This is a sample entry from Leslie Burton’s newsletter, The Weekly Gold Digger, published on Friday, May 16, 2014.
Gold has remained a popular hard currency, inflation hedge, deflation, safe-haven product and investment in recent years and as a way of diversifying risk as it correlates to a variety of markets. The catalyst for Gold at present may actually be deflation. It may trade inversely to the US Dollar and the Stock Indices as investors determine a risk-on or risk off environment. Gold has remained a standard for currency pegs as countries have held Gold reserves for years. The monetary policy also is highly correlated to the Gold as interest rates increase, the price of Gold may fall as investors look for the higher return or yield for their portfolio. The recent deficits in most of the major countries put the currencies under a great deal of pressure with the printing of money or quantitative easing. The more currency in circulation, the less the value. Gold remains the safety bid that people flock to in troubled times, when inflation is rampant and when other investments just seem vulnerable. We have become more aware than ever of the US weaknesses and the US Dollar has been challenged as the premier currency by world leaders such as China. Globally, the dollar is considered to have advantages in terms of currency manipulation as the other countries peg their currency to the dollar. Currency devaluation is one of the fears out there today. China and Japan had been main buyers of US Treasuries and the US Dollar as debt instruments. Recently, they have whittled down their US assets and have been accumulating Gold. Banks in China actually developed Gold Accumulation Plans with support of the World Gold Council so that investors could eventually take delivery if they so desired. The banks have about 17,125 branch offices with the GAP introduced to help the people build their wealth. They do keep their physical products separate from the paper assets. Projections from the World Gold Council have the Gold demand increasing in China 25% over the next four years. The population alone may more than double creating further demand without external factors. India had been the number one buyer of Gold until 2013 when China overtook them. 2013 was a robust buying year in Gold by the Chinese, but it is thought that 2014 may be more of a consolidation year. China may hold about 2.716 tons of Gold while the US may hold 8.812 tons. China, in previous years, had suffered the effects of hyperinflation leading many to hedge for future events. They believe that the US economic policies will someday destroy the dollar which would propel the Gold to new highs. China may have their own predicament with a potential credit crisis for which the Gold may also be of use. It had been used for gift giving for the Chinese Lunar New Year or Spring Festival and more recently Valentine’s Day and Mother’s day. Only the pure Gold would be considered investment grade. Now, it is believed that India’s import rules may ease allowing the country to catch up on the buying and importation of the Gold. Currently the import taxes are at 10%. They also have a rule that 20% of the Gold must be exported before further imports may take place. The weaker rupee may have been a driver for the strict policies, but now that the currency is a bit stronger, it is felt that the Gold could pick-up. The margin for the 100 troy ounce contract of Gold traded at the CME Group is being lowered to $6,600.00 from the $7,150.00. The maintenance or water level margins are therefore also reduced to $6,000.00. Back in February, it was rumored that the London Gold fix may have been manipulated by the banks. Now the regulators such as the Commodity Futures Trading Commission may be investigating the possibility. For now, the Gold is supported somewhat by the Ukraine unrest. It only makes sense to diversify into some Gold should the conflict escalate. The CFTC COT report showed the net longs increasing 14% to 102,895 futures and options contracts as of May 6th while the net shorts decreased 1.3% to 28,320.
The highlight of the day was the Housing Starts increasing 13.2% to 1.07 million annualized rate! Initially, the report did not really affect the market too much which may have caused some confusion. Later in the afternoon, the close was in the higher territory whether from the report or just profit-taking of the shorts. The bears may have been pounding their chests in the last couple of days, but a pullback does not make a bear market. Yes, there is always a turning point on every move, but next week, we could see a higher trade. After all, next week, US Chairperson Janet Yellen speaks and Wednesday is the FOMC Minutes which will lead to some speculation about that “tightening date”. Manufacturing has been strong, employment is gradually increasing and the consumer prices have been rising. Still, Yellen has referenced the “uneven” data, which may be another way of saying work in progress. Wages are slow to increase even as food costs rise. They uneven data have traders confused as to whether the recovery is expanding or contracting depending on the reports each day of the week. Earnings are mixed. It just depends on which ones are scheduled each day as small caps and internet shares have been what is pressuring the market. Valuations have been questioned. US Fed Chairperson Janet Yellen spoke to the Chamber of Commerce at the National Small Business Week event in Washington DC. Her speech again reaffirmed the Fed’s monetary policy tools are used to support the recovery. The accommodative stance attempts to keep interest rates low for households and businesses. She attributes about 85% of the Nonfarm payrolls employment to the private sector. She further acknowledged that the small business sector is responsible for so many jobs and the recovery in helping America grow! Her timing for any monetary policy changes still remain vague, unless we view her “about six months after the tapering ends” timeline. The National Federation of Independent Business’s Optimism Index increased to 95.2, the highest it has been in about seven years. The Retail Sales increased to $434.6 billion. It is clearly an uneven expansion, but may be setting up for a stronger second quarter. US Federal Reserve Chairperson Yellen finds that unemployment and inflation fall short of their target goals. The previous Federal Reserve Chairman, Alan Greenspan remarks that while inflation is not a threat at this time, it should not be taken out of the economic factors that may affect the global economy eventually. Cheaper goods make for happy consumers but inflation running low may lead to deflation which may slow the economy more. We have some divergence between the small cap and the large cap stocks as traders weigh in on value as opposed to growth. There are still concerns of uneven growth and the Ukraine situation is still looming. The shrinking US deficit in itself is a boost to the US as tax revenue is up perhaps which may keep interest rates down. The controlled government spending has also been a plus for the US deficit as it was a surplus $106.9 billion. The US Government spent $307 billion while taking in $414 billion. US Fed Chairperson Janet Yellen testified to the Senate Budget Committee last week with no decision on the central bank’s assets which consists of $4.5 trillion. She did mention that the portfolio should be reduced once the Fed decides to raise the near zero interest rates. The US Federal Reserve has not purchased or sold the US Dollar to increase or decrease the foreign-exchange rates in the first quarter. The end of the first quarter, foreign currencies held by the Exchange Stabilization Fund was at $21.88 billion. The European Central Bank (ECB) had $407 million with the dollar swap system with the Fed. While the US is tapering and contemplating tightening, the ECB is contemplating quantitative easing to thwart deflation. ECB President Draghi will be taking into consideration some incoming economic forecasts. His comments from Brussels last week emphasized the high degree of monetary accommodation maintained and the ability to act swiftly if required. The Consumer Credit advanced $17.5 billion. College tuitions and auto purchases increased to $16.4 billion while the revolving credit cards increased $1.1 billion. The service sector report exceeded all expectations showing expansion in construction companies, retailers, restaurant, transportation, agriculture and mining to name a few! The report not only confirmed again that the weather was the total reason for the contraction over the winter months. The April Employment report had shown that 288,000 new jobs were created last month which is a high point for the last two years. The last jobs report had 192,000 jobs created in March. The problem is that the labor force contracted to 806,000, so there are just less people looking for jobs. It could be the baby boomers going for early retirement or just discouraged job seekers giving up. The Unemployment Rate came in at 6.3% in line with the Fed’s expectations for the recovery to coincide with their tapering. The Professional type jobs increased by about 75,000 although about a third were temporary and some may be part-time. The Retail business added 35,000 jobs. Entertainment type such as bars and/or restaurants increased by 33,000 new workers. Construction added 32,000 employees. Manufacturing added 12,000 and last of all the US Government added 15,000. Temporary workers increases by 54,000. The Average Hourly Wages remained at $24.31 which does not generate consumer spending. The workers leaving the workplace also means that production does not increase with so many gone. Of course, many will be lower paying jobs. Low-wage jobs accounted for about 44% of jobs over the last four years. Mid-wage jobs accounted for about 26% growth. High-wage jobs accounted for about 30% of growth. The sanctions imposed on Russia have snowballed enough to affect the European Nations along with the Ukraine.
The havoc in the Ukraine still persists! The elections on May 25th should calm the conditions, yet there are concerns that the voting may be tainted due to possible intimidation tactics and actual attacks. The people of the Ukraine may encounter some major problems as they may have to declare Russian citizenship. Companies like Boeing Co. (BA) do business across the globe including Russia where the sanctions are weighing in. Boeing executives must use a great deal of discretion as they must skip talks in St. Petersburg. It puts them in a spot as they transact about $140 billion in jetliners with Russia. They are set to deliver about 57 aircraft to Russia in 2014 and 2015. Boeing Co (BA) and Lockheed Martin Corp. (LMT) are involved in a joint venture, the United Launch Alliance LLC which is contracted by the Pentagon for the US. Musk Space Exploration Technologies Corp. is involved in the fray. Russian President Putin has helped with the Iranian nuclear program as the country remarks that the use of uranium at high levels is for medical purposes only while the level may be further developed for nuclear bombs. The talks are targeting a July 20th target date accord. The Slovak Prime Minister Robert Fico reported that Russian President Putin has cut the gas supply to the Ukraine officially as of June 1! Russia has received sanctions on 45 individuals. Russian investors have countered by reducing US Treasuries by 20%. They actually could have simply shifted custodians to perhaps Belgium in fear of potential asset freezes. Russia’s GDP only increased 0.9% in the first quarter confirming the slowing economic growth. The Ukraine has sunk into the civil war that continues to undermine global expansion at every turn. With the unrest, it will be difficult to hold a legitimate elections. Russia is still held as the culprit behind the conflict although the Russian President declared that he was pulling his troops from the Ukrainian border. Prime Minister Arseniy Yatsenyuk states that to resolve the conflict that an international conference in Geneva with the participation of the countries such as Russia, Ukraine, US and UK would be necessary. The election is also regarded as potentially stabilizing to the crisis. The European Bank for Reconstruction and Development assessed Ukraine’s growth expecting about a 7% contraction this year. Russia is imposing their own sanctions! They stated that they will no longer export the rocket engines to the US for launching US satellites. The Russian engines may be used to launch the civilian payloads. G-7 leaders next meet in Brussels on June 4th and 5th. As Russia engages the affairs of the Ukraine more sanctions may be imposed. Russia may indulge in their gas/energy monopoly with the Ukraine demanding a prepay going forward. Russia is seeking prepayment on the gas as the $3.5 billion owed is still unrecovered. The Ukraine has received aid yet has not dispersed any of the funds to Russia. The Ukraine has borrowed about 1.8 billion so far which may not come close to being enough money to sustain them. A sustainable recovery for the Ukraine seems very far away. Countries are moving away from trading with Russia in light of the sanctions imposed where the energy purchases may be made from other sources. With the freezes on assets, Russia has sought sanctuary in Swiss Banks in 2012 of about 13.8 billion Swiss Francs according to the Swiss National Bank. Russian President Putin gains the support of his people by seizing Crimea with a vision to restore the previous empire. The Geneva Accord was to disarm the Pro Russian rebels and exit the area. The rebels have a different plan in mind as they attempt to take over buildings and respond with firepower claiming to have the upper hand. The Ukraine is not a NATO Member leaving the commitment vague in terms of US support. Surveys point to Americans wanting to distance the US from situations abroad. The Russian sanctions are increasing and so far, Russia has remained fairly unresponsive. The sanctions really focus on Putin’s inner circle with freezes on assets and visa bans. There is still the fear of retaliation especially as an unknown factor since Russia has a great deal of control in the Crude Oil area. The agreement signed in Geneva by the US, Russia, the European Union and Ukraine was to disarm the rebels. Russia stands by their right to protect Russian citizens according to the Geneva agreement. No one wants a military resolution, so the US and allied countries are attempting to increase the sanctions against Russia. Russia is already suffering with a weak Ruble and some lackluster data. Any further bloodshed may cause the conflict to escalate. Diplomacy is vital among the leaders of these nations to look for an accord for the benefit of life as we know it. The powers have strong backing in allies, both the US and Russia, so any further gas on the fire could ignite a conflict that no one wants to imagine. The Russian borders and Crimea have been close with many of its people Russian born. The vote was in favor of Crimea to secede and ask the Russian Federation for Membership. Crimea had belonged to Russia back in the 1954 until Nikita Khrushchev had given the Black Sea region to the Ukraine. Russia is experiencing the punishing effects of the sanctions as the sovereign wealth funds had outflows. Global leaders still regard Russia’s action as grabbing a country for benefits perhaps derived from the resources of the region. World leaders are intent on watching Putin to be sure his “annexing” stops at Crimea! British Prime Minister David Cameron regarded this action as a breach of international law. Sanctions may be imposed on Russia still yet regarding this action such as travel bans and financial sanctions. About $5.5 billion of outflows have already transpired this year in Russia in light of the sanctions. US sanctions have already stopped the Visa and MasterCard services at the Bank Rossiya in St. Petersburg. The sanctions have already had an impact on Russia as Fitch’s credit rating agency has cut the outlook to BBB negative. Loans have been called in and gold reserves have fallen to $493.2 billion as of March 14th. Asset blockades, financial and trade sanctions have all been suggested. Putin may pay about $3 billion ++ costs to annex Crimea. The problem seems to be a history of violating international boundaries for the Russian President. Putin retorts that the US and NATO have come close to the Russian borders. The currencies have become extremely volatile especially for the ruble and the Hryvnia. Russia is also set on building the relationship with China. China has been one of the only countries holding loyalty to Russia and not condemn the country for the Crimea situation. China has further stated that they do not believe that the sanctions do any country any good. China is a superpower that will matter and Russia wants to use that strength. China’s economy has contracted recently and may continue. Russia is pursuing Chinese investments to offset the effects of the sanctions. Putin is looking for financing from the second largest economy. As Putin organizes projects such as bridges, China may wish to participate. Russia and the US had fought on the same side during WWI and WWII yet tensions still run very deep. US Secretary John Kerry and European Union foreign policy chief Catherine Ashton met in Geneva to discuss a disarmament in the Ukraine of all illegal armed groups. US Vice President Biden warns Russia that time is short for action to dissolve any potential conflict. Pro-Russian militia occupying areas in the eastern Ukraine do not consider to be part of any deals reached by the US, Russia, Ukraine or EU. Russian troops seized the Crimean port of Sevastopol raising their flag. Russia’s take-over of Crimea will perhaps consist of pension adjustments up to the Russian pensions, raises, infrastructure upgrades such as quite possibly a bridge and a tunnel. The EU may proceed to lighten imports of natural gas from Russia. It is interesting that both the US and Russia may show their military strengths, yet no further move is acted upon. This is playing with fire as any potential mistake could cause an all-out war. No wonder we have a nervous marketplace.
Today, the Housing Start for April were at 1.072 million while the previous reading was 0.946 million. The Housing Permits were 1.080 million while the previous reading was 0.990 million. The Consumer Sentiment for May was at 81.8 while the previous reading was 84.1. The Initial Jobless Claims for the week of May 10th were down 24,000 at 297,000 while the previous reading was 319,000. The Continued Jobless Claims with a week lag time was down 9,000 to 2.667 million. The Consumer Price Index for April was at 0.3% while the previous reading was 0.2%. The CPI excluding food and energy was at 0.2% while the previous reading was 0.2% unchanged. The Empire State Manufacturing Survey for May of General Business Conditions Index was at 19.01 while the previous reading was 1.29. Industrial Production for April was at -0.6% while the previous reading was 0.7%. The Capacity Utilization Rate was at 78.6% while the previous reading was 79.2%. The Manufacturing portion was at – 0.4% while the previous reading was 0.5%. The Philadelphia Fed Survey of General Business Conditions Index for May was at 15.4 while the previous reading was 16.6. The Treasury International Capital of Foreign Demand for Long-Term US Securities for March was $4.0 billion while the previous reading was $85.7 billion. The Housing Market Index for May was 45 while the previous reading was 47. The E-Commerce Retail Sales for Q1:14 was 2.8% while the previous reading was 3.4%. The PPI for April came in at 0.6% while the previous reading was 0.5%. The PPI excluding food and energy was at 0.5% while the previous reading was 0.6%. The PPI excluding food, energy and trade service came in at 0.3% unchanged. PPI Goods came in at 0.6% while the previous reading was 0.0%. The PPI Services came in at 0.6% while the previous reading was 0.7%. The MBA Purchase Applications Composite Index for the week of May 9th was 3.6% while the previous reading was 5.3%. The Purchase Index came in at -1.0% while the previous reading was 0.0%. The Refinance Index was 7.0% while the previous reading was 2.0%. The Atlanta Fed Business Inflation Expectations for May was 1.9% unchanged. The NFIB Small Business Optimism Index for April came in at 95.2 while the previous reading was 93.4. To learn more information on the NFIB site at http://www.nfib.com/surveys/small-business-economic-trends/. Retail Sales for April came in at 0.1% while the previous reading was 1.1%. The Retail Sales excluding automobiles came in at 0.0% while the previous reading was 0.7%. The Retail Sales excluding automobiles and gasoline came in at – 0.1% while the previous reading was 1.0%. The ICSC-Goldman Store Sales for the week of May 10th came in at -0.1% while the previous reading was -2.0%. Redbook Store Sales came in at 4.2% while the previous reading was 4.4%. Import Prices for April came in at – 0.4% while the previous reading was 0.6%. Export Prices for April came in at – 0.1% while the previous reading was 0.8%. Business Inventories for March came in at 0.4% while the previous reading was 0.4% unchanged. The Treasury Budget for April was $106.9 billion while the previous reading was -$36.9 billion. The last GDP was 0.1% annual rate from January thru March. The Nonfarm Payrolls for April came in at 288,000 while the previous reading was 192,000. The Unemployment Rate was 6.3% while the previous reading was 6.7%. The Average Hourly Earnings was unchanged at 0.0%. The Average Workweek was 34.5 hour unchanged. The Private Payrolls was 273,000 while the previous reading was 192,000.
This is where the long-term safe-haven qualities must be viewed to determine the true value of Gold. It is not the type of commodity that is typically day-traded. Its true purpose is as a currency when others are devalued. It is a hedge against inflation and even more deflation. It is a backup plan for a world in conflict or crisis. It is the type of investment that one may not need all the time but when an event takes place, it is worth its weight in Gold.
The Gold (June) contract is in sell mode if it stays below $1312.80. It could retrace back up to $1392.20 depending on the Ukraine situation and the economy. A key consolidation area may be $1323.40. The range may be $1275.00 to $1325.00 for now. Should Russian President Putin become ambitious to acquire additional annexing of the neighboring regions, nuclear talks begin to fail, the economic reports detect a contraction of growth in the US and/or a slowdown in China all could spur positive price action in the Gold market back to the old highs or above. Unless the Ukraine situation is resolved, the Gold should spike possibly to the old highs and beyond. Russian President Putin seems to be displaying words of peaceful resolution while visiting Crimea to stir tensions. He walks a fine line between the skirmishes.
The options may give a trader the right to control a futures position at a specific price or to simply profit/loss on the premium itself. It is suggested to consult your broker without delving into options if you are unfamiliar with them.
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