Category: dailyquotes

Gold surges $11 at COMEX open on Brexit, Powell comments

DAILY MARKET REPORT

Gold surged at the COMEX open this morning – up $11 at $1225. Silver is up 10¢ at $14.40. We detect two principal factors driving today’s trading. One is ominous and clear-cut – UK’s Brexit woes. The other is less concrete but probably more influential in the marketplace – guarded comments from Fed chairman Powell that came off as an early warning that a change of direction might be brewing at the Fed on interest rates. Suddenly the possibility of a “pause” has entered market thinking. Adding to the “pause” argument, CNBC ran a blazing headline this morning: “Cramer says CEOs are telling him off the record the economy has quickly cooled.” Such anecdotal evidence might be what was behind Powell’s remarks two days ago.

As we mentioned yesterday, the unfolding Fed scenario might serve as incentive for traders to begin squaring the enormous short position at the COMEX which requires buying gold contracts as an offset. With a shaky weekend ahead of us, the prudent course of action might be to buy today.

Quote of the Day
“I remember being told many years ago on a South African game reserve that the buffalo was the most dangerous of the big five game animals. In large part, this is because of the complacency shown towards them relative to the other, more obviously dangerous big five game animals (ie the lion, leopard, rhino and elephant). It’s also a fact that unlike the other big five, the buffalo gives no warning of an imminent charge (see link). It’s complacency that gets you killed, and the same goes for investors with the macro-risks. We all know what the big macro-imbalances are out there, caused by years of loose money, but investors continue to ignore them at their peril.” – Albert Edwards, SocGen

Chart of the Day


Chart note: This interactive chart from the St. Louis Federal Reserve shows the average annual price of gold from 1970 through the present. It demonstrates at a glance gold’s strong performance as a portfolio holding over the long haul and emphasizes its role as a reliable long-term portfolio safe haven.

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Gold pushes cautiously higher on Powell reference to economic ‘headwinds’ in 2019

Gold cautiously pushed higher again today as a carryover from yesterday’s strong rise. It is up another $3 in early trading at $1214, and up about $15 over the past two days. Although one could point to any number of factors to explain yesterday’s sudden jump higher, the one thing that stands out is Fed chairman Jerome Powell’s remarks that the U.S. economy could face “headwinds” in 2019. In a clear break with previous public posturing, he cautioned that the Fed would be “thinking about how much further to raise rates and the pace at which we will raise rates.”

However one parses the whole of Powell’s speech and Q&A session yesterday, this revelation provides a hint as to what the Fed chairman might be thinking. It is likely to be read as a loosening of the more hawkish rhetoric in weeks past and perhaps an early indication of a shift at the Fed.

Gold, we believe, is responding to that possibility. It, in fact, might inspire some squaring of the record short postion at the COMEX. At the moment the dollar appears to be leaning toward an upward bias based on what is occurring in Europe (the UK and Italy) and continuing wariness on further easing in China. That reaction might eventually take a back seat though to a softening at the Fed. Silver is up 5¢ on the day at $14.19.

* Bloomberg: Powell says solid economy faces headwinds as Fed mulls rates

Quote of the Day
“This is a terrible fiscal situation we’ve got ourselves into. The administration is doing tax cuts and a spending decrease, but he’s doing them in the wrong order. What we need right now is to focus totally on reducing the debt. We’re in a stage where if nothing is changed, we’re about to go from stagnation to stagflation, with a significant rise in inflation and a wholly significant imbalance in the economy, which is very difficult to anticipate at this stage. But the outlook is not exactly terrific.” – Alan Greenspan, 12/2017, CNBC interview

Chart of the Day

Chart note: The St. Louis Federal Reserve recently released this new chart on tax receipts. It shows corporate tax receipts plummeting and taxes on production and imports rising. This might be a new set of circumstances brought about by the Trump administration’s tax cuts and tariff programs. In the aggregate, tax receipts represented by the thick black line are falling at a time when government debt is expected to increase – and by some accounts increase significantly. For a prescient observation as to what all of this might lead to, we refer you to the quote from Mr. Greenspan immediately above.

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Gold on the fence as global tangle dominates trading

DAILY MARKET REPORT

Gold continues to ping-pong on either side of the $1200 mark unable to make a convincing move up or down. It, in fact, is right at $1200 as we write this report and down $3.50 on the day. Silver similarly is stuck in and around the $14 mark and down marginally on the day.

The precious metals are experiencing headwinds from weakness in both the yuan and euro in recent days.  The situation in Europe – most notably having to do with Brexit and the budget situation in Italy – does not lend itself to quick or easy resolution.  With respect to China, there have been rumblings of lower interest rates and a weakening economy.  That prognosis is balanced in the United States against the prospect of rising inflationary expectations and concerns about stability in financial markets.

“Demand for copper shall be positive next year and in the coming years,” Marcin Chludziński, head of copper mining giant KGHM Polska Miedz SA, told Bloomberg yesterday. “The trade conflict may affect demand to some extent,” he concludes, “but on the other hand China is changing its growth model and starting to accelerate internal consumption in order to rely less on exports and more on its domestic market.”

In an odd break with standard operating procedure, ex-Fed chair Janet Yellen voiced her concerns about the dollar being too strong – a prospect she feels could widen the U.S. trade gap. It seems that much is up in the air at the moment on the global stage and gold is content to remain on the fence as a result – at least for now. That, as always though, is subject to change without notice. . . . . . . .

Quote of the Day
“[T]he object of speculation may vary widely from one mania or bubble to the next. It may involve primary products, especially those imported from afar (where the exact conditions of supply and demand are not known in detail), or goods manufactured for export to distant markets, domestic and foreign securities of various kinds, contracts to buy or sell goods or securities, land in the country or city, houses, office buildings, shopping centers, condominiums, foreign exchange. At a late stage, speculation tends to detach itself from really valuable objects and turn to delusive ones. A larger and larger group of people seeks to become rich without a real understanding of the processes involved. Not surprisingly, swindlers and catchpenny schemes flourish.” – Robert Z. Aliber and Charles P. Kindleberger, Manias, Panics and Crashes – Anatomy of a Typical Financial Crisis (2001)

Chart of the Day

Chart note: As the chart above illustrates, gold does not always react to the start of a crisis as anticipated. As the credit crisis gained momentum in 2008, gold declined as the dollar rose – acting in much the same way it is reacting now to the emerging markets crisis and U.S.-China trade war. It was not until late 2008, when the full extent of the crisis became all too apparent, that it began to move higher. Thereafter, from 2009 to September 2011, it rose to its all-time high of $1895 – a 215% gain in three years.

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Gold consolidating at $1200, looking to regain its footing

DAILY MARKET REPORT

Gold looks to be consolidating around the $1200 mark in early trading with the combined effects of last week’s Fed meeting and election now behind us. The stock market’s initial reaction to last week’s events was euphoric. Now with yesterday’s more than 600 point drop/reality check, and a weak open this morning, it looks to be having second thoughts. Gold plummeted initially. Now though it is attempting to regain its footing and muster support at the $1200 level.

China’s yuan keeps getting in the way of those aspirations – down sharply again today after a price rally failed in overnight trading. Financial markets are jittery about China with an economic slowdown and potentially lower interest rates worrying investors. Reuters reports Hong Kong bargain-hunters returning to the gold market the past few days.

As it stands, gold and silver are both level on the day at $1202 and $14.04 respectively.

Quote of the Day.
“The world hasn’t seen inflation in a decade now. But it’s coming. And while the Fed is raising rates to combat inflation, there’s zero chance it hits the perfect mix to keep markets chugging along. Remember, we’ve already seen the stock market and real estate panic crash in response to a small interest rate hike. And I think there’s more pain ahead as inflation really starts to work its way into the economy. With inflation looming, I’d want to own some gold.” – Simon Black, Sovereign Man

Chart of the Day

Chart courtesy of TradingEconomics.com

Chart note:Producer prices for final demand in the US,” says TradingEconomics, “rose by 0.6 percent in October 2018, following a 0.2 percent advance in September and easily beating market expectations of 0.2 percent. It was the biggest monthly gain in producer prices since September 2012 mainly boosted by a jump in costs for energy (2.7 percent vs -0.8 percent in September) and trade services (1.6 percent vs 0.1 percent). Prices also rose for foods (1 percent vs -0.6 percent) and transportation and warehousing services (0.6 percent vs 1.8 percent).”

 

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Gold continues push in southerly direction

DAILY MARKET REPORT

Gold continued to push in a southerly direction early today in a continuation of last week’s Fed-related downside. It is off $4.50 this morning at $1205. Silver is 8¢ lower at $14.07. Most of gold’s downside came during Asian trading hours in response to China’s yuan. The weakness carried over to the New York open and gained momentum as the dollar index opened at 18-month highs. With little in the way of news, today’s trading looks technically oriented at this juncture. Thus far, it has been a slow day for economic and market news. We will update if anything of interest surfaces here at our Online Daily Newsletter.

Quote of the Day
“[James] Grant makes the point that the debt has been increased and decreased on a regular basis but never until today was there a view that the deficit didn’t matter and could be increased indefinitely. He points out that it took the United States 193 years to accumulate its first trillion dollars of federal debt. And amazingly, that it will add that much in the current fiscal year alone.” – James Rickards, Daily Reckoning

Chart of the Day

Chart note: In the article linked above, James Rickards goes on to quantify the established danger zone for the debt to GDP ratio, which according to economists Ken Rogoff and Carmen Rinehart begins at 90%. The current debt to GDP ratio for the United States is 106%.


Subscription recommendation: James Grant’s Interest Rate Observer

 

 

 

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Gold suffering after-effects of Fed announcement

DAILY MARKET REPORT

Gold is suffering the after-effects of yesterday’s Fed announcement – one in which the central bank essentially pledged to stay the course on interest rates for the foreseeable future. Gold is down $12.00 on the day at $1211. Silver is down 22¢ at $14.24. A weaker yuan is also a factor in gold’s pricing this morning. Most of the damage was done during European trading hours where the weak euro/strong dollar sentiment continues to weigh on financial markets. Meanwhile, back in the United States, core producer prices registered a .6% gain, or 7.2% annualized – the largest increase since 2012 and something of a vindication for the Fed’s interest rate stance.

Quote of the Day
“I think we’re getting to the point now where the breakout is going to be on the inflation upside. The only question is when.” – Alan Greenspan, February 2018

Chart of the Day


(Interactive chart)

Chart note: This interactive chart compares price appreciation for gold and the dollar index. Gold has consistently outperformed the dollar in twelve of the last eighteen years – a formidable record. Even if one were to add in average yields on dollar-based investments, gold still comes out the clear winner in those twelve years. Gold is having an off-year thus far in 2018 – down 4.6% while the dollar is up almost 6%. Given the performance record, though, contrarian investors might see the present disparity as a buying opportunity.

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Gold drifts marginally lower in advance of Fed announcement

Gold drifted marginally lower in advance of today’s FOMC results to be announced later in the day. Following that announcement, we should get a read on gold’s true intentions – up, down or sideways. As it is, gold is $1 lower at $1225. Silver is down 11¢ at $14.46.

The markets, it appears, are still sorting out how the elections might affect the economy. The one immediate development that stands out on the economic front, though, is Trump/McConnell’s reach across the political divide on the possibility of a bipartisan infrastructure bill. Though the bulk of Americans might agree that such a program would be good for the country, the downside would be adding even more fiscal stimulus to an already strong economy leaning towards inflation. If one thing stands out from this election it is that neither side is interested in anything approaching genuine fiscal discipline.

Quote of the Day
“The best thing is, don’t play the game, because it is pros against you. We spend hundreds of millions of dollars a year to get an edge, and others do that too. So it’s very difficult for the individual investor to assume that he [or she] can pick something better. The best thing you can do is know how to have a balanced portfolio … because you ain’t going to win that game.” – Ray Dalio, Bridgewater Associates, speaking at the Harvard Kennedy School’s Institute of Politics

Chart of the Day

Chart note: Gold gets its share of press, not all of it good. In recent months, the financial media has hammered away at the mistaken notion that gold does not do well in a rising interest rate environment. Nothing could be further from the truth as revealed in our Chart of the Day. Since the Fed started raising interest rates in late 2015, gold has been in a sustained uptrend punctuated with bouts of weakness. The Fed funds rate has gone from .12% in November 2015 to 2.25% now. Gold simultaneously has gone from $1062 to $1225 for a gain of 15% – even at the current lows – during the initial stages of this rate raising period.

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Markets, including gold, letting the dust settle from the mid-term elections

As trading opens in U.S. financial markets, it seems the prevailing attitude is to let the dust settle from the mid-term elections and take some time to put the results into perspective. Gold pushed higher overseas, leveled, then gave up its gain before the New York market opened. The stock market’s reaction has been equally non-commital though the Dow is up 125 at the moment. Reactions in the FOREX and bond markets thus far have been low-key as well. In general, it looks like investors are taking a breather this morning, though that could all change as we move along. We remind our readers that, though the election is behind us, the Federal Reserve Open Market Committee meeting is upon us. Proceedings start today and end tomorrow and that could be contributing to gold’s tepid performance thus far today. Fed meetings – even those like this one which is expected to be low-profile – have been known to act as a drag on the gold price.

Quote of the Day
“Simple: Prices remain distorted by the long-term effects of the QE era. The blind central bank binging on corporate debt of the QE era continues to distort because prices have not yet fully adjusted downwards. (Liquidity is also stalled by technical reasons, like market making being regulated out of existence – a story for another day..) The smart buyers aren’t going to buy bonds at these levels – they are waiting for the correction. Inflation hovers in the background, and who wants to buy at rates that would leave holders with a real negative return? Anyone prepared to buy at current levels is making an implicit bet central banks will step back into distort the market again by keeping rates artificially low…” – Bill Blain, Blain’s Morning Porridge (10-23-2018)

Chart of the Day

Chart note: Last week national security advisor John Bolton focused attention on the national debt saying that it was “a threat to the society.” The national debt now stands at $21.7 trillion and $1.2 trillion has been added thus far in 2018. “And that kind of threat,” he added, “ultimately has a national security consequence for it.” This article is a bit vague as to what that “national security consequence” might be. An obvious one, though, is that interest payments eat up what might otherwise be spent on the national defense. Perhaps that is what has Mr. Bolton worried – particularly with interest rates on the rise. As you can see, there is a strong relationship between growth in the national debt and gold – one that goes all the way back to the early 1970s.

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Gold, financial markets cautiously on hold – at least for now

DAILY MARKET REPORT

Gold pressed cautiously higher in Asia overnight then gave up most of those gains at the New York open. Today’s election outcome and tomorrow’s Fed meeting have the U.S. market on hold – at least for now. Stocks, bonds and the dollar are all similarly in a wait and see mode. We won’t belabor the point. If anything of interest develops during the course of the day, we will be back with an update. As it is, gold is even on the day $1232. Silver is down 3¢ at $14.62

Quote of the Day
“Deflation is a threat posed by a critical breakdown of the financial system. Slow growth and recurrent recessions without systemic financial disturbances, even the big recessions of 1975 and 1982, have not posed such a risk. The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets. Ironically, the ‘easy money,’ striving for a ‘little inflation’ as a means of forestalling deflation, could, in the end, be what brings it about. That is the basic lesson for monetary policy. It demands emphasis on price stability and prudent oversight of the financial system. Both of those requirements inexorably lead to the responsibilities of a central bank.” – Paul Volcker, Keeping At It: The Quest for Sound Money and Good Government (2018)

Chart of the Day

Chart courtesy of TradingEconomics.com

Chart note: Bloomberg reported early Friday that the president had instructed the cabinet to prepare documents for a new trade agreement with China. Euphoria. The stock market shot higher. A few hours later White House economic advisor, Larry Kudlow, said no such order had been given. Chagrin. The stock market promptly reversed those gains losing nearly 500 points on the intraday swing. Sandwiched between the two media stories, the Commerce Department reported U.S. imports setting an all-time record at $266.billion, and that is probably the development of abiding interest to the Trump administration. China’s exports to the United States rose 4.5% even as tariffs kicked into gear.

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Gold off to ho-hum start for the week– election, Fed loom

DAILY MARKET REPORT

Gold got off to a ho-hum start this week but we should not be surprised. Two events of more than passing interest loom – tomorrow’s election and Wednesday’s Fed meeting. Results from the first are up-in-the-air; the outcome of the second already baked into the cake to a large extent, but the markets always worry about “surprises.” In addition, gold rarely does well in advance of an FOMC meeting, though it has been known to press on the accelerator after the Fed governors adjourn. As it is, gold is pretty much level on the day at $1232. Silver is down 5¢ at $14.70. More of what we have to say about the precious metals markets this morning is contained underneath our Chart of the Day immediately below.

Quote of the Day
“I think we’re getting to the point now where the breakout is going to be on the inflation upside. The only question is when.” – Alan Greenspan, February 2018

Chart of the Day

Chart note: Since October 1, gold is up 3.9% as of Friday’s close. Silver is up 1.9%. Silver has been more volatile than silver as is usually the case. Driving gold in the background, physical sales globally are on the rise with two sectors, according to analysis from the World Gold Council last week, leading the way – private investors and central banks. Both groups are purchasing gold for the same reasons – to balance their portfolios and to protect against currency, inflation and systemic risks. Whether or not these first signs blossom into something more, however, remains to be seen. We note with interest that, at the very least, the past month’s price action has represented a clear break with the past. Gold and silver have gone up while the stock market has gone down – a straight-forward indication of gold’s return as a safe haven destination.

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Gold, silver power higher in surprise overnight move

DAILY MARKET REPORT

Gold and silver powered higher this morning driven for the most part by a stronger yuan in overnight trading. Given the degree of strength – gold is up 1.3% on the day and silver 2.75% – we cannot help but think that there might be more to the move than a pedestrian appreciation in China’s currency.

One possibility could be short-covering. The enormous, record short position built-up on the COMEX over the past year still needs to be resolved and there is some advantage for traders to get ahead of the crowd – particularly with the year-end rush on the horizon. Another possibility, of course, is a reaction to the U.S. election – now just five days away. A Democratic sweep could send both gold and the yuan in an upward trajectory. Whatever the cause of today’s upside surprise, the momenturm seems to have slowed in New York. That could change as the day progresses and, if it does, we will keep you posted. As it is, gold is up $13.50 on the day at $1230 and silver is up 35¢ at $14.62.

Quote of the Day
“. . .[I]f you go down the line of currencies around the world, you don’t find many attractive opportunities. And that’s why I say if the world were to give up on dollars and give up on euros, they’d probably go back to the old standby, which is gold. And I don’t mean by gold, government-run gold standard, like we had in the late 19th century. That’s politically impossible. Governments will never be willing to subordinate their policies to the constraints of a hard commodity ever again… So how could gold make a revival as a sort of international money? Well, we don’t actually need a government-run gold standard anymore…since people have always had confidence in gold as a long-term store of value, there’s no reason why it couldn’t play that role.” – Benn Steil, Director of International Economics, Council on Foreign Relations

Chart of the Day

Chart note:  In the early stages of the trade war, supply lines are being redrawn, but commodities in general led by oil, as the chart shows, are rising in price. Over the past twelve months, the GSCI is up 14.4%. Whether or not the trend will continue remains to be seen and relies heavily on whether or not global demand falls off a cliff or simply continues to be rerouted. As for gold, recent history since the early 2000s shows it tends to lag the commodities complex and that, perhaps, explains gold’s performance over the past year. It looks like it has some catching up to do.
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Gold tracking lower on day but headed to possible 2% gain in tumultuous October

Gold continued to track lower from the $1243 high achieved this past Thursday. Today’s bout of selling began in Asia on concerns about the yuan pushing ever closer to the problematic 7.00 per dollar level. It then carried over to Europe where a weak economic growth report raised the possibility of the ECB watering down quantitative tightening expectations. Gold opened New York with the momentum to the downside. It is down $8 in early trading at $1214.50. Silver is down 15¢ at $14.32. Should gold manage to hold onto current price levels it will finish the tumultuous month of October with 2% gain. Likewise, if the Dow hold on to early gains this morning, it will finish the month with a 6.5% loss.

Quote of the Day
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.” – A Tale of Two Cities, Charles Dickens

Chart of the Day

Chart note: This chart supports the notion that the Fed’s policy of raising rates could turn out to be too aggressive. As you can see the money supply is not displaying the kind of growth that normally lends itself to future inflation. That’s not to say that the trend could not suddenly change. In fact anecdotal evidence of inflation seems to be cropping up at every turn, and some of it, oddly enough, is not the result of monetary policy per se but tariffs on imports.

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Gold weakens on higher dollar, China trade war concerns

DAILY MARKET REPORT

Gold weakened some in early trading taking its cue from a higher dollar. In turn, the stronger dollar is taking its cue from the president’s warning in a Fox news interview that he will crank-up tariffs if China fails to come around on trade negotiations next month. The Wall Street Journal reports this morning that “China guided yuan to weakest official level in a decade on Tuesday – a move that could fuel expectations of further, self-reinforcing slide.” That weakness spilled over to trading in the gold market – hence the $6 drop this morning to the $1224 level. Silver is up 2¢ on the day at $14.50.

Quote of the Day
“A lot of the bank issues in the United States and around the world have been solved. But migrating the problem to the sovereign balance sheets. So the banks look pretty good, but the Fed has $4 trillion of debt on its balance sheet. And it’s even more, we are not in a European audience. In Europe they would really know what they meant because all the European banking system is fixed but Europeans are all also buying up all the debt. The budget deficits haven’t contracted, they’ve widened. The banks buy the debt, then walk over to the European Central bank, finance it. . . You wonder is the next crisis going to be a sovereign crisis. And if it is, it will just be a continuation. People will look back and say ‘what we really did, we didn’t fix the outcome of the financial crisis. We left that open and as a result, its really been a thirty-year workout.’” – Lloyd Blankfein, Goldman Sachs

Chart of the Day

Chart note: This quarterly chart zeroes-in on why the national debt matters to ordinary Americans. Rising interest rates and massive growth in the gross debt will push these numbers much higher – so much so that it will exceed in the near future what the nation spends on national defense. . . .and the higher interest rates grow the greater the problem will become. One would think that like Italy or Greece, at some point, the level of debt and interest payments will affect the national credit rating. Last, please note the acceleration in debt payments over the last twelve months (the last bar represents Q3-2018).

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Gold marginally higher today in dollar terms, up 6% in euro so far this year and 5% in yuan

DAILY MARKET REPORT

Gold is trading marginally lower this morning in quiet trading – off $3 at $1230.50 Silver is down 2¢ at $14.69. The dollar is also trading in a narrow range. Markets in general seem to be taking a break as the week begins, though the Dow at the moment is up about 300.

Quietly, in the background, while market attention has been focused elsewhere, the euro has been steadily losing ground against the dollar. It is down almost 10% on the year. Merkel’s role – now more fully determined after yesterday’s state election in Germany – played a role in that decline, but so did the dovish ECB/hawkish Fed scenario. Beyond on the narrow fate of Angela Merkel and the CDU, there is the moe generalized political and economic upheaval in Europe. Germany, in the process, has developed a healthy appetite for physical gold. Since the beginning of October, gold is up about 6% in euro terms.

Meanwhile, across the Pacific, another drama is unfolding with China’s yuan. The Chinese central bank trenchantly warned off speculators against the currency late last week – a shot across the bow that pretty much defines where the country stands on its currency. This, too, could have positive implications for gold as the year concludes. Speculators, algos at the ready, are waiting to see if the government and central bank give ground. For its part, the citizenry in China, like its counterpart in Germany, continue to accumulate gold as a precautionary measure. Gold is up over 5% in yuan since the beginning of October.

Quote of the Day
“Although there are countless scourges which in general debilitate kingdoms, principalities, and republics, the four most important (in my judgment) are dissension, [abnormal] mortality, barren soil, and debasement of the currency. The first three are so obvious that nobody is unaware of their existence. But the fourth, which concerns money, is taken into account by few persons and only the most perspicacious. For it undermines states, not by a single attack all at once, but gradually and in a certain covert manner.” – Copernicus

Chart of the Day

Chart note: Since gold’s current rally began in early 2016, silver has kept up with its sibling metal in fits and starts. Presently, at a ratio of almost 84 to 1, silver is greatly undervalued relative to gold. The gap between the two metals, as you can see in the chart, has become accentuated in recent months leading some to think silver is overdue for a catch-up rally. There is precedent for such a rally. Silver languished behind in gold in early 2016 only to stage a sharply accelerated rally beginning in April of that year that closed the gap. Silver enthusiasts are hoping for similar performance in 2018.
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Gold pushes warily higher

Gold pushed warily higher this morning after emerging unscathed from yesterday’s off-month options expiration. It showed signs overnight of breaking higher then reversed a bit when GDP came in 3.5% higher and the Fed’s favorite inflation indicator registered a benign 1.6% gain.

Stocks traded nervously lower despite those readings with major tech companies announcing less than inspiring earnings. It is likely to be a tense day on Wall Street with the weekend coming up and so much politically, geopolitically and economically stacking up against it. A severe test there could translate to the gold market as the day progresses. (Please see today’s Chart of the Day for more background.) As it is, the markets, including gold, appear to be in a bit of a quandary thus far this morning.

Gold is up $4 at $1336 and showing an inclination to go higher. (It got as high as $1238 in overnight trading.) Silver is up 6¢ at $14.72. We will be back with an update if any of this coalesces into a firm reading on direction.

Quote of the Day
“What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.” – Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

Chart of the Day

Chart note: On Jim Cramer’s “Mad Money” recently, Carley Garner of DeCarley Trading made an interesting observation about gold’s price behavior of late. “[It] hasn’t reacted to the current trade war,” she says, “or the exploding deficit or even the recent uptick in inflation.” True enough. However, as we reported in yesterday’s DMR, gold is beginning to act again like the ultimate safe haven and asset of last resort. While the Dow has lost 8% in Shoctober, gold has gained 3.8%.

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The realm is quiet early on, gold up 3.8% so far in Shoctober

The realm is quiet this morning, but a sense impending danger still hangs in the air after yesterday’s stock market mayhem. Gold, for its part, is down marginally from our FOREX closing price yesterday. We are reminded that today is options expiration and that options-related trading is usually a drag on the market, even in the off-months like November. Stocks are trading to the upside, but few trust early-day strength these days. The big sell-offs of late have come toward the end of trading sessions – always a bad sign for experienced traders as it is seen as the time when smart money makes its move.

Up 3.8% in Shoctober, gold has reacted positively to weakness in stocks – something we have not seen in recent months. Because of today’s options’ expiration, though, we may have to wait until tomorrow or early next week to see if there is any further reaction to weak stock markets globally. Then again if something happens today, i.e., if it rolls through options expiration unscathed, it likely will be seen as a conspicuous show of strength. At the moment gold is down $4 on the day at $1230.50. Silver is down 5¢ at $14.65. (It is also options expiration day for the November silver contract.)

Quote of the Day
“In recent decades, mainstream economists insisted that markets are highly efficient, and do a near perfect job of digesting available information and correctly pricing assets today to take account of future events based on that information. In fact, nothing could be further from the truth. Markets do offer valuable information to analysts, but they are far from efficient. Markets can be rational or irrational. Markets can be volatile, irrationally exuberant, or in a complete state of panic depending upon the emotions of investors, herd behavior, and the specific array of preferences when a new shock emerges.” – James Rickards

Chart of the Day

Chart note: This chart shows monthly returns from the same month the previous year from 2000 to present. Gold is down 6% thus far in 2018 and down 7.1% from September of last year. The down years 2013-2016 followed gold’s dynamic performance from 2002 through 2012 when it posted a 652% gain and achieved an all-time high of $1813 based on the London Fix. Gold once again posted consistently positive month over month returns in 2016, 2017 and early 2018 (through May).

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Gold quietly higher, foreigners cut back Treasury purchases (WSJ report)

Gold moved quietly higher in early trading after yesterday’s solid run-up.  The markets in general seem to be looking for direction this morning. Gold and stocks both see-sawed between plus and minus territory in overnight trading, the volatility apparent. They are now trading right about where they were at the close yesterday.

The most important story in today’s Wall Street Journal was not something headlined in the main section which featured the president’s review of the Fed chair Jerome Powell’s performance thus far. Rather, it appeared on the front page of the second section under the banner – Foreigners Cut Back Purchases of Treasuries as Deficit Grows. We addressed the problem of financing the federal government’s debt in last Monday’ DAILY MARKET REPORT in the Chart of the Day section.

Foreign investor participation in U.S. Treasury auctions is on the wane. Collective holdings leveled-off at about $6 trillion beginning in 2013 and have not moved higher since. Most of that decline in participation has come the result of China and Japan withdrawing from the market. Private domestic buyers have picked up the slack thus far, but at higher rates. Going back to what broke the stock market earlier this month, the sharp rise in the 10-year yield clearly played an important, if not deciding, role.

What caught my eye in the article was a quote from the head of foreign exchange strategy at TD Securities, Mark McCormick. “Yields are rising,” he said, “to reflect risk premium, rather than healthy growth. People are concerned about how reliable a store of value the dollar is right now.” Such thinking generally finds its way to gold, especially among players with a global outlook. Immediately below, we repost the chart from last Monday for those who missed it, along with our comments.

Chart note: Popular belief holds that foreign investors and central banks hold the lion’s share of the nearly $22 trillion federal debt. These charts from the St. Louis Federal Reserve tell the real story. Though it has not always been the case, private domestic investors now hold the largest share of the national debt at $13.1 trillion. Foreign investors are number two at $6.2 trillion. Federal Reserve banks are number three at $2.8 trillion. As you can see, federal debt held by private investors is on an ascending curve while both foreign and Federal Reserve banks’ purchases have leveled off. At present, private investors hold more than half the national debt (59.3%) as shown in the pie chart at the very top. Foreign investors hold 28.1% of the U.S. federal debt.

Quote of the Day
“Gillian Tett (Financial Times): ‘Do you think that gold is currently a good investment?’

Alan Greenspan (private citizen): ‘Yes. Remember what we’re looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.'” – Council on Foreign Relations meeting, November, 2014

Chart of the Day

Chart note: Gold has delivered a solid real rate of return in twelve of the past sixteen years. In seven of those years, gold’s appreciation significantly outstripped the inflation rate during a disinflationary period fraught with systemic risks. Note also gold’s strong performance during the 1970s episode of runaway inflation. With gold currently trading at cyclical lows, the investor can now combine hedging a worst-case scenario with the extra advantage of securing an asset that is generally viewed as undervalued.

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Gold surges, a crisis looking for an excuse to happen

American investors awoke to a surprise this morning – a resurgent gold price pushing against the $1240 mark. Silver was also hopping. Since then, both have cooled a bit. Gold is now trading at $1236.50 – up $14 on the day. Silver is at $14.74 – up 22¢ as this report is posted.

A confluence of factors is working on the price starting with the ever-present trade war, the worsening difficulties with Italy’s sovereign debt and the unsettling developments in the Middle East. Over-arching all though is a prevailing sense that things are unraveling in the financial markets – a lurking crisis looking for an excuse to happen.

London analyst Bill Blain (Shard Capital) is out front with a concern rattling around the back of many minds: “Is this the unwind? It might be to pay-up the costs of the many unintended consequences of the Global Financial Crisis? . . . . Similar ‘wake-up-and-smell-the-coffee’ moments triggered the Asian Crisis of 1997, the dot.com crash of 2001, and the bursting of the mortgage bubble in 2007.”

“The smart buyers,” he concludes, “aren’t going to buy bonds at these levels – they are waiting for the correction. Inflation hovers in the background, and who wants to buy at rates that would leave holders with a real negative return? (EdNote: Please see today and tomorrow’s Chart of the Day) Anyone prepared to buy at current levels is making an implicit bet central banks will step back into distort the market again by keeping rates artificially low…” Blain says he is looking at “alternative real assets.”

Quote of the Day
“Debasement was limited at first to one’s own territory. It was then found that one could do better by taking bad coins across the border of neighboring municipalities and exchanging them for good with ignorant common people, bringing back the good coins and debasing them again. More and more mints were established. Debasement accelerated in hyper-fashion until a halt was called after the subsidiary coins became practically worthless, and children played with them in the street, much as recounted in Leo Tolstoy’s short story, Ivan the Fool.” – Charles P. Kindleberger, Manias, Panics and Crashes

Chart of the Day

Chart note: During that 18-year period from 2000 to present, the one-year Treasury provided a positive real rate of return in only six years. The rest of the time, the real rate of return was negative. The real rate of return is also important in the context of Federal Reserve interest rate policy in that it signals the performance of the dollar against other currencies and gold. At the moment, the consensus opinion is that the Fed will keep interest rates below the inflation rate in order to keep the economy from swinging into a downturn, a situation causing some analysts to question the longer-term staying power of the recent rally in the dollar. Note also the long period of positive annual real rates of return in the period before 2000 in contrast to the radical change from 2008 to present. Tomorrow, we will review the real rate of return on gold.

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Gold marginally higher, headed for third straight weekly gain

DAILY MARKET REPORT

Gold is trading marginally higher at $1228 early – up $2.50 on the day. Silver is up 10¢ at $14.72. Concerns about a slowdown in China’s economy – a restraint on gold and the commodities complex over the past few weeks – dissipated somewhat on an announcement from China’s Bureau of Statistics that its GDP had grown at a 6.5% clip. The gold market will likely view the report as a positive for gold and commodities in the near term, though concerns linger about its stock and debt markets. Oil also bumped higher in the early going. SPDR, the gold ETF, reports a 2.5% increase in its holdings over the past two weeks, an indication of institutional buying. Gold is headed for gains three weeks running if current prices at least hold through today’s close, and holding its own despite headwinds from dovish Asian and European interest rate policies favorable to the dollar.

Quote of the Day
“They are the strong hands who patiently await to scoop up shares when markets falter. As the smart money, these players unload inflated shares to the ‘dumb’ money or retail investors at ‘FOMO’ or fear-of-missing-out emotional peaks. The masses are advised to blind buy and hold. Retail investors are cajoled as ‘brave’ if they ‘ride it out.’ And whatever ‘it’ is can be counted in years, even decades. Time is precious to us mere mortals. Our lives are finite; Wall Street lives on forever. The precious time it takes to break-even is ignored. Not relevant. One of my favorite Nashville-based songwriters Drew Holcomb begins a song with a seminal line: ‘Time steals every paradise I’ve been looking for.’ When Wall Street prospers, Main Street doesn’t necessarily follow a similar, prosperous path.” – Richard Rosso, Real Investment Advice

Chart of the Day


Chart courtesy of Advisor Perspectives

Chart note: The relationship between margin credit and stock market performance is interesting to monitor. With interest rates extremely low historically, investors borrowed at extreme levels to buy stocks. Now with interest rates rising, one wonders how long it will be until these same forces either choose to sell because of the carrying costs are forced to sell because of margin calls. Shades of 1929. . . . .

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Gold sideways but stable, ignores past influences

DAILY MARKET REPORT

Gold at $1223 is sideways for the third day running and that might be an achievement in itself given what is going on around it. The yuan at a nine-week low is experiencing a renewed bout of weakness. The euro is under pressure as the EU edges toward a budget confrontation with both Italy and Spain. Last but not least, rising rates continue to hound the U.S. bond market with 10-year yields once again pushing higher somewhat aggressively.

Such readings in the past usually coincided with strength in the dollar weakness in the gold market. Today, the dollar is up and gold is stable – even showing some minor strength at short intervals. At one point in European trading overnight it pushed once more toward the $1230 barrier before falling back. All of this rekindles the safe-haven argument for gold and offers a hint that gold might be preparing for a break with the immediate past.

Last, we bring to your attention a nearly 3% drop in the Shanghai stock market overnight and remind that a similar drop a little over a week preceded the more than 1000 drop in the Dow Jones Industrial Average. Like it or not, the fate of the two stock markets might be more mingled than some would be willing to admit.

Quote of the Day
“The great Russian opera singer, Feodor Chaliapin, lost his entire fortune–then worth more than a million pounds–in the Russian revolution. This disaster seared him. He left Russia after the Revolution and went to live in France where in 1931 he bought gold bars and put them in a safe in his cellar in Paris. He was interviewed by the British Sunday Express newspaper on the 5th of May 1935, when he said, ‘People in Britain think governments cannot collapse. They think banknotes are money; banks are impregnable. But I have had everything I made in 25 years stripped from me. I was reduced to singing for tea in which there was sawdust, and bread in which there was wood. With my bar of gold and a pen knife I shall never go hungry.’” — Anecdote told by Haruko Fukuda, World Gold Council chair, in 2000 to the Business Club Zurich

Chart of the Day

Chart note: This chart demonstrates gold’s strong performance as a portfolio holding over a long period of time. It depicts the year-end price of gold since 1970. It dispels the notion that gold is somehow volatile or unpredictable and as a result unreliable as a long-term portfolio safe haven. To the contrary, it shows gold living up to its reputation as precisely the opposite – stable in the face of rapidly changing economic circumstances, predictable in that it reacts directly to those circumstances and reliable in that has performed as advertised over an extended period of time – in fact, as a hedge against the concurrent and continuous depreciation in the value of the US dollar since 1971.

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Gold running sideways again this morning, Italy concerns resurface

DAILY MARKET REPORT

Gold is running sideways again today at $1225 after a brief dip in overseas trading. Gold got as low as $1221 in Asian trading hours, reversed in Europe as concerns worked their way back to the surface about Italy’s recently submitted budget proposal. Giuseppi Conte, Italy’s prime minister, told the European Commission that “Austerity is no longer viable” as the country proposed a budget deficit three times larger than what the European Union deems allowable. Italian 10-year yields jumped on the news and gold turned higher – at one point trading at $1228, a $7 turnaround. Italy’s ruling political coalition, some think, is pushing for a break with the euro and reintroduction of the lira.

Also influencing the gold market this morning, the Dow Jones Industrial Average reversed a portion of yesterday’s gains – down 128 as this report is posted. We also note with more than passing interest that gold is holding its own, even displaying an occasional burst of strength, on a day when the dollar is advancing sharply against other currencies.

Quote of the Day
“The best thing is, don’t play the game, because it is pros against you. We spend hundreds of millions of dollars a year to get an edge, and others do that too. So it’s very difficult for the individual investor to assume that he [or she] can pick something better. The best thing you can do is know how to have a balanced portfolio … because you ain’t going to win that game.” – Ray Dalio, Bridgewater Associates, speaking at the Harvard Kennedy School’s Institute of Politics

Chart of the Day

Chart courtesy of HowMuch.net

Chart note: As you can see, after the United States and China, GDP for the rest of the nation states falls off quickly. Japan is a distant third and Germany an even more distant fourth. The European Union as a whole even without the United Kingdom, however, would replace China as number two if counted as a whole. This visualization drives home what’s at stake in the trade war between the United States and China. It involves the two largest economies in the world by far and nearly 40% of the global economy.

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Gold drifts sideways, a palpable, eerie calm hangs over markets this morning

DAILY MARKET REPORT

Gold drifted sideways this morning under quiet market circumstances – up $2 on the day at $1229. Silver is up 2¢ at $14.75. In a report published at Scrap Register, Germany’s Commerzbank has some interesting things to say about the current gold market environment. It attributes recent price increases primarily to short covering and points to the 100-day moving average as an incentive for the yellow metal to go even higher. “If it settles down above the 100-day moving average (currently at around $1,227) in any lasting fashion, we expect to see technical follow-up buying that should push the price further up.”

A palpable, eerie calm hangs over the markets this morning. “Everything is but one headline away from sharp reversals,” writes Bloomberg’s Richard Breslow. “Confusion and uncertainty are rife, and fear of loss has gained the upper hand over greed,” he goes on. “That’s a prescription for very unhealthy markets with informational content that should be consumed with care.”

Quote of the Day
“Picture yourself and your loved ones in the midst of a howling blizzard that lasts several years. Think about what you would need, who could help you, and why your fate might matter to anybody other than yourself. That is how to plan for a saecular winter. Don’t think you can escape the Fourth Turning. History warns that a Crisis will reshape the basic social and economic environment that you now take for granted.” – William Strauss & Neil Howe, The Fourth Turning [1997]

Chart[s] of the Day

Chart note 1: Sometimes the facts get in the way. Though China might be tempted to choose devaluation as a tactic in the trade war, it creates other problems for the country that it has tried to avoid in the past – most notably capital flight. The fact of the matter is that China has chosen to do just the opposite. It has kept the yuan in a tight band against the U.S. dollar and sold from its pool of U.S. Treasuries as a means to stabilizing its currency. China’s foreign exchange reserves as a result went from nearly $4 trillion to just above $3 trillion since 2014. Meanwhile, the yuan has traded in a narrow channel between 14.5¢ and 16.5¢.

Chart note 2: PBoC governor Yi Gang stated unambiguously over this past weekend that China “will not engage in competitive devaluation, and will not use the exchange rate as a tool to deal with trade frictions.” Part of the narrative behind the dollar’s strong showing of late has been concern that China would ‘weaponize’ the yuan in the trade war. Yi’s statement negates that concern. If China is successful in keeping the yuan within a band, it will kick one of the props out from under the recently strong dollar and in doing so indirectly offer a helping hand to gold.

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Gold regains initiative as we start the week

DAILY MARKET REPORT

Gold regained the initiative as we start the week after Friday’s modest drop – up $11 in the early going at $1229. Silver is up 18¢ at $14.76. Concerns that the China-U.S. trade war could escalate to a more generalized ‘cold war’ are playing a key role in gold’s turnaround that began last Thursday. Potential sanctions against Saudi Arabia and the implications for the oil market are also preying on investors’ minds. Underlying all, though, is the rising interest rate environment and its generalized effect on a number of markets ranging from emerging countries to global debt markets and U.S., Asian and European stock markets. Gold is trading at a 3-month high.

Quote of the Day
“Take some advice from two observers who have been around for awhile: The long term gets here before you know it. . . .Instead, we’d be dependent on foreign investors’ acquiring most of our debt — making the government dependent on the ‘kindness of strangers’ who may not be so kind as the I.O.U.s mount up. We can’t let that happen — not if we want an America that is able to provide growth and stability at home while maintaining global leadership. We would risk returning with a vengeance to stagflation — the ugly combination of inflation and economic stagnation that we tasted in the 1970s.” – Paul A. Volker and Peter G. Peterson

Chart of the Day

Chart note: Popular belief holds that foreign investors and central banks hold the lion’s share of the nearly $22 trillion federal debt. These charts from the St. Louis Federal Reserve tell the real story. Though it has not always been the case, private domestic investors now hold the largest share of the national debt at $13.1 trillion. Foreign investors are number two at $6.2 trillion. Federal Reserve banks are number three at $2.8 trillion. As you can see, federal debt held by private investors is on an ascending curve while both foreign and Federal Reserve banks’ purchases have leveled off. At present, private investors hold more than half the national debt (59.3%) as shown in the pie chart at the very top. Foreign investors hold 28.1% of the U.S. federal debt.

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Gold finishes up $30 on the day on safe-haven buying, possible short covering

AFTERNOON UPDATE

Gold finished the day up a solid $30 and well over the $1200 mark at $1224.50. Silver finished 27¢ higher at $14.60. The mainstream financial media was in a huff all day on who to blame for stock market plunge – the White House or the Fed. The markets though, with all due respect, do not care who’s to blame. It is the effect that has investors worried, not the cause.

This is the first time in 2018, a cursory review tells us, that gold has gone up when the Dow Jones Industrial Average has gone down more than 1000 points – a break with recent trends that speaks to a possible resurgence of gold’s safe haven status. Too, we should not overlook the possible role of short-covering in today’s rally. Speculators have built-up a record short volume on the COMEX and will need to reverse those positions in order to lock-in profits. As an early indicator that sentiment might be shifting among funds and institutions, gold ETFs yesterday recorded net purchases of eight tonnes – “the first daily inflow since July” according to Commerzbank.

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Gold moves convincingly to the upside in wake of global stock turmoil

DAILY MARKET REPORT

Having steadied itself the past few trading sessions, gold moved convincingly to the upside in the wake of yesterday’s global stock market turmoil. It is up $14 in the early going at $1208.50. Silver is up 15¢ at $14.47. The fact that gold broke ranks with other investment markets at a time of crisis is notable. In the recent past, its reaction to major disruptions has been to follow along with the crowd in the first stages – at least until the nature of the crisis took form. Capital this time around is moving in the direction of gold on short notice.

A significant portion of today’s upside occurred during Asian and European trading hours, but there was an additional surge higher (about $6) coming at New York’s open. “It was the perfect storm that gave U.S. stocks their worst day in eight months,” reports Bloomberg’s Justina Lee, sending European shares to the lowest since December 2016 and driving more than 1,000 Chinese companies to fall by the daily limit.”

We have reported on the “perfect storm” brewing in the global economy consistently over the past several months including the items mentioned in this Bloomberg report – interest rates, the trade war, the crisis among emerging countries, etc. What is particularly alarming about the current market situation is the widespread unleashing of primal forces all at the same time each fed by and contingent on the other – a pandora’s box that defies simple solution. Even if the current sell-off is contained over the next few days, we are likely to be left with a sense that it isn’t over, that there is more to come.

Quote of the Day
“A common feature of all these earlier troubles was that, having happened, they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. (Not only were a record 12,894,650 shares sold on 24 October; precisely the same number were bought.) The bargains then suffered a ruinous fall. Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months. The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable.” – John Kenneth Galbraith, The Great Crash: 1929

Chart[s] of the Day

Chart note: Gold’s strong performance this morning after the stock market dropped almost 5% yesterday is notable because it breaks with the recent past and demonstrates, if the trend gains momentum, a resurgence of the safe-haven trade. (See the full DMR above for details.)

 

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Gold quiet but dollar, stock market weakness might yet provoke a reaction

DAILY MARKET REPORT

The gold market is quiet again this morning with the metal off $2 at $1188. Silver is down 14¢ at $14.27. The tranquility in gold though stands in stark contrast to a sharp sell-off this morning in U.S. stocks led by the tech sector. Today’s sell-off makes it five sessions in a row that stocks have traded lower. The bond market is also lower. Not helping matters for Wall Street, Treasury Secretary Mnuchin upped the ante in U.S.-China trade talks by warning China against further devaluation of its currency. He also stated that an understanding on the yuan will need to be part of any future trade deal. Those comments combined with new rumblings from the White House on Fed interest rate policy sent the dollar index down sharply. We might yet see a reaction in the gold market before the day is out.

Added note:  Further down the page, you will find an interesting article in the context of today’s sell-off in stocks.  The Coming Crash features the views of Fred Hickey, editor of The High Tech Strategist, who now recommends gold as a contrarian opportunity. 

Quote of the Day
“I spoke to bankers at the time who said that what happened was supposed to be impossible, it was like the tide going out everywhere on Earth simultaneously. People had lived through crises before – the sudden crash of October 1987, the emerging markets crises and the Russian crisis of the 1990s, the dotcom bubble – but what happened in those cases was that capital fled from one place to another. No one had ever lived through, and no one thought possible, a situation where all the credit simultaneously disappeared from everywhere and the entire system teetered on the brink. The first weekend of October 2008 was a point when people at the top of the global financial system genuinely thought, in the words of George W. Bush, ‘This sucker could go down.’ RBS, at one point the biggest bank in the world according to the size of its balance sheet, was within hours of collapsing. And by collapsing I mean cashpoint machines would have stopped working, and insolvencies would have spread from RBS to other banks – and no one alive knows what that would have looked like or how it would have ended.” – John Lanchester, After the Fall

Chart of the Day

Chart note 1: When the Federal Reserve bailed out the financial system by purchasing U.S. Treasuries and mortgage-backed securities, it included those items as assets on its balance sheet. Much of that capital was then redeposited with the Federal Reserve as excess reserves creating a liability on the central bank’s balance sheet. Now, the Fed with much fanfare is reducing the asset side of its balance sheet. What is often neglected in the analysis is that it is also reducing liabilities. The chart below is a big-picture representation of the Fed’s balance sheet reductions – both assets and liabilities. In 2016, Federal Reserve bailout-related assets were roughly $4.5 trillion. Bailout-related liabilities were about $2.5 trillion. At present, assets are $4.2 trillion and liabilities $1.8 trillion.

Chart note 2: Since the process began in 2016, liabilities have run off the Fed’s balance sheet at a much faster rate than assets signaling the central bank’s inflationary bias. Keeping in mind Milton Friedman’s widely accepted dictum that there is an 18 to 24 month lag between monetary stimulus and response, the first signs of inflation appear to be right on schedule. By September 2017 – two years from the initial draw downs – the inflation rate had climbed back to the 2% mark. As of the September Consumer Price Index release, it had reached 2.8%.

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Gold lolls in quiet waters as U.S.-China trade war evolves to something else

DAILY MARKET REPORT

Gold lolled in quiet waters this morning gathering itself after yesterday’s trouncing. It is down $3 in early trading at $1187. Silver is down 7¢ at $14.26.

This morning’s Wall Street Journal highlights two editorials – one by Gerald Seib and the other by Walter Russel Mead – putting special emphasis on Vice-President Pence’s speech the other day before the Hudson Institute. It is the same speech I referenced in a MarketWatch interview last Friday. The headlines to the articles pretty much define the Journal’s viewpoint: The Significance of China’s Broadside (Seib) and Mike Pence Announces Cold War II (Mead).

As summarized in a market update yesterday, in our view, there will come a time when market sentiment associating this sort of thing with a stronger dollar will migrate to the bigger issue – an unraveling global economy and the very large systemic risks it represents. When that happens, gold will be understood again for what it is – a true depository of wealth that transcends the problems of nation states and their currencies and, come hell or high water, a better alternative than the dollar.

Quote of the Day
“In the United States-China relationship, China is very clearly the bank. But the conventional wisdom about what China might — or might not — be prepared to do could be wrong. China has lately reduced its holdings of United States government debt, and a growing number of financiers, economists and geopolitical analysts are quietly raising the prospect that China may look to its ability to influence interest rates as its ultimate Trump card.” – Andrew Sorkin, New York Times, 10-9-2018

Chart of the Day

Chart note: “Interest expense on Federal government debt is currently $320.3 billion,” writes Tocqueville Asset Management’s John Hathaway, “but the interest rate hovers near a 10-year low at 2.47%. It is amazing that despite the low nominal rate, the budgetary outlay for interest is the highest since 2005. Average maturity is relatively short at 65 months and 42% matures in two years or less. The sensitivity of the fiscal deficit to a rise in rates is high. Each 1% increase in federal interest expense would add around $150 billion, or approximately 15% of the expected 2018 deficit.” [Full report]

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Gold takes hit on China developments

DAILY MARKET RPORT

Gold took a hit in Asian and European markets overnight that carried over to early U.S. trading today. It is down $16 at $1187.50. Silver is down 27¢ at $14.35. Two major factors are at work in today’s pricing, both having to do with China. The Peoples Bank of China moved overnight to cut commercial bank reserve requirements as a way to push more money into its flagging economy. Second, talks between U.S. Secretary of State Pompeo and China foreign minister Wang Yi broke down in recriminations and accusations from both sides sending relations between the two countries to a new low. The two together sent China’s stock market and currency into tailspins. The Shanghai Index promptly dropped 3.7% – a plunge that would equate to a 975 point drop in the Dow. Caught up in this latest maelstrom, gold dropped as well.

Quote of the Day
“For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a pastime in which he is victor who says Snap neither too soon nor too late, who passed the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.” – John Maynard Keynes

Chart of the Day

Chart notes: Often forgotten, or in some quarters deliberately ignored, gold performed extraordinarily well in the disinflationary aftermath of the 2007-2008 financial crisis appreciating from $650 per ounce in January, 2007 to over $1800 in August, 2011. The consumer price index, on the other hand, was bumping along either side of zero and had the potential to evolve to a full deflationary spiral. Inflation, in short, was not an issue. Though gold is generally considered an historically-proven inflation hedge, it is also an historically-proven disinflation hedge as the post 2007-2008 example demonstrates. Investors from 2007 on were interested in gold for its safe-haven characteristics and as a refuge from a potential full-out financial system breakdown. One of the great advantages of being a gold owner is that it is an investment for all seasons protecting its owners against inflation, disinflation, deflation or hyperinflation.
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Gold gains traction as market doubts surface

DAILY MARKET REPORT

Gold is once again striving doggedly to gain traction above the $1200 level. It is up $3 on the day $1202. Silver is up 4¢ at $14.66. The strongest influence in the markets this morning seems to be the continuing sell-off in the bond market that began early in the week, gathered momentum yesterday, and spread to stock and bond markets globally.

“A severe bond sell-off that began on Wall Street rippled out across global markets on Thursday,” reports Financial Times, “triggering the biggest US equity decline in nearly four months. Bonds yields have been rising on optimism about the world economy and expectations that central banks will tighten policy, but fears that rates could climb high enough to restrain growth hit stocks in Europe, the US and Asia.”

That “hit” continued in Asian and European markets overnight and has carried over to a weak open for the Dow and the bond market in U.S. trading. Gold’s upside this morning is taking place under the unusual circumstance of stocks, bonds and the dollar all trading lower – something we have not seen for awhile. Gold’s reaction is a break with the recent past and an indication that its safe-haven role might be regaining some traction as doubts surface in the other markets.

Quote of the Day
“Yet gold has special properties that no other currency, with the possible exception of silver, can claim. For more than two millennia, gold has had virtually unquestioned acceptance as payment. It has never required the credit guarantee of a third party. No questions are raised when gold or direct claims to gold are offered in payment of an obligation; it was the only form of payment, for example, that exporters to Germany would accept as World War II was drawing to a close. Today, the acceptance of fiat money — currency not backed by an asset of intrinsic value — rests on the credit guarantee of sovereign nations endowed with effective taxing power, a guarantee that in crisis conditions has not always matched the universal acceptability of gold.” – Alan Greenspan, former Fed chairman

Chart of the Day

Chart courtesy of MacroTrends.net

Chart note: Silver is significantly more volatile than gold. In bull markets, it tends to rise faster than gold. In bear markets, it tends to drop faster than gold. This dynamic is reflected in the gold-silver ratio shown in our Chart of the Day, i.e., the number of ounces of silver it takes to buy an ounce of gold. At the present, the ratio is at its second highest level since 1991 and the highest level since the secular bull market for precious metals began in the early 2000s. To learn more about the important role silver can play in a well-diversified precious metals portfolio, we invite you to contact our Order Desk.

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Gold moves decisively to the upside on safe-haven impetus

DAILY MARKET REPORT

Gold moved decisively to the upside this morning. In early trading it is up $7 at $1205.50. Silver is up 12¢ at $14.75. Precious metals, as well as the stock, bond and currency markets, are still processing the Fed chairman’s remarks of two days ago – a somewhat confusing reference to the central bank’s target for interest rates. Bonds continued in a down trend that began yesterday and stocks are down 175 as we post this report. The dollar index is down sharply.

Gold, on the other hand, is tracking higher – a situation under this set of circumstances that points to its safe-haven role once again gaining impetus. Along these lines, the IMF issued a warning this morning that “the world economy is at risk of another financial meltdown, following the failure of governments and regulators to push through all the reforms needed to protect the system from reckless behaviour,” according to an article in The Guardian, a British newspaper.

Quote of the Day
“At the quarter-century mark of 1925, the great bull market was under way, and Graham*, then 31, developed what he later described as a ‘bad case of hubris.’ During an early-1929 conversation with business associate Bernard Baruch (about whom he disparagingly observed, ‘He had the vanity that attenuates the greatness of some men’), both agreed that the market had advanced to ‘inordinate heights, that the speculators had gone crazy, that respected investment bankers were indulging in inexcusable high jinks, and that the whole thing would have to end up one day in a major crash.’ Several years later he lamented, ‘What seems really strange now is that I could make a prediction of that kind in all seriousness, yet not have the sense to realize the dangers to which I continued to subject the Account’s4 capital.’ In mid-1929, the equity in the ‘Account’ was a proud $2,500,000; by the end of 1932, it had shrunk to a mere $375,000.” – Frank K. Martin, A Decade of Delusions

* Benjamin Grahm, “The father of value investing”, 1894-1976, Security Analysis (1934) with David Dodd, and The Intelligent Investor (1949).

Chart of the Day

Chart courtesy of OPTIONAlpha

Chart note: We guesstimate that we are somewhere between “thrill” and “euphoria” on stocks and “despondency” and “depression” on gold and silver. In short, the time might be right for starting to leg-out of stocks and ladder-into gold.
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