The Weekly Gold Digger (June 27 2014)

This is a sample entry from Leslie Burton’s newsletter, The Weekly Gold Digger, published on Friday, June 27, 2014.

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The US Dollar is in a downtrend yet the Gold remains in a consolidation. The US Dollar under pressures is supporting the Gold at this point.

Inflation has just reared its head and now the uptrend has the potential to become a momentum trade. While Gold is considered a monetary asset, like a currency, it is not able to be devalued as the currencies. Technical buying could potentially boost this market out of that $1330.00 resistance. US Fed Chairperson Janet Yellen’s words maintained the accommodative stance which feeds the Gold market. Bullard, on the other hand projected tightening sooner than anticipated which is to the detriment of the Gold market. The Gold market has been the background safety net for the marketplace as insurgents assault the Iraqi government capturing a city in Iraq. The city of Mosul was taken which is located near the oil fields. The fear and uncertainty in the economic community are a boost to Gold. 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. China seems to be consuming about 5.15 million ounces per month. 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. Chinese demand may have softened with today’s higher prices. The Shanghai Gold Exchange is to begin their international bullion contracts traded in Yuan in the third quarter.

India is thought to consume about 2.85 million ounces per month of Gold due to the tariffs imposed by the government. 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 US Mint sales in the month of May had contracted to 35,500 ounces. 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. Hedge funds and money managers are said to have increased their bullish positioning by 30% in the week of June 17th. 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 ETP holdings decreased 1,713.1 metric tons as of June 19th.

Next week is a short one with the fourth of July holiday next Friday. We have abbreviated trading on Thursday and the next big Unemployment Report due out that morning. Nothing like light volume and a major report to move the market around. We may expect some spikes or exaggerated moves. While we could experience a higher E-Mini S&P 500, it becomes even more fragile in next week’s environment which could be to the benefit of Gold. Seasonally, we remain bullish typically until after the first week of July in the indices. As traders, we may spend about 3% of our time on the fundamentals and 97% on charting patterns. Monday, we also conclude the quarter with about $20 billion coming out of the equities due to the rebalancing of portfolios. It is the process of realigning the weightings of one’s portfolio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation. Any drop in the indices would be the teeter totter effect to the benefit of the Gold market. US Fed Bank of St. Louis President James Bullard forecast that the interest rate increase may happen sooner than later. He predicted that the rate hike may take place in the first quarter of next year due to unemployment and inflation targets in sight.

Chairperson Janet Yellen’s commitment to monetary stimulus for as long as necessary and her emphasis on the Fed Funds Rate staying low for a “considerable time”! She carefully stressed that there is no mechanical formula for the first rate increase. She did confess that the monetary policy is data dependent. Before she had disclosed that tightening may begin in as little as six months once the tapering is finished. The market sentiment is that the economy may look much healthier in the second half of the year. The Fed has increased its balance sheet to $4.3 trillion to spur economic growth. This was a Fed led rally to begin with, so what the Fed gives, they may take away. GDP had that knee jerk effect on the market as it was below expectations at a contraction of 2.9%. The market continued to want to believe that the inclement weather still created the contraction, but that the second quarter would be in expansion.

Market stress has been analyzed in terms of deflation and inflation, but what about stagflation? If we reach a point of high inflation, high unemployment and low economic growth, will the Fed be able to address the impact. With the higher inflation, we would need higher interest rates which impedes growth. A vicious cycle could occur, so next week’s Unemployment may be regarded as vital for the indexes to continue their trend. Durable goods also came in weaker at -1.0%. The Fed has been occupied with tapering while other parts of the world are still easing. The mixed data has turned quite positive in recent weeks 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. Next week’s report may be expected more like 215,000 to 245,000. 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. The International Monetary Fund (IMF) lowered the US forecast for growth this year from 2.8% to 2.0%. It is thought that IMF Managing Director Christine Lagarde based the cut on the harsh winter weather blanketing the US over the first quarter. Lagarde had further encouraged the more labor friendly tactics such as increasing the minimum wage and strengthening the Earned Income Tax Credit. She further has recommended that the European Central Bank (ECB) consider an all-out quantitative easing program to boost the inflation out of the lows. The World Bank lender projections for global growth of the US were downgraded. They projected global growth at 2.8% expansion rate this year while the previous forecast was 3.2%. The projection for 2015 was left at 3.4% unchanged. It was thought to be lowered due to the Ukraine conflict and the inclement weather conditions in the US creating the mixed data. The projections going forward into next year are felt to be about expansion. The Fed has accumulated a portfolio of housing debt around $1.6 trillion. By default, there is no contender to the stock products.

The Grand Ayatollah Ali Sistani has demanded that the leaders select a prime minister by Tuesday! Nuri al-Maliki has been the Prime Minister of Iraq since 2006. The US had funded a million troop military investing about $25 billion to train and equip the troops. After the overtaking of Mosul earlier this month, the military somehow was whittled down. They are close to being the biggest oil exporter, so the US has protected that relationship. Some three years ago, US intervention has seemed to resolve any potential problems in the area. It even seemed as though an ally providing quantities of energy was an attribute to the US, yet somehow Sunni Islamic militants have stepped in to create civil unrest. They have threatened to divide the country and create their own jihadist state.

US President Obama has considered airstrikes to aid the Iraqi government. US President Obama has sent about 300 military advisors to support the Iraqi government troops. He has stressed that the US would not be sending troops to shed the blood of Americans on Middle-Eastern soil, but only strategists to aid in the intelligence and planning of containing the threats of the Sunnis. The US drones have made intelligence gathering easier as they are robotic instead of being manned by air force personnel. Middle-East conflict has plagued this market, just as one area subdues their conflict another situation pops up. Part of why this is so important is the demand for crude oil and the effect of any potential loss of production demands on this recovery. The increased oil prices may pressure the market severely as consumer spending which is about 70% of the GDP may be taken away with the higher oil prices.

US Secretary of State John Kerry said that President Obama is gathering information to determine if potential airstrikes are called for. He does not need approval as his tenure holds this power. The future of Iraq depends on Iraq’s leaders coming together soon according to Kerry. OPEC nations have stated over the years that they would like to stabilize the Crude Oil prices around 100. US shale production has perhaps prevented the price of crude to rise more as the 17,000 million barrel a day addition may stabilize rates more. The Saudi’s usually bump up their production as well to compensate, but this time it just may be too much demand. For now, the production numbers remain fairly high, so it may be a case of anticipation rather than actual demand. Crude prices have come down a touch on optimism that the US is gearing up to produce the energy to cover the demand and to possibly even export the oil. Sunni Islamic militants continue to create havoc with the marketplace especially the al-Qaeda group referred to as the Islamic State in Iraq or ISIL! Iraq exports about 2.5 million barrels of oil per day which has recently affected the global marketplace. The fear alone of demand for energy unmet has caused the prices of the crude oil to rocket higher. The US still remains dependent on the energy products even with the shale boom in the US and despite the efforts of President Obama to make the country less dependent. This conflict could set new boundaries for the countries of the Middle-East common to historical trends. For now, any thought of an energy supply disruption may keep the indexes pinned. To have the Iraq conflict on the heels of the Ukraine conflict may just weigh on the marketplace. This could just be the environment necessary to boost Gold out of its consolidation or range.

The cease fire agreement has been extended three days only to calm the violence. The European Union has given Russia an ultimatum to halt the rebellion or face further sanctions that could cripple the country economically and perhaps tarnish his popularity with his people. Russian President Putin intends still to control any groups on his borders. Putin is blamed for his support of the insurgents as tanks and military vehicles are in the hands of the insurgents. 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. The meetings between the Ukraine President and Putin were to strengthen and preserve Ukrainian unity and ensure lasting peace. 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. Both leaders are stressing the need for peace in the area. 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. Russia and the Ukraine were closer to a deal on the gas plan as the smaller country has a debt that needs to be paid. Russia as of late has cut the natural gas supplies to the smaller country pending advance payment. The supplies to the European Union has taken a precedence to the Ukraine. 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. Russia is said to maintain about 16,000 troops on the eastern border of the Ukraine and about 22,000 in Crimea. The Ukraine President has taken advantage of his meeting in Brussels making economic ties to boost the Ukraine by about $1 billion euros worth of exports. The Ukraine was offered a possible entry into the European Union with little to no cost. The US has imposed about 5 sanctions on Russia with little impact to date perhaps due to the sanctions being imposed on individuals more than banks and corporations. Now the sanctions may change. Poroshenko has constructed a 15-point plan to quell the conflict in the Ukraine.

The Reuter’s/University of Michigan Consumer Sentiment Index for June came in higher than expected at 82.5 while the previous reading was 81.2. The Initial Jobless Claims for the week of June 21st came in down 2,000 at 312,000 while the previous reading was 312,000. Continuing Claims came in up 12,000 to 2.571 million. This report has a one week lag time. Personal Income for May was at 0.4% while the previous reading was 0.3%. The Consumer Spending was at 0.2% while the previous reading was -0.1%. The PCE Price Index was at 0.2% while the previous reading was 0.2%. The Core PCE Price Index was at 0.2% unchanged. The Kansas City Fed Manufacturing Index for June was at 6 while the previous reading was 10. The Bloomberg Consumer Comfort Index for the week of June 20th was at 37.1 while the previous reading was unchanged. The Durable Goods New Orders were at -1.0% while the previous reading was 0.8%. The Durable Orders excluding transportation were at -0.1% while the previous reading was 0.1%. GDP for Q1f:2014 Real GDP was at -2.9% while the previous reading was -1.0%. The GDP Price Index was at 1.3% unchanged. MBA Purchase Applications Composite Index for the week of June 20th were at -1.0% while the previous reading was -9.2%. The Purchase Index was -1.0% while the previous reading was -5.0%. The Refinance Index was -1.0% while the previous reading was -13.0%. The PMI Services Flash for June was 61.2 while the previous reading was 58.4. Corporate Profits After Tax for Q1:14 were at 6.8% while the previous reading was 5.3%. The FHFA House Price Index for April was at 0.0% while the previous reading was 0.7%. New Home Sales for May were at 504,000 while the previous reading was 433,000. The S&P Case-Shiller HPI 20-city SA was at 0.2% while the previous reading was 1.2%. The 20-city NSA was at 1.1% while the previous reading had been 0.9%. Consumer Confidence for June was at 85.2 while the previous reading was 83.0. The Richmond Fed Manufacturing Index for June was at 3 while the previous reading was 7. The Redbook Sales for the week of June 21st was 3.3% while the previous reading was 3.5%. The ICSC-Goldman Store Sales for the week of June 21st was 2.0% while the previous reading was 0.4%. The State Street Investor Confidence Index for June was 119.5 unchanged from the previous reading. The Chicago Fed National Activity Index for May was 0.21 while the previous reading was -0.32. The PMI Manufacturing Index Flash for June was 57.5 while the previous reading was 56.2. The Existing Home Sales for May SAAR was 4.89 million while the previous reading was 4.65 million. The Existing Home Sales change was 4.9% while the previous reading was 1.3%. 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.

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 (August) contract is in buy mode if it stays above $1293.30. A key consolidation area may be $1330.00 to $1300.00. The range may be $1330.00 to $1300.00 for now. Some Analysts seem, to be fairly bullish toward the Gold into next week with the current conflict in Iraq and the employment report this coming Thursday, we could see $1392.00 again. Should the conflict diminish, inflation subside and the data come in spectacular, $1050.00 may be in sight. Next Thursday could be the point for Gold to rocket up or collapse!

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.