Gold finished Friday down -13.80 on heavy volume, while silver was down -0.35 to 21.33 on moderately heavy volume.  The big move came at 0842 EST, with a massive short attack on gold driving the price down $25 through 1275 support in three minutes with 16,500 contracts traded - really huge volume.  The rebound in gold was tepid, but in silver, more substantial.  Silver continues to have more buy-side interest than gold.  The gold/silver ratio rose +0.33 to 59.66.  PM has dropped four straight days, with increasing volume each day.  Gold is through 1275 support, with the 1200 level next.  Silver remains within its trading range, looking ill but remaining short of a breakdown.  The gold/silver ratio remains in no-mans-land, providing no clues as to direction.

The dollar dropped modestly, down -0.09 [-0.11%] to 80.49, but it closed the week up +0.24 [+0.29%] overall.  While the dollar has found some support at 80, the longer term downtrend remains intact.  The 50 day MA continues to fall, the USD price level remains below the 50 MA, and an overall pattern of lower highs and lower lows remains in place.  The medium-term downtrend in the buck is theoretically supportive of gold, but it has not been much help in recent months.

On the week, gold was off -38.60 [-2.94%] while silver was down -0.42 [-1.91%].  GDX was down -4.71%, and GDXJ dropped -9.51%.  Viewed from the weekly perspective, the picture remains bearish, with the miners leading gold down.

Mining shares - with four days of downside price action in the metal, GDX didn't have a very good week.  The GDX:$GOLD ratio made a new low on Wednesday.  There might be some modest support at GDX 23, with GDX 22 representing the June lows.  A move through 22 would likely lead to more selling.  Junior miners dropping faster than seniors - that's bearish.  New cycle lows for GDX, bearish.  Dropping GDX:GLD ratio, bearish.  Its not a pretty picture right now.  As an article I read asked rhetorically, are miners the single most unloved investment class?  To give you a sense: compared against the S&P 500, GDX is down -63% over the last 52 weeks.  Now that's underperformance on steroids.

And one more thing.  We are not far away from the end of the tax year.  Tax loss selling is likely to start playing a part in the calculus of everyone who is sitting on losses in mining shares and possibly ETF gold as well.  Once we get on the other side of this in the last week of December it means there are likely to be some pretty good bargains, but starting around mid to end of November, the miners could really get hit hard by the remaining owners selling order to offset capital gains in other investments.

Physical Supply Indicators

* Golden Week is over in China: premiums in Shanghai are now $12.42, an increase of +9.87 over last week.  Lower priced gold seem to have brought out Chinese buyers.

* The GLD ETF lost -9 tons of gold this week, down to 891 tons.  In January, GLD had 1350 tons.  Dan Norcini sees GLD's dropping tonnage as a reflection of negative "western sentiment" towards gold - I don't agree with him, but I figured I'd provide a contrary view.  Certainly his view fits in with the price action since April 2013 - something to consider.  However SLV hasn't lost any silver over that time period, which is why I disagree with him.

* The COMEX lost 1.34 tons of registered gold this week, and is down to 22.44 tons.  COMEX registered has tracked sideways for the past few months, but it remains down significantly from its April peak of 92 tons.  We are almost halfway through October, and there remain 296 contracts (0.92 tons) of deliveries remaining.

* ETF Premium/Discount to NAV; gold closing (15:59 close price) of 1287.40 and silver 21.62:

CEF 14.00 -6.97% to NAV [down]
PHYS 10.48 -1.20% to NAV [down]
PSLV 8.43 +1.22% to NAV [down]
GTU 43.83 -6.96% to NAV

I'm beginning to think that the physical ETFs may be a good sentiment indicator for western paper gold investors.  Currently, CEF's discount is as large as I've seen it and that ties in with the lows in GDX:$GOLD and some of the other ratios I watch.

Four down days in gold has resulted in increasing premiums in Shanghai.  At the same time, gold continues to leave GLD.  COMEX looks well supplied through October, but it would seem that physical supply pressure is increasing as the price drops.  This makes sense to me.

Futures Positioning

There was no COT report this week and last week; our friends in the CFTC that produce this report were deemed non-essential by the Executive Branch.

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

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

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

No change in trend this week.  Although silver price has dropped below its 50 day MA, it hasn't been long enough for the 50 MA to start falling just yet.  Silver's still-rising 50 MA is further evidence of my claim that silver has been doing substantially better than gold during this downtrend.

Fed Taper/No-Taper: Bank Credit

So here's something I spotted the other day: perhaps one unmentioned reason why the Fed decided not to taper.  In our system, money is created by banks, loaning money to willing borrowers at interest.  When money is repaid faster than it is borrowed, that's deflationary, and if there is one thing the Fed dislikes more than gold, its deflation.  Here's a monthly timeseries from FRED that summarizes what is happening with credit creation across commercial banks in the US.   It shows deflation.  Compare that to what was happening from mid-2011 through early-2013.  As long as this graph points down, I'm going to guess: no taper.

Summary

Gold broke support on Friday.  Whether that's a plot by the Fed or just a bear raid by big money looking to cash in on that descending triangle formation, its impossible to say from the outside looking in.  I certainly wasn't invited to the meeting where it was all planned out.  What is clear is that gold is now below its 1275 support level and that will most likely bring out even more sellers on the COMEX and GLD.  Traders will continue to short the market and sell rallies until that strategy stops working.  And that means, the beatings will most likely continue until the price of gold gets low enough to attract enough buyers in GLD and COMEX to swamp the sellers and drive the price back up.

An alternate scenario is that the buyers in silver at COMEX and SLV, who have appeared a lot more often recently than the gold buyers, decide that silver at 21.33 is so cheap they want to bid it higher.  Silver still maintains a pattern of higher lows and a rising 50 day MA even after two months of downtrend, so it is not beyond the realm of possibility that silver ends up dragging gold back up.

Miners suggest more downside ahead.  There is really no bullish case to be made there at all.  New lows, declining GDX:$GOLD ratio, and a falling GDXJ:GDX ratio all point downhill.  A few miners show accumulation, but the broad cross section of them do not.

Physical gold buying seems to have increased with the price decline.  This will eventually make itself felt in COMEX, but it will take time.

Futures positioning most likely remains bullish (with no COT report, all we can do is guess), yet we must await western hot money interest in order to push prices significantly higher.

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