Commentary for Wed Oct 16, 2013 – Gold closed up $9.00 at $1282.00 in reaction to the Congressional deal on spending. Gold actually traded higher in the day reaching $1289.00 during the seemingly tense talks but sold off on the handshake. Premiums for physical gold in both China and India continue to rise as steady demand supports the current pricing model.
Silver was up $0.18 today at $21.32 in quiet trading and the physical market is also worth a yawn.
Platinum was up $15.00 at $1397.00 and palladium was also higher by $7.00 at $712.00.
This is a portion of the latest comments by Kira McCaffrey Brecht (Kitco/TraderPlanet) and even with a debt ceiling solution in hand it is worth considering because of its wider implication for gold. “Let’s say the October 17 deadline is breached, but there is a solution in progress—that would still save the U.S. from the brink of disaster. Why? The government still has some cash on hand and it may not be until the end of October or November 1 when the bills can’t be paid. “Even if the Treasury’s cash could cover the $6bn of interest payments due on October 31, November 1 may prove to be the last straw given large social security and Medicare payments due (over $55 billion due),” wrote Nomura analysts in a research note. So, it looks like October 31 or November 1 are the actual deadline date. What is the worst-case scenario according to Nomura? “An outright default would likely generate the most severe effects. In this case investors who had counted on Treasuries as a certain source of liquidity would have to adjust, seeking liquidity elsewhere. This could easily set off a fire sale of assets. That is, of course, what happened in the Fall of 2008. It is certainly possible that a U.S. government default could generate a reaction in financial markets that is as bad, or worse, than what happened in the wake of the Lehman bankruptcy. Consequently, an outright default would likely push the U.S. economy into a deep and long-lasting recession,” wrote Nomura analysts. However, the base case outlook among the majority of market watchers is that a deal will be reached so the U.S. can pay its bills. But, again taking a look at the bigger picture. Policymakers in D.C. are willing to gamble and walk the U.S. government to the edge of economic catastrophe for political partisan differences. This does not bode positively for the future. Can these policy makers successfully address the larger long-term structural issues—such as the Social Security trust fund and Medicare, which are on track to run out of money? Promises have been made to citizens that the government most likely can’t keep unless substantial changes are made. The current mix of policymakers in Washington appears very unsuited and unlikely to come together and compromise for the greater good of the American economy long-term. What does this mean for gold? There’s just another crisis waiting around the corner. It may be this year, or in five years, but unless underlying structural issues can be tackled in a productive and successful manner, there’s just another crisis around the corner.”
Her reasoning outlines what is essentially on everyone’s mind in the real gold bullion business: if the latest round of dysfunctional government does not derail the train when can we expect the next emergency? And more importantly are the emergencies happening closer together? Most hard money advocates are pessimists either by nature or experience. They simply don’t trust all their money to government.
The hot money attracted by bank failures at the beginning of the financial crisis has been redeployed so the general price direction of gold will be dictated by actual physical demand. And most feel safer when considering brokerage houses or banks so while the good old days are not completely “good” the stock market reaching new highs is good for America. Real estate is making a comeback and in some parts of the US is once again booming. All of this is good for the American mindset and the job scene is improving providing a more secure home environment. But are Americans really secure in a world without a gold bullion insurance bet? There are reliable commentators who believe the structural problems in this country and Europe cannot be solved regardless of cooperation without inflation which obviously supports gold bullion.
But what is the value of gold in the “blow up” scenario? Most real bullion buyers get the inflation ticket but I am concerned that many, especially those in the US underestimate the danger of alternative scenarios. Things have improved and for that I am grateful but they have not improved to the point I am willing to trust my tomorrow to a well-meaning government: there are still too many financial loose cannons.
This from Steve Saville (www.speculative-investor.com) talks about the Federal Funds Rate (FFR) and the Future Inflation Gauge (FIG): “The Fed’s decision to maintain an ultra-loose stance during 2002-2004 was the fuel for the real estate investment bubble and set the stage for the collapse of 2007-2009. There was a lesson to be learned from what happened during 2002-2007, but the Fed apparently learned the wrong lesson. The lesson that should have been learned was: Don’t provide monetary fuel for bubble activities, because the eventual economic fallout will be devastating. Unfortunately, the lesson that was actually learned by the Fed was: An economic bust can be avoided forever by keeping monetary policy loose forever. The result is that the divergence between the FFR and the FIG that arose during the first half of the last decade is nothing compared to the divergence that is now in progress. Moreover, the near-zero FFR doesn’t do justice to the ‘looseness’ of the Fed’s current stance, in that 4+ years after the end of the last official recession the Fed is still pumping money as if the US were in the midst of a financial crisis. By the way, this year’s small decline in the FIG suggests that there is not going to be a significant change in the CPI’s growth rate over the next 6-12 months. If so, policy-makers at the Fed will probably conclude that they have plenty of leeway to maintain an ultra-loose monetary stance. By ignoring investment bubbles and erring far more in favour of “inflation” than it has ever done in the past, the Fed is currently setting the stage for the mother-of-all economic busts. We don’t have an opinion on when the bust will happen and how it will unfold, other than we do not expect it to happen within the next six months and we do expect that it will be very different to the bust of 2007-2009.”
The walk-in cash foot traffic has picked up significantly in the last two days and if you widen the view a bit there have now been several very large gold bullion sellers (whales). We have seen significant selling of old gold bullion positions (traditional products) probably dating back more than 20 years judging by the holders. This has been coupled with recent selling of new foreign positions either brought into this country in the last 10 years or purchased here but hallmarked gold bullion not usually seen across the counter.
The total of these recent public sales is significant and because a portion is “off-brand” it will be melted and turned into pure shot for use by the jewelry community.
This all supports my contention that a few long-time real believers are selling their gold bullion in favor of other investments. This might be further evidence of the “give-up” phase in this rather long unwinding phase.
I am convinced we are now waiting for round two in a gold bull market which will be fueled either by another blow-up financial disaster already in the making or foreign demand by central banks and the developing industrial classes in both India and China. Big US money in support of this expected next phase is still missing in action which is expected because Americans have little appetite for flat to lower markets but there have also been exceptions in the several hundred thousand dollar range. The million dollar gold bullion order is always scarce but lately they have been nonexistent. I expect this will change as soon as we see further cracks in the financial dam.
Phase One of our new golddealer.com web site will soon be complete (Oct 28th best guess) and includes a new look along with live pricing. It will also include Live Chat, you will be able to set up your own customer account, and you will receive automatic email confirmation on buying or selling. Look for further improvements before year end which makes accounting, shipping and tracking easier (check to see if we have your email in the new system).
We now offer the choice of USPS or FedEx Ground. Our new flat screens within the CNI Building are up and operational and the cash trade loves this idea. The feed and graphs are live (gold, silver, platinum and palladium). Bullion products are programmed with premium spreads so your choices are easier. As usual cash is always available. There is nothing like this on the West Coast and visitors enjoy complete transparency when buying or selling.
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Written by California Numismatic Investments (www.golddealer.com).