Commentary for Wednesday, Oct 16, 2014 (www.golddealer.com)
By Ken Edwards and Richard Schwary of California Numismatic Investments Inc.………
Gold closed up $5.70 today at $1244.00 so we made up for Friday’s small loss and added a few bucks on top. But my comments on Friday stand in that the market while short term technically stronger from its most recent low still looks like they are having trouble in the $1240.00 range.
The public however seems a bit more comfortable and we are seeing a few rather large buyers reenter the gold bullion market – perhaps testing the waters.
It appears the Chinese continue to buy gold. This according to BullionStar.com – Singapore – Chinese gold demand 67 tonnes in five days – The Chinese national holiday, The Golden Week, is over and the latest data from the Shanghai Gold Exchange (SGE) shows the Chinese have been buying extraordinary amounts of gold before and after this holiday. The SGE was closed from October 1 to 7, the latest SGE withdrawal numbers cover September 29 and 30, and October 8, 9 and 10. In these 5 days 68.4 tonnes were withdrawn from the SGE vaults (in the mainland and the Shanghai Free Trade Zone).
So which side of the fence are you on? Do you believe last Thursday’s shakeout in stocks was just a hiccup? Remember Europe the night before was showing a lot of red cards and the overnight market was shaky. Then Bullard got in the act in early domestic stock trading and the waters calmed – remember US economic data is not that bad and there is still optimism on Wall Street. But that hiccup was rather loud – the DOW plunged almost 500 points before hearing the Federal Reserve shill and recovering with a small frown.
The point being is that if you believe this downward move in the DOW was just profit taking – it has been on a tear of late – and Europe is really no worse off than it has been since the 2008 slide then the next meeting of the Federal Open Market Committee will not be of much concern to you and your guess as to the price of gold would be – flat to trending lower.
I think the next FOMC meeting is October 28th and 29th – as usual that is a Monday and Tuesday and they release their decisions after the market close on Wednesday – we don’t have to be too precise here because we are coin dealers and not CNBC analysts.
Traders will ponder whether the Federal Reserve will follow through with what they promised – the end of quantitative easing. I think Yellen is down to $10 billion a month in bond purchases so in the scheme of Federal spending we are not talking about a lot of money – and besides it’s your money not theirs.
Some thinkers outside the box believe they will continue the financial largess – afraid that pulling the plug will create waves in Europe. I think they will end quantitative easing as predicted – but assure the great unwashed that interest rates will remain low for the foreseeable future. In this case that may be a lot longer than anyone considered just a year ago. Backing away from this Keynesian nightmare is dangerous because creating fiat paper money is not the secret path to financial success.
Finally ending QE will create the usual drag on gold but not to the extent that most believe because the markets have already absorbed much of the reduction.
Back to my original question about the fence – which side do you like? If you think the Federal Reserve will capitulate and continue QE – gold will remain firm and perhaps test $1300.00. So for the short term your fate is in the hands of the Federal Reserve – and maybe in the long term too if they continue to inflate.
Silver closed up a quiet $0.02 at $17.30 and the physical market remains steady.
Platinum closed up $6.00 at $1268.00 and palladium was also higher by $5.00 at $761.00. This might be interesting – we are not seeing much in the way of trading gold bullion for platinum bullion even though they are very close in price. We are however seeing a great deal of trading gold bullion for silver bullion.
This from Ed Steer’s Gold & Silver Daily / Doug Noland (www.prudentbear.com) – The Downside of Do Whatever it Takes – At about 10:20 a.m. on Thursday, with European markets tanking and U.S. equities sinking, St. Louis Fed president James Bullard began to be interviewed on Bloomberg Television. Bullard, generally considered a FOMC moderate, had more recently shifted to the hawkish contingent. This ensured that his Thursday morning flutter to join the doves provided notable relief to the markets. The key Bloomberg headline (10:25 am): “Bullard Says Fed Should Consider Delay in Ending QE.” Nervous markets had been awaiting a signal of support from the FOMC. From the market’s 10:18 a.m. low to Friday’s high the S&P500 rallied 3.4%.
San Francisco Fed chief John Williams actually got things going Wednesday with his comment (Reuters interview), “If we really get a sustained, disinflationary forecast … then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider.” It was close enough to Bernanke’s summer of 2013 assurances that the Fed would “push back” against a tightening of financial conditions. As a longtime close advisor to Janet Yellen, Williams’ views matter to the markets.
The QE issue is a fascinating one. History is rather clear: once major monetary inflations begin they become nearly impossible to stop. I certainly don’t expect the ballooning of the Fed’s balance sheet stops at $4.5 TN. There will be no “exit.” I’m thinking “QE4” might be ushered in with something similar to the Fed’s statement before the stock market opened the day following the 1987 crash: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”
The bulls absolutely fixate on the Fed (and its cohorts) reliably backstopping the markets – “QE infinity”. I could only chuckle when reading a Wednesday UK Telegraph headline: “World Economy So Damaged It May Need Permanent QE.” Anyone asking how it became so damaged?
From a real world perspective, by now it’s apparent that QE doesn’t work as prescribed – as the propaganda asserts. Global central banks have added Trillions of liquidity and the global economy and markets are as fragile as ever. The Fed has “printed” almost $3.6 TN in six years and the U.S. economy remains extraordinarily vulnerable. Arguably, U.S. securities Bubbles are an accident in the making. Incredible QE in Japan has had only modest economic impact, with sinking stocks now weighing on confidence. In the past two years of incredible global monetary pumping, disinflationary forces have gathered momentum. Many commodities are trading at multi-year lows. Now global market participants and pundits clamor for aggressive ECB QE, while blasting what is commonly viewed as mindless German austerity. The hope has been that ECB QE would sustain the global Bubble. Mindfully, the Germans don’t want to play ball.
If only Bubbles lasted forever. And, unfortunately, the longer they persist and the bigger they inflate -the more problematic the unavoidable collapse. This important reality is ignored at everyone’s peril. Determination to avoid collapse only ensures greater and more precarious Bubble distortions and maladjustment. “World Braces as Deflation Tremors Hit Eurozone Bond Markets,” read another UK Telegraph headline. And Bullard and the global central bank community fret a “collapse in inflation expectations.” It is important to recognize that disinflation and collapsing “inflation expectations” are symptomatic of a bursting global financial Bubble, providing early evidence of what will be a spectacular failure in experimental “activist” central banking.
Predictably, the calls for more “money” printing turn boisterous and increasingly desperate. But more QE only delays the day of reckoning. I guess I am an “extremist” for stating that printing “money” out of thin air and inflating global securities markets are not going to resolve deep structural deficiencies in global Credit and economic “system”.
The above quote is only a small part of this interesting post on the Prudent Bear. You really should bookmark this site if you want to understand how serious world financial problems have become. I’m not saying we are facing a nuclear winter – that is not part of my personality but a quote at the beginning of Noland’s article is worth repeating – “Anyone who isn’t really *concerned* doesn’t understand the situation.”
Noland finishes as follows: I expect the markets will be confronted by myriad troubling European issues. From the markets’ perspective, the Ukraine crisis has been resolved. Putin buckled under the pressure of Western economic sanctions, in another win for contemporary finance. I suspect this thinking is way too optimistic. Actually, I believe Putin is determined that Western sanctions don’t win. And there were some rather ominous warnings this week regarding the potential consequences of “blackmailing” Russia. So don’t be surprised if Putin turns the tables and blackmails the West (i.e. if sanctions are not lifted there will be a renewed land grab in Ukraine, along with a more belligerent stance generally).
And while the focus was more on market volatility and the Ebola virus, the geopolitical backdrop worsens by the week. Putin and Beijing seem to be singing from the same hymnbook, as the Chinese turned more outspoken in blaming the U.S. for the Hong Kong protests (and other “color revolutions”). The situation in the Middle East becomes more alarming by the week. Overall, the gap between disconcerting global prospects and ebullient securities prices is as wide as ever. Clearly, central bankers would hope to maintain this gap – to defend the Truman Show World. And I don’t believe it is an extremist view to see this as one big financial scheme. Moreover, it’s not extremist to fear how things will play out when confidence wanes – when this scheme falters. Actually, the extremists are the inflationists that believe printing money will resolve the world’s ills. The Fed has been neither “wise” nor “courageous.” Have we not seen enough already?
Interested in the gold standard? Read this post from David Stockman/ZeroHedge written by Keith Weiner – The Problem With Central Bank Money Printing Is A Debt Spiral, Not Runaway Consumer Inflation – After President Nixon’s gold default in 1971, many people advocated a return to the gold standard. One argument has been repeated: consumer prices are rising. While this is true, it wasn’t compelling in the 1970’s and it certainly doesn’t fire people up today. Rising prices—what most people think of as inflation—is a dead-end, politically. People care about rising prices, but not that much.
There is a greater danger to fixating on this one argument. What if you make a really bad prediction? The Fed did massively increase the money supply in response to the crisis of 2008. Many gold advocates predicted skyrocketing prices—even hyperinflation. Obviously, this has failed to materialize so far.
Preachers of imminent dollar collapse have lost credibility. Worse yet, they have poisoned the well. People who were once receptive to the benefits of gold have lost interest (their selling has exacerbated and extended the falling gold price trend). And why shouldn’t they walk away? They can see that some Armageddon peddlers have a conflict of interest, as they are also gold and silver bullion dealers.
The gold standard has nothing to do with buying gold in the hopes that its price will go up. It has little to do with the price of anything—gold or consumer goods.
There’s no doubt that the fiat dollar harms us in many ways. However, the chronic rise of prices is the least of the wounds it inflicts. If prices could rise for a hundred years, then there’s no reason they couldn’t go on rising for another century—or a millennium. There is no finite endpoint for rising prices.
There is a finite limit to the abuse of credit, before the dollar will fail.
The interest rate is a prime driver of systemic failure. Interest has been falling for 33 years, since its peak in 1981. What happens when it hits zero? I don’t refer to the Fed funds rate, discount rate, or any short-term rate. I mean the 10-year bond or even the 30-year bond. In the U.S., the 10-year bond pays 2.3%. In Germany, it has already fallen to 0.91% (not a typo, 91 basis points). In Japan, it’s close to half of that, at 0.5%.
Naturally, the cheaper the rate, the more it encourages borrowing. When the rate keeps falling, the borrowing keeps rising. Is there a failure point for debt?
Along with encouraging borrowing, low and falling interest discourages savings. Isn’t that perverse, to discourage saving? What happens when an entire society doesn’t save?
Our financial system has suffered an escalating series of crises. Each crisis has grown out of the fix applied to the previous one.
The crisis of 2008 was different. No matter what the Fed has attempted, they have not been able to create even the temporary appearance of recovery (other than in asset prices). It’s not merely that growth will be slow, or slower than it should be in some theoretical ideal economic world.
There will be no recovery while our monetary cancer rages, unchecked. We must rediscover the gold standard, which is the only cure.
Our ancient ancestors adopted money to enable them to coordinate their productive activities in their economies. They could only go so far using barter, but money made possible the division of labor and hence specialization. Lubricated by money, there is no limit to economic growth and the development of wondrous products. For example, today we have access to the Internet on a thin handheld device.
The dollar still does perform this function, which is why it hasn’t collapsed yet. However, it is slowly failing. It is increasingly imposing perverse incentives. The dollar is hurting us by encouraging us to destroy precious capital in numerous ways.
The Gold Standard Institute is sponsoring an event in New York City on November 1. I will be speaking about the destruction being wrought by the dollar, including a detailed discussion of the problems mentioned above. I will also propose a practical transition path to the gold standard.
You are cordially invited to join us for a presentation of ideas you won’t get anywhere else. New York Gold Conference – November 1, 2014 @ 1:00 pm – 5:00 pm – 3 West Club – 3 West 51st Street – New York,NY 10019 – Cost $50, $25 for students.
The walk-in cash trade was steady and so were the phones. The general public seems content with this market and continues to buy both gold and silver bullion. I still wonder about why we seem to be hovering around $1240.00. There is enough tension in the air to push prices higher but we have not seen a big follow through.
The GoldDealer.com Unscientific Activity Scale is a “5” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 4) (last Wednesday – 3) (last Thursday – 4) (last Friday – 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 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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