Feb. 5, 2014
Our weekly email is a day early today with Waitangi Day tomorrow. So we’ll try and keep it relatively brief too.
It’s been a volatile week to say the least. Particularly in foreign exchange markets and in most stock markets around the world too.
Although they are back up today, US shares tumbled yesterday after falling steadily for the past week or so. Likewise the kiwi dollar has been falling all week but has bounced sharply back up over a cent today to be at .8193. Probably not surprising given it was getting into oversold territory after having tumbled rapidly a few cents in a couple of weeks.
So while gold in US dollars has been holding fairly steady around $1259, the stronger kiwi dollar overnight has seen the local gold price fall $16.27 since last week or 1.05% to be at $1531.73 today.
Likewise silver is down 33 cents per ounce or 1.37% to be under $24 again at $23.82. So silver whether in US dollars or NZ dollars has yet to get solidly above the 50 day moving average. Unlike gold which has clearly broken above this shorter term trend indicator. But you can see in the silver chart below that the price is being compressed between the blue 50 day moving average line and the horizontal support line. So it will have to break in one direction or the other very soon.
Why is Silver Lagging Gold?
Poor mans gold has been behaving poorly of late. While gold is starting to show signs of life, silver has just been bouncing along the bottom, trading in a pretty tight range for the past 2 months.
Why is this?
Well we could make a good argument for manipulation. But there might also be some reasons why actual real people have been going for gold rather than silver of late.
Our best guess is that it is due to silver being only partially a monetary metal in comparison to gold. Silver has a multitude of industrial uses (which we touch on in this article: Why Buy Silver). Much moreso than golds industrial uses.
So silver is more susceptible to opinions on global growth as a weakening world economy would mean less industrial silver demand. Given there appears to be a bit of doubt around currently about the global economy perhaps this is the reason for silver underperforming gold?
Money velocity remains low, showing all those trillions of digital money created by the US Federal reserve are yet to seriously make it into the wider economy (as we’ve discussed recently).
This would seem to portend a fear of deflation rather than inflation currently. Given gold is almost purely a monetary metal then people would be turning to it in times like these and ignoring silver. This is why we like to have a bit of both gold and silver as they don’t necessarily both move in unison.
Evidence of Fear of Deflation
This fear of deflation is also shown by the fact that so far this year, bonds are up (i.e. their interest rates are down), the USD is up, gold is up, and most stock markets are down (along with silver as mentioned already and platinum too).
Most people would be surprised to see gold and the US dollar rising at the same time, given gold is meant to be the “anti-dollar” but every now and then they both move up at the same time. This happened back in 2008/09 and it also happened towards the end of the last precious metals bull market in 1979.
It is of real interest to us in New Zealand as this is when we see the local gold price rise most sharply as the kiwi dollar weakens while the USD gold price also rises – a double shot as I think we said last week. Since the start of the year we have seen this with the local gold price in NZD rising more than in USD.
Not Convinced of Rising Interest Rate Story Yet
So for these reasons we are also not convinced that interest rates both abroad and at home will necessarily rise in a slow steady fashion as most predict. If the near to medium term risk is deflation then we would likely see a continuation of “safe haven” buying. More people buying the likes of US treasuries would mean that interest rates would stay lower too. As we have seen so far this year, it is possible that people continue buying gold at the same time.
Back here at home, deflation in the world economy would impact export demand and a weaker economy would lessen the need for the Reserve Bank to raise interest rates. As we’ve said recently we could see rate rises before then witnessing a backtrack and more rate cuts.
A deflationary scare would obviously slow up the Feds taper plans and this could be a trigger for the New Fed Head Yellen to come up with a plan to reduce the interest rate the Fed gives banks for holding their “excess reserves” with them. And there are A LOT of these reserves.
Inflation Versus Deflation
This would be the deflation first and then inflation scenario. Whereby the Fed responds to falling asset prices with the bazooka of a rate cut on the mountain of reserves banks are being paid to hold with them.
This inflation / deflation battle is shown brilliantly in Ronald Stoeferles latest chart book. A bit of which we featured last month.
The chart below of Google Trends shows the numbers of searches for deflation have taken a recent uptick. Still along way from the volume in 2008/09 and in 2010 but it is pointing up.
Also from Ronnies Chartbook is this chart of Incrementums “Monetary Seismograph”.
They explain the measure like this:
“Price inflation is a monetary phenomenon. Due to the fractional reserve banking system and the dynamics of ‘monetary tectonics’, inflationary and deflationary phases may alternate.
To measure how much monetary inflation is spilling into the markets, we utilize a number of market-based indicators, which are combined in a proprietary signal. This method of measurement can be compared to a monetary seismograph.
The measurement results in the “Incrementum-Inflation Signal”, indicating the current momentum of inflation.
From our point of view, it is not the absolute level of inflation but rather the change of inflation that matters. According to the respective signal we position ourselves for rising, neutral or falling inflation trends.”
(By the way, the full Chart Book can be found here.)
So Incrementums measure shows we have been in “disinflation” since late 2011, but could be getting close to a change in inflation levels.
Ronnie explains in more detail some content from his latest chartbook in a post on King World News that we’d recommend you check out. Ronald Stoeferle on King World News
NZ Bank Failure “Bail In” Scheme
If you’ve been keeping an eye on us for a while you will no doubt have read about the NZ Reserve Banks “Open Bank Resolution (OBR). Basically a means of avoiding a taxpayer bailout of a failed bank by instead using customers deposits.
A question as to whether we knew of any videos on the subject from a reader/client, prompted us to throw one together. So if you have yet to learn about the risks facing your money in NZ banks then be sure to check that out. It also contains links to the previous articles we’ve written on the subject.
A must read article on the site this week is from Bud Conrad who we have a soft spot for since it was a dinner he was speaking at that led to our meeting and the idea of goldsurvivalguide.co.nz being hatched back in 2008. Bud lays out clearly just why he thinks now is the time to again be buying gold. He covers most of the happenings in the gold space of late, including China buying, COMEX and ETF inventories dwindling, the reasons why gold fell and how there is a crisis brewing in the gold market. Definitely our must read of the week
Finally is a piece on Junior Gold Stocks, who have quietly started the year as the best performing asset of the past month. Not something many would have expected. History shows there can be a mountain of upside in these when they turn.
Could we be seeing something of a similarity to the 1930’s when during a period of deflation gold stocks were just about the only group that rose in the stock market?
Speaking of the 1930’s, here’s a chart that we have seen a few times this past week showing the US DOW index is tracking a similar pattern to that of 1928-1930 before the big plummet.
Dow Current v Dow 1928-1930
Monday 3 Feb 2014, Dow dropped 326.05 points, or 2.1 percent, to close at 15,372.80, its biggest decline since June 20, 2013.
An interesting chart, but it wouldn’t surprise us to see them manage to keep things going for a while yet.
Gold can also offer protection from an occurrence like this as the performance of the gold miners back then shows.
Anyway, we reckon Bud Conrad’s article we mentioned earlier makes a pretty good case as why now is likely a decent time to be buying again. Coupled with the fact that interest remains incredibly low from what we are seeing. Buying today you will be in the minority for sure. So If you agree with Bud and also want to go against the grain and begin or add to your stack then get in touch:
1. Email: email@example.com
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
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