Commentary for Tuesday, May 12, 2015 – Gold closed up $9.40 today on the Comex at $1192.60 as European bonds moved lower and stocks got the jitters.
The Dollar Index sold off somewhat today with the high being 95.16 and the low being 94.24. We are looking at 94.46 as of this writing and yesterday’s close was 95.02 – the euro being stronger this morning. WTI crude oil has been firm this past 30 days moving from $54.00 a barrel to $60.00 a barrel and higher prices were further supported by “positive price” oil talk recently.
So while today’s firmness in gold is probably safe haven buying created by the bond sell off in Europe these two factors (oil and the dollar) also support current trading levels. Consider too that as bonds move lower and their respective interest rates move higher the market may be thinking that the fear of inflation is not as dead as some might have you believe.
But I think all three factors are transitory relative to the price of gold. What is more interesting is the lack of success the bears have had at breaking down the long term support lines for the price of gold. Look at the 5 year chart for the price of gold and this becomes apparent – there is a great deal of support for gold in the band between $1150.00 and $1300.00 which goes back to May of 2010. And the longer this very long support line holds the more it becomes apparent that gold may have bottomed in this region.
Even if you are a pessimist by nature you would have to admit that we are now trading in a value range relative to gold’s old high made in August of 2011 ($1917.00) the worst case scenario for gold these days being $1050.00.
My point being that downside versus upside action might now favor new gold buyers and while some physical players continue to look for cheaper prices it would not take much to get everyone back on board especially if gold’s publicity can get out of the dog house.
Silver closed up $0.21 at $16.51. The physical across the counter action is not stellar but it remains consistent.
And there is some silver buzz – This from Chuck Butler (Daily Pfennig) – “I want to skip over to Silver this morning, and revisit something I talked about last year in our monthly letter to clients called the Review & Focus, in which I talked about how Silver was used in the making of Solar Panels, and how Solar Panels were scheduled to see a HUGE pickup in production this year. And then there’s an article this morning on the telegraph.co.uk/ that talks about how demand for Silver to make Solar Panels is expected to increase 30% this year and that China alone is expected to install 17 gigawatts of Solar Capacity by the end of the year, thus creating a HUGE demand for Silver.”
The public has always loved the US Silver Eagle Monster Box (500 coins) and from time to time there is a run on them by the cash trade delivered across our counter. This is interesting because it illustrates what the LA silver bullion crowd is interested in and at what price level this market gets warm (less than $16.00).
Lately there has been a rumor that JP Morgan has been accumulating a massive number of Silver Eagle Monster Boxes. Normally rumors are a dime a dozen in this trade but this particular information comes from the famous silver guru Ted Butler whose reputation for tracking “who has the real silver” is legendary. Equally famous is Ted’s work in the naked short area (selling physical product which does not exist) which is the underpinning often used as to whether the price of silver is being fixed on the Comex.
It is unlikely that JP Morgan would choose the US Silver Eagle 1 oz to hedge its very large silver positions so like many things in the silver investing world what is really happening remains vague. Still such a story from Butler should rightly turn heads.
Platinum closed up $6.00 at $1132.00 and palladium was higher by $4.00 at $785.00.
This from FXEmpire – Metal Traders Grow Bored with Greece and Disappointed by Chinese Moves – “As the new week begins and global geopolitical stress remains calm, most traders are focusing on the possibility of a Greek default and the multiple scenarios that this could trigger. Most speculators and analysts believe that the markets have already priced in the worse outcome. Gold is trading at 1187.40 easing just $1.50 in the morning session. Silver dipped 52 points to 16.413 as platinum dipped 0.52% to 1139.60.
With little on the economics calendar and traders tired of the Greek situation, many fundamental analysts are moving to the sidelines while technicians are looking for some direction in the charts. After eight weeks of grinding sideways movement there is quite some pressure in the gold-market and gold could explode either way anytime. The Bollinger Bands are as tight as they have been in last august. So a big move is coming and likely very close.
The most popular model is still bearish and analysts don’t think that this rally would finish the overall bear market but it could collect enough enthusiastic passengers around $1,245 for the final “pain-train” towards $1,035. As written above $1,210 is the first confirmation level for this scenario. At the same time the bear scenario is still possible too and should become reality as soon as Gold moves below $1,175 again.
Gold held an advance as investors gauged the outlook for higher interest rates after data showed that U.S. payrolls increased and unemployment fell while wage gains were limited. Palladium dropped from an eight-week high.”
The big variables relative to the future price of gold are well known – dollar strength – inflation and the price of oil. All of this turns out to be a mixed bag – I believe the dollar will move lower helping the price of gold but the two other variables are working against each other. In the good old days if the price of oil moved higher it would eventually spark inflation fears. Today when the massive quantitative easing program failed to move the inflation needle it left everyone scratching their heads and questioning their assumptions.
But in this new (at least for now) fog of pricing wars and international currency rigging the price of oil should be watched carefully. The following insight from Mike Myer is worth keeping in mind because if the price of oil remains capped – the chances of returning inflation and higher gold prices will also be capped all other things being equal.
This does not mean the physical world of gold investing will evaporate – real demand from China and India is too strong for that – but it does mean the American consumer who is primarily price and profit driven might have to be even more patient certainly in 2015 and perhaps in 2016,
This from Mike Myer (Everbank / Daily Pfennig®) – What Will Be the Price of Oil at Year’s End? Survey Results Are In – “Without a doubt, the crash in the price of oil was last year’s biggest market surprise. Nobody predicted prices would drop so fast – from $105 all the way to $45 a barrel. Now that prices seem to have stabilized, the questions are: Will oil recover back up to $100 or more? Or will it plunge to even lower levels?
Today, I’d like to go over the results of our February survey, when we asked fellow readers of the Daily Pfennig® newsletter for their year-end oil price expectations. And, thanks again to everyone who voted.
Half of the participants thought oil would remain trapped in a range between $50 and $74.99. As you’ll see in today’s article that sounds like a very reasonable opinion. There are a few factors that could help oil remain trapped in a range, instead of falling to new lows or rising back above $100 a barrel. Let’s take a closer look at those factors.
What’s Behind Oil’s Recent Rebound? – You may have noticed the price of oil has been increasing lately. The main reason for this rebound can be found in this popular commodities axiom: “The cure for low prices is low(er) prices.” It refers to the fact that producers of commodities tend to cut supply when prices drop below cost. And, that’s exactly what’s going on in the energy sector.
The plunge in oil prices has already forced many oil companies to implement aggressive production cutbacks. Half the country’s drilling rigs have come offline. As a result, the U.S. Energy Information Administration (EIA) predicts that the U.S. will have its first net drop in oil production since 2008 this month.
According to the EIA, output from North Dakota’s Bakken, one of the major U.S. shale regions, will decline 23,000 barrels a day to 1.3 million in May. And, output from the Eagle Ford in Texas, the second-largest oil field in the U.S., is expected to fall 33,000 barrels a day to 1.69 million.
With this expected slowdown in production, in addition to other factors such as other countries slowing down production, the price of oil has jumped about 16% since mid-March, as you can see in the chart below. However, this short-term recovery may not last too long. There are a couple of factors that may limit oil’s upside potential.
Why It’s Unlikely Oil Will Move Back Above $100 – The great majority of our poll’s participants, about 95%, think it’s unlikely oil will end the year above $100 a barrel. There are good reasons to believe our readers are right. Absent a crisis in the Middle East, I think that it’s unlikely oil will trade above $100 in the short-term. The main factor that may prevent oil from moving much higher is something called “fracklog.” It refers to the backlog of drilled wells that U.S. drillers plan to hydraulically fracture and place into service as soon as prices rebound.
The number of wells waiting to be hydraulically fractured has tripled in the past year, as drillers wait for prices to recover. According to analysis from Bloomberg, there are 4,731 wells from Texas to Pennsylvania on hold. That means drillers are keeping 322,000 barrels a day underground. That’s additional supply that may be released into the market once the price of oil increases to economic levels of production, probably around $60-65 a barrel.
The higher the price of oil, the more incentive large independent producers such as ConocoPhillips, Occidental Petroleum Corp., and EOG Resources will have to start eating into their backlog. As recently stated by ConocoPhillips CEO Ryan Lance, “Those who are drilling and deferring completions – obviously, if they get a price signal that the commodity price is coming back a little bit, you’ll see more supply come on. If $80-$90 [per barrel] comes back, there’s a good chance that $50-$60 comes back as well because of all the new oil that will come online from completed wells.”
We could also see additional supply coming from international markets. The Organization of Petroleum Exporting Countries (OPEC) continues to increase production as a way to defend their market share in Asia and Europe. For example, Saudi Arabia, the world’s biggest oil exporter, added 658,800 barrels per day in March to bring its production to 10.3 million barrels per day, its highest level in three decades.
OPEC will meet again on June 5 to discuss its strategy. But, I think that it’s unlikely they will cut production by a significant amount. Remember, the collapse in oil prices started after the Saudis decided to keep up output as a way to compete with U.S. shale producers. And, Saudi Oil Minister Ali Al-Naimi recently said that his country wouldn’t cede market share to higher-cost producers. So, it seems more likely Saudi Arabia will continue to follow this strategy and will not cut production.
The bottom line is oil’s downside may be limited by recent production cuts. At the same time, the fracklog, along with the Saudis’ new strategy, will act to cap the price of oil. As a result, oil is likely to remain trapped in a trading range for the rest of the year. But, that’s not necessarily the end of the story.
As long-time readers of the Daily Pfennig® newsletter know, we refer to oil as an anti-dollar asset, meaning we must always be conscious of an inverse correlation between dollar performance and oil prices. For instance, since a high of 99.99 on April 15, 2015, the Dollar Index fell 5.2%7 through the end of April, but oil has risen almost 10%.8 So, it’s entirely possible that we could begin to see oil prices creep up, especially if we’re on the verge of a currency turnaround and weakening dollar, which Chuck hinted at last week.”
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