The Weekly Gold Digger (Jun 18 2013)

The gold market should be in demand as a hard currency, but it simply has been pressured by the allocations from investors spreading into the Stock Indexes and many other products. The strength of the US Dollar puts pressure on the gold market while the tapering of the quantitative easing should increase the strength of the dollar. The Fed’s easing has prompted the rally in the gold market in the previous time-frame, propelling it about $1800.00. With the potential withdrawal of easing, the allocation may flow into other assets.

For now, gold is trading like a commodity, not a safe-haven or a hard currency. The main buyers of gold, China and India, have backed away somewhat. China is in a slowed growth period and India’s rupee is weak, making gold even more expensive. Indian import tax has increased to 8%, further limiting the purchase of gold. The Central Bank of India has even put restrictions on gold purchases. According to the World Gold Council, in 2012, the top global gold consumers were: India which used 864.2 tons, Vietnam used 77 tons and China used 776.1 tons. These statistics make it seem highly unlikely that the price of gold remain low.

The August Gold may trade in a range for the near-term unless it drops below $1323.00. Once it takes out the previous low, then perhaps $1250.00 is possible. The inflation target of the Fed is 2.0% and we are well away from it again, pressuring the gold. In order for gold to begin an uptrend, factors would have to line up. It must break through $1425.00.

• Inflation would have to accelerate.
• The economy would have to worsen.
• The Fed would continue or increase the easing and become ultra-accommodative.
• The European Central Bank (ECB) would increase their monetary stimulus.
• The central banks would have to bump up buying.
• The speculator would have to regain confidence in the gold market.

The data is showing signs of recovery, but not enough to convince the trading community that the US has mended and that it will not backtrack. In a stimulus driven market, all eyes turn to the Fed next week to see what clues may be hinted regarding monetary policy during the Tuesday-Wednesday meeting next week. While most do not believe that any major monetary policies could be changed this soon, it is the unknown factor that keeps the volatility in the market and the potential element of surprise. The International Monetary Fund (IMF) warns that if not dealt with properly, the “tapering” may have some risk in the unwinding. There virtually are no inflationary fears and yet the easing cannot continue indefinitely.

Today’s Industrial Production for May was 0.0% while the previous reading was -0.5%. Capacity Utilization was 77.6% while the previous reading was 77.8%. The Manufacturing portion was 0.1% while the previous reading was -0.4%. The Producer Price Index (PPI) for May was 0.5% while the previous reading was -0.7%. The PPI excluding food and energy was 0.1% unchanged. The US Consumer Sentiment for June was 82.7 while the previous reading was 84.5. The current account for the first quarter of 2013 was -$106.1 billion while the previous reading was -$110.4 billion. The current account is a measurement of international trade balance in terms of goods and services, both imports and exports to monitor foreign trade. The US Treasury International Capital for April was -$37.3 billion while the previous reading was -$13.5 billion. This indicator of US Securities tracks the allocations of financial products in and out of the country. The US Initial Jobless Claims came in at 334,000 down 12,000 giving the marketplace a boost. The previous reading was 346,000. Retail sales for May came in at a 0.6% increase while the previous reading was a 0.1% .

The Bloomberg Consumer Comfort Index Level was -31.3 while the previous reading was -29.7. The Business Inventories for April was up 0.3% while the previous reading was 0.0%. The rally that we have seen through the end of May possibly was Fed induced as Federal Chairman, Ben Bernanke, had stated on May 22nd that the stimulus, due to better data, may be tapered sometime in the future. The volatility has been an advantage to many traders who bought on the dips and took profits on the spikes. This has been a risk-on environment with the support of the Fed. The Fed meeting next week convenes June 18-19, and while traders are not looking for a monetary policy change or “tapering” at this particular meeting, they are looking for cues to signal the ‘when’ factor. This may be a bit sticky as the Fed Chairman is due to retire within the next six months.

The US government has posted a $139 billion budget deficit in May and is still expected to trim again. The smaller deficits are taking a bit of pressure off the leaders, particularly due to the Standard & Poor’s Credit rating boost of Monday. The MBA Purchase Applications Composite Index for the week of June 7th were 5.0% while the previous reading was -11.5%. The Purchase Index portion of the report was also 5.0% while the previous reading was -2.0%. The Refinance Index portion of the report was 5.0% while the previous reading was -15.0%. The Wholesale Trade Inventories for April were up 0.2% while the previous reading was 0.4%. The NFIB Small Business Optimism Index Level for May was at 94.4 while the previous reading was 92.1. The ICSC-Goldman Store Sales for the week of June 8th was -2.7% while the previous reading was 1.9%. The Redbook Store Sales for the week of June 8th was at 2.8% while the previous reading was 2.9%.

Last week, US Nonfarm Payrolls came in at 175,000, right on the money as far as expectations, but no closer to an answer on any Fed moves. The number confirmed that the US is on track for the recovery, but we need possibly 200,000 for four consecutive months to establish a stable job growth according to two prior Fed economists. The Unemployment Rate moved up as a matter of fact from 7.5% to 7.6%. The Average Hourly Earnings were at 0.0% or $23.89 while the previous reading was 0.2%. The Average Work Week was 34.5 hours while the previous reading was 34.4 hours. The Private Payrolls was 178,000 while the previous reading was 176,000. The US Manufacturing Payrolls were down 8,000. This all makes it debatable as to whether the easing is necessary, but it seems the Fed is not totally comfortable with pulling the plug quite yet. US Consumer Credit for April was at $11.1 billion while the previous reading was $8.0 billion. Non-revolving credit, such as student loans and auto purchases, were up $10.4 billion. Revolving credit, such as credit cards were up $682.3 million. Consumer spending reflects about 70% of the GDP.

While the US data points to potential growth, there is still the slowed growth in China and potential recession in the Euro Zone to contend with. So far the US has shrugged off a great deal of negative sentiment, but was it due to the Fed? World Bank had stated that the global economy will expand 2.2% in 2013. The move down this week may have been the reality of the easing days coming to an end as the Bank of Japan had left the monetary policy as is in their meeting this week.

The US Dollar and the Stock Indexes seem to be highly correlated and extremely responsive to any conversations related to the quantitative easing. This market has become addicted to stimulus and the reality of the Bank of Japan holding off on any additions to their stimulus brought home the idea that the day of the easing may be closer to an end than we may expect. Bank of Japan’s Governor, Haruhiko Kuroda, kept the $60 trillion-yen to $70 trillion -yen in place for the annual monetary base reasoning that the bond markets have stabilized. He also stated that the central bank will discuss longer funding operations as necessary. The hopes that the central bank would continue to advance its ultra-low interest rates to banks got quelled.

Traders have grown accustomed to the soft cushy words of support and easing from the Fed, the European Central Bank and the Bank of Japan. The markets were also thrown from the German constitutional court considering the legality of the European Central Bank (ECB) buying government bonds from the weak nations in the Euro Zone. The actual statement will take place around September 22nd. Some say that the ECB is independent and others say that the ECB has overextended its mandate. The concern is that Germany has bared the brunt of the ECB decisions to date, shouldering quite a bit of the debt. There was talk of a new “bond” introduction of the “Deutschlandbond” in July. If this turns out to be successful, more such ventures should transpire as well.

The European Central Bank’s (ECB) meeting had held to the previous rhetoric that the ECB will stand by the Euro FX and do whatever may be necessary to stabilize the Euro Zone. ECB President, Mario Draghi, has ruled out the negative overnight deposit rates for now. The ECB held interest rates at 0.50%. Draghi further felt that the Euro Zone would probably return to growth by year’s end.

The Standard & Poor’s credit rating agency had downgraded the US in August of 2011, and now almost 2 years later, adjusts the rating from negative to positive thus reviving the tarnished outlook of the US. The loss of the AAA rating was horrific, creating quite a selloff in the market place. The boost in the labor numbers may have helped but more importantly the unified way that the US has dealt with such things as the fiscal cliff and the slow but steady expansion may have been more influential. The S&P may be focused on economic growth more than the austerity limitations within the US. Stability is the key word and the US strives for it.

At the current level of inflation, the Fed has no pressure to pull-back on the quantitative easing quite yet. It is possible for the “tapering” to begin sometime between September and December due to the improvements in the US economy. The Fed had stated that their targets for “tapering” would be a 6.5% unemployment and/or a 2.5% inflation rate. Former US Fed Chairman, Alan Greenspan, has been outspoken in his insistence that the Fed withdraw the stimulus due to the impact it may have on the country later. It is highly unlikely that anything would change at this June meeting. Fed meetings to follow are scheduled for: July 30-31 and September 17-18. If the Fed stays true to form, they may begin the tapering after achieving either of their targets! One must remember that tapering may not go hand in hand with tightening. The Fed will be walking a fine line to insure market stability and continued growth. It is difficult to project whether the tapering could begin before or after Fed Chairman Ben Bernanke leaves his post. China is also pointing to a slowdown through their economic reports. This market has shrugged off “the fiscal cliff”, slowdowns in China, the sequester, the Euro Zone crisis and potential world conflicts which would point to stability and growth with a healthy recovery. This has not been overlooked by the Standard & Poor’s Credit rating agency as the US outlook was taken from negative to positive.

Gold may hold at the current level or possibly trend between the $1323.00 and $1488.50 range before finding some support. Next week may determine the trend for gold, but it still needs to come back through $1500.00 to gain any traction.

While reaping the rewards of being a gold trader, one must be sure to use stops and money management to stay in the game! Retracements are possible. While I remain very bullish still – use stops – live to trade another day!

Gold

The Sample Trade:
Buy December Gold 2013 1800 Call for 20.00 or better! It is currently at $160.00. This was begun on the last Gold Digger Alert!

The risk on the trade would be $2000.00 plus fees and commissions. The profit potential is unlimited and the expiration is November 25th 2013.
Please call or email me for the complete recommendation to coincide with your risk tolerance, so that we may apply the correct Money Management. The Weekly Gold Digger is a Free Weekly subscription to receive trading opportunities by email along with fundamental commentary and basic technical points of interest.

Take a close look and feel free to call in and talk to me in greater detail. It would be my pleasure. Good trading!

Call me at (877) 224-1952 or email me at lburton@danielstrading.com