Commentary for Friday, March 27, 2015 – Gold closed down $5.30 today on the Comex at $1199.80. So we are up $5.10 this week and $32.00 last week – positive but not earthshaking – the dollar was steady today around 97.50. Still this latest run might be more promising than it appears in the way of base-building in a technically damaged market.
We are seeing some mild profit taking in gold as the week comes to an end. But then the gains we have seen since mid-March ($1150.00) have also been smallish. This latest move by gold to higher ground ($1150.00 to $1200.00) has been prompted by some weakness in the dollar and the promise that the Federal Reserve will not raise interest rates anytime soon. And supported by increased Asian physical demand for gold – but both metrics are still looked at with a suspicious eye by today’s physical buyer. They are glad we are not moving lower but they remain very cautious. After all the interest rate boogie man may be lurking and physical demand while reasonably steady can come and go just as quickly.
Still the information released from the World Gold Council this week is encouraging. India could smuggle 200 tonnes of gold this year – legal imports for March approaching 150 tonnes – yearly imports looking like 945 tonnes (the highest in 4 years). That is substantial against a generally negative news backdrop and the possibility of rising interest rates.
Today’s move to the downside going into the weekend was simply profit taking and is healthy. But consider that with all the hubbub yesterday over air strikes in the Middle East today’s market seems too quiet. From a technical standpoint gold should be happy on the short term – the bulls now have some advantage. But a closer look at the 30 day price chart will show that we face considerable overhead resistance in the $1200.00/$1215.00 range. So while trading news is much more positive these days we may still be stuck in an existing channel between $1160.00 and $1220.00. Even a break to the upside in April is subject to a great deal of heavy lifting for gold because there is plenty of overhead resistance between $1220.00 and $1280.00.
So that’s all the bad news – if the gold market climbs this wall of worry we could be off to the races and keep in mind all the time that Europe is printing and printing and printing.
Silver closed down $0.07 at $17.05. Business here is steady and there are a couple of new products which always get extra publicity by the producing mints. They include the 2015 silver Libertad from Mexico, the 2015 Red Tailed Hawk from Canada and the 2015 Tunnel Webbed Spider from Australia.
Platinum closed down $10.00 at $1143.00 and palladium fell out of bed – down $32.00 at $740.00. Still platinum bullion products remain thin. Our current bid for the American Platinum Eagle 1 oz is $90.00 over spot and we have failed to buy even one coin. The Platypus 1 oz is in stock at spot plus $95.00 delivered.
Our Patented Employee Survey – Gold’s Direction Next Week?
Of course it’s not really patented but we do have some fun along the way. This is what the GoldDealer.com employees think – 9 believe gold will be higher next week – 2 think gold will be lower and 2 believe it will be unchanged.
Our Patented Customer Survey – Gold’s Direction Next Week?
Like the employees our customers were given three choices – up – down – unchanged. We limited the survey to a random sampling of 100 transactions – unscientific but worth considering because these people took action: 46 people thought the price of gold would increase next week – 37 believe the price of gold will decrease next week and 17 think prices will remain the same.
Precious Metal Closes & Dollar Strength – March 23 – 27
This from FX Empire – “Gold eased on Friday morning as traders booked profits after a seven-day rally and as the dollar rebounded on strong US data, but the metal looked set to post its second straight weekly gain on expectations US interest rates will stay low for longer. Tensions in the Middle East after Saudi Arabia and its allies launched air strikes in Yemen provided some support to gold, seen as a safe-haven asset. Gold tends to be an investor favorite when geopolitical tensions rise and risk-appetite dips. However, gold’s failure to hold on to 3-1/2-week highs reached on Thursday made traders cautious over the price outlook. “Although the metal breached the 100 day moving average – near US$1,208 during the session, it failed to close above the indicator, which may signal that this latest run is nearing an end,” said MKS Group trader James Gardiner.”
This post from DailyPfennig.com is worth remembering. “Yellen’s zero interest rate policy constitutes massive theft from savers. Applying a normalized interest rate of about 2% to the entire savings pool in the U.S. banking system compared to the actual rate of zero, reveals a $400 Billion per year wealth transfer from savers to the banks from the zero rates. This has continued for more than 5 years, so the cumulative subsidy to the banking system at the expense of everyday Americans is now over $2 Trillion. This hurts investment, penalizes savers, and forces retirees into inappropriate risk investments such as the stock market. Yellen supports this bank subsidy and theft from the savers.” – James Rickards
This from ValueWalk ( Mark Melin) – HSBC: Negative Rates May Be Good For Gold – As central bank stimulus appears not to be impacting real wage growth, HSBC notes the odd market for gold. While gold has a reputation as an inflation hedge, the impeccable image during inflationary periods is thrown shade by HSBC Holdings who observes in a recent research note that in certain inflationary periods gold was not a perfect hedge then contemplates an environment of negative interest rates.
HSBC notes that interest rates can theoretically rise to unlimited levels, but can only fall to zero, or to marginally negative levels. It is this odd netherworld of negative rates where implications for gold become interesting.
HSBC: The longer negative interest rates persist, the more damage done.
HSBC economist James Pomeroy, challenging the economic theory that dictates negative rates cannot exist, notes there is a security and storage cost to holding cash. Pomeroy, musing about Sweden’s negative interest rates in a research note, observes central bank quantitative easing has been used around the world but has had a limited effect on inflation. This means “the instrument has been blunted somewhat, whereas the unknown impact of negative rates carry a much clearer message that the central bank is willing to do whatever it takes to push inflation back to the 2% target.”
Negative interest rates can be an ominous precursor. The longer negative rates persist, and the more negative they go, the more significant the risk of a fundamental shift in the operation of the financial system, HSBC analyst Steven King and Pomeroy observed in a research piece titled “The new surrealism.”
Negative interest rates are like a mind-bending painting from Salvador Dali, the research piece observed, that “can spread confusion, not eliminate it,” the researchers noted, quoting Dali himself on the impact his paintings might have on the viewer of the art. The confusion in the current economic environment is that inflation “could extend far beyond declines in oil and other commodity prices,” and might be structural in nature, citing low wage growth and weak credit growth, indicators of the “real economy” that QE stimulus appears to have missed. Developing countries may have escaped deflation because of plunging currencies, deflationary fears could become entrenched, HSBC’s King cautions.
What does it mean for gold? There are certain points at which bad can become good for gold investors. HSBC suggests that if “a non-cash financial system offer negative nominal interest rates for any length of time, a point may be reached where a cash system begins to encroach on the non-cash system. This could be good for gold demand.”
The HSBC team has a “cautiously optimistic view on gold,” forecasting a trading range of $1,305 to $1,120 to remain intact, supported by a potential end in the rise of the U.S. dollar.
Another look at a portion of the recently published Gold Investor Volume 8 (World Gold Council) – The US dollar may continue to strengthen, but this trend will not last forever. A rising dollar – the current consensus view – is likely for the near future on the back of a number of factors: continued US economic outperformance; the prospect of tighter US monetary policy; economic weakness in Europe and China and some commodity-sensitive countries; and continued loose monetary policy in Japan, Europe and elsewhere. These themes have already driven the dollar up 20.3% between January 2014 and 20 March 2015 – based on the Federal Reserve (Fed) trade-weighted dollar index. Historically, such moves have always been associated with large falls in the gold price, yet the gold price has fallen only by 1.2% over the same period.
Although dollar strength is likely to continue, we see the pace of appreciation at a slower rate than that of the past few months. The dollar has already strengthened the most since the 1970s. Over the past 12 months, the dollar has appreciated the most of any 12-month rolling period since 1973.4 Further, the correlation between a 12-month period when the dollar moved up by more than 7.5% (or one standard deviation) and the subsequent 12-month period is -0.1, suggesting that after a period of strong appreciation the dollar tends to revert back to the mean.
Only during the early 1980s did the dollar appreciate strongly for an extended period of time. And this was a period in history with dynamics very different from todays. A flatter yield curve suggests the pace of economic growth is unsustainable. US short-term rates have been moving up while the long end of the curve has fallen steadily. The current yield curve is flatter than it has been during previous years of strong dollar rallies. This reflects less conviction by the market in both longer-term growth and the possibility of higher inflation down the road – thus a recipe for tame rate rises and a restrained currency – echoed both by authorities and market commentators. The anemic growth in Europe and China, among other regions, is partly a cause of nascent dollar strength and is likely to weigh on US growth prospects in the future.
The Fed will move cautiously, and elevated debt remains a thorny issue. The Fed has been clear about the ‘data dependence’ of its policy. Such a policy by its nature introduces a time lag. A reactive policy is more likely to keep real rates low – which in turn should stem the dollar’s rise.
In addition, the Fed has voiced concerns that external weakness and dollar strength could slow the US economy. Though not confined to the US, high levels of public debt are set to restrain interest rates to prevent hindering the capacity of borrowers to repay as the global economy rights itself. The restraint on interest rates should also slow the appreciation of the dollar.
Further dollar strength may bring adjustments but not upheaval. An ongoing strong dollar environment does not necessarily result in further gold weakness ahead.
There are other factors at play that we expect to support gold in the presence of a stronger dollar. Our analysis shows that, as is frequently the case with gold, factors are complex, and misconceptions are widespread. While a stronger US dollar may continue to put pressure on gold, we consider that there are many factors that would limit its influence.
The walk-in cash trade was average today and so were the phones. But I took the time to look at volume numbers this month – even though it feels like we are running in second gear it turns out that March will be one of the strongest months we have seen in the past 12 months! So there could be some steam building up in the kettle.
The GoldDealer.com Unscientific Activity Scale is a “ 6” for Friday. The CNI Activity Scale takes into consideration volume and the hedge book: (Monday – 5) (Tuesday – 4) (Wednesday – 8) (Thursday – 5). 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”.
Our “activity” is better understood from a wider point of view. If the numbers are generally increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.
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