Hi all, just a few items today following last night's Fed's rate rise of 25 basis points.
1. Per my post on 12 Dec, an update on the monthly average USD-BRL exchange rate for Dec'17, just to see the reaction to the rate rise.
As at two days ago: 3.263871 – avg for 11 days (Bloomberg's published rate for 12 Dec is 3.3038)
As at last night: 3.272504 – avg for 13 days (Bloomberg's published rate for 14 Dec is 3.3174)
2. Goldman Sachs' talk vs. walk. Note the dates of publication of the following two articles.
Gold Price To Suffer a Tremendous Drop Says Goldman Sachs
(***** News - Monday, 9 October 2017) - Although gold has found initial support, bouncing off Friday’s two-month low, one bank sees further technical weakness with the potential for prices to fall 14% from current levels.
In a report Monday, Goldman Sachs technical analysts, Sheba Jafari and Jack Abramovitz said that they see gold prices falling to $1,100 an ounce after the market was unable to test key resistance around $1,380 an ounce, which they noted represented a key level from the 2011 high to the 2016 lows.
"If true, it’s on track to forming another three wave decline which at very least comes close to testing the previous lows from Dec. ’16 at 1,123," the analysts said. "It could extend as far as 1,105; but shouldn’t run much further than there (given the corrective nature of the setup)."
In the current technical environment, the analysts said that gold could eventually retest support around $1,100 an ounce, however, they said that they expect that support to hold.
Goldman Sachs has been fairly bearish on gold, even as prices pushed to a one-year high last month. In a September report, the investment bank maintained its outlook that gold prices will end the year at $1.250 an ounce.
The bank’s reasons for being bearish gold is that it expects the U.S. dollar to shake off recent weakness. Monday, the U.S. dollar index continued to hold near a 10-week high Monday as expectations for a December rate hike rise significantly.
Precious metals specialist, Ted Butler, is nothing but forthright about his views on the big investment banks, notably JP Morgan as top of his list of the ‘baddest dudes’ in the sector. To this he has added the financial sector’s other frequently recognised ‘bad dude’ – Goldman Sachs – accusing them both of playing the markets in such volumes that they totally dominate them and frequently calling them out in what he describes as ‘criminal’ manipulation’ of these markets. Obviously the regulators disagree, or just turn a blind eye. And, in any case as we have pointed out before if any of the mega investment banks are called out on their activities and subsequently fined for, at the very least bending the rules, the size of the fines, even though they may be millions of dollars, are tiny compared with the money made and probably just considered a normal cost of doing business. It would probably take senior executive jail time to have any impact and, with the establishment (the swamp) protecting its own that would seem unlikely.
Ted’s latest accusation is that he now has conclusive proof that those two entities, which he sees as the ‘baddest dudes in the hood’ are taking 80% of all COMEX silver and gold deliveries for the first time in nine months in the case of one and much longer than that in the case of the other. That has made him really sit up and take notice.
In Ted’s view there is only one basic reason for why anyone would buy and take delivery of anything. As he says that is ‘that they think it will go up in value. No one buys and takes delivery (paying full cash value) for an asset expected to decline. That Goldman Sachs is now taking delivery of COMEX gold and silver, second only to JPMorgan, should send strong signals to anyone interested in these metals as an affirmation to do likewise.’
Ted goes on to note, as anyone who follows his extensive research will know, that JP Morgan has held the largest paper short position in the silver market for over ten years even though it also holds probably the world’s largest accumulation of silver bullion having been building this up for the past six and a half years.
In Ted’s view ‘the bank is taking advantage of the low prices its paper short position helped create to buy up physical silver at a bargain price. Until it started covering in this week’s COT report, JPM held its largest paper short position in years, only to turn around and add another 10 million physical ounces to its hoard this week.’
The recent gold price declines (and similar in the other precious metals) bear all the hallmarks of being engineered through futures markets notional transactions and Ed Steer (www.edsteergoldsilver.com – note revised web address) comments in his today’s newsletter that JP Morgan and Goldman Sachs again appear to have been the main buyers of physical metal on the dip for their own in-house and proprietary trading accounts. As Ed puts it in his newsletter: ‘It’s been a really weird delivery month so far. There have been 5,995 gold contracts issued and stopped, plus 5,147 silver contracts. HSBC USA has been the big short/issuer in both metals — and JPMorgan and Goldman Sachs have been gorging themselves’ – at least in the gold accumulations. In silver, the other big buyer has been Scotiabank which Ted Butler tars with much the same brush as JP Morgan in terms of silver market manipulation.
If Ted and Ed are correct then it looks like JP Morgan and Goldman Sachs could be positioning themselves for a big turnaround in the precious metals markets led, of course, by gold. When gold rises the others in the precious metals complex tend to do so too. But here again it is a question of timing. Maybe the New Year could be looking good in this respect. January tends to be a positive month for precious metals. It will thus be interesting to see how Goldman’s commodities analysts – normally bearish on gold in particular – will rate precious metals prospects at the year-end and at the beginning of 2018.
3. An opportune time to re-visit the perceived inverse relationship between the price of gold and US interest rates.
The Effect of Fed Fund Rate Hikes on Gold
By J.B. Maverick | Updated December 13, 2017 — 12:07 PM EST
While popular opinion is that interest rate hikes have a bearish effect on gold prices , the effect that an interest rate increase has on gold, if any, is unknown, since there is actually little solid correlation between interest rates and gold prices. Rising interest rates may even have a bullish effect on gold prices.
Popular Belief About Interest Rates and Gold
As the Federal Reserve continues to slowly normalizing interest rates, many investors believe that higher interest rates will pressure gold prices downward. Many investors and market analysts believe that, as rising interest rates make bonds and other fixed income investments more attractive, money will flow into higher-yielding investments, such as bonds and money market funds, and out of gold, which offers no yield at all.
The Historical Truth
Despite widespread popular belief of a strong negative correlation between interest rates and the price of gold, a long-term review of the respective paths and trends of interest rates and gold prices reveals that no such relationship actually exists. The correlation between interest rates and the price of gold over the past half century, from 1970 to 2015, has only been about 28%, which is considered to be not much of a significant correlation at all.
A study of the massive bull market in gold that occurred during the 1970s reveals that gold's run-up to its all-time high price of the 20th century happened right when interest rates were high and rapidly rising. Short-term interest rates, as reflected by one-year Treasury bills (T-bills), bottomed out at 3.5% in 1971. By 1980, that same interest rate had more than quadrupled, rising as high as 16%. Over that same time span, the price of gold mushroomed from $50 an ounce to a previously unimaginable price of $850 an ounce. Overall during that time period, gold prices actually had a strong positive correlation with interest rates, rising right in concert with them.
A more detailed examination only supports the at least temporary positive correlation during that time period further. Gold made the initial part of its steep move up in 1973 and 1974, a time when the federal funds rate was rising quickly. Gold prices fell off a bit in 1975 and 1976, right along with falling interest rates, only to begin soaring higher again in 1978 when interest rates began another sharp climb upward.
The protracted bear market in gold that followed, beginning in the 1980s, occurred during a time span when interest rates were steadily declining.
During the most recent bull market in gold in the 2000s, interest rates declined significantly overall as gold prices rose. However, there is still little evidence of a direct, sustained correlation between rising rates and falling gold prices or declining rates and rising gold prices, because gold prices peaked well in advance of the most severe decline in interest rates. While interest rates have been kept pressed to nearly zero, the price of gold has corrected downward. By the conventional market theory on gold and interest rates, gold prices should have continued to soar since the 2008 financial crisis. Also, even when the federal funds rate climbed from 1 to 5% between 2004 and 2006, gold continued to advance, increasing in value an impressive 49%.
What Really Drives Gold Prices
The price of gold is ultimately not a function of interest rates. Like most basic commodities, it is a function of supply and demand in the long run. Between the two, demand is the stronger component. The level of gold supply only changes slowly, since it takes 10 years or more for a discovered gold deposit to be converted into a producing mine. Rising and higher interest rates may in fact be bullish for gold prices, simply because they are typically bearish for stocks. [Riverred's note: per statista.com, global gold demand
is 4.309MT, global gold mine production is 3.010MT]
It is the stock market rather than the gold market that typically suffers the largest outflow of investment capital when rising interest rates make fixed income investments more attractive. Rising interest rates nearly always lead investors to rebalance their investment portfolios more in favor of bonds and less in favor of stocks. Higher bond yields also tend to make investors less willing to buy into stocks that may have significantly overvalued multiples. Higher interest rates mean increased financing expenses for companies, an expense that usually has a direct negative impact on net profit margins. That fact only makes it more likely that rising rates will result in devaluations of stocks.
With stock indexes are making all-time highs, they are always susceptible a significant downside correction. Whenever the stock market declines significantly, one of the first alternative investments that investors consider transferring money into is gold. Gold prices increased by more than 150% during 1973 and 1974, at a time when interest rates were rising and the S&P 500 Index dropped by more than 40%.
Given the historical tendencies of the actual reactions of stock market prices and gold prices to interest rate increases, the likelihood is greater that stock prices will be negatively impacted by rising interest rates and that gold may in fact benefit as an alternative investment to equities.
So while rising interest rates may increase the U.S. dollar, pushing gold prices lower (gold prices are denominated in USD), factors such as equity prices and volatility, coupled with general supply and demand are the real drivers of the price of gold.
(https://www.investopedia.com/articl...ct-fed-fund-rate-hikes-gold.asp#ixzz51Bu6hNtr)
