Commentary for Wednesday, July 16, 2014– Gold closed higher today by $2.70 at $1299.60 in a classic “market hangover” bounce. After two serious days of losses this week on Monday and Tuesday (combined read minus $40.10) we saw some mild covering which resulted in a $2.70 gain.
I was hoping for a more robust push above $1300.00 – the result of now imagined physical buying as the public realized the short players had overplayed their hand and presented magical discounts.
But all this was not to be in gold land. The stock market made new highs – traders ignored the Gaza escalation and the continued dovish tone from the Federal Reserve failed to impress.
So today’s push to higher ground was pretty much a bust. But then something is better than nothing as they used to say when I was a kid. And today the dollar was stronger as onlookers get more enamored with Fed Chair Janet Yellen.
I actually like her approach – she reminds me of my grandma – really old school – the roof could be caving in and she would thank God for the fresh air. That kind of attitude made America great after World War II.
Gold did test its 50 Day Moving Average ($1292.00) and the low of the day was $1293.00 so the markets continue to test support. But the bears are in charge and will remain so until gold can push into the $1315.00 range.
So let’s wait and see how this plays out – but one thing is for sure – the public is not jumping on lower prices. There is some action – but consider the last run to higher ground. It was strong enough to create talk that another test of the $1400.00 level was in the cards.
To follow through buying on this latest pullback is not encouraging.
Producer Prices released today showed an increase of 0.4% which is twice the expected number. Still no one seems to fear growing signs that inflation might be stirring or that the stock market is making record highs even though growth in America seems stagnant.
Silver closed down $0.12 at $20.72 in quiet trading with little action in our physical market. Just a note on the popular US Silver Eagle – the reverse of the coin may soon be changed. This is not assured as yet but if it happens the traditional Mercanti design – around since 1986 will be replaced with a more dynamic flying eagle perhaps reminiscent of the old Gobrecht design. If this happens it could change the premium dynamic but even that remains to be seen.
Platinum closed up $1.00 at $1485.00 and palladium closed up $8.00 at $876.00.
Yesterday I talked about rhodium pricing and the Baird 1 oz rhodium bar. Rhodium at this time really gets no play relative to gold or silver bullion but this landscape is changing. Sales have moved from nonexistent to modest and there have been some notable recent exceptions where very large orders of this rare platinum related metal have been placed by independent investors.
The question posed by a reader lead to yesterday’s rhodium commentary. And the reader responded with the following which I think is thoughtful.
“Thanks for the response it did help. Over the last 41 years Rhodium was less than the price of gold on three occasions 1982-83, 1996-97 and 2012-13.
In each of the first two occasions gold and silver declined the following two years as rhodium rose. The 2013 averages were rhodium $1074, silver $23.79 and gold $1411. 2014 is shaping up to follow this same pattern of rhodium rising while gold and silver decline. 2015 would also see gold and silver decline while rhodium rises if the pattern is repeated….over the 41 year period Rhodium has averaged almost 3 times the price of gold.”
All Gold Exchange Traded Funds: Total as of 7-9-14 was 55,226,307. That number this week (7-16-14) was 55,496,611 ounces so over the last week we gained 270,304 ounces of gold.
It might also be interesting to note that in 2013 the record high holdings for all gold ETF’s was 85,112,855 ounces. In 2014 the record low was 54,773,273 ounces.
All Silver Exchange Traded Funds: Total as of 7-9-14 was 625,241,710. That number this week (7-16-14) was 625,902,322 ounces so over the last week we gained 660,612 ounces of silver.
All Platinum Exchange Traded Funds: Total as of 7-9-14 was 2,848,765 ounces. That number this week (7-16-14) was 2,850,329 ounces so over the last week we gained 1,564 ounces of platinum.
All Palladium Exchange Traded Funds: Total as of 7-9-14 was 3,068,007 ounces. That number this week (7-16-14) was 3,066,470 ounces so over the last week we dropped 1,537 ounces of palladium.
We will talk about the RSI (Relative Strength Index) in future newsletters because it is one of many technical indicators that the average investor might find interesting. The RSI relative to gold is a momentum tool used by technicians in an attempt to determine overbought and oversold conditions in a particular asset class.
The RSI is really a ratio of averages – it divides the average number of “up” closes times the days involved with the average number of down close using the same number of days.
The RSI Range moves from 0 to 100. An asset (gold in this case) is considered overbought if this pure number approaches 70 – overbought in the sense that gold might be ready for a pullback or see some profit taking by paper traders. If the RSI approaches 30 it might be oversold meaning it could be undervalued and present buying opportunities for investors.
I will have more on the Relative Strength Index over the next few days including closes relative to gold and short-term history, say several weeks which might be helpful for those deciding whether to take a position in gold at these lower levels or wait for even better prices.
Like all technical indicators the RSI is not the Gospel According to Luke. There are ways it can go off the tracks but when looked at in the longer term it might be a simple and handy number to watch carefully.
I often quote Doug Casey because he was a recognized gold advocate when I got into the business in the early 1970’s. The following is a partial quote from an interview he did with Stansberry & Associates – Investment Research and the basics presented here about why gold is real money are worth remembering especially when there is pressure on the price of gold.
“But gold is ideally suited because it possesses all five characteristics of good money that Aristotle pointed out back in the fourth-century B.C.
First, it’s durable. Money needs to be durable for obvious reasons. It needs to last and not disintegrate in your pocket or in a bank vault. This is why you can’t use a commodity like wheat as money. It rots; it can be eaten by pests, and just won’t last very long.
Second, gold is divisible. Good money must be divisible to pay for items of different value. It’s why you can’t use diamonds or famous artwork as money. You can’t divide them up without destroying their value.
Third, it’s convenient, which is why other elements like copper or lead aren’t good money… it takes too much of them to be of value. Can you imagine carrying around hundreds of dollars’ worth of copper or lead to make a purchase?
Fourth, gold is consistent. This is why you can’t use real estate as money. Every piece of real estate is different from another, whereas one piece of gold is exactly like every other piece of gold.
Finally, and perhaps most importantly, gold has value in and of itself. Paper has next to no intrinsic value of its own, which is why paper is such terrible money.
For all these reasons, I suspect that within a generation – and probably much sooner at this point – gold will again be used as money in day-to-day transactions.
S&A: You mentioned paper money has little intrinsic value. Can you elaborate on why this is so important? Why is paper money in particular so terrible?
Casey: Well, there’s actually a sixth reason that Aristotle didn’t mention, because it wasn’t relevant in his context, but it explains why paper money is so dangerous: a government can’t create gold out of nothing.
Not even the worst kings and emperors of Aristotle’s time – who routinely clipped and diluted their coins – would have dreamed it possible to pass off worthless paper, which can be created without limit, as money. No one would have accepted paper money for trade.
Yet, that’s precisely what the United States started doing when Richard Nixon removed what was left of the dollar gold standard in 1971. Up until then, the U.S. Treasury promised foreigners it would redeem $35 with an ounce of gold, so the dollar was, theoretically, a warehouse receipt for gold. Since 1971, it’s literally become an “IOU nothing.” And we’ve been treated to a real time case study in the dangers of paper money ever since.
Having no real money – gold – in the system allows politicians to come up with all sorts of ridiculous spending programs. There are only three ways a government can get money: taxing – which no one likes; borrowing – which is just putting taxes off to the future, with interest; and inflating the money supply – which drives up prices, but can be blamed on oil companies, farmers, merchants, and anyone else who actually supplies goods and services.
Inflation causes the business cycle, which results in recessions, and eventually depression. It discourages saving, which is how wealth is accumulated. It encourages borrowing, which allows people to live above their means. Inflation makes it easy for governments to finance unpopular wars, like those in Vietnam or Iraq. And inflation will eventually destroy the dollar itself, which will be the ultimate economic catastrophe.
A strictly observed gold standard prevents all these things.”
The walk-in cash trade was again slow today and so are the national phones – typical summer but considering the lower prices I still expected more action on even a small bounce.
The GoldDealer.com Activity Scale is a “2” for Wednesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 2) (last Thursday – 2) (last Friday – 3) (Monday – 4) (Tuesday – 3). The scale (1 through 10) is a reliable way to understand our volume numbers.
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