Commentary for Tuesday, March 17, 2015 ( www.golddealer.com) – Gold closed down $5.00 at $1148.30 on the Comex today waiting for tomorrow’s comments from the Federal Open Market Committee. This close is the lowest of 2015 but gold traded as low as $1141.00 today before rebounding $1155.00 and finally settling at $1148.30.
This is certainly a nervous market which in my opinion is oversold but the possible price action created by comments by Janet Yellen on Wednesday is overplayed. The Federal Reserve has held unusual power over the financial market since the beginning of its now famous quantitative easing program. And everyone understands that current interest rates are “emergency” numbers but it took a lot of time to get into this mess and the Federal Reserve will take a lot of time trying to unwind this Rube Goldberg.
As far as surprises are concerned I don’t expect much – Federal Reserve pronouncements have almost always been negative for gold. Keep an eye on physical demand and ignore the rhetoric. Considering all the negative talk physical interest remains firm as lease rates move higher. And the premium for bars on the Shanghai exchange is higher than those in London. Refiners have even picked up production in anticipation that lower prices will spur demand in China.
The 5 day chart of WTI crude oil should cause some concern – we have moved from $49.00 a barrel to $43.00 a barrel and as of this writing we are looking at $43.34. The oil boys claim either that storage is now limited and we could see lower prices or that this recent dip is temporary and oil will move back to the more acceptable $50.00 a barrel level.
In either case lower oil really equals lower inflation expectation. And considering we saw zero inflation when oil was twice this price the current oil scenario supports a better recovery both here and in Europe.
This would also support the notion that the Federal Reserve can get away with some sort of rate hike perhaps by this summer. But keep in mind that our monetary policy of cheap money has been in place since 2008 so we are now about 7 years into cheap money. The cost of getting in was low but the cost of getting out will be expensive relative to time. We can’t possibly reverse this 7 year trend in 8 months – the Fed will struggle for years in getting the right balance so expect a long and drawn out time of interest rate experimenting – all of which must support their low inflation model. What a job! Not impossible but there are many things which could go off the tracks and support physical ownership of gold.
Silver closed down $0.04 at $15.56. I like this price zone for silver but I think that gold casts a long shadow. Gold traders are spooked over the interest rate monster and this also creates anxiety in the physical silver bullion market.
This from Reuters – “ The steep drop in prices of the white metal is failing to generate significant new jewellery demand in the once reliably price-sensitive Chinese market, analysts say.”
Their comment on silver bullion is discouraging – recently news has been positive that India was perhaps replacing some of their traditional gold interest with silver bullion. I thought this was the result of the still in place gold importation tariff but it would seem this new source of silver bullion buying might be slowing down. Still prices are cheap in my opinion – the Silver Bullion Physical Giant will soon show itself.
Look at the numbers – using silver’s most recent 2011 high ($48.00) and comparing this number with today’s close ($15.56) silver is now trading at a whopping 67% discount – even if you are lukewarm on silver a discount like that will prompt renewed interest.
Platinum closed down $13.00 at $1094.00 and palladium was off $18.00 at $762.00. Platinum has been in deficit but fears of slowdown in China has hurt prices. Platinum reached $2230.00 in March of 2008 so its current price range is heavily discounted.
This from Kitco – Gold Consolidation Underway, Support At $1,132/oz – Mitsubishi – “Gold’s downtrend from the Jan. 22 highs remain intact, says Jonathan Butler, precious metals strategist for Mitsubishi. “[B]ut with gold now oversold on the RSI and MACD measures, a consolidation appears to be underway,” he says. “Support remains around $1,132, the low seen in November last year.” For silver, Butler notes that a “surge in COMEX shorts recently raises the prospect of a short covering rally if the Fed press conference is more dovish than expected.” However, if the central bank remains hawkish, he says silver should resume its downward trend.”
So will gold continue to consolidate? Mitsubishi believes so and I think many in the gold community think gold will move lower. But I get nervous when the trade is all of one opinion so my suggestion is to wait on the Federal Reserve – place less consideration on a small interest rate move and watch instead for any sign of strong returning physical demand.
The ETF numbers are a good place to begin but keep in mind gold is now trading at a hefty discount. Look at the numbers – I am using the 2011 high ($1888.00) and today’s low ($1148.00) – that makes for a 40% discount! This will invigorate the physical trade regardless of the poor technical picture – because the real physical trade (China and India) really wants to own the metal. Gold to these cultures is money – the American model has always been the possibility of “making money”.
More informed opinion about what the Federal Reserve is up to – This from Associated Press – What It Means If Fed No Longer Says It’s ‘Patient’ On Rates – WASHINGTON (AP) — For the Federal Reserve, patience may no longer be a virtue.
Surrounding the Fed’s policy meeting this week is the widespread expectation that it will no longer use the word “patient” to describe its stance on raising interest rates from record lows.
The big question is: What will that mean?
Many economists say the dropping of “patience” would signal that the Fed plans to start raising rates in June to reflect a steadily strengthening U.S. job market. Others foresee no rate hike before September. And a few predict no increase before year’s end at the earliest.
Complicating the decision is a surging U.S. dollar, which is keeping inflation far below the Fed’s target rate and posing a threat to U.S. corporate profits and possibly to the economy. A rate increase could send the dollar even higher.
In a statement it will issue when its meeting ends Wednesday and in a news conference Chair Janet Yellen will hold afterward, the Fed isn’t likely to telegraph its timetable. Yellen has said that any decision to raise rates will reflect the latest economic data and that the Fed must remain flexible.
Still, nervous investors have been selling stocks out of concern that a rate increase — which could slow borrowing and spending and weigh on the economy — is coming soon.
“I think the odds are better than 50-50 that the Fed … will drop the word ‘patient’ at the March meeting, and that would put an initial rate hike in play, perhaps as early as the June meeting,” said David Jones, author of several books about the Fed.
Historically, the Fed raises rates as the economy strengthens in order to control growth and prevent inflation from overheating. Over the past 12 months, U.S. employers have added a solid 200,000-plus jobs every month. And unemployment has reached a seven-year low of 5.5 percent, the top of the range the Fed has said is consistent with a healthy economy.
The trouble is that the Fed isn’t meeting its other major policy goal — achieving stable inflation, which it defines as annual price increases of around 2 percent. According to the Fed’s preferred inflation gauge, prices rose just 0.2 percent over the past 12 months. In part, excessively low U.S. inflation reflects sinking energy prices and the dollar’s rising value, which lowers the prices of goods imported to the United States.
It isn’t just inflation that remains below optimal levels. Though the job market has been strong, the overall economy has yet to regain full health. The economy slowed to a tepid 2.2 percent annual rate in the October-December quarter, and economists generally think the current quarter might be even weaker. Manufacturers are struggling with falling exports, partly because of the strong dollar, and consumers – the drivers of the economy – have seemed reluctant to spend their windfall savings from cheaper energy.
What’s more, pay for many workers remains stagnant, and there are 6.6 million part-timers who can’t find full-time jobs — nearly 50 percent more than in 2007, before the recession began.
For those reasons, some analysts think it would be premature to raise rates soon.
“The last thing the Fed wants to do right now is spook the markets and the economy into an even slower growth trajectory,” said Brian Bethune, an economics professor at Tufts University.
After it met in December, the Fed said for the first time that it would be “patient’ about raising rates. Yellen said that meant there would be no increase at the Fed’s next two meetings. And in testimony to Congress last month, she cautioned that even when “patient” is dropped, it won’t necessarily signal an imminent rate hike — only that the Fed will think the economy has improved enough for it to consider a rate increase on a “meeting-by-meeting basis.”
Some economists say the Fed may tweak its policy statement this week to signal that a higher inflation outlook would be needed before any rate hike. And they expect the Fed to go further in coming months to ready investors for the inevitable.
“The process is going to be glacial,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. “They want to prepare the markets for change, but they don’t want to scare them.”
Though Swonk thinks the Fed will drop “patient” from its statement this week, she doesn’t expect a rate hike before September. Even then, she foresees only small increases in its benchmark rate.
Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, suggested that the Fed’s strategy in beginning to raise rates won’t be to slow the economy. Rather, he thinks the goal will be to manage the expectations of investors, some of whom weren’t even in business in 2004, the last time the Fed began raising rates.
“The Fed is just trying to send a message that the world is about to enter a new age after a long period of low interest rates to a period of rising rates,” Sohn said.
The walk-in cash trade was off and so were the phones today. There have also been a few large gold bullion sellers something we have not seen much of as gold trended lower. It should be interesting to see how much of this position has to be hedged as opposed to immediate resale – this will give some indication as to actual physical activity.
The GoldDealer.com Unscientific Activity Scale is a “ 7” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 9) (last Thursday – 8) (last Friday – 7) (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 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”.
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