Commentary for Thursday, June 4, 2015 – Gold closed down $9.80 today on the COMEX at $1174.90. Looks like a 5 week low to me and makes for the second day of red ink but I would not be jumping out the window just yet.
This market is so range-bound that it defies a logical trading model and we are stuck in a range between $1200.00 and $1150.00. We have tested $1180.00 4 times since last March and in each case the short paper action covered failing to break into lower territory and the market reacted just like any other oversold commodity.
The Dollar Index has been generally weaker over the past 5 days selling off from the 97.00 range but this short-trend has stabilized around 95.00 and todays reading looks like more of the same around 95.43 so prices are flattening out. But none of this has helped gold – which is perplexing to many. I think the reason is that traders will seize on any news to reinforce a trading bias and today the trading bias is neutral to negative for gold.
A good example of this mind-set is the decrease in jobless numbers today. This reinforces the belief that the Federal Reserve will soon raise interest rates in our recovering economy. Even the IMF has thrown its opinion in the pot today claiming that the US should not raise interest rates in 2016. But no matter – a coming interest rate hike is etched into the trading model and this hurts the price of gold and trumps even a weaker dollar for the time being. The decrease in jobless numbers today was the overriding reason gold was weaker.
The US Jobs Report coming out tomorrow reinforces this notion of higher interest rates with expectations that the US created 226,000 new jobs last month – a solid showing.
And the debt problems in Greece have also not changed the gold traders mind – for now. Greece today rejected a proposal by the International Monetary Fund, ECB, and Euro Commission that would have given Greece access to the $7 billion euro lending authority. Greece wants the money but has basically said that they don’t like the austerity desired by the lenders.
There is a bit of chip rattling going on here – earlier in the week Greece claimed it did not have the 300 million euros needed for their Friday payment but now they suggest the check is in the mail. This has allayed the fear of an immediate default. Whether or not the Greece debt problem is once again able to move the price of gold higher remains to be seen – but for now this problem looks like a no-show.
Silver closed down $0.37 at $16.09. This resulted in the expected rise in silver bullion and there is also more interest in $1000 face 90% silver bags. This has always been one of my old-time favorites for the last 40 years. It’s legal tender, recognized around the world and its one of the few silver bullion choices which the premium can rise substantially in a higher demand market.
Platinum closed down $4.00 at $1100.00 and palladium was off $2.00 at $755.00.
Myra Saefong ( MarketWatch) makes a number of important points:
Gold futures headed lower for a second straight session on Thursday, with prices dropping below the support level of $1,180 an ounce after data showed the number of workers making first-time claims for jobless benefits fell again.
Gold losses deepened after data showed 276,000 people applied for unemployment benefits in the week ended May 30, down 8,000 from the previous week and reflecting continued improvement in the labor market.
The data feed expectations for a strong U.S. jobs report on Friday, analysts said. That would reinforce expectations the Federal Reserve will move sooner rather than later to hike interest rates, a potential negative for gold, which doesn’t bear interest. See economic calendar.
The “link to the euro EURUSD, +0.0798% and weaker dollar DXY, -0.14% is not working at the moment,” said Julian Phillips, founder of and contributor to GoldForecaster.com. He expects Asian demand to “come in at these prices, but it is clear that New York does not reflect global demand — only U.S. demand.”
“Because the volumes are so thin, we can expect large price moves of little significance,” Phillips said.
He explained that the banks have largely exited Comex and physical volumes either go direct to buyers or through London. “London is thinning out over time too as China develops the Shanghai Gold Exchange,” he said.
Meanwhile, hopes for a deal to resolve a long-running debt showdown between Greece and its international creditors has robbed gold of haven support, analysts said. “The belief that Greece is close to a deal on its debt restructuring has taken the fear trade off the table,” wrote Peter Hug, global trading director at Kitco Metals.
This according to Coin World – The U.S. Mint’s authorized purchasers bought 29 percent fewer American Eagle 1-ounce silver bullion coins in May than in April. Sales of American Eagle gold bullion coins dropped 27 percent over the same period.
The Mint has yet to begin offering any 2015 American Eagle 1-ounce platinum bullion coins for sale. The platinum bullion coins were last offered in October 2014.
The U.S. Mint recorded May sales of 2,023,500 American Eagle silver dollar bullion coins, down 828,000 coins from the 2,851,500 coins it reported sold in April.
During the first five months of calendar year 2015, the U.S. Mint recorded sales of 16,946,000 American Eagle silver dollar bullion coins. Another 775,000 coins were sold during the first two days of June.
January is currently the highest sales month, with 5.53 million of the silver coins sold. The current monthly sales average of 3,389,200 coins is slower than the Mint’s record pace of 2014, when a record 44,006,000 silver American Eagles were sold.
American Eagle gold bullion coin sales totaled 21,500 ounces in May, down 8,000 ounces from April. May sales reflect 13,500 ounces in 1-ounce coins; 1,500 ounces in half-ounce coins (3,000 coins); 2,500 ounces in quarter-ounce coins (10,000 coins) and 4,000 ounces in tenth-ounce coins (40,000 coins).
American Eagle bullion coins are not sold directly to the general public from the U.S. Mint. The coins are sold to the network of authorized purchasers who acquire the coins at the closing p.m. price on the metals market on a given day plus a small premium. The coins are then resold to other dealers and the public for small markups.
Continue to watch China and its already substantial interest in gold bullion. And if you believe all they have going for them is cheap labor and huge manufacturing capacity consider the following from Chuck Butler (EverBank/Pfennig) – “China is one such contradiction. For years in these pages, we’ve focused on their economic rise, despite having questions about its sustainability. But despite their economy slowing recently, China’s innovators are making leaps and bounds. It’s estimated that this year, the country will graduate 17,000 postdoctoral fellows in science, math and engineering. That’s a 60% increase from 2010. They’re building supercomputers that rival IBM’s and 3-D printers big enough to print air wings. The Chinese also granted 217,000 patents last year — a 26% increase in the past two years alone. Oh, and did you hear that China opened up their repo market? Yes, according to the Bloomberg, “overseas branches of its biggest banks, and possibly some foreign lenders, will be able to borrow renminbi / yuan via repurchase agreements (repo) and us the proceeds abroad.” So, in the first 6 months of this year, China has opened its stock, bond and repo markets. Can anyone say, “to gain a wider distribution of the renminbi / yuan?” I knew you could!”
This is our usual Thursday Chicago Mercantile Exchange report covering the last 5 trading days – so we are looking at the trading volume numbers for the “August” Gold contract: Thursday 5/28 (257,392) – Friday 5/29 (257,964) – Monday 6/1 258,720 – Tuesday 6/2 (261,572) – Wednesday 6/3 (265,427). These numbers are on the higher side but keep in mind we are in the new active trading month.
Unless you have been interested in gold for some time you may not have heard of the Mises Institute founded in 1982. The genesis of the institute however has been around for a much longer time and is based on the life work of Ludwig von Mises (1881-1972) a leader of the Austrian School of economic thought. You can visit the Mises Institute at www.mises.org and their Mises Daily is free. A few visits might illustrate why extreme government intervention in the free enterprise system leads the world down a dangerous financial road.
This site will not make a case that owning gold or silver bullion is necessary in today’s world. But Mises has been referenced in the world of gold ownership and commentary since I became interested in why our dollar is becoming less valuable while at the same time the price of gold and silver was moving higher. Take a look – you might find this school of economic thought interesting and it could provide answers as to why, sooner or later the world of quantitative easing must lead to the next financial blowup.
This from Frank Hollenbeck (The Mises Institute) – The ECB and the Negative-Interest-Rate Game – The ECB is now two months into its bond buying binge but the European Central Bank (ECB) never clearly explained the goal and purpose of its own version of quantitative easing. The deflation bogeyman was never a serious threat, nor was it based on any solid theoretical foundation.
A possible justification may have been to make the 1 percent much wealthier so that their extravagant lifestyles trickled benefits down to the average working stiff. Another possible reason may have been to lower the value of the euro to benefit exporters at the expense of the rest of European consumers, the middle class, and the poor. This would be a violation of the unwritten rule that monetary policy should not be targeting the value of the currency directly.
Of course, when the rule maker breaks his own rules, it reduces the importance of all rules. The commitment not to print to finance government spending has gone to the same graveyard as the 60 percent debt-to-GDP rule or the under-3 percent budget deficit rule. Meanwhile, the ECB’s current actions are making a mockery of the alleged independence of central banking.
Central Banks Are Buying Up Government Debt – Under normal conditions, economists take it for granted that interest rates cannot drop below zero. Instead of paying someone to borrow your money, you could just as easily stuff the money in your mattress. So why is so much of European government debt actively trading at negative rates? Why would you take money out of your mattress and pay 1,060 euros for something that will only get 1,000 euros in a year?
The answer is simple: buying government debt can make sense if you have no intention of holding the debt to maturity and think you can find a “greater fool” who will buy the debt from you. That greater fool is often the European Central Bank which, like many other central banks around the globe, is buying up government debt to keep debt-financed programs alive for another day.
And now, faced with very low or even negative interest rates on government debt, governments have been rushing to issue even more debt before announcing, in all likelihood, more vote-getting government expenditures. So, let’s not be fooled by the ECB’s charade that its actions are not indirectly financing new government expenditures.
Why Aren’t Banks Lending More? – What about bank lending? Isn’t the ECB’s quantitative easing and negative-interest-rate policy spurring a Europe wide surge in borrowing? After all, negative interest rates are supposed to have the effect of discouraging saving and encouraging movement away from presumably safe government debt into other types of borrowing.
You can lead a horse to water, but you cannot make him drink, so the fact that interest rates are at rock bottom levels is not necessarily enough to spur a frenzy of borrowing by businesses in the face of an uncertain economic future.
Banks also face new hurdles. Not surprisingly, the ECB’s current actions are, in reality, being somewhat defeated by its previous monetary policy. Banks, as financial intermediaries, make money between deposit rates and lending rates. They borrow short term and lend long term.
By setting negative rates on reserves, however, and by inducing negative interest rates on government bonds, the ECB has created a significant compression in yields. This has reduced bank profits. Banks must now charge customers for deposits. Large customers such as hedge funds and mutual funds have been withdrawing funds, further drawing down bank profits.
For example, several large pension funds in Switzerland have recently rediscovered the advantages of the mattress. As Pater Tenebrarum noted, one fund manager showed that for every CHF 10 million in pension money, his fund would save CHF 25,000 – in spite of the costs involved in vault rent, cash transportation and other expenses.
Furthermore, Basel III forces banks to hold more risk-free assets. Banks have been forced to load up on government debt at negative rates. This also has been squeezing profits. Does anyone really expect European banks to lend more in such an economic environment?
What’s the Endgame? – The real objective of the ECB’s current money printing is essentially to kick the can down the road. It won’t solve Europe’s deep-seated structural problems. It will only postpone the inevitable and will also make the final reckoning much, much worse. Printing intrinsically worthless paper will not solve Europe’s fundamental problem of supply being misaligned with demand – a misalignment created by government’s incessant interference with the workings of the price system.
With this new phase of monetary expansion, Europe is slowly walking down the same slippery slope toward hyperinflation that is the inevitable endgame of all fiat currency systems.
In this, Germany missed an opportunity to set the ship straight. It should have made it crystal clear that any purchase of government bonds by the ECB (which violates European law) would have meant Germany’s leaving the currency union and reestablishing the deutschmark under German control. But then again, the German government is not the German people. Such quantitative easing makes it much easier to finance government spending, and the resulting inflation will lower the real value of the government’s existing debt. Of course, this is all for short-term benefits to the government, with long-term costs to everyone else.
The walk-in cash trade today was relatively active and considering we in the “no buzz” zone I am happy with that. The phones were average with a number of larger gold bullion deals – the public always likes cheaper.
The GoldDealer.com Unscientific Activity Scale is a “ 4” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Friday – 7) (Monday – 4) (Tuesday – 5) (Wednesday – 7). The scale (1 through 10) is a reliable way to understand our volume numbers. The Activity Scale is weighted and is not necessarily real time – meaning we could be busy and see a low number – or be slow and see a high number. This is true because of the way our computer runs what we call the “book”.
Our “activity” is better understood from a wider point of view. If the numbers are generally increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.
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