Commentary for Monday, March 9, 2015 – Gold closed up $2.30 today on the Comex at $1166.40 – flagging really considering the overnight Hong Kong and London markets traded as high as $1175.00 but the domestic market saw little in the way of bargain hunting after Friday’s collapse of $31.80.
Today’s action was surprising – my bet was for a much higher bounce considering today was the beginning of the European Central Bank bond buying program. This whopper will add some $60 billion euros monthly in stimulus – and as you can see gold yawned.
The continued bad weather on the East Coast has slowed some bullion product shipments.
This from Reuters – “The focus on Monday is likely to on the outcome of a meeting of euro zone finance ministers, who are due to discuss a recent letter of pledged reforms sent by Greece. Athens and its euro zone partners struck a deal last month to extend its bailout programme by four months, but the cash-strapped country has until April to successfully conclude a bailout review before it receives any further aid. Further uncertainty over the Greek debt crisis could boost bullion.”
Now that the EU has committed to an extensive bond program I think further funds for Greece are assured. So any short term boost in the price of bullion has been neutralized – the bigger question is how is this small country going to pay back all this money? And this is a common underlying question with many EU countries – some of which are not small.
And the outcome of the newly minted ECB bond buying program is unclear. They will create another mountain of debt – really not correcting their spending problems and adding to this uncertainty.
This collective EU debt problem is not addressed on any level except Greece because this collective banking system will rely on Keynesian economics. You could make a decent case that such freewheeling with the money supply has worked for the US and so Europe could become a surrogate.
But who knows the outcome of this now much larger world monetary experiment? A little gold bullion under the proverbial mattress might provide a better night’s sleep and ignore the “Cry Wolf” Greece scenario – the EU will not call their bluff – and besides they are a small part of the growing problem.
Silver closed down $0.03 at $15.75 – cheap enough but still another yawn both from the trading floor and across the counter.
Platinum was down $11.00 at $1148.00 and palladium was up $4.00 at $822.00.
The dollar remains steady but very strong – we looked at the Dollar Index on Friday (97.62). Today we saw a low of 97.29 and a high of 97.78 – as of this writing we are at 97.61 almost exactly where we were going into the weekend. Still the 97.62 is approaching nose bleed country and we still have the weaker euro to deal with so hold on to your hat.
Does the price of oil matter anymore relative to gold? Well of course it does – generally – the biggest metric in my mind being that lower oil prices should mean lower inflation. But on the shorter term the price of oil is becoming problematical. Because as blow-out prices pushed this market into the low $40.00 range – production was not altered much by OPEC. So why did oil stabilize around $50.00?
Let’s look at today’s pricing – crude opened at $49.60 and moved to a high on the day of $50.79 finally settling around $50.32 – these numbers have held fairly steady. The reason being that at the lower end of this range crude was stored not used. Today OPEC claims that production should increase or demand will push prices much higher. Other informed commentary claims the stored crude will come back to haunt the markets and prices will move back to early recent lows. So take your pick – either scenario is possible and so the cause/effect result on the price of gold should be ignored at least until the storage issue is sorted out – just something to think about over your morning coffee.
This from James Rickards (The Daily Reckoning) – Why the U.S. is Letting China Accumulate Gold – A lot of people think about gold as a percentage of a country’s total reserves. They are surprised to learn that the United States has 70 percent of its reserves in gold. Meanwhile, China only has about 1 percent of its reserves in gold. People look at that and think that’s an imbalance. But those are not very meaningful figures in my view.
The reason is that a country’s reserves are a mixture of gold and hard currencies, and the currencies can be in bonds or other assets. The United States doesn’t need other currencies. We print dollars, so why would we hold euros and yen?
The U.S. doesn’t need them, so it makes sense that the country would have a very large percentage of its reserves in gold. China, on the other hand, has greater need for other currencies.
A better metric, in my opinion, is to look at a country’s gold holdings as a percentage of GDP. GDP is a representation of how big a country’s economy is. It’s the gross value of all the goods and services.
There are different measures of money supply – M3, M2, M1, and M0. In a money economy, however, you can say that the country’s gold holdings are the real money. I call a country’s gold reserves gold “M-subzero”.
The IMF officially demonetized gold in 1975. The U.S. ended the convertibility of gold in 1971. Gold disappeared “officially” in stages in the mid-1970s. But the physical gold never went away.
Today, the US has about 8,000 tons. We haven’t sold a significant amount of gold since 1980. We dumped a lot of gold in the late 1970s to suppress the price, but none after that. So one of my questions for central bankers is, if gold is such a ridiculous thing to have, why are we hanging onto it? But that’s a separate question.
Right now, China officially does not have enough gold to have a “seat at the table” with other world leaders. Think of global politics as a game of Texas Hold’em.
What do want in a poker game? You want a big pile of chips. Gold serves as political chips on the world’s financial stage. It doesn’t mean that you automatically have a gold standard, but that the gold you have will give you a voice among major national players sitting at the table.
For example, Russia has one-eighth the gold of the United States. It sounds like they’re a small gold power – but their economy’s only one-eighth as big. So, they have about the right amount of gold for the size of their economy.
The U.S. gold reserve at the market rate is about 2.7 percent of GDP. That number varies because the price of gold varies – but it’s around 2.7 percent. For Russia, it’s about 2.7 percent. For Europe, it’s even higher – over 4 percent.
In China, that number is 0.7 percent officially. Unofficially, if you give them credit for having, let’s say, 4,000 tons, it raises them up to the US and Russian level, but they want to actually get higher than that because their economy is growing.
Here’s the problem: If you took the lid off of gold, ended the price manipulation and let gold find its level, China would be left in the dust. It wouldn’t have enough gold relative to the other countries, and because their economy’s growing faster and because the price of gold would be skyrocketing, they could never acquire it fast enough. They could never catch up. All the other countries would be on the bus while the Chinese would be off.
When you have this reset, and when everyone sits down around the table, China’s the second largest economy in the world. They have to be on the bus. That’s why the global effort has been to keep the lid on the price of gold through manipulation. I tell people, if I were running the manipulation, I’d be embarrassed because it’s so obvious at this point.
The price is being suppressed until China gets the gold that they need. Once China gets the right amount of gold, then the cap on gold’s price can come off. At that point, it doesn’t matter where gold goes because all the major countries will be in the same boat. As of right now, however, they’re not, so China has though to catch-up.
There is statistical, anecdotal and forensic evidence piling up for this. All of it is very clear. I’ve also spoken to members of Congress, the intelligence community, the defense community and very senior people at the IMF about it.
China is our largest trading partner. It’s the second largest economy in the world. The US would like to maintain the dollar standard.
I’ve described some catastrophic scenarios where the world switches to SDRs or goes to a gold scenario, but at least for the time being, the US would like to maintain a dollar standard. Meanwhile, China feels extremely vulnerable to the dollar. If we devalue the dollar, that’s an enormous loss to them.
That’s why, behind the scenes, the U.S. needs to keep China happy. One way to do that is to let China get the gold. That way, China feels comfortable.
If China has all paper and no gold, and we inflate the paper, they lose. But if they have a mix of paper and gold, and we inflate the paper, they’ll make it up on the gold. So they have to get to that hedged position.
Gold is liquid, but it’s a fairly thin market. If I call JP Morgan and say, “Hey, I want to buy 500 tons of gold,” I can’t do it. That would be a huge order. An order like that has to be worked between countries and central banks behind the scenes.
It’s done at the BIS, the Bank for International Settlements, in Basel, Switzerland. They’re the acknowledged intermediary for gold transactions among major central banks and private commercial banks. That’s not speculation. It’s in the footnotes of the annual BIS report. I understand it’s geeky, but it’s there. They have to acknowledge that because they actually get audited. Unlike the Fed and unlike Fort Knox, the BIS gets audited, and they have to disclose those kinds of things.
The evidence is there. China is saying, in effect, “We’re not comfortable holding all these dollars unless we can have gold. But if we are transparent about the gold acquisition, the price will go up too quickly. So we need the western powers to keep the lid on the price and help us get the gold, until we reach a hedged position. At that point, maybe we’ll still have a stable dollar.”
The walk-in cash trade was back to quiet and the national phone business was not much better. I really expected more of a bang from the walk in cash trade but such is life. Most will claim that prices are weaker and heading lower after today’s dead cat bounce but the jury is still out. Patience is needed however – let’s wait and see how our friends in Europe react to the first few rounds of stimulus. The number Draghi has cobbled together is not for the weak handed – there will soon be a ton of cash (euros) floating around looking for mischief.
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