Precious Metals End Of Week Market Commentary

Gold finished Friday up $14.10 on average volume to 1375, with silver up $0.25 to 23.18 on heavy volume.  The gold/silver ratio dropped to 59.31.  Silver's 50 day MA has flattened and is beginning to turn up.  The last time silver's 50 MA was moving up was mid-November 2012.  Silver has moved up 8 straight days in a row; the move is getting a bit extended, and may be due for a rest.

Over the week gold is up $62 [+4.72%] while silver is up $2.67 [+13.04%].

The dollar this week was largely neutral, up 0.19 [0.24%] to 81.35.  The dollar remains in a medium term downtrend; as always, moves down in the buck are generally supportive of PM prices, while moves up will provide headwinds.

I use gold/silver ratio (GSR) as a trend indicator for PM; a dropping GSR I see as good for PM overall.  The GSR broke below its 50 day MA last week, and this week it continued to plummet.  You can see the 50 day MA of the GSR starting to turn down along with the 20 EMA, and even the 200 day MA is beginning to flatten a bit.  During the heights of silver in 2011, the GSR was right around 30, so while the current move is quite strong, we are by no means approaching a low.

Mining shares had a great week, with heavy volume all week long.  The gold, silver, and junior miner ETFs were all up quite strongly: GDX was up +12.54%, SIL +15.56% and GDXJ +17.65%.  Volume was extremely heavy in many securities --  and with the ETFs as well.  There's nothing I like to see more than big price moves on heavy volume.  However, on Friday miners looked a bit tired.  Even moderate moves up in PM were unable to get the miners overall as a group to lift, which when combined with heavy volume I interpret as distribution, a somewhat bearish indication.  GDX was off -2.10% for the day.

After such large gains this week, some selling is to be expected.  Is this the start of a larger correction?  Possibly, but the heavy downside volume is still lower than Thursday's upside volume so we may have further to go on this leg up.  Still, its important to remember that markets do not move in a straight line up, in spite of what we've come to expect from silver over the past 8 trading days.  Corrections/dips are inevitable.

Sentiment & Seasonal Factors

Three funds reported that they had sold off large positions in gold during the 2nd quarter 2013.  Paulson cut his GLD stake by 50%, while some others sold their entire GLD holdings.  When gold believers sell during a massive move down, it can be viewed as capitulation, which is a generally positive signal.  It would have been even better if Paulson had sold all his gold.

Seasonally, the latter half of August, September and then November-February are strong months for PM.  Bias should be up for the next few months.

Physical Supply Indicators

* Gold premiums in Shanghai decreased $6.23, closing the week at a premium of $7.42.

* The GLD ETF gained 4.19 tons of gold this week.

* The COMEX lost -0.66 tons of gold this week, initially losing big on Monday but gaining gold during the week.

* LBMA GOFO rates were unchanged at -0.11%, surprising given the large increase in the price of gold.

* Premium/Discount to NAV: CEF -2.50%, PHYS +0.12%, PSLV +3.21%, all three up over last week, signs of improving investor demand.

With PSLV and PHYS moving into premium, western physical ETF buyers are at least halfway back on board.  CEF is still lagging, but it is much improved off the -7% levels seen at the 1180 lows.  Shanghai premiums have fallen substantially, and will likely move flat if gold rises much further.  It appears rising prices have reduced supply issues in Asia somewhat.

Futures Positioning

The COT report for gold (data through COB Tuesday) shows the Producer category (generally miners and others in industry) reduced perhaps 3000 long contracts this week, but still remains near historic highs, and it is still a very bullish indicator.

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

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

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

Silver 50 day MA moved from down to flat; if you look closely enough, perhaps it is even up.  Along with the plummeting GSR, this is a bullish sign.

Summary

Physical supply indicators suggest demand for physical gold is still outpacing available supply at current prices but demand in Asia is slowing.  Medium term trends in PM prices are gradually changing from down, to flat, to up.  Futures positioning remains positive.  Investors in the west are returning to the physical PM ETFs.  Mining shares have exploded higher on high volume, while the dollar has remained neutral while in a medium term downtrend.  Silver is leading gold, also on high and generally increasing volume.

It’s a positive picture, and anecdotal evidence suggests the bullion banks have a vested interest in prices continuing to move up.  Trends in motion tend to stay in motion; unless the shorts get some evidence of fading buy-side interest, and downside volume reappears, the trend remains up.

Adam Taggart

http://www.peakprosperity.com/