Commentary for Wednesday, May 27, 2015 ( www.golddealer.com) – Gold closed down $1.30 at $1185.90 on the COMEX today as gold turns flat, traders remain cautious.
This market is unusually quiet after yesterday’s flurry of action – this is important. No follow through to the downside for the bears is just as telling as no follow through to the upside for the bulls.
And the press is also sleeping. Under normal trading conditions the problem about debt default in Greece would have made the headlines and be good for $50.00 to the upside in gold. And the idea that the Chinese Navy is creating trouble in the South China Sea building landing strips in disputed areas is not even seen on the news. In the old days the Chinese Navy moving from offensive to defensive would also have been worth $50.00 to the upside.
After gold’s move to the downside yesterday – an expected weakness as both European and American traders returned from Memorial Day – the big story was strength in the dollar. Janet Yellen’s pronouncement that we are likely to see a rate hike before year end encouraged dollar bulls and pressured gold lower.
There was also the fear that Greece might really default on its next interest payment to the IMF and perhaps Spain was again in financial trouble. All of this and encouraging housing data pushed traders into dollars and produced little safe haven buying for gold.
Gold’s inability to hold the important $1200.00 line and its subsequent weakness has it now trading below its 50 Day Moving Average, its 100 Day Moving Average and its 200 Day Moving Average, so the technical picture continues to favor the bears.
On the positive side this lack of follow through should tell you something. We have seen this break to the downside twice in the past 30 days – the first time was in late April as gold moved from $1210.00 to $1180.00 – then reversing – moving again to $1220.00 – again – failing and once again testing the $1180.00 mark. So as long as this most recent support level holds gold remains range-bound.
From March through May gold was generally higher moving from $1150.00 to $1225.00 – the Dollar Index during the same time period moved from 100.00 to 92.00. Since May the Dollar Index has reversed itself moving from 92.00 towards 100.00 – gold was weaker – now testing old recent lows.
The key here is dollar strength. The Dollar Index this morning is 97.32 selling off from its high of 97.78 that is why domestic gold trading is flat this morning. The overnight Hong Kong and London markets were also uneventful.
The more interesting question however is whether gold will break to new lows and the dollar will continue higher or is the short trade now tired and is gold once again oversold? Real physical action will tell the tale – not the paper short trade.
Silver closed down $0.10 at $16.63. Interestingly – some Monster Box activity has resumed even though we are above what I would call the recent sweet spot in silver pricing ($15.50 – $15.75). It’s amazing how popular those big strapped boxes have become – at the store we use special dollies to load them into your truck.
Platinum closed down $5.00 at $1118.00 and palladium was higher by $4.00 at $785.00. Platinum is now trading for $67.00 less than gold – we should see some renewed trading of gold bullion for platinum bullion in this price discount range. Actually I am surprised we have not seen much action here – but it is summer time and stocks are coming off a whizz.
What’s in store for gold now that Fed Chair Janet Yellen has waffled on last week’s FOMC dovish interest rate stance?
Everyone now is convinced the Federal Reserve will raise rates before year end – just because the most recent CPI numbers show that core CPI rose 0.3% in April.
Remember that over the last 12 months core CPI was up 1.8% (well within the Federal guidelines). And if you do the math on the most recent government release – and assume the 0.3% number is going to be an average (0.3% x 12 months = 3.6%) – presto – you arrive at almost twice the Federal guideline!
But before you jump out the window let’s remember the economy is generally deflationary – both here and in Europe. It will take more than a one month blip in a metric which over the last 12 months has produced a CPI number of less than 2%.
And besides – higher inflation is what the Federal Reserve needs to get our economic engine chugging. These public meetings dispatched to assure the world that the Federal Open Market Committee is up to the challenge are great but their banging on about this 2% guideline seems to me a bit contrived.
Perhaps it’s even a construct designed to justify continued near zero interest rates. Maybe I did not get enough sleep last night – but I don’t just buy into scenario that something more than 2% is disastrous.
Every government in the world actually needs higher numbers, 3% or 4%. This would allow the politicians to sleep better, and it would guarantee the central banks could payback all this borrowed money with cheaper dollars.
So I suggest that a small rate increase is another straw dog when it comes to the price of gold. Much overrated in the press – it will have a negative effect on prices but remember we are at the lower end of this price shake out – just look at the 10 year gold chart and it’s easy to see we are bottoming because the rate of decrease is slowing considerably. This chart does not look like the end of the world for gold – it simply looks like gold is looking for a reliable footing.
This recent break below $1200.00 (a support line which goes back to 2013) is concerning because there are other things going on and the average person is negative on gold because of its back and forth nature of late.
Will this market continue to weaken – perhaps, but the blow out number is $1000.00 which goes back to 2008. And any break below $1140.00 will be met with massive physical buying – just as we have seen on other significant breaks to lower ground.
Also consider the press relative to gold, with a few short exceptions has been generally negative since late 2011. Even today the old “sell the rallies” commentary can be seen on a regular basis. This makes sense if you are a paper trader but our readers are solid long-term bullion buyers looking for an insurance bet against financial debacle.
My point being that when the press is the most negative we are usually at or near the bottom of the market because most sellers have already sold – the old tried and true contrarian doctrine.
The second straw dog for gold is dollar strength – it worries everyone because it’s bad not only for gold but also for stocks and the economy. Granted the Dollar Index got stronger with the threat of a soon impending rate hike last week.
But the Federal Reserve needs a strong dollar in this economic environment like it needs a hold in its head. This will kill Wall Street and cripple our ability to compete in world markets. Look for the Federal Reserve to do anything in its power to avoid continued dollar strength.
As of this writing the Dollar Index is trading around 97.00 but if you look at the 3 month chart the technical picture for the dollar is a mixed bag. You could make a case that we have bottomed around 92.00 and are now looking at a trend reversal – this because of the new QE in Europe, the continued improvement in the US economy and the possibility of an interest rate hike.
All of this makes sense but go back to the yearly Dollar Index and it is just as likely the Dollar Index trend to higher ground broke down in March – and this latest fuss might lead back to a more normal and much lower reading (80.00).
The reason the dollar is getting so much traction is because of our economic recovery and the fact that some think the euro is doomed. The euro is not doomed – the ECB will deploy the same Keynesian maneuvers that we used to kick the can down the debt road. The newly minted quantitative easing program courtesy of the European Central Bank will be successful – ultimately supporting the euro. Europe isn’t going anywhere – there will be no big domino chain beginning in Greece.
But they will not change the way they do things and too much debt is at the core of their financial system. This uncorrected financial largesse will eventually lead to the next financial failure.
So from an insurance viewpoint there are plenty of reasons to own gold or silver bullion. That is why the central banks of the world continue to accumulate gold with both hands. Now you are not a central bank so the best reason for the average investor is simply that prices are getting cheaper and you want the same insurance that bullion affords the central banks.
To understand lower prices from an American perspective consider that buyers line up when either gold or silver prices dip. This is happening all over the world but for a different reason. The price of gold or silver when expressed in the euro or a dozen other world currencies is moving higher. In other words they are encouraged to move their weakening paper money into gold or silver bullion – now.
You may question the results of world mass infusion of fiat paper money. But there should be one thing we all can agree on – it creates asset bubbles. And asset bubbles (either here or in Europe) will eventually lead to that next financial blow up and the associated panic. The last true panic happened during the real estate crash in 2008 and the resultant run on banks because of the liquidity panic. Gold easily moved toward $2000.00 an ounce – there was a real shortage of good bullion products and business across our counter was sizzling. The next panic will be much larger because the amount of fiat paper money is now gigantic relative to what was available in 2008. And all this cash will now be available both here and in Europe – you can draw your conclusions on that big difference.
This is the true value of gold either in dollars or any other fiat currency. Sooner or later governments will debase paper – it’s how they get more goodies – the real cost to us is a ridiculous debt burden to future generations (plus interest of course). Placing a portion of your savings in gold or silver bullion is how you protect your future – just in case this Keynesian train goes off the tracks sooner than later.
This is our usual ETF Wednesday information – these metrics are important to individual physical investors because they provide clues as to whether the physical market is enthusiastic and adding metals or is disappointed and selling metals.
All Gold Exchange Traded Funds: Total as of 5-20-15 was 51,572,558. That number this week (5-27-15) was 51,451,424 ounces so over the last week we dropped 121,134 ounces of gold.
The all-time record high for all gold ETF's was 85,112,855 ounces in 2013. The record high for Gold ETF's in 2015 is 53,901,867 and the record low for 2015 is 51,057,082.
All Silver Exchange Traded Funds: Total as of 5-20-15 was 612,963,128. That number this week (5-27-15) was 612,845,023 ounces so over the last week we dropped 118,105 ounces of silver.
All Platinum Exchange Traded Funds: Total as of 5-20-15 was 2,575,156 ounces. That number this week (5-27-15) was 2,575,066 ounces so over the last week we dropped 90 ounces of platinum.
All Palladium Exchange Traded Funds: Total as of 5-20-15 was 2,969,809 ounces. That number this week (5-27-15) was 2,982,330 ounces so over the last week we gained 12,521 ounces of palladium.
This from Ed Steer’s Gold and Silver Daily. This is a quote from Ed – “I consider Jim Rickards to be one of the brightest minds in the financial markets today. He’s worked with many of the largest financial institutions and government agencies—and as you know, he’s also written two New York Times best-sellers about the problems with today’s monetary system: Currency Wars and The Death of Money. In today’s piece, Jim explains why one of the most dearly held beliefs of gold bugs is simply not true. It was originally published in the May issue of Jim Rickards’ Strategic Intelligence.”
Jim Rickards – Why Most Gold Bugs Are Dead Wrong – “One of the most persistent story lines among gold bugs and market participants who foresee the collapse of the dollar goes something like this:
China and many emerging markets, including the other BRICS, are looking for a way out of the global fiat currency system. That system is dominated today by the US dollar. This dollar dominance allows the US to force certain kinds of behavior in foreign policy and energy markets.
Countries that don’t comply with US wishes find themselves frozen out of global payment systems and find their banks unable to transact in dollars for needed imports or to get paid for their exports. Russia, Iran, and Syria have all been subjected to this treatment recently.
China doesn’t like this system any more than Russia or Iran but is unwilling to confront the US head-on. Instead, China is quietly accumulating massive amounts of gold and building alternative financial institutions, such as the Asia Infrastructure Investment Bank, AIIB, and the BRICS-sponsored New Development Bank (NDB).
When the time is right, China will suddenly announce its actual gold holdings to the world and simultaneously turn its back on the Bretton Woods institutions such as the IMF and World Bank.
China will back its currency with its own gold and use the AIIB, NDB, and other institutions to lead a new global financial order.
Russia and others will be invited to join the Chinese in this new international monetary system. As a result, the dollar will collapse, the price of gold will skyrocket, and China will be the new global financial hegemon. The gold bugs will live happily ever after.
The only problem with this story is that the most important parts of it are wrong. As usual, the truth is much more intriguing than the popular version.
Here’s what’s really going on. As with most myths, parts of the story are true. China is secretly acquiring thousands of tons of gold. China is creating new multilateral lending institutions. No doubt, China will announce an upward revision in its official gold holdings sometime in the next year or so. In fact, Bloomberg News reported on April 20, 2015, under the headline “The Mystery of China’s Gold Stash May Soon Be Solved” that “China may be preparing to update its disclosed holdings …”
But the reasons for the acquisition of gold and the updated disclosures—if they happen—are not the ones the blogosphere believes. China isn’t trying to destroy the old boys’ club—it’s trying to join it.
China understands that despite the strong growth and huge size of its economy, the yuan is not ready to be a true reserve currency and will not be ready for years to come. It is true that usage of the yuan is increasing in international transactions. But it is still used for fewer than 2% of global payments, compared with over 40% for the US dollar.
Usage in payments is only one indicium of a true reserve currency…and not the most important one. The key to being a reserve currency isn’t payments, but investments. There needs to be a deep, liquid bond market denominated in the reserve currency. That way, when countries earn the target currency in trade, they have someplace to invest the surplus.
Right now, if you earn yuan trading with China, all you can do with the money is leave it in a bank deposit or spend it in China. There is no large yuan-denominated bond market to invest in.
In addition to a bond market, you need the “plumbing” of a bond market. This includes a network of primary dealers; hedging tools such as futures and options; financing tools such as repurchase agreements, derivatives, clearance, and settlement channels; and a good rule of law to settle disputes, secure creditors, and deal with bankruptcies.
China has none of these things on the needed scale or level of maturity. When it comes to true reserve-currency status, the yuan is not ready for prime time.
China is also not ready to launch a gold-backed currency. Even if it has 10,000 tons of gold—far more than it currently admits—the market value of that gold is only about $385 billion. China’s M1 money supply as of April 2015 is about $5.4 trillion. In other words, even on assumptions highly favorable to China, its gold is worth only about 7% of its money supply.
Historically, countries that want to run a successful gold standard need 20–40% of the money supply in gold in order to stand up to bank runs in the market. China could reduce its money supply to get to the 20% level, but this would be extremely deflationary and throw the Chinese economy into a depression that would trigger political instability. So that won’t happen.
In short, China can’t have a reserve currency because it doesn’t have a bond market, and it can’t have a gold-backed currency because it has nowhere near enough gold. So what is China’s plan? China wants to do what the US has done, which is to remain on a paper currency standard but make that currency important enough in world finance and trade to give China leverage over the behavior of other countries.
The best way to do that is to increase its voting power at the IMF and have the yuan included in the IMF basket for determining the value of the special drawing right. Getting those two things requires the approval of the United States, because the US has veto power over important changes at the IMF. The US can stand in the way of Chinese ambitions.
The result is a kind of grand bargain in which China will get the IMF status it wants, but the US will force China to be on its best behavior in return. This means that China must keep the yuan pegged to the dollar at or near the current level. It also means that China can have gold but can’t talk about it. In order to “join the club,” China must play by club rules.
The rules of the game say you need a lot of gold to play, but you don’t recognize the gold or discuss it publicly. Above all, you do not treat gold as money, even though gold has always been money.
The members of the club keep their gold handy just in case, but otherwise, they publicly disparage it and pretend it has no role in the international monetary system. China will be expected to do the same. It’s important to note that China will not act in the best interests of gold investors; it will act in the best interests of China. Moreover, just because the grand bargain is in sight does not mean it will be easy to realize. Both sides are jockeying for leverage.
Beijing launched its own development bank to put pressure on the IMF. The US Treasury blames the Tea Party for delays in approving China’s new votes at the IMF. Meanwhile, the White House does nothing to break the logjam in Congress. The White House is happy to let China twist in the wind while the game goes on behind closed doors.
Meanwhile, China will probably announce its increased gold holdings later this year. But don’t expect fireworks. China has three accounts where it keeps gold: the People’s Bank of China (PBOC); the State Administration of Foreign Exchange (SAFE); and the China Investment Corp. (CIC).
China can move enough gold to PBOC when it’s ready and report that to the IMF for purposes of allowing the yuan in the SDR. Meanwhile, it can still hide gold in SAFE and CIC until it needs it in the future.
China will also probably be admitted into the SDR basket later this year. Far from launching its own gold-backed currency, China will be acknowledging that the SDR is the true world money as far as the major powers are concerned.
Why would China want to give up on fiat money any more than the Fed or the European Central Bank? All central banks prefer paper money to gold because they can print the paper kind. Why give up on that monopoly of power?
Gold is still the safest asset, and every investor should have some in his portfolio. The price of gold will go significantly higher in the years ahead. But contrary to what you read in the blogs, gold won’t go higher because China is confronting the US or launching a gold-backed currency.
It will go higher when all central banks—China’s and the U.S.’s included—confront the next global liquidity crisis, which will be worse than the one in 2008, and individual citizens stampede into gold to preserve wealth in a world that has lost confidence in all central banks.
When that happens, physical gold may not be available at all. The time to build your personal gold reserve is now.”
The walk-in cash trade today was average and the phones were busy all day.
The GoldDealer.com Unscientific Activity Scale is a “ 3” for Wednesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Thursday – 2) (last Friday – 3) (Monday – Closed) (Tuesday – 2). 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 busy and see a low number – or be 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. 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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