PM Daily Market Commentary - 5/12/2016

davefairtex
By davefairtex on Fri, May 13, 2016 - 12:44am

Gold fell -14.00 to 1264.70 on heavy volume, while silver plummeted a massive -0.45 to 17.00 on moderate volume.  Metals sold off in Asia and London, rallied into the New York open as the dollar dropped, but then fell off a cliff an hour after open, closing at the dead lows of the day.

So what went wrong with the bull case for gold today?  Well, instead of the buck following through off yesterday's swing high, it rallied. At the same time, copper had a hugely volatile day, eventually breaking 2.07 support; it appeared that silver was moving largely in sympathy with copper, and once copper did its cliff-dive, silver did one also.  This appeared to drag gold down also.

On the chart, we see that gold was not able to follow through off yesterday's swing low, failing to move above its downtrend line in any meaningful way.  The candle print today was a bearish engulfing (21%) which looks worse than it probably is.  Gold ended the day below its 9 EMA, and is continuing its move south.  Gold held up relatively well, especially compared to what happened in silver.

Silver actually did fairly poorly prior to the problems with copper; after selling off in Asia, it did manage a minor rally back to even, but then just followed copper right off a 40-cent cliff slightly before 11 Eastern.  The drop in silver finally stopped right at round number 17, which is an important support zone.  A break below 17 could lead to a lot of selling.  My guess is that silver's future is tied in with where copper ends up.  Copper remains right around 2.07, but a renewed fall in copper prices will probably drag silver right below 17.

In spite of the troubles with silver and gold, miners did relatively well; GDX fell -2.00% on moderately heavy volume, and GDXJ dropped -1.42% on moderate volume.  Although that sounds unfortunate, both miners remain above their 9 EMA lines, and both charts remain quite strong.  While silver is flirting with a breakdown below 17, miners remain well within striking distance of another breakout.  I'm not sure that continues if silver collapses, but for now the miner uptrend remains in place.

Platinum fell -1.69%, palladium dropped -2.23%, and copper fell -1.10%.  While the drop in copper wasn't much on a percentagewise basis, copper's chart looks quite ominous.  Since May 1, copper has done nothing but drop, with just a few days of sideways movement interspersed with a collection of big red candles.    Today, copper rallied hard in Asia, but then just gave it all back and more or less collapsed at around 11 am Eastern.   That collapse pulled down both silver and gold too.  Copper made a lower high on April 30, and started its plunge May 1.  If you look at the gold and silver charts, you see they also topped out right around then.

This tie-in and copper's poor performance here at support now has me worried.  If copper blows through 2.07 (and today's ugly and very large spinning top candle print doesn't provide any sort of reassurance that we've hit a low), it will probably continue to drag silver down with it.

I believe this is about China.  Some decision was made high up in the government to stop pumping money into the economy end of April.  Word got out, and the top on May 1 was the result.  Ten days later we get to read this article: http://www.bloomberg.com/news/articles/2016-05-09/china-s-latest-debt-warning-comes-via-communist-party-mouthpiece

High leverage is the “original sin” that leads to risks in the foreign-exchange market, stocks, bonds, real estate and bank credit, the People’s Daily said in a full-page interview with an unnamed “authoritative person” starting on page one and filling the second page on Monday.

This was a page one article in the leading communist party newspaper by an "authoritative person."  If the debt party is truly over in China - even if debt growth just goes flat - Steve Keen's spreadsheet tells us they are going right into recession.  And by that I mean a real recession, not some "6.8% growth" recession.  That's just the way the math works out.  Copper told us this long before the article appeared.  This is why I like to follow prices.  News often just confirms what prices have already been telling us.

I think we have trouble ahead.  The world's biggest money printer (with the "printing press" being private credit) has just told us all that the machine will be switched off.  Do we believe?

The USD rose +0.34 closing at 94.13, completely ignoring yesterday's swing high and crossing back above its 9 EMA.  If the dollar continues to rise, it will (as always) provide a headwind for commodities and PM.  Right now the jury is still out on the near term direction.  The swing high has not been invalidated just yet; we'll have to see what happens tomorrow.

WTIC continued to rise, up +0.44 [+0.94%] to 47.19, making another new high.  We had a contract roll yesterday and I didn't notice - half of yesterday's "$2 rally" was actually $1 from contango from the roll.  Sneaky futures markets.  But even if we factor out the contango, oil still managed to hit a new high - following through off the bullish Petroleum Status report from Wednesday.

Although oil made new highs, oil equities are seriously lagging behind; it looks as though big money is liquidating its portfolio of oil stocks as oil prices continue to climb.  The XLE:$WTIC ratio has dropped from 1.95 down to 1.40 since oil made its low in early February.  Contrast that with the GDX:$GOLD ratio, which has risen from 0.0115 to 0.0194 (think "11.5" to "19.4", almost a double) during gold's rally.

SPX was mostly unchanged, dropping just -0.35 to 2064.11; no change means a doji candle print for today.  Not too much happened; utilities (XLU:+0.59%) rallied, while sickcare (XLV:-0.59%) dropped.  Retail continues to be hammered; Nordstrom's had a nasty earnings miss, but it was reported after market close so we'll have to see how that affects things tomorrow.  VIX fell -0.28 to 14.41.

TLT fell -0.46%, wiping out yesterday's gain.  TLT remains in a reasonably strong uptrend, but today is hinting at risk on.

JNK was flat, unchanged on a day when oil rallied.  JNK remains in a strong uptrend, but it may be forming a "lower high" here.  That looks like risk off to me.

CRB moved slightly higher, rising +0.17% in spite of the poor performance in the metals space.  CRB still looks relatively strong in spite of the near-collapse in copper.

Something happened on May 1 to change the direction of the market.  Since then, the gold/silver ratio started rising, PM topped out, copper started its plunge, and the buck made its low.   Its interesting how a bunch of stuff happens in concert.  If the party truly is over in China, that's probably ok for gold, bad for silver, terrible for copper, good for the buck, and the entire rest of the world will catch cold.  These days, growth in credit drives GDP growth, and so if you take away one of the major sources of credit growth in the world (i.e. China), the world drops into recession.  It really is just that simple.

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