Commentary for Monday, March 24, 2014 (www.golddealer.com) – Gold closed down $24.80 today at $1311.20 and while the overnight market in Hong Kong and London were quiet the domestic market reacted negatively to the slowing of the Chinese economy. There is also a psychological problem here in that technically the bears are now in charge and the numbers out of China just missed but the market was looking for anything to act upon now that tapering continues and the Russian problem might be on the back burner. Gold recently peaked at $1380.00 two weeks ago and has since lost its Mojo as stocks attract speculative money.
I appreciate the stock market is a bit frothy here but the perception that stocks are moving higher is supported by the large number of IPO’s coming on board. These IPO’s are like a money manufacturing machine and that liquidity comes from speculative funds which might otherwise be placed into either physical gold or the ETF complex.
At any rate gold has lost about a third of its surprising advance since the beginning of this year and like I said recent losses have placed the bears in charge. A 50% retracement of the 2014 advance would place gold around $1280.00 which looks like good technical support after trading today. And we are still above our 200 day moving average ($1300.00) which always supports bulls short-term. But gold must show some bounce here or we could be heading for trouble. I would define bounce as a big jump in physical sales here at GoldDealer.com. If the public yawns we would be in for more downside testing by the short paper players.
So what about all the hoopla regarding the Chinese slowdown? Their PMI (Purchasing Managers Index) moved from 48.50 to 48.10. The theory here is that a slowing Chinese economy might also slow their massive buying of everything these past few years and because she is the largest gold consumer the handwriting might be on the wall. I have always discounted this scenario and think that the reason gold sold off on a very slight move of the PMI to the downside is because no one really knows for sure what is going on over there and when the markets get suspicious they get defensive.
Platinum closed down $5.00 at $1431.00 and palladium closed up $5.00 at $793.00. Palladium has been moving against the lower trend in other metals because of rising demand and problems in mining. The strike continues in South Africa and now it is expected that sanctions could keep Russian palladium from getting to market. There is also some related action in rhodium which remains cheap in our mind.
A reader’s question: “What do you think will happen to the gold price when the US raises interest rates?” The stock answer is that higher interest rates are not good for gold. But let’s look a bit further. Extended lower interest rates have not produced the usual rise in gold prices and with a flat bond market it does not appear the US or other leading nations will do much with interest rates either in the short or medium term because economies are still not doing well.
So for now gold is between a rock and a hard spot. If inflation catches on and continues higher all governments will push interest rates higher to combat this damaging trend but the last time such a scenario was in play was in the 1970’s. And with continued tapering even Yellen’s suggestion that interest rates might rise was chilling to both gold and the US stock market.
But let’s play devil’s advocate and say that by summer of this year interest rates rise somewhat, meaning money is still cheap but the Fed still embraces a cheap money policy. It is not the rise in interest rates that will chill gold but the overall feeling that the gold market still feels heavy. Meaning there is not a great deal of buzz and speculators are looking elsewhere for possible gains. Inflation is still not producing any danger signals and most people feel comfortable with banks and securities. This to me is the most likely scenario and the reason I believe gold will remain flat or perhaps lower testing support into the $1200.00 range.
What gold needs now is a brand new reason to push overhead resistance. Think about it logically as the old reasons to buy this market fade and gold remains range bound. This type of talk is not the most encouraging to those who look at gold as a get rich quick scheme and so much of the speculative money is drying up but for real long term players in the physical market it offers advantages. I would also reinforce my previous comments that this type of market requires patience. Gold is still in a large consolidation pattern which will put fake players out of business and encourage scoundrels to invent preposterous scenarios designed to rob the unwary. For now stick with the tried and true real gold bullion products. Avoid silly advertising which advocates a fortune is to be made and its right around the corner. Buy real bullion products on weakness and wait for better news which will eventually push prices higher.
From Chris Gaffney (Everbank): But worries about higher US interest rates certainly haven’t survived the weekend, and the currency markets are looking like we will have another ‘risk on’ day with the Aussie dollar, South African rand, and Mexican Peso leading the currency pack this morning. IMF Managing Director Christine Lagarde gave traders a bit of confidence when she said in a speech yesterday that the world economy ‘is slowly turning the corner’ as global growth continues to improve. Data released out of Europe would certainly confirm the IMF Director’s opinion, as indexes for both manufacturing and services in the euro-area remained at good levels. The composite gauge published by Market Economics showed a slight drop from 53.3 in February to a reading of 53.2 this month. But the reading matched projections, and remained well above the 50 reading which indicates expansion. “The ongoing upturn in business activity in March rounds off the euro zone’s best quarter since the second quarter of 2011,” Chris Williamson, chief economist at Markit, said in a statement. A highlight of the Markit survey was France which saw manufacturing growth for the first time in two years. The March flash composite purchasing managers’ index for France jumped to 51.6 from 47.9 last month, a very large jump and good news for Europe’s second largest economy.
Considering the rather large sell off in gold I would have expected the walk-in trade to be subdued but the downstairs cash action was busy most of the day. I think most of this action is old-timers simply buying weakness. The phones were all over the place, busy to quiet.
The GoldDealer.com Activity Scale is a “4” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 4) (last Wednesday – 2) (last Thursday – 3) (last Friday – 3). The scale (1 through 10) is a reliable way to understand our volume numbers.
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