PM Daily Market Commentary - 2/1/2016

davefairtex
By davefairtex on Tue, Feb 2, 2016 - 2:46am

Gold rose +10.20 to 1128.60 on moderate volume, while silver climbed only +0.09 to 14.35 on moderate volume also.  Gold rose steadily all day long, while silver followed the same track but less enthusiastically.  Oil was absolutely hammered today, and that likely didn't help silver; the dollar fell, which supported gold.  There were lots of cross currents to sort through.

Gold staged a gentle breakout today, making a new closing high for this cycle.  After bouncing off the 9 EMA support, gold has now risen almost to the 200 MA.  It is at this point that I expect the shorts to start  unloading at COMEX; we will see how enthusiastic they are versus the managed money longs.  My guess is, gold could start to correct in the next day or two as this selling pressure is brought to bear.  This isn't a sure thing in my eyes because the COT report suggests the timing isn't quite right for a cycle top in gold.

Compared to gold, silver just looked weak today.    While silver remains above its short term uptrend line and above its 9 EMA - both good signs - unlike gold it was not able to make a new high today, and it remains more or less within its recent trading range.  The swing high from last week's outrageous LBMA silver fix "problem" still hovers over the silver chart.  Silver really needs to break above the 14.64 previous high if it is to keep up with gold.  Gold/silver ratio is at 78.65, quite near the top of the ratio's trading range.

Miners had a great day, with GDX up +3.10% on moderate volume, while GDXJ climbed +3.09% on moderate volume also.  After consolidating and finding support at the 50 MA for the past three days, senior miners broke sharply above their recent trading range, closing at the highs of the day.  Its a picture perfect bullish chart, at least so far anyways.  This is exactly what I'd like to see gold do on a break above the 200, but those COMEX buyers have to cooperate.  Damage from the barrage of miner forced selling from four weeks ago has been completely repaired.

Platinum fell -0.07%, palladium rose +0.99%, and copper was mostly flat, down just -0.02%, which isn't bad considering what happened to the CRB today.

The buck pretty much sold off all day long, dropping -0.62 to 99.03 and unwinding much of last Friday's BOJ-inspired rally.  However that's not because the Yen rallied - the Yen was largely flat vs USD.  The dollar's move lower came at the expense of all the other major currencies including the commodity currencies, which have been on a tear recently.  Today AUD was up +0.36%, and CAD rose +0.22%; CAD is up 5% off its low set two weeks ago, and AUD is up 4% during that same timeframe.  They put in their lows roughly the same time oil (and copper, and the commodity complex in general) did.

Curiously, even though commodities were hammered, the commodity currencies continued moving higher.  That's a bit of a puzzle, but definitely happy news for our friends in Australia and Canada.

SPX opened lower, rallied towards end of day but then sold off in the last 30 minutes, printing a doji and closing down -0.86 [-0.04%] to 1939.38.  Was this just some longs ringing the cash register after Friday's big move higher?  Its hard to know.  My sense is that SPX was tugged lower by the big move lower in oil prices today.  SPX is no longer moving in lock step with oil as it was over the past few weeks, but some influence remains.  VIX fell -0.22 to 19.98.

JNK fell -0.65%, falling in sympathy with WTIC.

TLT fell -0.31%, dropping just off its highs.  TLT remains in a strong uptrend.

CRB fell -1.96%, a big move especially considering the fall in the buck.

WTIC was basically smashed today, falling -2.42 [-7.17%] to close at 31.32, printing a swing high and blasting through its 9 EMA, closing at the dead lows of the day.  There did not appear to be any trigger for the sell-off that I could see.  It looks like the shorts have come back with a vengeance, and now we may get to see if the 27.56 low set three weeks ago will end up holding - we are almost halfway there already.  Oil equities did surprisingly well, with XLE losing only -1.67%.

From last week, I wondered if PM was just taking a pause, or if the rally was over.  The fact that gold found support on the 9 EMA was our clue that higher prices might be ahead; when traders buy the dips like that, its usually a good sign.  Now that gold is just at the 200 MA, we may see the topping scenario unfold.  I think it will depend on the commercials.  If they decide to pile in short here, we could easily see a high get marked.  The COT report suggests the timing is a bit off for that - we might have several more weeks before gold's cycle is over.  Miners are suggesting "all systems go", but silver continues to look feeble.  At least the buck isn't too much of a barrier.

In a downtrend, shorts have the advantage.  I think its much easier right now for the commercials to dictate pacing because the demand for exposure to the gold price remains relatively weak in the west.  At some point this will change, and the power will be removed from the hands of the commercials by the longs.  At least, that's what history tells me.  I'm not sure we are there just yet, however, so the (current, and probably decisive) power of the commercials must be respected when trying to sort out what the near term price action might lead to.

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7 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
Pettis: China's Debt Reckoning is upon us

Amazing article by Michael Pettis, an economics professor (and former trader) based in Beijing.  He's not the typical economist - he is well aware of both banks, and debt.  I guess that's because he's not just an academic, he's had some experience with the real world.  [http://blog.mpettis.com/about/]

China has been spending time and energy on "reforms" - which sound similar to the "efficiency" reforms advocated by the IMF/Troika to the periphery: Greece, Spain, Portugal, Ireland.  Theory being, "if you make things more efficient, you can grow and save your way out of your debt problem."  He says, this has never historically worked, especially not for a "miracle economy" (i.e. a very heavily indebted emerging nation) like China.  So its probably a bad strategy.  He also suggests that Spain (most likely) doesn't have enough time for these reforms to take effect before a debt crisis appears - and by extension, neither will China.

He explains that China cannot just wave a magic wand and make the debt go away.  The money has already been spent - some of it productively, some of it not.  [he estimates that 20-25% of Chinese apartments are empty, which he points out, are of absolutely no value to the people of China in that state.]

How can the debt problem be fixed?  Four options:

Debt can be reduced by partial debt forgiveness as part of a restructuring process following a default. It can be reduced as part of a pre-emptive restructuring. It can be reduced in the form of implicit debt forgiveness through monetization or financial repression. Or it can be paid down with funds generated from implicit or explicit taxes or from asset sales, including privatization. There are no other realistic ways to reduce debt.

So, the only four options are:

  1. involuntary default brought about by a 1930s-style financial crisis -  followed by a debt restructuring.
  2. pre-emptive restructuring (same as #1, but without the fire drill)
  3. debt forgiveness via money printing or financial repression
  4. debt explicitly paid down using increased taxes, or state asset sales.

Each option allocates the cost (or assigns the loss) of the debt reduction to some sector of the economy.  Sectors include:

  1. household sector - comprising rich households, and the rest
  2. private sector - comprising SMEs, large corporations, labor-intensive industries, capital-intensive industries, export sector.
  3. state sector - comprising either the provincial or the central government.

So if the PBOC prints money and monetizes the bad debt, that is "allocating the cost to the household sector" via inflation.  If a default occurs and the bonds are paid at pennies on the (dollar), it allocates cost to the bondholders - the rich people.   Asset sales - cost allocated to the state sector, either provincial or central government.  Bail-ins: household and corporate sector. 

A couple of paragraphs on consequences of continued inaction below:

http://www.macrobusiness.com.au/2016/01/pettis-chinas-debt-reckoning-is-upon-us/

China can choose to avoid reducing debt for as long as possible, as Japan has done, but the cost is a near permanent state of economic stagnation and the risk is that a poor, volatile economy like that of China is unable to last as long as Japan, in which case it’s debt burden will be reduced in the form of a debt crisis or in the form of monetization by the PBoC, which is simply another way of saying that the cost of the debt will be implicitly allocated to household savers, as was the case in the Chinese debt crisis of the late 1990s.

[If you put this off, things will eventually blow up of their own accord; in the resulting panic, you'll either have to print money, or involuntarily (and messily) default]

Alternatively China can choose to reduce debt explicitly by allocating the costs to some sector of the economy. As I have discussed many times, including in my 2013 book, Avoiding the Fall, arithmetically and logically the only appropriate sector is the government sector, and given the need for President Xi to further centralize power if Beijing is to implement reforms successfully, it is obvious that debt costs must be allocated to provincial governments.

[His chosen bagholder: provincial governments.  They need to sell assets, and presumably lose power.]

Of course this is politically easier said than done, but nonetheless these are the options open to China. It must rebalance and it will. It must reduce its debt burden and it will. It can do what many other countries have done in similar circumstances and waste time and resources by implementing the kinds of reforms beloved of academic economists that do not directly address the rebalancing or the debt directly, and so significantly raise its ultimate adjustment cost while running an increasing risk of crisis. Or it can take steps aggressively to direct the rebalancing and reduce the debt.

[It's the debt, stupid.]

AaronMcKeon's picture
AaronMcKeon
Status: Bronze Member (Offline)
Joined: Apr 29 2014
Posts: 71
Electronic Currency vs Gold

Hi Dave / Everybody,

There seems to be a lot of activity around the subject of electronic currency lately. As most here know, several countries have committed to going electric, and it's also become evident that the Fed is considering this route as well with "FedCoin" (source). The logic makes sense to me - create a secondary electronic currency and fix the exchange rate such that cash loses value so people/savers are forced into moving whereas debtors can keep debt in cash and have its value decreased.

Now I've also seen the following comment from Martin Armstrong:

Now out of real desperation, they claim gold will be reset at $5,000 to $100,000 and silver $400-$500. I really do not understand where they come up with this stuff, as if government will surrender all power and bow before them after laying down their weapons. Government would NEVER do such a thing, and in case they have not noticed, we are moving to electronic money; not bullion.

I know there are mixed opinions on him, but this has got me wondering: what really would likely happen to gold if we moved to digital dollars? Would it still rise vs the dollar because of its flight to safety characteristics during some transitional period? I think we would all like to see some gold-backed component to our money supply but what if this never happens?  Just curious to get the thoughts of Dave and others.

koigrl's picture
koigrl
Status: Member (Offline)
Joined: Nov 23 2014
Posts: 7
GoldMoney digital MasterCard

Hi, All, 

Regarding digital currency, has anyone had experience with GoldMoney's Mastercard? You can preload it with digital gold transposed (?) from your physical storage in singapore, london, zurich, etc, into currency of your choice.  and also can fund it with cash. use it anywhere that takes mastercard. you load as much or as little as you want, whenever you want.  The card is actual! forgot to say. can get it in 18k. or silver. or plastic.

I know more about this than about Goldbit, which is another digital gold product through Goldmoney.

Mod; this is my first post, so if it is in wrong location or off-topic, pls feel free to take best action. TY

 

 

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Reply to BJ.

Yes Boston Jumper, that has got me worried too. The other sceneario is

  • that we get free energy,
  • automation becomes good enough to provide all our needs,
  • quantum computing and AI makes human leadership obsolete and dangerous .The evidence is that H. Sap is not well suited to steer a car,  let alone the world's affairs. 
  • and there is a sharp drop in our population due to a rational decision by the AI that this will aid our survival and enhance our well-being. This need not be a painful process. The correct dosage of mass infertility will suffice. Think phages.

However I hedge my bets.  Silver is a better gamble than the state lotteries in my opinion. 

 

Dlumb77's picture
Dlumb77
Status: Bronze Member (Offline)
Joined: May 25 2014
Posts: 40
GoldMoney MasterCard

I have one. Really out of curiosity than anything else. You must have a GoldMoney or Bitgold account. You then pre-load the MasterCard with funds from your gold account.

It "works". You send funds to your gold account, they convert it to grams of gold at the prevailing rate. You redeem those grams when you pre-load the card. The card has a separate website where you can check transactions.

I guess you could treat it as an "offshore" account. Allowing you to stash some cash (denominated in gold) in Canada, and then spend it as you wish.

3 comments about Bitgold:

1. Transaction processing is slow.  You click some screens and it's really easy, however, I get the feeling they do it manually in a back room with pen and paper. Wire transfers out took 2 days on one occasion and 4 days on another.

2. It's not a "bank" - they're a precious metals dealer under Canadian law. Not sure how much you want to store in a private business with little regulatory oversight.

3. A few weeks ago they awarded one of their execs 100,000 stock options. The share price of Bitgold (listed on the TSX) fell from $5 to $3 (since recovered to $4.25 today). It gave me a wary feeling that someone was treating the company like their pet toy, not a rock-solid business.. Just my thoughts at the time.

They have an interesting offering, but I haven't worked out how to make it particularly useful to me.

 

koigrl's picture
koigrl
Status: Member (Offline)
Joined: Nov 23 2014
Posts: 7
Dlumb77, thanks for this

Dlumb77, thanks for this explanation which is very helpful. I, too, have a card but it's still in the box. POG is too low to cash out anything at the moment, but i do think the concept is brilliant. precious metal in physical form, allocated, and if you like, registered, in vaults and at the same time accessible to spend as cash. And yes, you're quite right that we must watch to see how BitGold fares. Though i do believe the metal holdings are safe, regardless. the metal is allocated and we are just paying rental fees on the space in the vault. my understanding from mr. turk is that if GM were to fail, the Jersey authorities would be in charge of unwinding it all. which would be horrible, but no worse than if banks fail and fiat becomes kindling. :)  i think this card is a very portable emergency option.

bubbagreen's picture
bubbagreen
Status: Member (Offline)
Joined: Jan 22 2016
Posts: 3
Pettis' book

Did anyone notice that Pettis' 2013 book is priced on Amazon for $8600 (used)?  If you are lucky enough to have a copy, Amazon will pay you a $6 gift card for it.

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