Rising Dollar Weighing On Prices

Gold finished Friday down -7.20 to 1315.30 on 1352.50 on moderately heavy volume, while silver dropped -0.05 to 21.86 on moderate volume.  The gold/silver ratio dropped -0.21 to 60.17.  Gold was sold starting in the afternoon in Asia through mid-day in NY, being particularly hard-hit after the 1000 EST ISM report release, touching a new low of 1305.  It rallied back above the departure point of the ISM plunge, which is a positive sign.   Silver moved hardly at all during the day, trading within a tight range.   Miners were crushed, with GDX off -4.06% on heavy volume, while GDXJ was down -3.14% on moderately heavy volume.  Both closed near the lows of the day.  The ratio GDX:$GOLD looks to be on its way to retest its low, which is bearish.

Gold has dropped 4 of the past 5 days, on moderate volume, at the same time the USD has rallied for the past 5 days.  I don't think this is a coincidence.  The current linkage is, dollar up = gold down.

On the week, gold was down -37.20 [-2.75%], silver down -0.73 [-3.23%], GDX -8.51% and GDXJ -12.25%; all components more or less wiped out the gains from last week and then some.  There's no good news here.

The USD

The dollar moved up +1.94% this week, which is a pretty big move - this was driven by the euro, which fell -2.3%, an even bigger move.  Was the dollar move based on some magical chart support line at 79, or were there so many dollar shorts that there was just nobody left to sell, and so the price eventually had to reverse?  Or was it some political factor we're not aware of?  It is hard to know.

Last week the buck was getting no love, this week it is up 5 days out of 5.  See the chart below - the buck fell until it got closer to 79, the rate of descent slowed, stopped, the buck printed a doji (last Friday), and then the reversal occurred this week.  We can see that the buck is now back above its (falling) 50 day MA, and the 20 EMA is starting to turn up.  A close above 81 and the rally in the buck starts to look more serious.  Intraday on Friday, the dollar rally stalled out at 80.87, right around the previous "lower high".

This would only be a matter of academic interest if the price of gold weren't inversely tied to the movements of the buck.  This inverse dollar-gold correlation has only been solid since Oct 15th, but it seems to be pretty clear at the moment.

Last week I asked, would dollar buyers show up.  They did.  Will they keep buying the buck, pushing it through resistance and into a new longer term dollar rally?  If so, given the current inverse dollar-gold correlation, it could get ugly for gold.  And the miners - when gold sneezes, the mining shares roll over and die.

Inflation: Commodities & Oil

The commodity complex, led by oil, continued dropping this week.  Oil is now at $94.60, off $17.40 from its high set at the end of August, which coincidentally was gold's last high as well.  While oil and gold don't move in lockstep, anyone thinking about buying COMEX futures or GLD based on an "inflation hedge" thesis is bound to be more reluctant to buy when the price of oil continually plummets, which it has been doing now for the past two months.

Again, what you and I think - and how often we read Shadowstats and imagine how GAAP deficits must inevitably lead to hyperinflation (in 2014!) - we don't matter.  Its the big money, bank prop desks, hedge funds and pensions who trade in GLD and COMEX futures.  They move prices in the daily/weekly timeframe, and their indicators are not reading inflation.

Political Factors & Confidence

A number of different sources I read are suggesting the next debt limit struggle will be much more placid than the one we just went through.  The mainstream Republicans don't seem to be lining up behind the idea of another shutdown; when the US Chamber of Commerce starts to talk about rethinking support for Republican candidates, you know you have a problem.

There's another interesting story too, this one from the Chief of Staff (via Martin Armstrong) of a libertarian-leaning Republican Congressman suggesting its unlikely the next debt ceiling fight will result in a shutdown:

http://armstrongeconomics.com/2013/11/02/another-debt-showdown-coming-in-washington-next-year-dont-bet-on-it/

Credible sources here in Washington have shared a chilling back-story that took place involving the President and congressional leaders of both parties as the clock ticked down to the Treasury running out of cash earlier last month.  It seems that more than one creditor nation, led by the Chinese, indirectly telegraphed a willingness to take very draconian measures in response to a ‘debt default’ – apparently even if coupon payments were made on outstanding debt owed to them.  Those measures were set to go way beyond being financial, and were said to be credible in nature.

At least one senior Republican scoffed at the threat, but relented when briefed by (at least nominally) non-political figures in the national security community.  That explains why, in part, the whole stand-off ended with a whimper and not a bang.

My belief is, the gold price is at least partially tied to confidence.  If our creditors were credibly threatening retribution if we didn't stop the political funny business and pay our debts - which would make sense - it would follow that once this became known to Big Money and it became more clear that the Republicans have relented and decided to go along, money would shift into the dollar and away from gold.  Confidence in the buck would increase, and that the perceived need for gold as a safe haven would decline.  And that's what we are seeing in the price action.

This is all speculation, of course.  None of us are on the phone calls with the bankers & hedge funds where this all gets passed on; all we can do is watch prices, which will reflect the eventual movement of money from sector to sector.  While we aren't part of the inner circle, if we don't remain stuck to our stories of "what we think must happen" then we might just be able to see the tracks of the well-connected moving their money around based on their inside information.

Physical Supply Indicators

* Premiums in Shanghai - well, they were discounts all this week, reaching a low of $-10 vs COMEX on Tuesday.  The falling price of gold caused premiums to rally a bit, closed the week at a discount of $-4.38, a change of +2.89 over last Friday.

* The GLD ETF lost -5.70 tons of gold this week, dropping down to 866 tons, the loss coming on Friday.  With Shanghai in discount - my explanation is Indian gold demand, although as with all of this stuff, its just a guess.  In January, GLD had 1350 tons, which is a drop of 484 tons.

* The COMEX lost -1.47 tons of registered gold this week, and is down to 20.48 tons, close to the year low.  COMEX registered is down dramatically from its April peak of 92 tons.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1315.30 and silver 21.87:

CEF 14.71 -5.12% to NAV [down]
PHYS 10.92 -0.55% to NAV [down]
PSLV 8.77 +2.70% to NAV [up]
GTU 46.27 -5.09% to NAV [down]

Premiums on the ETFs have mostly fallen, but not substantally.  PSLV's premium actually rose, which is surprising to me - and bullish.

Physical supply is once again a mixed picture.  Shanghai remains in discount.  COMEX registered is declining, and GLD lost gold even with Shanghai in discount.   So China pressure is off, India is most likely up - from smuggling - and at the COMEX, gold is once again leaving.

Futures Positioning

Producers decreased their longs and increased shorts; producers are about 10,000 contracts less bullish than before, which is a drop of perhaps 5%.  Managed money increased their long exposure by a similar amount, but these values are valid through October 22 only - so they missed this week's downturn.

This is the sort of activity that we want to see; managed money going long, helping to push up the futures price.  That said, I doubt that held true this week, given the price action.  We will know more with next week's COT report.

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

This last week has seen all moving averages turn down - silver short and medium term, along with gold short term.  Gold's stay above its 50 day MA was brief, as was silver.  Things are looking distinctly more bearish this week vs last week.

Summary

This week was as bearish as last week was bullish.  Some market commentators imagine a possible Taper happening starting in December.  I personally don't see it, but the market doesn't listen to me.  The only bullish indiction I saw was a gold spike down that was bought on Friday, but that rebound was modest, and not conclusive.  The gold/silver ratio was neutral.  All the rest of the indicators looked bearish: GDX:$GOLD, moving averages, volume - all of it.

The buck looks to be strengthening.  A close above 81 will likely lead to more trouble for gold.  Politically, my guess is we won't see another shutdown, which should reduce any confidence-driven gold buying.

Inflation isn't happening.  Other commodities are selling off, dropping prices of all the inputs that influence prices of the "real stuff" we buy.  This is a bearish influence on PM.  Nobody buys what they perceive to be an inflation hedge when there are no signs of inflation.

Tax loss season is approaching.  Unless gold decides to rally soon, things will likely get worse for mining shares, as longer term holders bail out in order to offset gains elsewhere.  This will be bearish for miners, since they are down heavily on the year.  It might provide a good buying opportunity last week of December, however.

Physical gold buying is a mixed bag again this week - in China they are selling, while in India, buying still seems quite strong.  With GLD and COMEX losing gold, net physical buying is likely a positive influence on price.

Once again this week, I think where gold goes depends a great deal on what the dollar does.  The buck is showing signs of a reversal; if it continues up, gold will likely move down, especially since there are no other catalysts on the horizon to move the price of gold higher.  Three weeks ago, gold found good support at 1250-1275; if the buck continues to move up strongly in the coming week, we may well see those levels tested again.

**********

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.