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PM Daily Market Commentary – 12/19/2018

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  • Thu, Dec 20, 2018 - 01:21am

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    davefairtex

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    PM Daily Market Commentary – 12/19/2018

Gold fell -6.64 [-0.53%] to 1248.79 on heavy volume, while silver moved down -0.04 [-0.27%] to 14.66 on moderately heavy volume. The buck edged down -0.09%, SPX plunged -1.54%, TLT shot up +1.32%, while JNK was hit hard, losing -1.40%. It was a strongly risk-off day. By comparison, gold and silver mostly watched from the sidelines.

The big driver of prices today was the FOMC press conference. The Fed raised rates +25 bp, which was mildly surprising (some thought the Fed might actually keep rates steady), but the real market-moving news came at the press conference. In response to a question, Powell underscored that the Fed’s balance sheet reduction was “on automatic” – there will be no changes – and this statement caused SPX to sell off relatively hard. Likewise, the December 2018 dot plot [below] shows that the Fed expects (on average) another 2 rate increases for 2019, to a rough average of 2.75%. That’s down from 3, to be sure, but it runs distinctly counter to the “mood” of the markets right now, which seem to be projecting a decent chance of imminent recession.

Neither Trump’s tweets, nor cratering oil prices, nor signals from China, Germany, and other places that a recession is on the way, nor the inverting 2-10 yield curve has dissuaded the Fed from doing more than slowing the pace of rate increases. Powell did say that rates were “at the lower edge of neutral”, and by that he meant there were 2 participants at FOMC whose dot plots showed they expected no more rate increases. Basically: they went from 3 projected increases down to 2, and risk assets were not amused. Powell tried to point out that the numbers showed the US economy was actually doing just fine (and I agree with him on that), but the mood in the room wasn’t buying this story at all.

Gold had spiked to new highs in the hours prior to the FOMC release, backed off, and finally plunged once the Fed’s rate increase announcement was released at 2pm.  Gold doesn’t like rising short term rates. The spinning top candle was mildly bearish (37% reversal), while forecaster dipped -0.11 to +0.16. That’s still an uptrend. While gold did get hit today, it wasn’t hit very hard. Gold remains in an uptrend in all 3 timeframes.

COMEX GC open interest increased +6,127 contracts. It looks like gold had some help correcting today from the shorts.  It will be interesting to see if they keep piling in.

Rate rise chances (+25 bp by March 2019) is at 22%, and 44% chance (+25 bp by Dec 2019). Contrast that with the dot plot – the market has a much more pessimistic outlook than Powell.

Silver spiked higher along with gold going into FOMC, but it plunged at 2pm also. The high wave/long black candle was somewhat bearish (37% reversal), and forecaster dipped -0.14 to -0.10, which is a sell signal for silver. Silver is now in a downtrend in the daily and monthly timeframes, and you can see that the overall daily trend has been slowly weakening for the past month or so. Still – silver managed to avoid plunging less than gold on a risk-off day. That’s actually pretty good performance, all things considered.   Maybe we should reserve judgement on silver’s near-term future until we see tomorrow’s close.

COMEX SI open interest fell -132 contracts.

The gold/silver ratio fell -0.22 to 85.07. That’s mildly bullish. The gold/silver ratio remains near multi-decade highs – that usually happens around a low for PM.

Miners rallied at the open, and then spent most of the day selling off, with the move accelerating after the Fed’s announcement at 2pm.  GDX was hit for -5.41% on extremely heavy volume, while GDXJ plunged -4.79% on extremely heavy volume also. XAU dropped -5.66%, a very large move. The bearish engulfing/strong line candle maxed out the negative rating (51% bearish) for these candle types, and forecaster plunged -0.97 to -0.24, which is a sell signal for XAU. Amazingly, XAU remains in an uptrend in both the weekly and monthly timeframes. At least for now anyway.

The GDX:$GOLD ratio plunged -4.90%, and the GDXJ:GDX ratio rose +0.65%. That’s bearish.

Platinum fell -0.59%, palladium rose +1.36% (and made a new all time high), and copper rose +0.72%.   Copper rallied strongly going into the announcement, and lost most of its gains – but still managed to end the day in positive territory.  Certainly that’s better than what SPX managed to pull off.

The buck fell -0.09 [-0.09%] to 96.45. The buck had sold off going into FOMC, but rallied as it became clear that the Fed hoped to raise rates further in 2019. While the takuri line candle was mildly bullish ((35% reversal), forecaster dropped -0.37 to -0.23, which is a sell signal for the buck. Todays move also took the buck below the 9 MA. The buck is in a downtrend in all 3 timeframes.

Lost in the fuss over the FOMC meeting (at least here in the US) is the news that Italy and the EU have resolved their budget standoff. The previous world-ending Italian budget deficit of 2.4%/GDP has now been fixed; both parties now agree to an infinitely better 2.04%/GDP deficit. My sense: driving this “crisis” was the following plan: Brussels and the “More Europe” crowd sought to discredit the new Italian government, and the vehicle for doing so was rejecting the Italian budget, regardless of deficit size, so that the new government could not fulfill its campaign promises to voters. Brussels wanted to show Italians that “Elections don’t matter”, as German FinMin Schauble famously opined during the Greek crisis. However events in France (the yellow jacket protests, followed by Macron’s budget-busting buy-off attempt) conspired to make the EU’s demands on Italy look just a teensy bit hypocritical, and so they ended up compromising.

Here’s a variety of headlines I observed on this story. Most people just read headlines, not the actual story. The NYT headline, for example, lets us know that the stupid Italian populists just got their come-uppance from the Laws of Physics, WAPO paints the Italians as losers in a struggle against the EU, while the rest of the world more or less just tells what happened, with a bit of framing here and there.  I thought it was interesting to see just how far into “propaganda mode” that some organizations have drifted.

  • DW: Italy strikes deal with EU over budget.

  • Guardian: Italy avoids sanctions after reaching 2019 budget agreement.

  • WAPO: Italy backs down in its budget standoff with the EU.

  • BBC: Italy budget deal struck with Europe after months-long row.

  • CNBC: Italy and EU reach budget deal.

  • NYT: Italy and EU Reach a Budget Deal as Populist Plan Runs Into Reality

  • FT: Italy budget truce fails to address economy’s long-term faults

The settlement caused the Euro to jump higher, up +0.50%, in the hours leading up to FOMC. However that rally reversed following Powell’s press conference.

Crude rallied +1.17 [+2.52%] to 47.60. The bullish harami candle was mildly bullish (35% reversal), and forecaster jumped +0.62 to -0.36. Even with the rally, today’s move was not enough for a reversal. The EIA report was mildly bullish (crude: -0.5m, gasoline: +1.8m, distillates: -4.2m), and that seemed to help prices for a time, but crude fell around $1 off its highs – right alongside equities – once Powell started speaking.  Crude remains in a downtrend in all 3 timeframes.  Is today’s rally just another dead cat bounce, on the way to re-testing support level at 42?  More likely than not.  No good news on any of my charts for crude.  Not yet anyway.  Crude and equities remain more or less connected.

SPX fell -39.20 [-1.54%] to 2506.96. SPX initially rallied both going into the announcement, and immediately afterwards, but then fell as the details became more apparent, plunging almost 70 points once Powell made it clear that there would be no let-up in the Fed’s balance sheet roll-off. SPX ended up closing relatively near the lows of the day. There seemed to be support at the 2500 level intraday towards end of day.  I’m not sure how long that will last. Today’s long black candle was a bearish continuation, and forecaster plunged further into downtrend. SPX remains in a downtrend in all 3 timeframes.  No good news at all on the charts for SPX.

Sector map has comm services (XLCC:-2.14%) and discretionary (XLY:-1.98%) leading lower, while utilities (XLU:-0.16%) performing best. That’s a relatively bearish sector map.

VIX was unchanged at 25.58.

TLT jumped +1.32%, breaking out to a new high on very heavy volume. TY did well also, up +0.31%which is also a new high for TY. TY remains in an uptrend in all 3 timeframes. The 10-year yield fell -4.7 bp to 2.78%. Got bonds?  A 10-year yield of 3.25% is far in the rear view mirror at this point.

JNK was hit hard, plunging -1.40%, making a dramatic new low. The downtrend in junky debt is starting to become serious. How serious? Well, it turns out, not all that serious just yet. During the depths in October 2008, JNK dropped -14.5% in just one day. Today’s plunge, although it was the worst day in 2 years for JNK, was only the 75th worst day on record, not even making the top 2%. Still, after a long time in sleepy-town, junky bondholders are starting to wake up. And sell. Coal mine canary is starting to feel a bit woozy, it seems.  JNK is now down 6.3% from peak, set back in late September.

CRB rallied +1.03%; 3 of 5 sectors moved higher, led by energy (+2.26%). Energy really is driving the commodity space right now.

So today risk assets (mainly equities and junky debt) were quite disappointed that the Fed intends to continue its rate-increase campaign, with only a modest downward adjustment to the pace. At the same time, the futures markets are projecting that, in actuality, the Fed might raise rates one more time next year – but chances are more likely that they will not. The message seemed to be: “we don’t like your plan at all, but we also don’t believe you will carry it out.”

One of my recession models, based on interest rates as well as equity and commodity prices, is now projecting a 10% chance of recession within 3 months. My other models agree with Powell: they are showing “all clear.”  Magic 8-ball says: “reply hazy, try again.”

So the burning questions for us here, are, will the miners continue their horrible plunge? And what about gold? Will it sell off too?

First, gold. In recent weeks, gold has moved slowly higher as SPX has plunged. Gold also spiked higher going into FOMC. I suspect some new money jumped in over the past few days, betting the Fed would stop raising rates. Those traders bailed out rapidly today once the Fed told us that it intended to continue its campaign. My question is: will gold continue to attract money as SPX falls? Certainly the “Fed will stop” traders have fled, but – its just my guess – gold will continue to attract safe haven money. Forecaster is suggesting this, anyway. Along with Treasuries, gold remains in an uptrend. I suspect – I guess – that gold’s uptrend will continue.

Miners I’m a little less sure about. They are not exactly a safe haven asset the way gold is. However, there has been a steady flow of money into the miners over the past few months as SPX has continued moving lower. Perhaps once the new money has fled, the miners will resume their slow upward path. That’s the hope anyway.

We probably have a few more days of reaction post-FOMC. How will the risk market rationalize its distaste for more rate increases with its prediction that the Fed won’t carry out said increases? That’s the question.

There are now only two remaining near-term potential reversals for risk assets: Santa Claus (and the end of the selling pressure from tax-loss sales), as well as the US-China trade settlement.  Both parties are motivated to settle.  Its one thing to talk bravely about the long term plan for 2025, its quite another to order people to stop publishing PMI data because the data is so bad, you are afraid to let anyone know what it is saying.

Hiding bad news isn’t a sign of strength, its a sign of both fear and weakness.

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