PM Daily Market Commentary - 5/4/2016

davefairtex
By davefairtex on Thu, May 5, 2016 - 1:07am

Gold fell -6.70 to 1281.50 on heavy volume, while silver dropped just -0.05 to 17.41 on moderate volume.  Gold moved south today mostly because of a dollar rally, but the move was relatively mild, and dip-buyers were evident towards end of day in both gold and silver.

Gold's move today was follow-through from the swing high printed yesterday, but gold is retaining a bid, as are some of the other commodities such as oil and silver.  During today's decline, gold found support at its 9 EMA, and the end of day rebound turned a $16 down day into a $6 drop.

So why aren't we seeing massive short assaults from the evil bullion banks?  Don't they control prices?  Here's a thought: it is possible that the evil bullion banks aren't really evil, they're more neutral - and they currently hold a large portfolio of gold mining equities.  So before a more serious PM correction occurs, they need time to offload their miner position, and so it is counterproductive for them to attack gold until they have sold off everything.  Its a theory.

Silver actually did quite well today; while it did break below the 9 EMA, it rallied back strongly and the loss on the day was modest.  Why do I say silver did well?  Its friend copper was hit quite hard, and the two tend to move in sympathy.  Silver seems to be retaining a strong bid - maybe it is tracking oil more closely than copper right now.  Regardless, if silver can avoid closing below the 9 EMA, that would be an astonishingly bullish signal in the face of a dollar rebound.

Miners followed through from their swing high yesterday and sold off hard today, with GDX off -5.07% on very heavy volume, while GDXJ lost -6.00% on very heavy volume also.  On the intraday chart, there was a 15 minute rally at the open, followed by selling for the rest of the day.   While gold staged a $10 late-day rally, the miners initially tried to follow, but then sold off into the close.  It felt to me like big money was using every pop in price as an opportunity to unload their positions.  That's quite bearish.

On the daily chart, we can see that this is the first time in five months that the miners have sold off for three days in a row.  In addition, GDX is now convincingly through its 9 EMA, and the volume was quite heavy.  All of this is bearish.  If the miners led us higher, I'm going to guess that the miners are also leading us lower.  The tone has changed - big money is selling - time to buckle up.  Before buying miners again, its probably best to wait for some convincing price evidence that big money has stopped unloading.

Platinum fell -0.92%, palladium dropped -1.19% falling through its 9 EMA, and copper was hit for -1.56%, smashing through its 200 MA and 50 MA in the same day.  Copper is back to looking ill again.  To say this is a danger sign is an understatement.  I don't like it much when copper behaves this way.

The USD continued to rally off yesterday's strong hammer candle, rising +0.26 to 93.19, printing a swing low.  Might this mark a more durable low for the buck?  That's hard to say; certainly the candle pattern has a strong likelihood (83%) of being a near term low, but the longer term is still up in the air.  I think we get at least a week's reprieve from the dollar downtrend at a minimum, and a more substantial (short-covering) rally in the buck is a fairly decent possibility.  That would have a negative effect on commodities and PM.  Quite possibly the confirmation by the buck is why the miners sold off so hard.

WTIC rose +0.17 to 44.05; oil made a new low but buyers appeared late in the day to bring crude back up to green.  The Petroleum Status report released at 10:30 showed an inventory build, which caused an immediate sell-off that pushed prices down to the day low of 43.22.  Market does not seem to be happy about the build, and in spite of the rally at end of day I think near-term momentum for oil remains down.  Oil equities (XLE) concur, dropping a fairly substantial -1.44%.  When the oil equities fall on a day when oil itself is neutral - that's a bad sign.

SPX fell -12.25 to 2051.12, pulled lower in part by falling copper prices.  Energy (XLE:-1.44%), industrials (XLI:-1.23%), and materials (XLB: -1.01%) led SPX lower.  On the daily chart, SPX made a new low and approaching its 50 MA.  The ongoing correction remains a relatively slow-motion affair.  VIX rose +0.45 to 16.05.

TLT continued rising, up +0.55% and closing more convincingly over its 50 MA.  While bonds aren't setting the world on fire, they do seem to be a beneficiary from the ongoing SPX correction.  Risk off.

JNK fell again, dropping -0.52% following on from the swing high printed yesterday.  JNK falling on a day when crude rallies is a sign of weakness.  My sense: traders are taking profits from the 3-month junk debt rally.  That's risk off.

CRB rose +0.02%; commodities attempted to rally today but the rally failed, running into resistance at the 200 MA.  The candle print looks bearish to me.

Both gold and silver are holding up quite well in spite of the dollar rally, however the strong selling in the mining shares has me fully concerned about the near term future for PM.  I believe the miners may be leading us lower, and it would be a mistake to assume the commercials have fallen asleep at the switch.  If the dollar continues to rally, and the DX COT report suggests there is plenty of fuel for a near-term short-covering move, I see lower PM prices ahead.

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8 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5408
a bridge too far

I believe the EU is finally taking that "one step too far" in an attempt to coerce the eastern europeans to  accept redistribution of migrants & refugees.  If this doesn't force Eastern Europe out of the zone, nothing will.  Hungary has already declared a referendum on the issue.

Is this positive or negative for BRExit?

Bullish or bearish for the Euro?  The dollar?

http://www.bbc.com/news/world-europe-36202490

The European Commission has proposed reforms to EU asylum rules that would see stiff financial penalties imposed on countries refusing to take their share of asylum seekers.

The bloc's executive body is planning a sanction of €250,000 (£200,000; $290,000) per person.

 

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2385
PM market water looks safer this morning...

No riptide that I can see.  I am inching back in.. put back positions in EXK and SA for Silver and Gold.  I had held my IAG throughout and it is just magnificent today.  

Again, we have to ask ourselves what is going on.. what has changed?  I have outlined previously the fundamental shifts I see happening in the Gold pricing mechanism.  Another interesting angle was provided by Michael Pento in the attached interview - he sees further dollar weakness as a result of the FED's inablity to raise interest rates.. Michael believes that this was the subject of Obama's Whitehouse meeting with Janet Yellen.  Michael also makes the point that US short term debt has the lowest real interest rate in the world due to the existence of inflation here.. even though nominal yields are higher here than in some European countries.  He sees continued dollar weakness ahead;

 

Jim H's picture
Jim H
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Posts: 2385
More on how Gold is priced.

I believe we are seeing a market in transition.. the long discussed flow of Gold (and now Silver) from West to East is now being followed by a shift in the measure of influence Eastern markets have on the price.  I have tried to explain some of this.. but I don't explain it as well as Craig Hemke does in the following piece he published just yesterday;

  http://www.tfmetalsreport.com/blog/7605/comex-gold-open-interest

Comex Gold Open Interest

In defending their long held short positions, the Comex Banks have now issued enough new contracts to drive total open interest back to levels not seen since 2011. Will they be successful in capping price or are they about to get a religious experience? We're about to find out.......

......On The Comex, where The Banks seek to manage and control the paper price, since time immemorial The Banks have been NET short and the Specs have been NET long the paper contracts. The degree to which The Banks are short and the Specs are long fluctuates daily and, once per week, the CFTC surveys all of the market participants to get their summary positions. This data is compiled and released every Friday as the "Commitment of Traders" report.

OK...so far so good?

Now here's where the fraud begins. The Banks, acting in their capacity as "market makers", have a virtually unlimited power to create from thin air as many Comex paper derivative contracts as they'd like. In doing so, The Banks take the risk of being short while the Specs, in taking the other side of the trade, take the risk of being long. The fraudulent game that The Banks play is in never being forced to deliver upon of their paper obligations. The Specs simply seek gold "exposure" so they buy the paper derivative contract and The Banks sell it to them. If prices go up, the Specs make fiat and The Banks lose fiat. If prices go down, The Banks make fiat and the Specs lose fiat.

Again, though, very little physical gold is ever delivered. Thus, the only price "discovered" is the price of the derivative itself, not the actual physical metal.

Having the unlimited ability to create new contract supply gives The Banks the nearly unlimited ability to control price, too. How? Think of it this way:

  • You call up your broker at Merrill Lynch and tell him to buy you 200 shares of Coca-Cola. A market order is submitted and someone, somewhere sells their existing 200 shares of Coca-Cola to you. The supply of Coca-Cola shares is finite on any given day so price must find an equilibrium where buyers and sellers meet.

However, as we laid out at the beginning of this post, that's NOT how it works on The Comex. Oh sure, most of the volume each day is an exchange of existing contracts. However, volume is also supplied by The Banks simply creating new contracts to sell to buyers. Go back to the bullet point above. How fair and legal would it be if your broker, instead of finding a seller of existing Coca-Cola shares, decided instead to simply create some new shares out of the blue and sell them to you? You'd have your long exposure to Coke and your broker would take the risk of being short Coke.

Not only would this be patently illegal and fraudulent, think of the impact this would have on the price of the Coca-Cola shares. Since willing sellers wouldn't need to be found for new buyers, price wouldn't need to rise in order to entice sellers to sell. Your broker would simply take the risk of being short Coca-Cola, all with the hope and the plan of seeing you eventually give up and sell your Coca-Cola shares back to them, likely at a lower price and at a profit for your broker.

And, again, this is EXACTLY how The Comex operates.

Without having to supply any additional physical gold or other collateral, The Banks simply create new gold derivative contracts whenever demand for contracts exceeds available supply. This has the obvious effect of dampening price moves as "price" isn't forced to find a true equilibrium between buyers and sellers. And this has played out for all to see here in 2016

Again, what is happening here is an overt attempt to contain and control price. If the total volume of available open interest on the Comex was anchored or tethered to a fixed amount of collateral, then the supply of derivative contracts would be relatively stable like the daily supply of available Coca-Cola shares. Instead, The Banks simply create new supply nearly every day and, in doing so, restrict and manage the daily movements of "price". It looks like this:

DATE            PRICE           TOTAL OPEN INTEREST            TOTAL "COMMERCIAL" GROSS SHORT POSITION

1/26/16            $1121                           385,350                                           175,176 contracts or 545 metric tonnes of paper gold

2/16/16            $1209                          428,912                                           259,784 contracts or 808 mts of paper gold

3/8/16              $1264                          499,110                                           311,865 contracts or 971 mts of paper gold

4/12/16             $1261                          504,523                                          353,968 contracts or 1,101 mts of paper gold

4/26/16            $1243                          497,994                                          356,553 contracts or 1,109 mts of paper gold

And now here's where it gets particularly egregious. Over the past week, the price of "gold" has risen by $49 to Tuesday's close of $1292. While that's still a significant move of nearly 4%, how much higher would the price of gold had risen if the total open interest, which has already been inflated by over 25% over the past 90 days, wasn't allowed to rise farther still? And, as of yesterday (Tuesday) it looks like this:

5/3/16               $1292                          565,774                                        410,000 contracts at a minimum or 1,275 mts of paper gold

I'm going to stop here to let that sink in for a while....

So, to control/manage price and to keep the rally contained at just $170 or 15% in the past 100 days, The Comex Banks have issued a whopping 180,424 new paper derivative contracts, growing the total Comex open interest by 47%! Not only that, but 180,424 new contracts is the paper equivalent of over 18,000,000 ounces of "gold", created from whole cloth and sold to the Speculators, all without additional capital or physical collateral requirements.

As noted above, the GROSS short position of The Comex Banks has more than doubled from 545 metric tonnes to as much as 1,100 metric tonnes today. This means that if The Banks were ever forced to make good on these paper short obligations, they'd have to physically deliver more than the entire stated holdings of Switzerland! Additionally, the entire Comex vaulting system only purports to hold 7,300,000 ounces of gold. So when The Banks are short 41,000,000 ounces of gold, aren't they fraudulently selling something that they don't own? (And please don't give me that line of garbage about producers hedging and selling forward. That scheme ended years ago.)

At the end of the day, you must understand the implications. The Banks are doing everything in their power to manage price...and why wouldn't they?!? When you're short 40,000,000 ounces of gold, every $10 move "costs" you $400,000,000. A $100 up move from here generates paper losses of $4,000,000,000 so they are fighting tooth-and-nail to keep that from happening by doubling down and putting "bad money after good" in the same way that a blackjack player thinks he will eventually win a hand and get all of his lost money back

The Banks hope that eventually they can spark a Spec selloff. Once the Specs head for the exits, this Spec selling will be utilized by The Banks. They'll take the other side of the trade and buy their shorts back. The Banks will then "retire" those contracts and total open interest will decline. The Banks will hope to engender enough Spec selling to allow them to cover (buy back) up to 100,000 of their ill-gotten shorts and drop total open interest back to the 450,000 level. The question is: Will they be successful? While this has been a foolproof business plan since 2013, it hasn't worked thus far in 2016 as Spec fiat has continually flowed into the paper gold derivative market.

So watch price and open interest very closely in the days and weeks ahead. The increasingly-desperate Banks are apt to openly raid price in their efforts to spur some Spec selling. The upcoming jobs report of this Friday being an obvious starting point.

In the end, however, I'll leave you with one, final thought. Now that the Chinese have pricing power in gold, they quite literally have the ability to completely screw and hammer the Comex and London Banks. They can raise the Shanghai Fix and enable the immediate arbitrage. They could use this tool to drain whatever gold is left and utterly crush every big, western Bank.

But the time is nigh. If The Banks successfully rig the price back down, squeeze out all the Spec longs and close back up 150,000 contracts of OI, The Chinese will miss their opportunity. So, will they take it? Maybe. Maybe not. Maybe they're not yet ready. We'll just have to wait and see.

Again, watch price and open interest very closely in the days ahead. It's crunch time and things are going to get increasingly volatile. Prepare accordingly.

TF

Let me emphasize one point from the above that I have been hammering on several times;

In the end, however, I'll leave you with one, final thought. Now that the Chinese have pricing power in gold, they quite literally have the ability to completely screw and hammer the Comex and London Banks. They can raise the Shanghai Fix and enable the immediate arbitrage. They could use this tool to drain whatever gold is left and utterly crush every big, western Bank.

This is what I am talking about.  While the flow of Gold from West to East has been somewhat indirect in the past.. the changing market structure makes the drain pipe bigger now ... because price disparity can now be settled in real time, profitably, via this arbitrage.  How will this look to us?

1)  Price will go up in the West - this is the only way to shut down this arb flow as long as price is rising in the Chinese market.

2)  You will not see SGE premiums vs. Comex much anymore.  This may be somewhat counterintuitive.. but I actually expect that we will see less of this (see #1 above). 

Good luck to all.....   

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5408
fixes, futures, and naked shorts

JimH-

Let me take your goldbug writer's post piece by piece.

In defending their long held short positions, the Comex Banks have now issued enough new contracts to drive total open interest back to levels not seen since 2011. Will they be successful in capping price or are they about to get a religious experience? We're about to find out.......

Now here's where the fraud begins. The Banks, acting in their capacity as "market makers", have a virtually unlimited power to create from thin air as many Comex paper derivative contracts as they'd like.

Given the "virtually unlimited power" to create from thin air all these gold contracts, and the desire to "defend their long-held short positions", one wonders how gold could ever rally.   If I had such power, and the need to "defend my short positions", I would make damn sure that gold would never rise above $250/oz.  I could stuff any rally at any time I so chose.  And I would most definitely choose, each and every time, to stuff any rally.  Who wants to lose money?  Means, method, opportunity = sure thing outcome.

Yet...that's not what we observe in the real world.  TF's theoretical assumptions don't end up predicting real-world events.  If the theory isn't useful at predicting real world activity, then there is something wrong with the assumptions underlying the theory.  That's just logic.

 

Then he goes on to say that, horror of horrors, futures markets aren't the same as equity markets:

How fair and legal would it be if your broker, instead of finding a seller of existing Coca-Cola shares, decided instead to simply create some new shares out of the blue and sell them to you? You'd have your long exposure to Coke and your broker would take the risk of being short Coke.

Not only would this be patently illegal and fraudulent, think of the impact this would have on the price of the Coca-Cola shares. Since willing sellers wouldn't need to be found for new buyers, price wouldn't need to rise in order to entice sellers to sell. Your broker would simply take the risk of being short Coca-Cola, all with the hope and the plan of seeing you eventually give up and sell your Coca-Cola shares back to them, likely at a lower price and at a profit for your broker.

And, again, this is EXACTLY how The Comex operates.

Without having to supply any additional physical gold or other collateral, The Banks simply create new gold derivative contracts whenever demand for contracts exceeds available supply.

Right.  TF has successfully established that, for some crazy, absurd, and clearly fraudulent reason, futures markets are not the same as equity markets.  Any participant can go "naked short" without posting the actual commodity as collateral.  According to him, to go short a gold future, you should be required to post the gold collateral to back it up.  That's only fair.  Futures should be like equities in that respect.  There should be 100 oz in gold behind each 100 oz GC contract!  Anything else - clearly illegal!  Fraudulent!

Problem is, he's confused.  Not about the mechanics, but the underlying reason why futures markets even exist in the first place.

So what are futures markets all about?  They are about hedging price movements for producers, consumers, or people with inventory.  In short, futures are a mechanism for providing price insurance for the fundamental participants.  Insurance helps business plan and facilitates investment by passing risk on to someone else who is willing to absorb the potential losses.  If a miner has fixed set of costs, he can execute his business plan and make a guaranteed profit for his investors much more reliably if he can lock in the price for his commodity.  And futures provides the ability to do just that.

So why have these illegal and fraudulent naked shorts?  Well, because that's the only way the whole thing could possibly work.  Just think for a moment.  If you are a gold mining company, and you want to hedge your future production, at the time you enter into the contract, you don't have any gold!  In six months, you will, but today, you don't.  So to lock in the price, you sell short (NAKED!  OMG!) 1 GC contract set to expire six months from now when your production is due to roll in.  You then spend six months mining the gold, and then you sell your production into the marketplace for whatever the spot price is, and you cash-settle your futures contract.  If the price has risen, you lose money on the GC contract, and you gain on the gold sale.  Vice versa if the price has fallen.  But you don't care - you can make payroll, buy equipment, and focus on simply executing on your mining operation secure in the knowledge that your sale price is locked in.

So the series of operations is this

1) start mining gold Jan 1.

2) On Jan 1, go short 1 July GC contract.  (a NAKED SHORT!  Oh the horror, the illegality, the fraud!)

3) pull gold out of the ground for six months

4) deliver gold to your local mint at the spot price.

5) cash settle your GC contract.

It would simply be an absurdity to force the miner to post physical gold for the short - because the miner hasn't produced the freaking gold yet!

TF clearly doesn't understand the fundamental reason why futures markets exist in the first place, because he's expressing horror at the mechanism, suggesting that the very concept of a "naked short" (i.e. a short position without posting the underlying commodity as collateral) is fraudulent and should be illegal, when in fact such a mechanism is required to fulfill the underlying purpose of futures markets.

Futures, you see, are about things that happen in the future.  You can't post collateral today that only appears once you're done producing it six months hence.  That's why they're called futures.

In the end, however, I'll leave you with one, final thought. Now that the Chinese have pricing power in gold, they quite literally have the ability to completely screw and hammer the Comex and London Banks. They can raise the Shanghai Fix and enable the immediate arbitrage. They could use this tool to drain whatever gold is left and utterly crush every big, western Bank.

So this confuses me.  Why would the Chinese banks decide to "raise the fix" (thus paying MORE for gold) versus simply buying the same amount of gold in the spot market in London for a cheaper price, and shipping that gold back to Shanghai?

See, the Chinese banks already have the power to "screw and hammer" the London banks.  All they need to do is just go to the LBMA and buy all the gold there.  Why raise the price of the fix and pay MORE for the same gold in Shanghai that they could simply buy more cheaply in London?

Here's the thing.  A "fix" is more or less the "settle" price for the day.  If you are a gold miner, or other gold market participant, you write up a contract where "receiving party agrees to pay per ounce according to the Shanghai Morning Fix on the date of delivery."  That's all it is - the day's closing price, set at a time certain using a particular algorithm.  Its not rocket science or some magical power.

In the past, the LBMA bullion bankers would have the London Fix written into all their contracts, and then on the day of a big gold delivery, they'd wang around the price at the time of the London Fix in order to skim  money from their customers.  They'd end up taking delivery of tons of gold at a $10/oz discount by hammering the gold price right before the fix, and then letting it pop back afterwards.  Nasty business, that.

Presumably, the Shanghai Fix is constructed in such a way so that it cannot be played around with the way the London Fix was.  Its also helpful to China that more trading happens in RMB, and its good for the Chinese miners that they don't have to use the fraudulent London Fix.

But aside from these (clearly positive) effects, I just don't see the game-ending event that all your goldbug writers are seeing.  Its nice, but not earth-shattering.  Gold won't immediately rush to $5000/oz because the Chinese have a gold fix.  No mystical powers are bestowed upon the Chinese by virtue of this mechanism for arriving at a daily closing price.

Sorry this got so long.  If I had more time I'd have written less.  :-)

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 830
Wow, a lot of effort into disproving a poor philosophical posit

Dave, I understand your basic theme, which is in the first part of your post -- and the rest of the post is evidence.

However, it appears that this particular goldbug didn't read the lawsuit settlements for illegal fixing that DID occur.

If I remember correctly, they were more of the nature of fixing the price contrary to supply and demand to benefit momentarily held derivatives contracts that they themselves held, when they actually were supposed to be responsible for bidding.

I don't remember if they were also front-running customers. I think, IIRC, that was more a matter of interpretation and net effect.

Point being that yes, the illegal fixing did occur, and yes, that can only happen in a captive market (that is, as opposed to a free market), and yes, when a bad actor works to drain the investors of money in a market, the money moves out and the price tends to depress.

Just sayin, that jurt because a goldbug doesn't do his homework and see what the situation is, doesn't make the basic claim wrong. it DOES make the goldbug a bad investment advisor, though.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5408
captive markets

MR-

Point being that yes, the illegal fixing did occur, and yes, that can only happen in a captive market (that is, as opposed to a free market), and yes, when a bad actor works to drain the investors of money in a market, the money moves out and the price tends to depress.

No that's not right.  With enough money you can manipulate a non-captive market for 15 minutes, and this is what they were doing: hammering price for a critical period of time when the fix was made, and then letting market pop back when they were done.

That temporary interference does NOT imply the market was captive.  If it were captive, they could have moved price to wherever they wanted it to be and it would have stayed there.  The fact that the market popped back up once they were done with their games is actually a strong indication that the market wasn't captive.

That's what I saw when I did my study: a fairly regular (but not every-day) pattern of depressed prices for a 15 minute period prior to the AM and PM fixes, with a bounce in the period immediately following the fixes.

And yes.  Its pretty clear the "analyst" either has no idea why futures are useful, or simply chooses not to mention the utility for reasons known only to them.

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 830
Dave, if I have to go through

Dave, if I have to go through you, Bill, or Larry to trade my Soldarium with Mary, Eva, or Mark, then that is a captive market.

If I can trade my Soldarium at will, that is not a captive market.

Thing is, if I choose to hand you my trade, and discover that you are hammering the market before the trade, exercising the trade, and then letting it pop back up, then -- in a free market I can just go somewhere else.

In this case, it seems to me the jeweler who was complainant in the settlement was not free to go somewhere else, because his tr-de still had to be executed on the market by a permitted bidder.

So the front-running couldn't be avoided nearly so easilyd

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5408
captive markets again

Eh, I haven't read the complaint so I don't know why this jeweler had to place his trade at the price set by the London Fix.  I'm handicapped by not having actually traded on the LBMA so there are mechanics I don't know.

I guess for some reason this guy had to buy his gold through one of the bankers, and if he could only buy through one of them, at a specific time each day, then yes he was definitely screwed and all those restrictions do define a captive market.

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