Gold Market Commentary: Gold Modestly Lower on a Stronger Dollar

Commentary for Friday, November 3, 2014 (

richard schwary thumb Gold Markets Hammered as the Bank of Japan Announces Fresh Stimulus

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

Gold closed down $1.80 today at $1,169.30 reacting to a very strong dollar and not much follow through from Friday’s big down day, which saw gold off $27.00 on the BOJ announcement of further quantitative easing.

The Dollar Index traded in a range between 87.02 and 87.41 – we are now around 87.09. To give you an idea how strong the dollar is consider that the Dollar Index 52 week high is 87.41.

I think everyone is waiting for the other shoe to fall considering Friday’s weakness – the technical picture belongs to the bears and there is zero fear trade. Still we are seeing fairly strong physical action across the counter – almost all buying in the small to mid-size range with a few big boy deals along the way – no whales as yet.

According to GFMS-Thompson (Reuters) the average cost of production at gold mines is $1,350.00. This number is interesting in that sustained trading below that number would eventually close mining operations especially those which are operating in the marginal range.

The latest Switzerland Gold Initiative Vote survey on the referendum shows 38% (yes) and 47% (no) with 15% (undecided). Earlier polls have shown a more positive outlook but most figure the referendum will not pass. Passage would require Switzerland to purchase 1500 tons of gold over a three year period – which is about equal to 12% of the annual worldwide production.

Silver closed up $0.10 at $16.17.

Platinum closed up $7.00 at $1,242.00 and palladium closed up $13.00 at $804.00.

gold_money_gearsThe stronger dollar is the overpowering negative force now plaguing gold. And with the end of quantitative easing encouraging that stronger dollar – the chance of a gold rally before year end is not good.

The declining price of oil is also a concern. Lower oil means lower inflation and here in the US inflation numbers seem tame enough.

If you look at our European friends they are struggling with negative growth – even deflation. So the European Union developed its own brand of quantitative easing and now completely ignores a mountain of debt – which at any other time would have created protests and austerity. Still this may be a small plus for gold as the EU plan moves forward.

Friday’s announcement of another round of massive quantitative easing by the Bank of Japan looks like desperation.

You could make a weak case that geopolitical events could help gold on the short term – there are a number of tense regions which are off the tracks. But this scenario seems unlikely to me – for now – there is a disconnect between hot spots and the price of gold.

The raging stock market is also worrisome if you like gold bullion. Arguing an inflated money supply created by quantitative easing will come to gold’s rescue is old hat. Not that the devil will miss his due – someone will eventually pay for the government’s spending spree. It just won’t be for some time if you buy the Fed’s low interest rate argument.

So if you are still interested in the price of gold bullion – the question now becomes how long will the nuclear winter last?

The governments of the world have gotten a “Get Out of Jail Free” card for now when it comes to quantitative easing. They have printed money to the moon and instead of seeing raising inflation rates and rising prices in gold – we are seeing rising asset prices in stocks as multinational corporations use cheap money to repurchase their own stock and buy smaller companies looking for synergies which will make stock holders smile.

And when will we see the return of inflation?

Hard to say “old boy” as our English friends are fond of saying.

One thing is sure – we are back to all bad news relative to gold. But I offer perhaps a whisper of hope in all this turmoil. Everything bad that could happen short term – has happened. In other words gold has to deal with the proverbial kitchen sink – so things might soon be improving if the slam down is over quickly.

The important question now is when will a balance be seen between continued gold liquidation and the real physical demand?

Let’s look at the 5 year chart of gold prices. From 2010 through the latter portion of 2011 we saw gold reach the $1,850.00 level – fail to move higher and then become range-bound between $1,600.00 and $1,800.00. This channel began to break down in April of 2013. In May of 2013 gold began forming its next formidable channel between $1,200.00 and $1,400.00.

We now have broken down that channel and are looking for the next leg down.

In 2013 Minyanville (Nasdaq) posted the following: “Roubini wrote an editorial at the beginning of June stating that he expects gold will fall below $1,000 per ounce, taking prices down to approximately 30% from current levels, which is a point not seen since 2007. “Gold remains John Maynard Keynes’s ‘barbarous relic,’ with no intrinsic value and used mainly as a hedge against mostly irrational fear and panic,” writes Mr. Roubini, who has a past of strong opinions on precious metal investing. He theorizes that because gold provides no income and doesn’t pay a dividend; investors are growing yield hungry and are moving towards riskier assets as markets improve.

At the root of this precious metal bubble burst, Roubini points to the global lack of inflation (a heavily debated point) despite an increase in the money supply. “The reason (for this) is simple: While base money is soaring, the velocity of money has collapsed, with banks hoarding the liquidity in the form of excess reserves. Ongoing private and public debt deleveraging has kept global demand growth below that of supply.”

The highlighted portion is from me and points to why we have not seen much traction in the price of gold since the two legs down I pointed out above. I would say however that this scenario ignores the natural physical demand seen in places like China and India.

As far as how much value gold must lose before that physical demand supports let’s use Roubini’s figure as a place marker.

The $1,000.00 figure is severe – I think most technical folks will say that gold’s next major support will be seen around $1,100.00.

Gold closed weak today at $1,169.30 – but this is not much of a follow-through from Friday. Many expected gold to be much weaker especially considering the dollar strength.

In this kind of breakdown it’s best to step aside and get a broader picture. Also keep in mind there are plenty of buyers at all levels so new buying traffic always picks up – this is not generally understood by new gold buyers. It is counterintuitive – why buy when the market is moving lower?

They buy in increasing waves because these are people who really want to own gold and lower prices present better opportunities and value. Keep that word “value” in mind and let me point out what happens in the mind of real gold believers. We are approaching a price for gold where the buyer gets twice as much bullion for the money – and if your yard stick is the number of gold coins or bars instead of their dollar value the dynamic works.

Frankly I thought gold would hold the $1,200.00 level but now that the technical picture points to lower ground let’s consider further support areas.

The first reasonable line in the sand was around $1,172.00. This is also a 61.8% Fibonacci retracement – worth mentioning if you study the ratios. But remember Friday we traded as low as $1,161.00 – which is troubling for the technical folks.

But if we continue to slide the next major long term support line comes in about $1,056.00 – which dates backs to 2010.

So what will happen now? I think somewhere between $1,050.00 and $1,150.00 a great deal of physical buying will return and we will get a positive spike to the upside. This traction is necessary for gold to “get on its feet” for lack of a better term.

How it reacts after that is a bridge too far for the moment. That will depend on how far the central banks of the world push quantitative easing – that’s why the following David Stockman commentary is worth the read. And keep in mind that not all countries will get away with this hat trick as easily as the US. In this country resources are vast and mistakes can be kicked down the financial road. This is not true with many smaller countries and sooner or later that mountain of debt will come home to haunt.

Finally consider this before jumping out the window – even with all the negative news – gold is still about twice the price it was in 2006. So let’s not cry too much about our spilt milk.

This from David Stockman (Contra Corner) The BOJ Jumps The Monetary Shark – Now The Machines, Madmen And Morons Are Raging – This is just plain sick. Hardly a day after the greatest central bank fraudster of all time, Maestro Greenspan, confessed that QE has not helped the main street economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote. Apparently the dissenters——Messrs. Morimoto, Ishida, Sato and Kiuchi—-are only semi-mad.

Never mind that the BOJ will now escalate its bond purchase rate to $750 billion per year—-a figure so astonishingly large that it would amount to nearly $3 trillion per year if applied to a US scale GDP. And that comes on top of a central bank balance sheet which had previously exploded to nearly 50% of Japan’s national income or more than double the already mind-boggling US ratio of 25%.

In fact, this was just the beginning of a Ponzi scheme so vast that in a matter of seconds its ignited the Japanese stock averages by 5%. And here’s the reason: Japan Inc. is fixing to inject a massive bid into the stock market based on a monumental emission of central bank credit created out of thin air. So doing, it has generated the greatest front-running frenzy ever recorded.

The scheme is so insane that the surge of markets around the world in response to the BOJ’s announcement is proof positive that the mother of all central bank bubbles now envelopes the entire globe. Specifically, in order to go on a stock buying spree, Japan’s state pension fund (the GPIF) intends to dump massive amounts of Japanese government bonds (JCB’s). This will enable it to reduce its government bond holdings—built up over decades—– from about 60% to only 35% of its portfolio.

Needless to say, in an even quasi-honest capital market, the GPIF’s announced plan would unleash a relentless wave of selling and price decline. Yet, instead, the Japanese bond market soared on this dumping announcement because the JCBs are intended to tumble right into the maws of the BOJ’s endless bid. Charles Ponzi would have been truly envious!

Accordingly, the 10-year JGB is now trading at a microscopic 43 bps and the 5-year at a hardly recordable 11 bps. So, say again. The purpose of all this massive money printing is to drive the inflation rate to 2%. Nevertheless, Japanese government debt is heading deeper into the land of negative real returns because there are no rational buyers left in the market—-just the BOJ and some robots trading for a few bps of spread on the carry.

Whether it attains its 2% inflation target or not, its is blindingly evident that the BOJ has destroyed every last vestige of honest price discovery in Japan’s vast bond market. Notwithstanding the massive hype of Abenomics, Japan’s real GDP is lower than it was in early 2013, while its trade accounts have continued to deteriorate and real wages have headed sharply south.

So there is no recovery whatsoever—-not even the faintest prospect that Japan can grow out if its massive debts. The latter now stands at a staggering 250% of GDP on the government account and upwards of 600% of GDP when the debts of business, households and the financial sectors are included. And on top of that there is Japan’s inexorable demographic bust—–a force which will shrink the labor force and squeeze even further its tepid growth of output as far as the eye can see.

Stated differently, Japan is an old age colony which is heading for bankruptcy. It has virtually no prospect for measurable economic growth and a virtual certainty that taxes will keep rising —since notwithstanding the much lamented but unavoidable consumption tax increase last spring it is still borrowing 40 cents on every dollar it spends.

So 5-year JGBs yielding just 11 bps are an insult to rationality everywhere, and a warning that Japan’s financial system is a disaster waiting to happen. But even that is not the end of it. Having slashed its historic holdings of JCBs, the GPIF will now double it allocation to equities, raising its investment in domestic and international stocks to 24% each.

Stated differently, 50% of GPIF’s $1.8 trillion portfolio will flow into world stock markets.  On top of that—the BOJ will pile on too—-tripling its annual purchase of ETFs and other equity securities. This is surely madness, but the point of the whole enterprise explains why the world economy is in such extreme danger. A Japanese market watcher caught the essence of it in his observation about the madman who runs the bank of Japan,

“Kuroda loves a surprise — Kuroda doesn’t care about common sense, all he cares about is meeting the price target,” said Naomi Muguruma, a Tokyo-based economist at Mitsubishi UFJ Morgan Stanley Securities Co., who correctly forecast more stimulus today.

That’s right. It’s 2% on the CPI…..come hell or high water.  There is not a smidgeon of evidence that 2% inflation is any better for the real growth of enterprise, labor hours supplied and economic productivity than is 1% or 3%.  It’s pure Keynesian mythology. Yet all the world’s central banks are beating a path toward the same mindless 2% inflation target that lies behind this morning’s outbreak of monetary madness in Japan. Folks, look-out below.  As George W. Bush said in another context…..this sucker is going down!

The walk-in cash trade was crazy again today and the phones were busy.

The Unscientific Activity Scale is a “8” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 4) (last Wednesday – 3) (last Thursday – 5) (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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