Category: Daily Market Report

DMR–Gold seesawing around $1200, but higher this morning on firming yuan, China premier comments

DAILY MARKET REPORT

Gold continued to seesaw around the $1200 mark this morning.  At report post-time, it is trading in the $1203 range and up $3 on the day.  Silver is up 4¢ at $14.23.  Overnight, gold got as high $1206 after Chinese Premier Li Keqiang was quoted on Bloomberg as saying China would refrain from devaluing the yuan to boost exports.  The yuan is also higher in early trading.

The yield on the 10-year Treasury went vertical yesterday to 3.048% on a TIC report showing a minor reduction in Chinese holdings of U.S. sovereign debt. In keeping with Li Kequiang statements this morning, China might be forced to sell U.S. government paper in order to defend the yuan.  Yield on the 10-year is even higher this morning at 3.074%, an indication that the market has not backed-off from yesterday’s assessment. Julius Baer’s Norbert Ruecker told Reuters this morning that “Overall, we are constructive for gold and we are telling our clients to start to build a long-term position. Negative sentiment and positioning looks like it has hit rock bottom, so this will start normalizing and support gold.”

Chart courtesy of TradingEconomics.com

Quote of the Day
“In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability – problem areas where America will have neglected, denied, or delayed needed action.” – William Strauss and Neil Howe, The Fourth Turning

Chart of the Day

Chart note:  The CBOE SKEW Index signals when option traders are concerned about a black swan event.  In August, the SKEW hit its highest level since inception in 1999.  Since then it has backed-off marginally, but the trend in sentiment and the danger signal remain intact. 

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Posted in Daily Market Report, Today's top gold news and opinion |

DMR–Gold unmoved by trade war escalation

DAILY MARKET REPORT

Gold had a muted reaction to today’s trade war escalation with the price going sideways. The U.S./China trade war thus far has had a negative effect on commodities across the board including gold, so holding its own and not retreating further comes as something of a surprise. Alibaba’s Jack Ma came out over the weekend predicting a protracted struggle that could last twenty years.  Thus far, the reaction in the West to the trade conflict has been subdued.  That sentiment, however, could change as the trade war moves from peripheral concern to immediate reality.  In China, the trade wars have done little to put a damper on gold imports.  It is on track this year to import another 2000+ metric tonnes of the metal – two-thirds of the annual global mine production.

Quote of the Day
“Two confrontational, nationalistic, and militaristic leaders playing chicken with each other, while the world is watching to see which one will be caught bluffing, or if there will be a hellacious war. We can also say that if … things go badly, it would seem that gold (more than other safe haven assets like the dollar, yen, and treasuries) would benefit.” – Ray Dalio, Bridgewater Securities

Chart of the Day


Chart courtesy of HowMuch.net

Chart note:  “One thing is immediately clear, ” says HowMuch. “Imports and exports are both on an upward trajectory year over year, but imports tend to grow faster. In other words, when looking at the graph you will notice the gap between the two numbers has gotten larger and larger while the space between the two circles has also become darker and darker. In short, the trade deficit used to be relatively small, averaging less than $150B year over year in the 1990s, but then it exploded in the 2000s. The single biggest increase occurred in 2004 when it jumped from $532B to $655B—a whopping $122B in one year.”

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DMR–Gold up $11 on technical factors, oversold conditions

DAILY MARKET REPORT

Gold got the week off to a strong start nudging back over the $1200 level to $1205 – up $11.00 on the day. Silver is up 21¢ at $14.25.  The move began overnight during Asian trading hours.  It then carried over to Europe and got a bit of a kicker in early New York trading.  Gold seems to be trading on technical factors and oversold conditions today rather than any specific political or economic development.  Last week’s Commitment of Traders numbers revealed some minor short-covering that might be indicative of a trend. The record short-position in gold and silver remains the prime factor in the paper gold market. A number of analysts have made the case for a healthy rally once the short-covering begins in earnest.  Turkey’s banks are reportedly selling physical gold to allay the effects of the lira crisis.  If there has been an effect on the market price, it has been minimal thus far.

Quote of the Day
“Banks in the United States have the potential to increase liquidity suddenly and significantly – from $12 trillion to $36 trillion in currency and easily accessed deposits—and could thereby cause sudden inflation. This is possible because the nation’s fractional banking system allows banks to convert excess reserves held at the Federal Reserve into bank loans at about a 10-to-1 ratio. Banks might engage in such conversion if they believe other banks are about to do so, in a manner similar to a bank run that generates a self-fulfilling prophecy. . . What potentially matters about high excess reserves is that they provide a means by which decisions made by banksnot those made by the monetary authority, the Federal Reserve System – could increase inflation-inducing liquidity dramatically and quickly.” – Christopher Phelan, economist, Minneapolis Federal Reserve

Chart of the Day

Chart note 1:   Though it is probably too early to confirm a correlation, this chart offers some early clues that Christopher Phelan’s scenario outlined in our Quote of the Day might be coming to fruition.  In January 2015, the inflation rate was at its nadir under zero percent.  Excess reserves were near their peak at $2.6 trillion. In September 2015, commercial banks began siphoning off excess reserves, leveraging that capital and lending it into the economy. 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 last week’s Consumer Price Index release, it had reached 2.8%.  

Chart note 2: This past June, the Fed lowered the rate on excess reserves to match the Fed Funds rate adding even more incentive for the banks to accelerate their draw downs. 

Related:  Please see Gold a safe haven in an ocean of excess reserves (Gold was trading at $1060 when this article was first-published.) Also see, the more recent update Excess reserve statement by chairman Powell moves markets

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DMR–A word on the ten-year anniversary of the Lehman Brothers’ collapse

DAILY MARKET REPORT

Gold pushed back below the $1200 mark this morning in lackluster trading – down $4 on the day at $1198. Silver is down 4¢ at $14.14.

Much of the news and opinion the past few days has centered around the Lehman Brothers’ collapse ten years ago this weekend. One of the more telling features is the amount of analysis pointing to a repeat crisis before 2020. JP Morgan, Ray Dalio, Moody’s Analytics, SocGen are prominent among a group warning of a Lehman moment at some point over the next two years. Even former Fed chairman, Ben Bernanke, says there will be a Wile E. Coyote moment in 2020.

The rush to the podium (so to speak) among analysts to make sure they are on the record with their warnings is something to behold. It is a much different spectacle from the financial elite’s We-Didn’t-See-It-Coming mantra first uttered in 2008 and religiously ever since. The Queen of England was among the group to hear that rationalization. Her response was classically discreet: “People had got a bit lax, had they?” Today, the financial elite display great care. The general public though has become alarmingly lax. Complacency is a word often bandied about in this context. In 2008, it was the other way around: The financial capitals were lax but the public was vigilant – as evidenced by the strong gold demand at the time.

Day to day, financial media tend to center their gold coverage around the price. The safe-haven argument for gold is offered but routinely muddied in the same paragraph. We tend to forget that the real reason to own gold is not to make speculative gains, but to protect against the kind of excesses the Lehman moment represents. The aftermath of 2008 is testament to gold’s role as the asset of last resort. The Queen’s question fittingly came, by the way, during a visit to the Bank of England’s gold room in 2012. The sight of all that gold must have set the wheels in motion. . . . .

Quote of the Day
“Why then is so much writing on the subject of money so needlessly complicated, with dense, impenetrable language and equations that make sense to only a handful of academicians? And why do so many people insist that bad ideas about monetary policy, like ‘inflation is needed to increase employment,’ are as settled and unassailable as scientific principles?” – Steve Forbes and Elizabeth Ames, Money: How the Destruction of the Dollar Threatens the Global Economy – and What We Can Do About It

Chart of the Day

Chart note: ““When President Nixon closed the gold window at the U.S. Treasury on August 15, 1971,” writes Economic Prism’s MN Gordon, “he told several whoppers. He said it was to, ‘defend the dollar against the speculators.’ He also said the action would, ‘suspend temporarily, the convertibility of the dollar into gold.’ Furthermore, he told Americans that, ‘your dollar will be worth just as much tomorrow as it is today.’ Nixon’s actions came on the heels of 60-years of gradual steps to remove gold’s backing of the dollar. In effect, $1 today has the same buying power that $0.16 had when Nixon took these ‘temporary’ actions. Over this same period, the U.S. national debt has run up from about $398 billion to over $21 trillion, and the economy has been utterly warped.” We sometimes become so immersed in the short-term ripples that we forget the long-term waves.

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DMR–CPI report stops gold in its tracks

DAILY MARKET REPORT

A benign U.S. consumer price report stopped yesterday’s gold rally in its tracks this morning.  Early on, the metal pushed past the $1210 mark and was up nearly $4 on the day. It is now down $3 on the day at $1204. Silver is down 4¢ on the at $14.21. Reuters reports that “Despite the moderation in price increases last month, inflation pressures are steadily building up, driven by a tightening labor market and robust economic growth.” The news service goes on to cite price increases building up in the supply pipeline resulting from tariffs on Chinese imports.

Yesterday, we posted our guess that some traders covered shorts in anticipation of the report. Those traders, if our hunch was correct, have apparently retreated to the sidelines – at least for now. Yesterday’s rally is a reminder how quickly things can change once sentiment shifts.

“[T]he net short on COMEX,” writes GFMS’ Rhona O’Connell in a report released yesterday, “was at record levels at end-August since the CFTC introduced its ‘managed money’ classification, at 244 tonnes. With outright shorts standing at 593 tonnes. Some short covering has ensued; we expect more and a sharp short covering rally is not out of the question.”

Inflation worries are one in a long list of concerns that could instigate the short-covering rally many gold market professionals anticipate.

Quote of the Day
“I wish Montagu Norman, Philip Snowden and the monetary experts were admirals or generals. I can sink them if necessary. But when I am talking to bankers and economists, after awhile they begin to talk Persian, and then they sink me instead.” – Winston Churchill, 1924

Chart of the Day

Chart note:  Growth in the money supply continues to be stubbornly restrained. That circumstance, however, does not necessarily signal weakness in the price of gold.  As this chart illustrates, the effect can be just the opposite. As the 2008 credit crisis unfolded, gold to the surprise of many proved its mettle as a hedge under disinflationary circumstances. Demand flourished among investors worldwide concerned about potential bank failures and a stock and bond market crashes. Even in the more placid economic setting since early 2016, gold has risen as monetary growth has slowed.  

 

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DMR–Gold in modest retreat, little to explain drop during London session

DAILY MARKET REPORT

Gold finds itself in a modest retreat this morning.  Scanning the usual indicators turns up little in the way of explanation. The drop occurred suddenly during the London session. We are left to think that it might have been the result of a one-time sale of some size. Gold at the moment is down $3.00 at $1192 and attempting to claw back earlier losses.  Silver is down 7¢ sympathetically, it would seem, at $14.08.  The gold-silver ratio at 84 to 1 now stands at its highest level in nearly three decades.

Quote of the Day
“The cost of living has skyrocketed in recent years. Let’s look at the cost of goods in services in terms of a salary earned by a full college professor. In the 1980s, our ‘full professor’ needed to pay almost 15 minutes of his salary to buy one kilogram of beef. Today, in July 2017, our full professor needs to pay the equivalent of 18 hours to buy the same amount of beef. During the 1980s, our full professor needed to pay almost one year’s salary for a new sedan. Today, he must pay the equivalent of 25 years of his salary. In the 1980s, a full professor with his monthly salary could buy 17 basic baskets of essential goods. Today, he can buy just one-quarter of a basic basket. And what about the value of our money? Well, in March 2007, the largest denomination of paper money in Venezuela was the 100 bolivar bill. With it, you could buy 28 US dollars, 288 eggs, or 56 kilograms of rice. Today, you can buy .01 dollars, 0.2 eggs, and 0.08 kilograms of rice. In July 2017, you need five 100-bolivar bills to buy just one egg.” – Timothy D. Terrell, on life in Venezuela (2018)

Chart of the Day


CLICK TO ENLARGE
Chart courtesy of HowMuch.net

Chart note:  “Looking at a map of economic freedom for the entire world reveals distinct pockets of freedom and repression,” says HowMuch.net, the creator of this chart. “The freest continuous group of countries stretches from the United States and Canada over to northern Europe and the Baltic countries. Russia is the only country touching the Arctic Ocean in a color other than dark and light green. Australia and New Zealand also stand out in the Pacific as bastions of freedom, especially combined with the other countries in Southeast Asia. On the other hand, almost all of South America, Africa, and Asia (at least on the continent itself) remain repressed.”

Chart note 2: It is also interesting to note that it is among the “mostly unfree” and “repressed countries” where the current emerging country currency and debt crisis resides.

 

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DMR–Quiet prevails, could be punctured later in the week

DAILY MARKET REPORT

Quiet prevails.  The markets are running sideways – stocks, bonds, gold, silver, the dollar, commodities. Even the Argentine peso, at least for the moment, looks stable.  Gold is trading at $1197; silver at $14.22. The quiet, however, could be punctured later in the week. The Labor Department releases its latest consumer price report on Thursday.  In the meanwhile, a feel-good story comes from Australia this morning.  Miners at work in the Beta Hunt nickel mine, owned by RNC Minerals of Canada, hit the mother lode last week – a single blast producing 9000 troy ounces of gold worth $10,000,000.  One 200-pound rock contains “2400 ounces of high-grade gold,” according to reports.  The mining company will auction off the find as collectors’ items.  It, by the way, says the mine might be even richer as it goes deeper.

Stay tuned.  We will update if things change.

Quote of the Day
“Because Chinese and American leaders have all sorts of carrots and sticks (e.g., economic, military, cyber, etc.) that they can use, they are now determining which ones to use, how far to push the testing, and how far the other will go in inflicting pain and enduring it. The escalations come in the form of tit-for-tats—i.e., a series of escalations that can become progressively larger and more painful, and that take different forms that can extend beyond trade (e.g., to include capital wars). It’s this series of escalations that the wise Chinese leader that I referred to conveyed can easily get beyond anyone’s control.” [Emphasis added]

Chart of the Day

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

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DMR–Gold climbs over $1200 on short-covering, a weak jobs report, and emerging country capital reshuffle

DAILY MARKET REPORT

Gold climbed back over the $1200 mark this morning with two London-based sources reporting short-covering in Europe. It is trading $1207 – up $9 on the day.  Silver is trading at $14.26 – up 7¢ on the day. Gold also got an assist this morning from the release of the ADP jobs report which came in below expectations. Beyond those immediate influences, some of the flow from an on-going re-shuffling of capital out of emerging nation stocks and bonds is making its way into gold. The demand is coming both internally from beleaguered citizens within those countries and externally from global funds and institutions who see gold as an under-priced asset. Financial Times quotes Pimco’s Gene Frieda as saying “We’ve had a series of idiosyncratic shocks, but this week it has felt like a more generalized sell-off than an idiosyncratic one.  Some investors just want to get out now.”

Quote of the Day
Our central bank monetary-led boom has made debt replace wealth for a long time. That’s not sustainable, of course. (We are ‘mining’ our soil for short-term gain.) We’ll see a return to the significance of productive stuff again I think, and that even includes farming – maybe especially farming. And the Midwest has a pretty good track record with productive stuff. Hard assets will matter again. But of course, I sound ridiculous even saying such things. Like a grumpy old grandpa.” – Mark Spitznagel, Universa Investments (as quoted by columnist, P.J. O’Rourke)

Chart[s] of the Day

Charts courtesy of TradingEconomics.com

Chart note: These three charts show the central bank balance sheet debt holdings for three of the top four largest economies – the United States, Japan and the European Union.  Together the three central banks hold an astonishing nearly $13 trillion in debt instruments, and not all are of the highest quality.  The US Federal Reserve is in the process of trimming its balance sheet, albeit on a slow fuse. The European Central Bank is scheduled to begin reducing its holdings later this year.  The Bank of Japan, for its part, says it will continue with its acquisition program as long as it deems necessary.

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DMR–Gold in recovery mode, emerging nation problems raise developed country contagion worries

DAILY MARKET REPORT

Gold is in recovery mode in today’s early going – up $5 on the day at $1197 – as the markets attempt to gauge the extent and depth of the contagion spreading through emerging markets from Asia, South America, Africa and Europe’s soft under-belly.   Financial Times even lists China among the countries analysts are monitoring for deeper problems.

That same article exposes what many see as the greatest source of vulnerability in this developing crisis:  “The rise in the US dollar since April,” says FT, “has exacerbated troubles in several emerging economies with the amount of dollar-denominated debt they have more than doubling to $3.7tn over the past decade, according to the Bank for International Settlements.”  That level of debt warns of a very large problem that is not going to be easily swept under the financial markets’ carpet as one country after the other tumbles into crisis.

So what happens when the debt repayments come due and these countries declare the lack of resources to meet their obligations?  The IMF does not have the resources to engineer a emerging country bailout at the level that might be required.  Where will emerging countries go for relief? Or do they simply default – in which case the crisis rolls unimpeded into New York, London, Frankfurt and financial centers beyond.

Please see: Emerging market sell-off spreads beyond Turkey and Argentina / Financial Times / 9-5-2018

Quote of the Day
“We have been in a state of stagnation since 2008. We’re moving towards stagflation. It feels good right now but it’s a false dawn.” – Alan Greenspan, May, 2018

Chart of the Day

Chart courtesy of VisualCapitalist.com

Chart note:  In a note accompanying this chart Visual Capitalist notes that ” If you add up all the money that national governments have borrowed, it tallies to a hefty $63 trillion. In an ideal situation, governments are just borrowing this money to cover short-term budget deficits or to finance mission critical projects. However, around the globe, countries have taken to the idea of running constant deficits as the normal course of business, and too much accumulation of debt is not healthy for countries or the global economy as a whole.” 

Too, we should not ignore the interlocking nature of global debt – a vulnerability that became all too evident during the last financial crisis and its aftermath.  The emerging country debt and currency disaster now unflolding across the globe has its antecedents in that crisis. Cheap money, widespread bailouts, more reckless borrowing and a wobbly repayment structure – all threaten to come home to roost as a disinflationary crisis (like 2008), a long-anticipated surge in global inflation, or as Alan Greenspan suggests in our Quote of the Day, as stagflation, a combination of the slow growth and inflation. Greenspan advocates owning gold as a precautionary measure.

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DMR–Gold turns sharply lowly on Chinese ambassador’s yuan comments over weekend

DAILY MARKET REPORT

Gold took a sharp turn below the $1200 mark in Asia overnight that carried over to early trading in New York. The metal is down $10 on the day at $1191. Silver followed suit – down 41¢ on the day at $14.08.  The bulk of the damage came from a drop in the yuan.

FOREX markets’ concerns about the yuan took a turn for the worse over the weekend.  Tui Tiankai, China’s ambassador to the United States gave a speech in which he stated that “On what to do next, for China it is very clear. I wish to advise people to give up the illusion that another Plaza Accord could be imposed on China. They should give up the illusion that China will ever give in to intimidation, coercion or groundless accusation.”

The Plaza Accord was an agreement among major industrial countries in 1985 to drive down the value of the dollar against other currencies, particularly the Japanese yen.  Cui’s comments were reported in Xinhua, China’s official press organ. The market reaction has been swift and gold is not the only casualty. The Dow is down 120. Bond yields are climbing and commodities across the boards, with the exception of oil, are taking a hit.

How much of this is posturing on the part of China and how strongly the Trump administration is likely to react to the statement are both open questions.  The president has already made it clear that he would like the Fed’s cooperation in driving the dollar lower, so there is no doubt that the currency situation is at the top of his agenda.

Quote of the Day
“If we are lucky, the next Fed-caused downturn will cause only a resurgence of 1970s-style stagflation. The more likely scenario is the type of widespread economic chaos not seen in America since the Great Depression. The growth of cultural Marxism, the widespread entitlement mentality, and the willingness of partisans of various sides to use force against their political opponents suggests that this economic crisis will result in civil unrest that will be used to justify new crackdowns on individual liberty. Those who understand the causes of, and cures for, our current predicament have two responsibilities. First, prepare a plan to protect your family when the crisis occurs. Second, do all you can to spread the truth in hopes the liberty movement reaches critical mass so it can force Congress to make the changes necessary to avert disaster. Since the crisis will result in a rejection of the dollar’s world reserve currency status, individuals should consider alternatives such as gold and other precious metals.” – Ron Paul, 8/27/2018

Chart of the Day

Chart note:   To learn why this chart is important to current and prospective gold owners, please see:  Gold: A reverse bubble in search of a pin – The victim could quickly find itself the beneficiary.

 

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

DAILY MARKET REPORT

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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DMR–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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DMR–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 this morning. 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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DMR-Gold up $6 in continuation of trend begun on 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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DMR–Gold higher third day in a row, market setting up for ‘dramatic short covering rally’

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.  Commenting on the record short positions in the gold and silver commodities markets, Tocqueville’s John Hathaway concludes that “The current futures market structure appears to be a set up for a dramatic short covering rally that will end up in losses for speculative shorts.”

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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DMR–Gold up sharply on dovish Fed rumblings and dollar intervention speculation, 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.

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.

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

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

DAILY MARKET REPORT

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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DMR–Gold even on the 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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DMR–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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DMR–Gold firms on stronger yuan, yen, global 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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DMR–Gold up on China trade delegation news

DAILY MARKET REPORT

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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DMR-Gold pushes to eighteen-month low 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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DMR–Gold on the mend, import prices up 4.8% without tariff kicker

DAILY MARKET REPORT

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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DMR–Gold plunges below $1200 as contagion spreads

DAILY MARKET REPORT

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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DMR–Gold warms; its third day on the plus side

DAILY MARKET REPORT

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

DAILY MARKET REPORT

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

DAILY MARKET REPORT

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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DMR–Gold shifts to higher ground, real rate of return goes negative on U.S. government paper

DAILY MARKET REPORT

Gold shifted to higher ground this morning after the government released its latest consumer price report which showed inflation pushing the 3% mark – a rate that puts the real rate of return on government paper in negative territory, even the 30-year bond.  Such stirrings are the sort of thing that can motivate a shift in investor perceptions – with commodities and gold being among the usual beneficiaries in a negative return environment. Today’s inflation number might mark something of a turning point in that regard, particularly when you take into consideration that sentiment favors rising inflation as a probable outcome of the trade war.   As it stands, gold is up $4 on the day at $1247 and silver is up 12¢ at $15.94.

Quote of the Day
“Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. Second, unlike a well-defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality. One is capable of unwittingly playing Russian roulette – and calling it by some alternative ‘low risk’ game.” ― Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

Chart of the Day

Chart note: Few correlations in the financial markets ring truer and more consistently than the one between the federal debt and gold. That relationship between the two is about as fundamental as it gets. For those with capital preservation as the goal, gold has been a stalwart and productive ally since the United States went off the gold standard in 1971 and launched the era of fiat money, federal deficits and the massive federal debt. As for the future, we should keep in mind that the very same conditions which created the long-term secular trend for both the national debt and gold are still in place today – nothing has changed fundamentally. As long as that is the case, we can assume gold will continue to attract capital as a long-term portfolio hedge just as it has, to varying degrees, through the first 47 years of the fiat money system. Please note, too, that gold is trading below the federal debt’s trend line, an indication that it might have some catching up to do in the months and years ahead.

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Posted in Daily Market Report, Today's top gold news and opinion |

DMR–Gold drops with rest of commodities complex, producer prices signal possible inflationary trend

DAILY MARKET REPORT

Gold dropped in early trading today in sympathy with the rest of the commodities complex.  Using the Bloomberg Commodity Index as a reference, raw commodities are down 1.25% as the markets attempt to factor in the impact of the latest round of tariff threats and counter-threats.  Gold is down $5 at $1251 and silver is down 10¢ at $15.94. Echoing a theme we raised earlier today (see below), Bloomberg headlines a growing concern that the latest “tariff barrage” will push “China fight to the point of no return.” Meanwhile, the producer price index registered a 3.4% gain over the past 12 months – an indication, when coupled with last month’s 3.1% annualized gain, that an inflationary trend might be in motion.  Tomorrow the  BLS will release the consumer price index report.

Quote of the Day
“If you could go back to 2007 would you really choose these policies again? Had they been used as short-term shock therapy only, the central bankers might have got away with it. As it is they now made our economies more dysfunctional than ever – and, worse, they can’t find a way out. . .They helped get us into this. They are not having much luck getting us out. But our elected governments have still ceded such enormous power over our financial system to them that we have no choice but to listen to their every word – if we want to have a chance of figuring out how the next (inevitable) crisis will play out, that is. Of all the things that have happened since 2007 that, I think, is the one that makes the least sense of all.” – Merryn Somerset Webb, Editor-in-Chief, Money Week

Chart of the Day

Chart note:  Much has been written and said about the lack of volatility in the financial markets over the past couple of years, but the volatility index can change direction abruptly and without notice. A single, negative event can send it soaring. If and when that happens, gold is likely to begin climbing as well as illustrated in the chart. Note how quickly the volatility index bolted higher in the early months of the 2008 financial crisis. Two months later, gold bottomed and began its historic run from the $750 level to nearly $1900 per ounce.

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DMR–Gold recovers from $1248 low in European trading, awaiting producer and consumer price reports

DAILY MARKET REPORT

Gold is down $4.50 on the day at $1254 after dipping below the $1250 level for the second time since this latest break began in early June. Gold turned around sharply during European trading hours after hitting a low of $1248.  Silver is trading at $16.03 and down 7¢ on the day. Trading in both metals is irresolute and lacks clear direction – in short a typical day in the annual summer doldrums. It looks like short-sellers are looking to reverse their positions on dips at or below the $1250 level and may be a sign that the price has reached a bottom.  Too, the precious metals could simply be in a wait and see mode with producer prices out tomorrow and consumer prices Thursday.

Quote of the Day
“I’m in the inflation camp. I think it’s coming. I have thought this for a while. People have looked all over for it as if looking for a lost sock or a hairpin: Where did it go? Where is that thing? But I do believe that the central bankers who have been kind of begging for inflation will be surprised at the generosity of the inflation gods over what they will ultimately be handed.” – James Grant, Grant’s Interest Rate Observer

Chart of the Day

Chart note:  Since 1971, the year the United States went off the gold standard, freed the dollar to float against other national currencies and ushered in the fiat dollar international monetary system, gold has appreciated over 3000%. In “Essay on the Coinage of Money” (1526), Conpernicus, the famed astronomer, noted: “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.” Today gold protects its owners against the nemesis of currency debasement as it has over the centuries and during the Copernicus’ times.

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Posted in Daily Market Report, Today's top gold news and opinion |