This is a sample entry from Leslie Burton’s newsletter, The Weekly Gold Digger, published on Friday, June 06, 2014.
The Bright Economy Dims the Luster of Gold!
The Gold market has been the background safety net for the market. Yet with European Central Bank’s Draghi yesterday and the US Employment report of today, it appears that the future of Gold may be bleak. Yet the technicals actually look to be supportive of the Gold! Market sentiment has viewed the Gold negatively pressuring the market back to the lows. Russian President Putin is expected to resolve any issues with the newly elected President of the Ukraine. The US weak data has been viewed as a fluke, transpiring from the harsh winter weather blanketing the country over the last few months. As the stock indexes climb, the allocations will possibly continue to favor the equities and pressure the Gold. A bounce would not be out of the question, but the bears are in control for the most part at this time. The Gold SPDR ETF’s have been reduced to 785.28 metric tons as of May30th. The Gold ETP holdings contracted to $2.6 billion in May. The Gold may simply follow the Euro FX lower.
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 demand in India could potentially increase to 1,000 tons this year. Thailand may purchase possibly 150 to 200 metric tons given the lower prices of Gold. 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. Barclay’s Plc. has been issued a fine of 26 million pounds for price manipulation of Gold. One of their traders fixed an erroneous price on the Gold with intentions to defraud a client. This goes back to June 28th of 2012, yet in the cases of scams or fraudulent actions, it is vital to retrieve all relevant information to complete the case file. These cases sometimes take years to put together. This is not Barclay’s first case of manipulation. They have been cited in others. In the financial world, reputation is everything, so this is a mark against the firm. The actual Gold fix is derived by a bank matching the buy/sell orders twice a day by phone. For now, the Gold could be somewhat supported by the Ukraine unrest.
The mixed data has turned quite positive in recent days with the US Employment showing that 217,000 new jobs had been created last month. Health care added 55,000 employees. Restaurants and bars hired 32,000. Transportation increased workers by 16,000 jobs. Construction added 16,000 new jobs. The US AA+ credit rating has been confirmed by the Standard & Poor’s credit rating agency. August 2011 was the downgrade by Standard & Poor’s that was responsible for taking the market down to AA+ from the AAA rating. Moody’s and Fitch Ratings have kept the US as AAA rated. Consumer Credit for the month of April was reported as $26.8 billion in total credit. The non-revolving credit portion increased by $18 billion which mainly consists of auto loans and school loans. The revolving credit advanced by $8.8 billion. The Fed next meets June 17th and 18th to review policies and the bond purchases. US productivity was down 3.2% in the first quarter attributed to the severe weather conditions that impeded growth and kept consumers homebound. Consumer spending did expand along with manufacturing. Housing has turned into the weakest link with inventory slight and tightening on home loans. Home prices were increasing with condo and apartment sales showing some strength. The ISM Non-Manufacturing reported increased sales. The Beige Book showed the pace of growth as “moderate” though the harsh weather was still factored in with projections of stronger data to come in the following quarters. All the data while mixed did support the Fed’s pace on tapering. Demand should increase along with consumer spending therefore prompting further productivity. Motor Vehicle Total Sales was at 16.8 million annual rate above the forecasts of 16.1 million annual rate. GM increased sales by 13% last month. Ford Motor was up 3%. Toyota was up 17%. Kia was up 15%. Hyundai was up 4%. Audi was up 26%. The incentives were increased to buoy the sales. TrueCar estimates the average increase of incentives was up 3.5% from the previous month.
The European Central Bank (ECB) met on Thursday where ECB President Draghi cut the deposit rate to – 0.1% with targeted offerings to banks as well to increase liquidity. This increases the possibility that the banks will keep cash at the central bank. This is to encourage more lending even with banks that are typically risk adverse. Euro Zone inflation had decreased to 0.5% last month from the April 0.7%. The Markit Purchasing Managers Index increased to 53.2 from the previous reading of 53.1. The Euro Zone GDP decreased to 0.2% while the previous reading was 0.3%. Draghi’s package is projected as aggressive, therefore investors may have a preference to the bonds from the Euro Zone as opposed to the US.
The G-7 Nations summit was all about an assessment of energy resources that may not depend so much on Russia. This was prompted by Russia’s move into Crimea. This will promote further moves toward climate friendly alternative fuels. As of the election, Petro Poroshenko is the elected official of the Ukraine. His openness to speak to Moscow is a welcome development which may just decrease any conflict. Putin is attempting to avert further sanctions in his quest for peaceful cooperation. It is thought that the sanctions may cease with the new developments. The Ukraine President is nicknamed the “Chocolate King” for his business in the confectionary sector. He had been the head of the parliamentary budget committee but had been accused of misplacing funds. A great deal of hope has been placed in the new President in the negotiations with Russia. They met in France during the D-Day commemorations. US President Obama also met with the Russian President during the D-Day celebrations. The US and Russia had fought side by side during WWII. They are to discuss some sort of cease fire in the coming days. Russia and the Ukraine are closer to a deal on the gas plan as the smaller country has a debt that needs to be paid. The Ukraine’s state energy company transferred about $786 million to Russia’s OAO Gazprom (OGZD) to pay for some of the arrears in the previous deliveries. Russian President Putin had considered Viktor Yanukovych as the legal president of the Ukraine. The International Monetary Fund (IMF) seems to be backing the Ukraine so that the potential for defaults would be null. The global concerns has worries about a possible monopoly with the Russian energy products and Russia is concerned about its global ability to sell its products. The World Bank projects the global GDP at 3.2% compared to the previous forecast of 3%. Factory growth has increased in China easing concerns over sluggish growth concerns.
The Nonfarm Payrolls for May was at 217,000 while the previous reading was 288,000. The Unemployment Rate was at 6.3% while the previous reading was unchanged at 6.3%. The Average Hourly Earnings was at 0.2% while the previous reading was unchanged at 0.0%. The Average Workweek was at 34.5 hour unchanged. The Private Payrolls was at 216,000 while the previous reading was 273,000. Consumer Credit for April was at $26.8 billion while the previous reading was $17.5 billion. The Initial Jobless Claims for the week of May 31st came in up 8,000 at 312,000 while the previous reading was 300,000. The Gallup US Payroll to Population for May was 44.5 while the previous reading was 43.4. The Challenger Job-Cut Report for May of announced layoffs were 52,961 while the previous reading was 40,298. Chain Store Sales were difficult to analyze particularly with this year’s Easter and the weather factor. The Bloomberg Consumer Comfort Index for the week of May 30th was at 35.1 while the previous reading was 33.3. The Fed Balance Sheet of Total Assets for the week of June 4th was up $8.3 billion. The Reserve Bank Credit was $0.3 billion. The Money Supply for the week of May 26th was $36.1 billion. The ADP Private Payroll Employment for May came in at 179,000 while the previous reading was 220,000. This report is sometimes viewed as the precursor for the Employment report on Friday. The Gallup US Job Creation Index for May was 27 while the previous reading was 25.0. The Nonfarm Productivity for Q1r:14 was -3.2% while the previous reading was -1.7%. The Unit Labor Costs was at 5.7% while the previous reading was 4.2%. International Trade Balance Level for April was at -$47.2 billion while the previous reading was -$40.4 billion. The ISM Non-Manufacturing Index for May was 56.3 while the previous reading was 55.2. PMI Services Index for May was 58.1 while the previous reading was 55.0. The Beige Book came out today characterizing the pace of growth as “moderate”. MBA Purchase Applications for the week of May 30th Composite Index was -3.1% while the previous reading was -1.2%. The Purchase Index was -4.0% while the previous reading was -1.0%. The Refinance Index was -3.0% while the previous reading was -1.0%. The Motor Vehicle Sales for May Domestic was at 13.3 million while the previous reading was 12.8 million. The Total Vehicle Sales was at 16.8 million while the previous reading was 16.0 million. Factory Orders for April was at 0.7% while the previous reading was 1.1%. Factory inventories increased 0.4% from the previous month. The ICSC-Goldman Store Sales for the week of May 31st was 2.9% while the previous reading was -1.2%. The Redbook Store Sales for the week of May 31st was 3.5% while the previous reading was 3.2%. The Gallup US ECI for May was -$14. The PMI Manufacturing Index for May was 56.4 while the previous reading was 55.4. The ISM Manufacturing Index for May was 55.4 while the previous reading was 54.9. The Gallup US Consumer Spending Measure for May was $98 while the previous reading was $88. The Construction Spending for April was 0.2% unchanged from the previous reading.
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 $1272.50. A key consolidation area may be $1318.90. The range may be $1225.00 to $1325.00 for now. Some Analysts seem, to be fairly bearish toward the Gold into next week so in the back of everyone’s mind, we could see $1050.00 again.
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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