Courtesy of Everett Millman and GainesvilleCoins.com ……….
While stocks were riding high yet again this week in response to a decidedly mixed bag of economic indicators for November, gold and silver slid below support levels at the week’s end. Crude oil has continued to tumble as both major world benchmarks are menacingly close to the $70 level. Fears of deflation are still acute in Europe and Japan, driving investors into Western bonds.
GEOPOLITICS & WORLD EVENTS
OPEC Meeting Sparks Race to the Bottom
The member nations of the Organization of the Petroleum Exporting Countries (OPEC) met on Thursday to discuss the cartel’s plans to deal with plummeting crude oil prices. Ultimately, their momentous decision was to not change anything.
Several smaller OPEC players such as Iraq, Algeria, and Venezuela were hoping that stalwart Saudi Arabia would cut their production of oil in order to bring prices back up. These countries were unwilling to curb their own output, however, in the hopes of continuing at full capacity as prices began to recover. In the end, the major players in the trade bloc–Saudi Arabia, United Arab Emirates, Qatar–opted to leave their production outlook unchanged, allowing crude prices to resume their steep slide.
The main reason for these oil-producers to stand pat amid falling prices is part of an effort to undercut the U.S. shale boom. Fracking operations in the States has significantly decreased demand for energy from foreign sources, and has also contributed to the global oversupply of available oil. If crude oil prices fall far enough, they would render some shale drilling operations in the U.S. no longer profitable. Prices are currently below the level that nine of OPEC’s twelve member nations need in order to balance their national budgets, however. Moreover, the International Energy Agency, based in Paris, estimates that many American shale projects can remain profitable down to as low as $42 per barrel.
While these factors make it unlikely that OPEC will be able to keep up this game of chicken without some adjustment, falling oil prices have been the bane of both the Eurozone and Japanese economies starved for inflation. It would seem we are on the verge of entering a new epoch in the oil trade, one in which the OPEC members are no longer willing to simply take their ball and go home. The rules of the game may be changing.
Swiss Gold Referendum Looms
Switzerland will hold its referendum on the “Save Our Swiss Gold” initiative this Sunday, November 30. While the initiative has been championed by gold bugs and proponents of the gold standard, it appears to be doomed by one ambitious provision.
The tenets of the referendum, which will be a wholesale “Yes” or “No” vote, are threefold: the Swiss National Bank must repatriate all Swiss gold held abroad (amounting to 30% of total reserves–20% held in England, 10% held in Canada); the bank must keep a minimum of 20% of its balance sheet covered by gold reserves (up from 7.5% at present); and the SNB would be restricted from selling any of its gold holdings.
This third stipulation is the killer: without the ability to ever sell its gold, the SNB would have a difficult time making adjustments to its balance sheet. Every increase in forex reserves would require additional buying of gold, but no gold would be removed from reserves if the bank’s holdings should ever need to contract. SNB officials have further levied that this “unsellable” gold would essentially be a dead asset, robbing the central bank of its flexibility in setting monetary policy.
Gold sentiment in Switzerland waned sharply after the Swiss franc was decoupled from its 40% backing by gold at the turn of this century; many citizens are still unaware of the referendum when it is only two days out. Some speculate that the vote would likely pass if the prohibition on selling gold reserves was somehow lifted, but the chances seem slim otherwise.
At minimum, the Swiss gold referendum could bring the issue of monetary stability to the fore in Europe, as the Dutch, Germans, and now the French have embarked on their own gold repatriation campaigns.
Amid Global Slowdown, U.S. Markets Faring Best
With much of the international community’s attention focused on the various signs that the global economy is slowing, the U.S. stock markets continued to climb this week despite being dragged down by sluggish energy stocks. With OPEC’s decision not to cut its output, crude oil prices are falling in earnest, with no clear signs of a bottom yet.
Crude oil futures sit at 4-year lows, giving no indications of a trend reversal absent some unforeseen explosion in economic activity across the globe. Thus far this year, WTI crude has given up 30%, while Brent crude prices have fallen 34%. Domestic gas prices have tracked lower every day since the beginning of October, the longest such streak on record, dating back to 2004.
The dollar fell this week on rumblings that the timetable for raising the federal funds rate is being pushed back further in 2015, perhaps to the middle of 2016. The greenback tends to firm up when anything hawkish comes out of the Fed, as an increase in interest rates from near-zero to closer to normalized levels is likely bullish for the world’s reserve currency. Yet, it’s already been a relatively good year for the dollar, as it has strengthened against all 16 of its major peer currencies since the calendar turned to 2014.
The Fed had reason to be cautious, as mixed economic indicators have made the current recovery seem more tenuous. Markets hardly budged on the upward revision of third quarter GDP from 3.5% to 3.9% growth, because first-time jobless claims unexpectedly rose and U.S. consumer confidence in November dropped significantly from a reading of 94.1 to 88.7. Even in the States, signs of weakness in the economy have not entirely been shrugged off. In fact, Standards & Poors reports that nearly 50% of all global corporate stock issuers are currently speculative-grade, which smacks of an inflating junk bond bubble. Meanwhile, the S&P 500 (as well as the Dow Jones Industrial Average) are still routinely hitting record-highs; the S&P is up 11% since its October low, and will gain about 2.7% on the month.
Another indication that concerns over the health of the economy have not fully abated has been the flight into U.S. Treasuries and other government bonds. After falling 5 basis points on Tuesday, the yield on 10-year Treasury notes continued to slide over the course of the week, sitting at just 2.21% on Friday morning. Foreign demand for U.S. Treasuries is at its highest in 10 years, as yields on European bonds have also remained low. The German 10-year bund slid from 0.75% to 0.694%, while government bonds from Britain, Australia, Austria, Belgium, the Netherlands, Finland, France, Ireland, Spain, Italy and Portugal all likewise saw falling yields. This is due, in part, to many investors expecting the European Central Bank to begin buying government debt as part of its stimulus program.
The ECB will not be alone in its desperate quest to stoke inflation, as the Bank of Japan plans its own ambitious stimulus measures. With an injection of monetary stimulus coming down the pipeline, markets in Japan and Europe have been heating up. The Nikkei 225 has been mostly trading sideways of late, but has risen nearly 2,000 points (about 11%) since dipping to end October. Meantime, Germany’s DAX has finally eased a bit after an 11-day streak in the green pushed the index near its record highs set earlier this July.
Safe haven demand for precious metals has been virtually nil, as money has instead poured into equities and government bonds. Gold was stagnant early in the week, seeing some greater volatility by midweek because of the thin trading volumes during the Thanksgiving holiday. After consistently hovering near $1,200, the yellow metal plunged below support, falling nearly 2% in Friday morning trading to just above $1,180. Silver also fell through its support levels to $15.75 on Friday, erasing this week’s rally, which touched as high as $16.90. Both platinum and palladium, however, have enjoyed renewed strength as the supply shortage from the 5-month miners strikes in South Africa are beginning to take effect.
GOVERNMENT & POLICY
So You Thought It Was Only Gold and Silver? (And Libor, and Forex . . .)
It seems that not a week goes by without word of yet another scandal relating to big banks meddling in the markets in order to derive illicit profits from manipulated price movements. At this point, it’s becoming a tradition–the 21st-century version of FDR’s “Fireside Chats” with the American public over the radio, perhaps.
Like Roosevelt’s conversational announcements over the airwaves, this new tradition is a harbinger of a world in economic disarray, and a financial system in peril. Unlike the “Fireside Chats,” these contemporary messages to the nation are in no way designed to comfort an uneasy public.
We have endured through the 2012 Libor rigging scandal, the rebranding of both the London gold fix and the silver fix due to tampering and insider trading, as well as this year’s revelations that the foreign exchange markets have been subject to rampant manipulation. In each case, the guilty parties (some of them culprits in all three scams) were merely ordered to pay fines while new regulations were implemented. All the while, investigative reports show time and again how the TBTF financial institutions have effectively “captured” their regulatory overseers, and are simply entrusted to police themselves.
The teeth of these “improved” regulatory procedures notwithstanding, it would seem that every benchmark has now been doctored, every market at some point subject to insider manipulation. Every frontier of the financial system has been usurped already, right?
It seemed so until this week’s revelation that Goldman Sachs and HSBC are being sued by a New York jeweler for rigging the platinum and palladium price fixes for the last eight years. The complaint, which also names juggernauts Standard Bank and BASF, charges that the accused institutions shared insider information about the direction of the fixes in order to manipulate trading and profit from the resultant price movements. This is essentially the same story as the past rigging charges mentioned above.
The manipulation of platinum and palladium prices can be quite lucrative, as the two metals enjoy strong industrial demand like their cousin silver, but come at a much heftier price tag: palladium spot prices are currently more than 50 times the price of silver, and platinum is about 50% more expensive than palladium. While silver has myriad industrial applications, the platinum group metals are predominantly used in making catalytic converters for automobiles.
Ironically, the price fixes for platinum and palladium were already scheduled to be replaced by a new price discovery mechanism on Monday, December 1. It remains to be seen if any of the new precious metal price fixes will improve the transparency of the process. If recent history is any indication, whenever one jig is up, there’s another one right around the corner.
News & Notes
Government sources in India announce that the 80:20 rule requiring 20% of gold imports to be re-exported is going to be scrapped, pushing the country’s Nifty stock index to record-highs.
Canada’s 3Q GDP beats expectations, growing 2.8%.
China surpasses Japan was the world’s second-largest stock market behind the U.S.
Unemployment in Italy reaches a record-high of 13.2%.
A LOOK AHEAD: The PMI and ISM manufacturing indices will be released on Monday, December 1, updating the outlook on the pace of growth in U.S. industries. If “Black Friday” activity and online shopping sales on “Cyber Monday” are particularly strong, analysts may have to revise their bearish expectations for U.S. retail sales this holiday season.