Commentary for Wednesday, Jan 28, 2015 ( www.golddealer.com) – Gold on the Comex closed down $5.80 at $1285.90 with little action in the aftermarket so today’s Federal Open Market Committee comments did not create much of a stir.
Most did not expect much out of this meeting – but like any FOMC any hint as to what the Federal Reserve has on its mind is gleaned – even the smallest innuendo is worth a consideration. This is overkill at its best – what everyone wants to really know is when they will move interest rates.
Apparently some of the wording of their previous release was either changed or omitted and even this creates commentary. I think the notion that this most current release is “hawkish” and that resulted in modestly lower gold is a stretch.
They were bullish on the economy citing good growth and strong jobs – now that’s interesting. And they said they could show patience when it comes to interest rates – that’s more interesting. There was no mention of the global situation in relation to Greece or the possible outcome of the newly announced Quantitative Easing by the ECB. So they remain cozy knowing that with low inflation there is no hurry to make any changes. We might see interest rates remain at these historic lows through 2015.
So gold basically yawned today. I would even claim that the weakness on the close had little to do with the FOMC and is now drifting looking for something more interesting to move the needle.
Look at the 30 day gold chart and you will see a market which began rather flat at or under $1200.00 and then began to gain a bullish buzz moving to $1280.00 in mid-January. The price of gold then went flat trading between $1280.00 and $1300.00 for the remainder of the month.
Even the new European Union QE program was not enough to push this market significantly over the $1300.00 level and now it looks content. Given the absence of a new crisis I think gold is happy to “wait and see”.
But this relatively content $20.00 trading range will not last – in the absence of new firewood expect more profit taking.
The Dollar Index traded on both sides of unchanged after the FOMC news release and has been relatively flat since Friday trading between 94.00 and 95.00. As of this writing it is 94.50 so we are at the high end of its 3 month range and this is the real problem gold has – the strong dollar has capped gains.
I still think the trading mood in gold has turned neutral to negative even though we are still holding around the $1300.00. Where is the mojo?
This from Reuters is typical – “With the U.S. bracing for its first rate hike in nearly a decade, gold prices are forecast to fall for a third year in a row in 2015, a Reuters poll showed. But analysts say the market should also find a floor, paving the way for a recovery next year.
In the immediate term, gold is unlikely to fall below $1,250 given buying interest from the Chinese ahead of the Lunar New Year next month, Lee said.
Gold imports from Hong Kong by top consumer China fell nearly a third in 2014, although the purchases were still the second highest on record at just over 813 tonnes.”
Silver closed unchanged in sleepy trading at $18.06.
Platinum was lower by $8.00 at $1257.00 and palladium was up $15.00 at $797.00.
This is our usual ETF Wednesday information – Gold Exchange Traded Funds: Total as of 1-21-15 was 52,748,150. That number this week (1-28-15) was 53,346,798 ounces so over the last week we gained 598,648 ounces of gold.
The all-time record high for all gold ETF’s was 85,112,855 ounces in 2013. The record high for Gold ETF’s in 2015 is 53,346,798 and the record low for 2015 is 51,361,279.
All Silver Exchange Traded Funds: Total as of 1-21-15 was 623,256,897. That number this week (1-28-15) was 618,060,403 ounces so over the last week we dropped 5,196,494 ounces of silver.
All Platinum Exchange Traded Funds: Total as of 1-21-15 was 2,626,983 ounces. That number this week (1-28-15) was 2,611,703 ounces so over the last week we dropped 15,280 ounces of platinum.
All Palladium Exchange Traded Funds: Total as of 1-21-15 was 3,043,495 ounces. That number this week (1-28-15) was 3,018,467 ounces so over the last week we dropped 25,028 ounces of palladium.
This from David Stockman (ContraCorner) – Today’s “Dip” Is a Warning—-Get Out Of the Casino! – “Shortly after today’s open, the S&P 500 was down nearly 2% and off its recent all-time high by 3.5%. But soon the robo-machines and day traders were buying the “dip” having apparently once again gotten the “all-clear” signal.
Don’t believe it for a second! The global financial system is literally booby-trapped with accidents waiting to happen owing to six consecutive years of massive money printing by nearly every central bank in the world.
Over that span, the collective balance sheet of the major central banks has soared by nearly $11 trillion, meaning that honest price discovery has been virtually destroyed. This massive “bid” for existing financial assets based on credit confected from thin air drove long-term bond yields to rock bottom levels not seen in 600 years since the Black Plague; and pinned money market costs at zero—-for 73 months running.
What is the consequence of this drastic financial repression along the entire yield curve? The answer is bond prices which keep rising regardless of credit risk, inflation or taxes; and rampant carry trade speculation that can’t get out of its own way because central banks have essentially made the financial gamblers’ cost of goods—the “funding” cost of their trades—-essentially zero.
Needless to say, this is all too good to be true because it has generated humungous funding mismatches. That is, on the warranted word of central bankers—-who are petrified of a Wall Street hissy fit in any event—-speculators have funded long-term debt and equity securities with overnight money which must be rolled every day. This “works”, of course, until the carry-traders are hammered by a sudden, powerful and unexpected shock owing to either a sharp drop in the price of their “long” asset or spike in the carry cost of their overnight funding.
Thus, the true evil of central bank “wealth effects” pegging of risk asset prices (i.e. the Greenspan/Bernanke/Yellen “put”) is not merely the under-deserved windfalls which accrue to the financial asset owning households at the very top of the income ladder. An equally baleful effect is that it suppresses fear of risk and eventually drives it from the casino entirely.
This destruction of fear is commonly measured by the VIX index, but that’s only the tip of the iceberg. Where the amnesia really shows up is in the carry trades—-most of which materialize in the options and futures markets, and which are fabricated or “bespoke” in the meth labs of Wall Street trading houses.
Notwithstanding, a few short, sharp stock market corrections in recent months, the six-year central bank suppression of fear remains largely intact. Looked at in terms of the trading charts since the March 2009 bottom, the buy-the-dips crowd remains supremely confident that the bull is still running up hill.
Accordingly, beneath the parabolic run pictured above, there has set-in a monumental spree of speculation and leveraged gambling that makes Wall Street’s pre-crisis plunge into toxic mortgage deals look like a Sunday School picnic.
Just last week, for example, after the Swiss National Bank’s surprise abandonment of the 120 peg, the CHF soared by 40%. Literally within minutes they were carrying currency traders off the field on their shields because they had been leveraged 50:1.
It might be asked who in their right mind would fund currency cowboys on 2% margin? The answer, of course, is nearly every major dealer in the casino! But that’s just the herd at work.
The truly scary part is the reason for this collective recklessness. Currencies move by inches, not yards and never miles at a time, the Wall Street apologists declaimed. And, besides, the SNB had double-promised that it would never, ever remove the peg.
So fast money traders borrowing short in CHF and speculating long in Italian 10-year bonds thought they were shooting fish in a barrel. Mario Draghi had guaranteed that he would buy their bonds yielding 1.95% at the time at ever rising prices; and on the funding side, the SNB had pledged that speculators could borrow virtually zero carry costs up to 95 cents on the dollar for so long as they pleased. Pocketing a 190 basis point spread plus capital gains on virtually no capital invested, speculators were truly laughing all the way to the bank
So last Thursday’s CHF massacre happened because it was not supposed to happen! That is, financial markets are no longer honest, rational, stable or independent; they are merely gambling hall subsidiaries of the central banks where most of the punters still believe that the latter will not permit risk asset prices to fall for more than a day or two or funding costs to rise unexpectedly.
The reason that the casino has become so stupendously dangerous, therefore, is that the whole financial house of cards—including vastly over-valued asset prices of every kind and insanely extended leverage like the CHF currency speculations— all depend on maintenance of confidence in central bank competence and omnipotence.
But it’s not so—not by a long shot. Last week’s CHF episode rang the bell. And as the cascades of collateral damage begin to flow in, it will become harder and harder to hide the truth—-even from the heedless gamblers in the casino.
The next layer of leverage behind the currency speculators in the CHF trade was comprised of households all over central and eastern Europe who took out mortgages denominated in Swiss francs owing to dirt cheap interest rates. Suddenly, the amount they owe is soaring in local currency, and banks and government throughout the region are scrambling to forestall a disaster.
In the case of Poland, for instance, outstanding CHF mortgages total $36 billion or nearly 8% of GDP. On a US scale basis, that would be the equivalent of $1.5 trillion in home mortgages that suddenly soared in repayment costs.
Not surprisingly, the allegedly “conservative” government of Poland has insisted that zloty-based homeowners will be protected from the CHF flare-up, but that the government will not bear the cost. That is, the banks are going to be hammered by state regulators just like they were in Hungary awhile back.
One thing leads to another and ultimately to a daisy chain of wreckage when honest “price discovery” is destroyed by the central banks. Even now several Austrian, Italian and other European banks, which plunged into the CHF lending business, are on the rocks.
It is only a matter of time before one “surprise” after another turns up owing to the speculative mania of the last six years. And it is virtually certain that the central bankers who have presided over this fiasco will be caught as flat-footed as they were during the sub-prime fiasco.
In a nearby re-post from the New York Times this morning ( Wake-Up Call To Yellen: Here’s How To Buy A BMW On Food Stamps—–Soaring Auto Junk Loans) , we suggested that Janet Yellen needed a wake-up call. The NYT obsessively “fact checks” everything—so here’s the real deal. The auto junk paper market is so out of hand that an unemployed NYC food stamp recipient recently got a $30,770 loan to buy her daughter a BWM 328xi so that she could drive to work…..in style, apparently.
This beneficent mom told no lender or dealer a lie. As related by the NYT:
Ms. Payne went with her daughter to a dealership that arranges loans for Santander and other auto lenders to buy the car. She said an employee at the dealership in Great Neck, N.Y., assured her that, even though she was on food stamps, she could afford the loan. At the time, Ms. Payne said she thought she was co-signing the loan with her daughter.
“I looked him in the eye and said, ‘I don’t have any income,’ “ said Ms. Payne.
Needless to say, Santander Consumer USA is a pure artifact of financial engineering deeply subsidized and coddled by the Fed. As a former LBO and now IPO, it is overwhelmingly funded with securitized auto paper. That is, it is able to fund BMW loans to mom’s on food stamps because it can bury them in massive baskets of loans that are then sliced and diced by Wall Street, and sold to investors desperate for “yield”.
If that sounds familiar—it is. Yellen did not see it coming last time, nor did the buy-the-dip bulls who claimed that the market was “cheap” at its peak in October 2007.
The S&P was then trading at 20X reported LTM earnings. That’s where it is today, as well.
But there is one huge difference. This time the casino gamblers have been playing with free money for 73 months running. Accordingly, the joint is an accident waiting to happen. Forget the dip. Get out of dodge.”
The walk-in cash trade was about average – some buying and selling but no large deals one way or the other. The phones were steady but not hurried and there were no very large dealings.
The GoldDealer.com Unscientific Activity Scale is a ” 3” for Wednesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 3) (last Thursday – 4) (last Friday – 3) (Monday – 4) (Tuesday – 3). 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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