29 July 2015

Gold Daily and Silver Weekly Charts - Gold Is the Statist's and the Con Man's Bête Noire

"I have one other issue I'd like to throw on the table. I hesitate to do it, but let me tell you some of the issues that are involved here. If we are dealing with psychology, then the thermometers one uses to measure it have an effect. I was raising the question on the side with Governor Mullins of what would happen if the Treasury sold a little gold in this market.

There's an interesting question here because if the gold price broke [lower] in that context, the thermometer would not be just a measuring tool. It would basically affect the underlying psychology.

Now, we don't have the legal right to sell gold but I'm just frankly curious about what people's views are on situations of this nature because something unusual is involved in policy here. We're not just going through the standard policy where the money supply is expanding, the economy is expanding, and the Fed tightens. This is a wholly different thing."

Alan Greenspan, Federal Reserve Minutes from May 18, 1993

If you take a look at the Fed minutes over the years you will see that Bernanke's response to the Congress that the FOMC does not think about gold is just prevaricating nonsense.

At this point I am getting curious why the Fed in particular would wish to see the price of gold kept down.  And I don't say this too lightly, but it would take a serious effort to ignore the blatant and heavy handed public relations campaign downplaying the value of gold, in the face of increasing physical demand around the world, and the undeniable fact that for the first time in several decades the central banks of the world have turned from being net sellers to net buyers.
As we see from the minutes above most clearly, the Fed was watching gold carefully for indications of monetary inflation.  And this was during the long bear market in gold in the 1990s when central banks were still routinely and openly selling gold to keep the price lower.

Why would the Fed, if indeed they are involved or more likely fully aware, like to see an indicator of inflation supine while they are laboring mightily to convince people that there is a recovery in the economy so that they can get off the zero bounds and raise rates?   Wouldn't a rising price of gold give them some credibility in such a move?

Or is this 'a wholly different things' as then chairman Greenspan said above?   Are we at that kind of moment that Eddie George, the governor of the Bank of England, talked about in late 1999, culminating in the infamous Brown's Bottom when England's financiers sold her gold on the cheap, presumably to bail out the Banking speculators.
"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake.  Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K."
This current pool operation is indeed odd, unless one subscribes to the idea of a currency war pitting the US dollar status quo against the emerging economies who wish to find alternatives to what they feel is an abusive, almost neo-colonial form of monetary repression and at times a facility for plunder.

Although as I have mentioned before, I have a very open mind to the notion that some of the shenanigans from the last decade put some official sector and too big to fail jokers 'over their skis' in the precious metal markets, to the extent that Eddie George's abyss was starting to yawn like the Grand Canyon again. I never like to attribute to bad policy what can be just as easily attributed to purely stupid and short-sighted personal concerns and greed.

August looks to be a littler more interesting at The Bucket Shop. There were some more dribbles out of the warehouse, and the 'leverage' of claims is probably still well over 100:1. I'll have a look at it when mon ami Nick puts out his latest.

Fundamentally speaking, if we dare do such a thing in such dodgy markets, the demand for physical silver is increasing in 2015 while the supply is contracting, resulting in a projected deficit for the year.

Have a pleasant evening.

SP 500 and NDX Futures Daily Charts - Failure to Achieve Liftoff, GDP Tomorrow

There was intraday commentary about the FOMC statement here.
Even though The Recovery does not warrant it, I am still of the same mind I have been, that the Fed will raise 25 basis points in September unless the wheels are falling off the global financial system and/or the economy.  It is purely an inward-looking policy thing, and they are falling all over themselves to prepare the markets and to justify their actions. 
The Fed wants to get off the zero bound so they have room to maneuver when the next financial crisis comes, most likely from the bursting of their latest financial assets bubble.  The Fed is a servant to the Banking system.
The SP managed to gain some ground after an initial flip flop.  I was disappointed that a purchase of some powered up VIX did not get filled at the announcement when they smacked VIX lower to clear the stops and then ran it the other way.  You have to be pretty aggressive to get past the HFT spoofing and front running at times like these.  It never really did get back to a cheap buy. 
Let's see how the Advance GDP number for Q2 looks tomorrow.
This is an artificial market, so 'policy considerations' and private greed will most likely continue to trump any reasonable estimation of 'investment' and 'price discovery.'
Have a pleasant evening.

FOMC Statement for July 29, 2015 - Lords of the Small Council

The Fed did nothing, but continued to smooth the way for some rate hikes.

The hikes have little to do with the economy or The Recovery™.   Or what George Mason Prof Tony Sanders aptly calls The Bartender Recovery of part time service jobs and very low real median wage growth that is losing ground to housing prices and inflation.

The Fed would like to get off the zero bound so that they have room to cut the next time the financial markets crash because of regulatory capture and gross policy errors that have allowed the financial sector to mutate and distort its role in the real economy.

So barring a market meltdown I would expect a 25 basis point increase in September. I don't think that there is unanimity behind this decision on the FOMC. I suspect Yellen is more dovish than other members, probably led by monetary technician Stanley Fisher, having a more hawkish lean not so much from an economic standpoint as from the practical standpoint of banking system technocrats.

Release Date: July 29, 2015

For immediate release

Information received since the Federal Open Market Committee met in June indicates that economic activity has been expanding moderately in recent months. Growth in household spending has been moderate and the housing sector has shown additional improvement; however, business fixed investment and net exports stayed soft.

The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey‑based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate.

The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.

28 July 2015

Gold Daily and Silver Weekly Charts - Option Expiry - Leverage 117:1 at The Bucket Shop

"Half of the harm that is done in this world is due to people who want to feel important. They don't mean to do harm. But the harm does not interest them.  Or they do not see it, or they justify it because they are absorbed in the endless struggle to think well of themselves."

T.S. Eliot

As you may recall we had the August option expiration for the precious metals at The Bucket Shop today.
The call options at the 1100 level and above expired worthlessly according to the preliminary report from today.  I have circled those in red below.  As you can see from the prior day open interest, a goodly chunk fell by the wayside.
The second chart shows the distribution of volume for both calls and puts for August gold.
As you may have noticed in the warehouse report from yesterday, a rather large chunk of bullion in the JP Morgan warehouse was moved from registered (deliverable) to eligible (in storage not for delivery).   This took what I call the 'claims per ounce' up to the rather high level of 117:1.
This may be just a tease since there is quite a bit of gold laying about, but not deliverable at these prices, so I won't be getting too excited just yet.  I might have been more impressed if open interest had soared, or if some gold had actually exited the warehouse, rather than JPM just playing the old switcheroo with about 105,000 ounces of bullion that is still there.
But the gold crowd is hard up for good news, so let's make a big deal about it for a day or two.
I am keying off gold here, since silver seems to be along for the ride.  It may well lead the way at some point as I have noted, but not yet.
After the usual price charts I show the current levels of gold and silver bullion in the warehouses.
We may expect a little punch to the holders of new contracts compliment of the expiration, but most of that work in skinning the option players and knocking down the open interest seems to have been done.  As a side note, rather than playing at options on the paper prices at the Comex, you might find buying lottery tickets to be about the same odds and more satisfying.  At least it will get you out of the house or office.

Also I wanted to add a comment with regard to all these fellows who are saying that interest rates rising can be good for gold.  They tend to like to look back at the 1970's, which I remember all too well.   Let me remind you that correlation is not causation.  The reason rates were rising back then was that inflation had clearly reared its ugly head, and the Fed was grappling with monetary mischief and a gas price shock (with rationing) that had been delivered by the newly formed OPEC.

In this current case although there is inflation and it is being grossly understated, the rate increases have little to do with it, and everything to do with a Fed that is gazing deeply into the navel of their own policy errors, and trying to get a little maneuvering room off that zero bound before they crush the economy again with another financial crisis.

I do think gold will get some serious legs sometime in the not too distant future, but it will be driven by events outside of the US, which may or may not even involve the dollar.  This long gold pool manipulation of the price has done serious damage to supply without affecting non-US demand.  This is a formula for the mother of all short squeezes at some point when the pooling operation falls apart.  What triggers that may or may not involve a real inflation in the dollar.
All these markets are mere constructions now.   It is not just the government and the Fed by a long shot, although some romantics think that this is the case, and that if only we could eliminate the government, the god of the markets would make all of us good boys and girls, honest and self-effacing.  Because people, especially well-educated businesspeople, are naturally superior, rational angels who are needed to tell everyone else how to live, and to be compensated exceptionally well for their troubles.
As if.
There is no doubt that the corrupting influence of easy money has seeped into most if not all aspects of the developed Western countries, and that this is the end result of a long process with its roots in the 1970's at least.  
Reform is needed badly to cure the infection in the body politic.   But most of the prescriptions we have been seeing are coming out of the heart of darkness that is at the root of this, and would make the situation only worse.  And that is the unbridled greed of powerfully driven sociopaths and narcissists, and their troops of suppliers and camp followers. 
The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.
Have a pleasant evening.


SP 500 and NDX Futures Daily Charts - Bounce

US equities had a nice bounce today, especially the SP 500, as compared to the tech heavy NDX.
The next two moves will tell us quite a bit more about this.   And especially the NDX which had led the way higher in the last rally which recently crested with the IPO of Paypal.
You have to be agile if you wish to play the wash-rinse game.  I do not recommend it.  The system is set up to wear you down with transactional friction from spreads and fees.
Have a pleasant evening.