Commentary for Thursday, Feb 26, 2015 – Gold closed higher again today on the Comex up $8.60 at $1209.60 even though the dollar reached a monthly high against the euro.
This from Market Watch – “Core CPI rose 0.2% in January, beating a consensus forecast of 0.1% growth from economists polled by MarketWatch. The headline CPI number, which factors in more-volatile food and energy prices, reflected a 0.7% contraction, in-line with economists’ forecasts.
Currency traders largely dismissed less-flattering jobless-claims data and the solid durable-goods orders report, analysts said. New unemployment claims rose to 313,000 last week, a six-week high. The volatile durable-goods orders number rose to 2.8% in January, beating expectations. Meanwhile, orders for core capital goods, a proxy for business investment, rose 9.5%.
“After throwing all this data in a blender and setting it to puree, traders have come to the conclusion that this morning’s reports represent a small positive for the world’s reserve currency, and the dollar index is now edging up back up to the mid-94.00s,” wrote Matthew Weller, senior technical analyst at Forex.com.”
Now here is something you don’t often see – a rising gold market reversing the most recent downward trend on the short term. So momentum players have helped gold rise for at least the past few days – this upward draft carried into Thursday and the Dollar Index rises substantially.
Initially flat in early trading the Dollar Index moved from slightly above 94.00 to 95.29 in a matter of hours after a stronger than expected consumer price index number surprised. Basically higher consumer prices indicate that the drop in inflation will fade. Gold benefited – moving higher in what might be interpreted as signs of inflation. I would not bet the farm here – inflation is rather dead but this does reinforce the notion that monetary debasement has consequences.
The overall technical picture for both gold and silver on the shorter term remains weak. For now the bears are in control so expect the short paper trade to test weak hands – this has been the usual trading strategy for professionals for some time now as the metals continue to unwind. This choppy up and down action is caused by bear paper raids followed by short covering profits.
The November/December gold run to the upside evaporated at $1300.00 as Europe and safe haven buying subsided and profit taking pushed markets lower. The Greek scare was dissuaded with promises of money for debt maintenance but keep in mind this is a delaying tactic – where the Greek state is going to get the billions they already owe is difficult to imagine. Expect a similar standoff sometime in May with the usual questions about the Greek exit from the European Union. Gold never reacted to the Russian/Ukraine tension – something that not too long ago would have been worth $50.00 to the upside – this is troubling.
And gold has yet to be heard from regarding the new EU quantitative easing program. The actual program will begin in March and consist of monthly bond buying to the tune of $60 billion eruo ($70 billion US) and continue into 2016. This is not small potatoes – Draghi is going in with guns blazing.
Another positive note is the Chinese are back and buying. If you believe demand for gold from China is in any way tenuous consider the following from Chuck Butler (Everbank/The Daily Pfennig) – “So, I guess the Chinese didn’t just sit around eating chocolate bonbons and watching Oprah, while they were out last week, for they came back to work, loaded for bear! The Chinese State Council announced yesterday that they were going to step up fiscal policy support and strengthen targeted controls to combat downward pressure on the economy. A package of tax breaks for small businesses, a reduction of the unemployment insurance tax, which will save businesses over 40 Billion renminbi / yuan annually, and a pledge to speed up construction of major water projects in the less developed central and western regions, are the highlights, and there are more projects in the package that was presented by the State Council.
He also included this insight: This is a note that Addison Wiggin printed 5 years ago from someone in China. Now remember this is 5 years ago in China. “What people fail to grasp,” this individual wrote, “is this place is much more capitalist than the States now: No capital gains tax – no property tax – no local or state taxes – a reasonable 35% tax rate for the highest earners – corporate tax rates of 0% for three years and 15% per year after that.
Still dollar strength caps any gold upside for now. Dollar strength or weakness remains a prime mover in the gold market. On the short term dollar weakness is the best chance gold has of bucking the negative trend but I would not hold my breath.
Consider Wall Street – stocks are paying investors big money. Equities are sometimes scorned in the physical gold community – this is a big mistake. A successful stock market – consider the massive market cap in a stock like Apple – is a significant drag on the price of gold.
Many believe Janet Jellen will move to raise interest rates perhaps even by this summer but with a sluggish housing market I think this is optimistic. The Federal Reserve might just dance around this question perhaps even into the third quarter of 2015.
But this alone is not enough to shake off the negative technical picture in gold. I reviewed her comments and while many consider them to be very dovish she is mighty crafty and left many options open and at the same time encouraged Wall Street.
The most recent economic numbers out of China are encouraging and it seems the government of India will soon reduce its import tariff on gold. Both of these developments are encouraging but unfortunately only provide support at current levels. Both of these nations are masters at buying the dips in gold – they will continue to do so – crashing through the front door is not in their interest.
What we really need is a game changing event to encourage the physical market. Without another “scare” of some sort gold might drift between $1150.00 and $1250.00 – supported by the real physical trade centered in China and India.
This is exactly what the physical trade does not need – a continued flat market produces a large “yawn” for today’s investors. The American buyer loses interest quickly especially as the US economy continues to gain strength and stocks remain solid. Speculative money is drawn away from gold and silver and into corporate America – and it’s difficult to argue when public companies are paying solid dividends and stock prices are either stable or moving higher.
Under the circumstances the biggest thing gold has going is near zero interest rates worldwide. But this factor has been true since the first round of quantitative 6 years ago. Inflation is still benign and both the financial and government complex is still waiting for the blowback.
Still gold remains the premiere safe haven asset when world tension increases. And there are plenty of reasons to fear financial bubbles which have been created because essentially free money creates a world of risk takers.
Sometimes the risks prove rewarding but the bad bets always surface. That is where a small and regular investment in gold and silver bullion, especially at the lower end of its current trading range makes sense. This cost averaging in a general negative market is a good insurance bet. This is especially true because you have not heard the last of Keynesian monetary policy.
Silver closed up $0.16 at $16.58 which is now the new normal perhaps even neutral price range for the physical silver market. The mid-$16.00 range for silver would have at one time brought in a crowd. Now the public wants the pot sweetened a bit before proceeding.
Platinum closed up $3.00 at $1173.00 and palladium closed up $2.00 at $810.00. Today there was little action in either metal despite platinum being down 20% this past year.
Chicago Mercantile Exchange reports for the last 5 trading days – so we are looking at the trading volume numbers for the April Gold contract: Wednesday 2/25 (261,261) – Tuesday 2/24 (264,156) – Monday 2/23 (265,018) – Friday 2/20 (262,861) and Thursday 2/19 (264,019). Trading volume is on the high side and has been steady in this area for weeks.
The walk-in cash trade was below average – some cash sellers seemed disappointed and might be just moving to the sidelines. The phones were also quiet – absolutely no buzz.
The GoldDealer.com Unscientific Activity Scale is a “ 4” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Friday – 3) (Monday – 5) (Tuesday – 5) (Wednesday – 5). 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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