Commentary for Tuesday, June 24, 2014 – Gold closed up $2.90 today at $1320.90 and the overnight Hong Kong and London markets were slightly higher so we are seeing an improved technical picture which probably places the bulls back in charge on the short-term.
But gold looks like it wants to flatten out in the $1325.00 area short term and it’s difficult to say if this is the result of “resting” or confusion.
You would have to figure some profit taking here after gold has pushed from $1245.00 in early June to the most current $1320.00 today. That makes for a $75.00 profit to paper traders who covered their short position and were looking at a slowly rising market again in early June. Why not book some of that profit and move to the sidelines?
There will always be the super bulls that believe this latest move is the start of something big but they are now a small minority. Most paper traders still like the short side of the gold market.
The recent pop in gold prices has created a number of scenarios as to why prices moved dramatically higher last Thursday (June 19) when gold moved up $40.30 at $1313.70. The most common reason given was that comments by Yellen were dovish leading to the conclusion that interest rates would remain low for the foreseeable future. Coming in second place was the (future) inflation scenario and perhaps third was the Iraq implosion or safe haven buying.
I actually think the gold market was just too short reacting to generally negative news and I will stick with this thought as long as gold does not confirm above perhaps $1375.00. But the inflation scenario will be valid sooner or later.
Why not sooner would be a good question? And the answer can be seen in the velocity of money. According to the Federal Reserve Bank of St. Louis – Money Velocity – Velocity is a ratio of nominal GDP to a measure of the money supply (M1 or M2). It can be thought of as the rate of turnover in the money supply–that is, the number of times one dollar is used to purchase final goods and services included in GDP.
A similar way of looking at this is the number of times a person uses a dollar to buy something which is included in the Gross Domestic Product. The higher the ratio the more the turnover and the greater the inflationary force. This ratio can be figured using either M1 or M2.
If M1 is used the ratio moved from 5.2 in 1970 to a high of 10.6 in 2008 – and then decelerates back to 6.3 in 2014.
Use M2 and you will see that the 1980 high was 1.8 and the all-time high was 2.2 in 1997 – from that point we again see a significant deceleration to 1.5 in 2014.
During that deceleration phase the dollar we talked about was used significantly less in both cases between 2008 and 2014 (M1) and between 1997 and 2014 (M2).
Now if you consider that in 2014 the money spigot has been wide open since 2008 it is not the case that the dollar number was lacking as the banks and corporations are sitting on more cash than at anytime in history – basically the result of quantitative easing.
So what gives? The money is out there – it is just not circulating relative to the Gross Domestic Product and so inflation is not an immediate concern.
This supports my belief that the Thursday pop was a short covering rally and not a significant inflation scare. When will inflation return? When our two Federal Reserve graphs reverse their significant downward trend relative to Money Velocity and show that dollars are once again being spent for stuff we all can’t live without.
But like most everything related to gold – stay tuned – there could be a great deal of tension under the surface and if gold breaks to the upside all bets are off as computer trading bells go off and we are once again off to the races.
Silver closed up $0.13 at $21.03 and some believe (not me) that the $21.00 level offers something magic in the way of historical rises.
Platinum closed up $14.00 at $1472.00 and palladium was up $8.00 at $830.00. The strike in South Africa – the longest in history – was officially resolved today. Platinum prices when the strike began were around $1380.00 and peaked at $1493.00 on May 22nd. The strike had been widely anticipated and stockpiles accumulated. Interestingly enough platinum was up $14.00 today despite the strike news. The CPM group announced an expected 814,000 ounce deficit in 2014. Overall platinum demand in 2013 was 7.2 million ounces and is expected to rise on increased jewelry sales and strong car sales.
This is interesting from Chuck Butler (EverBank/Bloomber) – “Germany has decided its gold is safe in American hands. Surging mistrust of the euro during Europe’s debt crisis fed a campaign to bring Germany’s entire $141 billion gold reserve home from New York and London. Now, after politics shifted in Chancellor Angela Merkel’s coalition, the government has concluded that stashing half its bullion abroad is prudent after all. “The Americans are taking good care of our gold,” Norbert Barthle, the budget spokesman for Merkel’s Christian Democratic bloc in parliament, said in an interview. “Objectively, there’s absolutely no reason for mistrust.”
Ending talk of repatriating the world’s second-biggest gold reserves removes a potential irritant in U.S.-German relations. It’s also a rebuff to critics including the anti-euro Alternative for the Germany party, which says all the gold should return to Frankfurt so it can’t be impounded to blackmail Germany into keeping the currency union together.”
Chuck again. Yes, I would love to have seen this Gold repatriated. But I would have to guess, that Germany was sat down in a smoke filled room and explained to that their Gold isn’t really there, so to repatriate it, the U.S. would have to buy it in the open market, which would cause a HUGE spike in the price of Gold, and we don’t want that happening now do we? You can see that Germany got an offer that they couldn’t refuse. At least, that’s how I would see it happening. How about you?”
The Dollar Index (DXY) looks like it is topping relative to the 6 month chart. The DXY high during this time period was something over 81.00 and the low was about 79.00 with today’s reading coming in at 80.27. The run to higher ground from May to June seemed to lose steam approaching 81 so all the talk of a stronger dollar relative to the weaker euro is correct but the ride to the upside which has helped cap gold prices might be over soon.
Technically you would have to say the bulls were in charge through May but the flattening of the curve would now indicate a neutral to negative bias with perhaps a test of the below 80.00 support. Still too soon to tell but I suspect a weaker dollar in the works and this will support gold in the short to medium term.
From Ed Steer (Gold & Silver Daily / Bloomberg) – Draghi Says Unlimited Cash Through 2016 Is Rate Signal – “Mario Draghi indicated that the European Central Bank’s interest rates will probably remain low for at least another 2 1/2 years. “We have prolonged banks’ access to unlimited liquidity up to the end of 2016. That is a signal,” the ECB president said in an interview published in Dutch newspaper De Telegraaf on June 21, responding to a question on how long rates will stay low. “Our program in support of bank lending to businesses will continue for four years. That shows that interest rates will remain low over a longer period. But thereafter they will increase when the recovery will firm up.”
A year after the euro area exited its longest recession, the Frankfurt-based ECB is still battling too-low inflation and attempting to reboot demand. Draghi introduced an unprecedented range of measures this month including a negative deposit rate and said quantitative easing remains an option if deflation appears.”
So look to long term – low interest rates for all the major powers (US – England – Japan – EU) to support continued loose financial policy which in turn will support higher gold prices.
Even with some trading tension in gold the walk-in cash trade today was slow and so were the phones. Most of the released economic data today like new home sales at 18.6 in May and 16.9% higher year on year as the economy rebounds did not do much to move the needle.
And increased tension in the Middle East is still a wild card. Really all in all I am surprised we again did not see much in the way of action and all the whales are on holiday in Bermuda. March and April is prime whale watching time in that part of the Atlantic Ocean – if you are so inclined.
The GoldDealer.com Activity Scale is a “2” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 6) (last Thursday – 5) (last Friday – 4) (Monday – 5). The scale (1 through 10) is a reliable way to understand our volume numbers.
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