Commentary for Monday, July 7, 2014 (www.golddealer.com) – Gold closed down $3.60 at $1316.50 and so remains in a relatively flat trading channel dating back to mid-June. Overnight the Hong Kong and London trade was fairly tight ($1312.00/$1316.00) and domestic pricing closed on a firm note above the $1316.00 mark. So gold continues to wander after the big pop above $1300.00 created when Yellen seemed a bit too dovish.
And you can ignore the dealer hoopla about gold bullion sales. They are lackluster at best.
German industrial output was down 1.8% last month. This could be interesting in that it might provide a clue as to what the ECB has in mind. The European Central Bank has been making noises for some time now that further currency stimulus was in the works. But as yet we have not seen any obvious steps. I think it is pretty clear they will follow the Japanese and American playbooks which should support gold.
Silver closed down $0.12 at $20.96 in quiet trading.
Platinum was down $10.00 at $1495.00 and palladium was up $7.00 at $867.00.
Today the price of palladium was at its highest since 2001 pushed by demand for auto catalysts on strong car sales from China and the US. Palladium is also used as a gasoline engine catalyst.
Palladium is now up 19% on the year and ETF numbers are on highs (255 million ounces).
This from Kira Brecht (Kitco/TraderPlanet) – Gas Prices Near 6-Year Highs, No Inflation? Who Says – “While official government statistics show U.S. inflation at still low levels, anyone who buys gas, food or health insurance can attest to the fact that inflation exists in our everyday lives. GasBuddy has predicted that U.S. consumers will see the most expensive July 4th since 2008 at the gas pump. Despite the dramatic increase in U.S. oil production in recent years, GasBuddy estimates that Americans are likely to pay about $1.435 billion per day for gasoline during the holiday week, about $50 million more each day, or $350 million more per week than last year.
“Fear about what could happen if Iraqi exports fall prey to violence has altered the calculus for summer oil prices,” says GasBuddy chief oil analyst Tom Kloza. U.S. oil production is as high as it has been since October 1986 and gasoline should be well supplied in all states during the holidays, “but big sellers will probably stay on the sidelines until it’s clear that Middle East exports aren’t threatened,” Kloza adds.
Nearby Nymex crude oil futures have rallied from a low around $91.25 a barrel to nearly $107.75 a barrel since the start of the year. While Iraqi oil exports have not been interrupted as of now, energy traders remain cautious and on edge about a possible supply disruption.
However, inflation is not just emerging in the energy sector —there are concerns about more widespread inflation rebounding in the broader economy. Societe Generale wrote a research report in late June entitled: “American Themes: Prepare for the return of U.S. inflation.”
“The next two years –prepare for upside risks on inflation…With import prices bottoming and no longer a drag on inflation, tighter domestic slack should push goods inflation higher. But the real upside is on the service side, as housing inflation heads towards new cyclical highs and healthcare costs reverse their recent weakness,” wrote Societe Generale economists.
Ryan Sweet, director of research at Moody’s Analytics weighed in. “Inflation has accelerated over the past few months. Inflation is going to overshoot the Fed’s target at 2%. We will see inflation above 2% later this year and in 2015 and 2016,” he said.
The Fed faces many challenges ahead and they are moving in uncharted waters with their current exit strategy. Never before have they had so many different balls to juggle. There is no playbook for them to fall back upon this time around. Inflation will be a critical factor to monitor in the months ahead. Faster economic growth will naturally inject higher rates of inflation in the economy. Don’t forget about all those excess reserves from major banks that are parked at the U.S. Fed right now. The Federal Reserve Bank of St. Louis tracks this data, and excess reserves totaled over $2.5 trillion as of May. See Figure 1 below. If a pick-up in economic activity were to stimulate demand for lending and banks started issuing new loans, all the ingredients for a quick jump in inflation are there. That would leave the Federal Reserve behind the curve, chasing after the markets and inflation with aggressive monetary policy rate hikes.
Gold has historically been utilized for many purposes —a safe haven investment, a vehicle for capital appreciation and diversification— and also traditionally as a hedge against inflation. While disinflation has been the concern in recent years amid the sluggish growth environment, faster growth will likely be accompanied by a pick-up in inflation. The Fed sees many challenges ahead and the massive amount of bank excess reserves add a more complicated piece to the current Fed exit strategy puzzle.”
With the stock market record high last week and all indices higher except the NASDAQ commentators are saying it might be time to protect against inflation. Yet paper inflation hedges like real estate trusts are not participating as yet.
And the precious metals have work to do in a generally lower market since highs in 2011 ($1800.00). So does gold represent an undervalued opportunity in a financial market where paper players are looking for inflation hedges?
From the US Department of Labor – Is the Consumer Price Index (CPI) the best measure of inflation?
Answer: Inflation has been defined as a process of continuously rising prices, or equivalently, of a continuously falling value of money.
Various indexes have been devised to measure different aspects of inflation. The CPI measures inflation as experienced by consumers in their day-to-day living expenses; the Producer Price Index (PPI) measures inflation at earlier stages of the production and marketing process; the Employment Cost Index (ECI) measures it in the labor market; the Bureau of Labor Statistics’ International Price Program measures it for imports and exports; and the Gross Domestic Product Deflator (GDP-Deflator) measures combine the experience with inflation of governments (Federal, State and local), businesses, and consumers. Finally, there are specialized measures, such as measures of interest rates and measures of consumers’ and business executives’ inflation expectations.
The “best” measure of inflation for a given application depends on the intended use of the data. The CPI is generally the best measure for adjusting payments to consumers when the intent is to allow consumers to purchase, at today’s prices, a market basket of goods and services equivalent to one that they could purchase in an earlier period. It is also the best measure to use to translate retail sales and hourly or weekly earnings into real or inflation-free dollars.
Using data from the US Department of Labor (CPI Inflation Calculator) to have the same buying power as $1000.00 in 2008.00 you would have to hold $1,104.95 in 2014. So the argument that the government inflation numbers are rigged might not hold water.
Using John Williams’ Shadow Government Statistics would produce an inflation number which is higher but the point is that we are experiencing “virtually no inflation” is not correct. Even the Federal target rate of 2% annually – quantitative easing not withstanding is enough to substantially chip away at our standard of living.
So why does this obvious inflation number not create more demand for gold bullion especially here in the US? Because the average investor still does not see a direct or one to one relationship between the inflation and gold. If they did bullion dealers would not have to make the case that gold is a great inflation hedge.
I am convinced the public does not put these two side by side because there can be a decided lag time between fiat money creation and inflation. The best most dealers can come up with is that inflation in already baked into the cake and sooner or later we will experience this loss of buying power.
The argument that investors don’t take action against inflation month to month because the loss is small also makes sense. But it’s beyond me why the cumulative result is not feared as the result in indisputable.
So inflation has become the ignored boogie man – much the same way as the “short” silver trade is ignored or explained – even though there is not near enough real silver to cover these commercial positions.
The possible “short squeeze” in silver is as real as the inflation punch and has been around for just as long. But the public continues to ignore the consequences even though the likes of Ted Butler have been documenting problems in the silver trade for years.
Could there be a “short squeeze” in either silver or gold caused either by paper manipulation or real shortages in either metal? You betcha as they say in Minnesota!
Will the average investor see either the “short squeeze” or inflation coming? Some investors with a historical slant will but most will not even though it will be easy to “connect the dots” after the fact.
This from Chuck Butler (Everbank) – For What It’s Worth – “This will be short today, as what this man has to say, didn’t take a day and one half to say it! The writer is Michael Snyder, and you can Google him to find out all the stuff he talks about all the time. So, here we go.
Of course the U.S. economy is struggling right now as well. It shrank at a 2.9 percent annual rate during the first quarter of 2014, which was much worse than anyone had anticipated.
But if U.S. economic numbers look a bit better for the second quarter, that doesn’t mean that we are out of the woods.
As I have stressed so many times, the long-term trends and the long-term balance sheet numbers are far, far more important than the short-term economic numbers.
For example, if you went to the mall today and spent a thousand dollars on candy and video games, your short-term “economic activity” would spike dramatically. But your long-term financial health would take a significant turn for the worse.
Well, when we are talking about the health of the U.S. economy or the entire global financial system we need to keep the same kinds of considerations in mind.
As for the United States, whether the level of our debt-fueled short-term economic activity goes up a little bit or down a little bit is not what is truly important.
Rather, the fact that we are nearly 60 trillion dollars in debt as a society is what really matters.
The same thing applies for the globe as a whole. Right now, the citizens of the planet are more than 223 trillion dollars in debt, and “too big to fail” banks around the world have at least 700 trillion dollars of exposure to derivatives.
So it doesn’t really matter too much whether the short-term economic numbers go up a little bit or down a little bit right now. The whole system is an inherently flawed Ponzi scheme that will inevitably collapse under its own weight.
Let us hope that this period of relative stability lasts for a while longer. It is a good thing to have time to prepare. But you would have to be absolutely insane to think that the biggest debt bubble in the history of the world is never going to burst.”
The walk-in cash trade was active but not a lot of size coming back from the holiday and the phone trade was less than average.
The GoldDealer.com Activity Scale is a “3” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 4) (last Wednesday – 3) (last Thursday 4). The scale (1 through 10) is a reliable way to understand our volume numbers.
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We would also like to thank Aaron Goggan – Fastmarkets – Head of Business Development North America – for his recent visit to the CNI Building. Aaron / Fastmarkets / Bullion Desk are responsible for a great deal of the independent pricing information we use each day. A very personable chap – Aaron took the time to provide an “inside” view of all the information he provides on a daily basis. Fastmarkets – Delivering a clear and focused understanding of the metals markets.
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