Gold Market Report – Gold Blinks in the Face of Higher Interest Rates

Commentary for Friday, May 27, 2016 (

Gold Market Newsletter with Richard Schwary

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

Gold market closed down $11.40 at $1207.70 in another round of selling going into the long weekend.

Fed Chair Janet Yellen’s public comments today were very hawkish – she is pleased with most aspects of this economic recovery and claims interest rate hikes are just months away. The Dollar Index moved dramatically higher – yesterday we closed at 95.14 and this afternoon we are looking at 95.74. It’s also noteworthy that crude oil seems to be holding in the $50.00 range.

Today’s close of $1,207.70 support floor for gold market which was established in March – so unfortunately a lower price scenario should be considered. If we cannot hold $1,200.00 which was established in February of this year the next support level for gold is $1100.00 and the entire push to the upside since the end of last year will be brought into question.

The biggest factor affecting the price of gold has been the continued threat of higher interest rates. This is amazing on one hand in light of world financial conditions and even the Canadians recently left their interest rates unchanged citing the wild fire problems.

It is troubling on the other hand when you consider that the US might unilaterally raise interest rates regardless of world pressure, Wall Street pressure and common sense especially because inflation is still not a problem.

Unfortunately my crystal ball is in the shop for repairs but my gut feeling is that these Federal Reserve officials must see something in these numbers that might indicate “inflation” will become a problem and so want to make sure a preemptive strike is in place.

It’s too soon to consider a drastic reduction in the price of gold because traders are still waiting for safe-haven or bargain hunting to develop. Actually I’m surprised at the sudden and fairly severe bearish posture but such is the power of the mighty American buck – gold has lost about $40.00 this past month.

Like I said however – it’s not the end of the world – gold is after all up significantly since its old lows last December ($1,050.00). The reason gold bulls are really disappointed is because this latest round of weakness takes the possibility of $1,300.00 gold completely off the table.

Silver closed $0.10 at $16.24.

Platinum closed down $14.00 at $980.00 and palladium closed down $5.00 at $537.00. will be closed this Monday for Memorial Day. Members of our staff have proudly served in the Air Force, Army, Navy and Marines – two saw action in Vietnam and lived to tell the tale. We salute, respect and remember those who served and those who gave their lives.

This from Jan Harvey (Reuters) – Gold heads for fourth weekly drop as U.S. rate view weighs – LONDON, May 27 Gold slid to an eight-week low on Friday and was heading for a fourth consecutive weekly drop as growing speculation that the Federal Reserve will press ahead with interest rate hikes hurt investor demand.

The metal fell for seven straight sessions to Thursday, its longest run of losses in more than six months, after minutes of the Fed’s latest policy meeting indicated last week that a rate rise may be on the cards sooner rather than later.

That view has been consistently supported by central bank officials this week. An increase in U.S. rates would raise the opportunity cost of holding gold, while boosting the dollar, in which it is priced.

The metal remains up 15 percent this year after a sharp first-quarter rally, but has fallen nearly 5 percent since the Fed minutes were released last week.

“After the minutes of the Fed meeting, rate hike speculation returned,” Commerzbank analyst Carsten Fritsch told the Reuters Global Gold Forum on Friday. “(The) gold price is under renewed pressure as a result.”

Fed Governor Jerome Powell, a voting member of the U.S. central bank’s rate-setting committee, said on Thursday he felt the economy was on a “solid footing” and within reach of the Fed’s inflation goals.

The Atlanta Fed meanwhile predicted the U.S. economy is on track to grow by a 2.9 percent annualized rate in the second quarter.

The gold market is awaiting further direction from comments from Fed Chair Janet Yellen later on Friday.

“Expectations for summer rate hikes from the Fed have changed over the past couple of weeks, and looking at that, combined with the dollar being off its lows, equities near the highs, and yields higher, it’s a warranted move in gold,” UBS analyst Joni Teves said.

“That’s especially as you’re coming from quite a big build-up in positioning. Last week’s CFTC data showed that net longs were around 98 percent of the record high.”

Our Patented Employee Survey – Gold’s Direction Next Week?

Of course it’s not really patented but we do have some fun along the way. This is what the employees think 6 believe gold will be higher next week – 2 think gold will be lower and 1thinks it will be unchanged.

Our Patented Customer Survey – Gold’s Direction Next Week?

Like the employees our customers were given three choices – up – down – unchanged. We limited the survey to a random sampling of 100 transactions – unscientific but worth considering because these people took action: 39 people thought the price of gold would increase next week – 49 believe the price of gold will decrease next week and 12 think prices will remain the same.

Precious Metal Closes & Dollar Strength – May 23 – May 27

Gold Blinks in the Face of Higher Interest Rates

If you have been reading the Almost Famous Gold Newsletter for anytime at all you are already familiar with my “most famous chant”. I have said for years that this credit binge will end badly if not curtailed in a timely fashion. Well the US and other world powers have been bashing away at lose money policy since 2008 and the party is still raging. It’s now stating the obvious that something isn’t right in Kentucky. The reason me and others have stopped beating this drum is simple – to date nothing spectacular has happened. But once again let me affirm my belief that there is never a free lunch – sooner or later the devil will appear. Consider a position in real gold and silver bullion to insulate yourself from the obvious.

This from Tyler Durden (ZeroHedge) – “The System Itself Is At Risk” Bill Gross Warns, Shorts Credit As “Day Of Reckoning Is Coming” – We were surprised to hear none other than legendary bond investor Bill Gross, who made billions going long bonds, admit to Bloomberg’s Erik Schatzker last night that he is starting to short credit, “a position that he said runs contrary to his instincts and training as an investor.”

bill_gross_janusThe reason why Gross, who called the Bund blow up last year with uncanny precision, is turning bearish on asset classes that Mario Draghi is directly supporting – and as such Gross is fighting at least on Central Bank – is peculiar: he thinks the time of central bank dominance is almost over. Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said he is moving to sell credit risk and insurance on market volatility rather than buying long-term debt, because he believes a day of reckoning will come when central banks will no longer be able to prop up asset prices and investors will withdraw from markets.

“It’s really hard to change your psychological makeup and to be a hedge manager that is comfortable with being short,” he said in an interview with Bloomberg’s Erik Schatzker. “I’m working on it, because I’m an investor that ultimately does believe in the system, but believes that the system itself is at risk.”

The underlying thesis behind Gross’ bearish take is simple: stimulus from central banks worldwide has artificially pushed up values of stocks and credit, which has made Gross cautious on such assets, he said.

Eliminating credit as an investment means “not buying stocks, not buying high-yield bonds.” Gross said. “It means going the other way, which comes at a price.”

Gross’ shift in position in odd because Janus’ unconstrained fund (up 2.6% YTD) which Gross co-manages with Kumar Palghat, invests in fixed-income and derivative instruments. It already has a rather low effective duration of 1.13 years, a short-term position that aims to reduce exposure to losses if rates rise. If Gross is indeed going net short, the duration will drop even further.

It’s becoming increasingly difficult for money managers to justify their fees or their jobs, Gross said. “I know that my investors want three, four, or five percent, or else they can keep it in the bank or stuff it in their mattress.” he said.

Which perhaps explains Gross’ transition to a Michael Burry-style investing mentality: betting on the “fat tail” event. Gross also had some comments on Japan, and the entire central bank endgame.

He said that the only way for Japan to eventually cut its debt burden is for the central bank to acquire it and forgo repayment, a scenario that may play out in similar ways in other countries.


“I think that’s where they’re headed. I’m not endorsing that. I think at some point, Japan will basically buy up all its debt and the central bank will forgive the treasury and try to move forward with that. I see no other way out for Japan.”

“Ultimately, they could own all the market,” he added during his Bloomberg interview. “At that point they could say to the fiscal side, ‘Olly olly oxen free. You don’t have to pay us back. Or we’ll extend your debt to 50 years with a zero percent coupon and at that point we’ll essentially eliminate the entire obligation.’”

Gross said such a move would have dramatic and damaging consequences for Japan’s currency, savings rate and private sector. Japan has unique demographic factors that exacerbate its economic dilemma, but other nations will face similar choices, he said.

He believes it is also the endgame. “Japan’s a pretty good picture for the rest of the world, maybe five or 10 years ahead. I have a sense that that’s the route central banks will pursue. They’ll keep on buying debt, keep interest rates low and then ultimately the treasury doesn’t owe them anything.”

What should central banks do?

Central banks, he said, need to start raising rates to restore the right incentives for investors. Gross said the Federal Reserve needs a leader similar to Paul Volcker, who raised interest rates in the 1980s despite popular opposition.

“We need another Volcker,” Gross said. Unfortunately that won’t happen.

Walk-in cash business was swamped until after lunch – a combination of a generally weaker markets and going into a long weekend. The phones never got out of second gear. 

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

Disclaimer – The content in this newsletter and on the website is provided for informational purposes only and our employees are not registered financial advisers. The precious metals and rare coin market is random and highly volatile so it may not be suitable for some individuals. We suggest before deciding on a course of action that you talk with an independent financial professional. While due care has been exercised in development and dissemination of our web site, the Almost Famous Gold Newsletter, or other promotional material, there is no guarantee of correctness so this corporation and its employees shall be held harmless in all cases. (California Numismatic Investments, Inc.) and its employees do not render legal, tax, or investment advice.

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