Commentary for Monday, May 18, 2015– Gold closed up $2.30 today on the Comex at $1227.80 in quiet trading. It is important that gold held above its 200 DMA ($1218.00) but is disappointing we did not see much follow through from last week’s big $36.00 gain.
Given that gold looks flat this week – the coming FOMC Minutes will probably be watched by everyone. This fixation on interest rates might get tiring but it is important .
This from eFXnews.com – This Week’s FOMC Minutes & BoJ Meeting – Nomura – “In the US this week, the headlines will likely focus around the minutes from the April FOMC meeting, released on Wednesday.
“The statement had been in line with our economists’ expectations, and the FOMC seemed confident about the economic growth trajectory. The minutes will be interesting in gaining a sense of the underlying confidence in the growth and to see if there were any concerns about the poor employment report from March,” Nomura projects.
For the BoJ meeting on Thursday/Friday, Nomura economists expect the BOJ to leave monetary policy unchanged.
“However, there will be an estimate of Q1 GDP growth in Japan on Tuesday/Wednesday, which could cause the BOJ to tweak its optimistic economic stance and raise questions on inflationary expectations. The GDP estimate is expected to show a decline of 0.3% q-o-q annualized, and our estimates are sharply below consensus of 1.6%,” Nomura adds.”
Silver closed up $0.16 at $17.71. Activity is steady – Monster Boxes and 100 oz bars rule. For smaller silver bullion buyers the 1 oz round, 10 oz bar and silver 1 Kilo remain popular.
Platinum closed up $9.00 at $1177.00 and the palladium was down $2.00 at $793.00.
Well now – what’s up with gold? After a quiet weekend it firmed up a bit in Hong Kong but sold off a bit in the domestic market. The trading range was a thin $8.00 with no momentum from last week’s generally higher market. This up and then flat market should be a familiar pattern by now but at least we continue to consolidate.
Last week’s rally in gold was its strongest since January so technically we are improving on the short term. I think most of this activity is fueled because the Federal Reserve is once again re-rethinking its interest rate policy. This may be helped by continuing unrest in the Middle East – a mess that will not be solved anytime soon. The latest ISIS victory is troubling because US air strikes failed to turn the tide.
This from www.independent.co.uk – Isis takes Ramadi: ‘Islamic State’ secures largest military victory for almost a year as last government troops flee Iraqi state capital – “The Isis militant group is reported to have secured its biggest military victory in almost a year, capturing one of the last remaining districts of the major city of Ramadi.
Iraqi military forces retreated from the city on Sunday, despite a desperate plea broadcast on state TV from the Prime Minister, Haider al-Abadi, begging them not to abandon their positions.
There are fears that the fall of Ramadi, the capital of Iraq’s biggest province Anbar, will establish a new stronghold for the jihadist group, and quickly be followed by new mass executions and slaughters as the last remaining government forces are wiped out.”
And gold being firm after the weekend is encouraging considering the dollar today is moving higher. The Dollar Index has traded between 93.27 and 94.00 – it being 93.92 as of this writing so on the day we are stronger – this has capped any big upward movement in gold but the fact that we still finished higher on the day looks solid.
Oil is steady around $60.00 a barrel and I’m still suspicious of this latest run to higher ground. There is plenty of oil around even though the press cites makes a big deal out of the decline in rig drilling.
Also worth noting is a new high water mark on Wall Street as the Dow continues to gather fresh money. There are those who suspect a rat here somewhere but I don’t know where it’s hiding and higher equities always diminish the cash gold pool.
And just because gold was stronger last week does not make believers out of the paper traders. This from Neils Christensen (Kitco) is typical – Gold Rally Could Be Over As Quickly As It Started – Triland Metals – “Although gold prices have ended the week above $1,200 an ounce, analysts from Triland Metals say it is too soon to tell if the market has enough momentum to push higher in the near term. “Looking at the extent of the dollar move you would expect gold to be a lot higher and the bullish enthusiasm surrounding a soft break above $1200 underlines the weakness in the precious metals complex,” they say. “It appears that the metals could be breaking out on a leg higher and yet there is a feeling that this rally could be over as quickly as it begun.” The UK brokerage firm says it remains cautious on gold as prices remain below $1,250 an ounce.”
So I think your bet here has to remain on the cautious side. A quick look at the 60 day gold chart will show that our shinny friend has broken above the recent congestion going back to March between $1180.00 and $1210.00. That’s good but like I said Friday I’m suspicious of fast moves to the upside in gold even if they are supported by a weaker dollar and a delayed Fed rate hike.
I’m a big fan of more deliberate – generally higher – back and filling charts which show progress over the long term. Anything else could just be another cry in the night.
Before gold gets more respect it must first show strength above $1250.00 and then above $1300.00. There is plenty of overhead resistance. This latest run could easily turn out like the last November through February run which fell apart at $1300.00 – if that is true we remain range-bound and not very happy between $1150.00 and $1300.00.
Finally the Greek debt problem has been plastered all over the media all day long. They claim a default is likely by June if they don’t get more money – this will probably firm up gold sales in Europe but nothing more – I don’t believe anyone is taking this seriously. The EU is going to do whatever is necessary relative to lending more money. Like my Rosary toting Mom used to say “If you drink the whole ocean one more drop is not going to hurt.” Gold would normally be worth $50.00 to the upside – today it continued flat which is not encouraging.
But before you go back to sleep remember that this bottoming pattern in gold has been in place since May of 2013. And the longer we hold the line the better the case we can make that gold has stabilized and is supported by the physical trade.
It’s kind of a goofy argument but I think that once this happens the dynamic for higher prices is set. Gold’s big rallying cry has always been either inflation or world tension. These two dynamics never go away – they just hide as the world enjoys another round of fiat money expansion and the debt problems are ignored. At some point these factors will enter the immediate thinking of investors and this most recent gold bottom will look cheap.
I think it’s clear by now that physical gold investment will not make you rich on the short term. But look at the bigger picture – gold in 2005 was around $400.00. So in the last decade, even if you throw out the 2011 ($1800.00) top we’re trading around $1200.00. Gold as an insurance policy against calamity makes sense – the problems of over speculation in paper instruments are alive and well – bank instability (yes it’s still there) caused by continued derivative expansion grows, and the unprecedented world debt problem has not been solved.
This from Greg Canavan (The Daily Reckoning)/Ed Steer’s Gold & Silver Daily – The Triffin Dilemma – “There is a fundamental incompatibility between the attainment of global economic stability and having a single national currency perform the role of the world’s reserve currency. This is hardly a new revelation. But events of the past few months have brought this topic back into the spotlight.
Belgian born American economist Robert Triffin first highlighted this incompatibility in the 1960s. He observed that having the US dollar perform the role of the world’s reserve currency created fundamental conflicts of interest between domestic and international economic objectives.
On the one hand, the international economy needed dollars for liquidity purposes and to satisfy demand for reserve assets. But this forced, or at least made it easy, for the US to run consistently large current account deficits.
Triffin argued that such persistent deficits would eventually put pressure on the dollar and lead to the demise of the Bretton Woods system of international exchange. The Triffin Dilemma, therefore, argued that the demands on an international currency meant that excess supply would undermine its value.
After WWII the Bretton Woods international monetary system came into being. This was a fixed rate currency regime with the dollar as the global reserve currency. But to ensure stability and financial discipline, the major currencies were fixed to the dollar and the dollar was fixed to gold at the rate of US$35 an ounce.
This is where the Triffin Dilemma kicked in.
The US soon understood that reserve currency status allowed them to run large deficits. The deficits were ‘paid’ for by issuing dollars. When the excess dollars began showing up in global central banks, they began converting their dollars into gold. This lowered the value of the US dollar in relation to gold.
At first the authorities tried to manage the Dilemma. In 1961 they established the ‘London Gold Pool’ in an attempt to keep the dollar price of gold to $35 an ounce. This system worked for a while but fell apart by 1968 when France withdrew from the Pool. The various nations then attempted to preserve the Bretton Woods system by maintaining a two-tiered gold market; one operating at the official $35 an ounce price while another traded gold at the market price, which was well above $35. Of course such a policy was completely unsustainable and it too failed.
Bretton Woods was on its last legs. President Nixon ended the system once and for all when in August 1971 he suspended the convertibility of dollars into gold. From that point on, the dollar was without an anchor and the global monetary system went from a fixed to floating regime.
What followed was a decade of monetary instability and record high inflation. Perhaps surprisingly, the dollar maintained its role as the world’s reserve currency throughout the decade. Due to its economic and military might, the reserve currency status of the dollar actually grew in acceptance throughout the next few decades.
But Triffin’s Dilemma never went away. It did remain out of sight though as parties on both sides of the equation enjoyed the mutual benefits of the dollar’s reserve status. The US benefitted by paying for imports with essentially costless dollars. In turn, the US’ main trading partners enjoyed robust demand for their products, creating employment and income growth.
The huge deficits brought about by excess US consumption produced a massive amount of liquidity throughout the global economy. While Triffin’s Dilemma would have predicted a collapse of the dollar because of the glut of dollars in the system, such an outcome didn’t eventuate.
This was primarily because the beneficiaries of US consumption didn’t want it to end. So they reinvested their excess dollars back into US asset markets, notably US Government debt. Such actions supported the dollar, kept interest rates low, and perpetuated the imbalances. Some commentators called this apparent happy state of affairs ‘Bretton Woods II.’ As the saying goes, markets make opinions and this was a flawed opinion born out of an ignorance of what brought the first Bretton Woods system undone.
The underlying conflicts identified by the Triffin Dilemma always remained. The ease with which the US could borrow and create debt was tolerated for decades. No doubt such tolerance was due to gold no longer being a monetary anchor.
But in 2007 it reached a point where it could no longer be tolerated. Not because investors decided to be prudent, but because the market structure could no longer cope with more debt.
At this point, the end of the decades long US driven credit expansion turned abruptly into a contraction and asset markets collapsed. Amongst the carnage, the dollar was about the only asset to increase in value relative to everything else. This was because previously abundant global liquidity rapidly evaporated and returned to the source, pushing up the value of the dollar.
The point here is that in times of crisis, the US dollar trades as the world’s reserve currency, not based on its domestic fundamentals, which are just as bad as other countries. That’s what you saw in late 2008 early 2009.
So the Triffin Dilemma is beginning to rear its head again. The US domestic political preference is for a weaker dollar to stimulate exports and create employment. But the international situation, being market driven, is more powerful. The dollar is therefore strengthening relative to other currencies while the U.S. economy is still weak.
In the past the US response to this currency strength would have been to lower interest rates and turn on the liquidity taps. This would have increased credit growth domestically and liquidity internationally (think of all those US treasuries piling up in foreign central banks when US economic growth is strong). But the interest rate ammunition has been spent.
Like every other country, the US needs a weaker currency. However a global reserve currency operates under different rules to ordinary currencies. In times of global uncertainty, like now, the US dollar will be strong regardless of its fundamentals. With the Euro-zone under pressure, the reserve asset of choice remains the US dollar. Perversely, this will allow the US authorities to pursue even more reckless policies in their attempts to provide global liquidity.
The inherent conflicts in the global monetary system that led to the great financial crisis have not been addressed. The dollar has served as the world’s reserve currency, without being linked to gold, since 1971. While on the surface the experiment has been a success, the legacy is a huge buildup of debt. The need for global liquidity creates an incentive for the US to live beyond its means and run up debt levels. Perversely, the debts sit in the vaults of foreign central banks and masquerade as assets. (It is from this asset base that domestic banking systems generate their own credit growth).
But debt levels have reached a point where this system no longer works properly. The crisis of 2008 has quickly given way to the European sovereign debt crisis of 2010. They were just a sign of things to come. The implications for you as an investor are many. Expect continued uncertainty and volatility as the world increasingly recognizes the current financial system has reached its use by date. This is a gradual and subtle process. You won’t see this recognition splashed across the front pages anytime soon. But it is happening now.
In the short term you should expect continuing loose monetary policy out of the US and a lack of fiscal discipline. Of course, the big picture investment implication here is that the US dollar will eventually lose its role as the world’s sole reserve currency. This is a multi year event and certainly difficult to assess in terms of the effect on markets. The IMF is already holding discussions about making changes to the financial architecture. Very few people understand the magnitude of what is going on, but it hasn’t been lost on the gold market.
Gold will be one of the major beneficiaries of change. Back in the 1960s Robert Triffin warned about the dollar glut and the fact that it would bring the Bretton Woods system undone. He was right.
The rising gold price was the first warning sign of the system’s weakness. So the best way to profit from this instability is to own physical bullion (not ETF’s or gold certificates). For a longer term bet on forthcoming changes to the financial system, you should be looking to buy gold on weakness.”
The walk-in cash trade today was average today but steady – with a few big gold buyers. The phones were active most of the day – also mostly buyers.
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