Summary

  • investor sentiment slowly demoralized since May
  • major gold miner mishedged production does not help matters
  • metals continue to focus on US/ China Trade War taking cues from CNY devaluation instead of usual USD/JPY relationship
  • CoT reports imply being short bigger risk as bulls wait for an event-driven short covering rally

[Edit:  The Opportunistic Trader is now pleased to offer exclusive access to Vince’s research and trades  previously reserved for  his fund and a few select clients- OT]

Spot Gold Monthly- It Could Be  Worse

Overview

Spot Gold  closed lower for 7 of the last 8 weeks as of this report, while Silver  has had 8 straight down weeks. The culprit continues to be a lack of physical buying in Asia due  to protracted trade issues between the US and China among others. Industrial metals have fared the worst with Copper dropping an astounding 19.6% from high to low these past 8 weeks. Gold, meanwhile has held up better in no small part due to its monetary qualities over the same period down 8% peak to trough. Silver is the middle child  down 12% from hi to low of this move.

 

Macro Price Drivers

Trade tariffs, Brexit, and mismanaged mines are the main drivers we see. The most important is the ongoing  trade war with China. That will be our focus in today’s report

 

China Syndrome

The US is levying trade tariffs to tax goods imported here from China. This leads to a drop in China’s  raw material demand. To partly counter those tariffs, China has devalued the CNY vs USD thereby making Chinese goods less expensive in USD terms.

Too simplify things: if the US levies  an import tax of 10% on Chinese goods; then  the PBOC could devalue the Yuan by 10% to offset said tax. The PBOC has done just that by devaluing  the CNY about 9% since may. Problem solved right? Wrong. This presents a real problem for Chinese businesses.

China’s domestic demand for finished goods cannot offset a lack of  US consumer demand. There is no customer to replace the US currently. And what is to stop the US from raising tariffs  higher? The result is China earnings could plummet. The Chinese equity markets are saying just that.

The effect of CNY debasing has helped obliterate China’s equity markets around 17% since May when the tariff winds began blowing. Meanwhile the S&P 500 is up over 6% during the same time period.

 

Gold Shorts Picking Up Pennies in Front of Steamrollers Now?

Absent an event like a favorable  resolution to this trade mess, precious metals will meet selling in every bounce. Between miners who have not hedged a la Goldcorp, confident shorts, and a dearth of fresh investor interest from China or elsewhere things look abysmal for bulls. But do you really want to play short now? Friday’s activity tells us that people are less inclined to go home short than previous  weeks.

 

July Trade Results

Trades entered for Client Global Macro Funds and Echobay Prop Account

Vector Short Term Momentum System (Gold and Silver)

  • Buy Signals: of the five 1-3 day buy signals we executed in July, 4 were not profitable. Their average duration was 4 hours. Total losses were 0.5% of AUM
  • Sell Signals: there were two trades entered. Not only were they profitable, but per system rules we booked profits well before the selloffs ended. Average duration was 8 hours. Total profits were 0.3% AUM

This is a sign that secular bearishness trumped short term momentum signals. Or as the old men used to say.. “there is no support in a bear market, only resistance”.

 

Opposite Year for Metals?

In the last few  years, Gold has made its annual lows in spring and its highs in late summer. This year that is not the case. But Friday we saw and confirmed signs that shorts are becoming impatient and said as much in Opportunistic Trader’s Live Stream chat room.

  1. We saw fresh money buying Platinum Thursday. This is significant because past Gold rallies frequently start in the “white” metals. Platinum was up while every other metal was down yesterday.
  2. Based on information and observation, fresh money put on a  Platinum/ Gold spread yesterday buying PL.

This activity above is a definite sign of nascent buy side interest if nothing else. So we watched and waited. It just might be opposite year for gold.

Spot Gold Daily-YOU ARE HERE

Sector Follow Through

Today saw every metal stronger. This is in part a function of undercapitalised shorts wanting to get flat in case of an event filled weekend. And that is how it starts: Too many people in one side of the boat panic when one guy walks to the other side. Here is what is on our radar next week in what could  be the start of a nice short covering rally.

On Our Radar Next Week

Gold (Dec Futures)

  • Buying Strength Above $1229: We will be watching volume  numbers near $1229 with an eye to buy for a 2-6 week hold. The risk would be new contract lows. This is not a vector  trade. It is an RTM (regress to the mean) trade.
  • Selling Strength near $1229: this is the corollary to the first trade. If you are bullish  above $1229, you are bearish below. Any signal to sell here would be a short term play and Vector System driven
  • Selling Weakness: We will not pick up pennies in front of possible steamrollers.  Technically it is well within reason the market could plummet to the $1140 area. If we were inclined to sell weakness, it would be expressed in  long Put spreads only.
  • Buying Weakness: any dip near the lows is a valid risk/reward play especially with funds near or at ATH short positions and commercials much less short than usual. Commercials are actually long in Platinum. That said, averaging down is not for us. We’d rather buy and get stopped out 5x on a tight stop a la Tudor Jones than add to losing positions.

Silver (Dec Futures)

Silver may be the best of all worlds in a reversal.  Industrial  qualities will move it in sympathy with Platinum and Copper. It also shares “moneyness” qualities with Gold. Equally important, while not as liquid as Gold, it is far more liquid than the other industrial metals. Silver is the metal of choice for us if a sector rally starts in the PGMs.

  • As believers in the motto “if you are bullish Gold, buy Silver” we will assess on the fly if something hits up
  • If a trade signal is triggered in Gold, we will look to Silver for confirmation and choose accordingly
  • Silver is an industrial metal, and although not a PGM it does switch allegiances back and forth between Gold and  PGMs
  • If PGMs rise and Gold does lags, Silver will be the preferred choice of entry if it gives a system trade alert

All trade alerts will be posted in the live chat for subscribers on OpportunisticTrader.com

Technical Analysis

Courtesy of Moor Analytics Professional Tools

Support and Resistance

Directional Opinion:

On a macro basis:  We broke above a well-formed macro line in the week of 8/7/17 that came in at 12629.  The break above here projects this upward $109 minimum, $420 (+) maximum—$330 of which will likely be attained within 3 months (if we are going to see it).  This had been back in play preliminarily since the open on 12/14/17—we have seen $105.8 of this, and fully since the break above 12755-56–we have seen $89.8 of this; but the 4/11/18 failure of 13622-23 put this on hold.  This line comes in at 11536 this week.  The decent trade below 13356-51 projects this downward $32 minimum, $53 (+) maximum. We have seen $122.6 of this so far. We have seen $90.2 of the renewed pressure we are looking for from the failure of 13027. The solid trade below 12731-27 projects this downward $103 (+). We have seen $60.2 of this so far.  I would be aware of possible key exhaustion areas for this move down from 13254 that come in at 12146-20 and 12066-47–one of which we may see a multi-day correction from (the lower of these is likely the stronger of the two).

On a short-term basis:  The decent trade below 12346 (+1 tic per/hour) projects this downward $8 minimum, $19 (+) maximum.  We have attained $22.1 of this. The decent trade below 12230-32 (+.4 of a tic per/hour) projects this downward $14 minimum, $53 (+) maximum (keeping in mind this has the potential of getting cut short at one of the exhaustion levels); but if we break back above decently, look for decent short covering to come in, likely for days–this will come in at 12232-40 today. A decent break above 12301 (-.8 of a tic per/hour starting at 8:20am) will project this upward $18 (+). If we break above here decently and back below decently, look for decent profit taking to come in.

Upside:  Sell against 12232-40; get long on a decent penetration and look for decent short covering to come in.  Get long on a decent penetration above 12301 (-1 tic per/hour starting at 8:20am), or pullback thereafter, and look for the move upward mentioned above.  If we break above here decently and back below decently, look for decent profit taking to come in. Get long above 12378.  If we break above here and back below, look for profit taking to come in. If we break above 12446-47 and back below, look for profit taking to come in.  Sell against a combination of the 12482-501 area and the 12497-502 (+1 tic per/hour starting at 8:20am) line; get long above the line on a decent penetration and look for decent continued strength to come in.  Sell against 12557-63 on the way up.  If we break above here and back below, look for profit taking.  

Downside:   Look for possible exhaustion in the 12146-20 area.   Buy against/into 12066-47 as a possible exhaustion area for a significant bounce; get short below. If we break below here and back above, look for short covering to come in to come in. Buy against 11968-47; get short below (a milder suggestion).  If we break below here, or even just below 11968, and back above—look for short covering to come in. Buy against/into 11823-797. If we break below here and back above, look for short covering to come in to come in.

Moor Analytics. Phone 646-708-4612

Note to first-time readers: Michael’s terminology is repetitive and plain intentionally. It is not a sales tool. His reports are written for professionals If you’d like help translating, look us up on the chat Monday.-  Vince

Bottom Line: Don’t be short PL this week. The next $50 may be lower, but it is starting to feel like the next $500 is higher.

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Personal Note: Since this is my inaugural post on “The OT” I feel it appropriate to say what an honor it is to join Larry Benedict’s (of Market Wizard fame) team for active traders. Being able to share ideas with like-minded people while helping individual investors is cutting edge stuff. Larry has created a  think-tank environment for traders of all types.

Good Luck
VBL

Twitter: @VincentLanci

About the Author:

Vince Lanci has 28+ years’ experience trading Commodity Derivatives. Through his Echobay entity, Mr. Lanci manages family assets and advises multi-billion dollar macro funds on Gold strategies. Over the years, his expertise and testimony have been requested in energy, precious metals, and derivative fraud cases. Lanci is known for his passion in identifying unfairness in market structure and uneven playing fields. He is a frequent contributor to Zerohedge and Marketslant on such topics. Vince contributes to Bloomberg and Reuters finance articles as well. He continues to lead the Soren K. Group of writers on Marketslant.

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