Investing in precious metals 101

PM End of Week Market Commentary – 2/14/2014

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  • Sat, Feb 15, 2014 - 07:51pm



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    PM End of Week Market Commentary – 2/14/2014

Gold finished Friday up +18.80 to 1318.90 on moderately heavy volume, silver was up +1.09 to 21.49 on very heavy volume.  The gold/silver ratio dropped a huge -2.36 to 61.39.  GDX was up +1.86% on heavy volume, while GDXJ rose +3.62% on massive volume.  Gold was steadily bid climbing all day long, and silver broke out in Japan and climbed steeply all day long, closing at the high.  Mining shares opened up, but traded sideways all day long, looking somewhat less bullish than gold & silver.

The big story of the week is silver, which caught up to gold in one massive, high volume move on Friday.  There was one high volume spike in Japan morning trading, but after that one violent spike up, COMEX buyers just steadily maintained the pressure on silver moving it up at a steep angle, closing at the highs for the day.  It was a bad day for the silver shorts, who saw no dips intraday they could use to cover.  "That's gotta hurt."

For the week, gold was up +51.90 [+4.10%], silver up +1.48 [+7.37%], GDX +10.20%, and GDXJ up +14.84%.  From a weekly viewpoint, this was a textbook PM uptrend week, with GDXJ leading GDX, and silver leading gold, with GDXJ and silver particularly making their move on some excellent volume.

US Equities/SPX

The US equity market rose steadily this week, up +2.32%, but volume was only average.  Still, SPX has pushed to within 10 points away from its old high of 1850, and it looks on track to break out once again.  I'm not seeing any signs of distribution, although the financials & banks sector which should be leading at this stage (were it a normal continuation of the bull market move) are distinctly lagging.  In addition, utility stocks are breaking out – which is not normally a sector that leads markets higher.

Still, it appears that Buy The Dip is still holding true.  We'll have to watch the market as to how it acts when it nears the high at 1850.  That's yet another logical point for the shorts to enter, although we've been waiting for the shorts to appear, and they just haven't done so yet.  A close significantly above 1850 would likely lead to a strong move higher in SPX, led by short covering by all the traders who figured all the distribution seen in January would lead to a correction.

From a macro perspective, one of the "Big Four" indicators I track, INDPRO (Industrial Production), actually ticked lower for the first time in six months.  INDPRO is what I consider to be a good coincident indicator for the overall equity market, and when it starts downhill in a serious way, SPX has historically followed.  Is this just about a Polar Vortex, or the start of something more general?

Big Four:

* Real Final Sales (FINSLC1)

* Industrial Production (INDPRO)

* Nonfarm Payrolls (NFPTTL)

* Real Personal Income (W875RX1)

Currently INDPRO has ticked down, real final sales is flat, Nonfarm Payrolls is tracking higher, and Real Personal Income is flat.  While the big four don't look particularly bullish, neither has the economy rolled over just yet.  Right now things are a bit in limbo.


Senior miners broke out of their 3-week consolidation on some good volume this week.  The one down day was met the very next day with strong buying.  On Friday however there did seem to be a bit of distribution, since while gold was up nicely and closed near its high, GDX after gapping up in the morning just traded sideways in a narrow range, but on relatively high volume, printing a doji candle which is sometimes a marker for a reversal.  This tells me some number of traders were ringing the cash register and bailing out.  Tuesday will tell us more – a close below today's GDX day low of 26 will signal a possible correction in the senior mining shares.

Still, GDX moving above its 200 day MA is an excellent sign.  Next positive hurdle to cross: moving that rising 50 MA above the 200 MA.  That's the magic "golden cross" trend change indicator, and it would be yet another sign for longer term traders to jump in and buy mining shares.  Step by step, this is how a long term downtrend (exemplified by the 50 MA below the 200 MA) turns into an uptrend.

GDXJ behaved a lot like GDX, except its breakout occurred on relatively higher volume, and the volume has increased every up-day for the past 6 days.  Increasing volume and a rising price means that money is pouring into the junior gold mining sector, and its exactly what you want to see in a breakout.


The USD fell this week, losing -0.56 [-0.69%] to 80.18.   The buck has fallen through its 50 MA, has made a new cycle low, and looks to be headed to test support down around the 79.75 level.  Most likely, the falling dollar has provided a boost to both gold as well as the rest of the commodity complex.  No grand collapse is taking place, but for the past few weeks the buck definitely appears to be in a steady move downhill.

A rebound in the buck might well cause difficulties for PM.

Rates & Commodities

The 10 year treasury rates tracked a bit higher this week, rising to 2.74% up 7 basis points on the week.  Bonds appear unsure of where they will go – likely the rallying equity market has stopped the flow of money into bonds.

Commodities on the other hand rose 1.57% this week, continuing to push past the long term downtrend line that has been in place since late 2011.

Rising commodity prices tend to be a positive influence on PM.  My feeling is, the steadily rising commodity prices provided steadily increasing buy-side pressure on silver which finally showed up in Friday's massive silver rally.

Physical Supply Indicators

* Shanghai premiums on the Au9999 contract have dropped -3.38 over the week, and remains barely in premium at +0.57 over COMEX.  Delivery volumes within the SGE remain elevated, and compensation was being paid from shorts to longs all week.  This says longs asking for delivery outnumbered shorts providing gold, which is bullish.

* The GLD ETF gained +4.20 tons of gold this week, and is back up to 801 tons.  After dropping consistently since the April gold crash, GLD ETF is now slowly gaining gold.

* Registered gold at COMEX rose 0.10 tons, to 19.90 tons of gold.  Apparently we won't default this month.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1318.80 and silver 21.44:

   PHYS 11.02 +0.26% to NAV [up]
    PSLV 8.74 +4.63% to NAV [up]
    CEF 14.93 -2.95% to NAV [up]
    GTU 47.43 -2.88% to NAV [up]

Discounts on the ETFs decreased across the board, with some dramatic moves in GTU and PSLV.  Buying silver from Sprott right now is expensive…4.63% over spot!  Remember when you could get PSLV for a discount, a few short months ago?  Long PSLV short SLV, that's how to profit from that move without exposing yourself to any downside in the price of silver.  4.6% – that's 20 months of interest payments on a 10 year treasury bond!

Shanghai premiums are flat, but deliveries are higher than normal, and the bias is towards the longs.  ETF buyers seem eager to jump back into the market, especially with PSLV, but GLD and COMEX suggest no shortage of gold exists currently.

Futures Positioning

The COT report is as of February 11th.  Big news is that Managed Money increased their long positions by about 9k contracts by actually going long rather than covering short.  This is quite bullish – Trader Dan likes to say that the only way COMEX moves higher on a sustained basis is by new longs entering the market, and they did that this week.  Perhaps Managed Money bought the "reverse head & shoulders" breakout on Tuesday.

The interesting thing is, there are still 64k Managed Money short contracts remaining, which should continue to provide fuel to the upside as gold moves higher.  Likely a number of them bailed out Friday as the gold price rallied through 1300.

Moving Average Trends [20 EMA, 50 MA, 200 MA]

Gold: short term UP, medium term UP, long term DOWN

Silver: short term UP, medium term UP, long term DOWN

This week saw silver's 50 MA start moving up, which is bullish.  Likewise, both gold and silver broke above their respective 200 day MA, which is also quite bullish.  Price hasn't been above the 200 MA for at least a year.  Selling gold when it broke below the 200 MA would have kept you out of the big gold crash.  Wouldn't that have been nice?  Moving averages work well in trending markets, but if there is no trend, you can get whipsawed – no indicator is perfect, which is why I tend to use many different indicators to understand what is going on.


This week the star performer was silver, a late entry that decided to do most of its work on Friday.  Although GDXJ moved more on the week, silver's catch-up move put that last puzzle piece into place.  For weeks silver had been a recalcitrant outlier to the bullish picture in PM, and its big catch-up move now brings it into line with the rest of the complex.

Looking at the various ratios and averages, gold and silver is now in an uptrend for both short and medium term timeframes (mostly bullish).  Price is also both above their 20, 50, and 200 day moving averages (bullish).  A longer-term trend change is in the making.  GDXJ:GDX is in an uptrend (bullish), as is GDX:$GOLD (bullish).  Lastly gold/silver ratio fell significantly this week, and is now in a downtrend (bullish).

It all looks pretty good.

Although Shanghai isn't in premium and is thus well supplied, physical demand still seems reasonable given elevated delivery volumes and the short-to-long compensation.  However, COMEX registered rose slightly, as did GLD's tonnage.  ETF buyers were enthusiastic, bidding up premiums across the board.  Let's call physical demand mostly positive.

All of the indicators point bullish for the PM market insofar as the trend is going.  That means its just about time for a correction within the medium term uptrend – things simply can't be this easy!  Momentum indicators (RSI, among others) suggest PM is quite overbought right now, and so right now is a particularly high risk time to buy.

When I saw Chris's "Gold and Silver Break Out" piece, I thought about the magazine cover jinx effect, and said to myself, "that should be good for a $20 correction at least."

Just kidding Chris.  🙂

Why am I taking away the punchbowl after saying the trend is now bullish?  Markets move in cycles – they very seldom just go just straight up.  And now with the RSI-7 of 88 on silver (quite overbought), after 11 straight days up, from a tactical point of view silver is a high risk buy at this moment, with gold only slightly less risky.  If you are looking to get onboard, lower risk is to wait for the (likely) correction and then buy the dip.


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  • Sun, Feb 16, 2014 - 12:06am



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    Silver CRUSHED as the monetary standard, years ago


I've read two posts by Steve of the reference below by Charles Savoie about the Pilgrims Society and wonder if this could all be true??  Shades of gold suppression, historically silver??? What REALLY started the Great Depression?


SRSrocco Report New Post

Link to SRSrocco Report

What They Did To Silver

Posted: 14 Feb 2014 01:06 PM PST

(by Charles Savoie) This brings us to Paul Volcker, who chaired the Federal Reserve System in D.C. (August 1979 to August 1987) during which time he shafted gold and silver investors and miners by such low blows including telling U.S. banks to not lend for “speculative” gold and silver buying; and arranging a “bailout” loan […]


  • Sun, Feb 16, 2014 - 06:49pm


    Chris Martenson

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    No worries DaveF, it wouldn’t surprise me either…

When I saw Chris's "Gold and Silver Break Out" piece, I thought about the magazine cover jinx effect, and said to myself, "that should be good for a $20 correction at least."

Just kidding Chris.  🙂

I always expect breakouts to get tested.  The best ones always are….

On the daily chart there are a couple of causes for near-term, overbought, concern:

Still, I like the recent action in gold and silver, and the entire commodity complex…nothing is ever certain, but the trend has been bucked.

  • Mon, Feb 17, 2014 - 05:41pm



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    Breakout Thread Reply


Until the POG can climb back above $1540 and prove that spot to be support, strong support, everything else is just action taking place deep in the well. Way back when the POG looked into an abyss with the rim right around $1540 and a ledge at $1430 to potentially catch on to. Neither support held or even looked like they tried to hold. The POG fell into that abyss whose bottom could not be seen from the rim. It appears the bottom may very well have been $1190(ish), which  was well above the $1040 (India Put) some, like me, had hopped it would be no lower than. Now the arduous (and in some ways exciting) task of climbing the chasm wall back to the rim. 
Until that hole is climbed out of and that lip said farewell to this PM bull is going to quietly enjoy these nice runs, these positive technical changes and mood swings but by no means will this bull look for an all clear. The PMs are not out of the woods, or even close, they are however no longer (seemingly) moving either deeper into the woods or wondering about lost in those woods. The PMs have found what looks to be a pathways out and are making haste following it.
Thanks for all you provide us,
  • Mon, Feb 17, 2014 - 07:56pm



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    gold: buy points in patterns


When you are buying a particular pattern – in this case, a prospective double bottom – the low risk point to buy said pattern is on a break above the middle point, or at about 1434.

A much higher risk buy is at the bottom – in this case, 1180.

Any buy points in between have varying degrees of risk to them.

If we use other indicators, such as moving average crossings, ratios such as GDXJ:GDX and GDX:$GOLD, they can alter our perceptions of how likely that double bottom is to work out in the way we hope it will.

There is no certainty in trading, only varying degrees of risk.  Certainly a buy-and-hold person with a focus on the next 5-10 years might well choose to wait for the break above 1434, while a more active trader might gamble on the 1180 low holding.


  • Mon, Feb 17, 2014 - 11:44pm



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    “Certainly a buy-and-hold

"Certainly a buy-and-hold person with a focus on the next 5-10 years might well choose to wait for the break above 1434, while a more active trader might gamble on the 1180 low holding."

Unless of course that long term B&H guy bought in 2002 and has added at waterfalls all along the way. 

I was not trying to write anything about timing a buy or sell and had not realized the focus was meant to be so narrow here. Mine was a simple, general commentary in the situation the PMs find themselves in today. I was hoping to stimulate some talk for folks to realize as nice as $1310 or $1340 is it i a long way from where the POG fell into the abyss back in 2013. 

PS Fun looking chart today with the paintbrushes painting 90° angles down -across- and back up in $8 -$10 strokes over the course of hours.

  • Mon, Feb 17, 2014 - 11:53pm



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    I’m Scared levels?

Nice write up, Dave. Very comprehensive.
The comments about Big 4 and other key indicators makes me ask- do you have any fairly hard values that make you want to take action?

Specifically for the Big 4 or any other?
Or do you just look at 4 as trend indicators without regard for absolute values?

I don’t mind sticking my neck out for a couple of “I’m Scared” levels or derivative numbers.
USD 72
10 year UST 4.0 yield (or frankly 1.4 on the other side since I don’t think the derivatives market will hold these levels of extreme swings. Can you say AIG2.0?)
I think I’m on record saying I’ll move to Montana when GLD hits 250 tons.
China officially states 10k Mt of gold (see earlier posts)
Honestly I don’t know what to do with .gov stats like household income. The fact that we are decreasing hh income in the face of trillions of USD liquidity is already scaring me.
Any Maginot Lines for youse guys?

  • Tue, Feb 18, 2014 - 08:10am



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    the big four


So I'm not the guy who originally came up with the big four – it was a pair of researchers (Chauvet/Piger) who were looking for a way to predict recessions, and they have this equation (details escape me) that take as input all four of these time series.  I don't wait for their indicator to report incipient disaster, I choose to watch the indicators for myself.

Honestly I don't have a hard and fast number I'm looking for.  I'm really looking at a selection of indicators that taken all together provide me a general sense.  INDPRO, NPPTTL, US NYSE Margin, and the change in part time employment/economic reasons, which seems to tick up a while before disaster strikes. 

Really, the top should be in and we should be going down the other side for perhaps a month before these indicators trigger.  However, that's ok – nobody needs to pick the exact top to do quite well.  The indicators will simply help reassure me that the move down is for real this time.

Believe me, if I see something exciting, I'll report it.


  • Tue, Feb 18, 2014 - 04:35pm


    Jim H

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    Spot the Propaganda

From Yahoo's finance section this morning;

  • Tue, Feb 18, 2014 - 09:42pm



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    My tarnished understanding of PM markets

Hi Jim and all,

I also found this article (Net gold demand slid 15 pct in 2013 on heavy selling – WGCinteresting and thought-provoking, because it challenges my belief that the physical PM market was on fire in 2013.  I understand that globally, consumers were demanding more jewelry and physical bars and coins, but that disinvestment (from GLD and other funds) meant that there was a fall in demand.  Is the article correct when it says that 15% less gold was demanded in 2013?

Perhaps a dumb question:  I hear a lot about net longs and net shorts.  I understand what net means and what long and short mean.  But, just to be sure, any market can only be net long or net short, right?  The reason I am confused right now is because, due to my (possibly ill-advised) decision to read KWN articles, I have been bombarded with the idea that the gold price has been suppressed by a massive amount of paper shorts.  Yet, this article give the impression that gold futures are net long at present:

"The market is getting back to balance. Futures sentiment is improving too, with the increase in net longs back to nearly 10 million ounces. 

Jim, I am also suspicious of propaganda within the article, but, on the other hand, hearing news different from what I thought was happening may just be a sign that I didn't understand what was actually happening very well.  I did find these two paragraphs to be specious:

Expectations of a tapering in the U.S. bond-buying programme, which had boosted gold by holding down interest rates while stoking fears of inflation, helped drive prices to their biggest annual loss in 32 years.

That, in turn, drove demand for gold jewellery, coins and bars, which rose 21 percent to its highest ever at 3,863.5 tonnes, the WGC said, while overall demand slid to a four-year low of 3,756 tonnes.

In the second paragraph it says that demand rose because prices were low.  But, that increase in consumer demand did not seem to buoy the price very well.  That doesn't quite add up to me.  I get the increase in jewelry demand as prices fall, but are individual coin and bar investors so stupid that they don't understand what all of the institutional sellers of GLD did apparently understand last year? 

After spending a couple of years trying to learn about the gold market, I still don't understand some of the dynamics very well, but maybe I can blame part of that on the confusing information and/or misinformation of the MSM and the possibly also irrational exuberance of the goldbug alternative media.

For the record, I still adhere to the idea that hard assets, especially PMs, are the way to go for wealth preservation in a time of inflated paper assets and paper currencies.  But, today, if I try to go beyond that, I feel like all I know is how much I don't know.


Truly tarnished


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