Commentary for Friday, April 10, 2015 ( www.golddealer.com) – Gold closed up $11.00 on the Comex today at $1204.60. This was the short-covering bounce I expected yesterday and more importantly gold was firm in the face of a stronger dollar.
The dollar this week was up by a whopping 3% which could easily translate into a $50.00 loss in gold over this time period – but instead we see gold up $3.70 these past 5 days.
The move to higher ground today highlights this divided trading floor. The gold bears pushing the short trade in anticipation of higher interest rates – testing the resolve of the physical ownership interests and all of this against the negative backdrop of a stronger dollar.
When the investment media gets over-negative keep in mind the consistent buying of physical metals from sovereign nations like China, India and Russia. India’s gold imports have doubled from a year ago and no one is sure about her under the table action.
The off the books trade in China and Russia is difficult to figure but their gold appetite under any circumstance is undeniable. These nations lighten up when prices are moving higher and load up when prices are moving lower.
The Dollar Index over the past 5 days has moved from slightly over 96.00 to 99.84 as of this writing – to have gold pop higher should tell you that the paper market is oversold at the lower portion of its current trading range.
Does this mean we have reached a bottom? Of course not and there are three reasons why gold will remain defensive on the shorter term. The first of course is the possibility of an interest rate hike. The second is that positive gold investor sentiment is on life support. And third – did you watch stock action today – rallies and positive talk both on Wall Street and in Europe. Things are looking up and the paper trade is making money.
But it does not mean that gold’s demise so eloquently opined these past few years by the fiat paper crowd is a reality. It just means we are continuing to unwind.
The investment crowd is defined by the “what have you done for me lately” concept. Gold for the past two years has been taken to the wood shed and will stay there until it can show stability and then sustained higher prices. As this happens, perhaps in 2015 but for sure in my mind by 2016 I believe the upside will be dramatic and swift. This next time around the public may not be so willing to trust that the government has another answer.
Silver closed up $0.19 at $16.37. For some reason the physical trade across the counter was active today – mostly buying silver bullion with continued interest in the new issue Canadian silver Monster Boxes.
Platinum was up $12.00 at $1170.00 and palladium was higher by $13.00 at $775. Huge gains in car sales, announced at 17.2 million units in the US helped both platinum (up $16.00 on the week) and palladium (up $29.00 on the week). We continue to see trading of gold bullion for platinum bullion and while there is improvement in availability this market might just sizzle if there were more choices in traditional bullion products.
Our Patented Employee Survey – Gold’s Direction Next Week?
Of course it’s not really patented but we do have some fun along the way. This is what the GoldDealer.com employees think – 6 believe gold will be higher next week – 2 think gold will be lower and 3 believe it will be unchanged.
Our Patented Customer Survey – Gold’s Direction Next Week?
Like the employees our customers were given three choices – up – down – unchanged. We limited the survey to a random sampling of 100 transactions – unscientific but worth considering because these people took action: 48 people thought the price of gold would increase next week – 38 believe the price of gold will decrease next week and 14 think prices will remain the same.
Precious Metal Closes & Dollar Strength – April 6 – April 10
This from John Hathaway (Tocqueville Asset Management) – Tocqueville Gold Strategy Investor LetterFirst Quarter 2015 – As an alternative investment to overvalued equities, or as a hedge against a reversal of the relative strength of the dollar, gold exposure has potential appeal as a tactic that may produce positive returns over the short to intermediate run. The possibility of a general loss of confidence in the policies and practices of central banking is an entirely different matter. It is this possibility that makes exposure to gold a potential game-changer. We endorse without reservation the view expressed by James Grant (of the aforementioned Interest Rate Observer): “The fixers of interest rates and the raisers-up of financial assets, which is to say…the Federal Reserve Board…the European Central Bank, and…the Bank of Japan—are the unwitting enemies of macro prudence. If price control is a policy that tends to backfire on the governments that implement it (and it is), and if interest rates are among the most critical prices in finance (and they are), 21st century monetary policy is riding for a fall” (3/20/15). A monetary orthodoxy that embraces competitive devaluation, money printing, financial repression, and creeping nationalization of banking institutions via regulation is in our opinion unsustainable.
Similar views are expressed by a growing number of respected voices:
“Low interest rates globally destroy financial business models that are critical to the function of modern day economies. Pension funds and insurance companies are perhaps the most important examples of financial sectors that are threatened by low to negative interest rates…. Negative/zero-bound interest rates may exacerbate, instead of stimulate, low growth rates in all of these instances by raising savings and deferring consumption…. The financial system has become increasingly vulnerable only six years after its last collapse in 2009.” – Financial manager Bill Gross, 3/15/15
“The Fed and the ECB have decided to address the issue of debt by slowly confiscating value from investors via negative rates…ZIRP [zero interest-rate policy] and QE as practiced by the Fed and ECB are not boosting, but instead depressing, private-sector economic activity. By using bank reserves to acquire government and agency securities, the FOMC has actually been retarding private economic growth, even while pushing up the prices of financial assets around the world.” – Christopher Whalen, Kroll Research, 3/23/15
“Central bankers have been left to paper over the global malaise with reams of fiat currency. With politicians lacking the willingness or ability to implement labour and tax reforms, monetary policy has morphed into a new orthodoxy where even central bankers admittedly view it as their job to use the balance sheets as a tool to implement fiscal policy….The depressed returns available on fixed-income securities, largely a result of QE, are a tax on investors, including savers, pension funds and insurance companies….Under the new monetary orthodoxy, the responsibility for critical aspects of fiscal policy has been surrendered into the hands of appointed officials who have been left to salvage their economies, often under the guise of pursuing monetary order.” – Financial Times, 3/26/15
We believe that confidence in central banking is the principal explanation for the current lofty valuations of financial assets and the corresponding low esteem for gold. That confidence, in our opinion, will dissipate if investment gains of the past five years begin to turn into losses. As noted last year by Elliott Management’s Paul Singer, “Our feeling is that confidence, especially when it is unjustified, is quite a thin veneer. When confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.” We believe that ZIRP and financial repression have skewed the investment thought process, short-circuiting critical analysis via the seduction of high nominal returns. The only way for this to continue, in our opinion, is for central bankers to advance ever more preposterous explanations for their policies and practices against what we expect to be a never-ending backdrop of stagnant or sinking global economic activity. Nobody, in our opinion, can predict the inflection point in confidence. The absurdities should collapse under their own weight.
As noted in our previous commentary (1/15/15), we believe that dollar strength is a precursor of systemic weakness. We thus see little virtue in the relative strength of the US currency, which, in our opinion, signifies capital flight from risk: “When the currencies in which investments are denominated experience historic levels of volatility (i.e., the euro has dropped by 20 percent against the dollar since last July), a new dimension enters the investment landscape. The unstable currency regime has created a highly unstable investment environment that is placing capital at risk” (The Credit Strategist, 4/1/15). As noted by analyst Paul Mylchreest, volatility in currency markets has historically led to destabilizing flows in speculative capital, which ultimately affects other financial assets (1873, 1929, and 1987).
We agree with Mr. Singer that a loss of confidence can and will lead to a severe, sudden, and simultaneous decline across a number of markets and sectors. Moreover, we do not believe that confidence in the practitioners of 21st-century monetary policy is deserved. Modern-day central bankers consist largely of academics with little practical business experience. Their policies have not generated growth, and they have in our opinion exacerbated systemic risk. Market expectations for economic growth seem destined for repeated disappointment. In our view, the coming reconciliation of illusion to reality promises to be epic, one in which ownership of real, not financial, assets, is essential. We have always believed that gold is the most liquid, easily acquired real asset with a legacy of protecting capital during periods of financial instability. That it has become discredited in Western capital markets speaks for itself. It is a message for contrarians to heed.
The walk-in cash trade was busy all day – mostly buying and the silver bullion players came out in force – which is a reversal in this lately quiet trade. The phones were average at best.
The GoldDealer.com Unscientific Activity Scale is a “ 3” for Friday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Friday – 3) (Monday – 4) (Tuesday – 4) (Wednesday – 4) (Thursday – 4). The scale (1 through 10) is a reliable way to understand our volume numbers. The Activity Scale is weighted and is not necessarily real time – meaning we could be busy and see a low number – or be slow and see a high number. This is true because of the way our computer runs what we call the “book”.
Our “activity” is better understood from a wider point of view. If the numbers are generally increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.
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