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PM Monthly Market Commentary – May 2019

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  • Sat, Jun 01, 2019 - 02:38am

    #1

    davefairtex

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    PM Monthly Market Commentary – May 2019

On Friday, gold shot up +17.18 [+1.33%] to 1310.75 on very heavy volume, while silver moved up +0.05 [+0.38%] to 14.56 on heavy volume. SPX dropped hard [-1.32%], the buck fell [-0.39%], crude was smashed again [-5.39%], bonds shot higher [10Y yield -8 bp to 2.14%], and crappy debt is finally starting to correct [JNK -0.79%]. Lastly, the much-hammered gold mining shares jumped +3.81%. It was quite a busy day.

The cause of Friday’s fuss? Thursday evening, Trump declared that a 5% tariff would be placed on all imports from Mexico starting June 10th if they don’t control the flow of illegal immigration into the US, and that the tariffs will rise 5% each month until such time as things improve. Everything took off (or plunged, in the case of SPX) right at 7:30 pm when Trump made his announcement.

To me, it appears that Trump is determined to get a win on illegal immigration, the Democrats are completely unwilling to give him one, and so he is getting more and more creative in how he will accomplish his goal.

The May metals sector map is showing distinct signs of a safe haven move. Gold is doing well, while silver languishes in negative territory. Senior miners are leading the juniors. What’s more, platinum and copper look horrible. This last pattern is both fallout from the failure of the US-China trade talks, as well as a recession warning. Silver appears to be split between the plunging copper & platinum prices, and rallying gold.  Palladium?  It appears to be charting its own course, although it has fallen from its highs.

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Senior Miners GDX 3.35% -3.36% rising falling rising falling ma50 on 2019-05-31 2019-05-31
Gold/Euro $GOLD:$XEU 2.49% 5.69% rising rising rising falling ma50 on 2019-05-30 2019-05-31
Gold $GOLD 1.72% 0.59% rising falling rising falling ma50 on 2019-05-30 2019-05-31
Junior Miners GDXJ 0.68% -9.78% rising falling falling falling ma200 on 2019-05-31 2019-05-31
Silver $SILVER -2.77% -11.38% rising falling falling falling ema9 on 2019-05-30 2019-05-31
Palladium $PALL -4.00% 35.11% rising falling rising falling ema9 on 2019-05-31 2019-05-31
Silver Miners SIL -5.76% -24.05% rising falling falling falling ema9 on 2019-05-30 2019-05-31
Copper $COPPER -9.48% -14.18% falling falling falling falling ma200 on 2019-05-13 2019-05-31
Platinum $PLAT -11.09% -12.56% falling falling falling falling ma200 on 2019-05-17 2019-05-31

Gold rose +22.17 [+1.72%] to 1310.75. Most of the gains came in the last two days of the month. The bullish engulfing candle was bullish (51%), and forecaster jumped higher into an uptrend. Gold is in an uptrend in all 3 timeframes – as is gold/Euros. On Friday, gold broke through round number 1300 with ease, and not even a vast number (21k) of new paper contracts was enough to keep gold from breaking out.

COMEX GC open interest jumped +21,490 contracts on Friday, and +14,373 contracts over the entire month.

Futures are showing a 17% chance of a rate cut in June, a 24% chance of one rate-cut by December and a massive 70% chance of 2 or more rate cuts. Will the Fed cut at the upcoming June meeting? There is an outside chance they will. By July, the chances are currently 50%.  Things have become very bearish.

Silver fell -0.41 [-2.77%] to 14.56. The opening black marubozu was a bearish continuation, and forecaster inched lower, moving silver into a mild downtrend. Silver daily did end up reversing back into an uptrend on Friday, but overall silver ended the month in a downtrend in both the weekly and monthly timeframes. While gold broke sharply higher on Friday, silver was not able to do so. This is more evidence of a safe haven move.  Money flowed into gold, but not silver.  No reversal for silver this month.

On the month, the gold/silver ratio jumped +3.76 to 89.78. That’s very bearish. It is also a 27-year high for the ratio. At some point it will matter, but so far, silver remains the poor stepchild in the gold/silver duo.

COMEX SI open interest fell -2,312 contracts on Friday, but rose +15,729 contracts on the month.


The miners had some interesting divergences; while GDX jumped +3.35% in May, XAU actually fell -1.60%. I’m not quite sure why the divergence was so large; normally GDX and XAU are more closely matched. XAU’s spinning top was mildly bullish (36%), and forecaster moved into an uptrend. XAU ended the month in an uptrend in all 3 timeframes. While the monthly chart looks at least somewhat bullish, the weekly swing low pattern was extremely bullish (72%). That was all about Friday’s massive rally in the mining shares – all of the GDX gains this month came on Friday.

The GDX:$GOLD ratio rose +1.60% while the GDXJ:GDX ratio fell -2.58. That’s bearish – its a safe haven move, which are famous for unwinding rapidly once the problem goes away. That assumes the problem actually does go away, of course.

USD

The buck rose +0.30 [+0.31%] to 97.21. The short white candle was a bullish continuation, but the forecaster plunged, moving the buck into a downtrend. Friday’s (daily chart) swing high was also bearish (51%). DX ended the month in a downtrend in both weekly and monthly timeframes, with the daily right on the edge of a bearish reversal too.  However – the monthly candle really didn’t look all that dreadful.  While the daily-chart buck looks bearish, I think we could still see higher prices.  I think it all depends on what happens with BRExit.  Boris Johnson could cause the buck to break out all by himself, if he becomes Prime Minister.

This month, the big currency moves were: GBP [-3.05%], JPY [+2.63%], CAD [-0.74%], AUD [-1.44%], and CNY [-2.53%].

Simply put, that’s BRExit, safe haven flight into the Yen, crude dropping, copper dropping, and the failure of the US-China trade talks.

US Equities/SPX

SPX plunged -193.77 [-6.58%] to 2752.06. The bearish engulfing pattern was extremely bearish (76%), and forecaster plunged, but was not quite enough to flip SPX into a downtrend. (DJI, by contrast, did drop into a downtrend this month). SPX ended the week in a downtrend in the daily and weekly timeframes.  Note how SPX and crude both look unhappy together.

The sector map had REITs and utilities leading, while energy, telecom, and tech did worst. This was a bearish sector map.

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Gold Miners GDX 3.35% -3.36% rising falling rising falling ma50 on 2019-05-31 2019-05-31
REIT RWR -0.31% 8.22% falling rising rising rising ma50 on 2019-05-29 2019-05-31
Utilities XLU -0.78% 14.24% falling rising rising falling ma50 on 2019-05-31 2019-05-31
Healthcare XLV -2.22% 5.91% falling falling falling falling ema9 on 2019-05-28 2019-05-31
Cons Staples XLP -3.64% 11.98% falling rising rising rising ma50 on 2019-05-29 2019-05-31
Defense ITA -3.66% 1.43% falling rising falling rising ma50 on 2019-05-31 2019-05-31
Homebuilders XHB -5.66% -2.34% falling rising falling rising ma50 on 2019-05-23 2019-05-31
Financials XLF -7.17% -4.30% falling falling falling rising ma200 on 2019-05-28 2019-05-31
Cons Discretionary XLY -7.60% 4.90% falling falling falling falling ema9 on 2019-05-22 2019-05-31
Industrials XLI -7.64% -3.21% falling falling falling falling ma200 on 2019-05-28 2019-05-31
Materials XLB -8.18% -9.33% falling falling falling falling ema9 on 2019-05-22 2019-05-31
Technology XLK -8.66% 2.85% falling falling falling falling ema9 on 2019-05-17 2019-05-31
Telecom XTL -10.87% -7.75% falling falling falling falling ma200 on 2019-05-09 2019-05-31
Energy XLE -11.10% -22.69% falling falling falling falling ema9 on 2019-05-22 2019-05-31

The US was second from the bottom in global equity performance.

VIX ended the month at 18.71. Given the size of the drop in SPX, that’s actually fairly benign. Puts are still relatively cheap.

Rates & Commodities

Bonds did extremely well this month; TLT was up +6.62%, making a new high on Friday. TY also did quite well, rising +2.41%, the white marubozu candle was a bullish continuation, and forecaster moved higher into an uptrend. There really was no bad news for bonds. The 10-year yield plunged -38 bp to 2.13%.

BAA rates fell -10 bp, a decent-sized rally for lower-grade credit. So far at least, the markets are not concerned about lower-quality issues. (JNK, on the other hand, fell -2.44%; the really crappy stuff is starting to come under pressure). The BAA.AAA differential moved up +6 bp, which tells us that, in spite of the rally in BAA bonds, the AAA items rallied harder. The market is starting to prefer higher quality debt, which is another sign of credit tightening.  Also, the monthly print for BAA.AAA was a bullish harami, which was a 57% bullish reversal.  A rally in the differential = more fear in the credit markets.

Crude plunged -10.04 [-15.80%] to 53.49. Most of the damage happened in the last 7 days, and the last 2 days of the month were especially bad. The monthly bearish engulfing pattern was extremely bearish (77%), and forecaster plunged, dropping crude into a downtrend. Crude ended the month in a downtrend in all 3 timeframes.  Crude looks pretty horrid right now – certainly worse than SPX.

Physical Supply Indicators

* The GLD ETF tonnage on hand fell -3.48 tons, with 743 tons in inventory.

* ETF Discount to NAV:

PHYS 10.40 -2.09% to NAV
PSLV 5.24 -3.94% to NAV
CEF 12.38 -4.02% to NAV

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows no premium for gold, and a 3c premium for silver.

* Big bars premiums were: gold [1kg] 1.35%, and silver [COMEX 1000 oz] 3.71%.

Grey Swans & Geopolitics

  • Ebola: There were 73 new cases this week, down from 127 cases last week. Is this actual good news, or just because fewer cases are being discovered? My guess: more likely than not, it is actual good news. The security situation appears to have improved, as have other epidemic-related metrics: lower numbers of “community deaths”, fewer “nosocomial infections” (infections received at hospital or from a healthcare worker) and an increased percentage of new cases that were reported as contacts. It will be a few weeks before we know for sure. https://www.who.int/csr/don/30-may-2019-ebola-drc/en/
  • EU Elections/BRExit: While the EU elections turned out to be a big win for “the nationalists” across the EU (parties that want more power for their national governments), the more immediate impact was its effect on BRExit. The overwhelming victory of Farage’s BRExit party in the EU election caused the resignation of PM May (effective June 7th), and has propelled Boris Johnson into the leading spot to replace her. Can Johnson execute a hard-brexit without the approval of Parliament? That’s one question. What will happen to the current Labor and Tory parties? That’s another question. As a cherry-on-top, Trump is going to visit the UK (June 3-5) just before May leaves office. Trump mentioned that he likes Boris Johnson. Can you just imagine the vibe at the state dinner?  Maybe its payback for “the Steele Dossier”, constructed by the Trump-hating Mr. Steele, a former MI6 operative.
  • US-China Trade: the negotiations fell apart this month. China accused the US of not being sincere, while the US accused China of backtracking. An article in SCMP hints at what might have been the turning point 5 days prior to the breakdown. It is from a Chinese source, so – grain of salt and all that, but the Chinese sources suggest that the US demanded that China open its Internet, among other things. Another core issue was apparently a US lack of trust in Beijing. That last item definitely sounds plausible – what with 10 years of “promise fatigue”. An intriguing possibility: perhaps the US didn’t want the talks to succeed after all? The US had to have known that “opening the Internet” was a third rail issue for China’s authoritarian government – assuming the article’s sources were telling the truth, of course. https://www.scmp.com/news/china/diplomacy/article/3012049/was-moment-us-china-trade-talks-fell-apart
  • Yield Curve Inversion: the 1-10 spread fell by -12.8 bp to -0.01%, ending the month inverted.
  • North Korea: KJU reportedly executed his top negotiator along with 4 other senior officials one month after February’s failed US-Korea Summit, after first charging them with spying for the US. Others were allegedly sent off to re-education camps. Punishment for failure differential:  fail Trump: “you’re fired”, but fail KJU: “shot to death on the tarmac at Mirim Airport.”  Is this story true?  That is hard to know.  http://english.chosun.com/site/data/html_dir/2019/05/31/2019053101126.html
  • Spygate: AG Barr has begun an investigation into spying (or “surveillance”) on the Trump campaign – and perhaps others – by the Obama administration leading up to the 2016 election. The key question: was the spying properly predicated? AG Barr seems to suggest it wasn’t. Brennan appears to be in the crosshairs of this investigation, along with Comey. I’m not concerned about the investigation itself – it won’t move the needle at all if Brennan gets tossed in prison – it is a hypothetical attempt to forestall the investigation that concerns me. What will the current group of people in the Deep State do if they believe they might get thrown into jail along with Brennan and Comey? What could they do? John F Kennedy comes to mind.  What would that lead to, given the divisions in America right now?  To me, the potential is more alarming than the Mueller Investigation.

Summary

So let’s see. We have bonds going nuts, gold finally breaking higher, the miners putting in a low, while the other metals (platinum, copper) are now dropping hard – leading SPX lower. And of course crude, which plunged an astonishing $10 in just one month.

The crude move is especially interesting, since the US is heavily pressuring both Venezuela and Iran. If you want to read the Washington Establishment’s view on Iran, try this article on for size. Executive Summary: Gosh We Really Love Using Power. https://foreignpolicy.com/2019/05/31/iran-might-not-be-able-to-wait-trump-out/

Oil being crushed in spite of all the geopolitical overhang is quite an achievement. OPEC is even saying how it won’t be increasing production, but nevertheless, price has been pounded down to $53 in just the past two weeks.

Is this just about Trump’s new Tariff regime – with China and now Mexico? Or is it something more?

Its pretty clear the US is in a “goods recession” – both PPIACO and INDPRO have dropped into a downtrend. This happens prior to – or coincident to – recessions. Likewise, the employment series “Working Part Time/Economic Reasons” series has turned up, as it tends to do immediately prior to recessions. In addition, housing has been in a downtrend now for at least six months – supply is higher, sales are down, and prices are lower, even though we have seen a 100 bp drop in mortgage rates since the highs back in October 2018.

The financial markets also believe that a recession is imminent. Futures markets are predicting a 70% chance of 2 cuts by December, and a 50% chance of the first cut coming in July. Also, money is clearly flooding into medium-term bonds; Wolf Richter has an article that details how the yield curve has changed over the past six months. Take a look at his chart: the droopy part tells you into which bond durations that money is flowing.  spoiler: 3 year debt.  https://wolfstreet.com/2019/05/30/yield-curve-spaghetti-middle-age-sag-gets-fatter-may-serve-up-surprises/

However, one caveat remains. As Wolf Richter stated in this week’s Off the Cuff, “services” remain in mostly positive territory. What are services? Well, “services” tend to be a skim off the top of the “real things” economy.

According to BEA: https://www.bea.gov/system/files/2019-04/gdpind418_0.pdf

Goods (20%): agriculture, forestry, fishing, and hunting; mining; construction; and manufacturing

Services (80%): utilities; wholesale trade; retail trade; transportation and warehousing; information; finance, insurance, real estate, rental, and leasing; professional and business services; educational services, health care, and social assistance; arts, entertainment, recreation, accommodation, and food services; and other services, except government

For those keeping score at home, services account for 80% of total private GDP. “Making real stuff”: only 20% of private GDP.

Do we care about real things anymore? Well I suppose if we want to eat, heat our homes, put gas in the cars – and actually have cars, and places to live, real things do matter. But for measured recessions, they don’t matter nearly as much.  What does this mean for the recession?  I’m not sure. But I do think that the uncertainty caused by the twin tariff regime will push the US economy into recession a bit faster than it would have otherwise.

Of course – this assumes the tariffs stay in place. With Trump, you just never know.

There are no shortages of gold or silver at this time.

Gold appears to have reversed, the miners may have reversed also, while silver continues to suffer – at a 27-year-high gold/silver ratio of 89.78. Some day that gold/silver ratio will reverse, but its hard to know when that will be. All I can say for sure is, “no silver reversal this month.”

Current Trends – Monthly:

Uptrend: 10-year treasury, gold/Euros, gold, palladium, utilities, miners, SPX.

Downtrend: copper, platinum, crude, USD, DJIA, silver.

Note: If you’re reading this and are not yet a member of Peak Prosperity’s Gold & Silver Group, please consider joining it now. It’s where our active community of precious metals enthusiasts have focused discussions on the developments most likely to impact gold & silver. Simply go here and click the “Join Today” button.

  • Sat, Jun 01, 2019 - 03:45am

    #2
    RPSTemple

    RPSTemple

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    Service part of the economy is doing fine but……

I notice that Deutche Bank ended the week at all time low of $6.77 having touched $6.74 on Friday.  DB is based in Euroland and therefore does not have the same “connections” to the Fed as the other Wall St banks.

From the share price action DB has problems – big ones – and the other banks, are I am sure, tied to it in more ways than they would like.  If it goes, is it the one that is going bust the “service” sector? 80% of GDP.

Richard

  • Sun, Jun 02, 2019 - 08:34am

    #3
    Nate

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    CAF podcast

Investment advisor and former Assistant Secretary of Housing Catherine Austin Fitts says when it comes to making government accounting secret, there is widespread bipartisan support. We are talking about the new rule from the Federal Accounting Standard Advisory Board (FASAB rule 56) that took government accounting dark. Fitts explains, “If you look at FASAB rule 56, it was approved by both the (Trump) Administration and the bipartisan (Congress) on the same week that everybody was screaming about Judge Kavanaugh. It was passed we had all the hearings on Mr. Kavanaugh’s teenage sex life. At the same time everybody supposedly looks like they are fighting, we had a bipartisan Congress and Administration pass this very quietly underneath the attention given to the Kavanaugh hearings.”

Why did both parties “quietly” pass FASAB rule 56 that makes federal budgets secret? Fitts says, “Since WWII, we have been building secret financial operations, whether it’s the ‘Black Budget’ or what some people call the ‘hidden system of finance.’ Secrecy is a huge financial addiction. I think every member of Congress does not see a way to kick the can down the road without becoming more and more extreme in tactics. I called FASAB 56 ‘secret money for secret armies.’ The same week that passed, an ad came out in one of the mercenary magazines that said ‘Blackwater is coming.’”

Just because trillions of dollars are “missing” and the federal budgets are now “secret” doesn’t mean you cannot see the effects of all the massive amounts of money created. It’s is showing up in the form of inflation, not official inflation calculated by the government, but real inflation for the man on the street. Fitts contends, “The U.S. dollar is getting debased. . . . Inflation is already here. If you are looking at an area with a 14% increase in the cost of goods year over year and your income isn’t rising, or it’s falling, we are already there. It’s not hyperinflation, but it is very significant inflation. It you look at the controls they have put on globally to fight inflation, they are quite significant. The U.S. debt went up 6% last year, and it’s estimated to go up 8% this year. God forbid we try to start any of the wars rattling around the world because the debt will skyrocket. We are in a spiral upward on the amount of debt. Next year, the social security fund will go negative cash flow. In other words, it’s going to stop being a net buyer of Treasuries and is going to be a net seller of Treasuries, which means if the foreigners are not buying, it’s down to the U.S. pension funds and the Fed.”

Fitts says “invest in real things” such as gold, silver, and she “loves farmland.”

Bipartisan Support for Secret Accounting to Hide Missing Money – Catherine Austin Fitts

  • Mon, Jun 03, 2019 - 08:18am

    #4

    davefairtex

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    wolf richter – bond market rally overdone

And he’s also suggesting that the economy isn’t going into the toilet, and the Fed has it right, the bond market is overreacting just like it did back in 2016.  People buying bonds now at 2.16% for a 10-year note are likely to be disappointed.  Or so he says anyway.

Food for thought.

https://wolfstreet.com/2019/06/02/the-wolf-street-report-treasury-market-acts-like-economy-is-in-death-spiral-but-wait/

  • Mon, Jun 03, 2019 - 03:54pm

    #5

    Grover

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    Forecaster Questions

Dave,

First off, thanks for tirelessly putting out these reports with your insights and humor. You make a dry subject enjoyable to read.

Secondly, I understand that the forecaster is a work in progress. I’m just wondering what would happen if one were to buy gold or silver when forecaster changes to positive and sell when it changes to negative. Pick an arbitrary time period – like a year using the daily forecaster to see the net results. Try it just on the current price and also with typical buying and selling commissions. My lying eyes tell me that a better option would be to sell when forecaster peaks and buy when it bottoms.

I know you love getting the computer to do this kind of work. If you have time and inclination to do so, I’d like to see the results. I’m sure others would find this interesting as well.

Thanks,

Grover

  • Tue, Jun 04, 2019 - 10:16am   (Reply to #5)

    #6

    davefairtex

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    re: Forecaster Questions

Grover-

Its an interesting idea.  I’ll go poke around and see if I can come up with an algorithm that figures out when to buy and sell based on trend reversals within the forecaster itself, rather than the simpler zero-line crossing.  Once I do that, figuring out the ROI is pretty easy.

I have to admit, I always get a bit nervous when the forecaster line gets extended in either direction…it reminds me a bit of the RSI, actually…

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