Commentary for Wednesday, Oct 15, 2014 (www.golddealer.com)

richard schwary thumb Gold Remains Firm as the Dollar Rise is Muted

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

Gold closed up $10.50 today at $1244.10 reacting to softer US economic data – Retail Sales down 0.3% and September Producer Price Index down 0.1%. A weaker dollar also helped the gold bulls today.

Continue to watch the dollar relative to the price of gold. The possibility of a delayed interest rate hike has muted the Dollar Index and helped support gold. The Dollar Index has seen a 52 week low of 78.91 and a 52 week high of 86.75. On Monday the Dollar Index was 85.53 – on Tuesday 85.83 – on Wednesday 81.84 so considerable weakness short-term has resumed and supported higher gold prices.

Stock volatility also supported safe haven buying in gold today. The DOW was down 460 points today before recovering – this may be a red flag. We have touched on this interplay before but there is now more press talking about a stock market which might be in trouble. This remains a backstory really because I think the press still likes the stock market but if it were to show serious decline gold would benefit.

Silver closed up $0.06 at $17.41 in another round of lackluster trading – the physical market remains quiet.

Platinum closed down $11.00 at $1261 and palladium closed down $30.00 at $764.00. Rhodium closed unchanged at $1230.00. This weakness in the PGM’s is indicative of worries over a stumbling European economy. I think the idea of a failing Europe is overplayed but it does provide a great talking point relative to safe haven buying. It’s more likely the European Union will figure out a way to create more money out of thin air – and inflate their way to the poor house.

What is interesting however is the price of gold ($1244.10) to the price of platinum ($1261.00). There is now only a $17.00 difference between the two – so if you are considering gold bullion a diversification into platinum bullion makes sense. From 2000 through 2010 platinum averaged a 95% premium over gold or in other words the price of platinum was almost twice that of gold.

gold_silver_bars_largeThis worldwide slowdown is not going to last forever – platinum is significantly rarer than gold and is used in countless industrial and medical applications.

This from Allen Sykora (Kitco) – Soft U.S. Data Sends Gold To 5-Week High As Stocks, Dollar, Treasury Yields Fall – “Three major U.S. economic reports Wednesday morning were all softer than forecast, sending gold to a nearly five-week high as equities, the U.S. dollar and Treasury yields sagged, traders said.

As 9:46 a.m. EDT, gold for December delivery was $11.30 higher at $1,245.60 an ounce on the Comex division of the New York Mercantile Exchange.

The government said U.S. retail sales fell 0.3% last month, which implies some caution on the part of consumers. Also, the producer price index was down 0.1%, the first decline in more than a year. Additionally, the headline number in the New York Federal Reserve’s Empire State manufacturing survey tumbled to a reading of 6.2 in October from 27.5 in September.

December gold was at $1,229.30 an ounce one minute ahead of the 8:30 a.m. EDT release of the three reports. Seventy-one minutes later, the market hit a high for the day of $1,250.30 that was its most muscular level since Sept. 11.

“Gold is being driven by lower interest rates kept weak by economic figures such as weak sales,” said George Gero, precious metals strategist with RBC Capital Markets Global Futures, adding that he sees potential for $1,300 gold by year-end. “In general, lower interest rates are friendly to gold.”

The yield on 10-year U.S. Treasury notes, which moves inversely to the price, has fallen to a low of 1.868%. By contrast, it had been as high as 2.642% on Sept. 18, the day after the last meeting of the U.S. Federal Open Market Committee.

A New York trader said gold has trended higher since an “exhaustion sell-off” back on Oct. 6, when the December contract hit its 2014 low of $1,183.30. This meant it held a double-bottom of around $1,180 on futures continuation chart, dating back to June 2013.

The early-Wednesday bounce is the result of more asset reallocation, he continued, citing not only a rise in bond prices – which pushes down yields – but lower stocks and a weaker U.S. dollar as well.

The euro has been as high as $1.28866, its strongest level against the U.S. dollar since Sept. 23. The Dow Jones Industrial Average was roughly 300 points lower shortly after the open on Wall Street, although it has since pared its loss to around 200 points.

“They’re just knee-jerk reactions,” a trader said, describing the move as investors suddenly “moving from one side of the boat to the other.”

While time will tell whether Wednesday’s moves continue, for now some of the economic data are “scaring people,” he continued, also pointing to softer numbers lately in Europe and China.”

The price of gold held steady in overnight trading in the $1234.00 range but began to fall in the Sydney and Hong Kong market eventually touching $1225.00 before flattening out. This is what Reuters had to say but note the comments on the German government lowering growth forecasts and India’s jump in September gold imports. This is why gold’s strong performance in the domestic market is worth noting. Read last night’s commentary and you come away with a neutral bias – but look at today’s domestic pop to higher gold prices over weak US data and it’s easy to see that the market remains highly divided.

SINGAPORE, Oct 15 (Reuters) – “Gold eased for a second session on Wednesday as the dollar rebounded modestly from sharp losses but the safe-haven metal still held close to four-week highs on lingering worries over the global economy.

* Spot gold slipped 0.3 percent to $1,229.10 an ounce by 0037 GMT. The metal hit a four-week peak of $1,237.90 on Tuesday, before paring gains to close 0.4 percent lower.

* Gold has been well-bid since last week on increasing concerns over the health of the global economy. Global equities tumbled, while the economic uncertainty and its potential impact on U.S. monetary policy sent the dollar lower, boosting gold’s appeal as a hedge.

* On Tuesday, however, the dollar recovered slightly as the euro and sterling nursed losses.

* Economic data from Europe continued to be weak, a factor that could keep gold prices supported.

* The German government sharply lowered its growth forecasts for this year and next, euro zone industrial production tumbled in August, and a closely watched German economic sentiment index registered its first negative reading since November 2012, at the height of the euro zone crisis.

* More Chinese and U.S. economic data later in the day could provide cues for gold prices.

* Meanwhile, litigation alleging that Deutsche Bank AG, Bank of Nova Scotia and HSBC Plc illegally fixed the price of silver has been centralized in Manhattan federal court.

* India’s September gold imports jumped sharply to $3.75 billion ahead of the wedding and festival season, data from the trade ministry showed.”

I have highlighted two of the Reuters fundamental points because these two factors play big in the shorter term price picture relative to gold.

But the shorts have covered and worries out of Europe will bring more safe-haven buying.

The return of the Indian gold wedding season and the admission by Indian gold jewelers that prices are cheap is promising.

But it only took another round of poor US economic data to focus paper traders. Now granted gold has been on a short term run to the upside since early October – bouncing from $1192.00 (October 3) into its current range and closing today at $1244.10.

This significant move was seen as a combination of short-covering and bargain hunting but traders had not turned bullish long term. Most thought this was something of a dead-cat bounce but some belived the gold market was oversold.

So what has changed? I think the honest anwer is not much…traders still remain cautious and even though the paper market is looking more technically positive I don’t see much in the way of large bullion buyers returning across our counter.

If you look at the 1 year gold price chart there is significant overhead resistance seen at the $1300.00 so let’s not count our chickens before they hatch – let’s hope gold remains strong and continues to confound the skeptics.

This is our usual Wednesday look at the precious metal Exchange Traded Funds – a handy way of judging sentiment.

Gold Exchange Traded Funds: Total as of 10-08-14 was 53,459,778. That number this week (10-15-14) was 53,303,728 ounces so over the last week we dropped 156,050 ounces of gold.

It might also be interesting to note that in 2013 the record high for all gold ETF’s was 85,112,855 ounces. In 2014 the record high was 56,456,599 and a new low was set today – 53,198,491 ounces.

All Silver Exchange Traded Funds: Total as of 10-08-14 was 640,249,005. That number this week (10-15-14) was 634,737,852 ounces so over the last week we dropped 5,511,153 ounces of silver.

All Platinum Exchange Traded Funds: Total as of 10-08-14 was 2,710,091 ounces. That number this week (10-15-14) was 2,723,381 ounces so over the last week we gained 13,290 ounces of platinum.

All Palladium Exchange Traded Funds: Total as of 10-08-14 was 2,980,608 ounces. That number this week (10-15-14) was 2,954,221 ounces so over the last week we dropped 26,387 ounces of palladium.

This excerpt from Ambrose Evans-Pritchard (The Telegraph) Dam Breaks in Europe as deflation fears wash over ECB rhetoric – “Bank of America said the ECB may have to take far more radical steps, pledging to violate its own 2pc inflation limit deliberately in order to break out of the vicious circle. “A commitment to keep nominal rates low for a long period does not necessarily work, and alone does not guarantee a recovery. The situation in the euro area might require more forceful action, a nominal anchor that implies the central bank committing to overshoot its inflation target,” it said.

This is almost impossible to imagine, given the political character of the eurozone. Any such move would breach EU treaty law.

It remains far from clear what the ECB intends to do. On Thursday, Mr Draghi vowed “new measures” to head off deflation if necessary, but traders are looking past the rhetoric for hard facts. The ECB’s balance sheet contracted by €10bn last week, falling back to levels of early July. Mr Draghi has yet to flesh out his vague plan to boost it by €1 trillion.

The US Federal Reserve, the Bank of Japan and the Bank of England all set clear timetables, spelling out exactly how many bonds they would buy, and the scale has been much larger in proportion to GDP. The ECB has merely given pledges, and these have since been qualified by the Bank of France, and have been openly attacked by the Bundesbank.

Germany’s five economic institutes – or Wise Men – said the ECB’s asset purchases will add “hardly any” extra stimulus to the real economy and may be unworkable in any case. They said there are not enough private securities that can plausibly be bought, and noted that a previous scheme to buy €40bn of covered bonds had run into the ground.

Analysts are watching German politics just as closely as ECB language. The rise of Germany’s AfD anti-euro party raises the political bar even further for full-fledged QE, and eurosceptics have announced their intention to file cases at the German constitutional court to block asset purchases once they begin.

The court has already ruled that the ECB’s backstop measures for Italian and Spanish debt (OMT) “manifestly violate” the EU Treaties and are probably “Ultra Vires”, which prohibits the Bundesbank from taking part. Pending cases on QE would raise questions over whether the Bundesbank might have to step aside on asset purchases.

The current circumstances are very different from July 2012, when Mr Draghi had the full political backing of the German finance ministry for his OMT rescue plans. This time he must battle critics across the whole political spectrum in Germany.

Giulio Mazzolini and Ashoka Mody, from the Bruegel think tank in Brussels, said the eurozone seems to be tipping into a “debt-deflation cycle” as rising debt and deflation feed off each other, yet the authorities remain paralyzed and still refuse to face up the gravity of the threat. “Even now, ECB officials regard deflation to be unlikely,” they said.”

The above is the crux of gold market nervousness at the present. The US has inflated to the moon but has contained the money within the banking system – so little civilian circulation – no inflation for now. But QE is coming to an end and interest rates will rise.

But where does that leave Europe? If deflation is the name of the game over there – perhaps something like the Japanese experiment – how is the US going to proceed? Well of course, they cannot without sending the European community further down the drain. That’s why even the suggestion that interest rates will not rise accordingly in the US sends gold higher.

The walk-in cash trade was just about average today – busy at times and then slower – the phones were average to slower so I still think the public is not that impressed with recent gains.

The GoldDealer.com Unscientific Activity Scale is a “3” for Wednesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Thursday – 6) (last Friday – 4) (Monday – 4) (Tuesday – 4). 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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