Commentary for Wednesday January 7th, 2015 (www.golddealer.com)
By Ken Edwards and Richard Schwary of California Numismatic Investments Inc.………
Gold closed down $8.70 at $1210.60 on short term profit taking and a stronger US dollar.
And the rebound in equities took away some of the tension created with a lower DOW and a troubled European Union.
The dollar was also stronger – always a cap to a rising gold market. The Dollar Index at this time is trading at 92.01 versus yesterday’s close of 91.75. The range today was 91.65 (low) to 92.27 (high) so we are now looking at the upper end of its daily spread. The tragedy in Paris moved the dollar higher – the continued weak oil market – WTI Crude at $47.93 also creates a drag on gold.
After the close in the metals the Federal Reserve released minutes of their latest meeting which is the biggest piece of news affecting gold today. No surprises but they did point out that “low” inflation was not a hindrance to their expected interest rate hike. They also acknowledged that European economic woe is the biggest threat to our continued economic expansion.
This from CNBC – “Inflation wouldn’t have to move off its current subdued levels for the Federal Reserve to start hiking rates, according to minutes released Wednesday from its most recent meeting. The December gathering of Federal Open Market Committee did not produce a rate hike, but some members indicated that conditions are changing. Minutes indicated, however, that using the word “patient” in the statement following the meeting would signal that the Fed wasn’t ready to hike for at least the next couple of meetings—a term Chair Janet Yellen told the media afterward indeed meant two.
“Most participants agreed that it would be useful to state that the Committee judges that it can be patient in beginning to normalize the stance of monetary policy; they noted that such language would provide more flexibility to adjust policy in response to incoming information than the previous language, which had tied the beginning of normalization to the end of the asset purchase program,” the minutes said.
Wall Street consensus is that the central bank likely will begin raising rates off near-zero levels by midyear, though low inflation levels have driven speculation that it could take even longer.
Some members pushed back, saying the Fed should allow itself even more flexibility to move as economic conditions warranted.
“Some participants regarded the revised language as risking an unwarranted concentration of market expectations for the timing of the initial increase in the federal funds rate target on a narrow range of dates around mid-2015, and as not adequately allowing for the possibility that economic conditions might evolve in a way that could call for either an earlier or a later liftoff date,” the minutes said.
The release of the minutes Wednesday afternoon had no discernible effect on markets, with stocks maintaining a strong rally and government bond yields mixed.
“The Fed is under really no pressure to do anything,” said Michael Cuggino, portfolio manager at Permanent Portfolio Funds. The real fear is aggressive moves or surprises that they feel like they have to move.”
Fed officials indicated at the meeting that they at least would need confidence that inflation was moving toward the 2 percent target.
As for the economy, FOMC members saw upside risks, with lower oil prices and labor market improvements providing a lift. Fed officials expect inflation to remain tame, though it sees the current plunge in energy prices as well as a stronger dollar as temporary. The officials, in fact, saw global weakness as the main threat to continued U.S. economic growth.”
Sales of US Gold Eagles might be picking up. The US Mint announced sales of 42,000 1 oz gold coins. This order was well above December gold sales of 18,000 gold ounces. In 2014 the US Mint sold a total of 524,000 gold ounces. That was less than half of 2010 sales of 1.2 million ounces to provide perspective – but in the wider view the US Gold Eagle 1 oz remains the most popular bullion coin today.
Silver closed down $0.09 at $16.51 – quiet today across the counter.
Platinum was unchanged at $1220.00 today and the public does not seem to care that the difference in price between gold ($1210.60) and platinum is small. Palladium was weaker by $8.00 at $792.00.
This is our usual ETF Wednesday information – Gold Exchange Traded Funds: Total as of 12-24-14 was 51,537,624. That number this week (1-7-15) was 51,449,890 ounces so over the last week we dropped 87,734 ounces of gold.
It might also be interesting to note that the all-time record high for all gold ETF’s was 85,112,855 ounces in 2013. The record high for Gold ETF’s in 2015 is 51,590,921 and the record low for 2015 is 51,449,890.
One of the big underlying reasons gold has been frenetic of late is because of what I call – the catch up cause. There are problems – not merely passing events which need desperate attention and correction or the financial consequences will be dire. One of these is the growing fracture between the US economy and the united economies of the European Union. The EU will be a great competitor if they can get all the parts to work together. They still have not reached this union and continue to throw money at bankrupt regimes by creating more debt. When this underlying structural problem is on the back burner gold does not get much attention. When investors realize that the debt load is becoming dangerous the default position is first the dollar and then gold. Stockman has nailed this underlying debt problem and underlines why it will only get worse unless our current money experiment is modified.
This from David Stockman (Contra Corner) – Europe’s Monetary Madhouse – If you want to know where the global experiment in massive money printing is heading—-just take a look at the monetary madhouse in Europe. And that particular phrase has full resonance once again as it becomes more apparent by the hour that Europe and the Euro were not fixed at all. Indeed, beneath the surface of Draghi’s “whatever it takes” time out, the crisis has been metastasizing into ever more virulent deformations.
The coming European monetary crack-up is rooted in the fact that the ECB’s financial repression and ZIRP policies have—like everywhere else—-destroyed honest price discovery in Europe’s massive sovereign debt market. There is no other way to explain the preposterously low 10-year bond yields prevailing this morning for the various and sundry fiscal cripples that comprise the EU-19.
In the wake of Hollande’s two odd years of serial tax, regulatory and fiscal blows to his nation’s economy, for example, why not load-up on some French ten-year bonds at a yield of 0.78%? Yes, the French benchmark bond is now trading in Japanese style basis points, not the whole integers that French state debt has carried since the time of the Black Plague. Indeed, today’s miniscule yield is but a tiny fraction of the rates prevailing in more recent times, including the 3.5% rate at the bottom of the global financial meltdown in late 2008.
But never mind. What could go wrong that might possibly warrant a few hundred basis points more of yield in compensation for an investor’s risk? A skeptic might mention principal loss to inflation, credit risk owing to France’s headlong fiscal deterioration and, most especially, the possibility that the euro goes kaput and bondholders get paid in something else—say Madame Le Pen’s depreciating French francs.
Not to worry rejoins 78bps of yield. Apparently, inflation has been abolished once and forevermore—-implying that today’s razor thin nominal yield does not require headroom for principal erosion due to a higher price level. Yet the only evidence for that is a small downward blip in the French CPI since world oil prices began their plunge last summer, which resulted in a December y/y inflation rate of 0.5%.
But why would six months of aberration trump 15 years of truth. Namely, that the French CPI has risen at a 1.7% annually rate since 1999—-a trend not appreciably different than everywhere else in Europe and North America. Has there really been a financial regime change so profound and so certain that the graph below can be consigned to the dustbin of history; and that 100 years of persistent depreciation of the purchasing power of government money came to a screeching halt around August 2014?
Then there is the matter of actual fiscal risk. With each passing month the Hollande government’s duplicity with respect to its fiscal deficit targets becomes more blatant. It has now postponed for the third time its compliance with the EU treaty cap of 3% of GDP deficits, and, in fact, is on a fast track toward the 100% debt-to-GDP mark where the debt trap of big deficits and faltering growth becomes nearly irreversible.
Like much of Europe, France is patently losing the debt trap battle. During the period since 2008 when its debt ratio has soared, its real GDP has barely inched forward, rising by less than 1% over 7 years.
And while France was clearly not growing its way out of debt, it was most definitely spending its way into an ever deeper fiscal crisis. State outlays have now reached 57% of GDP, and tower far above the already debilitating 46% of GDP that prevailed when Mitterrand’s socialist government first came to power in the early 1980s.
The larger point here is that France’s baleful fiscal numbers are not reflective of just a nettlesome business cycle or an incompetent government that can be replaced at the next election. The problem is structural, progressive and well-nigh irreversible.
The Hollande regime is just the latest in a line of statist governments which have trifled with an ever expanding state budget through ad hoc tax increases rather than thoroughgoing reform of bloated entitlements and entrenched subsidies. Yet by confiscating more than 50% of the people earnings, it has only exacerbated France’s fiscal death spiral by throwing up new barriers to enterprise, human efforts, capital investment and sustainable economic growth.
And that gets to the biggest shibboleth of all embodied in today’s 78 bps yield. Namely, the hoary proposition that advanced nations like France do not default, and therefore there is no sovereign risk that needs to be funded in the bond yield.
That’s a whopper if there ever was one. In fact, France will eventually default—- either thorough re-emergence of euro inflation after a spree of ECB monetization of state debt or through “frexit” (French exit from the euro) if the Germans succeed in shackling the ECB’s printing presses.
Needless to say, today’s 78 basis point bid anticipates neither of these unavoidable outcomes. Instead, it is a complete artifact of central bank manipulation of the government bond market. It amounts to outsourced monetization of the state’s debt through the agency of hedge funds and fast money speculators who are front-running the ECB in the anticipation of selling these vastly overpriced securities back to Draghi come January 22nd. Call it forward monetization.
But here’s the thing. Whether the Germans fold or not later this month, today’s punters in French bonds are heading for a rude awakening. If the Germans do fold completely and permit the ECB to purchase upwards of one trillion of French, Italian, Spanish, Portuguese etc bonds, the sell-off in the euro will gather a powerful head of steam on its way to par with the dollar or even lower. In short order, the French CPI will be back in its historic 2% track or even higher.
Stated differently, after the fast money unloads its bonds into Draghi’s bid, the slower footed trend followers—especially the national banks which loaded up on their own countries’ rising sovereign debt after mid-2012—–will at length find themselves on the “offer” side of the market. Even the quasi-socialist banks and pension funds of Europe will not long sit on deeply negative real yields as far as the eye can see.
Similarly, in the more likely event that the Germans force a cockamamie compromise in the form of “QE lite”, where each nation’s central bank guarantees the credit risk on ECB purchases of its own sovereign debt, even the fast money will get clipped. The latter are betting that the French 10-year bond at today price of nearly 110 rests on the credit of Germany, not France. It will become re-priced in a nanosecond when the later becomes evident.
Finally, if the Germans remain unyielding on QE or if the ECB becomes paralyzed owing to the Greek elections and a subsequent standoff with Syriza demands for massive debt relief—–demands which would puncture a massive hole in the ECB’s balance sheet if met—-the sell-off will be fast and furious across the whole spectrum of French and peripheral country debt.
In fact, the Italian 10-year bond, which is yielding just 1.72% at present, would be even more vulnerable to a violent run. Again, the story is the same as the French case—except the fiscal metastasis is well more advanced. Italy’s economy today is no larger in real terms than it was in 1999. Yet its debt burden has marched steadily upward and is now beyond the point of no return.
At the end of the day, the implacable reality of these French and Italian fiscal time bombs means the end of the euro as it is currently constituted. The only intermediate term relief from a run on the trillions of French and Italian bonds now perched precariously behind the fast money “sell” button, is massive outright monetization. But that would mean a plunging exchange rate and resurgent inflation that would be intolerable to the Germans.
So Greece may usher in a far more destabilizing crisis than an outright “grexit” or a prolonged stand-off with respect to relief on its quarter trillion of debt owed to the EU institutions and the IMF. If it causes the ECB to hit the pause button on “whatever it takes” a profound demonstration on the consequences of false prices and false markets for sovereign debt will be immediately had.
When upwards of $7 trillion of French, Italian, Spanish and other peripheral debt go on offers, the Greek default will amount to a rounding error. And the euro will stumble toward an early demise.
The walk in cash trade today was steady but unimpressive. Less than 10 pots of organic coffee were brewed as of this writing – that’s on the low side. The phones were also below average.
The GoldDealer.com Unscientific Activity Scale is a “3” for Wednesday. The CNI Activity Scale takes into consideration volume and the hedge book: (Closed last Thursday and Friday) (Monday – 5) (Tuesday – 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”.
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