Gold continues tumble without outside catalyst

Producer prices were flat as was the US dollar index, but that didn’t stop a determined seller from pushing gold prices down this morning.

What is driving the selling pressure?

Most traders are paid to execute orders to maximize value.  That is to say, if you are selling a commodity you want to sell it for the highest price (or short it at the highest price) to maximize your profits.

What we’ve seen within the last several years is the opposite of that.  Regular dumping of gold (and silver) futures contracts with heavy volume at the lowest prices.  Huge lots executed at once — rather than distributed over the course of a day to achieve a volume average weighted price.

Are prices being fixed?

This leads the gold investing community to believe that there is malicious manipulation underway in these markets.  And with just about every other market in the world having been proven to be manipulated, such as LIBOR, foreign exchange, bonds, equities and other commodities — perhaps, just perhaps it’s not too paranoid of a theory after all.

A reason to sell so many contracts in to the market at once would be to push price down through sell stop orders.  

This action forces prices even lower and pushes many out of long positions.

Only the people pushing the sell button truly know their own intentions (or that of the institution they are employed by).  An outside observer of these markets is forced to draw their own conclusions.

How can so many claim to own the same gold?

The ratio of futures contracts to ounces of physical gold at the COMEX has risen to the highest levels on record.  Last checked, it was closing in on 250 gold futures claims per ounce of physical gold actually available.  This means that should there be a large demand for COMEX gold delivery, there may not be the gold available to fulfill the order — necessitating a cash settlement.

If one was seeking delivery to obtain physical metal for storage, this would force that party to seek gold elsewhere as soon as possible with that settled cash.  And given that so many parties seem to have claims on the same ounces of gold, that could prove to be an interesting setup for a phenomenal short squeeze that drives prices much, much higher.

Potential scenarios for the continued decline.

How this particular situation resolves remains a mystery, but I am inclined to speculate that we have two possible scenarios that could play out:

1: We are witnessing the beginning of the one of the greatest deflationary collapses the world has ever seen, as evidenced by commodity prices imploding, China’s economy in serious decline and recent volatility in equity markets.  If this is the case then it will be difficult to find a safe home for one’s money almost anywhere.

2: The precious metals markets’ prices are being guided lower in order to reduce the bid for what were once considered safe haven assets by many.  Eventually, if such a scheme is underway, it will unravel with prices going much higher.

Which of these scenarios is playing out remains to be realized.  

The former means the global markets are coming unglued at the seams and the global economy is crushed.  The latter would indicate that certain parties are concerned that a higher gold price could reduce confidence in other markets such as stocks and bonds.

US dollar index rally stalling, long term trend still down

With all of the fervor over the US dollar index rallying close to 100, a reality check is in order.  According to financial media reports the Euro is collapsing, gold is a barbarous relic that’s lust its luster, oil is falling and the commodity complex itself is imploding.  Readers of this blog may remember that on November 1st of 2014 I wrote about the possibility that such a situation may play out in 2015.

Opportunities may exist in battered markets

Sentiment for other major currencies, energy, precious and non-precious metals could not be much worse than it is now.  Cautious contrarian investors may find opportunities in the extreme negative sentiment. Certainly many natural resources companies have much more attractive valuations now than they did several years ago.  Commodities themselves may also offer more value at these price levels than they did in previous years.  Both as a hedge against inflation and a bet that resource consumption will increase in years to come.

Meanwhile US dollar trend followers may pile on to what appears to be a massive multi-year rally in the US dollar index or short other currencies, commodities and similar assets.  There already exists an enormous amount of speculative betting on the dollar surging higher and other dollar priced commodities and foreign currencies tumbling.  This positioning leads me to believe that we may be closer to a high in the US dollar rally than a base to move higher from.

united-states-currencyThus far the US dollar index on a long term technical basis appears to have made a series of lower highs and lower lows stretching back to the rally in the mid-1980s (see above chart) which began as a result of massive interest rate increases by the US Federal Reserve.  In order to break this downtrend the index would have to rally beyond 120 and sustain itself there.  Only then would I feel that the US dollar has decisively entered an uptrend. That has not happened yet.

The range bound US dollar index

As of the last 10 years we find the US dollar index trading within a range between 72 and 100 (see chart below) which may continue for some time if there isn’t an outside catalyst.  Ultimately I believe the US dollar index is headed for a lower low when the current rally stalls further and then reverses lower.

10yUSD

One must remember that the US dollar index is a trade weighted currency basket that measures the dollar vs. the Euro, Yen, Pound Sterling and does not necessarily directly reflect the purchasing power of the US dollar other than when buying these currencies.  In addition, the US dollar index has enjoyed its current rally largely on expectations of a widening interest rate differential between the US Federal Reserve and other central banks.

Will the September hike come to fruition? Is it meaningful?

The Federal Reserve has repeatedly delayed its much anticipated interest rate hike, setting expectations that such an event may occur this September — and only if economic data fits their ever moving target.  Given the mix of economic data (both good and bad), combined with the backdrop of a significantly weaker Euro and the US dollar beginning to impact multinational companies earnings, I would be surprised if the Federal Reserve set its sights on a heightening cycle.  Perhaps a few increases to placate the financial media.  But a significant normalization of interest rates would likely have catastrophic effects on multiple asset markets, including mortgages, bonds, stocks and interbank financing.

Fed and interest rates thru 2009Up until 2008 the Federal Reserve largely followed the US Treasury 3 month bill rate — rather than vice versa. This meant that interest policy was apparently largely set by the 90-day Treasury Bill market.  See the chart above for a visualization of this trend.

Where there was once rate guidance there exists only volatility

Below you will find a chart of the 3 month Treasury bill rate graphed from 2000 to present.  In that chart one can see that the same dynamic may no longer exist. That is to say that the 3 month Treasury bill rate is extremely volatile and has been since 2008.  Is this an unintended consequence of quantitative easing and zero interest rate policy?  Is the Federal Reserve now without guidance from this critical interest rate setting market?  Or is the paradigm shift one where the Federal Reserve will now lead where the markets once did?

IRX-2000Much as the rate heightening cycle in 2004-2007 set off a powder keg of insolvencies related to highly leveraged speculative bets imploding, I believe any similar rate heightening cycle this time around will have equally disruptivbe, if not worse, consequences. But it’s anyone’s guess at this point.  As you can see we are largely in uncharted territory.

Fedflationary fabrications

These press conferences with Federal Reserve Chairman Dr. Bernanke are becoming more amusing as of late:

“We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation [..]” – Ben. S Bernanke

Really?  On what basis of calculating inflation can one say with a straight face that over the last 30 years inflation has been tame or for that matter stable?  Let’s take a look at the 30 year chart of the CRB index, which represents a broad view of commodities as priced in US dollars.

30 year CRB index chart showing high inflation and unstable prices

30 year CRB index

Clearly inflation is not under control.  However, if the above chart is not enough to make one skeptical of the Fed’s latest remarks, then here’s a 30 year chart of the US dollar index, the currency in which prices are set for all the items we purchase in the United States (and other countries using or pegged to the US dollar).

30 year US dollar index chart

30 year US dollar index

What one can gather from these charts is that we’re experiencing 30 years of a weakening dollar and extremely volatile commodities prices.  Our central bank has the audacity to tell us that inflation is under control, and that in essence one should ignore gas prices, food prices and the prices of other goods which have surged over the last few decades (because all of the official inflation statistics ignore said prices).

I’ve always been a skeptic of the Fed’s press releases and these conferences, but this statement alone is enough to make one’s head spin when put in to context with the charts above.  I believe instead that the Fed is claiming inflation is under control as a guise to give them the flexibility to perform more easing should the European contagion come home, or if our own sovereign debt issues begin to become more apparent to bond investors.

Without quantitative easing, twisting (and lots of shouting) our markets would likely have higher Treasury yields, lower equity prices — but people would be enjoying lower prices on food and energy.  With the labor market stagnating and the overall economic picture still quite dismal, one has to wonder whether the Fed’s dual mandate of encouraging employment and maintaining stable prices has been abandoned in favor of recklessly supporting the financial system at large, and more specifically US Treasury bond and equity prices.  It certainly seems to be the case when objective data is reviewed from a macroeconomic perspective.

US dollar index topping?

We may be seeing an interim top on the US dollar index, which is no doubt expected to see pressure from the stimulus plan and the Obama administration’s bank bailout 2.0 that is expected to be revealed in the weeks to come.  The US dollar index appears to be making a descending series of highs.  If the pattern continues this could signal the next wave down.

USD

Watch the foreign exchange markets, as the US dollar could be bound for a correction soon.  Possible trades include going long Canadian dollars, Australian dollars, Swiss francs, Gold, Silver and hedging by shorting the GBP Sterling.