Category: dailyquotes

Gold pushes higher in Asia, backs off in London-New York on mixed news

Gold pushed higher in overnight Asian markets reaching $1208 before backing off just after the London Fix. In the early New York trading it is priced at $1202, still up $2 on the day despite a sharp rally in the U.S. dollar. Silver is level at $14.57. Supporting gold overnight were currency and debt problems in a host of emerging nation states with Argentina and Turkey the most visibly pressed. Argentina raised interest rates to 60% yesterday, a 15% rise. Keeping a lid on the gold price was news of U.S. intentions to impose tariffs on a another $200 billion in Chinese imports.

Quote of the Day
“The ‘threat’ is best seen through the emergence of exchange-traded funds (ETFs), which allow investors to get a proxy physical gold exposure through an investment via their stockbroker. In truth, these products are, in many cases, more expensive than trading and storing physical gold (especially for larger investors with a long-term investment time frame), have less trading flexibility, and are less secure than owning real physical gold.” – Jordan Eliseo, ABC Bullion/Australia

Chart of the Day

Chart courtesy of TradingEconomics.com

Chart note: The Argentina peso and Turkish lira are the center of attention in foreign exchange markets today. Both have roughly halved in value since the beginning of the year. Yesterday Argentina pushed interest rates to 60% – a 15% rise. Turkey’s interest rate is at 17.75%. Wall Street investors are concerned about the potential for a contagion along the lines of the late 1990s Asian financial crisis that nearly resulted in a global economic meltdown. This time around the debts are much larger and the dangers much more widespread geographically. Though concern mounts among financial market participants with each passing day, the White House uncharacteristically has remained mum on the situation and the Federal Reserve has only made passing mention.

 

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Gold pushes through $1200 mark to downside as inflation heats-up (?)

DAILY MARKET REPORT

Gold pushed back through the $1200 mark to the downside this morning as the Fed’s favored PCE Index’ number for headline inflation came in over the target level at 2.3%. Silver is down 21¢ at $14.55. The push to the downside is largely driven by computer algorithms that ignore gold’s role as an inflation hedge. Instead the machines are programmed to read any inflationary news as cause for the Fed to push harder on the interest rate accelerator. Thus gold is down on the day when logic tells us that it should be up. The prices posted though will look very attractive to the citizenry of emerging countries, including China and India, beset by increasingly entrenched currency and debt problems. The historic comeuppance for artificially cheap prices is increased physical demand – demand that the real market will need to supply.

Quote of the Day
“What we have to reckon with now is that, contrary to the basic assumption of 2012-2013, the crisis was not in fact over. What we face is not repetition but mutation and metastasis. The financial and economic crisis of 2007-2012 morphed between 2013 and 2017 into a comprehensive political and geopolitical crisis of the post-cold war order.” – Eshe Nelson, reviewing Adam Tooze’s How a Decade of Crises Changed the World

Chart of the Day

The $74 Trillion Global Economy in One Chart

Courtesy of: Visual Capitalist
USAGOLD note: Numbers 1 and number 2 by a wide margin over the rest of the world are going at it head to head in the trade wars. For China, trade with the United States has played a major role in its quick ascent to number two. For the United States, cheap Chinese manufactured goods has played a major role in containing inflation. Now both advantages have become endangered species.
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Gold attempts to regain footing amidst mixed signals

DAILY MARKET REPORT

Gold is attempting to regain its footing this morning after yesterday’s options-related sell-off. It is up $2.50 on the day at $1205.50. Silver is down 3¢ at $14.74. Emerging country debt and currency problems are back on the financial pages. Turkey’s lira is down 3% and Argentina’s peso and India’s rupee hit all-time lows overnight. The Fed will be looking to strike a balance between two extremes: A warming domestic U.S. economy versus a cooling, even threatening, global economy fueled by a too-strong dollar.

Quote of the Day
“At the 1955 stock-market hearings, [economist John Kenneth] Galbraith was followed at the witness table by the aging speculator and ‘adviser to presidents’ Bernard M. Baruch. The committee wanted to know what the Wall Street legend thought of the learned economist. ‘I know nothing about him to his detriment,’ Baruch replied. ‘I think economists as a rule—and it is not personal to him—take for granted they know a lot of things. If they really knew so much, they would have all of the money, and we would have none.'” – James Grant, Wall Street Journal editorial (10-1-2010)

Chart of the Day

Chart courtesy of Advisor Perspectives

Chart note: There are a couple of things unsettling about this chart. First is the sheer amount of investor margin debt present in the current stock market – over $650 billion. Second is the correlation between the growth of that debt and ascent of the S&P 500. With that amount of leverage in the stock market and the influence it has on price levels, if and when the margin calls arrive, the tumble could be fast and extreme. FINRA (Financial Industry Regulatory Authority) warns that “many investors may underestimate the risks of trading on margin and misunderstand the operation of, and reason for, margin calls.” Shades of 1929.

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Afternoon Update

(USAGOLD, 8-28-2018) – In the absence of any market altering news to speak of, it was surprising to see gold drop about $8 in the last two hours of trading, and silver 15¢.  Looking around for a good reason to explain the sell-off, our best guess is options-related selling. Today is options expiration day on the September contract for both gold and silver. Gold finished at the $1201 mark, down $10.50 on the day. Silver finished at $14.70, down19¢ on the day.

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Gold down on quiet news day thus far

Gold is down $3 at $1208 – with nothing of earth-shaking importance having developed overnight or early in the New York market session. Aiding gold, China’s yuan is showing some strength today, as is the yen, while the rest of the currencies seem to be carried in their wake. Silver is down 5¢ thus far at $14.85.

Quote of the Day
“Speculators in gold price futures are short 670 tonnes – the biggest bearish position in 25 years. . .ANZ analysts Daniel Hynes and Soni Kumari say in the past, ‘such extreme levels of short positions have led to a rally in prices: 1999, short positions rose fivefold to hit a then record level of 80,000 contracts. Not long after, gold prices rallied 16% from USD250/oz to USD290/oz over the course of two months. Short positions spiked again in July 2005 and January 2016, with gold prices rallying 12% and 14% respectively over the subsequent three months. In both these cases, the net long position was extremely close to being negative. This raises the spectre of investors closing out their record level of short positions, and thus starting a short covering rally.” – Frik Els, Mining.com

Chart of the Day

Chart note: While commodities have held their own during this stage of the trade wars, gold has declined dramatically by comparison – a break in the long-term pattern of the two moving in the same direction. Some believe gold could play catch-up as we move into the last third of the year. Much of the downside for gold has been the result of the short position built to record levels on the commodities exchange – a position that will need to be covered in order for the speculators to claim their gains. In the past, as Frik Els points out in our Quote of the Day, covering those short positions has led to price rallies in 1999, 2005 and 2016. We might add there was a less pronounced example of short-covering in 2017 as well.

 

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Gold up $6 in continuation of trend begun Friday

Gold pushed another $6 higher at $1212 in a continuation of the upward trend begun on Friday. Overseas trading was quiet. Silver is up 10¢ at $14.89. Gold is up $27 since last Thursday’s close. As we reported last week, the market is being driven by a combination of three major developments – dovish remarks from the Fed chairman in a speech delivered on Friday, China’s moves to strengthen the yuan, and the perceived potential for short covering from speculators squaring the record short position at the COMEX (if not actual covering). The dollar is down sharply in early trading.

Quote of the Day
“President Trump’s actions over trade, which appear to have some short-term successes, are driving countries away from her sphere of influence. Ultimately this will prove counterproductive. Speculators buying into Trump’s short-termism and the Fed’s normalization policies are for the moment driving the dollar higher, without realizing that foreigners, far from suffering from a shortage of dollars, already own all the excess dollar liquidity created since the Lehman crisis. This seems certain to lead to the dollar’s downfall. Therefore, the dollar is rising only on short-term considerations, driven by nothing more substantial than speculative flows.

Once these abate, the longer-term prospects for the dollar will reassert themselves, including the escalating budget and trade deficits, record levels of foreign ownership of the dollar, and rising prices fueled by a combination of earlier monetary expansion and the extra taxes of trade tariffs. And if that’s not enough, the erosion of its hegemony coupled with China’s future demands for infrastructure capital seem bound to lead to a fundamental reallocation of capital to the detriment of the dollar. No wonder China and Russia decided to corner the market for physical gold.” – Alasdair Macleod, Mises Institute

Chart[s] of the Day

Charts note: The last time we featured these two charts, it was to illustrate the relationship between gold and the yuan as they moved in tandem to the downside. Late last week we caught a glimpse of the other side of the story – the upside. In Friday’s DMR we made note of the possibility that China might have an interest in demonstrating its desire to keep the yuan from plummeting to a disastrously low level. Though we emphasized trade negotiations with the United States as one incentive, there is another driver to Chinese policy that may be even more important over the longer run and the one with staying power. China also has an interest in controlling, even stopping, capital flight. China’s oft-state goal, we should remember, is to position the yuan as a competitor to the dollar for global reserve currency status. As a result the aspirations of the yuan might also become support for the price of gold.

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Gold up sharply on dovish Fed and dollar rumblings, possible short covering

Gold moved sharply to the upside this morning in response to dovish rumblings in financial media on the Fed chairman’s speech later in the day, a higher yuan and speculation about intervention to weaken the dollar. The metal is up $12 on the day thus far at $1197 and pushing toward the $1200 mark. Silver is up 22¢ at $14.76. Also, not to be ruled out, this morning’s rally is reminiscent of last Friday’s – a price surge we thought might be related to short-covering.

The commodities complex as a whole is pushing higher led by oil, gasoline and copper.  Given the generally negative breakdown in China-U.S. talks, what the Wall Street Journal described as ending with a “thud”, the commodities rally begs explanation. Meanwhile, the notion that the White House might intervene in currency markets to weaken the dollar gained additional credence via a major Bloomberg article this morning. “A deliberate move to weaken the dollar isn’t far fetched anymore,” said the news service.

We will update later in the day if any fresh news becomes available.

Added note:  The Wall Street Journal this morning reported a senior official as stating that “To get a positive result from these engagements, the Chinese must address the issues raised by the U.S.”  Perhaps, downward manipulation of the yuan was one of those issues.  Are the gold and currency markets reading the pullback in the yuan overnight as an attempt by China to send a message?  Could be.

Quote of the Day
“It was significant that we didn’t see any bears at either venue despite doing a 7.30am, 13 mile valley floor hike! I’m sure the absence of fellow bears was a significant countertrend sign. I learned something else on my trip worth sharing. We took the Yosemite Tram tour of the valley floor and the ranger gave a very interesting talk about fire. Until 1970 Yosemite Parks was extinguishing regular small-scale fires to prevent property damage. The resultant rise in dense small tree growth meant that although fires were less frequent, they quickly got out of control. Since 1970 they have allowed more fires to burn, resulting in less damage. . . It is therefore reasonable to argue that the US has already faced a ‘normal’ tightening cycle and any additional rate hikes are taking us into territory not seen in recent times. This already may be enough for the Fed to have broken something.” – Albert Edwards, Society Generale

Chart note: This chart shows the gains or losses in gold from the same month a year earlier. Since the Fed began raising interest rates in early 2016, gold has gone higher in 22 out of the past 30 months. That means that you could have purchased gold in any one of those months a year earlier and showed a gain 12 months later, and sometimes that gain was significant – as much as 10% to 22%!

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Gold backs off from gains earlier in the week, generally quiet day so far

Gold backed off a bit today from gains earlier in the week responding to a combination of interest rate concerns and renewed trade war tensions. The metal dipped as low as $1187 during Asian trading hours then recovered to trade in the $1192 range as New York opened – down $3 on the day. Silver is down 9¢ on the day at $14.67. Without much to report, we will sign off for now and update at the live newsletter page if anything interesting develops during the course of the day.

Quote[s] of the Day
Central bankers are coy about gold’s importance as a monetary metal. Former Fed Chair Benjamin Bernanke, at one of our hearings, claimed flatly that gold was not money. When I pressed Bernanke on why, then, do central banks hold gold, he declared that after a long pause that it was merely ‘tradition.’ He had no interest in my suggestion that the gold could be sold off to the American people if it’s not money. The point is that due to today’s impending crisis, many governments are now accumulating more gold—while others are holding onto what they have with the expectation it will once again be used in the monetary system.” – Ron Paul, former Congressman and presidential candidate [Emphasis added]

“Students of monetary history should recall that global growth shrank in the wake of the Smoot-Hawley Tariff Act of 1930, and the US was forced to devalue the dollar against gold in January 1934 with the result that the gold price rose by 70% (from $20.67 to $35.00).” – Martin Murenbeeld, Gold Monitor newsletter

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 average annual 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 – the extent of the fiat money era that began in 1971.

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Gold even on day, speculation about Fed-White House split overhangs markets

DAILY MARKET REPORT

Gold pushed briefly over the$1200 mark in late European trading today on concerns of renewed trade tensions – this time between the United States and the European Union – and continued firming of China’s yuan. As we go to fetch this report to the server, gold is even on the day and trading at the $1296 mark. Silver is down 4¢ at $14.76.

The most pressing issue in the gold market, though, is not the value of the dollar or the trade wars, but the one situation that underlies both – the determinations of the Federal Reserve on interest rate increases and the president’s remarks late last week. Though many expect something of relevance to occur at Jackson Hole, we are in the camp that thinks nothing much will happen there and that the Fed chairman’s speech will be significantly less than controversial. The Fed-White House split and the speculation about who will win out is likely to hang over all the markets, including gold, for some time to come.

Quote of the Day
“Why does the cycle move as it does? What causes these periodic alternations, this ebb and this flow, in the national priorities? If it is a genuine cycle, the explanation must be primarily internal. Each phase must flow out of the conditions – and contradictions – of the phase before and then itself prepare the way for the next recurrence. A true cycle is self-generating. It cannot be determined, short of catastrophe, by external events. Wars, depressions, inflations may heighten or complicate moods, but the cycle itself rolls on, self-contained, self-sufficient and autonomous. . .The roots of cyclical self sufficiency lies deep in the natural life of humanity. There is a cyclical pattern in organic nature — in the tides, in the seasons, in night and day, in the systole and diastole of the human heart.” – Arthur M. Schlesinger, Jr., The Cycles of American History

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 off marginally in quiet trading early

DAILY MARKET REPORT

Gold was off marginally in early trading – down $2.50 at $1188.50 in a quiet market session thus far. Silver is down 5¢ at $14.76. The precious metals seem to be taking a breather after a strong two-day run to the upside that gathered momentum after Bloomberg shed light on the rift between the White House and the Fed on interest rates. The president also accused China and the EU of manipulating the yuan and euro to gain leverage in the trade wars. Germany announced yesterday recording the largest trade surplus in the world for the third straight year – a performance not likely to escape the notice of the Trump administration. An improving Chinese yuan added to the shift in momentum for gold over the last couple of days. Today, though, gold is down despite the yuan trending to the upside during Asian trading hours indicating that we might see gold go positive before the day is out.

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 CrashesAnatomy of a Typical Financial Crisis (2001)

Chart of the Day

Chart note: Mapping and comparing secular bull markets is a risky business. No two are exactly the same, but at the same time they do follow a general pattern moving from accumulation to public participation and finally excess mania with ebb and flow occurring at each stage. The Dow Jones Industrial Average began its 1980-2000 secular bull market at 760 and topped at 11,723 – rising roughly 15.5 times. Gold began its secular bull market in 2002 at $280 per ounce. If gold were to match the Dow’s performance, it would rise to $4300 per ounce by 2022 – a 15.5 times gain. That said, the timeline for bull markets can vary – some shorter, others longer. In gold’s secular bull market of the 1970s, it rose 24 times in a ten year period – from $35 per ounce to $850 per ounce. If it were to match that price performance, it would be priced at $6500 per ounce.

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Bridging the ‘fourth turning’ with gold


The Fourth Turning – the influential work by William Strauss and Neil Howe published in 1997 – uncannily predicted much of what has happened in America over the past twenty years. “The next Fourth Turning,” the authors predicted, “is due to begin shortly after the new millennium, midway through the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation, and empire.”

Howe designates 2008 as the start date for the current fourth turning. Since turnings typically last 20-23 years, it will end sometime between 2028 and 2031. That puts us about midway through the cycle. At the moment, if the politicians, Wall Street and press accounts on the status of the economy are to be believed, the good times have arrived. For many Americans, though, that arrival has some pretty dark clouds hanging over it – the deep political divisions, the escalating trade wars, the emerging nation debt and currency crisis, the overvalued stock market, the threat of rising interest rates – and that is just a sampling of fourth-turning strata that worries global investors. The nation despite the rosy outlook is a bit unnerved by it all. For his part, Howe, who saw it coming, believes things could get much worse before before they get better.

“The fourth turning,” he said in a MacroVoices interview last August, “is the final season of history, if you will, the final generation. And that is the period of crisis. That is the period when we tear down institutions that we’ve built, everything that’s dysfunctional. And we sort of rebuild things from scratch again. And it usually follows a period where—it’s bound up in a period – where there’s complete disgust, complete distrust with what we have.”

There is a certain amount of inevitability interlaced throughout Howe’s analysis and a good many will have a hard time accepting it for that reason – especially those who believe that somehow this period in economic history is going to be different from others. Howe though sees strong similarities to the period just before and after World War II, the last fourth turning.

Once again his viewpoint, expressed almost a year ago, is uncanny: “And then the crisis,” he says, “when all of these problems begin to coalesce into one huge problem. It’s when the Great Depression met all of these—the rise of fascism both in Asia and in Europe, and everything came together, currency wars, everything became part of a huge problem. Which, by the resolution, you see—and this is what happens at every fourth turning. All the little problems come together into a giant problem. And then the giant problem gets completely resolved.”


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Is that not where we find ourselves today – in the current fourth turning?

“. . .I would say these are strong parallels that we see between the decade we’ve been living through and the 1930s,” he says. “Because it isn’t just what happens to/in the economy. I mean, you consider so many ways in which this last decade has recapitulated the 1930s, starting off with a financial crisis, worries about deflation, worries about declining fertility rates, and currency wars, and beggar thy neighbor policies, and radical attempts by monetary and ultimately fiscal policy to remedy the situation.”

Howe has something of a philosophical partner in the great Russian novelist, Leo Tolstoy who examined the role of fate in human affairs in his masterpiece novel, War and Peace. I am among the group that believes we are carried on great waves of history whether we like or not – what Tolstoy referred to as an historic “fatalism” to which we are all subject:

*We are forced to fall back on fatalism as an explanation of irrational events (that is to say, events the reasonableness of which we do not understand). The more we try to explain such events in history reasonably, the more unreasonable and incomprehensible do they become to us. Each man lives for himself, using his freedom to attain his personal aims, and feels with his whole being that he can now do or abstain from doing this or that action; but as soon as he has done it, that action performed at a certain moment in time becomes irrevocable and belongs to history, in which it has not a free but a predestined significance.

There are two sides to the life of every man, his individual life, which is the more free the more abstract its interests, and his elemental hive life in which he inevitably obeys laws laid down for him. Man lives consciously for himself, but is an unconscious instrument in the attainment of the historic, universal, aims of humanity. A deed done is irrevocable, and its result coinciding in time with the actions of millions of other men assumes an historic significance. The higher a man stands on the social ladder, the more people he is connected with and the more power he has over others, the more evident is the predestination and inevitability of his every action. ‘The king’s heart is in the hands of the Lord.’ A king is history’s slave.” – Leo Tolstory, War and Peace

Like Howe, I too believe that the “giant problem” will somehow find resolution, but my concern is getting across the bridge between the “final season of history” and its ultimate resolution – whatever fate might dictate. That is why I own gold personally and why I think every thinking investor should own it as well. The name of the game is to protect wealth and not leave the results of your life work on the table as the fourth turning moves into its final phases.

A diversification of about 10%-30%, in my view, will get the job done as it did in the first phases of the crisis from 2008-2009.* How high you go within that range depends upon on how strongly you feel about the dangers that lie ahead.

–– Michael J. Kosares, USAGOLD


Neil Howe interview (Courtesy of MacroVoices/Audio version)

* During the early stages of the crisis that began in 2008, gold moved sharply to the downside. In January, 2008 the metal was trading in the $900 range. By October, as the first wave of the crisis washed over the financial markets, it had fallen to $730 – a decline of roughly 20%. Then as the full extent of the financial crisis became apparent and the Fed introduced money printing measures, it began to rise reaching $880 by the end of 2008. From 2009 to September 2011, gold rose to its all-time high of $1895 – a 215% gain in three years.

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Gold’s sharp rally late looks like short-covering

AFTERNOON UPDATE

(USAGOLD – August 17, 2018) – As you can see in the accompanying chart, most of gold’s $11 move to the upside this afternoon occurred late in COMEX trading. The sharp rally has the classic look of short-covering though we won’t have any data to back that hunch until the Commitment of Traders report is released next week. Many analysts over the past few weeks have pointed to the record short position in gold as cause to be optimistic. At some point, shorts need to cover their positions in order to lock-in their profits. Simultaneous to gold’s reversal, the dollar took an equally sharp tumble. Both moved in the absence of any notable or publicly disclosed political or economic news.

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Gold firms on stronger yuan, yen, contagion concerns

DAILY MARKET REPORT

Gold firmed overnight beginning in Asia and the positive trend carried over to New York at the open. The precious metal is now priced at $1179.50 and up $4 on the day. Silver is up 6¢ on the day at $14.72. A stronger Chinese yuan and Japanese yen are the chief influences with weak stock markets in Asia and Europe adding to the flow of interest in the direction of precious metals. Commodity prices also firmed overnight led by oil and natural gas up 1.1% and 1.6% respectively as we upload this report to the server. The Turkish lira returned to the downside this morning as measures taken by the government appear to have worn off – a turn of events likely to reinvigorate global concern about an emerging market contagion.

Quote of the Day
“To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed.” – James Grant, Interest Rate Observer

Chart of the Day

Chart note: The direct relationship between growth in the federal debt and the price of gold. The national debt, by the way, now stands at $21.372 trillion with $880 billion added so far in 2018.

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Gold up on China trade delegation news

Gold is up this morning on overnight news that China is sending a delegation to the United States at the end of August for trade talks. At the time the announcement came public during Asian trading hours, gold was tracking sharply to the downside.  It abruptly reversed course on the news from the $1170 level.  In early New York trading, it is now up $5.00 on the day at $1179.  Silver is up 24¢ at $14.68. The Chinese yuan also reversed course.

The markets are likely to be cautious about these upcoming talks that come at the invitation of the United States.  We have already had several false starts in the negotiations.  On the plus side, though, the participants have now gotten a glimpse of a full-out trade war’s implications and the sight isn’t pretty.  Such realizations offer plenty of incentive on both sides to settle the matter and move on.

Also assisting gold, the Turkish lira is higher for the second straight day.  Generally speaking, the dollar weakened against currencies across the boards against both emerging and developed market currencies. With it, the threat to emerging markets seems to have receded somewhat.

Quote of the Day
“If history teaches anything, it is that government cannot be trusted to manage money. When currency is not redeemable in gold, its value depends entirely on the judgment and the conscience of the politicians. (That is the situation in this country today.) Especially in an economic crisis or a war, the pressure to inflate becomes overwhelming. Any alternative may seem politically disastrous. Whether it be the Roman emperors repeatedly debasing their coinage, the French revolutionary government printing a flood of assignats, John Law flooding France with debased money, or the Continental Congress issuing money until it was literally “not worth a Continental,” the story is similar. A government in financial straits finds its easiest recourse is to issue more and more money until the money loses its value. The entire process is accompanied by a barrage of explanations, propaganda and new regulations which hide the true situation from the eyes of most people until they have lost all their savings.” – Scientific Market Analysis

Chart of the Day

Chart note: “In 1982, back when I was a toddler,” says Sovereign Man’s Simon Black, “the price of a Ford Mustang was $6,572. Today the cheapest Mustang starts at $25,680 according to Ford’s website. So a Mustang today is around 4x as expensive as it was 36 years ago. US Labor Department data from 1982 shows that average earnings were $309 per week, or $16,086 per year. That was enough to buy 2.45 Mustangs. Today’s earnings are $881 per week, or $45,812 per year. That’s only enough to buy 1.78 Mustangs.” A good way to fill the gap is through gold ownership. A long-term gold holding has more than compensated for the destruction of the currency for those with patience and an understanding of the forces at work in the modern economy. The chart above on the purchasing power of the dollar and gold since 1971 speaks volumes.

 

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Gold pushes to eighteen-month how amidst global financial damage

Gold pushed to an eighteen-month low this morning in concert with significant damage to global stocks, commodity prices and currency values. The run of headlines posted further down the page tells the somewhat frightening tale. The dollar, though, continued to stand tall amidst the ongoing global asset destruction. As this report is posted, gold is trading at $1183 and down $11 on the day. Silver is down 36¢ at $14.67.

Yesterday we posted a link to articles from the Financial Times and New York Times about Tim Lee, a British economist who predicted Turkey’s demise in 2011. The summary of his thinking provided by NYT sticks in the mind:

“The river of global cash will dry up, the dollar will spike and there will be a series of financial seizures. Investors, he thinks, will flee developing economies, then Europe and eventually the American stock and bond markets. ‘It won’t be a banking crisis this time around — it will be a financial market crisis,’ Mr. Lee said. ‘And I am very confident that it will happen.’”

“Turkey,” he says, “is the canary in the coal mine.” One cannot help but be concerned that in this complacent summer of 2018 it might have already begun.

Quote of the Day
“China has a messy banking system, and politics that appear far more complicated than they did only a matter of months ago. The criticism emerging of Mr Xi, and finding its way into the foreign press, suggests that his position is not as strong as outsiders had assumed. And Chinese financial policy tends to be less an elaborate long-term plan, and more a series of reactive measures to ensure the continued survival of the Communists. None of this renders the Chinese exchange rate any less important. It just makes it far harder to understand than the Fed Funds rate or the Treasury yield. We should all of us make an effort to understand it.” – John Authers, Financial Times columnist

Chart[s] of the Day

Chart notes: These nearly identical charts plot the course of the yuan and gold since the trade war between the United States and China began in April of this year. Since the beginning of April, the yuan is down 9.3% and gold 8.8%.

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Gold on the mend, import prices up 4.8% without tariff kicker

Gold prices are on the mend this morning after yesterday’s sharp selloff – up $4.50 at $1197.50.  Silver is up 8¢ and back over the $15 mark at $15.07. In addition to a boost from emerging country currencies stabilizing, gold was helped by import prices registering a 4.8% gain over July of last year – a number that does not include tariff and duties add-ons. Oil prices are back to the upside on reports that Saudi Arabia cut production and concerns about Iranian supply reductions as U.S. sanctions kick-in. All in all, though markets’ crisis atmosphere appears to be more subdued today, few believe things will remain quiet for long.

Quote[s] of the Day
“We will implement a retail price increase and incremental retailer programs to help offset the inflationary headwinds we and others in the industry are experiencing.” – Andrew Callahan, Chief Executive Officer, Hostess Brands (Bloomberg/Inflation is coming to a theater near you)

“Products that we import into the U.S. from China, all of those products are going to be ultimately affected by the tariffs. It’s about $3.6 million per quarter, but we plan to pass these tariff charges on to our customers.” – Richard White, Chief Financial Officer, Diodes, Inc. (Bloomberg/Inflation is coming to a theater near you)

Chart of the Day

Chart note 1: With the US dollar the centerpiece of interest the past few days, 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.

Chart note 2: The declining tops and bottoms indicate long-term erosion in the value of the dollar and give credence to the argument in financial circles that we may be in the beginning stages of another major downturn similar to those launched in 1985 and 2002. The 2002 event corresponded with the launch of gold’s secular bull market. Among a group of major financial firms predicting that the U.S. dollar has peaked are Morgan Stanley, State Street Corp. and Wells Fargo & Co.

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Gold plunges below $1200 as contagion spreads

This morning gold went below the $1200 mark in European trading as the threat of a systemic contagion spread among emerging countries. It is now down $9 as New York trading opens at $1202. Silver is down 7¢ at $15.23.

“Volatility is likely to remain higher in the week ahead amid a lack of liquidity,” says Investopedia’s Mark Clayton, “and emerging-market fears will likely underpin gold. Positioning data should increase the potential for strong support near $1,200 per ounce, with sharp gains if the U.S. administration talks down the dollar.” One thing is certain: If something is not done to bring the greenback to heel, we are going to have a major mess on our hands. I suspect that the White House will be a busy place this morning with a potential global currency crisis at the top of the agenda.

The fact that emerging country investors are flocking to gold in record numbers speaks volumes about its safe haven reputation. There are circumstances under which price performance takes a back seat to the simple act of insuring one’s assets. A spreading contagion is one of them.

Quote of the Day
“Problems are likely to continue in emerging markets, compounded by rising interest rates and the US Fed’s monetary policy which has drained global dollar liquidity. We have already seen the impact on the Turkish and Argentinian currencies. We remain concerned about geo-political problems including Brexit, North Korea and the Middle East, at a time when populism is spreading globally. The resolution of these problems in this unpredictable era will surely be difficult. In 9/11 and in the 2008 financial crisis, the powers of the world worked together with a common approach. Co-operation today is proving much more difficult. This puts at risk the post-war economic and security order. In the circumstances our policy is to maintain our limited exposure to quoted equities and to enter into new commitments with great caution.” – Lord Jacob Rothschild, RIT Capital Partners, Half-Yearly Financial Report, June 30, 2018

Chart of the Day

Chart note: When the United States abandoned the gold standard in 1971 and freed currencies to float against one another, the fiat money era began. We are still in that era today. This chart shows the performance of gold from the early 1900s to 1971 when gold backed the dollar, and the era from 1971 to present when it did not. Gold has had its ups and down since 1971, but clearly, over the long run, in the absence of an official gold standard, individual investors have been well-served by putting themselves on a private gold standard.

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Gold warms; its third day on the plus side

Gold is warming a bit as we head into the second half of summer having spent the past three days in positive territory, though modestly so. The yellow metal is trading in the $1216 range – up $2.50 on the day. Silver is up 7¢ at $15.49. It is still too early to call the positive pricing in recent days a turnaround, but at least we can say the metals are steady at current prices, even if the support seems somewhat tenuous. In a bit of a surprise given widespread anecdotal reports of price increases from various manufacturers and wholesalers over the past couple of weeks, producer prices came in unchanged this morning. Some among the financial commentariat will see the timid showing as supporting the secular stagnation argument and cause for the Fed to go easy on its interest rate plans. Others will see it simply as the lag between the reporting framework and reality. That, in a small way, might be adding to gold’s performance thus far today.

Quote of the Day
“One thing that might even be most disturbing of all, is that no real crisis ever ultimately expresses itself, which actually, oddly enough, may be the worst outcome of all. That is to say, everything we see about our world today, the rich getting richer, the poor getting poorer, democracy sort of ebbing away, people feeling powerless over their political lives, people feeling less and less a sense of civic participation or belonging, and we have kind of turned that up. There is an interesting book by Tyler Cohen. He is a very popular writer now, he wrote Average is Over and The Great Stagnation. He wrote a recent book called The Complacent Class. If you want to read a book about America’s future in the absence of a fourth turning, read that book. The real rate of return gets lower and lower, we kind of approach the stationary state, productivity growth kind of ebbs to nothing, we become a kind of nominal market society, but one in which all the markets are dominated by a few very large companies with enormous market power and concentration. In that kind of society, highly stratified, not feeling at all like what we think of as being America, is, I think, the scariest one, one in which global problems, problems of global order are not rectified. And it is one that disturbs me the most.” – Neil Howe, McAlvany Weekly Commentary, 7/7/2017

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.

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Gold stages strong recovery in overnight markets, China yuan policy and Iran sanctions major influences

Gold staged a strong recovery overnight bouncing off lows at $1207 to trade as high as $1216 in overnight markets. It has since backed off a bit in early New York trading – now at $1213.50 on the day and up $4.50. Silver is also up trading at $15. Gold is supported by two ongoing influences this morning – China’s reinforcing of intentions to stabilize the yuan and the America’s imposition of sanctions on Iran. The first sends a signal to speculators to tread carefully shorting the yuan. The second drives home the reality of oil supply disruptions and the heightening of tensions throughout the Middle East.

Quote of the Day
“It doesn’t matter where the crisis begins. Once the tsunami hits, no one will be spared. The stock market is going to correct in the face of rising credit losses and tightening credit conditions. No one knows exactly when it’ll happen, but the time to prepare is now. Once the market corrects, it’ll be too late to act. That’s why the time to buy gold is now, while it’s cheap. When you need it most, once the crisis hits, it’ll cost a fortune.” – James Rickards, Daily Reckoning

Chart of the Day

Chart note: This chart illustrates Rickards’ point made in our Quote of the Day about the escalating cost of gold during crisis periods. During the 1970s, an inflationary crisis moved prices radically higher with 1980 registering the greatest increase right at double the previous year. The disinflationary crisis of the 2000s also instigated significant year over year increases with 2006 posting the largest at nearly 36%. For those who understand the inevitability of business and economic cycles, the time to buy gold is when everything is quiet – in times like the present.

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Gold tumbles in Asia, Europe; stages minor recovery in U.S.

Gold took a bit of a tumble in Asian and European markets overnight trading at one point just below $1208 before staging a minor recovery. It is now trading at the $1211.50 level in U.S. markets – down $2.00 on the day – as China’s yuan and Japan’s yen stubbornly track lower. Currency traders, at this juncture, seem poised to test China’s support of the yuan signaled late last week. Silver is down 5¢ this morning at $15.33. The markets in general seem to be off to a tenuous start for the week with stocks on the downside and bond yields steady ahead of a heavy issue of Treasuries through mid-week and inflation numbers on Thursday and Friday.

Quote of the Day
“Meanwhile, China instability and trade fears see EM markets take another leg lower, with particular market concern for the highly levered Asian economies. De-risking/de-leveraging dynamics attain self-reinforcing momentum, as contagion effects engulf the global ‘periphery.’ Fears of global financial fragility and economic vulnerability see risk aversion begin to gravitate toward the ‘core.’ Fears of EM central bank and Chinese selling of U.S. Treasuries overwhelm safe haven buying, as de-risking/de-leveraging dynamics see a widening of Credit spreads and illiquidity begin to impact ‘core’ fixed-income markets. In such a problematic global scenario, I ponder whether Beijing might perceive it’s playing with a relatively stronger hand than their U.S. adversary. Meanwhile, contagion effects would set their sights on the ‘periphery of the core.’ This just doesn’t seem all that far-fetched.” – Doug Noland, Credit Bubble Bulletin

Chart of the Day

Chart courtesy of TradingEconomics.com

Chart note: If you follow the on-going trade war between the United States and China with even passing interest, you have no doubt come across references to China selling U.S. Treasuries as its ultimate hole card. This chart shows something that few, including many financial journalists, acknowledge: China has been unloading exchange reserves since 2014 when they peaked at nearly $4 trillion. Most of those reductions, which have taken China’s reserves to a little over $3 trillion (a 25% reduction) came as part of its policy to smooth the yuan exchange rate against the dollar and prevent wholesale capital flight. It is unclear at this juncture to what extent China would be willing to drain reserves in defense of the yuan in the future. Trading Economics, as the chart shows, projects further reserve reductions in the future.

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Gold feels the stirrings of a breeze ‘midst the summer doldrums

Gold, lately becalmed in the annual summer doldrums, felt the first stirrings of a breeze this morning – rising nearly $11 to trade at the $1219 level. Silver was similarly disposed trading 22¢ higher at $15.54. Two factors of interest converged to put a breeze in gold’s sails – a less than gratifying jobs report and word that China had intervened “to cushion the yuan, ” as Bloomberg tells it. The Japanese yen, as has been its practice of late, quickly followed the yuan higher.

For those just learning about gold, we will repeat something we have written about often here. It is not sufficient to simply report that gold is down because the dollar is up, as much of the mainstream financial media is wont to do.

Instead, we should be constantly aware that there is usually something else driving the market behavior. So why would China defend the yuan when a weaker currency might be seen as in its best interest? The short answer is to curtail capital flight – money leaving China (or Japan for that matter) to a safer destination – and not to be ignored, to issue a warning to speculators shorting the yuan that China is prepared to spoil the party if need be.

In the interest of posting this report quickly, we will shorten it this morning to the above with a promise to update if market movement and information availability warrant it.

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Gold meanders, Sino-U.S. trade muddle deepens as both sides dig in heels

Gold wandered listlessly this morning as both sides in the Sino-U.S. trade dispute dug in their heels – one calling for wider and sharply higher tariffs, the other stating that it would not be pushed around. The yellow metal managed a small gain in Asia only to lose the advantage in European trading. As this report is posted, it is trading at $1215, down $2 on the day. Silver is even at $15.41.

The hardening of positions on both sides, coupled with the inability to get negotiations off the ground, has soured the mood in financial markets across the spectrum and around the world. A statement in this morning’s Wall Street Journal from “a senior administration official” summed up the deteriorating state of affairs: “Communications remain open. There are conversations about whether to have fruitful negotiations or not.” So we are having a conversation about whether or not we are going to have a conversation. We’ll let that one stand on its own. . .That same article linked the latest threat of tariff increases from 10% to 25% to the devaluation of the yuan.

Quote of the Day
“What does it mean for gold’s value proposition? First, gold does not appear to be expensive at the current price. In fact, there is reason to assume that it is (to borrow a term from the investment world) undervalued. Second, gold – if you look at it as a form of money – offers a hedge against the vagaries of the fiat money world. It cannot be debased by central banks’ money printing, and it does not carry a default or counter-party risk. Reflected upon from this perspective, gold certainly has not lost its shine for the long-term oriented investor. This becomes clear once the investor realizes that gold is not an investment instrument but a form of money – in fact, the best and most honest kind of money available.” – Degussa Market Report

Chart of the Day

Chart note: China’s yuan is down nearly 9% against the dollar since the beginning of the year. In competition with the yuan particularly in Asia, the yen has mimicked the yuan and movement in the two obviously has pushed the dollar higher. All of these currencies on a longer timeline, including the dollar, are in the process of being debased informally by their respective governments in terms of their overall purchasing power giving substantial credence to today’s Quote of the Day.

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DMR–The Fed meets. Gold goes down. Like clockwork.

DAILY MARKET REPORT

The Fed meets. Gold goes down. Like clockwork.

This week is no exception though the past three days’ downside has been mild compared to Fed week performances in the recent past. This afternoon we are scheduled for an announcement on what transpired at the meeting. That announcement is not expected to contain any surprises.

That said there is this nettlesome problem of every other major nation state easing monetary policy while the United States tightens. The dollar has been the unwelcome beneficiary in this process. China, Japan, Europe and most of the rest of the world, on the other hand, have watched with gratification as their currencies have sagged. The president has commented notably on the situation and the Fed chairman, even before the president’s comments, seemed to be treading lightly.

“Recent pressure from the president is having no impact on how they [the Fed] respond to data,” Priya Misra, head of global rates strategy at TD Securities recently told Bloomberg. “Ultimately, they will do what is right for the economy.”

That, I imagine, is cipher for saying that the Fed will continue on the path of raising interest rates despite the European Union and the ECB acting in concert to keep the euro down, Japan and the BoJ acting in concert to keep the yen down and China and the PBoC acting in concert to keep the yuan down. The Fed for its part continues on an interest rate path designed, it asserts, to provide space for lowering rates the next time a crisis occurs – a crisis, by the way, that could very well be instigated by the Fed raising rates.

Nevertheless, though unlikely, a minor surprise could be in the offing. If so, it would probably be in the direction of helping gold, not hindering it.

As it is, gold is down $4.50 on the day at $1220. Silver is down 11¢ at $15.44.

Quote of the Day
“I have a rather simple Bubble definition: ‘A self-reinforcing but inevitably unsustainable inflation.’ Most Bubble discussions center on the deflating rather than the inflating phase. A focus of my analysis is the progressively powerful dynamics that fuel Bubble excess, along with attendant distortions and maladjustment – and how they sow seeds of their own destruction. The ongoing ‘global government finance Bubble’ is unique in history. Rarely has market intervention and manipulation been so widely championed. Never have governments and central banks on a concerted basis inflated government debt and central bank Credit. And almost a full decade since the crisis, the massive inflation of ‘money’-like government obligations runs unabated – across the continents.” – Doug Noland, Credit Bubble Bulletin

Chart of the Day

Chart note: This chart summarizes the relationship between U.S. government debt and the purchasing power of the dollar since the early 1970s when the United States abandoned gold and launched the era of fiat money and an ever-expanding national debt. In that period of time, the national debt has gone from $302.6 billion to $2.1 trillion and the dollar has lost nearly 87% of its purchasing power.

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Putting the cart before the horse: Gold Hype

CLIENT UPDATE

MishTalk/Mike Shedlock/7-21-2018

“It is important to put the horse in front of the cart. The commercial market makers (the cart) react to the horse (the specs). Speculative sentiment rests with the horse, not the cart.”

USAGOLD note: There is, and always has been, a lot of disinformation and off-the-wall interpretations with respect to the weekly COMEX Commitment of Traders reports. This article sorts out the confusion and puts things in their proper perspective, especially with respect to what these reports signal. The commercials – in the case of gold that amounts to the bullion banks – simply take the other side of the trade presented by the speculators.

As Shedlock explains, the bullion banks are the cart and speculators are the horse with the speculators driving the action. Speculators have increasingly gone short gold over the past several weeks pushing the market lower, but as we have said repeatedly here, those shorts at some point need to be filled in order to lock-in profits. At the moment, the COMEX gold short position is near record levels establishing the need for significant covering. “I like this set-up,” says Shedlock in a separate article.

 

 

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Gold catches Asia tailwind on yen, yuan factors

Gold caught something of a tailwind in Asia overnight that pushed it to the $1333.50 level, up $8 on the day. A stronger Japanese yen and Chinese yuan were major contributors to the upswing. The yen moved higher on internal polices aimed at stemming capital flows out of the country. China’s yuan surprisingly moved higher despite a recently unveiled government stimulus program and a weaker PBoC yuan fix – two factors that should have pushed the exchange rate lower. Silver is also higher at $15.63 (+14¢).

The president’s recent attack on the Fed’s rate-raising policies – what Axel Merck called the “Trump put” – will now become a major factor in any practical analysis of the forex and gold markets. Former Minnesota Fed president Narayana Kocherlakota offered an interesting insight in a recent Bloomberg opinion piece. “President Donald Trump,” he said, “has recently taken an aggressive stance toward the Federal Reserve, publicly criticizing it for choking off growth by setting interest rates too high. Together with remarks made by other administration officials, this raises a troubling possibility: that the White House could pressure the central bank into taking actions that would lead to unduly high inflation.” By the end of the piece, he warns of a return to the “Great Inflation” that ran from 1965 through 1982.

Quote of the Day
“I’m fond of saying how crazy things get near the end of Bubbles. Convinced this is History’s Greatest Bubble, I’ve been anticipating a pretty astonishing variety of ‘crazy.’ Watching this all unfold with increasing trepidation, I sense an important line has been crossed. It’s time to retire ‘crazy’ – find a replacement that conjures up something more foreboding – more disturbing. And markets, well, they’re seemingly fine with it all; at times almost giddy. And that’s the fundamental problem: Dysfunctional markets continue to promote incredibly risky policy behavior – the polar (bear) opposite of imposing discipline.” – Doug Noland, Credit Bubble Bulletin

Chart of the Day

Chart note: When the United States abandoned the gold standard in 1971 and freed currencies to float against one another, the fiat money era began. We are still in that era today. This chart shows the performance of gold from the early 1900s to 1971 when gold backed the dollar, and the era from 1971 to present when it did not. Gold has had its ups and down since 1971, but clearly, over the long run, in the absence of an official gold standard, individual investors have been well-served by putting themselves on a private gold standard.

 

 

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Gold goes sideways, silver finishes higher

AFTERNOON UPDATE

FOREX Closes: Gold $1224.50 (no change) / Silver $15.46 (+ 10¢)

Reuters/Eric Onstad/7-24-2018

“Gold ticked higher on Tuesday as the dollar slipped, but struggled to stabilise after weeks of losses. . . Gold has shed more than 10 percent since touching a peak of $1,365.23 in mid-April, largely hit by a stronger dollar amid U.S. interest rate hikes. Last week it hit a one-year low.”

USAGOLD note: Silver managed to eke out a gain of 10¢. Gold got as high as $1229 in the trading session but turned south as the dollar regained its footing. As we roll through the remaining weeks of the annual summer doldrums, some are beginning to talk about a bullish reversal in the works for gold. I found this analysis particularly interesting from a short-term point of view. (Offered with the usual caveats in place. . . .)

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Gold drops again on stand aside PBoC yuan devaluation stance

Gold took a southerly turn in today’s early trading in response to sharp drop in the Chinese yuan. It is down $6.50 at $1225 following a surge late last week that took it back over the $1230 mark. Silver is down 9¢ at $15.43.

The president’s rhetoric late last week attempting to counter devaluation of the yuan, it would seem, has fallen on deaf ears. The precipitous drop in the yuan continues unabated (see today’s Chart of the Day) with the Peoples Bank of China sending a message of its own: It will stand aside and let the yuan drop on international currency markets.

As reported here last week, China is stepped up a dovish monetary policy, including a stronger dose of quantitative easing, while the Fed chairman over the weekend pledged to stay the course on raising in interest – all to the chagrin of the sitting president of the United States, who appears powerless in the face of it all. None of this has escaped the notice of international currency traders.

Meanwhile, through it all, China continues to import massive amounts of the “barbarous relic” to balance its huge dollar-based reserves. It imported 400 tonnes in the second quarter – about two-thirds of the global mine production. We would add that those imports crossed China’s border at very favorable prices.

Quote of the Day
“The currency should be depreciating from a broad macro perspective – you have the Fed hiking and PBOC easing, so at some point it will be reflected in the FX market. This is still in line with the broader PBOC policy of introducing more volatility and letting the market play itself out.” – Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong (Bloomberg interview)

Chart of the Day

Carryover Update

Last week in Myra Saefong’s MarketWatch afternoon gold market update:

“I do not believe that the trade wars at present are the dominant issue for gold and the dollar,” Michael Kosares, founder of gold broker USAGOLD, told MarketWatch. “Both, I believe, are still caught up in a syndrome dictated by dovish interest-rate policy across both oceans, while the U.S. continues to raise rates. That could all change in a heartbeat, though, if the inflation rate begins to run consistently higher than interest rates.”

Reports have surfaced that China’s central bank is aggressively pursuing its own version of a quantitative easing program. (Read here) Simultaneously it fixed the yuan top-shelf exchange rate lower signalling it was interested in a weaker yuan against the dollar and other currencies. The combination sent gold reeling overnight in Asian markets – down $14 at one point. Gold has staged a minor recovery in early U.S. trading and is now down $10 at $1217. Increasingly, currency traders are suggesting that the Fed may be forced to act. In an editorial this morning, the Financial Times warns “The U.S. central bank must be prepared to halt or reverse rates. . . if financial stability is threatened.”

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Update Thursday–Gold drops sharply on weak yuan fix

Yesterday in Myra Saefong’s MarketWatch afternoon gold market update:

“I do not believe that the trade wars at present are the dominant issue for gold and the dollar,” Michael Kosares, founder of gold broker USAGOLD, told MarketWatch. “Both, I believe, are still caught up in a syndrome dictated by dovish interest-rate policy across both oceans, while the U.S. continues to raise rates. That could all change in a heartbeat, though, if the inflation rate begins to run consistently higher than interest rates.”

This morning reports have surfaced that China’s central bank is aggressively pursuing its own version of a quantitative easing program. (Read here) Simultaneously it fixed the yuan top-shelf exchange rate lower signalling it was interested in a weaker yuan against the dollar and other currencies. The combination sent gold reeling overnight in Asian markets – down $14 at one point. Gold has staged a minor recovery in early U.S. trading and is now down $10 at $1217. Increasingly, currency traders are suggesting that the Fed may be forced to act.  In an editorial this morning, the Financial Times warns “The U.S. central bank must be prepared to halt or reverse rates. . . if financial stability is threatened.”

 

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Some speculation on yesterday’s selloff in the gold market

DAILY MARKET REPORT

We could not let the latest downside break in the gold price pass without a word or two. My first instinct is to point to the volumes on the COMEX yesterday and ask what on earth might have generated such an interest in gold on the short side? At precisely 9am yesterday, 5,458,000 ounces of gold were presented for sale on the exchange – a paper trade of over 170 metric tonnes. It was followed by another sale within the hour of another nearly 5,500,000 ounces, or another 170 metric tonnes, all toll 340 tonnes of paper gold dumped on a market that lacks a champion sufficient enough to oppose it – at least on the COMEX.

Are we to believe that thousands of commodity speculators the world over suddenly woke up Tuesday morning and decided to sell hundreds of tonnes of the metal on the basis of upcoming Congressional testimony on the part of the Fed chairman? And how could it have occurred before even knowing the nature of that testimony?

It is unlikely yesterday’s sell-off in gold occurred because thousands of investors suddenly lost faith in the safe haven qualities of the metal, as some in the press are wont to claim. More likely, it came the result of a small group, or perhaps even a single entity, deciding to short the market for its own purposes.

Of course, to the speculator in gold hoping to garner a profit, pointing out the nature of the problem is a poor salve for the wound inflicted. Know, though, that the short position taken today must be reconciled with a purchase farther down the road lest the profits be left on the table. That is why gold typically bounces back from these waterfall drops – though usually over a much more extended period of time than the original application of the short. For the paper speculator, the wound might have been debilitating if not fatal. For the well-capitalized investor, though, who holds the metal as a long-term safe haven in physical form, the wound – if a wound at all – is at worst superficial.

As is always the case in financial markets, for every action there is an equal and opposite reaction. The reaction in this case will come in the form of stronger demand for the physical metal from buyers – including nation states, major financial institutions and individual investors – who understand the real nature of what just transpired and how to take advantage of it. It is interesting to note as posted here yesterday (and just below) that 17% of fund managers polled by Bank of America Merrill Lynch see gold as a bargain at these prices – a record number.

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Gold trades lower on Friday the thirteenth

DAILY MARKET REPORT

Friday the thirteenth. . . . . .Gold is trading at the $1242 mark this morning (down $4.00) after having gotten as low as $1238 in European markets. Which way it will break from here remains an open question as the annual summer slowdown lingers, commodities continue to track lower, and the dollar, at least for now, reigns supreme in currency markets. In its market report this morning, Investing.com poses an interesting scenario, “Interestingly, Asian and European stocks were mostly higher today as investors yet again attempted to shrug off trade tensions. Could markets be turning increasingly numb to global trade developments? This may be the question of the quarter if stock markets and riskier assets continue to push higher despite trade tensions escalating.” And, by the way, if the one asset that should be flourishing in this environment continues to languish . . . .

With that thought we will leave you for the week and alert you that we will be posting only intermittently for the next couple of weeks as we move to a mid-summer schedule.

Quote of the Day
“Buying gold today is a statement that you believe that global economic events may spiral out of the control of Central Bankers. It is insurance against some sort of massive monetary policy mistake that cannot be fixed without re-conceptualizing the global economic regime – hyperinflation in a developed nation, the collapse of the Euro, something like that – not an expression of a commonly shared belief in some inherent value of gold.. . . . The stronger the Narrative of Central Banker Omnipotence, the more likely it is that the price of gold goes down. The weaker the Narrative – the less established the Common Knowledge that central bank policy determines market outcomes – the more likely it is that the price of gold will go up. In other words, it’s not central bank policy per se that makes the price of gold go up or down, it’s Common Knowledge regarding the ability of central banks to control economic outcomes that makes the price of gold go up or down.” – W. Ben Hunt, Epsilon Theory

Chart of the Day

Chart note: There is much concern about the flattening yield curve, i.e., the convergence of rates in various U.S. sovereign debt instruments and what it might portend for the future. In pulling together the data for these charts, we could not help but take special note of the two previous occasions in which there was a similar convergence – in 2000 just before and during the bursting of the dotcom bubble and in 2007-2008 just before and during the Bear Sterns/Lehman Brothers’ implosions. Both breakdowns, by the way, occurred coincident with an upswing in interest rates.

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