PM Monthly Market Commentary – Nov 2018
Once again, end of month fell on a weekend, so I’ll be doing a monthly update rather than a weekly.
On Friday, gold fell -1.86 [-0.15%] to 1228.09 on light volume, while silver dropped -0.13 [-0.94%] to 14.25 on moderately heavy volume. The buck rose +0.51%, a strong move, which definitely pulled metals prices lower. Also at play was the accelerating collapse of platinum: platinum dropped -2.50%, and I suspect that helped pull the rest of the metals lower as well.
Late-breaking news: on Saturday following the G-20, Trump and Xi have agreed to a “trade war ceasefire” – the imposition of 25% tariffs will be postponed for 90 days while the US and China work on settling their issues. More detail in the geopolitics section. This news is certain to affect prices on Monday. We are in what an old teacher of mine used to call “a news-driven market.”
This month, the metals sector map shows an interesting divergence: while palladium and copper have done well, platinum did worst of all, with gold and silver in the middle of the pack. Gold led silver, senior miners led juniors; that’s bearish. Something is up again with platinum – perhaps it is related to the auto industry.
|Name||Chart||Chg (M)||52w ch||MA9||MA50||MA200||50/200||Last Crossing||last|
|Palladium||$PALL||7.71%||14.39%||falling||rising||rising||rising||ema9 on 2018-11-28||2018-11-30|
|Copper||$COPPER||4.94%||-8.84%||falling||rising||falling||rising||ema9 on 2018-11-28||2018-11-30|
|Gold||$GOLD||0.96%||-3.90%||rising||rising||falling||rising||ema9 on 2018-11-28||2018-11-30|
|Senior Miners||GDX||0.85%||-15.04%||falling||rising||falling||rising||ema9 on 2018-11-29||2018-11-30|
|Gold/Euro||$GOLD:$XEU||0.79%||1.30%||rising||rising||falling||rising||ema9 on 2018-11-30||2018-11-30|
|Silver||$SILVER||0.04%||-13.43%||falling||falling||falling||rising||ema9 on 2018-11-30||2018-11-30|
|Silver Miners||SIL||-0.09%||-25.81%||falling||falling||falling||rising||ema9 on 2018-11-23||2018-11-30|
|Junior Miners||GDXJ||-2.67%||-15.99%||falling||falling||falling||falling||ema9 on 2018-11-26||2018-11-30|
|Platinum||$PLAT||-4.62%||-15.16%||falling||falling||falling||rising||ema9 on 2018-11-27||2018-11-30|
Gold rose +7.62 [+0.62%] this month. The short white/spinning top candle was unrated, the monthly forecaster did move higher but it was not quite enough for a buy signal, nor enough for a swing low. Things are improving, but only slowly. Gold/Euros monthly is in an uptrend – it issued a buy signal last month.
The December rate-increase chances rose to 83%.
COMEX GC open interest fell -88.9k contracts this month; the drop occurred during the past week, which saw the largest weekly drop (-132k contracts) in the history of the GC contract. What does this mean? I don’t think its bearish.
COT report shows commercial net rose +7k contracts, which was 29k longs sold, and 36k shorts covered. Managed money net fell -6.5k contracts, 4.4k longs sold, and 2.1k shorts added. The change in net was negligible this week. Commercial net remains at near-record (high) levels.
Silver rose +0.01 [+0.04%] this month, making a new low to 13.86, but managing to bounce back. The long-legged doji candle was bullish (53% reversal), but forecaster fell anyway, issuing a sell signal. The previous low, set back in Dec 2015, is 13.62. Might we be seeing a replay of 2015? Perhaps. It probably depends on what happens with tariffs and China.
The gold/silver ratio rose +0.95 to 86.18. That’s bearish. Last time the ratio was this high was back in the 1990s, when silver was trading around 6.
COMEX SI open interest fell -24.3k contracts.
The commercial net position fell -1.9k contracts; 3.4k fewer longs, and 1.4k covered shorts. Managed money net rose +1k contracts, with 2.6k fewer longs, and 3.7k covered shorts. These were minor changes; managed money remains fairly heavily net short, but is no longer at the extremes.
Miners rose +0.28%, basically unchanged. The doji candle was possibly bullish (53% reversal), and forecaster issued a buy signal this month. Over the past 3 months, miners have largely moved sideways, which looks similar to what happened back at the end of 2015, at the lows. The hope of course is that we’ll see the same sort of outcome.
The GDX:$GOLD ratio rose +0.22% while the GDXJ:GDX ratio fell -3.49%. That’s bearish. Those juniors aren’t doing so well.
The buck rose +0.13 [+0.13%] this month, more or less unchanged. The buck made a new high to 97.18; the doji candle was a bullish continuation, and forecaster remains in an uptrend as it has for 8 months.
This month, DX currencies were mixed; the buck rose against CAD and JPY, and fell against CHF, and AUD, while EUR was more or less unchanged. The buck fell against most emerging markets currencies; there were some pretty big moves (TRY:-6.65%, ZAR:-6.17%, INR:-5.87%).
SPX rose +48.42 [+1.79%] to 2760.16. SPX managed to avoid making a new low, and rallied strongly over the past week back up to the 200 MA. The resulting bullish harami candle print looked strong (66% bullish reversal), and the monthly forecaster issued a buy signal. I suspect there will be substantially more gains next week after the interim settlement with China on trade at the G-20.
The sector map had sickcare leading (with a new all time closing high for the sector on Friday – perhaps healthcare costs have risen to 21% of US GDP) along with REITs and homebuilders, while tech and energy did worst. Tech at the bottom of the heap means a bearish sector map.
VIX ended the month at 18.07.
|Name||Chart||Chg (M)||52w ch||MA9||MA50||MA200||50/200||Last Crossing||last|
|Healthcare||XLV||8.08%||14.86%||rising||rising||rising||falling||ma50 on 2018-11-28||2018-11-30|
|REIT||RWR||4.90%||1.05%||rising||falling||rising||falling||ema9 on 2018-11-27||2018-11-30|
|Homebuilders||XHB||4.47%||-18.98%||rising||falling||falling||falling||ma50 on 2018-11-30||2018-11-30|
|Industrials||XLI||3.81%||-2.64%||rising||falling||falling||falling||ema9 on 2018-11-28||2018-11-30|
|Materials||XLB||3.80%||-8.31%||falling||falling||falling||falling||ema9 on 2018-11-28||2018-11-30|
|Utilities||XLU||3.54%||-1.78%||rising||rising||rising||rising||ema9 on 2018-11-27||2018-11-30|
|Financials||XLF||2.63%||-2.00%||rising||falling||falling||falling||ma50 on 2018-11-30||2018-11-30|
|Cons Discretionary||XLY||2.48%||11.73%||rising||falling||rising||falling||ema9 on 2018-11-27||2018-11-30|
|Cons Staples||XLP||2.27%||0.37%||rising||rising||rising||rising||ema9 on 2018-11-28||2018-11-30|
|Telecom||XTL||0.86%||0.28%||falling||falling||rising||falling||ema9 on 2018-11-26||2018-11-30|
|Gold Miners||GDX||0.85%||-15.04%||falling||rising||falling||rising||ema9 on 2018-11-29||2018-11-30|
|Defense||ITA||0.15%||3.32%||falling||falling||falling||falling||ema9 on 2018-11-28||2018-11-30|
|Energy||XLE||-1.56%||-4.33%||falling||falling||falling||falling||ema9 on 2018-11-28||2018-11-30|
|Technology||XLK||-1.96%||6.42%||falling||falling||rising||falling||ema9 on 2018-11-28||2018-11-30|
Gold in Other Currencies
Gold moved higher in every currency except the Euro.
Rates & Commodities
TLT rose +1.54% this month, making a new low but then recovering. Long white candle was bullish (53% bullish reversal). TY also rose, up +1.12%. TY printed a monthly swing low/bullish engulfing (80% bullish reversal), and forecaster issued a buy signal for TY. The 10-year yield fell -12.76 bp to 3.02%. How does the recovery in bonds line up with the rally in equities? Well, it really doesn’t. We will have to see how bonds fare next week once the markets price in the tariff settlement, but for now, the steady move higher in bonds is suggesting a recession might be in the offing.
JNK fell -1.22% on the month, making a new low. JNK rallied strongly this past week after Powell hinted that rates were “just below neutral”, but the move had no follow-through. We will have to see how JNK performs in the next week once the market digests the tariff settlement news.
The BAA.AAA ratio staged a very strong rally this month – that’s terrible news. The ratio is now well above 1% and closing on the 1.1% level, which is approximately the level which has been predictive of recessions in the past. Not all moves above 1.1% result in a recession – only about 50% of them – and one recession occurred without a move above 1.1%. The 17 bp move in the ratio was very large. It was due to increases in BAA rates (+11 bp), and declines in AAA rates (-6 bp), which is a clear sign of big money flowing from risk to safety.
Crude plunged an incredible -14.13 [-21.75%], the 6th largest monthly drop in history. The opening black marubozu was not a reversal of any sort, and forecaster plunged deeper into downtrend. The previous low at 42.18 could be the next stop, if the pace of the decline continues. OPEC has a meeting on Dec 6th; if they don’t cut production, that 42.18 level seems almost guaranteed. Two months ago, Saudi Arabia was saying that $80 was a fine price for oil. This month, Trump tweeted that oil prices at $54 were fantastic, but that they should go lower still. What a difference two months makes. It now seems clear that Trump has asked for – and received – a quid pro quo from MBS: lower oil prices in exchange for Trump not throwing MBS under the “Khashoggi bus.” For MBS and Saudi Arabia, that was one expensive murder: $5.2 billion per month ($25 price drop x 7 mbpd in exports x 30 days) in revenue losses to Saudi Arabia alone. For those who imagine that Putin controls Trump: this is what it really looks like when a foreign country “owns” your leader.
A large jump in US oil production (+416 kbpd, to 11.3 mbpd) this month provided the backdrop for the whole affair.
The housing market has continued to weaken; the chart I use to watch it (below) is a ratio of MSPNHSUS (median sale price, new homes, US: a long-dated series going back to 1962) divided by the average US wage (A576RC1/POP). For technical reasons, I need long-dated monthly series that spend time in negative territory, which home prices don’t generally do, and that’s why I divide the new home sale price by the average wage. You can see that this chart has tipped over a few quarters ago, and is now heading lower. Could this be a repeat of 2006? It is probably too early to tell just yet.
Two additional clues: the MSACSR (months of home supply) is now at 7.4 months. That’s not good news at all; this indicator usually jumps at or near the tops of the housing market, and 7.4 is a pretty high number. Supply rises because “buyers go on strike.” Likewise, HSN1F (new home sales) has dropped fairly substantially too; that has been a pretty good leading indicator of where the overall housing market goes next.
Physical Supply Indicators
* The GLD ETF tonnage on hand rose +8.86 tons, with 762 tons in inventory.
* ETF Discount to NAV:
PHYS 9.82 -1.42% to NAV
PSLV 5.13 -3.80% to NAV
CEF 11.73 -4.29% to NAV
* Big bars premiums were: gold [1kg] 0.93%, while silver COMEX 1000 oz bars were sold out; the 100 oz bar had a premium of 4.98%.
Grey Swans & Geopolitics
Ebola: total cases 422, with 242 deaths. There were 36 new cases reported this week, with 2 of them being health workers. A high proportion of new cases were not previously registered as contacts. That’s not good. Note too that “new case” data lags by a couple of weeks (the time between infection and discovery), so we are effectively seeing the situation as it was 2 weeks ago. http://www.who.int/csr/don/29-november-2018-ebola-drc/en/
Turkey: the 10-year yield fell -6 bp to 16.20, and the TRY/USD pair fell to 5.18. Turkey remains stable..
German Government/Migration: While Merkel (who is on her way out…very slowly…) continues to defend her support of the UN migration pact, 40% of Germans fear the pact will lead to more asylum claims, while the three CDU successor-candidates are all taking pains to oppose migration. Meanwhile, Hillary Clinton (of all people) suggested that Europe needs to “get a handle on migration in order to thwart populism.” What seemed like a simple-but-accurate assessment of reality on the ground caused a great deal of consternation in some sections of the political spectrum. https://www.nytimes.com/2018/11/22/world/europe/hillary-clinton-migration-populism-europe.html
Italy – Budget: No change this week. Juncker says he sees progress, claims “we are not at war with Italy”, and urges people not to dramatize the current dispute. Good thing they aren’t at war: Italy has an army, while the EU does not.
Italy – Migration: Italy distanced itself from the UN migration pact, joining Switzerland, Austria, Australia, Bulgaria, the Czech Republic, Hungary, Israel, Poland, Slovakia, and the United States who have all decided not to sign. Is migration to any country of your choice a universal human right? With climate change, and the coming recession, the question will become increasingly important.
China – Tariffs & Debt: The Trump-Xi meeting at the G-20 resulted in a “trade war ceasefire”; the tariff increase was delayed for 90 days, and in exchange China agreed to buy an unspecified quantity of agricultural products from US farmers while the US & China engage in talks on forced tech transfers, IP protection, non-tariff barriers, and other issues. It is really an agreement to negotiate, but with the “25% Tariff Sword of Damocles” hanging over the heads of the negotiating team, it will focus the teams on getting things done without undue delay. No doubt insiders on both sides will be getting daily leaks from the negotiators, which will filter out to the markets in the form of capital flows which will show up in the price charts. It should make for an interesting few months ahead. My sense: both parties really do want a deal, if there is one to be had. https://www.reuters.com/article/us-g20-argentina/u-s-china-agree-trade-war-ceasefire-after-trump-xi-summit-idUSKCN1O031C
Yield Curve Inversion: the 1-10 spread narrowed -12.76 bp to 33.24 bp this month. This was a large move, and it was all driven by a drop in the 10-year yield. At this rate, in another three months, the yield curve will invert. That’s a signal of an impending recession.
US Congressional Elections, 2018. Final results, House: D+40, Senate: R+3. When viewed from the historical perspective, the Democrat gains in the House were about average, while Republican gains in the Senate were significantly above average. More importantly, Trump has proved himself an asset to the Republicans; some early Republican never-Trumpers have either converted (“Lyin’ Ted” Cruz, whom Trump helped get re-elected), or retired (Flake, Corker). My prediction: with R=53 in the Senate, Trump will not be successfully impeached. Side question: is Trump turning the Republicans into a Labor party? It sure looks like it. Go watch Fox’s Tucker Carlson for a week. He sounds like a labor activist at least 30% of the time. Talk of “Job Creators” is just gone. If true, it would be a sea change in American politics, which has not had a “pro-labor” party in 30 years – only two enthusiastic “pro-capital” parties that differentiate only along the usual acceptable-to-capital non-money issues.
North Korea: No progress. Here’s an article for all you armchair policy wonks which tries to explain why requiring a “full nuclear declaration” up front will be a non-starter with the DPRK. https://www.38north.org/2018/11/shecker112818/
Mueller Investigation: Manafort’s plea agreement with Mueller has fallen apart; apparently Manafort’s attorneys have been briefing Trump’s legal team about the evidence Manafort has been providing to Mueller, and when discovered, it really annoyed Mueller’s team. Also, Jerome Corsi walked away from a guilty plea he was negotiating (another “lying to the FBI” charge) with Mueller. Lastly, Cohen pleaded guilty to lying to Congress – only the 7th person in history to be penalized for this crime. James Clapper, former Director of National Intelligence, famously lied to Congress about NSA spying on Americans. No consequence for him, of course, even though his lie (just look at his face in the following video: it is utterly clear his statement was a lie) was covering up a massive, deliberate, and systematic violation of the 4th Amendment on the entire American population. This singular, incredibly egregious lie to Congress is what caused Snowden to throw away his entire career and act. Cohen: jail time. Clapper: walked away clean, and is now a regular guest on CNN. Takeaway: “If you are a well-connected tool, the Deep State has your back.”
I felt there were three near-term critical events this month: the oil price plunge, Powell’s statement that rates were “just below neutral”, and the Trump-Xi settlement at the G-20. Market-wise, the stealth rally in the 10-year has resulted in new lows for the 2-10 ratio (“the yield curve is moving closer to inverting”), which most likely signals an increased concern for recession in the near term. Since the tariff settlement happened over the weekend, it is unclear how that will affect prices of the various instruments. Will bonds retain their bid? Certainly risk assets and commodities will rally, perhaps even oil – and hopefully gold and silver too. It will be interesting to see who jumps in short for each of the commodity contracts.
How much of the impending recession sentiment was due to the scheduled 25% tariff imposition that was (formerly) set for January 1st and is now on hold? That’s really hard to say. Some of that concern will now unwind.
On the monetary front, we now probably only have one more rate cut and then the Fed may well be done. This is a large change in policy, and it was announced at a speech rather than at an FOMC press conference. This suggests the Fed saw this as a time-critical move – they couldn’t wait the 3 weeks until the next meeting to tell us all about it. At the same time, the ECB is scheduled to stop printing money this month, while the Fed is rolling off $50 billion in bonds each and every month. The primary visible effect of this is to pull Excess Reserves down from 2.7 trillion to 1.7 trillion. This suggests to me that the Fed is only 1/3 done with their normalization campaign. I expect they will continue normalizing until something blows up, but overall, this is a strong and steady “risk off” deflationary influence.
Its hard to know for certain how the US-China settlement will affect prices in the longer term; near term, I would not be short risk assets. We could well see new highs in SPX, and strong rallies in commodities. We will have to see how that affects the rest of the economy; that BAA.AAA ratio is one key metric I’m watching for clues. Housing is another.
Current Trends – Monthly:
Uptrend: palladium, utilities, gold/Euros, miners, USD, 10-year Treasurys, DJI, SPX.
Downtrend: crude, BAA corporates, housing/wage ratio, platinum, gold, copper, silver.
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