Commentary for Tuesday, May 26, 2015 (www.golddealer.com)

Gold Market Newsletter  with Richard Schwary

By Ken Edwards and Richard Schwary of California Numismatic Investments Inc….
 

Gold closed down $17.10 at $1187.20 on the COMEX today – saying good-bye to last Friday’s close of $1204.30 and throwing any short-term support at $1200.00 overboard.

This latest weakness in gold is all about dollar strength but there are a number of factors which have caused the mighty buck to roar and gold to move lower.

But first, let’s look at the Dollar Index to see how loud the roar was in this financial jungle. As of this writing the Dollar Index is trading at 97.29 versus a previous close of 96.74. The range today has been between 96.45 and 97.34 so you can see we are approaching highs on the day. That is a pretty loud roar – and there are a number of factors which support this newly found strength.

First, the Consumer Price Index (CPI) numbers last Friday were a surprise – and led commentators to reverse their opinion that there would not be a Fed rate hike in 2016. Janet Yellen’s latest comments which claim that this rate hike would happen this year if the economic numbers continue to improve set the stage for dollar strength.

federal_reserve_dollarRemember the European markets, like our markets, were also closed for Memorial Day (Monday). So today’s weakness is kind of a delayed reaction as traders come back to work.

Then there is the debt problem with Greece – unfortunately they claim they can’t make their debt payment without more money. As usual Europe will meet and see what can be done – but even the threat of a Greek default makes the dollar on the short term look pretty good.

And considering the weak press gold has enjoyed – gold could not even manage a rally – forget about any safe haven buying.

Greece made two payments to the International Monetary Fund (IMF) but has voiced the fact that they have no money to make future payments unless new loans are released. In June they will need to pay the IMF 1.6 billion euros – the first of those payments is 300 million euros due in a few weeks.

The problem with this continuing drama is that lenders want more austerity and the new government in Greece is hawkish about any changes in their status quo.

Also of some consideration is the general lack of action last week as traders left early in reaction to Monday’s close. And today’s upbeat report on home sales (up 6.8%) seemed to bolster the idea that our economy continues to improve – thus leading traders to believe that the Federal Reserve will soon do something with interest rates.

The “soon” part of the above statement is tricky – this being the first day of summer – those who claimed the Federal Reserve would raise rates “by the summer time” are running out of runway. I find this optimistic – especially when you consider the possible damage. Still a rate increase by year end seems realistic but I still contend that the gold trade overcompensates.

With the bears now front and center let’s see how today’s close ($1187.20) compares with the moving averages – Gold’s 50 DMA ($1197.00) – Gold’s 100 DMA ($1212.00) and Gold’s 200 DMA ($1213.00). As you can see gold is now trading below all three commonly followed moving averages – this means the technical picture is deteriorating and we might see a test of recent lows around $1150.00, especially if the dollar continues to surge.

But here is where I differ from most commentators. I believe this long term support going back to October of last year will hold based on the big surge we have seen at least twice in the physical market across our own counter – and at the same time the lack of selling we have seen at the lower end of this current trading range.

Silver closed down $0.33 at $16.73. This is a good example of the lack of interest during this shortened week coming back from Memorial Day. The summer time is usually a quiet time in the coin business and so we expect slower markets. Also this “back and forth” action simply kills the physical action across the counter. There is nothing like higher prices to get everyone excited and nothing like lower prices to stop the action. What to do? Nothing really – this market is still basing and the “unwinding” jump off point is still not clear. So relax – what you need here is patience. Something you probably already have if you are still reading commentary about the precious metals.

Platinum closed down $25.00 at $1123.00 and palladium closed down $3.00 at $781.00.

Mark O’Byrne (GoldCore) – China Creates Gold Investment Fund for Central Banks

– China’s new gold fund – 60 countries to develop gold mining projects

– Allow member central banks to have easier access to gold

– Gold to be traded on increasingly important Shanghai Gold Exchange

– Another important step in making yuan reserve currency

– China and Russia challenging U.S. dominance in key Eurasia

– New gold fund shows monetary importance placed on gold by China

– China ensuring supply in event gold flows from West to East end

– Gold’s reemergence as important monetary asset both for individuals and powerful nations

China has announced the establishment of a new international gold fund with over 60 countries as members. The large fund, which expects to raise 100 billion yuan or $16 billion, will develop gold mining projects across the economic region known as the New Silk Road.

President Xi Jinping said earlier this year he hoped annual trade with the countries involved in the increasingly important modern Silk Road would surpass $2.5 trillion in a decade. According to Xinhua, the official Chinese news agency, the project will facilitate the central banks of member states to acquire gold for their reserves more easily. This may explain the broad support which the project has received in the area.

“About 60 countries have invested in the fund, which will in turn facilitate gold purchase for the central banks of member states to increase their holdings of the precious metal, according to the SGE.”

The project is being overseen by the Shanghai Gold Exchange (SGE) and it is likely that the newly mined gold will be either be traded on the SGE or be sold directly to the PBOC and other central banks.

Shanghai Securities News reported yesterday that two leading gold producers, Shandong Gold Group, the parent of Shandong Gold Mining Co Ltd, and Shaanxi Gold Group will take stakes of 35 percent and 25 percent respectively, with the rest owned by other unnamed financial institutions.

The fund’s activities could take in the launch of gold-backed exchange-traded funds and buying stakes in listed gold companies and mining firms. The new project marks another step forward in the internationalization of the Yuan. Xinhua, which tends to represent the views of the Chinese government, quotes a spokesperson from the Industrial Fund Management Co. as saying:

“China does not have a big say in gold pricing because it accounts for a small share of international gold trade … Therefore, the Chinese government seeks to increase the influence of RMB in gold pricing by opening the domestic gold market to international investors.”

Coupled with the BRICS Bank and the AIIB, China’s power in the region and internationally is strengthening. The China Gold Association is on record as saying that they aim to surpass Germany in the near future as the second largest holder of gold reserves – with 4,000 tonnes of gold. The PBOC’s sights are on the 8,500 tonne mark which is the amount of gold supposedly held by the U.S. – reserves unaudited for half a century.

This from Matthew Lynn’s London Eye (Market Watch) – 5 Bubbles that Draghi’s QE is already blowing – Sixty billion euros here. A hundred billion there. “To paraphrase Everett Dirksen’s apocryphal quote about the U.S. budget, pretty soon you are talking about real money. Earlier this year, the European Central Bank (ECB) launched its quantitative easing program with 60 billion euros a month of asset purchases by the central bank.

Now, in response to some mild turbulence in the bond market, it is talking about front-loading QE, taking the total of fresh cash minted in Frankfurt every month up to 100 billion or even more. In short, real money.

Academics will no doubt be discussing the effectiveness of QE in lifting the real economy for a couple of generations at least, and probably not reaching any definitive conclusions. Perhaps it pulls countries out of a recession, or perhaps they would have eventually started to grow again anyway? One thing we can say for sure, however, is that it boosts asset prices.

In fact, it is already happening. A series of Mario Draghi bubbles are already inflating across the eurozone. Where exactly? Well, Spanish construction is booming, Dublin house prices are soaring, German wages are accelerating, Malta is riding a wave of hot money, and Portuguese equities are among the best performers in the world. For a lucky few investors, QE is already working its magic.

The ECB president probably had no choice but to finally bite the bullet and launch the ECB’s own version of QE earlier this year. The continent was sliding rapidly into deflation, with prices dropping in countries such as Spain. The economy was slipping into a depression, and unemployment was rising relentlessly even as the rest of the global economy was recovering. The only real surprise was that it took so long.

That doesn’t mean, however, that the money created won’t blow up asset prices. Indeed, it is already happening. Here are five markets that are already benefitting from the tidal wave of money Draghi has created.

First, take a look at Spanish construction. Only a couple of years ago, we were reading about how Spain was littered with empty housing estates and airports with one flight a day, the forlorn legacy of the building boom that was raging all through the middle of the last decade. You might think there was nothing left to build – but, as it turns out, you’d be wrong. The cranes are back in action again. Construction output in Spain is currently growing at 12% year-on-year, by far the fastest sector of the economy. Cement consumption is up by 8% this year. The property market is humming again.

Second, Dublin housing. There were few hotter markets at the height of the last boom than Irish housing – nor many crashes that were quite so bad. Now, the froth is back again, and anyone who snapped up a bargain as the country was bailed out and its banks went into intensive care will be feeling smug by now. Irish houses prices are up by 16% year-on-year, and by 22% in the capital, Dublin. The emerald tiger is catching another wave of hot money, and starting to boom again. Don’t be surprised if prices keep going even higher.

Third, German wages. For a decade, despite having supposedly the strongest economy in Europe, German wages had hardly risen. Now that is starting to change. The metalworkers union just secured a 3.4% rise, a decent hike in a country where deflation is still a threat, and prices are not likely to rise. Other workers want a better deal as well. This week, the train drivers are on strike, for the ninth time in the last year, as they push for a 5% pay rise and a shorter working week (who says the trains in Germany run on time). Already in 2015 Germany has lost twice as many days to industrial action as it did during the whole of 2014, according to the German Economic Institute. By the end of the year, wages in Germany are likely to be racing ahead at record levels.

Fourth, Maltese assets: The tiny Mediterranean island is expected to record the fastest growth in the European Union this year, at 3.6%. Prices are not rising quite as fast as they are in Dublin, but property is up by 10% year-on-year, the second fastest rate in the eurozone. Some of the local banks are reporting that their balance sheets are expanding by 40% a year or more. Has the Maltese economy suddenly had a surge of competitiveness? It seems unlikely. In fact, it is emerging as the new Cyprus — an offshore haven for all the hot money within the eurozone to find a temporary home.

Five, Portuguese stocks: It is hard to think of anything very good to say about the Portuguese economy four years after the country had to be bailed out. The economy is only expected to expand by 1.6% this year, only marginally better than the 0.9% it managed last year. Unemployment is still running at more than 13% and shows little sign of falling significantly. But, hey, you never guess that from the stock market. Lisbon’s PSI Index PSI20, +0.08% is up by 25% this year already, making it one of the strongest markets in the world.

In reality, central banks can print money when they want to. But they can’t control where it washes up. Some of the rising markets might be useful – higher wages in Germany, for example, might help to rebalance that country’s massive trade surplus.

But in the main Draghi’s tidal wave of euros is most likely to simply to blow up another series of asset bubbles. Indeed, in many cases they are exactly the same bubbles that blew up last time around, such as Spanish construction and Dublin property. That may be great for investors who get in on those markets on the way up. But it won’t do much to fix the eurozone economy – and it will inevitably be very painful when they finally pop.”

The walk-in cash trade today was average to quiet – typical summer action. The phones were a bit more active – a lot of questions especially about gold and silver bullion in Individual Retirement Accounts. By the way – don’t get tricked into placing certified gold or silver coins in your IRA. Whichever company you choose insist on plain-Jane, low premium bullion products. Anyone recommending anything else has their hand in your pocket.

The GoldDealer.com Unscientific Activity Scale is a “ 2” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 3) (last Thursday – 2) (last Friday – 3) (Monday – Closed). 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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