Commentary for Thursday, July 17, 2014 (www.golddealer.com) – Gold closed up $17.10 at $1316.70 on this tragic day.
The big upward move in gold was obviously due to the Malaysian tragedy.
A commercial jetliner flying from Amsterdam to Kuala Lumpur was shot down by what appears to be a surface to air missile over Ukraine. The plane with almost 300 people on board went down near Donetsk. The Ukrainian government claims pro-Russian rebels were responsible. This information came across the wires in early morning trading.
Gold had already developed a slight positive bias just below its 100 day moving average ($1305.00) before the sad news was broadcast worldwide.
The increased international tension took a summer, rather sleepy trading environment which was technically negative and turned it into a scramble to cover shorts – which then turned into safe haven buying.
Later in the morning it was learned that a Russian fighter mistook the commercial aircraft for a Ukrainian cargo plane. Perhaps – but this too is difficult to believe considering the intelligence, training and electronic surveillance available to both fighter and commercial pilots.
Still this event will re-focus the world on this Russian-Ukrainian situation.
And further sanctions were placed yesterday by President Obama.
I think the question here is whether the commercial jet was deliberately shot down or this was a terrible mistake or accident? If true – it will not overshadow a market with a technically negative bias. And I would expect the fight between the bulls and bears to continue short term.
On the other hand if this turns out to be a deliberate act it could signal a huge escalation in the Ukraine and gold will continue higher.
In the meantime expect reports to be inaccurate – both sides blaming the other as the slaughter of the innocent continues. I would also question why any commercial aircraft would be allowed to fly over a war zone even at 30,000 feet.
At the time of this writing the physical gold market both locally and nationally has not be affected. Bullion sales remain quiet even with the Israeli incursion into Gaza.
Silver closed up $0.36 at $21.08. The Silver Institute released positive news. Like a 7 million ounce increase in Silver ETF holdings this year and industrial demand for silver up 23%. Also noteworthy are expectations that solar panel usage of silver will be up 10% this year.
Platinum was up $18.00 at $1503.00 and palladium made a 13 year high – up $8.00 at $884.00.
Building Permits, Unemployment Claims, Housing Starts – Tom Moore (FastMarkets) – Building permits fell to 0.96 million, the third straight month of declines and a five month low. This does not bode well for the housing market as it indicates reduced supply going forward.
Housing starts have also fallen to a 9-month low, dropping to 0.89 million in June down from the revised 0.99 million in May. Housing starts have also fallen for 3 straight months, a trend that is likely to continue with building permits declining.
Unemployment claims dropped to a 9 week low of 302,000, the third straight week of decreases, indicating strength in the employment market. This follows the rise in employment shown by both the NFP and ADP payroll numbers.
I am a big fan of Kira Brecht (TraderPlanet/Kitco) and her commentary is especially relevant considering the Malaysian tragedy. America’s Role as Global Policeman. “The first half of 2014 has been littered with global political tensions and military uprisings including Russia’s annexation of Crimea and the rise of ISIS, a jihadist group, in Iraq. On the other side of the globe, China continues to spat with Japan over ownership of a chain of islands —known as the Senkaku in Japan and the Diaoyu in China — in the East China Sea. Commodities such as gold and crude oil have both seen gains in recent months.
Gold has gained in part amid its role as a hedge against global instability and a safe-haven investment, while crude oil has rallied amid concerns about a potential supply disruption, particularly in Iraq.
Meanwhile, average U.S. citizens are now questioning in larger and larger numbers the role that America should play as a global policeman. A recent Wall Street Journal/NBC news poll revealed that 47% of respondents favored a less active role by the U.S. in world affairs. Anti-intervention themes run across party lines here in the U.S. and with massive debt and deficit levels, some question the appropriateness of large defense budgets at a time of fiscal indebtedness.
What does this all mean for the commodity markets?
“The U.S. has acted as a global stabilizer in geopolitics since 1945. And, as we relinquish that role we are seeing more tensions,” said Bill O’Grady, chief market strategist at Confluence Investment Management. Pointing to recent global events, he added “the conclusion the rest of the world is drawing is that American promises of protection really aren’t that enforceable. The U.S. is giving up its previous role in the world.”
Looking ahead, O’Grady points to upcoming midterm elections and then the 2016 U.S. Presidential election as critical. “This election may determine if we try to retain our role in the world. Enormous portions of the American public are sick of the role and want to be done with it,” he said.
Pointing to the political spectrum, O’Grady noted there has been a shift in American politics as a fight between the populists versus the establishment. “The tea party and the radical left have more in common. Hilary Clinton is not a whole lot different than Jeb Bush. But, Rand Paul and Elizabeth Warren and a lot different than Clinton and Bush.”
The next presidential election could determine the direction the U.S. takes with its role as a global policeman. If the U.S. continues to step back from its role as global policemen, O’Grady suggests “it’s bullish for all commodities.”
With the potential for additional political and military unrest in various hot spots around the globe, the supply-side threats to commodity production could increase.
Many companies in recent years, especially during and just after the recession relied upon an inventory strategy known as “just-in-time inventory.” Why sit on supplies and pay holding costs when you can order supplies on an as-needed basis? An increase in geopolitical tensions in the years ahead could cause companies to change that strategy.
“The whole basis of just-in-time inventory is the security of supply,” O’Grady explained. “If U.S. defense spending contracts and there is less stability around the world, it makes just-in-time inventory look foolish,” he warned.
What commodities could be impacted? Crude oil, grains, industrial metals, and precious metals as a safe-haven and hedge.
“Oil, energy is by far the most important. Modern capitalist societies can’t operate without it. Food. If you are a leader of a country and your people can’t eat, you probably won’t be a leader for very long,” O’Grady warned. Bottom line? “What we are going through is pretty momentous,” he concluded.
Change is afoot in the global political and economic structures. Gold has been rallying in recent days and weeks. A strong bid continues to prop up the yellow metal. There are a myriad of reasons to own gold and the farther one looks out into the future even more bullish reasons seem to arise.”
The walk-in cash trade and national phone sales were slow today – so the physical reaction to increased tension worldwide is a rather disarming silence. We will have to wait for a better technical assessment tomorrow and perhaps the overnight Hong Kong and London action will provide more information.
The GoldDealer.com Activity Scale is a “4” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Friday – 3) (Monday – 4) (Tuesday – 3) (Wednesday – 2). The scale (1 through 10) is a reliable way to understand our volume numbers.
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