Gold Falls Asleep as the Financial World Argues

Commentary for Tuesday July 26, 2016 (www.golddealer.com) Gold closed up $1.40 at $1320.70 on the Comex today – so down $3.80 yesterday and up $1.40 today. This is not exactly exciting as gold marks time waiting for…you fill in the gap.

Today finishes the second day of closed door FOMC meetings – they will go on record relative to interest rate policy tomorrow after the market closes but few expect any interest rate movement but with new home sales up 3% in June (highest levels since 2007) something has to give here – we have experienced near zero interest rates since 2008. Is anyone home?

Gold continues to settle as traders lament the soft Asian demand and the Dollar Index while a bit wobbly this morning remains above 97.00. The famous Doug Casey claims there will be a panic into gold – he’s probably right – but not until our famous shiny friend shakes off these summer doldrums.

Since early July the technical picture for gold has been off balance – moving from the $1360.00 level to $1310.00.  The bigger picture is more pleasing – year over year we are up more than $200.00 but the commodity market is usually about what you can do for me today. The equally famous Peter Hug claims a break-out in gold is imminent and trading volumes are thin.

I’m more interested in today’s trading psychology than its technical pattern. The uncertainty factor is very large today – traders can be aggressively bullish on gold – and in a few days turn neutral and then to bearish on a headline. This shows how deep the financial water might be in today’s world. Few saw the 2008 financial catastrophe coming and it did create panic in our government as the Federal Reserve forced money down the throats of banks which did not want or need additional financing.

The debt today continues to grow – worldwide. And yet this problem remains on the backburner so it’s no wonder that Casey is worried.

Silver closed up $0.03 at $19.65.

Platinum closed up $8.00 at $1096.00 and palladium closed up $3.00 at $691.00.

This from Sarah Benali (Kitco) – Is America Headed For Bankruptcy? – Harvard Economist – Although markets are not pricing in a rate hike at this week’s Fed meeting, sentiment seems to be turning more positive on the U.S. economy with more investors expecting monetary policy tightening this year. However, according to one famed economist, the country may be in deeper trouble than we think, and the government is not doing anything about it.

“Two recent pieces of budget news are a grim reminder of the perilous state of fiscal policy in the United States,” Martin Feldstein, professor of economics at Harvard University, said in a Project Syndicate post Monday.

He was referring to America’s deficit problem.

A recent announcement by President Barrack Obama’s Office of Management & Budget showed that the federal government’s deficit this fiscal year will be about $600 billion, up by more than 35% since 2015, noted Feldstein.

The annual Long-Term Budget Outlook released by the Congressional Budget Office (CBO), he continued, also predicted that the federal government debt will rise from 75% of GDP to 86% a decade from now, and then to a record 141% in 2046, “near levels in Italy, Portugal, and Greece.”

What’s more, the Fed’s near-zero rate policies have brought down the cost of the interest on the Federal debt even if the volume of the debt continues to rise. As the central bank begins to normalize interest rates, it will cost a lot more to service these debts, which according to Feldstein, is projected to increase to 5.8% of GDP.

He added that this puts America in a tight spot because more than half of U.S. government debt is held by foreign investors, who may fear the government could adopt policies to reduce the real value of these holdings, if needed.

“While the U.S. government would never explicitly default, it could adopt policies such as deducting income tax on interest payments, which would disadvantage foreign holders and depress the value of the bonds,” he explained. “Moreover, foreign investors might fear that very high debt levels could lead to inflationary monetary policy, which would depreciate the value of the dollar and lower the real value of their bonds.”

The longer-term rise in the country’s annual deficit, which is inevitable due to an aging U.S. population, changing medical technology and rising rates, could be enough to eventually absorb the federal government’s revenues entirely, he noted.

“By 2046, the projected outlays for the ‘mandatory’ entitlement programs (Social Security and the major health programs), plus interest on the debt, would absorb more than all of the revenue that the government would collect with current tax rates. A small deficit (1.6% of GDP) would emerge even before spending on defense and other annually appropriated ‘discretionary’ programs,” he added.

The issue is even more pressing than the Obama administration is making it out to be. As Feldstein put it, “America’s exploding deficit” is cause for major concern and yet no presidential candidate in the running right now seems to be talking about it.

“But it should be a top priority for whoever moves into the White House next year. Given the need to act quickly to avoid the worst-case scenario, there is no excuse for waiting.”

The walk-in cash business was fairly quiet today and so were the phones – the Activity Scale is high because we continue to see liquidation of large gold bullion positions.

The GoldDealer.com Unscientific Activity Scale is a “7” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 7) (last Thursday 4) (last Friday – 4) (Monday – 4).

The scale (1 through 10) is a reliable way to understand our volume numbers. The Activity Scale is weighted and is not necessarily real time – meaning we could be busy and see a low number – or be slow and see a high number. This is true because of the way our computer runs what we call the “book”. Our “activity” is better understood from a wider point of view. If the numbers are generally increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.

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