Gold Weaker on Less Ukraine Tension and a Technical Break to the Downside

Gold Weaker on Less Ukraine Tension and a Technical Break to the Downside

Commentary for Tuesday, May 27, 2014 (www.golddealer.com) – Gold closed down $26.20 at $1265.40 so the coiling theory about gold panned out only the action was to the downside. This close after some insurance bets going into the long weekend is a 3 month low and in the bargain gold took out $1277.00 support. Gold was in trouble overnight both in Hong Kong and London and this selling wave continued into domestic trading. This is certainly a triggered computer selling wave which has taken out a few sell-stops but remember what I said about the $50.00 war premium relative to Ukraine.

The gold market was tight going into the long Memorial Day weekend and as tensions between Russian and Ukraine factions move lower so does the “premium” which the gold market allocated as the conflict escalated. Since the first of this year gold has moved steadily higher from its double bottom ($1200.00) and at one time challenged $1350.00 so we have plenty of room here for profit taking. News is still negative for gold and silver – other than its use as a financial backstop and stocks are again making new highs.

So “continued settlement” should be the order of the day especially if inflation remains subdued. Expect more of the same but don’t discount the actual physical market. We were taking orders like crazy this morning so the public is very interested in buying the dips. The technical players here will be very negative and this is an overreach in my opinion. We have already drank the whole ocean so another sip won’t kill anyone as my Mom used say…so disregard what I call the “further breakdown talk” meaning it is not the end of the world if gold once again challenges the big $1200.00 level and expect real physical buying support at these discounted levels.

Silver closed down $0.35 at $19.04. Same story here in that I include the negative Fastmarkets story below but who cares? Silver is trading at a significant discount from highs and there is massive physical support within $0.50 of $19.00 so what is your downside if you are a long term buyer?

From Fastmarkets – Silver to decline in medium term, break from narrow range – SocGen – The price of silver is likely to decline when it finally breaks out of its narrow-range trading pattern, Société Générale said. Other than the period from mid-February to mid-March, silver prices have been rangebound between $19 and $20.50 per ounce since mid-November. "We remain bearish about the silver price in the medium term. As gold continues to retreat, we expect silver prices to follow suit, averaging $19 per ounce this year and $18 per ounce next year," SocGen said. Spot silver was last at $19.40/$19.45 per ounce, down eight cents on Thursday’s close.  Given a falling price this year and next, producers should start to hedge to protect both primary and by-product revenues, which could increase supply, the broker said. "The fundamental position in the market therefore suggests that the outlook for the price lies largely in the hands of investors," it added. Mine production is likely to remain robust even if silver falls further because the price still far exceeds primary mine cash costs, which were $9.27 per ounce last year, according to Thomson Reuters. Some 22 percent of total global supply last year was produced as a by-product "at zero or even negative costs", SocGen said in the report. The prospective strengthening of the US economy is likely to be negative for precious metal prices as a whole, with investors moving instead to higher-yielding assets such as equities. "Given its industrial characteristics, silver will continue to suffer from slowing economic growth in emerging markets as they move towards more sustainable, domestically driven growth," the bank said. Demand in India, an important prop to the price, could also wane in the coming months while the new Indian government prepares to ease controls on the country’s gold imports, with investors thus having less reason to preference silver. Natixis in April identified a likely drop in investment demand, which reached a high of 25 percent of total demand since the financial crisis of 2008 – above historic levels around eight percent – as a potential driver of a price decline. One possible counterweight is the 13-percent increase in global physical demand for 2013, outlined in the recent World Silver Survey. There was also a 76-percent surge in retail investment in bars and coins in 2013, offsetting a decreased level of industrial demand and accompanied by a recovery in jewellery and silverware fabrication, SocGen said. A 24-percent slump in supply of scrap silver to its lowest since 2001 also appeared bullish, contributing to silver’s biggest deficit since 2008 at 113.3 million ounces, the report added. "Despite this, it is premature to talk about a turnaround for silver prices.  This balance does not capture investor selling in the OTC market, which was significant in 2013 and we expect to continue to be a major drag over 2014," it said.

Platinum closed down $8.00 at $1465.00 and palladium was up $2.00 at $833.00. Both platinum and palladium will be supported by the strike and little in the way of pipeline supply. Also consider adding the Baird Rhodium Bar 1 oz for diversification because I think one day a short-squeeze in rhodium will wake up everyone and today’s prices will seem cheap.

From Neils Christensen (Kitco) – More Potential For Palladium On Supply Concerns, Strong Demand – BMO – Jessica Fung, analyst at BMO Capital Markets, sees more potential in Palladium as supply concerns continue to dominate the marketplace.  “South African strikes are entering their 18th week and scrap merchants are now reportedly withholding supply to the market,” Fung says. Not only is supply a concern but she added that the Chinese transportation is expected to expand, which will increase demand for the metal as they metal is a key component for catalytic converters in gasoline engines. “Investors remain positive on palladium as well, with approximately 500koz added to ETF holdings since the March launch of two South Africa-based ETFs,” she said.

From Ambrose Evans-Pritchard (Telegraph) – Recovery stalls in Europe as austerity grinds on – Growth wilted across large swathes of the eurozone in the first quarter, dashing hopes of durable recovery and prompting demands for shock and awe action from the European Central Bank. Finland fell into recession, while output contracted by 1.4pc in Holland, 0.7pc in Portugal and 0.1pc in Italy. “The recovery has vanished,” said Italian think tank Nomisma. Bourses tumbled across Europe, with Milan’s MIB index down 3.6pc, led by a plunge in bank stocks. Madrid’s IBEX was off 2.35pc and France’s CAC fell 1.25pc, as investor dumped shares to buy bonds. France slipped back to zero growth and seems caught in a vicious circle as it keeps cutting spending further to meet its EU deficit targets. The country’s hardline premier, Manuel Valls, has vowed to push through €50bn (£40bn) of spending cuts, with fiscal tightening of 0.8pc of GDP this year. The country’s Observatoire Economique said the outlook was even more troubling than it looked. “France has seen a complete stagnation for the last 10 years, an unprecedented situation since the end of the Second World War,” it said. The body said fiscal cuts of 5pc of GDP from 2010 to 2013 had been premature and self-defeating. Prof Charles Wyplosz, from Geneva University, said the relapse should not be a surprise. “Austerity has been reduced but it has not stopped. Countries are still being told to reduce their deficits and they should not be doing that right now,” he said. The ECB has yet to offer stimulus to cushion the effects or to offset “passive tightening” from a strong euro and falling credit. Eurozone inflation was 0.7pc in April, with a bloc of countries already in outright deflation. Michel Martinez, from Societe Generale, said the latest grim figures cried out for action, predicting a cut in interest rates to 0.05pc and a negative deposit rate of 0.1pc. He expects the ECB to buy €100bn of asset-backed securities later this year, with full-blown quantitative easing of up to €1.5 trillion in reserve if the recovery dries up altogether. While the eurozone as a whole eked out growth of 0.2pc, this was largely due to Germany, where output surged by 0.8pc. The country is in a unique position, trading heavily with East Asia and benefiting from a chronically undervalued exchange rate within the EMU structure. Spain racked up growth of 0.4pc, but this was due to a compression of imports and use of a “GDP deflator” of -0.4pc. Spanish exports fell 0.6pc. “This was a statistical mirage,” said Simon Tilford, from the Centre for European Reform. “We are not seeing real recovery anywhere apart from Germany, and the picture becomes more troubling the more you drill into it. Nominal GDP growth is very weak, so we’re going to see a significant rise in debt rations,” he said. “We think it is highly unlikely that the ECB will launch the kind of shock and awe QE needed to convince the markets that they are really going to stay the distance,” he said. The slump in Dutch output is a nasty shock for the government, which declared victory too soon after a deep double-dip recession. While a fall in gas output due to the warm winter may have distorted the figures, the economy remains close to a debt-deflation trap. Bruno de Haas, a former official at the Dutch central bank and author of Why The Euro Will Break Us, said membership of EMU had a disastrous effect on the country’s credit structure and was now blocking recovery. “The sooner the Netherlands returns to the guilder, the better,” he said. Dutch property prices have fallen by 20pc, leaving a quarter of mortgages in negative equity. As the slump drags on, it makes it even harder for Dutch households to cope with loans near 250pc of disposable income. Dario Perkins, from Lombard Street Research, said the Netherlands faced a 70pc risk of deflation under the International Monetary Fund’s deflation risk model, which uses a complex mix of ingredients, including credit contraction, that goes beyond the headline price level. Perhaps the most worrying data are in Portugal, where exports have fizzled and deflation is gaining a foothold. This is an ominous development for a country with a public and private debt nearing 400pc of GDP by some estimates.

The news out of Europe is always mixed but my bet is that Pritchard is right on the money here, meaning this is what has led up to Draghi’s summer surprise. Like I have said before the euro is already trading at near zero rates and many parts of Europe have the same structural problems we face in the US meaning there is no real way of fast tracking financial solutions.

So what does he have on is mind relative to the euro this summer and how will this telegraphed move push gold? The ECB could go negative on interest rates but depending on how severe this might lead to letting the genie out of the bottle. Still since Bernanke has left office and taken to the lecture circuit at $250,000.00 a pop he claims the US can keep interest rates at near zero regardless of what the Fed does with its own quantitative easing program.

And this interest rate conundrum between the US and Europe will dictate the longer term direction for gold. Think about it and you should come up with the logical conclusion – we are all in the same boat. A recovery while not stuck in the mud is not producing the requisite employment. We all spend too much money on social programs even when we don’t have the extra money. And even though the US has dodged the 2008 financial collapse we are now 6 years into this mess and are still inflating like crazy. Forget the steady drumbeat of increased buying from China and India – that will be a bonus. The inflationary result of this massive monetary expansion should lead to higher prices for everything including gold.

The walk-in cash trade today was crazy and the phones were busy all day. Virtually no large sellers so the public remains interested as long as prices are cheap.

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