Gold Lower on Delayed Taper Reaction?

Commentary for Thursday, Jan 30, 2014 (www.golddealer.com) – Gold closed down $19.50 today at $1242.40 pressured by a stronger dollar and perhaps a delayed reaction to yesterday’s $10 billion taper. The dollar was up more than 1/2 percent and trading over 81 on the Dollar Index as the emerging market crisis put pressure on smaller currencies including those of Turkey, Argentina and South Africa.

In the US 4th quarter Gross Domestic Product showed a 3.2% improvement in the economy. The price deflator (a measure of inflation) was not an inspiration for metal buyers at only 1.3%. Yesterday the Fed followed through and lowered bond purchases to $65 billion per month. There had been some talk that as a result of the still mostly sluggish economy it might forgo this month’s taper. If they had there would have likely been a big spike in prices for the metals. As they left the taper in place the enthusiastic long paper plays were removed and the bulls were back on the defensive.

Some are saying gold is lower because of a delayed reaction to yesterday’s $10 billion reduction in the Fed’s quantitative easing program. This might be a bit of a stretch because overnight trading in Hong Kong and London were flat. Yesterday’s strength in gold might have been a hang-over bounce related to the foreign exchange worries so some safe-haven buying and because US stocks firmed this morning, the dollar was stronger and gold moved lower. There is also the Chinese New Year in play which means those big colorful dragons are all over the place with firecrackers too. These folks will be on vacation for a few days and so gold trading will be closed. Also remember there is still a large short trade in gold so until we replace current bearish thinking expect more bear raids on the trading floor.

Silver was down $0.42 at $19.10 and there was a big pop in the physical trade but also a few very large sellers – so our friend silver bullion remains defensive even though prices are cheap relative to old highs.

Platinum closed off $26.00 at $1383.00 and palladium was down $4.00 at $707.00. Platinum was weak because apparently there has been an agreement to build a refinery in Zimbabwe. That removed fears that supply from Zimbabwe might be withheld from the market. Also as a result of the falling South African  currency holders of the platinum ETF liquidated some sizeable positions.

So now that the follow through taper (another $10 billion yesterday) has been confirmed folks in the know will claim the taper is responsible for the stock market swoon. Don’t believe that and don’t believe there has been a great deal done to stem the quantitative easing program. Leaving Chairman Bernanke went for the next round of tapering because things are improving and he wanted to make a conservative statement. If you do the math the US balance sheet is still perilous. Figure $65 billion times 12 months (I appreciate we will continue to taper) so this is not exactly accurate but the number would be $780 billion annually. Not exactly small change and our balance sheet when the financial crisis began was about $700 billion so this comparison should shed light on how far we have come to avoid collapse since 2008. As far as stocks are concerned the taper has little to do with recent weakness and more to do with marketing as the Standard and Poor’s 500 (a group of well-known leading stocks) was trading at 18 times earnings. Stocks were on a tear and it was time for professionals to book some profits. Finally the US balance sheet is something like 4 trillion today or more than 4 times what is was just 5 years ago. And the Federal Reserve faces a daunting challenge: sooner or later they must either drain the excess liquidity and create a huge deflationary wave or allow all the hedged money circulate and face the next inflationary wave which will support gold. My bet is that they will choose the later option and when inflation begins to move higher the governments of the world will raise interest rates. But by that time gold will have made new highs and people who took advantage of cheap prices can then decide what to do with the profits.

If you are looking for additional gold commentary try www.zerohedge.com. They post a great many main stream stories about gold and always throw in a few controversial subjects like “Has Germany’s gold already been hypothecated?” or “Is the US government ready to steal your IRA money?” Or how about Tyler Durden’s latest – Nothing Lasts Forever; World Bank Ex-Chief Economist Calls For End To Dollar As Reserve Currency – “In the past we have discussed at length the inevitable demise of the USD as the world’s reserve currency noting that nothing lasts forever. However, when former World Bank chief economist Justin Yifu Lin warns that “the dominance of the greenback is the root cause of global financial and economic crises,” we suspect the world will begin to listen (especially the Chinese. Lin, now – notably – an adviser to the Chinese government, concludes that internationalizing the Chinese currency is not the answer (preferring a basket approach) but ominously concludes, “the solution to this is to replace the national currency with a global currency,” as it will create more stable global financial system.” ZeroHedge.com is always interesting and when they move into the conspiracy theater there is always something interesting to consider.

Like this crazy development in Poland. Tyler Durden (zerohedge) – “Poland Confiscates Half of Private Pension Funds To “Cut” Sovereign Debt Load – While the world was glued to the developments in the Mediterranean in the past week, Poland took a page straight out of Rahm Emanuel’s playbook and in order to not let a crisis go to waste, announced quietly that it would transfer to the state – i.e., confiscate – the bulk of assets owned by the country’s private pension funds (many of them owned by such foreign firms as PIMCO parent Allianz, AXA, Generali, ING and Aviva), without offering any compensation. In effect, the state just nationalized roughly half of the private sector pension fund assets, although it had a more politically correct name for it: pension overhaul. By way of background, Poland has a hybrid pension system: as Reuters explains, mandatory contributions are made into both the state pension vehicle, known as ZUS, and the private funds, which are collectively known by the Polish acronym OFE. Bonds make up roughly half the private funds’ portfolios, with the rest company stocks. And while a change to state-pension funds was long awaited – an overhaul if you will – nobody expected that this would entail a literal pillage of private sector assets. On Wednesday, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings.  The funds would effectively be left with only the equities portions of their assets, even this would be depleted, and there will be uncertainty about the number of new savers joining. But why is Poland engaging in behavior that will ultimately be disastrous to future capital allocation in non-public pension funds (the type that can at least on paper generate some returns as opposed to “public” funds which are guaranteed to lose)? After all, this is a last ditch step which no rational person would engage in unless there were no other option. Simple: there were no other option, and the driver is the same reason the world everywhere else is broke too – too much debt. By shifting some assets from the private funds into ZUS, the government can book those assets on the state balance sheet to offset public debt, giving it more scope to borrow and spend. Finance Minister Jacek Rostowski said the changes will reduce public debt by about eight percent of GDP. This in turn, he said, would allow the lowering of two thresholds that deter the government from allowing debt to raise over 50 percent, and then 55 percent, of GDP. Public debt last year stood at 52.7 percent of GDP, according to the government’s own calculations.”

The walk-in cash trade was very busy today with sizable transactions both buying and selling. The phones were also hot most of the day but the action favored mostly buying from the public in smaller units (less than $50,000.00 orders). Fairly large gold selling apparent in the last few days has subsided.

The GoldDealer.com Activity Scale is a “6” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Friday – 4) (last Monday – 3) (last Tuesday – 6) (Wednesday – 5) (Thursday – 6). The scale is 1 through 10 and we believe this is a reliable way to “sense” real bullion business.

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