Gold finished Friday down $3.00 on heavy volume to 1327.60, with silver up $0.13 to 22.28 on moderate volume.  The gold/silver ratio dropped to 59.57.  Both gold and silver were down early in asia, with gold hitting 1304 and silver 21.42, and for most of the day it looked quite likely that PM would have another down day right up until noon in NY, when both gold and silver staged a strong continuous rally into the close.  Buyers have reappeared in PM.  I can't explain to my own satisfaction why they showed up, but its clear that they did, and it is a sign of a possible reversal.  Gold printed a hammer candle, and silver more or less did as well rallying off its 50 day MA.  PM trading volume was solid today and supports the case of a reversal signal.  Both gold and silver require confirmation Monday for the reversal to be valid.

I always enjoy it when prices seem to "notice" the moving averages.  Its a form of self-fulfilling prophecy; traders use the 50 as an entry point, so sure enough it acts as support on the way down - and resistance on the way up.  Not always, but often enough for them to be useful tools.

As to why this PM reversal happens three days prior to the Fed meeting - I have no idea.  The longer I watch the market, the more I believe that it is not wise to get too distracted by my own stories (i.e. tapering, no tapering, Syria, premiums, COMEX defaults, Andrew Maguire whistleblower interviews at KWN, etc) and instead just look at what the market is doing and follow that.  Buyers showed up today starting at noon, and were confident enough to bid up prices right up into the close.  That's bullish.  If they move prices higher Monday, I'll call it a reversal.  We can figure out who caused what later.

For the week gold was down $63.40 [-4.56%], and silver was down $1.61 [-6.76%], GDX was off -8.50%, and GDXJ down -9.68%.  That's a bad week any way you slice it.  While gold seems to have support around 1300 and we seem to have a reversal in play, if for some reason gold moves below 1275, our uptrend will be over for now.

The dollar moved down this week, -0.69 [-0.85%], ending up below its 200 day MA, with both the 20 EMA and the 50 MA trending down.  In the shorter timeframe the buck is trending down, but viewed from the weekly timeframe, the buck still appears to be moving up.  That said, in recent weeks the dollar's moves did not appear to be affecting gold much, if at all.

Silver's big loss on Thursday broke the gold/silver ratio into a short-term uptrend; this is a bearish sign, if it continues.

Mining shares were up on Friday; GDX +1.34% and GDXJ +1.40%, with the volume on GDX almost as heavy as it was during Thursday's big move down.  The recent pattern in mining shares over the past few weeks was often one of buying during the first hour, followed by selling throughout the day with prices closing at or near the lows for the day.  This pattern looked to be repeating itself Friday right up until noon, when mining shares followed PM in a strong rally into the close, with prices closing at their day highs.  While the GDX didn't put in a possible reversal day, one of the miners I consider "tells" for PM equities did; SLW bounced off its 50 MA and printed a Bullish Engulfing candle.  The price action along with the volume is bullish, but by itself isn't enough to signal a reversal; we need to see confirmation on Monday by share prices rising above today's closing price.

Physical Supply Indicators

* Gold premiums in Shanghai were up this week $6.15 to $10.07.  Lower gold prices once again bring out the buyers in China.  High point was $28.53 on July 1 of this year.

* The GLD ETF lost -8.11 tons of gold this week, down to 911 tons.  In January, GLD had 1350 tons.

* The COMEX lost -0.68 tons of registered gold this week, and is now down to 21.39 tons.  High for the year was 95 tons at COMEX the week before the April crash.

* Premium/Discount to NAV: Based on 16:00 EST Friday prices, gold 1323.50 and silver 22.255: CEF 14.88 -5.19% to NAV, PHYS 11.02 -0.30% to NAV, PSLV 8.83 +1.56% to NAV, all substantially lower than last week.

COMEX continues to lose gold, the GLD ETF outflow has increased, gold premiums are growing substantially; the supply picture is gold-price-positive.

It is interesting to note the contrast between physical buyers in China and the physical ETF buyers in the west.  When the price of gold drops, Shanghai gold moves into premium.  In the west, the exact opposite occurs in the ETFs - all of them move more heavily into discount when PM prices drop.

Futures Positioning

The COT report for gold has Producers increasing long exposure by (net) 7700 contracts, and Managed Money increasing short exposure by 10,500 contracts.  In silver a similar trend - Producers covered short 2500 contracts, while Managed Money increased (net) short exposure by that same amount.  Producers tend to be the smart money, and so this is overall an increasingly bullish positioning; as the price has fallen, Producers have been buying the dips.

Pan-American Silver, a large silver mining company, announced on Tuesday it would remove its hedges by end of 2013.  Currently, PAAS is short 1060 silver and 240 gold contracts.  PAAS entered into the short positions "as a short term tactical response to reduce risk during a time of extreme price volatility" i.e. they (perhaps understandably) panicked during the crash.  They sold short at an average price of 20.43 for silver and 1323 for gold.  1000 silver short contracts covered over the course of four months won't on its own cause the market to rally, but if other mining companies took similar actions and are now going to unwind their new short positions, collectively it could be a significant positive force.

And if my theory about miner hedging driving GOFO rates is correct, the unwinding of these short positions should continue to cause GOFO rates to rise modestly as well.

http://finance.yahoo.com/news/pan-american-silver-eliminate-silver-123000255.html

Were I at PAAS, I'd have covered those gold shorts today - at a profit, no less!  Silver at 21.50 might have been tempting too, at least for a portion of the position.

Moving Average Trends [20 EMA, 50 MA, 200 MA]

Gold: short term DOWN, medium term UP, long term DOWN

Silver: short term DOWN, medium term UP, long term DOWN

Gold this week moved from short term neutral to down, as did silver.  Silver remains above its 50 MA, while gold closed just below.  Both gold and silver are below their 20 EMA.  The moving averages are turning bearish.  If the uptrend is to remain in place, both gold and silver need to trade above their 50 MA.

Summary

PM has been in a 3 week retracement during this 10-week move off the June lows.  It is possible this retracement is now over, and we have put in a short term cycle low.  While the moving averages are starting to turn down because of the retracement, futures positioning is still supportive of the uptrend, as is the physical demand situation.  Miner hedging should slowly come off as panic in the mining industry subsides; that's supportive also.  The wildcard remains the Fed.  Even so, I think the relief of uncertainty regarding tapering might well prove bullish for PM.  We could end up replacing the ominous Sword of Damocles with a much less threatening Light Club of Tapering.  But that's all just speculation.

FOMC Meeting ends Wednesday, with a news release at 14:00 EST, with a press conference at 14:30.  Prepare for volatility afterwards.

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