Sunday, May 18, 2014

Gold Weekly Update May 18, 2014

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What You Waiting For?
Long Term ~ Bearish
– Need a monthly close above 1560 for neutral trend without bearish potential. The key resistance area’s to regain new bull market leg are 1792 and 1804-1830.
Medium Term ~ Neutral – Resistance 1425-1525 & support 1222 & 1272. Gold held 1272 on a weekly basis and the close in between the moving averages (1288-1295) on May 15 kept gold neutral (barely) If gold can’t mount a rally soon, the downside can give in. We are two weeks away from entering month 34 of the gold bear market. We are arriving at a key and most important time to watch for 2014. June has the highest odds of 2014 for a reversal. Doesn’t mean we get one, but has highest odds. September 2014 is the other month to watch.
Intermediate Term ~ Neutral – The intermediate trend is neutral and it takes a close below 1272 to add to a bearish outlook. A weekly close above 1322-1336 gets us bullish on the intermediate term.
The next short term cycle turn cycle is underway this week. If we close below 1272 gold can get a BIG DUMP to 1222-1240 for starters and we could move lower to month’s end. If the upside is chosen, then we’ll have to see the pattern to determine if it has legs. Under 1322-1331 on a weekly closing basis leaves us Neutral.

Resistance for this week 1303-1312 and 2nd tier 1316-1326
Support for this week 1262-1275 2nd tier 1222-1240


How desperate are the Feds getting? We keep asking that question. Here we go again this week. It begins with Richard Fisher speaking on Monday, Charles Plosser on Tuesday, and for mid-week Wednesday, it becomes relentless. Not only will the FOMC minutes be released from the last meeting of a couple of weeks ago, but check out the Pre-game show.
It begins at 10 am EST when William Dudley speaks, then chief Janet Yellen gives her 2 cents beginning at 11:30, followed by a 12:50 speech from Esther George, a speech by Narayana Kocheriakota at 1:30 PM EST and then the Feature Presentation;

Drum roll please!!!

The FOMC MINUTES from two weeks ago.

Ta Da !!

Yes that’s right folks. It’s the minutes from the very same meeting that was stuffed down our faces just two weeks ago. While some may not remember, holders of gold sure do. That was when at exactly 10am two Tuesday’s ago when the Yellen FOMC meeting began and someone rethought their gold position and voila----700,000 ounces of paper gold sells hit the COMEX in one minute, and the gold rally from 1272 to 1316 the prior two trade days got punished back to 1290 BEFORE the Fed Chair begins to even speak.

So why must the minutes now be released?

Well, there are two important reasons for that. The first is to confirm whether the markets were correct in their interpretation of the last Fed Speak. The second reason is reserved for the FED to INCLUDE ANY STATEMENTS that may not have appeared in the previous meeting they had behind closed doors. Master Oracles from the blogosphere will carefully (with magnifying glass in hand) pour over sentence after sentence in search of any potential words that would equal A CHANGE IN DIRECTION from the last “FED SPEAK” event.

In other words, should the stock market continue it major downside reversal from last week, it may be necessary for the FEDS to include certain language to try and give the markets something to give a short term recovery in price some hope, and at the same time, it gives the control boyz yet another event they can time and either clear the stops or just out and out take out any remaining support that gold may have tried to establish.

One of these times, the opposite is going to happen. But until it does, don’t think the control boyz can’t manhandle another trigger lower (or higher) on any commodity they so choose.

Once the FED gets done with us, Thursday comes in with Jobless claims, Chicago Fed index activity, existing home sales, and the LEADING INDICATORS. Gee, what a coincidence that is eh?

INDIA has elected a new PRO GOLD government leader. Let’s see if that helps things out.

Finally, Russia is set to meet with China this week. THIS COULD BE THE BIGGIE OF THE WEEK.

Metals Overview
For the week, spot gold moved from $1,289.80, to $1293.40, and silver rose from (it’s tying 2014 low and 2nd lowest weekly close since the bear market started) $19.12 an ounce to 19.35 (It’s 3rd lowest weekly close since August 27, 2012.)

The chart below shows that while the flush in gold has decreased the open interest on futures, it is not so in silver. In fact it is rising hard. The last time this happened there were bullish articles on how the silver longs couldn't be shaken. Then it crashed from 30 to 20.

Keith Weiner, Monetary-Metals:
There is a stark difference between the states of the markets for the monetary metals. The number of open futures contracts in gold is low, while in silver it’s high. First, let’s look at the data and then we’ll discuss what it means.
Here is the graph showing the open interest.

The current buying of physical and selling the futures on silver is 1/2 % return. In a world of negative rates, perhaps there is a lot to be said here. They control boyz buy the physical and then sell the futures to gain the premium. It’s Ironic how physical holders are a big producer of PAPER, but it is also important that the average silver trader or holder of physical is not part of the mix. We’re talking the control boyz all the way.

The Weiner article goes on to say:

The picture is clear enough. Since the beginning of fall, the number of gold contracts has blipped up and down and now there are somewhat fewer (-3.7%). Meanwhile, the number of silver contracts has gone up substantially (+39%).

There is an unmistakable downward trend since the middle of 2010, almost 4 years ago. Then, there were about five gold contracts for every silver contract. Today, the ratio is down to two.

OK, but what does this mean?

Open interest is a proxy for speculative interest. This is not simply because contracts are created by buying, and destroyed by selling. You can’t assume that contracts are created and destroyed as the price moves. To see why it doesn’t work that way, look at the stock market. The price of a stock can move all over the place, but there need not be any change to the number of shares outstanding.

In the futures market (unlike in the stock market), the number of contracts changes continually. Contracts are added or removed by the computer software that operates the market. When you buy or sell, an existing contract may be transferred from one party to another, or a new one may be created.

It’s complex, but in essence if you want to buy a contract just when else wants to sell, the contract will change hands. It works similarly if you want to sell short, right when someone who is already short wants to buy.

By contrast, if there is no current owner of a contract to sell it to you, when you want to buy, then a new contract must be created. Who sells, who takes the short side of this contract? It can certainly be someone else wants to speculate on a falling price. There are always (well, usually) traders who go short silver. However, I don’t think that this is the full explanation of the data shown in these two graphs.

I favor a theory of arbitrage. If it’s profitable to buy metal in the spot market and sell a future against it, then someone will take this trade. This short seller is a source of unlimited contract creation, if it’s profitable.

It’s called carrying the metal. If you carry, then you make a small spread without price risk. This spread is called the basis the price of the future minus the price of spot metal. Or, more precisely, basis = Future(bid) – Spot(ask), because you must pay the ask when you buy the metal, and accept the bid when you sell the future.

Look at the gold basis and silver basis for the Dec 2014 contract, from early fall through today.

The profit to carry gold has been steadily falling. It began at 0.35% (annualized), when the duration was 15 months. It was hardly the stuff of legends or getting rich quick even last October. That meager margin has been steadily eroding, and is now 0.1% for 8 months. Suffice to say that gold carry has offered little or no opportunity to make money. Therefore the gold carry trade has not been a big source of contract creation.

The profit to carry silver, by contrast, has not much changed. It’s still around 0.5% (annualized) or more. This is far more attractive than gold, and probably more attractive than other opportunities in our zero-interest world. Therefore, the silver carry trade has created many silver contracts.

What drives the basis spread?
Speculators, when they buy a future, drive up its price just a little bit. This is the inducement to the arbitrager to buy a bar of metal and sell the future to the speculator. The arbitrager carries metal, to provide a service to the speculator. He is the one who “converts” (I use this term carefully, in the full context defined here) metal to paper, a bar to a contract. He’s ready, willing, and able to deliver that bar should the speculator have the cash to demand delivery.

The long and short of it (to make a tired cliché into a dreadful pun) is that in gold, there just is not much speculation, and therefore no profit to be made carrying the metal, and therefore when a buyer occasionally comes to the market his demand can be satisfied by a previous buyer who is selling a contract. (note; the old long traders are throwing in the towel and have had enough).

However, in silver buyers are running at a much more torrid pace. They’re too numerous to be satisfied by the occasional seller. They bid up the price of the futures, which makes it attractive for arbitragers to carry silver and sell them the contracts they desire.

Incredible as it may seem, at the low price of $20, speculation in silver is rampant. Market participants are trying to front-run a big price move. Due to rumors or gut feel or for whatever reason, they are expecting not only that silver will outperform gold, but that the silver price will rocket to a much higher price. Their frenetic buying of futures has pulled a lot of silver into carry trades.

Maybe hoarders will all of a sudden increase their appetite for silver metal that they will take off the market and bury. If so, the silver futures speculators will be proven right, and they will make a lot of dollars (money is a different story entirely).

I would not recommend that anyone bet his hard-earned money on a maybe. The data both open interest and basis show that the buying in the silver market is primarily speculators. They cannot sustain a higher price forever. They are merely trying to front run a higher price driven by hoarders. If hoarders don’t come in, the speculators will be forced to capitulate. If that happens, watch out below.

The neutral price of silver is in the $16’s today. If the price overshoots as far to the downside as it is now stretched to the upside, we could see silver with a 12 handle.

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