Commentary for Monday, Aug 18, 2014 (www.golddealer.com) – Gold closed down $6.80 today at $1297.70 as the world pauses to consider consequences – both in Ukraine and Gaza. But make no mistake – no one really figures these complicated political situations will resolve themselves.
The move below $1300.00 was expected as any attempt above $1320.00 these last 60 days has been met with extreme overhead resistance. But losing support above $1300.00 is not the end of the world – we are just giving up some “war premium”.
Gold closing below its 50 Day Moving Average ($1305.00) is not so good – and we are closing in on the 100 Day Moving Average ($1296.00). The real number here to watch is Gold’s 200 Day Moving Average (1284.00). Any break below this critical number will open the door to further downside testing and the bears will be very happy.
Fed Chair Yellen’s comments and the Consumer Price Index number this week will also be watched closely but it seems we are back to the good old one year chart in gold – a market wandering between $1250.00 and $1350.00. If things continue to cool in the Middle East and Ukraine – oil continues lower – and the dollar remains elevated – the remainder of the summer could be boring.
Look for the Federal Reserve to be behind the curve (that is to raise rates later than optimal) so money will continue cheap longer than you might imagine. The World Gold Council estimates that 200 tons of gold will be smuggled into India this year. India still has a 10% import tariff on gold (optimists believe this should have moved lower by now) – so far this year 403 kilos of gold have been intercepted at the Mumbai airport versus 61 tons at the same point last year.
If you just like to worry there are two wild cards which could place gold in the center of the frame. Europe is a mess and the stock market might be in trouble – just something to think about over your morning coffee.
Silver closed up $0.011 at $19.60 – still no stampede in the physical market which is telling because sub-$20.00 levels usually create more action.
Platinum closed down $14.00 at $1444.00 and palladium closed unchanged at $894.00.
Palladium makes 13 years highs: In palladium, there are concerns about supply from Russia, which has been facing ever-tightening sanctions in recent months following its intervention in Ukraine’s eastern borderlands. South Africa, also a large producer, has had to contend with major disruptions in labor relations this year.
“The geopolitical uncertainty should keep gold prices underpinned, especially if there is some flight out of equities, while the weaker economic outlook seems to be weighing on the more industrial precious metals other than palladium, which had stronger fundamentals before the strikes in South Africa,” FastMarkets analyst William Adams said.
Comex falls as Ukraine anxiety subsides (Tom Jennemann – FastMarkets) – London 18/08/2014 – “Gold futures fell below $1,300 again on Monday when investors shrugged off the turmoil in Ukraine, leading to a pullback in traditional safe havens and a rally in equities.
Gold for December delivery on the Comex division of the New York Mercantile Exchange was last down $8.10 at $1,298.10 per ounce. Trade has ranged from $1,293.00 to $1,316.50.
On Friday, gold jerked higher after reports surfaced that Ukrainian forces had attacked a portion of the Russian convoy that apparently crossed the border. But that boost was short-lived – gold traders are apparently in a selling mood to start the new week.
“Almost 60 hours later, the border story seems to be losing much of its punch,” INTL FCStone’s Ed Meir said, noting that the Ukrainians acknowledged on Sunday that the Russian convoy was carrying humanitarian aid and should be allowed in pending technical details being sorted out by the Red Cross under whose auspices the aid would be distributed.
“Given how poorly gold reacted to what should have been moderately bullish news on Friday, we expect it to head lower once again, especially now that the situation in Ukraine has improved in that Friday’s events did not deteriorate into a dangerous stand-off,” he added.
In data released earlier today, China’s foreign direct investment declined 0.4 percent after a 2.2-percent gain last month. This will add to market concerns that the Chinese economy, which has been a driver of metal demand, is slowing down.
The EU trade balance for June at 13.9 billion euros also undershot the forecast 14.9 billion euros and was below the previous month’s revised 15.2 billion euros, while Rightmove’s UK house prices index at -2.9 percent – a record fall for the month of August – was down from -0.8 percent last time.
Here in the US, the NAHB said that its housing market index increased to 55.0 this month from 53.0 in July, beating estimates for a reading of 53.0. That also marked a seven-month high.
In wider markets, the euro was 0.09 percent softer at 1.3380 against the dollar, while the Dow Jones industrial average and S&P 500 were up 0.64 percent and 0.54 percent respectively. In Europe, Germany’s DAX and France’s CAC-40 have rallied strongly, climbing 1.42 percent and 1.18 percent.
As for the other precious metals, Comex silver for September delivery was last up 2.5 cent at $19.550 per ounce. Trade has ranged from $19.505 to $19.955.
Platinum futures for October delivery on the Nymex were last down $9.20 at $1,448.00 per ounce, while the most-actively traded palladium contract was at $900.00, up $5.50.
“While we maintain that palladium should be approached from the long side, we believe that the price has rallied too far. However, with tension around Russian supply still lingering, pullbacks are likely to be shallow,” Standard Bank said in a note.
“In terms of real demand for [PGMs] metals, we keep a close eye on China import data for July, which is due for release within the next few days. We expect palladium import data to be quite strong, but for platinum import data to lag [behind] levels seen in 2013,” the broker added.”
To get a real idea of what is going on in Europe you have to read Ambrose Evans-Pritchard (The Telegraph) – France rebels against austerity as Europe’s recovery collapses – “Eurozone strategy is in tatters after economic recovery ground to a halt across the region and France demanded a radical shift in policy, warning that austerity overkill is driving Europe into a depression. Growth slumped to zero in the second quarter, with Germany contracting by 0.2pc and France once again stuck at zero. Italy is already in a triple-dip recession.
Yields on 10-year German Bunds fell below 1pc for the first time in history, beneath levels seen during the most extreme episodes of deflation in the 19th century. French yields also touch record lows. Much of the eurozone is replicating the pattern seen in Japan as it slid into a deflation trap in the late 1990s.
It is unclear whether tumbling yields are primarily a warning signal of stagnation ahead or a bet by investors that the European Central Bank will soon be forced to launch quantitative easing, buying government bonds across the board.
Michel Sapin, France’s finance minister, sent tremors through European capitals with a defiant warning that his country would no longer try to meet its deficit targets and would not inflict further damage on its economy by tightening into the downturn. “I refuse to raise taxes to close any budget gaps,” he said.”
Consider the problems of the Euro Zone. They traded in their respective currencies for the euro and now depend on ECB President Mario Draghi to conduct business across a vastly different set of countries. Europe is terribly afraid of a deflationary spiral which according to some figures has already begun – a cataclysm really leading back to recession.
The financial leaders of Europe and the European Central Bank went to the same economic school as our Federal Reserve leaders. They all believe quantitative easing will save the day relative to slow economic growth – or in simple terms the government will provide the necessary stimulus to save the day. So far this approach has worked in the US but the Europeans lack a similar system.
Draghi needs the ability to create money out of thin air – perhaps buying bonds from banks who will in turn lend the money back into the local economic machine. Sound familiar? At this point however they don’t have such a “money machine” in place and some believe this trick is not even legal in Germany. Draghi has done a spectacular job at promising such support – and for now that simple pledge has moved the needle – but if Europe continues to tank it would bring the gradual improvement in the US economy to a halt. Make no mistake – as Europe goes so does the US and worse we are now taking the first steps in a developing trade war with Russia.
To avoid this economic Frankenstein – governments will ignore “austerity programs” and massive debt accumulation. They will be forced to embrace fiat paper money and the resultant inflation to pay back the money owed and gold bullion will move higher in value.
Anyone who likes gold bullion will often cite the government printing press as the magic carpet to fame and fortune. The problem with this scenario is that if the price of gold does not move immediately higher – and the mantra continues – it becomes tiresome. Still a reminder once in a while is prudent.
Below you will find a small portion of a fascinating article written by David Stockman (Contra Corner) – Japan’s Keynesian Demise: a Cautionary Tale for Our Times. The entire article makes an important point which I think relates directly to the price of gold as world governments via for unending growth divined from printing unlimited paper money.
A visit to David’s site on a regular basis will provide a wonderfully different way of interpreting what some might see as benign government fiscal moves.
“This untimely collapse of the savings rate will prove especially destructive for the retirement colony that comprises Japan’s demographic future. Saddled with towering public debts and rapidly shrinking work force, Japan will swiftly consume its accumulated savings as its retirement rolls soar. A decade or two down the road it will become an international pauper.
If it gets that far. The other collateral effect of ZIRP has been a gigantic fiscal lie. Namely, the delusion that Japan’s massive government debts can be financed at close to zero nominal carry cost for the indefinite future. After all, the 10-year bond now carries a yield of 0.51%—–a rate which is close enough to free for government work. Yet even then, Japan’s interest carry cost has been consuming upwards of one-third of its current revenues.
That’s why the prospect of interest rate “normalization” is such a fiscal nightmare. Were Japan somehow able to stop the inexorable growth of its public debt, the annual revenue take shown above would be consumed entirely by interest payments under a scenario of normalized interest rates.
And that brings us to the folly of Abenomics and the BOJ’s latest round of QE—-a madcap rate of balance sheet expansion that would be equivalent to $250 billion per month at the scale of the US economy. At this rate, the BOJ is absorbing almost all of the available government bond supply and on some days has actually left the private market bidless. Indeed, it is monetizing assets at such a frenzied rate that it has now become a major buyer of ETFs and other equities.
In effect, the central bank in Japan no longer merely runs the casino; it has become the casino.
Still, it has only accomplished one thing: In the early run of Abenomics the world’s fast money traders went all-in with the BOJ and drove its stock index from 8,000 to 16,000 in a matter of months. But the excitement is now all over, and the actual results are pitiful—even if you believe that printing money can actually create sustainable output growth and real wealth gains.
The fact is, after the most recent quarter’s GDP wipeout, Japan’s real GDP is only 0.8% larger than it was five quarters ago when Abenomics was installed at the BOJ. And therein lies the frightful future.
Were the BOJ to actually achieve and sustain its 2% inflation target the Japanese government bond market would either collapse, or need to drastically reprice. The former case amounts to disaster now; the latter would entail fiscal collapse very soon as Japan’s revenues would be soon devoured by a surging carry cost on its towering debt.
And that gets to the ragged Keynesian excuse that all will be well once the jump in the consumption tax from 5% to 8% is fully digested. But here’s the problem: this is just the beginning of an endless march upwards of Japan’s tax burden to close the yawning fiscal gap left after the current round of tax increases, and to finance its growing retirement colony.
So there is no possibility that Abenomics will result in “escape velocity” Japan style and that Japan can grow its way out of it enormous fiscal trap. Instead, nominal and real growth will remain pinned to the flatline owing to peak debt, soaring retirements, a shrinking tax base and a tax burden which will rise as far as the eye can see. Call that a Keynesian dystopia. It is a cautionary tale for our times. And Japan, unfortunately, is just patient zero.”
Also not to be missed is David’s Best of the Week – How The Fed Turned A Flood of Treasury Debt into a Scarcity of Repo Collateral.
The walk-in cash trade was back to quiet today and we asked accounting if they paid the phone bill this month.
The GoldDealer.com Unscientific Activity Scale is a “3” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 2) (last Wednesday – 2) (last Thursday – 3) (last Friday – 4). The scale (1 through 10) is a reliable way to understand our volume numbers.
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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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