PM End of Week Market Commentary – 9/26/2014
On Friday gold dropped -2.50 to 1220.00 on heavy volume. Silver rallied, moving up +0.16 to 17.65 on moderate volume. PM tried to rally in Asia and London, but then sold off as the dollar broke out to new highs a few hours before the US market opened. However in the last 30 minutes of trading in NY, both gold and silver staged a decent end of day rally, bringing gold almost back to even, and moving silver clearly into positive territory. Traders did not want to be short PM going into the weekend, which I interpret as positive.
What's more, PM's relatively good performance on a day where there was a big [+0.48%] dollar rally was a hopeful sign as well.
On Friday mining shares fell, with GDX off -1.66% on moderate volume, and GDXJ dropped -2.77% on moderately heavy volume. On the charts, GDX closed down right at support, while GDXJ remained comfortably inside its recent trading range. Longer term, GDXJ looks stronger than its cousin GDX.
For the week, gold was up +3.10 [+0.25%], silver down -0.14 [-0.79%], GDX off -3.00% and GDXJ down -4.27%. Miners in general are underperforming metals right now, giving a strong "risk off" signal.
Once again, a strong week for the dollar, which broke above 85 closing up +0.89 [+1.05%] to 85.79. After this breakout, my weekly charts no longer show enough relevant price history – the buck hasn't been above 85 since July 2010.
What caused the buck to rise this week? Euro was off -0.96%, dropping through major support. Canadian Dollar was down -1.73%, and Australian Dollar fell -1.81%. AUD has been in free fall for 3 weeks, down about 5%, correlated to some degree with a falling copper price and a more gently falling Chinese stock market.
One possible reason for the steady decline in the Euro: anticipation of the first cut of those long-awaited bank stress test results. The ECB is starting "supervisory dialogues" with eurozone banks starting Monday, giving each bank preliminary findings of the health assessment.
National supervisors and the ECB must tread a fine line between giving the banks enough time to review their results and prepare responses while avoiding early revelations that would force a bank to disclose the outcome to markets.
Sources told Reuters last week that the ECB will announce the results of its assessment on 26 October.
I'd sure love to be a fly on the wall at those meetings on Monday. Is all that Big Money fleeing Europe already aware of what will be said? Perhaps they are thinking, "I'd rather have a US bank deposit paying me nothing rather than risk a bail-in here in Europe…"
Bottom line is, bankers get a wink and a nod on Monday from their regulator, giving them four weeks to sort out their official response before the great unwashed (you and me) receive the information. Do you think that very valuable market-moving information might manage to find its way to Big Money players between "hint release day" on Monday and 26 October?
Can you imagine a University having such a policy with grades? "Students! We are going to give you a hint as to your final grade on Monday, but we'll do it in such a way so that you don't need to actually tell your parents. Lets see, um, you didn't exactly excel this quarter, but neither did you fail. But since we didn't explicitly tell you, we feel it would be irresponsible of you to disclose this until the formal notification comes out in four weeks. This way you will have some time to get your excuses ready as to why you only got a C…doh!"
One thought. This might end up being a "sell the news" event. Simply avoiding widespread horrible bank results may be enough to cause a rally in the euro. It is dreadfully oversold. Sometimes dramatic news will trump charts, momentum indicators, normal support & resistance lines, and so on.
Mining shares continued falling, with the GDX drop of -3.00% less than that of GDXJ at -4.27%. Still, GDXJ remains 5% above its lows made in late May, while GDX is camped right at its May lows, right at support. Both the price and the volume picture appear better for GDXJ than for GDX.
As we saw a month ago, support breaks can lead to a whole lot of subsequent selling by disciplined traders looking to limit their losses. Let's hope GDX can remain above that 22 (ish) price level, otherwise things could get ugly again.
On Friday, SPX rallied back +17 from its Thursday loss, enough to move SPX back above its 50 MA but not enough to make up for Thursday's losses. On the week SPX was down -28 [-1.37%] closing at 1982.85. VIX was up +2.74 to 14.85, rising because of the see-saw back and forth price action in SPX. Current momentum appears to be driving prices lower in SPX.
Rates & Commodities
Bonds rose, with TLT up +1.22%, most likely rising off the equity market's weakness. TLT managed to regain its 50 MA, but its current chart does not look quite as strong as it did over the past six months. Perhaps there are some worries about tapering that are finally being felt.
Commodities dropped Monday, and then largely tracked sideways for the next four days, down -0.49% for the week. Still, the chart looks at least somewhat hopeful, especially given the dollar's strength during that same timeframe.
Oil was mixed this week; WTIC was up +1.59 to 93.36 looking like it might in the process of double-bottoming at 90.50. Brent dropped -1.39 to 97.00, Brent clearly struggling to avoid another breakdown. It looks like the two oil contracts are resolving supply/demand issues between them; perhaps thats a just reflection of stronger US oil demand vs weaker demand in Europe.
Physical Supply Indicators
* Premiums in Shanghai vs COMEX were up +2.41 this week, closing at +5.26. While premiums remain relatively modest, spot gold delivery volumes have risen dramatically – equaling the levels last seen after the 2013 gold crash. The relatively modest premium suggests to me that Shanghai is well supplied, but the volumes suggest that the Chinese are buying here en masse.
* The GLD ETF lost -4.19 tons, with 772.25 tons remaining.
* Registered gold at COMEX dropped -0.82 tons, with 30.63 tons remaining.
* ETF Premium/Discount to NAV; gold closing (15:59 close price on September 26) of 1218.00 and silver 17.61:
OUNZ 12.16 -0.02% to NAV [up]
PSLV 7.07 +3.37% to NAV [down]
PHYS 10.06 -0.63% to NAV [up]
CEF 12.58 -7.01% to NAV [up]
GTU 41.76 -7.31% to NAV [up]
ETF premiums were mixed but mostly up modestly, with only PSLV falling substantially from its 4+% premium of last week.
The COT report is as of September 23rd, when gold was trading around 1223 and silver around 17.77.
In gold, Managed Money added 6.9k shorts, and dropped -3.2k longs, an increase in the net short position but somewhat less than I would have thought. Producers did not change much at all, with a net long increase of about 2.1k contracts.
In silver, Managed Money activity was mixed; they both reduced shorts by -1.6k and longs by -1.0k, likely because of Monday's big drop followed by a short-covering rebound. Still, Managed Money has its second highest short position ever, which sets up a good environment for a short-covering rally if the rest of the market can only cooperate. Producers closed out -800 shorts, pushing to the most bullish "net" position in history.
Of the actors in this drama, Producers are most often right about direction, and their positioning suggests a silver turning point should not be too far in the future.
Moving Average Trends [20 EMA, 50 MA, 200 MA]
Gold: short term DOWN, medium term DOWN, long term DOWN.
Silver: short term DOWN, medium term DOWN, long term DOWN
Down. Moving averages are all pointing down.
This week gold tracked sideways, while silver continued falling, and the miners sold off as well. Gold momentum indicators suggest Gold may have hit bottom, while silver's momentum is still lower.
From the moving average perspective, gold and silver are bearish in all timeframes. The gold:silver ratio moved up +0.72 to 69.12, another new cycle high. GDX:$GOLD continued falling and is bearish, and GDXJ:GDX dropped too and is now looking neutral. SIL:$SILVER fell further and looks bearish. The picture continues to be almost entirely bearish – more so this week than last. Miners are giving off a strong risk off signal for PM.
The COT reports this week saw Managed Money continuing to go short in gold, but ending up more or less neutral in silver. Producers are at an all time high net long position for silver. Overall, the COT reports suggest a turning point in the market should be coming up soon.
Shanghai premiums are up this week and remain modestly positive, deliveries of spot gold in China have been very strong, GLD tonnage dropped, and the ETF premiums in general are up. Physical demand looks strong.
Gold's positive performance this week in the face of a strong dollar breakout is a hopeful sign that perhaps we are approaching the end of this particular move lower in PM. While the miners haven't received the message just yet, I feel it is likely they will move higher if and when the buck stops rising, based on price movements I've seen intraday.
Once again, we await moves in the currency market. Those international capital flows are driving everything right now. Perhaps Monday's wink-and-nod ECB regulator/bank meetings will provide some hints (that will of course leak out into the market) as to where we go from here. As always, a continuing drop in the euro would probably be bad news for PM.
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Do I detect a change in the behaviour of silver? Is it just me or has it's plunge been especially steep just recently?
Take the inverse of the chart. If you saw such a steep curve upward you might consider that it was in a bubble. Or was going critical.
So take a negative mirrored image again. If the spike upward was anything to go by we could expect a violent spike downward and then an equally astonishing spike upward. It all looks like volatility to me. I am going to take Harvey Organ at his word and buy around the middle of November.
Well, that is my opinion for this hour.
There are two schools of thought here.
My school of thought is that gold is a "monetary commodity" where gold and silver are affected by commodity prices as well as currency prices, with a "lottery ticket" possibility if there is a monetary reset after some big deflationary crash. But until this "reset" which will only happen after some Really Big Disaster, correlations matter, trends matter, and so these are the things I watch for clues as to price direction for PM. Currently, my momentum indicators say that PM right now is oversold, and silver more oversold than gold. Its not just your imagination. But my guess is, until the buck stops driving higher, PM remains at risk. But at this moment, the buck is ridiculously overbought. It could top at any moment, and the rebound should be impressive. "Right around now" might be a decent time to pick up some more for your "reset" stash hedge.
The other school of thought is that gold is the center of the monetary universe, and the corollary to this is that central bankers must therefore control its price. To control the price, they must sell their gold onto the market, and for the control to be effective, these sales must be kept secret. However after enough years of secret gold sales, the central banks must eventually run out of gold to sell. Predicting this "out of gold event" is the main focus for people who have this worldview. Trend analysis doesn't matter, momentum doesn't matter, correlations of prices to commodities or the dollar don't matter, the only question is – how close are the central banks to running out of gold. In the effort to predict this monumental, world-changing event, every potential hint or rumor is tirelessly run down and expounded on at length. Almost as obsessively as I watch my charts!
People in this second school also believe in the "monetary reset" scenario. That's where we have overlap.
But short of "the reset", for Harvey it doesn't matter that silver is oversold, or that the dollar is rising and might top out leading to a rebound in PM. He doesn't care. He is waiting for is the "out of gold" event. Or in this case, the analogous "out-of-silver" event.
You can't really mix the two world views. They don't play well together.
Here's why: if you believe the out-of-gold event is nigh, whether the price is in an uptrend or a downtrend simply doesn't matter, gold should be bought immediately. And if the out-of-gold event is NOT nigh, then its probably not the right time to buy gold regardless of what the trend says or where the price happens to be. Those Central Bankers will continue hammering the gold price for as long as they can – no price is too low for them.
The problem for normal people is, this second school of thought generates yearly or twice-yearly buy signals. It was generating buy signals at gold 1900 and silver 50, and it is generating buy signals here around gold 1220 and silver 17.50.
Since I have a hedge in place, I feel covered for either a "reset" or an out-of-gold scenario. I see no need to load up and make a killing from my gold holdings. It is insurance, not a get-rich-because-I'm-right scheme.
But if I were to advise people as to the timing of purchases, I'd generally favor the trend analysis approach, since I would prefer to avoid suggesting that people buy high, buy low, and buy at all points in between…
Dave, I think it is helpful to discuss the two views… and I think if we were to run a poll here at PP.com, a large majority would be generally aligned with the second view, hence I appreciate your speaking from this perspective as much as you can. I would define the second view a little differently.. you said;
The other school of thought is that gold is the center of the monetary universe, and the corollary to this is that central bankers must therefore control its price.
Some may think it nit picking, but I would rather call Gold the standard in the monetary universe.. using the term of, "standard" in the same way we consider any scientific or engineering standard used for the purposes of keeping weights and measures calibrated. Gold is the calibration standard for the monetary universe – YES.
In science and engineering we use standards all the time to keep us on a level playing field for all nature of things being measured… and this is the purpose in life for NIST. Now do you know that your thermometer is reading true? There's an app. for that;
How do you know that your particle size measurement instrument is calibrated correctly for the size of the Gold nanoparticles you are functionalizing for biochemical reactivity? (note that Jim H has a very small investment in NSPH). There's an app. for that;
Similar to the way we need to find our footing in science and engineering through the use of standards, we need some kind of fixed, non-printable monetary standard. Gold, and Silver to a lesser extent, are those. Because the flow (newly mined Gold) is so small relative to the stock (existing stored Gold) the amount of Gold is relatively fixed vs. the much more dramatic changes that can and do occur in the world of infinitely printable fiat monetary units.
For those of us who have been convinced based on the evidence that the second view reflects reality, it is obvious why the monetary powers that be would want to subvert the reference…. they don't want it to tell the tale of their monetary excesses. We all know that TPTB are attempting to subvert reality on many fronts… is it hard to imagine that the propaganda extends to the price of Gold and Silver?
Dave makes the case, as part of his argument for the first view, that the FED does not in fact think much about Gold. I have tried to show that other central bankers DO think about Gold, because they are buying it on a regular basis. In terms of Gold's function as a reference, the head of the world bank wrote an interesting Op-Ed a few years ago;
In an op-ed piece in the Financial Times, the World Bank’s president suggested that the dollar, the euro, the yen, the pound, and the Chinese renminbi be included in a “plan to build a co-operative monetary system that reflects emerging economic conditions.” Gold could be used to assess market expectations for inflation, deflation, and future currency values. But then, Zoellick said that “although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today,” adding ambiguity over the meaning of his words.
Yes, it would be nice to have a functioning reference standard against which to gauge, "future currency values". View #2 boils down to a very simple observation: You can suppress the price of Silver and Gold in the paper markets, but you can't print them. When a critical mass of market participants wake up and pull the last available Gold and Silver out of circulation, the gig will be up and a reset will occur. If you want to know why Silver appears to be getting pounded even more than Gold, it is easy to understand in the context of view #2, because central banks don't hold Silver.. they lack as much ability to obfuscate in this market by selling real physical into it, hence the efforts to kill speculative interest must be even more energetic.
I don't know whether Harvey is correct in his speculations about China holding the big Comex long Silver position.. but one way or another the (paper) markets will eventually break. I think the recent Andrew Maguire interview on KWN talks in less speculative terms about how the system is going to break.. with (true) price discovery moving Eastward with the internationalization of the exchanges in China and Singapore happening now. The website is not working.. here is a general link;
I'm new to this column but not new to PM's and PM price manipulation. I've read thousands of articles/interviews and communicated by email with several of the authors or writers. Until manipulation ends [default? some other trigger?] the real fact is the spot prices are completely under control of the manipulators. In my opinion Ed Steer's column with his source information from friend Ted Butler will give the most warning of when the manipulation scheme may break. Here is an excerpt from a column last week:
"It's obvious that the bear raids in the precious metals, copper and oil, by JPMorgan et al have reached a new level of ferocity the likes of which I, nor anyone else reading these words, has ever seen since I began tracking these markets back in 1999. The powers-that-be are pulling out all the stops on this one. When it all ends is now impossible to tell. One thing is for sure, is that the engineered price declines we've been witnessing for the past couple of months have nothing whatsoever to do with supply and demand. It's all paper games between 'da boyz' and the technical funds in the managed money category."
All predictions rather than observation of the facts & mechanics of PM manipulation is a mental exercise, and can not predict when or where PM's priced in fiat will move up substantially.
I am a fellow student of the dual markets, i.e. the paper, and the physical. Here is something new that will be effecting the paper futures markets, and would, to my mind, further drive out the small speculators, leaving the casino to be overrun further by the whales;
Precious Metals Prices are going to get more volatile starting October 1. The CME Group (NASDAQ: CME), which owns the COMEX, NYMEX, GLOBEX, and other commodity exchanges, has announced new margin rules on leveraged accounts to take effect that date in order to comply with the Dodd-Frank law.
Leveraged investments are those where the investor borrows funds, usually from the broker, in order to purchase or sell short a larger quantity of an asset than would be possible with just the funds the investor had available. The attraction of a leveraged investment is that it magnifies your profits should the market move in the investor’s favor. For instance, an investor might have $20,000 to purchase 1,000 ounces of physical silver. Instead, by the use of leverage, the investor borrows $180,000 to add to his own funds in order to purchase 10,000 ounces. If the price of silver rises by $1.00 per ounce, the investor is ahead 50% on the funds personally provided, minus the interest cost of the borrowed funds. In a leveraged short sale, the investor magnifies profits if the asset’s value drops below the purchase price.
The negative side of leveraged accounts is that when the market moves in the opposite direction of what the investor expects, losses are also magnified. Taking the example in the previous paragraph, an investor who borrowed $180,000 to add to his own $20,000 to purchase 10,000 ounces of silver would be in a loss position of $10,000 if the price of silver fell by $1.00 per ounce. Since the silver would then be only worth $190,000, a 90% leveraged position would require that the investor’s maximum loan for the investment to be $171,000. In such an instance, the investor would have to come up with another $9,000 to pay down the loan. This causes a 45% loss of original capital on just a 5% drop in the price of the asset. If the investor could not deliver funds against this margin call in the allowed time frame, the broker would close the position, returning only $11,000 to the investor minus the interest costs.
Up until October 1, CME Group has allowed investors 3-5 days to scrounge up funds to cover margin calls on leveraged holdings that are underwater. Beginning October 1, investors will only have one day to get funds to their broker.
Every time there is any kind of move in prices of investments, margin calls are triggered for some leveraged parties. Even under current rules, some investors are simply unable to come up with the funds within 3-5 days. If margin calls are not meant, the broker sells off their position. Closing the position puts even more pressure for prices to continue in the direction they were already headed.
Under the coming rule, fewer investors will be able to come up with funds in only one day. What this means is that a greater percentage of leveraged precious metals investors will be closed out of their long positions if prices fall, and that more leveraged investors will be closed out of their short positions should prices rise. Obviously, the more the price moves, the greater will be the number of margin calls hitting investors.
Don’t blame the brokers for this change that will make prices more volatile—which generally will increase the risk of loss. It was Congress and the President who enacted the Dodd-Frank Law.
In the article posted above, which is clearly referring to paper "shares" of a PM [Comex trading] it is interesting to note this from the article:
"The attraction of a leveraged investment is that it magnifies your profits should the market move in the investor’s favor. For instance, an investor might have $20,000 to purchase 1,000 ounces of physical silver. Instead, by the use of leverage…"
Note the mention of physical silver. Yes some large eligible traders may take physical delivery, but the Comex is not primarily a market for physical anything other than paper contracts.
The article starts out with:
"Precious Metals Prices are going to get more volatile starting October 1. The CME Group (NASDAQ: CME), which owns the COMEX, NYMEX, GLOBEX, and other commodity exchanges, has announced new margin rules on leveraged accounts to take effect that date in order to comply with the Dodd-Frank law."
And goes on to say:
"Don’t blame the brokers for this change that will make prices more volatile—which generally will increase the risk of loss. It was Congress and the President who enacted the Dodd-Frank Law."
I don't think it will make trading significantly more volatile. And neither Congress nor the president controls the financial sector, like the JPM et al manipulators. Congress is owned by and gets their marching orders from the financial sector. The Fed Reserve + TBTF banks + Wall Street oligarchs are far more powerful than Congress. The U.S. is an oligarchy.
The Dodd-Frank law is a gesture that will have minimal effect on anything. We also have an attorney general who has not and will not prosecute anyone in these financial institutions, even when caught laundering drug money or breaking numerous laws.
I don't know this author but someone who follows these markets every day for years and writes a daily column was unimpressed by the content of this article…and the likelihood of anything changing due to new margin rules or Dodd-Frank or anything until, for whatever reason[s], the manipulation stops.
That reason would be a default and the only entity who would insist on delivery that would break the system is a country [Russia or China] that is ready to face the full wrath of the Fed and it's long punitive reach.
Dave, I think it is helpful to discuss the two views… and I think if we were to run a poll here at PP.com, a large majority would be generally aligned with the second view, hence I appreciate your speaking from this perspective as much as you can.
Hmm, well polls never struck me as a particularly compelling way to get at truth.
Here's my core issue:
The almost-out-of-gold people have been issuing buy signals steadily for the past 14 years. "The manipulation" is always just about to end in tears, and the resulting advice is always to buy gold now. As a result, the advice from this group appears independent of price movements. Regardless of low prices, or high prices, the conclusion is always "buy gold." This consistent advice works great at the lows, and it works terribly at the highs.
And so I prefer not to be a part of such a constant drumbeat to buy gold regardless of price. Those poor people who were egged on by the almost-out-of-gold group in 2011 to buy silver at 50 (metals were "breaking free" of the manipulation, you see), do you imagine they are happy now with silver at 17? They probably feel conned.
Unless of course they still believe – "it was all about manipulation…it is just about to end in tears…gold will hit $5000 next year for sure…silver will be at $200!"
I prefer to use the "buy low sell high" approach. Now, for instance, the price of silver seems to be getting pretty low…and if the dollar would just cooperate and reverse, right around now would seem to be a good time to buy. This is not because I'm expecting us to run out of silver in November like Harvey suggests, but because silver is a decent value at this price. Right now, we are buying now below its cost of production, which over the long term will put a floor on the price. Simply because of peak resources and peak cheap oil this will probably end up being a wise purchase even if we never, ever have a COMEX default and the central banks have every ounce they claim to have.
Could price drop more? In a deflationary accident, it sure could. So going "all in" seems like a bad idea. Still, this buy-point seems to be a good one for the longer term.
Ultimately, buying because of trends (rather than on imminent default rumors) will end up with people avoiding buying the hype at the tops and then seeing price decline for years at a time. Commodities have price cycles as we have seen. We can claim its all about manipulation and thus avoid feeling guilty by advising people to load up and buy at $50 – the point of maximum hype – or we can understand that commodity price cycles happen, and choose to avoid buying near the peaks of the cycle: oil at $147 in 2008, silver at $50 in 2011, McMansions in 2006, dotcom stocks in 1999, equities and junk bonds here in 2014, etc.
I could totally be wrong, and the COMEX could have its default in November. Its impossible to prove that something won't happen. But I'm going with the odds. My advice: don't buy because you feel "the manipulation is about to end for sure this time", buy because its a good price, hopefully near the lows of the latest commodity price cycle, below the cost of mining. And the next time the commodity cycle goes nuts possibly years from now, you might actually have the courage to sell a portion of your holdings closer to the peaks, near the point of maximum hype. Wouldn't that be cool?
Jim, I delegate to you the task of reporting the very latest report from the almost-out-of-gold group. We all benefit from having a wide variety of information. For my part, I'll definitely look more closely at the evidence if it is backed up by a measurable and consistent premium expansion in bulk gold and silver, but otherwise I prefer to stick to my boring price & volume discipline with the goal being "buy low, and sell high."
Thank you for the response Dave,
We are not going to run out of Gold… there is 80 years of mined Gold sitting around in the world. The questions are as follows;
1) Where is that Gold? Quite a bit of it seems to be shifting geographic location.. not clear at what price, if any, it will be induced to move back toward the West.
2) At what price do supply vs. demand balance? With China right now, today, back to sucking up almost the entirety of world mine supply on a weekly basis (https://www.bullionstar.com/article/chinese%20gold%20demand%20explosive) and India and many central banks back to buying… it's not hard to see that today's dropping price is somehow disconnected from the reality of physical demand.
We all know how this works… price is "discovered" in the paper futures market, not the physical markets. Unlike the stock markets, where sales of naked shorts are illegal, this is NOT illegal in the metals market (as long as the activity can be loosely couched in the service of valid hedging). The question we must ask ourselves is this; How big is the gap between the present price, and a free market price that represents a balance of supply vs. demand?
I think this is where my view and Dave's differ. I think the gap is large.. it's hard to put a number on it, but let's just say, 50 – 100%, in today dollars, with today known/knowns. Where do you think a free market price, balanced by only supply vs. demand, and valid (those holding phys) hedgers, would fall Dave?
Finally, It needs to be stated that Silver is a completely different animal as compared to Gold, from a stock to flow standpoint. My prediction is that if TPTB continue pushing down the price of the paper Silver, then the stocks of available physical investment Silver will run out. The LCS shelves will be empty. The world will be hand-to-mouth for Silver supply.
One scenario I see unfolding is this – I will call this the Ricard's scenario ( I will find a link later); The current deflation head fake continues… Taper completes and the underlying US economy continues to weaken and limp along. Gold and Silver sentiment in the West remains poor as the physical stocks available such as the SGE Silver stockpile, continue to get drained. Then at the point of maximum wrong footedness on the part of Western investors, the Rickard's scenario unfolds… The new batch of money printers (FED committee members) gets voted into place in January, giving Janet Yellin free rein to recommence the money printing. New QE comes into the face of depleted phys stocks… the singularity arrives.. investors clamoring for physical can't get any.