Jul 09, 2015

The Greek Tragedy, China and Gold’s Short-Term

By   ghaccess     |   Category: Blog

Gold closed down over $20 per ounce, at just over $1152 per ounce on Tuesday – a technical sell is all but certain as a result of a stronger dollar created by the Greece fiasco.

In addition to Greece the Chinese stock market backdrop has the global marketplace feeling uneasy – at one point this year up 122% it is now up 36% so the drop has been substantial. In my opinion this is quickly becoming the larger story of the two. It is worrisome especially because of the behind the scenes work from the Bank of China. The Chinese problem has created a big drop in the price of copper (down another 3.3% as of Tuesday and barely fighting back today) and has also dragged the platinum group metals lower. It is difficult to imagine anything overshadowing the looming Greek exit tragedy playing out in front of us as I write this but leave it to China to actually do it!

The CSI300 index of major companies in Shanghai closed down another 6.8 percent on Wednesday (Today) and the Shanghai composite followed with a drop of 5.9 percent, bringing its total loses since its mid-June peak to about 35 percent lower.

To give you a sense of what is really happening and to further understand the magnitude of the situation in China of the 2,808 stocks listed some 1,476 stocks have suspended trading (for now) representing some $2 plus trillion in equity.
Stocks in many cases are being suspended simply because the companies themselves have bank loans backed by shares from their companies which the banks themselves may wish to liquidate, joining the queues of margin sellers being forced to sell at this point. With all of this happening now what is actually happening in the Gold market and what if anything might occur in the short-term?

The 60 day chart reinforces the notion that we have visited these lower prices a number of times. During this time frame gold has moved generally lower from above $1200.00 and settling in the $1170.00 range and holding within that range until this week for quite some time. Gold on Tuesday closed at just over $1152 per ounce so we are once again testing recent lows in the $1150.00 range which we saw in October of last year and again in March of this year. All this should tell you that gold continues technically weak and we might once again test the most recent low of $1148.00 made in March of 2014, although we would suggest that based on seasonal cycles this tends to be the low point each year for precious metals pricing representing some of the finest buying opportunities to date in the this 14 year bull market.

From a technical perspective on the shorter term the bears are in control but like I said we have visited this range a number of times and it still remains to be seen if gold will spring higher supported by physical demand or if the market remains defensive and perhaps moves lower. If gold once again fails to break to the downside this would further support the bullish notion that we have bottomed and Tuesday’s rebate from all-time highs will remain steady.

Also keep in mind that in negative markets investors always beat themselves up because a negative expectation rules. Tuesday was a good example – the phones were “ringing off the hook” – why? Sure the market was down but look at the numbers overall – they are really no big deal – Tuesday’s “big” down day really only amounted to a little over a $10.00 change in two trading days and the aftermarket was up another $4.00 so the real short-term change amounted to $6.00 – why all the ruckus?
Remember that gold’s peak close happened in 2011 ($1923.00) and if we compare that to the low close ($1148.00 / March 2014) you get the very nice discount of 40%. Now there will always be those who look for cheaper prices – fair enough, but I believe the reason you see that consistent bounce to higher ground is because this is sufficient incentive for the physical world to take action.

Looking at the price of gold from across Guildhall’s perspective we have seen virtually no large selling in our 60 day descent from $1200.00. And I can’t say safe-haven buying has played much more than a supportive role. So it’s not Greece, it’s not oil, it’s not political unrest – the Iran nuclear bad deal has barely been mentioned – it’s not the European Union.
Traders have their complete focus on the US Federal Reserve as minutes from the June FOMC meeting are scheduled for release today (Wednesday).
Just because gold did not react much to the Greek crisis does not mean Greece is not in trouble. And that trouble is closely related to the European Union – the result of the collective debt problem can be moved forward but it cannot be solved without drastic change.

Still this poses little immediate threat which can be seen in relative bond yields and no chance of a contagion. The debt problem is not overwhelming but it continues to simmer. Look at bond values – the US yields are a little above 2% – now compare the yields of Italy and Spain around 2.25% with Greece at 18%. If other small EU countries were in trouble their bond rates would not be on par with the United States.

Still most are scratching their heads as to why with all the trouble in Greece gold is not at least threatening $1200.00?
Like I suggested this past week on the Real Money Show, gold is kept on the defensive because of the perfect trifecta – the great Federal Reserve rate hike – a growing China problem and a dollar which remains stubbornly strong (the Dollar Index above 96.00 for a week and today moving above 97.00). Gold showed very little reaction to the weekend headlines on the Greek referendum and the intensified possibilities of Grexit. In fact prices are pointing to a total disinterest in the ongoing negotiations.

Speaking of the FOMC and what the Federal Reserve might or might not do with rates, data showed that the hurdle for a lift-off in rates is quite low, but the pace will be very gradual. The FOMC’s 1.9% growth forecast for this year implies average growth of 2.5% during Q2-Q4 and according to the “dots” this is good enough for at least one rate hike.
While the FOMC appears to be ready to lift rates relatively soon, maybe before September, the Committee is collectively trying to shift market focus to the pace of tightening and promising that it will be very gradual.

This message is expected to be reinforced in the FOMC minutes; with the caveat that “gradual” is not the same as the “measured” pace of tightening during the 2004-2006 tightening cycle. Yellen communicated this during the press conference, insisting the rates are not on a pre-set course and the path will be adjusted as the data evolves.
The speed of the tightening cycle might be being tied to the labor market and inflation. Things to look for in the FOMC minutes include any additional feedback on the timing of the lift-off and any discussion on how to communicate ahead of the first rate move.

Silver closed down $0.75 Tuesday at $14.97. Guildhall has been a zoo all week to put it mildly and the big action is in silver bullion. The US Mint announced delays in delivery of product and premiums on many products continue to rise – so demand remains solid even at these higher rates.
I will continue to be a buyer in these ranges as long as I awake to the same realization that we are in fact not getting better and the fundamentals that drove both Gold and Silver to enormous highs in 2011, 2008, 2006, and 2004 will continue to be in play. The question is will you be holding some when they do explode?

Yours to the penny,

Darren Long

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