This is a sample entry from Leslie Burton’s newsletter, The Weekly Gold Digger, published on Friday, July 11, 2014.
The Gold market received some support in the recent week by a Portuguese bank defaulting on a payment. The conflict in Iraq and the Ukraine continue to support the Gold as well.
This week was one of those times where the Gold market was due to shine. 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 $1350.00 resistance. US Fed Chairperson Janet Yellen’s words maintained the accommodative stance which feeds 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, but India had retained the 10% import tax and the 20% re-export rule. Thailand may purchase possibly 150 to 200 metric tons given the lower prices of Gold. The US Mint sales in the month of June had increased by 48,500 ounces. Australia’s Perth Mint sold about 39,405 ounces in June. Bullion backed ETP’s increased 12.6 metric tons just last week. Futures net-long positions increased 20% to 136,929 contracts of both futures and options. The SPDR Gold Trust increased 1.4% to about 796,39 metric tons thru yesterday. 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. Gold is still the valued market to hold during tumultuous times!
Banco Espirito Santo SA, controlling lender for Espirito Santo Financila Group SA has missed payments which began the worries of potential defaults to continue. The bank had suspended trading its shares and bonds claiming “ongoing material difficulties”. The Portugal bank released information on its risk exposure today to thwart the negative impact of the default. The exposure of the Portuguese bank was about 1.18 billion euros to the companies of Grupo Espirito Santo. The central bank disclosed that the lender is protected as they are above the capital requirements by 2.1 billion euros. The bank may replace a family member in a senior position as the family owned lender for 94 years has remained in good standing. Standard & Poor’s credit agency lowered the credit rating to B+ from BB- today. US economic expansion remains the will of the Fed as they continue to support the recovery thru the bond purchases. The bond buying is tapered according to schedule as there is no catalyst to derail the Fed’s plans. The Fed has been nurturing the economy at every turn, so they may not be as anxious to unleash the tightening until there have total confidence in the recovery. The Fed is to conclude their tapering in October as planned unless some unexpected factor derails the market. The Fed has expressed that the tightening may take place the first six months of 2015, but nothing is confirmed. The Fed is vigilant in monitoring the data releases and the trader is tracking the Fed for potential monetary policy changes. The recent boost in the jobs data to 288,000 new jobs created last month now just may have the investment community speculating that the eventual tightening may come sooner than anticipated. In reality, the average jobs report during the Clinton years may have averaged about 227,000 newly created jobs per month or up about 2.38%. Obama has about a 0.98% while Jimmy Carter had about 3.06%. Of course, each of them contended with different environments. Franklyn Delano Roosevelt had the better increases between 1932 to 1945. He was the only President elected for more than the two terms as his new deal was focused on 100% employment. The war broke out in his tenure creating a great deal more jobs of course. The Fed may use tools such as the overnight repurchase facility to control the lending rates.
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. On July 2nd Chairperson Janet Yellen reaffirmed that 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% with the next GDP on July 30th exactly before the FMOC meeting conclusion. The market continued to want to believe that the inclement weather still created the contraction, but that the second quarter would be in expansion. 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. The FOMC has its next meeting on July 29th – 30th. US Fed Chairperson Janet Yellen is to deliver her semiannual testimony to the Senate Banking Committee on July 15th. She is to speak to the House Committee on Financial Services on July 16th.
The International Atomic Energy Agency is up in arms over the missing nuclear compounds missing from Iraq’s Mosul University. They do not view it as dangerous in the sense of weaponry. Vienna talks this weekend should try to reach an accord on the Iranian nuclear program. Iran feels that they do need the enriched uranium for medical purposes while the material would be close to levels used for atomic bombs. These talks have been going on for quite some time. Israel has bombed the Gaza Strip and the Islamist militants retaliated. The Islamic State has taken Mosul as of June 10. There still has been no major energy supply hindrances despite the conflict. The Sunnis will not cease the fighting until Prime Minister Nouri al-Maliki steps down. All of this conflict exists in such a frail economic climate that balances on a thin line between desperation and desire for power. The cease fire has expired and the conflict resumes in the Ukraine yet Russian Foreign Minister Sergei Lavrov insists that a durable cease-fire is needed due to a “sharp deterioration of the situation”! US Treasury Secretary Jacob Lew concludes that further sanctions on Russia could drive the nation into a Recession. 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. The next sanctions may effect technology associated with energy products. The sanctions are said to add 11 more people to the list of individuals for which the sanctions have been imposed. The July 16th summit will be used to discuss if the bans should be enforced on Russian trade, industry, or investments. The sanctions become muddled somewhat as the Euro Zone needs the gas from Russia. Sanctions may go both ways. 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 could decrease any conflict, yet there were 108 violations of the truce which hardened the leader toward any peaceable solution in the near-term. 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. 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.
Today, the Treasury Budget for June came in at $70.5 billion while the previous reading was -$130.0 billion. The US Initial Jobless Claims for the week of July 5th was down 11,000 at 304,000 new claims while the previous reading was 315,000. Continued Claims for the week of June 28th was up 10,000 to 2.584 million. Wholesale Trade Inventories for May was at 0.5% while the previous reading was 1.1%. Chain Store Sales for June is thought to be increased rates of sales growth, but does not offer any data to support the commentary. The Bloomberg Consumer Comfort Index for the week of July 6th was 37.6 while the previous reading was 36.4. The MBA Purchase Applications Composite Index for the week of June 4th were at 1.9% while the previous reading was -0.2%. The Purchase Index was 4.0% while the previous reading was -1.0%. The Refinance Index was 0.4% while the previous reading was 0.1%. The Federal Open Market Committee meeting minutes were read validating that October may finalize the tapering. It is still undecided whether they will take the $15 billion or take $10 and $5 billion separately. The tightening may begin in the first half of 2015 but was not confirmed. The NFIB Small Business Optimism Index for Junehttp://www.nfib.com/surveys/small-business-economic-trends/ was at 95.0 while the previous reading was 96.6. JOLTS (The Labor Department’s job Openings and Labor Turnover Survey) was at 4.635 million for May while the previous reading was 4.455 million. Consumer Credit for May was at $19.6 billion while the previous reading was $26.8 billion. Revolving credit such as credit cards was up $1.79 billion in May. Non-revolving credit such as school loans and car loans was up $17.8 billion in May. Car sales was up 16.7 million annual rate. Consumer loans increased $4.4 billion. The ICSC-Goldman Store Sales for the week of July 5th was 1.7% while the previous reading was 1.0%. Redbook Sales for the week of July 5th was 6.0% while the previous reading was 3.1%. The Gallup US Consumer Spending Measure for June was $91 while the previous reading was $98. TD Ameritrade IMX for June was 5.67 while the previous reading was 5.69. Last Thursday, the Nonfarm Payrolls for June came in at 288,000 while the previous reading was at 217,000. The Unemployment Rate came in at 6.1% while the previous reading was unchanged at 6.3%. The Average Hourly Earnings was at 0.2% while the previous reading was at 0.2%. The Average Workweek is was 34.5 hour unchanged. The Private Payrolls was at 262,000 while the previous reading was 216,000.
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 $1310.10. A key consolidation area may be $1350.00 to $1330.00. The range may be $1350.00 to $1330.00 for now. Some Analysts seem, to be fairly bullish toward the Gold into next week with the current conflict in Iraq and the Ukraine. Should the conflict diminish, inflation subside and the data come in spectacular, $1050.00 may be in sight.
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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