Commentary for Wednesday January 6th, 2015 (www.golddealer.com)
By Ken Edwards and Richard Schwary of California Numismatic Investments Inc.………
Gold closed up $15.40 at $1219.50 today so yesterday’s move above $1200.00 is confirmed. This strength is no longer a short-covering rally – it feels like safe-haven buying the result of continued weakness in oil and economic turmoil in Europe.
The dollar has only flattened out these last few days meaning higher gold prices are not being helped by a lower dollar. The Dollar Index remains fairly steady trading on both sides of 91.50.
So let’s look at the three most watched Moving Averages – Gold’s 50 DMA ($1189.00) – Gold’s 100 DMA ($1215.00) and Gold’s 200 DMA ($1256.00). Now compare these with today close ($1219.50) and you can see we are trading above the 50 DMA and the 100 DMA but must move above the $1256.00 level to challenge the important 200 DMA. For me this makes the market very interesting but still not a Lotto winner.
It looks like the gold steam engine is building strength on safe haven buying and technically the picture for gold is improving. The short term factors being continued trouble in Europe – possible default in Greece – lower oil and weak stocks on Wall Street. But gold must show continued strength on the 60 day chart above $1230.00 and follow through on the 6 month chart above $1250.00 before we can build any faith that a test of the $1300.00 level is in the making.
Just finished writing commentary for a fresh look at the Gold to Silver Ratio – it’s posted on our site (www.golddealer.com).
Silver followed gold nicely up $0.42 at $16.60 and the usual over $16.00 sluggishness has not shown as yet – this may indicate silver has put in a short term low and the physical market is gaining some buzz.
Platinum closed up $10.00 at $1220.00 and palladium was higher by $7.00 at $800.00. The price of platinum and gold are virtually equal – consider a platinum diversification – it’s much scarcer than gold and unlike gold there are no large central bank holdings. It’s also important to remember that US car sales hit their highest level since 2006 with 16.9 million vehicles.
There is an interesting psychological turn to these higher markets. Consider that physical action might be slow because potential buyers believe they have missed recent lows – so no action – and physical sellers pause because they want to see if gold might run.
For those considering the price of gold today the Big Two in this fine kettle of fish are the US stock market and oil. Both oil and the DOW are powerful medicine short term – if stocks continue weak it will push safe-haven buyers into gold. And if oil continues lower it will increase world tension – further confuse producers – contain inflation and pressure gold lower.
U.S. stock futures were higher this morning, after Monday’s 331-point Dow slide—its worst day in three months—on oil’s break below $50 a barrel. Japan’s Nikkei stock average fell 3 percent overnight. (CNBC)
U.S. crude prices were lower again this morning—below $49 at one point—following Monday’s 5 percent drop in New York trading to lows not seen since April of 2009. (CNBC)
My contention that lower oil creates political strife is sound. We have not heard from the Russia/Ukraine theater lately but don’t discount further problems as the Russians and Chinese make deals to protect their financial future – deals which don’t include the US.
And don’t think the US is not up at night worrying about Putin. This from Adrian Croft (Reuters) U.S. to station 150 [more] armored vehicles in Europe – “The United States plans by the end of next year to station around 150 [more] tanks and armored vehicles in Europe for use by U.S. forces training there, according to a U.S. military commander. Some of the tanks and vehicles – enough to equip an armored brigade – could be placed in Poland, Romania or the Baltic states, Lieutenant-General Ben Hodges, commander of the U.S. Army in Europe, said in a telephone interview with Reuters from Wiesbaden, Germany.”
OK – some readers claim I am being too tough on gold. My case being that the dollar is already the default safe haven currency and there is a good chance the Federal Reserve will raise interest rates in 2015 so an even stronger dollar is in the making. Now throw in the collapsing price of oil – and a problematic technical picture which still looks like gold is trying to find a bottom.
So for now I still think that despite recent strength gold remains defensive. And will eventually trade between $1050.00 and $1150.00 waiting for a big game changer which will attract new speculative money. This scenario is not exactly horrible – after all gold would be almost three times higher than it was 10 years ago and in the meantime the world has been flooded with fiat currency. And this time around something is very different – gold even though battered these past 5 years has a much bigger following. Not everyone is buying but everyone is watching.
But that of course is just my opinion. There are others who believe we are close to a bottom and the gold dynamic is changing. Here is another possible scenario that carries some weight.
Let’s begin with the collapse in the price of oil due to over production which leads to other mischief and opportunities for gold on the short term.
This from FX Empire: “Just a few months ago it was almost unthinkable that oil would trade below the $100 price level. Crude oil was forecast to trade at $93 for 2014 but all that changed in just one day as the OPEC meeting on November 27th decided to continue with current quotas allowing the world to float in oil. Although the actual quotas were not the problem, it can best be described as market share as the US and smaller producers added to their production abilities. With the easing of sanctions and embargoes against Iran more and more oil hit the market place. Iraq has been steadily increasing its production along with Russia. Crude oil fell to a hair above the $50 price on Monday and is trading this morning at 50.28. Brent oil added 46 cents to trade at 53.47.
Oil prices sank to more-than-five-year lows overnight on fresh signs that supply will outstrip demand in the coming months. US oil prices briefly fell below $50 a barrel for the first time since April 2009, and Brent, the global benchmark, crashed through the $55-a-barrel mark.
Ample oil production, particularly in the US, and tepid demand growth have sent oil prices plunging in recent months. Consumers are reaping the benefits, while oil-exporting nations are struggling to balance their fiscal budgets and oil companies are seeing their stock prices slump. Production has showed no sign of slowing despite spending cutbacks by many oil companies. Prices slid Friday on reports that Russian oil output hit post-Soviet records and Iraqi oil exports were at their highest since the 1980s. Russia’s oil output hit a post-Soviet high last year, averaging 10.58 million barrels per day (bpd), up 0.7 percent thanks to small non-state producers, Energy Ministry data showed. Iraq’s oil exports were at their highest since 1980 in December, an oil ministry spokesman said, with record sales from the country’s southern terminals.”
A collapsing oil price is terrible for stocks and makes Europe an even bigger mess – if that is possible. The call for more austerity produces fringe political parties which add to the unstable mix already unhappy with the status quo.
Europe claims it has safeguards in place protecting against another financial meltdown in Greece but some who claim default is the only end game and soon Spanish bonds will become junk because no real economic reforms have prevailed.
This unfolding European calamity derails the US recovery and stock crash. If you are still reading all of this is not fantasy. I am not a big fan of this domino scenario but given the amount of hidden instability quantitative easing has created this type of bubble could be right under our nose and go undetected until it comes crashing in the front door.
By the end of 2016 gold makes new highs and everyone wonders why they did not buy weakness when the handwriting was on the wall.
Now consider this timely post by Kira Brecht (Kitco): “Also, the US equity market is simply overdue for a correction. Typically, a pullback is defined as a 5-10% pullback in stock prices, a correction is a 10-20% decline and a plunge of 20% or more signals a bear market. “The S&P 500 has gone 38 months without a decline of 10% or more, versus an average of 18 months since WWII (and a median of 12 months,” according to an S&P Capital IQ research note.
With jitters about potential Fed tightening this year running rampant, the stock market is on edge and vulnerable to selling pressure.
What are some early warning clues on what 2015 might usher in for US stock market performance? The Stock Trader’s Almanac, published by Wiley, outlines a handy historical and seasonal clue —looking at January’s first five days, which they call an “early warning system” for stock market performance. Simply put, after the first five trading days of 2015 —look at see if the S&P 500 is higher or lower.
The Stock Trader’s Almanac’s early warning system has an impressive accuracy rate. The most recent 42 positive first five day returns preceded overall gains for the year 35 times, which equals an 85.4% accuracy rate, according to the Almanac. Better than flipping a coin.
Why should gold traders care about this? Historically, gold has tended to benefit from major tops in the stock market. Now, it is much too early to call for a major top in the stock market yet. But, traditionally, when paper assets —such as stocks decline, investors tend to gravitate toward hard assets, such as commodities, which includes gold.
A generally inverse correlation has been seen between stocks and gold in recent years. Take a look at Figure 2 below. Stocks, shown in red have been rising, while gold prices shown in black have been falling. Bottom line? For traders looking for early insights on the major trends for stocks and possibly gold in 2015 —the early warning system can offer some clues.”
The walk in cash trade today was active but not hot – an interesting reaction considering the follow through in gold. And the phones were also underplayed – apparently the public is happy to watch and wait – perhaps waiting to see if recent strength will disappoint.
The GoldDealer.com Unscientific Activity Scale is a “3” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 4) (Closed last Thursday and Friday) (Monday – 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 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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