Investing in precious metals 101

PM Weekly Market Commentary – 12/21/2018

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  • Sat, Dec 22, 2018 - 02:13am

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    davefairtex

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    PM Weekly Market Commentary – 12/21/2018

On Friday, gold fell -4.36 [-0.34%] to 1261.34 on moderate volume, while silver dropped -0.14 [-0.94%] to 14.70 on moderately light volume. The buck jumped +0.74%, entirely reversing yesterday’s drop.  SPX plunged again [-2.06%], so did junky debt [-0.60%], crude [-1.70%], copper [-1.42%], and palladium [-2.48%].  There was very little on my screens that went up.  Perhaps traders wanted to be in cash ahead of the holidays.  Cash is a position too.  These days a 28-day T-bill pays 2.41%.  That’s better than a poke in the eye, right?

The fun events this week:

  • FOMC met, raised rates +25 bp, and decided to slightly moderate the pace of future rate increases. The current plan is to raise rates another two times in 2019. The market was both unhappy with this outcome, and disbelieving; market projects less than a 50% chance of a single increase by December 2019.

  • Italy settled its budget dispute with the EU. I’m certain the troubles in France encouraged the EU to compromise.

The weekly metals sector map shows junior miners leading seniors, but gold leading silver. Gold has also managed to close back above its 200 MA. The other metals are struggling, with copper looking weakest, having fallen below all 3 moving averages due to a large sell-off on Tuesday. My guess is that silver’s relative weakness (vs gold) is due to the plunge in copper.  Look at gold: all green.  That’s the market saying “safe haven” to you.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Junior Miners GDXJ 4.21% -12.49% rising rising falling rising ema9 on 2018-12-20 2018-12-21
Senior Miners GDX 1.59% -9.68% rising rising falling rising ema9 on 2018-12-20 2018-12-21
Gold $GOLD 1.36% -0.85% rising rising falling rising ema9 on 2018-12-20 2018-12-21
Gold/Euro $GOLD:$XEU 0.61% 3.28% rising rising rising rising ema9 on 2018-12-20 2018-12-21
Silver Miners SIL 0.57% -22.52% rising rising falling rising ema9 on 2018-12-20 2018-12-21
Silver $SILVER 0.38% -9.15% rising rising falling rising ema9 on 2018-12-21 2018-12-21
Platinum $PLAT 0.27% -14.01% rising falling falling falling ema9 on 2018-12-21 2018-12-21
Palladium $PALL -0.74% 12.58% falling rising rising rising ema9 on 2018-12-21 2018-12-21
Copper $COPPER -3.14% -16.46% falling falling falling rising ma50 on 2018-12-17 2018-12-21

Gold jumped +17.53 [+1.41%] this week, reversing last week’s decline and breaking out to a new high. Most of gold’s move came on Thursday; while gold seemed to be initially upset at the FOMC meeting results and that pesky dot plot projecting 2 more increases for 2019, there was no downside follow-through and Thursday’s big rally suggests to me that gold buyers far outnumbered FOMC-driven sellers. Perhaps – gold traders believe more in the market’s assessment of the future path of Fed increases, and not so much what the Fed itself is saying. I have to say, I’m with the traders on this one. Gold is in an uptrend in all 3 timeframes.

The March 2019 rate-increase chance is at 15%, while the Dec 2019 rate-increase change is at 46%.

COMEX GC open interest rose +36,785 contracts this week – that’s about 17 days of global production in new paper gold.  Much of that new paper was dropped on the market on Thursday.

COT report shows the commercial net fell -15k; that was 13k new shorts, and 2k fewer longs. Managed money net rose +11k, which was 11k new longs and 378 fewer shorts. The big move this week happened after the coverage timeframe of the COT. Managed money remains at a very low level of long positions. “Nobody cares” – which is a recipe for a rally if they suddenly decide that they need exposure.

Silver rose +0.05 [+0.38%]; silver tried to rally this week, hitting a high of 14.91, but ultimately the rally failed. Silver ended the wek below its 9 MA. After flirting with a breakout, silver remains in a downtrend in both the daily and monthly timeframes.  While I think the chart is relatively weaker than gold – it has yet to break out higher – silver’s forecaster is projecting a strong rally ahead.   Silver really needs that close above 15.

The gold/silver ratio rose +0.85 to 85.75. That’s bearish.

COMEX SI open interest rose +42 contracts this week.

COT report shows commercial net fell -7.6k, which was 4.3k new shorts, and 3.5k longs sold. Managed money net rose +10.9k, which was 7.1k shorts covered, and 3.8k longs added. These were fairly large moves again this week; managed money shorts continue to rapidly decline. Any rally will have to come from new long buying on the part of managed money.

Miners rose slightly this week, with XAU rising +1.60%. That concealed a lot of volatility; the miners rallied ahead of FOMC, smashed on the day itself, and then came back to end the week up overall, and just slightly above the 9 MA. While the big move on Wednesday caused a daily sell signal, XAU is still in an uptrend on the weekly and monthly timeframes. The miner chart looks a bit weaker this week; it tried and failed to confirm the double bottom pattern – but that long-shadow high wave candle on the weekly chart is not a reversal bar.  Yay.

GDX:$GOLD rose +0.18%, while the GDXJ:GDX ratio climbed +2.58%. That is bullish – and a big change from last week. The juniors finally seem to be getting a bit more attention, which is what you would expect in an uptrend.


 

USD

The buck fell -0.50 [-0.52%] this week; the two big days were Thursday [-0.78%] and Friday [+0.74%]. While the daily issued a sell signal, the buck ended the week on a very strong note. The buck is in a downtrend on both the daily and monthly timeframes, and the weekly uptrend looks a bit feeble. Maybe that nets out to a slightly bearish outlook for the buck.

There were some big currency moves this week: JPY [+2.38%], AUD [-1.86%], EUR [+0.90%], and GBP [+0.41%]. The BOJ had a meeting this week where Kuroda didn’t seem to say much, but the currency market sure approved.

US Equities/SPX

SPX plunged -183.37 [-7.05%] to 2416.58, the largest one-week drop since August, 2011, dropping for 5 straight days. Was Friday’s long black candle a reversal? Probably not (31% bullish). SPX is in a downtrend in all 3 timeframes. There was no positive news at all. This week’s move took us cleanly through the lows set back in February. It is not clear where support might be – perhaps 2100 or so? SPX ended the week with the RSI-7 at 10. That’s very oversold; this has happened just 86 times over the 23,843 days of SPX trading history. We “should” bounce soon. At least a dead cat bounce, if nothing else. Of course I said that about oil too. We got the dead cat bounce in crude, and then the downtrend continued.

Energy and telecom led the market lower – energy equities did worst because of the -11.66% drop in crude (!), while homebuilders did “best”, only dropping -5.13%. No good news in a sector map with losses this heavy.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Gold Miners GDX 1.59% -9.68% rising rising falling rising ema9 on 2018-12-20 2018-12-21
Homebuilders XHB -5.13% -28.93% falling falling falling falling ema9 on 2018-12-04 2018-12-21
Utilities XLU -5.30% 2.75% falling falling rising falling ma50 on 2018-12-18 2018-12-21
Materials XLB -5.30% -19.15% falling falling falling falling ema9 on 2018-12-04 2018-12-21
Financials XLF -5.98% -18.98% falling falling falling falling ema9 on 2018-12-04 2018-12-21
REIT RWR -6.30% -4.79% falling falling rising falling ma50 on 2018-12-17 2018-12-21
Healthcare XLV -7.06% -0.60% falling falling falling falling ma200 on 2018-12-17 2018-12-21
Industrials XLI -7.16% -17.42% falling falling falling falling ema9 on 2018-12-04 2018-12-21
Cons Staples XLP -7.93% -11.62% falling falling falling falling ma200 on 2018-12-18 2018-12-21
Technology XLK -8.32% -8.33% falling falling falling falling ema9 on 2018-12-07 2018-12-21
Cons Discretionary XLY -8.37% -5.46% falling falling falling falling ema9 on 2018-12-07 2018-12-21
Defense ITA -8.76% -11.21% falling falling falling falling ema9 on 2018-12-04 2018-12-21
Telecom XTL -9.24% -13.43% falling falling falling falling ema9 on 2018-12-04 2018-12-21
Energy XLE -9.63% -21.87% falling falling falling falling ema9 on 2018-12-04 2018-12-21

Globally, the US was the worst-performing equity market this week. The US is now down 10% over the last 52 weeks, which is actually still better than everywhere else. The US equity market plunge could be just catching up with the rest of the world. Germany, for instance, is down -25% for the year.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Emerging Asia GMF -2.70% -14.45% falling rising falling rising ma50 on 2018-12-19 2018-12-21
Eurozone EZU -3.77% -20.82% falling falling falling falling ema9 on 2018-12-04 2018-12-21
Latin America ILF -3.81% -11.08% falling falling falling falling ema9 on 2018-12-07 2018-12-21
Europe IEV -3.88% -18.47% falling falling falling falling ema9 on 2018-12-04 2018-12-21
Developed Asia VPL -4.51% -16.56% falling falling falling falling ema9 on 2018-12-04 2018-12-21
United States VTI -7.23% -10.23% falling falling falling falling ema9 on 2018-12-04 2018-12-21

VIX shot up +8.48 to 30.11. Wow.

Rates & Commodities

TLT shot up +1.89% this week, making a new high, but then retreating at end of week, with forecaster issuing a sell signal. TLT might be looking a bit tired. TY climbed +0.56%, also making a new high; the TY chart looks much stronger than the TLT chart. TY is in an uptrend in all 3 timeframes. The 10-year yield fell -10 bp to 2.79%.  Money continues to move into longer term treasuries and push prices higher, in spite of the massive US federal deficit, as well as the balance sheet roll-off by the Fed.

JNK cratered, plunging -3.91%, dropping 5 days out of 5. Traders are finally semi-serious about bailing out of junky debt. This was the worst week for JNK since 2015. While there wasn’t any panic last week, we are now starting to see the first serious signs of alarm. If we don’t bounce relatively soon, we could see some very large drops in junky debt ETF prices.  Why is that?

Wolf Richter explains: junky bonds are relatively illiquid, and yet you and I can sell an ETF that owns them in about two seconds. That ETF must then sell the crappy debt to the circling vulture funds (who have a wad of cash, and have been licking their chops, just waiting for this to happen) for pennies on the dollar. So far the ETFs have enough cash to meet redemptions, but this is a recipe for some really big losses yet-to-come once people get serious about bailing out.  Because of the liquidity mismatch issue alone, these ETFs appear guaranteed to blow up. http://wolfstreet.com/2018/12/21/leveraged-loan-boom-unglued-loan-mutual-funds/

Crude plunged -6.02 [-11.66%], dropping 4 days out of 5. Was it the Fed’s insistence at sticking to a rate-increase campaign? Its hard to know. Prices just seemed to want to move lower. Part of the problem is certainly shale: this month, the increase in Permian production all by itself more than offset the drop in Venezuela’s production. On the charts, crude remains in a downtrend in all 3 timeframes. Its just ugly out there for crude. Maybe there will be some support at around 42, but given the speed of the plunge, I’m not sure that 42 holds. Crude’s plunge is exacerbating the drop in equities – or maybe they are feeding off each other, its hard to say. Oil services equities are down 50% over the past two months. Some shares are trading as though the company is headed for bankruptcy. Who knows, with oil in the 40s once again, they just might be.

Physical Supply Indicators

* The GLD ETF tonnage on hand rose +9.11 tons, with 773 tons in inventory.

* ETF Discount to NAV:

 PHYS 10.10 -1.43% to NAV [increase]
 PSLV 5.27 -3.97% to NAV [unchanged]
 CEF 12.12 -3.94% 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 a $1.60 premium for gold, and an 8c premium for silver.

* Gold dealer big bars premiums were: gold [1kg] 0.91% and silver [1000oz] 3.42%. COMEX silver bars are back.

Grey Swans & Geopolitics

  • Ebola: total cases 549, with 326 deaths. There were 44 new cases. A total of 55 healthcare workers have been infected to date. Overall the number of new cases continues to slowly increase. https://www.who.int/csr/don/20-december-2018-ebola-drc/en/

  • Turkey: the 10-year yield plunged -121 bp to 16.09%, and the TRY/USD pair fell -0.05 to 5.30. That’s a big improvement.

  • Migration: The Belgian PM resigned as a result of a disagreement over migration policy; the PM supported the UN migration pact, while an important member of his coalition did not. While some in the US like to paint the US as “isolated” on the migration issue, there were 9 EU members who also “stayed away” (either voted no, abstained, or didn’t show up) on the ratification of the UN migration pact on December 19th at the UN.  Just wait until things really turn down.  The 9 will turn to “all of them.”

  • Italy – Budget: A compromise on the budget was reached, likely thanks to the yellow vest protesters in France.  Score a minor victory for “populism” (or “sovereignty”, depending on your point of view).

  • China Tariffs: No progress.

  • Yield Curve Inversion: the 2-10 spread fell -2 bp to 14 bp. Both the 2 and 10 year yields plunged this week. We are quite close to inversion, but the whole curve is receiving inflows right now.

  • North Korea: DPRK suggested this week that it would not denuke until the US nuclear threat to Korea is eliminated. There was a flurry of media coverage about this; Korea specialist site “38 North” suggested the fuss was way overdone. https://www.38north.org/2018/12/editor122118/ and https://www.38north.org/2018/12/rcarlin122118/

  • Mueller Investigation: the Judge postponed Flynn’s sentencing, after accusing him of committing treason – but then almost immediately walked that accusation back, treason being both a death penalty offense and having very specific requirements laid out in the US Constitution, of which the judge undoubtably is well aware. Still, he is not thrilled with Flynn’s conduct, whose actual crimes amount to unregistered lobbying for Turkey, and lying to the investigation about his otherwise-legal conduct.  Rumor has it that Mueller will wrap this up by mid-February.

Crude, equities, and junky debt all plunged this week, with money fleeing into bonds and gold. The FOMC stated it would continue raising rates (albeit a bit more slowly), and that certainly that had something to do with the plunge – but perhaps it was just that the Fed ended up not-rescuing the market rather than the Fed acting as the proximate cause for the move. “The Fed put is over”, or so the story goes. Crude’s renewed drop is at least half a “shale success” story, and half a “global slowdown” story. Gold and treasury bonds remain safe havens, while the mining shares seem to be a bit on the fence. At least they went up rather than joining the equity market plunge.

Big bar gold premiums on gold remain low, silver’s premium has remained the same, while ETF discounts increased somewhat. There is no shortage of gold or silver at these prices. COMEX bars have returned.

The COT report shows more short-covering this week in silver. While the managed money longs are thin on the ground, the shorts are also dwindling away. If we are to see a further move higher in silver, it will have to be from managed money jumping in long. So far, they haven’t done so. That’s not too surprising since silver isn’t much of a safe haven metal. Managed money gold longs are also relatively scarce. That suggests we don’t have as big a downside risk since there aren’t so many stops to run. I should do a study: “how many large drops follow a low point in managed money longs?”

Is tax-loss selling over? It should be. We will have to see what next week brings. Right now, all the risk assets are heading downhill at a fairly high rate of speed, and there aren’t any signs of a bounce at all. VIX is at 30. Now isn’t the time to pile in short, but…trying to catch the falling knife isn’t wise either.

I have a semi-alarming-looking longer term chart that has data going back to the beginning of time (i.e. 1920).  While the chart inputs have not yet been finalized (data updates for Q4 will continue happening into January), this is where we are right now. This isn’t a guarantee of a recession (INDPRO dropped in 2016, and no recession resulted), but from what I’ve seen, recessions do not generally occur without this one going into a decline. “Necessary, but not sufficient.”

Next week: half day on Monday, Christmas on Tuesday, followed by what is normally a relatively light week. Normally.

Oh, bitcoin popped 20% this week. As with many things in crypto-land, nobody is really sure why. Dead cat bounce because its just a Tether manipulation, or the first step on the way back to greatness? Candle code says: weekly swing low is a 68% reversal. That’s pretty highly rated. The weekly forecaster is also showing a buy. Not trading advice.

Weekly trends (in order of strength):

Uptrend: 10-year Treasury, silver, BAA corporates, miners, gold, USD, bitcoin, gold/Euros.

Downtrend: Junky debt, SPX, copper, platinum, crude.

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