Commentary for Thursday, March 19, 2015 – Gold closed up $17.70 on the Comex today at $1169.10 but keep in mind you are seeing follow through buying created in the aftermarket yesterday. The reason being is that this pop in price to the upside happened after the Comex close on Wednesday so today the market is at least playing catching up.
The problem being that I had hoped for something more in the way of momentum buying after all the fireworks yesterday. The overnight market in both Hong Kong and London traded between $1160.00 and $1170.00 and so the domestic close today was a psychological letdown because an interest rate hike was hyped for weeks. With that much negative rhetoric you would think that the FOMC admission that the interest rate will remain low would have created more of a bang in the price of gold.
So what do we conclude? Perhaps that the net change in the price of gold may have less to do with what the Federal Reserve does with interest rates than most people think. After all if there were dangerous down drafts in the price of gold relative to an impeding interest rate hike why is there not at least a relief rally now that we have kicked the hike down the road?
Also yesterday I mentioned the increase in premium being paid for the British Sovereign. Europeans are active buyers of gold coins like Sovereigns and before EU tensions relative to Greece and quantitative easing such coins traded in the 5% range – today that premium has almost doubled so there is continued action – perhaps because physical gold ownership in Europe is moving back towards gold as an alternative currency.
Silver closed up $0.57 at $16.09 also now reflecting yesterday’s aftermarket. The US Mint now has allocations in place for the American Silver Eagle. When this happens it indicates that production of these popular silver bullion coins is being sold quickly. Actually this is no real news – it would seem the popularity of the American Silver Eagle 1 oz both here and abroad is so great that regardless of the silver price investors keep buying. Our sell premium has been steady at plus $2.59 over spot – but this could change if demand stays strong and the mint does not increase production.
Platinum moved higher by $27.00 at $1120.00 and palladium moved higher by $1.00 at $765.00.
With all the fanfare over yesterday’s FOMC comments we are still stuck with the same scenario – for now watch gold and the dollar.
This from Reuters – “Gold hit a four-month low this week and remains down nearly 2 percent on the year on expectations that higher interest rates could lift the opportunity cost of holding non-yielding bullion.
“Currently all precious metals are very sensitive to the U.S. dollar and U.S. interest rates, meaning prices move lower when the dollar and rates rise,” ABN Amro analyst Georgette Boele said.
“The sharp sell-off yesterday in the dollar gave a temporary boost to precious metal prices, but the recovery signals that the dollar rally is far from over. A higher U.S. dollar will be a major negative driver for precious metals going forward.”
While the U.S. central bank removed a reference to being “patient” on rates from its policy statement, it sounded a cautious note on the economic recovery. It also cut its median estimate for the federal funds rate and expressed concern over the strength of the dollar, up 10 percent this year.”
And there are some who believe the system itself is broken and the Federal Reserve has created an interest rate monster which has consequences. Will all of this zero interest rate environment come back to haunt us? I don’t think so but there are a few well-read commentators who fear the worst.
This from David Stockman (Contra Corner) – The Financial Folly Lurking beneath Yellen’s Patient Lack of Impatience – “Janet Yellen’s pettifogging today about her patient lack of impatience was downright pathetic. Her verbal hair-splitting is starting to make medieval ritual incantations sound coherent by comparison.
But unlike the financial media’s dopey dithering about “dot plots”, Yellen at least has something to hide behind all the gibberish. Namely, she and her merry band of money printers are becoming more petrified each month that they will trigger a thundering Wall Street hissy fit if they move to “normalize” interest rates—-even as they are slowly beginning to realize that continuance of ZIRP much longer will only intensify the market’s addiction to rampant speculation, free money carry trades and the associated risks to financial stability.
But the Fed’s new found worry that its tsunami of liquidity might have untoward effects doesn’t even rank as a death bed conversion. It’s way too late to worry about a financial bubble that has become epic in scope and danger; and it’s especially too late to think that it can be weasel-worded down from its Brobdingnagian heights.
The reason the Fed is impaled in a monster trap is that history is closing in on it. We have now had upwards of three decades of increasingly aggressive monetary inflation – a corrosive trend culminating in what will be 80 months of zero money market rates and a massive monetization of debt claims that originally funded the consumption of real labor and capital resources.
Needless to say, that has generated a dangerous and ever widening disconnect between the real main street economy and the nominal value of assets in the financial system. This rupture has been called “financialization”, but it amounts to this: Fed attempts at monetary stimulus are now short-circuited; added liquidity essentially becomes sequestered within the financial system where it generates persistent inflation of existing asset values. That is, stimulus never leaves the canyons of Wall Street.
There is no monetary policy transmission outward to the real economy because the credit channel to households and businesses is terminally busted. This condition is partially owing to peak debt among households, meaning that they can’t borrow any more money even if the interest carry cost is virtually free; and also due to financial arbitrage in the corporate sector, where equity is being systematically strip-mined by debt-financed financial engineering in the form of stock buybacks, M&A takeovers and LBOs.
Accordingly, the financial system has ballooned dramatically faster than the real economy over recent decades – even when measured by nominal GDP, including the latter’s considerable element of pure price inflation on a cumulative long-term basis. The economic tether between the two, therefore, is now stretched like a rubber band to the breaking point. The possibility it might snap and cause a drastic implosion of the financial system is what the monetary politburo fears, even if it fails to realize the full extent of the danger.
A big picture approximation of this disconnect can be seen in the ratio of the market value of corporate equities compared to nominal GDP. Even on a pure read-the-charts basis, it is evident that at the current market capitalization-to-GDP ratio of 127% – we are on the far edge of historical observation. In fact, during the 250 quarters since 1950 shown in the graph, the ratio has been higher only 4 times. And that was at the lunatic peak of the dotcom bubble in late 1999 and 2000!”
Today’s action in the dollar is important – consider the Dollar Index and yesterday’s close of 97.82. Today we have seen a trading low of 97.21 and a trading high of 99.21 – we are currently around 99.09. This places us at the higher end of the trading range and shows the dollar has recovered from yesterday’s sell off over the FOMC commentary.
It would seem that until dollar strength moderates gold will remain under pressure. I think the Federal Reserve will raise rates sometime this year but the increase will be small. And this interest rate boogie man will continue to haunt the physical gold market but not to the extent that most believe.
I believe the physical trade is watching for cheaper prices and realizes that any discount to current levels is frosting on the cake. They will jump on the next round of weakness and this will give everyone a better idea of where prices are heading in the longer term.
But keep this in mind relative to the dollar – a stronger dollar is not in the interest of a better America. In fact a rise in the dollar from current levels will materially change America’s GDP (Gross Domestic Product) – this important number will deteriorate as the dollar grows in strength. So the Federal Reserve must have a weaker dollar or suffer the consequence – this fundamental truth will help push the dollar lower and eventually support the price of gold in the long term.
Chicago Mercantile Exchange reports for the last 5 trading days – so we are looking at the trading volume numbers for the April Gold contract: Thursday 3/12 (217,548) – Friday 3/13 (213,865) – Monday 3/16 (209,310) – Tuesday 3/17 (208,779) – Wednesday 3/18 (202,545).
Yesterday I published our usual ETF Wednesday information and it brought a few questions. So let’s review – this information is a weekly summary of the actual number of ounces in each Exchange Traded Fund. ETF numbers are important because these are a handy way of looking at trends in the physical market and will tell you whether investors are generally buying or selling.
Yesterday all four ETF fund numbers (gold, silver, platinum and palladium) were lower week over week. The week we are talking about is always behind us – it takes some time for the funds to publish their numbers and I don’t use daily numbers because weekly totals are a better indicator of the actual physical market.
In gold for example the major funds (there are a number of them) lost 1,038,371 ounces of gold last week and their total holdings as of Wednesday was 52,475,650 ounces. The record high for Gold ETF’s in 2015 is 54,094,507 ounces so we see selling pressure.
Finally the record low for 2015 is 51,057,082 so you could assume that since the beginning of 2015 physical gold ownership has improved but relative to the old high total (2013) of 85,112,855 ounces ETF holdings have struggled.
Because I also include silver, platinum and palladium numbers similar comparisons can be made. Hope all this helps make the picture a bit more clear and good luck.
The walk-in cash trade was on the quiet side today and so were the phones.
The GoldDealer.com Unscientific Activity Scale is a “ 4” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Friday – 7) (Monday – 5) (Tuesday – 7) (Wednesday – 5). 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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