From the Trading Desk
At the time of this writing, the Dow is down 500 points. The Vix index is up 11%. Commodities, as a whole, are a sea of red with crude oil down nearly 10%. Any feelings of comfort that the stock market recovery at the end of last week inspired have evaporated today. Gold is bucking the trend of the commodities sell off today and has managed to catch some safe haven bids. Palladium, a more industrial metal, has not been as lucky as gold and is down nearly 4% after encountering chunky offers at $600.
US equities started the day with a heavy tone after another skid in Chinese bourses overnight. Weak August US ISM Manufacturing data and commentary from Boston Fed President Eric Rosengren that the global slowdown may prompt a reduction in his growth outlook also weighed on equities. Resistance for gold is coming in at the 100 day moving average (currently at $1,162), a level it failed at two days in a row a week ago. Despite the big moves in nearly every other asset class, silver is surprisingly not doing too much. It has traded in a small 25 cent range today and was lifted off support at $14.50 earlier in the session. This remains short term support while resistance hangs overhead at $15.
We’ve seen gold try to stage a rally the last few days and the dollar dipped below 96 and headed further towards 95, but the mining stocks couldn’t get going and stay positive. If the mining stocks are leading indicators for gold, then they aren’t going a good job of leading the way. Naturally one of the main reasons for this is the stock market is continuing to fall. The simple fact that gold and silver mining stocks have the word “stocks” in them is reason enough for them to fall with the general market.
We do have one advantage that those who invest in stocks don’t have as an indicator that can help us find the eventual trend for gold. That is the U.S. dollar and how it is doing. Overall, since 2011 we have seen the dollar move higher and higher and during this time we have seen gold and silver move lower and lower. Over time, and I emphasize, “over time” here; they are polar opposites of each other. This will show the way from a micro perspective and it will dictate whether gold will fall or rise in the near future.
Overall you know I am dollar bullish and gold negative from a micro point of view. This “micro” viewpoint does lie within my macro viewpoint that gold and silver will bottom and then skyrocket higher. Let’s not lose sight of that please. Micro can mean different things for different people. For me, micro is a rather moot term but describes a bounce within an overall decline. In this case, as I have written, a dead cat bounce as the deflationary forces take ahold once again.
If the dollar moves below 95, gold and the miners should move higher. If the dollar moves above 96 and then 97 again, we may see the lower lows come in the weeks and months ahead as the dollar once again marches above the 100 level on the index.
You notice how no one on CNBC is talking about Greece or the problems with other European countries? The talk has been switched to China and we are seeing what a credit contraction looks like for their economy and we’ll soon find out how bad their own shadow banking industry is with the issues still to come.
Japan has been a great example for us on just how deflation and a credit contraction works and what it can do to stock markets and real estate. In 2010 I wrote an article comparing Japan to the U.S. and whether deflation can happen here. I laid the case then that it could, and it has and is continuing to occur.
The U.S. of course is not Japan as unlike that country we are not a net exporter and instead of owning a trillion of another’s treasuries, we owe everyone else trillions. But “perception” is that the U.S. is the last bastion of safety and because the world still to this day has 70% of it using dollars as their currency, we can keep exporting our inflation abroad and the game continues.
While many have said that China would eventually take over as the world’s currency and went so far to say they would back it with gold, we see now just how fragile China’s economy is. I have addressed this in the past.
Ironically, ISIS, of all people, is now trying to actually use gold as a currency, but it is declared illegal outside of their little group of wacko’s.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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