“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Friday, June 20, 2014

Silver Takes the Lead over Gold

Long time readers of this site will already know that it is my opinion that silver requires an environment in which inflation expectations are alive and well in order to outperform gold. In an environment in which traders are more concerned over deflationary pressures, silver will fare far less well than the yellow metal.

In other words, one's investment or trading decisions need to take into account the sentiment among players when deciding to approach either or both of these markets. Even more so that than however is the signals that can be derived from tracking these markets. When rightfully understood, it can help one discern what is on the minds of some of the large speculators that dominate these markets and whose buying or selling decisions most greatly influence price direction.

Take a look at the following charts where I have created a comparison for you and you will see what I am getting at.



The top graph, the blue line, is another one of my pesky ratio charts ( Yes, I know, I am addicted to these things). I am essentially taking the price of silver and dividing it by the price of gold. By looking at the direction of the line, one can easily see which one of these metals is performing better than the other.

It is my contention, that if the market is expecting Deflationary pressures to win out, the line will move lower as the price of silver will lag gold to the upside on rallies but lead it on moves to the downside in both metals. If the market is expecting the opposite, namely inflationary pressures, silver will lead gold on the moves to the upside in the metals or will not drop as hard as gold during moves to the downside in the metals.

Below this ratio chart, is a graph of the Goldman Sachs Commodity Index, which I follow religiously to get a bird's eye view of what is taking place in the larger commodity complex as a whole. By closely monitoring these commodity indices, one can see any rise in prices at the wholesale level, long before most other folks have the faintest clue what is happening. The futures market are just that - "Futures" markets - they are not "past" markets nor are they "present" markets. They look ahead.

Now, there are other variables that need to be considered when monitoring commodity indices that I have spoken to here at this site many times - most notably the forward structure of the Board. I have noted this quite frequently in recent posts as I discuss my reasons for expecting lower food prices by Q4 of this year and certainly by Q1 2015.

That being said, I tend to look too far ahead at times as I like to have some idea where things might be headed. However, for the purposes of trading and understanding what the "crowd" is thinking, one can take the commodity indices at face value and draw the proper conclusions.



What do you see when you examine the ratio chart line and the line of the GSCI? Can you see a connection? Yes, you should. When the overall commodity sector is moving higher ( wholesale prices are rising) the ratio moves higher as a general rule ( again - it is not a 100% relationship but it is very close). When the overall commodity sector is moving lower ( wholesale prices are falling) the ratio line moves lower.

In other words, Silver will outperform gold if the market expects to see inflationary pressures in the commodity sector.

What is the GSCI doing right now at this moment and what is the ratio line doing? Both are moving higher. This tells me that the sentiment in regards to the commodity sector at the moment is that players are becoming concerned about rising commodity prices.



Keep in mind that the biggest component of this particular commodity index, the Goldman Sachs Commodity Index, is the energy complex so this index does tend to skew the perception of the complex as a whole in favor of what the price of energy is doing, but ever since my beloved Continuous Commodity Index or CCI, went the way of the dinosaur, I have used the GSCI. The CCI was the best balanced commodity index in my opinion and most accurately reflected what was going on in the entire commodity complex because it was weighted more evenly than any other index out there. We have to use what we have to use however and thus the GSCI, which by the way is a major benchmarking index used by INDEX FUNDS.

I mentioned these index funds in a separate response to a post here at the site yesterday. They are not hedge funds. In my profession, we often call them "long only" funds. The reason is because they mostly take only the long side of the commodity futures markets that they invest in. These funds essentially exist for the purpose of providing investors exposure to the commodity complex as an alternative investment class. They receive monies from clients and buy a basket of commodities exactly the same as the index that they are benchmarking against.

During the big boom in commodities back during the initial rounds of QE, index funds were very active in the commodity futures markets buying huge blocks of commodity contracts. I think it is important to understand that this group DOES NOT TRADE FUNDAMENTALS in individual markets. They must buy every single commodity that the index they benchmark against includes in its basket in the same percentages that comprise the index. These weightings change every year so the index funds who roll their positions from month to month are forced to realign their holdings in early January or February each year.

The thing to come away with however is that whenever one experiences rising interest in commodities as an asset class, these index funds become more influential in the markets because the size of their buying increases. As a trader, they cause me more grief than the hedge funds because of the reason I stated above; they will buy and take long positions no matter what the markets might be doing or what the current fundamentals of that particular market are. In other words, they buy BLINDLY.


However, and this is key - when index funds begin investing more money into the commodity sector, the asset class is coming back into favor and that only happens when investors are worried about potential inflationary issues.

I maintain that something is happening in the marketplace in regards to its confidence in the Yellen-led Fed. I am not sure exactly what Yellen said in her comments this week, but ever since those comments were made, things have heated up considerably in the commodity sector overall. One gets the distinct impression that the market currently has not exactly given her a ringing vote of confidence.

Yet, the VIX, or Volatility Index, has continued to sink lower indicating that COMPLACENCY remains incredibly widespread at least in regards to stocks. However, in watching this climb in the silver/gold ratio and the move higher in the GSCI, I see signs of cracks appearing.

I will leave you for now with this daily chart of silver. Note a couple of things - the market has recaptured the $20 level in very convincing fashion. So far today it has even run to $21 where some profit taking has emerged. Price is above the 50 day and the 200 day moving averages and the 50 day is turning higher. The ADX is rising but it remains below 30. That means the potential for a trending move higher is growing. Bulls are in control

If the price can power through psychological round number resistance at the $21 level, it should be able to make a run at $21.50 and the area just above that, which is the next level of chart resistance.



23 comments:

  1. Hi Dan,
    Would your comments in silver apply to sugar, coffee, and wheat? I cannot for the life of me figure with costs in my life rising(insurances, groceries, energy, etc.) that inflation is not properly reported. Yet your comments about deflation in copper and other commodities have me convinced being sure of this direction is beyond my understanding. Which is it in your opinion? You pay bills, living costs are rising not falling. Thanks.

    ReplyDelete
    Replies
    1. Concord;

      I wish it were simple to understand but it is not. There are so many cross currents at work in these markets that it makes reading them and deciphering their message very tricky at times.

      I have been concerned about copper going one way and crude oil the other. The two should normally tend to move in unison with each other but they are not.

      Copper prices have been moving lower, on fears of slowing growth and on fears of Chinese double and triple counting.

      today however, it is up nearly 1.5% as it follows silver and the rest of the Commodity Sector up. All of a sudden, fears of excess supply from China have vanished in a single day! That is how schizophrenic these markets have become.

      They are like yo-yo's - one day they collapse lower - the next day they are soaring.

      It is the Fed and what it is saying or not saying, what it is doing or not doing, that is causing this volatility. On the one hand traders are now becoming worried about inflation. On the other, global growth is not exactly going gangbusters.

      If you look at the grains however, they are tracking lower, especially wheat and now even the beans are beginning to crack.

      Meats are all rising but as I said previously, I expect meat prices to moderate certainly by early next year and more likely by Q4.

      Crude is the wild card as it responds to geopolitical issues. One thing I have said for a while is that crude oil is actually a better inflation hedge in my view than is gold. Specs rush into this market as a hedge against inflation and thus, when you combine that with the geopolitical situation, it rises sharply.
      The problem is that one can misread the signal in crude as a sign of strong demand for the actual product which under normal circumstances would lead you to believe that the economy is roaring.

      We know that is not the case so even the signal from crude oil has now become distorted.

      I do not know how this is all going to play out nor do I know what these damned funds will focus on for any given day. They are about as fickle as a weather forecast.

      I guess we can just do our best to try to read the charts and get the input from as many markets as possible to get an indication of what traders are thinking for the immediate term but trying to make any long term forecasts in this sort of environment is an exercise in futility.

      Best wishes,
      Dan

      Delete
    2. Dan, great piece as usual. In heaven one minute, burning in hell the next in these busted mkts. Trying to logically make sense in the short term is a futile exercise. Look at plat and pall today. Have a good wknd!

      Delete
  2. Nobody with your level of acumen, gives people searching for answers time and real empathy like you. I find it amazing even as a future gold bull(who knows) that people in the gold community are so angry sometimes at you when all you are doing as illustrated by your thoughtful response is giving a expert opinion reading the facts as they exist at the moment. I was stunned to see gold bugs taking a victory lap here yesterday and I bought gold. Don't they understand if it gets bullish your views will change.

    Thanks for the thoughtful response Dan. I am grateful.

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  3. Hi Dan -

    I do not think there is much for Yellen to say.

    We have an uptick in the economy. With relatively fixed commodities, commodity prices went up. Due to things like tracking. So oil has gone up.

    She basically said - hey people! The CRB index is up over 10% since last year. That affects the consumer, the economy, margins, and earnings.

    Yellen then says, we are not raising interest rates. We are still tapering in a couple of months.

    Interpretation, the only way these high prices will go away is with higher commodity prices.

    ReplyDelete
  4. They have been bamboozled for so long into believing there is a grand evil conspiracy against gold that they start acting like zombie attackers whenever they think someone is out to get them.

    Can someone tell jim to stop posting this untrue kinda nonsense? Destroying the financial industry seems to be a goal in itself to jim.


    Hi Jim,

    It’s time to remind CIGAs about the importance of certificate ownership.

    Banks use your shares to short sell. Demand your share certificates. The bank is then forced to buy back and cover the short sell

    Regards, 
    CIGA Alex

    ReplyDelete
    Replies
    1. You hit it right on the nail head, Jim seems to have a personal vendetta against the financial system.

      Even to the point where he uses his CIGA's as guinue pigs as part of General Jim's war tactics. Remember when he was telling them to send emails to mining CEO's to get off their butts and do something about their company's being shorted? I guess in Jim's book it's not fare to short overleveraged underformers in a decling commodity sector.

      I would even suspect the whole GOTS was an attempt to short squeeze the mining sector getting everyone to pull certs.

      But what else would you expect from someone who is the CEO of a hole in the ground that runs a website promoting what he sells.

      Well maybe someday we'll get this bitter taste out of our mouths.

      Delete
    2. Duh. Here is a post someone made about Jim a while ago on yahoo - the place where people that like to know the truth about TRX (Jim call em people that just love to hate") go.

      "The CEO of this company cries out against manipulation of gold and mining stocks, yet that is where he cut his teeth in the markets. His ride of the gold bull to the top in the 1980's is what his fame is based on. Yet he admits how he manipulated the price of gold upward by spreading techniques against the bankers. Then he rode the short squeeze in Sutton up into the $40's from lows in the single digits, before getting into a battle for control of that company. No doubt he sold shares in the 40's before the battle took the price down over 50%. His next adventure with TRX came to a halt before he could work the same magic with the stock price. Now the company is heading for mediocracy, if it can survive after diluting the long-term holders in a mad scramble to raise needed funds to continue "operations", which for the most part reward the loyal members of his executive offices. The shareholders who have been hanging on for their payday have been thrown under the bus"

      Now that sums it up rather nicely.

      Delete
    3. Sounds about right. Only he worked his magic enough with trx making millions on selling shares, rich get richer and poor get poorer.

      Delete
    4. But hey "gentlemen get ready to defend yourselves!"
      Sheesh why didnt he just tell the ciga's to step on the rail road tracks and bend over for the coming steaming locomotive

      Delete
    5. When Jim posted a picture of his sheep, sheered with the comment that "the sheep deeply enjoy their sheering" right at the bottom in May 2013, he left me with no other conclusion that he traded his soul for monetary succes with the devil a long long time ago.

      Gore Vidal once wrote "winning is not enough, you have to lose".

      He just had to add insult to injury. It tells you all you need to know.


      Delete
    6. Interesting observation. You know Jim visits that spiritual guru in India that supposedly appeared to him in the middle of the night.

      Could be of satanic origin

      Delete
  5. Looking at the 1, 5 & 10 year charts http://www.kitco.com/Gold_Silver_Ratio_Charts/gold-silver-ratio-charts.html it is hard to reach any conclusion other than that the movements in the Silver: Gold Ratio this month have been anything more than noise in the system, and that a ratio in the mid-high 60's is far from abnormal.

    Over the past 6 months Gold is up 5.92% and Silver up 4.21% - to recover that lost ground, Silver would need to be at $21.27 today, and, frankly, I don't see it happening. Rather, I am an ardent follower of www.monetary-metals.com and Keith Weiner's view is that anything north of $17 is speculative froth. Your mileage may differ.

    ReplyDelete
    Replies
    1. What's his figure for gold's speculative froth level? I assume it's pegged to production costs. Any idea where he gets his cost data? $17 silver should put production costs at around $15, which is lower than I've seen elsewhere.

      Delete
    2. I've seen production cost figures above $20 (especially considering oil going up too). You have to consider availability of the metal too. If inventories are low and the product is wanted by investors and needed by industry price goes up regardless.

      Delete
    3. I think Mr. Weiner is right. The "speculative froth" is what values silver as anything other than what it is, an industrial metal. Gold is a one trick pony. Just look at stock to flow supply overhang. the vast majority of all the gold ever mined is still just lying somewhere. IMO all gold's production costs provide is a possible floor for the gold price. The longer gold stays near production costs the more pressure there will be on supply. Of course with the paper markets I am not sure how much of a role supply and demand fundamentals even matter for gold.

      Delete
    4. Gene, I think you are right; I can't get over the attention some people pay to all the Gold "moving to China" from where it will apparently never come back - it didn't stop the Gold price tanking last year, did it, and there is no indication that it is lifting Gold prices now either

      The notion that once Gold has gone East of Suez, that's it, is total nonsense; I am in Singapore, and I can assure you that in Shenzhen, Shanghai, Dubai and on a good day Mumbai there are regular coin shops and retail bullion dealers who will sell you as much Gold as you can afford to pay for at prices which are at least comparable with anywhere in the West. It's a myth that Asia represents "strong hands" - as the plethora of "We Buy Gold" pawn shops in Hong Kong and Singapore amply illustrates - there is a two way market over here just as surely as anywhere readers of this Blog are familiar with closer to home

      Delete
  6. Commercials added a lot of gold and silver shorts prior to this price rise. Too bad we dont know what happened yesterday.

    ReplyDelete
  7. Hey Mark, you were right, its official now.

    "Jim Sinclair’s Commentary

    Sir Richard the Good shares with us.

    Richard Russell Declares “The Bear Market In Gold Is Over”

    Russell: “Everything is coming up roses with the stock and bond markets and also with the precious metals. Now that GDXJ is acting so well, I’m wondering how many of my beloved subscribers have taken a position in GDXJ? Like most advisories, I tout or boast about the positions where I’m right and forget to comment on situations where I have been wrong"

    ReplyDelete
  8. Can we have on some factual based comments in the posts on this site rather than this continual gold bashing and counter defending. Who cares what Jim posts on a different site. If I was remotely interested in his views I would read his blog, but I an interested in clear and concise information which is why I read the information on this site. No idea who this guy is anyway and I do not want to know.

    Do you really think that any of your posts will influence anyone other than stupid people to do what you think will benefit your current positions. Gold has a part in a portfolio and will have good and bad years, as will stocks. There is a correction coming and all the signs are there and when it does gold will do well for a period, but then stocks will come back. That is the way it is and if that changes we are all in for a bad time.

    I do hope all the doom mongers that predict gold going to $5000 are wrong, but who knows. The fact is the politicians are only interested in their own wealth and do not care about the rest of us and so anything is possible in the next decade.

    Please let us have some factual posts about the points Dan raises so we can all benefit.

    ReplyDelete
  9. Hoe about providing some factual statements yourself david. I couldnt care leds what you hope for.

    ReplyDelete
  10. Dan you state:
    "That means, in subsequent COT Reports, we are going to want to see the number of new longs, especially on the hedge front side of things, outnumbering the amount of short covering. If this is the case, it will augur for further strength in the metal. If however, and this is key, we do not see that development, I will be concerned about the staying power of this current rally."

    Would this also be true of silver and that COT report?

    Couldn't help but notice the silver/gold ratio line you posted is still within (or maybe under) the downward sloping trend line taken from the peaks of the line (realizing sloping trend lines is not your favorite TA tool). Also, the GSCI value is well within the range seen over the past 12 months. Also PL and PA got hammered today for some reason. More reasons that the fireworks this week could turn into another fleeting rally and not to excited just yet? As mentioned, if Yellen does walk her comments back in the days ahead, that could be another market sentiment change, once again. Surely she is smart enough to know that higher oil prices (as you mentioned a few blogs back) will act as a tax on the economy...not good for her next "job review".

    ReplyDelete

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