Gold Moves Lower on Profit Taking and a Stronger Dollar

Gold Moves Lower on Profit Taking and a Stronger Dollar

Commentary for Monday, March 30, 2015 ( – Gold closed on the Comex today down $15.00 at $1184.80 – stocks got new traction as new home sales improve.

The PBOC (People's Bank of China) said that there may be room for more easing. China and India have been big buyers of gold for years. Their recent interest is a primary reason for current price support. The Saudi air strikes on Yemen are another reason for safe haven buying – Yemen is one more lost cause in the Middle East so look for continued trouble especially now that the Arab States appear to be talking about collective action.

There were however larger factors pulling at the price of gold today. First, we are seeing mild profit taking – after all gold has moved on the near term from $1150.00 (mid-March) to over $1200.00 – placing the bulls in technical control on the short-term (underline that short-term for now) – so paper traders booked profits and moved to the sidelines. Especially with Janet Yellen’s comments this past Friday regarding interest rates. Second, the dollar is pressing higher – the Dollar Index today moved from a low of 97.42 to a higher of 97.70 and is now trading slightly above 98.00. No doubt this strength is also the result of Yellen’s latest assessment of our improving economy.

This from Alex Rosenberg (CNBC) – This controversial theory has got Janet Yellen worried – In a speech on Friday, Federal Reserve chair Janet Yellen stayed her dovish course, maintaining that an increase in the federal funds rate "may well be warranted later this year." She also emphasized the Fed's data dependence, as well as her general tone of "cautious optimism" in the economy.

Yet it was in her discussion of what she termed "special risks and other considerations" where things got interesting. The first of her three special concerns around hiking rates run along the following lines:

"Some recent studies have raised the prospect that the economies of the United States and other countries will grow more slowly in the future as a result of both demographic factors and a slower pace of productivity gains from technological advances," the Fed chief stated.

"At an extreme, such developments could even amount to a type of 'secular stagnation,' in which monetary policy would need to keep real interest rates persistently quite low relative to historical norms to promote full employment and price stability, absent a highly expansive fiscal policy," she added. To take a step back, "secular stagnation" refers to the rather controversial theory that an economy may become stuck in a long-term period of slow growth and low interest rates, due to certain external factors.

Originally developed in the late 1930s by Alvin Hansen (who earns a footnote in the official transcript of Yellen's speech), it was reanimated by former White House economic adviser Larry Summers, who in 2013 asked whether the U.S. may be mired in secular stagnation.

Interestingly, Hansen's theory was that a lack of technological innovations could be to blame for the stagnation; Summers, however, was more focused on an exogenous shock.

In April 2014, Brown University economists Gauti Eggertsson and Neil Mehrotra published a comprehensive model of secular stagnation, showing how income inequality and a drop in population growth could lead the economy's ideal interest rate to fall.

Essentially, Eggertsson's point is that a surplus of individuals looking to save their money, combined with a surfeit of individuals looking to borrow money, can lead the market-clearing interest rate to fall to unusually low levels.

If the actual interest rate is too high (say, because it is at historically normal levels) then money will not flow from the would-be providers of income to the potential users of income. That would cause an economy to become mired in slow growth for longer than the economic cycle would predict—consequently making the stagnation secular rather than merely cyclical.

That would appear to have implications for Fed policy. For the central bank, the prescription is a familiar one: Keep rates lower for longer, as Yellen noted in her comments on Friday.

While the concept may sound obscure, the prospect is a scary one fraught with pitfalls. The most prominent modern example of a country suffering from secular stagnation is Japan, where a "lost decade" quickly morphed into 20 years of fallow growth.

For her part, Yellen was careful to frame secular stagnation as a risk rather than her base case. Indeed, the theory still remains far outside the mainstream.

Even uber-dove Narayana Kocherlakota, the non-voting Minneapeapolis Fed president (whose economic work was actually cited in the Eggertsson paper) told reporters in January that prolonged stagnation is a risk that "we should be thinking about as policymakers, but it is in no way my modal outlook."

Still, the critical point Yellen is making is that the mere fact that America risks falling into the economic quicksand "has important monetary policy implications for the near-term." On the margins, however, it may be enough to stay the Fed's hand when it comes to raising rates.

It should be noted that like most economic concepts, secular stagnation is politically polarizing.

Last year, some members of Congress proposed legislation that the Fed should endeavor to follow the "Taylor rule," which mandates the Fed base monetary policy on specific economic measures. Yet the proposed legislation assumes (implicitly, given the inputs to John Taylor's equation) that the equilibrium real interest rate is 2; Yellen said Friday that she believes it is lower.

If we are in a world marked by secular stagnation, the neutral rate is even lower than Yellen already thinks it is. In such a world, if the Fed begins to act as if the equilibrium interest rate is higher than it actually is, it could result in "appreciable economic costs." That may create or elongate a secularly stagnant environment, she said.

In other words, the economy is a delicate and temperamental beast. That creature—in the view of Yellen and other Fed officials—is best handled by the professionals.

The concept that the Chinese will use gold to back the Yuan and challenge the dollar has been floating around for years. I think the idea is a pipe dream but it makes for good copy when writers are looking for something to say about gold. Why would the Chinese want a currency to complete with the dollar when they already have so many dollars? Consider the following Reuters information – it will no doubt help the conspiracy theorists.

This from Reuters – Chinese Yuan to Be Added to IMF's Currency Basket? – Chinese Premier Li Keqiang has asked the head of the International Monetary Fund to include China's yuan currency in its special drawing rights (SDR) basket, state news agency Xinhua said.

Li added that "China hoped to, through the SDR, play an active role in the international cooperation to maintain financial stability and promote the further opening of China's capital market and financial area", the report said.

"China will push forward financial reform for the real economy and prevention of risk. China will develop private, small and medium banks to provide better support for small businesses," Li was cited as saying.

China's yuan at some point would be incorporated in the SDR currency basket, Lagarde said on Friday, currently made up of dollars, yen, pounds and euros.

The yuan’s inclusion could be seen as diminishing the dollar's standing internationally.

Silver closed down $0.39 at $16.66. Also lower because of expected profit taking in the paper market.

Platinum was down $26.00 at $1117.00 and palladium was down $11.00 at $729.00. The price of platinum is now $67.00 under the price of gold.

The walk-in cash trade was quiet today and so were the phones. It so happens that the end of March is also our fiscal year end – so here are some interesting numbers. Platinum Platypus sales up 22%, Credit Suisse 1 oz gold bars up 25%, Johnson Matthey 100 oz silver bars up 71% and the big winner – 1 oz P.A.M.P. gold bars up 116%.

The Unscientific Activity Scale is a “ 3” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 4) (last Wednesday – 8) (last Thursday – 5) (last Friday – 6). 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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