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The Gold Market Newsletter – Gold Closes Higher with Some Heat in the Aftermarket

Commentary for Thursday, December 8th, 2014 (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 closed up $4.60 at $1194.70 in the domestic market – in fact it was traded tightly in overnight trading both in Hong Kong and London – the high to low range was a few bucks at best. Then a short-covering rally dropped out of the sky – pushing prices towards $1210.00.

The Dollar Index is coming off – trading from a high of 89.55 to a low of 88.91 as of this writing – should be looked at carefully but could not have created the big jump in aftermarket prices.

And the generally weaker price in crude oil is negative for gold – so the sudden drop into the $65.84 range per barrel could not impact the price of gold in the aftermarket.

Even lackluster US economic numbers stirring up the notion that the Fed will delay interest rate hikes would not have created this much action in rather quiet holiday like trading.

goldcoins5Something spooked after hours trading – but exactly what is a mystery. It is possible that further conviction of a short-term bottom pushed another short-covering button – but this pop might also have been some sort of military action which has just not gotten coverage. At any rate we should know more tomorrow – for today keep in mind that this is typical of a market which continues to be confused as to shorter term direction.

Silver was a non-event closing up $0.02 at $16.21.

Platinum was up $10.00 at $1230.00 and palladium was down $2.00 at $798.00.

This article from Lawrence Williams (Mineweb) is interesting – Is Indian gold turnaround a game changer for prices? There has been a surprise move in India reducing its gold import restrictions and intimation from the RBI governor that further relaxation may be on the cards. “Something seems to have spooked the gold bears. We noted a few days ago that there seemed to be signs of new positive momentum building for gold, but then were worried that the big failure of the Swiss gold initiative might prompt another drive down in the gold price. Indeed it did, but the move was surprisingly short lived and gold then recovered a remarkable $70 from the $1 141 low point reached to hit $1 211 before falling back a little. It then hovered around the $1 200 mark for a day and then showed another period of strength prompting the bulls to question (in hope) that this could be the start of something much bigger. It is still having trouble advancing far past the $1 200 level though.

Almost unnoticed on Friday with news overshadowed by speculation about the Swiss gold referendum result – by then seen as a foregone conclusion – was the news from India that the government instructed the Reserve Bank of India to relax its gold import restrictions with the cessation of the rule demanding that 20% of gold imports had to be re-exported.  All talk prior to this suggested that the RBI might actually be looking to extend gold import controls given the very high import levels over the previous couple of months and their impact on the Indian current account deficit (CAD).

But, fast forward a couple of days and we have the RBI chief implying that there could possibly be a further government-led relaxation in the import duties – an enormous apparent RBI policy reversal all within a matter of days. It had been known that the Modi Government, which came into power in the second quarter of the year, would be more sympathetic towards India’s gold sector – it drew a lot of support from it. And the inbuilt Indian positive feeling towards gold probably meant there was a lot of peripheral support for the new pro-business government for the same reasons. There was also government awareness that gold smuggling, brought on by the import duties and controls, had risen dramatically and was effectively impossible to suppress.

Go back five years and the RBI had just made the biggest single gold purchase ever by buying 200 tonnes of gold from the IMF at a price reckoned to be just under $1 100. Did the government believe that this price level for a big proportion of the country’s gold reserves was worth protecting and that the potential fallout from the Swiss gold referendum result could have put this value level in danger?

By all accounts the volumes of privately held gold in India, not least by religious entities, is phenomenal, and is greater that all the gold held by central banks. As we reported in Mineweb three years ago Gold consumption is part of India’s culture and tradition. At a then value estimated at $950 billion (and no-one really knows – it could be even higher – the hoarding represents 11% of the global gold stock, the report has said, making India one of the largest private gold holders in the world.

Indian households are thus estimated to hold 18 000 tonnes of gold, says global research firm Macquarie which is testimony to the untamed demand for the yellow metal in India. Demand may have eased with the imposition of the import controls by the previous government and perhaps initially eased further still when the Modi government came in with an expectation of relaxation. But when this did not happen immediately demand started picking up again and the third quarter of the year has seen a huge rise in gold purchases and imports which continued into October ahead of the festival season and is presumably ongoing. Indeed it is difficult to assess the true import levels as government and RBI figures understate the picture due to large volumes being smuggled into the company to avoid import taxes and the other restrictions.

But should the RBI further reduce the import restrictions there is the likelihood that some of the pent-up demand perhaps restricted by the current 10% price premium because of the import tax will further boost demand.  But we do not know if, when and by how much the import taxes may actually be reduced moving forwards. Much will depend on the overall strength of the Indian economy and whether the Current Account Deficit is seen to be reducing.

With China maintaining its recent high gold purchasing levels, any prospect of a further boost in demand from India, traditionally the world’s most gold-hungry nation, will further enhance the demand side of gold fundamentals. We have already suggested that gold supply is in deficit and this would just widen it. If this all happens how long can the West continue to dominate the gold price?

This from David Stockman (Contra Corner) – Only YesterdayHow The Federal Debt Went From $1 Trillion To $18 Trillion in 33 Years – In the great fiscal scheme of things, October 22, 1981 seems like only yesterday. That’s the day the US public debt crossed the $1 trillion mark for the first time. It had taken the nation 74,984 days to get there (205 years). What prompts this reflection is that just a few days ago the national debt breached the $18 trillion mark; and the last trillion was added in hardly 365 days.  I remember October 1981 perhaps better than most because as the nation’s budget director at the time I had some splain’ to do. Ronald Reagan had waged the most stridently anti-deficit campaign since 1932 when, ironically, FDR promised a balanced budget while denouncing Hoover as a “spendthrift”. Likewise, Gov. Reagan had denounced Jimmy Carter’s red ink and promised a balanced budget by 1983.

But as 1981 unfolded and the US treasury borrowed large sums each day to fund what we were pleased to call Jimmy Carter’s “inherited deficits”, the trillion dollar national debt threshold rushed upon us. And, in truth it came far more rapidly than had been anticipated because by the fall of 1981, the Reagan white house had enacted the largest tax reduction in American history. On top of that, it had also green-lighted a huge defense build-up, yet, as we liked to rationalize at the time, had made little more than a “down payment” on sweeping reforms of domestic spending and entitlements.

The latter were supposed to happen in subsequent years and had been designated by a placeholder in the out-year budgets infamously labeled the “magic asterisk”. In fact, there was nothing magic or devious about it. Washington well recognized that it represented large and painful reforms of social security and other middle class entitlements that were to happen in 1982 and beyond. Needless to say, we never got there. What happened, instead, is that the GOP embraced a revisionist fiscal policy, which at first was called “grow your way out”; and, eventually, was articulated by the nefarious Dick Cheney, as simply “deficits don’t matter”.

Additionally, a new regime came to the Fed in August 1987 when lapsed gold bug, Alan Greenspan, discovered that he could run the Fed’ printing press with gusto, yet falsely claim credit for the disinflation of the 1990s. In fact, the tens of millions of Chinese peasants streaming from the rice paddies into Mr. Deng export factories inaugurated two decades of goods and labor deflation on a worldwide basis, allowing the Fed to monetize a growing portion of the ballooning national debt with seeming impunity.

Yet none of that was anticipated in October 1981. Most of Washington was still in thrall to the old-time religion, fearing the untoward effects of chronic budget deficits and unbridled rise of the national debt. That is, that massive treasury borrowing would “crowd” out private investment and eventually grind economic growth to a halt.

Even the Gipper, ever the optimist, did not want to trifle with this core precept of fiscal rectitude. With no inconsiderable reluctance, therefore, he embraced legislation to vault the national debt over the $1 trillion mark, while at the same time chiseling back his cherished tax cuts and defense build-up. Back then, there was really no choice. You couldn’t have found a single dyed-in-the wool Keynesian or even Marxist economist who would have embraced the path of massive, permanent government borrowing and debt monetization by the central bank which actually ensued.

So Washington stumbled forward at the $1 trillion mark. By October 1981, with the US economy sliding back into a double-dip recession, the fiscal math of Reaganomics was already beginning to burst at all the budgetary seams. The “Reagan tax cut” had triggered a monumental bidding war on Capitol Hill among special interest lobbies, and had ended up reducing the permanent out-year revenue base by about 6.2% of GDP—-compared to the original pure supply side rate cut of less than 3% of GDP.

Likewise, the defense budget was supposed to have grown at about 5% in real terms for a few years, but the Pentagon had spooked the new President into authorizing a decade long spending spree that would have tripled defense outlays by the mid-1980s (the neocons told him the Evil Empire was flexing for military victory when it was actually tumbling into economic collapse). Needless to say, the modest domestic cuts enacted during Reagan Administration’s initial honeymoon did not even make a dent in these monumental excesses on the tax and defense fronts.

So in the fall of 1981 it was not merely the symbolic ignominy of crossing the trillion dollar national debt threshold for the first time that weighed on the White House. It was actually driven by fear that acquiescence in giant, permanent deficits would lead to economic ruin.

And by the standards of the past, where even Johnson’s infamous “guns and butter” deficit of 1968 had only amounted to 2.5% of GDP, the outlook was dire. As I put it at the time, the nation faced 6% of GDP deficits “as far as the eye can see”.

And there’s one more salient point. The nation’s central bank was then being run by the great Paul Volcker who was determined to break the back of the double digit inflation that his predecessors, William Miller and Arthur Burns, had foisted on the nation during the 1970s. It goes without saying, therefore, that no one thought Volcker was about to monetize the Federal debt in order to let spendthrift politicians at either end of Pennsylvania Avenue off-the-hook.

So for nearly the last time in history, Washington reluctantly repaired to the “takeaway” mode. During the next three years by hook and crook about 40% of the giant Reagan tax cut was recouped. Likewise, the bountiful flow of the defense pork barrel was stretched out and tamped down. And, crucially for all that was to follow, they payroll tax was jacked-up by about 20% in the guise of rescuing the social security trust fund from insolvency in 1983.

Taken together, these measures of fiscal restraint did no inconsiderable amount of good. They put a cap on the runaway deficits that would have otherwise occurred owing to the frenzy of tax-cutting and defense spending in 1981 and the drastic recessionary shock to the economy that had resulted from Volcker’s unavoidable monetary medicine. Still, for the period 1982-1986, the Federal deficit averaged 5% of GDP.

Nothing like that had every been imagined before outside of world war—not even by Professors Samuelson, Heller, Tobin and the other leading Keynesian lights of the day. During the peacetime period from 1954 and 1964, for example, the Federal deficit had averaged less than 1% of GDP and Eisenhower had actually achieved several modest surpluses during the period. Indeed, the deficit breakout that ensued notwithstanding the take-back efforts of 1982-1984 was not even embraced by assistant professor Paul Krugman. Back then he was on economics staff of the Reagan White House. Never once did he aver that the national debt at only 33% of GDP was way too small, and that open-ended “stimulus” was in order.

But then came Volcker’s victory over inflation, a strong economic rebound and the “morning in America” campaign of 1984. For all practical purposes, the job of fully restoring fiscal rectitude was left unfinished; and permanently so, as it turned out.

What happened was that the structural deficit begin to shrink modestly. This was in part owing to the strong economic recovery of 1983-1985 when GDP growth averaged 5% per year, and also due to the delayed revenues gains from three tax increase bills signed by Reagan during 1982-1985 and the massive payroll tax increase that was buried In the so-called bipartisan social security rescue (1983).

And that was the historical inflection point. Thereafter, Social Security and Medicare entitlement reform was off the table due to the trick of the front-loaded payroll tax increase. This caused cash surpluses in the trust funds and the accumulation of intra-governmental accounting IOUs for the next two decades. At the same time, these front-end surpluses functioned to bury the long range fiscal disaster these intergenerational entitlements embody in 75-year projections that are always way too optimistic. Likewise, the White House took any further tax increases or defense cuts off the table in January 1985. The spending cut weary politicians of both parties, in turn, were more than happy to oblige by shelving any further meaningful domestic spending cuts, as well.

So in 1985, fiscal policy went on automatic pilot—where it has more or less languished ever since. Even before the fiscal madness of George W. Bush broke out in 2001, the handwriting was on the wall. By the time the 12 years of the Reagan-Bush administrations has elapsed, the national debt had reached $4.3 trillion, and was now 4X the size of national debt that Jimmy Carter had left behind.

Ironically, the scourge of deficit spending and his 1980 primary opponent, who had noisily campaigned against “voodoo economics”, had teamed up to generate deficits that averaged 4.1% of GDP. That initial 12-year plunge into permanent deficit finance was not owing to a weak economy or insufficiently robust read GDP growth, as Reagan revisionists have argued ever since. In fact, between 1982 and 1993, GDP growth averaged 3.8% annually and was at the top of the historic range.

No, it was a political choice that changed the policy landscape forever. The Reagan-Bush deficits amounted to 3X the average deficit that had been accrued during peacetime by FDR, Truman, Kennedy-Johnson and Jimmy Carter, combined. Accordingly, the Democrats would never again face Tip O’Neill’s great fear – that they would be someday flushed out of their congressional majority owing to a 1946 style GOP attack on their proclivity for deficit spending.

But there was something more. The economic ruin that was supposed to flow from large chronic fiscal deficits did not happen—-at least in the time frame that had been traditionally imagined. Accordingly, the GOP gradually embraced a militant anti-tax doctrine which simply ignored the ballooning levels of national debt.

Meanwhile, bourbon democrats and the fading ranks of orthodox Republicans made one last run at restoring fiscal rectitude during the early Clinton days. And on paper they made considerable progress. Indeed, the Federal budget registered surpluses during the last three years of the 1990s.

But the fiscal problem was not solved; it was merely temporarily buried beneath three illusions.

The first was that the giant Reagan defense build-up – which was actually a vast armada of conventional land, sea and air forces ideally suited to wars of invasion and occupation—-would go quietly in the night when the cold war ended and the Evil Empire was no more. It didn’t.

The military-industrial complex and its neocon propagandists panicked the nation into a pointless “war on terrorism” after the fluke tragedy of 9/11, and soon the defense budget had doubled, rising from under 3.0% of GDP during the early post-cold war to nearly 6.0% of GDP after Bush’s war campaigns reached full intensity by 2007.

Likewise, the front-loaded payroll tax hike eventually exhausted its capacity to deceive.  Accordingly, by fiscal 2013 the OASI fund (retirement) ran a $95 billion cash deficit and the DI fund (disability) generated an additional $45 billion cash deficit. This means that on a combined basis, the cash deficit was nearly $140 billion annually and growing rapidly into the future.

In effect, the so-called social security surplus, which had financed the general fund deficit for more than two decades, had not only disappeared, but had now entered the liquidation phase of Washington’s phony trust fund accounting scheme. Stated differently, the $3 trillion of paper IOUs which had been issued to the trust funds over the prior decades were no longer building up due to the receipt of real cash income from employers and employees.

Instead, the trust funds were booking just enough phony intra-governmental interest on the prior balances to give the appearance of solvency. But even by the lights of OMB’s rosy scenario economic projections, in which full employment is attained in 2017 and remains there for time immemorial, the trust fund cash deficit is projected to reach $190 billion by 2019.

By then, however, the trust fund accounting game will have been long exposed. In fact, the OMB projections show only $95 billion of phony intergovernmental “interest receipts” by 2019, meaning that trust fund “assets” will be liquidated by $100 billion that year alone, and then disappear entirely over the following decade. What this means is that the $18 trillion of public debt outstanding today is the real debt—–not the convenient illusion peddled by Washington and Keynesian economists that the “publicly held” debt is only $13 trillion and therefore a “manageable” 75% of GDP.

Nope, the nation’s true leverage ratio today is 106% of GDP. Thirty-three year later the public debt burden on national income has tripled. And when you add the $3 trillion of state and local debt, the total public sector debt ratio is nearly 120% of GDP. And That gets to the final question. How did we get away with this vast fiscal debauch? The short answer is that we didn’t.

Crowding out and high consumer price inflation never occurred because the Greenspan Fed launched the entire world economy down a path of massive credit expansion and financialization that generated large but dangerous central bank vaults where Uncle Sam’s debt has been temporarily sequestered. What happened is that central bank fiat credit was substituted for real savings from privately earned incomes.

Indeed, owing to currency pegging by the mercantilist export economies of Asia and the oil exporters nearly $5 trillion of the US public debt has been absorbed by foreign central banks and sovereign wealth funds. Another $3 trillion is owned by the Fed. And still another $5 trillion, as indicated above, had been temporarily funded by intergovernmental trust funds that are now about to plunge into an irreversible liquidation mode.

Two things are therefore evident. The first is that massive monetization of the public debt cannot go on much longer or the monetary system will be destroyed. That’s what being stuck on the so-called zero-bound really means. And that’s why the lunatic money printing in Japan is a sign that the end of the monetization era is at hand.

In the case of Japan, the largest debtor government in the world has already destroyed its own bond market—-the BOJ is the only bid left at 0.4% on the 10-year JGB. And the BOJ is now fast deep-sixing the yen, as well. Secondly, the US nominal GDP has been growing at less than 4% annually for the last decade, and, in a deflationary world, it has no chance of breaking away from that constraint. Accordingly, the ridiculously optimistic rosy scenario currently projected by CBO does not have a snowball’s chance of materializing over the next decade. Rather than $8 trillion of cumulative baseline deficits of the next ten years as projected by CBO, the current policy stalemate in Washington—that has been running for 30 years now— will generate at least $15 trillion of new public debt in the decade ahead.

Yes, add that to the nation’s current mountain of public debt and you get to $33 trillion by 2024 or so. And then also recognize that the giant financial bubble and vast malinvestments generated by the world’s central banks over the last two decades now guarantee a long spell of global deflation. Accordingly, US nominal GDP will be lucky to reach $24 trillion by that same year. The math computes out to a public debt equal to 140% of GDP. For all practical purposes, it means an endless fiscal crisis lurks in the nation’s future. That’s the real end game of a lamentable path embarked upon 33 years ago today.

The walk-in cash trade was very quiet today and so were the phones – if feels like the holiday season has arrived early.

The GoldDealer.com Unscientific Activity Scale is a “4” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 6) (last Wednesday 3) (last Thursday – 2) (last Friday – 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”. 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.

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