Commentary for Monday, Oct 27, 2014 (www.golddealer.com) – Gold remains steady off $2.10 at $1229.10. The overnight Hong Kong and London markets lacked any direction and moved within a $3.00 range.
The 30 day gold chart however shows gold is having trouble holding on to its $60.00 gain seen since early October. The improving technical picture and optimism was interrupted when gold failed to show any strength above $1250.00 – and since then we have simply drifted lower.
This is interesting because there was plenty of heat in the gold market before the break and then everything went quiet.
The Dollar Index looks like 85.48 as of this writing and its 5 day graph looks flat. But if you open the view of the index to 3 months it’s obvious that it recent strength has been muted – falling from a high of 86.75 to its present level. The leveled out trading these past 5 days is probably the result of a more defensive trading position caused by this weeks Federal Open Market Committee (FOMC) meeting.
So while gold is supported to some extent by a flattening dollar it is hurt by lower oil. The oil market looks like the short trade will rule. WTI Crude is trading at 81.01 but sentiment is now so negative that some believe oil will see 75.00.
Lower oil is great for consumers – gas in some places is less than $3.00 and there is always the possibility that the dollars saved at the pump may be spent in the upcoming holiday season.
Everyone and their brother will be watching for any indication as to the next move from FOMC. These folks love “steady as she goes” so I expect very little – the end of QE for now and the promise that interest rates will remain low.
But there is a problem with Europe – as we end QE they will begin QE. The result will be confusing to the markets and perhaps even dangerous. The EU released the results of their banking stress tests Sunday.
I thought this would be a much bigger deal – the results were completely ignored. Zero Hedge published some commentary but claimed the numbers were suspect. I looked at the original source and could not make sense of it because there are so many overlapping areas and so much information that conclusions are not clear. Apparently the world financial markets saw little to worry about unless your money was in Greece or Italy.
Still Europe could turn into another mess especially because of the Russian problems but this tension is almost completely discounted by the physical gold trade.
Silver closed down another quiet $0.02 at $17.11. And physical action to me seems subdued considering how inexpensive silver has become. There have been a few big boys in this market of late but generally we are seeing small to moderate buying – steady but no real whales.
Platinum closed up $3.00 at $1254.00 and palladium was higher by $5.00 at $786.00.
The latest from the World Gold Council – the complete report can be found at their website (www.gold.org) looking into Q4 2014: Gold is up, defying expectations – The gold price is up 3.4% year-to-date (as of 20 October 2014) amid record low volatility. The fact that gold has been above its 2013-end price for all but two days this year has defied predictions from market analysts, who have generally been expecting lower prices.
What does the current macroeconomic environment mean for gold?
In our view, there are four main reasons investors should view gold as a valuable portfolio component today:
– Positive economic growth is supportive of gold’s long-term demand
– Rising interest rates do not necessarily push gold prices down
– Gold’s cost effectiveness makes it an attractive portfolio hedge compared to other strategies
– Constraints in mine production and falling gold recycling have kept the market in balance.
It might be a mistake to believe that quantitative easing will simply disappear – never to be heard from again. The biggest, most recent argument relative to the price of gold is presented when discussing quantitative easing by the Federal Reserve.
The “soon to end” argument claims that no further good can come from this government largess. And further the end will further depress the price of gold while interest rates naturally rise and the dollar becomes stronger.
The “pro-gold” faction claims that quantitative easing is now so ensconced in modern Federal fiscal dogma that it will remain part of the landscape – perhaps forever. And interest rates will remained subdued by the Federal Reserve.
This idea that quantitative easing would last forever has been part of the fringe argument among those still interested in gold for the past 3 years. It was never taken seriously – not that proponents are crack pots – it just did not seem plausible.
For the modern gold bullion holder – who is more concerned with the price of gold on the shorter term these academic concerns turn into a judgment about quantitative easing – and more importantly when they want to get back into the game.
If QE continues in some form – then higher gold prices make sense. If Uncle Sam folds his tent – then gold will continue to unwind.
But what happens if we experience something in the middle?
Not just the end of this famous program this month but its reintroduction in the near future because the Federal Reserve read the tea leafs wrong. This relatively new theory is now being discussed by the physical gold community.
If the Federal Reserve restarted the quantitative easing engine after its supposed October close – the ramifications would be huge. Gold would be back to old highs in less than a year as old spec money returned and it would not matter that inflation was within the Federal target zone.
The following Paul Krugman commentary suggests such a possibility.
This is taken an Opinion Pages of the New York Times – Oct. 16, 2014 – Paul Krugman – What Markets Will – “In the Middle Ages, the call for a crusade to conquer the Holy Land was met with cries of “Deus vult!” — God wills it. But did the crusaders really know what God wanted? Given how the venture turned out, apparently not.
Now, that was a long time ago, and, in the areas I write about, invocations of God’s presumed will are rare. You do, however, see a lot of policy crusades, and these are often justified with implicit cries of “Mercatus vult!” — the market wills it. But do those invoking the will of the market really know what markets want? Again, apparently not.
And the financial turmoil of the past few days has widened the gap between what we’re told must be done to appease the market and what markets actually seem to be asking for.
To get more specific: We have been told repeatedly that governments must cease and desist from their efforts to mitigate economic pain, lest their excessive compassion be punished by the financial gods, but the markets themselves have never seemed to agree that these human sacrifices are actually necessary. Investors were supposed to be terrified by budget deficits, fearing that we were about to turn into Greece — Greece I tell you — but year after year, interest rates stayed low. The Fed’s efforts to boost the economy were supposed to backfire as markets reacted to the prospect of runaway inflation, but market measures of expected inflation similarly stayed low.
How have policy crusaders responded to the failure of their dire predictions? Mainly with denial, occasionally with exasperation. For example, Alan Greenspan once declared the failure of interest rates and inflation to spike “regrettable, because it is fostering a false sense of complacency.” But that was more than four years ago; maybe the sense of complacency wasn’t all that false?
All in all, it’s hard to escape the conclusion that people like Mr. Greenspan knew as much about what the market wanted as medieval crusaders knew about God’s plan — that is, nothing.
In fact, if you look closely, the real message from the market seems to be that we should be running bigger deficits and printing more money. And that message has gotten a lot stronger in the past few days.
I’m not mainly talking about plunging stock prices, although that’s surely telling us something (but as the late Paul Samuelson famously pointed out, stocks are not a reliable indicator of economic prospects: “Wall Street indexes predicted nine out of the last five recessions!”) Instead, I’m talking about interest rates, which are flashing warnings, not of fiscal crisis and inflation, but of depression and deflation.
Most obviously, interest rates on long-term U.S. government debt — the rates that the usual suspects keep telling us will shoot up any day now unless we slash spending — have fallen sharply. This tells us that markets aren’t worried about default, but that they are worried about persistent economic weakness, which will keep the Fed from raising the short-term interest rates it controls.
Interest rates on much European debt are even lower, because Europe’s economic outlook is so bad, and we’re not just talking about Germany. France is currently in conflict with the European Commission, which says that the projected French deficit is too big, but investors — who are still buying French bonds despite a 10-year interest rate of only 1.26 percent — are evidently much more worried about European stagnation than French default.
It’s also instructive to look at interest rates on “inflation-protected” or “index” bonds, which are telling us two things. First, markets are practically begging governments to borrow and spend, say on infrastructure; interest rates on index bonds are barely above zero, so that financing for roads, bridges, and sewers would be almost free. Second, the difference between interest rates on index and ordinary bonds tells us how much inflation the market expects, and it turns out that expected inflation has fallen sharply over the past few months, so that it’s now far below the Fed’s target. In effect, the market is saying that the Fed isn’t printing nearly enough money.
One question you might ask is why the market’s pro-spending, print-more-money message has suddenly gotten louder. My guess is that it’s mainly driven by events in Europe, where the slide into deflation and the growing public backlash against austerity have reached a tipping point. And it’s very reasonable to worry that Europe’s problems may spill over to the rest of us.
In any case, the next time you hear some talking head opining on what we must do to satisfy the markets, ask yourself, “How does he know?” For the truth is that when people talk about what markets demand, what they’re really doing is trying to bully us into doing what they themselves want.”
I added the highlighted sentences – but don’t dismiss Krugman as just another liberal who does not believe there is a consequence to creating more fiat paper money.
It is very possible that because the financial dam has not burst that such liberal monetary policy will become the norm. Why not bring back quantitative easing if the inflation rate remains low? Folks who believe this liberal approach makes for good financial planning have even suggested inflation is dead!
I believe this conclusion will eventually turn into another Black Swan event which can only push the price of gold higher. I also believe China and India already accept this as a fact and are making preparations for the coming storm.
The walk-in cash trade was off and so was the phone trade – very quiet – perhaps waiting for the release of FOMC information on Wednesday. There seems to be more interest in candy with Halloween right around the corner – now that is scary.
The GoldDealer.com Unscientific Activity Scale is a “2” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 3) (last Wednesday – 4) (last Thursday – 3) (last Friday – 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.
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