Commentary for Monday, Sept 8, 2014 (www.golddealer.com) – Gold closed down $13.10 today at $1252.70 reacting to a dollar that is defining gravity – the Dollar Index is now a smoking 84.22 showing a previous close of 83.85.
This is amazing really if you consider relative prices of the Dollar Index over the past 12 months – low (78.91) and high (84.35) so the dollar is now very close to year highs. Considering the euro is at 14 month lows and the S & P has set another record high it is a wonder gold did not do worse – for now we are $12.00 away from the summer low of $1240.00.
Gold was only slightly weaker overnight in Hong Kong and London – the real damage was done in the domestic market – so the bears are having a happy day.
Also the continued settling in Ukraine has helped this negative downward trend. And the pricing of crude oil has also helped the gold bears moving over the last quarter from a $105.00/barrel high to its current price of $93.29.
Gold’s 60 Day chart is not encouraging – you are looking mostly at a downward channel and today’s close of $1252.70 supports the bearish case. I would look for a short-term test of $1240.00 and perhaps even a test of the 5 year double bottom at $1200.00.
Not the end of the world because the Federal Reserve will soon end its quantitative easing program. I appreciate everyone believes this pressures gold lower but I am taking the other end of the trade in that with this albatross off the table we can move on – and if gold must move lower it will wash out what is left of the weak hands.
For now dollar strength will hold all the cards. And with the euro floundering it would make sense that the dollar should be steady to higher supported by an improving US economy.
But don’t get too carried away with continued cheaper gold – the discount to its old high will attract solid core holders. And believe me – while the short paper players are growing in strength they have little long term resolve.
Gold bullion may be resting but the bull is not retired especially as governments around the world rush to print more fiat paper money. Sooner or later that balance will tip in favor of gold and current price ranges will begin to look better and better.
Silver closed down $0.19 at $18.89 and I can’t say that this break below $19.00 has encouraged physical buyers across the counter – things remain quiet. Silver which began the year at $19.33 is within a whisper of the $18.71 early summer low and yet we have seen virtually no aggressive physical sellers.
Platinum was down $12.00 at $1398.00 and palladium was off $5.00 at $886.00.
This is from Mike Myer (Everbank World Markets) – A New Sub-Prime Bubble, Thanks To The Fed – “Federal Reserve Chief Janet Yellen recently justified the continued low interest rates by pointing out that the economy still has some weak areas and that unemployment remains high. But, there’s one area of the economy that’s certainly booming: auto sales. New car sales are on track to hit 16.5 million units sold this year, the best sales since 2006.
On the surface, this seems like great news for the economy. But, if you dig a little deeper, you’ll find some concerning trends. You see, sub-prime lending for consumers with poor credit may be the main force behind this boom in auto sales. As The New York Times reports:
“Auto loans to people with tarnished credit have risen more than 130% in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered sub-prime — people with credit scores at or below 640.”
Another Sub-Prime Crisis In The Making?
This boom in sub-prime lending is already grabbing the attention of regulators, such as the Office of the Comptroller of the Currency. Here’s a key section of a recent report from the nation’s commercial bank regulator:
“Auto lenders are pursuing growth by lengthening terms and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly monthly-payment driven, with loan terms easing to make financing more broadly available. The results have yet to show large-scale deterioration at the portfolio level, but signs of increasing risk are evident…the average loss per vehicle has risen substantially in the past two years; an indication of how longer terms can increase exposure. Average charge-off amounts are higher across all lender types over the last year.”
The traditional four-year car loans seem to have become a thing of the past. Consumers are now buying cars using loans that stretch for as long as six years. And, some of those loans carry extremely high interest rates. For example, after examining more than 100 bankruptcy court cases and hundreds of loan documents, The New York Times found some sub-prime auto loans that had interest rates exceeding 23%.
No wonder some of these sub-prime consumers are struggling to make payments. According to the latest data provided by Experian, repossessions have increased nearly 78% to an estimated 388,000 cars in the first three months of the year from the same period a year earlier. And, the number of borrowers who are more than 60 days late on their car payments also jumped in 22 states during that period. All reasons why Kevin Cole, an analyst with rating agency Standard & Poor’s, recently said of the industry: “We believe these trends could lead to higher losses and weakened profitability in a few years.”
What can explain this boom in auto sub-prime loans?
Another One Of The Fed’s Unintended Consequences
While there are many factors involved, it seems the Fed’s ultra-low interest rate policy is playing a key role in this sub-prime-lending boom. As a result of this, the current low interest rate environment is creating a lot of demand for alternative assets that pay higher yields. Wall Street banks are glad to meet that demand by creating securities through securitization, much like they did with sub-prime mortgage loans.
In other words, Wall Street is now bundling many sub-prime auto loans into complex bonds and selling them to insurance companies, mutual funds and public pension funds. And, since those securities pay a relatively high interest rate, investors who are hungry for yield are happy to buy them. As a result, in the last five years, total auto loan securitizations have surged 150%.
If consumers start defaulting on those loans, investors buying those bonds could suffer significant losses.
To be clear, I don’t expect this sub-prime crisis to pose a major threat to the financial system like the sub-prime mortgage crisis did. In 2007, the sub-prime mortgage market was worth $1.3 trillion. To put that in perspective, the entire auto loan market is worth $839 billion. Aside from being far smaller than the housing market, the car-loan market differs from mortgage lending in a key way: lenders can repossess cars that have loans in default.
So, I don’t expect the sub-prime auto-lending bubble will cripple the U.S. economy. But, it’s worrying that our economy has quickly shifted from one area supported by the Fed’s easy-money policy to another. It seems both consumers and the Fed haven’t learned much from the housing sub-prime crisis.”
I read Meyer because his insight is straight-forward. The above “bubble commentary” is relatively common in the gold market because it obviously supports the notion of physical gold ownership as an insurance against the unknown.
What I find interesting however is that this argument is a hard sell in today’s roaring stock market. To me this is exactly the right time to bring up this subject because the usual “inflation is coming” reason offered in the gold business has lost its luster.
No one saw the real estate bust and financial collapse coming in 2008. Wall Street concocted the idea using questionable real estate to back junk bonds which were in turn blessed by the auditors and sold worldwide.
Virtually no one today questions Wall Street gains pushed through the roof by the Federal Reserve’s expansion of the money supply. The supposed changes now in place because of Dodd-Frank legislation has not been scrutinized publically – any real banking changes including supposed modification in the derivative trade is so old news that no one talks about them anymore.
So why is suggesting that a portion of your saving be placed into gold bullion because the future is not even close to risk free such a hard sell? If you woke up Tuesday morning and found the DOW was down 2000 points – and panic was back in the air – would anyone really be surprised?
There is precedent and a few rumors – CNBC – “A technical analysis pattern for stock traders has pointed to an impending crash in stocks, adding to an increasing chorus of voices that have turned bearish on equities for the second half of the year.
The “Hindenburg Omen” – named after the Hindenburg disaster of 1937, in which the Zeppelin airship Hindenburg crashed and burned – is once again hovering over markets, according to Ron William, founder and principal market strategist at RW Market Advisory.”
The walk-in cash business today was back to quiet – not a surprise considering gold’s technical weakness which continues to pull silver and the platinum group metals lower. The phones did present some bargain hunting but no big players have resented themselves either buying or selling.
The GoldDealer.com Unscientific Activity Scale is a “4” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 2) (last Wednesday – 3) (last Thursday – 5) (last Friday – 3). The scale (1 through 10) is a reliable way to understand our volume numbers.
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In addition to our freshly ground organic coffee offered visitors throughout the day we have added cold bottled water, cokes and Snapple. We have also added fresh fruit in a transparent attempt to disguise our regular junk food habits – which seem to grow when things get this quiet. And it does not help that the world famous Randy’s Donuts is just down the street.
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