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PM Weekly Market Commentary – 10/11/2019

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  • Sat, Oct 12, 2019 - 10:25pm

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    davefairtex

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    PM Weekly Market Commentary – 10/11/2019

On Friday, gold fell -5.76 [-0.38%] to 1496.98 on very heavy volume, while silver rose +0.03 [+0.17%] to 17.63 on moderately heavy volume. The buck was hit hard [-0.42%] along with bonds [10Y yield +9.4 bp], while both crude [+2.10%] and SPX [+1.09%] rallied.

Market-moving news on Friday was the announcement of a “phase one deal” between the US and China: China has agreed to eventually buy more US ag products, has agreed to some IP measures, financial services, and currency, and in exchange Trump will delay the 25% tariff increase set for October 15th.

The weekly metals sector map shows the industrial metals doing best; this looks like the by-now-familiar “good news in the US-China trade war” move.  Miners led lower, but with silver outperforming gold. It is a somewhat confused picture – silver doing better than I would have expected – but all PM components are below both 9 and 50 MA lines, which indicates a downtrend.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Copper $COPPER 2.72% -5.16% rising rising falling rising ema9 on 2019-10-10 2019-10-11
Palladium $PALL 1.90% 55.76% rising rising rising rising ema9 on 2019-10-08 2019-10-11
Platinum $PLAT 1.75% 6.79% rising rising rising rising ma50 on 2019-10-11 2019-10-11
Silver $SILVER -0.17% 20.26% rising rising rising rising ema9 on 2019-10-11 2019-10-11
Gold $GOLD -1.13% 21.52% rising rising rising falling ema9 on 2019-10-10 2019-10-11
Gold/Euro $GOLD:$XEU -1.76% 27.25% falling rising rising falling ema9 on 2019-10-10 2019-10-11
Silver Miners SIL -2.36% 14.45% rising falling rising falling ema9 on 2019-10-11 2019-10-11
Junior Miners GDXJ -3.06% 26.39% rising falling rising falling ema9 on 2019-10-11 2019-10-11
Senior Miners GDX -3.23% 35.73% rising falling rising falling ema9 on 2019-10-11 2019-10-11

Gold fell -17.14 [-1.13%] to 1496.98. The last engulfing bottom pattern is a bearish continuation, and forecaster was unchanged, and remains in a downtrend. Gold ended the week in a downtrend in both daily and weekly timeframes. Gold/Euros is also in a downtrend in both daily and weekly timeframes.

The October 2019 rate-cut chance is at 75%, and the Dec 2019 rate-cut chance is 83%, and a 25% chance of 2 rate cuts. This is a substantial decrease over last week – probably driven by the positive news in the US-China trade talks.

COMEX GC open interest fell -8,890 contracts on Friday, and dropped -14,119 contracts this week.

Commercial net fell -7.3k contracts, which was +12k new shorts, and +4.7k new longs. Managed money net rose +9.6k contracts, which was +12k new longs and +2.3k new shorts. I’m not sure what all this says; the changes aren’t that large.  We are still closer to a high than a low.

Silver fell -0.03 [-0.17%] to 17.57. The high wave candle was unrated, and forecaster fell, dropping into a weekly downtrend. Silver ended the week in a downtrend in both daily and weekly timeframes.

The gold/silver ratio fell -0.92 to 84.91. That’s bullish.

COMEX SI open interest fell -1,059 contracts on Friday, and -2,856 contracts this week.

Commercial net fell -3.1k contracts, which was +3.4k new shorts and +320 new longs. Managed money net rose +2k contracts, which was -2.9k fewer shorts and +120 new longs. The changes were minor.

Miners fell -2.40% this week, with all of the damage happening on Friday. The spinning top candle was bearish (42%) and forecaster inched higher but remained in a downtrend. Friday’s big drop suggests yet another lower high is forming, which is bearish. XAU remains in a downtrend in both daily and weekly timeframes.

GDX:$GOLD fell -2.12%, while GDXJ:GDX ratio rose +0.18%. That’s bearish.

USD

The buck fell -0.51 [-0.52%] this week to 97.87, with the big moves taking place Thursday and Friday. The swing high print was quite bearish (72%), and forecaster moved lower, but remains in a slight uptrend. DX remains in a downtrend in both daily and monthly timeframes.

The big currency moves: GBP [+2.89%], EUR [+0.64%], AUD [+0.47%], CAD [-1.05%], CNY [-0.83%], JPY [+1.41%]. The huge move in GBP was all about Brexit. More on that later.

SPX rose +18.26 [+0.62%] to 2970.27. It was a very choppy week, with Friday’s rally accounting for all the gains. The spinning top candle was neutral (actually: both bullish and bearish), and forecaster moved lower, just enough for a slight downtrend. SPX ended the week in an uptrend in both daily and monthly timeframes.

This week, materials and industrials led higher, while utilities and staples did worst. This was the classic “positive US-China trade” sector map.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Materials XLB 1.85% 6.98% falling falling rising falling ema9 on 2019-10-11 2019-10-11
Industrials XLI 1.57% 4.62% falling rising rising falling ma50 on 2019-10-11 2019-10-11
Technology XLK 1.27% 18.85% rising rising rising falling ema9 on 2019-10-09 2019-10-11
Cons Discretionary XLY 1.15% 13.22% falling rising rising falling ma50 on 2019-10-11 2019-10-11
Telecom XTL 1.03% -4.33% falling falling rising falling ema9 on 2019-10-11 2019-10-11
Defense ITA 0.96% 11.12% falling rising rising falling ema9 on 2019-10-10 2019-10-11
Energy XLE 0.89% -20.48% falling falling rising falling ema9 on 2019-10-11 2019-10-11
Homebuilders XHB 0.83% 25.64% falling rising rising falling ema9 on 2019-10-10 2019-10-11
Financials XLF 0.69% 4.73% falling rising rising falling ema9 on 2019-10-10 2019-10-11
Healthcare XLV -0.21% 0.28% falling falling rising falling ema9 on 2019-10-10 2019-10-11
REIT RWR -0.41% 18.29% falling rising rising falling ema9 on 2019-10-10 2019-10-11
Cons Staples XLP -0.91% 16.80% falling rising rising falling ema9 on 2019-10-10 2019-10-11
Utilities XLU -1.31% 20.58% falling rising rising rising ema9 on 2019-10-08 2019-10-11
Gold Miners GDX -3.23% 35.73% rising falling rising falling ema9 on 2019-10-11 2019-10-11

The US equity market was dead last this week; Eurozone did best.

VIX fell -0.18 to 17.04.

Rates & Commodities

TLT plunged -3.80%, with the forecaster ending the week in a downtrend. Most of the damage happened on Thursday and Friday. The 30 year yield jumped +21 bp to 2.22%.

TY fell -1.28%, the bearish engulfing was actually a bullish continuation, and forecaster inched higher, remaining in an uptrend. However, this week’s drop pulled the monthly into a downtrend. TY ended the week in a downtrend in both daily and monthly timeframes. If it holds through end of month, this will be the first bearish reversal for TY on the monthly chart for the past 10 months.

DGS10, the 10 year yield, rose +24 bp to 1.76%. The bullish engulfing candle was a bearish continuation, and while forecaster jumped higher, it remains in a downtrend. DGS10 remains in a downtrend in both weekly and monthly timeframes. While it appears that 10-year bond futures (TY) are reversing, the much longer-lived yield series (DGS10 dates back to 1962) is not on board with that reversal just yet.

JNK rose +0.36%, and ended the week in an uptrend. Even so – JNK’s rally off the lows is anemic at best. It is not supporting the risk on thesis much, if at all. BAA.AAA differential was unchanged at +93 bp. There are still few worries from the credit markets about low quality debt.

Crude jumped +2.04 [+3.86%] to 54.94. All of the gains came Thursday and Friday. The long white/NR7 candle was unrated, and forecaster jumped higher but not quite enough to move crude back into an uptrend. Crude ended the week in a downtrend in the weekly and monthly timeframes, but is back in a fairly strong uptrend on the daily.  Crude might be reversing.

The EIA report on Wednesday was mixed: crude: +2.9m, gasoline: -1.2m, distillates: -3.9m. The report didn’t appear to have much impact on prices. Mostly, this week’s rally was about the improved prospects for the US-China trade deal. “Demand in China won’t be crushed after all.” That, plus an Iranian tanker either was hit by missiles, or “suffered explosions”, depending on who you listen to.

Physical Supply Indicators

* The GLD ETF tonnage on hand fell -2.05 tons, with 922 tons remaining in inventory.

* ETF Discount to NAV:

PHYS 11.93 -1.24% to NAV [increase]
PSLV 6.42 -1.82% to NAV [increase]
CEF 14.43 -3.38% to NAV [increase]

* Premium for physical (via Bullion Vault: https://www.bullionvault.com/gold_market.do#!/orderboard) vs spot gold (loco New York, via Kitco: https://www.kitco.com/charts/livegoldnewyork.html) shows no premium for gold, and a 5 cent premium for silver.

* Gold dealer big bars premiums were: gold [1kg] 1.13% and silver [1000oz] 3.25%.

Grey Swans & Geopolitics

  • Ebola: total cases 3207, with 2144 deaths (CFR: 67%). That’s just 10 new cases this week, which is a decrease over last week. However, outbreak response activities have recently been restarted in Lwemba Health Area after a security incident two weeks ago; the renewed access by teams may uncover some of as-yet-undetected cases in the near future. Likewise the cases appear to have moved from cities into the more hard-to-reach rural areas. This too may be causing a delay in detection and reporting. https://www.who.int/csr/don/10-october-2019-ebola-drc/en/
  • Iran: This week, the US sent 3000 troops to Saudi Arabia; 2 patriot missile batteries, one THAAD defense system, and some number of fighter squadrons to replace the fighters from the USS Abraham Lincoln, which is departing the region. Iran claims two rockets struck an Iranian oil tanker off the coast of Saudi Arabia early Friday morning. Will there be negotiations between Iran and Saudi Arabia? Maybe.
  • Italy – migration: At a recent EU summit, only 12 nations (out of 28) said they would be willing to accept the “Sea Taxi” migrants being dropped off at ports in Malta & Italy, and only after a number of technical issues were resolved. Apparently, most of Europe doesn’t want more migrants. Italy’s new Interior Minister promised to open its ports to the Sea Taxis just as soon as the EU agrees to divvy them up among its members. M5S leader Di Maio promised to expedite migrant deportations from Italy to 13 safe countries; he wants to deport 100,000 migrants (rejected asylum seekers) per year, and he says that in the future, the process will take 4 months rather than 2 years.  The migration issue has very much not gone away.
  • US-China trade: The “stage one deal” is very basic; China is buying more ag products and (perhaps) addressing some IP issues, while Trump is foregoing the 25% tariff increase. While the deal isn’t signed – and it will be a while before it gets thrashed out – the primary outcome is that the Chinese economy won’t get hit with the large tariff imposition. Issues of Huawei, restrictions on Chinese surveillance companies and visa restrictions on individuals involved in the Xinjiang concentration camps will not be part of the deal.
  • BRExit: After a good meeting with the leader of Ireland (where PM Johnson apparently caved on the “Irish Border” issue), there now may be some hope for a deal. Tea-leaf-readers suggest that the border may end up being effectively between Northern Ireland and Britain, rather than between Ireland and Northern Ireland. After the breakthrough on the Irish Border subject, real negotiations appear to be under way.
  • Yield Curve Inversion: the 1-10 spread jumped +15 bp to +9 bp. The yield curve inversion is now gone (1Y: 1.67%, 10Y: 1.76%). Part of the reason is the Fed’s new “It’s-not-QE” bond-buying-and-money-printing program, designed to inject reserves into the banking system which appears to be unwilling to lend money in the overnight markets. The new Fed program uses the same mechanism as QE, but it has a different name, and it targets buying short-duration bills rather than 10-year bonds. This will tend to have the effect of un-inverting the yield curve. Note: the banks are NOT running low on reserves in aggregate; they have more than 1.5 trillion dollars in “excess reserves”. And yet, banks with “excess reserves” are refusing to lend them out in the overnight market, for reasons unknown to those of us in the cheap seats. But make no mistake: this “refusal to make money” by the banks is a coal mine canary.  Something bad is going on; we just don’t know what it is.
  • Hong Kong: protests continue. The police appear to be increasingly targeting journalists. Either the police are in survival mode barely able to hang on, or they aren’t police at all: rumor is they are troops from the mainland (and about that rumor: officially denied by the Hong Kong government this weekend).  Article by a reporter from the Atlantic provides some street level insight. https://www.theatlantic.com/international/archive/2019/10/hong-kong-police-are-targeting-press/599815/
  • North Korea: no news.

Recession Watch

  • Producer Prices: headline -0.6% m/m, -2.6% y/y. Declining PPIACO is generally recessionary, and my quarterly PPIACO forecaster has been pointing downhill for a full year now. [Note I use the old-style PPIACO timeseries (that dates back to 1913) rather than the newer PPI-FD.]
  • CPI: headline +0.0% m/m, less-food-and-energy +0.1% m/m. This is recessionary, and should increase the odds of a rate cut.
  • Consumer Sentiment: headline 96.0 (prior 93.2), well above consensus 92.0. Current conditions 113.4, with expectations up 1.4 to 84.8. This number is not recessionary.

Summary

There were two big events this week, both of them gold-negative. There is progress on a Brexit deal – at the last minute, which according to Mish and EuroIntelligence, is when EU deals always happen – as well as that “phase one agreement” in the US-China trade negotiations.

I get the sense that some sort of Brexit deal will end up happening. If it doesn’t, Johnson can always just call an election, win it (with or without the Brexit party) and then leave with no deal. That’s a gun to the head of the EU. So with the Irish border issue out of the way, something will get worked out. I suspect this will knock out a number of the Eurozone gold buyers, since this takes a fair amount of the pressure off the German automakers as well as the ECB.

The US-China “phase one” trade deal is not just half a loaf, it is maybe 15% of a loaf. From what I can tell, there is no progress on IP theft, forced tech transfers, or industrial subsidies – all the hard stuff remains unaddressed by this “phase one” deal. And the deal has yet to be actually signed. And all the recent restrictions on China’s tech companies remain in place.

At the same time, avoiding that 25% tariff hit is a positive – or rather, a lack-of-a-negative impact, and it will reduce the expected “cross currents” for the Fed for their October 30th meeting.

The relatively muted response of SPX to the trade deal announcement – it was unable to get back above 3000, and it sold off in the aftermarket too – hints that we might just have a top for equities. I do not think the China deal will get any better anytime soon; I think China’s goal was just to do the minimum required to avoid the 25% tariff hit. For his part, Trump probably doesn’t want the US economy going into a tailspin a year before the 2020 election either. As a result, I think we’re at Peak China Trade Deal right now.

This suggests we might also be at a near term low point for gold, silver, and bonds too. It all depends on how positive a Brexit agreement will be for risk assets/negative for safe havens.

Rate cut chances have fallen; while we will probably get one more cut in October, the odds of a second cut in December have dropped substantially.  If nothing changes between then and now, of course.

Big bar premiums on gold and silver have changed little, and ETF discounts have increased. There is no shortage of gold or silver at these prices.

The COT reports show little change in position from last week. Gold still looks like a COT top, as does silver.

Over the next month, will have to see how the US economy responds to the “no tariffs coming” news. The response might be a bit surprising. How much “tariff front-running” (buying stuff ahead of the tariffs by companies and consumers) that drew demand forward occurred? If it was a lot, the post-announcement hangover could end up causing a slump. If true, this would suggest some unexpectedly worse economic news ahead.

Which would be gold positive, of course.

Anyhow, I believe Peak US-China trade agreement news has arrived. I think – sell the news (in risk assets) is probably what will happen next. My opinion – not financial advice. Etc.

Weekly trends (in order of strength):

Uptrend: 10-year Treasury, NDX, copper, USD.

Downtrend: platinum, gold, DJI, miners, gold/Euros, crude, silver, SPX, bitcoin.

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