PM Daily Market Commentary – 6/23/2015
Gold fell -7.60 to 1177.80 on moderate volume, while silver dropped -0.33 to 15.81 on very heavy volume. Gold generally sold off for most of the day, while silver was hit hard just after 9am EDT and more or less never recovered. Silver marked a new low for this cycle, and pushed the gold/silver ratio back up to a bearish 74.52.
Since the dollar was quite strong, we could easily blame gold's drop on currency effects, however that didn't seem to be the case for silver, which plunged lower all on its own.
PM continues looking weak; I had hoped silver's strength yesterday would end up pulling gold up, but instead gold's weakness pulled silver lower, right through support. I'm not sure if silver found buyers at 15.75, or if the sellers were just ringing the cash register on their short positions; my guess is, its probably the shorts ringing the cash register. I never like to see high volume breaks of support. Silver will probably retest the 15.50 suport at a mininum, and if that support fails, we'll see a retest of 15.25, more likely than not.
Mining shares did unexpectedly well given the weakness in gold and silver, with GDX up +0.27% on moderately light volume, and GDXJ fell only -0.24% also on moderately light volume. Both mining ETFs remain below their moving averages and still look bearish, but some buying did appear today for the miners – either that, or nobody really wanted to sell.
The buck broke out repeatedly today, eventually closing up +1.13 [+1.20%] to 95.64, a large move which clearly snapped the dollar's four-week downtrend line. The rally finally stopped on the 50 MA, but after this strong move I expect to see a continuing rally in the buck. If it happens, this will put pressure on gold and silver.
SPX (US equities) inched higher, up +1.35 to 2124.10, trading in a narrow range on the day. VIX plummeted, losing -0.63 to 12.11. In recent months, the VIX at around 12 has been a reasonably good buy. Still, it is summer, and volatility during the summer months is generally lower; last year around this time, VIX dropped to almost 10.
US economic reports are starting to look a bit better, with the GDP Now forecast up to 2% GDP growth for 2Q 2015. Manufacturing is weak but not fatally so, while new home sales are quite strong, and retail sales are improving. Of course in today's centrally-planned monetary world, this is seen as bad for stocks, because it increases the chance of a near-term Fed rate rise. Or so the theory goes anyway. Stronger economy = rate rise = stocks down, bonds down, dollar up. Got that?
The Greece bailout looks to be almost a done deal right now; the remaining question I have is, will Europe deal with restructuring the debt or will they continue to try to live in a fantasyland where Greece will somehow manage to pay it all off over the next 30 years?
Bond ETF TLT fell again, down -0.60%, and is quite close to making a multi-month low. Bonds continue to look quite weak. How many news articles have you read saying how there's no liquidity, bond funds are raising cash, and so on? Its all true, but a few more weeks of this, and the situation could be ripe for a rebound. The underlying issues won't have been solved, but markets seldom move straight down.
The CRB (commodity index) rose +0.50% again today, climbing above its 9 EMA, an amazing performance given the very strong dollar. Helping CRB was copper, which managed a +1.57% rally, marking a swing low but not yet back above its 9 EMA. If copper can continue to rally, that should help silver, at least to some degree anyway.
WTIC (west texas crude) also climbed higher, +0.87 [+1.44%] to 61.13, moving closer to the top of its trading range. Might oil break higher at long last? Oil equities have been selling off relative to oil for the past 4 months – they show no particular signs of a rebound just yet. I'm cautious for the moment.
A rising dollar will pressure PM, but rising commodity prices should provide some support. Let's hope rising commodities win the contest; if they don't, we'll probably see a retest of 15.25 for silver and 1140 for gold.
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So was playing around with various correlations and I stumbled on something relatively interesting – the relationship between mining shares (HUI index), SPX, and the price of gold. Namely, that the HUI/SPX ratio (did miners outperform, or underperform SPX) seemed to be relatively predictive of the longer term trends of gold.
Chart below, simply explained: when the red line crosses above the "0%" right axis at a sufficient velocity, it signals the start of a new gold bull market. When the red line crosses down across the 0% line, it signals the start of a new gold bear market (with one head-fake back in 2006). Today, we observe that the red line remains below the 0% line; until it can cross that 0% line with sufficient velocity, gold will likely remain in its bear market trend.
For those who want to understand how I calculated the red line:
red line = % change year over year of the HUI/SPX ratio, run through a 50 point MA.
Here is actual raw HUI/SPX ratio (i.e. without the "% change year/year" and without the MA). See how it seemed to lead the market, which is why I think it might make a good indicator. One caveat: I only have data for one cycle, so who knows if history will actually repeat.
Where are we now? Well, based on the downside velocity, we could be anywhere from 1999-2000.