Commentary for Monday, June 14, 2014 (www.golddealer.com) – Gold moved higher over the weekend as the Iraq situation deteriorates and the Russians have cut off natural gas deliveries to Ukraine asking for payment upfront. So the geopolitical forces are in charge short-term pushing gold as high as $1285.00 before New York opened. In the domestic market profit taking set in early and by the close gold managed only a nominal gain up $1.20 at $1274.90.
Considering gold only booked a small advance in light of two potentially disastrous political situations – either of which could easily get out of hand – I am surprised we have not seen more upside action.
Still US industrial production up 0.6% in May weighs on the price of gold. It was a good number and came in above expectations. But not so good as to create an expectation that Federal Reserve will change its current tapering plans – even when Europe is rolling out the printing press.
And we will be hearing from Federal Reserve Chair Janet Yellen this week but I suspect this will have little impact on gold and so expect a quiet week. Unless it’s not…really there is a great deal going on but both gold and silver appear to be catching a nap.
Silver closed up $0.07 at $19.70 and again this number is high enough to slow physical buying but anything under $20.00 keeps some tension in the market.
Platinum closed up $4.00 at $1439.00 and palladium was down $3.00 at $810.00. Officially the South African mining strike was over last week but today the rumor is that workers are still striking. I don’t know what to make of that but platinum moved higher on the unofficial word.
This from Chris Gaffney (EverBank) – Rates Go “Sub Zero” – The European Central Bank (ECB) took a rather dramatic step earlier this month when they became the first major central bank to lower interest rates below zero. ECB President Mario Draghi finally put his money where his mouth is and followed up his words with actions. Two years ago, he “saved” the euro-zone by pledging to “do whatever it takes” to prevent the collapse of the euro, but his strong words never had to be followed up with any actual actions. The ECB and Draghi were able to “jawbone” the markets without ever spending a cent. This time, Draghi and his compatriots at the ECB took a multi-pronged approach to try and stimulate the European economy, including pushing the deposit rate from zero to -.1%. This move means if banks decide to park their excess cash with the central bank, they will now have to pay a fee to do it.
This move was aimed at keeping the European economy from slipping into a deflationary spiral similar to the one that has gripped the Japanese economy during the past couple of decades. The ECB wants to see more inflation in their economy – and this move is meant to force banks to increase lending, which will hopefully lead to higher growth rates and, ultimately, to a healthier European economy. At least that’s the theory, but negative rates have never been attempted by any of the major central banks. The ECB also wanted to weaken the euro with these moves, and the euro did fall immediately after the announcement. Investors quickly took advantage of the cheaper prices and the euro rebounded and reversed all of its losses on the day of this historic move.
These events got me thinking about the role central banks play in “managing” the global economy, and about just how little we know of the consequences of all of these unprecedented moves. Traditionally, the main focus of central banks is to keep inflation at bay, and maintain the value of their country’s currency by stabilizing prices.
The German Bundesbank is perhaps the most respected of all central banks as it kept very close control of inflation in Europe’s largest economy throughout the second half of the 20th century. How desperate the members of the ECB governing council (which includes the President and Deputy President of the Bundesbank) must have been to lower interest rates below zero! They obviously believe the “inflation genie” is safely locked away and are now trying to encourage inflation instead of combating it.
Gaffney goes on to speculate about super lower interest rates migrating to the US. I guess the theory goes that what’s good for the EU goose is good for the US gander. The reason I don’t buy this argument is that there is not much “the same” about the EU versus the US.
So if the EU is committed to giving away the farm in an effort to push the euro lower – would that not mean the dollar will move higher? And if the dollar moves higher relative to the euro would that not cap the price of gold?
For now I think the gold market will have to be satisfied with the notion that the immediate link between a “loose money” policy and the price of gold is lost in translation. It’s a sure bet this cannot last forever but for now pounding away at an immediate link between expanding money supply and the price of gold does not make sense.
So let’s look for “another” factor which might push gold higher and consider oil. If you believe Cramer (CNBC) the US is closer now than ever before to becoming oil independent with development of the Bakkan region. The possible use of controversial recovery (hydraulic fracturing) has led many to believe this is the best way to finally rid ourselves of the Middle East connection.
But like everything else related to oil I think this newest “discovery” will pose problems. At any rate oil in my opinion in the short term “key” to the price of gold not monetary debasement.
If the problem in Iraq spreads this could be a short-term fuse. Will it happen? I don’t think so but then who really understands the Middle East?
The five year chart of WTI Crude does show a gradual increase in price but the one year chart tells a different story. In the last 12 months the price of crude has moved between about $90.00 and $110.00 – right now is stands at about $107.00. If oil surges to above $110.00 (perhaps $120.00 to $130.00/barrel) gold could “pop” short term regardless of what the EU or the US does short term with their “easy money policy”. But short of a big push in the price of oil I think gold will remain subdued – struggling to recapture $1300.00 until well after the traditional slower summer months.
The walk-in cash trade seems slow and so do the phones but the numbers coming out of the computer prove there is underlying action – more buying than selling and the selling does contain a few whales. But when the smoke clears the public seems to have no problem stepping up so I would continue to describe the market as mixed with a positive bias.
The GoldDealer.com Activity Scale is a “5” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 4) (last Wednesday – 3) (last Thursday – 3) (last Friday – 3). The scale (1 through 10) is a reliable way to understand our volume numbers.
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The new USPS server is installed with the upgraded post office software! This system will allow you to track USPS like FedEx – provide pinpoint location – allow you to reschedule if you were not home during the delivery and even provide text updates en route. This was the word from on high yesterday – the techs have now informed me that an interface problem will need to be fixed – so next week looks like the landing date.
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