Commentary for Wednesday, Sept 24, 2014 (www.golddealer.com) – Gold closed down $2.40 at $1218.60 today – this is all dollar strength. Yesterday the Dollar Index was trading around 84.67 when the newsletter was published – today the Dollar Index is trading over 85.00.
Also note my comment about yesterday’s US ISIS attack – the small amount of movement in gold was hardly safe haven buying but even that was given up today – and so my comment that all “war premium” has taken a back seat to dollar strength is repeated today.
Gold’s White Knight must remain a possible uptick in inflation or renewed physical buying from China or India – without either of these scenarios the new autumn months will bring more of the same – lackluster trader and further testing of weak hands.
But all is not lost – especially if you are a contrarian investor. Enter the Hulbert gold sentiment index – it has fallen to a minus 46.9%. This index measures the sentiment among gold managers and how they hold customer positions. Only once in the thirty years since this index was developed has it been below the current level. From a contrarian view this creates the groundwork necessary to create a positive outcome.
The theory being that all the sellers have already exited stage left – of course all this sounds good but like everything related to gold bullion these explanations tend to be simplistic – and figuring which way the price of gold is moving today is not simple.
Silver closed down $0.07 at $17.64. And physical buying has calmed down from yesterday.
Platinum was down $13.00 at $1319.00 and palladium was up $4.00 at $819.00. Rhodium was again unchanged at $1350.00.
This is part of a recent post by David Stockman – Contra Corner – always worth reading: The Fed’s Credit Channel Is Broken And Its Bathtub Economics Has Failed – Contra Corner Digest – September 23, 2014 – “So the Fed’s Keynesian model is fundamentally flawed—-a reality that perhaps explains its stubborn adherence to policies that do not achieve their stated macro-economic objectives, but simply fuel serial financial bubbles instead. And it also explains its inability to recognize or acknowledge either untoward effect.
However, even apart from the fundamental flaws of its basic economic model, the Fed’s Keynesian pre-occupation with the economy’s mythical full-employment brim (and the short-run business cyclical fluctuations related to it) causes our monetary central planners to ignore the obvious. Namely, that the credit transmission channel is broken and done, and that the massive resort to money printing—especially since the dotcom bust in 2000—hasn’t worked at all. In fact, massive monetary stimulus has been accompanied by sharply deteriorating economic trends.
Stated differently, the growth rate and general health of the US economy has drastically down-shifted during the last decade and one-half and now stands at only a fraction of its historic trends. Specifically, real GDP grew at a 4.0% rate during the golden age of sound money and fiscal rectitude between 1950 and 1970.
Then it dropped to about 3% during the next 30 years after Nixon defaulted on our Bretton Woods obligation to redeem the dollar in a constant weight of gold. This was an epochal move that permitted the world’s leading central bank to launch its one-time ratchet of the US economy’s leverage ratio, raising it from 1.5X national income before 1970 to 3.5X shortly after the turn of the century. The consequence was to allow the US economy to generate about $30 trillion of public and private debt beyond what would have been the case under the 100-year trend ratio that prevailed prior to 1971. This amounted to an incremental dollop of spending beyond that available from current production and income that temporarily juiced economic growth as measured by the Keynesian GDP accounts,
But since the dotcom bust in 2000—- when the Greenspan Fed finally went all out with printing press monetary expansion—-real GDP growth has amounted to only 1.7% annually. That is just 40% of its golden age rate, and in truth probably even less if inflation were to be honestly measured by the government’s statistical mills.
Faltering growth, in turn, has meant severe job market deterioration and declining investment in productive assets. Indeed, during the last 14 years of its intense economic weather watching and money printing, the Fed has never once noticed that breadwinner jobs have declined by 5%, real net investment in business plant and equipment is down by 20% and the median household income is not only sharply lower, but actually only at levels first achieved in 1989.
Needless to say, these failing trends in the fundamental measures of macroeconomic health occurred at a time when the Fed’s balance sheet virtually exploded, rising from $500 billion to nearly $4.5 trillion—or by 9X—during the same 14 year period. Yet it keeps attempting to shove credit into the economy notwithstanding this self-evident failure because at the end of the day there is nothing else in its playbook.
So we have reached peak debt in both the household and business sectors. That means the fed’s massive flood of liquidity never gets out of the canyons of Wall Street, yet it nevertheless keeps the spigot wide open, and promises to do so for 80 months running at least thru mid-year 2015.
In short, believing they are filling the macroeconomic bathtub with aggregate demand and full-employment jobs, Janet Yellen and her merry band of Keynesian money printers are simply blowing chronic, giant, dangerous bubbles on Wall Street. If they are beginning to become fearful of a Wall Street hissy fit, perhaps they should look at the two charts below.
Easy money is always the wrong medicine, but most especially for an economy that is already and self-evidently saturated with too much debt. In particular, the inflated and unsustainable growth that the Greenspan Fed engineered by encouraging main street households to stage a massive raid on their home ATM machines has sharply reversed, and properly so.
And this is no small number. Compared to the peak MEW (mortgage equity withdrawal) rate of 8% of disposal income, today’s negative 2% rate means there has been an approximate $1 trillion swing in household “spending”. Our Keynesian central bankers lament this as a loss of “aggregate demand” that they intend to remedy by printing more money. In truth, this was always phony demand that could not be sustained and had not been earned through production; its disappearance, therefore, marks the fact that households have been forced back to the old fashion virtue of “living within their means”.
Stated differently, the supply side is back in charge after a 30 year spree of one-time debt and leverage expansion. Consumer spending now depends on income—which means production, investment and enterprise are once again the source of growth, jobs and true national wealth.
The implication of all of this, of course, is that our monetary politburo is out of business; that “monetary accommodation” is nothing more than a one time parlor trick of central bankers. Unfortunately, like the real politburo in the Kremlin, the incumbents in the Eccles Building will not desist until they are finally chased from office by a massive uprising of the people—–that is, the savers, workers and entrepreneurs of America who have been shafted by the bubble finance policies of our monetary central planners.”
The above Stockman work is important because on a regular basis David points to problems with how the Federal Reserve conducts its business. If a gold dealer claims there may be a crack in the monetary system and one should seek protection with gold bullion it sounds like a good idea – until nothing happens. This is the present case with gold – even with all the fiat money created since the 2008 financial collapse gold is faltering and the dollar is growing stronger.
I appreciate this is difficult to believe until one reads someone like Stockman who understands financial bubbles. So a walk through “Stockmanland” once in a while will recalibrate reasonable thinking even though the price of gold may not act in a reasonable manner. And it will reinforce the notion that putting a little money in gold bullion from time to time still makes sense.
This is our usual Wednesday report which covers the movement of all Exchange Traded Funds – this is a handy gage to get a feel of another physical market alternative.
Gold Exchange Traded Funds: Total as of 9-17-2014 was 54,578,585. That number this week (9-24-14) was 54,108,581 ounces so over the last week we dropped 470,004 ounces of gold.
It might also be interesting to note that in 2013 the record high for all gold ETF’s was 85,112,855 ounces. In 2014 the record low was 54,773,273 ounces – but as you can see today we moved below that point so a revision here is necessary – 54,108,581 is now the new low.
All Silver Exchange Traded Funds: Total as of 9-17-14 was 636,886,529. That number this week (9-24-14) was 638,441,602 ounces so over the last week we gained 1,555,073 ounces of silver.
All Platinum Exchange Traded Funds: Total as of 9-17-14 was 2,747,814 ounces. That number this week (9-24-14) was 2,746,070 ounces so over the last week we dropped 1,744 ounces of platinum.
All Palladium Exchange Traded Funds: Total as of 9-17-14 was 2,960,083 ounces. That number this week (9-24-14) was 2,924,712 ounces so over the last week we dropped 35,371 ounces of palladium.
This from Kitco – the complete post is longer – the author is Stewart Thomson (www.gracelandupdates.com) and the reason it is worth considering is that most of the gold bullion and commentary today is negative – this writer is definitely taking the other end of the trade and appreciates the lower price opportunity. A pretty amazing read considering everyone is running in the other direction.
1. I prefer the “KIS” motto to the more common “KISS”. I define it as, “Keep It Simple”. Simply put, gold bullion is the ultimate asset, but when the price declines, Western investors often become nervous.
2. Some investors try to mitigate their worry, by reviewing factors that make gold the “queen of assets”. That helps, but I think a simple focus on gold demand versus supply is all that is required to own gold without worry.
3. In 2009 – 2010, the fear trade (the Western super-crisis) created massive and consistent demand for gold. Institutional investors literally flocked into gold ETFs.
4. That demand became so huge that it started to equal Indian and Chinese gold jewellery demand. In turn, that caused global demand to overwhelm mine and scrap supply, driving the gold price relentlessly higher until 2011.
5. Another part of the fear trade is geopolitics, and today’s bombing of ISIS targets in Syria is probably why gold is rallying this morning. Unfortunately for gold price enthusiasts, geopolitics has yet to create the kind of demand that the super-crisis did.
6. While the super-crisis has faded as a price driver, and geopolitics is not yet in play, global demand is still roughly equal to global supply now, because Chinese demand has grown and Indian demand is returning to its normal state.
7. ‘With the festive season round the corner, analysts feel gold and jewellery sector may see higher sales. “Gold demand will get a boost as festivals such as Navratra and Diwali approach,” Bloomberg quoted Ashish Shah, Head of AC Choksi Share Brokers Equity.’ – The Financial Express News, September 23, 2014.
8. The bottom line is that there is nothing for investors to fear in regards to lower gold prices at this point in time, because demand and supply are well-balanced.
9. Still, there is a regular ebb and flow of Chindian demand. When it’s strong during a particular month, as it was in June when India officially imported over 100 tons (and probably another 20 – 30 tons in the black market), gold tends to rally $50 -$150 higher.
10. When demand is a bit soft, as it was in July and August, the price tends to decline, by about the same amount. Many analysts tend to get quite excited about these intermediate trend movements, but I would suggest they are movements like the tides of the oceans.
11. The simple fact is that the ebb and flow of Chindian jewellery demand does not suggest great bearish or bullish price action is imminent, but it does move the price modestly higher or lower on a regular basis.
12. Gold is probably the most stable market in the world right now, and whether the next $100 price movement is to the upside or downside is most likely going to be determined fundamentally by whether October Chindian jewellery demand has upside strength, or downside weakness. There are some hints as to what is likely coming:
13. Please click here now . As “Golden Week” begins in China, children are celebrating by walking across a sidewalk of gold!
14. Indian jewellery stocks are also rallying strongly, probably in anticipation of good sales during the Diwali season.
The walk-in cash business was pretty steady all day – and at times the downstairs was full – no line at the back door – buyers and sellers were evenly mixed. A few more large gold sellers have appeared and the phones were also busy.
The GoldDealer.com Unscientific Activity Scale is a “5” for Wednesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 3) (last Thursday – 3) (last Friday – 4) (Monday – 4) (Tuesday – 5). The scale (1 through 10) is a reliable way to understand our volume numbers.
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