Global gold and silver prices rebounding

Gold Today –New York closed yesterday at $1,220.30. London opened at $1,222.15 today. 

Overall the dollar was weaker against global currencies, early today. Before London’s opening:

         The $: € was stronger at $1.1402 after yesterday’s $1.1448: €1.

         The Dollar index was almost unchanged at 95.75 after yesterday’s 95.76

         The Yen was stronger at 113.03 after yesterday’s 113.36:$1. 

         The Yuan was stronger at 6.7821 after yesterday’s 6.7881: $1. 

         The Pound Sterling was stronger at $1.2927 after yesterday’s $1.2855: £1.

Yuan Gold Fix
Trade Date     Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2017    7    13

     2017    7    12            

     2017    7    11

SHAU

SHAU

SHAU

/

268.39

267.30

Trading at 269.60

268.58

267.30

$ equivalent 1oz at 0.995 fineness

@    $1: 6.7821

       $1: 6.7995

       $1: 6.8034     

  /

$1,222.72

$1,217.03

Trading at $1,231.42

$1,223.59

$1,217.03

Please note that the Shanghai Fixes are for 1 gm of gold. From the Middle East eastward metric measurements are used against 0.9999 quality gold. [Please note that the 0.5% difference in price can be accounted for by the higher quality of Shanghai’s gold on which their gold price is based over London’s ‘good delivery’ standard of 0.995.]

 New York followed Shanghai higher yesterday leaving a $2.40 differential. Today, London turned higher, also following Shanghai but raising the differential to $9.27 from yesterday’s $7.

All global gold markets are seeing a rebound from the breakdown of the Technical picture from $1,250.  

Silver Today –Silver closed at $15.92 yesterday after $15.84 at New York’s close Monday.

LBMA price setting:  The LBMA gold price was set today at $1,221.40 from yesterday’s $1,219.40.  The gold price in the euro was set at €1,071.03 after yesterday’s €1.064.23.

Ahead of the opening of New York the gold price was trading at $1,220.80 and in the euro at €1,071.35. At the same time, the silver price was trading at $15.90. 

Price Drivers

The gold price is rebounding and not simply because it is a natural market move to do so. Janet Yellen’s comments yesterday in front of the Senate are playing a part. We expect more of the same from her today.

The Fed

Janet Yellen’s comments yesterday made it clear that the Fed wants a ‘neutral’ interest rate, neither higher than inflation nor lower. At the moment it is lower, but with inflation falling in the U.S. the Fed may well delay another rate hike beyond year’s end because they may  see ‘neutral’ rates without raising rates again this year. This has softened the dollar, which at one point nearly touched the point at which the dollar falls into a ‘bear’ market. We see that as coming very soon. It will benefit the dollar gold price.

The Gold Price

We do note that with demand and supply nearly in balance in London before the breakdown the sales over two weeks of 27 tonnes of physical gold into the London Market tipped that balance and the price fell.

What is important to understand about the gold price is that it does not reflect total demand and supply. For instance, in June, some reports suggest 220 tonnes of gold were sold into India (Although others suggest a much smaller 75 tonnes – Editor). This did not impact the gold price, because it did not go through the market. It was contracted and a price between the contractors was set against the afternoon price setting in London. It did not travel through the market. But sales from the SPDR cause the Custodian to unload that gold into the London market, which does affect the price. Essentially, the gold price is determined by  what is called the ‘marginal’ supply and demand, that is the unforeseen amount that are needed or got rid of in the market. Of course, this does not reflect total demand and supply and allows speculators considerably more pricing power than would be the case if all gold sales and purchases do go through the market.

In China there is an interbank market in gold, which operates off market, but the bulk of the physical gold bought and sold does go through the Shanghai  Exchange . With both an institutional and now a retail physical arbitrage market between London and Shanghai in operation Chinese and other international investors can affect price by dealing between the markets.

We believe that where gold is contracted between two parties they may  well find that the Shanghai Benchmark prices are more reflective of a truer gold price than the LBMA gold price settings and adjust the price they use to Shanghai’s in the future, as some exchanges are already doing.

Gold ETFs

Yesterday saw no sales or purchases from or into the SPDR gold ETF or the Gold Trust. The SPDR gold ETF and Gold Trust holdings are at 832.391 tonnes and at 211.41 tonnes respectively.

Julian D.W. Phillips 

GoldForecaster.com | StockBridge Management Alliance 

UPDATE: Same old, same old. Yellen speaks, gold falls

Here’s a lightly edited version of my latest article posted on the Sharps Pxley website yesterday – trying to make sense of gold’s latest price movements as President Trump’s inauguration approaches.  Yet again today gold is testing the $1,200 level on the downside and this time around the level may not be held, particularly if the Donald’s inauguration address seems to be conciliatry, as it probably will be – but with Trump who knows?

Gold investors are obviously holding back until they see which way the wind blows.  The world’s biggest gold ETF, GLD, has seen no purchases or sales since last Friday when 2.96 tonnes were added.  GLD sales or purchases do seem to provide something of a guide to the gold price direction – in the US dollar at least, which looks to be strengthening a little today – indeed today’s gold price weakness may well be down to a small recovery in the dollar index.

The EDITED VERSION OF THE Sharps Pixley article follows:

Gold has had a decent run, after a sharp fall immediately following last month’s US Fed interest rate rise.  If one looks back to last year, the gold price was volatile, particularly before and after the various Fed Open Market Committee (FOMC) meetings and it looks that this year the same may happen all over again, but this time around gold price movement up or down may be tempered by the perceptions of how the USA’s 45th President’s proposed policies may affect the economy.  While the Fed may be set on at least three interest rate rises this year – Yellen’s San Francisco statement yesterday did nothing to suggest this wouldn’t happen – we still think they may play wait-and-see before pulling the interest rate trigger, although others, like the well-respected, but nowadays slightly alarmist commentator, Jim Rickards, think the Fed will move quickly and implement another 25 basis point increase as early as March.

This year’s FOMC meetings, at which interest rate decisions are usually made, are due to be held right at the end of this month (Jan 31-Feb 1), which is almost certainly too close to the President Trump inauguration (tomorrow) for any such decision to be made.  The following meeting will be on March 14-15 – Rickards’ suggested date for the next rate rise – then May 2-3 and June 13-14 bring up the balance of FOMC meetings in H1 2017. We think the Fed may err on the side of caution and wait for one of these latter two meetings to raise rates for the first time in 2017 – if at all – in order to see which way the economic wind is blowing after the first few months of office of perhaps the most divisive U.S. President ever.  However an early rate rise could be seen as a Fed attempt to regain credibility given its failure to match its own economic predictions in previous years.

For the record, the H2 FOMC meetings will be on July 25-26, September 19-20, October 31-November 1 and December 12-13.  Expect gold price volatility around all these dates, as we saw in 2016.  If the Fed does raise rates early and the U.S. economy looks stable, unemployment doesn’t rise and equity markets don’t collapse then there could be a further two, or even three, rises in H2, but the uncertainty around the Trump Presidency makes this far from a sure thing.

Yellen’s statement yesterday did reiterate that in her, and presumably her colleagues’, viewpoint the U.S. economy remains on course to be able to support three small interest rate hikes this year, and more next, with a potential target of ‘normality’ of around 3% by the end of 2019.  But the Fed has been notoriously poor in its predictions for the strength or otherwise of the U.S. economy over the past five years or so.  Has its forecasting suddenly improved.  The Trump Presidency could well throw the Fed’s projections into disarray yetr again – but this could go either way if the new President’s policies are perceived to be generally stimulative for the U.S. economy.

Yet Rickards, despite his prediction that the Fed will raise interest rates at the March FOMC meeting disagrees: “They (The Fed) will raise (rates) in March and then something will hit the wall, either the economy or the stock market or both. Then the Fed will backpedal from there, starting with a forward guidance then perhaps a rate cut later in the year,” he says on his blog, and recommends holding gold and U.S. 10-year Treasurys.

If Rickards is correct in his predictions, the gold price could fly in the final three quarters of the year as the Fed misses its interest raising opportunities again.  But others do see the U.S. economy, inflation and unemployment levels ticking all the boxes for the Fed’s interest rate raising plans going forward.

But so much will depend on President Trump and whether Congress will allow him to proceed with his plans to cut taxes, spend heavily on infrastructure to boost the economy and implement other fiscal stimuli and cut legislative blockages given the country’s huge debt position.  The Trump proposals, if implemented, can only increase debt!  If the Trump boost to the economy is thwarted – there may be a Republican majority in both houses, but there are a number of anti-Trump GOP members in Congress and coupled with probably blanket opposition from the Democrats still sore over the Trump Presidential Election victory – the Donald’s legislative path may thus not be an easy one.

The last day of April will see the Trump Administration’s first 100 days in office – a time when the media tends to make its first judgments of likely success or otherwise of the new President’s proposed programmes – and we believe the Fed should not take any interest rate raising decisions before then at least, although what we believe is a sensible course will hardly influence the FOMC in its deliberations!

What will the first 100 days see?  We think some of the proposed policies will have to be rolled back altogether and a number of compromises will have to be made to satisfy Congress, while the Senate may block one or more of the Presidents’ proposed cabinet members from taking office which coluld make for an adverse perception of President Trump’s promises and his ability to deliver on them..

Gold is testing the $1,200 level on the downside today, but the enormous opposition to Trump as President, which will likely be highlighted by huge demonstrations in the nation’s capital, may sober the equity markets and boost gold again temporarily – but thereafter volatile markets are likely until a much clearer idea of where Trump policies are taking the nation become apparent.

Perhaps precious metals investors should take heart though from my colleague Ross Norman’s price predictions for the current year – See:  Sharps Pixley Forecasts Gold To Average $1310 With A High Of $1390 In 2017

Gold and silver jump in dollars, not Euros, post Fed

Gold TodayNew York closed at $1,334.00 after the previous close of $1,314.60 yesterday.  London opened at $1,332.70.

    • The $: € was weaker at $1.1232: €1 from $1.1147: €1 yesterday.
    • The Dollar index was weaker at 95.26 from 95.96 yesterday.
    • The Yen was stronger at 100.64: $1 up from 101.50: $1 yesterday against the dollar.
    • The Yuan was stronger at 6.6696: $1 from 6.6726: $1 yesterday.

 

  • The Pound Sterling was stronger at $1.3057: £1 from yesterday’s $1.2998: £1.

 

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
     2016  09  22

     2016  09  21

SHAU

SHAU

286.48

283.14

286.63

284.17

Dollar equivalent @ $1: 6.6696

$1: 6.6726

$1,336.00

$1,319.82

$1,336.69

$1,324.62

New York, Shanghai and London were roughly in line, adjusting them for changing exchange rates as all financial markets reacted to the Fed statement.

All financial markets now need time to digest the announcement and feed this information into prices. Overall, we see the dollar gold price continuing to benefit from the words of Mrs. Yellen.

LBMA price setting:  The LBMA gold price setting was at $1,332.45 against yesterday’s $1,319.60.

The gold price in the euro was set at €1,186.35 against yesterday’s €1,183.55.

Ahead of the opening of New York the gold price was trading at $1,333.10 and in the euro at €1,187.54.  At the same time, the silver price was trading again at $19.88.

Silver Today –The silver price rose to $19.83 at New York’s close yesterday up from $19.23, Friday.  

Price Drivers

Please note that the gold price in the euro is barely changed, but in the dollar higher because of the dollar’s weakness.

As the dealings in the gold ETFs have driven gold prices lately, the big purchase of over 5 tonnes into the SPDR gold ETF was certainly one of the drivers, but not nearly so much as the weakness of the dollar against gold did.

Despite global demand for gold rising well in the gold season, the gold price does not reflect this. It solely reflects U.S. demand via the gold ETFs and COMEX.

Gold as a monetary metal is functioning well in this regard as they reflect the value of currencies, not demand and supply of gold.

On the Technical front mixed signals are being sent out favoring both directions. Will we see a pennant formation developing to give us consolidation mode, or will overhead resistance be challenged, while the current target on this front is below $1,300.

We have a different take on the Fed’s announcement than the one that’s being reported inside the U.S. We see Janet Yellen and her team, although divided, paying great attention to the impact on the dollar, as we have said many times before. Most U.S. institutions look at the U.S. as being the driver of the rest of the world, leading the way forward. But the reality is that the U.S. is not an island, as shown by the dollar’s price in other currencies.

The rest of the world can hurt the U.S. by weakening exchange rates against the dollar [maybe Treasury whispered quietly in the BoJ.’s ear before their meeting]. The angst, we see now from U.S. institutions, is understandable if one disregards the global economy. Inside the U.S. interest rates are seen in the light of the U.S. economy, but looked at through currency eyes interest rate moves have to be seen in terms of other currencies’ values. We repeat the U.S. cannot afford a strong dollar anymore. This is gold positive.

Looking through the eyes of the currency markets we see the Fed removing the ongoing obsession of global markets of the ‘will there be or won’t there be a rate hike’ by stating that by the end of the year there will be a rate hike. Not two but one. The focus from now on will shift to the Presidential elections until the end of the year. We hope the ‘big’ picture will now impact the gold price more directly.

Immediately after the Fed announcement the dollar weakened, across the board.  The gold price leapt to overhead resistance at $1,340 before pulling back in London. Longer term, Yellen’s actions are gold and silver price positive as there are no shocks in the future and rate hikes as we have pointed out before have led to higher gold prices.

The Fed statement pointed far ahead, to prevent volatility over the subject hitting most markets now and in the future. Further, by attempting to put dots in place as to when to expect future hikes, the markets have plenty of time to discount these moves in relatively calm markets.

We will now keep our eyes on inflation rates to give us a clearer view of exactly when rate hikes will occur, as it is real interest rates in the context of global interest rates that count, when we look at potential moves in gold and silver prices.

Gold ETFs – There were purchases of 5.638 tonnes into the SPDR gold ETF (GLD) but no change in the holdings of the Gold Trust (IAU) yesterday, leaving their respective holdings at 944.391 tonnes and 223.51 tonnes.

Silver – Silver prices ignored the price action in gold yesterday climbing a little higher. Once again we say, ‘these are not the influences of fundamentals but U.S. silver investors expecting news that will send both gold and silver prices higher.’

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Gold and silver await Jackson Hole

Gold TodayGold closed in New York at $1,338.60 on Tuesday after Monday’s close at $1,343.40.  London opened at $1,341 again.

    • The $: € was at $1.1275 from $1.1335 yesterday.
    • The dollar index was at 94.67 from 94.39 yesterday.
    • The Yen was at 100.20 from yesterday’s 100.15 against the dollar.
    • The Yuan was weaker at 6.6536 from 6.6447 yesterday.

 

  • The Pound Sterling was at $1.3230 from yesterday’s $1.3184.

 

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  08  24

2016  08  23

SHAU

SHAU

286.76

286.47

286.73

286.56

Dollar equivalent @ $1: 6.6536

$1: 6.6447

$1,340.51

$1,340.96

$1,340.37

$1,341.37

Once again, overall, all global gold markets, together with global currencies seem to be moving sideways today with an emphasis on a slightly stronger dollar. But this strength is small. So we have gold prices in the dollar falling and those in the euro rising.

Friday’s Jackson Hole comments by Mrs. Yellen of the Fed will be the focal point of the week with markets finely measuring the emphasis she puts on her words, looking for the smallest sign of what the Fed is going to do and when. This is what she doesn’t want, so how she is going to play it with so much influence each word will have, is a difficult one.

She would do well to repeat her last speech so as not to give room for wrong impressions. Unfortunately, unless she does repeat her last speech, any emphasis that inclines hearers to believe that a rate hike is due in September, or later this year, will have all financial markets moving strongly, one way or the other. This includes the precious metal markets.

LBMA price setting:  $1,337.90 after yesterday’s $1,338.50.

The gold price in the euro was set at €1,187.03 up €5.34 from yesterday’s €1,181.69.

Ahead of the opening in New York the gold price stood at $1,338.15 and in the euro at €1,187.46.  It took a knock when the New York market opened falling back to the mid-$1,320s on renewed nervousness ahead of Jackson Hole, and on a slightly stronger dollar.

Silver Today –The silver price closed in New York at $18.88 yesterday down from $18.99 Monday.  Ahead of New York’s opening the price was trading at $18.90.  Like gold it fell immediately after New York markets opened.

Price Drivers

The market in gold has a very tight trading range around $1,340, but in London the gold price keeps trying to slip. Some have postulated that this is Venezuela selling off its reserves at $1,350 – 55. No one can say whether it is or it isn’t.

But we would have thought that any central bank still acquiring gold, such as China, would have negotiated a deal to take all available amounts direct, at a particular price, or with reference to the market price at the time of delivery. It does not make sense to open oneself up to the risk of either not reaching a particular price, or seeing prices fall. Selling directly into the market is a way to ensure a low price or a price that will go much lower if it becomes known that they are sellers in the open market. It hints at desperation!

On the buy side it would pay to take that gold off the market at say, $1,350 in one chunk and allow the overhang to be removed to see prices rise thereafter.

Gold ETFs – In New York on yesterday there was no change in the holdings of either the SPDR gold ETF or the Gold Trust. This left their respective holdings at 958.369 tonnes and 223.85 tonnes.

Since January 4th this year, the holdings of these two gold ETFs have risen by 384.604 tonnes.

Silver –Silver prices now holding around $18.87 showing that they will remain sensitive to even small moves in the gold price.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Gold sitting on support – so far.

A shortened, updated and edited version of Julian Phillips’ commentary for Tuesday which was delayed from reaching us for technical reasons.

Shanghai prices have been higher than in New York, after gold was sold from the SPDR gold ETF [see below], and London followed Shanghai’s prices, so at this stage we conclude that New York prices were considered to have been marked down too far.

A weakening dollar is at the heart of any strength there is in gold and silver prices. Once again, in the face of analyst’s opinions, we see the dollar weakening across the board, this time alongside the FOMC meeting.

While the risk to the euro is to fall to $1.07 against the dollar, the U.S. does not want to see the dollar any stronger than at present despite the state of the E.U. We reiterate that we believe the dollar’s ‘bull’ run is over.

Russia and China are now continuing to buy gold for their reserves. China, Kazakhstan and Russia simply issue local currency to their miner’s and take some or all the local gold production into their reserves. It does not leave their countries and does not pass through any international gold market.  The total amount involved could be around 25% of total global gold production.

Price Drivers

The FOMC meeting is scheduled to begin today with a statement issued on Thursday. There are few who expect a rate hike. We expect more reasons to be given as to why no rate hike is on the cards. The concept put forward by the Fed Chair Mrs. Yellen that we could see a rate hike in the ‘summer months’ is now off the table after Britain voted to leave the E.U., probably precipitating a recession in the U.K. and more than likely one in several member states of the E.U. if not the E.U. itself.

Physical demand in the U.S. remains the principal driver of the gold price, a fact that was aptly demonstrated Monday when over 4 tonnes of gold was sold from the SPDR gold ETF. This pulled the gold price to $1,314, but Shanghai took it back up with London agreeing China’s price. This is the first recent, noticeable, difference in the three global markets prices.

Gold ETFs – As noted, in New York on Monday there were sales of 4.466 tonnes of gold from the SPDR gold ETF (GLD), but purchases of 0.45 of a tonne into the Gold Trust (IAU), leaving their holdings at 958.688 tonnes and 217.99 tonnes, respectively.

Since January 4th this year, the holdings of these two gold ETFs have risen by 379.063 tonnes.

Silver –Silver prices could have a quiet time this week, until gold leads the way again.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance [Gold Storage geared to avoid its confiscation]

Last day before Brexit vote and gold ETFs still adding metal

Gold Today –Gold closed in New York at $1,265.90 down $24.20 on Tuesday as a “Bremain” position is taken in global financial markets.  Asia took it down to $1,265 too and London held it around that level, despite strong demand for physical gold in the U.S.

The $: € moved lower to $1.1271 from Tuesday’s $1.1341. The dollar index moved to 93.89 up from 93.46.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  06  22

2016  06  21

SHAU

SHAU

269.81

272.84

268.00

271.86

Dollar equivalent @ $1: 6.5886

$1: 6.5818

  $1,273.72

$1,289.38

$1,265.17

$1,284.72

New York, Shanghai and London have decided that $1,265 is the dealer’s consensus on the gold price and will wait for the vote tomorrow before they move one way or the other. We are getting the impression that Shanghai [under the control of the People’s Bank of China] does not want the price there to move out of line with either New York or London. There may well be a day when they change their minds, but we can’t expect that before September when the Yuan is an active part of the Special Drawing Right of the I.M.F.

The expected volatility this week will only reappear after the announcement of the British Referendum result.

At the moment, the positive Technical picture has not changed despite yesterday’s fall. We don’t expect any change, subject to tomorrow’s vote.

LBMA price setting:  $1,265.00 down from Tuesday 21st June’s $1,280.80.

The gold price in the euro was set at €1,119.96 down from Friday’s €1,129.45.

Ahead of New York’s opening, the gold price was trading at $1,265.40 and in the euro at €1,120.72.

 

Silver Today –The silver price closed in New York on Tuesday at $17.23 down from Monday’s $17.50 a fall of 27 cents. Ahead of New York’s opening the silver price stood at $17.24.

Price Drivers

The dollar is a little stronger today, tempered by Mrs. Yellen’s remarks yesterday in front of Congress. She clarified that the British referendum is a significant event that may well affect the U.S. economy. World financial markets are moving as if the referendum is a significant event. It took just one person’s death in 1914 to start World War 1. Will this event trigger events in the financial world as great, or greater, than 2008’ “Credit Crunch”. It would seem so!

The financial world wants a ‘Bremain’ result not a ‘Brexit’ and is discounting it to some extent. This means that a ‘Brexit’ result will cause tremendous turmoil in global markets while a ‘Bremain’ result may provoke a wobble but not turmoil. The polls show the vote still, as ‘too close to call’.

As we said yesterday, “Friday therefore promises to not only be a volatile day, but an historic one.”

The Pound Sterling continues to sit at very strong levels! If the vote is to leave, expect a heavily plunging pound!

Currencies and precious metals are in gambler’s territory as the polls look pretty even!

Gold ETFs – On Friday the holdings of the SPDR & gold Trust rose another 3.546 tonnes as the physical buying picked up its pace, into the gold ETF, leaving its holdings at 912.334. Another 0.45 of a tonne of gold bullion were added to the Gold Trust, leaving their holding at 201.91 tonnes.

Since January 4th this year, the holdings of these two gold ETFs have risen 317.458 tonnes.

Silver –Silver prices are steady and holding ahead of the vote tomorrow but remain within reach of $17.30 and now wait for the vote to be announced at 7.00a.m. tomorrow morning.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Gold, Silver and dollar calmed by Yellen.

Gold Today –Gold closed in New York at $1,245.20 on Monday, and held there in Shanghai and London’s opening on Tuesday morning, but then moved lower to $1,236 later in London’s morning.

The $: € moved from $1.1353 to $1.1346 overnight. The dollar index is standing at 93.90.

LBMA price setting: $1,241.10 up from Monday 6th June’ $1,240.55.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  06  07

2016  06  06

SHAU

SHAU

263.35

262.48

263.17

262.51

Dollar equivalent @ $1: 6.5742

$1: 6.5671

  $1,245.95

$1,243.17

$1,245.09

$1,243.32

It was London that made the gold price ahead of New York’s opening, not Shanghai. The Yuan continues to weaken against the U.S. dollar but Shanghai prices reflect this, keeping in line with exchange rates. We get the impression that the SGE is focused on the Yuan’s value against the dollar more than on any particular level of the gold price. Shanghai is allowing other exchanges to set the price of gold against their currencies. The U.S. dollar price of gold dominates the gold price internationally, despite little to no reason why it should.

Janet Yellen’s comments yesterday reassured the financial world that the U.S. economy is growing and the Fed’s targets are moving closer. But this simply stalled the dollar’s exchange rate and gold and silver prices. We see the dollar’s exchange rate as the key to gold and silver prices, not the Fed rate hike or its date, in themselves. It is how such subjects affect the dollar’s exchange rate that counts.

The gold price in the euro was set at €1,093.19 up from yesterday’s €1,092.714

Ahead of New York’s opening, the gold price was trading at $1,239.11 and in the euro at €1,090.86.

Silver Today –The silver price closed in New York on a week last Friday at $16.47, up from yesterday’s $15.99 a rise of 48 cents. Ahead of New York’s opening the silver price stood at $16.32.

Price Drivers

As we expected Mrs. Yellen comforted markets by reassuring them that the jobs report did not mean that the U.S. economy was turning down. She did remind us all that the Fed is dependent on data and that data could change. The Fed remains worried about the global influence on the U.S. and mentioned the U.K. referendum on leaving the E.U. or not. This implied that June would not be the month we see a rate hike.

Many now don’t see that until December. But all of us are turning from a specific date for a rate hike to a concern over the global economy and its future. We remain concerned over the U.S. economy. Certainly, if we see more such jobs reports, doubts about the U.S. economy will rise and impact all global financial markets, but be beneficial to gold and silver prices.

Gold ETFs – On Monday the holdings of the SPDR & gold Trust dropped by 0.291 of a tonne to 881.145 from 881.436 tonnes. In the Gold Trust Monday saw no change to its holdings, leaving the Trust’s holdings at 196.90 tonnes. This reflected the calming tones of Mrs Yellen.

Silver –The silver price still has not moved much for well over a week as it waits for gold to rise. It is resisting running ahead when gold jumped on Friday but it is also resisting falling much. We expect it to continue this tight consolidation in the days to come.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Gold and Silver waiting for Yellen!  

Gold TodayGold closed in New York at $1,219.70 on Thursday, down from Wednesday’s $1,224.20, a fall of $4.50. On Friday morning in Asia it rose to $1,223 while the U.S. dollar was almost unchanged against the euro.

LBMA price setting:  $1,221.25 down from Thursday’s $1,226.65.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  05  27

2016  05  26

SHAU

SHAU

257.00

260.35

258.36

259.60

Dollar equivalent @ $1: 6.5669

$1: 6.5610

$1,217.26

$1,234.23

$1,223.70

$1,230.68

China saw more volatility yesterday as the Yuan weakened again. London then took it down to be set lower by the LBMA. We have no doubt that a great deal of weight will be added to Janet Yellen’s comments today as the market are now pricing in a rate rise, next month. Should this happen, we have no doubt that the Yuan will be allowed to weaken much further than we see at present. This will lead to higher Yuan prices for gold, but we doubt whether we will see much lower dollar or euro gold prices.

The gold price in the euro was set at €1,092.84 down from Thursday’s €1,098.36.

Ahead of New York’s opening, the gold price was trading at $1,219.35 and in the euro at €1,090.95.  

Silver Today –The silver price closed in New York on Thursday at $16.32, up from Wednesday’s $16.30. The silver price rose yesterday while gold fell slightly, but we could see it fall more if gold turns down again, which it still could do. At the moment it is consolidating at lower levels.

Ahead of New York’s opening the silver price stood at $16.30.

Price Drivers

Today sees Janet Yellen feature as she speaks in public on the Fed’s view on the economy and interest rates. The data coming out of the U.S. is now positive on the economy and jobs front, so the likelihood of a rate rise at the next, June, FOMC meeting looks like seeing the Fed rates rise a 0.25%. We expect her comments today may well indicate that a rate rise is close, placing speculative pressure on gold and silver.

As we said yesterday, before that meeting we expect all markets to factor is the expected rise.

This may well place downward pressure on the gold price again. However, we will be listening to see if she mentions the dollar or the global economy.

G-7 inconclusion – The G-7 is rarely the place where one gets a statement that is put into action, but it is alarming to see such diverse opinions amongst the nations. This adds to our belief that the world will move away from ‘globalization’ adding to the potential for severe, global financial crises, particularly among the emerging nations. The focal point of these crises will be seen in exchange rates in currency markets.

Mr Abe of Japan has come out openly and warned of a potential “Lehman” moment in the global economy, if nations do not do something to stimulate growth. Other nations did not subscribe to this thinking.  Overall, it is clear that there was no unity on where to go, except to state the vague intention of doing more to stimulate growth. What does come out of this inconclusive meeting is a far greater degree of disunity than we have seen from this group before. This will prove to be gold and silver positive, longer term!

 

Gold ETFs – Thursday saw no buying or selling into the SPDR gold ETF of the Gold Trust yesterday. This leaves their holdings at 868.662 and 198.89 tonnes in the SPDR & Gold Trust, respectively.  

Silver –The silver price is fighting further falls and rose slightly while gold fell slightly yesterday. But we do see it falling if gold falls heavily today.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Precisely Wrong on Dollar, Gold?

 

By Axel Merk, Merk Investments

Since the beginning of the year, the greenback has shown it’s not almighty after all; and gold – the barbarous relic as some have called it – may be en vogue again? Where are we going from here and what are the implications for investors?

Like everything else, the value of currencies and gold is generally driven by supply and demand. A key driver (but not the only driver!) is the expectation of differences in real interest rates. Note the words ‘perception’ and ‘real.’ Just like when valuing stocks, expectations of future earnings may be more important than actual earnings; and to draw a parallel to real interest rates, i.e. interest rates net of inflation, one might be able to think of them as GAAP earnings rather than non-GAAP earnings. GAAP refers to ‘Generally Accepted Accounting Principles’, i.e. those are real-deal; whereas non-GAAP earnings are those management would like you to focus on. Similarly, when it comes to currencies, you might be blind-sided by high nominal interest rates, but when you strip out inflation, the real rate might be far less appealing.

It’s often said that gold doesn’t pay any interest. That’s true, of course, but neither does cash. Cash only pays interest if you loan it to someone, even if it’s only a loan to your bank through a deposit. Similarly, an investor can earn interest on gold if they lease the gold out to someone. Many investors don’t want to lease out their gold because they don’t like to accept the counterparty risk. With cash, the government steps in to provide FDIC insurance on small deposits to mitigate such risk.

While gold doesn’t pay any interest, it’s also very difficult to inflate gold away: ramping up production in gold is difficult. Our analysis shows, the current environment has miners consolidating, as incentives to invest in increasing production have been vastly reduced. We draw these parallels to show that the competitor to gold is a real rate of return investors can earn on their cash. For U.S. dollar based investors, the real rate of return versus what is available in the U.S. may be most relevant. When it comes to valuations across currencies, relative real rates play a major role.

So let’s commit the first sin in valuation: we talk about expectations, but then look at current rates, since those are more readily available. When it comes to real interest rates, such a fool’s game is exacerbated by the fact that many question the inflation metrics used. We show those metrics anyway, because not only do we need some sort of starting point for an analysis, but there’s one good thing about these inflation metrics, even if one doesn’t agree with them: they are well defined. Indeed, I have talked to some of the economists that create these numbers; they take great pride in them and try to be meticulous in creating them. To the cynic, this makes such metrics precisely wrong. To derive the real interest rate, one can use a short-term measure of nominal rates (e.g. the 3 month T-Bill, yielding 0.26% as of this writing), then deducting the rate of inflation below:

Description: MILLC.Marketing:Insights newsletters and blogs:2016 Merk Insights:2016-05-09 support:2016-05-16-inflation.jpg

The short of it is that, based on the measures above, real interest rates are negative. If you then believe inflation might be understated, well, real interest rates may be even more negative. When real interest rates are negative, investing cash in Treasury Bills is an assured way of losing purchasing power; it’s also referred to as financial repression.

Let’s shift gears towards the less precise, but much more important world of expectations. We all know startups that love to issue a press release for every click they receive on their website. Security analysts ought to cut through the noise and focus on what’s important. You would think that more mature firms don’t need to do this, but the CEOs of even large companies at times seem to feel the urge to run to CNBC’s Jim Cramer to put a positive spin on the news affecting their company.

When it comes to currencies, central bankers are key to shaping expectations, hence the focus on the “Fed speak” or the latest utterings coming from European Central Bank (ECB) President Draghi or Bank of Japan’s (BoJ) Kuroda. One would think that such established institutions don’t need to do the equivalent of running to CNBC’s Mad Money, but – in our view – recent years have shown quite the opposite. On the one hand, there’s the obvious noise: the chatter, say, by a non-voting Federal Open Market Committee (FOMC) member. On the other hand, there are two other important dimensions: one is that such noise is a gauge of internal dissent; the other is that such noise may be used as a guidance tool. In fact, the lack of noise may also be a sign of dissent: we read Fed Vice Chair Fischer’s absence from the speaking circuit as serious disagreement with the direction Fed Chair Yellen is taking the Fed in; indeed, we are wondering aloud when Mr. Fischer will announce his early retirement.

This begs the question who to listen to, to cut through the noise. The general view of Fed insiders is that the Fed Governors dictate the tone, supported by their staff economists. These are not to be mistaken with the regional Federal Reserve Presidents that may add a lot to the discussion, but are less influential in the actual setting of policy. Zooming in on the Fed Governors, Janet Yellen as Chair is clearly important. If one takes Vice Chair Fischer out of the picture, though, there is currently only one other Ph.D. economist, namely Lael Brainard; the other Governors are lawyers. Lawyers, in our humble opinion, may have strong views on financial regulation, but when it comes to setting interest rates, will likely be charmed by the Chair and fancy presentations of her staff. I single out Lael Brainard, who hasn’t received all that much public attention, but has in recent months been an advocate of the Fed’s far more cautious (read: dovish) stance. Differently said, we believe that after telling markets last fall how the Fed has to be early in raising rates, Janet Yellen has made a U-turn, a policy shift supported by a close confidant, Brainard, but opposed by Fischer, who is too much of a gentleman to dissent in public.

It seems the reason anyone speaks on monetary policy is to shape expectations. Following our logic, those that influence expectations on interest rates, influence the value of the dollar, amongst others. Former Fed Chair Ben Bernanke decided to take this concept to a new level by introducing so-called “forward guidance” in the name of “transparency.” I put these terms in quotation marks because, in my humble opinion, great skepticism is warranted. It surely would be nice to get appropriate forward guidance and transparency, but I allege that’s not what we have received. Instead, our analysis shows that Bernanke, Yellen, Draghi and others use communication to coerce market expectations. If the person with the bazooka tells you he (or she) is willing to use it, you pay attention. And until not long ago, we have been told that the U.S. will pursue an “exit” while rates elsewhere continue lower. Below you see the result of this: the trade weighted dollar index about two standard deviation above its moving average, only recently coming back from what we believe were extremes:

Description: MILLC.Marketing:Insights newsletters and blogs:2016 Merk Insights:2016-05-09 support:2016-05-16-dollar.pdf

If reality doesn’t catch up with the storyline, i.e. if U.S. rates don’t “normalize,” or if the rest of the world doesn’t lower rates much further, we believe odds are high that the U.S. dollar may well have seen its peak. Incidentally, Sweden recently announced it will be reducing its monthly bond purchases (QE); and Draghi indicated rates may not go any lower. While Draghi, like most central bankers, hedges his bets and has since indicated that rates might go lower under certain conditions after all, we believe he has clearly shifted from trying to debase the euro to bolstering the banking system (in our analysis, the latest round of measures in the Eurozone cut the funding cost of banks approximately in half).

On a somewhat related note, it was most curious to us how the Fed and ECB looked at what in some ways were similar data, but came to opposite conclusions as it relates to energy prices. The Fed, like most central banks, like to exclude energy prices from their decision process because any changes tend to be ‘transitory.’ With that they don’t mean that they will revert, but that any impact they have on inflation will be a one off event. Say the price of oil drops from $100 to $40 a barrel in a year, but then stays at $40 a barrel. While there’s a disinflationary impact the first year, that effect is transitory, as in the second year, inflation indices are no longer influenced by the previous drop.

The ECB, in contrast, raised alarm bells, warning about “second round effects.” They expressed concern that lower energy prices are a symptom of broader disinflationary pressures that may well lead to deflation. We are often told deflation is bad, but rarely told why. Let’s just say that to a government in debt, deflation is bad, as the real value of the debt increases and gets more difficult to manage. If, in contrast, you are a saver, your purchasing power increases with deflation. My take: the interests of a government in debt are not aligned with those of its people.

Incidentally, we believe the Fed’s and ECB’s views on the impact of energy prices is converging: we believe the Fed is more concerned, whereas the ECB less concerned about lower energy prices. This again may reduce the expectations on divergent policies.

None of this has stopped Mr. Draghi telling us that US and Eurozone policies are diverging. After all, playing the expectations game comes at little immediate cost, but some potential benefit. The long-term cost, of course, is credibility. That would take us to the Bank of Japan, but that goes beyond the scope of today’s analysis.

To expand on the discussion, please register for our upcoming Webinar entitled ‘What’s next for the dollar, currencies & gold’ on Tuesday, May 24, to continue the discussion. Also make sure you subscribe to our free Merk Insights, if you haven’t already done so, and follow me at twitter.com/AxelMerk. If you believe this analysis might be of value to your friends, please share it with them.

 

Waiting for Yellen! Gold and Silver Marking Time

Gold TodayGold closed in New York at $1,239.40 up from $1,233.70 on Monday. On Tuesday morning in Asia and Europe it fell back to $1,233, before the LBMA price setting.

LBMA price setting:  $1,234.50 up from Monday’s $1,230.85.

Yuan Gold Fix
Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  04  26

2016  04  25

SHAU

SHAU

259.23

258.42

258.53

258.80

Dollar equivalent @ $1: 6.4942

$1: 6.4945

$1,241.56

$1,237.63

$1,238.21

$1,239.44

The dollar index is lower today, at 94.58 down from Monday’s 94.80. The dollar is barely changed against the euro at $1.1283 from Monday’s $1.1256.

The gold price in the euro was set at €1,094.12 down from Monday’s €1,093.51.

Ahead of New York’s opening, the gold price was trading at $1,233.05 and in the euro at €1,092.84.  

Silver Today –The silver price closed in New York slightly lower at S17.05 on Monday almost unchanged on Friday’s $17.03. Ahead of New York’s opening the silver price stood at $16.89.

Price Drivers

Today, the FOMC meets with little prospect if any, of a rate rise. The focus is on the statement that comes out of the meeting tomorrow. What we all are fully aware of is that the Fed does not want to see a stronger dollar. Indeed it would prefer to see a weaker dollar. Currently the policies of the E.U. and Japan, no matter what they say are designed to weaken their respective currencies.

We are expecting Mrs. Yellen to mention the Fed’s concerns about overseas factors that make the U.S. economy vulnerable to outside influences just as she did after the last meeting. These not only include China but the E.U. and Japan.

Of additional concern is yet another warning from the IMF pointing out that global risks are on the rise. Governments across the developed world are not boosting economies as they should be so the IMF is correct when they say that monetary policy can only do so much. Monetary policies were not designed to create growth and yet we have been helped to focus only on their efforts and almost ignoring the failure of government to do their job.

It’s like watching a man fall out of a 50-story building and hearing spectators saying as he passes each floor, “so far, so good!”

Needless to say, this is all positive for gold and silver prices.

Gold ETFs – Yesterday saw sales of 2.378 tonnes of gold from the SPDR gold ETF but no sales or purchases from or into the Gold Trust. This leaves their holdings at 802.654 and 187.56 tonnes in the SPDR & Gold Trust respectively.  These sales were sufficient to let dealers drop prices leaving the gold price at the bottom of its trading range.

Silver – The silver price is continuing to mark time at just below $17.00 while gold is lower.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Yellen’s Interest Rate Intentions Good for Gold.  The Holmes SWOT

Strengths, Weaknesses, Opportunities, Threats analysis for the past week  by Frank Holmes – CEO and Chief Investment Officer, US Global Investors

Strengths

  • The best performing precious metal for the week was silver, up 2.05 percent.  Reuters reports that Mario Cantu, the General Coordinator of Mining for Mexico (which the U.S. Geological Survey estimates was the world’s biggest silver producer in 2015), expects to see lower gold and silver production in 2016.
  • Gold popped to a one-week high following Federal Reserve minutes that indicated policy makers would remain cautious on raising interest rates, reports Bloomberg. Gold speculators think the precious metal has more room to run too; while gold futures have dipped from a 13-month high, hedge funds are the most bullish in fourteen months as seen in the chart below.

SWOT2

 

  • Central banks are buying gold, according to Wealth Daily, which reports that banks added 483 tons of gold in net purchases. That is the second-largest accumulation of gold by central banks in a year since the end of the gold standard era, continues the article. Speaking of gold buying, Eric Sprott announced this week his purchase of 10 million Newmarket Gold shares from Luxor Capital for C$22.5 million, making him the second-largest holder according to Bloomberg data.

Weaknesses

  • The worst performing precious metal for the week was palladium, down -4.58 percent. In a research note from UBS this week, the bank noted platinum and palladium as having limited attention from investors right now. Saying that “interest is lackluster and liquidity conditions are poor,” the group explains that both metals have “barely” reacted to news reports of auto sales, which are important since PGMs are used for catalytic converters.
  • China added the smallest amount to its central bank gold reserves in March, reports Bloomberg, with the People’s Bank of China expanding holdings by 0.5 percent. In India, gold imports slumped 88 percent last month, as a strike by jewelers continues in several parts of the country. Inbound shipments declined to around 15 metric tons in March versus 133 tons a year earlier, reports Bloomberg.
  • Strong manufacturing and jobs data out of the U.S. pushed gold down for earlier in the week, reports Bloomberg. Speculation that the American economy is gaining momentum could dampen demand for gold as an alternative asset.

Opportunities

  • Integra Gold Corp. announced this week its $6 million strategic investment in Eastmain Resources by way of a non-brokered private placement. The private placement is conditional on the successful election of the revised slate of Eastmain Board nominees at the annual general meeting of shareholders on April 29. The proposed Board of Directors is a group of well-respected and experienced leaders in the mining space. Eldorado Gold, which owns a significant share of Integra, was also upgraded by Credit Suisse the same day as the Integra announcement to Outperform from Neutral, with an additional push coming from Scotia as well.
  • Fed Chair Janet Yellen says she is prepared to allow inflation to overshoot and unemployment to fall below sustainable levels to prolong the U.S. economic recovery, reports the Financial Review. Yellen’s intentions to keep interest rates low for longer is a positive sign for gold. Credit Suisse also pinpointed opportunities for the precious metal this week. The group believes the equities rally isn’t over yet, and that gold could reach $1,300 an ounce on the back of ETF buying and a declining mine supply, reports Bloomberg.
  • Last week the World Gold Council released its latest market update report, where the effects of negative interest rate policies on gold were covered. Not only does the report state that “negative interest rates double gold returns,” but also suggests investors “consider doubling their gold allocations amid negative rates.”

Threats

  • Stan Druckenmiller, who compounded money at an annualized rate of return of 30 percent during his 25 years as a hedge fund manager, is warning investors, reports ZeroHedge. Druckenmiller believes the U.S. is heading for disaster. “When I look at the current picture of expected tax revenues combined with benefits promised to future generations, this is the most unsustainable situation I have seen ever in my career,” he states. JP Morgan has also expressed its doubt on the U.S. equity market in particular, adding that central banks can no longer save the day.
  • The Federal Reserve announced Friday that it will hold a closed meeting on Monday April 11, with speculators stating the Fed will likely discuss the possibility of negative interest rates. The closed meeting will be held “under expedited procedures” during which the Board of Governors will review and determine advance and discount rates charged by the Fed banks, reports ZeroHedge.  The last time the Fed held such a meeting they raised rates a month later in December 2015.
  • The White House is pushing investors toward government accounts and out of private investment accounts, writes the Wall Street Journal, and President Obama’s regulators aren’t slowing down. The article explains that the Department of Labor says its so-called fiduciary rule will make financial advisers act in the best interest of clients. Continuing that what the rule fails to mention is that it carries an “enormous potential legal liability and demands such a high standard of care that many advisers will shun non-affluent accounts.”   Perhaps the government would like to collect those management fees from retirement accounts versus the private sector.  They have a wealth of experience managing Social Security assets.

Yellen sticks to the gold script

Gold TodayGold closed in New York at $1,241.30 up $23.10 from $1,217.20 Tuesday. On Tuesday morning in Asia, it held that level. London pulled it back to see the LBMA price setting at $1,238.30 although still well up on the previous day’s $1,216.45.

The dollar index held at 95.84 today the same as Tuesday. The dollar is weaker against the euro at $1,1330 after yesterday’s $1.1213.

The gold price in the euro was set at €1,092.94 up from €1,084.86 on Tuesday.

Ahead of New York’s opening, the gold price was trading at $1,234.75 and in the euro at €1,090.00.  

Silver Today –The silver price closed in New York at $15.33 up 16 cents on Tuesday. Ahead of New York’s opening the silver price stood at $15.35.

Price Drivers

The Technical picture remains negative but, as we said yesterday, this could change quickly because of the two-day nature of the fall from the uptrend. We continue to expect a volatile market. Having said that, we continue to expect to see U.S. investors buying the shares of the gold ETFs.

Janet Yellen’s comments were as we expected, with her reiterating Fed fears emanating from the global economy, particularly oil and China. The Fed remains data led and will ‘proceed cautiously’. Observers keep pushing, as always, for a hike in interest rates and keep being disappointed, despite the Fed making it clear that they are following the data not leading it.

For gold investors, the relevance of her comments lies in the dollar’s exchange rate. This continues to weaken with the dollar falling to more than $1.13 against the euro and to 94.96 on the dollar index. This is yet another expression that the U.S. Monetary Authorities do not want a strong dollar.

Gold ETFs For the first time in a long time we saw sales of 3.271 tonnes of gold from the SPDR gold ETF and a remarkable 7.14 tonnes from the gold Trust, yesterday. This leaves their holdings at 820.471 and 185.88 tonnes in the SPDR & Gold Trust respectively. These tonnages were more than enough to push prices down, but they didn’t. Instead the comments by Janet Yellen saw gold prices rise. Such is the power of COMEX over physical features of the gold market.

We suspect the sales were made before Janet Yellen spoke. We expect some tonnage to be re-bought soon, in the light of what she said.

Silver – The silver price began its recovery yesterday and saw 46 tonnes of silver bought into the Silver Trust. It must be noted that investors into the Silver Trust rarely influence the price as the silver price is priced as a monetary metal alongside gold.

These investments were very different from the gold ETFs, but we suspect that we will see more additions to both the Gold ETFs and the Silver Trust.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

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

 

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
click to enlarge

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
click to enlarge

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 picks up ahead of Fed interest rate decision

One of the buzz words going around at the moment re. Janet ‘will-she-won’t- she’ Yellen and the FOMC voting to start raising Fed interest rates is ‘normalization’.  But whatever the Fed does it is no way going to be ‘normalization’ in any realistic sense of the word relative to past ‘normal’  interest rate patterns.  The general consensus at the Mines & Money conference in London this past week was that rate rises would almost certainly begin this month as Yellen and the FOMC have talked themselves into a position where not to do so would destroy any remaining credibility that the Fed may actually have brought things under control – but ‘normalization’ – perhaps not..

Let’s face it, interest rate normalization is not raising rates by 25 basis points but more like instigating the start of a raising program which will see them rise to 2.5% or higher and there looks to be no way the U.S. economy is strong enough to handle this even over a couple of years.  Indeed another one of the prevailing thoughts at the Mines & Money conference from some very savvy analysts and commentators was that even if the Fed does raise rates by as little as 25 basis points now, it will likely have to backtrack and bring them down again within the next six months AND then instigate a QE4 on top of that.  The stock markets are weak and potentially on a hair trigger for a massive collapse.  Q3 earnings figures from major companies were mostly pretty dire and the strong dollar is eating into exports, while making imports ever less costly.  Government CPI and unemployment stats are largely a farce.  The market is being held up by sentiment alone – certainly not by fundamentals.  And sentiment can change overnight, sometimes on a seemingly innocuous piece of news.

The gold price performance today, and that of the general equity markets, ahead of any Fed announcement has been perhaps enlightening.  At the time of writing gold has risen about $30 above its recent lows.  Suddenly what had seemed a foregone conclusion that the Fed would start raising rates this month has perhaps run into doubt.  While we await the decision we still feel the Fed is too far down the line not to raise, although we would see the possibility of a smaller rise being implemented.  In some ways the Fed could be damned if it does raise rates, but perhaps even more damned if it doesn’t. A 10 basis point increase would be an uneasy compromise, but has to be a possibility.  However it would be seen as a sign of weakness.

The fall in the dollar index by nearly 2% though would also definitely have strengthened the gold price which tends to move counter to the dollar.  Whether the sharp dollar fall was a natural progression or part of Fed machinations to try and keep the rising currency, seen as damaging to the economy, under some form of control is less certain.

While some key indicators, notably today’s nonfarm payroll figures, are just what the Fed needs to support the interest raising decision, there are others like the recent Chicago PMI figure coming in at 48.7 (anything below 50 is seen as negative) suggests that all is not well in America’s industrial heartland.  Tuesday’s broader ISM manufacturing index figure was equally pessimistic at 48.6, although the ISM services index was positive at 55.9, despite this being a little down on the previous month.  So all in all it does look like the U.S. economy is far from out of the woods.

As noted above, the US Dollar Index dipped back from a brief foray above the 100 mark, back down to a current 98.3, which may have reduced slightly continuing concerns about U.S exports, although this is hardly conclusive.  Mario Draghi’s decision for the ECB to only reduce bank deposit interest rates by a smaller than expected 10 basis points helped here.  A bigger reduction might well have seen the euro move to nearer parity with the dollar.

Gold’s healthy performance today was despite the positive US nonfarm payroll figures and was perhaps down to the feeling that it has been oversold over the past month or so, resulting in a certain amount of short covering.  Markets often react too far in this manner – but even so, if the Fed does raise interest rates by the expected 25 basis points it could take a further knock, but anything less could see it soar.

Gold doing well in all currencies – except the dollar

New York closed with the gold price at $1,152.90 up from $1,130.10 yesterday. Gold fell back to $1,147 in Asia and in London further to $1,142 ahead of this morning’s fix. The dollar was stable at $1.1150 and the dollar index a little higher at 96.50 from yesterday. In London’s morning the LBMA gold price was set at $1,145.50 up from $1,134.45 and $20 in the last two days. In the euro this was €1,025.51 up from €1,012.59.  Ahead of New York’s opening gold was trading at $1,143.90 and in the euro at €1,024.27.  

The silver price closed at $15.13 up 34 cents over Thursday in New York. Ahead of New York’s opening silver was trading at $15.06.

Price Drivers

Gold, as we thought it would, attacked resistance at $1,140, jumped through it, as short covering on COMEX came in strongly to take gold to $1,154 before is pulled back to $1,140, which is now support. We do expect to see more short covering as it is clear that a further strong rise is possible today. The short positions on COMEX were at record highs and long positions at very low levels.

There was a purchase of 3.873 tonnes of gold into the SPDR gold ETF and one of 0.51 of a tonne into the Gold Trust on Thursday. This leaves the holdings of the SPDR gold ETF at 680.268 tonnes and 159.81 tonnes in the Gold Trust.

After a relatively massive quantitative easing program in Japan, it was announced today that the country has gone back into deflation. We are of the opinion that quantitative easing in the U.S. did prevent a banking collapse but was not the panacea for the U.S. economy it was made out to be. Japan’s current performance bears that out.  Just as reassurances that all will be well in the global economy are being postured by the authorities and media, the realities are pointing to a global economic downturn. As for the U.S. being able to have a strong recovery in isolation from the rest of the world, Janet Yellen has already scotched that concept. “No man [nation] is an island…” Reality points to the way of global slowing and financial turmoil of which we have already had a taste.

Gold is doing well in all currencies except the dollar and that’s the point. Gold is doing very well apart from the dollar, but more importantly, demand has never been higher. U.S. investors will return to gold once it gets close to $1,200 as U.S. investors buy on the rise for a profit, short term. Once the U.S. restrains the dollar from rising further gold will rise in all currencies.

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