PM End of Week Market Commentary - 2/26/2016

davefairtex
By davefairtex on Sat, Feb 27, 2016 - 12:47pm

On Friday, gold fell -10.90 to 1222.80 on heavy volume, while silver was crushed on very heavy volume, losing -0.45 to 14.69, smashing through its 200 MA and closing at the dead lows of the day.  For silver and gold, first notice day is Monday; every now and then, day before first notice can be particularly hard on the metals.  It was very hard on silver on Friday.

The dollar was very strong Friday; gold's losses were entirely a currency effect.  That's not true for silver.

On the week, gold fell -3.80 [-0.31%], silver dropped -0.46 [-4.36%], GDX climbed +1.69%, and GDXJ rose +0.85%.  Platinum was down -2.61% and palladium fell -3.33% while copper rose +1.66%.  PM continued correcting this week - except for the teflon-coated miners, which somehow managed to move higher.

This week gold formed a pennant pattern, broke out of the pennant to the upside, but the breakout now looks to be in doubt.  Gold is now hovering just above its 9 EMA, and broke momentarily below it on Friday.  The MACD momentum indicator executed a bearish crossover on either Thursday or Friday; the previous bullish cross occurred back in early December.    Looking back on the daily chart I notice that MACD has been a relatively solid indicator for gold's trend over the past four months.  This week's bearish crossover says we - more likely than not - will see lower prices in gold in the near future.  Of course I thought that would happen last week, and it didn't, but then again, there is the situation with silver...

Last week I was more than a bit concerned about silver based on a semi head & shoulders pattern.  This week, we saw a bearish MACD crossing on Monday and a close below the 9 EMA - the first danger sign, an ugly-looking failed rally on Wednesday, and a total collapse through the 200 MA on Friday.   Its not like silver wasn't giving us clues as to what would happen.  That first close below the 9 EMA was our clue, the rest were just piling on.

There were just no bidders on Friday, everyone just wanted out.  The only people buying late Friday afternoon were shorts ringing the cash register.  Most likely, we see lower prices next week.  Given the COT report, I see a re-test of the 13.75 lows as the most likely outcome in the next few weeks.

Miners

Miners scored a new high this week, the only PM component to do so.  On Friday, when silver was crushed, the miners had an unpleasant day but managed to close above that 9 EMA.  The MACD is showing signs of an imminent crossover, but it has not done so just yet.  If the selling persists on Monday, we will probably see an MACD crossover coincident with a drop below the 9 EMA.  Will the miners collapse the same way silver did?  My gut says no, based on the enthusiasm of the buyers over the past few months, but prudence would dictate caution.  If gold tips over and sinks, miners will probably follow.

The USD

The buck had a great week, rising +1.57 to 98.18, with most of the gains coming on Friday.  Friday saw the buck rise by +0.89, managing to squeak back above the 50 MA by a slim margin.  The move in the buck comes at the expense of the Yen, which appears to have topped out, a large drop in the Euro [-1.99%] and new lows for the Pound [-3.70%].  The pound is especially hard hit because of the chatter about BRExit.

Europe is surrounded by black swans, with each swan seemingly taking turns terrorizing the government in Brussels.  This week they came as a tandem; the significantly increased chance of BRExit alongside the migrant issue.  Negative rates at ECB cannot solve either problem.  The current "solution" to the migrant issue ("close the borders and let them rot in Greece") itself presents an existential issue.  There is both a near term deadline and a cranky bunch of Greek politicians which, if they end up as simply as a migrant holding pen, could react by leaving the EU and presumably defaulting on their debts to the ECB.  It is possible that after enough second-class citizen treatment, Greek citizens could come to see EU membership as a negative thing.  It is hard to know what will be enough to push them over the edge.

Still, it is clear there cannot be a repeat of last year's migration, and there's no other option on the table.  Erdogan of Turkey is probably overplaying his hand.  Europe will eventually do what it must, and once it does, I suspect Frau Merkel will not forget his "help."  And BRExit - the danger is, the people in England actually have a vote, and significant players in the Tory government have declared they will support Vote Leave.  Nigel Farage, having started all this, now finds his message co-opted.

The impact is seen in currencies - namely, the pound and the Euro both get hit hard because of the uncertainty.  Probably, capital flees Europe and England for the US.

On Friday, gold dropped in dollars, but gold in both Euros and Yen was unchanged on the day.  In fact, gold in both Euros and Pounds made new highs this week.  Here's the gold-in-Euros chart.  It looks substantially stronger than the Gold/USD chart.  If you thought BRExit was a possibility and/or the Shengen Area was coming to a close, you might just swap your Euros for gold too.  Especially if they were eliminating cash.

US Equities/SPX

US equities moved higher off last week's weekly-chart swing low, climbing +30.27 [+1.58%] to 1948.05.  The move higher has been a bit rough, but from what I can tell the rise in oil prices has been critical to the rise of the equity  market.  The market has gone from seeming willful ignorance of the shale ponzi to a laser-like focus on the subject.

While we'd all like to imagine that Just Desserts will be served to the market for ignoring price/earnings ratios for so long, the job of the charts is to potentially rescue us from our emotional involvement in the outcome.  What is the SPX chart telling us?  Well, this week we had a confirmation of the double bottom pattern by a very slim margin.  This invalidates one set of "lower highs", but the close above the previous high was not a conclusive move.  However if you are short, be careful.  A double-bottom pattern is a strong one, and if I were short, any strong move above 1950 would get me to cover.  Oil moving higher probably does this nicely.

What are the sectors telling us?  If you look at the sort order, it looks like more of a return to risk.  Financials are still lagging, but homebuilders and discretionary are near the top of the list.  The topping out of utilities is also a risk on sign.  Curiously, energy equities do not seem to be doing all that well.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Telecom XTL 4.74% -9.62% rising falling falling rising ma50 on 2016-02-22 2016-02-26
Homebuilders XHB 4.38% -13.85% rising falling falling falling ma50 on 2016-02-26 2016-02-26
Materials XLB 3.21% -18.20% rising falling falling rising ema9 on 2016-02-24 2016-02-26
Cons Discretionary XLY 2.87% -1.31% rising falling falling falling ma50 on 2016-02-25 2016-02-26
Industrials XLI 2.20% -8.78% rising falling falling rising ma50 on 2016-02-17 2016-02-26
Healthcare XLV 2.08% -7.03% rising falling falling falling ema9 on 2016-02-16 2016-02-26
REIT RWR 1.98% -5.09% rising falling falling falling ma50 on 2016-02-26 2016-02-26
Gold Miners GDX 1.69% -10.83% rising rising falling rising ma200 on 2016-02-04 2016-02-26
Financials XLF 1.62% -12.44% rising falling falling falling ema9 on 2016-02-25 2016-02-26
Technology XLK 1.48% -4.18% rising falling falling falling ma50 on 2016-02-25 2016-02-26
Energy XLE 0.74% -27.40% rising falling falling rising ma50 on 2016-02-26 2016-02-26
Cons Staples XLP 0.49% 3.19% rising rising rising rising ema9 on 2016-02-12 2016-02-26
Utilities XLU -0.06% 2.76% falling rising rising rising ema9 on 2016-02-26 2016-02-26

Gold in Other Currencies

Gold in XDR stayed even; in Euros and Yen it rallied, in USD, RUB, INR, and BRL it fell.  Perhaps gold itself didn't move at all - it was the currencies that rotated around the yellow metal this week.

Rates & Commodities

Bonds (TLT) fell on the week, losing -0.45% - not surprising given the strength in equities.  TLT has dropped below its 9 EMA, and it now feels as though it may be entering a correction.  This is the second time TLT has dropped below the 9 EMA.  This suggests risk on.

JNK rallied strongly this week, up +2.13%, managing to close above its 50 MA (first time in 3 months) as well as closing just above its previous high.  This second event, which also happened on Friday, suggests that the daily-chart downtrend for JNK is now over.  While that was hard for me to believe, that's what the chart is saying, and if junk debt really does start to see serious buying, that would be a distinct sign of "risk on".   I was actually thinking (independently of the JNK performance) of picking up some 9-year offshore driller debt yielding - are you ready? - 16%.  If oil pops back to $60, that debt should be ok.  Theoretically anyway.

Pulling back to the weekly chart, JNK really is starting to confirm the reversal signal.  Weekly MACD is quite close to a bullish crossover, and the swing low from last week does look convincing, much more so than any previous moves in JNK over the last few years.

The CRB (commodity index) rose +1.28%, more or less chopping sideways with a modest upward bias.  CRB is up off its lows, and if it manages to continue in this direction for a few more weeks, it should find itself above the 50 MA, which would be nominally bullish - except its hard to look at the CRB chart and see much bullish about it.  I think the best we can hope for right now is for the beatings to stop.

March WTI Crude (CLJ16) rose +0.88 [+2.75%] to 32.84, continuing oil's price recovery over the past two weeks.  The large daily price moves are slowly starting to abate.  On Friday we got a brief hint of good news - price rallied above the 50 MA for a time, but then sold off, suggesting a failed rally.  Next week may prove to be decisive.  If oil can close above 34 - its recent consolidation - that would be bullish.  If oil can close above 36, I think oil will be off to the races, equities will jump dramatically higher, as will junk debt.  The shooting star is a warning sign, however.  If we see a renewed move lower in WTIC, gold most likely comes roaring back and the equity market probably tips right over and sinks.

Can oil continue to move higher without Saudi Arabia taking action?  It might, if we start to see some real declines in production.  Just this week, both Continental Resources and Whiting Petroleum - large shale producers - announced they were halting all completions in the Bakken.  That's a start.  Its not a permanent reduction in activity, but now the decline rates in Bakken will start to really bite: 56% annual decline rates on the 1.1 mbpd mean a drop in production of 600k bpd per year.

The shale guys finally blinked.  "We really aren't profitable at WTIC = $32."

Physical Supply Indicators

* Shanghai is now trading at a discount: -0.03 vs COMEX.

* The GLD ETF tonnage on hand rose a huge +29.44 tons, with 762.44 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 1224.9 and silver 14.74.

 PHYS 10.11 -0.01% to NAV [up]
 PSLV 5.77 +1.97% to NAV [down]
 CEF 11.74 -6.97% to NAV [down]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) showed no particular sign of premium for gold, but offers for silver were a good 20-30 cents above the COMEX market close.

* HAA big bar premiums are higher for gold [2.27% for 100 oz bars in NYC], higher for silver [3.79% for 1000 oz bars in NYC].  Silver Eagle premiums fell [19.13% in NYC].

Futures Positioning

COT report covers trading up through February 23rd.

During the coverage period, the gold commercials added +24.2k shorts and dropped -6.9k longs.  Based on the failed rally on Wednesday, I am pretty certain that the commercials are fully loaded up short by now.   Managed added 15.2k longs and dropped -12.9k shorts.  Managed money shorts are now largely gone, and they are not far from being overdone to the long side.  The gold COT report suggests the high is in, more likely than not.

In silver, commercials added +4k shorts, piling danger on top of danger.  I thought it was ominous last week, and its worse this week.  Managed money dropped -1.3k shorts and added 1.9k longs - at just the wrong time, as always.  Silver COT suggested the top was in last week - and this week silver sold off hard.  The timing is usually not quite this perfect.  Normally it takes a few weeks before the pressure becomes too much.  Possibly, silver's weakness during the rally made the shorts more enthusiastic and the longs more tentative.

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

Both platinum and silver are looking unhappy.  Gold and the miners still seem to be in good shape.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Senior Miners GDX 1.69% -10.83% rising rising falling rising ma200 on 2016-02-04 2016-02-26
Junior Miners GDXJ 0.85% -5.57% rising rising falling rising ma200 on 2016-02-05 2016-02-26
Gold COMEX.Gold 0.63% 3.10% rising rising rising rising ema9 on 2016-02-23 2016-02-26
Silver Miners SIL 0.00% -20.50% rising rising falling rising ma200 on 2016-02-17 2016-02-26
Platinum COMEX.Platinum -3.23% -22.08% falling rising falling rising ema9 on 2016-02-25 2016-02-26
Silver COMEX.Silver -4.45% -11.64% falling rising falling rising ma200 on 2016-02-26 2016-02-26

Gold Manipulation Report

There was one "after hours" spike in silver on Monday - I didn't catch it earlier - for 12 cents around 3am Eastern - or around 08:00 GMT.  That drop was retraced over the next couple of days, so its not clear if this move ended up changing trend, however it did result in an MACD crossover on that day which may have affected sentiment.  Its hard to know if the one thing drove the other.

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 took a dramatic leap higher, closing up +3.39 to 83.27, the highest weekly close since Nov 2008.  GDX:$GOLD was flat on the week, but still looks bullish.  GDXJ:GDX rose, and now looks perhaps short-term neutral.  The high gold/silver ratio is the clearest sign of a flight-to-safety rally in PM.

COT report shows that gold is probably now in the danger zone, and silver moved in even deeper.  We got our spike up to hose the last of the managed money shorts on Wednesday - stopping them out, while giving the commercials the opportunity to go short themselves.  COT last week said: "silver leads gold lower."  We got the silver move - now we wait to see if gold will follow, or manage to avoid moving lower on the strength of buying in the Eurozone.

Gold and silver big-bar physical shortage indicators shows a mix once again; in the west, ETF premiums generally fell, but GLD tonnage rose substantially, and gold remained backwardation at COMEX.  Big bar premiums for gold at HAA were higher.  Very slight discounts were observed in Shanghai.  Overall, big bar gold does not look to be in short supply.

So from last week's pressure list, what happened?

COT top in silver came true in spades.  Gold yet to be determined, although gold COT plus MACD suggests it may be on the way.  Watch 9 EMA for clues.  Dollar strength hurts gold - but only gold priced in dollars.

Oil is steadily working its way higher, regardless of oil builds at Cushing and Saudi oil minister commentary.  This has provided a bid under the US equity market, and pushed junk debt from "daily downtrend" into "daily neutral" mode.

Europe still has its bad-bank issues, and now has the BRExit uncertainty and a near-term migrant crisis which has managed to split Austria and Germany apart!  Whoever planned this whole migrant deal, if their goal was to destroy the EU - hats off to them.  They now have issues the ECB can't fix.  "Whatever it takes" from Draghi will not make the migrants stop coming, or keep the UK in the EU.  Not all issues can be fixed by printing money, it turns out.

Tug of war continues; a cycle top in PM kicked off by silver plus a fits-and-starts rally in oil, versus the incipient chaos in the Eurozone that is providing a clear bid under gold when measured in Euros or pounds.  Perhaps it boils down to this: watch gold's 9 EMA.  That will give you a clue as to who is winning the tug of war.

Last week, computer said: long gold, short silver, long copper, long USD, long SPX/DJIA, long crude, short miners.  Computer was 5 for 7.  This week, the computer says: short gold and silver, no opinion on copper (data didn't update), long SPX/DJIA and crude, long miners - but perhaps 50/50 on the miners.

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6 Comments

Brunel's picture
Brunel
Status: Bronze Member (Offline)
Joined: Jul 26 2015
Posts: 28
Gold/Silver ratio

Dave - your PM reports are incredibly useful and insightful, one of the best parts of this site for me!  In regard to the leap in the gold/silver ratio, is this something you attach any great weight to?  Other market commentators always seem to jump on it as a reason to buy more silver - but conversely it could indicate that gold has become over-priced.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
gold/silver ratio

Thanks Brunel.  You are a very insightful person to enjoy my reports so much.  :-)

For me, I've been using the gold/silver ratio as a sign that we are in a "flight to safety" move.  Its not a specific "buy silver" timing signal, although it does say silver is undervalued with respect to gold.  Gold/silver ratio did hit 100 back in 1991, according to my memory....let me see...

It looks like every big spike higher in the GSR has been a fairly reliable silver buy signal over the decades.  Knowing when the peak is, now that's the trick to getting an actual buy signal.  In 1990, the peak could have been seen to be at 80 - but GSR still had another 20 points to go before topping out.

Can we say "anything above 80" is a buy?  Mostly that's true.

So is silver undervalued or gold overvalued?  You could do a paired trade and not care.  Long silver/short gold.  Its been a widowmaker since 2011, but I suspect eventually it will pay off.

Gold seems to receive a premium during times of discord possibly because its a lot less weight per unit of value.   Try swimming the Rio Grande with $60,000 in silver.  If that fear ever fades, the gold/silver ratio will probably plummet.  My guess is, that will be because gold will drop, and silver might stay the same.

GSR just tells me "flight to safety" (i.e. the 2008 experience) vs the 2011 commodity-up/dollar-down PM rally.

We also have negative rates, eurozone breakups, and China/India doing their gold buying too.  So it is 2008, but with some extra wrinkles.

For me its not a "buy silver" signal.  Not yet anyways.  But I think the long silver/short gold trade will do very well at some point.  If I knew when...

thc0655's picture
thc0655
Status: Diamond Member (Offline)
Joined: Apr 27 2010
Posts: 1517
Here's another strategy for the GSR

How about this?  Buy 20 oz of physical gold when the GSR is at one of its lows.  When the ratio reaches a high, trade the gold for silver based on the ratio.  Again, when the ratio falls to a low, trade all the silver back into gold.  This way you keep adding to your stash of precious metals without spending any more USD$.  And this method beats "buy and hold" (silver or gold) by a country mile.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
straw hats in winter

Tom-

I like your strategy - swapping something dear for something that is (relatively) cheap.  And you don't have to worry about changing your PM allocation.

FWIW, if/when the Martenson Prediction for the next Fed action (i.e. QE for Main Street) comes to pass, that might well make that gold/silver ratio reverse in a hurry.

Thing about silver is, it doesn't have all these Chinese and Indian people buying it to the extent gold does.

However in compensation, there is definitely a lot less of it floating around out there relative to value.

And once the retail public decides to get involved, man, those premiums in high-demand form factors will go nuts.  Pa Kettle won't be able to afford gold coins, but they'll want in on the silver thing.  Having some inventory lying around to re-sell to your local coin shop at a 50% premium over COMEX might be fun.  And if GSR drops to 20...why that's your chance to swap all that nasty, heavy silver for pretty lightweight gold.  Wow, a four-bagger, with PM allocation unchanged.

Again, that's why I say we won't run out of either metal.  But - wouldn't it be nice to be a seller of premiums instead of always being a buyer?

Great concept Tom.

Quercus bicolor's picture
Quercus bicolor
Status: Gold Member (Offline)
Joined: Mar 19 2008
Posts: 456
The swap - practical matters

So you go down to you bank, take a few or many gold coins out of your safe deposit box, take them down to your local gold dealer, swap them for silver (about 4.5 gold eagles = 1 $500 bag of junk silver or 360 silver eagles), go back to the bank and .....  looks like it's time to rent a bigger box!  Better keep that in mind.  You just turned a few ounces into 25 pounds or so.

I'm not saying it's a bad idea, just that it's something to keep in mind. 

Imagine doing that with $100K in gold.  You turn 80 or so coins most of which you could fit in you pockets without fear of ripping through the bottom, into 22 bags of junk silver - over 500 pounds.  No safe deposit box is that big.

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

QB-

Imagine doing that with $100K in gold.  You turn 80 or so coins most of which you could fit in you pockets without fear of ripping through the bottom, into 22 bags of junk silver - over 500 pounds.  No safe deposit box is that big.

Yes.  That's exactly why gold commands the premium right now.  Storage.

Junk silver is problematic for sure.

But if you can overcome the practical details somehow, I think its a money-maker.

One option is buying allocated, specific items from HAA or some other reputable site, and having them store it for you until the GSR drops appropriately, take delivery, and then execute the swap for gold.  That way you don't have to do the storage yourself, but you still get the physical goodies so you can trade them with your friends.

Barter transactions are taxable events, of course.  That's another practical matter.

Hmm.  I think I might have just talked myself into a trade.  :-)

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