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Market Report: Silver Sold, Then Squeezed

Fri, 08/28/2015 - 12:10
While gold consolidated its recent gains, silver was sold down this week along with other metals and energy.

The whole commodity complex suffered badly in the stock-market fall-out, before a sharp bear-squeeze across commodity markets pushed silver, copper and oil sharply higher yesterday (Thursday). Silver is now down 6.8% on the year and gold 5%. Prices were slightly firmer this morning in Asian trade, before the European opening.

Storm-force winds blew through all markets, with substantial falls in equities after last weekend. As it became clear that the falls would be contained for the moment, the US dollar rallied and US Treasury yields increased from the panic lows. This recovery in general sentiment led to weakness in precious metals generally.

The sharp fall in silver is hard to justify in anything other than purely speculative terms. While the last Commitment of Traders Report (18th August) for the US futures market showed Managed Funds short positions were slightly less extreme, they are still very high, as shown in our next chart.

We will get updated COT figures this evening, but it is reasonable to suppose that some of the long positions in this category have been closed with open interest falling about 7,000 contracts. There may have been some producer hedging as well. The net position, longs minus shorts, is our next chart.

The chart confirms speculators in the form of hedge funds were still extremely bearish as a crowd mid-month and there is little evidence this sentiment has changed this week.


Anecdotal reports are of significant shortages of physical gold and silver, despite the negative sentiment in futures markets. Demand for coins and retail bars in the US has cleaned out the dealers, particularly for silver, and in London availability of sovereigns continues to be tight. Western markets for gold in particular must be reflecting the strains imposed upon it by continuing Asian demand, which has led to progressive destocking of vaulted gold for the last three years.


The next chart shows how China's public demand for physical gold, the largest identifiable physical market, has grown over recent years.

In the first seven months of 2015 1,464 tonnes were taken up by the public, an annual rate of over 2,500 tonnes. If the average monthly growth seen in the first half persists, total deliveries could be somewhat more. World mine production according to the US Geological Survey in 2014 was only 2,860 tonnes, including China's own output of 450 tonnes, putting this one market in context. Other Asian countries are also buyers, notably India which is back in the market for an estimated 1,000 tonnes this year.

These two nations alone are taking out about 150-200 tonnes more than is mined, and while there are also scrap supplies to consider, maybe about 500 tonnes globally, scarce bullion stocks in the west are still being depleted.


The public response throughout Asia to currency instability could be the most important influence on the gold price in coming months. Traditionally, when currencies come under stress the public reaction is to step up gold purchases, in which case backwardations will persist and premiums in Asian markets will rise.

I shall tweet the latest weekly demand figure for China later today when available on @MacleodFinance.

Next week

Monday.

Japan: Capital Spending, Vehicle Sales, Construction Orders, Housing Starts. Eurozone: Flash HICP. US: Chicago PMI.

Tuesday.

Eurozone: Manufacturing PMI, Unemployment. UK: BoE Mortgage Approvals, Net Consumer Credit, Secured Lending, M4 Money Supply. US: Flash Manufacturing PMI, Construction Spending, IBD Consumer Optimism, ISM Manufacturing, Vehicle Sales.

Wednesday.

Eurozone: PPI. US: ADP Employment Survey, Non-Farm Productivity, Unit Labour Costs, Factory Orders.

Thursday.

Eurozone: Composite PMI, Services PMI, ECB Deposit Rate. US: Initial Claims, Trade Balance, ISM Non-Manufacturing.

Friday.

US: Non-farm Payrolls, Private Payrolls, Unemployment.

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Economics of a crash

Thu, 08/27/2015 - 12:20
This month has seen something that happens not very often: it appears to be the early stages of a global stock market crash.

For the moment investors are in shock, seeking reassurance and keenly intent on preserving their diminishing assets, instead of reflecting on the broader economic reasons behind it. To mainstream financial commentators, blame for a crash is always placed on remote factors, such as China's financial crisis, and has little to do with events closer to home. Analysis of this sort is selective and badly misplaced. The purpose of this article is to provide an overview of the economic background to today's markets as well as the likely consequences.

The origins of a developing crisis are deeply embedded in the financial system and date back to the invention of central banks, and more particularly to the Bretton Woods Agreement, which was the basis of the post-war monetary system. In the 1940s government economists were embracing the new Keynesian view that Say's law, the law of the markets, was irrelevant and supply and demand for goods and services could be regarded as independent from each other, and crucially, savings should be redirected into immediate consumption and replaced as a source of investment finance by a more flexible approach to money and credit.

Keynes wanted a new super-currency, which he called the bancor. Instead the world got the dollar and the "full faith and credit" of the US government expressed through her considerable gold reserves. While central banks could swap dollars for gold at $35 per ounce, there was no effective restraint on the issuance of dollar-money and credit. It allowed America to finance the Korean and Vietnam wars without resorting to domestic taxation. When those dollars-for-export returned home in the late sixties, the run against dollars and in favour of gold began, leading to the Nixon Shock, when the US finally consigned the Bretton Woods Agreement to the dustbin of history.

From the 1970s the dollar continued in its role as the world's reserve currency without any gold convertibility at all. As a deliberate policy the US government tried to remove gold's status as money by simply denying it had any such role. The propaganda persists to this day, expressed as progress in the development of government-issued currencies. Having thus disposed of the shackles of sound money, money and credit were expanded to pay for sharply higher oil prices in the early 1970s, and made available for Latin American borrowers without meaningful constraint. This was followed by an accelerating loss of the US dollar's purchasing power in the second half of that decade.

The expansion of money and credit since Bretton Woods corrupted business calculations in the same way as fractional reserve banking had done over the previous hundred years, but with the additional feature of unfettered expansion of raw money. Instead of periodic banking crises, which liquidated bad and excessive debts, banks were supported and debts were allowed to accumulate over successive credit cycles. Not even the increases in interest rates in the late-seventies, designed to halt runaway price inflation, saw total debt contract.

The consequences of these monetary and credit excesses up to the end of the last century were growth in financial speculation. This culminated in the dot-com boom, which was on a similar bubble-scale to the stockmarket excesses of 1927-1929, and arguably was fuelled by the same degree of public speculation recorded in the Mississippi and South Sea bubbles three hundred years ago. Stock markets were only rescued from the subsequent fall-out by the unprecedented actions of the Fed in 2001-2003, which reduced the Fed Funds Rate to 1%, laying the foundations for the housing bubble of 2005-2007. And as we all know, it was the collapse of this secondary bubble that led to the financial crisis that took down Bear Stearns and Lehman Bros.

According to the McKinsey Global Institute, global debt increased from $142 trillion in 2007 to $199 trillion at the end of 2014. This was admittedly a slower rate of growth than 2000-07, but the difference can be accounted for by the expansion of central bank base money and the higher average level of rolled-over interest rates during the earlier period. Separately, shadow-banking debt has also grown as a source of short-term financing. It remains the case today that financial instability is the consequence of excessive debt, and the global financial system is inherently more risky today than it was at the time of the Lehman Crisis.

Reliance on debt as an economic driver is the other side of the expansion of the total quantity of money. This can only continue so long as people accept that money maintains its objective exchange-value.

Interest rates
Since the late 1970s the major central banks, led by the Fed, have wrested control of interest rates from markets on the supposition that economic activity and price inflation can be managed by varying them at the state's behest. The policy is very different from the way interest rates are set in free markets. The philosophical bias behind state management of interest rates, that borrowers are more deserving than lenders, has a long history, dating long before Shakespeare's Shylock. Since central banks have controlled interest rates they have always favoured borrowers over savers, with the predictable result that global debt has expanded without the underlying production to support it. And without earnings set aside from production, debt cannot be repaid, so it must default.

Preventing this default has become a growing problem and is the primary task facing central banks. Household, corporate, government and financial sectors are all exposed to debt default, ensuring political and business considerations will allow no alternative outcome. The only means central banks can employ is the creation of yet more money, and to foster the expansion of bank credit at an ever-increasing pace, a remedy that was spectacularly confirmed as effective by the Fed's management of the Lehman crisis and the rounds of quantitative easing that followed. Zero interest rates have ensured that compounding unpaid interest is kept to a minimum, but at the same time they have encouraged yet more unproductive borrowing. Markets are signalling that we are arriving at a new financial crisis, and soon it will be time to unleash the monetary weapon again.

Each crisis is of a greater magnitude than the previous one. The trigger undermining the global debt problem this time is a sharp slowdown in global production. Without the fig-leaf of increasing productive output, the precariousness of the global debt problem has become all too evident to ignore, even for perpetual optimists.

The inevitable conclusion
Equity markets are telling us that the debt crisis is now upon us again. The detailed course that events will take from here cannot be predicted, but we can be certain that over the coming months governments will be ready to move heaven and earth to prevent a deepening crisis, by any means at their disposal. In this respect the lesson of the Lehman crisis is that flooding the system with money and guarantees of more money actually works. Gone will be any pretence of monetary discipline, gone will be any pretence of higher interest rates, and gone will be any constraint on the issuance of yet more debt. A crisis of malinvestment has become a crisis of the financial system, and will soon become a crisis of currencies. We can be increasingly certain that debt will be extinguished not by debtors reckoning with creditors, but by the debasement of money, and that this outcome becomes the unstated objective of policy makers.

It is an important conclusion. In effect, it posits that the only solution open to central banks is the deliberate destruction of their own currencies, not on the drip-feed basis that has existed since the Bretton Woods Agreement, but by a more deliberate acceleration. We cannot judge whether this will work one more time, postponing a final crisis. But we can see the circumstances ahead of us more clearly, and we can more easily imagine central bankers being drawn into repeating the mistaken policies of Rudolf Havenstein, president of Germany's Reichsbank in 1921-1923. In predicting this final crisis for any country that treads down the path of government corruption of its money, the economist von Mises described its manifestation as a crack-up boom, the boom to end all booms, when ordinary people finally realise the worthlessness of government currency and dump it as rapidly as possible for anything they can get hold of. The last vestiges of the currency's objective exchange-value evaporate.

The hyperinflation of fiat money and the prospect of a final collapse in its purchasing power is becoming an increasingly probable outcome of the financial events unfolding today. That much can be deduced from sound economic theory, and is confirmed by historical records of similar crises. We can also expect this outcome to be made certain by the misguided faux-science of macroeconomics, which bases itself on the denial of Say's law and which badly misleads government policy-makers.

Only this time the threatened currency destruction will be global, because where the dollar goes, and the dollar is still the reserve currency, so we all go.

 The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Dealing Desk: Rise in interest for gold deliveries

Thu, 08/27/2015 - 09:19
As the global stock markets plummeted in reaction to China's economic woes, online bullion dealer, GoldMoney, has reported a rise in interest from its customers for gold bars to be delivered to their homes.

GoldMoney Dealing Manager, Kelly-Ann Kearsey said, "While the gold price did hit a seven week high, it hasn't reacted to the stock market swings as much as we might expect. However, it's obvious that some people are concerned because this week we saw orders from the UK, US, and Canada for physical bullion bars to be delivered to customers' homes."

"We've had a busy week all round, with gold by far the most popular metal in busy buying activity, which is unusual for the holiday period. Silver has, to a lesser extent, also featured prominently on the buy lists, while the more industrial metals, platinum and palladium, have languished with some profit-taking on palladium."

"Federal Reserve head, Janet Yellen's comments about the rate rise not being imminent helped to depress the dollar a little and lift gold hopes, but today's better than expected US GDP figures have quashed that effect somewhat. However, we are still seeing our customers actively buying as the uncertainty in global markets sends people towards the safe haven and wealth preserving qualities of gold."

Week on week price performances
27/08/15 16:00. Gold down 2.3% to $1,123.11, Silver down 7.4% to $14.32, Platinum off 2.7% to $996.24 and Palladium down 9.8% at $554.97. Gold/Silver ratio: 78

 

NOTES TO EDITOR
For more information, and to arrange interviews, please contact Emily Cornelius, Communications & PR Tel: + 1 647 499 6748 or email: Emily.Cornelius@GoldMoney.com

GoldMoney
GoldMoney is one of the world's leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.
Through GoldMoney's non-bank vault operators, physical precious metals can be stored worldwide, outside of the banking system in the UK, Switzerland, Hong Kong, Singapore and Canada. GoldMoney partners with Brink's, Loomis International (formerly Via Mat), Malca-Amit, G4S and Rhenus Logistics. Storage fees are highly competitive and there is also the option of having metal delivered.
GoldMoney currently has over 20,000 customers worldwide and holds over $1billion of precious metals in its partner vaults.
GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey's anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers' assets with independent audit reporting every 3 months by two leading audit firms.

Further information:
Visit: Goldmoney.com or view our Video.

Market Report: Risk on

Fri, 08/21/2015 - 06:23
This week market relationships underwent a sea-change, with a sudden realisation that the global economy is in a deepening crisis.

Equity valuations in the developed nations are falling sharply and corporate bond spreads are widening, triggering a flight to the relative safety of government bonds. Gold and silver prices have recovered somewhat this week, with gold now 9% up from its lows of six weeks ago, and silver 8%.

While this has been encouraging for followers of precious metals, it is probably realistic to describe their performance so far as evidence of a developing bear squeeze and not yet a sign of something more material. Bears being closed out should be evident from a fall in open interest on the futures market, and this may be true in silver, which is our next chart.

Note how open interest continued to fall after early August, despite the price recovery. Another reason for OI to drop off is the September contract is winding down, so spread positions were being reduced accounting for much of the fall. If this is so, then short positions in the managed money category will still be uncomfortably high.

This is not so evident in gold, which is next.

In this case, open interest has steadied since early August, only picking up slightly in the last few days. It could be that new spreads are being opened, rather than new bull positions, but we shall only know for certain when the Commitment of Traders Report is published this evening.

China's series of minor changes to the yuan/dollar rate has triggered, or at least coincided with weaknesses in emerging market currencies, verging on a crash in some instances. The Khazak tenge lost 23% in one day as oil prices slid lower, and the Turkish lira, which has a poor history, has also fallen sharply on political turmoil. Other weakening EM currencies range from Brazil to South Korea, and Thailand to South Africa. Old hands are reminded of the Asian crisis in 1997, which started in a minor way with the Thai baht coming under pressure, spreading to other South East Asian currencies and becoming a full blown regional crisis.

Many of the factors that drove these currencies into a sharp devaluation are present today on a wider and larger scale, with nearly all equity indices firmly entrenched in bear markets. Investors are shifting their perceptions from chasing equity uptrends to protecting themselves, aware that if emerging markets sink further there is a risk of a full-scale rout developing. That being the case, gold prices should benefit considerably from accelerated buying of physical metal throughout Asia.

It seems improbable that the Fed and the Bank of England will persist in their desire to raise interest rates, particularly since the S&P500 and the FTSE are reflecting growing investor panic. Instead, unless equities stabilise of their own accord, there will be a growing likelihood of a new round of quantitative easing aimed at supporting the markets.

To summarise, precious metals prices are rapidly switching from an entrenched bear market to conditions that could drive prices significantly higher over the medium term.

Next week

Monday.

Japan: Leading Indicator (Final).
US: Flash Manufacturing PMI.

Tuesday.

UK: BBA Mortgage Approvals.
US: S&P Case Shiller Home Price, FHFA House Price Index, New Home Sales.
Japan: PPI Services.

Wednesday.

UK: CBI Distributive Trades.
US: Durable Goods Orders.

Thursday.

Eurozone: M3 Money Supply.
US: Core PCE Price Index, GDP Annualised (2nd Est.), Initial Claims.
Japan: CPI, Real Household Spending, Unemployment.

Friday.

UK: Nationwide House Prices, GDP (2nd Est.).
Eurozone: Business Climate Index, Consumer Sentiment, Economic Sentiment.
US: Core PCE Price Index, Personal Income, Personal Spending, University of Michigan Sentiment.
Japan: Large Retailers Sales, Retail Sales.

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Dealing Desk: Golden week for precious metals

Thu, 08/20/2015 - 13:19
Precious metals have had a positive week and GoldMoney Dealing Manager, Kelly-Ann Kearsey said there's been buying across the board.

"We have seen an increase in both value and volume trading which is particularly unusual for this time of year. Even more positive is the fact we have also noticed customers funding their holdings which means they are preparing to purchase as well, proving this might be more than just a week long bull run.

"The US Federal Reserve's caution with regard to when it might put up interest rates has hit the dollar this week, and that combined with the continued economic woes in China has pushed investors towards the safe haven of gold in particular. We know that whenever we see a boost in the gold price customers tend to start taking more interest in the metal again and look to buy in as part of the upward trend.

"Singapore has, as usual, been the favourite vault of choice for customers, with some interest in Canada, but it's not been all gold's glory. Silver has also done well and platinum is back up over its thousand dollar level.

"All in all, an unusual week for the middle of the summer holidays, but indicative of the jittery nature of the markets as the final proof of economic turnaround fails to materialize in the USA and China struggles to regain control of its slowing economy."

Week on week price performances
20/08/15 16:00. Gold up 5.5% to $1,149.03, Silver up 5.5% to $15.46, Platinum up 8.1% to $1023.75 and Palladium up 2.8% at $615.50. Gold/Silver ratio: 74

NOTES TO EDITOR
For more information, and to arrange interviews, please call Gwyn Garfield-Bennett on 01534 735 253, or email gwyn@directinput.je

GoldMoney
GoldMoney is one of the world's leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.

Through GoldMoney's non-bank vault operators, physical precious metals can be stored worldwide, outside of the banking system in the UK, Switzerland, Hong Kong, Singapore and Canada. GoldMoney partners with Brink's, Loomis International (formerly Via Mat), Malca-Amit, G4S and Rhenus Logistics. Storage fees are highly competitive and there is also the option of having metal delivered.

GoldMoney currently has over 20,000 customers worldwide and holds over $1billion of precious metals in its partner vaults.

GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey's anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers' assets with independent audit reporting every 3 months by two leading audit firms.

Further information:
Visit: Goldmoney.com or view our video online

China chooses her weapons

Thu, 08/20/2015 - 11:24
China's recent mini-devaluations had less to do with her mounting economic challenges, and more to do with a statement from the IMF on 4 August, that it was proposing to defer the decision to include the yuan in the SDR until next October.

The IMF's excuse was to avoid changes at the calendar year-end and to allow users of the SDR time to "adjust to a potential changed basket composition". It was a poor explanation that was hardly credible, given that SDR users have already had five years to prepare; but the decision confirming the delay was finally released by the IMF in a statement on Wednesday 19th.

One cannot blame China for taking the view that these are delaying tactics designed to keep the yuan out, and if so suspicion falls squarely on the US as instigators. America has most to lose, because if the yuan is accepted in the SDR the dollar's future hegemony will be compromised, and everyone knows it. The final decision as to whether the yuan will be included is not due to be taken until later this year, so China still has time to persuade, by any means at her disposal, all the IMF members to agree to include the yuan in the SDR as originally proposed, even if its inclusion is temporarily deferred.

China was first rejected in this quest in 2010 and since then has worked hard to address the deficiencies raised at that time by the IMF's executive board. That is the background to China's new currency policy and what also looks like becoming frequent updates on her gold reserves. It bears repeating that these moves had little to do with her domestic economic conditions, for the following reasons:

• To have an economic effect a substantial devaluation would be required. That is not what is happening. Furthermore devaluation as an economic solution is essentially a Keynesian proposal and it is far from clear China's leadership embraces Keynesian economics.
• Together with Russia through the Shanghai Cooperation Organisation, China is planning an infrastructure revolution encompassing the whole of Asia, which will replicate China's economic development post-1980, but on a grander scale. This is why "those in the know" jumped at the chance of participating in the financing opportunities through the Asian Infrastructure Investment Bank, which will be the principal financing channel.
• China's strategy in the decades to come is to be the provider of high-end products and services to the whole of the Eurasian continent, evolving from her current status as a low-cost manufacturer for the rest of the world.

China's leaders have a vision, and it is a mistake to think of China solely in the context of a country whose economy is on the wrong end of a credit cycle. This is of course true and is creating enormous problems, but the government plans to reallocate capital resources from legacy industries to future projects. Rightly or wrongly and unlike any western government at this point in a credit cycle, China accepts that a deflating credit bubble is a necessary consequence of a deliberate policy that supports her future plans. She is prepared to live with and manage the fall-out from declining asset valuations and business failures, facilitated by state ownership of the banks.

Instead, to understand why she is changing the yuan-dollar rate we must look at currencies from China's perspective. China is the world's largest manufacturing power by far, and can be said to control global trade pricing as a result. It then becomes obvious that China is not so much devaluing the yuan, but causing a dollar revaluation upwards relative to international trade prices. She is aware that the US economy is in difficulties and that the Fed is worried about the prospect of price deflation, so lower import prices are the last thing the Fed needs. Now China's currency move begins to make sense.

The mini-devaluations were a signal to Washington and the rest of the world that if she so wishes China can dictate the global economic outlook through the foreign exchange markets. China believes, with good reason, that she is more politically and economically robust, and has a better grasp over the actions of her own citizens, than the welfare economies of the west in the event of an economic downturn. Therefore, she is pursuing her foreign exchange policy from a position of strength. And the increments that will now be added to gold reserves month by month are a signal that China believes she can destabilise the dollar through her control of the physical gold market, because it gently reminds us of an unanswered question always ducked by the US Treasury: what evidence is there of the state of the US's gold reserves?

China would probably live with a deferral of her SDR membership for another year, if there is a definite decision in October to include her currency in the SDR basket. That being the case, China must be tempted to increase pressure on all IMF members ahead of the October meeting. The strategy therefore changes from less passivity to more aggression over both foreign exchange rates and gold ownership over the next eight weeks. We can expect China to tighten the screw if necessary.

The stakes are high, and China's devaluation of only a few per cent has caused enough chaos in capital markets for now. But if the eventual answer is that the yuan will not be allowed to join the SDR basket, it will be in China's interest to increase the pace of development of the new BRICS bank instead with its own version of an SDR, selling dollar reserves and underlying Treasuries to fund it. The threat that China will turn her back on the post-war financial system and the IMF would also undermine the credibility of that institution more rapidly perhaps than the dollar's hegemony if the yuan was accepted. And if a US-controlled IMF loses its credibility, even America's allies will desert her, just as they did to join the Asian Infrastructure Investment Bank a few months ago.

It was always going to be the US that faced a predicament from China's growing economic power. She has chosen to bluff it out instead of gracefully accepting the winds of change, as Britain did over her empire sixty years ago. Change in the economic pecking-order is happening again whether we like it or not and China will have her way.

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Market Report: China Acts Following SDR Rejection

Fri, 08/14/2015 - 11:43
Precious metals staged a good rally this week on bear-closing, triggered by uncertainty behind China's series of mini-devaluations.

Gold recovered by 4% before dropping $10 of consolidation yesterday (Thursday). And as can be seen in the chart above, silver has recovered its losses of the year. Gold has rallied to its 50-day moving average at $1,125 and silver is above its 50-day MA which is at $15.20. There could be sufficient momentum to drive prices higher towards their 200-day MAs at $1,175 and $16.05 respectively.


News was dominated by China which moved the renminbi-dollar rate downwards by 4.6% in what has become a moving peg. This sparked a number of theories ranging from a return of the currency devaluations of the thirties to a rerun of the late-nineties Asian crisis. The motivation as always is uncertain: to a Keynesian, devaluations are a sensible response to a failing economy; to a student of the Big Game, it is a response to the IMF decision to defer the yuan's inclusion in the SDR, which was unexpectedly announced on 6 August. It could be quite simple: dollar strength over other currencies has artificially strengthened the renminbi against nearly all other currencies in recent years and has encouraged capital outflows from China. Now that joining the SDR is not on the table, it is hardly surprising that the Chinese are addressing this issue.


For now, the common belief that prevails in futures markets that gold and silver prices are headed lower has taken a nasty knock. The deflationary implications of the Chinese devaluations for the US economy have caused US Treasury yields to fall sharply, and expectations of an interest rate rise in September in the US have been deferred again.

Bears of gold and silver have argued that because dollar interest rates are now set to increase, the dollar will continue to strengthen. That this outcome is now less likely undermines their position. It therefore seems reasonable to expect the bear squeeze to continue. Furthermore, there is the intriguing thought that the timing of dollar interest rate moves might now dictated by China's foreign exchange policy. So much for dollar hegemony, which is presumably the reason for the yuan being kept out of the SDR.

The burning issue for gold-watchers must be the Chinese public's reaction to currency devaluations. Assuming these devaluations have further to go, the implication is for relatively higher yuan prices for gold. Will profit-taking be encouraged, or will the public accelerate their purchases to hedge a weakening currency? Deliveries through the Shanghai Gold Exchange should be watched with great interest. The last chart is of deliveries to date.

Note the significant improvement in public demand in recent months, compared with the same time last year. Over the last three months deliveries totalled 636 tonnes, compared with 392 tonnes for the same period last year.

Next week

Monday

Eurozone: Trade Balance. US: Empire State Survey, NAHB Builders Survey, Net Long-Term TICS Flows.

Tuesday

UK: CPI, Input Prices, ONS House Prices, Output Prices. US: Building Permits, Housing Starts. Japan: Customs Cleared Trade.

Wednesday

Japan: All Industry Activity Index, Leading Indicator (Final). Eurozone: Current Account. UK: CBI Industrial trends. US: CPI.

Thursday

UK: Retail Sales. US: Initial Claims, Existing Home Sales, Leading Indicator, Philadelphia Fed Survey.

Friday

UK: Public Sector Borrowing. Eurozone: Flash Consumer Sentiment.

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

 

Dealing Desk: Chinese currency fears fuel the world’s oldest currency

Thu, 08/13/2015 - 13:00
The inevitable economic fears following China's decision to devalue its currency have sent some investors gold hunting this week, although interestingly, Dealing Manager Kelly-Ann Kearsey said more of their customers have been jumping on silver's ascendency.

'Silver was definitely the favourite metal of the week in terms of the number of buyers, although gold won the week in terms of the total value of purchased metal. While both have been slipping in recent months, silver has perhaps fallen the most. In April 2011, it was riding high at over $48, in recent weeks its been at its lowest levels in five years, trading at around $15.

'All the metals have made gains this week and we've seen the usual selling out of the UK and Swiss vaults, with buying going into Singapore.

'The latest World Gold Council (WGC) Gold Demand Trends report shows how gold demand had fallen 12% in the second quarter of this year - its lowest level in six years. This was, in part, this was due to China's economic slowdown, but also to India, being the world's two largest consumers of the yellow metal. However, it may predict a tailing off in supply and in recycling, and as we move into what are traditionally the busiest times for Indian gold buying, the WGC are expecting demand to pick up again.'

Meanwhile, says Kelly-Ann, 'The bears are continuing to predict lean times for gold prices until the U.S. Federal Reserve raises interest rates and the spectre of inflation returns. Conversely, concern over the Chinese economy and the impact it will have on worldwide stock markets is likely to still encourage those who want to diversify their portfolio risk into purchasing gold. Additionally, the low prices across the precious metals may also tempt speculators back into the market.'

Week on week price performances
13/08/15 16:00. Gold up 2.4% to $1,115.51, Silver up 5.1% to $15.39, Platinum up 4.4% to $988.25 and Palladium up 3.4% at $619.00. Gold/Silver ratio: 72

NOTES TO EDITOR
For more information, and to arrange interviews, please call Gwyn Garfield-Bennett on 01534 735 253, or email gwyn@directinput.je

GoldMoney
GoldMoney is one of the world's leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.

Through GoldMoney's non-bank vault operators, physical precious metals can be stored worldwide, outside of the banking system in the UK, Switzerland, Hong Kong, Singapore and Canada. GoldMoney partners with Brink's, Loomis International (formerly Via Mat), Malca-Amit, G4S and Rhenus Logistics. Storage fees are highly competitive and there is also the option of having metal delivered.

GoldMoney currently has over 20,000 customers worldwide and holds over $1billion of precious metals in its partner vaults.

GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey's anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers' assets with independent audit reporting every 3 months by two leading audit firms.

Further information:
Visit: Goldmoney.com or view our video online

Welcome to the world of ZIRP zombies

Thu, 08/13/2015 - 11:53
Interest rates in the US, Europe and the UK were reduced to close to zero in the wake of the Lehman crisis nearly seven years ago.

Initially zero interest rate policy (ZIRP) was a temporary measure to counter the price deflation that immediately followed the crisis, but since then interest rates have been kept suppressed at the zero bound. It had been hoped that the stimulus of close-to-zero interest rates would also guarantee economic recovery. It has failed in this respect and the low bond yields that result have only encouraged the rapid expansion of government debt.

It is clear that monetary policies of central banks are the problem. Instead of boosting recovery they have simply destroyed the mechanism which recycles savings into capital for production. They have brought about Keynes's wish, expressed in his General Theory that he "looked forward to the euthanasia of the rentier", whose function in providing finance for entrepreneurs is to be replaced by the state: entrepreneurs "who are so fond of their craft that their labour could be obtained much cheaper than at present."[1]

Instead of storing the fruits of his labour in the form of bank deposits to be made available to the investing entrepreneur, the saver is discouraged from saving, instead being forced to speculate for capital gain. In that sense, ZIRP is the logical end-point of Keynes's ideal.

The mistake is to subscribe to the ancient view that interest is usury and that it only benefits the idle rich, a stance that appeared to be taken by Keynes. What Keynes missed is that interest rates are an expression of time preference, or the compensation for making money available today in return for a reward tomorrow. If you try to ban interest rates by imposing ZIRP, then the vital function of distributing savings in the interests of progress simply ceases. An economy with ZIRP joins the ranks of the living dead.

Von Mises recognised this in 1909 when he wrote that "...a falling value of money goes hand in hand with a rising rate of interest and a rising value of money with a falling rate of interest. This lasts as long as the movement of the objective exchange-value continues. When this ceases, then the rate of interest is re-established at the level dictated by the general economic situation."[2]

Besides noting that Von Mises's analysis was independently confirmed by Gibson's paradox, it may be helpful to restate it in easier to understand terms. History has shown that a borrower of good standing in a sound-money economy that is stable would pay about 3% interest. If prices are rising, his margins will improve, and he will be prepared to pay more to seize the opportunity to profit. If on the other hand prices are falling, he can only afford to pay less and he will most likely restrict his future activities to those he can finance from his own resources. It is this free market demand that sets interest rates, not the usurious lenders reviled by Keynes.

On the face of it a suppressed interest rate should make it profitable to borrow, but that is not the way a producer looks at it. The marginal benefits of extra borrowing have to exceed the costs of investing in production in order to be profitable. A business with a good balance sheet will normally improve its existing products by reinvesting its own reserves without recourse to external funds under almost all conditions. Recourse to external funds implies a materially different product being planned or that a significant expansion of productive capacity is being considered, a more risky step requiring greater capital expenditure, only to be undertaken when economic prospects are set fair.

It is this capital commitment that is missing, despite prolonged monetary stimulus. Central bankers are becoming acutely aware of the failure, which has only lured their governments into a deepening debt trap. That is why the Bank for International Settlements has publicly expressed concerns for some time and why both the Fed and the Bank of England have expressed the wish to get back to some sort of interest rate normality. It will be extremely difficult, but let us assume for a moment that interest rates are raised: what happens then?

An increase in interest rates to more than one or two per cent will be accompanied by rising commodity prices: this much is evident from Gibson's paradox. It would likely come about as speculative money flees financial assets, closes short positions in commodities, and then seeks protection from a fall in the purchasing power of currencies.

Businesses will see two things. Obviously, with bonds, stocks and residential property prices falling as interest rates rise, the business outlook would be deteriorating. However, with commodities and wholesale prices rising, reflecting a fall in money's purchasing power, businesses would be prepared to pay more interest to Keynes's rentiers. This is the basis behind Gibson's paradox.

Not that this is properly understood: macroeconomists have found that their theories have failed, and they don't know why. They want to back-track to safer ground, but are frightened of the consequences. Normalising interest rates could generate a stock market collapse, risk setting off an avalanche of bankruptcies from overleveraged businesses and make government finances wholly untenable. Higher interest rates risk triggering a second financial crisis that could also undermine currencies, pushing up price inflation. While macroeconomic theories can be faulted on the basis of outcomes, there is little doubt the systemic threat from a trend of rising interest rates is very real.

On balance, it is a situation that calls for inaction justified by hope. After all, with the Fed funds rate at 0.25% and $2.6 trillion of commercial bank funds already on deposit at the Fed, could it be that even a small increase in the rate will just suck more deposit money out of the US banking system, leading to a contraction of bank lending?

Central bankers are beginning to see what it has been like for their colleagues in Japan, where for twenty-five years with zero interest rates nothing tried seems to work. Welcome to Keynes's world of euthanized savers and state-sponsored funding. Welcome to the world of ZIRP zombies.

 

[1] Keynes: General Theory of Employment Interest and Money, Chapter 24 section 2.
[2] See Von Mises, The Theory of Money and Credit, p. 349. (English translation, 1953 Yale University Press.)

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Market Report: The war between physical and paper hots up

Fri, 08/07/2015 - 07:29
Gold and silver traded in a tight range this week on low futures volumes.

Last Friday the gold price rallied from $1,080 to $1,101, last night it closed at $1,089. Silver also traded in a narrow range though both are slightly firmer in early European trade this morning.

The market background is extraordinary. Last week gold's open interest fell sharply, suggesting that some of the oversold condition was being unwound: not a bit of it, it was only spread positions being closed, and for the second week in a row the Managed Money category's net short position increased to an extreme condition previously unrecorded. This is shown in the next chart.

Isolating the short side is even more remarkable.

Since the date of the last data input (28 July) open interest has fallen by only 4,000 contracts, suggesting the speculative money is still very short. It would be remarkable if these market conditions are not followed by a massive bear squeeze.

Investors in gold ETFs such as GLD are liquidating dismayed by the negative trend. Some of the gold released is simply migrating east, but this is small in comparison to the increase in demand from value buyers around the world. In the week ending 24 July, the Shanghai Gold Exchange delivered 73.3 tonnes into public hands, and India has also reported a substantial increase in gold imports in recent months as well. And that's only the public in two countries. Recent reports suggest a global revival in physical demand from South Korea to Europe. British gold sovereigns are in short supply at some dealers suggesting demand has picked up in the UK. Coin dealers in the US are also reporting high demand.

How much all this amounts to one can only guess, but a figure of between two and three times mining output seems likely. The balance must be coming out of vault storage, as has been the case since April 2013. At these prices scrappage must have declined.

There is evidence that shortages of deliverable gold are also developing on Comex, where registered gold, in other words gold in Comex vaults available for delivery, fell to a very low 362,000 ounces. This is at the same time holders of the August contract have been standing for delivery, creating potential difficulties. The short term problem appears to have been partially resolved with a transfer in JPMorgan's vault of 276,000 ounces on Tuesday from the eligible category, or gold held in safe custody. Whether or not this is JPM acting out of charitable feelings towards the market or on behalf of a government agency to create deliverable liquidity we can only guess. Either way, it should be observed that if "the establishment" is prepared to bail out the market, Comex could become an easy source of physical gold for large buyers, given shortages and delays in delivery are common elsewhere.

It is hard to see that being permitted for long. Considering all these factors the odds favour a price recovery from current levels, if only to call a halt to the underlying redistribution of bullion.

Next week

Monday

Japan: Consumer Confidence, M2 Money Supply, Economy Watchers Survey.
Eurozone: Sentix Indicator.
UK: BRC Retail Sales Monitor.

Tuesday

Eurozone: ZEW Economic Sentiment.
US: Non-Farm Productivity, Unit Labour Costs, Wholesale Inventories.

Wednesday

Japan: Capacity Utilisation, Industrial Production, METI Tertiary Activity Index, Key Machinery Orders.
UK: Average Earnings, Claimant Count Rate, ILO Unemployment Rate.
Eurozone: Industrial Production.
US: Budget Deficit.

Thursday

US: Import Price Index, Initial Claims, Retail Sales, Business Inventories.

Friday

UK: Construction Output.
Eurozone: GDP, HICP.
US: PPI, Capacity Utilisation, Industrial Production.

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Dealing Desk: Gold hits 5 year low in lacklustre holiday trading

Thu, 08/06/2015 - 13:00
Monday saw gold hit a five year low with even the sell-off in Chinese shares not spurring safe haven buying.

Low inflation and the strong dollar continue to dominate says GoldMoney Dealing Manager, Kelly-Ann Kearsey, 'Interestingly we haven't seen any big sell orders, we've had a steady flow of small sells along with buys so our customers are still not committed either way.

'Investors might be attracted to some higher yielding options, but, with the current gold and silver prices, some customers have decided to add to their portfolio for wealth preservation. In the current circumstances, I can't see the market taking any real direction until we've got the first rate rise out the way which is the primary obsession. Once we're at that point, inflationary fears will come into play again. While safe haven buying hasn't been in evidence recently, the fact that the Greek debt situation has not yet been resolved could also present some opportunities for turbulence and a return to some safe haven tactics.'

'Singapore remains our most popular destination, and, of all the metals, gold still looks to be the most popular among GoldMoney customers, with its silver cousin coming in second.'

Week on week price performances
06/08/15 16:00. Gold off 0.2% to $1,089.56, Silver down 0.7% to $14.65, Platinum slipped 3.6% to $946.99 and Palladium down 3.3% at $598.47. Gold/Silver ratio: 74

 NOTES TO EDITOR
For more information, and to arrange interviews, please call Gwyn Garfield-Bennett on 01534 735 253, or email gwyn@directinput.je

GoldMoney
GoldMoney is one of the world's leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.

Through GoldMoney's non-bank vault operators, physical precious metals can be stored worldwide, outside of the banking system in the UK, Switzerland, Hong Kong, Singapore and Canada. GoldMoney partners with Brink's, Loomis International (formerly Via Mat), Malca-Amit, G4S and Rhenus Logistics. Storage fees are highly competitive and there is also the option of having metal delivered.

GoldMoney currently has over 20,000 customers worldwide and holds over $1billion of precious metals in its partner vaults.

GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey's anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers' assets with independent audit reporting every 3 months by two leading audit firms.

Further information:

Visit: Goldmoney.com or view our video online

Gibson’s paradox: the consequences

Thu, 08/06/2015 - 11:52
We now have an explanation for Gibson's paradox (posted here), a puzzle that has defeated mainstream economists from Fisher to Keynes and Friedman.

The best way to illustrate the puzzle is through two charts, the first showing empirical evidence that interest rates correlate with the price level.

And the second, showing no correlation between interest rates and the annual change in the price level, i.e. the rate of inflation.

The solution to the puzzle is simple: in free markets, interest rates are set by the demands of investing businesses which at the margin will pay a rate of interest based on whether their product prices are rising or falling: hence the correlation.

The second chart shows that central bank policies, which seek to control prices by setting interest rates, have no theoretical justification behind them. They are the consequence of blindly accepting the quantity theory of money, upon which macroeconomics is based.

A mistake made by central bankers is to believe that the price of money is its interest rate, instead of the reciprocal of the price of the products for which it is exchanged. Interest rates are money's time preference, which in free markets broadly reflects the average time preference of all the individual goods bought with money. The problem with monetarism is that it ignores this temporal aspect of exchange.

It is worth bearing in mind that tomorrow's prices, and therefore the purchasing power of money, are wholly subjective, or put another way cannot be known in advance: if they were, we would be able to buy or sell something today in the certain knowledge of a profit tomorrow, which is obviously untrue. It therefore follows that the relative quantities of money and goods are not the key factors in determining price relationships. Far more important are consumer preferences for money against goods, which taken to an extreme can render the purchasing power of a currency to be worthless, irrespective of its quantity. This insight is necessary to put monetary theory into its proper context.

Through monetary policy the Bank of England has overridden free market relationships since the mid-1970s, the Gibson relationship being apparent in the 240 years up to then. Chart 3 continues where Chart 1 left off.

The relationship ended when the Bank of England raised interest rates to 17.1% in 1974 to stop the hyperinflation of prices. For the first time the BoE set interest rates higher than the rate would have been in free markets relative to price levels, and the Fed did the same thing five years later. Since then prices have continued to rise, albeit at a declining pace, and sterling has lost a further 88% of its purchasing power and the US dollar 76%. Since that time interest rate management by these central banks has continued to suppress the Gibson relationship, as we should now call it.

Monetary policy impairs the market between borrowers and savers. We see this today, with zero interest rates suppressing the relationship between savers and investing businesses creating an economic stasis. This brings us to a second error exposed by Gibson. The Fed is expected to raise interest rates from the zero bound in a few months' time in an attempt to return to some sort of normality.

A rising interest rate trend would, according to Gibson, encourage prices to rise towards and likely through the Fed's 2% target inflation rate. This is not how financial traders see it, nor does the Fed. They expect the exact opposite, believing that rising interest rates are bad for demand and commodity prices, which is why the decision has been deferred for so long.

The evidence tells us this view is mistaken and that rising interest rates will be accompanied by rising commodity prices. For example, between 1970 and 1980 gold rose from $36 to $800, and US interest rates from 9% to 17% as shown in Chart 4.

This is a slightly different point, but is graphically illustrates the mistake of thinking the price of anything can be suppressed through higher interest rates.

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Market report: Markets in limbo

Fri, 07/31/2015 - 10:18
Gold and silver remain close to their lows for the year, discouraged as usual by dollar resilience.

Precious metals appear to be in limbo: speculative buyers are discouraged above all by their disappointing performance during the Greek crisis, and the possibility that a Chinese stock market crash might lead to forced selling of gold by Chinese speculators. So far, the latter concern has proved unfounded with public demand in China accelerating on lower prices and exceeding global mine output on its own. As well as Chinese demand, anecdotal evidence tells us that at these prices physical demand from the public has increased elsewhere, with gold sovereigns becoming scarce in London. And our dealers yesterday reported buyers outweighing sellers this week.

Desultory trading has led to a large fall in open contracts in gold futures on Comex, with the August contract running off the board instead of being rolled forward. This is shown in the next chart, and we can assume that this will have relieved the oversold condition somewhat.

The gold price bottomed last Friday at $1,079, and after rallying from that level to a high of $1,104 was sold down yesterday morning to a low of $1,083, which is the same price in early European trading this morning. Silver fared better, outperforming gold, and in this case open interest has held up, the nearest active contract being September. This is our third chart.

On Wednesday the Federal Open Market Committee published their latest minutes, which were virtually unchanged from the previous ones. According to Fed-watchers, the odds probably favour a December rate hike over September, assuming no other factors come into play.
The Fed has so far dismissed suggestions that external factors will affect its timing, such as a collapsing Chinese stock market and a weakening euro driven by a rapidly disintegrating Greek economy. But it is hard to envisage a Fed that simply ignores these important developments, when a higher Fed funds rate would increase global asset and currency instability.

For now, this is a topic of uncertainty, coming towards a crunch-point. Both these problems are likely to strengthen the dollar, particularly against the euro, which looks likely to weaken to under dollar parity. Until this issue is resolved, gold faces selling pressure in futures markets.

This analysis describes what looks like a developing crisis. On one side are the markets, which are awash with fiat currency beginning to be driven by fear; on the other is the Fed, seemingly powerless to act conventionally with interest rates at the zero bound. For patient holders of gold it can only be a matter of a month or two before something breaks, but until it does it could continue to be a rough ride.

I shall tweet Chinese demand for last week when the information becomes available today on @MacleodFinance.

Next week

Monday

Eurozone: Manufacturing PMI.
UK: IPS/Markit Manufacturing PMI.
US: Core PCE Price Index, Personal Income, Personal Spending, Manufacturing PMI Construction Spending, ISM Manufacturing.

Tuesday

UK: Nationwide House Prices.
Eurozone: PPI.
US: Factory Orders, IBD Consumer Optimism

Wednesday

Eurozone: Composite PMI, Services PMI, Retail Trade.
UK: Halifax House Price Index.
US: ADP Employment Survey, Trade Balance, ISM Non-Manufacturing.

Thursday

Japan: Leading Indicator (Prelim.).
UK: Industrial Production, Manufacturing Production, BoE Base Rate.
US: Initial Claims.

Friday

UK: Trade Balance.
US: Non-Farm Payrolls, Unemployment, Consumer Credit.

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Dealing Desk: Precious metals drift on interest rate talk currents

Thu, 07/30/2015 - 12:55
The precious metals bears are still prowling around this week, with relatively little change in prices week on week.

However, as Dealing Manager Kelly-Ann Kearsey explains, this week was similar to the last with plenty of buying by its customers, 'We are into the holiday season now so trading is going to generally be lighter than usual, meaning any fairly large buy or sell orders will create some waves; but whilst we have seen some profit taking at GoldMoney, there are still more individual buyers than sellers.

'All of the metals are drifting somewhat, with gold floating down to close on its 2010 levels so that will have persuaded some to profit take. The markets are being completely dominated by US rate hike talk, and after the dollar had a slightly bumpy ride this week it has now stabilised. This stabilisation follows news that the US economy grew at an annual rate of 2.3% in the three months to June, and amid further talk from Federal Reserve Chair, Janet Yellen, that there could still be a rate hike this year.

'As usual the selling has been out of the UK and Switzerland, with buying going into Singapore and Canada. We're not expecting any drama over the next few weeks as people vacate offices for their summer holidays, but the autumn could turn interesting as further rate hike speculation returns.'

Week on week price performances
30/07/15 16:00. Gold down just 0.1% to $1,092.16, Silver up 0.3% to $14.75, Platinum up 0.9% to $982.75 and Palladium up just 0.1% at $618.72.

NOTES TO EDITOR
For more information, and to arrange interviews, please call Gwyn Garfield-Bennett on 01534 735 253, or email gwyn@directinput.je

GoldMoney
GoldMoney is one of the world's leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.

Through GoldMoney's non-bank vault operators, physical precious metals can be stored worldwide, outside of the banking system in the UK, Switzerland, Hong Kong, Singapore and Canada. GoldMoney partners with Brink's, Loomis International (formerly Via Mat), Malca-Amit, G4S and Rhenus Logistics. Storage fees are highly competitive and there is also the option of having metal delivered.

GoldMoney currently has over 20,000 customers worldwide and holds over $1billion of precious metals in its partner vaults.

GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey's anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers' assets with independent audit reporting every 3 months by two leading audit firms.

Further information:

Visit: Goldmoney.com or view our video online

China’s 1929 moment

Thu, 07/30/2015 - 07:21
Anyone with a nose for markets will tell you that the Chinese government's attempt to rescue the country's stock markets from collapse is far from succeeding.

Bubbles collapse, period; and government interventions don't stop them. Furthermore, we are beginning to see a crack widen in the foundations of China's capital markets that could end up undermining the whole economy.

Since the government owns the banking system, some of the knock-on effects will doubtless be concealed. A consequence for China is that domestic financial instability could threaten her current plans for the international development of her currency. Here the timing couldn't be worse, because in a few months the IMF is due to announce its decision about the inclusion of the renminbi in the SDR*. The odds were in favour of China succeeding in this quest, on the basis that China was deemed to have fulfilled the necessary conditions, and the IMF itself has been supportive.

A 1929-style collapse in China's stock markets would change this delicate balance. In mainstream macroeconomic theory, the only way China can resolve her excessive financial imbalances is to devalue the renminbi against other SDR currencies, hardly a good start for a new member. The IMF, probably egged on by the Americans, could be forced to defer its decision again, reviewing it in 2020.

This would be a bad outcome, given China has set her sights on joining the IMF's top table. There can be little doubt that the recent announcement increasing her gold reserves by only 600 tonnes was made in the context of her desire for the currency to be included in the SDR. If she is rejected, China could swing the emphasis more firmly towards gold, which she owns and mines in abundance.

If Plan A fails, it is time for Plan B. It is almost certain China has substantial undeclared holdings of physical bullion. The enabling regulations for China's gold accumulation programme go back to 1983, and the State will have acquired the bulk of its bullion before it permitted its own citizens to buy from 2002 onwards. Western analysts seem generally unaware that the bulk of China's acquisition of gold was in the late twentieth century, the last time the west was dishoarding huge quantities of bullion into a prolonged bear market, and she had massive capital inflows followed by trade surpluses to offset. This was the basis for my speculation last October that Government holdings could have grown to 20,000 tonnes by 2002, which explains why public ownership was then permitted.

The Chinese government almost certainly views gold as the ultimate money. The time is approaching for Plan B when a higher gold price would serve her interests better than membership of the SDR. It would reduce China's debt levels expressed in the ultimate money, without currency intervention. And it would also boost the personal wealth of her people. In short, it would be popular with ordinary people, at a time when the authorities' credibility is threatened by internal financial developments.

It must be tempting. The effect on western capital markets, having been drained of physical bullion and left with uncovered gold liabilities, could be very interesting. After all, the Chinese curse was for us to live in interesting times.

*Special Drawing Rights

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Market Report: Commodity rout

Fri, 07/24/2015 - 08:17
Industrial commodities, including energy and base metals, were aggressively sold this week as more evidence came in that the global economy is stalling, with world trade having now declined for five months.

Gold was attacked and broke the $1,100 level last weekend to slide to new lows, down 7.9% on the year and silver is now down 4.8%. It is notable how well silver has held up, when it usually moves about twice as much as gold.

There are two reasons behind silver's relative strength. The first is the already substantial short position in silver limiting its fall, and the second is that the cause of the sharp decline in precious metal prices was a bear raid on gold. Whoever engineered it chose their timing carefully: it was very late on a Sunday evening in US time, and the Tokyo market (TOCOM) was shut for a holiday. By dumping several thousand contracts in a very thin market the seller was able to trigger stops, yielding an immediate profit.

The decline in world trade behind the commodities rout has been evident for some time from China's import/export figures, so is hardly a surprise. However, futures markets have become dominated by speculative players with hot money, the result of central banks' monetary policies, instead of a mechanism for producers to sell their production forward to hedge price risk. Volatility has increased to levels that would probably not otherwise be seen.

This is reflected in record short positions in a range of commodity contracts. The chart below, which is of hedge fund short positions in gold on Comex illustrates the almost universally negative sentiment driving prices.

Records in bearish positions are continually being broken. But equally, there were some hedge funds brave enough to be long, and they were obviously the target of the bear raid.

The longs are roughly average for this contract so there was clearly profitable scope for the bear raid that occurred.

Meanwhile, the fall in the gold price has predictably ignited widespread demand for bullion, according to various reports from around the world. The Shanghai Gold Exchange announced a sharp jump in deliveries to 61.8 tonnes, for the week ending 10th July when the gold price averaged $1,150. This was up 39% on the previous week and exceeds global weekly mine output of about 58 tonnes. It will be interesting to see how much prices at the $1,100 level increase Chinese demand, and if you follow me on Twitter (@MacleodFinance) I shall tweet the number for the previous week (to July 17) when it is available later this morning. When one country absorbs all new supply, you know that despite all the bearish chatter, gold is under-priced in the market.

There is an FOMC meeting scheduled this week, and on Wednesday we may hear more definitively about the long-expected rise in the Fed Funds Rate, which is the rate commercial banks are paid on their reserve holdings at the Fed. The likely reason the Fed is getting optimistic that it can raise the rate is banks have withdrawn $145bn from the Fed's reserves in the last three months. This fact coupled with improving employment figures could bring forward an interest rate increase. But double-guessing the Fed on this is not easy, because the FOMC members seem to believe their own official forecasts; that the prospects for the US economy remains rosy, while as stated above world trade outturns suggest otherwise.

Next week

Monday

Eurozone: M3 Money Supply.
UK: CBI Industrial Trends.
US: Durable Goods Orders.

Tuesday

UK: Nationwide House Prices, GDP(1st Est.), Index of Services.
US: S&P Case Shiller Home Prices, Consumer Confidence, FOMC Meeting (to 29th).
Japan: Large retailers Sales, Retail Sales.

Wednesday

UK: BoE Mortgage Approvals, Net Consumer Credit, Secured Lending, M4 Money Supply, CBI Distributive Trades.
US: Pending Home Sales, FOMC Interest rate decision, Fed Funds Rate.
Japan: Industrial Production.

Thursday

Japan: Vehicle Sales.
Eurozone: Business Climate Index, Consumer Sentiment, Economic Sentiment, Industrial Sentiment.
US: Core PCE Price Index, GDP Annualised, GDP price Index, Initial Claims.
Japan: CPI Core, Real Household Spending.

Friday

Japan: Construction orders, Housing Starts.
Eurozone: Flash HICP, Unemployment.
US: Employment Cost Index, Chicago PMI.

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Dealing Desk: Precious metals slide as the bears prowl the markets

Fri, 07/24/2015 - 06:58
Monday saw a drop in the gold price, partly triggered by Asian markets and rumours that some big funds might be dumping gold into the market.

Not surprisingly there was some panic selling as a result, but as Dealing Manager, Kelly-Ann Kearsey, explains, there were still many buyers prepared to put some money into the yellow metal: 'We had a 73% increase in activity compared to last week and while there were some selling orders we actually had more customers buying - albeit in smaller amounts. The usual vaults, UK and Switzerland saw the bulk of activity.

'A conclusion to the Grexit situation and indications of rising inflation in the US, and thus an increased likelihood of a rate hike, dampened gold's safe haven status and brought out a riskier appetite among investors. Moving forward, the American driving season and summer holidays in many markets, should indicate a quiet period, but one where any fairly large movements could have a significant effect on the markets.

'Silver was also on the selling list for some GoldMoney customers this week, although the gold/silver ratio has improved slightly. There was little activity with platinum and palladium.

'Next week brings the US Durable Goods Orders on Monday and then the Federal Open Market Committee meeting on Wednesday which might give further food to investors.'

Week on week price performances
23/07/15 16:00. Gold fell 4.5% to $1,092.81, Silver lost 2.3% to $14.71, Platinum dropped 3.3% to $973.99 and Palladium was down 2.2% at $617.97. Gold/Silver ratio: 74

NOTES TO EDITOR
For more information, and to arrange interviews, please call Gwyn Garfield-Bennett on 01534 735 253, or email gwyn@directinput.je

GoldMoney
GoldMoney is one of the world's leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.

Through GoldMoney's non-bank vault operators, physical precious metals can be stored worldwide, outside of the banking system in the UK, Switzerland, Hong Kong, Singapore and Canada. GoldMoney partners with Brink's, Loomis International (formerly Via Mat), Malca-Amit, G4S and Rhenus Logistics. Storage fees are highly competitive and there is also the option of having metal delivered.

GoldMoney currently has over 20,000 customers worldwide and holds over $1billion of precious metals in its partner vaults.

GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey's anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers' assets with independent audit reporting every 3 months by two leading audit firms.

Further information:

Visit: Goldmoney.com or view our video online

Gold and Gibson’s Paradox

Thu, 07/23/2015 - 07:21
There is a myth prevalent today that the gold price always falls when interest rates rise.

The logic is that when interest rates rise it is more expensive to hold gold, which just sits there not earning anything. And since markets discount future expectations, gold will even fall when a rise in interest rates is expected. With the Fed's Open Market Committee debating the timing of an interest rate rise to take place possibly in September, it is therefore no surprise to market commentators that the gold price continues its bear market. Only the myth is just that: a myth denied by empirical evidence.

The chart below is of a time when the opposite was demonstrably true. From March 1971 to December 1979 the trends in both interest rates and the gold price rose and fell at the same time. It is worth noting that this occurred over more than one business cycle, so it is not a relationship which was cycle-dependant.

The myth is therefore satisfactorily debunked. To understand why this relationship between interest rates and gold is not as simple as commonly believed, we must take the argument further to bring in commodities generally and visit the tricky subject of Gibson's Paradox. This paradox is based purely on long-run empirical evidence, when gold was transaction money, covering the two centuries between 1730 and 1930. It observes that the level of wholesale prices and interest rates are positively correlated. It is not the price relationship that is consistent with the quantity theory of money, which presupposes that interest rates correlate to the rate of price inflation instead of the price level itself. This maybe a reason why monetarists mistakenly argue, as we also discovered in the seventies, that central banks can manage the rate of inflation through interest rate policy. The common view in markets today about the relationship between interest rates and price inflation is wholly at odds with the longer-run evidence of Gibson's Paradox and accords with the more fashionable quantity theory instead.

Gibson and his paradox are generally forgotten today, and those who centrally plan our money and markets appear unaware of the challenge it poses to their monetarist preconceptions. Keynes, no less, described Gibson's Paradox in 1930 as "one of the most completely established empirical facts in the whole field of quantitative economics", and Irving Fisher also wrote in 1930 that "no problem in economics has been more hotly debated". Even Milton Friedman agreed in 1976 that "The Gibson Paradox remains an empirical phenomenon without a theoretical explanation".*

Resolving this paradox can be left to another time; instead we shall consider the implications by looking at price relationships between wholesale prices and interest rates in a post-gold world. The next chart is of producer prices measured in gold compared with one-year Treasury yields.

I have taken the St Louis Fed's "Producer Price Index by Commodity for Crude Materials for Further Processing" to more closely reflect commodity price trends, and to reduce the additional considerations of changes in processing margins over time. The one-year interest rate is preferred to the original evidence of Gibson's Paradox, which used the yield on undated British Government Consols stock as being the only continual information on rates available, because we need to more firmly link the evidence to modern interest rate policies.

Looking at the chart, it is hardly surprising that Gibson's Paradox was quashed from the time of the Nixon Shock in 1971, when the US unlocked a huge rise in the gold price by ending the Bretton Woods Agreement. Instead, the gold price took on a life of its own, driving down wholesale prices priced in gold for the next nine years. The rise in the index from 1980 to 2000 reflected gold's subsequent bear market when gold fell from $800 to $250, but the influence of Gibson's Paradox appears to have returned thereafter.

This conclusion might be considered suspect; but the chart tells us that not only are producer prices at their lowest for thirty-five years when measured in sound money, the price level also coincides with zero interest rates. In theory, it accords precisely with Gibson's Paradox. So where do we go from here?

There is only one way for interest rates to go from the zero bound, it being only a matter of time, time which according to the Fed is now running out. Commodity prices in their role as raw materials therefore seem set to rise with interest rates, if the Paradox is still valid. Furthermore, the evidence from this analysis suggests that wholesale prices are suppressed even more than the price of gold. This being the case, when the interest rate cycle turns the potential for higher raw material prices measured in dollars could be truly spectacular, even more so in the event the gold price rises at the same time, which seems likely in the event that financial markets become destabilised by higher interest rates.

It is worth repeating at this point that the economic consensus, which adheres to the quantity theory of money and has been comforted by the apparent absence of consumer price inflation in the wake of the post-Lehman monetary expansion, takes a diametrically opposite view to that indicated by the Paradox. The prospect of a turn in the interest rate cycle is expected to drive the dollar's exchange rate higher still, weakening commodity prices and gold even further. In the language of the dealers, everyone is on the same side of the trade, meaning the dollar is technically over-bought and commodities over-sold.

Gibson's Paradox says it will turn out otherwise, and it could be central to linking the cyclical relationship between interest rates, securities markets, and commodity prices. It becomes much easier to see how these relationships tie together. Rising interest rates would almost certainly be accompanied by a potentially large fall in overpriced bond and stock markets as speculative positions are unwound, the former even undermining bank solvency ratios.

The flight of speculative capital from falling markets has to go somewhere, particularly if cash balances held in the banks are at a growing risk from systemic default. The Paradox tells us that these are the conditions for commodities to become the safe haven of choice for the highest levels of speculative money ever recorded since fiat currencies dispensed with their golden anchor. Ergo, Gibson's Paradox probably still holds.

*All three quotes are taken from Barsky & Summers, National Bureau of Economic Research Working Paper No. 1680, (August 1985).

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Market Report: Extremes become more extreme

Fri, 07/17/2015 - 06:40
Gold and silver continued to drift lower over the course of the week, with gold trading at $1,145 and silver at $15.02 in early European trade this morning.

This is close to the lowest prices we have seen since 2010. At the same time equities have rallied strongly and the S&P 500 Index is within a whisker of its all-time high.

It is a crazy world. On the New York Stock Exchange margin debt has hit all-time records at $500bn, roughly double that at the top of the dot-com bubble in 2000 when valuations rose to the highest ever recorded. This is at a time when China's stock markets have begun at the very least a serious bear market; at worst embarking on a 1929-style market crash.

Contrast this irrational exuberance with the situation in the gold market: the hedge funds have never been so bearish, with hedge fund (managed money) gold shorts on Comex at all-time records, shown in the chart below (the dotted line is the long-term average).

Even the balance of longs and shorts, the net position, has fallen to 2,099 contracts, the lowest recorded.

These are the positions revealed by the Commitment of Traders (COT) report for Tuesday 7 July. Since then gold's open interest has jumped sharply on a falling gold price, which can only happen if yet more shorts have been opened. Open interest is shown in our next chart.

Open interest has increased by 18,575 contracts since the last COT report, and assuming these contracts represent hedge funds selling yet more shorts in the wake of Greece's agreement to new negotiations, not only will the hedge fund shorts have rocketed to an unprecedented 120,000 contracts (373.24 tonnes equivalent) but for the first time ever they will be net short.

The situation in silver on 7 July was even more bizarre, with short contracts for managed money at 56,859 contracts, which at 5,000 ounces each represents one third of annual mine production. The only redeeming factor is that open interest has decreased by about 9,000 contracts since Tuesday 7th July. We have no way of knowing ahead of tonight's COT figures whether on balance managed money longs or shorts are capitulating; but if gold is any guide it could be longs. The next chart shows the last known position.

In both metals, these extreme positions are at a time of low and diminishing liquidity in underlying bullion markets. Hedge funds are ignoring not only this important factor, but they also seem unaware that the professional dealers are squaring their positions.

We can see that extreme extremes are the order of the day in financial markets that are seemingly oblivious to risk. Doubtless hedge funds that have shorted precious metal futures to buy equities have done well and may be relying on this strategy being underwritten by the central banks: a Yellen put option for equities and a call option for gold. But as the Peoples Bank of China can today confirm this strategy is not fool proof, and when it goes wrong it goes wrong in spades.

Next week

Monday

Eurozone: Current Account.
UK: CBI Industrial Trends.
Japan: BoJ releases minutes.

Tuesday

Japan: leading Indicator (Final).
UK: Public Borrowing.

Wednesday

Japan: All Industry Activity Index, Customs Cleared Trade.
UK: BoE MPC minutes released.
US: FHFA House Price Index, Existing Home Sales.

Thursday

UK: BBA Mortgage Approvals, Retail Sales, CBI Distributive Trades.
Eurozone: Flash Consumer Sentiment.
US: Initial Claims, Leading Indicator.

Friday

Eurozone: Flash Composite PMI, Flash Manufacturing PMI.
US: Flash Manufacturing PMI, New Home Sales.

Disclaimer: The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Dealing Desk: A see-saw week for gold and the USD

Thu, 07/16/2015 - 11:16
There has been a clear divergence in the fortunes of the Dollar and the Euro this week which has weighed heavy on the gold price and the yellow metal's safe haven status.

Head of Dealing and Settlements Roland Khounlivong, said, 'Today's announcement that the Greek parliament has agreed the new austerity measures and therefore agreed to creditor conditions, has pushed the Euro down around 1.5% from last week, and given some investors their risk appetite back.

'Gold's see-saw relationship with the US dollar has meant that as it strengthened this week, so gold went south. Helping the swing was US Chair of the Federal Reserve Board, Janet Yellen, who said the raising of interest rates there is very much on the agenda. She also confirmed that the US economic recovery is on track and won't be worried by the situation in Greece or the shaky Chinese stock market.'

The result has been gold heading back to mid March levels, but the gold/silver ratio is still well above 70, with silver being much cheaper relative to its yellow cousin. 'Silver is still underpriced in comparison,' says Roland Khounlivong, 'and now we're entering the holiday period we can expect the market to be relatively quiet until at least the end of August.

There will be some interesting figures out tomorrow in the form of the US Consumer Price Index, but then next week little in the way of interest and therefore we can expect the market to drift a little in the coming weeks.'

Week on week price performances
16/07/15 16:00. Gold down 1.6% to $1,144.67, Silver off 2.0% to $15.06, Platinum slipped 1.4% to $1,007.49 and Palladium fell 1.0% at $631.72. Gold/Silver ratio: 76

 

NOTES TO EDITOR
For more information, and to arrange interviews, please call Gwyn Garfield-Bennett on 01534 715411, or email gwyn@directinput.je

GoldMoney
GoldMoney is one of the world's leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.

Through GoldMoney's non-bank vault operators, physical precious metals can be stored worldwide, outside of the banking system in the UK, Switzerland, Hong Kong, Singapore and Canada. GoldMoney partners with Brink's, Loomis International (formerly Via Mat), Malca-Amit, G4S and Rhenus Logistics. Storage fees are highly competitive and there is also the option of having metal delivered.

GoldMoney currently has over 20,000 customers worldwide and holds over $1billion of precious metals in its partner vaults.

GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey's anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers' assets with independent audit reporting every 3 months by two leading audit firms.
Further information:
Visit: Goldmoney.com or view our video online

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