Gold Follows Through – Higher on Short Covering and Nervous

Commentary for Wednesday, Oct 9, 2014 (

richard schwary thumb Gold Closes Lower then Reverses after Dovish FOMC Comments

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

Gold closed up a strong $19.30 at $1224.60 as the overnight Hong Kong and London markets confirmed their strength after the release of September’s FOMC minutes yesterday.

While this latest move might yet turn out to be a tempest in a tea pot the Federal Reserve is genuinely worried about raising interest rates now that its quantitative easing program is drawing to a close.

They should be but this latest information might have created a bit of an overreaction – probably because the committee is trying to move away from describing what it is trying to accomplish to something more mathematical relative to what the public sees and hears.

The Federal Reserve is also worried about the bigger global slowdown. Talked about but basically on the back burner for sometime now – still the EU is also nervous. And the simmering pot with Russian sanctions is not helping – so there are plenty of cross currents relative to gold.

This pop in the price of gold is nonetheless interesting when you consider that the dollar moved higher (up 0.24%) and oil continues to lose value.

Silver followed gold higher up $0.35 at $17.36 and the physical business remains steady in the small to mid-size player range – silver bullion whales have still not returned.

Platinum was up $11.00 and palladium was higher by $4.00 at $800.00. Rhodium remains unchanged at $1215.00 and we are seeing some smaller buying of the Baird 1 oz Rhodium Bars.

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 10/02/ (148,824) – Friday 10/03 (186,087) – Monday 10/06 (147,758) – Tuesday 10/07 (142,509) and Wednesday 10/08 (192,007). These numbers are trending toward the higher end of the range – expected – this market remains confused and traders edgy.

This from Reuters (The AGE Business Day/Ed Steer) US Fed in no rush to increase interest rates – “The Federal Reserve’s debate on its interest rate guidance heated up last month, with several officials showing concern about misleading investors and pushing for a more data-dependent approach, according to minutes from its last policy meeting.

fed_sealBut as the Fed grapples with how to communicate its view on hiking rates, the minutes also show concern about the rising dollar, slowing inflation, and economic turmoil in Europe and Asia, factors that support the US central bank’s current of keeping policy accommodation in place for the near future.

“The concern was raised that the reference to ‘considerable time’ in the current forward guidance could be misunderstood as a commitment rather than as data dependent,” said the minutes of the Fed’s September 16-17 meeting, which were released on Wednesday.

The US dollar, which has risen in the last 12 weeks, trimmed gains from earlier on Wednesday. Yields on Treasury bonds dipped, while US stocks rose, suggesting investors read the minutes as dovish.

In its September 17 statement, the Fed’s policy-setting committee repeated its assurance that rates would stay ultra-low for a “considerable time” after a bond-buying stimulus program ends, a pledge it has kept in place since March. The bond buying program is set to end this month.

The extent of the debate present in the minutes suggests the committee could move as soon as its upcoming meeting on October 28-29 to change its description of when it may begin to lift rates. It has held benchmark overnight borrowing costs near zero since December 2008.

The minutes also showed signs of concern from a “couple” of meeting participants that the strengthening US dollar could hit parts of the economy and cause longer-term inflation expectations to move slightly lower.

In an unusual move, the Fed acknowledged its concern that the market seems to be expecting a slower pace of interest rate hikes than the US central bank itself is predicting.

“The probability that investors attach to such low interest rate scenarios could pull the expected path of the federal funds rate computed from market quotes below most Committee participants’ assessments …,” according to the minutes.”

The two big factors pushing the price of gold today are dollar strength and an answer to just when the Federal Reserve will begin to raise interest rates. The above is the reason that gold did an about face yesterday and remains strong today. The Reuters article was interpreted to mean that the Fed will not be raising interest rates anytime soon and so the gold bulls were happy.

Of course anything that supports the price of gold is good right? After all we are all in the physical business of owning the stuff. But there is a darker side to this short term rise in the price of gold. That being that most economists believe the US cannot stay at near zero interest rates for ever and sooner or later a “normal” range must appear.

In 1980 the Federal Reserve managed to facilitate unheard of rates (15% or more) in an attempt to quell rising inflation. Nothing could compete with this rate and so gold was hammered and the resultant long winter lasted for 20 years.

So what’s different today? You could begin with the huge rise in available money still penned up in US banks. But I think a more appropriate thought is that today’s gold bullion investor just does not trust the government to the extent it did in past generations.

Still the rising interest rate threat holds great sway and like the strong dollar will create problems for the price of gold on the shorter term.

gold_coin_barIn the past 30 days gold has moved steadily lower from the $1260.00 level making a short term bottom around $1190.00 before reversing direction and moving sharply higher into the $1220.00 range.

There is a great deal of agreement that the $1180.00 level is likely to hold in this most recent price unwinding but the short money is not through with pressing this bet. After the Fed’s reaffirmation that interest rates will remain low for now and the subsequent move to higher ground the very short action supports a minor bullish trend – but we see considerable short term resistance at $1220.00.

So unless gold can break considerable higher – into the most recent $1260.00 range this recent price action looks faulty and I suspect the return of another bear market raid.

Let’s wait and see what happens and keep in mind that real physical demand both from India and China could dramatically alter this picture – but both of these sources are very market savvy and capable of using this price weakness to further support their overall plan.

You have not heard the end of more gold into India created by her industrial development and more gold into China because of her plan to bring her currency into the modern age and perhaps compete with the US dollar. Don’t laugh at this idea – the IMF has already claimed the Chinese economy is bigger than the US and her gold reserves continue to rise.

The following is from Paul Nathan ( and is worth the read especially because of the confusion within the gold industry. Perhaps it is not gold that has a problem? Perhaps it is doing just what it always does – forecast poor monetary decisions. Gold Predicted Falling World Growth and Inflation: What it’s Saying Today – My exposure to resource stocks is as low as it has been in recent history and still, I’m nervous. Things are happening that shouldn’t be. The last time I said that was last July when I turned bearish and defensive on gold.

And here in October I’m sensing the same thing. Let me repeat my thesis: that the world economy is moving toward deflation and recession and the realization of this is just dawning on most market participants and that’s why stocks are falling. The IMF just announced a downgrade to their world growth estimates. Analysts suddenly fear deflation and recession abroad and are beginning to blame that for the stock market decline. That’s a first. They have finally come around to my way of thinking that falling world growth is a real threat to the US and will affect our growth rate here at home and therefore, corporate earnings.

Gold has proven to be a good barometer of future growth and inflation rates and caught these developing trends months ago. The stock market just caught on, hence the huge triple digit losses of late.

At the beginning of the year gold was selling at 1180, its lowest level to that point, even though US growth was moving up briskly at a 4% rate. What gold was forecasting was the coming drop in growth in the first quarter which ended down almost 3%. Gold rose from there to 1382 in March forecasting a rebound in growth in the US and abroad and an increase in inflation domestically and internationally even as growth was plummeting 2.9%.

What gold saw was a reversal in the deflationary/recessionary trend toward higher inflation and world growth ahead. And, indeed that’s what happened. But in July, at the peak of new inflation fears and a good rebound in growth to over 4%, gold began to fall. It fell from 1340 back to almost where it is now and where it began at the first of the year. What gold was predicting was a return to the deflationary/recessionary bias that plagued the world in 2013 and early 2014. And here we are today with that very scenario hitting the headlines on Wall Street and around the world.

So what is gold telling us now? It is holding just above its December low, and if it can hold here we may see some stability in currencies, interest rates, and the commodity and stock markets. As of this writing gold has regained the 1200 level, and copper is holding above the 3 handle. But a breakdown of such levels could spell serious trouble ahead. Oil has fallen below 90 dollars a barrel as interest rates continue to fall and stocks are down hard in what could be the third consecutive week of stock market losses.

The IMF downgrade of its world growth rate may be a still absurdly high rate if markets continue to plunge. Germany just released a surprising negative report on industrial production which plunged an unexpected 4%. Italy may be in recession already, and France is a basket case. Then there is Japan whose GDP fell 7% and China whose growth rate is suspect. Here in the US the news has been much better although it was just reported that consumer credit is falling. And concerns about the real estate market are surfacing.

We need to stabilize here. If markets continue to break to new lows it could mean serious trouble ahead for both the financial system and the world economy. A continuation of present trends, especially abroad, can be extremely painful in the future and is already spreading to the US.

I’ve said many times in the past that I believe the Fed and most other central banks are too tight monetarily. A return toward deflation and recession are testimony to that fact. Our money supply based on M2 has stagnated, taxes are too high, and controls and regulations impose costs on all consumers and this at a time when real wages and incomes are falling. Gold and the entire commodity sector are telling governments to loosen up. Buying bonds has not and will not keep recession and deflation at bay.

The Eurozone, Japan, and China are no better off today than they were 5 years ago. And the US is undergoing the worst recovery in its history. Obviously something has to change. It’s time for governments and central bankers to re-think their monetary theories and fiscal policies.

Post Script. The Fed minutes just came out and indicated concern over falling growth and inflation rates. This is bullish for gold and for the markets and economies of the world IF these concerns are followed up by actions and not just words by governments and central bankers around the world.

There was a decided slowdown in both the walk in cash and national phone business today.

The Unscientific Activity Scale is a “6” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Friday – 7) (Monday – 5) (Tuesday – 8) (Wednesday – 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 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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