Gold & Precious Metals

These last few weeks have acted as a nice reminder that the fundamentals of the gold trade can span beyond the idea of Quantitative Easing and the US Federal Reserve. Ultimately, it was a fear trade that brought an influx of fresh buyers to the gold market since its most recent bottom in June of this year, and thus propelled gold higher surrounding 1,400 US per ounce. Of course investors saw those gains quickly pared back as political gaffes from a defeated US administration allowed investors to see that the dissipating threat of military action on Syria would not jeopardize positions in riskier assets like equities. But without taking a myopic or short term view of the metal, the action in gold reminded us of the role gold plays as a hedge or safe harbour from geopolitical instability.

It purely was the lack of direction and organization of the United States Executive Branch that created a shift in the markets this past week. The inability of the representative of the President of the United States on foreign soil, Secretary of State John Kerry, to deliver a satisfactory press conference by conveying his President’s agenda shifted the US to the passenger seat in terms of negotiations with the Russian’s. It also illustrated to investors that this would become a mundane process with little influence on financial markets as the United States diplomatic ability not only lacks conviction, yet also follow through.

Now the bigger question for gold investors and also potential gold investors is: when is there going to be an appropriate entry point for this market?

It seems this market has quickly shifted past this idea of a “war premium” or increased demand stemmed from geopolitical uncertainty. Moreover, if gold’s role is to act as that hedge when investors lose faith in risk assets and look for a safe harbour, the goal would be to already holding a fraction of your portfolio in physical metal. Investors may position themselves in the metal, but ultimately those holdings would be for a long term hedge in lieu seeking a profitable short term trade. Thus, the focus of gold from short to medium term horizon (12 to 18 months) shifts back to the taper debate at the US Federal Reserve.

As the Fed begins their two day policy meeting in Washington next Tuesday, it has long been the anticipation of investors that the Fed will commence tapering asset purchases. Personally, I would like to think that this effect was priced into the market when it collapsed back in the second quarter of this year, but more bearish forecasts arise as Goldman Sachs commodity’s research chief said Friday he could see the metal dipping below 1,000 US per ounce as the Fed reveals there tapering schedule. UBS AG’s Wealth Management commodities research head echoed that message as an advanced taper could ultimately provide a shock to the market. But the message from the investment banks is a signal that the mainstream perspective for gold’s outlook is sideways to negative. Nonetheless, this relates back to gold’s ultimate role as a hedge.

A hedge is an asset that is negatively correlated or uncorrelated with another asset. An example of this is gold and the US dollar; US dollar strength is often associated with weakness in the gold market and vice versa. Stanley Druckenmiller, George Soros’s point man for his infamous Quantum Fund, which brought down the British pound, appeared on Bloomberg recently. According to Druckenmiller, “QE has subsidized all asset prices, and when you end that, all prices will go down.”

Gold will act as that hedge, even if it does not go up in value, it will hold its value amidst market turmoil elsewhere. It has throughout history, and it will continue to. 

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The Fed Taper & Gold

Posted by Mark Jasayko, CFA, Portfolio Manager

on Friday, 13 September 2013 15:38

McIver Wealth Management Consulting Group / Richardson GMP Limited

There is quite a bit of chatter this morning about downward pressure on the price of gold. Goldman Sachs is forecasting the price to fall below $1,000, and some talking heads on CNBC were talking about gold hitting $600.

Most of the rationale focuses on the Federal Reserve and the reduction of Quantitative Easing (QE3). The implication is that “tapering” the rate of money printing is going to somehow reduce the size of the Fed’s balance sheet, which has been bloated by about $3 trillion with Treasuries and mortgage bonds acquired during the Grand Monetary Experiment.

Even if the Fed “tapers” it is still adding significantly to the size of its balance sheet. If the Fed “tapers” QE3 all the way to zero, the balance sheet might stabilize at that point, but if we are talking a year from now, there will be about $4 trillion.

Gold is not a bet that QE will go on forever, which is what a lot of the commentators this morning are trying to argue.

Gold is a bet that the Fed will never find the will to reduce the size of its balance sheet back to normal.

Here is why a perpetually bloated Fed balance sheet is a problem:

If there is $4 trillion worth of bonds when the Fed finishes “tapering” QE3 all the way to zero, there will be at least $20 trillion of inflationary power in the U.S. banking system looking for a spark. Most of the cash that the Fed prints to buy the bonds becomes “excess reserves” in the banks. Banks have not been lending money at the rate that they have traditionally because they are not overly confident. But, if they become more confident (perhaps in conjunction with more robust economic growth and employment) they will start to lend that money out. Under the Fractional Reserve banking system, only 10% of the capital has to be kept at the banks. As a result, on excess reserves of $4 trillion, the banks can potentially lend out about $36 trillion in the most aggressive scenario. But let’s say they are conservative and only expand lending by about $20 trillion. Well, the total money supply is currently only $16 trillion. It would become $36 trillion under this relatively conservative scenario. That’s a tremendous amount of money growth and considerable devaluation in a relatively short period of time. That’s what gold is potentially protecting against.

As a result, this morning’s prognosticators discussing the downside of gold need to explain how the Fed is going to “exit”, not how the Fed is going to “taper.” Unfortunately for their argument, Ben Bernanke quietly discarded his Exit Plan in April 2009, five and a half years ago. Without that, the argument for lower gold based on current Fed policy is just hopeful rhetoric for the gold bears and shorts.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. 

Richardson GMP Limited, Member Canadian Investor Protection Fund.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

The U.S. Comex gold futures (COMEX:GCZ13) fell 2.43% on Thursday to $1,330.30, the largest one-day percentage drop since July 5. The gold futures have plunged 4.05% this week after dropping 0.69% during the previous week. The Dollar Index (NYBOT:DXZ13) fell 0.41% in the past two days to 81.489 on Thursday after falling 0.8% last week. The S&P 500 Index (CME:SPU13)and the Euro Stoxx Index have risen 1.71% and 2.09% week-to-Thursday, following a surge last week. The U.S. 10-year Treasury bond (CBOT:ZBU13) yield retreated from the 3% level reached on Sept. 6 to 2.911% on Thursday.

Fed Tapering, U.S. Data and the Fed Appointment in Focus

The initial jobless claims in the U.S. for the week ending Sept. 7 fell to 292,000 from 323,000 in the week prior, compared to an expectation of 330,000. The four-week moving average of 321,250 was the lowest level in almost four years. The percentage of small business owners wanting to hire has also jumped to the highest level since 2007, reflecting further improvement in the labor market. The uncertainties of the Fed’s QE tapering in the FOMC meeting next week have increased the volatilities in the bond, equity, currency and gold markets. The U.S. Congress will soon have to vote on a funding bill to avert a government shutdown. In the next few weeks, President Obama will nominate the new Fed chairman; a global poll by Bloomberg reveals that Larry Summers is expected to keep a tighter monetary policy if elected and has a higher chance of winning compared to his opponent, Janet Yellen.

Second Half Gold Outlook

The London-based GFMS forecasts a lower gold demand at 2,237 metric tons in the second half of 2013 compared to 2,533 metric tons in the second half of 2012 due to the expected lower jewelry and bar purchases as well as reduced buying by the central banks. The GFMS expects the gold prices, which have declined 21% year-to-date, to move higher towards $1,500 from now until early 2014 and then decline afterwards. GFMS predicts that China’s gold purchases in 2013 are expected to exceed those of India by close to 100 tonnes.

What to Watch

The market will focus on the U.S. August industrial production on Sept. 16 and the U.S. August inflation data on Sept. 17 as well as scrutinize any new policy announcements in the FOMC meeting and the Fed’s press conference on Sept. 18. The market will likely watch for any renewed tensions from Syria as well as the U.S. budget negotiations

Planned Attack Sets Gold Up For Big Move

Posted by Toby Connor, GoldScents

on Thursday, 12 September 2013 19:04

AND IT BEGINS

As I was afraid would happen, gold suffered an overnight hit that drove it back below the $1350 support zone. The drop occurred in the span of one minute so it’s pretty obvious this was a planned attack with the intent of taking out that support zone in the thin overnight market when there would not be any buyers to defend the against the attack.

(Click Chart for Larger Image)

gold-one-minute-chart-1024x629

 

This has also broken the intermediate trend line which should take out all the technical traders as few will want to buy a broken trend line.

gold-IC-trend-line-1024x629

At this point I think we need to align our goals with those of the manipulators. This doesn’t mean selling short, but it does mean delaying gratification until the manipulation has accomplished its goal. That goal, I’m almost certain, is to setup the trade of the century. By lowering the starting point before the bubble phase of the bull market begins this manipulation is creating more and more profit potential once it ends and the bubble phase begins.
 
Yes, this entire debacle has stolen a load of money from those depending on freely traded markets. But this is also going to setup the conditions to make back all of those losses and many multiples more during the bubble phase of the bull. Instead of fighting the manipulation we just need to accept that it is happening and why it’s happening. Wait patiently until it’s done, and then get positioned to profit from it right along with the forces that have orchestrated this charade.
 
At this point I doubt we will get a cycle bottom until the FOMC meeting next Wednesday and maybe not until OEX next Friday. The bounce out of the daily cycle low I expect will fail to reclaim that $1350 resistance zone and gold will head back down to test $1179. At that point I think we can safely assume we will see another one of these overnight attacks to break that support. This will probably trigger a waterfall collapse back down to the prior C-wave top around $1030ish.
 
That’s the point where we will back up the truck as that is the logical level for shorts to cover and longs to enter in preparation for a final bottom and the beginning of the bubble phase.
So at this point I’m ready to cheer for the criminals running this scam because I know they are not only setting up the trade of the century for themselves, but I’m planning on taking advantage of it myself. Now we just have to be patient and wait for setup to develop.
 
I signaled an exit into strength last Tuesday and got subscribers out of the way of this attack. We are now sitting on the sidelines waiting for the manipulation to run its course and preparing to enter long once it has.
 
The $10 one week trial subscription is still available for anyone who is interested in trying the nightly premium report. There are still plenty of opportunities in the meantime while we wait for this to run its course.

 
POSTED BY AT 

Gold bulls have felt some jitters in recent days. But, over and over again in recent weeks, short-term dips have turned into buy spots. 

There are a bevy of fundamental factors on the near term horizon, which could prove gold supportive in the days ahead. The first is the U.S. Federal Reserve and whether will it taper — or not— at its Sept. 17-18 Federal Open Market Committee meeting. Recent data does not necessarily reveal the type of strong economic recovery the Fed has hinted it would like to see. 

Yet, the persistent and loud “broadcasting” of the Fed’s tapering intentions may leave the central bank in a position where it needs to at least initiate a small type of “token” tapering to maintain its credibility at the September meeting. Maybe a cutback by $10 billion per month in U.S. Treasuries and another $10 billion in mortgage backed securities. Get ready for tapering. It’s coming soon whether or not the data actually warrants it. But, that’s not the real gold story short term. 

Beyond the Fed’s actions, a renewed focus will shine on U.S. policymakers when Congress returns from recess next week. The debt ceiling debate will once again steal center stage as the U.S. government faces a potential shutdown. 

Brace yourself. House Speaker John Boehner is gearing up for a political battle over raising the nation’s $16.7 trillion debt ceiling limit this fall. Meanwhile, President Obama has repeatedly been quoted as saying he will not negotiate on the debt ceiling. 

The current “continuing resolution” which is basically a band-aid patched over a budget hole will expire on Sept. 30. Through some extraordinary juggling, however, experts see the U.S. government being able to operate into early November before a crisis will actually hit. Leadership in both political parties both know the costs of actual government default are too high to truly bear, but that won’t stop them from pushing the U.S. to the brink amid showmanship and the inability to compromise. 

Gold traders will remember that the last major political skirmish over the U.S. debt ceiling in the summer of 2011 was one of the factors propelling the yellow metal to its all-time highs at over $1,900 per ounce. That was the summer that Standard & Poor’s stripped the U.S. government of its AAA ranking. Recently, Fitch Ratings has warned it is taking into account the debt ceiling politicking in its review of its current U.S. rating. 

Does this mean a retest of the gold market’s high in the cards this fall? Probably not. But, the $1,490/$1,500 target is a bullish objective and could be within reach on a multi-week basis. On the chart, key technical support remains in the $1,350/$1351 zone. That level needs to hold to keep the overall near term bullish bias intact. 

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