PM End of Week Market Commentary – 6/13/2014
Happy Friday the 13th!
Today gold closed up +3.40 to 1276.60 on light volume, while silver was up +0.15 to 19.66 on moderately heavy volume. Silver hit new highs today, and so did gold. Both metals just seemed to slowly melt up during the NY session, closing relatively near the highs for the day.
Mining shares were down early in the day, with traders looking like they were taking profits, but then they rallied, with GDX closing up +0.33% on moderately heavy volume. GDXJ had a big trading range but closed almost even, -0.44% on very heavy volume. With buyers showing up to the miners after rallying all this week, I take it as relatively bullish sign.
For the week gold was up +24.20 [+1.93%], silver +0.66 [+3.47%], GDX up +6.49% and GDXJ up a massive +13.00%.
Over the past several weeks, the gold/silver ratio has dropped to 64.93, several points below where it was two months ago. A dropping gold/silver ratio is generally positive for PM.
Last week it seemed that GDXJ was indicating good times ahead for PM and the miners. It sure wasn't kidding. GDX moved past three different moving averages just this week, with some decent volume on the up-days. GDXJ did even better, moving strongly through its 50 and 200 MA on massive volume. What's more, the 20 EMA of GDXJ is now crossing back above the 50, and the 50 is starting to curve higher as well.
Contrast GDX with GDXJ. GDX did break out of its consolidation area, and on Friday it managed to squeak above its 200 MA, so far so good. The volume is just ok for a rally, and it still hasn't surpassed its previous "lower high" – which means the GDX downtrend hasn't been formally ended, even though things are much improved over where they were last week, and GDX has more than recaptured its losses from the breakdown.
Compare this to GDXJ, which has moved way above its 200 MA, and moved past 2 previous "lower highs", conclusively ending its downtrend pattern. Volume is absolutely terrific.
Conclusion: GDXJ leading GDX – we can see this even without looking at the ratio chart. We saw the hints of this move last week when GDXJ:GDX started to break higher, and now we see the results this week. Definitely, "buying the breakout" for GDXJ when it starts to lead GDX seems to have been a decent strategy this time around.
SPX topped and fell back a bit, closing down -13 [-0.68%] to 1936. Perhaps it was higher oil prices, or perhaps it was just time for the market to take one of its infrequent breaks. Insurance is slightly more expensive, with the VIX closing at 12.18, but is still quite low by historical standards.
The buck moved higher, up +0.19 [+0.23%] to 80.62. It looks like Draghi is being taken at least somewhat seriously, although momentum in the buck's move higher seems to have stalled a bit.
Rates & Commodities
TLT rallied, up +0.50% bouncing off its 50 MA three different times. Yield is down to 3.14%. An unexpectedly solid 30 year auction on Thursday helped bonds recover their footing. A correction in the broader market should help bonds to rally, and of course a new high in SPX next week will likely be bad for bonds.
Commodities were largely unchanged this week, closing up +0.22%. This hid a big move higher in oil (+3.87% to $106.77) and a medium-sized move lower in copper (-1.05% to 3.03). China's stock market actually rose +2.28% this week, so that suggests that while there may be issues with warehouse receipts and copper (and other base metals), traders do not think it will affect the larger economy in China. We'll see if they end up being right.
Physical Supply Indicators
* Premiums in Shanghai are down this week, dropping -2.68 to just +0.14 over COMEX. Premiums have fallen with the rise in the metal, but delivery volumes have risen as well. However, sellers appear to be outnumbering buyers at the SGE on the Au(T+D) (futures) contract, which suggests that Chinese traders are looking to get out of positions they have at the SGE.
* The GLD ETF remained unchanged, with 787.08 tons remaining.
* Registered gold at COMEX remains unchanged at 29.04 tons.
* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1277.10 and silver 19.69:
PHYS 10.58 -0.46% to NAV [up]
PSLV 7.84 +2.37% to NAV [up]
CEF 13.84 -4.96% to NAV [up]
GTU 44.54 -3.63 to NAV [up]
ETF premiums all climbed this week. Western buyers are starting to get more interested in PM.
The COT report is as of June 11th. Managed Money positions in gold remain more or less unchanged – they increased both long and short exposure, retaining their relatively high gold short position. Producers reduced both long and short positions, remaining unchanged on net basis.
In silver, Managed Money covered 3.5k shorts, burned by the rise in silver off the 19 low. Producers increased short positions marginally, remaining at a historically low net short position.
The short covering has started in silver. Lets see where it goes from here.
Moving Average Trends [20 EMA, 50 MA, 200 MA]
Gold: short term UP, medium term NEUTRAL, long term DOWN.
Silver: short term UP, medium term DOWN, long term DOWN
The rally in PM has moved the short term moving averages to UP, and with gold it has turned the medium term moving average to NEUTRAL. Moving averages are signaling "early bullish".
After finding a bottom at 1240, gold steadily climbed higher this week, moving up towards first resistance at 1280. Volume remains low, and so the move higher looks a bit unconvincing. Not so the move in silver, after bouncing off 18.75, it has rallied and managed to recover everything lost in the drop two weeks ago and then some, on generally increasing volume.
Looking at the various ratios and averages, both gold and silver's EMA 20 has started to turn up, giving off an "early bullish" signal. Medium and longer term momentum still remains down. Gold/silver ratio has continued dropping, causing the ratio's 20 EMA to move below its 50 MA, bearish for the ratio, but bullish for PM. GDX:$GOLD is rallying strongly, moving above all 3 moving averages, and looking bullish. GDXJ:GDX has rallied most strongly of all, reaching almost to that ratio's high set back in February. The picture of a trend change in progress is clear.
The COT reports this week showed Managed Money starting to cover short in silver, and positions largely unchanged in gold. In silver, all that short covering will provide the fuel for the initial move higher, and that should drag gold higher along with it. That's the theory anyway.
Shanghai premiums are more or less flat, GLD tonnage is unchanged, and ETF premiums were up. Physical demand seems neutral. June is known to be a weak month for gold.
Trends are showing early bullish, leading indicators are definitely bullish, miners are doing well as is silver, with only gold looking sluggish. Lets see how the next phase plays out. I wouldn't be too surprised to see PM take a rest next week, especially the hyperactive junior miners.
What do you guys make of this story in the FT:
that central banks are pouring many trillions directly into the equity markets, including PMs?
I always thought the Fed's money was laundered thru the TBTF banks by their bond buying. This suggests they're running the world's biggest prop-trading desk!
Thank you for this comprehensive response. I presume the Fed's balance sheet is included in the $29T number, but if so I would expect the "added at least 1T in recent years" would be much higher. It still begs the question as to whether the Fed itself owns any equities directly (other than MBS).
Ha just to be clear, my "comprehensive response" was a cut & paste of the report summary, not my own work. Sorry I didn't indent it property.
The neat thing about that report is, it doesn't NEED to be our Central Bank buying equities to explain why the equity market has just continued moving higher. It only needs to be someone else's Central Bank. Switzerland perhaps. Or Japan. (Both have acknowledged buying equities with their reserves). Or China. Or a Sovereign Wealth fund.
Does our Fed own equities? At this point its just a question for the conspiracy-minded, of which I am one. Assuming the leaders at the Fed don't want to actually be breaking the law and their balance sheet is legitimate (and these guys are paid like bureaucrats, not bankers – there's no big payday for them to justify taking such a risk):
In english: Treasury holdings + Liquidity Swaps + Reverse Repos + MBS Holdings + Other Loans + Other Assets. (I excluded a bunch of stuff from the 2008-2010 era – Maiden Lane assets, TALF, etc)
So, "Other Loans" is right now about $183 million. "Other Assets" is $24.9 billion. There's not a lot of room in there for a big equity position.
Now they might have lent money to a firm to do their work for them, or they might have lent treasury bonds to a firm for the same purpose, but taking a long term risk position in equities directly counter to their charter puts them in a sticky situation. Is $200k/year enough money to risk doing something that? If it goes wrong, they could easily be thrown under the bus by a pissed off Congress.
If I were the Chairman I'd have to think long and hard before signing up to be an even bigger hedge fund manager than I already was, taking the risk of breaking the law, while getting zero reward for it.
Bonds – they already do and know, and are legally allowed to do. Equities – its another kettle of fish entirely.