"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

Trader Dan's free work will soon be available at www.traderdan.biz

Friday, October 24, 2014

Mining Shares Continue their Meltdown

Before getting into the particulars of the charts from the mining sector, take a look at the continued exodus from GLD. The gold ETF shed yet more tonnage dropping nearly 5.5 tons from yesterday and is now down to a mere 745.39 tons of gold. At the risk of beating a dead horse, we now have to go all the way back to OCTOBER 2008 to find such a trifling sum in this once proud flyer. At its peak some two years ago, there was over 1351 tons of metal in this exchange traded fund.

Western-based investors simply want no part of the metal right now which brings us to the mining shares. The GDXJ, an index composed of junior miners is pulling a disappearing act. Down over 2% today alone, the index made not only a NEW WEEKLY LOW close for the year, but has now gone negative on the year with today's close at 30.95.

The Index is now a mere two points away from its all time low!

Simply put, if it looks like gold, guys running investment portfolios are not interested in it.

The exception is some hedge funds who are still buying gold over at the Comex as can be seen from this updated chart of the Commitment of Traders report from this afternoon. They were sizeable buyers this past week. However, this is noteworthy, the bulk of that buying was SHORT COVERING, not fresh buying. There were some 13,000 shorts covered as opposed to some 10,000 new longs instituted. It was this strong wave of short covering that took the metal up to its high made this week near $1255.

It has been downhill since Tuesday however, ( the cutoff day for the COT report) with the gold price shedding some $24 since then. I cannot say for certain as I do not have the data in front of me and will not be able to see it until next Friday, but I suspect we had some decent long side liquidation from Wednesday on. As long as the VIX sinks lower and stocks ride higher, gold will be sold by speculative interests.

Would you like to see the main driver of the gold price? Contrary to the perma gold bull camp, it is not the bullion banks but rather the big speculators; more specifically hedge funds.

Take a look at this chart using their NET POSITION and overlaying it against the price of the metal. As shown before here on this site, the price rides up and down in perfect harmony with their buying or selling.

Just for illustration purposes, here is a chart of gold over at the Comex.

As you can see from the indicator below the price graph, the market remains trendless and stuck in a choppy back and forth type of trade since holding above that former double bottom ( now triple bottom ) near $1180. Short covering and some bottom pickers managed to run the price up to the 50 day moving average before the sellers showed up and the buyers backed off from chasing it. One cannot blame them when they look over at the falling holdings in the GLD and the collapsing mining shares.

The metal has so far managed to hold above support near $1220 but is stuck below $1260. One or the other of these levels must give way to generate some more volume and bring in some excitement into the lackluster trade that is being seen in there for now. Bears would dearly love to kick the floor out below $1220 and run the metal down to test $1200 but there has been pretty good demand coming out of India for the festival season which is propping the metal up for now. Bulls know where the upside stops are lurking; they just cannot reach them however.

Speaking of new lows - the commodity sector, as illustrated by the GSCI or Goldman Sachs Commodity Index, notched a fresh new WEEKLY CLOSING LOW of 49 months!

There was a great deal of short covering in the grains this week and that component of this index helped keep the index from finishing even lower than it otherwise would have. However, grains were all weak today once more along with crude oil and its products.

Gasoline futures remain new FOUR YEAR LOWS. Once the beef finally tops out, which I still expect very soon ( today's Cattle on Feed report discussed later ) we will finally see grain prices, meat prices and fuel prices all moving lower in sync. Red meat has been the exception for reasons cited here very often the last few months but as I said back then, expect lower pork, chicken and beef prices in the 4th quarter and continuing into next year. Hallelujah for we meat lovers!

Let me shift gears just a bit ( still commodity related however ) and throw up a chart of a metal that I rarely post here. I am speaking of platinum, and of its sister metal palladium. The reason I bring these up at this time is to illustrate why silver is having problems ( note - it has nothing to do with some supposed nefarious plot by the feds to manipulate its price lower ).

Platinum and Palladium are industrial metals primarily. Yes, some buy them in the role of alternative precious metals but such demand makes up only a small percentage of their use. It is in the industrial arena that demand is generated.

What do you see when you look at these charts? If you answer: "FALLING INDUSTRIAL DEMAND DUE TO SLOW GLOBAL GROWTH", go straight to the head of the class!

Take platinum for example - the price recently made a FIVE YEAR LOW! This year alone it fell more than 15% from its starting level at one point although it briefly recovered and is now trading down only about 10-11% for the year.

Palladium fares much better than Platinum as it has a different set of fundamentals but it is currently essentially flat on the year.

Heck if I had to pick a metal to own, it would be palladium based on its rather stalwart chart, given the overall weakness plaguing the commodity sector in general.

The Dollar ended the week still stuck in the midst of its trading range from 87 - 85 basis the USDX. The Yen was initially higher overnight as equities were weak but as they recovered in the West, it gave back most of its gains. Just remember if you are trading the yen, it is essentially a currency trading the "RISK ON;  RISK OFF" trade.

I will get some more up later about the grains and the moo-moos. The Cattle on Feed report was out today and it contained no surprises that I could see. The trade estimated the numbers pretty well so I would except little reaction from the report on Monday morning. If anything, the market will trade the sharply lower beef on Friday but with the sharp selloff today, in anticipation of a less friendly report than what we have been used to seeing the last few months, any bearishness that some might see in the report is already dialed in. As I said, the beef and the cash will be key, much more so than this report, which does tell us that cattle numbers have picked up ever so slightly.

The grains? All I can say is that I am overjoyed that November soybean option expiration is over as of today! What a nightmare the antics tied to the massive amount of options written against that month contract created this week for we grain traders! First it was the 960 call writers, then the 980 call writers and finally the $10 call writers that got obliterated. The market had what I and others refer to as a "MELT UP". Simply put, there was no one on the sell side of sufficient size to absorb all of the buying generated by professional option writers who had sold a slew of calls and were forced to buy futures as the price moved past their strike level and put those calls into the money.

From a fundamental standpoint, I see nothing ( other than some harvest delays and some surprise big export numbers from China yesterday ) that could have justified a run of nearly $1.00 higher in the beans this month. That being said, short term technical always trump fundamentals. I am betting that we are going to see Chinese cancellations sooner rather than later on those bean 'sales'.

More later.... I Need a break!


  1. This is a very dangerous game, and I am for the time being extremely hesitant: if we may presume that there will at some stage be a bottom to the collapse in price of mining shares, then the art lies as much in predicting which will survive just as much as in predicting the price point itself.

    On a pure diversified portfolio basis it may be worth dipping a toe in the water at some stage, but whilst that might attenuate some of the name-specific Beta risk, it can't do anything about the sector-wide Alpha exposure - which for the time being appears to be entirely to the downside.

    Overall - as a total neophyte - I am gradually forming the impression that Miners are more directly influenced by macroeconomics than the Gold price itself, and that as long as we remain in an economic downswing, there is unlikely to be much upside. Please correct me if I am wrong in this conclusion

  2. Thanks Dan. I recall seeing that first chart before and it's still an eye-opener.
    The correlation is clear to see.

    Regarding GLD...the same folks who doubt or completely dispute that any phyz gold exists are the same one's who assert that the GLD withdrawals are going east to China.
    How can that be? How can something which doesn't exist be moved to China?

    I'm sure it's all JPM'S fault.
    It's far easier to inflame their herds and blame some boogieman like JPM etc. then it is for the herd to look at the huckster and question their dual assertions regarding GLD or any other wild and unknowable facts they claim to have insider information about.

    If Willie, Maguire or some mysterious eastern whistleblower are their inside info then they're gullible for lapping it up and spreading it around like gospel.

  3. gold started selling off after Fed head Bullard dropped the QE4 comment. Stocks reversed from their nose dive over the last few weeks and Gold topped with GLD shedding tonnage. New normal, with the threat of a new QE, stocks up...gold down.

  4. Dan thanks for the post. The bean volatility this week was a bit of a nightmare...

  5. There now seems to be suppport amongst the Usual Suspects for the establishment of a Producer Cartel to force the price of Silver up during 2015


    This, of course, is not "manipulation" because it provides pressure to the upside - even though it probably violates Federal AntiTrust legislation

    I have no doubt that Miners are under significant pressure - although it is notable that the CEO inteviewed in the above video notes an all-in cost of production of $16 / oz, which he anticipates will fall to $13/oz - and withholding product from the market is a common and entirely legitimate business tactic. However, inciting other producers to act in concert to artificially inflate the market price is not only blatantly manipulative, but also smacks of hypocritical desparation on the part of the Bugs

    The CEO interviewed in the video appears to be both sane and fundamentally reasonable - explaining the negative sentiment in the market and noting common weakness across other commodities including Copper. Unfortunately the interviewer and the intended audience are only hearing what they want to hear

    1. This comment has been removed by the author.

    2. It sounds like a good idea on the surface but in practice all it'll end up doing is crushing the price of First Majestic's stock price.

      In the future, when or if the price of silver rises moderately or substantially, it'll have been a good move on their part because future profits will ease some of the pain the stocks price will have to endure. Just check out FM's chart.

      The shorts will pounce on FM even more so when declining revenues from decreased saleable production starts showing up on their balance sheet.

      I'm guessing most shareholders, unless they're silverbugs, would rather see a higher stock price then a moral high ground in the short to medium term.
      FM's fiduciary duty to their shareholders is to provide maximum value or return to their investors whenever possible.

      All in all, I see it as a sign of the times in the PM miner industry because the move by FM is born of desperation on some level but being draped as some moral highground.
      The CEO should be applauded on some level for his conviction but the decision needs to also be viewed as a gamble.

      Lets face it, some popular miners will eventually succumb to this lousy silver or gold market that's currently in place.
      Keep your eye's on FM and it's options chain.

      Silverbugs will always find the silver lining in anything that seems to give them hope. Who could blame them at this point?
      What they won't see, by choice, is how some shills got the silver markets action wrong for over 3 years and CONTINUED TO PUMP SILVER and extoll to their herds how it was in short supply and it would skyrocket eventually.
      Salesman will say ANYTHING to move their product or sell their sevices.
      Some 'bugs will overlook all of that for whatever reason. Being purposely mislead apparently doesn't bother them.

      The 'bugs with blind faith in their Dear Leaders are probably finding it hard to accept some ugly truths...that their "experts" were terribly misguided and wrong whether by design or simply struck with a case of silver/gold fever that rendered them unable to consider other alternative viewpoints that ended up being detrimentall to the financial health or safety of their herd.

      For example, did anyone ever hear or read from their Dear Leader to short the paper metal shares at anytime during this 3 year downturn???
      Those 'bugs would be sitting pretty now instead of saying "Wtf!" with every grinding downturn they've endured.

    3. I noted the with old action with interest. On the one hand it is akin to a savings account without interest on the other, it's a gamble on commodity price appreciation.

      While it is surely popular among the silver bugs, sufficient cash flow is needed to keep operating. Suspect at some point selling a least part of their production will be necessary. It's sure a gamble the might be better handles with hedges than with withholds.

    4. Take a look at the response my Comment on this elicited when I posted on Mike Maloney's "Hidden Secrets of Money" forum: http://hiddensecretsofmoney.com/blog/Fed-emergency#comment-1653386094

    5. Same thing as a farmer holding his grain off the market or oil companies shutting in wells when prices fall near or below the cost of production. What's the point in giving your product away if you can afford not to. Potash cartel has worked perfectly fine for years.

  6. Dan!
    The chart of hedge funds net positions vs the price of gold is simply compelling.

    In my day job I am a process engineer looking for correlations between variables and results. I have seldom seen a better one.

    The wide distribution of this chart with a little background information should act as a powerful counter to some of the conspiracy theories. If I had your permission I would like to post it a couple places.

    Now if we could find a similar relationship for silver.


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