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PM Weekly Market Commentary – 8/9/2019

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  • Sun, Aug 11, 2019 - 02:06am

    #1

    davefairtex

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    PM Weekly Market Commentary – 8/9/2019

On Friday, gold fell -4.68 [-0.31%] to 1508.54 on heavy volume, while silver rose +0.03 [+0.18%] to 17.05 on heavy volume also. Crude rallied [+2.27%], The buck moved slightly lower [-0.12%], sos did bonds [10Y yield +1.8 bp], while SPX fell a bit more strongly [-0.66%].

The Trump tariff imposition, along with the Chinese response and subsequent plunge in CNY [+1.78%] to an 11 year high of 7.10 (CNY/USD rising = $1 buys more CNY = CNY weakening) were the headline news of the week. The trade talks appear to be toast. China does not want a deal – they appear to be waiting for a more “flexible” US President. Perhaps after the 2020 elections, they will get one.

This week’s metals sector map shows silver leading gold, and the miners leading metal. This is a classic PM uptrend sector map. The industrial metals are moving higher, but they are at the bottom of the heap. Even so, the recovery in industrial metals does suggests that the first “impulse” of last week’s risk asset sell-off driven by the tariff imposition is probably past.  Note that all PM components are above all 3 moving averages, and all have executed golden crosses.  Check out the 52-week change in the miners: +35% for the juniors, and +41% for the seniors.  And gold is up +24% over that same time period.  Silver: +9.64%.  Poor silver.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Silver Miners SIL 6.58% 9.31% rising rising rising rising ema9 on 2019-08-06 2019-08-09
Junior Miners GDXJ 6.11% 35.80% rising rising rising rising ema9 on 2019-08-01 2019-08-09
Senior Miners GDX 5.73% 41.77% rising rising rising rising ema9 on 2019-08-01 2019-08-09
Silver $SILVER 4.44% 9.64% rising rising rising rising ema9 on 2019-08-06 2019-08-09
Gold $GOLD 3.84% 23.59% rising rising rising rising ema9 on 2019-08-01 2019-08-09
Gold/Euro $GOLD:$XEU 2.97% 27.55% rising rising rising rising ema9 on 2019-08-01 2019-08-09
Platinum $PLAT 1.87% 3.50% falling rising rising rising ema9 on 2019-08-07 2019-08-09
Copper $COPPER 1.05% -6.12% falling falling falling falling ema9 on 2019-07-30 2019-08-09
Palladium $PALL 0.90% 57.47% falling rising rising falling ma50 on 2019-08-01 2019-08-09

Gold rose +55.83 [+3.84%] to 1508.54. That’s a new 6-year high, and a close above round number 1500. Both of those are incredibly bullish events. While the opening white marubozu is bearish (77%), forecaster jumped higher and is now in a strong uptrend. Gold remains in an uptrend in all 3 timeframes.

Gold/Euros rallied for an 11th straight week; the all-time high for gold/Euros is 1391, set back in September 2012. Gold/Euros closed the week at 1346. This means that less than a 50 Euro move sees gold break out above the all time high. Gold/Euros remains in an uptrend in all 3 timeframes too.

The September rate-cut chance is 100% for one cut, and 14% for two cuts; the Dec 2019 rate-cut chance is at 100% for one cut, 85% chance of 2 rate cuts, and a 38% chance of 3 rate cuts. That’s an increase in rate cut projections over last week.

COMEX GC open interest fell -465 contracts on Friday, but rose 15,711 contracts this week.

The COT report showed commercial net plunged -36k contracts, a large change, which brings the commercials almost to historically low levels. This was mostly new shorts (+32k) and a few longs sold (-4k). Managed money net shot up +41k contracts, which was +33k new longs and -8k shorts covered. The COT positions suggests a long-term top for gold.  Then again, it suggested that last week too.

Silver jumped +0.76 [+4.67%] this week. Most of the move happened on Wednesday’s giant rally – which occurred for no reason that I could see. The long white candle is bearish (57%) but forecaster was virtually unchanged and remains in a reasonably strong uptrend. Friday saw the daily drop into a slight downtrend, which puts silver in an uptrend in both weekly and monthly timeframes. Silver’s monthly trend continues to look quite strong.

The gold/silver ratio fell -0.70 to 88.48. That’s bullish. Silver is finally starting to outperform gold.

COMEX SI open interest plunged -4,308 contracts on Friday, but rose +908 contracts for the week. That is 9 days of global production removed on Friday alone.

The silver commercial net rose +8.7k contracts, which was +4.3k new longs and -4.3k fewer shorts. Managed money net fell -15.7k contracts, which was -5.7k fewer longs and +9.9k more shorts. Silver continues to look as though a medium-term top is here, although it faded a bit this week.  Note that Wednesday’s big move wasn’t covered by this week’s COT report update.


Miners broke out to new highs this week that date back to mid-2016.  The opening white marubozu was bearish (77%) but forecaster moved higher, leaving the miners in a moderate uptrend. XAU closed the week in an uptrend in all 3 timeframes.  Note: miners “only” made a 3-year high this week, while gold made a 6-year high. In spite of the miner’s strong percentage-wise performance this week, and even over the past 52 weeks, the miners continue to lag gold when looking at the longer term charts.  This is saying that the miners really haven’t taken off yet – not like they did back in 2011.  Money – at least in the US – still isn’t paying very much attention to the mining shares.

The GDX:$GOLD ratio rose +1.81%, while the GDXJ:GDX ratio moved up +0.37%. That is bullish.


USD

The buck fell -0.53 [-0.54%] to 97.07. All of the damage happened on Monday, driven by China’s response to Trump’s tariff declaration last week. The swing high was bearish (54%), and forecaster fell sharply, moving the buck into a downtrend. DX is now in a downtrend in both weekly and monthly timeframes.

The big currency moves: CNY [+1.78%], JPY [+0.99%], EUR [+0.85%], GBP [-0.53%]. The breakout in CNY/USD to 11 year highs was the biggest news of the week, although the 1.78% move was not enough to make up for those 10% tariffs. At least not yet anyway. Tea-leaf-readers disagree on whether or not China really wants to let the currency go; if it weakens too much, it might cause a crisis of confidence among Big Money in China which could lead to a surge in capital flight that they might not be able to control.

There is also a nascent banking crisis in China; the government effectively seized a third bank in as many months.  Apparently 1 in 10 rural banks received a “fail” rating in the new, first-ever, risk review of the banking system by PBOC.  https://www.bloomberg.com/news/articles/2019-08-09/china-to-buy-stake-in-another-troubled-regional-bank-report


SPX fell -13.40 [-0.46%] to 2918.65. The damage happened on Monday, and SPX spent the rest of the week trying to recover. The takuri line candle was somewhat bullish (47%), but forecaster moved lower, moving SPX into a mild downtrend. SPX ended the week in an uptrend in both daily and monthly timeframes, although the daily uptrend looks a bit iffy.

Sector map had energy and telecom leading lower (with financials and tech close behind), while defense and utilities did best. This was a bearish sector map.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Gold Miners GDX 5.73% 41.77% rising rising rising rising ema9 on 2019-08-01 2019-08-09
Defense ITA 2.39% 6.22% falling rising rising rising ema9 on 2019-08-08 2019-08-09
Utilities XLU 1.20% 14.37% rising rising rising rising ma50 on 2019-08-07 2019-08-09
REIT RWR 1.07% 7.21% rising rising rising rising ma50 on 2019-08-08 2019-08-09
Materials XLB 0.70% -3.04% falling rising rising rising ma50 on 2019-08-09 2019-08-09
Homebuilders XHB 0.49% 3.16% falling rising rising rising ema9 on 2019-08-09 2019-08-09
Healthcare XLV 0.38% 1.53% falling rising rising rising ema9 on 2019-08-08 2019-08-09
Cons Discretionary XLY 0.16% 4.06% falling rising rising rising ema9 on 2019-08-09 2019-08-09
Cons Staples XLP 0.15% 11.00% falling rising rising rising ema9 on 2019-08-08 2019-08-09
Industrials XLI -0.53% -0.42% falling rising rising rising ma50 on 2019-08-01 2019-08-09
Technology XLK -0.71% 6.62% falling rising rising rising ema9 on 2019-08-09 2019-08-09
Financials XLF -1.56% -3.99% falling rising rising rising ma50 on 2019-08-05 2019-08-09
Telecom XTL -1.86% -10.00% falling falling falling rising ma50 on 2019-08-02 2019-08-09
Energy XLE -2.15% -21.02% falling falling falling rising ma50 on 2019-08-01 2019-08-09

US equities were actually #2 this week; developed Asia looked weakest.

VIX rose +0.36 to 17.97.

Rates & Commodities

TY rose +0.53%, making a new high. The spinning top was bearish (45%), but forecaster moved higher into a moderate uptrend. TY remains in an uptrend in all 3 timeframes.

DGS10 (the 10-year yield, inverse of TY), dropped -12.1 bp to 1.74%. The opening black marubozu was a bearish continuation, and forecaster moved lower into a strong downtrend. DGS10 remains in a downtrend in both weekly and monthly timeframes.  No bottom yet for the 10-year yield.

JNK fell -0.27% – like equities, it took a big hit on Monday, and spent the week recovering. Forecaster moved back into an uptrend for JNK, although it remains below both 9 and 50 MA lines.  It feels as though it might just be a dead cat bounce.

BAA.AA differential rose +1 bp, ending the week at +88. The takuri line candle was bullish (51%) but forecaster was little changed, remaining in a downtrend. No credit concern – I’m guessing because traders are front-running the central banks, who will feel the need to buy up all the crappy debt in order to “stimulate the economy” (but really to save all those zombie companies who would otherwise go under).

Crude fell -1.21 [-2.19%] to 54.00. All of the damage happened in the first part of the week, with crude bouncing back on Thursday and Friday. A bearish EIA report (crude: +2.4m, gasoline: +4.4m, distillates: +1.5m) didn’t help, but by the time that report came out, most of the selling had already occurred for the week. The hammer candle was bullish (41%), and forecaster edged higher but remains in a weak downtrend. Crude daily did manage to print a swing low on Friday, which pulled daily forecaster back into an uptrend. That left crude in an uptrend in both daily and monthly timeframes – but those trends are quite weak.  Crude remains in a position where it could really go either way.

Physical PM Supply Indicators

* The GLD ETF tonnage on hand rose +9.09 tons, with 840 tons in inventory.

* ETF Discount to NAV:

PHYS 12.01 -0.90% to NAV [decrease]
PSLV 6.27 -1.04% to NAV [increase]
CEF 14.38 -2.81% to NAV [decrease]

* 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 5c premium for silver (London).

* Gold dealer big bars premiums were: gold [1kg] 1.17% and silver [1000oz] 3.43%.  Silver premium is up a bit this week.

Grey Swans & Geopolitics

  • Ebola: total cases 2781, with 1866 deaths (CFR: 67%). That’s just 68 new cases this week, which is a decrease over last week. Almost all new cases are from Beni and Mandima – previously the majority of cases came from Katwa and Butembo. No new cases from Goma have been reported. Just looking at the charts, things seem to be improving, except the security situation has grown worse in Beni – EVD operations are temporarily suspended until the situation calms down.  That could account for the drop in reported cases this week.  https://www.who.int/csr/don/08-august-2019-ebola-drc/en/
  • Iran: The US is trying to create a maritime protection mission in the Gulf; if Israel joins, Iran says they reserve the right to confront such a “clear threat.” Germany ruled out participating in this mission just last week.  Some part of me feels as though we should just stand back and let those gulf states sort out their problems amongst themselves.  Problem is, that probably results in nuclear exchanges between the various countries, so long term it is probably not the right approach.
  • Italy – migration: Salvini has called for snap elections; this is because Lega’s poll numbers have jumped higher, at the expense of coalition partner M5S, and these same polls suggest that Lega might be able to run the country without M5S if they are fortunate in the election.  Salvini has been able to leverage his interior ministry position to raise his popularity and that of his party.  https://euobserver.com/news/145618
  • US-China: This week, China either devalued its currency, or money fled China – maybe both.  The plunge in CNY will insulate US consumers from at least some of the tariff effects. Meanwhile the media in the US is talking trade doom & gloom: “dangerous miscalculations”, “how Trump and Xi can Make America and China Poor”, “trade war heats up”, etc.  A few months back, Trump was too soft, and now he’s being too hard.  Will Trump ever be “just right”?  Seems unlikely.
  • BRExit:  On the one hand, PM Johnson is telling the EU they should make some “common-sense changes” to the withdrawal agreement.  Naturally, having crushed May during the last round of negotiations, EU is staunchly refusing to make any changes. On the other, a “senior EU diplomat” complained that “No Deal now appears to be the UK government’s central scenario.” Curious, that: the EU refuses to negotiate, and then they complain that their adversary is assuming that no negotiations will take place. https://www.theguardian.com/politics/2019/aug/05/no-deal-brexit-is-boris-johnsons-central-scenario-eu-told
  • Yield Curve Inversion: the 1-10 spread fell -7 bp to -6 bp. The yield curve is now clearly inverted.
  • Hong Kong: new entry this week. Citizens of Hong Kong are protesting against an extradition bill that would have effectively placed Hong Kong citizens under the jurisdiction of mainland courts. Given the propensity of the mainland legal system to shoot people that displease the Community Party, this terrified the citizens of Hong Kong, who have a much stronger tradition of the Rule of Law. Currently this bill (despite pro-Beijing leader Carrie Lam’s insistence it is “dying a peaceful death”) is actually “pending resumption of second reading” in the legislative council, and pro-mainland legislators have indicated that the process could resume after the current protests end. Serious protests on the bill have been ongoing for 3 months; it is now materially affecting the economy of Hong Kong. The primary risk to the rest of us is if China loses patience, and sends in the Army the way they did in Tienanmen some 32 years ago. If they do this, it could cause a sudden, massive exodus of money out of Hong Kong as well as the mainland, due to what would be perceived as effectively eliminating the Rule of Law in the city.  Confidence in Hong Kong and China would crater, and the resulting capital flight would cause an immense plunge in asset prices.  Anyone (banks?  in Asia?) with large short derivative positions that effectively bet on “things remaining stable” could be wrecked as a consequence.
  • North Korea: fired a pair of short-range missiles this week. Trump then tweeted he received a letter stating that Kim would like to meet and start negotiations as soon as the US/South Korea military exercises conclude. Apparently, missile launches will stop as soon as military exercises stop.

US Recession Watch

Here are the economic reports for this week:

  • US ISM Non-Mfg Index: headline 53.7 down from June 55.1. Not recessionary, but continuing to decline.
  • US PPIACO: +0.35% m/m; that’s a slow increase after 4 quarters of decline. Not recessionary.

Services are slowing, and producer prices have improved slightly. No recession here, but not much expansion.  Both Germany and the UK appear to be heading into recession, but the US remains above stall speed.  I’m guessing that large deficit spending is the reason things are “so healthy” here.

Summary

This week the equity market continued to react to the news about the 10% tariffs; Monday was a bad day, and the rest of the week was spent recovering. Bonds hit new 3-year highs (10-year at 1.74%!!), and gold hit new 6-year highs.  Gold/Euros is moving within striking range of a new all time high.

Are there flickers of interest in gold from the mainstream yet?  As it turns out, yes.  Google trends/US just showed a strong pop in the search terms “gold price” and “gold mining stocks”, and a much smaller move in the search term “buy gold”.  Retail has noticed the gold rally, and is starting – perhaps – to think about buying some.  Worldwide, the search term “gold price” is much stronger – almost as strong as in 2011 – but the location of the interest may be revealing of something.  Look at the top 10 region list and think about what it might mean:

“gold price”: UAE, Qatar, Nepal (!), Oman, Lebanon, Kuwait, Bahrain, India, Myanmar, Singapore.

Do you see the US in there?  No.  We are #26th!

So maybe the buying pressure isn’t coming from Europe.  Maybe it is coming from elsewhere.  Rich oil sheiks looking to keep their wealth intact, along with poor Nepalese and Burmese who want to hide from a currency collapse.  And the Indians – perennially worried about their currency, and the rich Asians in Singapore.  I’ll leave you with a chart of gold/INR: this probably explains the interest in India.  How many other nations around the world look like this?  73, according to “the guy from GATA” in an interview over at usawatchdog.com.

Big bar gold premiums on both gold and silver moved lower, and ETF discounts moved lower as well, except for PSLV which is back in a slight discount. No shortage in gold and silver at the moment. From all I can see, physical retail – in the US – has yet to become involved in the new bull move.  If you had the urge to pick up some physical, premiums remain relatively low, at least in the big bars.

The COT report looks even more like a high for gold, while silver has backed away from its high just a bit.

I still see silver as the longer term sleeper-winner, and by extension, silver mining shares which are now starting to show some signs of life off very low levels.  If/when silver ever starts to catch up to gold for real – the move will be breathtaking.  A similar move happened in 2010-2011 following the great silver crash in 2008.

And of course as Chris says, there probably won’t be any physical silver to be found.  It remains a very small market.

Not financial advice.  Of course.

Weekly trends (in order of strength):

Uptrend: Gold, Gold/Euros, Bitcoin, 10-year Treasury, Miners, Silver, Platinum.

Downtrend: Copper, DJI, Crude, SPX, USD.

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  • Mon, Aug 12, 2019 - 01:59am

    #2

    davefairtex

    Status Diamond Member (Offline)

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    Hong Kong Black Swan

Here’s a document written by Kyle Bass – who is almost certainly short HKD and other (related) Hong Kong assets – which details the relatively alarming situation there from a financial & political standpoint.

https://www.yumpu.com/en/document/read/62642522/the-quiet-panic-in-hong-kong-april-2019

[Warning: the document is tedious to read – not because of the writing, but because the “reader” they require you to use is…entirely obnoxious and you have to struggle – well I had to struggle – to make the text large enough to be visible and still scroll through it), but the content is interesting enough so I waded through the technological slime.  They really should find a better way.  Presumably, they aren’t poor over at Hyman Capital.  Perhaps you will fare better.  I digress.]

Executive Summary:

* HKD is pegged to the USD.  Pegs always fail.  This peg may fail soon.  If (when) it does, it will cause a whole lot of impacts throughout Asia.

* HK banks are heavily exposed to China – and very, very levered.  Cause of the problem: the USD peg resulted in “growing Hong Kong” having the Fed’s interest 2008-2017 0% interest rate policy.   Result: shitloads of leverage.  Now: 850% debt/GDP, the highest leverage ratio in the world.

* If the PLA marches into HK to stuff the protests, the US will (probably) no longer recognize HK as “sufficiently autonomous”, which means the special treatment HK gets from the US goes away.  If that happens, money flees Hong Kong for real.  So when you read the news, look for those two words: “sufficiently autonomous.”  So far, they are.  According to Trump.  At least today.

If the peg fails – and pegs always eventually fail – and money flees HK, the HK banks will fail, and there will be no backstop for HKD depositors since leverage is way too high for the city of HK to bail out.

Kyle concludes: “Hong Kong is currently the center of China’s ability to raise US dollars in Asia.  China is desperately short of US dollars and, therefore, needs Hong Kong to remain a non-tariffed most-favored-nation trader with the US and the UK.  Financial teetering coupled with political uncertainty could abruptly change the complexion of the foundation of investments in HK and throughout Asia.”

I like the understatement: “abruptly change the complexion”, which translated, means overnight bank failures and rapid currency resets.  And maybe cascading failures for heavily US dollar-indebted entities in China.  Lehman-style.  Or Asia financial crisis 1997-style.

This is indeed a black swan in the making.  Things are a lot closer to failing than I realized.  I had hints of trouble, but this is the real thing.

Armstrong – I always tie things back to him – said that a dollar rally will cause massive failure around the world due to a huge amount of USD debt that will be vastly more difficult to repay.

And it does appear we are right at that breakout point.  And HK may well be the trigger.  That, alongside Trump’s 10% tariffs.  Why didn’t I notice before?  I have been using the wrong USD index.  China isn’t in that index.  They are in the trade-weighted index, which follows.  My mistake, sorry about that.

Thanks to Chris for finding the more relevant USD index.  Armstrong mentioned it, but I let it go by unheeded.

  • Mon, Aug 12, 2019 - 04:11am

    #3

    Eannao

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    Kyle Bass

Hi Dave,

China (and the threat they pose) has been a passion project of Kyle Bass for quite a while. I’ve been following him on it on Real Vision for a couple of years. For him it seems to have gone far beyond the purely financial…. he’s looking at the IP theft, the financial and cyber warfare and the human rights abuses and is questioning why we turn a blind eye and continue to do business with them, giving them concessions in the WHO etc and facilitating their ascendancy and the regime of the Chinese Communist Party. He feels so passionately about it, that he no longer has a position against the currency. He wants to be able to give his opinions objectively, with a dog in the fight, as it were. You should check out his Twitter feed for more info.

Regarding the HK black swan, China is probably caught between a rock and a hard place… the rock of wanting supress the HK uprising and the hard place of wanting to maintain HK as an international fincial hub. Interesting to see how they resolve it.

  • Mon, Aug 12, 2019 - 04:44am   (Reply to #3)

    #4

    davefairtex

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    re: Kyle Bass

E-

Thanks for the perspective on Kyle Bass.  I’m not a follower, but I did scan his twitter feed and he sure does seem quite passionate.  I’m glad to hear he’s not expending all this energy just for a trade.

I think I’d go beyond “rock and a hard place.”  I think the instinct of the mainland is to obtain total control over all nearby valuable “Chinese” things, and Hong Kong is one of them.  Taiwan is another.

The thing I didn’t realize is just how levered HK is, how it all depends on a peg (and pegs always fail), and how the USD chart is poised to break out higher, which will drop extraordinary strain on said peg, right at the same time of all these protests.  The cherry on top is the “sufficiently autonomous” designation.

And then add Trump’s 10% tariffs; thing + thing + thing + thing =  an explosion.

Why China chose this moment to try and impose legal jurisdiction over the people of HK is really beyond me.  Why not just wait 28 years and it falls into their hands like a ripe plum!  I thought they were supposed to be the patient ones!

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