If they sell oil FOB north dakota, there's a $7-$10 discount because of transport costs.

In googling around, I found a wiki that listed maybe 100 oil products.  Apparently, specific gravity and sulfur content are the two characteristics that matter.  You want a high specific gravity, and low sulfur.  WTIC has exactly that.

https://en.wikipedia.org/wiki/List_of_crude_oil_products

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The world's debt is alarmingly high. But is it contagious?
davefairtex wrote:

Trend is down in the US equity market, and in the economy, so that's what we have to look forward to going forward.  But in re-reading the 2008 timeline, I am reminded of just how dreadful the series of events were that happened during that period.

This article on debt levels seems relevant, even if the analysis is limited. 

The world's debt is alarmingly high. But is it contagious?

The fact that rich-country sovereign debt is not mentioned is unfortunate considering that gov't debt increased faster from '07 to '14 than any other category:

Source - McKinsey

But it has some good arguments regarding Chinese and other emerging market debt.

Some interesting parts (parsed together):

The world has continued to borrow hand over fist since the financial crisis, adding nearly $60 trillion since 2007 in the process of pushing the worldwide debt load to $200 trillion, or nearly three times the size of the entire global economy.

The potential for disaster depends on how contagious a new round of defaults would prove and whether writedowns in one part of the world could cause losses in others. 

Since 2009, the average level of private debt in emerging economies has gone from 75 percent of GDP to 125 percent, according to the Bank for International Settlements. Private debt levels in China and Brazil are now double the size of the national economy.  

Hedge fund billionaire Kyle Bass, who made a fortune betting against the U.S. subprime crisis, is telling his investors that China's state-owned banks may take losses upward of $3.5 trillion—four times more than what U.S. banks got hit with during the 2008 financial crisis.  

 The trouble is that no matter how much credit gets added to its economy, China's slowdown is inevitable. Adding leverage to an already leveraged system may only make the reckoning more painful.  

So long as China's government is willing to backstop the country's banking system—and so far all indications are that it is—there's little chance of liquidity freezing up like it did in  the fall of 2008 when U.S. banks started running out of money.

"As soon as a [Chinese] bank or a company looks at risk, the government will just swoop in. So it's the strongest link that matters." The problem, he says, is that China ends up pouring good money after bad, rather than investing in growth.

 [Moving beyond China,] more countries have floating exchange rates than in the past, giving them the flexibility to devalue in the face of a rising U.S. dollar. "That's made a tremendous difference," says Kenneth Rogoff, an economist at Harvard who has written extensively on the nature of debt. "In my opinion, floating exchange rates are the only reason Russia and Brazil haven't had a financial crisis yet."

Any attempt to forecast the risk of global debt crisis wouldn't be complete without revisiting one of the main culprits from 2008: the dreaded credit-default swap....Today, the total CDS market is a fraction of that inflated size, having steadily shrunk down to $16 trillion by the end of 2014, according to the Bank of International Settlements. Things may still go bad, but, like always, whatever goes wrong will be different from the last time.      Source

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swooping in

I used to believe that the whole swooping-in thing made it so that China was immune to debt issues.

"As soon as a [Chinese] bank or a company looks at risk, the government will just swoop in. So it's the strongest link that matters." The problem, he says, is that China ends up pouring good money after bad, rather than investing in growth.

Its actually worse than he lays out.  The money for the "swooping" has to come from someone.  If it is printed into existence, that's inflationary, and that hoses people and savers.  If it is taxed from someone, whoever it gets taxed from, loses.

Each lender in China expects to get paid back.  The government can either pay them back with tax money, or with printed money.

The current guess is that China will solve the problem with money printing.  If they do, that hits the currency, and that's why money is fleeing China right now.  Swooping will (probably) be paid for with printed money, and there will have to be a devaluation as a result.

So my sense is, money will flee China until the peg blows up.  Its not about Kyle Bass, its about a whole bunch of high end Chinese people who are fleeing in advance of the inevitable currency devaluation.

No contagion though.  Losers are anyone holding RMB, and most likely, regular people in China.  Anyone with assets does ok.  Such as gold, for instance.  If I were in China right now, I'd be converting all my RMB into gold.  I don't think there is any chance that China will allow any serious level of defaults that could lead to contagion.  They'll print instead, and they'll release the peg, and that will be that.

Just my opinion, of course.

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No contagion?

Dave,

If China devalues as you, Bass and a lot of others think is inevitable, isn't that effectively exporting deflation to the rest of the world? Won't many other currencies then devalue to maintain parity in the next great round of the currency wars as they try to avoid the deflation wave? Does the USD then swallow the tsunami again and get strengthened? Gold goes up in every other currency but USD. That lasts right up until the point that the US joins the race to the bottom by printing too and trying to send the problem right back to China...

Isn't this always the solution of Central Bankers? Sounds cliche.

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davefairtex
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contagion or contagion

From what I understand, some significant percentage of loan principal was stolen through corruption.  The stolen money has left (is leaving) the country to buy condos in Vancouver, London, etc.  Normally this fleeing money would cause the currency to fall, but China is intervening and propping the currency up, using their foreign currency reserves to do it.

Once the reserves run out, if the stolen money continues to flee, it will cause the currency to move big time.

What is left behind is the massive pile of debt, with a lot fewer productive assets than you would hope to support that debt.  Debt is therefore fundamentally unpayable; only choices are widespread default (currency wins, holders of cash win, but creditors lose, holders of real assets lose, deflationary crash ensues), or "swooping in" (currency loses, holders of cash lose, creditors get paid back in devalued RMB so they lose too, holders of gold and real assets stay win (they stay even), and no deflationary crash).

China won't be doing it because of some clever strategy.  They're doing it because they don't want to pick choice #1, so choice #2 is what's left.  And once they are unable to intervene to prop the currency up, that's when it will get interesting.  Will money flee even faster?  That I don't know.  It will depend on the rate of swooping, I suppose, and that all-important confidence.

The semi-panic repaying of all the dollar debt by Chinese businesses is also exacerbating the fleeing-money problem.  If I had a business in China and I expected the currency to move against me in the near future, I'd swap the (low interest rate) dollar debt for (higher interest rate) local currency debt as fast as I could.

As for exporting deflation, I'm not sure that's the right term.  Deflation is a contraction of money and credit; I don't see that is what they would be exporting.  They will be exporting lower prices via the exchange rate, that's for sure, and that will be a big problem for industry in other countries.

All the over-indebted nations have this same problem.  Do you pay down the unpayable debt by widespread default and a deflationary crash, or by swooping in, printing money, and rescuing everything that might lead to contagion/debt deflationary crash?

Its less of a cliche, and more of "which door do you pick?"

(A third door is what Japan picked: pretend for 20 years that the debt is still A-OK.  2 lost decades was the result.  They got deflation, just very, very slow deflation over 20 years; I worked there 20 years ago.  Prices for, say, a meal are cheaper now than they were 20 years ago.  Its a strange feeling.)

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