PM Daily Market Commentary – 6/25/2014
Gold closed up +0.20 to 1319.30 on moderately heavy volume; silver was up +0.10 to 21.01 on very heavy volume. Gold sold off in early Asia trading culminating with a nasty downspike at 2245 EDT to 1305, but then recovered the losses from the spike almost instantly. Then once the -2.9% Q1 US GDP print occurred at 0830 EDT gold rallied strongly into mid-day in NY, but then gold faded into the close. Lots of movement intraday resulted in basically no change in the price of gold.
Silver traded in much the same pattern, but ended up holding more of the day's gain. Still, I expected much more of a selloff after the bad behavior of the miners yesterday. Sometimes its the dog that didn't bark which provides the clue to solve the mystery. So far at least the metals have avoided any correction – this tells me that the bid underneath gold and especially silver has been very strong.
I ran the Shanghai gold premium calculation this evening and noted that Shanghai gold is now trading at a discount of -1.18 to COMEX. From this I postulate that our rally in PM is largely a western phenomenon at this point in time.
The buck dropped -0.15 closing at 80.28 moving slowly lower, with the largest chunk of the move coming at 0830 EDT when the -2.9% GDP print was released. If money steadily flows out of the dollar (and out of US assets), it should eventually affect the US equity market. Theoretically anyway.
Miners staged a modest rally, with GDX up +1.14% on moderate volume, and GDXJ up +2.97% on heavy volume. Still, downside volume has been exceeding upside volume in recent days, and the picture painted by the miners is significantly more bearish than the one painted by gold and especially silver prices. Miners are flashing caution, although not an outright "sell" signal.
Silver has resisted every attempt to sell off, and has chalked up a remarkable 13 straight days up, with increasing volume. At some point, the string will be broken, a sell-off will ensue, and then we will see exactly what sort of support the longer term bulls will provide. If the dip is a shallow one, that's quite bullish since it suggests traders are afraid to miss out on the rally. A deep dip says that our last three weeks was more about momentum traders than about a more fundamental change in trend. We cannot know now, but we should find out relatively soon.
The SPX "massive correction" of 13 points yesterday brought out the dip-buyers, causing SPX to rise +10 and close at 1960. VIX was down as a result, closing at 11.59. The -2.9% GDP print this morning affected SPX for about 60 minutes, and caused a 4 point drop in SPX that was subsequently erased by a 14 point rally. When the market rallies on bad news, its a really bad idea to go short.
TLT (bonds) rallied on the GDP print at 0830, but could not hold the gains into the close – they were up today only +0.26%. Money continues flowing into the equity market.
Brent crude was down -0.46 to 114.00, and appears to be forming a trading range in the 114-115 area.
Breaking news straight off the AP news wire –
The world ended today but don't fret, the stock market showed modest gains.
Sorry Dave but these markets are enough to make a guy go nuts.
Yes, the US equity market doesn't make sense, because we are not possessed of complete knowledge of what is going on. Clearly, there is someone, or a lot of someones with a great deal of money who have the opinion that the US stock market is a better asset class to put their money in than the asset class where it is currently. That's why the market keeps rising: money keeps flowing in. That's the only reason a market can possibly rise.
Who could these people be? What could be their motives? Are they money managers who simply have to chase markets higher because they can't risk underperforming their index? Are they foreigners who don't want to be holding JGBs, and see even the overpriced US market as a better place to be than where they are now? Or perhaps they are europeans scared of bail-ins?
Likely it is an unintended consequence of all the money printing we've seen, of some sort, alongside sovereign debt issues, and maybe a combination of the two. Tracking it back to its causes will be a job for financial historians 20 years from now.
However, waiting to figure out the underlying causes is not an option for a trader. As traders, we can only look at what is going on, and take action accordingly. In this case – going short seems to be a bad idea, with such strength in place, regardless for the reason the strength is there.
(If strength disappears, we can try going short – but for heaven's sake, use stops, in case that strength reappears and the market makes new highs again.)
A macro analyst looking at longer term trends and comparing them against history has the luxury of opining on the "lack of legitimate signals provided by markets these days" but the traders do not have such an option. Buy, stay in cash, go short, those are your choices as a trader. The choice: "this makes no sense" does not appear on the list. 🙂
And indeed, I do wonder what legitimate signals the market was giving off back in 2000 when "eyeballs" were the metric of choice for valuing most of the dotcom stocks. Sometimes, the market just goes nuts, because the market is people, and as a group, we just tend to do that with distressing regularity. Blaming manipulators or secret plots is just a cop-out, in my opinion. It gives the thundering herd a pass on the "crazy" we tend to get on every few years. Markets do what they do, as do people, end of story.
However, I've always maintained that if something makes no sense to me, its probably best not to put my money there…that I learned long ago from Peter Lynch's original book on investment. And I'd say that's a rational response of most people to today's trading environment.
So – as a trader, my advice is: if the market seems to be getting into one of its crazy periods, then its probably best to run off and put your money in something local. My favorite item, not very exciting, is solar panels. A 6-8% tax free ROI every year is amazing right now. Its a much safer bet than any you could make in the market today.
Or you can wait for the GDXJ to correct, find support, and then roll the dice and buy some of them. But with solar panels you don't need stops – with GDXJ you definitely do. 🙂
Mish referred to this article today in his column:
Prices will average $1,250 an ounce next quarter, about 5 percent less than now, according to the median of 15 estimates. The analysts were surveyed before and after the Fed's June 18 outlook, and the forecast was unchanged. Even after a 28 percent plunge in 2013, the bears are emboldened by this year's records in equity markets, and gold assets in exchange-traded products have shrunk to the smallest since 2009.
"The surge in gold can't sustain itself," Donald Selkin, who helps manage about $3 billion of assets as chief market strategist at National Securities Corp. in New York, said June 20. "It was a temporary spike because of a confluence of events: Iraq and Yellen. People will be looking at other areas for excitement. Holdings are down, so people are leaving gold in search of something better."
I'm just guessing that Mr Selkin's fund is short gold. Either that, or it was stopped out of a short position. Its a pity Bloomberg reporters don't ask questions like, "so what was your fund's position in the item you're opining upon over the past 3 months?" I suppose that would be impolite. And these guys are so dreadfully underpaid these days, they can't afford to be too impolite. [FWIW: I'm long gold. But everyone already knows that. :-)]
This article suggests that most money managers have no interest in buying gold. That's exactly what we need at or near the lows as fuel to push things higher. These guys will become easily convinced as price rises and the charts start improving to jump on board – they aren't dogmatic, they are swayed by making money and momentum. And them jumping on board will provide the necessary fuel to really push prices higher.
Now then, when Bloomberg reporters start quoting diehard goldbugs right and left and referring to "the inevitable move to $50,000 gold" – that's the time I start looking for the exits.
Everything goes in cycles. Even gold.