Gold Remains Flat as Technicals Improve

Gold Remains Flat as Technicals Improve

Commentary for Tuesday, Oct 14, 2014 (www.golddealer.com) – Gold closed up $4.30 at $1233.60 after trading as high as $1238.00 in the overnight London market on poor economic data out of Germany.

So gold’s continued modest rise is weighed down by dollar strength and lower oil, but continues to be pushed by what looks like some resumed safe-haven buying coupled with a classic oversold bounce to higher ground.

The global slow down talk of late has also posed a problem to traders. The technical picture for gold has been poor for the last 60 days – everyone and their brother were looking at the short trade.

But like all trends related to gold – cross currents are disruptive. The higher dollar is capped – ISIS becomes very scary – the EU suddenly promises something which sounds like quantitative easing to me – the Russians and Chinese begin to talk new currencies and China/India demand wakes up just as the world reconsiders gold’s safe haven status.

The Federal Reserve is looking for a reason to delay an interest rate hike because of the problems in Europe and the notion that the economic picture in the US – while improving still looks sluggish. This continued near zero interest rate environment makes the bulls smile but is no substitute for strong demand.  

Bloomberg – “Treasuries climbed, with two-year note yields dropping the most in more than a year, as signs of economic weakness in Germany fueled speculation that slowing global growth will delay Federal Reserve interest-rate increases.

Thirty-year bond yields dropped below 3 percent for the first time since May 2013 as reports showed U.K. inflation dropped to a five-year low in September and German investor confidence eroded. A gauge of inflation expectations measured by the difference between yields on 10-year notes and similar-maturity inflation-index debt traded close to the lowest in more than a year. Volatility reached the highest level since January.”

Silver closed up a modest $0.06 at $17.35 and the physical excitement of silver below $18.00 has pretty much played itself out. Still this market carries a certain tension at these levels for two reasons – (1) there really is a shortage of real silver bullion and (2) there has been a 65% pullback in silver prices since the peak in 2011.

Platinum closed up $12.00 at $1272.00 and palladium closed up $9.00 at $794.00.

Continue to watch the dollar relative to the price of gold. The possibility of a delayed interest rate hike has muted the Dollar Index and helped support gold. The Dollar Index has seen a 52 week low of 78.91 and a 52 week high of 86.75. As of this writing on Tuesday we are looking at 85.83. The dollar is not getting considerably weaker in the bigger picture but the possibility of continued near zero interest rates seems to have capped its rise on the short term. Still we are 30 basis points higher than yesterday’s reading (85.53) so the drag on gold continues. 

This from Chuck Butler (EverBank World Markets) – “The IMF warned countries at the International Money Fund’s semiannual meeting that easy money policies adopted by central banks to stimulate growth are bringing the world closer to another financial crisis, saying that, "A major lesson of the last crisis is that accommodative monetary policy contributed to financial excesses.” Then we had an article in The NY Times that was written by Paul Krugman, where he expresses his fear that the world will crumble under the weight of austerity measures taken by consumers and countries.  So, how far apart are those thoughts?  And longtime readers know where I stand on all of this, so I don’t need to pick this stuff all apart, and say why I did so, I’ve been doing that already for years now! But I will take one shot here before I go on to other things this morning. Who said that taking austerity measures would be easy? There was all that pleasure in the years leading up to the financial meltdown, now there is pain to be paid, to clean out the excesses and form a new base to move forward.” 

This from FXEmpire (Barry Norman) – Oil Prices Continue to Slide as Price War Begins – “Oil prices continued to fall on Monday morning surprising most traders who expected a rebound after last week’s steady declines. Crude oil is trading at 84.65 down by $1.18 while Brent oil took a larger fall to trade at 89.36 giving up $1.22 as traders continue to turn their backs on energy products.  Energy stocks have taken a beating so far in October as commodity prices continue to deteriorate. A wave of bad news has hit the commodities sector. A weakening global economy, a surplus in oil supplies and a strengthening U.S. dollar have combined to send oil prices lower in recent weeks.

Last week, the slide continued when Brent crude dropped below $90 per barrel for the first time in more than two years. Poor economic data from Germany raised fears that a renewed European recession could be on the horizon. The S&P 500 lost 2 percent on Oct. 9, and the markets have experienced some of the worst volatility so far this year. The International Monetary Fund (IMF) also revised downwards its projection for global economic growth in 2014 and 2015, warning that “global growth is still mediocre.”

China’s oil demand remains weaker than it has been in years. To a certain extent, China’s oil imports have been artificially elevated as it has diverted oil into its strategic stockpile. Oil imports could soften as stockpiles fill up. China even posted a decline in oil imports for the month of July. The current decline in oil prices is not strange. Supply has been rising steadily since the 2008 crisis. According to EIA, total production of crude oil and liquid fuels rose by 10 percent in the last five years, from 83.3 million barrels per day (bpd) in early 2009 to 91 million bpd in mid-2014.  Additionally, in recent years, demand has been losing strength.  The US, Europe and Japan have reduced their consumption of oil since 2008 by around 10 percent or four million bpd, due to improvements in energy efficiency and low GDP growth. Demand from emerging economies keeps rising, but growth is weaker than in previous years.”

Lower prices in oil is another serious drag on the price of gold – and lower oil portends lower inflation in my mind. The above is another one of those sideline factors that don’t make sense in the longer run but on the short term should be second in line relative to why gold struggles. Of course the dollar strength remains in the first position but this continued downward pressure on the price of oil should be troubling for the gold bullion community – especially as gold struggles for traction at the lower end of its current trading range.

Neils Christensen from Kitco does a nice job summarizing what the Normura report expects on the upcoming Swiss gold referendum – Nomura Currency Analysts Think Swiss Gold Vote Unlikely To Pass – “Although more attention is being focused on Switzerland’s gold referendum on Nov. 30, currency analysts at Nomura said a “yes” vote could be difficult to achieve, according to the country’s voting statistics.

According to a research report published Tuesday by Nomura, referendums in Switzerland are fairly popular; however, very few are actually able to pass. Since 2000, the country has voted on 66 different initiatives, about 4.7 referendums per year, and only 15% have passed.

In the Nov. 30 referendum, Swiss citizens will be voting on three initiatives: whether or not the Swiss National Bank should increase its gold reserves to 20%, that the central bank should stop selling its precious metals and that all its gold should be held within the country.

The analysts said that their base case is for the “no” side to win, but they still looked at the implications in the off-chance that the “yes” vote won.

The analysts noted that a yes vote would force the SNB to purchase between $67 and $83 billion worth of gold and trip its current gold holdings at 1044.9 metric tons.

The analysts added that the immediate aftermath of a “yes” vote be “business as usually,” as the central bank would have two years to repatriate its gold reserves – currently 20% of its reserves are held at the Bank of England and 10% of its reserves are held at the Bank of Canada; the SNB would also have five years to boost its gold holdings to 20% of its total reserves.

However, in the long-term a yes vote would lead to the central bank increasing its balance sheet and depending on three scenarios, could lead to an appreciation of the Swiss franc.

In the mostly likely scenario, analysts said that the central bank will probably just buy more gold as this would have the least impact on the country’s currency. They added that the SNB would have to, on average, buy about 9.62% of the world’s gold production each year for the next five years.

The second scenario would be for the central bank to reduce its foreign exchange reserves and purchase a smaller amount of gold; however, this would lead to a stronger franc, which in turn could hurt the country’s economic growth.

The third scenario Nomura sees is for the SNB to reduce its foreign exchange reserves by 69% and not actually buy any gold; however, this is unlikely because it would lead to an extremely strong currency. “What may seem like a simple decision to the Swiss electorate has in fact complicated consequences for policy makers at the SNB in respect to its holdings of gold and foreign exchange reserves,” they said.

Earlier in the week, Swiss Finance Minister Eveline Widmer-Schlumpf continued to urge voters to reject the referendum as it would impede the central bank’s monetary policy.

It is still too early to determine the sentiment within the country. Exit polls are expected to be released within the next few weeks, leading up to the vote.”

I talked about this Swiss initiative a few weeks ago and agree that the possibility of passage is slim. But the interesting part of the commentary comes when you think about repatriation of gold held in other countries.

Other countries including Germany have a similar problem in that all the gold owned is not within its borders. So why would a country choose to store gold reserves out of the country? It’s probably a safety measure left over from the big World Wars – and when everything settled down the respective country thought such a strategy added stability.

But as currencies around the world moved toward the fiat side some legitimate commentators began to wonder if there was enough gold to go around – some even claimed the reserves were hypothecated in some sort of secret deal.

This sounds too contrived to me but I do wonder why when the country decides to move its gold home the time involved is a matter of years. So something in this accounting scheme is not kosher.

Still when countries begin to think about buying gold and moving their reserves home it leads one to consider this a big defense move.

I’m not saying central banks of the world are worried about the mountain of fiat currency they have created. But if they were, this type of international gold bullion movement is exactly what I would expect. And they would proceed exactly as they are doing – claiming in the process that this is no big deal.

The walk-cash trade was on the quiet side today and so were the phones. This lack of public follow through in the physical markets even though the technical picture for gold is getting better and the physical demand from India is off the back burner reminds me how cautious gold bullion investors have become. There has been a solid bounce from $1180.00 lows and some are even saying we have seen a conclusive bottom but I have my doubts. We need to see further follow through in gold – something in plus $40.00 range ($1280.00) before the across the counter market wakes up and decides to test the waters.

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