Commentary for Monday, Fed 2, 2015 ( www.golddealer.com) – Gold was weaker in the overnight London and Hong Kong markets by about $10.00 but managed a closing rally in the domestic trade finishing the day off $2.30 at $1276.20.
The reason for the late rush might have been a slip in US spending. Anything which detracts from the government story (true or not) regarding an economic recovery might lead traders to question the coming change in interest rates – which supports gold.
This from Associated Press – US Consumer Spending Slips In December As Auto Sales Weaken – WASHINGTON (AP) – “U.S. consumer spending slipped in December, as the pace of motor vehicle sales slowed and more Americans saved their money.
The Commerce Department says consumer spending fell 0.3 percent in December, compared to a 0.5 percent increase in November. Cheaper gas and fewer auto sales accounted for most of the decline. Personal income rose 0.3 percent in December, aided by the steady wave of hiring over the past year. But rather than spend those gains, consumers saved 4.9 percent of their disposable income, up from 4.3 percent in November.
Consumer spending accounts for about 70 percent of economic activity. Over the final three months of 2013, consumer spending climbed a solid 4.3 percent, contributing to an overall annualized economic growth rate of 2.6 percent, the government reported last week.”
Still after Friday’s pop to the upside no follow through was disappointing. The Dollar Index was non-committal, trading between 94.37 (low) and 94.88 (high) – as of this writing we are looking at 94.54. Keep in mind however that this is at the higher end of its recent trading range and there is little long trading liquidation which would indicate we might move higher.
Gold must however muscle up or move lower – the technical picture is not completely negative but it must do something to confirm. The fact that we are below $1300.00 and once again defensive is hard to understand. Considering the new European Quantitative Easing program in place either the public does not get it or as some commentators claim QE will not work in the European Union as it has in the United States. We will have to wait and see but these “in-between” days get on my nerves.
Silver closed up $0.04 at $17.23. You might conclude from the price action in silver that the physical markets are faltering but in fact just the opposite is true. The US Mint has sold almost 4 million Silver Eagles so far this year and our January volume sales are up 48% versus 2014. In fact our January volume number in US Silver Eagles was the largest we have seen since January of 2011 so while the price of silver bullion is volatile the public has no problem buying weakness.
Platinum closed down $8.00 at $1231.00 and palladium moved higher by $16.00 at $788.00. Sales of platinum bullion have finally moved higher but 1 ounce product is still not available in any quantity. Sales of palladium continue to lag which is surprising.
Over the weekend Mike Myer (EverBank) made an interesting comparison – Watch for These Two Global Economy Red Flags – “The stock market may be trading close to an all-time high, but the risk of deflation in the U.S. and around the globe is on the rise. Just look at what’s going on in the commodities arena. In the past six months alone, the CRB commodities index has dropped 30%.
Today, I would like to take a closer look at two of the most widely used commodities in the world: oil and copper. They’re both highly sensitive to global economic growth. So, the fact they have gone down so much recently is a red flag. Let’s start with copper.
Red Flag #1 – Copper is used in many things around us, such as home wiring, plumbing, cars, electronics, and refrigerators. This is what makes the metal so sensitive to economic activity. Copper is also said to have a Ph.D. in economics because of its ability to predict turning points in the global economy.
In 2008, for example, copper peaked in July, right before the great global recession. That’s why the fact the metal has recently dropped to its lowest point in six years is a little concerning. Copper inventories in London, New York and Shanghai are up 32% since June. That’s a sign that demand is weak and the global economy is slowing down.
Red Flag #2 – But, perhaps what’s even more concerning is the crash in the price of oil, a commodity that’s essential to every single economy on the planet. The chart below shows the performance of copper and oil over the past four years. As you can see, the collapse of oil prices has been even more dramatic than the recent drop in copper.
Since peaking in June, oil has dropped almost 60%. Sure, the booming production of oil here in the U.S. and the resulting rise in supply has played a role. But, supply is just half of the price equation. We must also consider demand. And, such a huge collapse indicates that demand around the globe is weakening, which brings me to my next point.
The Risk of Deflation Is On the Rise – The weak commodity prices point to a rising risk of deflation, with inflation dropping sharply in almost every major economy. In China, for example, it has reached an unprecedented level of 2%. In the latest 12 months, the Consumer Price Index (CPI) in the Eurozone rose a scant 0.3%, the lowest year-over-year change since 2009. And, in the U.S., inflation remains below the Fed’s target of 2%.
And, inflation expectations are in free-fall here in the U.S. The chart below shows the U.S. five-year breakeven inflation rate. It uses the yield on Treasury bonds to measure what market participants expect inflation to be in the next five years, on average. As you can see, inflation expectations have fallen to 2009 levels, when deflation was a serious concern.
Normally, people view gold and silver as good inflation hedges. With inflation dropping, and the risk of deflation on the rise, you may think all this is bad for precious metals. But, that’s not the case.
See, the dollar has been very strong lately, primarily because of expectations the Federal Reserve will hike rates sometime this year. But, deflation, which is the Fed’s No. 1 enemy, is on the rise. It’s unlikely the Fed will choose to hike rates in such an environment. If the Fed decides to postpone a rate hike, we could actually see the dollar weakening, which would be good news for precious metals and other currencies.
Make no mistake about it. With deflation on the rise, central banks around the globe, including the Fed, will do everything they can to boost inflation. The European Central Bank (ECB) has already responded to this increasing risk of deflation by announcing its own quantitative easing (QE) program. It plans to inject at least €1.1 trillion into the ailing Eurozone economy.
All this money printing is great for precious metals. Just look at the recent performance of gold and silver. Since bottoming in early November, silver is up 17%, while gold is up 13%. And, that rally has accelerated in recent weeks. The ultimate bottom in precious metals could be behind us. If the Fed joins the ECB in fighting deflation by delaying a rate hike, precious metals could go even higher.”
Also noting Drew Trachtenberg (InvestorCenter) – January Barometer Flashes Red Signal for Investors – “As goes January, so goes the year: that’s the basis of the January Barometer, devised by the Stock Trader’s Almanac.
The idea is that what we see from the S&P 500 (^GSPC) in the first month sets a tone for the rest of the year. Taking out the Januarys when the index barely budged, it has correctly predicted an up or down market for the full year better than 75 percent of the time since 1950.
If that correlation holds this year, 2015 could be a rough one for investors. The S&P fell 3.1 percent in January. “Almost every single down January up until last year was followed by a bear market, a 10 percent correction or a flat year,” according the Jeffrey Hirsch, editor of the almanac.
‘Not Everything Is So Rosy’ – Hirsch says the drop this January indicates “that not everything is so rosy, but it does not mean we’re going down 20 percent from here.” This January has been especially volatile, as the Dow Jones Industrial Average (^DJI) swung up or down by 1 percent or more (about 170 points) 10 times in 20 days of trading, including Friday’s 251-point slide.
The market has been roiled by the plunge in crude oil prices, which sent energy company stocks tumbling, the slumping economies of Europe and Russia and disappointing earnings news from blue chip companies, such such as Caterpillar (CAT) and Microsoft (MSFT).
The S&P and the Dow both set dozens of record highs over 2014, as stocks entered the sixth year of the current bull market. “These markets don’t go up forever,” said Hirsch. “We see a little more upside, but I don’t think this market will go up for many more years.” He and other Wall Street pros have been saying that for some time. The market is due — some say overdue — for at least a correction, but the endurance of this bull market has been consistently underestimated.
Hirsch says that while the January Barometer, devised by his father Yale back in 1972, is a valuable indicator, it has been trumped in recent years by the Federal Reserve’s massive quantitative easing program, which pumped billions of dollars into the economy and provided support for the stock prices.”
Santelli this morning on CNBC was commenting that the Baltic Index number was low and moving lower. This index is the way countries measure how much “stuff” they are shipping around the world. Rick’s point was that all the latest QE money is good on the short term but does not promote real growth – it just creates more “stuff” regardless of demand. The index may be moving lower because world demand is flagging – perhaps another deflationary red flag.
So what’s this mean for gold? Not much for now – it’s just interesting background. But it could turn very interesting if the Federal Reserve does not raise interest rates in 2015 because of these deflationary forces and the stock market moves lower. This possible scenario might set the stage to confirm a bottom in gold and bring in fresh money at the same time.
The walk-in cash trade was average to slow and the phones were generally quiet – picking up some in the afternoon. All in all however the physical market feels somewhat unenthusiastic which is interesting considering Friday’s pop in the price of gold. My bet is that the public is still very interested but may be kicking the tires.
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 – 3) (last Wednesday – 3) (last Thursday – 5) (last Friday – 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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