The Weekly Gold Digger (Oct 10 2014)

This is a sample entry from Leslie Burton’s newsletter, The Weekly Gold Digger, published on Friday, October 10, 2014.

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The US Dollar strength may not only pin the Gold prices but may have a negative impact on global growth!

The fear and anxiety created in the global marketplace this week was well received in the Gold as it moved into a buy mode posture. These have been fairly short lived as many traders are just selling the rallies nowadays. The bounce may have been attributed to the state of the European economy or the Chinese back from their Golden Week holiday. 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 World Gold Council believes according to one of their reports that the Chinese sentiment is that the US may devaluate their dollar driving up the price of Gold eventually. There may be some demand out of India as the Diwali festival is October 25th. The monsoon may have given crops that were less than perfect, but perhaps there may be a little buying the metal. The asset allocations have veered away from the Gold recently in light of a recovering economy with little inflation and Fed tightening to begin next year. The market seems to take the geopolitical strife in stride with some anxiety and fear only to boost the Treasuries and the US Dollar. The SPDR Gold Trust decreased about 5.4% to 762 tons as of Wednesday. 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 fourth European Central Bank Gold Agreement as of September 27th limits the selling of any significant amount of Gold. There are about 21 central banks signing the agreement. As of 2013, about 30,500 tons of Gold were held by the central banks. This restriction may help any potential devaluation of Gold a bit, but their holdings only amount to about a fifth of the globally mined Gold. 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 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 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 Swiss Gold Initiative referendum is to be voted on November 30th which could be the onset of a global path to financial stability. The Swiss have printed money over the years much like the US and many other nations. This is vital as it may bring the national Gold back to Switzerland. It may require the Swiss National Bank to hold about 20% of the assets in Gold and contain the Gold sales. Since many currencies have been devalued over the years, this is the one key to bring back normalcy. The Swiss have printed about 400 billion SF’s over the last six years to devalue its currency and increase the export appeal. Bottom line, this would mean that the Swiss National Bank would be in the market to buy about 1,700 tons of Gold over the next few years.

European Central Bank (ECB) President Mario Draghi was in Washington yesterday where he reflected on the Euro Zone region economy losing momentum. Contagion fears had begun this growth regime and now we find that the same anxieties are back to haunt us. The Euro Zone recovery affects the US significantly in import/export trade and currency valuations. The US Dollar strength may impede the US recovery to some degree as Euro goods become cheaper and more appealing. US Corporations and their earnings thus may be effected. The ECB may be bumping up the volume on stimulus measures to increase inflation and growth thru the purchases of junk-rated bank loans and perhaps other lower quality asset based instruments. European Central Bank President Mario Draghi described the European economic slowdown as structural and not cyclical. He advocates reforms but with little progress, the contagion fears are back. Germany’s economy may be threatened as exports to both China and Russia are hampered. China seems to be slowed almost to recession levels in terms of growth. Russia is fighting recession in the midst of the sanctions issued by the US and the UK. The International Monetary Fund topped it off with a lower projection of global economic growth from 4.0% to 3.8% next year. The IMF further had concern about the geopolitical tensions translating into the stock market reaching “frothy” levels. Contagion fears haunt the market with sentiment that the European Central Bank will not be able to add enough stimulus to increase inflation and stir the economic growth. Their falling Euro FX should prompt better exports and a boost to their economy next to the stronger US Dollar.

The global economies are showing divergent monetary policy strategies at present. The US is winding down its stimulus program while the European Union may be two years behind. China is stagnant on the issue even though its growth may not make the 7.5% target. Another possible catalyst may have been the words of Carl Icahn (entrepreneur) stating to CNBC that a market correction is “definitely coming” and then he is backing his position thru S&P 500 shorts. This is a risk-off scenario with markets collapsing! The fears and anxiety are real. The ISIS or ISIL perhaps becoming the biggest fear, Ebola perhaps just as much, the Euro growth lags and the US Fed action remaining obscure. Inflation may be a worry, but deflation may be a bigger one. The extreme volatility may be challenging to the most savvy investor, but as a trader, there are significant opportunities. The CBOE Volatility Index (VIX) or fear factor may be just the barometer of the near-term volatility and market sentiment. The investor may simply trade the implied volatility. The VIX may trade inversely to the E-Mini S&P 500 thus making it a product to possibly hedge equity portfolios or to be integrated into a diverse portfolio. Data is available where traders may evaluate the historical significance of market moves correlated to the VIX. One may even cite a seasonality factor to the VIX. The descriptive studies of the VIX may lead to predictive studies. The CBOE has extended the trading hours of the VIX as of June 22nd, 2014 to 24 hours a day for a 5-day week. The Chicago Board Options Exchange Volatility Index or VIX was increased 13.22% to 21.24 today. Traders may simply buy the volatility of the VIX rather than trade the trend of the indexes. While the volatility may relate to the tapering ending this month, the market sentiment is the driver in market direction. The tapering ends in October and phrases such as “considerable time” puts the tightening out perhaps to take place between July and December of 2015. 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 Federal Reserve is watching the data closely and has introduced a new gauge. The Labor Market Conditions Report is a more in-depth look into the labor markets using about 19 indicators. The next Fed meeting was agreed upon to take place on October 28th – 29th. There were 248,000 New Jobs created last month while the previous month had only 142,000 jobs created. The core structure of the US has strength and may be due to recover more quickly than the European Union and China. The Consumer borrowing numbers reported fell below expectations at $13.5 billion to $3.25 trillion while the previous reading was $21.6 billion. The revolving credit decreased $208 million. The Non-Revolving credit was increased by $19.8 billion. This was made up of mostly student loans and some auto loans. Auto sales did increase to a 17.5 million annualized rate in August. The JOLTS (Labor Department’s Job Openings and Labor Turnover Survey) for August was 4.835 million job openings while the previous reading was 4.673 million. About 2.47 million people quit their jobs in August while the hiring rate was flat. The Ebola virus in this country alone could really affect market sentiment. The contagion affect could be disastrous in terms of fatalities, but also in terms of productivity. How many workers will want to take their public transportation or actually want to shop in an environment that presents such an illness.

The ISIL developments do not seem to be going away any time soon. If we dissolve one fraction, another may pop-up. While Turkey has joined with the US against the Islamic State, they have not involved the country in any active combat. While the airstrikes may help, the ground battles show no real progress. If Kobani is taken by the Islamic State, a massacre may take place. This may have dour consequences in market sentiment and global attitudes. The Islamic State military seem to be blending in with the civilians to take towns and control more and more in Syria and other countries. The airstrikes may cull the target zones but the battles may continue for years to come as the infiltration may not allow the airstrikes to single out the ISIL troops embedded in the towns. They also have new fighters enlisting day by day which allows them more flexibility to advance. The Islamic State may become more contained as Turkey has now parliamentary approval allowing air strikes to be launched from their bases and may allow their territory to be used to dispatch the enemy. Civilians are fleeing to Turkey in fear as towns are being taken. They then confiscate the grains. This gives power and control which allows them to act as a government almost. 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. 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. Now the President is clarifying that it is not the US against ISIL. He stipulates that the US is only an aid in this battle to the other countries in opposition to the ISIL militia. He admits that the US overestimated the aid of the Iraqi army in the battle. Israel’s President vows that the Islamic State is not as fearsome as Iran’s nuclear activity and wants to shift the US attention back to the nuclear talks. The deadline is slated for November 24th, but it is probable that an extension may be requested. Chief Catherine Ashton is set to meet Iranian Foreign Minister Mohammad Javad Zarif in Vienna on October 14th to continue the talks.

The parliamentary Ukraine elections scheduled October 26th may diffuse some of the conflict during the truce or cease-fire rather. The sanctions have really dimmed the growth prospects in Russia. The Bank of Russia must use about $456.8 billion of reserves to support the ruble. 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 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 but feel that the allotment should come from other sources as well as the IMF. 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 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 somewhat. The sanctions appear to have negative effects on global growth.

The Import Prices for September were at -0.5% while the previous reading was -0.9%. The Export Prices for September were at -0.2% while the previous reading was -0.5%. The Initial Jobless Claims was at 287,000 while the previous reading was 287,000. Continuing Claims decreased 21,000 to 2.381 million with a one-week lag time. Chain Store Sales for September were reporting moderate increases. The Bloomberg Consumer Comfort Index for the week of October 5th were at 36.8 while the previous reading was 34.8. The Fed Balance Sheet for the week of October 8th Total Assets was at $5.1 billion while the previous reading was -$8.8 billion. The Reserve Bank Credit was at $3.9 billion while the previous reading was -$9.9 billion. The Money Supply for the week of September 29th was -$7.3 billion while the previous reading was -$10.0 billion. The MBA Purchase Applications for the week of October 3rd Composite Index were at 3.8% while the previous reading was -0.2%. The Purchase Index was 2.0% while the previous reading was 0.0%. The Refinance Index was 5.0% while the previous reading was -0.3%. The FOMC minutes from the last meeting of September 16th-17th were leaning to more of a dovish stance with emphasis on data dependency. They are fixed and on course for the tapering, but the tightening remains obscure. The JOLTS (Labor Department’s Job Openings and Labor Turnover Survey) for August was 4.835 million job openings while the previous reading was 4.673 million. The Gallup US ECI (Gallup’s Economic Confidence Index) for September was -15 while the previous reading was -16. The ICSC-Goldman Store Sales for the week of October 4th was 0.1% while the previous reading was -0.2%. Redbook Store Sales for the week of October 4th was 5.4% while the previous reading was 4.3%. Consumer Credit for August was $13.5 billion while the previous reading was $26.0 billion. The Gallup US Consumer Spending Measure level for September was $87 while the previous reading was $94. The TD Ameritrade IMX level for September was 5.79 while the previous reading was 5.68. The Nonfarm Payrolls for September was at 248,000 while the previous reading was 142,000. The Unemployment Rate was 5.9% while the previous reading was 6.1%. The Average Hourly Earnings was 0.0% while the previous reading was 0.2%. The Average Work Week was 34.6 hours while the previous reading was 34.5 hours. The Private Payrolls was at 236,000 while the previous reading was 134,000. 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%.

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 a temporary buy mode if it stays above $1186.10. A key consolidation area may be $1225.00 to $1185.00 for the moment. $1222.70 may be the comfort level. The range may be $1225.00 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.

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.