Crude Falls Below $35 per Barrel in New York for First Time Since 2009

http://www.bloomberg.com/news/articles/2015-12-14/oil-falls-below-35-in-new-york-for-first-time-since-2009

il traded near the lowest level in more than six years as Iran reiterated its pledge to increase crude exports, bolstering speculation that rising OPEC production will deepen the global glut.
Futures fell as much as 3.1 percent to $34.53 a barrel in New York, the lowest since Feb. 18, 2009. Prices lost almost 11 percent last week, the biggest drop in a year. There’s “absolutely no chance” Iran will delay its plan to boost shipments even as prices slip, said Amir Hossein Zamaninia, the nation’s deputy oil minister for international and commerce affairs. Speculators in the U.S. have raised bearish bets to an all-time high. Diesel and gasoline futures led declines as warm U.S. weather curbed heating fuel demand.
Oil slumped last week to levels last seen during the global financial crisis, while speculators increased bets on falling U.S. crude prices to an all-time high after the Organization of Petroleum Exporting Countries this month set aside production limits. The supply glut will persist at least until late 2016 as demand growth slows and OPEC shows “renewed determination” to maximize output, according to the International Energy Agency.

Market Gloom

"The OPEC decision 10 days ago just exacerbated worries about excess supply," said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. "There’s been no heating demand so far, which is hurting as well. Diesel and gasoline are leading the energy space lower."
WTI for January delivery fell 8 cents to $35.53 a barrel at 11:22 a.m. on the New York Mercantile Exchange. The volume of all futures traded was 57 percent above the 100-day average. The aggregate volume of monthly WTI contracts climbed to a record of 1.596 million on the Nymex on Dec. 8. Each contract corresponds to 1,000 barrels of oil.
Brent for January settlement dropped 61 cents, or 1.6 percent, to $37.32 a barrel on the London-based ICE Futures Europe exchange. It touched $36.33, the lowest since Dec. 26, 2008. The European benchmark crude was at a $1.7 premium to WTI.
In the U.S., Senate negotiators are nearing a deal to allow unfettered crude oil exports for the first time in 40 years, though differences remain on renewable-energy tax credits that Democrats are demanding in return, according to people close to the discussions.

U.S. Exports

While any agreement could still collapse in the coming days -- the deal faces opposition in the House -- lawmakers are weighing the extension of solar and wind tax credits for as long as five years in exchange for lifting the crude-export restrictions, which were established during the energy shortages of the 1970s.
"If the ban is lifted the Brent-WTI spread will be crushed," said Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC. "Refinery margins in the U.S. will shrink. U.S. refiners have had the advantage of using captive crude."
Iran, which expects international sanctions over its nuclear program to be lifted by the first week of January, has already secured customers for its planned supply expansion, Zamaninia said in an interview in Tehran. The country pumped 2.8 million barrels a day last month, data compiled by Bloomberg show.

Hardened Resolve

OPEC, which set aside its output quota at a Dec. 4 meeting, is displaying hardened resolve to maintain sales, the IEA said in its monthly report Friday. While the group’s strategy has affected other producers, triggering the steepest fall in non-OPEC supply since 1992, world oil inventories will probably swell further once Iran restores exports, predicted the Paris-based energy adviser to developed economies.
Money managers’ short position on WTI futures and options rose 5.8 percent to 181,849 contracts in the week ended Dec. 8, according to CFTC data Friday. Net longs retreated to a five-year low.
"The market is oversold after falling seven days,"Phil Flynn, senior market analyst at the Price Futures Group in Chicago. "There are record short positions. You have to watch because there could be a violent snap back when they cover those shorts."
U.S. natural gas for January delivery tumbled to the lowest level since January 2002 amid forecasts that mild weather will persist through the end of the month. Futures fell as much as 6.4 percent to $1.862 per million British thermal units on the Nymex.

Oil recovery by 2017? Not likely

http://finance.yahoo.com/news/oil-recovery-2017-not-likely-174225516.html

Energy analysts are confidently predicting that oil prices will rebound by 2017, as global supply and demand come back into balance. "Buy for the long run" is once again Wall Street's over-used mantra.

Related Stories

1. Oil Prices: OPEC Stands its Ground Motley Fool
2. Yergin: Why oil prices cannot stay this low CNBC
3. Oil turns higher after dropping below $37 MarketWatch
4. Why Did Crude Oil Prices Fall after OPEC’s Meeting? Market Realist
5. Crude Oil Prices Slip Back from $42 Resistance Level Market Realist

Economists John Maynard Keynes once notably remarked, "in the long run, we are all dead."

This long-run thinking defies the logic of the oil markets. Not only has oil been among the most volatile commodities in modern economic history, it also has a tendency to spike, crash and then remain depressed for years on end.

Analysts have focused on the 18-month decline that has seen crude-oil prices drop from $107 in June 2013 to below $37 on Tuesday — a 65-percent decline. But crude oil is actually down a whopping 74 percent from its 2008 high of $147 per barrel. That decline has been in force for seven long years, since the dawn of the fracking age.

History tells us that, while price spikes tend to be sharp and somewhat short-lived, bear markets in oil, at least since the 1980s, tend to be quite long, drawn-out affairs.
When prices crashed in 1985, they went from $35 a barrel to $10 a barrel by the following year. And then they averaged just under $20 until 2003. The market flat-lined for 17 years, with an occasional bear-market rally.

With OPEC failing to rein in excess production; with U.S. frackers becoming more efficient, ringing more oil out of existing wells with fresh technology; and with other non-OPEC countries like Russia, Norway and the U.K. pumping flat out, the gap between supply and demand is yawning.

There are 3 billion barrels of excess crude sloshing around the world, according to the International Energy Agency, with crude-oil supplies outstripping demand by about 1.6 million barrels per day.
The International Energy Agency and other industry watchdogs expect supply and demand to come into greater balance next year, but that remains to be seen, with every producing nation in the world pumping as much oil as they can.
They may be losing money on lower prices, but apparently they plan to make it up on volume!

This is somewhat reminiscent of how commodity producers acted during the Great Depression in the 1930s. Despite falling commodity prices, particularly for rubber, which was in great demand during the 1920s auto boom, Asian countries, stung by the plunge in demand for new cars, continued to produce rubber at a break-neck pace, driving prices ever lower and depleting their coffers at an equally fast pace.

We are seeing that among oil producers, as well. Russia may run out of surplus cash as early as next year. Saudi Arabia has tapped global bond markets to extend their excess currency reserves, apparently hunkering down for what could be a prolonged period of depressed energy prices.

The Federal Reserve has suggested that the decline in energy prices should prove transitory. If history is any guide, oil can easily go down and stay down for many years to come.

Oil briefly fell below its 2009 low of $37.75 a barrel. Below that level, long-term support for oil prices is somewhere around $20 per barrel. That would represent a nearly 50-percent additional decline in prices!

The impact on inflation would be far more long-lasting than is currently modeled by the Fed.
These are structural, not transitory, changes that have taken place in the energy markets that may have permanently altered how fossil fuels are produced and consumed. Certainly there will be bear-market rallies, but the path of least resistance still appears lower for longer.

The impact on inflation may also be structural as well — good news for consumers, but, once again, a confounding factor for the Fed. The Fed is committed to lifting inflation while raising rates to ensure inflation does not get out of control.

That is a dual mandate that may be simply unattainable in a world awash in crude and other commodities, all of which could mean the Fed is on course for a "one and done" policy of interest rate hikes.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.

The Coming Bubble Boom in Gold Mining Stocks - Mike Swanson (08/13/2013)

http://www.wallstreetwindow.com/node/8628

Today gold is down a bit after yesterday gain while European markets are up once again. They actually talked about Europe on CNBC around 8:00 AM today. I couldn't believe it as they almost never mention investing in Europe - but they said that the rally there could fall apart in an instant and the anchor said "he would not buy European banks" and laughed! You can't make this silliness up as Greek bank Alpha Bank is up 7% this morning!

The CNBC people were speculating that if the Fed tapers QE the dollar will rally and the Euro will go down. Whatever. I don't see how anyone can listen to this stuff and translate it into money. All they talk about is buying the US stock market after it already has gone up for four years! It's down this morning after falling yesterday.

While gold stocks screamed higher yesterday too.

We are in a key transition phase right now. European markets just broke out into new bull markets and metals and mining stocks are next. Check out the charts in this video presentation Dave Skarica and I just did. Once you do I think you will understand why we think the next few years will result in a bubble boom for mining stocks.


I got Dave to agree to a special deal for his subscription service. He is a specialist in the gold mining sector and has all kinds of new recommendations he will be making soon. Since now is the time I want to encourage you to take action on these markets so I got him to agree to a special monthly subscription as a way to get in to his service at a cheap price instead of the big annual price.
To check it out click here.

We are going to pull down this deal Wednesday night so join now by clicking here.

Swiss watchdog opens bank probe into precious metal collusion

The Swiss competition watchdog has launched an investigation into possible collusion in the precious metals market by several major banks, it said on Monday, the latest in a string of probes into gold, silver, platinum and palladium pricing. Global precious metals trading has been under regulatory scrutiny since December 2013, when German banking regulator Bafin demanded documents from Deutsche Bank under an inquiry into suspected manipulation of gold and silver benchmarks by banks.
Even though the market has moved to reform the process of deciding on its price benchmarks, accusations of manipulation have refused to go away.
Gold prices have also shed some 9 percent in the last two years as investors lose faith in its status as a store of value.
Switzerland's WEKO said its investigation, the result of a preliminary probe, was looking at whether UBS, Julius Baer, Deutsche Bank, HSBC, Barclays, Morgan Stanley and Mitsui conspired to set bid/ask spreads.
"It (WEKO) has indications that possible prohibited competitive agreements in the trading of precious metals were agreed among the banks mentioned," WEKO said in a statement.
A WEKO spokesman said the investigation would likely conclude in either 2016 or 2017, adding that the banks were suspected of violating Swiss corporate rules.
The banks face financial penalties if WEKO finds them guilty of wrongdoing, the spokesman said, though he declined to comment on the size of any possible fine.
WEKO could add more banks to its investigation if it finds cause for suspicion, the spokesman said.
The move comes a month after press reports that the European Union's competition regulator was investigating anticompetitive behavior in precious metals spot trading, and follows news of a U.S. probe by the Department of Justice (DoJ) and the Commodity Futures Trading Commission earlier this year.
U.S. authorities are investigating at least 10 major banks for possible rigging of precious metals markets, according to reports. HSBC and Barclays said earlier this year that they were cooperating with the investigation.
Aside from regulatory probes, a number of lawsuits have also been filed in U.S. courts alleging a conspiracy to manipulate precious metals prices.
Commenting on the WEKO probe, a Julius Baer spokesman said the bank was cooperating with authorities.
In a statement, Deutsche Bank said it was cooperating with requests for information from "certain regulatory authorities" over precious metal benchmarks but declined to comment further. A Mitsui spokesman in Tokyo said the firm would cooperate with the Swiss authorities in its investigation.
Representatives for UBS, Barclays, Morgan Stanley and HSBC declined to comment.
PRESSURE RISES AFTER LIBOR
Scrutiny of precious metals pricing ramped up with the LIBOR scandal in foreign exchange markets. In May, four major banks pleaded guilty to trying to manipulate forex rates and, with two others, were fined nearly $6 billion in another settlement in a global investigation into the $5 trillion-a-day market.
A push for more transparency in precious metals saw banks last year abandon existing benchmark prices, including the century-old "gold fix", which had been set twice a day via a telephone auction, in favor of a physically settled electronic system.
The benchmarks were used by miners, refiners, traders and end-users to price gold and silver, as well as platinum and palladium, which are chiefly used in autocatalysts.
Last year Swiss financial regulator FINMA said it had found a "clear attempt" to manipulate precious metals price benchmarks during a cross-market investigation into trading at UBS.
As part of ongoing obligations imposed by FINMA, UBS is seeking to automate at least 95 percent of its global foreign exchange and precious metals trading by the end of 2016.
The UK Financial Conduct Authority (FCA) last year fined Barclays 26 million pounds ($43.8 million) for failures in internal controls that allowed a trader to manipulate how gold prices were set.
Germany's Bafin has also investigated the gold market, but said earlier this year that it had found no signs of benchmark price manipulation.
The impact of the probes on wider precious metals trading was likely to be muted, according to Brian Lucey, professor of finance at the School of Business, Trinity College Dublin.
"The question is not if individuals, or groups of individuals are collaborating to rig the game for themselves, the question is if this has any material effect," he said.
"I'm not convinced collusive behavior will have a meaningful effect micro-economically to the structure of gold trading around the world."
(Additional reporting by Kathrin Jones in Frankfurt, Steve Slater and Clara Denina in London and Yuka Obayashi in Tokyo)

Read more at Reutershttp://www.reuters.com/article/2015/09/29/us-precious-manipulation-swiss-idUSKCN0RS0DX20150929#pKm336Kox8FfxbS9.99http://www.reuters.com/article/2015/09/29/us-precious-manipulation-swiss-idUSKCN0RS0DX20150929#LxKtOdBqAwTk1Owp.97

Metals, Currency Rigging Is Worse Than Libor, Bafin Says

http://www.bloomberg.com/news/articles/2014-01-16/metals-currency-rigging-worse-than-libor-bafin-s-koenig-says

Germany’s top financial regulator said possible manipulation of currency rates and prices for precious metals is worse than the Libor-rigging scandal, which has already led to fines of about $6 billion.
The allegations about the currency and precious metals markets are “particularly serious because such reference values are based -- unlike Libor and Euribor -- typically on transactions in liquid markets and not on estimates of the banks,” Elke Koenig, the president of Bonn-based Bafin, said in a speech in Frankfurt yesterday.
Koenig is the first global finance regulator to comment publicly on the investigations as probes into the London interbank offered rate, or Libor, expand into other benchmarks. Joaquin Almunia, the European Union’s antitrust chief, said this week that its preliminary probe into possible foreign-exchange manipulation covers similar practices as in the regulator’s probe into Libor-rigging.
Investors should short Deutsche Bank AG stock because of probes into currency manipulation and as a rally in banking shares reverses, Berenberg Bank said in a report today. “The investigations by regulators into the bank’s foreign-exchange trading remain a significant risk considering Deutsche is the world’s largest foreign-exchange dealer,” Berenberg said.

Bafin Investigation

Bafin said this week it is investigating currency trading, joining regulators in the U.K., U.S. and Switzerland, who are examining whether traders at the world’s largest banks colluded to manipulate the WM/Reuters rates, used by money managers to determine the value of holdings in different currencies.
At least a dozen firms have been contacted by authorities and more than 13 traders suspended, fired or put on leave in the currency case. Regulators are examining how traders, who communicated in instant-message groups, exchanged information on client orders and agreed how to trade at the time of the fix, five people with knowledge of the probes said last month.
“That the issue is causing such a public reaction is understandable,” Koenig said. “The financial sector is dependent on the common trust that it is efficient and at the same time, honest. The central benchmark rates seemed to be beyond any doubt, and now there is the allegation they may have been manipulated.”

Deutsche Bank

Bafin interviewed Deutsche Bank employees as part of a probe of potential manipulation of gold and silver prices, a person with knowledge of the matter has said in December. The U.K. finance regulator, the Financial Conduct Authority, is also reviewing gold benchmarks as part of its wider investigation into how rates are set.
Firms including Barclays Plc and UBS AG have been fined for manipulating Libor and related rates. The European Union fined six firms, including Deutsche Bank and Societe Generale SA, a record 1.7 billion euros ($2.3 billion) in December for rate-rigging. Ten people have also been charged in parallel U.S. and U.K. criminal investigations into the matter.
A proposal by the European Commission to regulate reference values​is going “in the right direction, but not far enough,” Bafin’s Koenig said. It relies too much on self-control, she said, adding that trading on currency and precious-metals markets is “decentralized and to a large scale done bilaterally and not on exchanges or exchange-like platforms” and therefore hard to monitor.

Here's What the Next Gold Bull Market will look like

https://www.caseyresearch.com/articles/heres-what-the-next-gold-bull-market-will-look-like


We measured every bull cycle of gold stocks and found there have been eight distinct upcycles since 1975.

We also discovered something exciting: Only one was less than a double. (A second was 99.9%.)
Even more enticing is that the biggest one—a 601.5% advance in the early 2000s—occurred just after a prolonged bear market.

And our current bear market is longer than that one.



look what those gains would mean to GDX, the Gold Miners ETF (based on the June 1 price).

Gold ETF	Current Share Price	1976– 1980	1982– 1983	1986– 1987	1989– 1990	1993– 1994	2000– 2003	2005– 2008	2008– 2011
		554.2%	205.1%	141.8%	51.5%	99.9%	601.5%	206.4%	272.5%
GDX	$19.49	$127.51	$59.45	$47.14	$29.53	$38.96	$136.72	$59.72	$72.60

Keep two things in mind about this table:

1. The percentage gain from each past bull market is calculated using an index. The stronger companies will perform better than a static ETF.

2. It’s not unreasonable to think that the gains in the next bull market will be similar to some of the higher returns listed above. That’s because stocks will be rising from the depths of one of the more severe bear markets.

Oil heading to $130 by 2017

http://www.bnn.ca/Video/player.aspx?vid=747036




While many expect oil prices to remain low for longer, Emad Mostaque, analyst at the London-based consultancy of Ecstrat, says oil soon be heading to $130 per barrel.

Tony Robbins Economic Warning part 1 (2010)

Tony Robbins Economic Warning part 1

 

https://www.youtube.com/watch?v=KzREzgDoaZg

 

 

https://www.youtube.com/watch?v=0lz3NMUVFEY

Don’t dump biotechnology stocks yet, says chart guru Thomas Dorsey

http://www.marketwatch.com/story/dont-bet-against-biotechs-yet-says-chart-guru-thomas-dorsey-2015-09-23?siteid=yhoof2

Biotech sector is still No. 1 in Dorsey Wright’s relative-strength sector rankings

Getty Images

Biotech sector’s trend of outperformance remains intact

Biotechnology stocks took a big hit this week amid outrage over surge-pricing practices, but one widely-followed technical analyst said it’s still too early to bet against the sector.
The SPDR S&P Biotech exchange traded fund XBI, -1.19%  has tumbled 7.7% this week through Wednesday, as Presidential Candidate Hillary Clinton unveiled a plan to counter high drug prices, in response to a New York Times article about a company that raised the price of a drug to $750 from $13.50 overnight. The iShares Nasdaq Biotechnology ETF IBB, -1.20%  has shed 8.2% amid a four-session losing streak.
That selloff may have spooked some investors in the high-flying sector—the S&P Biotech ETF is still up 18% year to date—just as the broader market struggles to regain its bullish composure—the S&P 500 index SPX, -1.01%  is down 5.8% this year.

But Thomas Dorsey, co-founder of Dorsey Wright & Associates, a subsidiary of Nasdaq, said the recent volatility in the biotech sector was still just noise, as it is still No. 1 in Dorsey Wright’s relative-strength sector rankings. And as the chart above shows, the biotech sector’s uptrend relative to the S&P 500 remains firmly in place.
“Everything still suggests [the biotech sector] still has the strength, not just in itself, but on a relative basis,” he said.
Dorsey Wright has a history of outperforming the broader market by simply betting on relative-strength leaders, rather than by trying to find bargains by calculating historical valuations or profit and sales trends.
Don’t miss: Top fund manager’s secret to success

 

Jay Paul for The Wall Street Journal

Thomas Dorsey (black T-shirt) meets with interns and junior staff members in 2014.

Since inception on March 6, 2014, the First Trust Dorsey Wright Focus 5 ETF FV, -1.17% which holds the five First Trust sector-and industry-tracking ETFs with the highest relative-strength rankings—it’s re-evaluated every week—has climbed 17% while the SPDR S&P 500 ETF SPY, -1.04%  has edged up 3.3%. The Focus 5 ETF has included the biotech sector FBT, -1.23%  since inception.
The other sectors held by the Focus 5 ETF in order of ranking, are health care FXH, -1.53% Internet FDN, -1.27% consumer staples FXG, -0.60%  and consumer discretionary FXD, -1.03%
Dorsey said Clinton’s plan wouldn’t change his mind about biotech stocks, as politicians and lawmakers tend to have an agenda when they announce policy initiatives. Read more about how drug-pricing policy isn’t likely to change soon.
“Do you know what doesn’t have an agenda? A relative strength chart,” Dorsey said.

Stan Druckenmiller on oil

 

 

http://www.bloomberg.com/news/articles/2015-04-15/druckenmiller-bets-on-market-surprise-with-china-boom-oil-riseOil Prices

Druckenmiller anticipates oil prices -- which plunged about 50 percent since June -- will rise by next year after companies slowed production and exploration.
Duquesne Family Office sold its retail and airline stocks, which benefit from lower oil prices, and has bought equities that benefit as energy prices climb, such as LyondellBasell Industries NV. The world’s biggest maker of polypropylene plastic rose as much as 3.1 percent today to $96.18, the highest price since October. He’s also buying crude futures.

Oil's Worst-Ever Summer Signals Price Rout Is Nowhere Near Done

http://finance.yahoo.com/news/oils-worst-ever-summer-signals-102928817.html

If crude’s slump back to a six-year low looks bad, it’s even worse when you reflect that summer is supposed to be peak season for oil.

U.S. crude futures have lost 30 percent since the start of June, set for the biggest drop since the West Texas Intermediate crude contract started trading in 1983. That beats the summer plunges during the global financial crisis of 2008, the Asian economic slump in 1998 and the global supply glut of 1986.

It even surpasses the decline of 2011, when prices fell as much as 21 percent over the summer as the U.S. and other large oil-importing nations released 60 million barrels of oil from emergency stockpiles to make up for the disruption of Libyan exports during the uprising against Muammar Qaddafi.

More from Bloomberg.com: The Fed Is on Thinner Ice Than It Realizes, and It May Be Setting Us Up for Recession

WTI, the U.S. benchmark, fell to a six-year low of $41.35 a barrel Friday. It may slide further, according to Citigroup Inc.

“Summer is when refineries are all running hard, so actual demand for crude is as good as it gets,” Seth Kleinman, London-based head of energy strategy at Citigroup Inc., said by e-mail.

OPEC’s biggest members are pumping near record levels to defend their market share and U.S. production is withstanding the collapse in prices and drilling. The oil market is still clearly oversupplied and “it will get more so as refiners go into maintenance,” Kleinman said.

Oil demand usually climbs in the summer as U.S. vacation driving boosts purchases of gasoline and Middle Eastern nations turn up air-conditioning. 

Crude has sunk this year even U.S. gasoline demand expanded, stimulated by a growing economy and low prices. Total gasoline supplied to the U.S. market rose to an eight-year high of 9.7 million barrels a day last month, according to U.S. Department of Energy data.

More from Bloomberg.com: S&P 500 Erases Drop as China Concern Eases; Gold Gains With Oil

Crude could fall to $10 a barrel as the Organization of Petroleum Exporting Countries engages in a "price war'' with rival producers, testing who will cut output first, Gary Shilling, president of A. Gary Shilling Co., said in an interview on Bloomberg Television on Friday.

"OPEC is basically saying we're not going to cut production, we're going to see who can stand lower prices longest,'' Shilling said. "Oil is headed for $10 to $20 a barrel.'' 

More from Bloomberg.com

Opinion: Gold won’t have been tested until the crap really hits the fan

Opinion: Gold won’t have been tested until the crap really hits the fan http://www.marketwatch.com/story/gold-wont-have-been-tested-until-the-crap-really-hits-the-fan-2015-08-05?page=2

 

By Matthew Lynn

Published: Aug 5, 2015 3:03 p.m. ET

Nothing too awful has happened yet in Greece, China, Ukraine

The euro is about to fall apart. The Chinese stock market is crashing, taking the economy down with it. The emerging markets are disappearing down a plug hole as commodity prices collapse. And what happens to gold? The ultimate safe haven, the one asset that is meant to provide a refuge in even the worst of storms, enters a bear market as well.
Plenty of people have concluded that gold is finished. Use it to make some nice jewelry, but don’t expect it to have any place in a well-managed portfolio. If it doesn’t show so much as a flicker of life during that kind of turmoil, then you might as well forget about it.
But hold on. There is a flaw in that view.
By any historical standards, we haven’t any real crisis yet. In reality, the markets are going through a period of remarkable, and possibly unnatural, calm. Perhaps it is true that gold is no longer a reliable a store of value. Maybe bitcoin, land, or indeed cash, have taken over the as natural refuge in times of turmoil.

Saudi-Led Coalition Claims Strategic Victory in Yemen

(1:35) Saudi-led forces in Yemen have defeated the country’s rebels at a strategic southern air base. It is the latest victory in a string of recent gains by the coalition, setting the stage for forces to make a further push into Houthi-controlled areas. Photo: AP.

But it is far too early to conclude that — let’s wait until something really bad happens.
It has certainly been a dismal few years for gold investors. After hitting all-time highs of close on $2,000 an ounce at the peak of the financial crisis, the price of gold GCZ5, +0.28%   has been in relentless decline over the last four years. In the last month, the price has dipped below $1,100, and keeps on going down. The gold miners GDX, +0.22%  are in even worse shape, with many operations no longer profitable at these depressed prices.
That in itself might not be so bad. Every asset market goes up and down, and there is no reason to expect gold to be any different. The trouble is, gold is meant to go up when there is panic in the markets — not down. That calls into question whether it is still a safe haven — and if it isn’t there really isn’t much point to it.
Take Greece, for example. As the country teetered on the edge of a dramatic exit from the eurozone last month, a fresh financial crisis looked imminent. No one really knows what happens when a country tumbles out of the euro EURUSD, +0.3753%  , or what kind of losses might be triggered right across the financial system if the country defaulted on its debts. And yet, through that whole saga, the gold price was about as lively as a Tuesday afternoon at an old people’s home.
Or take China. The stock market for what will soon be the biggest economy in the world soars in a frenzy of speculative buying, then collapses back into an equally dramatic bear market, losing a third of its value in the space of a couple of weeks. What would happen to the global economy if China was engulfed in its own version of the credit crunch? No one can say for certain, but it does not sound good.
And gold? You’d find more life in the cemetery.
It gets worse. Syria has descended into civil war. Russia has effectively invaded the Ukraine. Islamic State has taken over swathes of Iraq. None of those events did anything for the gold price either. It is easy to see why some analysts are starting to conclude that it is not a safe haven anymore.
But hold on. There may be some truth in that, and certainly no one should rule it out. But it is equally possible that the gold market is quiet because the world is as well.
Greece? As it turned out, there was never that much chance of it tumbling out of the eurozone. The Finance Ministry had put together a Plan B, but it was about as coherent as a Donald Trump policy speech, and so long as there was no serious preparation in place for a return to the drachma then the country was always likely to knuckle down to whatever fresh austerity measures its European Union partners had in store for it.
The crisis never spread to Portugal or Italy, or anywhere else for that matter. In financial terms, it was a nonevent.
How about China? Sure, the market is down a lot, and there will be some small investors in Shanghai nursing heavy losses. The Shanghai index SHCOMP, +2.26%  is down from close on 5,000 to 3,700. Then again, a year ago it was at 2,000. Anyone whose trading horizons stretch for more an a couple of month are still going to be sitting on some very handsome profits.
Volatility in what is effectively an emerging market is nothing very unusual. If the index crashed to 1,000 and stayed there, that might be a problem. Until then, not much has happened.
Nor do any of the other events that have dominated the news. Syria may be tragedy, and Islamic State a menace, but economically neither count for anything. Neither does the Ukraine, and even sanctions against Russia don’t matter much to anyone apart from Polish farmers and German car manufacturers.
In fact, by any historical standards, the world is remarkably calm, and so are the markets.
Only a few localized wars disturb the peace, and all the major bourses are trading in a narrow range. Central banks are maintaining rates close to zero, with only microscopic rises in interest rates planned. Inflation has vanished, but deflation hasn’t really taken hold. Growth has resumed, but only modestly. A more placid outlook would be hard to imagine.
So what would you expect gold to do in those circumstances? Drift sideways, and lose some of its value. Which is pretty much exactly what has done.
Sooner or later, there will be a genuine crisis. A revolution will topple the Saudi regime. Japan will default on its massive debts. The Chinese middle class will demand democracy. France will leave the euro.
Any of those would be huge. If the gold price did not soar on any of those events, we could conclude it was no longer a safe haven. But until something on that scale happens, it is too early to say.

Hilsenrath Shows Up On Schedule to Ask How Fed Will Raise Rates

http://wallstreetexaminer.com/2015/04/hilsenrath-shows-up-on-schedule-to-ask-how-fed-will-raise-rates/


On March 26, I wrote the following on the issue of how the Fed will raise rates:

This is a subject that I have been ranting about for months. The mainstream media has avoided it assiduously in spite of me constantly haranguing various Fed reporters about it. Now that Spicer has broken the story, the floodgates will open. You can be sure that the Wall Street Journal’s Jon Hilsenrat will be on it like a fly on horseshit to get all the credit for it next week. He’ll report the Fed authorized, whitewashed, rubber stamped, and promoted version of the story.
Here’s Why The NY Fed’s Head Trader Is Now Doing A Dog and Pony Show That You Need To Know About

My timing was off by just a week. Hilsy was out today with a WSJ blog post that reports but, as predicted, soft pedals, the issue.

Minutes released by the Federal Reserve of its March policy meeting were a reminder that the central bank could face real operational challenges when it decides to start raising short-term interest rates.

I’ll say. Their unconventional tools of increasing IOER, or RRP and TDF, won’t work because they will pay an additional subsidy to the banks, increasing their income and reducing their cost of funds. ‘Splain to me again how that will induce them to raise rates.

As part of its bond-buying programs, the Fed has flooded the banking system with $2.7 trillion of funds known as reserves. Bank reserves are like a dollar in your pocket – they pay no interest.

Come on Jonny Boy. You know that’s not true. You know that the Fed is paying interest on those balances. The media even coined an acronym, IOER. And it’s coming right out of taxpayer pockets because it reduces the surplus interest income the Fed recieves which it returns to the Treasury.

This abundance of funds is a giant weight keeping short-term interest rates near zero. When it comes time to raise interest rates the Fed will need to either a) eliminate those reserves or b) pay a higher interest rate than zero to private financial institutions in exchange for them. The Fed has chosen the latter route for the early stages of the rate hike cycle, but the minutes showed Fed officials are still struggling to define the tools they’ll use to pull this off.

Because they KNOW, but are not saying, that paying interest to the banks won’t induce the banks to raise rates. Au contraire.

Paying higher rates to banks is simple since they have accounts with the Fed. But the reserves seep out of the banking system into other financial institutions like money market mutual funds and officials are reluctant to use a new instrument – overnight reverse repo trades – designed to manage rates outside of the banking system. Last September they set a $300 billion cap on these trades. In March they agreed they might need to ignore their own cap, according to the minutes.

This is laughable gibberish. Reserves do not “seep out of the banking system.” They are cash assets on the books of the commercial banking system. They can move from bank to bank, but like the Hotel California, they can’t leave unless the Fed extinguishes them. The only way to do that is for the Fed to sell assets. That results in the liquidation of the reserve deposits on the Fed’s balance sheet as the banks exchange their cash for the paper which the Fed sells to them.

Fed officials also entertained ways to eliminate reserves more quickly than planned, including by selling some securities before they mature or allowing some to mature without reinvesting the proceeds. It is striking that they discussed new strategies for eliminating reserves at the March meeting.

Dude! They discussed it in January! Did you not read those minutes. They had pages of discussion on it. No one in the mainstream media reported it. Not you. Not anyone. Just one crazy, lone, independent analyst, waving his fist at the sky in a raging lightning storm. Everybody else just played through, as if the sun were shining, no thunder crashing around them.

For months it had sounded like Fed officials were settled on their plans on this front – no asset sales and continued reinvestment of proceeds from maturing securities until after the Fed had already started raising rates. Now they don’t sound so sure about that strategy. “A number of participants suggested that it would be useful to consider specific plans for these and other details of policy normalization under a range of post-liftoff scenarios,” the minutes said.

This is where I get to say I told you so. I said that you’ll know the Fed is serious about raising rates when they start floating trial balloons about shrinking the balance sheet. Because that’s the only way they can get rates to go up.

For years, Fed officials have sought to reassure the public that they had all the tools they would need to raise interest rates when the time came, even with all of these reserves in the banking system. The minutes show that even now the mechanics of how they’ll do this are very much a work in progress, and a possible source of market uncertainty as the Fed looks toward rate increases later this year.

The truth is that they know that their “unconventional tools” won’t work. They need to start shedding assets. Whether they do that by allowing them to run off or selling is the question. My guess is that allowing paper to mature won’t have much effect initially. They would need to start selling assets. There are those who would argue that that will never happen because markets would disintegrate. They may be correct. Will the Fed be willing to test that?
From March 17-

Top 6 Myths Driving Oil Prices Down

http://oilprice.com/Energy/Oil-Prices/Top-6-Myths-Driving-Oil-Prices-Down.html


Whoever would overthrow the liberty of a nation must begin by subduing the freeness of speech.”
Benjamin Franklin, Silence Dogood, The Busy-Body, and Early Writings
I start with that quote because once the media, as well as politicians for that matter, have no accountability for actions or words then liberty will dissolve. Over the last few weeks I have witnessed another litany of lies that the media insists on putting forth. They come in the form of statements presented as facts to sway opinion while others are opinions quoted by others. Either way, the bias in talking down oil prices, reinforcing the “glut” that is fueled in part by misleading EIA and IEA data, is readily apparent.
Earlier in the year I documented half a dozen media reports which turned out to be 100 percent false. Now I expose another half dozen in just the past few weeks. Prices remain unchanged as a result of the largest drop in production in a year, as well as a large inventory draw this week via the EIA. The very fact that prices haven’t responded demonstrates my points. This comes despite the dollar index (UUP) over the last month remaining essentially flat while USO has fallen over 15 percent (so much for that relationship, except when the dollar rises right?)…
Related: A Reality Check For U.S. Natural Gas Ambitions
Even at the time of this article the dollar index is down 1 percent yet oil is down as well.
Here is a list of the latest lies:
1. Iran Agreement to flood market. FALSE. OPEC has even stated that the natural 1.0 to 1.5 million barrels per day (MB/D) rise in demand in 2016 will more than offset any production rises in Iran which, contrary to earlier reports, won’t come on line until early 2016. In addition, China will open up refining to third party, non-state-owned refineries which will reportedly add another 600,000 B/D in demand in 2016.
2. Iran floating storage will flood market. FALSE. As initially reported in the media, it was Iranian oil floating in storage but it now turns out to be low grade condensate as stated by PIRA on Bloomberg a few weeks back and then supported by tankers attempting to move inventory to Asia. Later media reports corrected earlier ones that the storage is in fact condensate while failing to report on its grade.
3. U.S. production resilient. FALSE. The latest EIA data refutes this as does data via EPS calls at Whiting Petroleum (WLL) & Hess Corporation (HES). Yes, some are increasing production such as Concho resources (CXO), but in the Bakken both companies confirm that 2H15 production will decline due to lower rigs and depletion. HES raised production for the year as a result of 1H15 production being higher than expected by some 5 percent. All in all, next week should see further production drops.
4. U.S. Inventory resilient. FALSE. EIA data would have fallen last week by some 4MB as it did this week ex import surges and continues to be overstated by “adjustments” made to production that amount to millions of barrels in daily production.
5. Cushing inventory fears revived. FALSE…see above.
6. OPEC supply will continue. The Saudis, as OPEC’s largest producer and largest contributor to growth in 2015, have already stated that they will reduce output by 200,000-300,000 by summers end. Yes true, OPEC as an entity won’t formally announce a cut but isn’t it misleading to report this?

Birinyi: S&P 500 can hit 3,200 by 2017

http://www.cnbc.com/2015/08/04/birinyi-sp-500-can-hit-3200-by-2017.html

The S&P 500 can rise to 3,200 within two years, a more than 50 percent upside from its current level, bullish investor Laszlo Birinyi said Tuesday.
"What we're really trying to tell people is stay with it. Don't let the bad news shake you out," he said on CNBC's "Fast Money: Halftime Report."

The S&P has risen more than 50 percent in the last three years. It has inched nearly 2 percent higher so far this year.
Read MoreWhy investors expect 'August angst' to come
Global trends like volatile Chinese stock markets and Greece's effect on the euro zone have spooked investors this year. But the founder and president of Birinyi Associates shook off concerns that the years-long bull market would not persist.
"There's no reason why we can't keep on going," Birinyi said.
Individual stocks look more appealing than specific sectors, he added. Birinyi contended that stocks including Chipotle, Google and Visa would continue grinding higher.
Still, some negative market trends have caught Birinyi's eye. Apple—his biggest holding and the world's largest company by market cap—has shed nearly 6 percent in the last five days.
Read MoreWhy we're 'losing' Apple: Technician
Birinyi noted that he could not explain what has held back the stock.
"It is a concern to me because I don't know what's going on," he said.
On the other hand, short seller Bill Fleckenstein, who correctly predicted the financial crisis in 2007, told "Fast Money" the entire market could be heading for calamity in the coming months.

Deutsche Bank lifts 2013, 2014 gold-price outlook

http://www.marketwatch.com/story/deutsche-bank-lifts-2013-2014-gold-price-outlook-2012-10-02

Deutsche Bank AG DB, +0.00% Tuesday raised its outlook for gold and silver prices in 2013 and 2014, citing support from stimulus measures by central banks such as the U.S. Federal Reserve.
The bank raised its 2013 gold forecast by 3% to $2,113 a troy ounce and its 2014 outlook by 11.1% to $2,000/oz. Next year, the price of gold could exceed $2,200/oz, it said.
Similarly, Deutsche Bank increased its 2013 outlook on silver by 3% to $44/oz and its 2014 forecast by 11.1% to $40/oz.

A major support for precious metal prices are the recent moves by central banks to expand their balance sheet, said the bank. Since gold is often sought as a hedge against currency weakness and inflation at times of loose monetary policy, such moves tend to boost its appeal to investors.
"We believe central bank action to stimulate growth, avoid deflation and reduce systemic risk is unambiguously bullish for the precious metals sector and specifically gold," said Michael Lewis, a research analyst at Deutsche Bank.
"While we have targeted gold prices moving above $2,000/oz since the beginning of 2011, we believe the Fed's open-ended program of QE announced last month increases our confidence that a surge in the gold price above this level is only a matter of time," he added.

Gold demand weakest since 2009 in Q2 as Chinese turned to stocks-GFMS

http://finance.yahoo.com/news/global-q2-gold-demand-weakest-080332024.html

MANILA/LONDON (Reuters) - Demand for gold slid to its lowest in six years in the second quarter of this year as buyers from top consumer China poured funds into its now troubled equities market, an industry report showed on Tuesday.

Retail investment from China fell by a quarter and jewellery demand by 23 percent in the April to June period as stock markets there soared, GFMS said in a quarterly update.

However, a subsequent plunge in Chinese share prices from mid-June has not helped bullion, it said, as some investors were locked in and others nervous about switching to different asset classes while financial markets are so volatile.

After a 12-year bull run peaked in 2011, global prices of the safe haven metal have struggled to gain traction. Last week, gold sank to $1,077 per ounce, its lowest in 5-1/2 years, after a sudden sell-off in New York and Shanghai, as investors worried about Chinese growth and the prospect of U.S. interest rate rises made the dollar more attractive.

"Gold has certainly moved out of favour in China in recent quarters," GFMS analyst Andrew Leyland said.

"I think Chinese demand was a reaction to weak price performance, rather than a cause. Both the equity market, and the U.S. dollar have promised stronger returns than gold, and this put investors off the yellow metal."
GFMS was cautiously optimistic that both demand and prices could start to pick up in the final quarter of the year.

"Chinese purchasers tend to buy into rallies, so when gold gets some upward momentum Chinese purchasing should support this," Leyland said.

China and India are the world's top gold consumers. Physical demand there has not picked up strongly despite a sell-off last week that knocked global prices (XAU=) to 5-1/2 year lows.

That contrasts to the explosion in physical demand seen after gold prices dropped sharply in the second quarter of 2013.

GFMS, a division of Thomson Reuters, said global demand for gold bars and coins fell 12 percent year-on-year in April-June and was around 63 percent below the peak two years ago.

In the largest consuming sector, jewellery, consumption dropped 9 percent and production declined 6 percent, GFMS said. Overall physical demand stood at 858 tonnes in the second quarter, down 14.2 percent from a year before.

Central banks remained net buyers of gold, but their purchases fell 62 percent year on year.
That helped push the physical surplus in the gold market to its highest in five years at 196 tonnes, more than double the total of a year before.
While jewellery consumption in India increased 2.5 percent to 158 tonnes during the period, gross imports fell 10 percent to the lowest in five quarters, the report said.
China and India consumed almost the same amount of gold in January-June, with China a tad higher at 394 tonnes against India's 392 tonnes, it said.

In the full year, GFMS is expecting gold demand to come in at around 4,000 tonnes, Leyland told the Reuters Global Gold Forum on Tuesday.

"That's the weakest since 2010, but still 1,000 tonnes per year higher than the 2004-2007 period," he said.

GFMS forecast gold would average $1,135 an ounce in the third quarter against $1,192 in April-June, before recovering to $1,175 in the last quarter of the year.

"It remains our view that a U.S. rate hike this year is already priced into the market and that an increase could well prompt a review of asset allocations that leads to an increase in gold holdings," the report said.

Any gold rally from here is likely to be a rally within the context of a bear market.’ Mike Armbruster, Altavest

http://www.marketwatch.com/story/gold-retakes-1100-as-dollar-slides-2015-07-27

Gold futures rebounded on Monday from their lowest level in more than five years, finding support from weakness in the U.S. dollar to trade near $1,100 an ounce, but analysts said prices haven’t likely hit bottom just yet.

The yellow metal was benefiting from haven demand as stocks mostly retreated world-wide, led by a major selloff in Chinese equities, but technical analysts attributed Monday’s rebound in gold to technical factors.

August gold GCQ5, +0.88%  climbed $11.10, or 1%, to $1,096.60 an ounce on Comex, after tapping an intraday high of $1,104.40. Prices were staging a comeback from Friday’s settlement price of $1,085.50, which was the lowest level since February 2010.

September silver SIU5, +0.74%  rose 12.7 cents, or 0.9%, to $14.615 an ounce.
Prices got a boost for both technical and fundamental reasons, according to Mike Armbruster, principal and co-founder at Altavest Worldwide Trading.

‘Any gold rally from here is likely to be a rally within the context of a bear market.’

Mike Armbruster, Altavest

“Technically, gold is bouncing off of longer-term trendline support,” which is roughly at $1,085 — close to Friday’s settlement price, he said. “Technical indicators are in deep oversold territory and conditions are ripe for a short-covering rally.”

But “any gold rally from here is likely to be a rally within the context of a bear market,” said Armbruster. “We think the trend toward lower levels is likely to continue in the months ahead.”
Similarly, Ross Norman, chief executive officer at Sharps Pixley Ltd. in London, said momentum in the gold market is “still with the bears.”

Prices haven't hit bottom yet, he said, and he expects them to “attack the $1,080 level, which is “midway between the all-time high at $1,922 and the 36-year low at $246.”
Still, given overall bearishness for gold, “we may indeed be nearing a bottom—as a contrarian, this represents an excellent buying opportunity,” said Norman.

The price climb Monday came as the U.S. dollar DXY, -0.78%  slid against most major currencies, ahead of a closely watched Federal Reserve meeting later in the week that could determine the trading action in currencies and commodities in coming weeks. The U.S. central bank is widely expected to keep interest rates at a record low at the meeting, but expectations are rising that a rate hike could come before New Years. Read MarketWatch’s Fed preview

Those expectations have recently driven the greenback higher, and in turn added pressure on dollar-denominated commodities that get more expensive for other currency holders.

U.S. data released Monday didn’t offer much of an economic hint for the Fed’s next move. They showed that orders for durable goods jumped 3.4% in June, but U.S. business investment rose just modestly.

In other metals price action, platinum for October delivery PLV5, +0.58%  picked up $2.20, or 0.2%, to $982.90 an ounce, while September palladium PAU5, -1.32%  added 15 cents $622.75 an ounce.
September copper HGU5, -1.32%  slipped by 2.2 cents, or 0.9%, to $2.361 a pound.

Gold: Storm on the Horizon?

• 21 Jul 2015
• By Erik Norland
• Topics: Metals, Energy, Interest Rates, Economic Events, FX

While a range of commodities, including crude oil and iron ore, have been on a wild ride over the past twelve months, gold has been comparatively stable. As such, options on gold have spent much of the past several months trading near a record low in terms of implied volatility (Figure 1). Is the market underestimating the risk in holding gold?

The direction of implied volatility on gold options is closely, but not perfectly, linked to the direction of gold prices. In gold, as in equities, implied volatility tends to rise when prices are falling more so than when prices are rising. Measured daily over the period from November 2010 to July 2015, the correlation between changes in implied volatility on three-month constant maturity options on gold futures and gold prices, stood at -0.38. So, while rising implied volatility isn’t exactly the same thing as falling gold prices, the two are related (Figures 2 and 3). If one is worried about an increase in gold option implied volatility, one should probably also be asking what could cause gold prices to fall?

Figure 1.

Figure 2.

Figure 3.

Don’t be lulled into complacency by the low level of realized and implied volatility in gold.Before we delve into reasons why the price of gold might fall, it is worth noting that implied volatility on gold options has risen during gold bull markets in the past. Notably this was the case in August and September 2011, just as gold reached its all-time high (nominal) price in US Dollars. At that time investors appeared to be buying protection in the event that gold prices fell. Fall they did, and as they fell gold implied volatility pushed even higher, peaking at 36.2% annualized on constant maturity 30-day options on gold futures. Since then, however, gold implied volatility has basically only risen when the price of gold has fallen and vice versa. So here are several reasons why implied volatility on options on gold futures could rise.

1) Implied and Realized Volatility are Abnormally Low

Currently, with gold options trading near a record low in terms of implied volatility (12.1% as of July 14, 2015 and up to 18.8% on July 21, 2015), there is little scope for gold implied volatility to decline further. By contrast, there is a great deal of room for it to go higher. A large part of the reason why gold implied volatility is so low currently is that annualized realized volatility has been exceptionally low as well, around 8.7% over the past 30 days. Since 1975 it has averaged around 17%, nearly double its current level (Figure 4). Since November 2010, when the implied volatility series available in Quikstrike begin, realized and implied volatility have both averaged 16%. So, whether you compare it to long run or intermediate term averages, realized gold volatility has been exceptionally low.

Figure 4.

2) Increases in Mining Supply Could Drag the Price of Gold Lower

As we pointed out in our paper, “The Push-Pull Dynamics in Gold & Silver,” mining supply explains as much as 50% of the year-to-year price variation in precious metals.  Moreover, gold supply influences both silver and gold prices, as does silver mining supply. The more supply, typically the lower the price.
Gold mining supplies have grown strongly since 2009.  This growth may have put downward pressure on gold prices, helping them to fall by approximately 40% since September 2011. As a result of this decline, some observers forecast that gold mining supply might begin to contract by as early as the second half of 2015.  

We are skeptical. While the current price of gold, around $1,150 per ounce, is far below its high of around $1,900 from September 2011, the current price still exceeds most estimates of the cost of production. Globally, the all-in sustaining cost of running a gold mine is around $982 per ounce, according to Metals Focus (Figure 5). Thus, at the current price, there is reason to believe that investment in new mines might taper off, as might the expansion of existing mines (at least relative to the torrid pace of expansion in the past decade), but there are not a lot of reasons to think that currently operating mines will slash production.
Moreover, the cash cost of running a gold mine, on average, is just above $700 per ounce. This may be the more relevant indicator when it comes to the level at which gold production might be cut back. In fact, if one looks at gold mining costs country by country, the current price exceeds the all-in costs in almost every case and exceeds the cash costs without exception (Figure 6). Since running a gold mine is a cash flow positive business at $1,150 per ounce, so long as the price remains at or above current levels, there is no particular reason to think that gold mining production is going to decline.
If gold mining production defies expectations and continues to rise, this could put downward pressure on the price of the yellow metal and this, in turn, would likely send the implied volatility of options on gold futures contracts higher. On the other hand, if gold mining production does decline, then it should support gold prices and this, in turn, might keep implied volatility on gold options near historic lows.
It is worth pointing out that after gold prices collapsed in the early 1980s, mining supply continued to rise for another eighteen years (Figure 7). This underscores the point that once capital investment goes into a mine, it becomes a sunk cost and that mine needs to continue to produce until the point at which it goes cash flow negative. Moreover, as McKinsey & Company points out in its recent report, “Productivity in Mining Operations: Reversing the Downward Trend,” there is enormous potential to make metals mines of all sorts more productive. To the extent that this is accomplished in coming years, it will lower the price at which gold can be profitably mined.

Figure 5.

Figure 6.

Figure 7.

3) Gold Prices are Defying Gravity with Respect to other Commodities Such as Crude Oil

Crude oil led gold prices higher during the most recent commodity bull market. Crude oil began to rally in 1999, three years before gold began its long upward trek. Likewise, oil prices peaked in 2008, also three years before gold hit its all-time high in 2011 (Figure 8). Given oil’s massive collapse in 2014 and its inability to sustain a rally amid an inventory build-up in 2015, one must wonder whether or not gold might follow it lower.

The oil-gold ratio is no longer near historic highs (see our paper in February, “Oil-Gold Ratio: Dial Down Deflation Concerns”). At 22.7 barrels of West Texas Intermediate Crude (WTI) /Troy Ounce of Gold, it is still higher than its historical average of 16. If one, hypothetically, held the price of WTI constant and allowed the oil-gold ratio to return to its historical average, this would imply a gold price of around $800/ounce – not too far above its break-even cash flow cost of mining. Of course, there is no particular reason to think that the oil-gold ratio should or will revert to its long running historical average any time soon. That said, if it did, it would likely send the implied volatility on gold options a great deal higher.

Figure 8.

The silver-gold ratio is also trading a bit higher than it has historically as well (figure 10). Given the partial substitutability of the two metals, this also might not be a great sign for gold. Jewelry makers and investors might prefer to use silver rather than gold given the larger-than-normal price disparity.

Figure 9.

Figure 10.

4) Monetary Policy and the U.S. Dollar

Federal Open Market Committee (“FOMC”) Chair Janet Yellen has made clear that she and (most of) her Federal Reserve colleagues would like to raise rates before the end of 2015. For the moment, the markets are skeptical. Fed Funds futures don’t fully price in a rate hike until Q1 2016. Moreover, Yellen has given the FOMC some wiggle room, clearly indicating that the Fed is data dependent. For its part, the data has not always been cooperative. While employment, total labor income and the housing sector are growing solidly, retail sales have been sluggish (1.8% annualized growth ex-autos and gasoline in H1 2015), and inflation has remained abnormally low.
What matters for gold isn’t so much the actual Fed move, when and if it occurs, but rather how the expectations of a Fed move develop over time. Day-to-day changes in gold prices have exhibited an increasingly negative correlation to the day-to-day movements of Fed Funds futures rates (Figure 11).
As such, any economic data or policy pronouncements from the FOMC that bring forward expectations for a rate hike, will more likely than not send gold lower, and by extension, send the implied volatility of gold options higher. Of course, the opposite is true as well. Weak economic data that diminishes expectations of a Fed rate hike will probably support gold. Indeed, the significant decline in expectations for Fed rate hikes in 2015 and 2016 (Figure 12) may be one factor that has supported gold in recent months and prevented it from following the likes of crude oil, silver, and iron ore off the cliff.

Figure 11.

Figure 12.

Additionally, if Fed rate hike expectations are brought forward (meaning more rate hikes sooner than currently priced) it would also likely support the US Dollar. A strong USD is probably bad news for gold and other commodities. As we have pointed out in previous articles on gold, the price of the yellow metal has been relatively stable from the perspective of some of the world’s weaker currencies such as the Indian Rupee, the Japanese Yen, the Russian Ruble, and the Brazilian Real. While that information is interesting, it doesn’t change much the implied volatility of gold options, which is based on the USD price of gold.

Bottom Line

Don’t be lulled into complacency by the low level of realized and implied volatility in gold. While diminishing expectations of a Fed rate hike earlier in 2015 may have prevented gold from following other commodities on a dramatic downward path, given the abnormally low level of volatility, the potential for changes in U.S. monetary policy, and the prospects for increasing mining supply, there remain significant downside (and upside) risks to gold that could drive up volatility. After all, gold is typically bought as a hedge against inflation – of which there is none – or as protection against financial disasters – central banks have the markets’ back for now. While history is not always a good guide, caution is advised since we may be experiencing the calm before the next storm.