Jobs, Brexit and Gold – the unholy trio that are upsetting the Fed applecart

As maybe I’ve mentioned before, of the plethora of supposedly independent information and reports which come through to me in my daily emails, one I will always read assiduously is Grant Williams’ Things that make you go hmm… twice monthly (usually) newsletter.  Not only does he take a pretty jaundiced view of much of what passes for mainstream economic analysis and media comment, but he expresses his opinions forthrightly and with good humour as anyone who has attended one of his conference presentations will be well aware.

Grant is both a Singapore-based fund manager and very well followed commentator on geopolitics and economics and he occasionally touches on gold as a part of this terrific coverage in his subscription-based newsletter.  He makes you sit up and think – and understand that much of what data is released by governments, central banks and government funded economists is more akin to some of the claptrap often put out by junior mining and exploration companies (and some bigger ones too) and their PR companies in trying to hoodwink investors by putting a strong positive spin on financial and drilling results which often, on deeper analysis, should be suggesting quite the opposite.

His latest newsletter, entitled ‘The 60 Second Excitement’ looks in some depth, inter alia, at the latest U.S. non farm payroll figures, the possibility of a Brexit (Britain leaving the European Union) and their combined effect on the gold market, gold stocks and the gold price should the initially unexpected materialize – as it has already done with the U.S. jobs figures.

Let’s take all these in order:

Firstly the latest U.S. jobs statistics which showed an increase in non-farm payroll figures for April of only 38,000 – hugely below the consensus expectation of 160,000 – coupled with also reducing the figures for the prior two months as well.  Yet in Fed terms the positive spin was that the overall unemployment rate fell to 4.7% (below the Fed 5% target),  but conveniently ignoring the incontrovertible fact that according to government stats this relatively low unemployment rate has only been achieved by an ever-continuing rise in the percentage of people who have somehow withdrawn from the labour market altogether.  One is thus drawn to John Williams’ (no relation to Grant or myself – we Williamses seem to be getting around!) Shadow Stats, which looks at such government statistics more in the way they used to be calculated before goalposts were moved (several times in some cases).  According to Shadow Stats the U.S. unemployment rate is, in reality, is somewhat north of 20%, which would seem confirm reality rather than manipulated government statistics.

Prior to the latest jobs announcement observers had seen the likelihood of the Fed raising rates 25 basis points in June much more likely and gold had been suffering as a consequence.  After the jobs announcement the likelihood of a June rate rise receded substantially, although some observers feel a July rate rise still on the cards if U.S. economic data between now and then looks supportive – and if the U.K votes to stay in the European Union in the referendum on June 23rd.  Others think September, or even later, will see the next Fed rate rise.  Undoubtedly the Fed has talked itself into imposing another rate increase this year, or perhaps two, just to maintain what little credibility it may have left in its ability to really jumpstart the U.S. economy and promote sustainable growth.

But now back to Brexit.  As we have pointed out here before there’s a substantial underswell amongst the British public of anti-EU feeling.  Whether this will express itself in a Brexit vote remains uncertain – a set of opinion polls published today (so after the latest TTMYGH newsletter was written) – suggest that the Brexit vote may indeed carry the day, although the high powered government-based Remain propaganda machine may yet prevail.  But if the Brexit option does emerge triumphant in just over 2 weeks’ time, with its decidedly uncertain, and almost certainly immediately negative impact on the U.K. economy, there are a growing number who believe the impact on the whole European Union concept – and even on the global economy – could actually be even more severe.

There has been a huge ‘project fear’ campaign unleashed on the U.K. electorate by the Remain camp, but as Grant Williams points out all the statistics being put about predicting doom and gloom for the U.K. economy as a whole and for the wealth of the person in the street, are totally unquantifiable – much as the positive spin on some drilling results from exploration juniors could be equally speculative but on the positive side.  Not that the pro-Brexit campaigners are not equally guilty of disseminating unquantifiable statistics and suppositions of their own.

So what has all this to do with gold?  Gold tends to thrive on uncertainty and the Fed’s dithering over rate increases, growing concerns about whether the U.S. economy is actually growing, and the potential effects of a Brexit should it come about – which looks to be much more of a possibility now than it did only a couple of weeks ago, are all uncertainties gold could thrive on. Add to that the apparent beginnings of a downturn in global gold production and doubts about continuing supply availability, coupled with what has been enormous gold ETF demand so far this year, and this is all gold supportive.  True, Asian demand has slipped.  Indeed this fall in demand from the East coupled with the huge ETF demand shows there has been something of a reversal in gold flows with more flowing into the Western gold ETFs than into India and China combined.  But virtually no-one believes that Asian demand will not pick up again – quite probably later this year and if this is accompanied by a continuation of ETF inflows the doubts about availability of unattributable (i.e. freely available physical gold) will multiply.

Grant Williams also points to another supportive phenomenon in the performance of gold stocks which have been hugely outstripping the rise in the metal price, and which have been remaining relatively strong even through the recent correction in the gold price.  Some of the biggest gold stocks of all have more than doubled and the most significant gold stock indexes and ETFs have been outstanding performers vis-à-vis the gold price itself.  Gold stocks are often the precursors of significant moves in the gold price rather than just being followers.

But while the TTMYGH newsletter highlighted just the three factors noted above, Grant Williams goes on to end with the comment: There are plenty more (such factors).  He mentions China, the upcoming US elections, the explosion in corporate debt levels and perhaps the biggest problem of all—unfunded pension liabilities—which will all have a big part in determining what kind of outcome the world gets as the ghosts of 2008 return.  You have been warned.

The above article is a lightly edited version of one I posted onto the info.sharpspixely.com site a day earlier

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Weekend reading on gold

Lawrieongold readers may be interested to read my two most recent articles on SeekingAlpha.com and Sharpspixley.com which both look at specific aspects of the current  gold and gold stocks markets.

To read the Seeking Alpha article click on Billionaires, Gold And Gold Stocks… They Are In For The Long Term, Should You Be Too?.  This in a way comments on some recent media decrying the idea of following some highly publicised media coverage of some huge investments in gold and gold stocks by some high profile billionaires.  My view is that it’s not too late to follow their example as they are for the most part investing in gold for the long term.  They see a whole lot of factors ahead which will support a rising gold price over the remainder of this year and into the years ahead.

For the Sharps Pixley article click on Reversing gold flows could lead to Perfect Storm.  This article examines the changes in gold flows which have been taking place this year which have seen the main area of demand in the West, rather than in the East which has been the case for the past several years.  This has been due to weak Asian demand coupled with enormous investment demand in the U.S. and Europe exemplified by the big move back into gold ETFs and in coin sales.  It also takes a look at the  recent Swiss data which saw big gold imports from the UAE and Hong Kong – normally major recipients of gold from the Swiss refiners, and a very big export figure for gold into the U.K. – again a huge reversal of the normal flows.  Is this an indicator that London is actually short of unattributable physical gold?

Readers are reminded regarding this latter possible conclusion by my earlier article: Switzerland gold data raises new doubts about London’s Gold Stocks

In my view these are very interesting times for the gold market, which could result in some good upwards momentum, particularly given the recent weak U.S. employment data which could yet again dissuade the Fed from raising interest rates in the near future.  And if and when the Fed does raise rates, probably by a paltry 25 basis points again, should gold investors be worried.  Consider what happened to the metal price when the Fed raised rates in December.  It was closely followed by one of the biggest gold price surges in years rather than knocking the price back as most analysts were predicting.  The weakness in price mostly occurred prior to the event and strength afterwards.

Readers may also want to look at the possible impact of a Brexit should the U.K. public vote to withdraw from the EU in 3 weeks time.  This now looks to be a definite possibility, while only just over a week ago many commentators had virtually written this possibility off as highly unlikely.  There is an underswell of resentment regarding EU membership in the U.K. which only now seems to be becoming apparent.  See: Brits and Europeans may find gold attractive as Brexit possibility looks stronger.

All good weekend reading!

David Morgan talks gold and silver and where he thinks they are headed

Mike Gleason of Money Metals Exchange in the U.S. interviews David Morgan of the The Morgan Report to get his take on the advance in the metals so far this year, how long it’s likely to continue, and whether or not the Silver Guru is concerned.  The interview was conducted ahead of this week’s FOMC meeting and gold’s pullback before it and pick-up after.

David Morgan

Mike Gleason: I’m happy to welcome back our good friend David Morgan of TheMorganReport.com and author of the book The Silver Manifesto. David it’s a pleasure to talk to you as always, how are you?

David Morgan: I’m doing well, thank you for having me on your show.

Mike Gleason: Well to start out I’ll ask you to comment on the market action here in 2016 so far. Now, gold and silver have done quite well, we had gold advancing on weakness and concerns in the equities markets earlier in the year. Now over the last week we’ve seen it continue to do well even as stocks rebounded after a strong employment report. One would think it’s a bullish sign when we get good price action even with supposedly negative news for precious metals coming out. So give us your thoughts on the market action so far this year, David, and specifically why do you think the metals have done so well here in the early part of 2016?

David Morgan: Well a couple things, one to quote The Economist magazine, which is a pretty well-known and revered publication. They stated that, “This is the best start of gold mark in 35 years.” On top of that, the main reason is because the overall equity market has basically gone 20% down. From a technical perspective, you have a top in the stock market in the United States and other markets around the globe. So the most negatively correlated asset to equities is gold itself, not gold stocks.

That’s basically it. I think it’s pretty simple. I don’t think you need to look much further than that. I would add on another real key element to knowing that things are finally off the bottom and going to continue, backing and filling, up and down – but nonetheless, the bottom is in – is the volume. The volume is substantial. The amount of flows into the gold ETF is the greatest that it has been since 2009, which is after the 2008 crisis but the first one that was off the bottom were the precious metals.

Most of us know that gold basically bottomed in 2008 along with silver. Silver went from basically the $9 level and over several months made it all the way to $48. Gold bottomed, and I forget the number, but it went up to $1,900. Are we going to repeat that? I think in the long-term yes, but in the short-term, gold’s ahead of silver.

Mike Gleason: That leads me right into my next question. We do have gold outperforming silver so far this year, which generally we don’t see when the metals as a whole are rising. That means that the gold to silver ratio has actually even gotten a bit higher, sitting at about 82 to 1 as we’re talking here [It’s since come back to around 78 – Ed.]. Are you concerned that silver is lagging gold a little bit?

David Morgan: I am concerned. I believe that we have a non-confirmation. I like to see that the whites the yellow or vice versa and that non-confirmation does concern me. I think that we want to see silver over $16 and then things will proceed upward, probably even more than they have so far. In other words, silver will either play catch up or it won’t. If it doesn’t, it doesn’t mean gold won’t continue (going up). What it does mean is that there might be some more work to be done.

As far as how these markets come off of bottoms, usually what happens is the big money, the smart money moves into like the large gold stocks, and they have. We’ve seen very big volume into the large top tier mining companies, and they have moved substantially higher on a percentage basis. You’ve seen that across the board, you haven’t seen those smaller stocks come up as strongly.

Silver of course is a subset of gold. It’s 85% correlated with gold. And the silver stocks have performed well. So we’re really just kind of keeping our eye on silver. It doesn’t mean much other than we need to pay attention because it could indicate that again, we might see kind of a pull back, and we might come back all the way to where this launch took place. Technicians can always pick their sweet spot. I’d say about the $1,200 level. I put that out for our members that I was long gold at $1,200. Obviously that’s paying off well so far and of course I’ve put my stops up, so I’ve protected the profit.

Mike Gleason: Certainly the mining stocks do quite well, you eluded to that a moment ago. They seem to be leading the bullion a little bit. Is the worst behind us in the mining industry or is there still more carnage coming?

David Morgan: Great question, and of course you have to really answer it correctly, you have to answer on a case-to-case basis. But from a broad brush perspective, yes the worst is behind us for the miners. There are of course case-by-case basis that companies that won’t make it that need either a merger and acquisition type of situation that they have assets of value or they just can’t get loans at this point in time to continue their projects.

And that means that there will be some even though that from, again a broad perspective things have bottomed on individual cases, that there may be some favorites out there in the lower tiers, not to mid-tier so much as the speculative tier that may not make it even though gold and silver look to continue onward. Again, I can’t give a specific answer. I will give the fact that for example that we had SVM as a short term trade for our members, the members of our website. And that stock doubled and that happened while silver basically did very little and gold was just starting it’s move.

So the equities can really take off. Silver sat there from what you said, just under $14 to not quite $16, and I don’t know what the percentage is, 2 bucks on $14. 100% or a double on a silver stock, that’s a pretty liquid stock, is definitely an outperformer to what the metal itself has done.

Mike Gleason: We have a mutual friend, Steve St Angelo who runs the fantastic SRSrocco Report website, he’s a bit of a peak silver guy. Where do you come down on that? We’ve seen declining production coming from places like Mexico, a huge silver producer, and other countries that produce a lot of silver, certainly here in the States. Looks like our supply is dwindling, mine production is dwindling. Where do you come down on that? What are thoughts on the potential for peak silver?

David Morgan: Well, first of all, Steve and I are pretty close and we do talk I guess every month or so. I don’t agree with him totally. Again, it’s an economics situation, so if you look at it from today’s perspective, when you’re looking at sub $16 silver, that statement could look very very accurate, but if you got to $40 silver again then all the dynamics change. Because what’s very uneconomic today would become very economic at those prices.

If you want the details, what we really think, we did a whole chapter on it in the book The Silver Manifesto. And we go through and based on our work and our projections on where we think the metals are going, we think that the peak silver scenario is probably a few years out.

Mike Gleason: Certainly though, and I guess you hit on the point that at sub $16 silver, there is a finite supply of the metal out there, meaning the prices can stay this low forever and there still be supply, is that basically what you’re saying?

David Morgan: That’s basically it. If you want to be a super deep thinker, you could argue that it’s never going higher than that, and if it didn’t a lot more mines would be out of business. I don’t take that view. It doesn’t necessarily mean that the price has to go higher, but it pretty much is a strong indication that it will.

Mike Gleason: Negative interest rates are in the news both in Europe and now here in the States, which is obviously fueling the metals markets, gold in particular. Negative interest rates on cash means that gold and silver actually pay a higher rate of interest. What are your thoughts there, on the Fed, the likelihood that they are done with the interest rate hikes or even experiment with negative rates like central bankers are doing over there in the EU?

David Morgan: Yeah, tough question, and I will answer it. In my views because this is opinion and I’ll give you my thinking. Obviously the negative interest rate scenario is one that I don’t think the central banks have really thought through very well. The idea, first of all if we back up and look at all those with debt problems say, “How are we going to solve this debt problem?” “Oh, borrow more money and then increase the debt load.” That was basically what took place during the financial crisis with Hank Paulson that put out this TARP situation.

Then we go to QE1 and we add more debt to our debt problem and that doesn’t work so what we should do now is add even more debt to the debt problem, which was QE2, and that’s when silver took off from $26 to $48 because people anticipated inflation in the marketplace on Main Street, not just on Wall Street. It didn’t take place on Main Street, but it did take place on Wall Street, so the market backed off for that one and several other reasons.

So now we’re in a situation, well if adding debt to debt doesn’t work, what we need to do, and if a zero interest rate policy, let’s just take interest rates negative and that’s certain to work. And of course my view of certain not to work. As far as coming around to the question, the U.S. has already raised interest rates on a very very modest level. I think it was done more as a trial balloon more than anything else.

I’m still of the belief or the opinion that the United States will not go to negative interest rates for a while, if ever. They may get there, but I still think that the reason that these interest rates are being raised by the Federal Reserve is to provide strength to the U.S. dollar because what’s really happened as my friend Hugo Salinas Price pointed out recently in one of his articles is there’s been a massive exit out of the U.S. dollar by the Chinese, something on the order of a trillion dollars.

And that didn’t move interest rates, which is almost impossible. Anytime any market creates freely and there’s a massive buyer, a massive seller, it will change the price and interest rates is the price of money. So it certainly should have changed the price and it didn’t. There’s other interviews you can find on the internet regarding the mechanics of that and why it did or didn’t happen. My view is that the U.S. Fed, although they’ll never say this publicly, is concerned that they have to keep the dollar game going as long as they possibly can. So to make it the strongest kid on the block by keeping interest rates positive or perhaps even raising them again somewhere down the road, perhaps once again before the end of this year will give the illusion that the dollar has strength and the illusion that our economy might be doing better than other places on the globe. Which is really a fallacy, but nonetheless, perception is everything in today’s Orwellian society.

So I have a different view, Mike, I think they’re going to stay the same or even perhaps increase again. I’m a very very lone wolf on this. I don’t know many people that are saying what I just said, but that’s my view.

Mike Gleason: Switching gears here a little bit, we’ve seen a big drop in the registered stocks of gold in the COMEX and a seemingly ridiculous situation where more than 500 ounces of paper gold are backed by a single ounce of physical gold in exchange warehouses. What do you make of that? Is there any reason for alarm there? This is something that’s been talked about for a long time. Could we be at a tipping point as to the ability of the future’s markets like the COMEX to remain a trusted price-setting mechanism for physical gold and silver?

David Morgan: Yeah, great question. I wish I had an absolute for everyone. First of all, there’s a considerable concern. The actuality of it taking place I think is rather low for a couple of reasons. One is if you read the contract that everybody signs, well they’re just an individual investor and trade, one contractor at a time or a mini contract. Or they’re a huge institution that trades thousands of contracts at a time or even a central bank that “hedges” in the thousands upon thousands of contracts at a time. The rules are what they are, which means that you can settle in cash.

So if there were a stand-for-delivery mechanism, which exists, AND it was above and beyond what the physical amount of gold in the CME is, there would be paper settlement. And I’m sure that the mainstream press would probably spin it to where they would make it sound as positive as possible, something along the lines of, “Rogue trader stands for delivery, contracts settled by law with the price.” And they won’t say paper price. And “how dare they stand for delivery when everybody knows that a gold contract is just a paper mechanism to set the price and nothing to do with the physical demand.” Which of course is true and false.

Less than 1% of all the trading ever results in standing for delivery and taking physical metal. Nonetheless, over the years it has taken place. And the amount of gold that exists on the CME is pitifully small, so certainly someone could stand for delivery or a few people or entities and really cause some havoc. But the next question is this: who would be willing to do that? And the answer is I don’t know. But most of the bigger players would be unwilling to do it because the negative press would be so great and probably the phone calls that you would never hear about in the public domain, about you know, it’s not going to happen, Bank X or hedge fund Y or money manager Z. We’re not going to let this happen.

I am suspect, and I hate to sound so cynical, but I’ve been in this industry for 40 years and I’ve seen a lot of things. You look at what happened in the silver market back in late 70’s, and if you read the bookSilver Bulls, which I have several times, written by Paul Sarnoff, you get a pretty good idea of the day-to-day what took place during the Hunt brothers situation and what kind of conversations took place.

On a personal level, I would love to see it. I would love to see someone stand for delivery on that pitifully small amount of gold and see what the heck happens, but is it going to? I don’t think it will Mike. It could. Again, I’d like to see it happen, but the outcome is not quite as optimistic, and I could be wrong. This purely my opinion, but I think if it were to take place, first of all, I just don’t think it could. I think there’ll be too many roadblocks, but let’s say that it did take place.

If it were to occur, it’d be what I just said, I want to repeat slightly that the spin on it by the mainstream would be severe and they would try and make it look as if these gold bugs were causing problems and these speculators were putting misery in the markets and on and on. So it could have, to the general public, more of a negative outlay that it would be to us that understand the financial markets and how important honest money is than we might like to think.

So I would really want to think that one through. We just have to wait and see what takes place in the future.

Mike Gleason: Very interesting take on all that. That’s pretty insightful. I think you’re probably right. I think we see it much the same way. But it’ll be interesting to see what happens there. Well as we begin to wrap up here, David, how do you envision the year playing out in the metals? Do we get follow through after the strong start this time because in 2014 and 2015 both, gold and silver did well in January and February only to fall off to close the year lower. So will 2016 be a different story? Will we see a strong performance in the metals continuing this time? And if so, why do you believe that will happen?

David Morgan: A great refresher for everyone, yes I think we’ll have a good year but not a great year. I think the reason being is what I outlined. The biggest push for gold is a negative equity market. It’s certainly in the cards. If you look at the rollover, the moving averages, the chart pattern, everything that I know after years is the fact that the stock market looks as if it’s peaked here. And if that’s true, then you’re going to see more and more come into the gold market. Plus we have such a big start with the gold market, best in 35 years and volume. In other words, more and more are coming in the gold sector, which is primarily the large money which primarily invest in gold through the paper system meaning the ETFs.

So I think we are on our way. I don’t think it’s going to be substantially huge. I think it’s going to be good. And I do think this year finally we’ll see higher prices at the end of the year than the beginning of the year. My forecast for The Morgan Report was you could have all of this assured back in January and hope you will get carried through in like the middle of March or maybe even April, middle of April, which I still hold to.

I think there will be the pullback summer doldrums type of thing. A lot of these companies and the gold market and probably the silver market will come off wherever they peak but they will be higher than the end of the year last year and then they’ll just kind of wallow around, and then I think you will see a final finish for 2016 that’s positive like we usually see. The seasonality and the precious metals is usually that you get a pretty good lift near the end of the year, and of course that has not been the case as you pointed out for the last several years.

In fact, in a few of those years, we got the lowest print of the year on the last trading day in the market. Going back to the CME question, most of these traders take pretty long holidays and they just don’t trade. They close their positions and they’re free of any obligations, and they’re off on holiday. So the trading platform is extremely thin, which means there are very few participants, which means it’s very easy to move the market either up or down. And most of these guys choose to move it down, so you can get a very low print at the end of the year for gold or silver.

Then the mainstream financial pundits can say, “My, my look at gold close at a new low this year,” Of course it’s all true, but it’s easy to do because of the way the market is mechanically set up.

Mike Gleason: The heavy volume that we’ve seen there in the ETFs, it will be interesting to see if that’s continues. Obviously that’s a good sign that there’s maybe more interest among the gold-buying community.

Well it figures to be quite an interesting ride this year. We have the contentious presidential election, Fed backpedaling on interest rate hikes, a global economy that seems to be rolling over, and who knows what else. There are a lot of things to keep an eye on, and we always appreciate your thoughtful analysis here on the Money Metals podcast. Now before we let you go David, please let folks know how they can follow you there at The Morgan Report because this figures to be a great time for people to dive deeper into the metals.

David Morgan: Absolutely. I would like to suggest to everyone that we have, in fact, me, I basically did it all on my own this time although I’ve got talent fairly deep, a new report called “Riches in Resources.” And the “Riches in Resources” report is like eleven pages long and it will provide good information to you about the big picture on down, which means you’re going to learn from the beginning about what happens at the end of the age of empire and what the progression is to a state of empire and then it moves from there down into the resource sector, then into the gold and silver story, the dollar story, the debt problem, and then it moves forward into the mining sector and what we do here at The Morgan Report. It gives you opportunities to make money in this market, not only through a subscription on The Morgan Report as a website member, but also we just give you some freebies on how you can make money in that report. Just a very, very easy situations if you are inclined to purchase gold and silver.

So we just finished it. It’s going to be available. It’s a double opt-in. Go to TheMorganReport.com. Go to the right hand side, get your pre-special report, Riches in Resources. All you need is a first name and your primary email address and we’ll send that to you in your inbox.

Mike Gleason: Well great stuff, David. Thanks so much. We really appreciate it and hope you have a great weekend. Take Care.

David Morgan: Thank you.

 

Gold pre- and post- Fed non-decision: Surge back to $1,270

Here are links to a couple of my posts which are up on the sharpspixley.com website.  The first was written prior to the latest U.S. Fed Open Market Committee meeting looking at the nervousness ahead of the meeting which had seen gold fall back to the $1,230s.  while the consensus had always been that the Fed would do little or nothing, which indeed proved to be the case, there were still some predicting a more hawkish stance which did ahave an adverse effect on precious metals.

See: Tense time for gold bulls

In the event, as noted above, the Fed was cautious on any progress on the U.S. economy and on potential global reaction to any suggestion that the next rate increase might be sooner rather than later.  The non-decision by the Fed boosted equities and saw gold as a major beneficiary shooting up to around $1,270 at the time of writing.  What this observer thinks this means for precious metals is covered in the article.

See: Gold back at $1270 level after cautious Fed statement

Gold may have found a foundation above $1,200.  

Gold TodayGold closed in New York at $1,208.20 up from Tuesday’s $1,199.60. In Asia, it held close to that level, but pulled back to $1,204 in London to be set at over $1,212 this morning but then slipped back to $1,204 before London opened. Then the LBMA set it at $1,204.40 up from $1,202.00 up $2.40, with the dollar index stronger at 96.85 up from Monday’s 96.54.

The dollar is slightly stronger again, against the euro at $1.1116 up from $1.1144 on Wednesday. The gold price in the euro was set at €1,083.48 up from €1,078.51.

Ahead of New York’s opening, the gold price was trading at $1,207.15 and in the euro at €1,087.82.  

Silver Today –The silver price stood in Asia at $15.27 up 5 cents at the close in New York.  Ahead of New York’s opening the silver price stood at $15.32.

Price Drivers

Wednesday saw no purchases into the SPDR gold ETF but a purchase of 0.80 of a tonne into the Gold Trust, still waiting for gold to build a bottom. The holdings of the SPDR gold ETF are now at 710.954 tonnes and at 180.39 tonnes in the Gold Trust. Investors into these ETFs are certainly not sellers right now.

The gold price is holding over $1,200 settling and building a bottom there. This is reassuring bulls and worrying bears. We take note of the fact that U.S. investors have turned bullish on the physical side and we take further note that U.S. investors are not in a position to drive the gold price down with large physical sales. The ongoing weighty exports from London to Switzerland and to the Far East add to the draining of liquidity from the gold market in favor of Asia. Likewise, China’s demand at 215 tonnes of gold in December 2015 confirms just how great that demand is!

In India, current demand when extrapolated points to 1,000 tonnes being ‘officially’ imported ignoring a vast amount over and above that through smuggling into the country to gain the 10% of unpaid duties.

When totaled for 2016 we see a picture of ongoing demand into Asia taking all of the newly mined gold supplies off the market. Against this, how can sellers dominate the prices of gold and silver?

The Fed and Japan

The news out of the Fed Minutes and out of Japan gives some clarity on the way forward for the gold and silver prices. The Fed’s worry and uncertainty on the way forward for the U.S. economy, due to influences outside the U.S. is new to the usually introverted and myopic investor opinions. While such a viewpoint is new, it is likely to be a feature of Fed and Treasury actions going forward. U.S. investors are used to the nation leading the world on the economic and monetary fronts. For investors to recognize that the U.S. is very much a part of the global economy and influenced by it is a difficult departure for them.  To us it is a forerunner to major structural changes in the monetary world.

As to Japan’s disappointing export performance [falling 14%] just reported, this confirms that it will take far more than monetary stimuli and exchange rate weakening action to bring about an economic revival in Japan. With the dislike of Japan by China, the current driver of global growth, these numbers are indicative of a much longer term picture.

Silver – The silver price continues to hold strongly above $15.00 and we expect will do so while gold is in this Technical pattern.

 

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Steve Forbes speaks out – on the U.S. Presidential race, the Fed and on Gold and a Gold Standard

Steve Forbes Pulls No Punches in Interview with Money Metals Exchange‘s Mike Gleason*

Mike Gleason, Director, Money Metals Exchange: It is my great privilege to welcome Steve Forbes, Editor-in-Chief of Forbes Magazine, CEO of Forbes, Inc. to our Money Metals Exchange podcast. Steve is also author of many fabulous books, including Flat Tax Revolution, How Capitalism Will Save Us, and his latest work, Reviving America: How Repealing Obamacare, Replacing the Tax Code and Reforming the Fed Will Restore Hope and Prosperity. He’s also a two-time Presidential candidate, having run in the Republican primaries in both 1996 and 2000. It’s a tremendous honor to have him with us today. Mr. Forbes, thank you so much for joining us and welcome.

Steve Forbes, CEO of Forbes, Inc.: Good to be with you, Mike. Thank you.

Steve Forbes
Steve Forbes

Mike Gleason: I want to start out by getting your take on the 2016 Presidential election cycle, especially given your first-hand experience in the whole process. We’re seeing an anti-Washington voter revolt of sorts… it’s the anti-establishment candidates that have been getting all the momentum. This is especially true on the Republican side, where we see an outsider like Donald Trump currently leading and guys like Ted Cruz, Ben Carson and others having garnered a lot of support. But also on the Democratic side we’re seeing admitted Socialist Bernie Sanders starting to overtake Hillary Clinton with his outsider bid. What’s driving this phenomenon, and is this a good thing or a bad thing?

Steve Forbes: What it demonstrates is the intense, deep voter dissatisfaction with where the country is and fears about the future. There’s contempt for the political class for not being able to handle things. There’s the feeling that those who are in charge either don’t know what to do, or if they do they don’t know how to do it, so people are looking for outsiders for a fresh perspective. Just as in business where incumbents get too comfortable, you always find the entrepreneurial outsiders to challenge the status quo and upend things, and you’re seeing the same thing happening on the political side.

So who knows if Trump will go all the way, how far Bernie Sanders will go, but it’s a way of (at least for now) voters expressing dissatisfaction, unhappiness, and saying we want positive change. You cannot continue doing what you’re doing.

Mike Gleason: The issue of sound money has been getting more attention during the GOP debates than it has in several decades. It’s quite encouraging to us at Money Metals Exchange, as proponents of precious metals ownership, to hear Cruz, Paul, Carson, and even Trump bring up issues related to sound money such as reigning in the Federal Reserve. returning to some sort of a gold standard, and adoption of other measures to get America’s fiscal house back in order. I’m guessing you probably felt like a lone voice in the wilderness when you raised these subjects during your Presidential runs. So among the current candidates, who do you think best understands the problems created by our current monetary policy and might actually do something about it if elected President?

Steve Forbes: I think it’s encouraging that a growing number are recognizing there is a problem. Even before you get to solutions you’ve got to recognize and acknowledge that the way things are being done is not working and that the Federal Reserve has been a huge factor in the sluggishness of the U.S. economy; very, very destructive actions they’ve taken. I was delighted that Ted Cruz in one of the debates brought up the idea of a gold standard. Rand Paul of course was suckled on the idea of safe and sound money. Ben Carson has made reference to it. Donald Trump has made noises about the Federal Reserve. I think that’s a good sign.

One of the things that really most of the economics profession doesn’t seem to get is that money is simply a means for us to buy and sell with each other. It’s like a claim check. You go to a restaurant, check your coat, the claim check has no intrinsic value, but it’s a claim on the coat. Money is a claim on products and services. It has no intrinsic value. What it does, it’s like a claim check on products and services. It works best when it has a fixed value.

Money measures value the way scales measure weight or clocks measure time or rulers measure space and length, and it works best when it’s stable. The best way to get stable money, as we explained in our book Reviving America, is precisely to link it to gold the way we did for a hundred and eighty years. It works. Gold is like a ruler. It has a stable value. When you see the price fluctuate, that means that it’s the dollar’s value that’s fluctuating, people’s feeling about it for the present and for the future. But gold is like Polaris. It’s the North Star. It’s fixed.

Mike Gleason: That leads me right into my next question here. About a year ago you and Elizabeth Ames co-wrote the book titled Money: How the Destruction of the Dollar Threatens the Global Economy and What We Can Do About It. You proposed a modified gold standard… and I’ll quote here, and then I’d like to get your comments.

The twenty-first century gold standard would fix the dollar to gold at a particular price. The Federal Reserve would use its tools, primarily open market operations, to keep the value of the dollar tied at that rate of gold.

What would be the main benefits of such a reform? And also I’m curious why you stopped short of calling for an end to the Fed all together and a return to true free markets when it comes to gold and the rate of interest?

Steve Forbes: In terms of the role of the Federal Reserve, I think you’ve got to take one step at a time. One of the fears is that if you didn’t have the Fed you get a panic, which happens for whatever reason every few years, the thing would spin out of control. I think the key thing now is to get the dollar fixed in value, which we propose in that book, whether it’s a thousand dollars an ounce or eleven hundred dollars an ounce.

I think the best way to understand this is to imagine what would happen if the Federal Reserve was in charge of the time bureau, and the Fed decides to float the clock, sixty minutes to an hour one day, thirty-five minutes the day after, ninety minutes the day after that. Everyone would know that if you had a fluctuating clock, if your timepieces couldn’t keep accurate time, life would be chaotic. The same is true of money when it has a floating value. If you had the floating clock, imagine baking a cake. It says bake the batter thirty minutes. Is that inflation adjusted minutes, nominal minutes, a New York minute, a Mexican minute?

Gold is the best way to fix that value. The only role for the Fed, at least for now, would be to keep that fixed value and then deal decisively with the occasional panic, just as the British showed us a hundred and fifty years ago. If you have a panic where banks need the temporary liquidity, they go to the Fed with their collateral, borrow the money at above market interest rate, and then, as the crisis recedes, they quickly pay it back and it’s done. So the Fed’s role could almost be done by summer interns if they knew what they were doing, so it would not be the monster that it is today where the Fed tries to dictate where credit goes, what happens to the economy, etc. It’s really bizarre and destructive.

Mike Gleason: They certainly have a whole lot of control and a lot of people have a lot of interest in Fed policy, way too much for our liking, and I’m sure yours as well.

Steve Forbes:One other example on that is Janet Yellen, the head of the Federal Reserve, says that we should have two percent inflation, which in her mind is seeing the prices rising two percent a year. If you take a typical American family making fifty thousand bucks a year, that means their costs would go up a thousand dollars a year, two percent of fifty thousand. Who gave her the authority to raise the cost of living, which is an effective tax, a thousand dollars on a typical American family? Yet Congress, they just nod their heads. It’s a travesty.

Mike Gleason: I’ve always wondered if two percent is good, isn’t three percent better? What about four percent? It seems like it could just go on and on and get higher and higher.

Steve Forbes:Yep, which is what happens. An unstable dollar, whether it’s weak or strong, is like a timepiece, a watch that is too slow or too fast. Neither one is going to help you.

Mike Gleason: The equity markets have been quite vulnerable here in the early part of 2016 and a lot of that seems to stem from these over-valuations we were starting to see. Do you believe the recent pullback is just a short-term market cleansing? Or do you expect a bigger, more dramatic event to occur with this just being the tip of the iceberg?

Steve Forbes: Well, when you get a big change in the stock market it’s usually because of a surprise. People talk about oil, people talk about China, the pressure on earnings, those things are already known. It’s the unknowns that hit you. I think one of the things that has hit the markets – and they can’t be able to know the exact consequences – is precisely what’s happening in our politics. The idea of Bernie Sanders winning is still remote, but now you can’t rule out the possibility. What does Donald Trump want to do about trade? Well he’s been all over the map, to be blunt about that. He says he’ll negotiate it, but with that kind of uncertainty, people stay on the sidelines.

Mike Gleason: Looking at the current economic landscape and the debt-based dominated markets that we have now, the situation appears to have only worsened since the ’08 financial crisis, how do you envision this playing out? Are we looking at some kind of economic collapse again or will the Fed and the central planners be able to keep the wheels on this thing?

Steve Forbes: Those words “central planners” get to the very problem with the Fed. The idea that the economy is a machine is a preposterous one. The economy is individuals. The idea that you can control people the way you can modulate an automobile is… that’s how you get tyranny. That’s why in the third part of our book, Reviving America, we talk about Soviet style behavior by the Federal Reserve and by economic policymakers. When you look at the great disasters of the past – like the Great Depression, the terrible inflation of the 1970s, what happened to us in the panic in 2008-2009 – all of those had at their roots disastrous government policy errors.

Mike Gleason: I want to talk to you about the role that gold, and to some extent silver, can play into all of this. In your book you’ve written about gold and its role in an investor’s portfolio, but we shouldn’t necessarily look at it as an “investment.” Talk about that and then also whether you view gold ownership as more or less important now versus say ten, twenty, or thirty years ago.

Steve Forbes: In terms of gold, unless you’re a jeweler, I see it as an insurance policy. It doesn’t build new factories or things like that, new software. What it is is insurance that if things really go wrong you’ve got something that will balance your portfolio. So whether it’s five percent, ten percent, it shouldn’t be dominating your portfolio. But since you cannot trust this right now, what politicians do, what you have working out here is a situation where yes, the price of gold has come down since 2011 when it looked like the U.S. Government might default, but today in this kind of environment, is probably a good time. Not that you’re going to make quick money on it, but it’s like an insurance policy. You hope it doesn’t have to be used, but if it does you’ve got it.

Mike Gleason: We talked about how anti-establishment forces are starting to get some momentum. Do you see any real change coming about in our monetary system without some kind of crisis event forcing it? Generally it seems like things don’t change unless they’re forced. What do you think, is now maybe the time in Washington for some of these politicians to seize on the fact that a lot of Americans are very frustrated and maybe there is the ability to get some traction with some of these radical reforms and getting us back to sound money?

Steve Forbes: Well, this is one of the reasons why we did the book. It was to lay out what needs to be done so, if the opportunity or the crisis arises, we have the tools to do it. We had this terrible crisis in 2008-2009, but because policymakers were still holding these obsolete theories and dangerous notions about money, which got us in the crisis in the first place, they not only made mistakes, they invented new mistakes such as Quantitative Easing or zero interest rates.

Zero interest rates sounds great, like price controls sound great. You’re in an apartment, you only pay ten dollars a month, boy, that sounds great if you don’t mind having no maintenance. But when you suppress prices you distort the marketplace, deform the marketplace, people don’t invest, and you get stagnation. If the Federal Reserve announced that it was going to put price controls on Big Macs at McDonald’s and what you pay for a rental car and things like that, people would say that’s outrageous. And the Fed would say we want to suppress prices to stimulate the economy so you have more money to spend. We know it just wrecked the economy.

Yet when they do the same thing with interest rates, Congress hardly says boo! The Fed has distorted markets to the point where on zero interest rates, what the Fed in effect did was seize almost four trillion dollars of assets out of economy, made it very easy for those assets to go to the government and the large companies, and starved credit to small and new businesses.

Just one statistic, in the last five years the growth of credit to government has gone up thirty-seven percent, growth of credit to corporations thirty-two percent, growth of credit to small businesses and households only six percent. As you know, small and new enterprises are where the bulk of the jobs are created. So the Fed is in the business of credit allocation. That is profoundly wrong and must be changed.

Mike Gleason: We’re talking here in advance of the January Fed meeting. By the time this interview will air that decision will be known. But just more generally speaking, where do you see Fed policy going here? Are they truly stuck between a rock and a hard place? What do you think their policies are going to be as we go throughout the year?

Steve Forbes: They’ll be tempted to stop allowing the market interest rates in the name of saving the economy, which is like taking an anemic patient, a patient suffering from anemia, and bleeding them. With the Fed the “rock and a hard place” (idea) is only in their minds. What they should do is just step aside, let borrowers and lenders determine what interest rates should be, and let the markets function again instead of trying to control them like commissars in the old Soviet Union. Free markets always work when you let them, but the Fed has to be pushed on that.

Mike Gleason: As we begin to close here, what do you think it’s going to take for gold and silver to become a mainstream asset class again? For example, will it be China or Russia backing its currency with precious metals because the devaluation has gone too far too fast? Something like that? What are your thoughts there as we wrap up?

Steve Forbes: Well I think if they see precious metals for what their historic role has been, we have gold-based, gold-backed money today. Remember, gold is a ruler. Because it’s got that fixed value, it makes sure that the politicians don’t muck around with the integrity of the U.S. dollar. We had a gold standard from the 1790s right through the 1970s, a hundred and eighty years, and it worked very well. We had the most phenomenal growth of any country in the history of the world.

Since then we’ve had more financial crises, more dangerous banking crises, lower economic growth, and we see the stagnation that we have today. So maybe the Russians will get it, maybe the Chinese will get it, but the reason we have this book Reviving America, is to help activist citizens have the tools they need to push and get integrity back to the U.S. dollar, get rid of this horrific tax code, and get patients in charge of healthcare again. We do those things and you’ll see the American economy will roar off like a rocket. You should have your gold as that insurance policy and life will be good again.

Mike Gleason: Mr. Forbes, I can’t thank you enough for your fantastic insights and for being so generous with your time. I very much enjoyed reading your latest book in advance of this interview. You give the reader a great explanation of the history behind all of this, and then also more importantly some practical things that they can do to protect themselves, and we certain urge everyone to check that out.

It was great speaking with you today and we wish you and your family and your team there at Forbes and Forbes.com all the best. Thank you so much, and thank you for your continued efforts to spread the ideals of free market and liberty. It’s been a real pleasure to talk with you.

Steve Forbes: Great pleasure to talk with you. Don’t lose faith. Markets are people, and people thrive most when they are free.

Mike Gleason: Excellent way to end. That’ll do it for this week. Thanks again to Steve Forbes, CEO of Forbes, Inc, Editor-in-Chief of Forbes Magazine, and best-selling author, including his latest work,Reviving America: How Repealing Obamacare, Replacing the Tax Code and Reforming the Fed Will Restore Hope and Prosperity. You can obtain a copy of your own at Amazon.com, download it onto your Kindle or iPad, or purchase it at other places where books are sold.

 

Negative data driving Fed policy, boost for gold

 

The New York gold price closed Wednesday at $1.125.80 up from $1,121.40 up $4.40. In Asia on Thursday, it pulled back to $1,118.35 ahead of London’s opening and then the LBMA set it at $1,119.00 up from $1,116.50 with the dollar index down at 98.85 from 99.00 on Wednesday. The euro was up at $1.0910 $1.0874 against the dollar with a wide spread. The gold price in the euro was set at €1,025.66 down from €1,026.76. Ahead of New York’s opening, the gold price was trading at $1,119.65 and in the euro at €1,026.26.  

The silver price in New York closed at $14.48 down 2 cents at Wednesday’s close.  Ahead of New York’s opening, the silver price stood at $14.42.

Price Drivers

Wednesday saw no purchases or sales to or from the SPDR gold ETF but a purchase of o.72 of a tonnes into the Gold Trust. The holdings of the SPDR gold ETF are now at 669.229 tonnes and at 165.85 tonnes in the Gold Trust. We expect the gold price try to climb in consolidation mode, today.

The story of the day was the Fed’s decision yesterday and the comments attending the announcement. With a vast array of commentary on this and the future of rate hikes, we suggest readers keep an eye on the overall perspective surrounding the announcement.

To us it was clear that the Fed is data driven and the data is negative. Pertinently, the Fed announced it would monitor the global economy carefully. We have to factor in the changing global cash flow and note that the U.S. is not an island, but very much a part of the global economy, so it must take note of the impact of U.S. interest rates, no matter how small.

The Fed is thus seeing the U.S. in a global context, not just with its eye on the U.S. economy. The recent plunging of global markets bears testament to this. In particular, the level of the U.S. dollar exchange rate has become very, very important. We see the Fed as not being happy with it going any stronger and wants it to remain below 100, on the dollar index or lower.

The importance of this lies in the impact on U.S. exports and imports which are very much a part of the global economy. Evidence of this is the declining market share of Boeing, losing to Europe’s Airbus. We see exchange rates in 2016 becoming a major focus of the global economy and a telling factor on gold prices, particularly in the dollar.

But gold prices do not just reflect exchange rates and inflation. If they reflected inflation they would be moving around $15 a year at present, but we have seen that in the last week. The changing shape of global gold demand and supply alongside fundamental structural changes in the gold markets will decide the gold price in 2016.

Silver should take a breather today alongside gold.

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com

 

Equities tank, dollar down, gold up

Today (Friday) has seen some disturbing movements in the general equities sector with markets – led by China, which has moved into bear market territory leading the way.  Will the other markets follow – they are certainly heading in that direction.  Investors may have breathed a sigh of relief on Thursday when all the American indices opened lower, but then made good gains in positive territory, only to see all those gains wiped out and much morw in Friday’s trade.  The Dow had fallen down below 16,000 – 3% down on the day – (it was over 18,000 only as recently as early December) while the S&P 500 had fallen to below 1,870, also down 3%, while the NASDAQ had fallen over 3.8% to below 4450.  The markets are volatile and they may recover some but the trend has to be worrying – particularly those who have relied on a fed-fuelled equity boom which at one time was perhaps looking unending to the unwary.  The two weeks of the year to date have certainly provided something of a reality check.

The dollar was also down today per the dollar index – but in fact it only really fell against the three key currencies in the basket – the Euro, the Yen and the Swiss Franc (and marginally against the Yuan).  In virtually any other currency you care to name, including in those of the major gold mining nations, it was actually mostly around between 2-3% higher.

Gold however made something of a recovery from the downturns of the past couple of days and was heading back north of $1090.  Margin calls may reduce gold’s upside should equities continue to dive, as they did back in 2008, but once these were out of the way gold recovered fastest of all more than doubling in price over the following three years.

Are we in for a repeat?  It’s too early to tell, but with markets this nervous it wouldn’t take much to put them into a long downwards spiral.  Maybe the Fed raising interest rates (albeit by a pretty minuscule amount) has been all there was to set the process in motion.  Unintended consequences perhaps?

If the stock price rout continues next week it will once again enhance gold’s position as a safe haven investment in times of turbulence, perhaps reinforced by all the geopolitical flashpoints we are seeing developing around the world.  2016 could very well be an annus horribilis.

The Fed rate increase: An historical perspective

By Frank Holmes – CEO and Chief Investment Officer, U.S. Global Investors

What were you doing in June 2006?

That’s when the Federal Reserve last raised interest rates, just a year after the last Star Wars flick hit theaters. The biggest movie at the time was Adam Sandler’s “Click,” the hottest song, Shakira’s “Hips Don’t Lie.” The best-performing S&P 500 Index stock for the month was C.H. Robinson Worldwide. And as for Janet Yellen, she was president of the Federal Reserve Bank—of San Francisco.

Up to a third of money managers working today are more likely to have attended a midnight screening of the last Star Wars movie than experienced rising interest rates.

If June 2006 doesn’t seem that long ago, consider this: Up to a third of asset managers working today have never experienced a rate hike professionally.

On Wednesday, Chair Yellen announced that, for the first time in seven years, easy money will become slightly less easy. The target rate will be set at between 0.25 and 0.50 percent, which doesn’t sound like much, but it’s important that the Fed ease into this cycle cautiously and gradually. Plus, this comes at a time when fellow industrialized nations and economic areas around the globe are considering further monetary easing measures.

Effects and Possible Ramifications: Keep Calm and Invest On
Up to a third of money managers working today are more likely to have attended a midnight screening of the last Star Wars movie than experienced rising interest rates.

Rising rates, of course, have a noticeable effect on mortgages, car loans and other forms of credit. Savers will finally start earning interest again.

The question on investors’ minds, though, is what effect they might have on their investments. After all, the last couple of days have been challenging for stocks, with the S&P 500 dropping 1.5 percent on Friday alone. Is the Fed decision to blame?

To answer this, CLSA analyzed what happened to the U.S. dollar and stocks in the S&P 500 Index 60 trading days before and after the initial rate hike in past cycles and then calculated the averages. It’s important to keep in mind that, aside from rising interest rates, a multitude of unique factors—from geopolitics to economic conditions to the weather—played roles in influencing the outcomes. Nevertheless, CLSA’s research is instructive.

The group finds that, on average, the U.S. dollar peaked 10 trading days before the rate hike, and then afterward slid lower for four to five weeks. This created an agreeable climate for gold and other precious metals and commodities, as their prices typically share an inverse relationship with the dollar.

Opportunity for Commodities: U.S. Dollar Average Performance Around Time of First Rate Hike
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As for equities, they traded up for 60 trading days following the initial rate hike, 70 percent of the time.

S&P 500 Index Has Historically Risen for 60 Trading Days Following First Rate Hike
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But CLSA’s analysis looks only at possible near-term scenarios. What about the long-term?

In the past, the results were just as reassuring—most of the time. Barron’s records S&P 500 returns 250 and 500 days following the initial rate hike in six monetary tightening cycles going back to 1983. The findings suggest that the market went through an adjustment period, with average returns falling from 14 percent before the rate hike to 2.6 percent 250 days afterward. But by 500 days, returns returned to their pre-hike average of around 14 percent.

Equities Survived Previous Fed Rate Hikes
S&P 500 Index Returns Before and After Rate Increases
Performance Before/After Initial Rate Hike
Date of Initial Hike 250 Days Before 250 Days After 500 Days After
5/2/1983 36.60% -1.10% 12.20%
12/16/1986 19.10% -5.90% 11.20%
3/29/1988 -11.40% 11.70% 30.60%
2/4/1994 5.30% 0.60% 34.10%
6/30/1999 19.70% 6.00% -10.70%
6/30/2004 14.80% 4.40% 9.10%
Average 14.00% 2.60% 14.40%
Past performance does not guarantee future results.
Source: Barron’s, U.S. Global Investors

Again, many other factors besides interest rates contributed to market behavior in each instance. And this time is especially different, as the market was given an unusually long runway, allowing it to price in the full effects of the liftoff before it finally happened.

I can’t say whether the same trajectory will be taken this time as before, but what CLSA, Barron’s and others have found should be encouraging news for commodities and stocks.

I should also point out that according to the presidential election cycle theory developed by market historian Yale Hirsh, markets do well in a presidential election year.

The consumer price index came out this week and, with an inflation rate of 2 percent, the 5-year Treasury yield is now negative. (The real interest rate is what you get after subtracting inflation from the 5-year government bond.) This bodes well for gold. Also, the 10-year bond yield is lower than it was six months ago.

Investors Flee Junk Bonds and Defaulting Energy Companies, Find Comfort in Tax-Free Muni Bonds

In 2008, the Fed trimmed rates to historically-low levels in response to the worst financial crisis since the 1930s. Most people would agree that this helped put the brakes on the U.S. slipping further into recession.

But low rates were also partially responsible for driving many investors into riskier investments over the last few years—corporate junk bonds among them—as they sought higher yields.

Junk bonds, or high-yield bonds, are known as such because they have some of the lowest ratings from agencies such as Moody’s and Standard & Poor’s. Because they carry a higher default risk than investment-grade bonds, they offer higher yields.

But with corporate default rates nearing 3 percent for the year, and at least one large high-yield bond fund cutting off all redemptions, investors are facing liquidity problems and learning the hard way why these equities are commonly called “junk.”

The week before last, it was announced that a high-yield bond fund—whose assets under management were worth $2.5 billion as recently as 2013—would be closing after suffering nearly $1 billion in outflows this year. This sent the junk bond market into panic mode, with several similar funds experiencing near-record outflows. Fears intensified when legendary investor Carl Icahn tweeted: “Unfortunately I believe the meltdown in High Yield is just beginning.”

To make matters worse, high-yield bonds have fallen into negative territory, giving investors little reward for the risk.

Corporate High-Yield Collapses, Short-Term Munis Climb
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Energy companies, highly leveraged since oil began to spill value in the summer of 2014, top the default list for the year. JPMorgan estimates that the industry’s overall default rate might hit 10 percent next year.

“Junk bonds will likely be dead money for at least several years,” says Tony Daltorio, writing for Wyatt Investment Research. “Put your money elsewhere.”

But where, exactly, is “elsewhere”?

With rates now on the rise, many investors have turned to investment-grade, short-term municipal bonds, which have seen inflows at the fastest pace since January.

U.S. Investors Pile into Muni Bonds Despite Rate Hike
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Savvy investors know that bond prices move in the opposite direction of interest rates, but shorter-term munis are less sensitive to rate fluctuations than longer-term bonds. Put another way, bonds that are more sensitive to changes in the interest rate environment will have greater price fluctuations than those with less sensitivity.

“As municipal bonds head toward the strongest returns in the U.S. fixed-income markets this year, investors say the end of near-zero interest rates will do little to knock state- and local-government debt off its stride,” Bloomberg writes.

Over the past seven years, low rates certainly contributed to one of the strongest bull markets in U.S. history. Now that easy money is coming to an end, we can expect to see more volatility. But as the CLSA and Barron’s data show, there’s still plenty of room for growth.

It’s important, therefore, to stay diversified. Focus on high-quality, dividend-paying stocks; investment-grade, short-term municipal bonds; and, as always, gold—five percent in gold stocks, the other five percent in bullion.

Gold and silver market morning: Currencies the key

The New York gold price closed at $1,050.70 down $22.60 from $1,073.30 on Thursday’s close.  In Asia prices rose  back to $1,057.00 before London held it around $1,056 and the dollar index rose to 98.99 up from 98.83 in the dollar Index. The euro fell back to $1.0821 down from yesterday’s $1.849 from Thursday’s level against the dollar. The London a.m. LBMA gold price was set at $1,055.25 down $10.60 from Thursday’s $1,065.85.  In the euro the fixing was €975.55 down from yesterday’s €982.26. Ahead of New York’s opening, the gold price was trading at $1,056.45 and in the euro at €976.52.  

The silver price in New York closed at $13.72 down 43 cents. Ahead of New York’s opening the silver price stood at $13.77.

Price Drivers

This is the second time gold has hit $1,050 and this after the euro weakened and the dollar strengthened, worldwide. Our focus is on the dollar and whether it will be allowed to get really strong, against the interests of the U.S. or whether it will be restrained to protect those interests. Gold’s way forward, at least in New York and London are contingent on this path.

We believe that gold and silver investors must understand and appreciate the importance of currency influences on gold and silver prices if they are to succeed in these markets.

After the Fed hiked rates and we saw the differential between Europe’s interest rates and those of the U.S. widen, it looked as though the bull market in the dollar had restarted and the further falls in the gold price appeared inevitable. But as we cautioned, it appeared that the moment the dollar index approached 100 it was turned back. Yesterday it did get to 99 but today we see it at 98.99 again. So the way forward of the dollar continues to be capped for now. We need to see the dollar Index over 100 before we believe the bull market in the dollar has resumed. This picture needs to clear before we see the way forward for gold and silver prices.

COMEX speculators appeared to have the day yesterday as gold fell heavily. There were sales of 4.464 tonnes of gold from the SPDR gold ETF yesterday but none from the Gold Trust. We think this amount of sales did support the heavy fall in the gold price, in the U.S. The holdings of the SPDR gold ETF remain at 630.166 tonnes and now at 155.87 tonnes in the Gold Trust. With COMEX still massively short the way forward still looks down.

We still need to see what follow through there will be in the week ahead, at least?

The silver price will follow gold and the euro again. Julian D.W. Phillips for the Gold & Silver Forecasters – www.silverforecaster.com and www.goldforecaster.com

Gold and silver markets: On the brink of a very different monetary world

The New York gold price closed at $1,085.20 up from $1,063.20 on Friday, a rise of $32.50 over the week’s lows.  In Asia prices held at that level as the dollar held just above Friday’s level at 98.42 on the dollar Index. The dollar is at $1.0818 up from $1.0938 on Friday against the euro. The London a.m. price was set at $1,082.70 up from Friday’s $1,063.00.  In the euro the fixing was €1,000.65 up from Friday’s $975.68. Ahead of New York’s opening the gold price was trading at $1,083.35 and in the euro at €1,001.29.  

The silver price in New York closed at $14.55 up 44 cents. Ahead of New York’s opening the silver price stood at $14.56.

Price Drivers

With just over a week to go to the Fed’s announcement on interest rates, the gold and silver markets are likely to move sideways, unless there is a concerted attack on these prices by bears. We don’t think this is likely after the disappointing surprise from the European Central Bank on more stimuli. When the rate rise from the Fed does come, we expect either a 25 basis point rise OR LESS. If we see a smaller than 25 basis point rise, we expect markets to react in a similar way to the way they did last week. This will be positive for gold and silver.

We say this in the context of how critical the $: € is to both the E.U. and the U.S. and how important it will be to ‘manage’ the exchange rate and dollar index. The accepted relationship of the dollar moving the opposite way to the gold price is as strong as ever in the U.S. So when the Fed acts to restrain the dollar in currency markets, it will have a direct impact on the gold and silver prices. With the Yen, the Swiss Franc, the Pound being forced to exchange rate levels that their central banks want, the U.S. dollar will do the same when the Fed acts that way. So after currencies cease to be ‘safe havens’ what’s left for investors, particularly long-term investors?

This should be seen in the context of a steadily evolving currency world gradually being freed from the restraints lifted not only in 1971 but now with nations acting in their own individual interests in exchange rates.  With discipline being lost in the monetary system in this way, we are on the brink of a very different monetary world in 2016 than we saw in 2015 and before.

There were no sales of gold from the SPDR gold ETF or from the Gold Trust, on Friday. The holdings of the two gold ETFs, the SPDR gold ETF and the Gold Trust remain at 638.797 tonnes in the SPDR gold ETF and at 157.07 in the Gold Trust. Seemingly, these investors remain in a holding pattern waiting for the Fed too.

The silver price remains well over $14.00 and even if gold should fall heavily, we may well see silver break away from the gold price and not fall.

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com

Could gold drop below $1,000? If there’s a stock market crash – yes.

Another week and gold has been falling again, but investors don’t know which way to turn given the yo-yo performance of the major stock indices – particularly in the U.S. and Asia. Gold has been damaged by yet another set of indicators which have suggested to some that the U.S. Fed will next week make its long heralded decision to start raising interest rates.  It has talked itself into the position that it will have to raise rates sooner or later or lose whatever credibility it may have, but there’s still so much uncertainty around that the decision could yet be postponed to later in the year, or even into next although this observer feels that sooner rather than later is the most likely outcome.  Indeed any decision to start raising rates will probably come as a relief to the gold investment community with the gold price having been knocked down almost every time the Fed is predicted to take the decision to start the process……

The above is the intro to my latest article on gold for Sharpspixley.com – to read the full article click on this link.

Silver defeating bear raiders as gold soars further

On Wednesday New York closed at $1,132.70 up $15.00. The dollar was weaker at $1.1122 down from $1.1062 with the dollar Index slightly weaker at 96.50 down from 96.80 on Thursday morning. Asia took the price higher still to $1,138. This morning the LBMA gold price was set at $1,137.95 up $14.75. The euro equivalent was €1,019.53 up €2.28. Ahead of New York’s opening, gold was trading at $1,139.25 and in the euro at €1,019.60 and has since soared well above the $1,140 level and above €1,025.  The next major resistance point is seen as being at $1,152.

The silver price closed at $15.26 up 38 cents over Wednesday’s close in New York. Ahead of New York’s opening today it was trading at $15.40 and following in gold’s wake had moved above $15.50 as the New York market opened.

The Fed minutes stated that the conditions needed for a rate hike, ‘were approaching’. Despite the meaninglessness of the statement, there will be a host of translators telling us what this means. Bear in mind that these statements were made before important, but negative factors, came into being including further falls in the oil price. It does appear that oil prices still have some way to fall. The Fed will wait until inflation indicates that it is moving to the 2% level. With oil still falling this is unlikely to happen in the next month. Hence, it appears that September will not see the rate hike. The currency market’s reaction was for the dollar to weaken slightly.  We do not believe gold reacted to these minutes, but reacted to the Technical picture as gold broke up through resistance convincingly.

With such a large short position on COMEX and in the physical market the failure to fall is precipitating short covering and demand from Asia with the gold season approaching fast.-

There have been no sales or purchases in either the SPDR gold ETF or the Gold Trust so far this week, leaving the holdings of the SPDR gold ETF at 671.867 tonnes and 161.02 tonnes in the Gold Trust.  We are seeing the strong move we forecast yesterday in gold and silver prices.

Silver appears to be defeating the ‘bear raiders’ recovering most of its losses earlier in the week. We were right to expect the silver price to recover and to revert to its riveted place next to the gold price, as gold is firm.         

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com

U.S. employment figures batter gold

This article was submitted to Mineweb on Friday but as the site seems to shut down for the weekend as far as posting new articles is concerned, it was not published so have taken it upon myself to update it and release it here as the comment remains totally relevant.

Lawrie Williams

A higher than expected non-farm payrolls figure in the U.S. caused the gold price to dive on Friday as the view was that this would mean the Fed would raise interest rates sooner rather than later.

LONDON

The latest U.S. non-farm payroll figures showed an above-expectations rise of 280,000 jobs, while average hourly earnings rose by 0.3%, which again was higher than general expectations.  The immediate knee-jerk reaction on the gold price was to knock it down substantially below its recent $1175 to $1220 trading range and it remains to be seen whether Asian demand at the lower price levels will take it back up again.  So far there has been something g of a recovery back up to the $1175 level so it looks like the support at this kind of level remains with us.

Recent media reports have suggested that both Chinese and Indian demand for gold is slipping – fairly normal for the time of year.  The main early year festival boosts are behind us, as is the Indian wedding season and buying tends to fall in the latter pre-monsoon as well.  It doesn’t look to be an auspicious time for gold.

What really hit the markets though was the assessment that the latest U.S. employment figures would put a U.S. Fed raising of interest rates sooner rather than later back on the table – despite an earlier statement from the IMF effectively saying that the U.S. recovery is not strong enough to raise interest rates yet.  The feeling in the U.S., which for the moment seems to be setting the gold price, is that the stronger payroll figures would justify interest rate increases starting in September and might even put June back in the frame, although with the next FOMC meeting not scheduled until June 17th-18th when it will be coupled with a Janet Yellen Press Conference, the earlier date seems to be too soon to be implemented.  Thus the June FOMC meeting and ensuing statements, will be followed with particular interest by the markets.

There is something of a disagreement among analysts as to what effect the interest rates rise, when it does come, will have on the gold price.  A recent UBS analysis, which looked at the effects of previous U.S. interest rates rises suggested that an upwards move would indeed be negative for gold – with even the suggestion that continuing rises could push the gold price down well below the $1,000 level – disastrous for perhaps around half of the world’s gold mining industry where many producers are struggling to make profits even at current prices.

On the other hand, listening to a panel of gold experts at the recent Bloomberg Precious Metals conference and reading analysis by the major gold analytical consultancies, GFMS and Metals Focus, there has been the suggestion that once interest rate rises begin, they will be seen as being extremely modest with the result that real interest rates will remain negative and that, after an initial downturn, gold will recover quickly and make subsequent gains.  At least once interest rate rises are officially scheduled to begin it should release gold from the ever continuing upwards and downwards moves as economic data suggests that either the Fed will start to raise interest rates soon, or defer such a decision another few months.  Thus it should at least take some uncertainty out of the system.

At the time this article was originally written, the spot gold price had fallen back to around $1165 – a fall of around $12 on the previous day’s COMEX close. With markets closed over the weekend until Asian opening on Monday the price was subdued but pulled back to the $1175 level this morning.  This does suggest that buying does come in at the lower price range – for the moment at least.

Gold awaits data-driven Fed’s next move

Julian Phillips’ latest analysis of the gold and silver markets and their key drivers.

The key news of yesterday was the drop in U.S. GDP growth to 0.2% in the first quarter. More importantly the data coming out of the U.S. is for a continued slowdown with it possibly worsening. With no weather constraints now, the current quarter is crucial to what the Fed will do in the future. It has made it clear in the past that its actions are data driven so speculation as to whether a rate rise will happen in June, September or even later, appears pointless as future data will make that decision.

If the U.S. is slowing you can be sure the Eurozone is too, with the prospect of a recession there starting again. It is possible that, as different economic flows converge, we could see a very different global scene in the second half of the year to the one we are seeing now. How will that affect gold? One of the main flows that will directly affect gold this year is the continued path to a truly global gold market alongside the move of the Yuan to center stage in the global monetary system, while economic weakness returns. We see this to the detriment of the dollar. We know that the U.S. could use a much weaker dollar now, but China too, would like to see a steady to weak Yuan going forward. In this climate the environment for gold is distinctly positive.

Just remember that we have had 7 years of quantitative easing in the U.S. and now see it at massive levels in Japan and the Eurozone. If growth falters, questions about the abilities of governments to control growth jump up! That is gold positive!

Markets

New York gold closed at $1,204.00 down $8.20 on Wednesday. Asia saw it hold there and London took it up a dollar. The LBMA Gold price was set at $1,204.30 down only 50 cents. The euro equivalent stood at €1,076.13 down almost €20 while the dollar was weaker at $1.1192 down from $1.0993 against the euro. Ahead of New York’s opening, gold was trading in London at $1,203.40 and in the euro at €1,075.81.

The silver price closed at $16.53 down 8 cents on Wednesday. Ahead of New York’s opening it was trading at $16.57.

The dollar index fell, again, this morning  to 94.61 from 95.89 yesterday with the dollar continuing to lurch lower against the Euro from $1.1008 to $1.1212 today.   The fall of gold in the Euro is extraordinary and may spur arbitrageurs to lift the gold price in the Euro soon.  The question this poses is, “Is gold priced in the dollar or the euro?”  So now a weak dollar means a weak gold price?

There were no sales or purchases of gold from the SPDR gold E.T.F. or from or into the Gold Trust on Wednesday. The holdings of the SPDR gold ETF are at 739.065 tonnes and at 165.58 tonnes in the Gold Trust.

 

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com

 

Gold demand remains solid in India and China.

Julian Phillips’ latest take on the gold and silver markets and their key drivers.

New York closed at $1,203.20 down $7.10 on Wednesday. Asia dropped it to $1,195 then London started to lift it. The LBMA Gold price was set at $1,196.00 down $15.10 on yesterday’s level. The euro equivalent stood at €1,114.37 up €0.66. Ahead of New York’s opening, gold was trading higher in London at $1,200.00 again and in the euro at €1,114.36.

The silver price closed at $16.52 down 36 cents yesterday. Ahead of New York’s opening it was trading at $16.33. The silver price is very sensitive to downward moves in gold now and strongly leads the way down.

The gold price was moved against the dollar alone, having risen slightly in the euro. The dollar continues to strengthen at $1.0750 against the Euro up from $1.0905 last week and on the dollar index to 98.36 up from 97.24 last week.

We note that the Fed minutes said that Fed officials didn’t need to see an increase in core price inflation or wage inflation before hiking rates. Further improvement in the labor markets, stabilization of energy prices or a leveling out of the value of the dollar might be enough to move rates.

We are impressed that the Fed now factors in currency values. It shows a global perspective and the vulnerability of the U.S. to events outside their shores. We have seen gold prices being moved by local U.S. factors alone and expect this to continue until global arbitrage operations in the gold market make its price considerably more efficient than it is today. With major currency/global monetary events set to start this year considerably more focus will be seen inside the U.S. on external factors from now on. We see these as gold positive.

There were no sales or purchases from or to the SPDR gold ETF or the Gold Trust yesterday. The holdings of the SPDR gold ETF are at 733.059 tonnes and at 165.28 tonnes in the Gold Trust.

Gold demand remains solid from India in particular and China.

The need in China is for an efficient arbitrage system where Chinese demand can quickly absorb gold sales in New York and London. The same can be said of India, but premiums on gold prices persist in both countries. In India, the government’s continued imposition of duties prevents this, as duties widen the spreads to the extent it is not feasible to arbitrage. In China where premiums today are low, we do expect to see, in 2015/16, such arbitrage operations set up where the large gold banks use a pool of gold to prevent any delivery delay from the import process. This will eliminate the premiums and better reflect global demand and supply balances in daily gold prices.

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com