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Metals Thoughts: All About the Benjamins Edition

Tags: silver gold

There is more important prose to be read this week in the wake of the Paris tragedy, so we’ll skip straight to our markets:

Bull Case

– XAU seems to be surviving another test at 1077 lows and this is a market that has been doing 2x tests all year before bouncing higher and then inevitably getting sold again.

– The slope/severity of the selloff in both XAU and XAG has lessened over the last 5 trading days or so. If you like to see a market grind out a low, here it is.

– RSI for Silver in particular screaming ‘oversold’, but has been for a week now, perhaps contributing to the decreased intensity of the drop of late

– CFTC positioning shows a market that is a bit bearish, having cut net bullish Gold bets by 80% since the start of the month and is well below the 10wk moving avg

– Shanghai premium (roughly +$5) is indicative of improving eastern demand. We have seen large bar deals increase of late

– Producer selling has slowed down significantly with the reduced spot price

– Silver ETF holdings have begun adding ounces of late

– Plenty of room between here and first resistance: 1100/1105/1130 (prior lows 1 and 2 plus 100/50 DMA)

– Put skew getting to be a little too strong for our liking at +3.5vols over calls for 1 week and 1 month alike (15 delta for any fellow nerds)

Bear Case

– Momentum is terrible, but perhaps less so than a week ago. Silver is down 13 straight trading days in a row in the longest streak since 1950, which might as well be called “Ever” from a markets standpoint

– Somehow, silver positioning is still a bit on the long side. CFTC shows as of last Tuesday that a decrease in bets, but still not really back to averages. Oy.

– Unless the Dollar stops going higher, little chance of recovery for gold or silver (or base, or energy for that matter)

– Retail silver coin and bar has not had quite the pop we would expect by revisiting the low $14 spot area. Retail inventories are high, which may contribute.

– Gold ETF holdings continue to drag lower, and along with managed futures, probably provide the marginal ounce for buying or selling at these levels.

– 66% chance of Dec hike has stabilized near the highs after taking a slight dip after the Paris tragedy

Chart 1 Get the dollar, get the gold. I’ve flipped gold in this chart (Yellow candles) to show visually the high level of correlation with DXY (white line) and 2yr yield (green). Compare to Q1 of this year when the correlation broke down, largely on positioning and a solo-rally in gold despite DXY strength. With DXY threatening the 100 level, it could serve as enough resistance to turn back the dollar and give a boost to gold. Whether that helps silver, PGMs, base and energy is yet to be determined, but as long as the dollar is strengthening, no commodity looks appealing without supply shocks.

image0022 Metals Thoughts: All About the Benjamins Edition

Chart 2 A straight line into the dirt. Silver down 13 days in a row and $2.15 since the end of October. At this rate, we’d be at zero on April 1st. Obviously not going to happen, but just speaks to the one-sided and brutal nature of the sell-off. Interestingly, silver implied volatility for options pricing

image0072 Metals Thoughts: All About the Benjamins Edition
Coin Toss: Get the US Dollar right and you can basically nail gold’s movements of late and probably for the foreseeable. With rolling 10-day correlations near 85%, it is clear that everything for the yellow metal is driven by Fed hike expectations. After a weekend and a work day reading and reflecting on the Paris attacks and geopolitics, we expect today’s CPI number (shortly) and FOMC Minutes tomorrow to mark a return to trading. Based on positioning and feel, we have a cautious bullish outlook for gold, but are less optimistic for silver. Short covering rallies can get nasty, but either probably runs out of steam after a few percent higher.

It can sound empty, but our prayers are truly with those affected by the Paris attacks as well as those less developed parts of the world subject to this sort of horror on a far-too-frequent basis. Take heart, the good guys will win.

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Metals Thoughts: All About the Benjamins Edition


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