PM End of Week Market Commentary - 4/29/2016

davefairtex
By davefairtex on Sat, Apr 30, 2016 - 3:05am

On Friday gold rose +26.80 to 1294.90 on heavy volume, while silver climbed +0.29 to 17.89 on moderately heavy volume.  I believe the plummeting dollar (down a big -0.70 to 93.03) was the proximate cause of today's large gold rally.

This week, gold rose +61.20 [+4.96%], silver climbed up +0.86 [+5.05%], GDX screamed up a massive +14.34%, and GDXJ did similarly, up +14.51%.   Platinum rose +6.78%, palladium climbed +3.15% and copper was the laggard, up just +0.57%.  It was a superlative week for PM.

This week we saw two central bank announcements almost back-to-back.  The Fed ended up changing very little, which resulted in no appreciable moves in prices as they were not expected to make any moves this meeting.  This differed greatly from the outcome of the BOJ's almost identical announcement of no further action - market very clearly expected action out of them.  The outcome post-BOJ was a huge (5%) two-day rally in the Yen, and a concomitant two day drop in the buck.  Here's what that looked like on the dollar-yen chart.  While the move doesn't look all that dramatic, just imagine - everything in Japan (7% of the world economy) just got 5% more expensive over just two days.

The huge move in dollar yen caused (COMEX paper) gold traders to back up the truck - the first day saw a $21 rally, and the second saw a $26 move that blew gold clean through its previous high at 1287.  I said last week that gold needed some kind of catalyst to cause it to break higher: either some new emergency, or a big drop in the buck.  BOJ dutifully provided us with that big dollar drop by unexpectedly doing nothing, and the $60 rally in gold was the result.

This brings to mind one of my favorite quotes from the Tao Te Ching:

The Master does nothing, yet he leaves nothing undone. The ordinary man is always doing things, yet many more are left to be done.

Ok, so I'm not exactly comparing the BOJ to a master sage - it is just that sometimes, by not acting, you end up having a massive effect.  Alternatively, that phrase from the Tao might also mean the sage accomplishes a great deal without seeming to spend any effort.  Look at me, trying to explain the unexplainable.  Another one:

The Tao that can be explained is not the constant, eternally unchanging Tao.

But I digress.

SI contract buyers at COMEX ignored last week's forest of indecision candles and relentlessly pushed prices higher; I suspect one issue is that the commercials have reduced their shorting campaign to some degree.  At least, I expected the silver OI to have jumped dramatically; it did rise, but not by all that much, and less than last week's move.

This somewhat reduced enthusiasm for shorting means that the SI buyers find fewer ready counterparties, and so the current price must rise in order to discover buyers willing to part with their long COMEX contracts.  Perhaps the bankers are more or less "all in" and aren't interested in layering on more risk.  While in a goldbug-theoretical world the evil bankers stand willing to generate an infinite number of naked short contracts to cap the price, it would seem that in the real world, bank risk management teams won't allow the bank's traders to do this.

As the price rises, I suspect that some silver miners continue to add production hedges.  Their near-death experience a short six months ago has to be fresh in their minds.

With the RSI-7 at 94, silver is horribly overbought, but I've noticed silver likes to behave in this way.  It gets very extended both to the upside as well as to the downside.  While I believe the buck helped silver to break higher, silver had a clear bid under it prior to the BOJ's non-action.  So far for this move: $3 in 4 weeks.

Miners

Miners broke out again this week, ignoring the swing high printed last week after finding support on the 9 EMA.  The rising volume on the breakout, the support at the 9, closing at the highs on Friday, it all suggests an ongoing bullish tone that hasn't appreciably diminished since the initial break above the 9 EMA happened back in late January.  Traders look willing to buy miners every time gold does well.  In fact, miners seem to be leading, which is what you want to see in the PM space if you are long.  Two days of selling is the maximum bearishness we have seen over the past three months.  Pretty much every dip has been bought.

While trees do not grow to the sky and this rally cannot continue like this forever, a trader I respect once told me that in situations like this, you are only wrong once, at the top, and in the meantime you are right every other time.  Buy the miners on any retracement to the 9 EMA, put a stop under the 9, and wait for the next breakout.  If the trend reverses, you get stopped out, your loss is small.  If the uptrend continues - you get that 15% weekly move.  That's better than a poke in the eye with a sharp stick, right?

The USD

The dollar fell hard this week, dropping 5 days out of 5, down -2.06 [-2.13%] to 93.03.  The buck made a new low this week driven mostly by the BOJ's surprise non-action, as mentioned before.  It is my belief that this large move was the proximate cause of the large gold rally this week.

The buck is nearing final support here at 93.  The last "previous low" at this level is around 92.50; a fall through 92.50 could lead to a huge wave of selling in the buck, and that's probably driving a reasonable amount of fear right now in prices across many markets.  However, let's look at things realistically.  For the buck to drop in some massive way, you have to imagine that traders want to buy both the Euro and the Yen with both hands.   Both regions remain under a huge amount of pressure.  At some point this drop in the buck will reverse, and that will (most likely) spell the top for gold, at least for now.  But no need to bail out now - wait for market prices to provide us the evidence first.

US Equities/SPX

US equities fell this week, dropping -26.28 [-1.26%] to 2065.30, printing a weekly swing high.  VIX rose +2.48 to 15.70.  We may have a top for the previously teflon-coated equity market. 

Looking at the sector map - well let's ignore the GDX ridiculous 14% gain for a moment, shall we?  Utilities in the lead suggests a general bearish tone, as does tech and healthcare being the lowest performers.  This map definitely paints a picture of risk off.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Gold Miners GDX 14.34% 29.55% rising rising rising rising ema9 on 2016-04-05 2016-04-29
Utilities XLU 1.65% 11.55% rising rising rising rising ema9 on 2016-04-27 2016-04-29
Telecom XTL 1.19% -2.86% rising rising rising rising ema9 on 2016-04-22 2016-04-29
Cons Staples XLP 0.87% 10.74% falling rising rising rising ma50 on 2016-04-27 2016-04-29
Energy XLE 0.69% -18.36% rising rising falling rising ma200 on 2016-04-18 2016-04-29
Financials XLF 0.41% -7.08% falling rising falling rising ema9 on 2016-04-05 2016-04-15
Materials XLB 0.36% -4.64% rising rising falling rising ema9 on 2016-04-11 2016-04-29
Industrials XLI 0.14% 2.85% rising rising rising rising ema9 on 2016-04-12 2016-04-29
Homebuilders XHB -0.06% -6.35% rising rising falling rising ema9 on 2016-03-28 2016-04-15
REIT RWR -0.37% 3.74% falling rising rising rising ema9 on 2016-04-28 2016-04-29
Cons Discretionary XLY -0.83% 5.05% falling rising rising rising ema9 on 2016-04-28 2016-04-29
Healthcare XLV -1.35% -1.06% falling rising falling rising ema9 on 2016-04-28 2016-04-29
Technology XLK -2.16% 0.32% falling rising rising rising ma50 on 2016-04-28 2016-04-29

Gold in Other Currencies

Gold rallied hard in every currency except JPY.  That gives you a sense at just how much JPY moved this week.

Rates & Commodities

Bonds (TLT) rallied +0.79% this week, printing a swing low on Wednesday and managing to struggle back above its 9 EMA.  While bonds are not back to the races just yet (probably because money is leaving the US due to the falling dollar), they may have put in a low - although this week's rally was ultimately capped by the 50 MA.  Cautious sign of risk off.

JNK rallied another +0.74% this week, making yet another new high.  JNK likes rising oil, and remains in a strong uptrend, above all 3 moving averages and continuing to signal risk on.  I ask: how steep can an equity correction be when junk bond prices continue to rise?

The CRB (commodity index) added to last week's gains, rising +2.76%, making a new high, and closing above its 200 MA for the first time in two years.  CRB is now above all 3 moving averages and appears to be in a strong medium-term uptrend.  Thank oil for the move.

WTIC rallied +2.24 [+5.12%] this week, making yet another new high and closing at 45.99.  Oil continues to be relentlessly moving higher - kind of like silver.  Oil ignored a mildly bearish inventory build on Wednesday, rallying after the FOMC ended up doing nothing.  Oil is above all 3 moving averages, similar to the CRB, and remains in a strong medium-term uptrend.  Eventually oil will run into a wall of selling from the shale producer hedging programs, but so far price just continues to move higher.  T Boone Pickens suggested that might be "around" $50/barrel.

Physical Supply Indicators

* Shanghai gold rose to a premium of +0.50 vs COMEX this week.

* The GLD ETF tonnage on hand fell -0.89, with 804.14 tons remaining.

* Gold is not in backwardation, but the difference between two front month contracts is +0.0.

* ETF Premium/Discount to NAV; gold closing of 1295.10 and silver 17.88.

 PHYS 10.75 +0.64% to NAV [up]
 PSLV 6.85 +0.30% to NAV [up]
 CEF 13.12 -6.39% to NAV [down]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) showed no particular sign of premium for gold or silver.

* HAA big bar premiums are lower for gold [2.14% for 100 oz bars in NYC], higher for silver [3.69% for 1000 oz bars in NYC].  Silver Eagle premiums plummeted [15.71% in NYC].

Futures Positioning

COT report covers trading up through April 26th.

Gold commercials did not alter their net positions this week, selling a small number of longs and actually closing some shorts.  Managed money did the same - virtually no net change in holdings.

In silver, commercials added +9.9k shorts and +2.7k longs, a big move, while managed money added just +2.2k longs.  Commercial shorts for silver continue to break records.

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

Everything green & gold.  Miners are just starting to look ridiculous.  Platinum is the only odd-man-out in PM.  Interesting.  The platinum:gold ratio is 0.83, up just a bit from the low of 0.70, and a far cry from the high of 2.40 last seen in 2008 or even the 1.50 high set in early 2010.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Junior Miners GDXJ 14.51% 55.57% rising rising rising rising ema9 on 2016-04-05 2016-04-29
Senior Miners GDX 14.34% 29.55% rising rising rising rising ema9 on 2016-04-05 2016-04-29
Silver Miners SIL 11.86% 37.69% rising rising rising rising ema9 on 2016-04-06 2016-04-29
Platinum PL.CW 6.78% -5.31% rising rising rising rising ema9 on 2016-04-19 2016-04-29
Silver SI.CW 5.11% 10.71% rising rising rising rising ema9 on 2016-04-07 2016-04-29
Gold GC.CW 4.96% 9.51% rising rising rising rising ema9 on 2016-04-26 2016-04-29

Gold Manipulation Report

There was one up-spike in silver this week on Monday; it didn't look particularly meaningful.  No spikes in gold.  Something to notice: when the trend is bullish, spikes are generally in short supply.

I expect when the buck starts to rally, we will see a lot more of them.

Summary

Commodities had another great week, with oil and PM leading the way.  PM mining shares were the standout performers, after spending a long few years wandering in the wilderness.  "So the last shall be first, and the first last."  There's a bible quote to go along with the one from the Tao Te Ching.

The gold/silver ratio was mostly unchanged, down just -0.08 to 72.38.  The GDX:$GOLD ratio rocketed higher, and is increasingly bullish.  The GDXJ:GDX ratio is unchanged, and remains relatively bullish.

COT report for gold and silver show increasingly high (and bearish) commercial short concentrations for silver - highest ever for commercials - but little change in commercial shorts for gold.  Positions remain very bearish.  Still with the buyers continuing to show up at COMEX, there seems to be little opportunity for the usual manipulation spikes to push prices lower.

Gold and silver big-bar physical shortage indicators show no signs of shortage.

The big drop in the dollar this week driven by the huge move higher in JPY kicked off new highs for gold, silver, and the miners and probably in the commodities too.  Equities are starting to correct (possibly impelled lower by AAPL's Unpleasant Earnings Surprise), but junk debt still remains strong giving mixed signals on risk.  If the buck continues to drop, gold will probably continue moving higher.  That is the question - how much gas is left in the tank of the USD/JPY move?

My computer on trends: long gold, silver, miners, crude oil, and short equities and USD.

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6 Comments

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1216
What are the chances....

What are the chances that this is going to end well?

more than doubled in the last month!!

Yes - you read that correctly - The S&P 500 Energy Sector currently trades at 101.5x analysts' expectations of next 12 months earnings. (link)

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

This terrible earnings environment is exactly that force that causes the demand destruction that carries with it the seeds of the next commodity bull market.

My guess is, earnings in these companies are generally pretty bad at the lows.

In fact, it might be instructive to chart the PE ratio of the sector vs the price.  Just seeing the PE alone isn't so useful in determining timing and opportunity.

 

 

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1216
Perhaps but...

Yeah, that might be instructive but no matter how you cut it, either the sector price (P) went up 4-fold or the earnings (E) went down to 1/4 of what it was within the last 4 months (or some equivalent combination), most of that in the last month. In the mean time the product, oil, has gone up 44% in price since mid January.  On the surface that doesn't sound positive to me but perhaps looking back to the late 70s and early 80s might show something more encouraging about how these transitions play out. Sector prices have to crash or earnings have to scream higher to get the P/E back into some realm of normality soon. If earning don't rise rapidly I would think that confidence in the price will drop quickly. By the way, how much of oil's recent price rise is simply the dollar's weakening, just like the PMs correlations you look at?

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
what are earnings

Some chunk of the losses are due to reserve writedowns.  I'm not exactly sure when those writedowns had to happen, but it might have been this quarter.

Also, in the past it appeared to me that the shale drillers may have been showing fake profits by under-reporting depletion.  Now that they can't possibly be making money, there's no incentive for them to pay taxes on fake profits so the writedowns from depletion magically increase.  I don't know this to be true - it is a guess.

Also, some of the shale drillers probably had their hedging run out - or at the very least, the hedges are at much lower price levels.  Some of the companies I was looking at before had an amazingly large contribution to earnings from hedging gains.

I wouldn't expect the recent move in oil to materially show up in earnings just yet.

Fun fact: the oil contract 1 year forward (June 2017) settled at 48.45, $2.55 above the front month's closing price.  That's not much of a premium.

I'd ask a real oil analyst these questions.  Especially the one about reserve writedowns happening this quarter.  If you have 7 years of reserves, and you lose 2 years worth because some reserves are no longer profitable at the current price, that's a big hit to earnings.

neechi's picture
neechi
Status: Member (Offline)
Joined: Feb 11 2016
Posts: 1
Palladium

Any thoughts on the viability of palladium at the current price?

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 772
umm, yes

I bought Pd at 850, and rode it down to 600, then bought again at 750, and rode it down to the 400s.

Naturally, I'd think Palladium is extremely viable.

But I might be wrong.

But I might be right. Past performance is not an indicator of future results!

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