Commentary for Thursday, March 5, 2015 – Gold closed down $4.70 today on the Comex as the dollar made another recent high and the euro fell to the lowest level seen since 2003.
The Dollar Index moved from a low of 95.84 to a high on the trading day of 96.59 settling at 96.30 as of this writing – yesterday’s close was 95.91. So continued euro weakness is pushing the dollar higher and gold lower – with some predicting the dollar and euro will soon achieve parity.
Still gold is holding a respectable trading range. This is surprising as traders are expecting a break to the downside and can’t figure out why gold remains resilient.
This from Reuters – “However, with the dollar at an 11-1/2-year peak after strong U.S. data and the technical picture looking weak, analysts expect gold to head lower. The next support for gold currently comes in at $1,195, said technical analysts at ScotiaMocatta.
“We expect a further test of this level, and should we see it break, it would be bearish for gold and open a test of the $1,131-low (reached in November 2014),” they said.
Gold is on shaky ground on the back of robust U.S. economic data, fears of an interest rate hike in the near future and waning investor sentiment.
Data on Wednesday showed U.S. private employers added 212,000 private-sector jobs in February. Separately, the Institute for Supply Management said its services index was 56.9 in February, up slightly from 56.7 in January.
A robust economy decreases the appeal of bullion, often seen as an alternative investment during times of economic and geopolitical uncertainty. A stronger dollar makes gold more expensive for holders of other currencies.
Investors are now waiting for U.S. nonfarm payrolls data on Friday for more clues about the economy. The data is also being eyed to see how it could impact the timing of the Federal Reserve’s move to hike interest rates. Higher rates could hurt demand for non-interest-bearing assets such as gold.
SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, saw its holdings drop to a one-month low earlier this week, after posting its biggest one-day outflow this year.
For trading cues on Thursday, traders will be eyeing the European Central Bank’s policy meet. The ECB, which starts its quantitative easing, or bond-buying, programme of more than 1 trillion euros this month, is expected to detail the plan after the meeting.”
Everyone is talking about dollar strength today but let’s not forget about the Federal Reserve and that pesky interest rate hike. There are many commentators who believe this rate hike will not happen because of the European near zero interest rate structure. But I think the rate hike figures – it will more symbolic than anything else but it does lay the groundwork for higher interest rates over the next few years.
Some argue that weaker US economic data might forestall this increase but it does not matter. Even if our economic numbers are not robust the data will be brushed aside – the Fed will blame severe weather conditions causing havoc on the East coast. The real indicator of a Fed hike will be continued progress on the jobs front.
The jobs numbers are also kind of rigged – in other words there could be something hidden right in front of everyone which distorts the picture and may bring grief down the road.
The US Bureau of Labor Statistics publishes these numbers. How they define U-1 – “Persons unemployed 15 weeks or longer, as a percent of the civilian labor force” versus U-6 – “Total unemployment, plus all persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force”. These unemployment distinctions result in an “unemployment rate” which differs from between 5.7% and 12%.
At any rate all other things being equal look for that rate hike in the 2 nd or 3 rd quarter but while this will dampen gold on the shorter term its overall effect will not be jarring. By the time it happens gold will have already tested lower levels. The bigger shorter term question is whether gold will hold its restricted trading range.
Could gold test recent lows of $1131.00? Sure – especially if the dollar continues to climb and the technical picture remains negative.
But the closer we get to that recent bottom the more the physical demand from China, India and perhaps even Europe (reacting to the lower euro) will support these lower prices. Those who really want to own gold bullion will continue to buy weakness.
Silver closed unchanged at $16.13. Can’t say they are rushing the counter to buy silver bullion today but there was some light action.
Platinum closed down $3.00 at $1180.00 and palladium closed down $5.00 at $825.00. Trading in platinum bullion today was also very light.
Chicago Mercantile Exchange reports for the last 5 trading days – so we are looking at the trading volume numbers for the April Gold contract: Thursday 2/26 (257,857) Friday 2/27 (259,681) – Monday 3/02 (260,824) – Tuesday 3/03 (257,753) – Wednesday 3/04 (252,739).
European Union Bank President Mario Draghi finally committed to an exact date the EU will begin buying bonds – March 9 th which is next Monday . This should be very interesting because the EU economic model is different than our model. Their banking is different and being a union of different countries their economic goals are different. This might rightly be called Part 2 of The Great Fiat Money Experiment – results to follow.
To get an idea of what I mean consider this great insight from Ed Steer (Gold & Silver Daily / Casey Research) – ECB Will Cut Rates to Minus 3%: JP Morgan – A running theme here over the past several weeks has been that the ECB’s €1.1 trillion foray into quantitative easing will be severely hindered by a laundry list of constraints (some of which were unwittingly self-imposed). Another topic we’ve covered exhaustively is the idea that the world’s central banks will likely all, in relatively short order, run up against the natural limits of accommodative monetary policy (indeed, even some Japanese policy makers are starting to agree on this).
Thinking about these two things in conjunction raises an interesting question for the ECB: if a tail event comes rearing its ugly head and the global central bank race to the bottom accelerates, will Mario Draghi, effectively fighting with one hand tied behind his back by virtue of Q€’s limitations, be able to fend off an outright collapse?
Here’s Financial Times with more: …the ECB is now close to running out of ammunition. The true constraints on further ECB intervention lie in the 25 per cent issue limit and 33 per cent issuer limit on its sovereign bond purchases.
Except for Greek debt, the 25 per cent and 33 per cent caps should not prove binding in a scenario where the ECB keeps its monthly asset purchase pace of €60bn. However, the limits could be reached in worst-case scenarios where the ECB would have to boost the size of its QE programme or implement OMTs [Outright Monetary Transactions] targeted on specific sovereigns.
I sent this story off to Jim Rickards as soon as I received it—and this is what he had to say. “Thanks Ed. It’s a good summary of Europe’s problems. The interesting question is how can Europe have such deflation without exporting it to the U.S. via currency wars? And, if the deflation is exported to the U.S, how on earth can the Fed raise rates without making that situation worse? They probably can’t, and may even have to fight back with QE4 in 2016. That could be bearish for gold in the short run (as deflation prevails), but bullish by late this year (as more Fed ease appears on the horizon). Fasten your seatbelt!”
The walk-in cash trade was light to moderate and the phones were on the slow side. It would seem the public is not that interested one way or the other today.
The GoldDealer.com Unscientific Activity Scale is a “ 4” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Friday – 2) (Monday – 4) (Tuesday – 5) (Wednesday – 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”.
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