Investing in precious metals 101

PM Year End Market Commentary – 2016

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  • Sun, Jan 01, 2017 - 03:54pm

    #1

    davefairtex

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    PM Year End Market Commentary – 2016

On Friday gold fell -7.00 to 1152.00 on moderate volume, and silver fell -0.24 to 15.96 on moderate volume also. Gold, silver, and the miners retraced their recent gains, with silver losing most. PM printed a collection of bearish engulfing and dark cloud cover candle patterns, but given where we are in the cycle, these prints are not as bearish as they might be if we had rallied for a substantial amount of time.

But instead of looking at the last week, I will instead look at the full year 2016 instead, with an eye towards where we might be headed in 2017.

Looking at the PM sector map for the year, we can see that even though the past five months have been unpleasant for PM, the gains in the miners have been fantastic; silver miners led, up 73%, but even the senior miners rose +52%. Platinum was the laggard, retracing almost all of its 2016 rally.  At year end, we see that gold and the miners have crossed their 9 EMA lines, which suggests that a rebound might be at hand.  Gold has not been above its 9 EMA for eight weeks.

Name Chart Chg (A) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Silver Miners SIL 73.47% 73.47% falling falling rising falling ema9 on 2016-12-30 2016-12-31
Junior Miners GDXJ 64.24% 64.24% rising falling rising falling ema9 on 2016-12-28 2016-12-31
Senior Miners GDX 52.48% 52.48% rising falling rising falling ema9 on 2016-12-27 2016-12-31
Copper $COPPER 17.49% 17.49% falling rising rising rising ema9 on 2016-12-12 2016-12-31
Silver $SILVER 15.28% 15.28% falling falling rising falling ema9 on 2016-12-30 2016-12-31
Gold $GOLD 8.64% 8.64% rising falling falling falling ema9 on 2016-12-28 2016-12-31
Platinum $PLAT 1.44% 1.44% falling falling falling falling ema9 on 2016-12-21 2016-12-31

Themes driving gold this year were negative interest rates in Europe and Japan, along with the surprise BRExit vote. However, Trump’s election, the ECB deciding to taper, and the Fed projecting 3 rate increases for 2017 caused gold to reverse course. In the last week of 2016, there were hints of a rebound; a swing low, a 9 EMA crossing, along with a COT report that showed managed money was heavily short. This resulted in a spinning top candle on the monthly chart for December, which to my eyes does not look much like a reversal.

On the monthly chart, we see that gold rallied $300 during 2016, hitting a high of 1377.50 before falling to close the year at 1152.00. That’s a $300 rally, with a 71% retracement, leaving gold up +91.60 for the year. There is no clear chart support until the strong support zone at 1000-1045.

The chances for 3 rate rises: 37% by Dec 2017.

Year over year, gold open interest rose by +55k contracts, first hitting a high of 902k contracts the week after BRExit, then plunging back down to 503k by end of year.

Silver took much the same path as gold, rallying $7.41 before running into resistance at the 50 month moving average. Silver started dropping several months before Trump’s election, but like gold it ended up retracing 2016’s gains by 71%. On the weekly chart, strong support is visible for silver at 16, but the monthly chart support looks stronger at the 200 month MA, which currently is right around 15.

The 2016 move in the miners vastly outstripped either gold or silver, with the HUI (the long-term gold miner index) rising 172 points or 151% at the peak, which happened in July right after BRExit. Since the HUI had previously plunged almost 83% (600 at the 2011 high down to 100 in Dec 2015 – a 500 point drop), the bounce doesn’t look all that astonishing on the chart, but if you bought the miners down at HUI 100, you had a very good year, even with the 60% retracement from the peak.

USD

In 2016, the buck moved up +3.53 [+3.57%] to 102.28, making a new high that dates back to 2003. The break higher was mostly due to Trump’s election win, with a little bit extra from the raised expectations for Fed rate increases during 2017. The dollar chart remains quite strong, and current expectations are for Trump to enact policies that are more inflationary as well as more positive for the USD. My guess is that the buck will move higher in 2017, driving the Euro down to parity, if not even lower.

US Equities/SPX

For 2016, the US equity market rose +194.89 [+9.54%] to 2238.83. The leading sector (apart from the miners) was energy, which rose +24.87%. Sickcare did worst, dropping -4.29%. Looking at the year sector map, the market bifurcated – energy/telecom/financials/industrials had double-digit gains, while sickcare/homebuilders/REITs/consumer staples all did relatively poorly.

Most of the gains for the leaders came immediately following Trump’s election – even the losers actually recovered in the period from Nov 7 – Dec 31. Will the “Trump Rally” continue into 2017? I expect that will depend on what Trump will end up getting through Congress.  Initially, however, we might get a correction as traders take profits from the (approximate) 10% “Trump Rally.”

Name Chart Chg (A) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Gold Miners GDX 52.48% 52.48% rising falling rising falling ema9 on 2016-12-27 2016-12-31
Energy XLE 24.87% 24.87% falling rising rising rising ema9 on 2016-12-28 2016-12-31
Telecom XTL 23.33% 23.33% falling rising rising rising ema9 on 2016-12-28 2016-12-31
Financials XLF 20.15% 20.15% falling rising rising rising ema9 on 2016-12-28 2016-12-31
Industrials XLI 17.37% 17.37% falling rising rising rising ema9 on 2016-12-28 2016-12-31
Materials XLB 14.46% 14.46% falling rising rising rising ema9 on 2016-12-28 2016-12-31
Technology XLK 12.91% 12.91% falling rising rising falling ema9 on 2016-12-28 2016-12-31
Utilities XLU 12.22% 12.22% rising rising falling rising ema9 on 2016-12-29 2016-12-31
Cons Discretionary XLY 4.14% 4.14% falling rising rising rising ema9 on 2016-12-22 2016-12-31
Cons Staples XLP 2.42% 2.42% falling falling falling rising ema9 on 2016-12-30 2016-12-31
REIT RWR 1.88% 1.88% rising falling falling falling ema9 on 2016-12-29 2016-12-31
Homebuilders XHB -0.97% -0.97% falling rising rising rising ma200 on 2016-12-28 2016-12-31
Healthcare XLV -4.29% -4.29% falling falling rising falling ma50 on 2016-12-30 2016-12-31

Gold in Other Currencies

During 2016, gold in USD was up +91.60, which was just slightly better than gold in XDR. The big loser was gold in Rubles, which fell a big -177; that’s because the buck fell 18% vs the Ruble, which dropped from a peak of above 80 down to 60 on Dec 30th. As oil prices recover, and if/when the US shuts down the sanction regime in Europe, I’d expect the Ruble to recover even further.

Best performer was gold in GBP, which rose +264. Thanks BRExit!

Rates & Commodities

TLT staged a massive round-trip this year, rising 16% in the first half of the year only to retrace all of that and more, ending the year down -1.20%. Anyone buying at the top is down 16%; the 2.75% annual yield not much comfort. If bond yields return to their peaks of 2009-2010, total losses peak-to-trough will be 35%. Can you imagine what this will do to pension fund returns? Prior to such a larger move down, I suspect (based on the COT report, among other things) that we’ll see a near-term rally in bonds, especially if the equity market ends up correcting.

JNK rose +7.49%. It has managed to climb back only halfway to the most recent peak set in 2014, but the combination of the 6.2% yield and the 7.49% yearly move is an SPX-beating 13.69%. JNK is my proxy for credit-quality worries, and JNK’s 2016 rally shows a lessening of concern, especially regarding the energy sector.

CRB rose +9.29%, with the rebound in energy and industrial metals prices pulling the index higher. CRB is clearly recovering from its January 2016 low; it has moved back above the weekly 50 MA, which has now also started to turn up. Recovery in the commodity space looks to be a slow process.

For the year, crude rose +16.82 [+45.37%] to 53.89, almost double the low of 27.56 set back in January. On the chart, we can see that oil crossed its (monthly) 9 EMA in April, struggled a bit in July/August, and is clearly starting to break out following the OPEC oil agreement signed in December. There is a strong resistance zone above 52 which crude has already moved through, with the next resistance line at around 60. Absent any big geopolitical events, my guess is that oil should move up to 60, as long as OPEC doesn’t cheat too much and shale drilling doesn’t restart in a big way. Judging from the US rig counts, most of the shale regions are not very profitable at current prices; only the Permian region has seen a significant recovery in active rigs.

Physical Supply Indicators

* SGE premium to COMEX has risen to $30 over COMEX. Chinese remain very strong buyers of physical gold at these prices. Levels such as this also sometimes mark a low for gold.

* The GLD ETF tonnage on hand rose +180 tons, with 822 tons in inventory.

* ETF Premium/Discount to NAV; gold closing of 1152.00 and silver closing of 15.96:

 PHYS 9.24 -0.90% to NAV
 PSLV 6.08 +0.14% to NAV
 CEF 11.29 -9.41% to NAV

* Big bar premiums are 2.10% for 100 oz bars in NYC, 3.16% for 1000 oz bars [NYC], and silver eagle premiums are 18.55% [NYC].

Futures Positioning

At the end of 2016, the gold COT report shows a heavy concentration of managed money shorts: 87k contracts, which in the recent past has often (5:7 times) resulted in a 2-3 month rally. In two instances, the rally occurred once the short concentration had built to 110k contracts. So my conclusion is, more likely than not, we have at least a 2-3 month short-covering rally ready to happen for gold in the very near term.

That same situation is not in place for silver; managed money has only 19k short contracts, while the lows typically occur between position sizes of 30k-50k contracts. Any silver rally that occurs will not be driven by short-covering. However, there has been a large amount of long liquidation in silver; if those longs should decide to jump back in again, silver would definitely move higher, but something would have to impel those longs to buy.

So – from the standpoint of a “manipulation” (commercial-controlled) rally, gold is ready, while silver is not. From the standpoint of a major trend change, that’s much more difficult to identify. After the election of Trump, western gold buyers are back to not-caring again.

Summary

The miners were the star this year; the rally off the 2015 low was awesome (52% gains for GDX), but only if you bought the low. If you bought the top in 2011 and held, the 2016 rally didn’t even begin to cover your losses – you went from down 83% to down “just” 70%.

Gold didn’t do quite as well as the miners, but an 8.64% gain was only slightly worse than SPX, and was a whole lot better than if you were in treasury bonds.

Commodities bottomed in February 2016, led by energy: for 2016, oil was up 45%, while natgas rose an even larger 59%. I know we here at the site tend to focus on gold, but sometimes there are opportunities in other “real stuff” areas that have larger potential. This year, oil and natgas were the place to be, at least compared with gold.

Looking Forward to 2017

So what do I see for next year?

Gold COT report is suggesting an imminent rally, based on the level of managed money shorts. Silver isn’t there yet; it probably needs a catalyst of some sort to bring the longs back into the market. Whether this rally lasts beyond a month or two – assuming it actually happens – depends on the buck, and a catalyst for gold.  So I’d guess we’ll have a Jan/Feb gold rally, but what comes after that is really up in the air.

2017 will be a troubled year for the Euro area. There are national elections in the Netherlands [Mar], France [June], and Germany [Aug-Oct]. Any of these elections have the ability to upset the current status quo. If Trump actually starts to execute on his campaign promises without resorting to fascism, it could encourage European voters to select non-mainstream candidates in their own countries – imagine Marine LePen saying she’ll “Make France Great Again.” Elections of any euroskeptic party into a leadership position will call into question the existence of the Euro, and if that happens, money will flee the Euro: for the buck, the Pound, the Yen, Swiss Franc, into German treasury bills, and probably into gold too.

Looking at total credit growth – credit growth drives GDP – it does appear that the three nations with upcoming elections are seeing some growth; one might wonder if the ECB’s money printing operation starting up one year prior and slated to run through the end of 2017 might have been deliberate to keep the current parties in power. Credit growth right now is: EU [+2.3%], Germany [+2.9%], France [+3.9%], and Netherlands [+6.4%]. As a comparison: Italy [+0.1%], Ireland [-5.4%], Spain [-4.4%], Greece [-3.2%], and Portgual [-3.6%]. Or more acronym-ically: GFN wins, PIGS lose.

Will this be enough to keep the incumbents in power?  It appears that the ECB has stacked the deck as best it can, but your guess is as good as mine if it ends up working. Migrant/Refugee issues may end up overriding everything else.

Ultimately, here’s the dynamic I see playing out.

US Good News: If the buck rallies on “US good news”, that’s bad for gold, and will probably eventually send gold down to test support at 1000-1045. This will depend on a successful series of Fed rate increases, on Congress passing a chunk of Trump’s legislation which will (theoretically) be viewed favorably by the market. Under this scenario, I would see the Euro drop down to parity, the buck rise to (around) 107, and gold down to test 1100 if not 1045.

EU Bad news: If the buck rallies on “EU bad news”, that’s good for gold – and possibly, really good for gold, if a Euroskeptic party is elected and actually ends up leaving the Eurozone. An EU exit probably sees the buck rampage through 120, and the Euro plunge into the 80s. I don’t expect a NE-Exit, a FR-Exit, or a DE-exit in 2017, but the election of a euroskeptic government might cause a referendum to be scheduled, giving the new government time to print a bunch of new currency “just in case.” I wouldn’t see DX 120 util an Euro exit was imminent. A sharp rise in the buck would really hurt US exports, and would eventually send the US into recession.  I’d see gold at 1500+ in this scenario, probably at 2000+ after an actual *-Exit.

US Bad News: If the buck falls on “US bad news” (i.e. Congress simply refuses to pass any of Trump’s budgets or legislation), that’s probably mildly good for gold, since the Fed won’t raise rates under that circumstance, and the buck will correct back into the low 90s. Under that circumstance, gold might rally back to the mid-1200s. I don’t think that’s as likely an outcome, but it could happen.

White Swans: Other wild cards (foreseeable problems that don’t have dates attached to them) include either a China credit meltdown, or a Japan credit meltdown, both of which would probably be quite gold positive for the respective local physical markets, but might not impact the international price of gold as substantially. The authorities would probably implement strict capital controls, which could end up splitting off the local physical gold market from the international prices.

Ultimately, if gold does drop to the 1000-1045 level, I’d be a buyer, both of the metal, and of the mining shares. The “populist” wave is building. Trump is a symptom, not a one-off, and I believe the time is not far off when this wave will have enough momentum to swamp any attempts to fend it off. This happens in either 2017 or 2018, that’s my sense. Perhaps the fuse gets lit in 2017 and finally explodes 12 months later.

I guess I’d put my money on an early gold rally, followed by a combination of US Good News, and then some EU Bad news, so a rally to (perhaps) 1200, followed by a drop to 1000-1045, then followed by a very strong rally – the timing and extent of which will be driven by the election cycles in Europe.

Note: If you’re reading this and are not yet a member of Peak Prosperity’s Gold & Silver Group, please consider joining it now. It’s where our active community of precious metals enthusiasts have focused discussions on the developments most likely to impact gold & silver. Simply go here and click the “Join Today” button.

 

  • Sun, Jan 01, 2017 - 05:37pm

    #2

    lambertad

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    Thanks, Dave

Happy New Year, Dave. 

As always, I appreciate the time you take to write the daily, weekly, and year end market commentaries. 

It will be interesting if things play out the way you expect, and the best part is you put your predictions down in writing so you either get to say I told you so, or we get to give you a hard time about it… just kidding. 

I'm saving up some cash for the possibility of a 1000-1045 low that both yourself and others have discussed. I think I'll start averaging in once we get to 1050 and buy heavy if we get below 1000.  

Thanks again and best wishes in 2017. 

Adam

  • Sun, Jan 01, 2017 - 05:45pm

    #3
    Nate

    Nate

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    lunatic or prophet?

Clif High podcast with Greg Hunter

[quote=Greg Hunter]

High, who calls what he does “Predictive Linguistics,” mines the internet and collects billions of data points to produce forecasts of the future.

High’s data is pointing to Silver and Gold prices starting to takeoff in early 2017. High says data is showing a possible “$600 per ounce price for Silver” at some point.  High says before that happens, he sees “$125 per ounce” price for Silver on up to “$345 per ounce.”  High’s data also repeatedly says the “gold price per ounce will eventually be equal to the Dow.”

[/quote]

 

 

  • Sun, Jan 01, 2017 - 07:51pm

    #4

    thatchmo

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    Thanks for the article Dave.

Thanks for the article Dave.  I always read them and try to noodle them out.  However,

 

spinning top candle

bearish engulfing and dark cloud cover candle patterns

Oh, my.  Some of the jargon reminds me of a certain wine magazine I might find in the waiting room of my broker, if I actually had a broker.  Maybe change the column name to "Mine Spectator".  Best of Joy, Health, and Prosperity to you and yours, and all at PP.  Aloha, Steve.

 

 

  • Mon, Jan 02, 2017 - 07:16am

    #5

    davefairtex

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    candle patterns

Candle patterns are an attempt to summarize 1-3 days worth of activity in one phrase.  So, a "bearish engulfing" tells me that day #1 involved a move higher, and day #2 saw a (bullish) gap up at the open, but then the item sold off all day long, dropping below day #1's open.  At least over those two days, momentum for the item reversed.

Short answer: bearish engulfing = "bearish" (reversal from uptrend to downtrend) + "engulfing" (second day was a "bigger" day in terms of price movement than the first day).

It looks like this:

http://www.onlinetradingconcepts.com/TechnicalAnalysis/Candlesticks/BearishEngulfing.html

Dark cloud cover is another unpleasant day, with a gap up on day #2, followed by a bunch of selling – although less than for a bearish engulfing, because the selling on day #2 didn't quite overwhelm the buying on day #1.

http://www.onlinetradingconcepts.com/TechnicalAnalysis/Candlesticks/DarkCloudCover.html

 

  • Mon, Jan 02, 2017 - 06:35pm

    #6
    Peak Prosperity Admin

    Peak Prosperity Admin

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    Same Here!

I know this is serious stuff (and I always appreciate the commentary) but my imagination starts to wander when I read some of the candlestick pattern names.  Things like sliding panda, smiling monkey, coiled snake, crouching tiger, and hidden dragon come to mind.  One of my favorites is "upside gap, two crows".  Sounds like an honorific for some tribal elder.

http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:candlestick_pattern_dictionary

  • Mon, Jan 02, 2017 - 08:26pm

    #7

    davefairtex

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    candle pattern history

dennis-

So candle patterns came from Japan, and so that's where the fun names come from too.  Some have been translated, others have not.  Just look at the list of candles and you will see.  For example: "harami" = "pregnant" (as in, bullish/bearish harami).

Dark cloud cover.  Doesn't that sound ominous?  Bearish engulfing sounds scary too.  Run, don't walk!

I've noticed in Asia they have all sorts of fun names for things.  In America, we might call a particular martial arts move something boring and practical, such as a "spinning heel kick", but in Thailand, it's "the crocodile sweeps his tail" (Joroke fad hang).  No crocodiles, no tails, but the colorful names probably help you remember, and they might actually help with visualization too.  Lots of people want to know if you can do "joroke fad hang" if they hear you practice muay thai.  I had to learn it just to keep up appearances.

Friend of mine has a kung fu school.  The only move-name I can remember – it really stuck in my mind – is "monkey grabs the peach."

Ouch.

  • Mon, Jan 02, 2017 - 08:35pm

    #8

    davefairtex

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    Armstrong EOY Comment

Martin Armstrong finally gave a smattering of comments about what his computer is reporting:

https://www.armstrongeconomics.com/armstrongeconomics101/welcome-2017-looking-more-optimistic-than-ever/

Meanwhile, gold held the support, the Dow elected two Daily Bearish Reversals, Crude elected two Minor Yearly Bullish Reversals warning of a test of $60, and the Euro fell to bounce off of its Yearly Bearish Reversal at 10365 reaching 10352 and then failed to elect it. With the US share market up for 7 years in 2015, a pause in trend seems likely failing to elect some critical numbers in various markets. Of course, the long-term remains unchanged. The markets are reflecting something far bigger at stake. Trump is bringing in hope of repairing the economy with consumer confidence at a 13 year high. Optimism is in the air, but this cannot alter the long-term trend without reforming the debt crisis as we have laid out. Only then can we postpone disaster a little while longer.

So, to translate:

  • "pause in trend" = correction for SPX/DJIA
  • short term rally in gold [although he said elsewhere he expects a test of $1000 before "the big rally"]
  • Oil rallies up to $60
  • Euro rally / dollar correction
  • Tue, Jan 03, 2017 - 04:25am

    #9

    Locksmithuk

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    Silver Speardrop takedown

Within the candlestick glossary is there one named the Ripple 'n Speardrop for an improbably consistent silver price line, followed by a sharp whack on the head? This was exactly the scenario over the past few hours? Smells, walks and talks like price manipulation.

 

 

 Price of Gold

 

  • Tue, Jan 03, 2017 - 05:25am

    #10

    davefairtex

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    silver takedown???

I'm not seeing any sort of silver takedown on my trading app.

In fact, I'm seeing a rally.  I show silver up +0.14 to 16.13, gold up +5.70 to 1157.40.

And that's even with the buck up +0.38.

 

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