PM Daily Market Commentary - 3/2/2016

davefairtex
By davefairtex on Wed, Mar 2, 2016 - 11:48pm

Gold rose +7.80 to 1240.50 on moderately heavy volume, and silver climbed +0.13 to 14.97 on moderate volume.  Apart from some selling at the time of the ADP payroll report at 08:15, PM moved higher starting a few hours before the US market open and managed to keep most of its gains into the close.

Today seemed to be a day of rest after the big "risk on" move yesterday.  Junk debt retreated and treasury bonds rallied modestly, while equities staged a late-day rally assisted by oil.

Gold remains well bid.  Gold endured some selling in Asia and also immediately following the ADP employment report, but buyers appeared to buy the dip both times, finally pushing prices up to a high of 1245.  Today's rally in oil does not seem to have hurt gold at all.

Gold is slowly working its way towards re-testing the previous high at 1263.  It has worked off its "overbought" condition by more or less moving sideways (RSI-7 is now at at a relatively benign 64), and while the commercials have undoubtedly been loading up short all during the past week, the buyers appear to have them outgunned and outnumbered, at least for now.

GLD tonnage rose +2.37 tons to 788.57 tons today.

Without my noticing it, gold staged a "golden cross" a few days back: that's when the 50 MA crosses over the 200.  Its a bullish longer-term signal, and it should suck in some more buy-side interest from longer term traders.  Yay gold!

Silver is slowly working its way back up after Friday's big sell-off.  While silver did outperform gold for the first time in quite a while, it has yet to rise above that 200 MA.  Until that happens, the sellers will remain in control.  Any momentary weakness in gold will likely lead to a large sell-off for silver.  We could see another leg down to the 50 MA if gold falters.  Of course if gold breaks higher it will probably carry silver back through the 200.

Right now, commercials still seem to have the advantage now in silver.  Gold/silver ratio is 82.87, down ever so slightly, but I haven't seen the momentum change just yet for the ratio.

Miners appear to be in distribution right now.  GDX rose +2.59% on moderately heavy volume, while GDXJ climbed +2.84% on moderately heavy volume also.   Why do I say distribution?  Miner chart is now moving sideways, with alternating low volume up days, and high volume down days.  While GDX is back above the 9 EMA (and that's a good thing), today's rally only regained 50% of yesterday's loss.  That's not so good.  Overall, the pattern appears to be the big money unloading inventory to the crowd, which has stopped the upside momentum.  "Buy the dip" is still happening with the miners, but with reduced enthusiasm.  One more strong selling day for the miners and I think that's all she wrote for this cycle.

Like gold, the miners also staged a "golden cross" a few days back.  While we might be putting in a cycle top for the miners soon, the golden cross is quite positive for the longer term trend.

Platinum fell -0.40%, Palladium was up +0.12%, and copper finally broke higher, up 4 cents [+2.05%] to 2.19, breaking cleanly above resistance at 2.15.  This breakout started in Asia, but prices were pushed even higher during the US market hours.  I'm hearing chatter from China about lots of new credit being dumped into the system, apparently to cushion the 2 million jobs will be lost in the steel industry.  As you know we like to ignore the news, except when prices confirm - and copper is definitely doing that now.  This copper breakout should not be ignored.  Dr. Copper is up more than 25 cents since its January low.  A near-term China "problem" may be off the table for now.

The buck fell -0.14 to 98.22; it remains above its 50 MA and in a near-term uptrend.  The Euro decline may be slowing down, and the pound appears to have put in a low.  Perhaps the initial burst of fear from BRExit has run its course for now.  The AUD went nuts today, climbing +1.63%, more or less tracking copper.  A copper rally = AUD rallies too.  Both the AUD and copper bottomed out at roughly the same time back in January.

SPX rose +8.10 to 1986.45 today, with most of the move happening towards the end of the day.  Energy led, with XLE up a big +2.45%, and financials second at +1.10%.  The equity market did not seem to be affected by the ADP payrolls report - I'm not sure if this is foreshadowing for the NFP report coming Friday.  Maybe it just won't matter one way or the other.  If anything, equities followed oil more than anything else, but the influence was a bit muted today.  VIX dropped -0.61 to 17.09.  If you bought puts three weeks ago, you probably are not very happy.

TLT rallied today, up +0.41%, regaining just a small fraction of yesterday's big losses.  Bonds appear to be headed lower, having made a new low yesterday while smashing through its 9 EMA.  Today's very modest rally does not change this picture very much.  A move lower in bonds suggests risk on for equities.

JNK sold off today, falling -0.71% printing a Harami Cross candle pattern - big move yesterday, small move today.  This suggests a continuation of the trend, but not a particularly strong one.   Longs were ringing the cash register, but the volume of the selling wasn't overwhelming.  We'll know more tomorrow about trend.

CRB moved higher, rising +0.45% and moving ever closer to that 50 MA.  Commodities don't seem to be in any hurry to break out, but at least they aren't falling any longer.

WTIC oil (CLJ16) managed to break above its 50 MA for the first time since November, rising +0.84 [+2.48%] to 34.73.  This is a fairly big deal since the Petroleum Status Report at 10:30 looked at first glance to be an utter disaster, showing an inventory build of 10.4 million barrels, but demand for gasoline rose 6.9% y/y, a big increase in demand.  Oil immediately dropped after the report, but then rallied strongly spiking to 35.17 and making a new high for the cycle.  Oil kept most of its gains into the close.  Oil equities finally responded today; E&P companies did best, up +4.28% on the day.  Shale producers APA, CLR, and OAS were all up more than 8%.

Gold still seems strong, silver has yet to recover from last week's sell-off, and those miners look to be in distribution.  When the snap-back rally is 50% of the drop, and volume is lower, its not a great sign.  Maybe it is time to buy some GDX puts?  Crude is moving steadily higher, rising in spite of horrid inventory reports.  What do we conclude when the oil market rallies on what should be bad news?  That's bullish for oil, plain and simple.

So we have a breakout in copper, a steady short-term move higher in crude, and a slow recovery in commodity prices.  What picture does that paint for you?  An imminent economic collapse?

But gold sure still has a bid.  If this stuff were easy, we'd all be on the beach sipping margaritas.  It appears that the western gold buyer really is back!

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5 Comments

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

So since Chris posted his trade, I'll post one of mine.  It will probably go south immediately - that seems to be what happens when you announce what you are doing, but I thought it is potentially interesting in a larger context.

There's this offshore drilling company called Noble Corp (NYSE:NE); they have a fleet of 30 drilling rigs, and as you might imagine, they are having issues right now given the price of oil.  Who wants to drill offshore with oil at $34?

To make matters even more exciting, they have a fair amount of debt.  4.5 billion in debt, vs 0.5 billion in cash.  Book value for the company - those drill ships - is about 19 billion, while the current market cap is around 6.  NE is selling at a big discount to book value.  What's more, it is profitable this year.  Trailing P/E is 4.5.  And ships are booked for years at a time.  Problem is, drill ships are slowly rolling off contract, and they are starting to become idle.  So the income is trailing off, but the debt payments remain.  According to the forward P/E - they'll be lucky to break even in 2016, and in 2017 - if oil is still cheap in 2017, then there will be a problem.

So if all the ships are under contract, making those debt payments isn't a problem.  But if oil stays down at $34, nobody is going to rent a drill ship from Noble.

So normally if I thought oil might recover relatively soon, I'd just buy NE stock.  I did, and it definitely has done pretty well, at least recently.  But, there is also the debt.  Bonds.  What do they look like?

So yesterday I bought an NE 5.95% coupon bond due 2025 for about 51 cents on the dollar.  What does that mean?  For the next 9 years (or until NE goes bankrupt and stops paying), I'm going to get 5.95% / 0.51 = 11.67% on my money, each year.  And when the bond pays off - IF it pays off - I'll get 100 cents on the dollar.  So that's a two-bagger on the debt, and an 11.67% payment for 9 years while I wait.  Sounds awesome!  As long as NE doesn't go bankrupt.

Boy, 9 years is a long time to wait.

Of course if Noble goes BK, then they sell off the drill ships, and I get some number of pennies on the dollar.  25 cents, perhaps?  Its hard to say.  Maybe they restructure outside of bankrupcy, and I'll get some cash payment plus some equity in the "New Noble Corporation" in place of my debt.  But those poor equity holders will likely end up with zero.  So my downside risk is lower with bonds than if I bought shares.  And the payoff is pretty good.

This, then, is "buying distressed debt" and hoping for a recovery in the underlying situation.  Analysts think NE has about two years of time before they have to start thinking about bankruptcy.  My hope is, oil recovers before those two years are up.

It's a dice roll, but the payoff is pretty nice.

If the markets are true to form, me talking about this trade will cause oil to immediately tip over and sink...

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

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

the markets are true to form, me talking about this trade will cause oil to immediately tip over and sink...

I'm convinced GDX hasn't sold off yet bc I mentioned here last week that I had purchased a couple'a Puts.  You're welcome to everyone still long :)  

i really appreciate you sharing that though.  NE does seem to be in the early stages of a new uptrend on the weekly chart and a little overextended on the daily...at least based on the trading software I use. 

Great PM write up also!

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
COMEX, infinite money, no dogs

JimH-

Price of Gold is discovered in the paper Comex futures market today.  In this market there is really no limit on the number of contracts that the bullion banks can create at any point in time.. in other words, they can, if they want to, overwhelm any buying wave, at any point in time, with an equivalent, or greater, wave of paper shorting.   I am not saying that they always do this.. just that they can, and do at times, do this.  They can reverse the process once they get a wave of selling going by tripping stops.. so the tracks are often lost.. (right, WT?)   

Most people don't understand this as deeply as you and I Dave.  They kind of think of the Gold market like the stock market.. but it couldn't be more different.  The stock market is the dog.. and it wags a paper futures market.  In Gold, there is no primary market, in other words there is no market where price discovery takes place based on the trading of physical Gold.. in the Gold market, there is no dog.. only the tail wagging the dog.  It's so counterintuitive most people don't even get it.. very much like the story of how banks create money!

1) Yes, the benchmark price is set in the futures market, but that price is then modified by the premium at each location based on physical scarcity.  If London runs out of gold, then "physical gold loco London" trades at a premium to the benchmark.  So you are partially right, but you forgot the critical bit about the premium.  If the physical scarcity situation continues, the premiums will rise.  If the premium of gold loco London rises to, say, $40 above COMEX, the contribution of the physical aspect becomes much more apparent to price setting.

And I daresay, if gold becomes scarce everywhere, then the price at each physical location will diverge more and more dramatically from the COMEX price.

Things are substantially less "papery" than you imagine.

2) Regarding the ability of the commercials to overwhelm any buying wave at will -  I've seen this "overwhelm any buying wave" happen exactly twice - once at the top in 2011, and another time during the gold smash of 2013 - although the second case was more about pounding price through support versus overwhelming buying waves.  But that's exactly twice.

There are more frequent assaults at or near the tops of cycles, after the commercials have gone short and the buyers haven't been powerful enough to keep prices moving higher.  But thats more about buyers running out than it is about the all-powerful commercials overwhelming any buying wave.

Neither the "cycle top" assaults nor the rare overwhelming events should be permitted to happen.  But in terms of setting price, since those overwhelming selling waves only happen very occasionally, during the other times, which is the 99.9% case, this very-seldom-used power by "whomever" doesn't rule the roost, nor does it set the trend.  In combination with the physical premiums that happen during times of actual scarcity, the futures benchmark + loco premium seems to be perfectly fine.

Right now is a fantastic case in point.  Without a doubt, we see the commercials loading up short.  Likely, some number of them are actually miners hedging production.  But is gold sinking?  No.  Buyers outnumber the commercials, so gold is rising in spite of the theoretical ability of the commercials to overwhelm any and all buying waves.  In reality, I believe the cycle tops are more about buyers running out of firepower at a given price than it is about the commercials using their "infinite ability to generate contracts."

The whole case reminds me of people who say the Fed has infinite buying power, and they buy e-mini contracts - which suggests that the price of equities should never go down.  Problem is, in reality the Fed isn't willing to risk their balance sheet in that way.  Neither are the commercials, from what I can see, except once in 2011, and another time in 2013.

3) You say that there is "no dog" - no price discovery on trading physical gold.  So what?  Why must there be?  There isn't any price discovery on trading of any commodity.  Its all done in the futures markets.  That's true for oil, for copper, for cotton, wheat, silver, platinum, gasoline, and even for blessed crude oil.  They are, most of them, priced relative to a benchmark whose prices are "discovered" in the futures markets, where speculators provide liquidity and fundamental participants can hedge both production and consumption.

Airlines (famously, Southwest) bought gasoline futures to hedge their fuel costs.  That worked fantastically during the 2000s when gas prices were skyrocketing, yet Southwest remained profitable due to their futures contracts.  They could confidently sell tickets 6 months ahead, because their major costs were locked in.  Shale producers sell oil futures to hedge their production.  That act has kept a large number of them alive for over a year when by rights they should have died off.  Is the futures market doing its job?  You bet it is.

Do we hear any complaints from the participants that "the price of oil isn't set in the physical markets?"  Uh.  No.  But since goldbugs don't buy oil, they don't notice.  They think nobody needs to hedge gold prices.  That's because they don't consume gold, or produce gold, or have a big gold inventory they need to hedge against big price moves.

For instance, if I had a gold shop and I didn't want to carry risk, I'd be short gold to hedge against my vast inventory of gold coins, and I'd just be content to make money on the premiums.  If I had 10 million in inventory, that's 80 GC contracts short.  That way a $200 drop in the price of gold wouldn't mean I would lose $2 million, which would definitely wipe out any profits I made from my 3% premium for a very long time.  Properly hedged, I'd make back on the GC contracts the same as I lost on the inventory.  Or if I were a miner, I'd be short gold too, for at least a chunk of my production, for the same reason those shale drillers went short crude - to survive a price downturn.

Prices for commodities being set in futures markets has been true now for...well since the futures markets have been in operation.  I think Armstrong has evidence that says they first arose in Babylon, 3000 years BC.

So no, prices aren't set by the physical markets, not for gold, or corn, or wheat, or pretty much anything else whose price needs to be hedged from either by a producer, a holder of inventory, or a consumer.

Under a gold standard, no hedging was required, since the price was fixed.  With no gold standard, you need hedging to protect yourself from price movements.

Here's a question to ask your local coin retailer.  Does he hedge the value of his inventory in the futures markets, or is he naked long gold and silver?  And if the latter, how difficult has the last four years been for his P&L?  Imagine: he buys inventory at $1300, sells it three weeks later after a dip for $1200, and loses money on every trade.  How long could he afford to pay the rent?

Penny551's picture
Penny551
Status: Silver Member (Offline)
Joined: Nov 8 2012
Posts: 149
KMI Chart & Oil..

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