Commentary for Tuesday, June 23, 2015 – Gold closed down $7.50 on the Comex today at $1176.20.
Gold was lower today but the close of $1176.20 should look familiar – since early March this band of prices between $1180.00 and $1200.00 has been supported technically and by strong physical action across the counter.
Today’s close is no different – the usual suspects walked in with cash and walked out with gold bullion products. There were also reasonable physical sales in silver bullion products like $1000.00 face 90% silver bags and new JM 100 oz silver bars. The bags are always nice looking in rows within our inventory room but the stacks of JM bars are much more impressive.
The two factors pressuring gold lower today are dollar strength and further progress towards getting Greece more of the promised money it needs to pay its next installment (1.6 billion euro/June 30 th).
The Dollar Index closed yesterday at 94.32 and its range today has been 94.30 through 95.64 – we are trading at 95.38 as of this writing so there is about a one point move to the upside which is big for the dollar and bad for the price of gold. This strength is the result of comments by Fed Governor Powell. Stocks weakened – so like I mentioned yesterday a strong dollar has no friends. To give you a relative idea of where we are with the Dollar Index consider that its yearly high is 100.32 so we are only 5 points away from making a new 12 month record.
This from MarketWatch – “The dollar strengthened against its main rivals on Tuesday after Fed Governor Jerome Powell said the U.S. economy could meet the criteria for a rate hike as soon as September. Powell’s comments also helped traders shrug off weaker-than-expected May durable-goods data to push the dollar higher.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, attributed the dollar’s strength on Tuesday to renewed hopes for monetary-policy divergence, which reemerged after Monday’s optimistic home-sales data.
“People in the U.S. did not appreciate the significance of the U.S. home sales,” Chandler said. “It was the first-time buyers who bought a third of [homes]. This is boosting confidence that the Federal Reserve will raise rates.”
Federal Reserve policy makers signaled last week that interest-rate hikes would unfold more gradually than the market had expected, pouring cold water on the policy-divergence trade. Policy divergence is the idea that the U.S. is slowly tightening monetary policy, while central banks in Asia, Europe and much of the developing world are easing. Tighter policy tends to strengthen a currency, as higher rates boost returns on assets and deposits denominated in that currency.”
There are a few other things which keeps gold defensive – but lack substance.
This according to FXEmpire “The kiwi is hit its lowest price in 5 years after the release of Chinese HSBC manufacturing PMI showed continued contraction. The data printed a bit higher than expected but remained below the 50 level. Activity in China’s manufacturing sector has contracted for the fourth month in a row, according to a private survey. The HSBC Flash China Manufacturing PMI rose to 49.6 in the flash reading for June, up from a final reading of 49.2 in May. The reading was expected to come in at 49.4, according to a Reuter’s poll. A reading above 50 on the survey points to expansion, while a reading below 50 indicates contraction.”
Anything which suggests China is slowing down introduces uncertainty in the physical gold market. I personally discount this because “slowing down” in China is still massive relative to other manufacturing giants.
The second area which has traders worried (they all live on rumors) is the price of crude oil. A weak market here will further pressure the price of gold. The talk of an oil glut is coming back from the back burner – I don’t see this anymore than I do the Chinese slowdown.
The reason being the crude oil technical picture – look at the price of crude oil over the past 12 months – it was in trouble in Jan and Mar of 2015 coming down from highs ($100.00) and bottomed in these two months around $50.00. The market has since recovered and seems steady around $60.00 a barrel and the world economy is slowly making a comeback – this must at least support current levels or portend higher prices as the US considers a rate hike between now and the end of the year.
Silver closed down $0.40 at $15.73 – so we are reasonably below $16.00 and this usually means a big jump in our across the counter physical sales. This close today broke below a long term trend line dating back to the December 2014 low of $15.45 – paper traders were hoping the $15.80 support would hold but it did not – so technically the price of silver remains shaky especially because we have seen a big recent jump in paper short positions.
But here is where the physical market comes back to life and the paper traders must reassess their charts. The physical buyers are much more aggressive – I recently pointed out that the premium on 90% silver coins was increasing – this is the handwriting on the wall.
I always suggest $1000 face 90% silver bags but watch the premiums. A purchase of 100 oz bars from sovereign producers like Royal Canadian Mint, JM or others will yield 10% more silver for the same amount spent. On a $10,000.00 purchase that would amount to 60 more silver ounces!
Platinum closed up $7.00 at $1068.00 and palladium was up $1.00 at $695.00. Platinum is now trading for $108.00 less than gold.
Stockman considers the dangers inherent in today’s fiat money expansion – don’t laugh at the Greek debt problem – many nations today may face these disastrous choices as a consequence of unfettered access to quantitative easing.
This from David Stockman (Contra Corner) – “That is pathetic beyond words and today’s Greek show down provides a striking example of how this monetary evil-doing imperils the very essence of political democracy. In a word, Greece bankrupted itself years ago because its politicians were served up heaping piles of cheap bonds by a so-called debt market that had been falsified by the ECB.
Thus, in 2001 Greece’s public debt was about $150 billion and equated to exactly 100% of its nominal GDP. In a world in which bond vigilantes had not yet been euthanized by central bankers, what happened next would have been impossible. By 2010, Greece’s public debt had soared to $380 billion, meaning that it grew at a compound annual rate of 10% for an entire decade.
Needless to say, nothing had changed with respect to Greece’s notoriously corrupt, inefficient, special interest dominated economy that would have warranted a $230 billion surge in public debt – especially given the 100% of GDP starting ratio in 2001. Yet Greece’s 10-year bond yield dropped dramatically until 2008, and even by the time of the crisis fully hit in early 2010 it was only 5.5%.
In the interim, the ECB had opened the spigots wide. During the same 11-year period ending in 2010, it balance sheet soared by 3X, representing an 11% annualized growth rate. In short, the printing presses in Frankfurt so drastically falsified euro bond prices, that even with a yield premium; the Greek state was able to borrow itself into bankruptcy.
Stated differently, there is not a snowballs chance that Greece would have been lugging around $380 billion of public debt by 2010 in a honest bond market. Moreover, real bond vigilantes would never have been fooled by the phony debt-fueled boom that temporarily bloated the Greek economy during the first decade after it adopted the euro.
Specifically, between 2001 and the 2009 peak, the Greek economy appeared to surge – with nominal GDP expanding from $150 billion to $340 billion or by 10% annually. But that wasn’t sustainable organic growth; it was a debt fueled bubble of public and private construction investment and new household consumption on the part of Greece’s legions of public employees and social beneficiaries. Not surprisingly, Greek politicians got exactly the wrong message from this phony boomlet. The latter ballooned the denominator of the public debt ratio (GDP), generating the appearance that it was only creeping up slowly to about 115% by 2008 – when in fact the true ratio was soaring.
Consequently, since there was no crisis on the horizon and yields were still eminently manageable, politicians—especially those of a nation addicted to leftist statism – did what they invariably do. Namely, they drastically increased pensions and other social welfare programs.
And this gets to the heart of the stupid debate between Syriza and the troika apparatchiks about “austerity”. Yes, as shown below, Greece has actually reduced nominal outlays for its pension and old age programs by 6 billion euro or 16% since the peak in 2009. But in the prior three years alone it had increased outlays by 35% and by upwards of 60% since joining the eurozone.
The so-called rollbacks and pension cuts, therefore, actually amount to the recoupment of the huge, unaffordable largesse that Greece’s governments were induced to dispense based on a bubbling economy and the false bond market prices enabled by the ECB. Stated differently, today’s pension “red line” is an artifact of a dishonest bond market, not evidence of Greece’s original fiscal sin, as viewed by its German paymasters, or social justice, as claimed by its current government.
In this context, it is also evident that the “austerity” to which Greece has succumbed is not the result of elective fiscal policies that have been shoved down its throat by the Troika. The hoary argument of the Keynesian commentariat that Greece’s debt problem is the result of its shrinking GDP is mathematically correct but economically ludicrous. Greece sustainable GDP was never $340 billion in 2008; that was a debt financed mirage.
The shrinkage of its GDP toward $200 billion at present simply represents the liquidation of a bubble economy that was totally dependent upon massive and continuous new injections of debt. To pretend that this mirage can be restored by the elimination of the fiscal constraints being imposed by Greece’s paymasters is exactly the kind of Keynesian fairy tale that afflicts fiscal policy all around the world.”
The walk in trade was again busy all day – there were a few cash sellers but we were mostly delivering silver bullion across the counter. There was also a spat of platinum bullion sales – mostly Canadian Platinum Maple Leafs – a great platinum bullion coin.
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