Commentary for Wednesday, Sept 10, 2014 (www.golddealer.com) – Gold closed down $3.30 to at $1243.50 so the market remains defensive with the bears in charge. Gold has ignored the upcoming President Obama speech tonight in which he will perhaps outline plans regarding the terrorists group ISIS. The President has wide powers here relative to the War Powers Act but I can’t believe he will signal his intentions to a potentially deadly opponent.
The psychology behind the gold market remains negative as there seems to be concern that the Federal Reserve will raise interest rates sooner than later although calmer heads figure they can’t do much until perhaps the summer of 2015. This has to be a red herring – or perhaps this technically driven bearish market is just looking for a reason to stay short.
But like all bear market raids on gold it pays to respect the bounce back. Professionals are worried about a substantial pullback in the stock market – this new ISIS thing is worrisome – Europe remains underwater as far as debt is concerned and who really knows what the Russians are up to?
The public however is still waiting for cheaper prices. This is always the case when markets are negative but keep in mind there are plenty of buyers – yes they are waiting – but they will act when more certain about the shorter term. Also of some note we saw a big pop in the physical – local India contingent today. These folks are masters at buying in a down market.
Silver closed up a sleepy $0.01 today at $18.85. Still have not seen the big rush across the counter in buying when the public thinks we have seen “cheap”. But it will appear as it always does somewhere between $18.00 and $18.50. And then hold on to your hat because all physical supplies will dry up and premiums will begin to move higher.
Platinum closed down $5.00 at $1382.00 and palladium was off $12.00 at $848.00.
Most investors in the physical gold business have never heard of a gold dore bar. There is really no reason they should – and if presented an opportunity to purchase a gold dore bar you should run as fast as you can in the other direction. The off-market sale of fake gold dore bars always leads to fraud – so save your money.
So back to the notion of what exactly is a legitimate gold dore bar? These very ugly and rough gold bars are usually the result of refining at a real mining site. In other words they are the impure result of the first stage in the physical mining of gold.
Now you might ask “so what”? So let me share an inside view of how gold dealers get a sense of market direction through the most unlikely sources.
Edwards was having a recent conversation with one of the largest legitimate refiners in the world when the subject of sourcing came up. In other words Ken was curious as to how the big gold refiners get the raw material to make pure gold bars which are sold to the public at low premiums.
He was actually more interested in how the falling price of gold might have changed the secondary market dynamic. The answer to his question is of course that gold recovery in the secondary market comes from a large number of sources but among the top players are (1) gold scrap – in other words old jewelry and such being melted and (2) the production of gold dore bars purchased at primary mining sites.
So it’s no secret gold has been moving lower in value. But it turns out that both of these gold sources are being affected because the price of gold is moving lower. It means that all those cheesy gold buying commercials have gone away and the volume of scrap buying is moving lower.
And because the price of gold has moved substantially lower the number of dore gold bars available for further refinement is growing smaller especially at marginally profitable mining sites.
Long story – but this might mean that because gold in the secondary refining market is getting more difficult to find we are approaching a bottom in the price decline. Of course all of this is not the gospel according to Mark but it does qualify for one of those little insights which are worth retelling.
Here is our usual Wednesday report on the movement of all physical Exchange Traded Funds –
Gold Exchange Traded Funds: Total as of 9-3-2014 was 55,013,852. That number this week (9-10-14) was 54,692,185 ounces so over the last week we dropped 321,667 ounces of gold.
It might also be interesting to note that in 2013 the record high for all gold ETF’s was 85,112,855 ounces. In 2014 the record low was 54,773,273 ounces.
All Silver Exchange Traded Funds: Total as of 9-03-14 was 634,556,008. That number this week (9-10-14) was 634,484,694 ounces so over the last week we dropped 71,314 ounces of silver.
All Platinum Exchange Traded Funds: Total as of 9-03-14 was 2,762,730 ounces. That number this week (9-10-14) was 2,759,646 ounces so over the last week we dropped 3,084 ounces of platinum.
All Palladium Exchange Traded Funds: Total as of 9-03-14 was 2,951,888 ounces. That number this week (9-10-14) was 2,952,391 ounces so over the last week we gained 503 ounces of palladium.
From our friends at Casey Research – The World Order Becomes Disorder (Don Coxe, Chairman, Coxe Advisors LLC) – Is the post-Cold War global boom over? Since the fall of Bolshevism, the world has seen remarkably sustained growth in international cooperation, brought about by freer trade and new technologies. Financial assets have generally performed well, increasing prosperity across most of the world. There were just two major interruptions—the tech crash in 2000, and the financial crash in 2008.
The world warmed up fast after the Cold War. Prices of most commodities rose, despite major corrections:
- Oil climbed from $15 per barrel to as high as $140. It collapsed with the crash, but climbed back swiftly to near $100.
- Corn climbed from $2 to as high as $8 before sliding to $3.60.
- Copper climbed from 80 cents to $4.30 before sliding to $3.
- Gold shot up from $350 to $1,900 before pulling back toward $1,200.
So what’s happening with commodity prices now? Is this just another correction, or has the game really changed?
Commodity prices have risen against a backdrop of falling interest rates:
The US ten-year Treasury yielded 8% as recently as 1994, and as low as 2.1% during the crash. Recently the consensus target was 4%—before fears of outright deflation drove it to 2.4%. Bond yields have fallen below 1%. Even the bonds of the southern members of the Eurozone yield Treasury-esque returns.
Remarkably, those low yields persist even as major geopolitical outbursts have ended the mostly benign post-Cold War era. The foundations of global economic progress are being shaken by geopolitical earthquakes from Russia and Ukraine to Syria and Iraq, where a new caliphate has been proclaimed.
It seems bizarre, but the world is heading toward a revival of both the Cold War and the Ottoman Empire.
Unfortunately, these concurrent crises are occurring at a time when the great democracies’ leaders bear scant resemblance to those leaders responsible for the end of the Cold War and the launch of global cooperation and free trade: Reagan, Thatcher, and George HW Bush. Mr. Obama won his nomination by voting against the invasion of Iraq. He ran on the promise of ending wars, not starting them. Now, faced with sinking popularity in an election year that could give Republicans complete control of Congress, he naturally fears dragging America into the ISIS chaos—or Ukraine.
Obama is also haunted by the collapse of his most daring and creative foreign policy achievement—the reset with Russia. Last week, Mr. Putin doubled down on his Ukrainian attacks by warning that Russia should be taken seriously, because it is a major nuclear power and is strengthening its nuclear arsenal. Those with long memories recall Khrushchev banging his shoe at the United Nations and shouting, “We will bury you!”
Meanwhile, Western Europe’s leaders show few signs of being prepared for either crisis. Angela Merkel, raised in East Germany, is cautious to a fault. British Premier David Cameron is struggling to prevent Scottish secession and to deal with the likely return of hundreds of ISIS-trained British citizens. (Military analysts generally agree that well-funded returnees with ISIS training are much greater threats than Al Qaeda ever was… yet Cameron has failed to convince his coalition partner to support restraining their re-entry into British Muslim communities.)
The backdrop for long-term investing has, in less than a year, swung from promising to promises broken by wars and threats of more-terrifying wars.
Another unlikely threat is deflation. DEflation?
When central bankers have been running the printing presses 24/7?
Most economists, strategists, and investors would have deemed deflation a near-impossibility with government debts at all-time highs, funded by money printed at banana-republic rates. Who thought that the Fed would quadruple its balance sheet? And who dreamt that such drastic policies would be sustained for six years and would be accompanied by outright deflation in much of Europe and minimal inflation in the USA?
So why have Brent oil prices fallen from $125 in two years despite production outages in Syria and Libya and repeated cutbacks in Nigeria? Are Teslas taking over the world?
The answer is that the US is once again #1 in oil production, thanks to fracking (in states that allow it). Mr. Obama likes to boast about the new US oil boom, but he has been a bystander to this petro-revolution. According to an oil company executive interviewed in the New York Times last week, without fracking, global oil prices might be at $200 a barrel, and the world would be in a deep recession. He’s a Texan and thus inclined toward hyperbole, but his point is directionally valid.
US frackers—deploying advances in science and technology with guts and skill—have averted fuel inflation. And farmers, using the tools of modern agriculture—GMO and hybridized seed, farm machinery equipped with GPS and logistics, and carefully monitored fertilizers—have combined with Mother Nature to unleash record crops of corn and soybeans. So much for food inflation.
Capitalism is doing its job: to expand output of goods and services, thereby preventing shortages from derailing recoveries through inflation. That success story means central bankers can keep printing away.
So what should investors do? The S&P’s rally has been sustained through near-zero-cost money used to: (1) buy back stock to enrich insiders and please activist hedge funds which have borrowed big to buy big; and (2) prop up the overall market because investors have learned that buying on margin when the costs are minimal—and below dividend yields—just keeps paying off. Stein’s law says, “If something cannot go on forever, it will stop.” Too bad it doesn’t say when.
Gold loses its luster when: (1) inflation seems to be as remote as a pot of gold at the end of the rainbow; and (2) even a concatenation of crises fails to send investors rushing into the time-tested crisis consoler.
We had predicted in February that 2014 would be the year of increasing geopolitical risks that would challenge conventional asset allocations. We see geopolitical risks expanding from here—not contracting—and stick to our investment advice that the broad stock market is precariously valued. A range of options is available for those who wish to hedge themselves against even worse news.
Gold is part of any such risk mitigation. So are long government bonds.
Most importantly, we have entered an era when wise investors will devote as much time to reading the foreign news as they allocate to reading the investment section.
The walk-in cash business today seemed on the slow side – and the phones were on and off but the activity level again came in at a solid 5. Really not bad considering the market is moving lower and the general gold news is negative. I still think the public remains weary and willing to sit on the sidelines on the short-term. Still we do not see any large sellers – the mid to small size accumulators might be staying home but they are not selling what they own.
The GoldDealer.com Unscientific Activity Scale is a “5” for Wednesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Thursday – 5) (last Friday – 3) (Monday – 4) (Tuesday – 4). The scale (1 through 10) is a reliable way to understand our volume numbers.
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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 – which seem to grow when things get this quiet. And it does not help that the world famous Randy’s Donuts is just down the street.
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