Commentary for Thursday, Oct 30, 2014 (www.golddealer.com) – Gold closed down $26.20 today at $1198.50. An expected drop created yesterday in the aftermarket as the Federal Reserve announced the end of its current quantitative easing program.
This weakness in gold is accentuated by a stronger dollar – now trading over 86.00 on the Dollar Index and encouraged by Gross Domestic Product numbers released today showing a strong plus 3.5% for this 3rd US quarter. All of this as inflation remains subdued and oil trends lower.
The good news for those who want to own gold bullion is that all the bad news is now out in the open. Personally I am glad QE is over – it takes a big negative away from the gold market. And if the Federal Reserve ever decides to tap the program again it would be a huge positive for gold. So at this time no downside and plenty of potential upside.
As far as short term numbers – gold is under pressure but pressure we have seen at least three times going back to the summer 2013. From the technical viewpoint the bears own the road – for now.
From the physical demand viewpoint I think the jury is still out. There are the regular suspects – India and China – but judging from our across the counter sales I would say the American consumer is still on the sidelines. Typical really in a weak market – but don’t underestimate the ability of the American consumer to reinvent this market overnight. There is a ton of money floating around – real estate looks like its cooling off and so does the stock market. And it’s not that anyone has given up on gold bullion – the market is just so jittery the public is just looking for traction. Create some upward numbers at these depressed levels and the American demand will return – perhaps not with a bang but in enough number to make the market interesting.
In the meantime gold’s next big support level is $1180.00. This number has held up many times throughout 2013 and 2014 – that’s the positive news – the negative side of the tale is while gold bounced higher on several occasions those bounces have been smaller and smaller.
Silver closed down $0.83 at $16.38. For silver this is a big move down so the bears rule. Where silver will see some traction is difficult to figure. Today’s close is the lowest close of the year and the lowest point we have seen since its peak. The day to day sales across the counter are steady – small to mid-size and no whales.
But this steady one-way grind adds up and while the public is usually not happy when prices move lower – the real silver bullion buyer seems eager to increase positions. If you are a long term investor this market offers opportunity.
Platinum closed down $23.00 at $1245.00 and palladium was off $20.00 at $780.00.
This from Paul Gilkes (Coin World) – United States, India leading worldwide silver investment over past two months – Demand for silver American Eagle bullion coins continues to drive world market for products containing the precious metal.
Physical investment in silver over the past two months has increased worldwide, primarily bolstered by demand from the two largest markets, the United States and India, according to Valcambi Suisse.
The demand for American Eagle 1-ounce silver bullion coins in September reached 4.14 million coins, with 4,365,000 recorded in October through noon Oct. 29 with additional sales expected.
October’s sales of American Eagle silver bullion coins by the U.S. Mint are already the third highest monthly total for calendar year 2014. March leads the way with 5,354,000 coins followed by January with 4,775,000. The calendar year 2014 total tallies 36,616,000 silver American Eagle bulllion coins.
Festival buying – According to Valcambi Suisse, weaker silver prices are encouraging bargain hunting. In India, specifically, festival buying for Dusshera and Diwali has also driven demand. “In spite of this apparent support, the silver price has, so far, failed to regain much of the ground it lost to gold last month (when the gold:silver ratio briefly exceeded 72:1, having started the year at around 62:1),” according to Valcambi Suisse. “Looking ahead, the recent strength of physical investment seems unlikely to be maintained in the coming months.”
This from Bloombert Businessweek (Peter Coy) – The Hawaiian Tropic Effect: Why the Fed’s Quantitative Easing Isn’t Over – But quantitative easing is the gift that keeps on giving. Even after the purchases end, its effects will persist. How could that be? The Fed will still own all those bonds it bought, and according to the agency itself, it’s the level of its holdings that affects the bond market, not the rate of addition to those holdings. Having reduced the supply of bonds available on the market, the Fed has raised their price. Yields (i.e. market interest rates) go down when prices go up. So the effect of quantitative easing is to lower interest rates for things Americans actually care about, such as 30-year fixed-rate mortgages.
Imagine that the Federal Reserve wants to increase the price of suntan lotion. There are 10 bottles of Hawaiian Tropic for sale at the cabana. The Fed buys one per hour until it owns nine. Each time it acquires one, the price for the remaining bottles rises because people who don’t want to get sunburned are competing for the dwindling supply. Now that just one bottle is left, the Fed stops buying. Would you expect the price of the last bottle to fall suddenly? No—there’s still lots of demand and constricted supply. Same with bonds. The price of bonds should stay high—and yields stay low—as long as the Fed hangs onto its huge inventory.
To mix metaphors, ending QE isn’t putting on the brakes. It’s just easing off the accelerator. The Fed’s bond holdings will naturally shrink as bonds come due; as new debt comes onto the market, the Fed’s portfolio will have less impact. For now, the Fed will continue to reinvest the proceeds back into other bonds. It says it won’t allow the portfolio to start shrinking until after it starts raising the short-term interest rate it controls, the federal funds rate. That’s likely to happen sometime in 2015, most economists expect.
This from David Stockman (Contra Corner) – Good Riddance To QE – It Was Just Plain Financial Fraud – QE has finally come to an end, but public comprehension of the immense fraud it embodied has not even started. In round terms, this official counterfeiting spree amounted to $3.5 trillion— reflecting the difference between the Fed’s approximate $900 billion balance sheet when its “extraordinary policies” incepted at the time of the Lehman crisis and its $4.4 trillion of footings today. That’s a lot of something for nothing. It’s a grotesque amount of fraud.
The scam embedded in this monumental balance sheet expansion involved nothing so arcane as the circuitous manner by which new central bank reserves supplied to the banking system impact the private credit creation process. As is now evident, new credits issued by the Fed can result in the expansion of private credit to the extent that the money multiplier is operating or simply generate excess reserves which cycle back to the New York Fed if, as in the present instance, it is not.
But the fact that the new reserves generated during QE have cycled back to the Fed does not mitigate the fraud. The latter consists of the very act of buying these trillions of treasuries and GSE securities in the first place with fiat credits manufactured by the central bank. When the Fed does QE, its open market desk buys treasury notes and, in exchange, it simply deposits in dealer bank accounts new credits made out of thin air. As it happened, about $3.5 trillion of such fiat credits were conjured from nothing during the last 72 months.
All of these bonds had permitted Washington to command the use of real economic resources. That is, to consume goods and services it obtained directly in the form of payrolls, contractor services, military tanks and ammo etc; and, indirectly, in the form of the basket of goods and services typically acquired by recipients of government transfer payments. Stated differently, the goods and services purchased via monetizing $3.5 trillion of government debt embodied a prior act of production and supply. But the central bank exchanged them for an act of nothing.
Contrast this monetization process with honest funding of government debt in the private market. In the latter event, the public treasury taps savings from producers and income earners and re-allocates it to government purchases rather than private investments. This has the inherent effect of pushing up interest rates and, on the margin, squeezing out private investment. It is a zero sum game in which savings retained from existing production are reallocated.
To be sure, the economic effect is invariably lower investment, productivity and growth down the line, but the process is at least honest. When the public debt is financed from savings, government purchase of goods and services are funded with the fruits of prior production. There is no exchange of something for nothing; there is no financial fraud.
And it is the fraudulent finance of public deficits which is the real evil of QE because the ill effects go far beyond the standard saw that there is nothing wrong with central bank monetization of the public debt unless is causes visible inflation of consumer prices. In fact, however, it does cause enormous inflation, but of financial asset values, not the CPI.
Despite the spurious implication to the contrary, central banks have not repealed the law of supply and demand in the financial markets. Accordingly, their massive purchases of the public debt create an artificial bid and, therefore, false price. Moreover, government debt functions as the “risk free” benchmark for pricing all other fixed income assets such as home mortgages, corporate debt and junk bonds; and also numerous classes of real assets which are typically heavily leveraged such as commercial real estate and leased aircraft.
In short, massive monetization of the public debt results in the systematic repression of the “cap rate” on which the entire financial system functions. And when the cap rate gets artificially pushed down to sub-economic levels the result is systematic over-valuation of all financial assets, and the excessive accumulation of debt to finance non-value added financial engineering schemes such as stock buybacks and the overwhelming share of M&A transactions.
Needless to say, the false prices which result from massive monetization do not stay within the canyons of Wall Street or even the corporate business sector. In effect, they ride the Amtrak to Washington where they also deceive politicians about the true cost of carrying the public debt. At the present time, the weighted average cost of the $13 trillion in publicly held federal debt is at least 200 basis points below a market clearing economic level—–meaning that debt service costs are understated by upwards of $300 billion annually.
At the end of the day, the fraud of massive monetization makes the rich richer because it drastically inflates the value of financial assets—–roughly 80% of which is held by the top 5% of households; and it makes the state more bloated and profligate because its enables the politicians to spend without imposing the pain of taxation or the crowding out effects which result from honest borrowing out of society’s savings pool.
In the more wholesome times before 1914, the Federal government didn’t borrow at all. During the half-century between the battle of Gettysburg and the eve of World War I, the public debt did not rise in nominal terms, and amounted to just $1.5 billion or 4% of GDP at the time of the Fed’s creation. Even then, the Fed was established as only a “banker’s bank” which could not own a dime of public debt, but instead existed for the narrow mission of liquefying the banking market by means of discounting solid commercial paper on receivables and inventory for ready cash.
The modern form of monetization arose in the service of financing war bonds, not managing the business cycle, levitating the GDP or boosting the labor market toward the artifice of “full employment”. These latter purposes reflect a century of “mission creep” and the triumph of the statist assumption that governments can actually tame the business cycle and elevate the trend rate of economic growth.
But history refutes that conceit. In the early post-war period, central bank interventions mainly caused short term bouts of unsustainable credit growth and an inflationary spiral which eventually had to be cured by monetary stringency and recession. In the process of repetition over several decades culminating in the 2008 crisis, the household and business leverage ratios were steadily ratcheted upwards until the reached peak sustainable debt.
Now the credit channel of monetary policy transmission is broken and done. The Fed’s most recent massive monetization and “stimulus” has therefore simply inflated financial asset values—-meaning that the Fed has become a serial bubble machine.
There is a better way, and it contrasts sharply with the systematic fraud of QE. That alternative is called the free market, and at the heart of the latter is interest rates which are “discovered” by the market, not pegged and administered by the central bank. Stated differently, the free market requires that all debt and other forms of investment be funded out of society’s pool of honest savings—-that is, income that is retained out of production already made.
Under that regime there is no fraudulent bid for public debt and other existing assets based on something for nothing. Markets clear where they will, and interest rates are the mechanism by which the supply of honest savings and the demand for investment capital, including working capital, are balanced out.
Needless to say, free market interest rates are the bane of Wall Street speculators and Washington spenders alike. They can spike to sudden and dramatic heights when demand for funds to finance government deficits or financial speculation out-run the voluntary pool of savings generated by society. So doing, they bring financial bubbles and fiscal profligacy up short.
In stopping QE after a massive spree of monetization, the Fed is actually taking a tiny step toward liberating the interest rate and re-establishing honest finance. But don’t bother to inform our monetary politburo. As soon as the current massive financial bubble begins to burst, it will doubtless invent some new excuse to resume central bank balance sheet expansion and therefore fraudulent finance.
But this time may be different. Perhaps even the central banks have reached the limits of credibility—- that is, their own equivalent of peak debt.
“I think QE is quite effective,” Boston Fed President Eric Rosengren said in a recent interview with The Wall Street Journal, describing the approach as an option for dealing with an adverse shock to the economy.
The walk-in cash trade was very crowded today – the downstairs was filled from time to time. There were some cash sellers but as usual most of the public was buying. The phones were very busy to moderate all day.
The GoldDealer.com Unscientific Activity Scale is a “5” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Friday – 3) (Monday – 2) (Tuesday – 4) (Wednesday – 3). 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 very busy and see a low number – or be very 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 – perhaps a week or two. If the numbers are generally increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.
Email confirmation using a PDF File when buying or selling is functional. It also includes the various forms of payment and includes bank wire instructions. And you can now see your actual invoice or purchase order on your computer screen.
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Our four flat screens downstairs with live independent pricing (BullionDesk.com) are a big hit with the cash trade. Live pricing moves all the buy/sell product prices on a real time basis. Yes – you can visit the store with cash and walk away with your product. Or you can bring product to the store and walk away with cash. When buying from us remember if you exceed $10,000 in cash (the real green kind) a Federal Form is necessary.
In addition to our freshly ground organic coffee offered visitors throughout the day we have added cold bottled water, cokes and Snapple. We have also added fresh fruit in a transparent attempt to disguise our regular junk food habits.
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