PM Daily Market Commentary – 12/3/2015
Gold rose +8.40 to 1061.10 on very heavy volume, while silver climbed +0.10 to 14.07 on heavy volume. Today was all about Draghi and the ECB; earlier in Asia both gold and silver made new lows, but none of that mattered once ECB Chairman Draghi announced what "doing what it takes" really meant, and it turned out, the answer was "not really all that much." The buck was absolutely smashed as a result, as the disappointed markets adjusted to the reality of a whole lot less money printing than they'd hoped for.
Bloomberg's headline read: "Draghi Braves QE Hype with Boost that Leaves ECB Room to Do More."
How anodyne can you get? The thing I like about the markets is, they don't lie to me in this way. Here's the headline I'd have written, backed up by the following chart:
"Dollar Crushed, Euro Screams Higher as Disappointed Traders Panic Out of Their Positions."
I know that sounds like the daily headlines at King World News, but this really was a huge move. And the buck closed right at the lows, which suggests there might be more downside to come.
In spite of the huge move higher in the Euro (and the slightly less huge move lower in the buck), gold's rally today in USD was modest by comparison. Gold hit a new low of 1045.40 early in Asia trading, and it struggled higher after Draghi's announcement at 12:30 GMT (07:30 Eastern). Why didn't the traders at the COMEX didn't back up the truck? Most likely, some of them did. However they were probably overwhelmed by traders in Europe dumping gold. Gold measured in Euros dropped -2.19%:
Silver followed gold higher; it too rallied off Dragi's announcement and the dollar's plummet, but the rally was unspectacular – it certainly wasn't as strong as the dollar's fall. Silver needs a close above 14.15 to mark a swing low. I don't have any great hopes of this happening, unless we have unexpected fireworks from Nonfarm Payrolls tomorrow.
Miners rallied, with GDX rising +2.12% on moderate volume, while GDXJ rose +2.27% on moderately light volume. The rally today was modest compared to what I had expected from such a strong currency move; GDX is moving slowly higher which is positive, but its not setting the world on fire.
SPX did not appreciate Draghi's announcement; SPX dropped -29.89 [-1.44%] to 2049.62, with the selling starting in the futures markets before the NY open, and then continuing almost all day. SPX did find support at its 50 MA, but it is starting to look rather like a lower low is being formed now in US equities, which is the mark of a downtrend. If SPX closes below 2020, things could get ugly fast. VIX rose +2.20 to 18.11.
JNK dropped -0.20%, supporting the sense of risk off building in equities.
Bond ETF TLT suffered a big loss today, dropping -2.72%, and is now back below all three moving averages which moves it back into downtrend territory. It looks like a chunk of that money from Europe is going back home. Loss in bonds mirrors the loss in the interest rate sensitive equities.
The CRB rose +1.36% today, a decent enough move when viewed in isolation, but pretty paltry when you consider the dollar's loss of -2.39%. Commodities remain heavy and appear to be finding it difficult to rally.
WTIC rose +1.17 [+2.92%] to 41.27; oil wasn't driven higher by currency moves, it did its thing all on its own. There was a pre-meeting meeting today of OPEC members which came to no particular conclusion, but Saudi Arabia did say they promised to listen to everyone before (in my opinion) changing nothing.
The Saudis, the world’s largest oil exporters, have stuck to their one-year-old view that any output cuts won’t work unless big producers outside OPEC, including Russia and Mexico, join.
We made a pretty dramatic top in the dollar today, but gold didn't respond quite as strongly as I had hoped. Nonfarm Payrolls could surprise to the downside, which would probably support PM prices. I suspect the market has the Fed rate hike baked into the cake by now, but its hard to know for sure. That COT report is quite supportive of a rally in PM, but we might just have to get past the FOMC meeting in two weeks before prices move higher. Here are the list of events coming up which will drive prices in both currencies and PM:
- Friday, Dec 4: OPEC meeting
- Friday, Dec 4: Nonfarm Payrolls
- Dec 16: FOMC Rate Decision
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While the Nonfarm Payrolls report looked decent today and one might expect gold to sell off as a result, that's not what happened. While the buck initially rallied and gold sold off, that reversed fairly rapidly and now gold appears to be breaking out.
If we close here at end of day, both gold and silver will print swing lows and be above their respective 9 EMA lines, both of which are quite positive outcomes especially given that today's positive NFP report pretty much sealed the deal on the Fed rate rise on the 16th.
It appears that the gold market is engaged in a "sell the news" event – or in this case, a cover-the-short event. Shorts are ringing the cash register, as they (perhaps) don't feel there is any more bad news that can possibly hit gold at this point, and that's when lows are made – no more possible bad news = no reason to enter short.
Of course we have to wait for the close, and we've seen PM gains fade far too many times for me to count, but I really like the reaction of gold today to what is a relatively positive NFP report.
Oil is not so fortunate. I think the OPEC meeting isn't going so well, and we might well see it break 40 today.
These two simple points juxtapose so nicely I think;
If Gresham's Law has any validity at all, and I firmly believe that history shows that it does, and if the markets stay 'free' enough to allow people to buy and sell things at anywhere near a voluntary price, then gold is going to continue to flow from West to East, and will not cease until the gold rigging ceases its operations.
"When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."
Real gold is flowing from West to East. And what it is leaving behind is a pile of 'synthetic' gold positions and IOUs.http://jessescrossroadscafe.blogspot.com/2015/12/nav-premiums-of-certain-precious-metal_4.html
No nation ever achieved global hegemony by weakening its currency. Hegemony requires a strong currency, for the ultimate arbitrage is trading fiat currency that has been created out of thin air for real commodities and goods.
Generating currency out of thin air and trading it for tangible goods is the definition of hegemony. Is there is any greater magic power than that?
Real vs. Paper? Receipts, or vouchers for wealth vs. true primary wealth?
An alternate view of what underpins the USD comes from Catherine Austin-Fitts, who suggests that the "Central Banking/Warfare Model" is the primary force keeping the dollar as reserve currency, and that specifically the US Navy's ability to protect … or otherwise control … the sea lanes (and now space) is what keeps the dollar strong. "That's an awfully nice bunch of container ships you have there, Mr Abe. You wouldn't want anything to happen to them, would you? And on a completely unrelated matter, how about buying some Treasury bonds?"
And that's why the South China Sea issue is something of importance. It all ends up being about the buck.
Her theory, not mine, but I think it has a certain merit to it.
Armstrong supports this indirectly, by bringing up Roman history. Specifically, when the Roman Emperor Valerian was captured by the Persians, the currency went into free fall shortly thereafter, as confidence in the Roman Empire tanked hard, as seen through the lens of the silver content in the Roman denarius – which dropped from 1 gram down to 0.05 grams following the capture of the Emperor.
My sense is, the drop in the silver content of the denarius wasn't the cause of the trouble, it was a symptom. Romans had no choice – the drop in confidence required the Romans to mint a huge batch of new (debased) coins in order to fund government spending, which no doubt resulted in a great deal of inflation, maybe even hyperinflation. It was their way of printing money to fund government. Presumably, tax revenues plummeted due to confidence issues, and so they had to resort to printing.
While I certainly agree hard power has a role in any reserve currency (see below), that over simplifies things IMO. It's soft power that really counts. Debasing silver coins is one thing, issuing debt-money that's backed by the promise that somebody will pay interest is another.
What's the value of such money? That's defined by things such as the rate of interest, the likelihood of getting paid the interest due, and the possibility that the currency being purchased (via a bond) will actually increase in purchasing power. These are essentially bets on the productivity and national income stream generated by the economy/nation that issues the currency.
The Roman Navy controlled the seas fairly effectively, but that wasn't enough to offset the devaluation of the money. But now the "value" is set by conditions other than silver/gold content. IMO the value is partly a bet on the economy that issues the currency, and the relative scarcity/over-supply/demand for the currency. As I explained in my recent 2-parter, USD is actually somewhat scarce now, hence its massive appreciation. the yield on USD denominated currency is also fairly attractive compared to alternatives, as are the odds of further appreciation. It is not as over-supplied as many imagine.
The role of the Navy is this: commerce between nations is profitable, as are the derivatives of commerce such as financing cargo, insuring cargo, writing futures on cargo, etc. Commerce feeds the income and productivity of nations that engage in large-scale commerce. The USN protects the USD by insuring large-scale commerce can continue without externalities such as piracy.
I'll bring up Mao: power devolves from the barrel of a gun.
Ultimately, soft power only exists when hard power is in place to enforce the rules. That's because while most of society is law-abiding, we have people who will always push the envelope. Hard power must exist to force them to follow the rules, whatever they might be.
So if you assume the pre-existing condition that hard power is enforcing the rules, then most definitely it is soft power that is most effective. Hard power is seldom used – "the last refuge of the incompetent", to quote one of Asimov's characters. But without the threat of its use, soft power simply doesn't exist.
An old manager of mine explained this to me at one point. He told me, "Dave, I have only one real power. I can either 'drop the rock' on you (i.e. terminate you), or refrain from doing so." That was the extent of his actual authority. However, to bring a project to a successful conclusion, that power was grossly insufficient for the task at hand. Indeed, it was only used very occasionally. 99.9% of the time was spent using his admirable cat-herding skill, most of which was persuasion, process establishment, encouragement, and dispute resolution. But ultimately, we listened to him because we knew he could drop the rock.
I liken this to CAF's central point. US soft power is used most often. But if someone wants to push the envelope (i.e. break out of the central banking model, and/or decide to nationalize American interests, or break whatever unwritten rules there are), then hard power is required.
Without the US Navy to enforce the rules, the "Empire" related US soft power wouldn't exist.
And linking this back to currencies; since its the US navy that enforces the rules, its the US navy that underpins a decent-sized chunk of the value of the US dollar. Imagine a world where the USN vanishes. I think the chaos that would ensue as everyone who previously wanted to break the rules would be madly doing so, whatever "Empire Premium" the USD currently has would vanish. What that amount is, I don't know – but I don't think its a small percentage.
CAF suggests that the current situation, where the average salary in the US is $52k, and the average salary in India is $4k, did not come about by accident. She thinks some amount of this was an act of deliberate policy, and that status quo is kept in place by either force or the threat of force. USN again.
What would the value of the USD be if salaries around the world were more or less equal? Would the US still be the reserve currency?
Day to day, things are as you say. Supply & Demand, debt deflation, interest rate differentials, and so on. Most likely this was true during 350 years of Roman rule as well. But this all chugs along under the protective umbrella of force. If confidence in that force evaporates, that will be reflected in the currency – and those changes will dwarf any "interest rate differentials" or "supply/demand considerations."