Commentary for Tuesday, July 15, 2014 – Gold closed down $9.40 today at $1296.90 so we did see some follow through from yesterday’s $30.70 loss. So it goes without saying the bulls are not happy.
Gold was moving slightly higher in overnight trading trying to get on its feet and remained steady into the beginning of Yellen’s testimony but something see said spooked the market. This is interesting because most commentary claims she was neutral relative to gold.
The now not so new Fed Chair was her old self – assuring and very trustworthy looking. She took over the helm and has not changed the quantitative easing playbook. Job recovery needs improvement – and interest rates will remain low until the government is sure raising rates will not derail all their work since the financial crash began in 2008.
But then Yellen decided it was time for a “throw-in” – she left the door open relative to interest rates. The Fed “may have to raise rates sooner and faster if the labor market continues to surprise”. That small comment was all gold needed especially after yesterday’s slam to move lower – now pushed below the 100 day moving average ($1309.00), the 50 day moving average being $1292.00.
Of course saying you will raise interest rates is good if you are rattling your chips but actually doing so is a different matter. Retail sales for example (up 0.2%) sits next to anemic real job creation – and both look at a deflationary Europe. Dragi is working nights figuring out how to get more money in their system using some kind of proprietary loan system. This looks like a drop in the bucket but my point is that most governments are heavily relying on quantitative largess – and this must at some point lead to trouble.
So am I worried about the extra $10 bucks to the downside today? It depends on how you define “worry”. The smaller follow though might be seen as good – leading to consolidation well above the relatively safe $1240.00 double bottom.
And really I would not have much trouble even with yesterday’s big loss considering paper profits over the last month amount to maybe twice that number so you are still playing with house money. The problem I do have is that even with two days of lower gold prices the phones have not reacted in the usual manner. Typically when this market sells off the physical players are eager buyers at lower levels – this time around things are a bit too quiet for me.
The next day or two will be important relative to the physical market. Because any price up-tick could prompt that physical buying wave I am look for – but for now a “wait and see” attitude might prove rewarding.
Silver closed down $0.02 at $20.84. Quiet here too but there have been recent “big boy” positions sold to us relative to silver bullion. And premiums on $1000 face 90% silver bags are getting even cheaper – an indication that demand might be waning short term.
Platinum closed down $8.00 at $1484.00 and palladium closed down $2.00 at $868.00.
This is an interesting question from a reader: “How is the published spot price of Rhodium set? The published price has been about constant but the buy sell prices have increased. There is no futures market that I know of to cause a disconnect between the physical prices and the published prices, like there is in the other precious metals.”
The price or rhodium “fix” if you want to call it that is generated out of Europe. And the reader is correct in saying that unlike the other precious metals there is no futures market to reference. According to Hoover and Strong – “The Johnson Matthey Base Prices are the company’s quoted selling prices for wholesale quantities of platinum group metals set by their trading desks in the USA, Hong Kong and London, based on market offer prices. The price is for metal in sponge form, with minimum purities of 99.95% for platinum and palladium, and 99.9% for rhodium, iridium and ruthenium, and is normally available to customers for several hours after it is set – an advantage not offered by any other price setting or fixing.”
But the real question here is how bullion dealers then arrive at the “buy” and “sell” of the popular Baird 1 oz Rhodium bar? Investors are used to a one to one relationship between “spot” and the physical metal of choice but should understand that the individual dealer’s prices contain another important variable – demand or lack of demand.
So while the “fix” will relate directly to the finished bar price – the spread will vary according to the dealer’s inventory. This is especially true of rhodium because it is not often traded in quantity. A real example might help – let’s suppose a dealer gets a late order for rhodium bars of say 20 or 30 ounces – the buyer will not see much of a change in the price spread because most large dealer carry this much or more for immediate delivery.
On the other hand if the dealer tries to lay off a large position ($100,000.00 or more) to balance his hedge – he might be charged an extra $5.00 or even $10.00 per bar to cover because the rhodium market is thin. This might cause a change in the normal buy/sell spread even though the base price of rhodium remains relatively flat.
A good rule to remember is that dealer’s buy/sell spreads are never really fixed but are driven by scarcity of the particular product and demand. In a flat or unchanging market most remain constant – but in a “dear” market meaning actual material is being sold very fast – all dealers will adjust their spreads based on their physical hedge. The opposite is true in a slow or declining market as dealers often narrow their spreads to attract more buyers.
Today you can purchase the Baird 1 oz Rhodium bar for $1295.00 delivered. The base rhodium price looks like it’s up about $45.00 during that time and our usual $125.00 over spot (selling price) has remained steady – so Kenny has not made any premium changes other than a reflection of the higher base rhodium price.
If you have not considered the Baird 1 oz Rhodium bar let me add that rhodium in my mind is cheap and like palladium has pretty much flown under the small investor’s radar. Considering its all-time high was almost $10,000.00 in 2008 – and its average price has been $2600.00 during that 6 year period – this is a solid contrarian investment.
This from Alex Rosenberg (CNBC) – “As Janet Yellen testified before the Senate Banking Committee, gold sank 1 percent in 10 minutes, taking the metal back below $1,300 for the first time in nearly a month. But rather than being the victim of a single massive bearish trade, it appears the metal was reacting to a slightly less dovish outlook from the Fed chair than some gold holders were expecting or hoping for.
“It’s simple,” said gold expert George Gero of RBC Capital Markets. “Yellen was a little bit more hawkish than expected. That signals higher rates sooner rather than later. And that’s anti-inflationary, and presents competition for gold.”
After all, gold does not bear any yield. So as yields on fellow safe-haven assets like Treasurys rise, gold becomes less attractive.
Still, several traders noted the oddity of gold moving so quickly on comments that didn’t surprise many people. At 10:55 a.m. EDT, about 7,600 gold contract traded, which means that nearly $1 billion in nominal gold value changed hands in that minute.
This boost in volume led to speculation that gold futures fell because someone “dumped” $2.3 billion worth of the futures. But market data expert Eric Hunsader of Nanex says that doesn’t comport with what he’s seeing.
“I don’t see anything unusual like that,” Hunsader told CNBC.com. For Chicago-based trader Jim Iuorio, the explanation could be a bit more nuanced. He believes that Yellen’s comments caused one trader to sell gold, and that this sale triggered stops around the $1,300 level. “It was a whole lot of volume all at once, and Yellen didn’t really tell us anything new,” he said. “I think one guy was waiting for a reason not to sell, and when Yellen didn’t give it to him, he sold—which led to a lot of other orders getting triggered.”
The walk-in cash trade was again uninteresting. It is not that there is nothing going on – it is just that even with lower markets there is no “pop” in buying or selling – no buzz either way which should raise some red flags if this continues for the next few weeks.
The GoldDealer.com Activity Scale is a “3” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 2) (last Thursday – 2) (last Friday – 3) (Monday – 4). The scale (1 through 10) is a reliable way to understand our volume numbers.
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