Gold up $11 on technical factors, oversold conditions

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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