Short Squeeze in Both Metals
Well, things continue to be very hard to read in the precious metals world. Overnight we saw what looked very much like a short squeeze with both gold and silver dipping lower before both powering higher.
As a result the prices of both metals in NZ dollars are largely unchanged from a week ago. In fact silver remains exactly the same at $24.26 per ounce, while gold is down just $2 an ounce to $1524. However the double bottom in gold that we mentioned last week could be playing out didn’t occur and both metals actually dipped to new lows during the week. As you can see in the chart below gold in NZ dollars remains in a downtrend.
During the week NZD silver dipped briefly below long term support too.
As we mentioned earlier a short squeeze looked to occur last night. In US dollar terms gold went as low as $1212.00 but on New York open started moving higher, reaching $1248, just below the $1250 resistance level.
Silver in US dollars got below $19 for the first time since coming out of lows of June, but then it too charged higher rising just short of a dollar an ounce to reach $19.85.
It would seem reasonable to hazard a guess that we will retest the lows of June in US dollar terms and overnight we were really not very far from that mark.
Adrian Ash of Bullionvault comments this morning on the number of gold traders betting on a fall to $1180 or lower at the moment and that if past history is any guide they often get it wrong.
“…this week’s action so far, plus the looming Non-Farm Payrolls report from the US due Friday, points to the growing taste amongst speculative traders for a drop to $1180 per ounce or below.
That was the Dollar-price low hit at the end of June. Short-term traders jumped piled onto the bandwagon, and took the biggest “short” position in 14 years…only to find gold rallying 20% over the next 3 months.
That rally was hardly a surprise. The hot money gets this stuff wrong all the time. But that doesn’t stop it blurring the picture for longer-term investing.
It might just be, however, that 2013’s bear trade on gold is running out breath as the year ends. The heaviest betting in January gold options is currently for a drop to $1200 or lower. Traders in February gold options, in contrast, are currently backing a rise to $1300.
That’s what short-term traders playing gold on borrowed money think, at least.”
So hard to know what quite to make of that. It was interesting to see the price bounce so strongly from just above US$1200 overnight.
Also of note have been the number of “stop logic” events on the Comex exchange where its circuit breakers have been tripped due to large sell orders placed at low volume times. While it has taken much smaller orders to cause this than earlier in the year, the moves down have also been much smaller. Of late only $10 to $20 an ounce. So this would back up the theory that there is not too much downside left at the moment.
Of course you can never say never and that’s why we outlined back in April the 50% retracement level for gold as a possible turn around point. And as you can see in the chart below we are still a little way off that yet.
Negative interest rates, cashless societies and Bitcoin
Last week we mentioned a few articles appearing on the topic of charging depositors in banks a negative interest rate.
One of these discussed how the Fed may employ a new tool to make adjustments. It could adjust the rate of interest they currently pay on the deposits banks place with them to zero from the current 0.25%. Thereby forcing banks to lend more. But banks have threatened to charge depositors to hold their money if this was enacted – effectively meaning a negative interest rate for savers.
Well, the always straight talking Paul Craig Roberts had an article this week that outlined how insider, and until his recent withdrawal Fed Chairman candidate, Larry Summers made a case for even stronger measures than this at an IMF conference last month…
“At the IMF Research Conference on November 8, 2013, former Treasury Secretary Larry Summers presented a plan to expand the con game.
Summers says that it is not enough merely to give the banks interest free money. More should be done for the banks. Instead of being paid interest on their bank deposits, people should be penalized for keeping their money in banks instead of spending it.
To sell this new rip-off scheme, Summers has conjured up an explanation based on the crude and discredited Keynesianism of the 1940s that explained the Great Depression as a problem caused by too much savings. Instead of spending their money, people hoarded it, thus causing aggregate demand and employment to fall.
Summers says that today the problem of too much saving has reappeared. The centerpiece of his argument is “the natural interest rate,” defined as the interest rate at which full employment is established by the equality of saving with investment. If people save more than investors invest, the saved money will not find its way back into the economy, and output and employment will fall.
Summers notes that despite a zero real rate of interest, there is still substantial unemployment. In other words, not even a zero rate of interest can reduce saving to the level of investment, thus frustrating a full employment recovery. Summers concludes that the natural rate of interest has become negative and is stuck below zero.
How to fix this? The way to fix it, Summers says, is to charge people for saving money. To avoid the charges, people would spend the money, thus reducing savings to the level of investment and restoring full employment.
Summers acknowledges that the problem with his solution is that people would take their money out of banks and hoard it in cash holdings. In other words, the cash form of money provides consumers with a freedom to save that holds down consumption and prevents full employment.
Summers has a fix for this: eliminate the freedom by imposing a cashless society where the only money is electronic. As electronic money cannot be hoarded except in bank deposits, penalties can be imposed that force unproductive savings into consumption.”
We think this points to what may lie ahead. It just might be that various bubbles have to get blown a bit higher, then imploded before the central planners have an excuse to roll out a modification of the ZIRP (zero interest rate policy) to the NIRP (Negative interest rate policy).
The cashless society angle is interesting too. Of course the central planners would love this as it further enhances their control and limits our freedom. This is what worries us with the rise and rise of Bitcoin of late. We have read opinions that it was started by the CIA and various other theories. Of course given next to nothing is known about it’s inventor who knows how it started exactly.
Anyway back to our worry on the cashless society. Could Bitcoin and the fact that it was (surprisingly) recently somewhat endorsed by the US Senate and even the US Fed head be an initial test to see how we would accept a completely digital cashless society?
Some opinions we’ve read show that Bitcoin is not as untraceable as is commonly promulgated – or at least not without some effort. So we reserve judgement. Although we still think a marriage between digital currencies and gold/silver remains a real possibility. Here’s hoping we get to see some true monetary competition before too many years pass.
Money Manager: Risks Facing the NZ Dollar
Last week in the Casey Research Daily Dispatch (you can sign up for free) there was a guest article from Mark Whitmore, of Whitmore Capital Management. He is a rarity in money managers in that he is a longer term investor in currencies as opposed to most hedge funds who are looking to ride the latest fad, ducking in and out from one currency to the next in next to no time. It was interesting to note he had some specific thoughts on the NZ dollar particularly in comparison to the Aussie dollar:
“Currency Opportunities Today
I am of the opinion we are in the most treacherous investing environment since the 1970s as the tug of war between inflation and deflation plays out in the global economy. While too vast of a topic to address here, in sum, we are left to consider the odds of what looks to be a distinctly bi-modal global economic future. It thus strikes me as prudent to execute currency investments in a manner so as to limit downside exposure in the event the world economy breaks in one direction or another.
Accordingly, my favored currency strategy at the moment is to find currency pairs whereby one is much more attractively priced than the other, yet both would move in a similar fashion no matter what the economic environment…”
He then went on to discuss the Russian Ruble and the Turkish Lira. Next up though he had some comments on a couple of currencies closer to home – emphasis added is ours…
“Another pair that appears to be a good risk-reward play is the Australian dollar (AUD)/New Zealand dollar (NZD). The NZD looks to be the most vulnerable to a significant correction among the dollar-bloc currencies. Its current account deficit as a portion of GDP is approaching 5%, while Australia recently reported a yearly current account deficit at less than 3.2%. Should asset markets become roiled once again, this level of a structural deficit in New Zealand’s current accounts could be seen as an acute vulnerability.
Moreover, when adjusting for wage inputs, the NZD looks even more overvalued than the AUD on a PPP basis. The NZD is also still trading very near its all-time highs versus the dollar, whereas the AUD has recently pulled back more than 15% from its all-time USD highs. As a contrarian, I like the fact that the AUD is utterly despised. (In August, non-commercial traders had the largest net short position against the AUD in years.) Finally, should the precious metals complex eventually recover some, the AUD would be likely to get a little bit of a tailwind at its back compared to the NZD.”
So he identified a number of reasons why the NZ dollar could take a fall. Interesting that he made note of the NZ current account deficit as we note that the business news of late has focused on NZ’s improved terms of trade. In fact reaching a 40 year high this week.
From wikipedia: “Terms of trade refers to the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods. An improvement of a nation’s terms of trade benefits that country in the sense that it can buy more imports for any given level of exports.”
So in simple terms, terms of trade refers to how much stuff a country can buy as a ratio to how much stuff it sells. i.e. the price of the stuff. Whereas a current account deficit/surplus refers to how much stuff a country is actually buying or selling.
In NZ’s case we have the best terms of trade in decades (our export prices are high), yet we still have as Mr Whitmore notes, a massive trade deficit. (We buy lots more than we sell).
In the current imbalanced world that may not appear to matter too much. However you have to consider what it might mean in a ‘different universe’. Like one where international balance of payments were settled with say gold?
You might recall that this is the system that John Butler believes may be what we will end up with. (See here for more on that) In the case of New Zealand (who you might recall holds zero ounces of gold reserves) it would mean we would have to balance our imports and our exports. That is get rid of the trade deficit. Either by selling a lot more stuff – not that easy to do in a hurry. Or by importing a lot less stuff – not that easy to do either when we’ve been buying lots of stuff for so long, but the more likely outcome. So we could be heading for a rather significant adjustment in a rebalanced world.
A final thought is that if Mr Whitmore is correct about the NZ dollar then gold and silver are natural hedges for New Zealanders against a sudden fall in the exchange rate – such as we saw in 2008. Much simpler than working out how to short the kiwi dollar as an NZer.
This Weeks Posts
Just videos to share with you this week actually.
Firstly the latest from the always passionate and entertaining Darryl Schoon with his usual monetary history lessons.
Next up, an excellent interview with Bud Conrad of Casey Research. We actually get a short summary of the presentation he was about to give at the conference he was attending and why he has swung around to the idea that gold is being manipulated.
The 1960’s London Gold Pool – a Blueprint for Today?
Speaking of manipulation, Grant Williams in his latest TTMYGH letter looked at the London Gold Pool of the 1960’s. Which is an interesting story if you haven’t read much about that before.
Because as Grant points out there are very close parallels to what is going on today.
Here he discusses how the pool was breaking down due to overwhelming amounts of physical gold being bought and perhaps gives some insight as to what could eventually happen with paper markets currently. Again emphasis added is ours…
“That evening, emergency meetings were held in Buckingham Palace, with the Queen subsequently declaring Friday 15th March a “bank holiday”. Roy Jenkins, Chancellor of the Exchequer, announced that the decision to close the gold market had been taken “upon the request of the United States”.
Hmmm… a “bank holiday” declared on a Friday evening, after which time there was no access to gold for two weeks for anybody who owned it and didn’t have it in their physical possession?
Yeah. Right… Like THAT could ever happen today???!!!
<coughcoughcoughcypruscough>. What happened next? Let’s see:
The London gold market remained closed for two weeks, during which time the London Gold Pool was officially disbanded. During that two weeks, Zurich and French markets continued to trade with open market prices for gold exceeding $44 per oz (up 25% from London’s official price of $35.20 per oz).
A fortnight later, an official “two-tiered” price was announced to the world, where the official price of $35.20 would remain for central banks dealings, while the free market could find its own price, the London market re-opening again on the 1st April.
Yes, the “free market” price of gold was 25% higher than the level at which it had been maintained by the London Gold Pool. As De Gaulle no doubt said at the time, “Quelle surprise!”
By now, the chart of the gold price looked a little different from the one that had left the Pool members slapping each other on the back and congratulating themselves on a job well done:
Of course, as anybody with even a passing interest in gold knows, once the London Gold Pool cracked, dominoes began to fall in rapid succession.
De Gaulle’s aggressive moves to perfect the gold backing France’s dollar reserves was tolerated begrudgingly until it reached the point where others were starting to want THEIR gold, and that just wasn’t going to be allowed to happen.
In August of 1971, Richard Nixon made his famous speech about devaluation, removed the gold backing of the dollar, left France and everybody else queueing up to get their gold twisting in the wind, and ushered in the age of pure fiat currency.
The parallels are frightening if you look at them closely enough – except that this time, rather than being backed by gold, the dollar is backed by “the full faith and credit of the United States government.”
He makes a good point. The parallels are quite uncanny. The current prices might one day be looked back upon in much the same way as the $35.20 price was at the end of the 1970s when the gold price reached over $800. And while he doesn’t say it in so many words it shows just how quickly the tables can turn when they do. So the old saying of “better a year early than a day late” when it comes to (financial) insurance springs to mind.
(On the topic of Grant Williams, King World News has some comments from him on some of the content in this latest letter surrounding the operation of the London Gold “fix” – which you may have heard is under “investigation” and so is worth a look as it’s a short read.)
So if you’d like a tranche of gold or silver insurance we remain at close to 3 year lows which means the “insurance premium” is cheap. Here’s how to get in touch:
1. Email: firstname.lastname@example.org
2. Phone: 0800 888 GOLD ( 0800 888 465 ) (or +64 9 2813898)
3. or Online order form with indicative pricing
Have a golden week!
Glenn (and David)
Ph: 0800 888 465
From outside NZ: +64 9 281 3898
This Weeks Articles:
|Double Bottom for Gold in NZD?|
|2013-11-28 14:17:50-05Gold Survival Gold Article Updates: Change this to the current date March 13, 2013 This Week: Double Bottom for Gold in NZD? China and Turkey still buying plenty A Follow Up on GLD Negative Interest rates on Bank deposits coming? USA OBR on the Way? Double Bottom for Gold in NZD? Gold and silver have […]|
|Evidence on Why Gold Is Falling on the Verge of a Dollar Implosion|
|2013-12-04 16:47:56-05We haven’t featured anything from Bud Conrad of Casey Research since April (see the link at the end of this article if you’d like to check out that last piece which is definitely worth a read). In this compact interview you get a summarised version of the presentation he gave at Metals and Minerals Investment […]|
|Bankers Card Tricks and Why Private Bankers are in Trouble|
|2013-12-04 17:37:21-05Here’s the latest from the always passionate Darryl Schoon. It’s actually a 2 part video but we think the best content is in the second half which begins at 24:47 mins in. (Part one mainly covers how the rip off that is the 30 year mortgage came into being). Here’s what is covered in Part […]|
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