Commentary for Tuesday, Aug 12, 2014 (www.golddealer.com) – Gold closed up $0.30 today at $1308.80 after at least some fighting between the bulls and bears.
After gold’s big move from $1288.00 to $1308.00 on the 6th of August this market looked like it was good for a dramatic technical comeback as follow through strength took us to $1321.00 within days.
Then the bubbles went flat as gold reversed direction but held the $1305.00 through 1309.00 range in what looked like a return to a market waiting for the other shoe to fall. There are plenty of reasons to offer why gold made the first solid run above $1300.00 but the lack of follow through left most commentators scratching their head.
Today’s action was just as perplexing as gold pushed higher overnight in Hong Kong and London and further pushed prices above the $1317.00 mark in the domestic market probably on news that a Russian convoy of 280 trucks left Moscow on a humanitarian mission. This sparked fears that perhaps this was not just humanitarian and Ukraine announced it would not let the truck convoy into the country.
However a stronger dollar and weaker oil (down 1%) was enough to silence the rally as profit taking set in and we ended the day up $0.30 at the familiar $1308.80. Gold has now closed within a $4 range in the past 5 sessions.
Silver closed down $0.19 at $19.87 so we are again approaching that “sweet spot” under $20.00 where physical action has typically picked up – but not today.
FASTMARKETS UPDATE – The new London Silver Price (Dominic Hall) – London 12/08/2014 – “As you may have read on www.bulliondesk.com, the 117-year-old London Silver Fix ceases on August 14. From this Friday, the fix will be replaced by a new London Silver Price (LSP). The LSP is being administered on behalf of the LBMA by Thomson Reuters and the CME, although the terms of the agreement state that the LSP should be equally available live from any participating vendor. Since the announcement of this change was made in July, FastMarkets has been actively seeking clarification from both Thomson Reuters and CME about how the LSP will work.
Unfortunately, despite our best efforts, there is still much that we do not know. With two days to go, it is far from clear that we – or other vendors – will be able to source the LSP and distribute it to our subscribers and data feed customers. What we do know is that the LSP will be discovered through an electronic auction process. There will be no chairman; instead, the system algorithm will move the auction price up and down until buy and sell orders are matched to within a reasonable tolerance of 300,000 ounces. There will be a wider number of participants than the old fix, although we do not who they will be. In addition to the actual LSP price, it will theoretically be possible to follow the live auction process, observing net supply and demand at the various trial prices. Access to the LSP will initially be free but after an introductory period of six months a fee must be paid. There are many questions then that still need answering, not least what the auction data will look like and what it will cost to follow the LSP process live or observe the price live. FastMarkets will continue to do everything possible to secure this important silver benchmark for our customers.”
Platinum was unchanged at $1472.00 and palladium was up $3.00 at $878.00. Rhodium continues higher – up $15.00 at $1370.00.
According to Reuters – The Russian and Chinese central banks have agreed on a draft currency swap agreement, which will allow them to increase trade in domestic currencies and cut the dependence on the US dollar in bilateral payments.
“The draft document between the Central Bank of Russia and the People’s Bank of China on national currency swaps has been agreed by the parties,” and is at the stage of formal approval procedures, ITAR-TASS quotes the Russian regulator’s office on Thursday.
Transcript of David Stockman Interview on King Word News (David Stockman’s Contra Corner) – Stay Out Of Harm’s Way –
Eric King: “David, the man who is counsel to big money around the world, Michael Belkin, just spoke with KWN and issued a dire warning for the financial markets. I just wondered how you see things at this point with the Dow recently tumbling and everything that is happening across the globe? What should we expect?”
Stockman: “Well, the watchword at this point is stay out of harm’s way. We are headed into a perfect storm of policy failures. This is not simply a failure by the Fed, which has inflated this massive bubble and painted itself into a corner with no clue how to get out, but we are also seeing an absolute failure of American world dominance.
Our foreign policy is collapsing everywhere and yet the Washington war party keeps wanting to do more of the same. This confrontation with Putin is utterly out of hand and unnecessary. Now we have a trade war going that is going to ricochet through an already fragile European economy.
We hear today that Obama is considering going back into Iraq. What is he thinking? If you layer that on top of an already fragile financial bubble that is waiting to burst, I think we are in a zone of extreme danger. It’s hard to predict whether this will be the big, destructive bear market that inevitably has to come, or simply just another dip that encourages the robots and the trained seals on Wall Street to buy for another move higher. But one of these times we are going to have a big failure and I don’t think it’s too far down the road.
If you look at the stock market it has gone nearly straight up for the last 64 months. If you look at the chart of the S&P 500 you can see that year after year the dips get shallower and more infrequent and that is not a healthy chart. That is a sign of a market that is not discounting the actual real world future, but simply trading the word clouds and the liquidity that is being injected by not only our central bank, but central banks around the world.
The difficulty is that I don’t believe this central bank ‘act’ can be kept up. We have had such tremendous expansions of balance sheets that even the central bankers are now beginning to second guess themselves, become divided among themselves, and begin to worry about how they get out of the corner they have painted themselves into.
So those are the factors that will ultimately cause a major collapse. It’s just a question of when the black swan comes flying in, or when the confidence in this whole central banking illusion finally breaks down in the markets.”
Eric King: “Michael Belkin also told KWN that the Fed doesn’t understand the leverage they have created. Their easy money policy and money printing funnels into all kinds of hedge funds in mid-town Manhattan and according to Belkin, ‘they leverage up the wazoo in all these weird, arcane derivatives.’ He warned a great deleveraging is coming that is going to feed on itself.”
Stockman: “Yes. I think the whole global financial system is booby trapped with both visible and hidden leverage. The problem with the Fed, and Yellen in particular, is that they are looking at a very narrow set of indicators. For instance, the nominal balance sheets of the big banks.
But the biggest source of leverage in the economy today is the whole area of structured finance and options trading of one type or another. These Wall Street mechanisms are inherently leveraged; and the market has been coiled up like a spring everywhere owing to the endless bid funded by that massive leverage. Well, on the way up this forces assets values to continue to inflate and rise. But on the way down, when these positions are liquidated, the adjustment can become very violent in the other direction.”
Eric King: “It sounds like we have a train wreck in front of us.”
Stockman: “Train wreck is a pretty good term to describe what is coming. But this train wreck isn’t simply going to hit a wall out of the blue. Actually, it has been forming and accumulating and expanding for many years now, and yet it has simply been ignored, particularly by the financial markets which have ridden this bubble to these extreme and historic heights.
But when you take the balance sheet of the Fed from $900 billion to $4.5 trillion in less than 70 months, and when that pattern is replicated around the world, that is a train wreck in slow motion. The only issue is, when does it hit the wall? The answer to that question is it’s not very far down the road, and I can promise you that is when all hell is going to break loose.”
Now the above may sound a bit like the “world is coming apart” – not one of my personal views but Stockman is always worth reading and this interview highlights the importance of taking defensive measures with physical gold bullion possession.
Do I think a cumulative train wreck is right around the corner? Probably not – but even if the chances of such a catastrophe was 1 in 10 who would cover the bet? The problem I have however is not the idea itself – it is the fact that our financial media have all but forgotten the 2008 scare. Further they are willing in mass to accept the notion that the Federal reserve is completely on top of this transition to the $4.5 trillion balance sheet debt and further they will successfully engineer us back to something more “reasonable” – beginning I suppose this October when the quantitative easing program has ended. It is the “unwinding” which is unsettling. Perhaps they can pull this off – no problem – but I would rather have a few bucks in real gold bullion in case there is a surprise in store.
I’m happy to pass this along – any good press about silver is worth repeating.
Top 7 Reasons I’m Buying Silver Now (Jeff Clark, Senior Precious Metal Analyst / Casey Research)
1. Inflation-Adjusted Price Has a Long Way to Go
One hint of silver’s potential is its inflation-adjusted price. I asked John Williams of Shadow Stats to calculate the silver price in June 2014 dollars (July data is not yet available).
Shown below is the silver price adjusted for both the CPI-U, as calculated by the Bureau of Labor Statistics, and the price adjusted using ShadowStats data based on the CPI-U formula from 1980 (the formula has since been adjusted multiple times to keep the inflation number as low as possible).
The $48 peak in April 2011 was less than half the inflation-adjusted price of January 1980, based on the current CPI-U calculation. If we use the 1980 formula to measure inflation, silver would need to top $470 to beat that peak. I’m not counting on silver going that high (at least I hope not, because I think there will be literal blood in the streets if it does), but clearly, the odds are skewed to the upside—and there’s a lot of room to run.
2. Silver Price vs. Production Costs
Producers have been forced to reduce costs in light of last year’s crash in the silver price. Some have done a better job at this than others, but check out how margins have narrowed. Relative to the cost of production, the silver price is at its lowest level since 2005. Keep in mind that cash costs are only a portion of all-in expenses, and the silver price has historically traded well above this figure (all-in costs are just now being widely reported). That margins have tightened so dramatically is not sustainable on a long-term basis without affecting the industry. It also makes it likely that prices have bottomed, since producers can only cut expenses so much. Although roughly 75% of silver is produced as a by-product, prices are determined at the margin; if a mine can’t operate profitably or a new project won’t earn a profit at low prices, the resulting drop in output would serve as a catalyst for higher prices. Further, much of the current cost-cutting has come from reduced exploration budgets, which will curtail future supply.
3. Low Inventories
Various entities hold inventories of silver bullion, and these levels were high when US coinage contained silver. As all US coins intended for circulation have been minted from base metals for decades, the need for high inventories is thus lower today. But this chart shows how little is available. You can see how low current inventories are on a historical basis, most of which are held in exchange-traded products. This is important because these investors have been net buyers since 2005 and thus have kept that metal off the market. The remaining amount of inventory is 241 million ounces, only 25% of one year’s supply—whereas in 1990 it represented roughly eight times supply. If demand were to suddenly surge, those needs could not be met by existing inventories. In fact, ETP investors would likely take more metal off the market. (The “implied unreported stocks” refers to private and other unreported depositories around the world, another strikingly smaller number.) If investment demand were to repeat the surge it saw from 2005 to 2009, this would leave little room for error on the supply side.
4. Conclusion of the Bear Market
5. Cheap Compared to Other Commodities
6. Low Mainstream Participation
Another indicator of silver’s potential is how much it represents of global financial wealth, compared to its percentage when silver hit $50 in 1980.
In spite of ongoing strong demand for physical metal, silver currently represents only 0.01% of the world’s financial wealth. This is one-twenty-fifth its 1980 level. Even that big price spike we saw in 2011 pales in comparison.
There’s an enormous amount of room for silver to become a greater part of mainstream investment portfolios.
7. Watch Out for China!
It’s not just gold that is moving from West to East…
Silver market trading volumes rose sharply last year, mostly a result of the Shanghai Futures Exchange (SHFE) initiating overnight trading.
Don’t look now, but the SHFE has overtaken the Comex and become the world’s largest futures silver exchange. In fact, the SHFE accounted for 48.6% of all volume last year. The Comex, meanwhile, is in sharp decline, falling from 93.4% market share as recently as 2001 to less than half that amount today.
And all that trading has led to a sharp decrease in silver inventories at the exchange. While most silver (and gold) contracts are settled in cash at the COMEX, the majority of contracts on the Shanghai exchanges are settled in physical metal. Which has led to a huge drain of silver stocks. Since January 2013, silver inventories at the Shanghai Futures Exchange have fallen a remarkable 84% to a record low 148 tonnes. If this trend continues, the Chinese exchanges will experience a serious supply crunch in the not-too-distant future.
There’s more…Domestic silver supply in China is expected to hit an all-time high and exceed 250 million ounces this year (between mine production, imports, and scrap). By comparison, it was less than 70 million ounces in 2000. However, virtually none of this is exported and is thus unavailable to the world market. Chinese investors are estimated to have purchased 22 million ounces of silver in 2013, the second-largest amount behind India. It was zero in 1999. The biggest percentage growth in silver applications comes from China. Photography, jewelry, silverware, electronics, batteries, solar panels, brazing alloys, and biocides uses are all growing at a faster clip in China than any other country in the world.
The walk-in cash trade today was slow and the phones moved from quiet to busy and back again to nothing happening – the last two days were a 2 on the Activity Scale. We might be back to worrying about lunch – and all large dealers have a similar problem – you can tell when they begin to call Ken Edwards and ask if anything is happening.
The GoldDealer.com Activity Scale is a “2” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 4) (last Thursday – 3) (last Friday – 3) (Monday – 2). The scale (1 through 10) is a reliable way to understand our volume numbers.
Email confirmation using a PDF File when buying or selling is functional. It also includes the various forms of payment and includes bank wire instructions. And you can now see your actual invoice or purchase order on your computer screen.
When you buy or sell please check to see if we have your current email on file and that your computer will accept our email (no spam).
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Our four flat screens downstairs with live independent pricing (BullionDesk.com) are a big hit with the cash trade. Live pricing moves all the buy/sell product prices on a real time basis. Yes – you can visit the store with cash and walk away with your product. Or you can bring product to the store and walk away with cash. When buying from us remember if you exceed $10,000 in cash (the real green kind) a Federal Form is necessary.
In addition to our freshly ground organic coffee offered visitors throughout the day we have added cold bottled water, cokes and Snapple. We have also added fresh fruit in a transparent attempt to disguise our regular junk food habits – which seem to grow when things get this quiet. And it does not help that the world famous Randy’s Donuts is just down the street.
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