PM Daily Market Commentary - 10/14/2013

davefairtex
By davefairtex on Tue, Oct 15, 2013 - 2:22am

Gold closed up +0.20 to 1272.80 on moderately light volume, with silver down -0.07 to 21.26 on light volume.  The gold/silver ratio rose +0.21 to 59.87.  Gold rallied right up to a previous high point at 1292 - more or less the departure point prior to yesterday's big move down.  It failed to move higher, after which it slowly sold off for the rest of the day.  Shorts like to establish new positions at various points in a downtrend, and failed tests of the most recent high is one of them.  They'll keep trying this shorting game until the price gets cheap enough to bring the buyers off the sidelines.  That's why I say I want gold to prove to me it has some strength by a > 100% bounce off a "bear raid".  Today gold retraced 100%, but no further, and failed to hold that retracement.  Longs were not able to push past the force of new shorting.

The buck was down -0.08 [-0.11%] to 80.40.  The buck has been side-tracking since the Fed No Taper decision; it remains below all 3 of its moving averages, two of which are declining.  That sounds bearish, and at least at the "daily" level, it is.  From the weekly viewpoint the buck is still doing relatively well, far above its low of 73 set back in mid-2011.

Gold mining seniors managed to eek out a gain; GDX was +0.26 on light volume, while GDXJ was off -0.26%.  Miners opened up, sold off, tried to rally again, and then sold off.  Sounds dramatic, but the overall moves were quite modest.  "Nothing much happened today" is a pretty good summary of miner activity.

Not enough buyers in gold, the usual failed rally in the miners - same story, different day.  We need to see gold move to and hold above 1292 and preferably 1295 before the longs prove they're interested in buying and holding gold futures.  Same story, target price above 21.68 in silver.

 

12 Comments

davefairtex's picture
davefairtex
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a possible catalyst - dear ben bernanke

So I've been harping on gold needing a catalyst to get western longside buyers of futures and GLD off the sidelines and into the fray.  Here's one that might satisfy.

http://www.reuters.com/article/2013/10/09/us-grayson-debt-idUSBRE99814O20131009

With this crisis, America is risking financial Armageddon. The default of Lehman Brothers on its $613 billion of debt ignited a chain reaction in the financial system, nearly destroying the U.S. economy.  A default by the U.S. government on $17 trillion of debt - debt that has been considered the safest in the world - could be far worse.

But at heart, this is not a debt problem. It is an accounting problem. The Treasury Department issues U.S. debt, and lots of it. So you would think that America is deeply indebted to its bondholders. Yet increasingly, it is the U.S. monetary authority, the Federal Reserve, and not private investors, who buys this debt.

So a simple solution to the impasse is as follows: Federal Reserve Chairman Ben Bernanke should simply cancel the Treasury debt that it owns. The government can just forgive the government's debt.

I'm sure that would only happen once.  [That's a joke, son!]

I've often wondered what they'd do as an encore to money printing.  This might be it.  And apparently it fixes the debt limit issues at one fell swoop as well.

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davefairtex
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new low in silver - 20.91

Another "bear raid" in the afternoon in asia - we await the rebound to see if prices are cheap enough to bring the futures buyers off the sidelines.  So far, no luck.

 

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janb
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very interesting link, Dave

  I have often wondered if the government forgiving it's own debt was a realistic option (or perhaps a secret endgame plan).  Would someone please comment on how this would contribute to the risk of hyperinflation?   Also, I wonder if world powers could some day simply forgive each other's debt and start over with some agreed upon exchange rate or ratio, relative to each other's currency.  In order to preserve the status quo and their  trading partnerships.  Is a sort of world wide jubilee a possibility?  Jan 

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Bankers Slave
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Absolutely no chance

of them doing the ethical moral thing. Integrity posted missing as usual. Citizens of the world are in for a right good fleecing. Just accept it and prepare accordingly!

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davefairtex
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fed debt forgiveness

I think they certainly they could move from their current printing strategy to printing money, buying debt, and repeatedly forgiving it.  I honestly don't see the difference from a practical standpoint, since the Fed remits the interest payments right back to the government so the interest burden from the debt the Fed has taken on doesn't really exist while the Fed holds the debt.  The only difference I see is that official Fed debt forgiveness makes it permanent, and the Fed can't take it back again out of circulation if things start to get inflationary.  In some sense, it becomes a permanent addition to the Fed's balance sheet; the Excess Reserves are out in the marketplace permanently.

I think the PM market would likely go nuts if it happened, since the policy would set precedent.

My current indicators don't show any signs of "monetary hyperinflation." Here's what I watch:

* money velocity (M2V) - continually dropping since 2006.  Far below average.  Deflationary.

* USD Index - if it drops too rapidly, that's a danger sign.  Middle of the trading range, neutral.

* TIPS Yield - currently around 1%, low end of the range.  Indicates modest deflation.

* Central Bank Reserves: Currently the USD is 62% of worldwide central bank reserves, flat since 2010.  Down from 72% in 2000 - a bit worrisome but not getting worse.  Somewhat inflationary.

* US Currency in Circulation: 7% annual growth.  Average.  Neutral.

* US Total Bank Credit:  1.8% annual growth, and falling.  Significantly below average - deflationary.

Conclusion: current bias - modest deflation.

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davefairtex
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gold breakout 1281

Now this is what I'm talking about.  Gold gets pounded in asia - point of departure was about 1272, gets pounded down four times to 1251, what one might call a "bear raid on no news" or alternatively "shorts doing their thing after a long, long, long downtrend where this has been repeatedly successful."  And yet right after that 1251 low is reached, buyers start to appear; eight hours later and a whole bunch of shorts are stopped out, gold is breaking above 1278, miners are actually rallying towards end of day.

This is what I mean when I say gold needs to rally over its initial line of departure for me to believe buyers are really showing up.

I could calculate the number of tons of paper gold bought by the "upside manipulators"...but I suspect that would get everyone angry at me.  I'm perfectly willing to talk about it on the downside along with the rest of the goldbug gang, but I'm all alone when I see it on the upside too.

A lot of shorts were stopped out today.

Gold, if it closes where its at now, will print a high volume hammer.  Just the sort of thing you want to see at the end of a long, long, long downtrend.  Silver is showing a dragonfly doji.

Both candles need confirmation tomorrow, and the miners have to rally too, but so far we're halfway to a reversal.  Best signal in a while.

Wow, gold 1286.  Silver 21.49.

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Jim H
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Excess reserves

DaveF said,

In some sense, it becomes a permanent addition to the Fed's balance sheet; the Excess Reserves are out in the marketplace permanently.

The excess reserves have never been the issue, since their existence does not, and won't, push new lending.  Banks lend first and get reserves second.

The real issue is, and always has been, that QE creates money that is then spent into the economy via Gov't spending.  This spending is inflationary, or deflation-fighting, to the extent that it allows the Gov't to finance more easy deficit spending than it otherwise would be able to were not the artificial demand, at artificially low interest rates, created by the FED.

I find this same conceit used by many who would deny the inflationary potential of QE - trying to make people believe that, somehow, the money has not been spent, because it is lying in reserves.  That is simply not true.. the money has been spent.. the reserves created in sympathy to their expenditure, as described exactly below by S&P's chief global economist.   

Where Deposits Come From
 
This goes against the grain of the usual way of describing bank lending, which suggests that banks "collect" deposits
and then "lend them out." That is not the way it happens at all. In a closed economy (or the world as a whole),
fundamentally, (8) deposits come from only two places: new bank lending and government deficits (9). Banks create
deposits when they create loans, as explained above. Governments also create deposits when they run budget deficits
because they are putting more money into the public's bank accounts than they are taking out. This net flow creates

new deposits in the banking system, which has its counterpart on the bank's balance sheet as an increase in reserves.

link:  http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_...

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davefairtex
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deficits & excess reserves

JimH-

I agree 100% with both of your statements:

* Excess Reserves don't cause new lending.  (Willing borrowers do that.)

* Government deficit spending causes inflation, especially when monetized by QE.

If you read what I wrote carefully, you'll note that nothing I said disagreed with either of those statements!

What do Excess Reserves do, actually?  From the perspective of the Fed, they represent the amount of money that needs to get sucked back out of the system in order for the Fed to be able to start raising short rates again.  Hussman talks about that in some of the posts he's written, and that seems to make sense to me.

So as I said in my post, if the Fed were to forgive the debt, and lending picked up again, the Fed would be unable to suck the Excess Reserves back out of the system, and thus would be unable to control short rates.  That's the theory anyway.

I totally agree deficit spending + QE is inflationary.  It goes right out into the system, just as you say.  But I still maintain that the extent of additional government spending was only barely enough to counteract the deflation post debt-bubble-pop, which is why none of my inflation indicators are registering much if anything.  Its not to say QE isn't inflationary, its that 3 trillion dollars against a 57 trillion dollar TCMDO (that is deflating anyway) over 5 years wasn't enough to move the inflationary needle.

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Hrunner
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Money ain't Inflation until it gets spent

Jim H, Dave,

You know I don't care for a good ole inflation discussion because I prefer precise metrics like price and not amorphous ones like 'inflation', but some key points need to be considered.

1.  We do have inflation in the stock market.  Dave, the S&P price is 1733 now from a low of 735 in Jan 2011.  On anemic to nonexistent absolute revenue growth (some Dow components like Merck actually shrinking by 1% in sales). 

You and the pundits may call this happy days growth, I simply call this stock inflation.

2.  Case Shiller

 

Notice how that little blue line is turning up since 2012?  That's a roughly 14% housing inflation in the last 18 months.  Do you think that Ma and Pa Kettle are upsizing to a bigger McMansion?  With demographics favoring an aging U.S. population in search of downsizing their homes, and household income falling?  Uh, sorry Dave, no.  More like hot money that is now finally a bit scared of the size of the stock market inflation looking for the next asset to bubble up.  Next up, commodities.  Except for gold of course.  Gold smashed down and in a trading range despite 235% stock market inflation, 14% housing inflation, massive amounts of QE.  Driven down in price with wonderfully efficient profit-maximizing sell execution where massive 20 seconds dumps of 2/3 of the annual production of gold dumped in the dark of night.  Nothing to see here, please move along.

FWIW, Dave, you joke about upside manipulations, but in these thinly traded and manipulated markets, where commercial banks are allowed to create infinte, unregulated amounts of paper metal (I thought commodity markets were representing actual producers of goods, not fictitious paper / electronic goods, but call me stupid), I am concerned that profiteering entities use naked paper like an accelerator, brake, accelerator, brake, on a backdrop of real traders, to place price where they want it, when they want it, making money on knowing the directionality in advance. 

If you knew exactly where and by how much price was going 10 minutes before it happened, do you thing you could make money off of that knowledge? 

So yes, we are getting asset price increases.  I don't give a rat's you know what about the fraudulent CPI numbers, models, estimations, divining rod estimations, whatever they are.  Consumer-level prices have risen but not into high-inflation, hyper-inflation levels because 1) consumer are over-leveraged due to years of living beyond their means, and under-capitalized due to stock and housing market crashes, and 2) are simply making less money due to structural labor market changes, Obamacare job losses and hour losses, and general business de-leveraging.

Nobody in the main stream media seems the least bit stunned that we have increased the money supply by trillions but get a net loss in the labor participation rate, and a net loss in household income.  Again, nothing to see here, move along.

General price increases, aka inflation is coming.  I think the triggers will be a combination of hits to the dollar confidence raising bond yields (ex-US investors start this by selling UST), which (finally) trigger consumer loss of confidence in the dollar, meaning you and I start buying whatever we can now, fearing that the price will be higher tomorrow.  And a spectacular money-printing show by Central Banks globally as they double, triple, quadruple down on their printing.  As Kyle Bass and Chris and others have said, they will "succeed" in inflation targets, at least nominally, beyond their wildest imaginations.

As far as repudiating Fed holdings of UST, it could theoretically happen, but I say no for these reasons:

1)  UST = USD = exchange value for actual wealth such as boats and houses (at least for now, until hyperinflation).  If you were a member of the Fed, would you like to be $2 trillion dollars poorer overnight?

2)  This is a spectacular admission of failure of Keynesian wonder economics.  While in theory, it should make remaining UST more, not less valuable (scarcity and all that), the price of anything is driven in large part by subjective value (hat tip to Menger), and UST holders would see this as a scary sign, and start selling.  And they would be correct.  Repudiating/ Vaporizing $2 trillion UST is a bandaid.  The Fed will print that in 2 years or less- I believe as things become unglued, in much less than 2 years.

The Fed has been dishonest for many years regarding "monetizing the debt".  Bernanke makes technical arguments.  His distorted logic is that the Fed is not monetizing the debt because monetizing the debt means the Fed prints money out of thin air and buys UST and then holds it to maturity (by law returning the interest profits to the US government).  The core of his logic is that the Fed is just temporarily holding the UST but will then return it to the market, thus they are not monetizing the debt.

Hmmmm.  Except for Operation Twist, which was balance-sheet neutral regarding total UST held, when exactly was the last time the Fed SOLD UST into the open market?  Last time I checked, the direction the Fed was going was at least $45 billion per month in the opposite direction.  I'm sure that the Fed will soon start selling their trillions of UST back into the market (sarc off), not to mention shutting down QE altogether.  After all, if they didn't sell their holdings, that would be monetizing the debt, wouldn't it?

Enjoy your weekend,

H

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davefairtex
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hrunner - we agree 80%

I'm not sure how you got the idea we had such violent disagreements.  For instance:

You and the pundits may call this happy days growth, I simply call this stock inflation.

I agree with you, its equity-price inflation.  I'm not sure why you lump me in with the pundits, and I'm not even sure who these pundits are.  Money pumped into a sector causes inflation of the prices in that sector.  We can see this effect from the NYSE Margin credit, and how it has expanded all throughout the rally off the lows in 2009.  Money has also likely rotated into that sector from other places, likely some of the money that used to be in treasury bonds that were bought by the Fed.  Money searching for yield.

Example #2:

...that's a roughly 14% housing inflation in the last 18 months.  Do you think that Ma and Pa Kettle are upsizing to a bigger McMansion?  With demographics favoring an aging U.S. population in search of downsizing their homes, and household income falling?  Uh, sorry Dave, no.  More like hot money that is now finally a bit scared of the size of the stock market inflation looking for the next asset to bubble up...

Once again, I agree - minus the strawman you assigned me.  Money rotating into a sector pumps up prices in that sector.  I'm not sure why we have to imagine hot money being scared - simply money looking for a place to get yield in a time of rate repression would suffice.  Lever it up 2:1 and you get a bunch of hedge funds buying SFHs with wild abandon.  I don't think it will end well, but they didn't ask me.  But its not J6P getting larger numbers of loans driving prices higher, which is the way it worked over the past 40 years.  Mortgage loan money in aggregate is still deflating.  First time in the history of the series, and its been happening for 5 years.  And I think the hedge fund money rotation isn't sustainable.  Ask me again in 6 months and we'll see.

Consumer-level prices have risen but not into high-inflation, hyper-inflation levels because 1) consumer are over-leveraged due to years of living beyond their means, and under-capitalized due to stock and housing market crashes, and 2) are simply making less money due to structural labor market changes, Obamacare job losses and hour losses, and general business de-leveraging.

100% agree once again.  My interpretation - money printing inflationary impact has been absorbed by the deflationary impact of the debt debt bubble pop, which you just finished describing.

General price increases, aka inflation is coming.  I think the triggers will be a combination of hits to the dollar confidence raising bond yields (ex-US investors start this by selling UST), which (finally) trigger consumer loss of confidence in the dollar, meaning you and I start buying whatever we can now, fearing that the price will be higher tomorrow.

I agree once again with you - this time about the scenario you describe, although my level of certainty isn't as high as yours.  I think it is one possible outcome.  I'm watching for this very thing.  I think it will likely happen after Japan and Europe have their issues, but who knows for sure.  Financially, I think we'll have warning.  But until the buck drops and treasury bonds get sold...likely, no inflation.  Both things we can watch.

If overall monetary inflation starts to occur, you'll hear me talking about it every day, you'll get bored and tired of it like you probably are now about my pointing out the same lack of inflation you yourself have observed.

Now here is one spot I don't agree with you:

If you knew exactly where and by how much price was going 10 minutes before it happened, do you thing you could make money off of that knowledge?

Of course that's an easy one: yes.  Especially if someone else spends the required cash to move it there.  A harder question - and much more relevant to the subject of gold market manipulation - is, if I have to spend a billion dollars to move price up by $10 against a flood of selling by other people, will I make money?  My answer is - it depends on the trend.  If the trend is up, yes.  If the trend is down, then no.

I believe that tactical manipulations happen daily.  Manipulating the trend - I believe - is much more difficult, and it is potentially extremely expensive.  I have folks who agree with me who know the markets quite well.  They are traders.  You have folks who agree with you.  Hard to settle this one by dragging in references, so I'll try a different approach.

Point 1: Real-Life Examples

China openly manipulates its currency.  How much has it cost them?  About 3.5 trillion dollars.  Just to hold the currency steady.  And they haven't even done that.  CNY is up 30% since 2006.  At a cost of 3.5 trillion dollars.

The Fed openly manipulates the treasury bond market.  How much has it cost them?  About 3 trillion dollars.  And they got rates down perhaps 1-2%.  Right up until a bunch of sellers showed up, and they lost that 1% in one month.  And they have a massive position long treasury bonds, which is likely underwater at this moment.  Mark-to-market, they'd be in the red.  No bonuses for anyone.

Two examples of real-life "trend" manipulation - huge organizations with unlimited funds that try to change the trend in the face of massive supply.  From this we might conclude that manipulating trend is very, very expensive.  And once the sellers show up en masse - because the market is larger than they are - they get swamped.

So, you imagine the banks do this with gold?  All by themselves?  And most crucially, they make money doing it, against a flood-tide of buyers who, when prices drop, actually start buying MORE gold, not less?

Point 2: Rigging Markets Doesn't Involve Trend Changing

The amount of market rigging going on is phenomenal.  However, you have to be experienced at trading or a careful reader to understand the specifics behind each of the manipulations.  In none of them were trends being manipulated - with the possible exception of Goldman's aluminum warehouse, where they were able to control supply at no cost to themselves.  The rest were all about banging the close or other techniques to move prices for a short period of time - like what happens almost every day prior to the London AM/PM fix for gold.

That's all tactical.  They can skim a great deal of cream over time without adding value (something the banks do best) but the banks don't change rates in the economy - they just wang them around for 10-15 minutes a day, or they lie about them.  That's not the same thing that the Fed is doing through their "trend manipulation scheme."

Point 3: Ignoring Contrary Evidence

I see the tactical manipulations on both sides.  The people who agree with you, they only see manipulations in one direction, and that's down.  When the exact same thing happens in the up direction, somehow, that's not manipulation.  Example: If I punch you, that's assault.  If you punch me, well, I deserve it because I'm being a jerk.  :-)  Emotionally satisfying perhaps, but only if you are emotionally involved.  If you are a disinterested observer, it just looks childish.

When someone lies to me, or - at best - ignores evidence that contradicts their conclusions, they lose credibility with me.  That's why I joke about it.  Gold spiked up $20 after a buy in the AM in Tokyo in Monday many months ago.  What's that.  Manipulation?  If I flipped the direction to down, the answer is simple - goldbugs would all scream manipulation.  But if the move is to the upside it becomes - what?  When I ask this question, all I hear is crickets.

That's not science, that's promotion.  Its sloppy thinking.  Its ignoring evidence that doesn't fit your worldview.

So - tough to conclusively prove anything, but knowing how expensive real life trend manipulation examples are, and knowing how the banks like to make money, and taking into account the sloppy thinking of gold promoters, I come down on the other side: tactical manipulation happens (as it has happened in all the other market rigging scandals), but trends form themselves.

I'm in full agreement the Fed doesn't like gold and wishes it would go away.  Fed also even more desperately wants rates to stay low, and we've seen how that plays out, even after they've spent literally trillions of dollars to change the market's idea of what rates should be.

I know that some people are convinced that the Fed has a secret gold manipulation account where they've allocated infinite amounts of money "off book" to do exactly this.  My opinion: possible, but not likely.  I recognize that intelligent people can differ on this one, and if evidence emerges that shows the Fed engaging in China-style unlimited gold price suppression, I will be surprised - but also thankful I was able to buy gold at such a discount.

I think the rigging in the gold market is like the rigging in all the other markets - tactical in nature, and focused entirely on making a quick buck with little to no effort and as little risk as possible.

hammer6166's picture
hammer6166
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Posts: 26
Thanks Dave

Thanks for your clear presentation of the facts.  I like that you spell out when you switch to an opinion.  This presentation style works well for the engineer in me.

I know from experience if I believe my software doesn't have a bug, even though it is malfunctioning, I often times can't find the bug.  Once I shift my beliefs to allow that I could be mistaken, I quickly find the bug.

I was late to the PM game and followed the goldbug advise.  It seemed to make sense at the time.  When it didn't work the way they said and the way I thought it would, I asked myself why.  You, along with a few others, have provided the mostly likely answers.  Like most here, I believe in the likely, but not certain, long term outcomes of the story. 

Thank again.

davefairtex's picture
davefairtex
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Posts: 5416
finding bugs with hammer6166

Glad you like my approach hammer6166.  Not suprising though - since I've done my share of writing code as well.  And I too don't think I have the answers, I just have some explanations that make the most sense to me given the evidence I have.  Coming to tentative conclusions in a field of uncertainty.  Estimating project length based on a device you've never worked with, with a customer whose requirements keep changing.

Finding bugs is like looking for your keys.  If you are SURE your keys aren't in the room, then your chance of finding them if they are actually in that room is practically nil.  Its something in human nature that is hard to explain but seems to work out pretty consistently.

Coming from a place of not-knowing lets in more information, but takes more time and energy.  We use the short-cut of certainty so we don't have to spend time & energy thinking about something we already know to be true.  However its important to be careful what we accept as "true" or else we will end up not finding our keys even if they're sitting on the table.

 

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