Commentary for Wednesday, Oct 16, 2014 (www.golddealer.com)

richard schwary thumb Gold Rebounds on Soft US Economic Data and Safe Have Buying

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

Gold closed down $3.60 at $1240.50 today. So the recent push to higher ground may be in need of a rest – or the push may be running out of gas.

I’m not saying gold is finished with this recent run – there are too many things going on like perhaps the Federal Reserve is having second thoughts about its bond buying program now that Europe is having more problems.

But this most recent close does not look like much in the way of profit taking – it may be just book squaring getting ready for the weekend. But in any case the real buzz in the physical market has left for an early weekend.

The stock market was a big flop on the morning bell but recovered – even when we were looking at a great deal of red ink across the DOW gold showed little reaction – down a few bucks. I would have expected more considering the mess in Europe but today’s action closed on a whisper and the stock market seemed to get legs and closed with some respect.

The really big question now is whether the Federal Reserve will use the “global slowdown” as a reason to delay interest rate hikes.

Chuck Butler thinks the Fed will finish quantitative easing on schedule and then be forced to bring it back creating an economic implosion – interesting thought which would push gold prices higher.

But these markets remain conflicted – the US economy still looks fairly good with higher industrial production announced today and platinum traded lower. By the way platinum is now $12.00 over the price of gold so consider trading gold bullion for platinum bullion.

Silver closed down $0.03 today at $7.46 – this market too looks like it is losing physical momentum. The $1000 face 90% silver bag is looking cheap premium wise.

Platinum closed down $9.00 at $1252.00 and palladium closed down $18.00 at $746.00.

Chicago Mercantile Exchange reports for the last 5 trading days – so we are looking at the trading volume numbers for the December Gold contract: Thursday 10/09 (165,358) – Friday 10/10 (121,360) – Monday 10/13 (119,916) – Tuesday 10/14 (113,551) and Wednesday 10/15 (258,099). Look at the volume number for yesterday – almost double the average.

There is no way gold is going anywhere facing a strong dollar. And if you have been following the Dollar Index the yearly high is 85.75 and the yearly low is 78.91. As of this writing its trading at 84.87 with a negative daily bias but it’s easy to see we are at the higher end of its yearly trading range which creates trouble for gold. And there are some who believe the dollar is on a tear and will go higher.

gold_rims_thumbBut here are a few comments from someone who understands the currency markets. This from Chuck Butler (EverBank World Markets) – “The bond guys (& girls) have their fingers on the pulse of the U.S. economy. They always have, and didn’t like having the conn in bonds taken away from them by the Fed, during their 5 years of Quantitative Easing / QE. For instance, for more years than I care to mention, it was a given that an inverted yield curve for Treasuries, indicated that a recession in the U.S. was on the way. And when Bond traders rally bongs, which mean bond prices go up, and yields go down, it simply means they don’t see good things for the economy. So, what are the bond traders telling us now? Well, unless there’s outside interference from the Fed, which I don’t believe there is, except for their remaining tid-bits of QE that will be wiped clean at the end of this month, according to the Fed, what we have here in the U.S. is an economy that’s going nowhere, despite what the Fed members, the economists, and flag wavers for the Gov’t, tell us, the bond traders are not buying it. Of course I never did buy it. The bond guys could have just checked with me and I could have saved them the losses they incurred when Treasury yields rose from 1.80% to 3%. Because look at them now? They’re back below 2%.

And that all plays nicely in the sandbox with my call last year that the Fed will not be away from the QE table very long, before they come back to administer more QE to this going nowhere economy. And when they do that, I feel that the markets will come unglued. They will feel as though the Fed mislead them, and will take away credibility the Fed had built up. That won’t be a good thing for the dollar in my eye.

But for now, we deal with the Clingons. You know those clinging on to the idea that this is going to be a multi-year rally for the dollar. That’s OK, we’ve had to deal with these Clingons in 2005, 2008, 2011, and again now. And they pack a powerful punch when they have the conn, like they do now. And will continue to have until the rest of the markets catch up with what the bond guys are telling us. And what Chuck has told you for some time now.”

If Chuck is right the longer term implications for gold are big. The currency markets are always volatile but longer term economic thinking has predicted a lower dollar and lower euro because of loose economic policy. The thought being that while inflation hurts the saver (if there are any left in today’s world) but helps the borrower by paying back debt with inflated dollars. This scenario is traditional gold rhetoric but outside of immediate safe-haven buying is the only real solution which will support longer term gold prices.

This from Ambrose Evans-Pritchard (The Telegraph) – BIS warns of “violent” reversal of global markets – “The global financial markets are dangerously stretched and may unwind with shock force as liquidity dries up, the Bank of International Settlements has warned.

Guy Debelle, head of the BIS’s market committee, said investors have become far too complacent, wrongly believing that central banks can protect them, many staking bets that are bound to “blow up” as the first sign of stress.

In a speech in Sydney, Mr Debelle said: “The sell-off, particularly in fixed income, could be relatively violent when it comes. There are a number of investors buying assets on the presumption of a level of liquidity which is not there. This is not evident when positions are being put on, but will become readily apparent when investors attempt to exit their positions.

“The exits tend to get jammed unexpectedly and rapidly.”

Mr Debelle, who is also chief of financial markets at Australia’s Reserve Bank, said any sell-off could be amplified because nominal interest rates are already zero across most of the industrial world. “That is a point we haven’t started from before. There are undoubtedly positions out there which are dependent on (close to) zero funding costs. When funding costs are no longer close to zero, these positions will blow up,” he said.

The BIS warned earlier this summer that the world economy is in many respects more vulnerable to a financial crisis than it was in 2007. Debt ratios are now far higher, and emerging markets have also been drawn into the fire over the last five years. The world as whole has never been more leveraged.

Debt ratios in the developed economies have risen by 20 percentage points to 275pc of GDP since the Lehman Brothers crash.

The new twist is that emerging markets have also been on a debt spree, partly as a spill-over from quantitative easing in the West. This has caused a flood of dollar liquidity into these countries that they have struggled to control. It has pushed up their debt ratios by 20 percentage points to 175pc, and much of the borrowing has been at an average real rate of 1pc that is unlikely to last.

China was able to act as a stabilizing force during the global downturn of 2009, letting rip with an immense burst of credit. These buffers are now largely exhausted. All of the BRICS (Brazil, Russia, India, China, South Africa) countries have hit structural limits, and face difficulties of one form or another.

Mr Debelle said the markets may at any time start to question whether the global authorities have matters under control, or whether their pledge to hold down rates through forward guidance can be believed. “I find it somewhat surprising that the market is willing to accept the central banks at their word, and not think so much for themselves,” he said

The biggest worry is a precipitous sell-off in the bond markets once the US Federal Reserve and the other major central banks begin to tighten in earnest. Mr Debelle cited the US bond crash in 1994, but warned that it could be even more violent this time with a “fair chance that volatility will feed on itself”.

The picture is further complicated by a fall in the depth and inventory of market makers, the side-effect of new regulations that have raised costs and caused firms to exit this specialist business. “Market liquidity is structurally lower now than it was in the past. The question today is whether there is too little capacity. When volatility returns, it may well rise quite rapidly,” he said.

Mr Debelle may be especially sensitive to the risks, given his ring-side seat in Australia where authorities are grappling with a housing bubble and a commodity shock from China. Yet his warning is global: investors have taken on too much risk, and the illusion of liquidity can vanish almost overnight. “That strikes me as a dangerous combination and unlikely to be resolved smoothly,” he said.”

The above is typical of commentary coming out today regarding Europe. Too much debt, no real changes in the old guard, dependence on quantitative easing – all of which begs the question: have we learned anything from the big financial meltdown of 2008?

But if there is a blow up in Europe it does not mean gold will necessarily benefit immediately. Any real financial blowup will eventually attract the physical gold buyer but the real winner if someone pushes the panic button is usually the US dollar. Yep, you can’t lose on the short term if you choose the good old American buck.

That’s why it’s so popular and as a consequence interest rates remain low.

And gold could also be hurt in the big blow up scenario because it is the best form of instant cash – that being needed to cover all the leverage and derivative junk floating around and passing as “good investments” these days.

But after the fires die down gold will benefit – especially when the world wakes up to the financial inconsistencies and bubbles created when governments simply print money which is not connected in some way to their gross domestic product.

So a word to the wise – establishing the gold “fire wall” is way better and less costly before the dam cracks – afterwards is much more expensive.

The walk-in cash trade was surprisingly quiet today and so were the phones.

The GoldDealer.com Unscientific Activity Scale is a “4” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Friday – 4) (Monday – 4) (Tuesday – 4) (Wednesday – 3). 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 very busy and see a low number – or be very 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 – perhaps a week or two. 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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