Investing in precious metals 101

PM Daily Market Commentary – 10/19/2018

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  • Sun, Oct 21, 2018 - 03:15am

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    davefairtex

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    PM Daily Market Commentary – 10/19/2018

On Friday, gold rose +0.74 [+0.06%] to 1233.75 on moderately light volume, while silver climbed +0.05 [+0.38%] to 14.65 on moderate volume. The buck fell -0.21%.  Not much happened on Friday; SPX did have a relatively large failed rally, but the event didn’t seem to help gold all that much.

The weekly metals sector map saw little change from last week. While it was mildly positive, platinum did slip back below its 9 MA. Gold led silver, miners led metal, but seniors led juniors. That’s still a safe haven configuration.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Senior Miners GDX 1.32% -14.63% rising falling falling rising ema9 on 2018-10-11 2018-10-19
Palladium $PALL 1.18% 12.21% rising rising falling rising ema9 on 2018-10-19 2018-10-19
Gold/Euro $GOLD:$XEU 1.13% -1.86% rising rising falling rising ema9 on 2018-10-11 2018-10-19
Junior Miners GDXJ 1.13% -12.36% rising falling falling rising ema9 on 2018-10-11 2018-10-19
Silver Miners SIL 1.09% -25.75% rising falling falling rising ma50 on 2018-10-12 2018-10-19
Gold $GOLD 0.75% -4.79% rising rising falling rising ema9 on 2018-10-11 2018-10-19
Silver $SILVER 0.27% -15.20% rising falling falling falling ma50 on 2018-10-12 2018-10-19
Copper $COPPER -0.89% -12.30% rising rising falling rising ema9 on 2018-10-19 2018-10-19
Platinum $PLAT -0.96% -9.98% rising falling falling rising ema9 on 2018-10-18 2018-10-19

Gold rose +9.04 [+0.74%] this week. Gold mostly just moved sideways, but with a bias to the upside; it was a relatively narrow trading range, with all of the gains coming on Monday. Gold ended the week in an uptrend in both the daily and weekly timeframes. Gold in Euros looks even better, up +1.13% on the week, and gold/Euros is in an uptrend in all 3 timeframes.

The December rate-increase chances rose to 81%.

COMEX GC open interest fell -43 contracts this week.

COT report shows the commercial net position plunged -58k contracts, with most of that new shorts (+50k) and some of it sold longs (-8k). Managed money net jumped +49k contracts, with 47k shorts covered, and 13k longs added. This was a massive short-covering week by managed money – most of it probably happened on last Thursday’s $30 rally. But instead of the open interest dropping, the commercials jumped in short in roughly the same amount, so the overall number of contracts didn’t change. This really kept a lid on the rally – without the commercials jumping in short, it would have been even more dramatic. Commercials are no longer net long gold.

Silver rose +0.04 [+0.27%] on the week, which is practically no change at all. That means this week’s candle is a doji, which was neutral. Forecaster didn’t like it, issuing a sell signal on the weekly timeframe. While silver remains above the 9 and 50 MA lines, it is now in a downtrend in both the weekly and monthly timeframes.  Momentum for silver appears to be reversing.

COMEX SI open interest fell -1,304 contracts this week.

COT report shows commercial net fell -8.4k contracts, mostly new shorts (7.8k) and a few sold longs (-543). Managed money net rose by +7.8k, with almost all of that covered shorts (7.7k) with a few new longs (205). There is still a lot more short covering to come, but commercials are no longer net long.

Miners moved slightly higher, with XAU up +1.17%. Mostly the miners just chopped sideways, with the weekly northern doji candle being rated as neutral. Weekly forecaster moved higher into an uptrend, but the daily issued a sell signal on Thursday. That has XAU split; downtrend in the daily & monthly timeframes, and an uptrend on the weekly.

GDX:$GOLD fell -0.01%, while the GDXJ:GDX ratio rose +1.04%. That’s mildly bullish.

USD

The buck rose +0.48 [+0.51%] to 95.26, printing a strong swing low on Wednesday, resulting in a daily forecaster buy signal. Weekly forecaster issued a buy signal at end of week, which brings the buck back into an uptrend in all 3 timeframes. That monthly uptrend has remained intact over the past 7 months.

Mostly the buck advanced against the major currencies; +0.46% vs the Euro, +0.62% vs the Pound, and +0.17% vs the CNY.  Emerging market currencies had a bit of a reprieve this week.

The Turkish Lira did the best this week of the currencies I track, rising +3.85% vs the buck. Turkey appears to be the hands-down winner in the Khashoggi Murder Lottery, and they certainly are pulling out all the stops to keep this in the headlines – audio, forensic investigations, video. At this point, this Saudi operation now appears to have been a colossal blunder by MBS. Not that he was involved, of course.

Over the weekend, Saudi Arabia admitted that 15 rogue agents of the security service went and grabbed a plane, bringing along a forensic pathologist armed with a bone saw “just in case”, flew to Turkey, took over a consulate, told the Consul General to get stuffed, then got into a tussle with overweight, 62-year-old Khashoggi, who unfortunately ended up dead. Then they painted the place to tidy up, and whisked his (dismembered?) body off to…to…we’re not exactly sure. MBS was shocked, shocked to discover this whole affair conducted by the intelligence service, of which he is the head. Tragically, one of the 15 rogue agents had a fatal traffic accident shortly after his return to the Kingdom.

This explanation strains credulity well past the breaking point.

I liked the line from a British historian best: “The crown prince has got a big credibility problem now, and for decades to come. Fairly or not, I cannot see how any democratic leader in the West will want to be photographed shaking hands with this man.”

Anyhow, Turkish Lira is the big winner – Erdogan gets a get-out-of-jail-free card, at least for now.

US Equities/SPX

SPX rose +0.65 [+0.02%], going nowhere this week. SPX rallied sharply on Tuesday, but then lost it all over the following 3 days. The gyrations caused first a buy, then a sell signal on the daily chart. SPX closed the week just below the 200 MA. As with last week, SPX ended up in a downtrend in both the daily and weekly timeframes.  Momentum seems to be pointing downhill right now.

The sector map shows consumer staples and utilities doing best, while homebuilders and energy brought up the rear.  Homebuilders look especially ugly right now.  My models show home prices in a strong downtrend for the past six months.  And…that’s a bearish sector map.

Globally, the US did best, along with developed Asia and Europe, while emerging Asia did worst.  China’s equity market plunged to new 4-year lows. China’s market is down 52% from its 2011 high.  Ouch.

VIX fell -1.42 to 19.89.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Cons Staples XLP 4.41% 1.22% rising rising falling rising ma50 on 2018-10-19 2018-10-19
Utilities XLU 3.06% -0.46% rising rising rising rising ema9 on 2018-10-16 2018-10-19
REIT RWR 2.60% -3.54% falling falling falling falling ema9 on 2018-10-19 2018-10-19
Telecom XTL 2.30% 3.19% falling falling rising falling ma200 on 2018-10-18 2018-10-19
Gold Miners GDX 1.32% -14.63% rising falling falling rising ema9 on 2018-10-11 2018-10-19
Financials XLF 0.91% 1.29% falling falling falling falling ema9 on 2018-10-10 2018-10-19
Healthcare XLV 0.48% 9.21% falling rising rising falling ema9 on 2018-10-19 2018-10-19
Defense ITA 0.46% 11.14% falling falling rising falling ma200 on 2018-10-15 2018-10-19
Industrials XLI -0.97% 1.39% falling falling falling falling ma50 on 2018-10-10 2018-10-19
Technology XLK -1.16% 15.36% falling falling rising falling ema9 on 2018-10-18 2018-10-19
Materials XLB -1.23% -8.83% falling falling falling falling ma50 on 2018-09-26 2018-10-19
Cons Discretionary XLY -1.97% 16.68% falling falling rising falling ma200 on 2018-10-18 2018-10-19
Energy XLE -2.01% 5.75% falling falling falling falling ma50 on 2018-10-11 2018-10-19
Homebuilders XHB -3.53% -17.41% falling falling falling falling ma50 on 2018-09-21 2018-10-19

Gold in Other Currencies

Gold rallied in all the major currencies, doing best in GBP.

Rates & Commodities

TLT fell -0.66%, moving slowly lower all week long. TY looked fairly similar, dropping -0.20%, moving back below the 9 MA, issuing a daily sell signal on Wednesday, and ending the week in a downtrend in all 3 timeframes. Even with the iffy equity market, traders still don’t really want US longer term debt. The 10-year yield rose +5.7 bp to 3.20%.

JNK fell -0.37%, rallying strongly Tuesday along with equities, but then losing it all, falling hard on Thursday. After flirting with a rally on Tuesday, JNK ended the week back in a downtrend.  That’s risk off.

Crude fell -1.72 [-2.41%] to 69.57 this week, with all of the losses coming Wednesday and Thursday. The EIA issued another bearish report (crude: +6.5m, gasoline: -2.0m, distillates: -0.8m) and that seemed to definitely weaken price, but oil was selling off ahead of EIA; the report just seemed to accelerate the decline. This week’s plunge resulted in drop below the 50 MA, as well as a sell signal on the weekly chart; this pulls crude into a downtrend in both the daily and weekly timeframes. The monthly remains in an uptrend, as it has for the past 17 months. I think a decent amount of the decline in crude has to do with the Khashoggi murder – how will the anti-Iran alliance hold together with Saudi Arabia and the US at loggerheads? Iran’s leadership is probably doing a dance of happiness at the unnecessary (and homicidal) “own goal”, which appears to have snatched defeat from the jaws of victory.

Physical Supply Indicators

* The GLD ETF tonnage on hand rose +1.18, with 746 tons in inventory.

* ETF Discount to NAV:

 PHYS 9.85 -1.65% to NAV [decrease]
 PSLV 5.29 -3.53% to NAV [decrease]
 CEF 11.86 -4.41% to NAV [increase]

* Bullion Vault gold (https://www.bul lionvault.com/gold_market.do#!/orderboard) shows a $8 discount for gold and a 20c premium for silver.

* Big bars premiums were: gold [1kg] 0.75% and silver [1000oz] 3.41%.

Grey Swans & Geopolitics

  • Ebola: total cases 220, with 142 deaths. There were 26 new cases, mostly from the city of Beni. “An increasing trend in weekly case incidence has been observed. The rising trends are likely underestimated given expected delays in case reporting, the ongoing detection of sporadic cases, and security concerns which limit contact tracing and investigation of alerts.”  http://www.who.int/csr/don/18-october-2018-ebola-drc/en/

  • Turkey: the 10-year yield fell -28 bp this week to 18.00. The continuing drop is probably due to a perceived decline in tensions between Turkey and the US – Turkey having just won the geopolitical lottery vs their struggle with Saudi Arabia.

  • German Government: last week’s election in Bavaria showed that Seehofer’s move right on immigration turned off moderates, who fled to the Greens, and probably wasn’t enough for the conservatives who fled to the AfD. The surprise winner are the Greens; according to a new national poll, they are now the #2 party in Germany, sucking voters away from the SPD, with AfD coming in third.  Merkel ducked responsibility, but admitted “there has been a lost of trust.”  For some reason.  I suppose she was also shocked, simply shocked, to find all these migrants now living in Germany.  https://www.dw.com/en/record-low-support-for-angela-merkels-government/a-45950376

  • Italy – Budget: On Thursday, the EU spanked Italy for proposing a budget that was apparently an ‘unprecedented’ breach of EU fiscal rules. Last numbers I saw suggested a deficit of 2.4%, up from the previous budget which had a deficit of 0.8%. It is below the 3% required by the Maastricht Treaty. My sense is, Brussels wants to stuff the new government if at all possible. “You guys really need to stop bellyaching and go back to being Europe’s migrant camp, like you were under those fine pro-Europe water-carriers in the PD.” The Italian 10-year closed the week at 3.57%, more or less unchanged, after hitting 3.78% intraday on Friday.  https://www.reuters.com/article/italy-bonds-budget/update-3-investors-cut-italy-debt-rate-hike-bets-on-eu-budget-warning-idUSL8N1WZ16J

  • China – Tariffs: China’s RCEP – a Chinese version of the TTIP focused on Asia – is running into trouble for a variety of reasons. According to India Times, “Beijing’s struggles to close the deal on a trade bloc that would cover almost half the world’s population illustrate the continuing suspicion among its Asian trading partners.” Apparently it is not just Trump and the US that has concerns with China. “In Asia, there is a mixed view of the US-China war. On the one hand it’s fantastic news because companies are going to look to move out of China and relocate elsewhere in the region. On the other hand, all that production in China has to go somewhere.” They are worried China will now target their countries for dumping China’s export surplus. Trump has scheduled 25% tariffs to hit China in January. The 10% tariff levels, reportedly, are not a serious impediment to business, while the 25% tariffs are another matter entirely. Trump and Xi will meet at the G20 in November. https://economictimes.indiatimes.com/news/economy/foreign-trade/china-trade-pact-stalls-as-trump-tariffs-feed-india-backlash/articleshow/66283807.cms

  • China – Debt: China’s Q3 GDP growth dropped to the lowest level since 2009. Falling GDP makes the debt that much harder to service. China managed a small amount of deleveraging in 2017, but observers now think that the tariff war, which is scheduled to become quite serious in 2019, will most likely lead China to re-engage in debt-funded stimulus. https://china-underground.com/2018/10/19/trumps-trade-war-is-forcing-beijing-to-withdraw-from-its-own-anti-debt-battle/

  • Yield Curve Inversion: the 1-10 spread rose +2.2 to 51.3 bp.

  • US Congressional Elections, 2018. The generic ballot shows Democrats 49.7% [+8.3%] vs Republicans 41.4%. Outcome Projection: Democrat control: Senate 21.3% (-0.4 seats), House: 85% (+39 seats). https://projects.fivethirtyeight.com/congress-generic-ballot-polls/

  • North Korea: US and South Korea suspended more military drills in order to assist in the ongoing peace process. Trump and KJU are scheduled to meet again early next year.

  • Mueller Investigation: no news. Lots of opinions on when it will wrap up, and what it will conclude, but no news.

Summary

The bounce in equities had more than a little odor of “dead cat” to it this week; JNK’s bounce looked worse.  Gold’s $30 rally last week – a massive flurry of short-covering by managed money – was met with a very large increase in shorts by the commercials.  What would it have been without that commercial shorting effort, I wonder?  $60?  More?  This shows that gold most definitely remains a safe haven.  I suspect if the equity market sell-off gets more serious, gold will end up doing well.  I’m not so sure about silver.  Miners remain looking strong.  Oil is definitely starting to look weak; if the Iran squeeze project fails due to MBS and his ill-considered operation, all that Iranian supply will come right back online.

Big bar gold premiums on gold remain low, silver’s premium remains moderate, and ETF discounts were mixed. There is no shortage of gold at these prices – at least according to my numbers anyway.

This week the gold COT showed massive short covering by managed money, and equally massive shorting by the commercials.  Silver showed less change.  Both remain bullish.  There are still very large short positions for managed money in both metals, but a measurable chunk was taken out of that position during this reporting period.

While the Khashoggi murder has the focus of the headlines, and the shock at such conduct is definitely well-deserved, I can’t help but wonder, did the Saudis learn that rendition technique by watching the CIA?  How many such missions have US teams carried out against people our government doesn’t like?  No doubt we have been caught by host countries doing exactly the same thing, but for some reason it hasn’t made the front pages.  Perhaps having witnessed so many such operations, MBS just assumed he could get away with it too.  Some 731 people were sent off to Gitmo over the years; 40 remain.  They didn’t get there by teleportation.  And they didn’t come willingly.  One wonders, how many didn’t make it, chopped up into pieces in some consulate?   Sure, they weren’t reporters working for WAPO.  Presumably anyway.  Still, after reading all the stories, the thought lingers in my mind: how many operations just like that have we done over the years?  https://www.nytimes.com/interactive/projects/guantanamo

As usual I digress.

So my guess is, we probably have more downside in the equity markets ahead of us.  JNK is back to looking weak – although its not a 100%-reliable detector of such things.  Still, I suspect we probably re-test the lows.  So far, however, there is no sign of recession ahead.  The only bad economic news comes from the housing market, which has been dropping for the past six months and shows no sign of stopping.  Housing prices do not like an increasing 10-year yield.  I’m also seeing increases in the BAA somewhat-junky corporate rate too.  However the BAA/AAA ratio isn’t getting out of control just yet.  It is slowly inching higher, which supports the “no recession on the horizon” thesis.

So whatever is driving equity prices, it isn’t macroeconomics.  Part of it could be competition from interest rates.  If you can get 2.67% in a 1-year Treasury, and 2.19% for a 1-month Treasury, that’s significantly better than the 1.8% dividend yield of the SPX, and it is slowly moving closer to the 3.44% for the utilities ETF XLU.  Supposedly, the Fed will push rates right up to 3% by end of next year.  Would you rather have XLU with its price risk, or no price risk and 3.2% delivered every 30 days to your bank account?

It may well be that money is now finally seeing alternatives to chasing equity prices higher in a hunt for yield.  And Powell just told us, things will only get better going forward.

Weekly trends (in order of strength):

Uptrend: miners, copper, platinum, gold/euros, gold, USD.

Downtrend: BAA corporates, 10-year treasury, SPX, crude, bitcoin, silver.

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