Choppy Markets Awaiting A Breakout

Gold finished Friday up $23.70 on moderate volume to 1391.00, with silver up $0.68 to 23.90 on below average volume.  The gold/silver ratio dropped to 58.20.  Gold recovered all of what it lost Thursday, but volume in PM was light.  The move in gold Friday was driven entirely by the release of the Nonfarm Payrolls report, which was interpreted by the market as bad.  Making that good for gold, of course.  Gold had a $29 move in 1 minute at 08:30 EST with incredible volume attached, after which it tracked sideways the rest of the day.

For the week gold was down $5.20 [-0.37%], silver was up $0.34 [+1.44%], GDX was off -0.43%, and GDXJ down -1.54%.

The dollar this week ended more or less flat, up +0.09 [+0.11%], seemingly trying to figure out if it wants to break above its 50 day MA or not, but having alternating up and down days, much like PM.  It has a generally higher short term bias right now; the buck's 20 EMA is rising, however the other moving averages are pointing in different directions painting a more neutral picture longer term.  As always, if the buck decides to move higher, that will likely put pressure on PM prices.

The gold/silver ratio has more or less chopped sideways the past four weeks with a slight downward bias, which is in line with the relative uncertainty currently in PM, but with silver performing better than gold.  I'm not sure the difference is enough to indicate a trend, but I do think that silver in general has been less affected by the news flow than gold has, for what that's worth.

Mining shares were up on Friday; GDX +1.74% and GDXJ +2.93%, with both indices recovering some of what they lost Thursday.  Volume on GDX was above average, but the trend overall for the miners these last two weeks is a picture of lower volume on the up-days, higher volume on the down-days, amidst a series of lower highs, which is a bearish picture for the miners.

Both gold and silver are in a short term downtrend - the past 7 days both gold and silver have alternated between relatively large moves down, then up, then down again, but with a series of lower highs and lower lows that indicate a downtrend is in place.  Silver appears to have support currently at 23 and bounced nicely today, while gold has twice bounced off a support zone between 1350-1360.  But with the short term downtrend in place, we have to look for evidence of a reversal, which (for instance) would be a close above yesterday's high in both gold and the mining shares, preferably with some volume attached.  The most recent bounce in silver looked good on the chart, but there wasn't much volume, so the signal is a little suspect.

Trying to extract any more information from the recent choppy movement is difficult.  One day we see a strong selloff, the next day a strong rally - a trader friend of mine once opined that sometimes a market can give the following impression: "the cat is always on the wrong side of the door."  A market in this mode alternates rapidly between bullish and bearish sentiment, whipsawed by the latest news release either up or down.  To me that more or less describes where we are right now, although the current short term bias is currently down.  Taper, don't taper - Syria, no Syria, its all a big mess.

The taper situation will hopefully be cleared up at the next Fed meeting, scheduled for ten days from now on September 17-18, with the market-moving bit happening on afternoon of the 18th.  The FOMC meets every six weeks, and every other meeting has a press conference following.  It has been suggested that any major event (i.e. the start of tapering) will likely occur on a Fed meeting with a press conference attached, and that is why the focus is so strongly on this upcoming meeting.

It is a sign of the times that such an amazing amount of analysis and market volatility centers around which meetings have press conferences, while reading each and every economic report with a view towards how our Lords and Masters will interpret the data.  The US won the cold war, and yet somehow at this moment we find ourselves with our very own FOMC Politburo that meets every six weeks to decide the latest tweaks they will make to the US Five Year Plan.  How did we get here?

Physical Supply Indicators

* Gold premiums in Shanghai were up this week $0.74 to $4.77.

* The GLD ETF lost -1.8 tons of gold this week, down to 919 tons.

* The COMEX lost -0.52 tons of registered gold this week, and is now down to 22.07 tons.

* Premium/Discount to NAV: Based on 16:00 EST Friday prices, gold 1388.80 and silver 23.88: CEF 16.00 -3.72% to NAV, PHYS 11.62 +0.22% to NAV, PSLV 9.58 +2.74% to NAV.  Premiums have dropped.

COMEX continues to lose gold, the GLD ETF is back to a modest outflow, gold premiums in Shanghai remain positive and are up slightly; the picture is modestly gold-price-positive.  With India resuming imports of gold, it will be interesting to see what the supply picture looks like next week.

Here is a longer term physical supply perspective - the past seven months of the premiums in Shanghai compared to the price of gold.  I've noticed that some places just post charts when Shanghai is in premium, but I don't see any talking about it when it moves into discount.  Just this week, Shanghai gold moved into discount for one day.  That's not the end of the world, but given the chart below, do we think it is likely that Shanghai will remain in premium all the way back to gold $1600?

From this chart I get the sense Shanghai buyers line up when the price drops, and they start to sell when the price rises.  It seems to be less about absolute price levels than it is about recent relative price movements.  But you can judge for yourself.

Futures Positioning

The COT report for gold shows only modest changes; Producers increased short exposure by 4k contracts, while Managed Money increased longs and decreased shorts by about that same amount.  Its a modest continuation of the trend, where producers are gradually moving short and Managed Money is gradually moving long, but overall participants are not increasing their exposure to

Overall, futures positioning remains bullish, however to resume the uptrend there needs to be either new speculative money entering the market, or shorts must cover.

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

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

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

Gold this week moved from short term up to neutral.  Both gold and silver prices remain above both the 50 MA and the 20 EMA, which remains bullish, although gold did close below its 20 EMA on Thursday.

Adam Taggart

http://www.peakprosperity.com/