Gold Weakens on Technical Selling, Lower Oil in Thin Trading

P.M. Kitco Roundup: Gold Weakens on Technical Selling, Lower Oil in Thin Trading

Wednesday December 24, 2014 1:52 PM

(Note: I want to take this opportunity to wish all of my valued Kitco readers Happy Holidays. I have a great job, being able to provide you with my daily perspective on the markets. Thanks for your loyalty.—Jim)
 Gold prices ended the U.S. day session modestly lower and closed at a fresh three-week low close in quieter trading Wednesday. The yellow metal was pressured by more chart-based selling amid the overall bearish technical posture of the market. Lower crude oil prices were also a bearish “outside market” factor working against the precious metals markets Wednesday. Markets were also generally quiet overnight on this Christmas Eve day. Most U.S. markets closed early today and many traders and investors have already checked out for the week, if not for the rest of the year. February Comex gold was last down $2.80 at $1,175.20 an ounce. Spot gold was last down $2.00 at $1,175.40. March Comex silver last traded down $0.002 at $15.765 an ounce.
The buzz in the market place has been the dramatic rebound in the U.S. stock indexes the past week. The indexes were left for dead last week, but have come roaring back to establish record highs in the Dow (above 18,000) and S&P stock indexes. The big money flows back into the stock markets worldwide have dented many raw commodity markets, including gold and silver.
Market watchers are also discussing Tuesday’s big third-quarter GDP growth number, at up 5.0%, which is the strongest economic growth in a decade. The report falls squarely into the camp of U.S. monetary policy hawks—also bearish for the metals.
The Russian ruble has stabilized this week, following last week’s serious erosion against the U.S. dollar and other major currencies. Reports Tuesday said the Russian central bank sold $420 million of its foreign currency reserves last week to support the beleaguered ruble. Reports today said a major credit ratings agency is considering downgrading Russia’s credit rating to junk status.
Technically, February gold futures prices closed nearer the session low and closed at a three-week low close today. The gold bears have the firm overall near-term technical advantage. Their next upside near-term price breakout objective is to produce a close above solid technical resistance at this week’s high of $1,203.60. Bears' next near-term downside price breakout objective is closing prices below solid technical support at $1,150.00. First resistance is seen at today’s high of $1,181.20 and then at $1,185.00. First support is seen at this week’s low of $1,170.70 and then at $1,160.00. Wyckoff’s Market Rating: 2.0
March silver futures prices closed near mid-range today. Silver bears have the solid overall near-term technical advantage. Bulls’ next upside price breakout objective is closing prices above solid technical resistance at the December high of $17.355 an ounce. The next downside price breakout objective for the bears is closing prices below solid support at $15.00. First resistance is seen at $16.00 and then at this week’s high of $16.175. Next support is seen at this week’s low of $15.53 and then at $15.25. Wyckoff's Market Rating: 2.0.
March N.Y. copper closed down 180 points at 284.80 cents today. Prices closed nearer the session low today. The copper bears have the solid overall near-term technical advantage. Copper bulls' next upside breakout objective is pushing and closing prices above solid technical resistance at 295.00 cents. The next downside price breakout objective for the bears is closing prices below solid technical support at the contract low of 277.75 cents. First resistance is seen at today’s high of 287.40 cents and then at this week’s high of 290.50 cents. First support is seen at last week’s low of 282.70 cents and then at 280.00 cents. Wyckoff's Market Rating: 2.0.
By Jim Wyckoff

Read More

What's Your Strategy - Full Coverage

Merry and Bright…

Wednesday December 24, 2014 17:55

Well, not so much gold and crude. Pricing continues under pressure for those two leading commodities and the end of the downward push is nowhere in sight.
Oil is a bit more complex than gold, but here is the short version on today’s slide. Supplies are building. No major producer has cut production and it is going into storage. They’re doing this in hopes that prices will turn around. The perverse effect is that such tactics only drive the price down lower. As you probably well know, this is a tactic that other commodity producers use when prices are low. Coffee is notorious for that game play. You probably also know that eventually it catches up with the commodity in question. A glut is a glut is a glut.
Gold, of course, has an assigned value, more or less agreed upon in the marketplace by traders and investors. It moves in relation to money; equities and outside markets such as oil. The relationships are clear. How those relationships move mechanically is not always clear.
Fundamentally at the moment we have some clear signals that do not look bullish. The U.S. economy is bellowing and snarling, a pent-up beast finally unleashed. So, a need for safe haven is out of the question. Crude keeps dragging gold with it. Unless consumption somehow ramps up and production is ratcheted down, there is no good reason why the price should rise anytime soon. And if oil rises, it won’t rise much.

Some analysts and think-tankers are saying that the Saudis and a few of their cohorts in league with the United States are keeping prices as low as possible to hurt ISIL/ISIA and to punish the Russians and other pro-Assad forces in Syria. It’s a sort of win-win for the forces of stability at any price.
Just as an aside, the Saudis have about $1.4 trillion in reserves. They could stop producing oil tomorrow and have 10-years’ worth of money in the bank.
Let’s be reminded that volatility is our main watchword in the holiday season. Today has been extraordinarily quiet, as will be Friday and much of next week.
Wishing you as always, good trading, and to all a good night…
Gary Wagner

Read More

Dec 24 FYI Christmas week market schedule Ron Nicklas

Christmas week market schedule

Dear PennTrader:

Here's the holiday schedule for U.S. and Canadian exchanges.
Wednesday, Dec 24 -- Christmas Eve
US and Canadian markets are open only half-day. Both close at 1pm EST - that's 10am PST. PennTrade will close then also.

Thursday, Dec 25 -- Christmas Day
US and Canadian markets are closed for Christmas. So are we.

Friday, Dec 26 -- Boxing Day
US markets are open normal hours. Canadian markets stay closed for Boxing Day. PennTrade is open regular hours.

Monday, Dec 29
Things return to normal. US and Canadian markets are open regular hours, and so is PennTrade.

All of us at PennTrade wish you and yours a Very Merry Christmas.

As Tiny Tim said, "God bless us, every one!"

Ron Nicklas

Read More

Dec 24 From Weak Hands into Strong Hands Bob Moriarty

From Weak Hands into Strong Hands

Bob Moriarty
Archives

At market tops, shares move from strong hands into weak hands. At market bottoms, the opposite: from weak hands into strong hands.
Sheldon Inwentash of Pinetree Capital (PNP-T) had some early Xmas presents for investors as Pinetree Capital managed to violate covenants of their convertible debentures in November and then again in early December. On November 10, the company announced the first, on December 2, announced the second. As a result, Pinetree has been dumping shares with both hands to raise cash.
As those shares have moved from weak hands into strong hands, they offer an unusual opportunity. The first time I saw shares literally being thrown off a cliff was with the shares of Sanatana (STA-V) on the 8th of December as the price plummeted from $.065 to $.025 on volume of more than 23 million shares. That was 25% of the float. Those shares have recovered 50% already. Nothing at all changed with the company other than Pinetree needing cash.
For the last ten days, Pinetree has been dumping Gold Canyon (GCU-V). Pinetree/Sheldon owned 12 million shares. While it’s impossible to know exactly how many shares they have remaining, about 12 million shares have traded hands. No doubt there were other weak hands anxious to capture the very bottom with their sales.
If you like gold, Gold Canyon offers one of the best opportunities to leverage the price of gold. The Northern Miner did a piece on the company in early 2013 showing an NPV of $579 million with gold at $1300 and silver at $25.
The Springpole project has a 43-101 resource of about 5 million ounces of gold and 26 million ounces of silver. The company has $1.5 million in the bank and will sit until the price of gold and silver recovers. The shares were $.25 just over a month ago and touched $.09 days ago under the weight of 12 million shares being dumped. They will recover. At $.10 a share, you are paying about $2.60 an ounce for gold in a safe jurisdiction. That’s pretty hard to beat. Who knows, gold might go up someday.
Gold Canyon is not an advertiser. I do own shares. Do your own due diligence.
Gold Canyon Resources

Read More

Dec 24 Crude Oil, US National Debt, and Silver

Crude Oil, US National Debt, and Silver

Gary Christenson

Conclusion:
Crude oil and silver prices have crashed before, and they will again.  But the one constant in our financial universe that seems inevitable, for the foreseeable future, is increasing debt.  Crude oil and silver prices will follow increasing debt.
*****
Examine the following chart of monthly crude oil prices.  In the past 26 years crude oil prices have crashed 65%, 59%, 54%, and 76%.  The current crash is about 51% so far.


Examine the following chart of monthly silver prices.  You can see similar crashes of 64%, 46%, 51%, and 68% since 1986.  Prices rallied after these crashes and went considerably higher.  Sometimes it took years, but like the national debt, silver prices have substantially increased since 1913.

Examine the US national debt, which is currently over $18 Trillion = $18,000,000,000,000.  Unfunded liabilities, which might be ten times larger, are not even considered in the following graphs.  Adjust the national debt for population increases so we see only the per capita national debt.  As expected, it is climbing exponentially higher, and accelerating since 9-11.
Following the increase in national debt is an increase in the currency in circulation and the prices for most commodities and consumer goods.  Examine the graphs for population adjusted national debt, crude oil, silver, and the S&P 500 Index, all of which show annual averages of weekly prices.  Note that all prices have been indexed to 1971 = 1.0 for comparison purposes.

Note that the recent crash in crude oil prices is not yet reflected in the annual average of weekly prices.


Conclusion:
Crude oil and silver prices have crashed before, and they will again.  But the one constant in our financial universe that seems inevitable, for the foreseeable future, is increasing debt.  Crude oil and silver prices will follow increasing debt.

Read More

Dec 24 Gold In 2015: A Quick Heads-Up

         

Gold In 2015: A Quick Heads-Up

 

Gold in 2015 will find mine output slowing, the dollar rally questioned, and China's demand ever-more important.

[This article originally appeared on BullionVault and is republished here with permission.]
After 2013 belonged to equity investments worldwide, and gold prices sank with silver, 2014 saw a split between the U.S. and the rest of the world.
Pretty much anything stamped "Made in America" gained sharply this year, as our Annual Asset Performance Table shows.

Yet gold has held steady versus the almighty dollar, gaining in euros and sterling terms, and flying versus the Japanese yen and Russian ruble. Silver, on the other hand, has fallen badly again, dragged down by being an industrial metal caught in the same commodity slump as crude oil and copper.
So what might 2015 bring?
U.S. monetary policy will be crucial again. But not quite as much as most analysts are now forecasting.
QE ending this year in the U.S. was already priced in by 2013's near-record crash. As we said at the start of 2014, a lot of good news was also priced in to other asset classes, especially the stock market.
2015 is now expected to bring the first rise to U.S. interest rates. Yet the Fed's new buzzword—that it will be "patient"—says any rise will likely be small, a mere token. Delaying and disappointing the dollar's bull run could see a marked rebound in dollar gold and silver prices.
And in truth, I think QE has not really ended. It’s only taking a pause.
Looking to the floor for precious metals, world gold mining output is likely to have peaked this year. Cost-cutting is starting to delay or close new projects, and lower investment means lower output further ahead. This might not matter immediately, but mining costs suggest a psychological floor for 'hot money' traders to work with around this $1,200 level.
Silver could also see mine output slip from near-record levels in 2015, because it's mostly a byproduct of mines wanting to get other metals, and the commodity slump is denting new spending there as well. Current prices are well above whatever cost an analyst might put on digging up silver. Still, it is perhaps a signal that this month's sharp crash to near five-year lows came right around estimates for primary silver mining costs at $14 per ounce.
On the demand side, the growing threat of a slow, global deflation could hurt both gold and silver buying. But savers wanting to preserve their wealth will always find gold has appeal, especially if deflation risks credit defaults and bank failures.
Silver, in contrast, may find technology and other end-user demand suffers. 2014's new five-year highs in the gold/silver ratio suggest "store of value" is winning over industrial growth.
Most urgently, though, we still don't know how China's huge private gold buying will respond to a slowdown in the world's second-biggest economy (and it is the No. 1 consumer of pretty much everything), let alone a "hard landing" or credit bubble collapse.
2015 looks increasingly like the year we might get to find out at last.

Read More

Dec 23 Will they Hang Bankers Again on Wall Street?

Will they Hang Bankers Again on Wall Street?

Posted on December 21, 2014 by Martin Armstrong

What took place in Washington over the past two weeks with the repeal of Dodd Frank and then the effective repeal of the Volcker Rule sounds strikingly familiar to at least three previous periods in American History that led to total disaster. There were of course the Northern “carpetbaggers”, whom many in the South viewed as opportunists looking to exploit and profit from the region’s misfortunes following the Civil War.The “carpetbaggers” would play a central role in shaping new southern governments during Reconstruction period who were joined by Southerners who saw economic gain in joining the Northerners in the exploitation of the South. There were called “scalawags”.

Then there were the Silver Democrats who were bought and paid for by the mining industry. William Jennings Bryan’s red-hot emotional speech at the 1896 Democratic Convention will forever live on in history. The shenanigans of the Democrats and Republicans who tried to overvalue silver led to the near bankruptcy of the nation and made JP Morgan famous thanks to the Panic of 1896 when he had to arrange a gold loan to save the country.
Then there was what people called the First Gilded Age more than a century ago, when senators and representatives were owned by Wall Street and big business. This culminated in the 1929 Crash.
What did all three of these periods have in common with the last two weeks? Then, as now, those who footed the bill for political campaigns were richly rewarded with favorable laws. This is standard operating procedure in Washington and why we are in such desperate need of political reform.

In all three such periods there was a rising underbelly of rising tension and rebellion against the powers that be. Today, people are increasingly becoming fed up with Washington and the rebellion unfolds ONLY when the economy turns down. There was Charles Dazey’s Broadway Play The War of Wealth (February 10, 1896). This 51.6 year ECM Wave that peaked in 1929.75 (#919-924) was a Private Wave that began with the death of Karl Marx and the previous 51.6 year Wave peaked in 1878. In 1882, because of anti-monopoly laws, Standard Oil is organized as a trust, which would become the target of all time.
Indeed, what the bankers pulled off these past two weeks was done on the basis that they ASSUME the people have such a short-attention span that (1) they did not expect any press, and (2) they expected this will blow over with the holidays.
The bankers have made the greatest MISTAKE of their career. Their desire to exploit the world economy through trading preferring to be TRANSACTION oriented rather than RELATIONSHIP (meaning there is no long-term plan here just trade by trade), will be their undoing. The bankers have ALWAYS become the most hated within society. It was the bankers that caused the Panic in Ancient Athens, Rome, and even caused countless riots and civil wars. It was Philip IV of France who confiscated and imprisoned the Italian Bankers for lending money to England to wage war. He seized even the Papacy moving that to France. He wiped out the Knights Templar who were a major banking organization. Julius Caesar crossed the Rubicon because of the corrupt bankers in the Senate and the people cheered him as the bankers fled to Asia.
One a time scale, the Panic of 1896 came 13 years into that 51.6 year wave. Relating this to the current wave that began with the formation of G5 in 1985, that brought us to 1998 and the first bailout of Long-Term Capital Management. Then 26 years into that wave brought us to 1908. It was the 1907 Crash that shifted the focus from the Railroad to the Industrial Age. Currently, 26 years into this wave brought us to 2011 and the peak in all commodities from gold to oil. This has marked the beginning of the Euro Crisis with the first crack in 2010 being Greece.

We are embarking on a new shift and the stock market is reflecting this change. What the bankers just puled off will lead to their demise  They have played with a historical fire that may end in actual bloodshed. It would not be the first time they have been dragged from their palaces and hanged on the streets. That is what the term “BLACK FRIDAY” really stood for – the day a mob hanged bankers on Wall Street.

Read More

Dec 23 Wall Street Bank Regulator Issues Outrageous Press Release

Wall Street Bank Regulator Issues Outrageous Press Release

By Pam Martens: December 22, 2014

Present Franklin Delano Roosevelt Signing the Glass-Steagall Act on June 16, 1933

Last week members of both the House and Senate were issuing press releases to express their outrage over the sneaky repeal of a Dodd-Frank financial reform provision meant to stop giant Wall Street banks from using FDIC-insured bank affiliates to make wild gambles in derivatives, thus putting the U.S. economy in grave danger again and the taxpayer at risk for another behemoth bailout.
What was the Federal regulator of these very same banks doing? It was bragging in a press release issued at the end of the same  week about the gargantuan risks these  insured banks were taking in derivatives.
The press release was issued on Friday, December 19, 2014 by the Office of the Comptroller of the Currency (OCC), the regulator of all national banks which is mandated to make sure that insured banks “operate in a safe and sound manner.”
The press release begins with a bizarre sounding headline for a bank regulator: “OCC Reports Third Quarter Trading Revenue of $5.7 Billion.” It wasn’t actually the OCC that had this trading revenue, of course, it was that “Insured U.S. commercial banks and savings institutions reported trading revenue of $5.7 billion in the third quarter of 2014” and year-to-date trading revenue of $18.3 billion, as the press release explains.
In a sane financial world, of course, insured banks are not supposed to be trading; they are supposed to be receiving insured deposits backstopped by the U.S. taxpayer in return for making loans to worthy businesses and consumers in order to create jobs and grow our economy.
But Alice in Wonderland regulators have now completely bought in to the lunacy of today’s Wall Street bank structure, as this press release leaves no doubt. This next paragraph sounds more like a gushing letter to clients from a hedge fund than a press release from a Federal bank regulator:
“ ‘There were fairly low expectations for trading revenue at the beginning of the quarter, but client demand picked up fairly sharply toward the end, helping to make trading performance fairly positive,’ said Kurt Wilhelm, Director of the Financial Markets Group. ‘Trading revenue tends to weaken as the year goes on, so it wasn’t much of a surprise that it fell from the second quarter. But, stronger client demand, especially in foreign exchange (FX) products, helped to make it a much stronger quarter than last year’s third quarter.’ ”
We learn further that “Credit exposures from derivatives increased during the third quarter” and were driven by a 90 percent increase in receivables from foreign currency exchange contracts which now total $623 billion.
A 90 percent increase in any speculative trading should raise alarm bells but when foreign currencies like the ruble, yen and euro are experiencing wild volatility and Wall Street banks are under investigation for rigging foreign exchange markets, the concern should be even more pronounced, not cause for a celebratory press release.
Equally alarming is the news that “the notional amount of derivatives held by insured U.S. commercial banks increased $2.6 trillion” to a total of $239 trillion, of which 93 percent is concentrated at the four largest banks. The report itself breaks this out in more detail: Citigroup, the poster child for bank bailouts, now holds more derivatives than any other bank, $70 trillion, in its insured unit, Citibank. JPMorgan Chase, the bank that lost $6.2 billion just two years ago gambling in its insured bank with exotic derivatives, now holds $65 trillion in derivatives. Next in line is Goldman Sachs Bank USA with $48.6 trillion in derivatives and just $111.7 billion in assets in the insured bank unit. Coming in fourth is Bank of America with $37.5 trillion.
The irrational exuberance of this press release reminded us of its stark contrast to the opening lines of the Glass-Steagall Act, the legislation Congress put in place following the 1929 Wall Street crash – an epic collapse of speculation very much on a par with the crash of 2008. The Glass-Steagall Act, also known as the Banking Act of 1933, opens with these words:
“…to provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes.”
The legislation created insured bank deposits to stop the run on banks while giving the Wall Street banks just one year to split apart: banks holding insured deposits could no longer put the country at risk with wild speculations in trading and underwriting of securities. Those operations, investment banking and brokerage, had to be spun off. The Glass-Steagall Act was repealed at the behest of Wall Street and its army of lobbyists in 1999; the financial system crashed a mere nine years later.
The response by Congress to the 2008 crash was to allow Wall Street banks to grow dramatically in asset size, derivative holdings and systemic risk. Even after the Senate’s Permanent Subcommittee on Investigations released a 299-page report last year, clearly demonstrating that Wall Street had learned nothing from its wild trading gambles that collapsed the financial system in 2008, Congress has taken no concrete action to rein in the risk.
The Senate’s 299-page report released on March 15, 2014 concluded a nine-month investigation into how JPMorgan Chase, the country’s largest bank, had misled the public and its regulators while hiding vast losses on exotic derivatives in its insured banking unit. The episode became known as the London Whale scandal since the trading occurred in London and the size of the trades was mammoth. Senator Carl Levin, Chair of the Subcommittee, released the following statement at the time:

“Our findings open a window into the hidden world of high stakes derivatives trading by big banks.  It exposes a derivatives trading culture at JPMorgan that piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public. Our investigation brought home one overarching fact:  the U.S. financial system may have significant vulnerabilities attributable to major bank involvement with high risk derivatives trading…

“The whale trades demonstrate how credit derivatives, when purchased in massive quantities with complex components, can become a runaway train barreling through every risk limit.  The whale trades also demonstrate how derivative valuation practices are easily manipulated to hide losses, and how risk controls are easily manipulated to circumvent limits, enabling traders to load up on risk in their quest for profits…And given how much major U.S. bank profits remain bound up with the value of their derivatives, derivative valuations that can’t be trusted are a serious threat to our economic stability.”

Until the Glass-Steagall Act is reinstated, our country, our economy and the U.S. financial system remain in peril.

Read More

Dec 23 Could an Energy Bust Trigger QE4? Peter Schiff

Could an Energy Bust Trigger QE4?

Peter Schiff


In a normal economic times falling energy costs would be considered unadulterated good news. The facts are simple. No one buys a barrel of oil to display above the mantle. No one derives happiness from a lump of coal. Energy is simply a means to do or get the things that we want. We use it to stay warm, to move from Point A to Point B, to transport our goods, to cook our food, and to power our homes, factories, theaters, offices, and stadiums. If we could do all these things without energy, we would happily never drill a well or build a windmill. The lower the cost of energy, the cheaper and more abundant all the things we want become.

This is not economics, it is basic common sense. But these are not normal economic times, and the mathematics, at least for the United States, have become more complicated.

Most economists agree that the bright spot for the U.S. over the past few years has been the surge in energy production, which some have even called the "American Energy Revolution". The stunning improvements in drilling and recovery technologies has led to a dramatic 45% increase in U.S. energy production since 2007, according to the International Energy Agency (IEA). And while some suggest that the change was motivated by our lingering frustration over foreign energy dependence, it really comes down to dollars and cents. The dramatic increase in the price of oil over the last seven or eight years, completely changed the investment dynamics of the domestic industry and made profitable many types of formerly unappealing drilling sites, thereby increasing job creation in the industry. What's more, the jobs created by the boom were generally high paying and full time, thereby bucking the broader employment trend of low paying part time work.

The big question that most investors and drillers should have been asking, but never really did, was why oil rocketed up from $20 a barrel in 2001 to more than $150 barrel in 2007, before stabilizing at around $100 a barrel for much of the past five years. Was oil five times more needed in 2012 than it was in 2002? See my commentary last week on this subject.

Despite the analysts' recent discovery of a largely mythical supply/demand imbalance, the numbers do not explain the rapid and dramatic decrease in price. Yes, supply is up, but so is demand. And these trends have been ongoing for quite some time, so why the sudden sell off now? Instead, I believe that oil prices over the last decade has been driven by the same monetary dynamics that pushed up the prices of other commodities, like gold, or of financial assets, such as stocks, bonds, and real estate. I believe that oil headed higher because the Fed was printing money, and everyone thought that the Fed would keep printing. But now we have reached a point where the majority of analysts believe that the era of easy money is coming to an end. And while I do not believe that we are about to turn that monetary page, my view is decidedly in the minority. Could it be a coincidence that oil started falling when the mass of analysts came to believe the Fed would finally tighten?

If I am wrong and the Fed actually begins a sustained increase in rates starting in 2015, oil prices may very well stay low for a long time. But apart from the fact that our broad economy can't tolerate higher interest rates, an extended drop in oil prices may create conditions that further force the Fed's hand to reverse course.

If prices stay low for very long, many of the domestic drilling projects that have been undertaken over the past few years could become unprofitable, and plans for further investment into the sector would be shelved. Evidence suggests that this is already happening. Reuters recently reported a drop of almost 40 percent in new well permits issued across the United States in November (this was before the major oil price drops seen in December).
This huge negative impact on the primary growth driver of U.S. economy may be enough in the short-run to overwhelm the other long-term benefits that cheap energy offers. If prices stabilize at current levels, then the era of triple digit oil may, in retrospect, be looked back on as just another imploded bubble. And like the other burst bubbles in tech stocks and real estate, its demise will make a major impact on the broader economy. But there is a crucial difference this time around.

When the dot-com companies flamed out in 2000, most of the losses were seen in the equity markets. Dot-coms either raised money either through venture capitalists or the stock markets. They rarely issued debt. The trillions of dollars of notional shareholder value wiped out by the Nasdaq crash had been largely paper wealth that had been created by the sharp run up in the prior two years. As a result, the damage was primarily contained to the investor class and to the relatively few number of highly paid tech workers and entrepreneurs that rode the boom up and then rode it down. In any event, the Fed was able to cushion the blow of the ensuing recession by dropping rates from 6% all the way down to 1%.

The real estate and credit crash of 2008 was a much different animal. Despite the benefits that lower home prices may have brought to many would be home-buyers who had been priced out of an overheated market, the losses generated by defaulting mortgages quickly pushed lending institutions into insolvency and threatened a complete collapse of the U.S. financial system. Unlike the dot-com crash, the bursting of the housing bubble posed an existential threat to the country. The construction workers, mortgage brokers, landscapers, real estate agents, and loan officers who were displaced by the bust represented a significant portion of the economy. To prevent the bubble from fully deflating, the Fed bought hundreds of billions of toxic sub-prime debt (that no one else would touch) and dropped interest rates from 5% all the way down to zero.

I believe, a bust in the oil industry will likely play out somewhere between these two prior episodes. As was the case with falling house prices, while low prices offer benefits to consumers, the credit and job losses related to unwinding the malinvestments, made by those who believed prices would not drop, can impose severe short-term problems that the Fed will be unwilling to tolerate. Of course, long-term it's always good when a bubble pops, it's just that politicians and bankers are never prepare to endure the short-term pain necessary for long-term gain when they do.

A good portion of the money used to finance the fracking boom was raised by relatively small drillers in the debt market from banks, institutional investors, pension funds, hedge funds, and high net worth wildcatters. Public involvement has been involved primarily in the high yield debt market where energy companies have issued hundreds of billions of "junk" bonds in recent years. In 2010, energy and materials companies made up just 18% of the US high-yield index but today they account for 29%.

But many of the financing projections that these bond investors assumed will fall apart if oil stays below $60. Although the junk bond market is nowhere near as large as the home mortgage market, widespread defaults from energy-related debt could cause a crisis, which could make wider ripples throughout the financial edifice. Bernstein estimates that sustained $50 oil could result in investment in the sector to fall by as much as 75%. According to the Department of Labor, oil and gas workers as a percentage of the total labor force has doubled over the past decade, and have accounted for a very large portion of the high-paying jobs created during the current "recovery." As a result a bust in the oil patch will result in a very big hit to American labor, causing ripple effects throughout the economy.

But we are far less able to deal with the fallout now of another burst bubble than we were in 1999 or 2007 (the years before the two prior crashes). I believe it will take much less of a shock to tip us into recession. But I don't even believe that a burst energy bubble is even our biggest worry. Much greater and more fragile bubbles likely exist in the stock, bond and real estate markets, which have also been inflated by the easiest monetary policy in history. More importantly at present the Fed lacks the firepower to fight a new recession that a bursting of any of these bubbles could create. Since interest rates are already at zero, it has no ability to aggressively cut rates now in the face of a weakening economy. All it can do is go back to the well of quantitative easing, which is exactly what I think they will do.

Despite the widely held belief that 2015 will be the year in which a patient Fed finally begins to normalize rate policy, I believe the Fed has no possibility of withdrawing the stimulus to which it has addicted us. QE4 was always much more probable than anyone in government or on Wall Street cares to admit. A recession and a financial panic caused by sub $60 oil will significantly quicken the timetable by which the Fed cranks up the presses. When it does, oil could once again increase in price, along with all the other things we need on a daily basis. That should finally dispel any remaining illusions that the Fed could successfully land the metaphorical plane. More QE may minimize the damage in the short-term, but I believe it will keep us trapped in our current cocoon of endless stimulus, where we will slowly suffocate to death.

Read More

Dec 23 Gold Stocks: Rational & Profitable In 2015 Stewart Thomson

Gold Stocks: Rational & Profitable In 2015

Stewart Thomson


Dec 23, 2014

1. As the end of the year approaches, gold is swooning a bit. Please .
   
   
2. That’s the daily chart for gold. A broad and gently sloping uptrend channel has been established, with very volatile price action between the channel lines.
   
   
3. I expect gold to trade in this manner throughout most of 2015. Short term volatility will be high, but the price will trend higher.
   
   
4. Gold is working off what is an overbought technical condition, and should be poised to stage a significant rally by early January.
   
   
5. Please. That’s the daily oil chart. While the odds of a brief and violent rally are growing, the overall fundamentals are horrific. Demand for oil is collapsing around the world, and supply continues to increase.
   
   
6. While a modest rise in the price of gold in 2015 might not sound very exciting, when coupled with a further collapse in the price of oil, gold stocks could suddenly become the darling of institutional investors around the world.
   
   
7. Gold companies are much more efficient now than they were just two years ago. Lower fuel prices coupled with even modestly higher gold prices could produce a violent move to the upside, for the entire gold stock sector.
   
   
8. Demand for gold from China and India should see another year of superb growth in 2015. While gold may decline for another week or two, that’s mainly due to technical and seasonal factors. The ebb and flow of Indian demand is based on religion, and December is viewed as an inauspicious time to buy gold.
   
   
9. With key physical buyers taking a rest, the price is a little soft. Also, Western investors tend to buy when the price of any asset is high, and sell at a loss each December. They are adding to the gold price softness now.
   
   
10. I expect Chinese demand in 2015 to increase substantially. Trading volume on the Shanghai Gold Exchange (SGE) is experiencing truly dramatic growth, year after year. My subscribers know that I’ve predicted that volume on the SGE will surpass COMEX volume by early 2017.
    
    
11. Gold is clearly the ultimate asset, and it should offer the ultimate in stability to conservative investors for the next decade. Aggressive investors should focus on gold stocks.
    
    
12. Unfortunately, the outlook for the American stock market is much less rosy than it is for gold. Mainstream media claims that debt-soaked consumers working multiple part time jobs are somehow the “economic leader” of the world economy.
    
    
13. Now, the US stock market has lost a prime engine of earnings growth; oil. Healthcare and defensive stocks are keeping the huge stock market rally alive, but the impact of much lower oil prices won’t be felt for another quarter or two.
    
    
14. Technically, healthcare stocks look headed for trouble. Please click here now. This monthly chart of a key biotech ETF shows a rapidly deteriorating technical situation.
    
    
15. I think that the month of December in 2015 will see Western investors back at the “tax loss trough”, selling most of their US stock market investments.
    
    
16. American GDP numbers will be released this morning. With most of India’s gold buyers in “quiet mode” this month, that report could push gold to my $1150 - $1160 short term target area, and provide a short term boost to the US stock market.
    
    
17. US economic data generally has only a short term effect on the gold price. The long term price is determined mainly by the demand from China and India, compared to supply from mines and Western entities. Once the Western funds and retail entities have sold most of their gold, I expect Chinese and Indian jewellers to begin tapping Western central banks for the gold they hold, since mine supply appears to be peaking.
    
    
18. In the Western world, good economic data causes seemingly rational economists to make very irrational statements about gold. In contrast, in China and India, good economic news spurs gold demand. People celebrate the good news, by buying more gold!
    
    
19. As the West becomes more irrelevant to the global gold market, the questionable statements made by Western economists about gold will likely be ignored by most professional investors.
    
    
20. I doubt there will be much gold left anywhere in the West by the year 2050. Crypto currencies like bitcoin are more suitable as central bank reserve assets than gold. Rather than being held as useless bars by bankers and government bureaucrats who can’t be trusted, most gold should be held in the form of fabulous jewellery, by the citizens of the world. Also, he or she who has the most gold, makes the most rules. The citizens should make the rules, not bankers and “Gmen”, and in time they will.
    
    
21. The Swiss government just released that country’s latest import and export statistics for the month of November. Please click here now. I’ve highlighted a few key numbers from that report.
    
    
22. While the United Kingdom did import about 64 tons of gold, it exported about 109. While gold price enthusiasts may be a little disappointed with the numbers from China, I should mention that Hong Kong also imported about 34 tons.
    
    
23. In 2013, Chinese demand surged far above 2012 levels, but Western exports overwhelmed Chinese and Indian imports, and the price declined. In 2014, demand roughly matched supply, and the price was neutral. By late 2015, I expect Chinese and Indian demand to place noticeable stress on available supply, and the price should begin moving aggressively higher.
    
    
24. Please click here now. That’s the daily GDX chart. Gold stocks are my “trade of the year” for 2015. Like gold, GDX is working off an overbought situation on the chart. There’s a bull wedge pattern in play. In the very short term, US economic data today could create panic selling, by Western gold stock shareholders that respond to that data with irrational action. With the Indian “titans of ton” quiet in December for religious reasons, the price movement in many gold stocks could be a bit frightening, but only for a few days. I’m a buyer of all irrational selling, and I think the entire Western gold community can look forwards to a very rational and profitable year, in 2015!

Dec 23, 2014
Stewart Thomson

Read More