Commentary for Monday, July 14, 2014 (www.golddealer.com) – Gold closed down $30.70 at $1306.30 so physical players were not smiling today despite elevated turmoil in the Middle East. But before we jump out the collective window remember that gold over the past 6 weeks moved higher by $94.00.
The dollar was flat today (gold neutral) and stocks made new record intraday highs (gold negative). Many speculate as to when the Federal Reserve will raise interest rates – and what it might do – relative to our still recovering economy. But higher interest rates are relative – we are coming off a spending binge – a steep rise in rates (not likely) would be bad for gold.
The weakness in gold began last night as the Hong Kong market sold off and this weakness carried over into London and finally domestically. The market got its legs above $1300.00 but significant damage has been done to the short-term bullish side. Once again the 30 day gold chart is the key – it defines a significant upward run from $1260.00 to $1340.00.
Today’s $30.70 loss is then profit taking in a paper market. Gold’s most recent support line in the $1320.00 range is history and now replaced by significant support in the $1300.00 range going back to early March. The next few trading days will be important because gold is back in play – will gold hold $1300.00 or test the recent (Jan and May) double bottom of $1240.00.
This market got spooked because of light trading volume and days of summer like drifting followed (last night) by early data coming out of Europe which points to a deteriorating financial system. Not unexpected as the EU has been reshuffling the deck for some time but has yet to deal itself a winning hand.
Now consider that this market was generally higher over the last month and it’s easy to see this profit taking punch coming through the front door. Some claim recent support was created by the Iraq civil war only as the physical market was lacking. Perhaps the failure to change Indian gold tariffs supports this contention. The GoldDealer.com sales of gold bullion were not up to snuff considering higher oil and inflation rumors.
Too bad gold paper traders got cold feet – because gold sentiment and the technical picture were improving and some expected higher prices and perhaps even a test of the significant $1400.00 level – but we will have to remain patient.
Still price action over the next few days we tell you whether we are in for a route or this is just a paper market unwinding short term profits.
This from Peter Hug (Kitco) is good as usual – Traders Cash In – “Gold and silver were lower overnight as profit taking took the edge off the recent spike. The metals, as opposed to the past cycle, are much more susceptible to these jerky actions as many investors that have been on for the ride now see strength as an opportunity to liquidate as opposed to re-engaging. The fundamental issue with the sustainability of this market has been the virtual absence of physical demand as the market becomes dominated with the “trade” acting on news bites and opportunistic trades. This creates a “weak” hand position, with no medium term conviction, and the result is a volatile chart. For investors holding a position against monetary debasement of currencies, geopolitical and economic risks, this should all be viewed as noise. If you are comfortable with your metals percentage allocation, as a portion of your overall portfolio, enjoy the summer.”
Silver closed down $0.55 at $20.86 and represents another setback to rumors of something big happening to the price of silver in September. We saw a few silver players blink in early trading which led to selling their silver bullion positions but these did not outpace the accumulators.
Platinum closed down $20.00 at $1492.00 and palladium was off $2.00 at $870.00. Fundamentals support either and we see higher prices especially because the shakeout in Europe is probably overblown and the US car market seems strong.
This if a portion of what Mike Meyer (Daily Pfennig) had to say about raising the minimum wage. Why Higher Wages Could Lead To Inflation – “Jeff Opdyke, investment director of the Sovereign Society, has done some research on this subject. Using data going back to 1938, he cross-referenced previous minimum wage hikes with the monthly change in the inflation rate over the next one and two years. He concluded that inflation does, in fact, correlate with minimum-wage increases – especially when wage hikes are large and occur after a long stretch of stagnant wages. Here’s how he describes his findings:
“On an average basis, inflation in the first 12 months following an initial minimum-wage hike was 1.3 percentage points higher year-over-year. After two years, inflation was 2.5 percentage points higher. And when I look at just the years in which the minimum wage rose more than 20% – as is the case this time around – the inflation rate spiked sharply by the second year.”
David Rosenberg, chief economist & strategist of Gluskin Sheff, also thinks higher wages will lead to inflation. He says: “36 states are boosting the minimum wage or introducing legislation to do so. We are going to begin to strain scarce supply-side resources in terms of available labor and capital. Then inflation re-emerges.”
So, it’s very likely that a new federal minimum wage of $10.10 per hour, which represents a 39% jump, would contribute to higher inflation. And with many states already moving toward that minimum wage or higher, we could see higher inflation sooner rather than later.”
Forever, it seems I was against raising the minimum wage. That’s because I grew up on the wrong side of the tracks. In those days the argument was that “entry level” jobs were a beginning and in theory lead to better jobs. Today – with government intervention driving every sector of the economy I believe the old system is broke.
And fear it will not recover anytime soon because we have crossed the Rubicon. In Caesar’s time the Rubicon was just a small river in northeastern Italy, but crossing it laid the groundwork which created the Roman Empire.
So could something as innocuous as increasing the minimum wage lead to inflation? The bigger picture has more to offer in my mind. The government has floated us out of the 2008 financial crisis through fiat money creation but at the same time has increased the size of the permanent “under class” in America through this financial mismanagement.
You need look no farther than the disappearing middle class in America. And because of this our “savings rate” has gone up in smoke. Who can afford to “save” when there is significant discussion centered on minimum wage?
The minimum wage will have to be raised because it no longer provides that old spring board we conservatives were so proud to roll out while shouting “free enterprise” is the answer to all problems.
We have already crossed the Rubicon relative to inflation and the rising cost of wages will be just one more step in the expected result. I remain convinced there is no way out of this mess except through inflation. Whether the system produces that inflation through the shock of higher oil, or the cost of wages or industrial materials remains to be seen but one thing is sure – the die is cast and gold bullion will react accordingly.
The walk-in cash trade was quiet but interestingly a few big gold buyers did show up as the market moved lower. The phones were average but even here we are not seeing much in the way of sellers which might support the notion that we could see bargain hunting later in the week. But for now it is too early after this sell off to read the tea leafs.
The GoldDealer.com Activity Scale is a “4” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 3) (last Wednesday – 2) (last Thursday – 2) (last Friday – 3). The scale (1 through 10) is a reliable way to understand our volume numbers.
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