Gold Moves Lower as the Greek Drama Continues

Gold Moves Lower as the Greek Drama Continues

Commentary for Tuesday, June 30, 2015 ( – Gold closed down $7.00 at $1171.50 on the Comex today. Hard to believe gold is moving lower as the Greek drama continues. To add insult to injury they missed today’s deadline payment of 1.6 billion euros to creditors as the hopeful claimed that the default would not be official until midnight.

There are some who claim gold sales have been strong in Europe over this mess but I find this hard to believe – the roof is falling in relative to debt default and gold remains weak.

Of course the technical picture for gold has been negative and the dollar has been strong so I guess I should be thankful for small blessings – we could be doing worse.

There is also a dynamic which is particular to the gold market and should not be forgotten. If default actually happens meaning there is real debt repudiation it might push either banks or bond holders into selling gold simply to raise cash.

Finally consider that gold may yet surprise – if during this entire ruckus we fail to break-down the $1140.00 level it would be very bullish and more would begin to believe gold has bottomed in the low $1100.00 range.

Silver closed down $0.11 at $15.55. Our silver bullion sales remain strong and even with a few large 100 oz bar sellers today our book remained relatively flat – this means that after all is said and done Kenny did not sell any excess inventory into the marketplace – we needed all that we purchased and more because our physical silver bullion sales remain strong.

Also of some note are 90% silver bag premiums – under usual conditions (meaning there is no big push on these bags) the premium over spot is $1.50. When the action heats up – the selling premium moves higher but so does the buying premium. We are selling $1000 face 90% bags today at $2.40 over spot delivered – granted a higher premium but our bid price is also higher. This is exactly how a real marketplace works to provide product to the public.

Some dealers are claiming $1.50 premium over spot but are sold out of product. Like my Mom used to say “My pork chops are really cheap when there is nothing in the case”. Be careful of bogus low selling premiums when the claiming dealer cannot deliver – he either does not understand the market (doubtful) or he is taking a shot with your money hoping premiums will decrease (always a ticket to disaster in the bullion business).

Platinum closed down $3.00 at $1078.00 and palladium was up $6.00 at $672.00. The price of rhodium moved lower today – down $50.00 at $850.00. The 1 oz Baird Rhodium bar is $980.00 delivered and there is some action considering recent discounts – rhodium is trading at about half of the levels seen earlier in this year – so like platinum it’s bargain time for longer term investors.

Even with all the huff and puff it’s hard for me to get too excited over gold’s prospects relative to the Greek default. I appreciate the possible contagion problem but I think this is overstated unless countries like Spain and Portugal join this club. If this ugly debt situation was presented during the original 2008 financial collapse we could have expected giant fireworks but this late in the financial recovery game it seems tired. Still there are some who believe a Greek exit will expose currency and debt corruption – this more serious view is not mine but is presented below for consideration.

This from Sharps Pixley / Seeking Alfa – Irrational Greek Government May Encourage Europeans to Purchase Gold – The European situation changed dramatically over the weekend and this had caused me to change my position on gold. On June 15, I wrote an article titled "Should We Buy Gold On Grexit Concern?" as a reply to a reader's indecision on whether I said buy gold on Grexit because gold is negatively correlated with the expected USD strength but it is also a hedge against financial instability. My assumption back then was that the EU would be able to contain the situation with Greece and hence the financial instability function would be superseded by the rising value of the USD.

After all, the majority of Greeks want to stay within the EU and this was expected to constrain the Syriza government. The current Greek government is expected to make some loud demands for concessions while the EU is expected to push against it for further reforms before dispensing the bailout money to keep Greece in the family. There will be a lot of heat and news stories back home so that both sides can show that they have pressed for the best possible deal. In short, business as usual was expected as it had been for the past 5 months with negotiations being held close to the deadline.

Moot Referendum – However Greek Prime Minister Alexis Tsipras pulled an unexpected move that derailed the entire negotiation process. Tsipras called for a referendum for the Greek people to decide if they would accept the EU's bailout proposal or not. Before we get into the details and reactions to this referendum, consider the simple issue of time. The deadline for the Greek bailout would be on June 30 and yet the Tsipras referendum is on July 5. In other words, the referendum is moot for the simple reason that there will be no bailout proposal to consider simply because Greece had already defaulted!

This referendum had effectively dashed hopes that a last minute agreement can be reached in time by the June 30 deadline. Perhaps the Greek gamble is that the EU would accommodate them by extending the deadline for another 5 days. However this is merely wishful thinking as the sudden nature of the referendum insulted the powerful politicians who had to put their careers on the line in order to carry out the negotiations in the first place against the growing impatience from their people back home.

This is how the Financial Times reported the reaction from 2 key negotiators from the ground. The Chairman of the committee of eurozone Finance Ministers, Jeroen Dijsselbloem, was quoted as saying:

"That is a sad decision for Greece. It has closed the door on further talks while the door was still open, in my mind."

The German Finance Minister, Wolfgang Schäuble, took the hardline on this topic and was quoted to have effectively closed negotiations with Greece over the matter with the following quote:

"The negotiations are clearly ended, if I understand Mr. Tsipras correctly, we have no grounds for further discussions."

There are other angry comments on the group as the various European finance ministers realized that they had wasted a lot of effort on bailout negotiations. There is no need to quote them as the Wolfgang and Dijsselbloem comments had made it clear that this is the end of negotiations and Grexit is only a matter of time.

Capital Controls – As of June 28, the European Central Bank (ECB) remains committed to supply $89 billion euros of Emergency Lending Assistance (NYSE:ELA) to the Greek Central Bank according to this Marketwatch report. However in light of the referendum, the ECB would likely cut off its ELA funding by June 30.

While the ECB is committed to keep Greek banks open temporarily, there had been a massive run on the banks as seen in the long lines that formed once the referendum announcement were made. By the end of the week, Tsipras had to announce capital controls which limited ATM withdrawals to $60 euros a day. In addition, Greek banks are now closed for an indefinite period of time. This is on top of the $5 billion euros that left Greece in April 2015 alone.

This capital control announcement had triggered a decision by Greek neighbor, Macedonia to order its bank to pull out its money from Greek's bank. This is a sign that Greece's weaker neighbors are currently actively taking steps to insulate themselves from the potential fallout effects from Grexit. It should be noted that 20% of Greek banks asset are based in Macedonia.

Conclusion – In other words, the situation on the ground is rapidly spiraling out of control and a Grexit is virtually guaranteed. In this situation, it is entirely likely that financial instability would engulf Europe even if the Troika absorbed the majority of Greek's bad debt. The irrational nature of the Syriza government would multiply the likelihood of a disorderly Grexit as Syriza might impose more than just capital controls.

Surprise is the trademark of the Syriza government and this has been pushed to the next level. Perhaps the root of the problem is that the twin wishes of the Greek people, which is to stay in Europe and to avoid the pain of austerity, are mutually exclusive to each other. They must either stay in the eurozone and take the pain of austerity or they can leave the euro and be free of the austerity demands from their creditors through default. They cannot have both and the fact that they want to have their cake and eat it, too, is one of the primary reasons for chaos.

They are threatening to unravel the whole European project and it would encourage other debtor nations such as Spain and Italy to leave the eurozone. For this reason, there is likely to be legitimate demand for physical gold all over Europe. This can be a potential short term demand for gold as its price is likely to get more expensive despite the rising USD. However the fact that events had been pushed to their climax would mean that we would likely to have a conclusion to the Grexit issue soon.

Over the longer run, a successful resolution would be conducive to the economic development of Europe. Over the medium term, that would reduce the demand for gold on the assumption that the Grexit effect can be contained with Greece itself and not spread to the rest of Europe.

The walk in cash trade was busy but not hectic today – surprisingly the phones were busy all day and the public continues to buy silver bullion in its various forms.

The 4 th of July falls on a Saturday – so the CNI Building will be closed Friday July 3 rd for our Independence Day.

Also note that the trading markets, banks and post office will also be closed Friday – July 3 rd . Wishing you all a happy and safe 4 th of July.

The Unscientific Activity Scale is a “ 6” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 4) (last Thursday – 4) (last Friday – 6) (Monday – 6). 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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