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PM Weekly Market Commentary – 5/3/2019

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  • Sat, May 04, 2019 - 06:39am

    #1

    davefairtex

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    PM Weekly Market Commentary – 5/3/2019

On Friday, gold rose +8.54 [+0.67%] to 1283.78 on very heavy volume, and silver jumped +0.31 [+2.15%] to 14.95 on very heavy volume.  SPX rallied hard [+0.96%], crude moved higher [+0.54%], so did the other metals [HG: +1.36%, PL: +2.46%, PA: +1.28%], and so did the 10 year [-2.1 bp].  Most if not all of these moves seemed to be triggered by the Nonfarm Payrolls report at 8:30 am.

The metals had a bad week; the industrial metals led lower.  Within the PM group, silver led gold down, miners led the metals down, and the juniors led seniors down.  That’s a mostly-typical bearish configuration.   Still, the rebound on Friday saw both gold and silver regain their 9 MA lines, which suggests that a reversal is possible next week.  Longer term, about half of the items remain above the 200 MA, which is a long-term positive sign.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Gold $GOLD -0.56% -2.49% rising falling rising falling ema9 on 2019-05-03 2019-05-03
Silver $SILVER -1.12% -9.12% falling falling falling falling ema9 on 2019-05-03 2019-05-03
Gold/Euro $GOLD:$XEU -1.26% 4.30% rising falling rising falling ema9 on 2019-05-01 2019-05-03
Copper $COPPER -2.33% -8.37% falling falling rising falling ema9 on 2019-05-01 2019-05-03
Platinum $PLAT -3.10% -3.19% falling rising rising rising ma50 on 2019-05-03 2019-05-03
Silver Miners SIL -3.88% -22.48% falling falling falling falling ema9 on 2019-05-01 2019-05-03
Senior Miners GDX -4.74% -10.42% falling falling falling falling ma200 on 2019-05-01 2019-05-03
Junior Miners GDXJ -5.68% -15.14% falling falling falling falling ema9 on 2019-04-29 2019-05-03
Palladium $PALL -6.29% 42.67% falling falling rising falling ema9 on 2019-04-29 2019-05-03

Gold fell -7.23 [-0.56%] this week. Much of the damage came following the Fed’s press conference on Wednesday, but Friday’s payrolls report triggered a strong gold rally that caused a daily swing low candle print (67% bullish), and also a flip to an uptrend on the daily forecaster. Gold remains in a downtrend in both weekly and monthly timeframes, although the weekly looks as though it might be ready to reverse. Gold/Euros is in an uptrend in both weekly and monthly timeframes.

The May 2019 rate-cut chance is now at 5% and the Dec 2019 rate-cut chance is 37%, and just a 10% chance of 2 rate cuts. The bearishness has been substantially reduced.

COMEX GC open interest rose +12,627 contracts this week.

The commercial net fell by -31k contracts, which was mostly new shorts (+24k) and also fewer longs (-7k). Managed money net rose by +34k contracts, which was mostly short-covering (-28k) and some more new longs (+6k). Note this didn’t cover the period of decline following the Fed meeting. Its hard to know what to make of this report – gold might be in the process of reversing higher, although it is not a clear-cut thing.

Silver fell -0.17 [-1.12%] on the week. As with gold, most of the damage came following the Fed press conference on Wednesday. Friday’s strong rally driven by the payrolls report resulted in a swing low print (57% bullish) and a flip back into an uptrend from the forecaster. Weekly candle print was a strong-looking hammer (43% bullish), and forecaster inched lower but remains in an uptrend. Silver ended the week in an uptrend in all 3 timeframes.

The gold/silver ratio moved up +0.43 to 85.81. That’s bearish.

COMEX SI open interest fell -444 contracts this week.

The commercial net fell -1.3k contracts, which was 13k fewer shorts and 15k fewer longs. Managed money net rose by 3.8k contracts, 2.5k more longs and 1.2k fewer shorts. Not much change in the managed money position, but commercial shorts dropped quite substantially. Silver still appears to be at a reversal point from the COT perspective.

Miners were hit hard this week, with XAU falling -5.31%. As with gold and silver, most of the damage happened following the Fed’s Wednesday press conference, but unlike gold and silver, there was no strong miner rally on Friday. The weekly candle print was an opening black marubozu (surprisingly bullish: 39%), but forecaster remains in a strong downtrend. XAU ended the week in a downtrend in all 3 timeframes.

The GDX:$GOLD ratio plunged -4.21%, and the GDXJ:GDX ratio dropped -0.98%. That’s very bearish.

USD

The buck had a volatile week but ended down -0.50 [-0.51%] to 96.96. A reasonably strong rally following the Fed’s press conference vanished after Friday’s payrolls report. The weekly print was a mildly bearish dark cloud cover (30% bearish), and forecaster dropped hard and is right at the edge of moving into a downtrend. The buck ended the week in an uptrend in the weekly and monthly timeframes.

The big currency moves: GBP [+1.75%], EUR [+0.36%], AUD [-0.36%], JPY [-0.35%].

The big move in GBP came on Friday – it was the big winner from the payrolls report, with the rally starting right at 8:30 am. Euro jumped too, but not nearly as much.

SPX rose +5.76 [+0.20%] to 2945.64, making a new all time high this week. SPX also fell following the Fed press conference on Wednesday, and it also rallied following the payrolls report – although 1/3 of Friday’s 31 point move came in the futures markets overnight. The weekly doji candle was a bullish continuation, and forecaster was unchanged, remaining in a reasonably strong uptrend. SPX remains in an uptrend in all 3 timeframes.

Sector map showed homebuilders and financials leading, while energy and materials did worst. This was a mostly bullish sector map.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Homebuilders XHB 2.62% 6.19% rising rising rising rising ema9 on 2019-05-02 2019-05-03
Financials XLF 1.34% 4.27% rising rising rising rising ma200 on 2019-04-11 2019-05-03
Healthcare XLV 1.29% 12.20% rising falling rising falling ema9 on 2019-04-25 2019-05-03
REIT RWR 1.15% 13.73% rising rising rising rising ma50 on 2019-04-30 2019-05-03
Industrials XLI 1.14% 9.76% rising rising rising rising ema9 on 2019-05-03 2019-05-03
Defense ITA 1.09% 12.36% rising rising rising rising ema9 on 2019-04-12 2019-05-03
Cons Staples XLP 0.75% 17.21% rising rising rising rising ema9 on 2019-04-26 2019-05-03
Telecom XTL 0.44% 4.92% falling rising falling rising ema9 on 2019-05-03 2019-05-03
Technology XLK 0.36% 18.81% rising rising rising rising ema9 on 2019-05-03 2019-05-03
Utilities XLU 0.34% 13.69% rising rising rising rising ema9 on 2019-04-24 2019-05-03
Cons Discretionary XLY -0.47% 16.98% rising rising rising rising ema9 on 2019-05-03 2019-05-03
Materials XLB -0.70% -0.74% falling rising falling rising ma50 on 2019-05-03 2019-05-03
Energy XLE -2.97% -12.57% falling falling falling rising ma50 on 2019-04-26 2019-05-03
Gold Miners GDX -4.74% -10.42% falling falling falling falling ma200 on 2019-05-01 2019-05-03

The US equity market was second from the bottom this week.

VIX rose +0.14 to 12.87.

Rates & Commodities

TLT fell -0.12%, but ended the week in an uptrend – above all 3 moving averages. TY did worse, falling -0.25%. The weekly bearish harami pattern was neutral, and forecaster rose, remaining in a slight uptrend. TY ended the week in an uptrend in the weekly and monthly timeframes. The 10-year yield rose +2.6 bp to 2.53%.

JNK fell -0.44%, dropping mostly because of that Fed press conference, ending the week in a downtrend. BAA yields rose +3 bp, but it remains in a downtrend. The BAA.AAA differential fell 4 bp, and the downtrend is strengthening. Credit markets are still showing no signs of stress.

Crude dropped -0.92 [-1.46%] this week, with all of the damage happening on Thursday’s big plunge. The EIA report showed a strong build (crude: +9.9m, gasoline: +0.9m, distillates: -1.3m), but it didn’t seem to cause all that much trouble for price – that’s possibly because this is maintenance season for US refineries, so this kind of build is expected at this time of year. Weekly candle print was a swing high (75% bearish), and forecaster continued falling and is now in a moderate downtrend. Crude remains in a downtrend in both daily and weekly timeframes.

There was an issue this week with deliberate oil contamination in Russia – which supplies crude to refineries in Europe. What’s up with that? A criminal investigation is reportedly under way.

Backwardation price patterns are hinting at tightening supply later on this year.

Physical Supply Indicators

* The GLD ETF tonnage on hand fell -5.87 tons, with 741 tons remaining in inventory.

* ETF Discount to NAV:

PHYS 10.18 -2.37% to NAV [increase]
PSLV 5.34 -4.61% to NAV [increase]
CEF 12.25 -4.56% 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 premium for gold, and a 2c discount for silver.

* Gold dealer big bars premiums were: gold [1kg] 1.38% and silver [1000oz] 3.66%. That’s a large increase in silver big-bar premiums this week.

Grey Swans & Geopolitics

  • Ebola: total cases 1367, with 984 deaths (CFR: 66%). That’s 128 new cases this week, a new high. The case fatality rate continues to climb also. Problems in containing the epidemic continue to center around security issues as well as community mistrust. “The high proportion of community deaths reported among confirmed cases, relatively low proportion of new cases who were known contacts under surveillance, existence of transmission chains linked to nosocomial infection, persistent delays in detection and isolation in ETCs, and challenges in the timely reporting and response to probable cases, are all factors increasing the likelihood of further chains of transmission in affected communities and increasing the risk of geographical spread both within the Democratic Republic of the Congo and to neighbouring countries.” Put more simply: things are getting worse. https://www.who.int/csr/don/02-may-2019-ebola-drc/en/
  • EU – Scheduled for May 23rd. A 23-nation poll discovered that people in Europe were not as positive about the future as those in China and India, and specifically the less-positive people tended to vote populist.
  • EU Recession: no news.
  • China – Trade: Liu He will travel to Washington on Wednesday for the next round of talks. Mnuchin said that the talks in China this week were “productive.” How far away is the finish line? Mnuchin suggested it was perhaps two weeks away.
  • BRExit: Labor decided to only conditionally support a second referendum, which did not please the Remainers within the party. Voters in local elections in the UK expressed their disapproval of the Tories, causing them to lose 850 local council seats. Negotiations between May and Corbyn are moving closer to a Brexit deal – reportedly a “customs union” with the EU.
  • Yield Curve Inversion: the 1-10 spread rose +3 bp to 13 bp.
  • North Korea: fired a short range ballistic missile on Friday – the first launch in almost 18 months. It appears that North Korea is unhappy with the lack of progress in resolving sanctions and denuclearization.

US Recession Watch

Here were the economic reports this week:

  • Personal Income & Outlays: consumer spending rose +0.9% m/m, but incomes only rose +0.1% m/m. Spending good, incomes not-so-good.
  • ISM Mfg Index: came in far below expectations; 52.8 was the lowest reading in 2 years. New orders were at 51.7, and export orders dropped to 49.5, which is actually in contraction.
  • Construction Spending: fell -0.9% m/m overall, and -1.5% m/m in SFH construction. Construction is a leading indicator for the housing market overall – so more bad news for housing.
  • Motor Vehicle Sales: fell to an annual rate of 16.4M, which is a sizable drop from the 2-year average of above 17M.
  • ISM Non-Mfg Index: it is slowing, but still shows reasonable strength with a reading of 55.5. Employment looks weak at 53.7.
  • Friday’s Nonfarm Payrolls headline number was quite strong (+263k), but underneath the covers, the number of workers working part time for economic reasons jumped substantially. When this number rises, it is either a coincident or sometimes leading indicator of recession. One month doesn’t determine a trend, but given there are no extenuating circumstances this month (such as a government shutdown, for instance), this jump is definitely bad news.

So that’s continued bad news for housing, mostly-stagnant income, manufacturing continues to look a bit ill, and now payrolls are giving off signs of trouble. Services are still doing reasonably well, but employment is slowing there too. The part-time-worker series is especially concerning.

Summary

Powell’s press conference on Wednesday caused some minor havoc in the markets, as most everything sold off following his statement: he saw no strong case for moving rates in either direction at this time. The markets had leaned in the direction of a cut, and they were disappointed. But then the payrolls report on Friday flipped that around – it appeared that most every market saw something in the report to like. Silver did especially well, as did platinum.

Big bar gold premiums on gold remain low, silver’s premium increased, as did all ETF discounts. There is no shortage of gold or silver at these prices. The discounts for the ETFs are fairly large right now. Is that a signal of some sort?

The COT report for silver looks more and more like we are at or near a low for silver, while gold COT report looks much less convincing.

The larger economic picture is starting to darken somewhat. While Trump was enthusiastic about the headline jobs number, the jobs report looked more than a little ominous to me. And yet, credit markets remain placid – even improving, while equities are making all time highs. From the viewpoint of SPX, the future is so bright we have to wear shades. What else does a new all time high say?

Which brings me to silver. It continues to slowly decline – in fits and starts – and the 3-month trend is definitely lower. But at this moment all my forecasters are pointing (cautiously) higher. And the gold/silver ratio is at 20 year highs which tells us that – at some point – a major reversal should occur. Of course, “some point” for the major GSR reversal could be months if not years away, so the timing for that indicator isn’t exact. In fact, its distressingly imprecise. The COT report is suggesting something similar – it too looks bullish, although COT timing tends to be measured in weeks rather than months or years. So I’ll leave you with the COT report, which shows managed money net short. I’ve run the COT Managed Money Net through a 7-point RSI, which seems to do a better job of showing momentum highs and lows, stripping out the changes in overall positioning that has happened over the years.

This chart suggests that, more likely than not, a bullish reversal will happen within the next week or two. Whether that is just “a” low, or “the” low, is unknown. The only sure things in life are Death and Taxes, after all.

And of course, I’m long silver…so…take what I say with a grain of salt.

Weekly trends (in order of strength):

Uptrend: SPX, BAA bonds, DJI, silver, 10-year treasury, gold/Euros, USD.

Downtrend: copper, miners, crude, platinum, gold.

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  • Sat, May 04, 2019 - 09:08am

    #2

    davefairtex

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    Yield Curve Inversion: The Fed's Fault?

Wolf Richter has an article on the Fed and the details of its April balance sheet roll-off.  In the article, he mentioned something that caught my eye: the Fed has a lot of 10-year treasury bonds, and no shorter-term bills.  I suspect this was – probably – the result of Operation Twist.

The Fed now wants to reverse this process – to buy shorter-term bills and notes, and sell some of the 10-year bonds it currently owns.  What do we imagine this will do?  Well its pretty simple – its Reverse Operation Twist – it will steepen the yield curve, and probably raise mortgage rates.  Any guesses what that will do to our friendly housing bubble?

Did I hear anyone else talk about this?  Not so much.  A useful nugget of information.  Once they start doing this, I expect that yield curve inversion will vanish also.

https://wolfstreet.com/2019/05/03/fed-balance-sheet-drops-46-bn-in-april-qe-unwind-reaches-580-bn/

  • This reply was modified 2 months, 2 weeks ago by davefairtex davefairtex.
  • Sun, May 05, 2019 - 05:31am

    #3
    phusg

    phusg

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    Another grain

This chart suggests that, more likely than not, a bullish reversal will happen within the next week or two. Whether that is just “a” low, or “the” low, is unknown. The only sure things in life are Death and Taxes, after all.

And of course, I’m long silver…so…take what I say with a grain of salt.

Thanks again for sharing your hard work and insights Dave. I now have some skin in this ‘game’ so it’s more appreciated than ever. Here’s a thought or two from an amateur short silver…

Looking at your last chart I would worry about the value of the RSI being below 30, as the time it was the lowest in your chart was in the midst of the time silver tanked the hardest, in the first half of 2013.

It also apparently doesn’t help identify “the” low as the 2016, 9 year low in silver didn’t have a preceding RSI drop below 30.

Also, I don’t visit there much anymore, let alone read the comments, but I noticed this comment by JIMSJOE2 on zerohedge that sounded fairly intelligent and was wondering whether you agree:

The commercials generally are in the physical commodity business on a day to day basis and these need to hedge to protect the value of the physical. For the most part they are not in the markets to make money but again to hedge and that includes the banks who place trade for clients and also those with physical commodity trading desks need to hedge. Some also hire firms to enhance their revenue but again these are mostly hedges. On the noncommercial side is also entities hedging especially currency traders protecting their dollar trades both long and short in currency markets. In addition is the speculators who provide the liquidity for those that hedge by selling options. They are in the market to make profits. So you have two different groups in markets for entirely different reasons, one to hedge and one to make money. Now since most hedges expire worthless the speculators make enormous profits. Since they are in markets to make a profit history proves the speculators are more right than wrong and the few hedges that are triggered are more than offset by the majority that do not.

Many in the metals community see the massive shorts on the COT report and think the “cartel” is suppressing prices but again these are mostly hedges protecting value in case the instrument they are hedging goes goes south and if triggered helps to offset loses. The last thing they want is to have the thing they are hedging which is their main trade to go down in value.

  • Mon, May 06, 2019 - 06:09pm   (Reply to #3)

    #4

    bronsuchecki

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    Commercial hedging

There is a lot of truth to that. If you think about all the businesses that use precious metals in their business, eg refiners, mints, jewellery companies, industrial users etc, they all have gold and silver tied up in their working inventories. Every one of those would not want to be exposed to price changes so they would hedge, thus they will be short. So there should be a natural ongoing short position in the markets equal to the total amount of gold and silver in these business, which would have to be quite significant.

Having said that, I do think that there would be many managers within those businesses that could not resist the temptation to do a little bit of speculation around their core short position, so they may reduce or increase their hedge depending on their views of price. I don’t think they would be completely unhedged, just tweaking their position, eg they maybe long 50,000oz of inventory but only go short 45,000oz.

The other thing to keep in mind about the COT is that an entity can only be in one category. So in my example, the business with 45,000oz short would be a commercial even though they are really 50,000oz commercial and 5,000oz speculative.

Same would apply to a bullion bank, they would be a commercial even though they may have a pretty large speculative position along with their underlying commercial hedging position.

Also note that many businesses would hedge using forward purchases/sales, direct leasing (we saw that with Republic), and other over the counter trades which will not show up in futures markets (only to the extent that the bullion bank is hedging its OTC trades with futures).

IMO you have to therefore consider the COT data as “fuzzy”.

  • Tue, May 07, 2019 - 10:04am

    #5
    phusg

    phusg

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    Commercial hedging size

Thanks for that Bron, gives me some more insight. Thinking on it some more, I wonder how much hedging is needed to legitimately hedge all the silver businesses in the world? Dave often relates the amount of hedging to total yearly production, which is very useful. I wonder how many years of silver production would equate to a legimate hedge for all the PM related businesses you mention in addition to the miners eg refiners, mints, jewellery companies, industrial users etc

  • Tue, May 07, 2019 - 11:14am

    #6

    davefairtex

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    grains of salt

phusg-

Yeah, the reason I included so much history is because its definitely not one of those sure things – especially for the huge drops like we saw in 2013.  If you go back to the big 2011 move, COT wasn’t helpful there either.

I think for the more normal moves, it is more predictive.

Here’s roughly the same chart, but with no RSI7.  You can see that the recent commercial moves have been stronger than in the past given the same-sized moves in the underlying.    Look at the change in 2019: commercials covered 60k shorts, after only a $1.20 move in silver.  Compare with the low in 2015, when they covered 50k after a $4 drop.  I don’t know if there is meaning in that – which is why I used the RSI7 to try and factor it out.

Ultimately, there’s a rhythm to these moves, and I assume that the most plugged in people here are the commercials.  When they cover, I assume they know what they are doing.  And most of the times, they seem to get it right.

They could have more left to cover – maybe another 20k.  A “mostly sure thing” would be after another 20k contracts vanished.

The fact that you can hold your short through 30c daily rallies is pretty amazing.  Congratulations.  🙂

  • Wed, May 08, 2019 - 01:21am

    #7
    phusg

    phusg

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    Courageous of crazy?

The fact that you can hold your short through 30c daily rallies is pretty amazing. Congratulations. 🙂

Haha, no doubt a day-trader like yourself was much more nimble through last weeks big moves, but yes that did get this amateur’s eye-brows raised. But don’t worry, I ain’t betting the farm so I can afford to be more hands-off with it 🙂

  • Wed, May 08, 2019 - 05:17am   (Reply to #7)

    #8

    davefairtex

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    re: Courageous of crazy?

Well, its a funny thing.  Although I write a daily report, I’m much more of a swing trader by nature.  But when your assignment is “write a daily PM report”, you write a daily PM report, even if some days you end up saying “not much changed.”

Today was a bit different though.  The US-China trade deal might well be coming unraveled.  And this could be a really big deal.  So every now and then…daily reports are actionable…

Implicit in your comment is a really important point: position size is key to remaining calm during volatile conditions.  One SI contract is … way too large for me to be comfortable holding through those 30-cent reversals.  (I could do a mini-SI – 1000 oz vs 5000, but going long, I prefer PSLV and its big fat 4% discount)

 

  • This reply was modified 2 months, 1 week ago by davefairtex davefairtex.
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