Investors Should Brace for the Fed’s October Tightening Gambit

by: Stefan Gleason*

September’s Federal Reserve meeting left interest rates unchanged but sounded a hawkish tone. The Fed seems intent on hiking interest rates again come December.

Following Fed chair Janet Yellen’s remarks this Tuesday, interest rate futures markets bumped up the odds of a year-end rate hike to 81%.

The more immediate – and perhaps more important – policy move pending from the central bank is its plan to gradually reverse its Quantitative Easing bond buying program starting in October.

Yellen calls it “balance sheet normalization.” She is right in acknowledging that there’s nothing normal about the $4.5 trillion balance sheet the nation’s currency custodian has built up following the financial crisis of 2008.

Whether the Fed’s bond portfolio ever will get “normalized” to pre-crisis levels will depend on how markets react to the Fed’s attempt at Quantitative Tightening beginning next month.

The Fed technically won’t sell bond holdings into the market. Instead it will let bonds mature without rolling them over. The effect on the market will be as if a regular, reliable, very big customer stopped buying.

Initially, the Fed will allow $10 billion in Treasuries and mortgage-backed securities to mature off its balance sheet per month. Over the next year, the pace of “normalization” will accelerate. It is slated to eventually reach $50 billion per month.

Quantitative Tightening, if it goes through as planned, will withdraw hundreds of billions of dollars’ worth of liquidity from the financial system. Fed chair Yellen thinks the impact on long-term interest rates will be minor.

She has to know that the risks to the equity markets are huge. After all, her predecessor, Ben Bernanke, touted the bond buying program as an effective way to boost the stock market. Since 2009, the stock market has followed in roughly the same direction as the Fed’s balance sheet.

The latest run-up in stocks since the 2016 election has been different in character. The Fed’s balance sheet hasn’t expanded during this period. Instead, optimism toward the prospects of stimulus in the form of tax cuts has helped lift equity valuations.

Monetary Tightening and Another Failure on Capitol Hill Could CRUSH the Stock Market

This fall, investors could get hit with political disappointment on the tax front (if recent legislative let downs are any indication) coupled with monetary tightening. We may soon find out how much the stock market can take… until it finally breaks.

Stock Market

As for precious metals markets, they are less sensitive to changes in interest rates than bonds or equities. Conventional wisdom is that quantitative tightening and higher rates will be bad for gold and silver. That conventional wisdom seems to be confirmed by the pullback in metals since the Fed’s September meeting.

A pullback, however, does not make for a trend!

Gold and silver prices are still up since Janet Yellen first raised rates back in December 2015. In fact, that rate hike coincided with a major cyclical bottom in the precious metals.

It’s worth recalling what happened back when the third round of Quantitative Easing (“QE3”) was announced in September 2012. At the time, many analysts assumed that QE3 would provide an immediate boost to gold and silver prices. Instead, the metals markets responded counterintuitively. They declined for several months following the Fed’s announcement.

The lesson is that precious metals markets don’t move in direct sympathy with Fed easing or tightening. Nor are they necessarily hurt by rising long-term interest rates, as is the conventional wisdom (at least among precious metals naysayers and ignoramuses).

Gold and Silver Have Almost No Correlation to NominalInterest Rates

Metals show virtually no correlation to nominal interest rates. What matters is real interest rates – which is to say, interest rates relative to the inflation rate.

Interest Rates

There is also the safe-haven factor. Demand for physical precious metals has been soft since the “Trump rally” began. As the stock market hits record after record and the bond market chugs along, conventional investors see no need to seek the safety of sound money.

Of course, it’s inevitably the case that the masses will be extremely bullish at market highs (and extremely gun shy at market lows).

It’s been a long time since any real fear has entered the conventional markets.

Nobody on Wall Street seems terribly concerned about the Fed’s plans to tighten in the fourth quarter. But the bond market is starting to reflect some preemptive selling.

October and November are known for their potential to get volatile. A jump in volatility would mean downside for stocks. Precious metals markets could go either way. Given the risks to conventional financial assets posed by the Fed, owning gold and silver is a smart way for investors to hedge themselves.

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Gold gains from economic storms, ‘fake rates’ and Jackson Hole

Are You Prepared for These Potentially Disruptive Economic Storms?

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

Hurricane Harvey

Here in San Antonio, grocery stores were packed with families stocking up on water and canned food in preparation for Hurricane Harvey, which has devastated Houston and coastal Texas towns. I hope everyone who lives in its path took the necessary precautions to stay safe and dry—this storm was definitely one to tell your grandkids about one day.

Similarly, I hope investors took steps to prepare for some potentially disruptive economic storms, including this past weekend’s central bank symposium in Jackson Hole, Wyoming, and the possibility of a contentious battle in Congress next month over the budget and debt ceiling.

As you’re probably aware, central bankers from all over the globe visited Jackson Hole this past weekend to discuss monetary policy, specifically the Federal Reserve’s unwinding of its $4.5 trillion balance sheet and the European Central Bank’s (ECB) ongoing quantitative easing (QE) program. Janet Yellen gave what might be her last speech as head of the Federal Reserve.

As I told Daniela Cambone on last week’s Gold Game Film, there are some gold conspiracy theorists out there who believe the yellow metal gets knocked down every year before the annual summit so the government can look good. I wouldn’t exactly put money on that trade, but you can see there’s some evidence to support the claim. In most years going back to 2010, the metal did fall in the days leading up to the summit. Gold prices fell most sharply around this time in 2011 before rocketing back up to its all-time high of more than $1,900 an ounce.

Gold prices generally fell days before the annual economic symposium
click to enlarge

Many of the economic and political conditions that helped gold reach that level in 2011 are in effect today. That year, a similar Congressional skirmish over the debt ceiling led to Standard & Poor’s decision to lower the U.S. credit rating, from AAA to AA+, which in turn battered the dollar. The dollar’s recent weakness is similarly supporting gold prices.

In August 2011, the real, inflation-adjusted 10-year Treasury was yielding negative 0.59 percent on average, pushing investors out of government bonds and into gold. Because of low inflation, we might not be seeing negative 10-year yields right now, but the five-year is borderline while the two-year is definitely underwater. Bank of America Merrill Lynch sees gold surging to $1,400 an ounce by early next year on lower long-term U.S. interest rates.

Are Government Inflation Numbers More “Fake News”?

If we use another inflation measure, though, yields of all durations look very negative. For years, ShadowStats has published alternate consumer price index (CPI) figures using the methodology that was used in 1980. According to economist John Williams, an expert in government economic reporting, “methodological shifts in government reporting have depressed reported inflation” over the years. The implication is that inflation might actually be running much higher than we realize, as you can see in the chart below.

Official US consumer inflation vs shadowstats alternate
click to enlarge

If you believe the alternate CPI numbers, it makes good sense to have exposure to gold.

Recently I shared with you that Ray Dalio—manager of Bridgewater, the world’s largest hedge fund with $150 billion in assets—was one among several big-name investors who have added to their gold weighting in recent days on heightened political risk. That includes Congress’ possible failure to raise the debt ceiling and, consequently, a government shutdown. Dalio recommends as much as a 10 percent weighting in the yellow metal, which is in line with my own recommendation of 10 percent, with 5 percent in physical gold and 5 percent in gold stocks, mutual funds and ETFs.

I urge you to watch this animated video about opportunities in quality gold mining stocks!

Falling Dollar Good for U.S. Trade

Returning to the dollar for a moment, respected CLSA equity strategist Christopher Wood writes in this week’s edition of GREED & fear that it’s “hard to believe that the political news flow in Washington has not been a factor in U.S. dollar weakness this year.”

The U.S. media certainly wants you to believe that Trump is bad for the dollar. Take a look at this chart, showing the dollar’s steady decline alongside President Donald Trump’s deteriorating favorability rating, according to a RealClearPolitics poll.

US dollar tracks trumps favorability down
click to enlarge

However, a weak dollar is good for America’s economy. I’ve commented before that Trump likes a falling dollar, because it is good for the country’s export trade of quality industrial products. It’s also good for commodities, which we see in a rising gold price and usually energy prices.

Ready for a Big Fight?

You might have watched the Mayweather vs. McGregor fight, but have you been watching the fight between Trump and the Fed?

At the symposium in Jackson Hole, Fed Chair Janet Yellen squared up directly against Trump when she defended the strict regulations that were put in place after the financial crisis. Echoing these comments was Dallas Fed chief Robert Kaplan. This is the opposite of what Trump has been calling for, which is the streamlining of regulations that threaten to strangle the formation of capital.

Hurricane Harvey

It’s important to recognize that the market is all about supply and demand. The number of public companies in the U.S. has been shrinking, with about half of the number of listed companies from 1996 to 2016. Readers have seen me comment on this previously, and I believe that the key reason for this shrinkage is the surge in federal regulations. The increasingly curious thing is that we are seeing the evolution of more indices than stocks, as the formation of capital must morph.

As I told CNBC Asia’s Martin Soong this week, there is a huge amount of money supply out there, and investors are looking for somewhere to invest. The smaller pool of stocks combined with the greater supply of money means that the market has seen all-time highs. In addition, major averages were regularly hitting all-time highs not necessarily on hopes that tax reform would get passed, but on strong corporate earnings, promising global economic growth and the weaker U.S. dollar.

Meanwhile, small-cap stocks are effectively flat for 2017 and heading for their worst year since 1998 relative to the market, according to Bloomberg. Hedge funds’ net short positions on the Russell 2000 Index have reached levels unseen since 2009. Remember, these are the firms that were expected to be among the biggest beneficiaries of Trump’s “America first” policies.

However, the weakness in U.S. manufacturing has a great impact on the growth of these stocks, as indicated by the falling purchasing managers’ index (PMI). The slowdown in manufacturing is offset by strength in services, shown by the Flash composite PMI score of 56.0 which came out this week. Though there is a spread between large-cap and small-cap stocks, historically this strong score is an indicator of growth to come.

Spread between large cap and small cap stocks continues to widen
click to enlarge

Some big-name investors and hedge fund managers are turning cautious on domestic equities in general. On Monday, Ray Dalio announced on LinkedIn that he was reducing his risk in U.S. markets because he’s “concerned about growing internal and external conflict leading to impaired government efficiency (e.g. inabilities to pass legislation and set policies).” Pershing Square’s Bill Ackman and Pimco’s Dan Ivascyn have also recently bought protection against market unrest, according to the Financial Times. Chris Wood is overweight Asia and emerging markets.

Stay Hopeful

It’s important to keep in mind that there will always be disruptions in the market, and adjustments to your portfolio will sometimes need to be made. For those of you who read my interview with the Oxford Club’s Alex Green, you might recall his “Gone Fishin’” portfolio, which I think is an excellent model to use—and it’s beaten the market for 16 years straight. Green’s portfolio calls for not just domestic equities, Treasuries and bonds but also 30 percent in foreign stocks and as much as 10 percent in real estate and gold.

Stay safe out there!

Even another flash crash can’t keep gold price down for long

This is a lightly edited version of one first posted on the Sharps Pixley news website

2 million ounces of gold were dumped on the gold market in a minute on Friday, just ahead of Janet Yellen’s speech at Jackson Hole – and, after a very brief downwards spike to below $1,280, the gold price rapidly climbed back to unchanged.  This has to be an incredibly bullish signal for gold in that even this amount of presumably paper gold thrown at it (62.2 tonnes) couldn’t keep the gold price down.  Bloomberg described the 2 million ounce trade as ‘mysterious’.  Perhaps at least that is a welcome change from the usual ‘fat finger’ attribution which seems to be applied to these seemingly increasingly frequent mega-sales of paper gold which, despite protestations to the contrary, seem to be designed to keep the gold price suppressed.

Today, the gold price drifted upwards ahead of New York’s opening and then, at around 11.00 am New York time the price spiked upwards sharply, soaring through the $1,300 psychological barrier.  The question is where to next?

The key here may well be what has been happening with physical gold.  On Friday the SPDR Gold Shares ETF (GLD) had almost 6 tonnes of gold bought into it.  GLD has thus seen 18.33 tonnes of physical gold added to it in 2 weeks after what we might describe as ‘mysteriously’ seeing some 80 tonnes withdrawn over the previous two months – during which time the gold price didn’t seem to be spooked by this amount of gold being taken out of the world’s biggest gold ETF.  We had already pointed out the anomaly that America’s second biggest gold ETF – the iShares Gold Trust (IAU) – had not seen corresponding metal liquidations.  The Swiss gold import and export statistics, also reported in these pages, had shown that there appears to be a ready market in Asia for any physical gold released in the west, and this could well be a sign that gold could be moving into a short supply situation in the West.  If America starts buying physical gold again, we could thus see big price rises with buyers bidding up what might be an increasingly rare commodity.

As I write, the gold price rise seems to have stalled at the $1,310 level and there will almost certainly be attempts to drive it down, or at least prevent it rising further.  But it does seem to have some momentum behind it and could well move up to the $1,320s.  But, as we have pointed out before, this time next week is the U.S. Labor Day holiday and this often seems to provide an inflection point in economic trends.  It could presage a sell-off in gold or see the price boosted into the stratosphere, figuratively speaking.  Nothing is simple with gold.  But if gold gets a boost after September 4th we could see equities – and perhaps bitcoin – moving sharply in the other direction.  Both would seem to be in bubble situations and sooner or later all bubbles burst.

We’d rather bet on gold than alternatives.  Even if there is a gold price turndown ahead it is likely to be relatively minor, while the fall, when it comes, as come it must, in equities and bitcoin could be devastating.  Food for thought ahead of the U.S. holiday weekend.

Gold waiting on Yellen and Draghi indicators

Gold Today –New York closed yesterday at $1,286.20. London opened at $1,285.95 today. 

Overall the dollar was slightly weaker against global currencies before London’s opening:

         The $: € was slightly weaker at $1.1799 after the yesterday’s $1.1794: €1.

         The Dollar index was slightly weaker at 93.28 after yesterday’s 93.31

         The Yen was slightly weaker at 109.63 after yesterday’s 109.29:$1. 

         The Yuan was slightly stronger at 6.6609 after yesterday’s 6.6621: $1. 

         The Pound Sterling was slightly stronger at $1.2822 after yesterday’s $1.2807: £1

Yuan Gold Fix
Trade Date     Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2017    8    25

     2017    8    24           

     2017    8    23

SHAU

SHAU

SHAU

/

277.00

276.39

Trading at 277.60

277.25

276.92

$ equivalent 1oz at 0.995 fineness

@   $1: 6.6609

       $1: 6.6621

       $1: 6.6624     

  /

$1,288.24

$1,285.33

Trading at $1,289.70

$1,289.40

$1,287.80

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 closed at $3.20 lower than Shanghai’s yesterday’s close. Today sees Shanghai holding just $0.30higher than yesterday, which was $3.75 higher than London’s opening. The global gold markets remain close to each other with Shanghai barely moving.

Silver Today –Silver closed at $16.95 yesterday after $16.95 at New York’s close, Wednesday.

LBMA price setting:  The LBMA gold price was set this morning at $1,287.05 from yesterday’s $1,285.90.  The gold price in the euro was barely changed being set at €1,090.35 after yesterday’s €1,090.76.

Just before the opening of New York the gold price was trading at $1,287.20 and in the euro at €1,089.19. At the same time, the silver price was trading at $17.03. 

Price Drivers

We cannot remember seeing prices in the precious metals this calm for a few days. As we have said before Shanghai has had a calming effect on global gold markets, but even its calmness is remarkable. It is not that we expect anything dramatic from Jackson Hole but in such a calm market, any news at all, will have an impact.

We feel for Janet Yellen and Mario Draghi as the financial world waits for the slightest hint in their speeches today of dovishness or hawkishness. The slightest stumble on their part could influence the entire financial world. Nevertheless, central bank policies are really the only policies affecting the financial world.

It should be government policy with central bank policy backing up government policy, but governments just don’t seem able to get things done and have not done it since the credit crunch in 2008. In itself, this tells you just how fragile the financial world is, when governments are so emasculated.

It is so fragile that even if the two central bankers were neutral in what they said, the financial world will behave in a mercurial fashion. We do expect action in financial markets today which will turn the market calmness into a storm in the coming weeks.

But we need to be clear on the reality that whatever Yellen and Draghi say that does not directly affect exchange rates, will be gold neutral or will only affect gold prices for the short term. We remind readers that the gold price is a synthesis of global gold prices and not the result of U.S. factors. It reflects the condition of the currency and monetary world which continues to evolve away from dollar hegemony.

Once again there are no purchases or sales into or from the SPDR gold ETF and the Gold Trust as U.S. gold investors wait too.  

Gold ETFs – Yesterday there were no purchases or sales of gold into or from the SPDR gold ETF but there were small purchases into the Gold Trust of 0.44 of a tonne. The SPDR gold ETF and Gold Trust holdings are at 799.286 tonnes and at 215.91 tonnes respectively.

Since January 4th 2016, 177.55 tonnes of gold have been added to the SPDR gold ETF and to the Gold Trust. 

Since January 6th 2017, 15.95 tonnes to the gold ETFs we follow.

Julian D.W. Phillips – GoldForecaster.com | StockBridge Management Alliance 

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