Gold Continues Weak Against a Strong Dollar

Gold Continues Weak Against a Strong Dollar

Commentary for Tuesday, Sept 30, 2014 ( – Gold closed down $7.00 today at $1210.50 and in early trading touched $1205.00 before finding short-covering support.

The gold story remains the same – it’s all about a stronger dollar and weaker oil. The Dollar Index has moved in the past 5 trading days from roughly 84 to roughly 86 – encouraged by better US economic numbers and a continued weak euro. WTI Crude this last quarter has been equally unfriendly to gold moving from $105.00 a barrel to $90.00 a barrel.

How long this unlikely contango will last is difficult to guess – especially because real commentators believe interest rates will rise as the Federal Reserve backs away from its long standing quantitative easing program. One thing is for sure – prices are getting cheaper and the physical trade is beginning to place their bets.   

Today both the physical cash trade and phones were busy all day – with buyers outnumbering sellers by about 10 to 1.

Silver really broke to the downside today off $0.51 at $17.00 – but actually traded as low as $16.85 before finding its feet. This is a carefully orchestrated market – really – the Exchange Traded Funds are at all-time highs – the physical market is very active and seeing mostly buyers yet the paper trade is weak – pushed by short traders and encouraged by a poor technical picture.

But the silver bargain sign is out – consider the summer 2011 high close was $48.00. And silver last traded for less than $17.00 in late 2010.

Platinum closed down $9.00 at $1300.00 and palladium was down $14.00 at $775.00. Rhodium closed down $20.00 at $1290.00.  

This according to Associated Press: US Stocks Decline, Following Drops Overseas – “The market has turned choppy in recent weeks, flipping between solid gains and steep losses. Since hitting a record on Sept. 18, the S&P 500 has slipped 1.7 percent. Coming after a calm summer, the slide has set off a flurry of worried calls to brokerages.

John Canally, chief economic strategist at LPL Financial in Boston, said many investors think the market has gone too long without a major fall. "I can’t tell you how many calls we’re getting now asking, ‘Is this it? Is this the big one?’" he said.

One reason for the recent turbulence is that the stock market appears "priced for perfection," McMillan said. It’s an increasingly common saying among investors, and it means the S&P 500 is so high that corporate profits and the economy have to keep improving just to sustain current prices. Good news isn’t enough.

"The question is no longer, are we doing well? It’s, are we doing even better?" McMillan said. "When you pay for perfection, anything shy of that is a disappointment."

At current prices, investors are paying $16.69 for every dollar in company earnings, according to data from FactSet. That’s 10 percent above the long-term average. "There’s a certain amount of faith needed at this level," McMillan said.”

The above is important to keep in mind – there is now a recurring theme relative to stocks – that being that a correction is in the works. We have touched on this before and believe it may be one of the underlying factors which continue to support gold. Will the stock market flop?

It’s hard to imagine with all the cheap money out there – but if it did some of the financial outflow would certainly find its way into the gold market. And if the fall is sudden and sharp it could create a rather large pop in the price of gold especially if the traders see gold as oversold. This is not a big chip to play here but something to consider if thinking about gold becomes too negative.

Gold’s struggle against a stronger dollar will not disappear overnight. The dollar and gold usually move in opposite directions. Watch the unfolding picture in Europe for a snapshot as to what realities gold must face before moving higher on the short term.

But like I always say don’t jump out the window in the process – the gold market is generally defined by the paper traders and helped along with the physical market. There have been a number of large bankruptcies within the trade over the past year but there are still good – honest bullion dealers to serve you.

What happens at this point is kind of like what we used to call gas wars in the old days. A real dealer lowers his premiums to attract more customers in a shrinking market.

Now don’t get me wrong – margins in this business are already razor thin for legitimate dealers. What follows? Everyone simply lowers their premiums also and has another martini – the result? You get better prices which are already trading at the extreme end of the selloff curve – so if you still think gold and silver are worth owning there may not be a better time to get your feet wet.

This from Associated Press – ECB Under Pressure As Inflation Falls Again – LONDON (AP) — “Inflation across the 18 euro countries dipped further toward zero in September, piling pressure on the European Central Bank to pull the trigger on its biggest stimulus weapon — a large-scale program to create new money.

Expectations that the bank will back such a program— similar to the one pursued by the U.S. Federal Reserve in recent years — mounted Tuesday after official figures showed consumer prices in the eurozone rose only 0.3 percent in the 12 months to September.

The decline from the previous month’s 0.4 percent annual rate leaves inflation at its lowest since October 2009 and way below the ECB’s target of just under 2 percent.

Though the fall was largely due to a big 2.4 percent drop in energy prices and was widely anticipated in financial markets, a closer look shows a worrying underlying trend — the core inflation rate, which excludes energy, tobacco, alcohol and food, fell to 0.7 percent from 0.9 percent.

"This is a serious blow to those still arguing that the weakness of inflation will be temporary," said Jennifer McKeown, senior European economist at Capital Economics.

Traders think it’s now more likely that the ECB will back large-scale purchases of government bonds with newly created money — called quantitative easing, or QE — though not at this Thursday’s meeting. For now, it is likely to want to see whether other stimulus measures it unveiled in June and in September have an impact.

Following the inflation figures’ publication, the euro was down 0.7 percent on the day at $1.2594, the first time it’s been below $1.26 since the summer of 2012, when it started recovering in the wake of comments from ECB President Mario Draghi that the bank would do "whatever it takes" to save the euro.

Because QE would increase the amount of euros in the economy, expectations of such a stimulus program from the ECB have weighed on the euro. It’s down 9 percent against the dollar since May and its further drop on Tuesday suggests traders are preparing for the possibility of QE in coming months.

Obstacles remain, however.

Some countries, particularly Germany, Europe’s powerhouse economy, are worried that QE would amount to ECB financing for governments. Draghi has also been resisting calls for QE by insisting governments should speed up reforms to make their economies grow faster.

"I believe he will succumb to this pressure eventually, though perhaps not as soon as Thursday’s policy announcement," said Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown. "Stiff opposition from Germany will need to be overcome." The key will be whether economic indicators improve in coming months — if they do not, Draghi has said the ECB is ready to do more to help the economy. The sharp fall in the euro could be a deciding factor as it should help growth by boosting exports and lift inflation by raising the price of imports.

French Economy Minister Emmanuel Macron said the weakening euro is "very good news" for the country’s industries, such as carmakers Renault, PSA Peugeot-Citroen and plane maker Airbus.

"Until now, it was one of the weaknesses for our competitiveness," he told The Associated Press on the sidelines of a Peugeot-Citroen event Tuesday. "I do trust Mr. Draghi."

By shoring up economic activity with stimulus measures, the ECB hopes to keep inflation from remaining too low — a growing economy can drive up wages as unemployment falls and fuel inflation. Separate figures Tuesday showed that unemployment in the eurozone was unchanged in August at a still sky-high 11.5 percent with huge discrepancies across the region — while Germany has a low unemployment rate of 4.9 percent, Spain’s stands at 24.5 percent.

The ECB, like all other central banks, would rather see a modest inflation rate than a very low one. A particular concern would be a sustained period of falling prices — so-called deflation can make consumers delay purchases as they anticipate lower prices and make businesses reluctant to invest. Japan is the most recent example of a major economy in the grip of deflation — two decades on, the world’s third-largest economy is still struggling to emerge from its period of stasis.”

I have always been interested in an estimate of the illegal gold trade in India. I read Casey Research on a regular basis – always good and he cites the hindustantimes (Manish Pachouly) – 50 Tonnes of Gold Smuggled into India in 10 Days – About 50 tonne gold has been smuggled into the country in the past 10 days, and subsequently pushed into the market to cater to a surge in demand for the precious metal in the festive season. There is a heavy demand for gold during Dussehra, for which booking and supply will start from Thursday, when shradh ends and Navratri starts.

Market sources said that 30% of the smuggled gold has been supplied in Mumbai to unscrupulous jewellers, while the rest was distributed to different parts of the country.

Sources said that illegal gold is finding a place in the market because of below average import resulting from the 80:20 scheme and 10% import duty. Against the average monthly demand of 80 tonne, the import is presently around 51 tonne in the country.

Sources said that gold was smuggled into the country through the land route, via Nepal, Bhutan, Bangladesh and Pakistan. “This is because airports have tightened security, restricting the smuggling of gold by the air route,” said a market expert. The Mumbai airport customs, which has started a serious crackdown on gold smugglers, has seized around 529 kg gold from April to August this financial year.

Experts fear that more gold will be smuggled from similar land routes in days to come, as the demand will shoot up once the marriage season begins, in the later part of November. “There will be huge demand because of the festive season, and also the low price at which gold is presently being traded,” said Kumar Jain, vice-president of Mumbai Jewellers’ Association.

Jain said, “The government should immediately bring down the import duty and relax the 80:20 scheme, so that official import goes up. That will bring down the smuggling.”

Rajiv Popley, director Popley Group, said, “Smuggling of gold has been on the rise for the last eight months, due to irrational supply issues. The officially available gold was at a premium, which was higher than anywhere else in the world.”

Popley said that the demand for gold is increasing with the onset of festivities. “Both Dussehra and Diwali are auspicious festivities to invest in gold,” he said.

What is the 80:20 scheme
* The Reserve Bank of India made it mandatory, in July 2013, for each importer to export 20% of gold that was imported into the country

* According to these norms, importers could bring more gold into the country only after this 20% was released to exporters

* The RBI move was an attempt to restrict gold imports, which were thought to be the biggest contributor to the widening current account deficit
Gold import:
960 tonne – average annual import in good market conditions
Import in 2014-2015 (April to August) – 257 tonne
Import in 2013-2014 – 563.4 tonne
Import in 2012-2013 – 845 tonne
80 tonne – average monthly import in good market conditions
51 tonne – average monthly import at present
Rise in import duty:
* Raised to 2% from the earlier Rs300 for 10 grams in January 2012
* Raised from 2% to 4% in March 2012
* Raised from 6% to 8% in June 2013
* Raised from 8% to 10% in August 2013

The walk-in cash business was hot today and the phones were also busy. The public always likes cheap and we are approaching very cheap – consider yesterday’s comment that most traders believe gold is now oversold so expect a pop to the upside as the shorts cover.

The Unscientific Activity Scale is a “6” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 5) (last Thursday – 5) (last Friday – 5) (Monday – 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 very busy and see a low number – or be very 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 – perhaps a week or two. If the numbers are generally increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.

Email confirmation using a PDF File when buying or selling is functional. It also includes the various forms of payment and includes bank wire instructions. And you can now see your actual invoice or purchase order on your computer screen.

When you buy or sell please check to see if we have your current email on file and that your computer will accept our email (no spam).

About shipping information – when buying or selling your rep will walk you through your current mailing information. Thanks for keeping us up to date if you have moved.

Our four flat screens downstairs with live independent pricing ( are a big hit with the cash trade. Live pricing moves all the buy/sell product prices on a real time basis. Yes – you can visit the store with cash and walk away with your product. Or you can bring product to the store and walk away with cash. When buying from us remember if you exceed $10,000 in cash (the real green kind) a Federal Form is necessary.

In addition to our freshly ground organic coffee offered visitors throughout the day we have added cold bottled water, cokes and Snapple. We have also added fresh fruit in a transparent attempt to disguise our regular junk food habits.

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