PM Daily Market Commentary – 3/3/2015
Gold fell -2.50 to 1203.50 on moderately heavy volume, while silver dropped -0.13 to 16.27 on moderate volume. PM was hit hard early in Asia, with gold dropping to a low of 1194.60, only to rebound – but it was unable to hold those gains into the close. Gold still appears to have a relatively solid bid anytime price drops below 1200. How long that lasts is anyone's guess.
In just two days, complexion in the mining shares has changed, and not in a good way. Today although gold was off $2.50 (-0.21%) GDX dropped -1.83% on moderately light volume, while GDXJ fell -1.11% on light volume. Distribution is taking place in mining shares; some traders who were hanging on before have clearly decided to bail out. GDX dropped through its 50 MA today, and based on how it was trading today, if GDX loses support of its previous low at 20.21, we will probably see a whole lot more distribution. That translates into 3-5% down days on heavy volume for the miners.
The USD was largely unchanged, dropping -0.03 to 95.45. The Euro is slowly dropping; today it closed at 111.75, which is not very far away from its previous low at 110.96. A fall through 110.96 will probably lead to another leg down for the Euro – and a breakout higher by the buck. I'd say that outcome is more likely than not to happen.
US equities (SPX) had a surprisingly bad morning, dropping as much as 19 points before lunch, only to rebound, regaining the 9 EMA and closing down -9.61 to 2107.78. There weren't any big economic reports released today that could help explain the drop. VIX rose +0.82 to 13.86.
Long bond ETF TLT continued falling today, down -0.36% and seemingly heading for a test of its recent low. The sell-off in SPX today didn't seem to help bonds at all. That's not a good sign for bonds.
The CRB (commodity index) were largely unchanged, closing up +0.02%.
WTIC closed up +0.86 to 50.65. Oil seems to be following the line of its flattening 50 MA; today it managed to close above the 50, which would be bullish if it can manage to maintain this for more than a day at a time.
With the drop of miners through their 50 MA, PM is now almost solidly red.
|Name||Chart||Change||52w ch||EMA9||MA50||MA200||50/200||Last Crossing||last|
|Platinum||COMEX.Platinum||-0.03%||-18.45%||rising||falling||falling||rising||ema9 on 2015-02-27||2015-03-03|
|Gold||COMEX.Gold||-0.31%||-10.82%||falling||rising||falling||rising||ema9 on 2015-03-02||2015-03-03|
|Silver||COMEX.Silver||-0.91%||-24.20%||falling||rising||falling||rising||ema9 on 2015-03-02||2015-03-03|
|Junior Miners||GDXJ||-1.11%||-38.36%||falling||rising||falling||rising||ema9 on 2015-03-02||2015-03-03|
|Silver Miners||SIL||-1.78%||-33.19%||falling||rising||falling||rising||ema9 on 2015-03-02||2015-03-03|
|Senior Miners||GDX||-1.83%||-22.01%||falling||rising||falling||rising||ma50 on 2015-03-03||2015-03-03|
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The Williston basin is basically the good part of the Bakken region. Here's the latest rig counts from that area. For the last few months, the rig count has been dropping 5-12 rigs per week. This week, it was 12. At this rate, in less than 3 months, no rigs in Williston basin will be active.
With no rigs active, shale decline rates imply that Bakken production will drop by perhaps 6% per month.
By end of year, if the rig counts continue dropping at this rate, Bakken shale production will be down perhaps 30%.
Yesterday was a key one for students of traders' behavior in PM-related stocks, I think. I refer to the nearly 5% gap down in SLW at the start of trading.
This was due to a "bought deal" involving a consortium of banks and a Vale gold mine in Brazil. A story in the Financial Post ( at http://business.financialpost.com/2015/03/03/silver-wheatons-train-wreck-800-million-bought-deal-is-getting-snubbed/ ) says that such "bought deals" happen from time to time, and in this case SLW's offer (in the deal) to provide 38+ million shares at a discount from the market price involved a modest discount, by comparison with some other such deals.
Why would the existing shareholders support such massive dilution of their shares? The answer seems to be that SLW will be buying gold at $400 per ounce from Vale. That looks great until you ask whether that wonderful price will ever show up in the price of the stock, given that it always (except for a day like yesterday) tracks the spot price of silver quite well. That is, the $400 may assure the company's survival going forward; but how will the shareholders now holding diluted stock benefit?
Traders promptly brought the stock's bid and ask prices to levels well below the share price that was part of the deal ($20.55). Thus the banks who bought the new shares are faced with selling them at a paper loss. Why was it not obvious that this was going to happen? Is it that the banks do not care about that capital loss; because it is far less than the fees and other deal-related payments they will get from SLW? Or am I missing something here?
Unless I am all wrong in how I see what was done in this deal, I feel that retail investors already owning the stock would accept such a deal when it is very likely that soon it will create a solid upward force to share prices or to dividends, after the initial set-back created by the deal. Where is the argument that such an upward force is to be expected in this case? If that argument is not solid, didn't the current holders of the stock "get the shaft" yesterday?
In closing, I am a true Newbie here, so I am hoping to get an education out of witnessing yesterday's events in the market involving SLW. I welcome corrections of my mistakes here.
My guess: independent traders are thinking there will be a whole bunch of selling pressure on SLW for a while from the banks that financed the secondary offering at 20.55, who will be enthusiastically unloading their shares every time price rises close to 20.55.
So if you buy/own SLW, you have to resign yourself to the fact that the price will stay below 20.55 for a while, simply because there is so much new supply on the market.
See, these financing banks aren't investing in SLW for the long haul. They're just doing it to make a quick buck for this quarter – they charge a fee for financing the deal, and they also get to buy at a discount to yesterday's market price. Clearly, that discount wasn't big enough.
So these banks are motivated to bail out, sooner rather than later. That means lots of new supply.
Thanks for the heads-up. There may thus develop some interesting divergences between SLV and SLW while the latent selling pressure on the latter is unresolved.
At this point (near 11:00AM, Mar. 4) not only are bid and ask on SLW below 20; but there have been a few big volume spikes with concurrent price downshifts (sellers overwhelming buyers in those spikes) well below 20! This observation supports your conjecture, and if the banks dump their load slowly (to avoid seriously damaging the price level) this pattern could recur for quite a few days.