"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

Trader Dan's free work will soon be available at www.traderdan.biz

Tuesday, June 3, 2014

Euro Gold Below Chart Support

Trading in gold has been relatively quiet in today's session ( boring would be a better word). I suspect traders on both sides do not want to get too aggressive before the outcome of the ECB meeting on Thursday is known and the monthly payrolls number is released this Friday.

The thinking at this point among the majority is that the ECB is going to provide some sort of stimulus measure. Recent inflation readings in the Eurozone and especially in Germany indicate that the bank has room to make a move along this line. The biggest concern is the lack of lending by banks ( borrowing by others). That is the same issue that had been plaguing the US economy even after the first two rounds of QE came and went. The Fed opened up the liquidity spigots but the money never made it out of Wall Street and the equity markets into the hands of the consumer in a large way. That lack of circulation through the broader economy is the reason that the Velocity of Money fell and has continued to fall.

One wonders if that ECB does unveil some sort of liquidity program whether or not that would produce the same outcome this time over in the broader Eurozone.

It seems to me that the one thing that the ECB could do, which would find broad acceptance among most of the members - and certainly among business - would be to try to knock the Euro even lower.

Keep in mind that when the Japanese government came under new management with the Abe administration, that it set about deliberately trying to weaken the Yen ( even though it denied so doing). Japan was trying to fight deflation but what they managed to do was to, in a sense, export some of that deflation to the Eurozone because the weakening Yen tended to push up the other majors at its expense.

If the ECB starts trying to take the Euro lower, who gets to import the deflation impact from its currency strengthening? That is unclear.

I guess we will all find out soon enough what the ECB is going to do this week.

For the time being, I am keeping a close eye on the gold price in terms of Euros, or Eurogold.

Here is its chart.

You can see, for the last two months ( April and May) whenever the gold price neared the 920 level, it bounced. Last week it fell through that level and has remained below it for the time being. It is still up for the year but its looks heavy.

There is some uncertainty as to what gold might do if the ECB acts. One school of thought is that if they set out to deliberately drive down the value of the Euro, it would benefit the US Dollar and thus pressure the gold market. Another train of thought goes that, depending on whether they engage in their own version of QE, it would tend to shore up the gold price as traders who fear a debauchment of the Euro would buy gold as protection against that.

I have to wonder whether or not the ECB would be any more successful than the US Federal Reserve however when it comes to producing inflation. Central Banks can lower interest rates until the cows come home but they cannot make consumers or even business for that matter, go out and borrow. To take on new debt, individuals have to feel comfortable enough or confident enough, that they can handle the additional debt load. The labor markets, I believe, have more sway over the inflation issue at this point in the game than any other area of economic interest. That is true whether it be in the Eurozone, here in the US or over in Japan.

The key in my mind, at least as it regards gold, is whether these Central Banks efforts can seriously fan the flames of inflation or whether their policies are more or less acting to produce a type of standoff between inflationary forces that they want to set loose and the deflationary forces from large levels of debt and stagnant or moribund labor markets.

Based on the price action in the bond markets, and especially the action of the TIPS spread, the market is looking ahead and seeing a period of slow but stable growth without any strong inflationary pressures. That is what we have had for the last couple of years in particular and why stocks have done so well and why gold has fared so poorly.

Something would need to change on that front to alter the current sentiment.

Interest rates have perked up a bit here in the US with the yield on the Ten Year back above the 2.5 level. It is currently sitting at 2.588, up from 2.438 last Tuesday.

Here is a quick look at the broader commodity sector using the Goldman Sachs Commodity Index.

It has fallen to the same level from which it bounced last month in May. It still is showing no signs of any upward acceleration however.

One of the reasons that this index is thus far refusing to break down is on account of the strength that continues in crude oil. Large hedge funds have huge long positions in that market and have refused to sell those down and that is keeping this market supported even in the face of some sizeable stocks in storage. As I have said before, crude is a mystery to me because I cannot fathom how much of this hedge fund buying is related to their wanting to own the stuff as an asset class into which they can diversify or how much is due to a general perception that the US economy is very slowly improving with a corresponding increase in demand.

I watch both copper and crude very closely in this regard and their chart pattern over the last of week or so has been remarkably similar. both remain supported but have been unable to extend higher. That might change at any time but for now, neither are giving any clues as to what direction they expect the global/US economy to move in.


  1. Larry Edelson Issues BUY on IAG:
    Major New Mining Share Recommendation.
    Buy Shares in IAMGOLD Immediately.

    We’re going to start with one of my favorite mid-tier gold producers, IAMGOLD, symbol IAG.

    IAMGOLD is a junior producer with operating mines in Quebec, Mali, Suriname in South America and Burkina Faso in West Africa.

    The company has roughly 11.3 million ounces of proven and probable gold and another 17.4 million ounces of potential gold resources.

    In addition, IAG is now producing more than 830,000 ounces of gold per year, at a cash cost of roughly $715 per ounce, and an all-in sustaining mining cost of $1,038 an ounce, 15 percent lower than last year.

    Like many miners, IAG has taken its lumps over the last three years as the price of gold fell, with many investors focusing all too much on the company’s ore grades and debt.

    But in my opinion, management has recently taken all the right steps to reduce debt (now at only 15 percent of total assets) and to further slash mining costs, per the 15 percent decline in all-in costs noted above.

    Moreover, the company does not hedge its gold reserves, a major positive.

    Most importantly is the company’s share price, which is now trading at roughly $3.07 — down more than 87 percent from its record high of $24 when gold was over $1,900 an ounce three years ago.

    My view: IAG’s shares are a steal at current levels.

    IAG is a great mid-tier gold miner, and as gold’s new bull market begins to unfold, I believe IAG’s share price can rocket higher.

    Look at it this way: The company is in better shape today than it was when gold was fetching over $1,900 an ounce and the company’s share price was $24.

    If gold were to just move back to $1,900, the share price should easily match its former highs. From the $3.07 level to $24 — would equate to a potential gain of better than 680 percent.

    But it doesn’t stop there. As you know, I expect gold to reach at least $5,000 over the next three years. At $5,000 gold, more than double its 2011 price high of $1,921 …

    IAG’s share price should trade hands at a tad north of $62, a more than 1,900 percent gain in its share price.

    And even if I’m only half right and IAG’s share price soars to say $31, you’d still be staring at more than a 900 percent gain on your investment.

    My view: I repeat, combined with all of my models now saying this is the time to start buying mining shares, IAG’s share price is a steal at its current levels.

    My recommendation:

    Use five percent of the funds you have allocated to precious metals in the Basic Survival Strategies section of Real Wealth Report, and …

    Buy shares in IAMGOLD, symbol IAG, at the market.

    1. Sounds like an attempt to manipulate the share price. Gold at $5,000 eh? I'll buy shares in airborne pig drones instead, thanks

  2. Dan,

    I think crude bounces off of the 20 dma and makes new highs as the 4th of July holiday rolls around. I think that gold will move with oil when this happens. I think that oil could easily hit 120-130 a barrel and with the Fed stimulus waning this could be the perfect storm to knock off the U.S. stock market. In terms of equities, institutional money will most likely start to sell off U.S. shares and get into countries like Japan & Europe that have stable blue chips at much lower valuations. Their central banks are providing easy money which I think will lift their stock prices.
    @Wolf Wisdom,
    I am very bullish on gold miners as I think they will hit fair value. I luckily added to Iag a few days ago and am relieved but still put the majority of my eggs in abx & nem as I find them more stable. If gold hits 1500-1600 Iag will be a home run though. I'm not kidding anyone when Iag hit 3 I started shitting bricks

    1. I am short-medium term bullish on oil and long term bearish on oil. I think if oil can hit 120, it will kill demand and the economy will slow down. Usually markets end long term bull markets with a blow off top. That's what I think will happen with oil as we approach a seasonal bullish period for oil. We'll see it play out.

    2. Alex;

      Let's watch and see if crude can best that stubborn $105 level. That has served as an effective cap on it for a while now. If it can clear that, we should have some further upside and a chance to see if your scenario plays out.

    3. Alex, it sounds like you envision a replay of 2008, and it was a very nice time for energy stocks through July 4, and then...woosh...along with everything else. I remember it well. You could be right, but stay nimble.

  3. This comment has been removed by the author.

  4. Alex, I am curious as to why the '02-08 crude oil move to $147 is not a blow-off in your estimation?

    1. so you think oil has been in a bear market since? 2008 was almost 6 years ago

  5. Dear Dan,

    You aren't wasting your time. You're patient and thorough, and with someone like me, your site _does_ change the way they think about the market. If I were to bet on it, I would say you're probably right about the market grinding lower absent some shock; the money is clearly to be made elsewhere.
    I run a business called buyingsterling.com. We buy and sell a little more than $1m/year in silver, and 100k in gold. Over the last few years I've put aside the best pieces - popular patterns in great condition, rarities, premium jewelry, etc. I don't have money in anything aside from metal and cash (95% silver, 5% gold). Because they're all premium pieces, a 20% movement in the market isn't devastating, the silver we retail sells mostly to collectors who pay less attention to the price. The rest of it turns over from purchase to payment in an average of about ten days (gross margin on metal purchases over the last two years was 15%). We have an email list with more than 10000 separate suppliers. It's a fabulous business already, and we're updating the website shortly to include good payouts on silver and gold in almost any form (aside from the low content items like film and computer parts).
    I've been reading ZH for years, and found your site a while back, then recently came back for a closer look. I did come here thinking that the moves lower over the last few years were manipulation, but you've disabused me of that. I can see that it is a market trend, and it exists because of real trader sentiments. I also came here to see what the future holds for metals, and I feel much better informed.
    I also agree that this market would be moving lower regardless of government action. I've never said a single word about the fix. My only argument has been to try to establish that government sponsored/Fed manipulation has happened (you've granted this) and that the price of gold is largely about confidence in the dollar, so since we are debauching the latter, we really have no idea how much the CBs want to shake confidence in the gold market. We have no idea if some of the chart action is them or not. I concede that they'd be less likely - all other things being equal - to do it in a declining market, but if they want a declining market, a little nudge here and there may be just the thing to keep the ball rolling.
    Does this affect daily trading? Maybe, maybe not. Your guess is better than mine. But to categorically say it isn't happening is to invite skepticism, particularly when gold is the only commodity the Fed is legally allowed to push around to defend the dollar (the legislation contains no caveats about rising or falling markets).
    In the case of the FT article regarding the Barclay's trade, other traders say the price is moved regularly to avoid payouts. That news can't be good for investor sentiment. Maybe it happens all the time in every market. If so, that may partl explain the thinly traded markets.
    I came here to learn what more I can do to protect my silver business and now I'm focused on that and on diversifying. You seem committed to moving people in that direction (thank you) and you will find more success in doing so If your argument is a 'yes, but' argument rather than what is often perceived as an attack (since it often involves derision, appears to be unprompted, and doesn't differentiate between 1. investors who are approaching the metals sanely but approaching the market ignorantly and 2. the very hucksters who may well have driven them here in the first place.)

    I read the totality of what you're saying and see the 'yes, but', but it takes a while to tease it out. If that came out up front you'd find a vastly more receptive audience among those you've spent so much energy trying to awaken.



  6. How's that "Humble Pie" diet working out for ya, Greg? Only a few more years and I reckon you'll be close to having a discussion with someone about Gold in whichbyou don't feel the need to get personally abusive

    1. I thought you'd tucked your tail between your legs and slunk off. Any time you see me being uncivil please feel free to point to the words. As I made clear to you and your friend, I don't care for _uninvited_ incivility.


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