The Gold Market Discussion with Jim Clark: Week of December 8-12, 2014

The Gold Market Discussion with Jim Clark: Week of December 8-12, 2014

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12/12/14- Jim Clark

Each weekend I cover the previous week in precious metals. It only seems fitting that I open this week’s with a list I found today on Zerohedge (source: zerohedge.com) about all of the crazy market occurrences this last week gave us.

  • WTI’s 2nd worst week in over 3 years (down 10 of last 11 weeks)
  • Dow’s worst week in 3 years
  • Financials worst week in 2 months
  • Gold’s best week in 6 months
  • Silver’s last 2 weeks are best in 6 months
  • The US Dollar’s worst week since July 2013
  • Portugal Bonds worst week since July 2011
  • Greek stocks worst week since 1987

The month of December continues to be an exciting time in the precious metals market with gold soaring to $1,235, its highest level since October, amid a retreating dollar, sliding oil prices, and a drop in the stock markets. As I mentioned last week, global forces are showing the signs of a pending gold rebound. I believe this is a good time to accumulate gold. All of the markets are extremely volatile. We are getting multiple signals from oil, bonds, gold, silver, commodities, currencies, and stocks. Since the financial crisis, market economies are being replaced by government controlled economies, which has led to the present dysfunctional credit and debt system. As a result, so many of these signals are perverted and devoid of honest economic information. A sharp fall in gold often signals major trouble, but a sharp rise in gold, along with the dollar, could be signaling trouble as well. The long term message of gold is safe haven, and right now governments and institutions are showing fear and mistrust about the financial conditions around the world. Let’s look at this week in precious metals…

Speaking of government controlled markets, there appears to be a correlation between the drive up in the Nikkei and the drive down in the gold price. The more it has risen, the more gold has fallen. And the more the cost of repo funding declined, the more the price of gold declined. We are in a global credit bubble in which more and more speculation in risk assets has been encouraged as a result of multi-trillion dollar expansion of central bank balance sheets and the imposition of near zero interest rates. Since September 2012, most of the major moves in the Nikkei index and the gold prices were ties to Bank of Japan (BoJ ) monetary policy meetings that announced increased monetary stimulus. For example, in April 2013, the BoJ promised to inject about $1.4 trillion into the economy in less than two years. Gold began to collapse shortly afterwards when the gold futures market opened in to a monumental selling of 100 tonnes of gold taking gold to the lowest level that was seen back in 2012. Two hours later, 300 tonnes of gold was dumped in 30 minutes of trading showing the hallmarks of a concerted “short sale’. The selling was in gold futures contracts. Another interesting aspect of the collapse in the gold price in mid-April 2013 was that it contradicted the market signal of tightness in physical gold supply at the time as shown by the Gold Forward Offered Rate (GOFO). GOFO is the cost, in terms of the interest rate, of borrowing dollars using gold as collateral. When GOFO moves close to zero it shows that the market has a greater need to borrow physical gold, i.e. to swap it for dollars. GOFO has been declining since the gold price peaked in October 2012, showing that investors have been taking advantage of the falling price to accumulate physical gold. On the day the gold price collapsed in April 2013, the GOFO had fallen to 17 basis points and briefly went negative the following month. In a market with sufficient physical supply, GOFO should never go negative. Negative GOFO implied that the market was so short of physical that it would pay interest to holders of bullion to borrow their gold. Other indicators such as the COMEX gold inventories and the gold basis also indicated a shortage of physical gold. In 2014, the Nikkei continued to rise and gold rebounded. Then, on July 14, 2014, coinciding with the first day of the BoJ’s July Monetary Policy Meeting, $1.37 billion in gold futures was dumped at the opening of the U.S. markets, driving down the price of gold. Rueters noted that some of the biggest price moves in gold since late October have, unusually, occurred in Asian hours and traders. Following the most recent sell-off, the gold market is showing renewed signs of tightness in physical supply with a 1-month GOFO rate of -0.298%.

So, some of the fundamental indicators that would normally push gold higher, like a weak U.S. dollar, have reversed. But many indicators show gold holding steady. Some of these indicators include the following: China gold imports are up with 12 importing banks in China-which we know of. China is working to accelerate its accumulation as evidenced by its record volume trading on the physical exchange which has reached tidal proportions. Other countries are also hoarding gold. India and Russia are having record imports of the yellow metal. Silver is also on track to exceed the 2013 record-setting pace with November silver Eagle sales from the U.S. Mint up 49% from the previous year. And India’s silver imports rose 14% this year, setting a record. Also, some mainstream investors are buying gold including Ray Dalio who runs the world’s largest hedge fund. Ray Dalio, who has approximately $150 billion in assets under management, currently allocates 7.5% of his portfolio to gold. And Japan, with the second-largest pension market in the world, has recently begun to actively invest pensions in gold.

China appears to be turning away from the dollar indicated by Beijing promoting its currency, the renminbi, as an international currency. It is doing this by ramping up its overseas development agenda using funds which have been recycled into Treasuries for more than a decade, keeping U.S. interest rates low and underpinning economic growth in the west. However, a new 10-point plan for financial reform calls on using their foreign exchange reserves to support their domestic economy and development of overseas markets for Chinese high-end equipment and goods. This leads to the question of what kind of an impact will this have on U.S. debt financing and global interest rates? Beijing has indicated its concern at the U.S. Federal Reserve printing more money. Luo Pin, an official at the China Banking Regulatory Commission, stated in New York in 2009, “Once you start issuing $1 trillion-$2 trillion …we know the dollar is going to depreciate so we hate your guys-but there is nothing much we can do.” It looks like they are trying to do something about it now.

And this week, in Greece, Europe’s most indebted state, the Athens Stock Index went down over 11% in a day, destroying three weeks of gains, and the Greek 3Ybond price has collapsed. I wouldn’t be surprised if this resulted in another EU bail-out.

The financial crisis of 2008, which began as the simply the capital market trying to purge and liquidate the speculative rot that built up during the Greenspan era, led to Fed Chairman, Ben Bernanke tripling the Fed’s balance sheet, and it has continued since then. The world has become addicted to central bank stimulus. The major central banks of the world have footings in excess of $16 trillion which is about triple the pre-financial crisis level. This massive infusion of capital has potentially fueled the biggest asset inflation bubble ever seen.

Late Thursday night, in order to avoid a government shutdown, Congress passed a $1.1 trillion dollar spending bill which funded everything President Obama wanted including his executive amnesty order and Obamacare. This massive increase in spending can only translate into increased money supply and ultimately higher inflation.

So with all this fear and economic madness, why not buy a little peace of mind and hedge against inflation and dollar collapse with gold and silver, commodities that have held a constant value over thousands of years?

As always, I encourage you to call one of my precious metals experts at Republic Monetary Exchange to learn more at 602-955-6500 or 877-354-4040.

I’ll be keeping a sharp eye on the market and I encourage you to do the same!

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Jim Clark, CEO, Republic Monetary Exchange