Archive for gold

GOLD: A Quick Note on Fed Policy

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(Posted: May 22, 2013 from Twitter)

Gold prices moved higher this morning in anticipation of Fed Chairman Bernanke’s testimony today before the Joint Economic Committee.

Recent speeches by other Fed officials in the past few days suggest the Fed will leave the door open to stepped-up quantitative easing should the economy falters or if inflation remains below target.

Any talk of more QE from Bernanke this morning could give gold enough juice to re-test overhead resistance around $1400 . . . and possibly move higher.

See my recent posts on NicholsOnGold.com for more on Fed policy and the economy.

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Fed Speak: Implications for Gold

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(Posted: May 21, 2013 from Twitter)

This week’s gold-price action reflects a market once again range bound, searching for direction in an uncertain economic environment.  For sure, the risks of further gold-price retreat remain high.  Much depends on the market’s sense of prospective Federal Reserve policies.

This Wednesday the financial markets will be listening carefully to the latest Fed speak on monetary policy and the economy for clues.

First off, the FMOC will be releasing the minutes of its April policy-setting meeting — always an interesting document to Fed watchers who, like the Greek oracles, look for meaning in even the slightest change in wording from the previous FOMC meeting minutes.

In addition, financial markets will be listening carefully to Fed Chairman Bernanke’s Wednesday testimony before the Joint Economic Committee.

If that wasn’t enough, financial markets are re-reading yesterday’s somewhat ambiguous speech by Charles Evans, president of the Chicago Fed and a voting member of the FOMC this year . . . and today’s speeches from James Bullard, president of the St. Louis Fed, also a voting member this year, and William Dudley, president of the New York Fed and a permanent voter.

Financial markets — including gold — will be parsing every word for clues about prospective monetary policy, especially with regard to its accommodative bond-buying program.

Any hint of “tapering,” that is cutting back on its $85 billion monthly bond-buying program, could   send the dollar higher and gold prices lower.  But, most likely, taken in total, all this Fed speak is likely to leave markets still uncertain and confused about the Fed’s intentions.

What will matter more in the weeks ahead is the flow of economic news.  If the economy seems to be gathering strength, markets will assume an early reduction in monetary accommodation — and, other things being equal, this could make it more difficult for gold to renew its long-term uptrend.

My sense, however, is that the economic news will not be encouraging.  After all, the economy still faces continuing drag from January’s rise in payroll taxes as well as increases in state and local taxes and user fees and from the on-going sequestration-required cuts in Federal spending and resulting worker layoffs and unpaid furloughs.

Importantly, Europe’s deepening recessions and slower growth in China, India, Brazil, Mexico and other emerging economies that are important markets for U.S. exports is taking its toll.

Uncertainty about U.S. fiscal policies, the continuing divide between the White House and Capitol Hill, the approaching U.S. Federal debt ceiling and talk of a downgrade in Treasury debt by the rating agencies later this year is making it difficult for businesses to make long-term investment decisions and for consumers to take on more debt, necessary to sustain household spending.

Optimists point to Wall Street’s strength and the rise in home prices as evidence of an improving economy are looking through rose-colored glasses,

In my book, these asset markets are rising, not because the economy is regaining its health and vigor . . .  because the vast quantity of liquidity created each month by the Fed’s bond-buying program has no where else to go — and the computer models that govern much of the action on U.S. and world equity markets are trend followers, seeking the implied yield that comes from going wherever the momentum indicators take them.

Signs the economy is losing ground — and is increasingly at risk of slipping into recession — could be the catalyst to an upside gold-price breakout.

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Gold: Vulnerable, but Looking for a Bounce

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(Posted: May 17, 2013 from Twitter)

No one should be surprised if gold prices take another dive. The market certainly remains vulnerable to more institutional selling. That said, I’m looking for a bounce-back in the week ahead — with the yellow metal recovering some of the ground lost in the recent flash crash — if only because the price has fallen so far, so fast.

Some of the institutional players who were inclined to lighten their long positions or short the metal along the way down have already done so . . . and some of the large hedge funds — including a few that made news by selling in recent months — may begin re-establishing long positions at what they believe to be attractive long-term acquisition prices.

Moreover, Asian buying has been especially strong — apparent from the large premiums in the key Asian markets over London and New York delivery — and retail investment demand for coins and small bars in the U.S. and Europe has also provided some support.

I expect that some central banks have been and will continue to buy on dips and this too should help

However, the key to recovery is in the paper market. What the hedge funds and other large-scale institutional traders need now is a sense that downside risks are retreating and some degree of comfort that prices have hit bottom.

When that confirmation comes, pent up demand could give the metal a short-term boost . . . and, from there, who knows?

Recent talk of Fed tapering (that is reining in its accommodative monetary policy by reducing the magnitude of its monthly bond purchases) along with a worsening global economic picture has given the U.S. dollar a boost in world currency markets — and, by extension, has contributed to the swift sell-off in gold.

But with U.S. employment markets showing no signs of real and meaningful improvement and recent inflation data below the Fed’s own targets, expectations among Fed watchers are beginning to shift, albeit subtly, and this could make a world of difference for gold in the weeks and months ahead.

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GOLD — What’s Going On?

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(Posted: May 15, 2013)

Gold prices have caved today under pressure from dollar appreciation and wave of technical selling at key chart points - selling aggravated by continued flow of funds from gold (and commodity indexes) to equities.

Just as the rising price trend in the equity indexes has attracting more buying, the renewed downward momentum in gold is engendering short sales and more outflows from gold ETFs.

Importantly, program trading and other technical strategies have added to the downward pressure on gold - and continue to do so.  (See my previous commentary posted earlier today for more on program trading and the dark pools.)

Institutional selling of the commodity indexes (some of which include gold) and by commodity funds is also contributing to gold-price weakness.

But pricing across asset markets continues to be inconsistent and illogical.  Rising equity prices are usually an indicator of economic vigor, right?  And, falling commodity prices are usually an indicator of flagging demand and a weak economy, right?  So, what’s going on here?

Few would deny that the global economy is faltering:  Europe is sinking further into the abyss; America has yet to suffer the most serious consequences of sequestration and fiscal drag arising from Federal spending cuts and January’s payroll tax hike; and the major emerging economies are slowing as demand for their exports continue to erode.

So you tell me, which market — equities or commodities — is most accurately reflecting economic realities?

The key here is that the trading models and strategies that are driving gold lower and equities higher do not rely of real-world economics . . . but take their cues from internal market triggers where time horizons for successful trading may be measured in seconds.

As we have discussed long before most other gold analysts and commenters have even noticed, the battle for gold has been between physical markets and paper markets.  And, for the last year and a half, it looks like the paper markets have won out.

This despite the fact that the physical markets have been super strong with intense demand for bullion bars and retail investment products . . . and from a number of central banks who are using episodes of price weakness to augment their official gold holdings.

Many of these buyers - both private sector and official - have a long-term perspective and allegiance to the metal, often accumulating gold with the hope and intention of passing on their holdings to future generations.

In contrast, traders and investors in the paper markets have much different motivations and often very short-term perspectives.  To an important extent, they are trading for short-term gains and will take positions in one asset market or another based on their perception of relative return.

Unlike many physical buyers, the paper traders rarely have any long-term allegiance to the metal.  They may be in or out, short or long, or arbitraging tiny price inconsistencies.  Some of the biggest institutional players trade on both the regulated commodities futures exchanges (like the CME COMEX Division), regulated ETF markets (like the NYSE), and the largely unregulated dealer and inter-bank market where volumes can be huge but trades and outstanding positions may be invisible.

The abandonment of long gold-ETF positions built up over the past half-decade by hedge funds and other institutional investors and the short-term trading activities of a relatively small number of institutional speculators have together been largely responsible for gold’s steep price decline in recent months.

What could turn the price upward again?

It may be as simple as the depletion of long positions in paper markets — with selling by “weak hands” having run its course.

Or, it could be a revival of “safe-haven” demand — driven by renewed sovereign risk and fears of debt default by one -(or more) of the euro-zone nations . . . or even renewed talk of debt limits and default by the United States, unable to get its fiscal house in order.

Or, perhaps, it will take a rout on Wall Street — as equity investors realize the miss-match between equity prices and the state of the economy.

Or, maybe, it will take a step up in quantitative easing — in reaction to a string of negative economic indicators and deflationary fears — with still more bond purchases by the Federal Reserve.

Or, maybe a black swan, perhaps some unanticipated geo-political development, or some other event that strikes from out of the blue.

What do you think?

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