Gold and Dollar Down but Both Will Rise Next Year

As I pointed out in my last article, I expected continued selling of gold by the big boys; the Hedge Funds, Mutual Funds and Professional traders and they didn’t disappoint. The largest ETF; SPDR Gold Shares (GLD) saw an outflow of 12.9 metric tons last week.

From Kitco;

Holdings of gold by SPDR Gold Shares (GLD), the world’s largest exchange-traded fund backed by the metal, fell last week by 12.9 metric tons to 801.22 tons, according to a weekly report issued by the plan administrators. Still, GLD shares closed Friday at $117.12, up from $115.94 the week before. Daily share volume last week fell to 4,191,110 from 11,995,433 the prior week, the report says.

The price of gold still went up however last week, although it is down about $17 today to $1,196 and we have one more day of possible selling tomorrow, the last day of the year. Silver is down 49 cents to $19.59.

Dollar Down

I will note that the selling today is in spite of a fall in the Dollar Index down below 80 again as seen in the following chart but has now rebounded to above the 80 mark again. 80 does seem to be the line in the sand at present and I’ll explain why I expect a stronger dollar below.

Monthly Dollar Chart

You can see from this longer term chart that we are still in a Dollar short term uptrend since April of 2011 and the price of gold has fallen since about that time. The question a buyer of gold has to ask, is will the dollar break down from here or continue higher?  I am in the camp that it will break higher. This isn’t what a gold bull wants to hear, but for me to say this, it simply means that I am more negative on the Yen and Euro which make up 70% of the Dollar Index. If those go down in value, the Dollar, by default, benefits.

Euro Fall Coming? – Dollar Bullish

I have to give Axel Merk of Merk Funds credit as he has been bullish on the Euro and it has outperformed the dollar the last 6 months. I had a chance to ask him a few questions as to his thinking last July of 2013 and his reasoning to be bullish was that the Euro had no budget deficits to deal with. I have to believe that the Euro’s run is over though. Many see it as being vulnerable in the new year. See Euro rises against dollar and yen but seen vulnerable.

We remain skeptical of euro strength and will be watching funding rates in the first days of the new year for signs that the liquidity squeeze which supported the euro mid-December is continuing to fade,” said BNP Paribas analysts in a note.

This recent rise in the Euro was the result of ECB liquidity to banks, basically kicking the can down the road as the Fed has been doing here in the U.S., hoping the banks would use the funds to make loans and stimulate the economy. Bank lending in the U.S. up to this point has been non-existent as they sit on $2.3 Trillion. What the ECB is now contemplating doing is continuing to lend banks money but with strings attached; they can’t use the money to shore up their terrible balance sheets like the U.S. banks have, but instead forcing them to use the money for business loans.

ECB President Mario Draghi concurs “We are ready to use any instrument, including another LTRO if needed, to maintain the short-term money market rates at a level which is warranted by our assessment of inflation in the medium-term.” Of course there is no inflation, but banks in Europe are still sitting on terrible balance sheets.

Bad loans at European banks hit $1.7 trillion

Bad debts still rising for banks in Italy’s Lombardy-BOI

Spanish banks’ bad loan ratio rises to record 

Budget will increase bad loans, warns Bank of Portugal

Greece’s Piraeus Bank warns of rising bad loans

This however is the Central Banks plan in dealing with the 3 year loans they gave banks that will come due late 2014 and early 2015. When this type of plan was first announced, the Euro fell. I expect the Euro to fall more when they finally announce the implementation of this plan. This is Dollar Bullish.

Yen Decline Is Dollar Bullish

Japan Prime Minister has done the same thing by weakening the value of the Yen versus the Dollar and Euro. I believe Japan had no choice. They lead the civilized world in Debt to GDP ratio (see table below).

Gold Priced in Yen, Euro’s or Dollars – We Are Going Higher Medium and Long Term

Although I cautioned against one more push down in prices for the precious metals, after a possible bounce in January, the medium and long term prices are still bullish. We may get the 50% retracement in gold, and we are already at a 60% retracement for silver, but whether you own Yen, Euro’s or Dollars, or any other currency for that matter, every country’s Debt to GDP ratio is moving higher and higher which will be more and more bullish for gold as time goes on.

Source

Every Central Bank is throwing money at the banks, hoping to stimulate, but the Velocity of Money is at a standstill to this point. The banks are just sitting on their hordes of cash to the tune of $2.3 Trillion as I mentioned. When this money comes into the economy, it will have its effects, but what would make a banker lock in long term loan rates when they know rates are going higher? Bernanke doesn’t want higher rates and can’t afford the consequences of them. It would mean more has to be paid from the budget for interest and this could stagnate the economy because cuts would have to be made. So the money will sit for the time being.

Japan’s world leading Debt to GDP ratio has lasted through their deflationary contraction period because they were a net exporter and net creditor and their citizens owned 99% of the Treasuries. But their spending policy is catching up to them and the Yen is depreciating quickly versus the dollar. Europe’s growth rate isn’t anything to speak of. I see nothing but weakness for the Yen and Euro in the coming year. If this is the case, then this represents 70% of the U.S. dollar. The only question is the timing. Without any real growth in Europe, and with perceived stability here in the U.S., I see the Euro declining and declining as the year moves on and the ECB gets closer to dealing with the ending of their 3 year bank loan program.

Being that the U.S. is experiencing some of this Japanese style deflation, it has hurt the price of gold somewhat, despite all of the QE that Bernanke is throwing at it. But you will note below, the price of gold in Yen has moved higher throughout most of their deflation as seen in the following chart. Gold will take on a life of its own in the years ahead despite this talk of inflation and deflation.

The effect of the Fed’s QE to infinity is going to be felt at some point, not just yet. The deflationary credit contraction is dwarfing anything the Fed has done and the $10 trillion taper the Fed just told us they will implement isn’t going to change the fact that more QE is going to come at some point. For now, the Fed has everyone fooled that they are in control. A stronger dollar is on the horizon. I do believe a higher price of gold is on the horizon as well. But there will be some bleeding still to come, especially if we get a stronger dollar. Once gold bottoms out, and I do think it will be doing so next year, we will be off to the races. The Fed won’t know what to do as everything they have done will come back to haunt them. They simply won’t be able to unload their balance sheet at a profit.

In a nutshell, I do still see a bounce in January, followed by a test and breach of the lows. Patience for those invested in gold and silver will be rewarded. For those sitting on significant losses, as I pointed out in my last article, it’s not too late to take advantage of the tax loss provisions via the Internal Revenue Code if you are inclined to do so. There will be plenty of time to get back in and enjoy the ride in precious metals to much higher levels.