Investing in precious metals 101

PM End of Week Market Commentary – 5/16/2014

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  • Sat, May 17, 2014 - 10:00am



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    PM End of Week Market Commentary – 5/16/2014

On Friday gold closed down -3.50 to 1292.80 on moderate volume – silver was down -0.14 to 19.35 on moderately light volume.  Gold mostly tracked sideways, it was briefly hammered at the time of the housing starts report at 0830 EDT but the buyers showed up and gold rebounded and mostly recovered.  Silver slowly sold off for most of the day.

For the week gold was up +3.40 [+0.26%] , silver +0.18 [+0.94%], GDX down -1.31%, and GDXJ up +0.15%. The numbers looked ok for the metals, and silver has put in a higher low, which is a sign that the two month silver downtrend might be at an end.  Gold is moving sideways and appears to be forming a wedge, which usually leads to a strong break in one direction or another.  But for GDX and GDXJ – the story is not quite as happy.  More on that later.

US Equities/SPX

SPX popped briefly higher, breaking out to a new closing high but then promptly sold off the next couple of days, closing the week basically flat.  Yet for the last four weeks the 50 MA has acted as support, and this week was no exception.  While the "risk on" instruments have continued looking mostly ill, SPX still appears more or less unaffected.

Is this still a topping process or a consolidation prior to a new break higher?  Technical analysis says that the trend is alive until the market shows you otherwise.  And that 50 MA is still acting as some pretty strong support.  And the VIX continues to fall.

Money will continue flowing into equities as long as the uptrend remains.  Unlike a few months ago, there are no clear signs of distribution in the overall index at this moment.  But its awfully hard for me to think about buying the SPX with the high fliers having been sold off so hard, and as of yet unrecovered.


GDX tried to move above its 20 EMA this week and failed, closing lower by end of week.  There is not much to like about the GDX chart, and the related GDX:$GOLD ratio is heading lower also.  Miners are fading and unloved right now, and getting more so as time passes, with each rally attempt climbing less vigorously.  GDXJ behaved slightly better than GDX, avoiding making a new low but also failing to move above its 20 EMA.  Yet miners are not oversold enough to have put in any sort of conclusive bottom at this point, based on the current RSI for GDX which is still above 30.

At some point, the mining shares will get cheap enough that the buyers will reappear, and we'll see the signs in the price & volume.  It could happen tomorrow – but it did not happen this week.


The buck continued moving higher this week, closing up +0.18 [+0.23%] to 80.11.  While the numbers look positive, on the charts it appears that the dollar is consolidating a bit after its charge higher last week.  That's normal after a big move.  USD remains solidly above its 50 MA, and looks set to continue its move higher.  If it does, it may make it more difficult for gold and silver to rally, although in recent months the gold/dollar correlation has been especially weak.

Rates & Commodities

TLT found support on its 20 EMA and blasted higher this week, closing up +2.07%.  Given the move higher in the dollar, and the move sideways in equities, I conclude that treasurys are attracting money from outside the US – who find the prospect of loaning money to Uncle Sam for the next 20 years to be an exciting prospect given the 3% yield they will receive.  Some quick math shows that even with tapering, the Fed is buying (monetizing) more bonds than the Treasury is creating – demand from Fed monetizing exceeds shrinking supply from Treasury.  That likely puts a bid under the market also.

The chart is quite bullish.  I must admit, a 20 year bond at 3% doesn't entice me, but I don't argue with charts like this.  It doesn't mean this will continue like this forever into the future – but unless the market gives you evidence like (say) at minimum a lower high, one just doesn't go short in situations like this.

Speaking of lower highs, the commodity daily chart is showing more signs of some fatigue, having shown us two lower highs in the past two weeks.  Commodity prices have dropped below its 50 MA and appear to be in danger of entering into a correction.  This will likely hurt gold and silver, which tend to track the prices of the overall commodity index over the long haul.

What's the old rock/paper/scissors game?  "Paper covers rock."  Treasurys beat commodities.  That's where we seem to be right now.

Physical Supply Indicators

* Premiums in Shanghai dropped fractionally, off -0.50 to +2.98 over COMEX.  Premiums dropped slightly, but delivery volumes rose.

* The GLD ETF lost -0.87 tons, with 781.91 tons remaining.

* Registered gold at COMEX dropped 0.03 tons to 25.07 tons.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1293.10 and silver 19.35:

  PHYS 10.71 -0.52% to NAV [down]
  PSLV 7.75 +2.86% to NAV [down]
  CEF 13.86 -4.88% to NAV [down]
  GTU 46.22 -3.41% to NAV [down]

ETF premiums are all lower this week.  They haven't dropped dramatically, but the modest rise in the metals prices didn't seem to have impressed the ETF buyers.

Futures Positioning

The COT report is as of May 13th.  Managed Money bailed out of some longs and increased shorts, for a net change of 8k short contracts this week, a decent-sized move.  Producers increased their short exposure too, by a net 7k short contracts.  Although the metals prices rose, both sides are increasing their short exposure and dropping longs, putting a bit of a bearish note into what is still a fairly bullish long term positioning.

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

Gold: short term DOWN, medium term DOWN, long term NEUTRAL.

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

The moving averages stayed relatively constant this week – although silver started to rebound, it wasn't enough to turn any of its averages positive, and indeed silver remains below all 3 of its averages.  Gold looks a bit better than silver, but it too remains below its averages, although by a much smaller margin.


Gold found support again at 1280, but failed in its attempt to rally above 1310, remaining within a narrowing trading range.  Gold appears to be forming a wedge, unsure if it will rise or fall.  Silver formed a higher low, which suggests that its multi-month downtrend may be at an end.  That doesn't mean it will immediately resume its uptrend, but at the very least, the downside momentum has a decent chance of being broken.

Looking at the various ratios and averages, gold's moving averages remain unchanged, looking mildly bearish, while silver's averages continue solidly downhill.  Silver will need to move sideways or higher for a while for its bounce to be reflected in its moving averages.  GDX:$GOLD fell further, while GDXJ:GDX showed modest improvement, but still appears bearish.  The gold/silver ratio may be topping, which would be bullish for silver and PM overall, but that's still a work in progress.

Miners look weak, with GDX the weakest.  Based on the current trend, I'd expect a "flush" in the mining shares in the near future – which could be a good thing, if the buyers show up.  Sometimes a good flush is just the thing; I get the sense that buyers are sometimes waiting in the wings for the flush to shake out the longs, after which they buy the dip and then a rally ensues.  We can hope anyway.  Of course if a flush happens and no buyers show up, that's another matter entirely.

On the COT report, Producers increased shorts, as did Managed Money.  Positioning remains bullish, but this week (at least through Tuesday) looked distinctly bearish.

Shanghai premiums were very modestly positive, GLD tonnage dropped slightly, and ETF premiums fell.  Physical demand seems basically flat.  At least its not bearish.

So to summarize – silver looks to be improving, gold undecided although with seemingly strong support at 1280, while the miners are heading lower in line with the current trends, and there's not much help from physical demand right now.  Plus commodities overall are weakening, which isn't helping.  It's a mixed bag, but I'll give the nod to the weakening miners, who seem to be determined to make new lows due to the current lack of buyers.

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  • Sat, May 17, 2014 - 06:59pm



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    eurozone bond stress indicator

So way back when, I came up with a eurozone bond stress indicator, which aggregates the spread between the core nation debt & the peripheral nation debt in one synthetic instrument.  The value has been dropping steadily since mid-2012 when it peaked at 2.57%, right up through last week, when it suddenly jumped.

This can be seen in the yields of all the core nations 10 year bonds, which dropped suddenly, and that of the PIGS, which jumped.  Perhaps this also explains the last week of the US bond market rally.

Something has the natives restless over there, for the first time in quite a while.  This could be the start of a big deal.

  • Sat, May 17, 2014 - 07:29pm



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    Re: eurozone bond stress indicator

There is only so much money chasing yield in PIIGS.  We should see ECB begin formal QE operations soon.

  • Sat, May 17, 2014 - 10:14pm



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    chasing yield


There is only so much money chasing yield in PIIGS.

I think a chunk of it was greed from eurozone banks making money on the (formerly high) spread, another chunk was encouragement from local regulators to the local banks to buy as a quid pro quo for "light touch regulation" (i.e. extend & pretend for bubble mortgages), and a third chunk was a momentum trade from hot money.

God help them when the hot money decides its time to split.  It may be starting now.

It does sound like the Bundesbank is at least verbally on board with QE operations.  I suppose I should keep an eye on the ECB balance sheet.  I'm running out of eyes at this rate…

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