Commentary for Tuesday, February 21, 2017 (www.golddealer.com)
By Ken Edwards and Richard Schwary of California Numismatic Investments Inc ……
Gold closed virtually unchanged today down $0.20 at $1,238.90. It lost ground in early trading and at one point reaching $1,227.00 before turning around – gaining back its lost ground despite a strong Dollar Index which moved from 100.90 to 101.42. The dollar gaining strength over bullish Fed comments regarding that possible March rate hike.
The story for now is that the price of gold will be capped by a stronger dollar. Actually the dollar is already too strong but with anticipation of a rate hike this coming March we can expect that recent gains will be reinforced. The argument which everyone applauds is that this rate hike is supported by our improving economy. Most of the pessimists in the group (me included) claimed that higher interest rates in the US would be a disaster to Wall Street and how could this be possible while the EU is still struggling?
Well this picture might be changing – read what Chuck Butler (EverBank Global Markets) has to say – “This just came across the screen. Eurozone Flash Composite PMI’s beat expectations! First of all, the Composite report is a combo of the manufacturing sector PMI, and the Services PMI, and this way you get a better picture of the economy in one print. And the “flash” report is like a “first report” and can see changes when the data is confirmed, but for the most part, these “flash” reports are pretty darn near what the final report prints. And for January, the Eurozone Flash Composite PMI printed at 56! The expectations were for a solid 54.3. So, that’s a nice strong print to start 2017 for the Eurozone, folks. I sure hope European Central Bank (ECB) President, Mario Draghi, takes note of this stronger than the average bear report!”
If Europe begins to develop economic traction the US will no longer be in a “wait and see” mode – they will raise rates as promised and we may even see further rate hikes if the US does not slip back into recession. The consequences for gold however may not be as drastic as most believe – there are already signs inflationary forces are beginning to stir – Federal Reserve Bank President Patrick Harker claimed he would likely support an interest-rate increase in March if he sees additional evidence that inflation is gaining momentum.
And the political world remains tense over everything from Trump to what the Russian’s are up to – traders are even worried that an upset victory in the upcoming French election will prompt a French exit from the European Union – expect safe haven buying to continue its present course and it would not be a real long shot if it increased.
Finally let me point out again that gold remains undervalued. In its current trading range we are talking about a 35% discount from old highs – in a world full of turmoil as sentiment over gold’s value is moving from very negative to at least a positive bias.
Consider the following from Neils Christensen (Kitco) – Gold Is Undervalued Say Record Number of Fund Managers – BAML Survey – “The gold market, holding near three-month highs, could have more potential as a recent survey shows a record number of fund managers see the yellow metal as undervalued.
In the latest Bank of America Merrill Lynch fund manager survey, released last week, one third of respondents said that gold was the best hedge against protectionism. At a same time, with a net margin of 15%, respondents said that the yellow metal was undervalued. This is only the second time investor sentiment has reached this level, tying the record first set back in January 2008.
The results of the latest survey of 175 money managers, collectively controlling assets of more than a trillion dollars, comes as gold prices hold near three-month highs. Gold prices last traded at $1,238.10 an ounce, relatively flat on the day.
Along with growing concerns of global protectionism, according to the survey, fund managers are also concerned about rising inflation and stagflation threats, viewing gold as a safe-haven asset.
Not only does gold have the potential to move higher, but the survey also showed that fund managers are cooling on the U.S. dollar. The survey showed that 41% of respondents viewed a long-U.S.-dollar strategy as the most overcrowded trade. The second most overcrowded trades, at 14%, was shorting government bonds.
Although sentiment in the gold market is starting to improve, money managers have been fairly reluctant to actually add positions. According to trade data from the Commodity Futures Trade Commission (CFTC), net-long gold positions are still relatively muted compared to previous years. For the week ending February 14, the latest trade data showed that money managers are net long gold by 63,625 contracts, well below the five-year average and down more than 76% from the record highs seen in July 2016.
However, the participants noted that the yellow metal still faces some challenges, in particular growing optimism over the global economy, which is expected to continue to support equity markets. According to the survey, 23% believe that the U.S. economy will see above-trend growth in 2017, up significantly from only 1% of respondents during the same time last year. In total, 59% see global growth moving higher.
At the same time, the doom and gloom sentiment is also shrinking with only 43% of respondents saying there is a risk of secular stagflation, down from 88% last year.
Optimism Grows Despite Doubt Surrounding President Trump’s Economic Proposals
The survey showed that investor optimism is not solely based on the new Donald Trump administration. Only 23% of respondents said that they expected Trump’s proposed tax cuts to happen before Congress takes a summer recess in August. At the same time, 30% of respondents don’t see the proposals enacted until 2018.”
Silver closed down $0.03 at $18.00 and pretty quiet in this price range. Gold Continues to Hold Steady.
Platinum closed unchanged at $1,006.00 and palladium closed down $0.40 at $778.80.
News from Reuters – LONDON, Feb 21 Gold prices fell on Tuesday as renewed expectations of an increase in U.S. interest rates next month pushed the dollar higher, although political and economic uncertainties in Europe and the United States supported investor sentiment.
The dollar strengthened after Federal Reserve members pointed to the potential for higher U.S. rates next month, making commodities priced in the currency more expensive for non-U.S. buyers.
“Gold is capped by the likelihood that U.S. monetary policy will be tighter at some stage, potentially in March,” Societe Generale analyst Robin Bhar said.
“There is a lot of political uncertainty, there are safe-haven flows going into gold.” Bhar added that gold is also an investment hedge against corrections in what look to be overvalued equities.
Investor demand for gold can be seen in the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, holdings of which have risen by more than 5 percent to 27.044 million ounces since Jan. 31.
Major U.S. indices – the Dow Jones Industrial Average and the S&P 500 – have hit consecutive record highs in recent days.
“Gold’s resilience is all the more impressive considering U.S. equities are setting record after record, while the dollar is also fairly strong,” INTL FC Stone analyst Edward Meir said.
Support is down to a “myriad political and economic uncertainties” that lie ahead in 2017, Meir added. Traders are focused on speeches by a number of Federal Reserve presidents, looking for clues on the timing of U.S. rate rises.
Also on the radar is U.S. President Donald Trump’s address to Congress on February 28, which analysts and traders hope will offer detail on infrastructure spending and tax cuts.
The walk in cash trade was really busy today for a change – a few large sellers but mostly the public is accumulating gold bullion and the national phone business was steady.
The GoldDealer.com Unscientific Activity Scale is a “4” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 3) (last Thursday – 3) (last Friday – 3) (Monday – closed).
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 increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.
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