Gold Continues Higher but Where is the Physical Buzz?

Gold Continues Higher but Where is the Physical Buzz?

Commentary for Mon, Jan 12, 2015 ( www.golddealer.com) – Gold on the COMEX closed up $16.70 to $1232.70 so there was follow-through after Friday's $7.60 gain. And we saw another dollar or two in the aftermarket so it's not that gold is sleeping.

So we have a positive bias in early morning trading but gold was relatively flat in overnight trading showing a range of between $1220.00 and $1230.00.

There are a number of factors to watch – first the US stock market, which seems to be stable and relatively strong – supported by decent economic numbers which support a continued US recovery. Stocks opened higher and sold off but the consensus is that Wall Street is stable and perhaps a bit more bullish than last week. This combination takes some of the buzz away from gold. It does not make any sense to argue with success – stocks and the economy are fine – the gold trade needs to get over it.

The Dollar Index is also stable trading above 92 but relatively flat in this area – so a strong dollar continues to cap higher gold prices for now. The trade needs to get over a stronger dollar too.

And continued weakness in oil – with benchmark numbers now below $50.00 continues to plague international markets. Perhaps threaten Wall Street and create a drag on gold – so from that point of view I'm a bit surprised gold has held up.

The recent strength in gold can best be seen on the 60 day chart – we have moved from just above $1170.00 in December to around $1220.00 so technically gold is improving. Still it will have to show strength above $1230.00 to get more attention.

CNBC claims the ECB could be ready to announce a quantitative easing program based on contributions made from Central Banks.

This is bullish for gold and at the same time takes tension from the Greece debt problem.

Still, based on our across the counter action gold feels sluggish even though we have booked $40.00 to the upside these last 2 weeks. It's surprising we have not seen a big jump in physical action – so the public remains cautious.

Without significant physical follow through it's hard to get excited. And without physical follow through we could see profit taking this week. That view puts me in the minority this week – the general consensus is that recent gains will be maintained because of world tension and European financial problems. So we will just have to wait and see what shakes out over the coming EU meeting at the end of this month.

Silver closed up a sleepy $0.15 at $16.53 and here is something to consider. Dana was talking with an old customer and she later remarked that he was out of the early data base. She claims things are too quiet because silver again moved above $16.00 but claims a number of her early customers are getting reacquainted – they are not buying yet but they are kicking the tires.

Platinum closed up $11.00 at $1240.00 and palladium was higher by $14.00 at $814.00. Gold and platinum prices remain close to each other but the public is still cautious. Amazing really considering how many cars GM and other auto makers are producing.

So who wins as oil moves steadily lower? The American consumer for sure as gas prices move lover. According to AAA the price of gas has moved from $3.66 to $2.55 over these past 12 months. And as consumers save at the pump the Federal Reserve becomes more encouraged that the US recovery is real and gathering steam. This will lead, some assume to an interest rate hike before this summer. And higher highest rates are not good for gold.

But lower oil prices are also not good for stocks and a falling stock market might create more demand for gold bullion. So the price bag for gold remains mixed especially when political instability returns to the front burner. Recent examples of this have been the Russian/Ukraine problem and the recent horror in France. Any type of political instability supports gold prices – not in the sense that these events are big price movers – they are not. These events are transitory – higher prices don't signal the beginning of the next bull market in gold. But such turmoil takes the short players away from the market instantly – and price direction drifts waiting for the next piece of news which might fit the price de jour.

But here is where things get dangerous. When oil first headed lower ($70.00 a barrel) I thought it was an oversupply problem. But when we moved below $55.00 I thought oil might be reflecting worldwide deflation already showing up in Japan and parts of Europe. But what if the price of oil has become a political football? I know this sounds absurd but perhaps we are all being played?

Consider this from FX Empire – "Iranian hard-liners are lashing out at Saudi Arabia, accusing it of conspiring with the West to keep oil prices low in a bid to harm the Islamic Republic's economy and pressure the country to conclude a nuclear deal with West. In retaliation, Iranian hawks are urging restive Shia Muslims in eastern Saudi Arabia to rebel against the ruling House of Saud. U.S. officials deny any collusion between Washington and Riyadh.

"The Saudis learned their lesson from the past when they curbed production to help keep oil prices high, only to see Russia and Venezuela grab some of their market share," said a senior U.S. State Department official, who declined to be named.

The real targets of Saudi Arabia's decision not to cut production and to contribute to the falling price of oil are America's shale oil producers, the official argued. Thanks to shale oil, America has become the world's largest oil producer, an emergence that has reshaped the world's energy market. Though America does not export crude oil, it imports much less now, increasing reserves around the world. Global demand for oil has fallen with the downturn in global economic activity and with increased efficiency."

This from David Brown (Macroscope) – Time very short for EU to adopt easing, pump economy – As it stands, the euro zone risks sliding into the same downward spiral of chronic deflation and recession that has been Japan's scourge for the last two decades – "The euro zone is in deep crisis. The economy's plunge into deflation is a very bad omen and policymakers must work fast to stop it. But as it comes just as political cracks in the 19-member bloc are turning into fissures, it is clear that the euro's very future hangs in the balance.

Much of the blame for deflation is down to failings at the European Central Bank. The ECB has dithered far too long over adopting quantitative easing (QE), the strategy successfully employed in the US and UK in the last six years, involving large scale asset-buying and unlimited money-printing to promote faster recovery. The euro zone's chronically weak economy, ultra-high unemployment and negative inflation are the legacies of the ECB's poor management record.

Germany's deep-rooted aversion to QE has been the major stumbling block. The ECB monetary policy meeting on 22nd January must mark the turning point for change. ECB President Mario Draghi has to fulfil his pledge to do 'whatever it takes' to boost inflation and take it back to the ECB's 2 per cent target. With oil prices falling so much in recent months, inflation will continue to dip even lower than December's minus 0.2 per cent read.

As it stands, the euro zone risks sliding into the same downward spiral of chronic deflation and recession that has been Japan's scourge for the last two decades. Deflation encourages consumers and businesses to put off spending and investment decisions to a later date to make the most of falling prices, posing a massive drag on growth in the process.

The ECB must marshal all its monetary might to stop this happening. There can be no half-measures. Large-scale bond-buying operations must begin very quickly to pump new liquidity into the monetary system.

The ECB blundered badly by letting its balance sheet shrink by as much as a third in the last two years, sapping the economy of vital liquidity. Its balance sheet probably needs to double in size to four trillion euros from two trillion euros, if the central bank has any hope of jump-starting sustainable recovery. And it should allow the euro to fall to boost export growth. A break below parity against the US dollar is needed.

Official interest rates should move deeper into negative territory to penalise euro zone banks that prefer to keep cash on deposit with the ECB rather than lend to hard-pressed consumers and businesses. Bank lending growth has been contracting for years, which has been a big impediment to recovery.

Short term monetary policy remedies can only go so far. More radical solutions are definitely needed to turn things around in the longer term.

On the budget side, euro zone governments must suspend austerity cutbacks and return to expansive fiscal policies to put growth back onto the road to recovery. The European Union Fiscal Stability Pact should be temporarily suspended.

The EU also needs to cut some slack with Greece and offer a better deal on debt rescheduling and writedowns to stop a threatened exit from the euro zone and sparking a contagion crisis that global financial markets can ill-afford right now.

The argument for the formation of a euro zone fiscal union gets stronger as the crisis deepens. With Germany enjoying record low unemployment and a booming budget surplus, there is a clear case for better economic distribution across the euro zone. Closing the wealth gap and building closer economic ties would definitely help improve political unity within the bloc.

Germany must play its part as a strong leader in all this. Its political leaders must proclaim that a stronger euro zone emerging from QE is a goal worth working for. Sustainable growth and better all-round prosperity from a healthier euro zone will be positive paybacks for Germany in the long run.

January 22 is the crucial policy meeting date. The clock is ticking and there is a lot at stake."

The walk in cash trade and the phones were on the quiet side – surprising considering the recent strength in gold – we have not seen any significant selling in gold bullion so perhaps the public expects to see higher prices given the world news lately.

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