The Weekly Gold Digger (Sep 29 2014)

This is a sample entry from Leslie Burton’s newsletter, The Weekly Gold Digger, published on Monday, September 29, 2014.

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The US Dollar has been relentless in pressuring the global markets! The strong dollar makes US goods more expensive and pins the other currencies and tangible commodities such as Gold.

The Gold market is typically used primarily as a hedge against inflation, a hedge against dollar valuation changes and a safe-haven asset. The political uncertainty in the Ukraine has supported the Gold, but so many other factors have weighed in against the metal. The recovering US economy has pressured the Gold along with the US Dollar strength. Inflation has remained subdued which has not supported the Gold. The Gold market is just bearing the brunt of a strong US Dollar and monetary policy that has been interpreted as perhaps a bit hawkish. The US Fed tapering is pretty much set for an October expiration but the tightening is regarded as data dependent. That leaves it wide open. The tightening may arrive earlier than anticipated which is extremely bearish for Gold. Inflation remains below target levels which again is added pressure for the Gold market. China’s Gold consumption may be one of the strongest factors for the Gold bugs. Another potential negative factor to look out for is Russia. The sanctions have created a possible recession for Russia whereby they may have to sell off some of their Gold reserves.

The central banks have been buyers of Gold increasing reserves. Russia and the Ukraine increased their holdings in August while Mexico and the Czech Republic decreased their holdings according to the International Monetary Fund. US Jewelry purchases were about 26.1 metric tons second quarter which was 15% over the same quarter of last year. This year is expected to remain a year of consolidation for the Gold market, yet expectations beyond may warrant an increased demand for Gold. Gold supplies are estimated at about 163,000 tons above ground at present according to the World Gold Council.

The Golden Week in China starts next week. In India, we have Mahatma Gandhi’s Birthday. On October 8th, the Haji begins marking the Muslim pilgrimage to Mecca, Saudi Arabia. So far this year, the Chinese net imports from Hong Kong total 497 metric tons. The Shanghai Free Gold Exchange is operational. The Chinese Central Bank is considering boosting their Gold reserves. They have a small Gold reserve amount in comparison to the US 70% in Gold reserves. Shanghai imported about $15.98 billion of Gold so far this year. Since Gold bullion was permitted in China (2004) the demand has risen from 10 tons to 397 tons last year according to the World Gold Council. They anticipate by 2017, that Gold demand may reach 500 tons.

The ICE Exchange announced that it may offer one kilo bars (32.15 troy ounces) of Gold contracts to boost both volume and potential deliveries. The start date may be February 2015. The CME Exchange may launch a Gold contract that may be deliverable in Hong Kong and the price may be fixed to the Hong Kong bullion. Chinese demand has become more interested in the brands of the Gold rather than the acquisition. Investment demand is reaffirmed in the sideways movement of the market as shown below even with the bars and coins. Total investment demand over the 2nd quarter amounted to 341.1 tons. The 53% decline in demand on the bars and coins were attributed to the Chinese and Indian consumers. The World Gold Council announced that in 2013, China purchased a record 1,065.8 tons up 32%. India bought 974.8 tons. The global demand decreased 15% to 3,756.10 metric tons for 2013. The outflows from the Gold funds accounted for 880.8 tons. The Chicago Mercantile Exchange lowered the margin to an initial of $5,060 from the $5,940 and the maintenance to $4,600 from $5,400 for the 100 troy ounce Gold contract! Seasonally, trade stats tracking buy dates on the Gold historically in both September and October are extremely bullish. Marking 93% and 80% of the last 15 years or so. The conflict abroad should have created more of a bullish scenario for the Gold market. September is seasonally strong with the weddings/festivals in India and the jewelry industry preparing for Christmas. We approach harvest where typically the fruits of one’s labors may be realized. The Central Banks purchases in the 2nd quarter were about 117.8 tons or approximately $4.9 billion US. Gold mining has increased this last quarter by 58.2 tons of Gold. The rate is supposed to decline from this point on. The CME Group and the Thompson Reuters Corp. are vying to manage the London Gold Fix. The winning bid will be announced in October. At least the Exchanges and primary leaders in the industry still value the luster of Gold.

The US Gross Domestic Product (GDP) came in as expected at 4.6% while the previous reading had been 4.2%! About 70% of the GDP is made up of consumer purchases which came in at 2.5% at an annual rate. We have recovery coming to fruition and still have the stimulus with low interest rates. Inflation has not been a worry to date, but when Yellen is satisfied with wage increases, will the companies raise prices to pay the increases? Then will inflation become a problem? Gold thrives during inflationary times! The rising US Dollar will make export trade more expensive which could affect US production. The Federal Reserve policy changes may be delayed and “considerable time” may be viewed as a potentially difficult tightening in light of Chairperson Yellen’s comments on the American workforce still underutilized. The ISIL or Islamic State have now announced that they will be taking their brutality to US and French soil as they threaten the subways in Paris and New York. China had discovered about $10 billion in trade fraud which pressured money inflows as banks were involved. China has announced that they will not be adding stimulus. The European Central Bank is considering more stimulus to thwart deflation concerns. The Bank of Japan may maintain additional stimulus to spur their economic growth. Russian law proposed to compensate victims of the sanctions brought against citizens of Russia that have been singled out as close friends and/or associates of the Russian President. They proposed using federal funds to make up for seized assets. In turn, the Russian government may seize foreign state assets in Russia even assets under diplomatic immunity. The manufacturing in the US remains strong and has propelled the stock indexes to their highs along with mixed data! The housing market still lags with home construction down by about 14.4% as of August. Existing home sales came in -1.8% at 5.05 million annual rate in July while the previous reading was 5.15 million annual rate. Next Friday’s unemployment report is vital as disappointing numbers makes the last so called anomaly real.

US Fed Chairperson Janet Yellen spoke last week highlighting the hardship that families may be experiencing during the “recovery”! Policy rates are unchanged at 0-0.25% and the tapering remains on schedule with an out clause “assets are not on a preset course” and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation! She retained the “considerable time” and the “employment rate is little changed”! She also kept in her significant “underutilization of labor resources” in to assess the need for maximum employment and price stability. These are key in terms of the doves yet then she later added that the Fed is seeking normalization when the conditions warrant and that may be the end of 2017. Her remarks that the economic data may change the expectations of normalization at any time is what the hawks were seeking. She further described “considerable time” as not a schedule but a conditional factor. She realizes that there are still a significant number of individuals who are long-term unemployed and that many may be working part-time as they could not find a full-time job. The tapering ends in October and phrases such as “considerable time” puts the tightening out perhaps to take place between March and December of 2015, but the majority of analysts are looking to July – September of 2015. The last employment report was totally unexpected at 142,000 new jobs created for August. Of course, many analysts simply refer to the numbers as an anomaly. The underemployment rate actually dropped 12%. The long-term (27 weeks or more) unemployed came in at 2.96 million. Private hiring increased 134,000. The service providers (private) increased 112,000. Construction companies increased jobs by 20,000 workers. Retail employers decreased jobs by 8,400 in August. The average hourly earnings did increase by 0.2%. Casino closings in Atlantic City could also increase the unemployment numbers in the following weeks. The Fed did estimate that interest rates could be 1.375% at the end of 2015. At the end of 2017, they expect about an interest rate of 3.75%.

The US dollar itself may be a hindrance to the marketplace as US goods become more expensive to foreign buyers. The recovery is not smooth and neither shall the market moves. The US Senate was set to approve President Obama’s plan to arm and train Syrian troops to fight the Islamic State. The President vows to “degrade and destroy” ISIL in light of the violence that threatens Americans and Global allies. Airstrikes have been used, but may not really have the total impact necessary to alleviate the threat. ISIL has been investigating the possibility of crossing the border into the US thru Mexico. The ISIL militants pressed Turkey to allow refugees from Syria to crossover. Now after the beheading of a French tourist, the threats are of violence coming to the Paris and/or New York subways. The Ukraine President Poroshenko has recently visited the Oval Office as he was granted full support during the conflict between the Ukraine and Russia. The pledge consisted of a $53 million aid to support the Ukraine during this crisis. The IMF had offered $17 billion in loans to the Ukraine as well. The IMF estimates that another $19 billion may be needed by year’s end. Russia is experiencing the deepening sanctions in finance, business and import/exports. September 5th was the beginning of the cease-fire between the Ukraine and Russia, yet deaths have occurred and little trust has been built. The meeting in Berlin today where the Ukraine, Russia and EU discussed gas supplies came closer to an accord. So far, it may be required that the Ukraine pay $3.1 billion by the end of the year for delivered goods then Russia will deliver about 5 billion cubic meters of gas over the winter months. The Ukraine may pay about $385 for every 1,000 cubic meters over the next 6 months. The sanctions may work inversely as winter approaches with Russia controlling a large percentage of the supplies. Regarding the MH17 tragedy, Russia is pushing for more UN involvement in the investigation. The Ukraine President insists that while the cease-fire still has loss of life, the situation has deescalated.

The Q2f:14 Real GDP was at 4.6% while the previous reading was 4.2%. The GDP Price Index was at 2.1% while the previous reading was 2.1%. Consumer Sentiment for September was at 84.6 while the previous reading was 84.6. Corporate Profits for Q2:14 (After-tax Profits) were 4.6% while the previous reading was 4.5%. The Initial Jobless Claims for the week of September 20th was at 293,000 while the previous reading was 280,000. The Continuing Claims increased 7,000 to 2.439 million. The Durable Goods New Orders for August are were at -18.2% while the previous reading was 22.6%. The Durable Goods excluding transportation were at 0.7% while the previous reading was -0.8%. The PMI Services Flash for September was at 58.5 while the previous reading was 58.5. The Kansas City Fed Manufacturing Index for September was at 6 while the previous reading was 3. The Bloomberg Consumer Comfort Index for the week of September 21st was at 35.5 while the previous reading was 37.2. The Fed Balance Sheet for the week of September 24th was $9.5 billion in Total Assets while the previous reading was $28.2 billion. The Reserve Bank Card Credit was $10.1 billion while the previous reading was $29.9 billion. The Money Supply for the week of September 15th was $7.4 billion while the previous reading was $25.1 billion. The New Home Sales for August were at 504,000 while the previous reading was 412,000. The MBA Purchase Applications Composite Index for September 19th was -4.1% while the previous reading was 7.9%. The Purchase Index was -0.3% while the previous reading was 5.0%. The Refinance Index was -7.0% while the previous reading was 10.0%. The FHFA House Price Index for July was 0.1% while the previous reading was 0.4%. The PMI Manufacturing Index Flash for September was 57.9 while the previous reading was 58.0. The Richmond Fed Manufacturing Index for September was 14 while the previous reading was 12. The ICSC-Goldman Store Sales for the week of September 20th was 0.1% while the previous reading was -2.6%. The Redbook Store Sales for the week of September 20th was 3.7% while the previous reading was 3.6%. The Existing Home Sales for August level SAAR was at a lower than expected -1.8% annual rate of 5.05 million while the previous reading was 5.15 million. The Chicago Fed National Activity Index for August was -0.21 while the previous reading was 0.39. The Nonfarm Payrolls for August were at 142,000 while the previous reading was 209,000. The Unemployment Rate was at 6.1% while the previous reading was 6.2%. The Average Hourly Earnings was at 0.2% while the previous reading was 0.0%. The Average Work Week is forecast at 34.5 hours unchanged. The Private Payrolls was at 134,000 while the previous reading was 198,000. The GDP for Q2p:2014 Real GDP was at 4.2% while the previous reading was 4.0%.. The GDP Price Index was at 2.1% while the previous reading was 2.0%. Next week, we look forward to the Employment Report on Friday!

Gold Chart

The safe-haven properties of the Gold are perfect for those times of conflict in the world and it certainly has a run when the conditions seem their worst, but that does not seem to be the case now.

The Gold (December) contract is in sell mode if it stays below $1236.40. A key consolidation area may be $1240.00 to $1185.00 for the moment. $1218.60 may be the comfort level. The range may be $1250.00 to $1185.00 for now. Some Analysts seem, to be fairly bearish toward the Gold now with projections down to $1050.00 or even $750.00. Other analysts have more of a bullish consensus with increased targets to $1450.00. However; if it holds $1200.00, there could be a short-term bounce to possibly buy.

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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