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- DMR–Gold seesawing around $1200, but higher this morning on firming yuan, China premier comments
- The risk of derivatives isn’t gone. It’s merely morphed.
- Gold: A new trade war weapon?
- China’s US Treasury holdings just fell to six-month low amid escalating trade war
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Monthly Archives: December 2017
U.S. Q3 current account gap narrowed to -$100.6 bln, inside expectations of -$116.8 bln, vs revised -$124.4 bln in Q2.
Gold better at 1262.36 (+0.70). Silver 16.17 (+0.03). Dollar lower. Euro higher. Stocks called mixed. U.S. 10-year 2.42% (+3 bps).
Gold accelerated higher today finishing up $6.91 at $1262.08. Silver also climbed higher up 16¢ and back over the $16 level at $16.12. Over the past several months, the waterfall drops have been balanced with rocket ship recoveries – the action over the past few days being another example of the rocket ride half of the equation.
One impetus for gold’s good showing today is something that was largely overlooked. In an article headlined “Japan Tiptoes out of Radical Experiment in Monetary Policy,” the Wall Street Journal reported this morning that “Japan’s central bank has been the world’s poster child for radical monetary easing. Next year, its stance is poised to change.” The Bank of Japan, says the Journal, “is likely to raise one or more of its key interest-rate targets in 2018.” Such a move would likely boost the yen against the dollar, something that might be enough to tip the scales in gold’s favor if becomes a mainstay in 2018. Over the past several months, gold and the yen have demonstrated a strong trading correlation often rising and falling in tandem.
Quote of the Day
“. . .[T]he decay of capitalism and free markets should raise concerns for anyone’s market thesis, bullish, bearish or agnostic. What stops a central bank from manipulating asset prices? When do they cross a line from marginal manipulation to absolute price control? Unfortunately, there are no concrete answers to these questions, but there are clues.
Global central banks’ post-financial crisis monetary policies have collectively been more aggressive than anything witnessed in modern financial history. Over the last ten years, the six largest central banks have printed unprecedented amounts of money to purchase approximately $14 trillion of financial assets. . . Before the financial crisis of 2008, the only central bank printing money of any consequence was the Peoples Bank of China (PBoC).” – Michael Lebowitz, Real Investment Advice
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…”The last three days have reconfirmed by commitment for a much higher gold price in 2018. We are making higher lows for the year – the recent behavior made me nervous, but something very telling happened in the last three days,” Lanci said in an interview on Thursday.
“On Tuesday we had a short covering rally. And Wednesday there was a 10,000 contract increase in December – that’s very unusual, that is an over 2.3% increase in open interest,” Lanci explained. The point Lanci stresses is that gold is now back in a “safe area” between $1250-$1275 an ounce. “The $1,700 call I believe in is going to come to fruition- [if gold gets] above $1275 I will double down on a momentum bet.”
PG View: Lanci has made note of the cyclical pressures that have lifted gold and believes they will come to bear in a more significant way in 2018.
As an aside, Lanci see the marketing of bitcoin as the new digital gold as a “disaster waiting to happen.”
Gold is up, having established a 7-session high at 1263.97. A breach of minor chart resistance at 1264.10 would favor a short-term challenge of the 200-day moving average 1268.83.
This is a critical week for the GOP and the Trump administration. Tax reform is expected to be voted on early this week with the plan to deliver the bill to the President’s desk before the Christmas recess. However, the budget and debt ceiling issue has to be dealt with before December 22 as well.
A partial government shutdown may hang in the balance, although neither party seems inclined to press the issue. Consequently, we may see that can get kicked into the new year.
One thing is certain, the debt ceiling is going to have to rise. The tax bill is expected to add the maximum $1.5 trillion to the national debt over the next decade. However, that may be conservative based on perhaps too optimistic growth projections.
With the Fed both raising rates and tapering their balance sheet, the cost of financing the massive and growing debt are likely to rise as well. That is going to provide an additional headwind to those growth prospects.
Consumer debt exceeded the $1 trillion milestone earlier this year, but MarketWatch contends more consumer debt is “One sure-fire prediction for 2018.” Perhaps not surprisingly, delinquencies are expected to rise in the year ahead as well. This is another significant impediment to growth.
Despite the risks, stocks love the prospects for tax cuts. However, I’m wondering if this will end up being a classic case of ‘buy the rumor, sell the fact.’ Yale economist Stephen Roach cautions that “the CAPE ratio has been higher than it is today only twice in its 135-plus year history – in 1929 and in 2000. Those are not comforting precedents.”
The implication of course it that stocks are really overvalued and we know what happened in 1929 and 2000. A little portfolio balancing into year-end, seems like a prudent strategy.
Potential investors in bitcoin should steer clear of a dangerous gamble and not complain to financial regulators if things do go wrong, Denmark’s central bank governor warned.
…The comments echoed concerns of a bubble about to burst made by other market participants and central bankers after the price of bitcoin rocketed more than 1,800 percent since the start of the year.
Rohde said that if people decide to ignore his warnings, they should realize that they are pretty much on their own.
Gold futures ticked higher Monday as the dollar index slipped, building slowly on what was the yellow metal’s first weekly gain in a month last week.
…The dollar slipped against most other major currencies, with the ICE Dollar Index DXY, -0.56% down 0.3% at 93.70. The greenback advanced on Friday on increased optimism the Republican tax bill will get approved before Christmas. Gold typically moves inversely to the dollar and stocks, as investor appetite for riskier assets tends to lure investors away from the haven of gold.
Accordingly, gold’s upside Monday was held in check in part as risk-on investment sentiment persisted, leaving major stock indexes on track for new records. Such optimism was the result of tax-policy progress. Speaking on several Sunday talk shows, Treasury Secretary Steven Mnuchin said he has “no doubt” that the GOP’s tax bill will make it to the desk of President Donald Trump this week.
Despite seemingly robust indicators, the world economy may not be nearly as resilient to shocks and systemic challenges as the consensus view seems to believe. In particular, the absence of a classic vigorous rebound from the Great Recession means that the global economy never recouped the growth lost in the worst downturn of modern times.
…While I have great respect for the forecasting community and the collective wisdom of financial markets, I suspect that today’s consensus of complacency will be seriously tested in 2018. The test might come from a shock – especially in view of the rising risk of a hot war (with North Korea) or a trade war (between the US and China) or a collapsing asset bubble (think Bitcoin). But I have a hunch it will turn out to be something far more systemic.
…At risk are the very fundamentals that underpin current optimism. One or more of these pillars of complacency will, I suspect, crumble in 2018.
PG View: If the age of investor complacency comes to a screeching halt, gold is going to scream higher.
Gold edged higher on Monday as uncertainty over U.S. tax reform weighed on the dollar, while an analyst said bullion may face renewed headwinds early next year.
…”If the whole thing (tax reform) falls apart at the last minute, it would be hugely positive for gold, but I think that is unlikely,” said analyst Carsten Menke at Julius Baer in Zurich.
If the tax bill passes, gold might dip slightly, but that scenario is largely priced in the market, he added.
Gold is up in early U.S. trading, buoyed by a weaker dollar. The rise in the yellow metal comes despite continued gains in shares and firmer yields, as cyclical forces seem to have taken hold.
The stock market is eagerly anticipating final passage of the GOP tax bill early this week, despite swirling doubts about the positive economic impact of the legislation and a certainty that the debt level is going to rise. Congress also needs to pass a budget agreement and address the debt ceiling this week, or face a partial government shutdown.
While the tax bill can get passed without any support from Democrats, the budget/debt ceiling agreement is going to require at least a little bipartisanship. The more likely scenario is that they kick-the-can yet again with another short-term deal.
Silver is back above $16, but remains comparatively soft. However, there is a growing recognition that silver is quite undervalued relative to gold. Kitco reported late last week that “both TD Securities and Bank of Montreal came out and said that they see silver prices pushing to $20 an ounce next year.”
Gold higher at 1259.57 (+4.51). Silver 16.10 (+0.05). Dollar lower. Euro higher. Stocks called higher. U.S. 10-year 2.37% (+2 bps).
Gold finished up $2.50 today at $1255.13. Silver finished up 10¢ at $15.97. We got another waterfall drop this morning precisely at the COMEX open (8:30 am) after (in response to?) a strong showing in the overnight market that took the price to the $1261.50 mark. As we have pointed out consistently at this page, it is unlikely that this type of price action is the result of thousands of investors suddenly deciding to sell gold at exactly the same moment and then just as suddenly completely stopping . . .Take special note of the very large volume bars at the bottom of the chart. Someone gave their computer a kick this morning. Woke that sleeping dog.
Nevertheless. . . . . On the week:
Gold – Up $6.82 [$1248.31 ––>$1255.13]
Silver – Up 13¢ [$15.84 ––> $15.97]
Quote[s] of the Day
“The South Sea Bubble took place in the 18th century in England. Sir Isaac Newton who was one of the great intellects in history lost his fortune in the South Sea Bubble. Strangely enough he invested, took profits, but then was lured back into the mania near the peak of the bubble and ended up losing his fortune. Without going into great detail the South Sea Company was a joint stock company created to consolidate and reduce the cost the national debt of England in the early 18th century. Before the bubble burst Sir Isaac Newton was famously quoted as saying ‘I can calculate the movement of the stars, but not the madness of men.’” – Bob Moriarity, 321Gold
“There have been 2 spin-offs (Bitcoin Cash and Bitcoin Gold) from Bitcoin and there are currently more than 1,300 different cryptocurrencies. So the idea that it’s limited is actually not correct. The long term chart of Bitcoin is curvilinear and just like at every other market top there are 100 reasons to buy (just as there are 100 reasons to sell at every market bottom). People are irrational. You don’t need to know anything about Bitcoin, you just need to understand human nature. This is a bubble and some of the brightest people alive fell for it.” – Bob Moriarity, 321Gold
(According to Convoy Investments, bitcoin achieved dubious distinction this week. It surpassed the 1619-1622 Dutch TulipMania as the biggest investment bubble in history.)
News & Views
Forecasts, Commentary & Analysis on the Economy and Precious Metals
Here we are in December, chugging along toward the end of the year. In the recently released December issue of News & Views, we concentrate on the gold market itself with a variety short but informative reports with the upcoming year in mind:
• On the ghosts of Decembers past (See reprint above)
• End-of-year gold and silver price predictions
• U.S. Mint makes a mint selling gold coins at a 25% mark-up
• Gold’s mysterious waterfall drops
• The gold/quality man’s suit ratio
• And a long run of “Notable Quotables” for your reading pleasure
If you are not already a subscriber, we invite you to sign-up for free immediate access to the December issue, as well as future issues of our newsletter. We think you will enjoy the subject matter and gain from our take on recent events in the gold market.
“So let me start, Steve [Leisman, CNBC] with the stock market generally. Of course the stock market has gone up a great deal this year and we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price-earnings ratios and comparable metrics for other assets other than equities we see ratios that are in the high end of historical ranges. And so that’s worth pointing out.
But economists are not great at knowing what appropriate valuations are. We don’t have a terrific record. And the fact that those valuations are high doesn’t mean that they’re necessarily overvalued.
We are in a – I’ve mentioned this in my opening statement and we’ve talked about this repeatedly – likely a low interest rate environment, lower than we’ve had in past decades. If that turns out to be the case, that’s a factor that supports higher valuations.
We’re enjoying solid economic growth with low inflation and the risks in the global economy look more balanced than they have in many years.
So I think what we need to, and are trying to think through, is if there were an adjustment in asset valuations in the stock market, what impact would that have on the economy and would it provoke financial stability concerns.
And, I think when we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange.
We have a much more resilient, stronger banking system and we’re not seeing worrisome buildup in leverage or credit growth at excessive levels. So, this is something that the FOMC [Federal Open Market Committee] pays attention to, but if you ask me is this a significant factor shaping monetary policy now, while it’s on the list of risks it’s not a major factor.”
MK note: Apparently, she disagrees with other members of the FOMC who recently declared their concerns about overvaluation of stocks as revealed in minutes released at the end of November. All of which reminds me of a Stein cartoon drawn specially for USAGOLD just after the 2007-2008 Wall Street implosion.
“La Mancha has invested almost $1.5bn in gold miners making it one of the largest private investors in the sector globally, according to Sébastien de Montessus, chief executive of Endeavour. Mr de Montessus told a conference in London on Monday Mr Sawiris ‘truly believes in the gold sector and it’s a long-term investment’”.
MK note: Sawiris, according to the Bloomberg Billionaires Index, is the 372nd richest individual in the world. Augmenting great wealth with gold is an ancient predilection that can be traced to Mr. Sawiris ancestors who founded a great civilization along the Nile River beginning some 7500 years ago.
“Egypt is a land rich in gold, and ancient miners employing traditional methods were thorough in their exploitation of economically feasible sources. In addition to the resources of the Eastern Desert, Egypt had access to the riches of Nubia, which is reflected in its ancient name, nbw (the Egyptian word for gold). The hieroglyph for gold—a broad collar—appears with the beginning of writing in Dynasty 1, but the earliest surviving gold artifacts date to the preliterate days of the fourth millennium B.C.; these are mostly beads and other modest items used for personal adornment. Gold jewelry intended for daily life or use in temple or funerary ritual continued to be produced throughout Egypt’s long history.” – The Metropolitan Museum of Art
“Despite a recent bounce back, analysts and investors say the greenback could lose more ground against the euro and yen as the prospect of strong economic growth and tighter monetary policy outside the U.S. more than offsets higher interest rates at home. The dollar is down more than 7 percent versus the world’s major currencies this year, the most in over a decade.
The economic growth ‘we’re seeing in Europe, emerging markets and the rest of the world will likely cause the dollar to sell off again,’ said Erin Browne, the head of asset allocation at UBS Asset Management, which oversees about $770 billion. When it comes to what central banks in Europe and Japan might do, ‘there’s very little priced in.’”
European Union states and legislators agreed on Friday on stricter rules to prevent money laundering and terrorism financing on exchange platforms for bitcoin and other virtual currencies, the EU said in a statement.
The agreement is part of a broader set of measures to tackle financial crimes and tax evasion. EU legislators also backed stricter controls on pre-paid cards, and raised transparency requirements for the owners of trusts and companies.
…Bitcoin exchange platforms and “wallet” providers that hold the cyber currency for clients will be required to identify their users, under the new rules which now must be formally adopted by EU states and European legislators and then turned into national laws within 18 months.
“[Vince Lanci, founder of Connecticut-based Echobay Partners]said he could see the metal hitting $1,700 an ounce or higher in 2018, if correct, his forecast would be an over $450 rally from the current level of $1,250 an ounce. ‘On Tuesday we had a short covering rally. And Wednesday there was a 10,000 contract increase in December – that’s very unusual, that is an over 2.3% increase in open interest that comes on the heels of the day before, of people getting out – that is not common, but when it does happen it’s a sign that either a) shorts are getting stopped out or b) you have prop traders positioning themselves for asset allocators coming in,’ Lanci explained.”
Gold is up modestly, having given back more significant gains seen earlier in the session. However, the yellow metal still appears to be on track for its first weekly gain in the last four.
News that some last-minute concessions were being made on the tax bill to win the support of GOP holdouts, helped the dollar recover intraday, knocking gold off the highs for the week.
The final version of the tax bill is expected to be made public later today. Given that the plan is not terribly popular with the general public, perhaps it’s not surprising that it will drop late on a Friday. Congress would then likely vote next week and get the bill to the President before the Christmas recess.
Congress is also going to have to come up with another temporary spending measure and kick the can on the debt ceiling on or before December 22 as well. The tax bill is expected to add the maximum $1.5 trillion to the national debt over the next 10-years.
However, it may prove to be much more than that if tax cuts fail to spark the fast growth that proponents are anticipating. As noted in this morning’s Snapshot, the Fed’s economic forecasts that came out earlier in the week, reflect some serious doubts.
While the central bank now projects 2.5% GDP in 2018, they see the pace of growth moderating to 2.1% in 2019 and 2.0% in 2020. The Fed kept their long-term growth forecast steady at 1.8%.
The Fed definitely tends to be pretty optimistic on their forecasts. However, their forecasts suggest they see the fiscal impact of the first major tax overhaul in more than 30-years as negligible and short-lived.
Without any significant and sustainable fiscal stimulus, the onus is going to fall right back on the Fed to support growth with easier monetary policy. In other words, the tightening cycle that began a year ago may have to be paused again, or perhaps even reversed.
That realization would weigh on the dollar, boosting gold in the process. The yellow metal needs to climb back above the 200-day moving average (presently around 1268.52) in order to ease near-term pressure on the downside. At that point, renewed tests above $1300 would become likely.
The big question in Washington: Will the tax bill have the votes? From NBC’s Benjy Sarlin: “Just days before an expected vote, the sweeping Republican tax bill’s fate was up in the air Thursday, with few details confirmed and key senators withholding support unless changes were made.
U.S. industrial production +0.2% in Nov, below expectations of +0.3%, vs positive revised +1.2% in Oct; cap use ticked up to 77.1%.
Gold edged higher in Asian trade on Friday, heading for their first weekly gain in four, as the dollar sagged on concerns about the progress of U.S. tax reform.
“The U.S. dollar is weakening a little and that’s benefiting gold,” said Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong.
…President Donald Trump’s efforts to win passage of a sweeping tax bill in the U.S. Congress hit potential obstacles when two more Republican senators insisted on changes, joining a list of lawmakers whose support is uncertain.
Albert Edwards has a new warning: Stop focusing on the bitcoin bubble, and look instead at what’s happening in the equities market.
…the “the underlying profits recovery looks increasingly fragile and indeed on some key measures a rapid deceleration is underway.”
“Amid all the focus on the parabolic rise of Bitcoin it has gone almost unnoticed that, following its rapid ascent, the main S&P Composite index is now most overbought since 1995.
…”As well as overvaluation, we showed recently that the extreme bullishness currently prevailing among professional advisors has not been seen in markets since (just before) the 1987 crash,” he writes.
PG View: It might be worth considering taking some money off the table in stocks and diversify with some gold!
Gold is up in early U.S. trading, buoyed by a softer dollar and appears poised to record its first weekly gain in the last four. This is a good initial indication that the pattern that has emerged in recent years, where gold bottoms late in the year and rallies into the new year, is set to repeat.
Fresh doubts about whether the reconciled tax bill has the votes to clear Congress is stoking political uncertainty. While the Fed now sees GDP rising to 2.5% in 2018, they see it tapering again to 2.0% by 2020. The long range forecast remains steady at 1.8%, raising doubts that the tax bill will “pay for itself.” as the backers claim.
The GOP is trying to get the legislation passed before the new Democrat Senator from Alabama can get seated, which would further narrow the already razor thin advantage Republicans holds in the upper chamber. If the tax measure fails to get to the President’s desk by year-end, stocks would likely reverse, which would push gold back toward $1300.
Gold higher at 1261.31 (+7.56). Silver 16.09 (+0.16). Dollar easier. Euro higher. Stocks called higher. U.S. 10-year 2.35% (unch).
Gold gave back a portion of yesterday’s gains but by and large managed to hold its own today. It finished at $1252.70, down $2.58. Silver too gave back a bit finishing at $15.87, down 17¢ on the day.
One of the more interesting releases during the course of the day came from Germany’s Commerzbank. In its Bullion Weekly Technicals publication, analyst Karen Jones says “We suspect that the [Gold/Silver ratio] has peaked at 80.” As for gold, using Elliot wave chart analysis, she projects a “5 wave” top for gold over $2000 per ounce and the bottom of the “4 wave” at $1168. Says Commerzbank on gold: “Our long term bias remains bullish.”
Quote of the Day
“The defining feature of the recent half-cycle is that monetary policy, regulatory policy and proposed tax policy have all very intentionally nourished the primitive, untethered, speculative Id of Wall Street. Freud called the Id ‘a cauldron full of seething excitations, striving to bring about the satisfaction of instinctual needs subject to the observance of the pleasure principle.’ That’s a reasonable description of monetary policy under Ben Bernanke, and much of what has unfolded under the current Administration.” – Jon Hussman, Hussman Funds
If you agree with Commerzbank, perhaps swapping out of a gold position for silver at the 80:1 ratio makes financial sense. We invite you to call our Order Desk to review whether or not this makes sense for you (and/or your IRA). The premiums on silver coins and bars offer additional incentive at present. We have a strong inventory position at advantageous prices we can pass along.
Outright purchase at our Online Order Desk
“According to our beliefs about how investment markets work, the up and down phases of asset cycles are closely connected. Also, monetary stimulus influences both phases at the same time. It helped fuel the giant gains of recent expansions, but it also helped create the imbalances that led to giant losses. And after the accelerated advances of 2016-17, it’s fair to wonder if today’s imbalances are approaching the extremes of 2000 and 2007. Even some FOMC members are gently acknowledging that risk.” – Daniel Nevins, FF Wiley
MK note: Richard Russell, who before he passed away ranked among the most widely read and admired American newsletter writers, used to occasionally remind his readers that trees did not grow to the sky. Investors are almost always caught by surprise at the severity of the downsides once a bull market turns to the negative.
Simultaneously, we haven’t seen much follow-up to the implicit warnings about “financial imbalances” issued by FOMC in minutes made public at the end of November. That in itself was an implicit warning about market cycles. (We mention the Fed meeting minutes in the December issue of News & Views.)
Along comes FF Wiley’s Daniel Nevins to emphasize those concerns raised by the Fed. He also offers some interesting speculation as to what may preoccupy the beginning years of Jerome Powell’s tenure at the Federal Reserve. Financial imbalances, he says, not a recession will be the major concern. In that respect his reading of the future is in keeping with our own – a prognosis, by the way, that should encourage a gold diversification among those who share it.
The charts mentioned in the headline illustrate a point well made. . . .
Gold extended to new highs for the week in overseas trading, but has since been consolidating the solid gains seen after the Fed’s policy decision yesterday. Silver on the other hand, was unable to sustain the rebound above $16.
Today’s generally better than expected U.S. economic data and steady policy from both the BoE and ECB are providing some support for the dollar, which is a bit of a headwind for gold. With the Fed raising rates and the other major central banks still on hold, the divergence will tend to favor the dollar.
That being said, the Fed’s continued concern about low inflation and slow wage growth may temper tightening expectations if those conditions persist into the new year. As noted yesterday, at some point the central bank is going to have to give up on the notion that the situation is “transitory.”
The World Gold Council’s investor report focuses on Germany, but this paragraph in introduction is a nice thumbnail sketch for the gold market at this point:
That fits nicely with the seasonal patter that has emerged in recent years, where gold has bottomed around the time of the December FOMC meeting and rallied into the new year. Yesterday’s initial post-FOMC rally is encouraging, but some upside follow through is needed to further bolster confidence in the upside.
Despite rising interest rates, a strong U.S. dollar and a persistent bull market in equities, gold managed to defeat the odds this year.
The yellow metal, up close to 9% this year, was the shining star of the glum commodities space.
For John Reade, chief market strategist for the World Gold Council (WGC) – there are several reasons why gold will continue to have an upward trajectory in 2018.
To say that the global financial crisis had a seismic effect on markets is almost a truism. But the events of 2008 reshaped investor behaviour too, not least in Germany.
As a nation which values long-term wealth preservation, Germany has a long tradition of gold investment. Around the turn of the century however, German investors discovered a new-found fascination for equities and interest in gold waned. Banks, historic distributors of physical assets, closed down or minimised their gold desks and investment demand fell to generational lows.
The financial crisis transformed that mindset, reminding German investors of the properties that had attracted them to gold in the past – its resilience in the face of disaster; its lack of correlation with other assets; its immunity from credit risk; and above all, its reliability as a wealth generation tool.
Since that time, the German gold market has gone from strength to strength, boosted by a rich ecosphere that facilitates gold investment online, in stores, at banks and via ETFs.
In this edition of Gold Investor, we explore Germany’s relationship with gold, showcasing that, when conditions are right, a gold market can experience rapid development, to the benefit of stakeholders across the value chain.