Investing in precious metals 101

PM Daily Market Commentary – 2/6/2018

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  • Wed, Feb 07, 2018 - 04:18am



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    PM Daily Market Commentary – 2/6/2018


Gold fell -15.60 [-1.16%] to 1326.90 on heavy volume, while silver dropped -0.11 [-0.66%] on heavy volume also. Equities recovered, bonds plunged, and the buck ended up mostly unchanged.

Gold rallied early in Asia, but then spent the rest of the day falling – the plunge in gold wasn’t driven specifically by the equity market rally, or by currency. It just looked like nobody wanted to own gold today. The trading range was quite large, and the candle print was a long black candle, which appeared to be a bearish continuation. Down-day volume has been quite heavy, which is bearish.  Oddly, the forecaster moved up +0.05 to -0.21. Gold remains in a downtrend.

COMEX GC open interest fell by -5,993 contracts today. Commercials appear to be ringing the cash register and covering short rather than pushing prices lower.

Rate rise chances (March 2018) remains at 69%.

Like gold, silver rallied in Asia, and then spent the rest of the day selling off. However unlike gold, silver did not make a new low, which is a mildly positive sign. After the smash two days ago, silver right now is just chopping sideways. Forecaster jumped +0.42 to -0.42; that’s still a sharp downtrend, but it is curious – and a bullish sign – that silver managed to outperform gold today. That’s probably why the forecaster moved higher.

COMEX SI open interest fell -185 contracts today.

The gold/silver ratio fell -0.41 to 80.01. That’s bullish.

The miner ETFs had another bad day, gapping down at the open and selling off all day long. GDX dropped -2.64% on extremely heavy volume, while GDXJ fell -2.69% on extremely heavy volume also.  However, the XAU saw a different result: it fell only -1.17%, and the candle print looked more like a doji. Might this differential be some sort of ETF effect? Perhaps its a weighting issue.  Forecaster for XAU jumped higher up +0.39 to -0.15. That’s still a downtrend, but a slowing downtrend. Do we believe GDX or XAU? I don’t know. I use XAU because it has a longer track record, and so the model tends to be more accurate. It is probably also a different basket of gold mining shares too.

Today, the GDXJ:GDX ratio fell slightly, while the GDX:$GOLD ratio fell much harder. That’s bearish.

Platinum rose +0.03%, palladium dropped -1.80%, while copper rose +0.78%. Both palladium and platinum made new lows, while copper was able to close back above its 9 MA. All 3 metals remain in downtrends, although copper looks more as though it is just chopping sideways.

The dollar had a moderately wide trading range, but ended the day up +0.05 [+0.06%] to 89.30. That was a doji candle, which was a bullish continuation. Forecaster jumped +0.24 to +0.14, which is a buy signal for the buck. This is the second day that the dollar has spent above its 9 MA; given the strong equity market rally, the buck’s small move higher is probably due to something other than safe haven moves. I think it will take a bit more time to sort out if this is the start of a more durable trend change. Dollar weekly forecaster remains in a downtrend.

Crude moved up +0.47 [+0.74%] to 63.82. Trading range for crude was fairly narrow, and much of the day’s gains came after market close – the API report was more bullish than expected (crude -1.0m, gasoline -0.2m, distillates +4.5m), and crude rallied about 50 cents following the release at 4:30 pm. Where to for crude? Forecaster rose +0.28 to -0.17. That’s still a downtrend, and today’s rally was much smaller than yesterday’s plunge.

SPX rose +46.20 [+1.74%] to 2695.14. In the futures markets overnight, SPX had dropped 120 points, making a new low to 2529 during trading hours in Japan. Then the dip-buyers appeared. Was this official intervention? Certainly it would make sense after such a large drop. However the market definitely struggled to move higher, with a fair amount of back and forth intraday.  In the last 90 minutes of trading, price rallied 60 points, accounting for all the day’s gain and then some.

There was some pretty strong differentiation among the sectors, however; materials led (XLB:+3.27%) along with tech (XLK:+2.87%) while utilities had a terrible day (XLU:-1.49%). The sector map was relatively bullish. Candle print was a thrusting pattern, which had a 77% chance of being a bullish reversal. Forecaster ticked up +0.09 to -0.92; the forecaster will take some more convincing than the candle pattern code.

The VIX had a huge trading range, topping out at 50 in the futures markets overnight and continuing to trade in a wide range all day long. VIX ended the day down -7.34 to 29.98.

So what’s the deal with all this VIX stuff anyway? Well, I don’t follow the VIX instruments all that closely, but I do know that the XIV ETF, based on VX futures, blew up today. Yesterday it was $99, today it closed around $7. What I notice, however, is that a large number of the equities I follow have some expensive options right now. If you don’t think the market is about to collapse tomorrow, you can make a fair amount of income writing put options. Implied vol is about double what it was just last week. What does that mean? Well, let’s say you like RIG (the offshore drilling company Transocean) at 10. You could write a Jan 2019 10 put, and you would receive about $1.70 in premium. If the stock trades >= 10 by January 2019, you get to pocket the premium. If the stock trades < 10, then you have to buy RIG and pay $10/share. This trade makes money as long as RIG doesn't drop below $8.30, and the implied annual yield if RIG trades sideways or higher is 17%. That's a pretty good return – and its not like RIG is trading at bubble highs either – it was trading at 60 3 years ago. The implied yield on that put option is about 50% higher than it was last week.

That’s what the VIX is to me: its the “put” premium – roughly speaking, the higher the VIX, the more yield I get when I provide downside insurance for individual equities.

TLT fell today, dropping -0.62% and giving back a fair amount of yesterday’s rally. If the world isn’t ending, then it appears that the long bond will probably remain under pressure. TY also dropped, losing -0.62%, which is a big plunge for the 10-year – it gave back most of yesterday’s rally. TY forecaster dropped -0.39 to -0.03, which is a sell signal for TY. TY is now back below its 9 MA.

JNK gapped down at the open, traded in a wide range during the day, but ended up +0.53%, printing a bullish belt hold pattern, which is a 80% chance of being a bullish reversal. That’s back to risk on.

CRB fell -0.47%; 4 of 5 sectors fell, led by industrial metals (-1.74%).

Yesterday I thought we’d see some dip-buying today, and that’s what happened.  Equities and junk debt both rallied strongly, while bonds and gold sold off.  Gold has not been doing well during this whole event; on the scary down days, gold moves up a bit, but when the fear recedes, gold drops fairly hard.  That’s a bad sign, and it tells us that gold is probably not ready to move higher just yet.

Armstrong suggests this is because the public’s confidence in government remains intact, and until that changes, gold will remain weaker than we’d like it to be.

Still, at 1335, it is a far cry from the lows of 2016, when it hit 1050.

Where do equities go next?  I think they probably move lower, although the timing of the drop is hard to sort out.  We probably rally a bit more before prices fall again – assuming they do, of course.

The SPD and the CDU have successfully concluded negotiations on forming a new government for Germany; now the rank and file get to vote.  SPD stands to get control over the finance ministry, as well as foreign affairs, and labor.  Will an SPD finance minister be nicer to Greece?  That’s one I didn’t see coming.

This is probably Euro-positive/dollar-negative.

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