-- Published: Sunday, 12 January 2014 | Print | Disqus
Gold finished Friday up +21.70 to 1248.50 on heavy volume, silver was up +0.62 to 20.16 also on heavy volume. The gold/silver ratio dropped -0.87 to 61.93. GDX was up +3.48% on heavy volume, while GDXJ was up +5.18% also on heavy volume. An unexpectedly bad Nonfarm Payrolls number released at 0830 EST triggered the move, causing the metals and miners to close right up against their respective 50 day MAs.
For the week, gold was up +11.30 [+0.91%], silver down -0.01 [-0.05%], GDX +0.82% and GDXJ +0.15%. If it weren't for Friday, the metals and especially the miners would have had a down week. As it was though, the unfortunate NFP number (200k expected, 75k reported) caused a massive spike higher for both gold and silver, bringing back the spectre of No Taper. The thing I liked best about this move wasn't the initial spike, it was the follow-through. Not only did gold spike up, it continued to move higher all day long, and it closed right at the high for the day. Traders actually wanted to take gold home for the weekend.
As you can see in the chart below, gold hasn't been above its 50 MA since last October, and even then it wasn't above it for very long. In addition, there looks to be strong resistance at 1260. A break above the 50 MA would be a signal for momentum traders to start considering buying more GLD & COMEX futures, and a move above 1260-1270 would likely cause a bunch of short covering - managed money has a very large short position right now, and things could get quite explosive if some bit of bad economic news caused another upspike. From the standpoint of longer term traders, the pattern of "lower highs" needs to be broken at a minimum for gold's long downtrend to be over - and that happens on a move above 1265.
Miners
Just looking at price, the gold mining shares are not doing as well as gold is at the moment. However, if we look at volume, we can see that the days when mining shares drop, volume is low while on days when mining shares are rising, volume is high. This tells me the selling pressure in miners is relatively low - perhaps everyone who wants to bail out of mining shares has already done so.
In addition, GDX has been in a sideways consolidation for perhaps six weeks, and is right up against its 50 day MA. A simultaneous breakout from the consolidation and a 50 day MA crossing could lead to a combination of short covering as well as fresh buying by momentum players, which could be quite explosive. If we pair that with the volume observations, miners look like they're a buy on any break above GDX 22.10 - and likely they're a moderately higher risk buy right now, just based on the odds.
Individual mining shares also have some interesting trading patterns to them. Some number of them are showing some very tight price consolidations below important moving averages. Here's a junior miner that has consolidated below its 200 day MA for the past 6 trading sessions. Any break above this consolidation and the 200 MA at the same time will most likely lead to a big move higher. When you look at the chart of this junior miner vs the chart of GDXJ, you can also see that it is outperforming its peers. [Note: while the CEO of this miner doesn't draw a paycheck - he owns 14% and has the title "Chief Owner", very unusual in the mining space - this particular junior miner has some moderately serious country risk; if you buy long term, you should understand what you are getting into. I'm just using this as a trade/chart example.]
The USD
The dollar was down this week -0.29 [-0.36%] to 80.75, most of the loss happening on Friday. As the poor NFP number was good for gold, it was also bad for the dollar. Immediately prior to the release, the buck had moved up to 81.30 and looked to be ready to break higher, but the surprising news caused the buck to be hammered. At this point, the recent upward momentum in the buck that started Dec 31st seems to be at risk.
Its too soon to say that another downtrend has started for the buck, we have to see how things play out. Likely it will depend on the US economic newsflow and if that newsflow confirms the poor NFP number.
Rates & Commodities
Last week I said that the 10 year treasury rates were looking to move through 3%. Well it tried, it really did, but it appears that a 3% rate was so attractive, it brought out the buyers of bonds at that level. No doubt bond shorts were salivating at the prospect of a big rate breakout through 3%, and so when the bad NFP number occurred on Friday, it ended up causing a massive short-covering bond rally, which of course led to a big drop in rates. We can see that the 10-year dropped 10 basis points (0.1%) which is a big move for one day.
No doubt, the Fed is quite happy. Rates dropped, and the equity market remained intact (for now). That's a win-win in their book.
In spite of the rally in gold & silver, the commodity complex is looking ill. From the viewpoint of an inflation-driven investor, the last two years of commodity prices is one of things moving steadily lower. Looking at the chart evidence, It appears that the overall complex is vulnerable to a very large move down in commodity prices. I see a massive descending triangle with the peak starting in 2011, and the apex - maybe in the next month or two. Descending triangle patterns often end badly - and the bigger they are, the more dramatic the ending.
We did have a modest rally in commodity prices at end of December, but as soon as the new year hit, that rally failed completely. Oil is a great example: it was $100 in the waning days of December, and is now trading at $92, a large move in a short time for such an important commodity.
Silver tends to be affected more than gold by the commodity complex, but both of them tend to follow the rest of the commodities, so a drop in commodity prices would put significant pressure on PM prices.
This commodity price picture dovetails nicely with the clear monetary deflation in the eurozone (about 7% per year, on average) and the declining growth in total bank credit in the US (currently, its 1%, down from about 5-6% during 2012).
From a commodity price and monetary standpoint - the current trend is clearly deflation.
And the US bank credit growth: 1% is NOT what the Fed wants to see.
Physical Supply Indicators
* Shanghai gold premiums dropped substantially this week; at 1530 CST 2014-01-10 Shanghai physical gold (the Au9999 1-kilo gold contract) closed at a premium of $1.82 to COMEX, with the premium being down -8.43 over last week. Delivery volumes remain about the same - about 200 tons per week. [Note: delivery doesn't necessarily mean gold leaving the SGE, it represents unallocated gold changing hands among owners at the exchange]
* The GLD ETF lost only -1.5 tons of gold this week and is down to 794 tons, which is a change from the usual weekly 10-15 ton loss. The drop in GLD's inventory has been almost continuous since the beginning of 2013. In January, GLD had 1350 tons, which is a drop of 556 tons.
* Registered gold at COMEX dropped by 2.07 tons this week, dropping the total available to 12.96 tons. This is a new low for the COMEX. Things certainly are getting interesting. While there was no danger of default before, 13 tons is really not much gold. The Shanghai Gold Exchange delivers that much to their Au9999 holders in one day, and more on the big days.
* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1246.60 and silver 20.15:
PHYS 10.35 -0.47% to NAV [up]
PSLV 7.91 +0.65% to NAV [up]
CEF 13.53 -6.80% to NAV [down]
GTU 44.15 -4.47% to NAV [up]
Discounts on the ETFs decreased modestly, except for CEF whose discount rose substantially.
Physical demand remains positive, but with the increase in the price, appears to be weakening, at least judging by the premiums.
Futures Positioning
The COT report is as of January 7th. We are starting to see things reverse; Managed Money is starting to cover shorts and go long, while the Producers are beginning to sell off some of their long positions. This is the way the bottom in gold will occur. Those Managed Money shorts are the fuel for the rapid spikes higher on news events like we saw Friday, however for the rally to continue there must be new longs coming into the market - typically from Managed Money.
Moving Average Trends [20 EMA, 50 MA, 200 MA]
Gold: short term UP, medium term DOWN, long term DOWN
Silver: short term UP, medium term DOWN, long term DOWN
No change from last week. However, both gold and silver have rallied right up to their respective 50 day MAs - if the price crosses the moving average, that's a signal for the longer term buyers that a trend change is occurring, which will most likely lead to more longs entering the market.
Summary
This week saw four days of a fading PM price, with a big rally on Friday off the bad NFP report moving gold up to a new cycle high. Both gold & silver are up against their 50 day MAs, which is both a logical point for shorts to enter, as well as a big opportunity for a breakout should one occur. GDX appears to be behaving well, with low volume on the down days and high volume on the up days, and it too is approaching a breakout point. In one sentence: PM was rescued from a bad week by the NFP report.
Looking at the various ratios and averages, gold and silver both remain in a moving-average downtrend in medium and long term timeframes but both now have risen above the 20 EMA and are threatening to do so above the 50 MA. GDXJ:GDX is still trending up (bullish), GDX:$GOLD is trending up more weakly but is still bullish, and the gold/silver ratio is perhaps neutral. The moving averages and prices look strong short term, while the ratios are perhaps a bit weaker this week over last but are still generally bullish. Silver is still weaker than it should be in a real bull move - most likely because of the sick commodity complex.
Shanghai premiums have dropped substantially and are almost neutral. GLD's loss was negligible, ETF buyers are modestly more bullish, and COMEX is definitely running low on gold. Let's call physical demand as mildly positive at these price levels, with COMEX being an interesting possible wildcard going forward.
In the near term, I believe that if we continue to get a series of unexpectedly bad economic news reports, gold will continue rising. Enough momentum has built up in the miners and the metal to keep causing short-covering rallies and once prices cross the 50 MA it is likely new speculative money will start rolling in, and that will fan the flames. The only question is, will the news continue to be bad?
This week, the No Taper gamblers were placing their bets causing gold to rally, but the commodity complex prices don't support this move longer term. The Fed must be seeing the same thing I'm seeing. They can't possibly like the deflationary monetary pressures. If they won't be buying bonds, what could be next? My guess: they'll drop rates on excess reserves, in an attempt to get that money loaned into the marketplace. LIkely that will cause gold to really move higher. This I see in more of a 1-3 month timeframe.
Another serious catalyst for gold could be India reducing the duties on gold.
Longer term, I see a tug-of-war between the monetary/credit growth and commodity pricing fundamentals (driving "inflation expectations" amongst COMEX buyers) and money printing by the Fed. Indeed, that's the larger conundrum in the overall economy. Without growing bank credit in the eurozone and the US, monetary inflation is not going to happen, and that's going to be a challenging environment to get traders to continue buying COMEX contracts and shares of GLD.
Near term, I think we've got a good case for a nice move up in PM. It's the longer term that concerns me; unless we start to see some commodity-price/monetary inflation, its going to be tough to keep gold moving higher, at least at the COMEX anyway.
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-- Published: Sunday, 12 January 2014 | E-Mail | Print | Source: GoldSeek.com
