DMR–Gold recovering this morning from yesterday’s Sintra inspired downdraft

DAILY MARKET REPORT

Gold is staging something of a recovery this morning from yesterday’s downdraft trading at $1268 and even on the day. Silver is down 2¢ at $16.32. Gold broke to the downside late in yesterday’s session responding, as best we can gather, to statements at the Sintra central bank conference from the ECB’s Draghi and Nowotny, the Fed’s Powell, BoF’s Villeroy, BoJ’s Kuroda and others.

Those statements reinforced the split in interest rate policies between the United States and the other participants. That divergence between the perceived hawkish U.S. stance and the rest of the world’s dovish positioning was interpreted as bullish for the dollar and bearish for the rest of the world’s currencies. The result was yesterday’s sell-off. In this new and highly complicated financial order, though, nothing can be taken as given. The dollar index is trading down this morning and gold is recovering from yesterday’s lows.


An observation. . . . .

It is going to be awhile before the present turmoil settles into something recognizable. Market players and investors from institutions and hedge funds to small private investors alike are asking themselves some down-to-earth questions:

1. “Is the world a safer place than what it was before all of this happened?”

2. “Is the trade war likely to be a quick or will it become a long, drawn-out war of attrition?”

3. “Have the markets already priced-in the shock of what is quickly becoming a new world order or we are on the threshold of something more consequential?”

And last but certainly not least. . .

4. “Is my money safer where it is now or do I need to acknowledge that things have changed, perhaps radically, and make some necessary adjustments?

Today Germany’s Daimler, the manufacturer of Mercedes Benz, issued a warning that its profits would be undermined by China’s tariffs on U.S. imports. Stocks for Europe’s automobile manufacturers dropped sharply as a result. The announcement amounts to the recognition of a new way of doing business and one, by the way, that is not specific to Daimler. There are likely a good many similar epiphanies in the waiting both on the corporate level and among private investors as well.

Quote of the Day
“For those that have invested across assets – and especially over time – gold’s role as a safe haven is a familiar one. A refuge from panic is defined by confidence in stability and liquidity. The precious metal’s capacity to play that critical outlet has been proven over centuries. This particular status has only solidified itself over recent years, however, as some of the favorite alternatives have been materially distorted by financial conditions. In particular, government bonds from top credit rated countries have seen their value eroded substantially by dramatic rise of stimulus programs. It is that same diversion for safety that caters to the more prolific ‘anti-fiat’ appeal in the commodity. More and more, the threat of a wide risk aversion promotes the appeal of the metal as Dollar, Yen and Swiss franc find themselves undermined by circumstance.” – John Kicklighter, NASDAQ Daily FX

Chart of the Day

Chart note: With the US dollar the centerpiece of interest the past several weeks, we thought it appropriate to post the long-term overlay chart of the gold price and the major-currency version of the US Dollar index. As you can see, the dollar has been in a secular, long-term decline against other major currencies since the early 1970s when the U.S. abandoned gold-backing for the currency and the world switched to free-floating gold and currency prices. Despite all the talk of a strong dollar and how Treasury secretaries historically back the concept, the reality is the opposite – a weak dollar when measured against its major competitors. In the end, unencumbered ownership of physical gold coins and bullion, as this chart amply illustrates, has proven to be a very effective defense in the on-going process.

 

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