Don’t bet on deflation in the U.S. to define the gold and silver markets

Contributed commentary from Clint Siegner of Money Metals Exchange.  The views expressed are his own and are not necessarily those of  Although this commentary was written a week ago, before the latest sharp stock market falls and mild recovery, it makes some interesting and valid points. This is very much a U.S.-centric appraisal (almost half our readers are in the U.S. so valuable in that context) and may not apply to the same extent in other parts of the world.  However it is still the U.S. futures markets which remain the principal global price setters for the precious metals complex for the time being – a position which may ultimately be usurped by China, but not yet!

There are plenty of reasons we might see even lower official inflation numbers and a stronger dollar in 2016. But don’t think for a second that consumer prices or living costs will fall. They haven’t, they aren’t, and they never will in a sustained way – thanks to the Fed’s creation in 1913. This is where the deflationists have it wrong.

The impact of further disinflationary forces or even a deflationary episode on precious metals prices is a bit harder to predict.

The bear case for precious metals is rather simple. Should metals trade like commodities, they are likely to follow other raw materials lower. If we get a liquidity crunch akin to the 2008 financial crisis, just about everything will be sold as investors raise cash to meet margin calls or flee to the dollar as a perceived safe-haven.

There is also the possibility that metals prices will simply be managed lower. Growing numbers of investors realize that Wall Street is not a bulwark of free markets. Major banks have admitted to rigging markets against their own customers, and the Federal Reserve aggressively intervenes in markets in its quest to centrally plan the world economy. Why wouldn’t the Fed also be active in trading precious metals? Those dismissing the notion that metals prices are manipulated are naive.

Today’s Situation Is Different Than 2008

The bear case assumes history, in particular the experience surrounding 2008, will repeat. Or that there is still plenty of ability for anyone seeking to force metals prices lower in the futures market to actually do so. Or both.

Maybe. But relying on those assumptions could be a tragic mistake.

For starters, the U.S. dollar is already near record highs. Meanwhile, commodities and precious metals have been beaten down mercilessly. This set-up is the complete opposite of what faced investors leading up to the summer of 2008. And even though stocks and commodities got hammered in 2008, gold posted modest gains for the year as a safe haven from the threat of a collapsing economy.

Lower gold and silver prices have already produced an imbalance between bullion supply and demand. Supply deficits in 2016 are likely to make the developing problem with inventory at the COMEX and other exchanges even bigger. Registered stocks of gold all but vanished recently as bargain hunters, particularly in Asia, have been happy to buy and take delivery. Silver inventories aren’t in much better shape.

More deliverable bars must come from existing stocks, but holders won’t be anxious to sell. Those with “eligible” COMEX bars have certainly been slow to convert them to “registered” of late. By all indications, miners will be unable to provide the needed supply.

With prices below the cost of production, mine output is set to drop significantly this year. [Editor’s Note: Here we might disagree.  The strength of the dollar against most producing countries’ currencies means the economics of gold mining at a lower US dollar price is not reflected in countries where the price received for their output has actually risen in the local domestic currency in which most of their costs are incurred.  We suspect that global new mined gold production may thus be flat this year – indeed it could still rise marginally -, although lack of new project finance availability will eventually see production turning down as older mines are phased out and grades fall, not to be replaced by new projects and expansions coming in.]

If the metals markets look forward, as markets are supposed to do, they will anticipate the Fed’s response to a strengthening dollar and economic malaise. In 2008, investors knew little about the lengths to which the Fed would be willing to go. Today they DO know. The Fed will overwhelm deflation by creating new inflation.

Markets are completely dependent on Fed stimulus, and people simply expect officials to roll out an even bigger initiative whenever the need arises. Anything to prevent the cleansing effect of corrective forces from restoring heath to the economy. In a recent interview, market expert Jim Rickards predicted the Fed will abandon rate increases and actually commence lowering before the year’s end.

Metals investors should take heart in the fact that gold and silver prices have shown some resilience in the face of disinflationary forces recently. Both metals outperformed oil and most other commodities last year. Yes, prices declined roughly 11% for both metals. But crude oil fell 36% and copper lost 22%. The precious metals gained purchasing power against many other things.

Bottom line: Don’t bet on a meaningful deflation. Fed officials will not allow it. And they can keystroke dollars into existence until the power goes out for good.


Gold and silver market morning: It’s all about dollar strength

New York closed at $1,077.20 after closing against the dollar as low as $1,069.50 last Thursday.  In Asia prices were marked down to $1,170 as the dollar continued to rise against everything. The LBMA price setting fixed it at $1,068.35 down from $1,070.50 from Thursday. The dollar Index is at 99.82 up from 99.62 on Thursday. The dollar is at $1.0625 up from $1.0656 against the euro.  In the euro the fixing was €1,005.008 up from 2.81 down from €1,003.81 on Thursday.  At New York’s opening gold was trading in the dollar at $1,069.35 and in the euro at €1,006.02.  

The silver price closed at $14.15 down 6 cents since last Thursday. At New York’s opening, silver was trading at $13.93.

Price Drivers

We have been away from the desk since a week last Friday. The moves in the gold price since then are not due to physical sales, but to moves in the U.S. dollar. Look at the gold price in all other currencies and it is doing fairly well, because all other currencies, like gold, are falling against the dollar. So the gold market and most other markets are all about the dollar.

Yes, it is still below 100 on the index but now it seems that we have reached decision time. Will the dollar be allowed to follow market forces and continue higher or will it be ‘managed’ lower [or held here] by the U.S. Treasury? To emphasize this, we expect the Yuan to fall [not be devalued] because its ‘peg’ against the dollar is taking it higher against all other currencies too.

The economic data continues to point to lower inflation and lower growth which, translated, means deflation. With the oil price still falling, this seems to ensure that such numbers continue to decay. What is disturbing is that by now, a halving of the oil price should have stimulated growth, but it hasn’t, so why should further falls? Likewise, more stimulation [QE] is unlikely to produce growth when it has failed so far.

So, we are in a currency war of note! Who will pull the dollar down? The U.S. will have to, as it is damaging the U.S. economy and all the more so, if it rises further.  In that case gold will follow other currencies down but then the damage done will call for a reassessment of the value of gold. The nearest parallel we have to this scene is in 2008 when gold fell to its bottom before moving to its peak of $1,921.  Why, at that time, did the gold price then rise? Because of fears of a collapse of the financial system! We certainly do not believe that the time since then has improved the financial system. This implies that what happened then, probably triggered by higher interest rates, will precipitate similar extreme times.

There have not been sufficient sales from the SPDR gold ETF or Gold trust to move gold prices down.

Silver is pushing lower ahead for potential falls in the gold price.

Julian D.W. Phillips for the Gold & Silver Forecasters – and

Gold resistance at $1140 – strong move to follow

New York closed with the gold price at $1,139.60 up $8.30 on Friday. Gold held there in Asia but pulled back slightly in London to see the LBMA gold price set at $1,136.85 up $0.85. In the euro this was €1,007.86 up from €992.49 up €15.27.  This morning the dollar index started the day at 95.32 up a full 1.21 points higher from Friday’s 94.11, a complete recovery from Friday’s fall. Ahead of New York’s opening gold was trading at $1,134.00 and in the euro at €1,007.28.  

The silver price closed at $15.15 up 4 cents on Friday in New York. Ahead of New York’s opening silver was trading at $15.15.

Price Drivers

The gold price was held back by overhead resistance on Friday at $1,140 and looks set to continue to consolidate until this formation is completed. Then we will see the strong move, either way.

It will take some time for global markets to factor in what the Fed did do last week in terms of the U.S. dollar.  Our view received partial confirmation of this, in that there were no sales or purchases from or into the U.S. based gold ETFs.

As we said last week, “While the dollar is still only in the mid-way of a bull market, its potential rise is not wanted by the Fed or the Treasury. To us, this is sufficient to know that they will arrest this bull market in the dollar.” With the gold ETFs in the U.S. still to react fully to the Fed statement we saw no dealings in the SPDR gold ETF or the Gold Trust on Friday. This again leaves the holdings of the SPDR gold ETF at 678.183 tonnes and 159.30 tonnes in the Gold Trust.

We do see the Treasury continuing the policy of quietly managing the dollar exchange rate, particularly with the euro, so as to keep it stable around current levels in the $1.07 to $1.14 trading band. While the implied objective of the Fed, last week in not raising interest rates, was to ‘stabilize’ the dollar against other currencies, in essence, it is a competitive devaluation policy, ensuring the international trade competitiveness of the U.S is not undermined by other currency exchange rate depreciations.

Whether the G-20 says they will not OK a currency war, the world is in one already. This battle of the currencies will continue as we enter the multi-currency monetary system away from the dollar hegemony that has persisted since 1971.

Julian D.W. Phillips for the Gold & Silver Forecasters – and

Gold price attention swings back to dollar strength

New York closed yesterday at $1,157.90 down $5.10 with Asia and London taking it down to $1,155. The dollar was stronger at $1.0992 up from $1.1147 against the euro with the dollar Index at 96.94 up from 95.87 before London opened.  The LBMA gold price was set this morning at $1,153.20 down $1.75. The euro equivalent was €1,045.51 down €2.38. Ahead of New York’s opening, gold was trading in London at $1,154.00 and in the euro at €1,046.14.

The silver price rose to $15.50 down 8 cents in New York. Ahead of New York’s opening itoday t was trading at $15.36.

The attention of the gold price has, as we said yesterday swung back to a stronger dollar and away from the Greek tragedy. The deal between Greece and the E.U. needs to be ratified in the Greek Parliament before it is a reality, but we see no danger to the euro from Greece any more.

Dramatically, it seems that Iran and the U.S. have reached a deal, at last. While the oil price has and will fall because of this we do not expect Iranian oil to hit the market, any more than it is doing at present until the middle of next year. Even then it will only be at around 15% of its peak production of 3.5 million barrels a day. Nevertheless, while there is an oversupply, there is more likelihood of prices falling then rising until then. The deal does seem to open the way for Iran to take a higher profile in the fight against ISIS, but will worsen relations between Saudi Arabia and the U.S. We do not see this leading to a change in Saudi Arabia’s use of the dollar to receive payments for oil. If this happened it would be positive for gold prices.

The most important event in the last month for gold and silver has been the fall in the euro price of gold when the prospect of Greece leaving the E.U. was real. Of great interest to all is the strength of the dollar and just how far it will rise and the euro fall. It could easily fall to par if the U.S. does not prevent that. The U.S. recovery cannot remain intact if the euro falls too far!

A look at the gold price in other currencies also shows its resilience, while in the dollar it has been in a +$50 [5%] trading range for the last 18 months. Professional investors in the U.S. have been long of gold in weak currencies such as the euro and the Yen profitably so. We see this as continuing.

Silver will likely recover faster than gold now.   ,

Julian D.W. Phillips for the Gold & Silver Forecasters – and


Gold very much better in other currencies than dollar

Julian Phillips’ latest commentary on the gold and silver markets and factors driving them

New York closed yesterday at $1,203.40 up $7.80. Asia held it there before London opened, where it slipped to $1,197.00 ahead of the LBMA Gold price where it was set at $1,198 down $11.40 but higher than the market was trading before the price was set. The euro equivalent stood at €1,106.54 up €6.89. Ahead of New York’s opening, gold was trading in London at $1,200.40 and in the euro at €1,106.36.

The silver price closed at $17.05 up 8 cents. Ahead of New York’s opening it was trading at $17.07.

There were sales of 5.97 tonnes of gold from the SPDR gold ETF but nothing from or to the Gold Trust on Thursday. The holdings of the SPDR gold ETF are at 737.237 tonnes and at 164.71 tonnes in the Gold Trust.  This sale did pull New York back, but back to support. Asia added to the fall, so now on the busiest day of the week we wait to see if support will hold. As we said yesterday, “If the gold price holds above $1,200 it is support, once again. The next two days will see if it holds.”

The dollar is starting to recover taking the dollar index back to 97.67 up from 96.43 while the euro is slipping standing now $1.0827 down from $1.1013 yesterday. The dollar is looking toppy so we do expect it to slip back or consolidate at current levels. This leaves the gold and silver prices, once again embroiled in currency moves.

However, just in case you haven’t factored this in, the gold price in the euro is now well above support at over €1,106. The overview is therefore that all currencies are now slipping against the dollar once more, but this may not last for long as the dollar does look vulnerable. Any more rises in the dollar will be firmly against the interests of the U.S. as implied by the Fed and clearly followed through on by the Treasury.

Gold in currencies other than the dollar has done very much better than in the dollar. In the dollar, gold has moved away from its lows and regained a point where, if support holds, it can move strongly higher. But in other currencies that have weakened against the dollar gold is seeing good gains. Demand from nations other than the U.S. [which is a relatively small long-term player and consumer of gold] is rising as gold is recovering well.

What is surprising is that the Yuan is stronger than the dollar at 6.20 up from 6.24: $1. We cannot see this lasting as it is in China’s interest to see the Yuan weaker.

Julian D.W. Phillips for the Gold & Silver Forecasters – and


Expect some big mining costs falls in Q1

By Lawrence Williams

The fall in the oil price will be having a very positive effect on operating costs at mines employing diesel-powered equipment and particularly those which have to rely on oil fuelled generators.  

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The huge fall in oil prices may be having a devastating effect on major oil producers’ economies, but for the beleaguered global mining sector it will be proving, in many cases, a godsend.  Expect to see some big falls in mining costs in Q1 as a consequence.  Indeed Q4 costs are also going to be lower as a result of the reduced oil prices, but with the main price falls hitting late in the year we will only be seeing the principal impact this year.  With no signs of an oil price recovery in sight these cost falls could continue for some time to come.

Energy consumption can account for as much as 40% of some mines’ operating costs – particularly those in remote locations which have no access to grid power.  They mostly rely on diesel generators to provide mine power – and every part of the mining process utilises energy.  The percentage is probably highest for big open pit operations with long truck hauls.  A big 240 ton mining truck like a Cat 797 has a 1,000 gallon fuel tank which will require topping up every shift.  Costs will also be reduced for those operations employing long mine to port haulage distances for bulk minerals requiring diesel powered rail or truck hauls.

Underground mines also have high fuel consumption haul and load equipment and if long up-ramp truck hauls are required consumption rates are high, much as long up ramp hauls out of open pits, are also very fuel cost intensive.  Diesel powered underground loaders, which involve stop start activity while loading and tipping, are also high fuel users.  Virtually every activity, underground and surface, requires energy supply.

Mineral processing plants require large amounts of power too – indeed a recent Australian report reckoned that as much as 40% of a mine’s energy costs may be accounted for by comminution – crushing and grinding.  Even those on grid power may benefit as utilities relying on oil-fired power plants may be able to reduce their charges too.

Many of these miners, which incur costs in domestic currencies, but sell their product in US dollars will benefiting also, at least in the short term, from dollar strength, although since fuel is traded in US dollars this will reduce the benefits of the falling oil prices.  However the fall in oil prices will, in most cases, have been far greater than the rise in the dollar against the local currency.

As implied above, those that will see the biggest costs benefits are operations in remote locations relying almost entirely on diesel power.  For the most part they will already have been taking substantial steps to cut fuel usage – through elements on the mining side like improving mine design and haulage conditions and better scheduling of mine vehicles, while as to mineral processing the installation and utilisation of more efficient comminution equipment is also very important in cutting overall energy costs.  It is to be hoped though that the reduction in oil costs does not lead to ther cost cutting options being ignored.