Commentary for Tuesday, November 24, 2015 (www.golddealer.com)

Gold Market Newsletter with Richard Schwary

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

Gold closed up $8.00 at $1074.80 on the Comex today reacting to the news that Turkish fighters shot down a Russian military jet which they claim had invaded their air space. Supposedly the Turkish military warned the Russian fighter before firing and the Russians claim their fighter was not in Turkish air space when it was shot down.

Another fine mess in a region which is armed to the teeth and itching for a fight – the Russians claim they will seek retribution and this attack was unprovoked and a “stab in the back”.

This along with the French ISIS attacks, video of ISIS claiming the US is next and various other attacks worldwide has everyone on edge – thus the push to higher ground in gold. The problem now is that these countries need to stop and take a deep breath – rhetoric will lead to more civilian misery.

I posted the Reuter’s report on just released Gross Domestic Product numbers – things continue to improve so expect that pesky interest rate hike in December. By the way if they do not raise rates after all this hullabaloo the price of gold will again move above $1200.00.

gold_money_gearsThe Dollar Index numbers look steady – we closed yesterday at 99.76 – the range today was 99.47 through 99.79 and we are now trading at 99.61. There has been some firmness in the price of oil probably because of the Turkish/Russian incident.

So the US Mint has stopped making US gold eagles – expect to hear from your favorite telemarketer that this is a monumental reason for buying gold. Of course we all know that the US Mint stops producing gold Eagles around this time every year as it gears up for its new 2016 production run. Newly minted coins (2016) will be available in the 1st quarter of next year – don’t believe any dealer claiming to have coins in 2015 – it’s against the law. And don’t pay any additional premium for 2016 before or after they are released – everything will settle down and these premiums will melt like they do every year.

Finally there are lots of alternatives to US Gold Eagles – every mint in the world is producing gold bullion product and they are essentially all the same – they will all move directly with the price of gold so why not save some money?

Silver closed up $0.13 at $14.17.

Platinum closed down $6.00 at $840.00 and palladium closed unchanged at $541.00. Platinum is now trading for $234.00 less than gold.

This from Reuters – The U.S. economy grew at a healthier clip in the third quarter than initially thought, but strong inventory accumulation by businesses could temper expectations of an acceleration in growth in the final three months of the year.

The Commerce Department on Tuesday said the nation’s gross domestic product grew at a 2.1 percent annual pace, not the 1.5 percent rate it reported last month, as businesses reduced an inventory bloat less aggressively than previously believed.

The pace of economic growth, which was also boosted by upward revisions to business spending on equipment, suggests a resilience that could help give the Federal Reserve confidence to raise interest rates next month.

While consumer spending was revised down a bit, its pace remained brisk, suggesting consumers were cash-flush.

“The economy continues to move along at a good clip relative to its potential. With growth like this, the Fed has the data it needs to light the candle finally and lift off on December 16,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

When measured from the income side, the economy grew at a sturdy 3.1 percent clip, the fastest in a year and an acceleration from the second quarter’s upwardly 2.2 percent pace. Wages and salaries increased $109.3 billion, $61.6 billion more than initially estimated.

The third-quarter’s respectable expansion should set up the economy to achieve at least 2 percent growth in the second half of the year, around its long-run potential. In the wake of robust job growth in October and strong domestic demand, the Fed is expected to raise rates at its Dec. 15-16 policy meeting. Other data on Tuesday showed consumer confidence fell further in November, hitting a 14-month low, as sentiment towards the labor market surprisingly soured. Economists suspected the Nov. 13 attacks in Paris and rising tensions in the Middle East had weighed on consumer confidence.

Despite the drop, more consumers say they plan to buy homes, automobiles and other big-ticket items over the next six months.

“The bigger picture suggests that domestic demand is still firm, spending plans are evolving positively and the housing market continues to post gains,” said Robert Kavcic, a senior economist at BMO Capital Markets in Toronto.

A third report showed house prices rose solidly in August.U.S. financial markers were little moved by the data as investors worried about global security after Turkey shot down a Russian warplane.

Large Inventory Accumulation – In the third quarter, businesses accumulated $90.2 billion worth of inventories, instead of the $56.8 billion reported last month. That followed more than $100 billion worth of inventories accumulated in each of the prior two quarters.

As a result, the change in inventories chopped off only 0.59 percentage point from third-quarter GDP growth, rather than the 1.44 percentage points the government reported in October. That, however, suggests inventories could be a drag on fourth-quarter growth.

“The bigger inventory overhang helps explain why manufacturing sentiment remains cautious early in the fourth quarter, and does present downside risk to our 2.5 percent estimate for current-quarter GDP growth,” said Michael Feroli, an economist at JPMorgan in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a still strong 3.0 percent rate in the third quarter, down from the 3.2 percent rate estimated last month. The downward revisions mostly reflected weak outlays on communication services and utilities.

A measure of private domestic demand, which excludes trade, inventories and government spending, was revised down to a still sturdy 3.1 percent pace from the previously 3.2 percent rate. Though there are signs consumer spending slowed early in the fourth quarter, it should continue to be supported by strong income gains. Income at the disposal of households after adjusting for inflation rose at a robust 3.9 percent pace in the third quarter.

A trade deficit that was larger than previously estimated subtracted 0.22 percentage point from GDP growth in the third quarter. Data on Tuesday showing a smaller goods trade deficit suggested trade would contribute to fourth-quarter growth.

Deep spending cuts by energy firms following a collapse in oil prices continued to weigh on growth. Spending on mining exploration, wells and shafts tumbled at a 47.1 percent rate, rather than the 46.9 percent pace reported last month.

However, business spending on equipment was revised up to a 9.5 percent rate from a 5.3 percent pace.

The Commerce Department also reported that corporate profits after tax fell at a 1.6 percent rate in the third quarter after rising at a 2.6 percent pace in the second quarter. Profits, which have been undercut by the dollar’s strength and lower oil prices, were down 8.1 percent from a year ago, the biggest decline since the fourth quarter of 2008.

This from Sarah Benali (Kitco News) – Is Gold Still A Good Investment or Just A Pet Rock? – CME Group – As investors shy away from gold given the metal’s continuous decline and imminent U.S. interest rate hike, one senior economist says that although he remains pessimistic on the yellow metal in the short term, historical data still proves it remains a great portfolio diversifier.

CME Group’s Erik Norland said that although it is difficult to say with certainty whether or not gold is a good investment, he looked at historical data to decipher if gold was useful in portfolios in the past.

“To do so, we compare the risk-adjusted excess returns of gold to the risk-adjusted excess returns on stocks and bonds,” he said.

The four main results based on his research report released on (date) showed that: having gold in the portfolio was “marginally Goldbeneficial” both in the shorter and longer terms, the ideal gold allocation was around 10-15% of portfolio risk, gold has much lower risk-adjusted excess return over time than either government bonds or stocks, and since gold has a low correlation to both stocks and bonds, it makes it a “useful portfolio diversifier.”

However, Norland remains pessimistic on gold in the short term and the reason for it is not necessarily the same as the market consensus – U.S. rate hikes – but rather related to mining.

“Those familiar with our research will know that we aren’t especially optimistic about gold in the short term because we think that it’s driven by mining supply to a much greater extent than most people realize, and that mining supply, in our view, is likely to continue growing,” he continued.

“Our perspective on mining supply appears to be in the minority. Many analysts think that gold-mining supply is likely to come down significantly in the next few years. If mining companies begin shutting down production, it would be bullish for gold,” he explained.

Norland also noted that he does not see inflation becoming a major problem, which would in turn be negative for gold.

“The Fed seems to disagree, however. If they didn’t think that inflation was a threat at all, they probably wouldn’t be considering raising rates,” he said.

“To the extent that they tighten, however, this should be negative for gold as it will quell inflation fears while, at the same time, highlight the contrast between (near) zero interest rate gold deposits and rising interest rates on T-Bills and other short-term interest rate instruments in the U.S.”

However, Norland noted that his apathetic short-term sentiment towards gold is also shared with equities and bonds.

“[W]e wouldn’t be surprised if fixed-income returns are close to zero or even negative, after inflation, over the next decade or so,” he said.

“Equities present a more complex picture… corporate profits aren’t growing very quickly and with the Fed apparently getting ready to hike rates, the cost of capital might begin to increase slightly,” he noted, adding that equities in Europe and Asia, on the other hand, are cheaper and may outperform the S&P 500 in coming years, especially if the U.S. dollar remains strong.

Based on Norland’s research, the benefits of diversification historically come mainly from stocks and bonds rather than gold, but with the data he gathered, he saw that the yellow metal still added value to an investor’s portfolio.

The walk-in cash business was a slow start today and never really recovered – the phones were the same although the Activity Scale remains high so volume numbers are holding up. This is interesting in that I would expect volume to decrease as we head into the holidays. Finally there have been a few gold whales that have shown up – just something to think about over that extra helping of mashed potatoes.

The GoldDealer.com Unscientific Activity Scale is a “7” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 7) (last Thursday – 8) (last Friday – 5) (Monday – 6). 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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