Commentary for Thursday, Sept 18, 2014 – Gold closed down $8.70 at $1225.70 in action which was initially weaker but was eventually supported by a short-covering rally as short traders covered positions taking profits and moving to the sidelines.
The gold market has been generally negative since early September – so short traders are sitting on $70.00 in profits – this would portend more short covering rallies as the result of yesterday’s FOMC data is further evaluated. The further reduction ($10 billion) was expected as the quantitative easing program comes to an end (October) – but the market was really looking for interest rate hints. In absence of this we are back to the old story less quantitative easing does not support gold and so the bears remain in charge.
Silver closed down $0.21 at $18.45 – our across the counter physical market still looks sluggish even at these discount prices. But the sum of all silver Exchange Traded Funds this week gained 2,401,835 ounces of silver.
Platinum moved lower by $13.00 at $1350.00 and palladium was off by $7.00 at $831.00.
Chris Gaffney (EverBank World Markets) is always worth reading – FOMC statement gives the markets what they want – “Good Day! And welcome to Thursday. The much awaited FOMC September meeting came to a close yesterday, and Chairman Yellen tried her best to give the markets what they wanted. The dollar and US equities climbed to record highs while the bond market and precious metals sold off. Today could turn out to be a historic one as many of the Scotts have already cast their vote for or against independence. The results of this vote could have major implications not only on the UK, but across the globe. Unfortunately we won’t see any results from the vote until tomorrow morning, so the markets will continue to trade on yesterday’s FOMC decision and today’s data which includes the weekly jobs numbers along with some housing data.
Yesterday morning started with a surprisingly weak CPI reading here in the US. US consumer prices fell for the first time in nearly 1 1/2 years in August, dropping .2% after a modest .1% increase in the previous month. Expectations were for a flat MOM number due to falling gas prices, but the negative number surprised most market watchers. This set up the FOMC announcement, which saw sentiment shift yesterday afternoon from expecting a change in the language to a common thought that the ‘considerable time’ qualifier would stay in the FOMC statement.
The theory is that without inflation pressures, there is no reason for the Federal Open Markets Committee to start to raise rates. We always get a number of readers who point out the fact that inflation is alive and well in the US – just look at the shrinking size of goods, or increases in health care, education and food. But the ‘official’ numbers don’t reflect the reality; and the FOMC members use these official numbers to make their decisions so we have to pay attention to them in order to try read what the markets will do. The Year on Year numbers did show a slight increase in the CPI during August but the 1.7% reading was the smallest YOY increase in five months.
Janet Yellen has pointed to the labor markets as the key to when the FOMC will begin to increase rates, and yesterday she re-iterated her views that there are many different data points which are involved in judging the health of labor. Average Hourly Earnings is one of these pieces of the puzzle and yesterday’s data showed earnings increased .4% in August a number which matches the yearly increase. This morning we are expected to see another week of over 300,000 initial jobless claims – another sign that there is still slack in the labor markets. We will also get a look at housing starts and building permits in August, both of which are expected to show decreases in their MoM figures. The inflation numbers released this week along with some of the recent data on labor and housing indicate that concerns about deflation risks are still somewhat valid. And without inflationary pressures, there is little to force action by the FOMC.
And from my reading of our Fed Chairman, there will need to be a good reason in order for her to risk the fragile US recovery with an early increase in interest rates. Janet Yellen has always been known to be a dove, and nothing I read or heard yesterday leads me to believe she has become any more hawkish during her short tenure at the helm of the Fed.
So you are probably asking yourself ‘so why did the currency and commodity markets sell off so sharply if the language of the Fed statement was largely unchanged’? The answer is in the accompanying estimates of where interest rates will be in the coming years. All of the voting members give their predictions of interest rates, inflation rates, and growth through 2017. All of this data is plotted on a ‘dot graph’ so that their estimates can remain anonymous and the averages of these estimates accompany the FOMC statement. Four of the 17 participants saw the fed funds rising to at least 4% at the end of 2017 and another six see it resting between 3.5% and 4%. But the numbers which seemed to drive currency and metals investors were the interest rate estimates for the end of 2015. For the end of next year, the median projection was 1.375% compared to a 1.125% estimate in June. So while interest rates may not start rising any sooner than previously thought, the increases once they begin are expected to come a bit faster.
The higher interest rates were what the dollar bulls focused on, and the dollar index rallied to a 14 month high. Jack Stapleton shouted across the floor from the Infinity desk to let me know the yen had hit a six year low vs. the US$ after the FOMC announcement. The yen hit 108.10 yesterday and continued to weaken overnight in the Asian markets. The emerging market currencies were some of the hardest hit following the FOMC meeting as investors worried US interest rates would rise more rapidly than previously predicted. Many of these emerging markets attract investment dollars with positive interest rate differentials, so any indication that these differentials could narrow is bad news for these high yielding currencies. The Brazilian real and Russian Ruble were two of the worst performing currencies as the rate differentials added to already negative sentiment.”
Lamenting the fact that gold is moving lower is good – it gives everyone a chance to get into the act and it supplies another needed dynamic – interest. A market which is generally trending lower runs the risk of becoming invisible.
The physical gold market splits into two opposing voices – neither of which makes any sense. The first group are those who will not give up on the old rhetoric – inflation is coming back and gold is going to $4000.00 – run for cover while you still have the chance. This argument is dead for now so get over it – resurrection is possible but in the short term move on.
The second group claim governments of the world are conspiring to rob the masses – no one can be trusted and therefore place all your money in gold under a rock. When everyone is making a fortune in the stock market this group sounds disconnected.
Of course both groups get some marginal attention but for the most part any real gold discussion gets put on the back burner.
Today’s early dip in the price of gold was simply the expected follow through – from yesterday’s FOMC decision to cut quantitative easing. That being said the expected test of the $1200.00 support line was interrupted as early morning headlines seems to contradict the notion that all is well that ends well with quantitative easing.
On the positive side supporting gold we have – The Philadelphia Fed Manufacturing Index Slides – The Scottish Referendum Causes Uncertainty – US Housing Starts Fall 14% – China Opens Gold Market to Foreigners – US Dollar Mixed after FOMC Rally.
On the negative side consider – Gold Prices Hit Eight Month Low – US Weekly Jobless Fall.
So what should you do? Just be patient and watch two important metrics – dollar strength and whether gold holds the important $1200.00 level.
If the dollar is on some kind of messianic mission there is nothing which will keep gold above $1200.00 – but physical demand will support the move to lower ground. And like I have pointed out many times a triple bottom here would be big for gold as real physical demand takes over through 2015.
Expect somewhat weaker prices – even with a pickup in physical demand because we have still not rid ourselves from the bearish talk created over the end of quantitative easing. Again – QE is ending – good riddance – now what is the relative gold commentary.
What everyone wants to know is whether $1200.00 was the bottom of the rather large correction in the price of gold? Who knows for sure – but one thing should be kept in mind – no one really knows the ultimate reality created by our massive quantitative easing program. And the Europeans are about to jump off the same cliff – so what financial constant remains?
I think the answer has to be physical gold – and if that constant is cheaper why not just take advantage of a good financial opportunity?
We are a day late on our usual Wednesday report which covers the movement of all Exchange Traded Funds – this is a handy gage to get a feel of another physical market alternative.
Gold Exchange Traded Funds: Total as of 9-10-2014 was 54,692,185. That number this week (9-17-14) was 54,578,585 ounces so over the last week we dropped 113,600 ounces of gold.
It might also be interesting to note that in 2013 the record high for all gold ETF’s was 85,112,855 ounces. In 2014 the record low was 54,773,273 ounces.
All Silver Exchange Traded Funds: Total as of 9-10-14 was 634,484,694. That number this week (9-17-14) was 636,886,529 ounces so over the last week we gained 2,401,835 ounces of silver.
All Platinum Exchange Traded Funds: Total as of 9-10-14 was 2,759,646 ounces. That number this week (9-17-14) was 2,747,814 ounces so over the last week we dropped 11,832 ounces of platinum.
All Palladium Exchange Traded Funds: Total as of 9-10-14 was 2,952,391 ounces. That number this week (9-17-14) was 2,960,083 ounces so over the last week we gained 7,692 ounces of palladium.
This post by Paul Gilkes (Coind World) is interesting – Gold owned and stored by the United States Treasury valued in trillions of dollars – Worth calculated at ‘official’ price of $42.2222 per fine troy ounce – The worth of the gold held by the United States Treasury would be valued at more than $338 trillion if the worth was calculated using the spot price of the metal per troy ounce.
The $338 trillion figure was rendered by multiplying the Sept. 16 closing spot price of gold on the London market at $1,232.25 per troy ounce by the 274,951,736.798 fine troy ounces of Treasury-owned gold in Treasury and Federal Reserve Bank storage.
But the current value as kept on government ledgers is just over $11.6 trillion, since the calculation is based on an official price of $42.2222 per fine troy ounce of pure gold.
The statutory price of gold has been $42.2222 per fine troy ounce since 1973.
U.S. Treasury-owned gold as reported by the Treasury’s Bureau of the Fiscal Service:
??Reflects gold bullion and gold coins owned by the federal government.
??Summarizes the fine troy ounces and the book value of gold held by various facilities.
??Identifies the value of gold coins and bullion on display at Federal Reserve banks; coins and bullion in reserve at the Federal Reserve Bank of New York; and gold held by U.S. Mint facilities.
The Federal Reserve does not own gold. The Gold Reserve Act of 1934 required the Federal Reserve System to transfer ownership of all of its gold to the Department of the Treasury.
The Treasury report from the Bureau of Fiscal Service states that the highest quantity of gold is stored at the Fort Knox Bullion Depository in Kentucky, with 147,342,858.382 fine troy ounces. The Fort Knox total includes 10 1933 Saint-Gaudens gold $20 double eagles and 12 Proof .9999 fine gold 2000-W Sacagawea dollars.
The walk-in cash business today was a bit more hurried than yesterday and there was a pop in the cash sale of 1 oz gold bars. The phone trade was on the slow side.
The GoldDealer.com Unscientific Activity Scale is a “3” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Thursday – 5) (last Friday – 7) (Monday – 6) (Tuesday – 4) (Wednesday – 3). The scale (1 through 10) is a reliable way to understand our volume numbers.
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Our four flat screens downstairs with live independent pricing (BullionDesk.com) are a big hit with the cash trade. Live pricing moves all the buy/sell product prices on a real time basis. Yes – you can visit the store with cash and walk away with your product. Or you can bring product to the store and walk away with cash. When buying from us remember if you exceed $10,000 in cash (the real green kind) a Federal Form is necessary.
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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