PM Daily Market Commentary - 1/21/2015

davefairtex
By davefairtex on Thu, Jan 22, 2015 - 4:16am

Gold dropped -1.30 to close at 1293.00 on heavy volume; silver rose +0.14 to 18.14 on heavy volume as well.  Gold rose strongly during London trading, hitting a new high of 1307, only to sell off immediately after hints by the ECB they were going to print 50 Billion Euros/month through 2016.  Silver had a similar pattern.  Gold recovered somewhat, ending up printing a doji on the day, and silver printed an inverted hammer - both of these candles describe failed rallies, which hints at a possible top for this cycle in PM.

The ECB meeting is tomorrow, with the interest rate announcement at 0745 EST, and the press conference starting at 0830 EST.  We also have US Jobless Claims at 0830 EST as well.  Brace yourselves for a volatile day - it all starts a couple of hours before the US markets open.

While the technicals on the gold chart below seem to be signaling the possibility of a top (a doji print while overbought suggests this to me), when the ECB is releasing its decision about something so huge as Euro QE, the result will assuredly trump these signals - either to amplify a sell-off, or to push prices higher.  What's more, we have that Greek election on Sunday.  So while I can show you a pretty picture that in a non-news-driven market might have some significance, I believe only God Himself only knows where the market ends up going tomorrow.

The USD sold off hard today on the ECB QE trial balloon, but rebounded, closing down only -0.25 to 93.08, and printing a bullish hammer candle.  The dollar remains quite near its cycle highs, and still looks quite strong.  While it looked for a time that the Euro might rally strongly, the rally ended up failing.  The market can't seem to decide if money printing is Euro positive, or Euro negative.

Mining shares sold off at the open, driven lower by the drop in gold after the ECB trial balloon.  They recovered somewhat by end of day; GDX dropped -1.74% on moderately heavy volume, while GDXJ dropped -1.50% on moderate volume.  GDX is back below its 200 day MA, and I can't decide if it printed a Bearish Engulfing candle or - something else.  I suspect traders were ringing the cash register from their healthy miner gains over the past month ahead of the ECB meeting tomorrow.  I know I sure considered it.  We'll see tomorrow if my decision to hold off was wise or not.

SPX climbed +9.57 to 2032.12, seemingly helped by modestly rallying oil prices and the more vigorous energy shares (+2.03%).  VIX fell -1.04 to 18.85.

Long bond ETF TLT sold off today, dropping -1.16%, and printing a Bearish Engulfing candle.  While TLT still looks quite bullish, on the weekly chart it appears overbought, and ripe for a retracement.  If the buck keeps climbing this pattern likely won't lead to anything major, but if the buck tops out here after the ECB QE annoucement, TLT could drop quite a bit and still remain in an uptrend.

The overall commodity index ($CRB) moved higher, climbing +1.03%, recapturing some of the losses from yesterday.  The index is slowly chopping sideways, and its downside momentum seems to have slowed. Whether this leads to a bounce, only time will tell.

WTIC tried rallying today but retained only part of its gains, closing +0.70 to 47.34.  Even the halfway-successful attempt by oil to move higher really helped energy equities - an E&P ETF I follow (IEO) was up +2.71%, while the oilfield services ETF (IEZ) rose +2.89%.

PM prices right now are driven primarily out of Europe - all of the major price action happens during London trading time.  Tomorrow, we'll get one major event out of the way, and then the Greek election will (probably) rule the headlines from Friday on.  Syriza is polling 4-5 points ahead of the current government (31-32 to 27, depending on the poll) on a platform of obtaining debt forgiveness.  They seem a lock to win; the only question now would seem to be, by how much?

http://www.bloomberg.com/news/2015-01-21/greek-election-battle-in-final-days-with-syriza-maintaining-lead.html

And now - finally - we hear talk of debt forgiveness; article here in the guardian:

http://www.theguardian.com/world/2015/jan/18/should-greece-debt-forgiven-new-idea-europe-syriza

...although it has received an extraordinary €252bn in bailouts since 2010, just 10% of that has found its way into public spending.

Much of the rest poured straight back out of the country: in debt repayments and interest to its creditors, many of them banks and hedge funds in the core eurozone countries, including Germany and France; and in sweeteners to persuade lenders to sign up to the 2012 bond restructuring that helped prevent the country crashing out of the euro.

In effect, the “troika” of the European Central Bank, the International Monetary Fund and the European commission has simply replaced the banks and the hedge funds as Greece’s paymasters. The country’s overall debt burden has actually increased in the almost five years since it was first “rescued”, and of the amount still outstanding, 78% is now owed to public sector institutions, primarily the EU.

No, really?  The bailout primarily benefitted the banks and the hedge funds?  I'm shocked, simply shocked.

And here, support from the French Foreign Minister:

http://en.enikos.gr/international/22590,French_Finance_Minister_open_to_debt_dia.html

French Finance Minister Michel Sapin has called on Eurozone nations to respect the outcome of Sunday’s election in Greece, saying that the EU should be ready to negotiate with the country’s new leaders on restructuring its huge public debts or extending the terms of its bailout.

“Whatever the result of the election will be, it is absolutely fair and legitimate that discussions should take place between the EU and the new Greek government…What we would think is extremely important is the stability of the eurozone,” Sapin said during an interview with the FT in Tokyo.

All this "debt forgiveness" talk stems directly from the prospect of a likely Syriza victory.

But let's think more than one move ahead on this chessboard.  How will debt forgiveness affect elections in Ireland, in Portugal, Spain, and Italy?  These overindebted nations will actually have to pay for Greek debt forgiveness, since Greek debt is now owed to the EU due to the "bailout."  And - turns out, to get your creditors to start thinking about forgiveness and end austerity, all you need to do is elect a radical government.  Hmm.  "If you owe your banker $100 million, its the banker who has the problem, not you."

So if Greece gets forgiveness via Syriza's win, what would you predict to be the outcome of the next set of elections in overindebted Portugal, Ireland, Italy, and Spain?

Ultimately, paying for the required Eurozone-wide debt relief can realistically only come from one place that I can think of: the ECB.  Print money, buy the debt pari-passu for all the Eurozone nations, and then simply write it off.

That would be Euro negative - and most likely, gold positive.  Especially for gold valued in Euros!  I do think they'd end up solving that pesky deflation problem...but they'd also need a cleanup of the banking system to really get things back on track.  Perhaps more printed money could solve that too?  And push the Euro to maybe 0.50 in the process.

Perhaps the prospect of this endgame is why the SNB decided to exit its peg...

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7 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5063
ECB announces: Printing 60 billion Euro/month

The 60B/month is slightly higher than the trial balloon yesterday.  80% of buying needs to come from national central banks, and it must only be "investment grade" debt.  Whatever "investment grade" means in the Eurozone these days.

Immediate market reaction: gold up a bit (+0.80, but +10 from the point of the announcement), oil down a bit, euro down (-0.67%), US equities unchanged (although they rallied in anticipation of the announcement).

 

pollux's picture
pollux
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Posts: 9
Political scenarios

Thanks for all the data and extremely interesting political scenarios in the end, Dave!

I live in Sweden and have acquired some physical PM in the past few years.

It has been painful to see the current valuations of PM drop dramatically since 2013. However, in the past half a year the Swedish Krona has lost 20-25 % of it value against USD. That, an the recent surge in the USD price of gold, have meant that my PMs on average are no longer in the red. Yippi! ;-)

Sweden, thank god, elected not to be part of the Eurozone. Still, as a small nation exporting mainly to European countries, our future prospects are strongly tied to the rest of Europe. Your scenarios pointing to a potential strong rational economic incentives for people towards voting for parties with "extreme economic solutions" is an eye-opener to me.

Given how things are starting to unravel politically and economically in Europe, I'm very content that I've sticked with PMs in the recent downturn.

davefairtex's picture
davefairtex
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Posts: 5063
view from Sweden

Pollux-

Thanks for your viewpoint!  You guys totally seem tied to the Eurozone - if anything, SEK is doing worse than the Euro, which means recently, gold has to be doing pretty well in your local currency.  Let's take a look...

I honestly see just a few paths the Eurozone can take on the subject of debt relief - which is the larger issue here that entirely trumps deflation and/or the recent QE decision:

1) Germans veto any debt relief.  Syriza-led Greece either exits the Euro, or defaults within the zone on its own.  Chaos ensues.

2) Germans accept the principle of negotiated, controlled debt relief for Greece - encouraged by Spain, Ireland, Portugal, and Italy.  Once the Germans accept, many nations cannot (or will not) pay for the Greek debt relief (and certainly not the follow-on Italian or Spanish debt relief), so therefore it must come from printed money.  All the rest demand debt relief too.  In the spirit of fairness (no nation-specific bailouts), all nations debts are reduced by the same percentage via this mechanism.  Likely, Germany ends up with no debt, and Italy and Greek debt gets cut in half.

Debt reduction on that scale would be ... astonishing.  Trillions.  Total Central Govt Debt in the Zone: 6.86 trillion Euros.  If that gets chopped by 50%, that's 3.5 trillion Euro, and that ends up growing 5.8 Trillion M1 by 60%.  And that still doesn't fund bank recapitalizations.  They still need to happen too.  As long as we're in Check Writing mode, might as well...

Like I said, Euro goes from 114.56 (where it is right this moment) to...way below par.  0.50-0.70.  Gold in Euros will double, at least.

Can you imagine the Swiss reaction?

pollux's picture
pollux
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Posts: 9
Thanks again, Dave!  Your

Thanks again, Dave! 

Your chart with gold price development in SEK, with the very recent hockey-stick was more dramatic than I would have guessed. 

I haven't seen anyone in main stream media in Sweden stating anything about the potential knock-on effects of a Grexit. Your scenarios are freightening, to say the least.

The central bank in Sweden ("Riksbanken") has been heavily accused by many stakeholders in the past few years of not acting strongly enough with lowering their funds rate (the lending rate to the banks). When they have been lowering the rate, it has been perceived to be too late by the same stakeholders. So the focus from these stakeholders seem to have been to avoid deflation. 

With the funds rate now being as close to zero as you get, the accusations against "Riksbanken" has gone away. The latest idea (since Riksbanken might be perceived as being out of bullets) that surfaced in the leading Swedish weekly business magazine "Affärsvärlden" is to increase the debt ("since it is so cheap to borrow now") and do massive public investments in infrastructure. I wonder if the next idea to be surfaced is QE.

My view is that the main public sentiment in Sweden towards the predicaments are a mix of ignorant, complacent and confused.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5063
more sweden

pollux-

Here's some data on Sweden.

1) Total bank loans outstanding: no credit growth for 2 years.  My guess: Swedish people are maxed out on debt.  Riksbanken has probably been having kittens for the past year.

2) You guys have a dreadful property bubble.  That's a 540% move since 1986; the US "only" managed a 295% move over that same time period.  We were right up there with you until we peaked in 2006.  I'm guessing home prices in Sweden are more than a bit unaffordable.

Arthur2014's picture
Arthur2014
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Joined: Jul 17 2014
Posts: 56
paths the Eurozone can take

Dear davefairtex

davefairtex wrote:

Can you imagine the Swiss reaction?

Yes. They will go shopping in the neighboring EU countries.

 

davefairtex wrote:

I honestly see just a few paths the Eurozone can take on the subject of debt relief - which is the larger issue here that entirely trumps deflation and/or the recent QE decision:

Mr. Rickards, a gentleman at least partially and temporarily paid by the CIA, wrote in his book “The Death of Money” (published April 2014) about five analytic failures the Euro skeptics with their histrionics (page 129) committed:

1.) Failure to recognize the zero-sum nature of cross exchange-rates:

In 2010 the USA initiated a cheap-dollar policy. Their policy implied a strong euro in dollar terms. (page 129)

2.) Conflating crises in debt, banking, and currencies:

The dynamic of a currency in which bonds are issued is different from the dynamic of the bonds themselves. The currency’s strength has to do with  central bank policy and global capital flows. (page 129-130)

 

3.) Failure to recognize that capital flows dominate trade flows in setting exchange rate.  Since the USA and China did not want a weak euro, it could not go down. (page 130)

 

4.) Unjustified belief in flawed Keynesian sticky-wage theory: The theory only holds if labor is the predominant factor input in productivity, labor substitutes do not exist, unionization is strong, globalized outsourcing is impossible, and unemployment is low. (page 130-131)

 

5.) Failure to recognize that the euro has always been and is a political project rather than an economic one. (page 131)

 

Rickards summarizes: “the euro is strong and getting stronger:” (page 131)

“Over the next ten years The EU will become the world’s leading superpower” (page 136). Eurobonds will provide a liquid pool of investable assets (page 136). All factors together may enable the euro to displace the dollar as leading reserve currency by 2025 (page 137).

 

Is his estimation outdated by the recent policy of the European Central Bank?

Best regards

Arthur

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5063
rickards and the euro

arthur2014-

Nice quotes from Rickards.  Rickards may be hampered by a fondness for sound money.

Right now, it is exactly those same capital flows that is causing the Euro to drop.

My guess is, the local politicians in the Eurozone "encouraged" the local banks to buy up a huge chunk of the sovereign debt of the peripheral countries in order to push bond yields down, in order to help fund the debt and send the market a message that "all is well" via low interest rates, and so when there is a flight to safety and big money wants to hide somewhere, the "safe places" in the eurozone already have very low yields, so they must leave the Euro.  That generates those capital flows.

Even after the recent US bond rally, US 10 year bonds still yield 1.8%.  The German 10-year yields 0.37%.

If Europe ever solves the debt problem and recapitalizes their banking system, I could see Rickards dream come true.  Pensions still might be an issue though - Germany's demographics issues rival Japan's.

They should probably also get a reliable long term energy supplier.  Angering Russia is probably not the best strategy.  It might not bite them today, but 4 years from now when that gas flows to China, it sure will.

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