“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, November 14, 2014

Watching for Evidence of a Shift in Sentiment

For some time now the general sentiment in the broader markets has been that economic growth is slowing, in spite of Central Bank efforts to stimulate it. We have seen that in data coming especially out of the Eurozone. We have also seen it in Japan, whose Central Bank just recently evidenced how stubborn the deflationary pressures have been in their economy.

Here in the US, last Friday's payroll numbers, which was mildly disappointing, the market reacted by selling the US Dollar with the thinking that the Fed would go slower on any potential rate hike.

In the commodity markets, we have seen in sinking commodity indices in responses to sharp moves lower in crude oil, natural gas, unleaded gasoline, grains, sugar, etc. across the board.

Thus far the sentiment has been in which there is no inflation with the general threat being regarded by Central Bankers as one of deflation , or in their terms, disinflation.

It is this sentiment which has resulted in money flows out of commodities in general and into equities.

In attempting to discern when/if this sentiment might be changing, I have been closely monitoring both copper and crude oil prices. Just yesterday I mentioned that the close of copper below the $3.00 level was something that concerned me, especially with crude oil prices going into a downside freefall.

Something else I watch is the action in the Australian Dollar. I view this currency as a sort of "quasi growth currency". The reason is because so much of Australia's economy is dependent on the export of the huge amount of raw materials it produces. Basically, if world economic growth is moving higher, especially growth in its neighbor China, the Aussie tends to benefit. The converse is true if growth is slowing.

With that in mind, take a look at this intermediate term chart of the currency. Notice the sharp rise beginning in early 2009 which was when the Fed launched its first QE program. Optimism was high that it would be successful in liquefying the financial system and growth would ensue.



Somewhere along the line however, it dawned on markets that Central Bank efforts, including those of the ECB and BOJ, as well as stimulus efforts by China, were not having the intended effect. The currency then began a slow, grinding move lower.

As of this week, it has surrendered exactly one half of its gains from the beginning of QE1, back in early 2009.

So where from here? Good question.

Today, there were two pieces of news that hit the market which came as bullish surprises for the economy. The first of these was Eurozone GDP numbers which, while still pitifully weak, were better than anticipated. The second was US retail sales, which surprised to the upside as well coming in at +0.3% for October compared to an expected +0.2% rise.

Together, both pieces of data had the effect of pushing the Euro higher at the expense of the Dollar but it was especially was seen in the Nasdaq. That market has been lagging the S&P 500 and the DOW, which as the reader knows, have both made new lifetime highs this year. The Nasdaq has not. Today however it pushed up towards levels last seen in March 2000.



I am watching very closely to see if there is any sort of hint, that sentiment might therefore be shifting away from the "slowing growth" scenario to one of "the global economy is over the deflation scare and now will work towards one of growth". Please note that I am NOT saying such a sentiment is here; I am merely stating that to be successful at this business, one has to constantly gauge sentiment which influence money flows and money flows influence price.

It is that simple, especially when it comes to silver, but even gold as well.

Next week we are going to get some more pieces of economic data as well as the minutes from the Fed's October FOMC meeting. This will give us some fresh data to work with to see what kind of response the market has.

My thinking is that if there is indeed any shift that has actually taking place, something of more significance than the price action of a single week, it will begin to show itself in the Australian Dollar chart and in copper and in crude oil.

I noticed that crude oil cut yesterday's horrendous losses by half in today's session and that the XLE was up more than 1%. It is interesting to note that the XLE has performed much better overall than the price of crude itself. Today looked a lot like some big players were taking the opportunity to renew their exposure to the energy sector.

Remember, silver needs a "solid growth environment", one in which inflation dominates, rather than disinflation or deflation, if it is to thrive. In my view, silver is NOT a safe haven. If the sentiment begins to shifts towards one of slow but steady global growth, silver will probably bottom down here. If the sentiment is a short term phenomenon and we start getting more evidence of economic stalling, it is going back down again.

Time will of course make things clear, but I would strongly caution would be silver bulls who are constantly warning us about how crappy the US economy really is and how the stock market is really just a huge bubble, to be careful what they wish for in terms of stocks. they really seem to believe that if stock prices implode silver will soar and therefore are always rooting for equities to tumble as they constantly nitpick and criticize anything positive about the US economy that might actually happen to be reported.

Let me just say this -  If equities were to fall out of bed because markets begin fearing overpriced stock valuation in a slow growth environment, guess which way silver is going? Hint - it ain't higher!




32 comments:

  1. Thank for this piece. Your analysis helps me as day trader a lot. I see EUR will rebound a bit for the rest of the year then down fast at the beginning of 2015.Thanks

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  2. When you say sentiment. Are you talking about the sentiment of the computer algorithms? If so, all I can picture is some crazy guy (with poofy Einstein like hair) sitting in front of 30 monitors, and a chair that is attached to a 220 volt electrode that fires off each time a new piece of economic data comes out .............

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  3. Dan here are some questions. If the economy does tank, normally silver would tank as well because of its industrial use. But what if as a result of the economy tanking, the base metal miners who produce 70% of silver as a by-product, reduce production of the base metals thereby lowering the production of silver. Under such a scenario, my question is, is it not possible to still have a stagflation like event in the 70's? My thoughts were if the masses stop believing in the government's financial data and came to the conclusion that the Fed is actually trapped and had to engage in QE4 to keep serious problems from developing, would it still be possible for silver de-couple from gold? thanks

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  4. New to your site (have been reading for about a month and have thoroughly enjoyed it). What does this analysis mean for gold? Hot world economy = inflation = gold higher. Or hot world economy = gold is no longer a safe haven = gold lower? Thanks

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  5. Thanks for that informative analysis, Dan. It was very much appreciated. I hope you have a nice, relaxing weekend.

    ReplyDelete
  6. if silver goes all the way to 22, will you eat your hat Dan?

    also this release compliments your notes above...

    http://www.glencore.com/assets/media/doc/news/2014/Media-statement-Glencore-announces-temporary-coal-production-shutdowns....pdf

    ReplyDelete
    Replies
    1. I don't think Dan will need to. Nothing goes down in a straight line, and the PMs are having another of their counter-trend, mini-meltups. I don't think SI will get a whole lot higher than the low 17 range, setting up another good short entry.

      Delete
  7. Great stuff as always, thanks.
    I like Linh's thoughts on the EUR in 2015.
    I think the big thing going forward is how fast the yen continues to break down or if it goes sideways for awhile around 120.
    My guess would be that if yen keeps falling and gold starts going up instead of falling like it has since Dec. 2012 that a reversal in the bearish trend might show signs of turning around.

    There's so many other things to consider of course and TD touched on many of them. I guess the two things I'd watch the most are the yen/gold correlation and what direction crude oil goes in and for how long.
    The volatility in the currencies makes for a crapshoot investing environment.

    ReplyDelete
  8. I am using interactive brokers to trade GC January expiration. I had a buy stop limit order of 1181.00 stop, 1183 limit. I looked at my screen at around 1030 pst and GC was trading at 1187. The stop limit didn't turn into a buy limit order of 1183 like it was suppose to. Does anyone know why this occurred? Thanks!

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  9. Dan, thanks for another great week of posts.

    @DPH - I've attached a chart of gold price against Yen. Last week of trading is especially interesting.

    The argument that Japan secretly pegged the Yen pegged to gold is ludicrous--you could have also said that the Yen was pegged to oil.
    http://tinypic.com/m/idrptw/3

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    Replies
    1. Thanks for that MDLGTO.
      That short term charts showing that gold has fallen as the yen has plunged, correct?
      Maybe I'm looking at it wrong and it's too early and my coffee hasn't kicked in yet.
      It seems as though gold has plunged as the yen has weakened since late 2012. Not in lockstep though.
      Maybe just a coincidence?

      Delete
    2. I'm definitely not saying that the recent yen/gold correlation being touted out there is whats going on like ZH has asserted. I don't believe that's the case right now.

      I guess my point was that if the yen starts to really fall and the inverse correlation to a weak yen/weak gold (priced in USD) were to stop and reverse for several months that "maybe" a trend would develop the other way....weak yen/higher gold in USD.

      TD's post on possible trend shifts had me thinking along those lines.
      Coffee is starting to kick in :-)

      Delete
    3. Ok...so you got me thinking a bit and I started looking around while sipping a large mug of extra strength joe. :-)

      http://seekingalpha.com/article/2641865-chris-hamilton-is-the-printing-of-the-japanese-yen-the-poison-pill-for-gold-the-more-yen-japan-prints-the-lower-the-price-of-gold-until

      I think this summarizes where I'm coming from better then I can explain plus there's some charts.

      Delete
    4. DPH - what do you think of this article which explores the relationship between gold and the yen?

      http://www.investing.com/analysis/gold%E2%80%99s-smoking-gun-232335

      Thanks

      Delete
    5. Thanks EW...just found the article.

      For some reason Investing.com is hard to navigate and I usually keep getting redirected to the main page when a specific link should take me to a specific article.

      Let me read and digest that a bit later. I have a some leaf raking to get done before it starts snowing later.
      Thanks again, looks like a pretty indepth look at the yen/usd/gold nexus.

      Delete
    6. Wow...that was some type of heavy duty chart/cycle analysis!

      What it tells me is that my observations back in Nov. 2012 about Abe's aggressive yen policy were correct in the sense that it was a significant event. I had no idea how it would manifest going forward but looking back it's clearer to see.

      I had no idea it might correlate into what that author laid out in that brilliant piece. I'm no chartist by any stretch so my thoughts on the yen weakening/gold weakening/USD strengthening were just something that couldn't be helped but noticed but given the benefit of time and seeing it laid out on those charts you can clearly see the correlations that are going on.

      So it seems like depending on what the yen continues to do or at what rate it weakens or stabilizes is pretty much the direction gold seems like it's going to head. I don't see the yen stabilizing anytime soon unless it gets a bit hesitant around 120 towards the end of the year here.
      But I'm thinking after some hesitation it might just slice easily through the 120's

      I'm glad you provided that link. Sometimes it's hard to know if one's thoughts are generally on the right track when noticing certain trends that I can't verify through the use of charting techniques and cycle analysis like that author just did.
      Outstanding stuff, thanks for sharing that.

      Delete
  10. Not a peaceful weekend for PM shorts ?

    ReplyDelete
  11. Funny things happen sometimes in this era of millisecond high frequency trading during periods of high volatility and high volume.

    I've had something like that happen to me a couple times trading options before. Kind of blew my mind and cost me some money on some sell orders. :-(

    ReplyDelete
  12. Gold dropped $13.52 to $1148.28 by a little after 8:30AM EST, but it then jumped to as high as $1193.50 by early afternoon in New York and ended with a gain of 2.49%. Silver surged to as high as $16.384 and ended with a gain of 4.42%. Those who shorted yesterday and fri am were caught with their pants short.

    Is this what technicians call a key reversal ?

    ReplyDelete
    Replies
    1. Wolf

      no. I think its called "a squeeze" and I am not expecting it to last

      Delete
    2. Lot of balls may have been squeezed though !!

      Delete
  13. Dan

    I believe your former position on gold is wrong. I think its time to be long gold. Best wishes

    ND

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  14. Dan, with respect, China is not Australia's "neighbor": the distance between tge most northerly city in Australia (Darwin) to the most southerly city in China (Hainan) is greater than the direct-line distance from Boston to San Diego

    I agree that the Aus$ is a viable proxy for the Chinese economy (my daughter is at University in Brisbane, and professionally Australia is often referred to "The Quarry" just as New Zealand us "The Farm"), but the cultural, political, economic and geographical distances are immense

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  15. You might well want to be buying gold, and especially gold shares at very cheap prices for a swift and possibly dramatic profit, until the Swiss Referendum, then move to the sidelines. If the initiative is voted in, the Swiss Cantons then have to approve it, and it is conjectured that they would not. However, for them to fly in the face of a popular vote would be very arrogant and undemocratic in the eyes of many Swiss, and coukd have serious repercussions. If it does go through the impact on the gold price woukd probably be huge, not just because of the quantity being bought, which would be extended over a 5 year period, and the effect therefore muted, but because of the psychological impact, and probable contagious effect extending to other nations. One is probably right to remain skeptical about this actually happening, but if it does, the whole picture for gold will change to a most positive one.


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    Replies
    1. Nice thoughts PD, that scenario sounds very plausible if that "yes" vote were to happen.

      As undemocratic as it might be it seems possible if not probable they go against the grain of public opinion.

      Delete
    2. I heard the Swiss can take up to 3 years to start implementing the gold buying scheme IF it actually passes.

      Delete
  16. Dan, can you please comment on the COT for CL? In particular, has that large speculative long position you have referred to been whittled down as the price has gone down? I ask because 1) if the long overhang has dissipated a bit, and 2) your musings about sentiment changing play out, we could be in for a hell of a rally. Thoughts?

    ReplyDelete
  17. H'mm...

    "Putin Said to Plan Early G-20 Exit as Ukraine Casts Shadow"

    By Ilya Arkhipov and Jason Scott
    November 15, 2014 6:22 AM EST

    President Vladimir Putin intends to leave the Group of 20 summit in Australia earlier than scheduled, according to people familiar with his plans, as some leaders demanded Russia stop arming rebels in Ukraine.

    Putin plans to skip an official lunch tomorrow and bring forward his news conference before leaving Brisbane...(cont.)

    http://mobile.bloomberg.com/news/2014-11-15/g-20-leaders-chastise-russia-as-ukraine-crisis-overshadows-talks.html

    Should make for some interesting and possibly ominous comments maybe.

    ReplyDelete
  18. One meant to say, buy gold shares, not gold, until the referendum.

    ReplyDelete
  19. Tricky to be a short from Oct to Feb: Hindu festival of Divali followed by marriage season then Christmas, NewYear and Chinese New Year: half the world's population ! If half of them buy a tenth of an ounce of Gold teach, on the average, that equals 150 Million oz. See article below
    http://www.business-standard.com/article/news-ians/gold-silver-prices-shoot-up-114111501258_1.html

    ReplyDelete
  20. Trader Dan: What do you think of the recent report on price manipulation by the Swiss authorities? IS this more hyperbole from gold bugs or a real change in attitude?

    Regarding the Nasdaq 100, are you looking for a double top and a heavy reversal of sentiment? Is that what the charts look like to you. Thanks.


    http://www.reuters.com/article/2014/11/12/banks-forex-settlement-gold-idUSL6N0T22Z420141112
    LONDON, Nov 12 (Reuters) - Switzerland's financial watchdog said on Wednesday it had found a "clear attempt" to manipulate precious metals price benchmarks during a cross-market investigation into trading at UBS bank.

    ReplyDelete
  21. This is such a great site thanks to Dan's hard work and generosity with his time. He has a regular full time job, yet still takes the time to do in depth analysis, charts, replies to questions, and shares his knowledge and expertise. The community here has been growing and we are starting to get a lot of great people. If you feel you've gained from this site (monetarily or non-monetarily), please occasionally give Trader Dan a big thank you by once in a while clicking on the donate button. Thank You!

    ReplyDelete

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