Commentary for Thursday January 15th, 2015 (www.golddealer.com)

richard schwary thumb Gold Market Newsletter : Gold Closes Lower as the Dollar Strengthens

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

Gold on the Comex today closed up $30.30 at $1264.70 with a slightly weaker aftermarket. It was quiet in overnight Hong Kong trading but jumped during the London session and saw strong follow through into domestic COMEX trading. This push to the upside in gold was created in a surprising move by the Swiss National Bank.

The Swiss decoupled the Swiss Franc from the euro. The two were initially pegged in 2011 to keep the Swiss Franc from becoming a default safe haven currency.

Today’s action by SNB was not announced – violating the game rules of “communication first” between central banks and the International Monetary Fund. This courtesy rule is however problematic because if the Swiss announce first the result is the same as the rule change.

This sudden change in the rule book came from the Swiss (who are sitting on a very large number of Swiss Francs in reserve, the result of defending their currency against the euro) because of suspected upcoming changes within the European Central Bank.

The move caused a huge rally in the Swiss franc relative to the euro – up as much as 30% today before settling. Such changes between currencies can create havoc within international finance.

swiss_francA typical change between currencies over an economic adjustment usually produces a percentage point or two change between the currencies. So this latest SNB move was huge and might have significant consequences confirming ongoing fears that the European economy is not creating enough traction to reverse deflationary trends.

This added to an already difficult situation in Europe as their continued economic problems have pushed the European Union toward a formalized quantitative easing. This US like response to recessionary forces has been embraced by EU President Mario Draghi for some time but his exact plan has never been formulated. The next EU meeting will be at the end of January so most feel some sort of bond buying process will be implemented – supported by the central banks.

This and the problems of potential Greek default have increased European tension and are responsible for driving gold higher in safe haven buying. This latest bull move in gold began in early January as gold first stabilized around $1180.00 and then began moving higher eventually running into recent overhead resistance around $1240.00.

Gold has since tested the $1240.00 level on two recent occasions before failing and moving lower on profit taking. Most analysts expected lower prices this morning but the move by the Swiss National Bank has revitalized this recent bullish leg well above the last overhead resistance mark at $1250.00 so the bulls are back in charge on the short term.

Silver closed up another quiet $0.12 at $17.07. Another surprising move as I would have expected a bigger jump – but remember we are now significantly higher than recent lows so traders will be looking for a bout of profit taking.

This goes into the “ for what’s it worth” section: Within the last year or two some dealers have begun carrying “copper” rounds and bars. An average price on line is around $1.00 an ounce. Now there have been times in last thirty 30 years that investment in copper has come up on the radar – when real copper cents were discontinued for example. And at times GoldDealer.com has been asked why don’t you carry copper rounds?

We don’t carry copper rounds for practical reasons – but let’s assume you want to invest in copper. The best approach is not with copper 1 ounce rounds because you have to pay for those – consider rather the 40% silver Kennedy clad half dollar (1965 – 1969).

Because of the coin composition you get 440 ounces of pure copper in a full bag or 220 ounces of pure copper in a half bag. So why pay for a copper when you can invest in cheap 40% silver and get the copper thrown in for free? In today’s world investing in copper does not make much sense but contrarian folks might have something – years down the road. So if you have time to wait it may not be a bad idea.

Platinum closed up $24.00 at $1262.00 and palladium closed lower off $14.00 at $766.00.

Chicago Mercantile Exchange reports for the last 5 trading days – so we are looking at the trading volume numbers for the February Gold contract: Thursday 1/08 (202,844) – Friday 01/09 (197,479) – Monday 01/12 (189,877) – Tuesday 01/13 (184,045) and Wednesday 01/14 (178,496). On the higher end of the range but coming off somewhat meaning volume numbers are decreasing. Keep in mind however we are looking backwards and these do not contain today’s action – which is probably substantial.

This from Chris Mooney (Washington Post) – Why there are so many kooky conspiracy theories about oil? – Russian President Vladimir Putin heads a meeting with senior military officials at the Defense Ministry’s control room in Moscow, Russia on Friday, Dec. 19, 2014. (AP Photo/RIA Novosti, Alexei Druzhinin, Presidential Press Service)

The sudden, dramatic drop in oil prices has changed the world almost overnight. Russia’s facing an economic crisis, and U.S. consumers are saving a fortune at the pump. The reasons for the sudden swing are not particularly glamorous: They involve factors like supply and demand, oil companies having invested heavily in exploration several years ago to produce a glut of oil that has now hit the market — and then, perhaps, the”lack of cohesion” among the diverse members of OPEC.

But now, right on cue, out come the conspiracy theorists —including Vladimir Putin — to tell us what’s really going on.

Recently, Putin floated the idea that the oil price drop is the result of a U.S.-Saudi plot to hurt his country. “We all see the lowering of the oil price. There’s lots of talk about what’s causing it,” Putin said recently. “Could it be the agreement between the U.S. and Saudi Arabia to punish Iran and affect the economies of Russia and Venezuela? It could.”

With these remarks, Putin joined a long tradition of conspiracy theorists who have surmised that the world’s great oil powers — whether countries or mega-corporations — are secretly pulling strings to shape world events. Prior oil-related conspiracies abound: 9-11 Truthers and JFK assassination conspiracists alike have sometimes given oil interests or companies an integral role in their theories.

Such thinking has a long history. “During the 1960s and 1970s, when the American conservative movement was taking over the Republican Party, the Rockefeller family was seen as this massive manipulator that controlled America from backstage,” says Robert Alan Goldberg, a professor history at the University of Utah author of the book “Enemies Within: The Culture of Conspiracy in Modern America.” The Rockefellers owed their wealth, of course, to…that’s right, oil.

To understand why oil features in so much conspiratorial thinking, you first need to understand conspiratorial thinking. There are several key things to remember here, the first being that on a personality level, conspiracists tend (not surprisingly) towards distrust or even paranoia, but also towards feeling powerless and cynical. So they tend to think that manipulative people are keeping them down and that there are wheels-within-wheels: Elaborate plots, run by unscrupulous schemers.

Furthermore, the psychological research suggests that conspiracists don’t just believe one conspiracy theory. They often believe lots of them. And many of the conspiracies have similar structures — suggesting there are deeply powerful but unseen players working behind the scenes to shape world events.

“A lot of conspiracy theories take as their premise that there’s a small group of people who are plotting to control something, to control the government, the banking system, or the main energy source, and they are doing this to the disadvantage of everybody else,” says University of California-Davis historian Kathy Olmsted, author of “Real Enemies: Conspiracy Theories and American Democracy, World War I to 9/11”.

There is also usually some initial plausibility to conspiracy theories, says Goldberg — before they go completely off the rails. “There’s this sense of legitimacy to conspiracy theories, I think we all agree that great wealth brings great power,” says Goldberg. “But what flips into the conspiracy theories is this sense of malevolence.”

And now you can maybe see why oil fits the bill so well:

1. It’s the perfect lever for shifting world events. If you were a mad secret society with world-dominating aspirations and lots of power, how would you tweak the world to create cascading outcomes that could topple governments and enrich some at the expense of others? It’s hard to see a better lever than the price of oil, given its integral role in the world economy.

“Oil has been the life blood of the world economy for more than a century,” says Goldberg, paraphrasing the thinking of a conspiracy theorist. “Those who seek world domination – by fair means or foul – will seek to control supplies and prices in order to disrupt countries; foster recession, depression, run away inflation or deflation; weaken their resistance to takeover.”

2. Governments really do depend on oil revenues — and are deeply involved in oil companies. And then there’s the veneer of superficial plausibility. From Russia (which mostly owns Rosneft) to Brazil (which mostly owns Petrobras) to Norway (which mostly owns Statoil) to Saudi Arabia (which owns the gigantic Saudi Aramco), oil and governments are very closely entangled indeed. Any plotting or any conspiracy in this context could, indeed, have world wide consequences. So the conspiracist’s belief draws on an existing body of real evidence, before running off into surmise, conjecture, and the highly implausible.

3. Oil producers really do coordinate. And then, there’s OPEC, which is widely referred to in the press as a “cartel,” and which states up front that its mission is to “coordinate and unify the petroleum policies” of its 12 member countries, which collectively produce 40 percent of global crude, and export 60 percent of it. Again, there’s that veneer of plausibility to the idea of some grand oil related strategy — before the conspiracist goes off the rails. After all, as Michael Levi of the Council on Foreign Relations argued in the Post, OPEC is not actually that coordinated — that may be its problem.

4. Struggling leaders need somebody to blame. In Putin’s case, finally, we must recognize that a conspiracy theory like the one above is politically expedient — especially in newly perilous economic times. “Governments use conspiracy theories in order to convince their people to support them,” says Goldberg. There’s no better way to rally support than to suggest to your people that outside forces — not supply and demand, but malicious schemers — are out to get them.

So in sum, with a surprising and dramatic event like this year’s oil price decline, it would be shocking if it did not generate conspiracy theories. Humans believe them all too easily. And they’re a lot more colorful than a more technical (and accurate) story about supply and demand.

The walk-in cash trade was busy today and so were the phones. Not overly so but enough to wake everyone up. This upswing in the price of gold is helpful is because it should remind everyone that trying to guess an absolute bottom in a defensive market is murder.

This big pop to the upside in gold fell out of the sky today. The same thing might happen if Europe goes over the cliff or inflation suddenly comes up on the radar. The result relative to the price of gold will happen overnight and drown the bears – just like deflation and financial recovery drowned the bulls.

So it makes sense to build your precious metal positions on weakness and diversify your holdings. I still would not get carried away with gold – at this time perhaps 10% makes sense for insurance money. If things continue to improve and gold remains sleeping there is no harm done – but if the financial waters encourage safe haven buying you can always increase you total position.

The GoldDealer.com Unscientific Activity Scale is a “ 3” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Friday – 2) (Monday – 4) (Tuesday – 2) (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 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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1 COMMENT

  1. Gold is going slightly up for now, but I think it’s inevitable that it will drop below 1k at some time in the next few years. It’s value in relation to silver is overblown, and silver is very low right now. It’s hard not to think gold wont drop much more. I know this goes against what mining costs are and such, but I just think the price disparity is too great. Sure, silver may be very undervalued, but even if it’s 40 dollars an ounce, if gold stayed at 12 or 1300 the price disparity still seems out of whack.

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