PM Daily Market Commentary - 9/24/2015

davefairtex
By davefairtex on Fri, Sep 25, 2015 - 2:49am

Gold launched higher, rising +23.80 to 1153.30 on very heavy volume, while silver rose +0.36 to 15.12 on moderate volume.   Gold and silver took off at 09:00 Eastern for no reason that I could discern; it wasn't correlated with moves in any of the usual suspects, nor were there any US economic reports that released at that time.  Perhaps it was something in Europe.  Both gold and silver retained their gains into the close.

Gold blew through two former highs, one at 1140 and another at 1147.30, and it just managed to close above the medium term downtrend line.  These are all fantastic signs.  Volume suggests there was a lot of short covering.  Technically, gold needs a close above 1170 to snap the medium term pattern of lower highs and lower lows - it snapped the shorter term downtrend by its close above 1147.30 today.

I'd be happier if I knew why gold launched higher; Martin Armstrong thinks it might be tied to a potential failure of the huge German bank Deutche Bank.  

Unlike gold, silver remains below its previous high; it didn't quite manage to regain the losses from two days ago.  Chart clearly shows that silver remains the poor stepchild, which isn't the standard pattern for a PM bull move.  It was a nice move by silver, but not a great one.

Miners responded strongly to gold's breakout; GDX rose a huge +7.24% on heavy volume, but GDXJ climbed only +5.11% on moderately heavy volume.  Senior miners have a lot of catching up to do with gold.  Today, they had a big gain and on good volume, but that GDX:$GOLD ratio is still bumping along the bottom.  It did improve today, but the ratio chart can't possibly be called bullish even in the short term.  Miners have been heavily sold, and it will take a lot more buying to move the miners back into the "bullish" camp.  You can see that GDX has yet to surpass its recent high, nor has it broken its downtrend line.

The USD encountered a lot of selling today that pushed prices down almost -0.80, but then it rebounded; USD closed off only -0.06 to 96.15, printing a bullish-looking hammer candle on the day.  There was no single catalyst for the buck - no economic report that caused a spike, etc.  The rebound in the dollar did not seem to affect gold at all.

SPX also sold off heavily and then recovered, closing down -6.52 to 1932.24.  Most of the losses in SPX came in the morning and one point SPX was down almost 32 points, but it managed to bounce back printing a bullish-looking doji-like candle on the day.  From what I can see, SPX and the dollar are fairly well correlated - the buck made its low around 11:00 right along with SPX.  VIX rose +1.34 to 23.47.

Bond ETF TLT climbed +0.68%, breaking to the top of its recent trading range.  If SPX manages to rebound, I suspect bonds will sell off.

The CRB (commodity index) rallied +0.63%, regaining not quite half of yesterday's losses.  CRB looks to be moving lower right now.

WTIC (oil) sold off in the morning, touching 43.71 and momentarily breaking below 44 support, only to rebound and close green, up +0.49 to 45.10.  Support at 44 wins again, although I question how many times oil will be able to bounce back.  Brent's recent trading range is narrowing; 47.50 - 50 and support for Brent is a clear line at 47.50.  Right now, the chart looks to me like oil goes lower.  Brent needs a close above 50 to break the pattern.

HAA has 100 oz gold bars right now in NYC at 1171.99/oz [+2.16% over spot], and 1000 oz silver bars in NYC at 15.65/oz [+3.69% over spot].   Eagles in NYC are quoted at 20.86 [+38.24% over spot].  Premiums on the big bars were mixed, and Silver Eagle premiums rose again.

Gold's breakout is very helpful from a chart perspective - it snapped the short term downtrend and is setting up to snap the medium term downtrend too.  Miners have a lot of catching up to do, and silver is still looking a bit weak by comparison.  Commodities look to be headed lower - that's probably why silver's rallies are a bit less enthusiastic than one might hope.

When gold is leading PM, it feels like a safe haven move.  This aligns with Armstrong's opinion.  If DB really does start having troubles, life could get extremely interesting in a hurry.  Comments from 2013 from the #2 guy at FDIC: "DB 'Horribly Undercapitalized'": http://www.cnbc.com/id/100818126

DB has 520 billion euros in deposits, or about 11% of the total German deposit base.  This would be a really big bail-in, and with 54 trillion in total derivatives outstanding, the failure of this bank (and the breaking of all those contracts) would affect the whole world.

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13 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Is Gold Money?

Martin Armstrong writes today about whether or not gold is money.  He argues that during the 1930s, gold was indeed money because of the Gold/Dollar peg.  Why is this important?

During deflation, assets fall vs money.  During inflation, assets rise vs money.  As a result of the gold/dollar peg, gold did well during 1929-1932 deflation.  Turns out, money also did well during deflation.  In fact, because of the peg, gold AND money did equally well, right up until the devaluation.  Post-devaluation, gold did especially well - but only because of the peg.

Today, gold is not money.  Why is gold not money right now?  There is no peg.  No peg = gold is not money, and and the implication is, it will not behave as money during deflation.  Instead, it will behave like an asset.

Currently, the price of gold is well-correlated with other commodities.  It does better than most of them, but, because there is no peg, gold is not money.

Armstrong explains here: http://www.armstrongeconomics.com/archives/37416

.... Money is the unit of account that measures wealth and that rises [and] falls in value. Even gold is being measured in dollars (the unit of account). Wealth is simply a valuation at an instant in time. When the stock market or any asset crashes, the valuation evaporates.... Wealth in every other form is simply a valuation that evaporates — it does not transfer to someone else. [emphasis added]

Gold rises ONLY when there is uncertainty about government or the banking industry. It will not keep pace with inflation [c.f. 1983-2000] and its fate is tied to the commodity sector. Some people will send hate mail over that simply because they WANT to believe something else.

Julius Caesar understood that and said that people believe only want they want to believe. He was correct. There is no convincing a Democrat he should be a Republican or vice versa. You will believe gold is money and shut out everything to the contrary, or you will have an open mind and comprehend that money is whatever the majority accept at that point in time.

There are two important concepts here.

1) Money is the measuring stick for wealth.  When asset prices fall, the value of all that "stuff" (measured in units of money) declines; money is preferred to asset ownership.  Unless a Gold/Money peg is in place, gold is an asset, not money.

2) Money is defined by this circular statement: money is what the majority accepts as money at the current point in time.  Nothing else is money.

Value of money is underpinned by both tax and debt liabilities.  Changes in money value are driven by changing perceptions of risk, which motivates the desire to either load up on debt [money value declines], or to repay that debt [money value rises].

My last point:

The “safe haven” will return ONLY when the public questions the survivability of banks and government — not fiat and inflation.

Armstrong is not saying gold is bad, he's just pleading for people to understand how things really work. 

Once we comprehend how things work, we'll buy gold for the right reasons and with appropriate expectations, and as a result we will end up a lot more emotionally sanguine about price movements than if we simply swallow the propaganda from the promoters whole.

 

Edwardelinski's picture
Edwardelinski
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Speaking of banks dave

I was haunted by you commentary on Deutsche bank yesterday.I went and checked the price of there stock,so far stable.As you mentioned the underlying derivatives.Volkswagen no doubt is maybe the black swan that could conceivably take Germany down.I don't see any other way for them to get out from underneath this aside from bankruptcy.When you have countries,governments and individuals coming after you, what other option is there ?Now, the trillions in debt on the derivatives not having anything to do with what was once there most stable of companies Volkswagen.Disaster doesn't begin to cover it.Yesterday Raymond James warned that Wells Fargo has the biggest energy exposure of the American banks,followed by BOA and Citi.They have warned that they are going to have to set aside money for loan losses in the energy sector.I believe the largest Canadian banks have already begun the process.As 2008 proved,banks are not safe!!

cmartenson's picture
cmartenson
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Gold and Armstrong

Well, I've been saying the same thing here since...forever.  Gold is not an inflation hedge.  It is insurance against systemic, institutional, sovereign and/or monetary failure.

However, one clarification is needed that Armstrong might want to consider.  The BIS considers gold to be Tier 1 capital, meaning it is counted as a 'zero percent risk-weighted item.'

Said another way, within the banking system it's 'money' or at least it behaves like money on the balance sheet as far as the regulators are concerned.  I think that confers a bit of 'money-ness' to gold, especially when things are dicey as in a deflation.

Jim H's picture
Jim H
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BS Dave...

And thank you Chris for correcting him.  Armstrong is not promoting how it, "really" works. How it really works is as the BIS states;

http://jessescrossroadscafe.blogspot.com/2015/09/gold-daily-and-silver-w...

"The IMF has put Monetary gold right at the top of the global reserve assets list – above SDRs. The IMF writes, '…The gold bullion component of monetary gold is the only case of a financial asset with no counterpart liability.'"

Koos Jansen

 http://3.bp.blogspot.com/-8Ppo4Rk3bfo/VgCJdoh8T5I/AAAAAAABDg8/38mFzQqL7fY/s1600/Screen-Shot-2015-09-18-at-7.52.17-pm.png

 

Mark Cochrane's picture
Mark Cochrane
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Not quite sure I believe it

From Dave's post above, there are the two restated caveats from Armstrong.

1) Money is the measuring stick for wealth.  When asset prices fall, the value of all that "stuff" (measured in units of money) declines; money is preferred to asset ownership.  Unless a Gold/Money peg is in place, gold is an asset, not money.

2) Money is defined by this circular statement: money is what the majority accepts as money at the current point in time.  Nothing else is money.

Now I can see how #2 has some validity but the important qualifier in the statement is "at the current point in time". It is all based on belief in the current imagined 'money'.  That can evaporate in a heartbeat.

I am not so sure that statement #1 really makes sense, although it works for deflation, it doesn't really hold for the opposite case of inflation. In Brazil, 'money' is the Real. It is what the majority accept as money. Asset prices in Reais are actually rising, so the supposed quote-unquote "value" of all their stuff is rising in money-units as well but I do not think they feel wealthier (my family members sure don't). There is a case for wanting asset ownership over money, especially gold. Because gold is better than money...

The problem with any current fiat currency is that it is only 'money' until it is not. I have seen Cruzeiros, Cruzados, Cruzados novos and Reais in Brazil since the 1980s. In the US we have no recent experience with failed 'money'. The rest of the world uses USD whenever their money fails but what the heck happens if the USD fails?

The 'money' game is great semantics but is full of peril if you cannot identify its failure signs and immediately escape the 'money' with your 'value' intact when it collapses. Perhaps this is why even the banks hedge with gold and value it above even SDRs?

I fully expect to lose financially when/if the big reset of markets (society?) comes. I just would like to have some confidence that I will not lose everything...

Mark

 

davefairtex's picture
davefairtex
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Gold is Money

Chris-

Best case, gold is a foreign currency.  Current case: gold is an asset - more liquid than a building, more concentrated than other commodities, but without a peg, its definitely not "money."  A fixed amount of gold cannot discharge a fixed amount of dollar debt because there is no peg.

ECB carries gold on the books as an asset valued at current market price.  That would be the same as if it were a large amount of copper, silver, barrels of oil in a tanker, a building, or even another foreign currency.  To the ECB, gold is an asset, marked to market.

That's distinct from local currency, which is good for all local debts, and/or taxes, and can be immediately applied to either without any bid/ask spread, and once you have a fixed amount of local money, you can always discharge a fixed amount of debt with that money.  In my lexicon, that's what makes it "money."

In other words, $2000 in money today will always discharge $2000 in debt however far into the future we go.  2 ounces of gold today will discharge that same amount debt today, but it might not do so tomorrow.  That lack of certainty marks it as an asset, not money.  That's why money is a risk-free asset: the unchanging ability to discharge a fixed amount of debt.

This simple equation gets more complicated when we talk about confidence-impacting actions such as bail-ins, and/or eliminating cash, and negative rates.  Once a fixed amount of "money" can no longer reliably discharge debt at some point in the future - when it can be snatched away in a bail-in, or gradually trickled away with negative rates, "money" suddenly becomes a lot less interesting to hold.

Perhaps, if mistreated enough, it will stop being money altogether.

Once we understand this, we can see under what circumstances we might expect gold to pop.  Once it is perceived as safer than money - once "money" can no longer be expected to discharge debts risk-free - then I'd expect gold to rocket higher.

Its all my attempt to understand how the world works.

Mark-

If I were in Brazil, I wouldn't be focused on "gold is money", I'd be talking about currency issues.  The two nations have very different problems.  So my viewpoint here is a US-centric viewpoint that is perhaps most interesting during times of deflation and debt bubble pop.

"Will gold rise or fall during deflation?"  That topic is less interesting to people in Brazil, I think.

Jim H's picture
Jim H
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OMG...

Dave, you are going way over the top today.

That's why money is a risk-free asset

You have really got to be kidding me.  You are putting the words, "money", meaning for example dollars, and "risk free",  in the same sentence!  You are the master!  I have to hand it to you....      

davefairtex's picture
davefairtex
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Posts: 5681
there's nothing like context

JimH-

Since you quoted me completely out of context - even to the point of yanking one single phrase and not including the rest of the sentence - I'll do myself the favor of quoting my entire paragraph.  Let's see, how did it go again?

In other words, $2000 in money today will always discharge $2000 in debt however far into the future we go.  2 ounces of gold today will discharge that same amount debt today, but it might not do so tomorrow.  That lack of certainty marks it as an asset, not money.  That's why money is a risk-free asset: the unchanging ability to discharge a fixed amount of debt.

In a debt deflation - where the US is heading right now - it becomes increasingly more popular to pay down debt.  All forms of money become scarce, and asset prices drop as everyone sells assets to raise money.  The certainty that a specific amount of money will pay down a specific amount of debt is very highly valued during this time.  That's just the anatomy of a debt deflation.  And that's where we are headed.

Until a bank or two has failed in a core nation and depositors have lost money, bank deposits and cash will be viewed as equal safe havens due to that ability to discharge debts with certainty.  That changes immediately after the first bail-in, and/or after rates go negative.  I believe that gold (and some other assets) will start to move higher once confidence in bank deposits takes a serious hit.

Of course, we as clever people need to start looking for signs of this coming in advance.  That's why my concern over the issues at DB.  I'm always on the lookout for problems in the banking world, because the problems there tend to manifest much more rapidly than any other sorts of problems we are facing.

If we start to have a serious problem in the banking system, I think physical gold (and the big bars specifically) will start to diverge dramatically from the paper market.  That's what I'm expecting to see anyway - premiums start to blow out at HAA, PSLV, PHYS, etc.  In the meantime, as long as confidence in banking & government remains, because of deflation, we will probably see a slow move lower in all commodities, including gold.

 

Luke Moffat's picture
Luke Moffat
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Posts: 384
davefairtex wrote: Until a
davefairtex wrote:

Until a bank or two has failed in a core nation and depositors have lost money, bank deposits and cash will be viewed as equal safe havens due to that ability to discharge debts with certainty.  That changes immediately after the first bail-in, and/or after rates go negative.  I believe that gold (and some other assets) will start to move higher once confidence in bank deposits takes a serious hit.

I think that's what we're really waiting on (as grim as it sounds) - which again harks back to centralised organisations departing the rails. Deutsche Bank's outstanding derivatives have been a little concerning - what are we now, $54 trillion? Some reports put their exposure as "low" as $46 trillion.

Western fallacy combined with Eastern demand will see gold rocket (in my opinion). Time will tell us what money is - as it always does.

All the best and glad to be in your company,

Luke

KugsCheese's picture
KugsCheese
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Posts: 1469
Given the sweep of history,

Given the sweep of history, fiat money is an anomaly.  It will soon be swept away.  The BS is getting ear splitting now.   NYT did not mention Yellen had a mini stroke in its article of her speech.  Cover up.  Google "Chapwood Index" or go here http://www.chapwoodindex.com/  Remember Rule of 70.  If inflation is 10% then prices double in 7 years.

David Allan's picture
David Allan
Status: Silver Member (Offline)
Joined: Nov 15 2009
Posts: 109
Those dastardly promoters

'...than if we simply swallow the propaganda from the promoters whole.'

Dave, you are right to warn us of the dirty propaganda from those unscrupulous PM promoters out there. There sure are some wild claims. Why, not long ago I was reading an article penned by one such rascal titled Gold and Silver: The Screaming Fundamentals ;-) The other side of the story is of course presented in a straight forward, transparent and truthful manner by those sterling fellows in the Fed, government, bullion banks and regulating authorities!

At the end of the day I don't disagree with most of your conclusions Dave. But I also agree with Jim and others that the potential exists for silver in particular to disappear quite quickly off the menu.

David Allan's picture
David Allan
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Posts: 109
The scoundrel's at it again

Just saw the front page ' Buy gold while you still can'. !!!

nlbao's picture
nlbao
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Posts: 3
Gold confiscation

I am interested in your views on the probability of a gold confiscation like in the 30'.

Thanks

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