Gold finished Friday down -18.20 to 1289.00 on heavy volume, while silver dropped -0.16 to 21.50 also on heavy volume. The gold/silver ratio dropped -0.40 to 59.95. Gold traded sideways right up until the Nonfarm Payrolls report at 0830 EDT (unexpectedly good news for payrolls: good economic news = bad news for gold), after which it dropped $25 in 30 minutes eventually touching a low of 1280, cascading lower while the dollar raced higher. Silver followed gold down, but was not as hard-hit. Gold rallied modestly at end of day. GDX was initially hit hard by gold's plunge, but in the afternoon in NY it rallied hard into the close, ending the day up +0.58% on moderately heavy volume. GDXJ was up +0.73%, on heavy volume. Mining shares moved in distinct contrast to the metal - GDX buyers most definitely showed up, and chased prices higher. The metals were bearish, but miners were bullish.

Contrast gold with miners in the following two charts:

On the week, gold was down -26.30 [-2.00%], silver down -0.36 [-1.65%], GDX +0.83% and GDXJ -1.10%. Miners clearly outperformed metal this week and even printed a possible reversal candle on Friday (requiring confirmation by a close above GDX 24.30), which is an interesting change of behavior from last week. The only piece absent from the possible reversal is heavy volume - GDX volume on Friday was only moderate. The more pieces that are in place, the more likely the signal is accurate.

Still, when you have two related instruments, and one gets bought while the other is sold, that's a divergence in behavior. They both can't be right.

The USD

The dollar moved up +0.66% this week. This was driven primarily by economic news releases, with the buck bought whenever unexpected good news appeared. This looks similar to last month's pre-Fed taper worries. Although various polls suggest economists don't think the Fed will taper at this upcoming Fed meeting, the market's reaction to economic news releases suggests the concern over tapering remains.

Dollar buyers have continued to push the buck higher this week, and at the same time, gold has continued falling. Dollar up, gold down continues to be the paradigm. Resistance points for the buck include 81.80 (the 200 MA) and 82.70, the most recent high set on Sep 8. The buck has broken its downtrend pattern of a lower highs with the break above 81, and has now reversed.

Bonds - Rates, Tapering and The Fed

The 20 year treasury was crushed Friday, dropping -2.41% which is a huge move in just one day. This move blew through its 50 day MA and broke the pattern of lower highs that had characterized the bond rally started late August. As a result of bond prices dropping, long term interest rates rose (that's just how bonds work). The 10 year treasury yield (TNX) jumped 13 basis points to 2.74%. A few more days like this, and we'll see the 10 year rate back up at 3%.

Why do we care? Gold and silver are both reacting badly to positive economic news likely because of renewed speculation regarding taper/no-taper. So are treasury bonds. When gold plummeted on the Nonfarm Payroll report on Friday, at that very moment the 30 year treasury bond futures sold off too. And while people speculate that the Fed might be beating down gold through some sneaky program in the shadows, the Fed shows its concern for lower bond rates by openly buying $85 billion in bonds every month!

So the Fed cares a great deal about bonds. And my guess is, if rates continue to climb with every bit of good news because of this "taper possibility", the Fed will - most likely - try and jawbone rates back down again. In the past, they have sent out a flock of Fed Presidents to accomplish this goal. They will end up giving talks whose collective message will be, "Oh my no, we are not going to taper at this point."

The impact? If they are believed by the market, it will lead to a drop in rates. However, as a side effect, it will most likely provide a lift to gold. We may not have to wait until the Dec 17-18 Fed meeting to get the answer to the tapering question.

Bonds are why I think "the Fed is in a box." Every time tapering seems like it might be a possibility, rates rise, which keeps the Fed Finger on the print button.

Physical Supply Indicators

* Earlier in the week, gold premiums in Shanghai rose briefly to flat, and then dropped again to discount by Friday. Currently Shanghai gold is selling at a discount of -6.02 to COMEX, down -1.64 over last week.

* The GLD ETF gained +2.10 tons of gold this week, rising to 868 tons. In January, GLD had 1350 tons, which is a drop of 482 tons.

* The COMEX lost -2.15 tons of registered gold this week, and is down to 19.87 tons, a new low for the year. COMEX registered is down dramatically from its April peak of 92 tons.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1287.40 and silver 21.47:

CEF 14.52 -4.99% to NAV [up]
PHYS 10.70 -0.44% to NAV [up]
PSLV 8.62 2.82% to NAV [up]
GTU 45.35 -4.99% to NAV [up]

Discounts on the ETFs have fallen/premiums have risen - very slightly, but surprisingly. Normally when PM prices fall, discounts for these ETFs rise, but not this week. This tells me that PM-savvy ETF buyers are more interested in buying than selling at these levels. Perhaps - the weak hands that normally get flushed out of the PM ETFs on price drops have already sold?

Physical supply is still a mixed picture. COMEX registered is still declining, but GLD gained gold with Shanghai in discount. India is likely a positive. Let's call it a wash.

Futures Positioning

Finally updated through Nov 5, the COT report shows that Producers decreased their longs and increased shorts substantially. They are now net 30k short, a drop of 20k contracts from the last time we saw them on October 18th. The configuration of the Producers futures holdings are still bullish, but less now than before, mostly because of a loss of longside exposure.

Moving Average Trends [20 EMA, 50 MA, 200 MA]

Gold: short term DOWN, medium term DOWN, long term DOWN

Silver: short term DOWN, medium term DOWN, long term DOWN

There is no change from last week. Gold and silver trends are down in all three timeframes, with the price of both gold and silver both below all three of their moving averages. This is a bearish configuration.

Summary

This week saw another leg down for PM - a rising dollar and "good economic news" are causing trouble for gold and silver. Support for gold is 1280, with resistance at 1320 and 1360.

With no inflation on the horizon (18 months of bank credit deflation in the eurozone, plus continually dropping commodity prices have removed inflation from the equation), this leaves the market with taper/no-taper as the driver for PM prices. And so with every bit of good news, the market sees increased odds of tapering, which drives gold prices lower.

Gold seems closely linked to the dollar. And with the dollar in an uptrend, the dollar shorts are bailing out with every unexpectedly positive economic release, while gold is dropping. If the good economic news keeps coming, the buck will likely keep moving up, and gold will keep moving down. Trends once set in motion, tend to stay in motion.

Shanghai is trading at a discount to COMEX, gold is returning to GLD, but gold is still leaving COMEX. I conclude that physical buying pressure appears to be more or less neutral at this time.

Chart-wise, PM is showing no sign of a reversal. Its in a downtrend in all timeframes, and is showing no signs of stopping its downward move. Buyers in COMEX futures and GLD shares just haven't showed up enough during the recent set of downside moves. Silver is doing better than gold, which is bullish, but both price charts show no signs of a reversal, and the last few days have seen heavy volume.

However, this bearish picture for PM is ruined by the price action in the mining shares. Normally when gold drops, the mining shares have heart failure, roll over and die. But this week, mining shares actually ended up for the week, during which gold had dropped 2%. What's more, at end of week, traders actually wanted to take mining shares home over the weekend. This is bullish, especially given that gold is behaving badly. We have to wait for Monday to figure out if this is predictive of the gold price, but its an intriguing end to a Taper week.

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