Commentary for Tuesday, July 29, 2014 – Gold closed down $5.00 today at $1298.30 as consumer confidence moved higher. The Dollar Index (81.21) has also been generally higher over the last 5 days and crude oil while somewhat weaker has remained in the triple digits ($101.67).
I would also say that early gains in overnight Hong Kong and London trading turned into profit taking opportunities when escalating Middle East violence failed to ignite safe-haven buying.
The Federal Open Market Committee began a meeting today which will conclude tomorrow – not much buzz but you never know these days – let’s wait for released information.
This from Bloomberg – “Confidence among consumers soared in July to an almost seven-year high as increased employment opportunities led to brighter views of the U.S. economy.
The Conference Board’s index advanced to 90.9, the highest since October 2007, from 86.4 in June, the New York-based private research group said today. The gauge exceeded the most optimistic projection in a Bloomberg survey of 75 economists.
“Employment conditions improved, gas prices are lower, equity markets remain robust, and that’s pretty much it,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “The fact that confidence is rising at a fairly steady rate implies that employment growth is going to continue at a fairly healthy rate.”
More Americans than at any time in the past six years viewed jobs as abundant and a greater share anticipated their incomes will increase, laying the groundwork for a pickup in consumer spending. Progress in the labor market and other data showing limited traction in the housing market probably explain why Federal Reserve policy makers are forecast to keep interest rates low well into 2013 even as they trim monetary stimulus.
Home prices rose in the 12 months ended in May at the slowest pace in more than a year as a lull in residential real estate limited appreciation. The S&P/Case-Shiller index of property prices in 20 U.S. cities increased 9.3 percent from May 2013 after a 10.8 percent gain in the year ended in April. Compared with the prior month, home prices fell for the first time in two years, the group said today in New York.”
Silver closed up $0.02 at $20.54 and actual physical sales with the coin dealers we talk to are disappointing – not terrible but they seem stuck in the typical summer doldrums.
Platinum followed gold lower down $7.00 at $1483.00 and palladium was off $2.00 at $878.00. Kenny moved rhodium spot to $1270.00 today and we are selling the world standard Baird Rhodium 1 oz Bar for $1390.00 delivered – still undervalued and the physical market remains active with investors.
This from Kira Brecht (Kitco/TraderPlanet) – Who Wins the Tug Of War in Gold? Geopolitics Versus Better Growth Outlook – Comex December gold futures closed out last week’s action at nearly unchanged levels, after trading both higher and lower intra-week. The gold market is caught in a tug of war right now, supported on the downside by concerns about geopolitical uncertainty, but beaten down by concerns that stronger economic growth will lead to Fed rate hikes sooner rather than later.
Let’s take a close look at both sides of the coin to see who might hold the edge going forward —gold bulls or gold bears?
Over the weekend, the cease-fire in the Gaza broke down. And, German government leaders began to prepare the public against the consequence of sanctions against Russia as the European Union is expected to up the ante this week on its economic response to the crisis in the Ukraine. Could these situations continue to escalate? Could Russia adopt an energy embargo on its oil exports? What impact could that have on the European Union and even the global economy?
This multitude of global hot spots, instability and political, military and economic concerns has put a bid into the gold market in recent days and weeks. Dips in gold have been used as buying opportunities.
On the other hand, this week will usher in an economic heavy data week in the U.S. — with forecasts showing expectations of generally improving economic conditions. That in turn pushes the U.S. Federal Reserve closer and closer to the timing of its first monetary policy rate hike.
On Wednesday, the second quarter GDP advance is due for release, with Nomura forecasting an annualized rate of growth at 3.1%. That would be a strong rebound following the 2.9% decline in U.S. GDP growth in the first quarter. Also, on Wednesday, the Federal Open Market Committee (FOMC) will conclude its two-day meeting. For now, no major new announcements are expected though modest changes to the language surrounding the nature of the economic outlook are possible. Then, finally on Friday, the U.S. Labor department will release the July non-farm payrolls report. Nomura expects a 250,000 gain in non-farm payrolls.
The brightening economic outlook in the U.S. has been a reminder to gold investors that the timing of the first rate hike is coming closer. For now, most market watchers expect a hike in the second or third quarter of 2015. But, what could this stronger economic data mean to the inflation front? And, is the Fed perhaps already behind the curve, letting inflationary pressures brew?
With these two underlying bullish (geopolitical uncertainty) and bearish factors (concerns over economic improvement and rate hikes) buffeting gold back and forth, near term trade could be choppy, volatile and see whipsaw type of trade amid illiquid late summer trading conditions.
Both the geopolitical developments and economic improvements have risks ahead. Let’s dig a little deeper. Looking at the Russian-Ukraine situation, most countries in the European Union and Eastern Europe are very dependent on Russia for their energy needs for both crude oil and natural gas.
“A Russian curtailment of energy exports, even a short-lived one, would likely plunge continental Europe, if not the global economy, into another recession,” according to Jay Bryson, global economist at Wells Fargo. While a Russian decision to halt exports would hurt their export revenue significantly, it remains a lethal economic weapon in their arsenal if the situation continues to escalate. Euro zone or global recession would likely prove gold supportive as global central banks would be forced to maintain their historically accommodative stances.
Meanwhile, shifting to another global hot spot, oil export questions are heating up. Over the weekend, news broke that Baghdad is disputing the right of the Iraqi Kurds to sell oil, and have threatened legal action. Nearby crude oil futures remain above $100 per barrel, despite the ever-growing levels of U.S. domestic production.
With global crude oil production sitting at roughly 92 million barrels per day, there is some spare capacity in the global oil marketplace, but not much. Spare capacity refers to the amount of extra crude oil the world could produce on short notice if needed. With Iraq exporting about 2.9 million barrels per day, the threat of a supply disruption continues to loom large. Supply disruptions would cause a further spike in oil prices, which at its root is an inflationary impact in the economy.
With the evolving geopolitical uncertainties seemingly around every corner, sell-offs in gold will likely meet buying interest.
Finally, looking back at the improving U.S. economic picture, there are some who argue the U.S. Federal Reserve may already be behind the curve in its tightening cycle, which leaves risk for inflation to grow stronger as the economy continues to improve.
“We still think the evidence is the Fed is behind the curve as the labor market is all but at full employment. No inflation today, but keep in mind many inflation episodes are commodity driven by stronger worldwide economic demand. It can come back in a hurry. As the U.S. economy continues to move forward from here now in the sixth year of expansion from the recession, Fed policy needs to be in neutral and neutral is a few hundred basis points higher from here. Better get on it. There is no risk of too-low inflation anymore. Inflation risks are all on the upside the next few years, according to Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ.
While there are plenty of concerns about the so-called “Taylor Rule” which was developed by economist John Taylor about two decades ago —the economic formula projects a fed funds rate about 100 basis points higher than it is now. Does this mean the Fed is ignoring inflation risks? Possibly.
“The rule relates the appropriate level of Fed funds to the trend rate of growth (assumed to be 2%), to the rate of inflation, plus half the deviation of inflation from target and half the deviation of GDP from potential output. Currently, inflation is 0.5% below target and, according to the Congressional Budget Office, the output gap is 4% (way too wide, in our view, as an estimate, but let’s assume it is right). At the moment, this would deliver a target Taylor rule-consistent rate of 1.25% (2 + 1.5 – 0.25 – 2.0). That is 100bp higher than currently applies, if we take the OECD’s estimate of the output gap,” according to BNP Paribas economists.
Add it all up? The improving economic picture leaves the U.S. economy at risk for above-target inflation, especially with a Fed that could already be behind the curve. Geopolitical uncertainty will keep a bid under the market. While gold may get knocked back in the near term by improving U.S. economic data, rising inflation may be waiting in the wings, and that tends to be gold-bullish as well.
This from ONE News – More than 35% of Americans have debts and unpaid bills that have been reported to collection agencies, according to a study released today by the Urban Institute.
These consumers fall behind on credit cards or hospital bills. Their mortgages, auto loans or student debt pile up, unpaid. Even past-due gym membership fees or cellphone contracts can end up with a collection agency, potentially hurting credit scores and job prospects, said Caroline Ratcliffe, a senior fellow at the Washington-based think tank.
“Roughly, every third person you pass on the street is going to have debt in collections,” Ratcliffe said. “It can tip employers’ hiring decisions, or whether or not you get that apartment.”
The study found that 35.1% of people with credit records had been reported to collections for debt that averaged $5178, based on September 2013 records. The study points to a disturbing trend: The share of Americans in collections has remained relatively constant, even as the country as a whole has whittled down the size of its credit card debt since the official end of the Great Recession in the middle of 2009.
The above quote about American debt should get everyone’s attention – without a fast way to bankrupt this accumulating debt it will eventually support the idea that cheap money is the only way to move on and still keep the American consumer buying on credit. In the end this debt will support the price of gold.
While it may look like a tug of war between the bulls and the bears, in the end both sides of the coin could ultimately prove to be gold bullish.”
The walk-in cash trade today was again quiet and so were the national phones. The public continues to ignore the safe-haven market.
The GoldDealer.com Activity Scale is a “2” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 5) (last Thursday – 5) (last Friday – 4) (Monday – 3). The scale (1 through 10) is a reliable way to understand our volume numbers.
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