Commentary for Monday, May 12, 2014 – Gold closed higher today up $8.30 at $1295.60 and while some writers see this as a symptom of the continued problems in Ukraine I think this market is purely driven by technical trading. Gold began rising in value overnight in the Hong Kong market and continued active into London and the COMEX reaching $1307.00 at one time before selling off and closing at $1295.60. This looks like computer trading meaning higher activity feeds on itself and leads to more forward momentum.
The referendum by pro-Russian Ukrainians in Kiev passed by a margin of 90% and violence ensued. The fact that Putin says he wants to diffuse the situation and his claims of troop pullbacks helped reduce the fear of civil war. This hostile action places a footing on the gold market but nothing more as most understand that Russia may push the envelope and the US will talk about further sanctions. But after that not much is going to happen and when this mess blows over any gains posted by gold will be given back.
Look for gold to continue weaker as the taper continues unless the dollar decides to move below 79. Over the weekend Tim Smith (Everbank) posted an interesting correlation between gold and the dollar: Why 79 Is The Key Number For The Dollar – The dollar index tracks the performance of the buck against six major currencies: euro, Japanese yen, British pound, Canadian dollar, Swiss franc and Swedish krona. As you can see in the chart below, the dollar index started a 15% rally in May of 2011, going from 73 to 84. But, it has been declining since July of last year. And, based purely on technical indicators, there’s good reason to believe the dollar will continue to weaken. I say this because there’s a bearish pattern forming on the weekly chart below. Named for its appearance, the “head & shoulders” pattern tells you when an uptrend is coming to an end, and the asset is about to break lower. Two peaks with a higher peak in the middle characterize this pattern. And, it indicates the uptrend is losing momentum because the asset failed to make a new high, which is essentially what creates the “right shoulder.” In other words, it suggests selling pressure is increasing. But, the most important thing in this pattern is the line that connects the bottom of the peaks, known as the “neckline.” Notice that, for the past couple of years, every time the dollar index dropped to 79, the demand was strong enough to trigger a rebound. It was this demand that “created” the line. Right now, the dollar index is trading at the “neckline” around 79. If it breaks below that level, the bearish pattern will be complete. If that happens, it will indicate there’s no longer strong demand for the dollar at that level. It will also indicate sellers have likely taken control of the market. So, the chances of a downturn will increase dramatically. This is also important for gold, silver and commodities in general. A Weaker Dollar Would Give A Boost To Commodities – The past few weeks haven’t been good to gold bulls. After starting off the year with a 15% rally, the yellow metal peaked in mid-March just below $1,400 an ounce. It has been trending lower ever since. But, after dropping as low as $1,268 an ounce a couple weeks ago, gold has rebounded a little bit. And, thanks to the U.S. dollar, there’s reason to believe gold will continue to move higher. In fact, if the dollar index breaks below 79, it’s likely that gold, silver and other commodities will rally. The 20-week rolling correlation between the U.S. dollar and gold is currently -0.73, which means they tend to move in opposite directions. This is also clear in the chart above. Notice that gold peaked a couple of months after the dollar bottomed in mid-2011. And, it started to recover in July of 2013, when the dollar index peaked at 84. Also notice that the last time the dollar index broke below 79 was at the end of 2010, when it dropped all the way to 73. On that occasion, gold went from $1,300 to $1,550, a 19% move. So, if the dollar index breaks below 79, we could easily see similar types of gains in the yellow metal. But, remember, all we have right now is a potential “head and shoulders.” The dollar index needs to close, on a weekly basis, below 79 in order to confirm this bearish pattern. Otherwise, this could be just part of a long-term sideways move, instead of a new downtrend. So, keep watching the dollar index. It may just hold the key to the direction of gold and other commodities in the coming weeks.
Silver was popular today with the Buffalo Round selling the most. It closed up $0.43 at $19.50 following gold and I don’t see activity picking up unless we once again move below $19.00 as this market is now value driven.
Platinum also followed gold higher up $12.00 at $1441.00 and palladium was up $8.00 at $808.00.
With talk about China and its use of copper in rebuilding infrastructure “falling apart” the piece on CNBC this morning was interesting. China is working on capital market reforms which stabilize international markets and portend reasonable growth so both the Shanghai and Bombay indexes are up 2% in early trading meaning public confidence is fine. The Bombay stock market is mentioned because India’s new leadership is pro-capital formation and if anything India will use more copper than China in the overhaul of their infrastructure. Both China and India are large and developing countries which need large amounts of copper. This in turn will support all metals including gold. Now consider a strong stock market based on capital reform and free enterprise and it won’t be long before everyone is citing increased gold bullion buying by the growing working class.
I ran across this quote reading Ed Steer (Gold & Silver Daily): Money News – Fed’s Yellen – It Could Take 5-8 Years to Shrink Fed Portfolio – The U.S. Federal Reserve is in no rush to decide the appropriate size of its balance sheet, but if it ultimately shrinks it to a pre-crisis size, the process could take the better part of a decade, Fed Chair Janet Yellen said on Thursday. Yellen, in testimony to a Senate panel, said no decision had yet been made on the central bank’s portfolio of assets, which has swollen to $4.5 trillion from about $800 billion in 2007. Three rounds of asset purchases meant to stimulate the economy in the wake of the 2007-2009 financial crisis have boosted the balance sheet to this record level. Unsatisfied with the U.S. recovery, the Fed is still adding $45 billion in bonds each month, though the purchases should end later this year. Yellen said the portfolio should start to shrink once the Fed decides to raise near-zero interest rates.
The Fed’s balance sheet now at more than 4 trillion dollars because of quantitative easing has become the boogieman of finance. And Yellen seems to be able to make such statements with impunity because Congress is mesmerized with the idea that through monetary manipulation they have dodged the financial bullet created in 2008. I don’t want to rain on the parade but why not ask about the cost of that 4 trillion dollar debt as interest rates increase? No one cares now because money is cheap but believe me the cost of this carry in a high interest rate environment is merciless.
From the Huffington Post – The Supreme Judicial Court of Massachusetts ruled Friday that reciting the Pledge of Allegiance in public schools does not discriminate against atheists, despite containing the words “under God.” According to the AP, the court ruled in Doe v. Acton-Boxborough Regional School District that the phrase “under God” reflects a patriotic practice and is not necessarily religious. “Although the words ‘under God’ undeniably have a religious tinge, courts that have considered the history of the pledge and the presence of those words have consistently concluded that the pledge, notwithstanding its reference to God, is a fundamentally patriotic exercise, not a religious one,” the court’s ruling said. The court also noted saying the pledge is voluntary. “All students are treated alike. They are free, if they choose, to recite the pledge or any part of it that they see fit. They are entirely free as well to choose to abstain,” the court’s ruling said. “No one is required to say all or even any part of it. And significantly, no student who abstains from reciting the pledge, or any part of it, is required to articulate a reason for his or her choice to do so.”
The above quote is interesting because it sets a precedent relative to our coinage. The words “In God We Trust” were placed first on the 2 cent piece in 1864. A Pennsylvania minister wrote a letter suggesting it might be a good idea after the Civil War. The “motto” as we call it in the coin business has been legally challenged a number of times but has managed to also avoid the heretics. For you coin collectors out there the “motto” had a number of early variations like “God Our Trust” and “Trust In God” but Congress settled on “In God We Trust”. Not a bad idea and for you old timers remember this ubiquitous sign? In God We Trust / everyone else pays cash.
The walk-in cash trade was off today and the national phones were also below average.
The GoldDealer.com Activity Scale is a “4” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tues – 4) (last Wed – 6) (last Thurs – 4) (last Fri – 6). The scale (1 through 10) is a reliable way to understand our volume numbers.
An update on the In and Out Hamburger Wagon in our parking lot idea. Everyone loves a good hamburger and we thought it would be a nice way of saying “thanks” for the business. Anyone with a tax free invoice ($1500.00) can get a free Double/Double on the way out. The truck would be in the parking lot about 2 hours and we would have tables in one corner. The upside to this idea is getting a great hamburger when you make a purchase in person. The downside is that while we have a large lot this idea might create a parking problem. Please opine at RSchwary@aol.com and thanks for the input.
The initial reaction is mixed. Some love the idea and some claim the parking lot can be crowded at times and this idea will create more problems for those who are in a hurry.
So the jury is still out but the most creative answer to our free hamburger dilemma has to go to this reader: First Prize (there really was no prize giveaway but we needed some sort of drum roll) – LOVE the idea of burgers in the parking lot. I can buy bullion to protect against hyperinflation, whilst hyper-inflating my waistline.
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