DAILY MARKET REPORT

Gold surged $18 in early trading again breaking through the $1200 barrier and reaching $1206 as this report is posted.  Silver is up 40¢ at $14.90.  Looking around among the usual indicators that might explain the sharp increase in prices, nothing stands out. In the absence of anything else, we reduce the possibilities to three that override the others.

– The first is the announcement yesterday (reported below) that Saudi Arabia will not open the production floodgates to forestall oil’s rise to $100 per barrel – an inflation threat.

– The second is that the downside has simply reached the point of maximum exhaustion, particularly for silver which is leading the way higher for both metals.

– The third is related to the second and has to do with the beginnings of short-covering in both gold and silver as we move into the fourth quarter of the year.

There is no direct confirmation of the latter at this point other than the anecdotal message delivered in the price itself and the absence of other prominent drivers. Investors should keep in mind the huge outstanding short position in both metals that needs to be covered. It will encourage big traders to ‘leg-in’ over a period of time – a process, though, that could be compromised as traders compete with each other to be first through the exit.

We will update if anything of defining interest surfaces.

UPDATE 1

In the past we have featured charts showing waterfall drops in gold accompanied with high volumes on the COMEX. Those volumes were part and parcel of the enormous short position that has been built up on the exchange and reported weekly in the Commitment of Traders reports. Here – in this chart – we see the first signs of an equal and opposite reaction. . . . a rocket-launch ascent.

Quote of the Day
“The population of the world is increasing at the rate of five thousand four hundred every hour. A small percentage of these people will become gold hoarders, people who are frightened of currencies, who like to bury some sovereigns in the garden or under the bed. Another percentage needs gold fillings for their teeth. Others need gold-rimmed spectacles, jewelry, engagement rings. All these new people will be taking tons of gold off the market every year. New industries need gold wire, gold plating, amalgams of gold. Gold has extraordinary properties which are being put to new uses every day. It is brilliant, malleable, ductile, almost unalterable, and metals except platinum. There’s no end to its uses. But it has two defects. It isn’t hard enough. It wears out quickly, leaving itself on the linings of our pockets, and in the sweat of our skin. Every year, the world’s stock is invisibly reduced by friction. I said that gold has two defects…The other, and by far the major defect, is that it is the talisman of fear. Fear, Mr Bond, takes gold out of circulation and hoards it against the evil day. In a period of history when every tomorrow may be the evil day, it is fair enough to say that a fat proportion of the gold that is taken out of one corner of the Earth is at once buried again in another corner.” – Ian Fleming, Goldfinger

Chart of the Day

Chart note:  What keeps the chairman of the Federal Reserve up nights? As shown on today’s Chart of the Day, the last time interest rates converged like they have over the past six months, it was 2006-2007 just before the financial crisis.

DAILY MARKET REPORT

Gold is tracking marginally lower as we begin the week and the final quarter of the year.  The yellow metal traded as low $1185 overnight, bounced back to $1192 at the COMEX open, and is trading now at $$1188.50 – down $3.50 on the day.  Silver is down 20¢ this morning at $14.44 shedding about half of Friday’s strong gain.

The U.S. Mint reports soaring sales of American silver eagle bullion coins.  According to its month-end report, it placed 2.897 million of the popular one-ounce coins through its wholesale network during the month of September – a gain of 89% over August’s 1.53 million ounces in sales and a more than 900% gain over the same month last year.  The performance bodes well for demand as we move into the perennially strong fourth quarter of the year.  Wholesalers report dealers stocking up for that demand and to get ahead of the Mint’s annual production shutdown later in the year.

“The Mint ran out of silver Eagle bullion coins Sept. 6. Sales resumed Sept. 17,” reports Numismatic News. “Supplies as they are produced are being rationed. The Mint expects this situation to continue through the end of 2018. The Mint calls rationing “allocation.” The biggest regular buyers get the biggest allocations among the official Authorized Purchasers.”

Quote of the Day
“Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” – Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds (1841)

Chart of the Day

Chart note: Last September was one of the worst in years for silver Eagle sales. The Mint sold only 320,000 coins. Last month was a different story entirely with the Mint selling almost 2.9 million silver eagles – an 89% gain over last month’ strong number and 900% gain over September last year. As reported previously here, low Mint sales in both metals over the past two years reflected broker/dealer inventories being sourced from the secondary markets following a string of record demand years prior to 2017. That secondary market supply suddenly dried-up in August though channeling demand back to the Mint, as reflected in the chart above.  The surge in sales indicates a reawakening of strong investor interest in silver at currently low price levels. Gold American Eagle bullion coins turned in a more modest performance with sales of 20,500 ounces in September. That total is down slightly from August of this year but an encouraging nearly double sales from September of last year.

DAILY MARKET REPORT

Gold is up $2.50 at $1186 in today’s early going. Silver is up sharply (25¢) at $14.51.

Here is an interesting snippet from Bloomberg opinion columnist Robert Burgess published yesterday:

“[JP Morgan’s Marko] Kolanovic, who has dominated Institutional Investor’s annual rankings of top strategists for a decade or so, was out with a research note Thursday arguing that President Donald’s Trump’s isolationist foreign policy is a ‘catalyst for long-term de-dollarization.’  Put another way, the dollar is in jeopardy of no longer being the world’s primary reserve currency and all the benefits that go along with that, such as interest rates that are lower than they otherwise might be and the government’s ability to fund budget deficits in perpetuity. ”

At the moment, no one wants to believe that the current market paradigm can come to an end, but, unless history is stood on its head, end it will. JP Morgan’s Marko Kolanovic may have put his finger on what could turn out to be the catalyst – trade policy and its effect on the dollar.  Overshadowed in the political tumult of the past week was President Trump’s address to the United Nations. In it, he outlined what might come to be known as the Trump Doctrine.

Here in part is what he said:

“Each of us here today is the emissary of a distinct culture, a rich history, and a people bound together by ties of memory, tradition, and the values that make our homelands like nowhere else on Earth. That is why America will always choose independence and cooperation over global governance, control, and domination. I honor the right of every nation in this room to pursue its own customs, beliefs, and traditions. The United States will not tell you how to live or work or worship. We only ask that you honor our sovereignty in return.”

And. . .

America’s policy of principled realism means we will not be held hostage to old dogmas, discredited ideologies, and so-called experts who have been proven wrong over the years, time and time again. This is true not only in matters of peace, but in matters of prosperity. We believe that trade must be fair and reciprocal. The United States will not be taken advantage of any longer.

And, last. . .

America is governed by Americans. We reject the ideology of globalism, and we embrace the doctrine of patriotism. Around the world, responsible nations must defend against threats to sovereignty not just from global governance, but also from other, new forms of coercion and domination.

Whether you like Trump or not, whether you agree or disagree with his trade and tariff policies, the UN speech outlines something other than business as usual and it should be taken into account. That something has yet to be reflected in asset prices. Many will discount the UN speech as more presidential bombast and go about their business. Yet, these are policies that are already in place – realities not proposals.

In a separate article, Bloomberg’s Cecile Gutscher passes along one of the conclusions from Kolanovic’s study: “Gold, which tends to benefit from a weaker greenback, also offers a hedge for any tentative push to de-dollarize. And it’s looking decidedly cheap right now . . . U.S. unilateral policies risk bringing major powers of China, Europe and Russia closer, and such an alliance could profoundly impact the dollar-centric financial system.”

Quote of the Day
“We are hurtling towards a financial crisis in the next couple of years as sure as night follows day, and even with 4 per cent growth it doesn’t get you out of this. We had this massive tax cut and we now have trillion-dollar deficits as far as the eye can see. I have been a huge supporter for tariffs but I find it ironic that on the day that we actually sign the [Article 301 investigation into China’s practices] we pass a bill that is going to create these deficits and China is the financier of last resort for those deficits.” – Steve Bannon, former White House advisor

Chart of the Day

Chart courtesy of HowMuch.net

Chart note: “You can see the same top-heavy trend when looking at which continents have the highest reserves,” says HowMuch. “Asia clearly leads the way on the right side of the map, second to the green countries from Europe (thanks only to Switzerland). Every other continent is comparably tiny. Take a look at North and South America compared to Asia. It’s not even close. And where is the entire continent of Africa in our visualization? Since we excluded countries with less than $5B in reserves, only four orange countries made it onto the map.”

Gold broke sharply to the downside at the open of futures trading this morning on heavy short-selling. Nearly 15,000 contracts were dumped within the first hour of trading, the equivalent of 1,500,000 troy ounces, or nearly 45 metric tonnes. Looking around for a motivation for such aggressive selling, the culprits are few and far between. The Fed announcement from yesterday was devoid of anything remotely jarring. The GDP number for July was confirmed at 4.2%, but this is a revision that confirms a number already well-known and understood. China’s yuan is down but marginally. The rest of the markets – bonds, stocks and the commodities – are trading quietly. So, gold market trading this morning, for lack of better adjective, looks “peculiar” and distinctly algo-driven – a description with which we will stick until something better comes along.

Quote of the Day
“We have to sell a lot of Treasury bonds, and we as Americans will not be able to buy all those treasury bonds. The Federal Reserve will have to print more money to make up for the deficit, will have to monetize more, and that’ll cause a depreciation in the value of the dollar. . .Two years out is when I’m worried about. It’ll be more of a dollar crisis than a debt crisis, and I think it’ll be more of a political and social crisis.”” – Ray Dalio, Bridgewater Associates, September, 2018

Chart of the Day

Chart note:  “Central banks,” reports the World Gold Council, “added a net total of 193.3 tonnes of gold to their reserves in the first six months of 2018, an 8% increase from the 178.6 bought in the same period last year. This marks the strongest first half for central bank gold since 2015.” Since the beginning of 2017, the biggest buyers were Russia – 383.3 tonnes; Turkey –125.8 tonnes and Kazakhstan – 68.4 tonnes. A surprise on the list, and reported here earlier this month, is India – 15.3 tonnes. The Peoples Bank of China, who many analysts believe to be the largest buyer, does not report publicly on its purchases. Some sources report though that its purchases could be as high as 500 tonnes per year.

Please see full report: Central bank buying activity/World Gold Council/9-20-2018

Also, please see this in-depth analysis – PBoC Gold Purchases: Secretive Accumulation on the International Market/Bullion Star

DAILY MARKET REPORT

The double-whammy of options expiration and today’s anticipated higher interest rate announcement pushed gold in a southerly direction this morning. It is off $6 at $1195.50. Silver is down 9¢ on the day at $14.42. The dollar is up against most currencies and commodities look mixed.

Pushed to the back burner, but perhaps undeservedly so, the geopolitical/military confrontation in the Pacific between the U.S. and China has escalated over the past week. Just before China called off the latest round of trade talks last weekend, the U.S. sanctioned its military over jet purchases from Russia. Yesterday, the U.S. announced the ramped-up sale of military equipment to Taiwan – a maneuver that prompted a stiff Chinese response. Yesterday China blocked a U.S. warship port of call visit to Hong Kong. The leakage of trade war animosity into the military theater has been overlooked in financial markets, but perhaps we should all be paying closer attention.

Quote of the Day
“If we don’t quite know what the future holds, there is little point in getting carried away by very fancy mathematical calculations of optimal portfolios. Don’t rely on past data to be a good guide. Try to think through what mix of assets gives you the best chance of surviving some big event. That must mean including assets that are negatively correlated or uncorrelated in your portfolio. And I am very struck by the fact that over many many years, central banks, governments and individuals have always, despite the protestations of economists, held some gold in their portfolio. Obviously, there is no high running return, but when unexpected things happen, particularly when governments rise and fall, then gold is a means of payment that everyone is always prepared to accept. And I think that’s why even central banks have always had a role in their portfolios for gold.” – Mervyn King, former Governor, the Bank of England

Chart of the Day

Chart note 1:  Yesterday we published a chart on the debasement of the Roman denarius that stretched over nearly three centuries.  During the period, the silver coin went from 98% to 5% silver.  Similarly, the United States dollar has lost 96% of its purchasing power from 2013 to present – a 105 year period. The timeline for the dollar’s debasement has been compressed to roughly one-third that of the denarius.  The one feature both share in common, however, is a relentless progression.

Chart note 2: In 1933, the dollar was backed by gold and silver.  In 1933, the federal government seized gold bullion from its citizenry, replaced the gold and silver coinage with gold-backed paper money and suspended  domestic convertibility.   In 1971, the United States suspended international convertibility and instituted a pure fiat money system.  The 1933 dollar was worth 78% the 1913 dollar.  The 1971 dollar was worth 25% the 1913 dollar.  The 2018 dollar is worth 3.8% the 1913 dollar.  What the consumer could buy with $1 in 1913, it takes $26 today.