Gold Turns Lower against a Stronger Dollar and Continued Profit Taking

Commentary for Wednesday, Oct 23, 2014 (

richard schwary thumb Gold Remains Firm but Suspecious

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

Gold closed down $16.30 at $1228.50 taking all the fizz out of recent action around the $1240.00 level. The dollar was strong as the Dollar Index saw a trading range of 85.66 through 85.88.

I think today’s loss also represents further profit taking first seen yesterday.

Also some of the fear trade from a not so promising European Union – struggling with how to get on the quantitative easing train was questioned – at least for today.

NEW YORK (MarketWatch) — The euro rebounded against the dollar Thursday after dropping sharply Wednesday on data that showed better-than-expected growth in the eurozone’s manufacturing and services sector.

European manufacturing improved in October, after Markit Research Group said the October Purchasing Manager’s Index came in at 50.7, compared to 50.3 in September. Germany led the region with a 51.8 reading, up from 49.9 in September, more than compensating for tepid growth in France.

“The German data was particularly encouraging because it suggests that the dip in September was temporary, caused by the geopolitical tensions in the region rather than a secular decline in demand,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management.

There was some commentary that gold’s strong recent move from the $1180.00 range to around $1250.00 might be the beginning of a run to $1300.00 – but a look at gold’s 60 day price chart makes today’s close of $1228.50 look more like the first bounce off lows in a chart which looks like more consolidation.

gold_marketsChicago Mercantile Exchange reports for the last 5 trading days – so we are looking at the trading volume numbers for the December Gold contract: Thursday 10/16 (180,590) – Friday 10/17 (117,545) – Monday 10/20 (96,271) – Tuesday 10/21 (151,078) and Wednesday 10/22 (113,405). Trading volume days look rather average.

Silver closed down $0.07 at $17.11 and the across the counter business has slowed dramatically in the past few days. The real silver bullion action has lost its buzz which is confusing. A week ago this market was hot – the world mints were talking about allocation and product was flying off the shelves.

Platinum closed down $16.00 at $1255.00 and palladium was up $2.00 at $777.00.

According to Jeff Starck (Coin World) – “The release of the 2015 Panda silver and gold bullion coins and related Proof collector offerings might be notable for what the coins don’t contain.

The 2015 Panda coins lack inscriptions confirming their metal content, weight and fineness. Since 1983, China’s Panda coins have included these inscriptions on the reverse, and since 2009 the wording has been located below the oft-changing panda design.

According to a representative of the firm that sells the coins in the U.S. market, the inscriptions were removed from the designs, according to his sources. The 2015 program is being released during the Beijing International Coin Exposition Oct. 24 to 26.

While other Chinese collector coins do not contain such markings, the Panda coin series at its core a bullion program and markings with weight, purity and alloy are commonly included on world bullion coins. The lack of inscriptions may make it easier for collectors and dealers to be fooled by counterfeit coins.”

I can’t believe the China Mint would not use specific weight designations – it would damage their stellar reputation and create uncertainty with the public. The article goes on to say that this step might have been taken because the mint wants to eventually use gram weights to accommodate their own national market.

My bet is that this is misinterpreted and the Chinese will not change the way they have identified weights in the past. But you never know these days so keep your eyes open.

This from Reuters (Andreas Framke, Eva Taylor and Paul Carrel) – ECB looking at corporate bond buys, could act as soon as December – “The European Central Bank is considering buying corporate bonds on the secondary market and may decide on the matter as soon as December with a view to begin purchases early next year, several sources familiar with the situation told Reuters.

European shares rallied on the news, led by banks and shares in peripheral countries. The euro fell more than half a cent against the dollar and credit indices tightened sharply.

Policymakers are desperate to revive the euro zone economy, which is barely growing and dogged by low inflation of 0.3 percent, far below the ECB’s target of just below 2 percent.

The ECB has already carried out work on corporate bond buying, which would widen out the private-sector asset-buying program it began on Monday. It is hoping these measures will foster lending to businesses and thereby support the euro zone economy.

“The pressure in this direction is high,” said one person familiar with the work inside the ECB, speaking on condition of anonymity.

An ECB spokesman, however, said of such purchases: “The Governing Council has taken no such decision.”

The ECB has already cut interest rates to record lows, offered banks cheap loans and begun buying covered bonds, which are backed by high-quality assets. It also plans to start buying asset-backed securities, or bundled loans, later this year.

Stressing that the ECB alone cannot tackle the euro zone’s woes, central bank president Mario Draghi has urged crisis-hit countries to get their economies into shape with reforms.

He has also made a thinly veiled appeal for Germany to embark on a round of deficit-funded investment spending. But with Germany wedded to strict budget discipline and other countries taking time to implement structural reforms, markets are looking to the ECB to do more.

DECEMBER MEETING – The ECB’s policymaking Governing Council could discuss the possibility of making corporate bond purchases at its December meeting, two of the four sources Reuters spoke to said. All four said such plans were being discussed.

The policymakers could decide at the December meeting to go ahead with the purchases, but such a step is not certain. Should the Council decide in December to proceed, the purchases on the secondary market could begin in the first quarter of 2015, one of the sources said.

The ECB will also release updated economic forecasts from its staff at the December meeting.

Draghi has heightened investors’ expectations by saying the ECB’s asset purchases should help expand its balance sheet back towards levels seen in early 2012, when it briefly topped 3 trillion euros. The balance sheet now stands at some 2 trillion.

Buying corporate bonds would allow the ECB to add more stimulus, taking it closer to the target without having to buy sovereign bonds — a problem for Bundesbank chief Jens Weidmann, who opposes such purchases on the grounds that they amount to central bank financing of governments.

Draghi has also repeated that the ECB stands ready to use additional unconventional instruments, and “alter the size and / or the composition of our unconventional interventions” should it become necessary.

“This makes a lot of sense in a lot of ways,” RBS economist Richard Barwell said of the news the ECB is considering corporate bond purchases.

“It fits with the notion that some people on the Council want to do more. It fits with the notion that others on the Council don’t want to buy sovereign bonds. You’re then just looking for Plan Bs — and this is one,” Barwell added.

The ECB began buying covered bonds on Monday, part of the private-sector asset-purchase program that will also see it buy ABS later this year.

However, there is concern at the ECB that these measures may have an insufficient impact to help support the economy.

“In the view of many Governing Council members, the economic picture has recently taken a turn for the worse,” one of the sources told Reuters.”

President of the European Central Bank Draghi has talked about some sort of quantitative easing for some time but the about Reuters article is a real hint at what might be in store for a struggling European union. Talk of a recovering EU is confusing but bonds from smaller countries like Greece, Spain and Portugal are trading lower indicating that further bail-out funds might be necessary. It was not long ago that possible default rumors in smaller EU nations created some gold safe-haven buying but possible reforms in their debt structure and refinancing of debt seemed to have quelled financial fear.

While the US has shown economic improvement it appears Europe is not only stuck but may be experiencing deflation. And with the end of US quantitative easing right around the corner there is fear that if the US wobbles – and recent Russian sanctions create more economic trouble the EU could prove more unstable.

Worry over Europe – in the wider view creates uncertainty and mild fear because of a possible domino effect to the worldwide economy. This always creates some safe haven demand for gold. It won’t create a stampede unless the whole business goes south but it does keep the short players in check and provide a kind of cushion to gold prices.

It remains to be seen just what President Draghi will actually do as the EU does not have a system similar to our Federal Reserve. But one thing is clear – their own form of quantitative easing will involve buying bonds and creating more paper liquidity.

This attempt at solving their economic problems is problematical because it will create more fear of default encouraging safe-haven gold buying but at the same time will push the euro lower relative to the dollar and a stronger dollar will dampen gold prices. So expect more volatility in the price of gold and more indecision relative to price direction.

The walk-in cash trade was very subdued all day and the phones were also quiet. It is funny how a down day in gold is such a cooler – the jewelry demand is still there and the central banks are still buying – but for the moment the public is more interested in the World Series.

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