PM Daily Market Commentary - 8/26/2014

davefairtex
By davefairtex on Wed, Aug 27, 2014 - 3:00am

Gold closed up +4.60 to 1281.60 on moderate volume, while silver closed up +0.01 to 19.33 on heavy volume.  Both metals rallied strongly right up to an hour before the US open, silver actually breaking above its downtrend line and up 33 cents on the day, only to sell off all day long in NY losing almost all of its gains: this sort of disappointing price action is called a "failed rally."

For the day, gold printed an inverted hammer candle, while silver printed a tombstone doji.  While failed rallies can be dangerous to bull markets during an uptrend - they are a clear reversal signal indicating a top may be forming - they are not seen as significant during a downtrend.  In this case, I'd say they were a signal of possible bullish sentiment, given everything else going on right now.  A trader I respect suggested that gold's failed intraday rally was "probably based on a hint of the dollar falling."   That matches with the dollar's extended uptrend which will fail at some point (they all do), and its as good a reason as any I've heard for the rally.

Dollar strength continued today, with the buck closing up +0.11 to 82.69, another new cycle high.  The plummeting euro (1.3168, down -0.24 today) is no doubt pleasing Germany's manufacturers.  On the weekly chart, the euro is starting to look quite bearish, having dropped 9 cents (high 1.40) since May.  "Sale in the Eurozone, 8% off, Everything Must Go!"

One possible contributing factor in the euro decline: the ECB has a banking stress test scheduled for publication in October, but between then and now, banks in europe are scrambling around to sort out their positions in advance of the publication date - recognizing loan losses, selling bad loan portfolios, and so on.  Forex traders are possibly concerned that this particular ECB stress test will actually be stressful (oh the horror) unlike the previous ones.  Reason given is that now the ECB is taking over as banking supervisor in November.

http://www.bloomberg.com/news/2014-08-08/ecb-says-banks-bending-stress-test-rules-to-be-shown-red-light.html

Mining shares loved the rally in gold, even though it started to fail before the NY market even opened!  GDX was up +2.22% on moderately heavy volume, while GDXJ rose +2.19% on moderate volume.  Perhaps that odd rally after market close yesterday in GDX was a "tell" of some sort.  Today, the market is telling me traders are eager to buy mining shares on the dips with pretty much any excuse - even a failed rally on gold will do.  That's bullish, at least for miners anyway.

An interview at KWN with Rick Rule from Sprott Asset Management described sovereign wealth money that was interested in long term ownership of mining shares and companies, coming from Korea and China, looking to invest money in Sprott and its mining company portfolios.  This money could explain the outperformance of GDX vs gold itself.  I have been seeing signs of a steady bid underneath PM mining shares since early June.  When the story matches market performance that has changed significantly - and GDX in 2014 is behaving much differently than GDX in 2013 - that really captures my interest.

As for SPX - NEW ALL TIME CLOSING HIGH ABOVE 2000!!  That is, SPX up +2.10 to 2000.02.  SPX at one point hit 2005 intraday but could not hold that into the close.  VIX was mostly unchanged at 11.63.  With the 2000 level finally broken, albeit by 0.02 points, we are now allowed to crash.  :-)

Long term treasuries (TLT) were off -0.38% but still quite close to their highs.

Like gold, Brent crude also had a failed rally today, breaking out briefly only to fall back, closing down -0.15 to 102.50.

Commodities did better, closing up +0.54%.  If you are long silver, you want to see a commodity rally, since rising commodity prices will signal "inflation" to our friends at Managed Money, who will dutifully pile in to COMEX silver contracts pushing up the price of your metal.

Note: If you're reading this and are not yet a member of Peak Prosperity's Gold & Silver Group, please consider joining it now. It's where our active community of precious metals enthusiasts have focused discussions on the developments most likely to impact gold & silver. Simply go here and click the "Join Today" button.

9 Comments

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Gold going Down.

A fascinating discussion by Ambrose Evans-Pritchard.

He holds a contrary view to most of us here on PP.

"America has never been as powerful"

"Gold is going to take a hiding"

"Putin is on the ropes."

"The FED is going to increase interest rates, decimating emerging currencies."

Ex Zerohedge

 

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
Request: Inflation vs. Deflation for Dummies

Thanks for posting that interview, Arthur.

It was certainly interesting in terms of the differences between Evans-Pritchard's view and most of us here on many issues.  I was especially surprised and pleased that Egon von Greyerz's outfit (Matterhorn Asset Management) was the backer and publisher of this interview, because if you compare what Evans-Pritchard says here to much of what von Greyerz says about the economy and gold, there seem to be quite a few differences, so here's to airing different viewpoints.

E-P touched on so many topics in this 30 min. interview, and I'm not necessarily convinced of some of his points.  Many of his comments need more explanation and evidence. Also, I didn't see a lot of evidence that E-P was trying to relate energy to his views, although maybe others more familiar with his work have seen his ideas on the role of energy in the economy somewhere else.  He said a little bit about the new energy boom in the US, but it was such a brief comment that it doesn't tell much about his views on the financial sustainability of this boom.

For me, though, the recurring motif here was DEFLATION!  Deflation for China, deflation for Europe, at least until the Euro-zone cracks, earlier and harder monetary tightening by the Fed, and deflation in emerging markets as they feel the fallout of Fed tightening.  The data he mentioned for China's debt buildup was certainly awe-inspiring and I wonder how on Earth gold prices could do anything but fall if China has a major crash and recession.  The velocity of money seems to be wallowing in relative dormancy just after the last recession.  What will happen to velocity if China implodes?

If Chris, Charles Hughes Smith, Gregor Macdonald, or Davefairtex has time to do a piece or podcast on the inflation vs. deflation debate for dummies, I'd be interested, as I fall into that latter category in that I am pretty mystified by this.  I realize that we will see deflation in some areas and inflation in others, but there still seems to be some basic either/or answers to the question of inflation vs. deflation.

One of these is, will oil prices rise (CHS) or fall (Tverberg)?  Another one is will gold prices rise significantly or stay flat and/or fall?  An important question for those of us who have placed many financial chips on "gold will rise".

Cheers,

Hugh

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5463
the AEP interview

Arthur, Hugh-

Great interview with AEP.  I really respect his writing - I don't always agree with it, but he usually ends up making me think.

In this case, he's saying three things:

1) there is incipient wage-price inflation in the US that is encouraging the Fed to raise rates sooner rather than later.

2) gold does poorly in a rising rate environment

3) EM currencies are gonna get whacked hard

First an explanation. I believe that QE causes inflation in other countries by dropping rates to 0% which encourages carry trades, whereby traders borrow USD for extremely low rates here in the US, and then send it overseas to find a yield.  Cheap money in the US causes money to flow elsewhere, where rates are higher.

Carry Trade For Dummies:

Step 1) Borrow $1 billion US at LIBOR-1M rate; cost 0.16%.

Step 2) Trade $1 billion US for 1.075 billion AUD.

Step 3) Buy 1.075 billion 2-year AUD govt bonds; yield 2.52%

Step 4) Collect $23 million USD/year for doing no work at all.

This trade works great as long as the currencies don't change, and the yields don't change either.  But if the 1M LIBOR rate starts to climb (and it would if the Fed started raising short term rates), the trade instantly becomes less profitable.  If this is a new trend, traders will react quickly to unwind their trades.  (Trading rule: make sure you panic first).  So to unwind the trade, they would sell the AUD treasury bonds, trade AUD into USD, and then repay their LIBOR 1M loan.  If enough of them do this, the AUD/USD currency pair will sink - AUD is sold, USD is bought -> AUD drops, USD rises.  Thats why AEP says EM currencies will get hit.  They are one of the places where our poor USD hedge funds can lever up and get yield these days.  This all seems right to me.

Now then, will gold fall in that environment?  I don't think it will.  If the whole mess is caused by wage-price inflation, that's a happy gold environment.  Commodities should rise in that case, and gold will get dragged right up along with commodities, and silver will turn into a rocketship again.  Honestly, I don't see wage-price inflation without commodities also moving higher.

All that said - the key question is, are we seeing incipient wage-price inflation in the US?  Are we close to "full employment?"  I see no widespread evidence of this.  Perhaps it is true in the SF Bay Area for tech people riding the Google Bus, but nationwide?  I don't think so.  My current favorite chart is:

LNS125000000: Full Time Employees - "Employed, usually work full time" (SA)

CNP16OV: Total Potential Workforce - people in the US, not in jail, or other institution, able to work, 16 years or older.

LNS125000000/CNP16OV = "percent of total potential workforce with full time jobs", or as I call it,

"Dave's Full Time Employment Rate", currently at 47.8%.

Of course the headline unemployment rate is calculated quite differently.  The numerator is "everyone who worked at least one hour in the past week", while the denominator is "everyone who wants a job" among the CNP16OV group.  That's currently at 6.2%.  (Just FYI, under these rules, only 62.9% of people who could work (CNP16OV) actually are in the category of "wanting a job" (CLF16OV))

Its all very intricate and numerical, but boiling it down, the vast majority of the improvement we've seen to date in the headline unemployment is from two factors: an increase in the number of people working part time, and a decrease in the number of people who "want a job."  (If you don't look for work and you don't have a job, then you "don't want a job" according to BLS - you are CNP16OV, but not in CLF16OV)

So my guess: if wage-price inflation actually starts threatening to make itself felt in the real world of companies and labor (rather than in the minds of the statisticians at the Fed and the BLS), companies will simply give more hours to their part time workers, and some of those people who dropped out of the workforce will join back up again.  Problem solved, and no wage-price inflation.

Just my opinion.

charleshughsmith's picture
charleshughsmith
Status: Platinum Member (Offline)
Joined: Aug 15 2010
Posts: 718
excellent topic

Excellent topic suggestion, HughK, and nice follow-up, Dave. Yours is the best explanation of carry trades I've seen.  This is a topic on which I am not an expert, but I have seen estimates that the yen/USD carry trade (borrow ridiculously cheap in any time frame in yen and buy T-bills or dividend stocks yielding 2%--voila, free money) pumps $200 billion a month into US equities and bonds. That's about 8 times larger than the $25B/month of QE.

This example reveals just how important currencies are to everything else--trade, commodity demand, asset bubbles, etc.  I tend to think currency's role is undervalued in the deflation/inflation question.

HughK, I might be willing to write a piece to kick off the discussion, but I won't come down in any one camp. The system we're talking about is complex and dynamic, and the various feedbacks can strengthen or weaken with policy changes--meaning any prediction is contingent.

For example: zero-interest rates and QE inflate asset bubbles, some of which leak into demand for commodities which could be viewed as inflationary.  If asset bubbles pop, so does the wealth effect supporting consumption.  As Chris and others have pointed out, once oil drops enough, much of the current production becomes unprofitable and will be closed off. That will shrink supply, setting up another spike higher--a dynamic I call the head-fake.

As for wage inflation, I've written about the possibility that many of the unemployed have figured out some other way to get by without working (gaming a disability claim, etc.) and so they won't be coming back. Another factor is many people are marginally productive, and as jobs now demand much more (even supposedly low-end jobs like fast-food), many of these workers simply aren't employable any longer because there aren't many marginal jobs left.  All of this is hard to track.

No wonder the inflation-deflation topic is like the blind men touching the elephant--one's conclusion depends on what you're sensing as important.

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1449
Arthur Robey wrote:A
Arthur Robey wrote:

A fascinating discussion by Ambrose Evans-Pritchard.

He holds a contrary view to most of us here on PP.

"America has never been as powerful"

"Gold is going to take a hiding"

"Putin is on the ropes."

"The FED is going to increase interest rates, decimating emerging currencies."

Ex Zerohedge

 

Per Ambrose the FED is tightening.  Where is the evidence?  $20B/month is not tightening.  The FED has also said it is going to keep rates low for the foreseeable future (think QE4).  And can the FED control the rate completely?   What if foreign sentiment turns against the dollar?   That the IMF is pushing for SDR as a currency is very troubling.  Also, the emerging market crisis did blowback to USA via LTCM.  Ambrose seems lost in his thinking.  I am with Stockman.

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
Piece on inflation & deflation - yes please
charleshughsmith wrote:

 I might be willing to write a piece to kick off the discussion [of inflation v. deflation], but I won't come down in any one camp. The system we're talking about is complex and dynamic, and the various feedbacks can strengthen or weaken with policy changes--meaning any prediction is contingent.

Charles,

I would be very interested in a piece on inflation and deflation in our rapidly transforming, or deforming, global economy.  I don't expect perfect predictions or even someone to come down on one side or the other.  Even a clear framing of some of the basic issues regarding inflation and deflation would be very interesting to me, and could be educational in terms of what metrics we might watch going forward.

Thanks,

Hugh

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
So, Fed tightening is inflationary in EMs, at least in some ways
davefairtex wrote:

3) EM currencies are gonna get whacked hard

First an explanation. I believe that QE causes inflation in other countries by dropping rates to 0% which encourages carry trades, whereby traders borrow USD for extremely low rates here in the US, and then send it overseas to find a yield.  Cheap money in the US causes money to flow elsewhere, where rates are higher.

Carry Trade For Dummies:

Step 1) Borrow $1 billion US at LIBOR-1M rate; cost 0.16%.

Step 2) Trade $1 billion US for 1.075 billion AUD.

Step 3) Buy 1.075 billion 2-year AUD govt bonds; yield 2.52%

Step 4) Collect $23 million USD/year for doing no work at all.

This trade works great as long as the currencies don't change, and the yields don't change either.  But if the 1M LIBOR rate starts to climb (and it would if the Fed started raising short term rates), the trade instantly becomes less profitable.  If this is a new trend, traders will react quickly to unwind their trades.  (Trading rule: make sure you panic first).  So to unwind the trade, they would sell the AUD treasury bonds, trade AUD into USD, and then repay their LIBOR 1M loan.  If enough of them do this, the AUD/USD currency pair will sink - AUD is sold, USD is bought -> AUD drops, USD rises.  Thats why AEP says EM currencies will get hit.  They are one of the places where our poor USD hedge funds can lever up and get yield these days.  This all seems right to me.

Thanks for this, Dave.  In the post above, I said that I thought that AEP's comment about emerging market currencies falling due to Fed tightening sounded deflationary.  Now that I think about it, after reading your post, that seems I was at least partly wrong.  As you say, Fed tightening will tend to reverse the flows of the carry trade out of other currencies, including emerging market currencies, into the USD.  This strengthens the dollar and devalues the other currency.  So, this means that Aussie or Turks or Filipinos will see higher prices for imported goods and services in their countries.  I realize that rising prices isn't necessarily the same as inflation, but I don't think it's wrong to say that on a simple level, Fed tightening is inflationary in terms of causing prices in emerging markets to rise.

I tried to look at some EM stock markets, as I recall that they fell when the Fed started tightening, but my internet is slow right now so for now I'm giving up on checking my suspicion that Fed tightening is deflationary with respect to EM stock markets.

Indirectly, it seems that monetary tightening in one of the economic heavyweights, such as the US or China, will tend to have a deflationary effect in emerging markets as demand for EM exports will tend to fall in the economic superpower after tightening and tourism is also likely to fall.

At the very least, I have to amend my earlier comment and say that in terms of currency strength or weakness, Fed tightening tends to be inflationary for EM currencies, at least in the early stages when the carry trade is reversing.  But, maybe that changes as other feedbacks kick in...

Cheers,

Hugh

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Emerging Emergy.

"Dave's Full Time Employment Rate", currently at 47.8%.

Wooee! That caught my attention Dave.

Thanks for pitching the carry trade at my level.

Carry Trade For Dummies:

Step 1) Borrow $1 billion US at LIBOR-1M rate; cost 0.16%.

Step 2) Trade $1 billion US for 1.075 billion AUD.

Step 3) Buy 1.075 billion 2-year AUD govt bonds; yield 2.52%

Step 4) Collect $23 million USD/year for doing no work at all.

Got it.

Anyway my take on E-P was that he made too many declarative statements with not enough context.

I would like him to have discussed the role of communications in dissolving the very notion of a Nation. I see Nations becoming irrelevant, dissolving like sugar in my tea.

There is something tickling the back of my mind and it has to do with the "basket of goods" note. If we have a World Denomination that E-P discusses, and it is based on the basket of goods idea- I wonder if gold and silver will become simply valued on their scarcity or on their embedded energy? Which raises the topic of the "Emergy". Perhaps the only item in the basket of goods will be the Emergy.

Die Off  Jay Hansen might have his way, after all.

And just because I am a visual sort of person I add his artwork.

 

Arthur2014's picture
Arthur2014
Status: Bronze Member (Offline)
Joined: Jul 17 2014
Posts: 56
Macroeconomic data on European economies

Davefairtex wrote:

nothing has really improved in the eurozone.

 

Dear Dave,

some comparative data on European economies:

http://www.jjahnke.net/rundbr106.html#3145

In general Mr. Jahnke has a quite grim view about German policy in general and especially about economic policies which he judges as market-fundamentalistic.

I’m not in contact with him and have nothing to do with him.

It is just the only such comparative source I know. He edits many statistic data from official sources.

Even if one does not read German one has his charts to watch.

Best regards

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments