Commentary for Thursday, March 20, 2014 – Gold closed lower again today down $10.90 at $1330.50 making for the 4th straight day of decline under the weight of tapering by the Federal Reserve. So the toll in losses over this 4 day period has been $46.00 which might be big psychologically but in reality is not worth all the commotion because we are still above the $1300.00 mark so don’t consider jumping out the window just yet.
So with the taper in place the big concern becomes interest rates. In her news conference yesterday Fed Chair Janet Yellen said that about 6 months after the end of taper rates might be put higher. This caught a hyper sensitive market by surprise because everyone is desperate to figure out when rates will move higher. Her comments might indicate that interest rates might move higher by mid-2015. But it seems clear to me that rates will not move higher until inflation becomes a problem.
Supporting this contention is the still nagging concern of some that this recovery might still have problems. Some of the economic data even this morning looks sluggish, home starts are moving in the wrong direction and mid-level consumer spending remains missing in action. Higher interest rates in the mortgage market are already becoming a drag on the real estate recovery.
Remember the biggest borrower in the world is the United States and the poorest savers are its citizens. And as rates go higher the massive $4 trillion Fed bond portfolio goes down in value and the cost of interest maintenance moves higher. Gold opened much weaker this morning looking at $1320.00 before bargain buying and short-covering created that important bounce supporting the notion that the sky is dark but not falling because while we are down $46.00 in four days we are also up about $140.00 over the previous 6 weeks.
Silver closed down $0.40 at $20.40 again in quiet trading but the physical market seems to pick up both from across the counter cash sales and phone business when we are under $21.00.
Platinum was down $17.00 at $1435.00 and palladium was up $2.00 at $770.00. There is some talk that Russian sanctions might threaten the supply of palladium from Russia (world’s number two producer). The number one producer is South Africa which remains embroiled in an extended strike.
Consider Jim Wyckoff (Kitco News) – Comex gold prices ended the U.S. day session lower and hit a three-week Thursday. The spot gold market finished near steady. However, both prices did finish nearer their daily highs as some bargain hunters stepped in to buy the dip and some short covering surfaced in gold futures. This could be an early clue the sellers have become exhausted from their recent assault on prices. A solid rally in the U.S. dollar index the past 24 hours and the FOMC news from Wednesday pressured the precious metals markets again Thursday. April gold was last down $11.50 at $1,329.80 an ounce. Spot gold was last quoted down $0.70 at $1,330.50. May Comex silver last traded down $0.426 at $20.40 an ounce. The market place on Thursday further digested the statement of the latest U.S. Federal Reserve Open Market Committee (FOMC) meeting that ended Wednesday afternoon, and Fed Chair Janet Yellen’s press conference afterward. As expected, the FOMC will continue on its “tapering” program, whereby monthly bond purchases are whittled down by $10 billion a month. What rattled some markets, including gold, was an indication the Fed could begin to raise U.S. interest rates sooner than many expect—sometime in 2015. Yellen is perceived to be fully in the dovish camp on monetary policy, and several markets were caught off guard by the FOMC statement and her remarks that were deemed less-than-fully-dovish. The U.S. dollar index surged following the FOMC developments, which in turn has been a bearish underlying factor for commodity markets, including gold. U.S. Treasury market prices have also slumped (yields rising).
Note the interesting use of the word “exhausted” when it comes to sellers in this market. Wyckoff understands that while recent news regarding gold is not good, there are other factors at play. The tapering question is the perfect storm for short traders but that bounce we saw in the market today shows that covering and bargain hunting in gold is still alive and well. In other words it would be a mistake to take the paper trading world completely at face value relative to market mood. It should be clear by now that the gold market is still in a settling phase and is technically (long term) bearish. But most moderates would concede that the worst might be over and the longer we stay above the fail-safe $1200.00 mark which produced the double bottom this past year the more confidence the physical market will retain. Understanding this defensive position will allow for a better night’s sleep and a cooler head.
The walk-in cash trade was just moderate today and the phones were on the quiet side. This type of physical action is standard for a declining market looking for value.
The GoldDealer.com Activity Scale is a “3” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Friday – 3) (Monday- 4) (Tuesday – 4) (Wednesday – 2). The scale (1 through 10) is a reliable way to understand our volume numbers.
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