Commentary for Wednesday, June 10, 2015 – Gold closed up $8.80 at $1186.10 on the Comex today but I think all the usual reasons for a higher price are a bit of window dressing.
There is a lot less to the recent rally in gold – that’s right, less. At this point commentators are rolling out the usual suspects – the Greek debt scare, the somewhat weaker dollar, safe haven buying – China and India gold imports – well, you get the picture.
Look at the 30 day price chart and you will see that gold topped $1220.00 in mid-May and has trended lower since – turning around just above $1170.00 a few days ago and moving higher.
To me this now looks like the same old pattern we have seen on three occasions this past 6 months – a short-covering rally in which traders continue to try and break down the price of gold in the $1140.00 to $1160.00 range.
All the additional rhetoric is thrown in after the fact – the possible Greek default will never happen – real Asian buying provides solid support in this price range and central banks of the world also continue to accumulate at these lower levels.
The dollar is a threat but even this might turn out to be a paper tiger considering the possible fallout in Europe. The Dollar Index closed yesterday around 95.19 and is now trading at 94.70 so we are somewhat weaker – but look at the 6 month picture – we have flattened out around 95.00. It could be as much as 20% overvalued but as of this writing it is still very strong.
So I think we are still range-bound in gold trading $1150.00 and $1200.00 waiting for the other shoe to drop. This is the most reasonable picture, subject to change of course because the outcome might not be what typical traders think, namely a lower gold market based on a deteriorating technical price picture.
An alternative view might follow a returning inflation guideline – admittedly not popular today but nonetheless a real possibility. The reason the Federal Reserve is always harping on their inflation guideline is because they are worried about what happens when the money supply is greatly inflated. And so is every other central bank in the world – Japan, England the EU all watch that inflation number like hawks.
So are inflation numbers creeping higher? Not really but all central banks know if they act too late in tightening the money supply the inflation genie becomes a real problem. The common wisdom is that the banks are about 6 months behind the curve meaning that if they are looking for a result this December they must act now. But they also know that much can be accomplished with a little saber rattling. My point being that everyone is looking behind them when it comes to inflation numbers. And the turnaround could be closed than you think.
So just a supposition in a world which knows inflation is not a problem today but wonders about the near term. The stock market is roaring, the real estate market is roaring, money is cheap and has been since 2008, central banks of the world are printing like mad and the US economy is beginning to build steam. You are seeing all those goofy ads for real estate refinancing (100% – no problem) return – does this sound familiar? Does not this sound like a return of inflation should at least be a consideration?
I have said this before but we own the ethnic gold trade in Los Angeles – which leads to some interesting conversations. Here is one which took place over our counter yesterday – one customer asks another customer “Why the Indians are so enamored with gold?” Keep in mind this group may be one of the smartest and well educated in the country so when you ask a question like this don’t expect an answer which centers on “We just like gold.” The real answer was something like this – “in 1966 it took 4.76 rupees to buy a dollar – now it takes 64 rupees to get that same dollar and the dollar has also declined significantly since 1966. So which is the better value, the rupee, the dollar or gold?”
Silver closed again unchanged today at $15.95. Also note total silver ETF activity posted later in this commentary – it moved higher by 5,302,242 ounces.
Platinum closed up $7.00 at $1115.00 and palladium was up $4.00 at $742.00.
This from Reuters – US job openings hit record high; small businesses upbeat – “U.S. job openings surged to a record high in April and small business confidence perked up in May, suggesting the economy was regaining speed after stumbling at the start of the year.
The economy’s stronger tone was reinforced by other data on Tuesday showing a solid rise in wholesale inventories in April, in part as oil prices stabilized.
“This is more confirmation that the economy is indeed emerging from that soft patch in the first quarter and can still pick up even faster in the next few months,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.
Job openings, a measure of labor demand, rose 5.2 percent to a seasonally adjusted 5.4 million in April, the highest level since the series began in December 2000, the Labor Department said in its monthly Job Openings and Labor Turnover Survey (JOLTS).
Hiring slipped to 5.0 million from 5.1 million in March. Economists say the lag in hiring suggests that employers cannot find qualified workers for the open positions.
The number of unemployed job seekers per open job, a measure of labor market slack, fell to 1.6 in April, the lowest since 2007 and down from 1.7 in March.
“On balance, we read the April JOLTS data as suggesting labor market momentum remains intact in the second quarter and labor market slack continues to diminish,” said Jesse Hurwitz, an economist at Barclays in New York. The JOLTS report is one of the indicators being closely watched by Federal Reserve policymakers as they contemplate raising interest rates this year. The U.S. central bank has kept the short-term lending rate near zero since December 2008.
Tightening labor market conditions were corroborated by a separate report from the National Federation of Independent Business that showed confidence among small businesses rising to a five-month high in May.
The share of businesses saying they could not fill open positions also increased to 29 percent last month, matching February’s reading, which was the highest since April 2006.
Regaining Steam – The economy contracted at a 0.7 percent annual pace in the first quarter and growth got off to a slow start in the second quarter, in part because of the lingering effects of a strong dollar and spending cuts in the energy sector. But a surge in job growth and automobile sales as well as gains in May factory activity suggest the economy is strengthening.
Prices for U.S. government debt fell, while U.S. stock indexes edged up. The dollar slipped against a basket of currencies. In a third report, the Commerce Department said wholesale inventories increased 0.4 percent in April after rising 0.2 percent in March. Inventories are a key component of gross domestic product changes.
The component of wholesale inventories that goes into the calculation of GDP – wholesale stocks excluding autos – rose 0.2 percent, prompting economists at Barclays to bump up their second-quarter growth estimate by one-tenth of a percentage point to a 2.9 percent annualized rate.
Sales at wholesalers surged 1.6 percent in April, the largest rise since March of last year. Sales had been weak since last August, in part due to the negative impact of lower oil prices on the value of petroleum goods sales.
That had led to an accumulation of inventory, leaving wholesalers with little appetite to buy more merchandise.
Petroleum sales jumped 4.9 percent in April. At April’s sales pace it would take 1.29 months to clear shelves, down from 1.30 months in March. An inventory-to-sales ratio that high usually means an unwanted inventory buildup, which would require businesses to liquidate stocks. That would weigh on manufacturing and economic growth.
Economists, however, caution against reading too much into the elevated inventory-to-sales ratio, given the role that oil prices have played in depressing the value of petroleum goods sales.
Still, they expect an inventory drawdown in the quarters ahead, which is one of the reasons for less robust second-quarter GDP growth estimates. Inventories added a third of a percentage point to first-quarter GDP.”
This is our usual ETF Wednesday information – these metrics are important to individual physical investors because they provide clues as to whether the physical market is enthusiastic and adding metals or is disappointed and selling metals.
All Gold Exchange Traded Funds: Total as of 6-3-15 was 51,294,300. That number this week (6-10-15) was 51,161,325 ounces so over the last week we dropped 132,975 ounces of gold.
The all-time record high for all gold ETF’s was 85,112,855 ounces in 2013. The record high for Gold ETF’s in 2015 is 53,901,867 and the record low for 2015 is 51,057,082.
All Silver Exchange Traded Funds: Total as of 6-3-15 was 612,956,262. That number this week (6-10-15) was 618,258,504 ounces so over the last week we gained 5,302,242 ounces of silver.
All Platinum Exchange Traded Funds: Total as of 6-3-15 was 2,573,517 ounces. That number this week (6-10-15) was 2,569,319 ounces so over the last week we dropped 4,198 ounces of platinum.
All Palladium Exchange Traded Funds: Total as of 6-3-15 was 2,974,471 ounces. That number this week (6-10-15) was 2,971,923 ounces so over the last week we dropped 2,548 ounces of palladium.
Yesterday we posted Anthony Hart’s (Perth Mint) 12 reasons to own gold part 1 – which was 6 of his 12 reasons. These are the remaining 6 reasons.
This from Anthony Hart (Perth Mint) – 12 reasons to own gold now: Part 2 – If you needed any further justification to take the plunge and invest in some precious metals, or to add to current holdings, then read on. Below we provide our second half dozen reasons why, in no particular order, investing in gold may just be a good idea.
7. The rise of Chindia – China and India, with almost 40% of the world’s population (combined total of nearly 2.7 billion people) albeit only 15% of global nominal GDP, are both developing and growing rapidly. Although there will be inevitable hiccups along the way, both countries are increasing overall GDP and, more importantly for gold, GDP per capita, at a fairly rapid rate. China is somewhat ahead of India on the development timeline; however there is hope that with the election of Narendra Modi, India will be able to further accelerate its development. There are clear indications that after many years of acrimony, these two developing giants are starting to find some fertile common ground. This is a significant benefit not only for them, but for the global economy at large. It’s also important to note that as well as a shared border, they have fairly complementary economical models with China focusing on manufacturing and India on services, including IT. Both countries have a strong cultural affinity with gold and further GDP per capita growth would likely prove supportive of gold demand in the medium to long term.
8. Equity market valuations – Given its continued importance in the global market place, we’ll put our emphasis on US Share prices. There is little question that regardless of which market ratio metric you care to use, the equity markets are richly valued. Earnings growth has outstripped revenue growth substantially in the last few years, largely as a result of a reduced cost of debt (as a result of interest rate suppression) and very active cost reduction, often in the form of labour cost savings. Combine this with the above average CAPE (26.9 now versus 16.6 historically) and we can see a reversion to mean in earnings (as a percentage of revenues) and the CAPE multiple could lead to a significant market re-rating. Critically, these are far from the only indicators flickering red. Please take note, I am far from suggesting that the stock market is due an imminent crash, as although prices appear elevated compared to history they have been more elevated in the past – the quote often attributed to John Maynard Keynes comes to mind: “Markets can remain irrational longer than you can remain solvent”. However, given the price correction gold has endured over the last couple of years it could certainly be argued that, relatively speaking, it’s become better value.
9. Diversification – Wherever you are on your savings and investment journey, diversification is key. You can be more aggressive or defensive in your investment approach, depending on what stage you are at in life, however you should never ignore the value and merits of diversification. Many are the stories of broken and bankrupt individuals or corporations who put all their eggs in one basket, only for that particular market to plummet and turn all their hard earned capital to dust. There are various asset allocation theories, such as the permanent portfolio, which largely operate under the premise that disparate asset classes perform differently depending on the condition of the economy. Although it can be convincingly argued that the modern monetary approach of interest rate suppression and money printing has had the effect of a rising tide appearing to lift all asset boats, and somewhat subverting the previous observed differences in asset class performance, there is little doubt that a certain level of diversification is still important. It would be prudent to include an allocation to hard assets (and gold/precious metals specifically) in any portfolio.
10. Eliminate counterparty risk – In today’s highly financialised world, one entities asset is often another entities liability – in essence, there’s an owner, and an owner – and this clearly creates counterparty risk. Take something as simple as the cash you may hold at the bank – to you, that is an asset however to the bank it’s a liability – and that, for you, presents a risk. If the bank were to chew through its capital and reach a point of insolvency, you may become an unsecured creditor. I know, I know, most sovereign states provide deposit insurance, at least up unto a prescribed limit…however I think that is likely cold comfort for many holders of bank deposits in Cyprus a couple of years ago. Real assets in your possession overcome this counterparty risk issue – if you own it, and hold it, you aren’t reliant on any counterparty to make good on it.
11. History – Historically gold has proven to be exceptionally successful as a store of value. Whilst inflation has had its merry way with all fiat currency values, unscrupulously eating into the purchasing power of each note you hold (the king of kings USD has by some estimates lost 98% of it’s purchasing power since the formation of the Fed in 1913) gold continues to purchase, very roughly, the same amount of goods it has been able to purchase for centuries. To be somewhat glib, an ounce of gold could buy you a quality toga in classical Athens just as it can buy you are reasonable suit today. Perhaps surprisingly, even though the USD only purchases approximately 2% of what it did a little over a century ago, it is actually one of the outperformers in the fiat currency realm – you only have to look as recently as Zimbabwe to see some real destruction of fiat currency purchasing power. If you view gold as ‘savings’ and a repository of value, history is unquestionably on your side.
12. Insurance – Astute readers will notice this was the topic of my first blog post…and it hasn’t lost its relevance in the week since (surprising huh…). Due to some of the reasons contained within the dozen detailed in the last two days…and many more…gold continues to have a legitimate role to play in insuring your overall portfolio for the ongoing systemic risk, and volatility (and potential failure) inherent in the current global financial system.
So there you have it – a dozen solid reasons to invest in gold. There was an element of crossover with my initial blog, but with any luck the repetition has only served to reinforce the message. Feel free to contribute your own suggestions below – there are undoubtedly many more valid and appropriate reasons out there.
The walk in trade was steady all day and so were the phones. Not a big rush but we are writing steady action all day – mostly buying in all cases and no significant selling.
The GoldDealer.com Unscientific Activity Scale is a “ 6” for Wednesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Thursday – 4) (last Friday – 5) (Monday – 4) (Tuesday – 4). 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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