August Starts With A Big Thud, Gold Leading The Way

In a broad indication of how low in esteem gold is held right now, even after a nearly 20% sell-off in Greek equities as their bourse re-opened, the yellow precious metal fell significantly today.

Gold’s poor reaction to what should have been a natural demand as a safe haven came also in the face of a continuing decline in Shanghai equities, a slowdown in India, and wavering interest in U.S. equities.

Not only did gold decline, it is sticking around near its lows. Gold is out of fashion as an investment and as an ornament such as for jewelry. So, physical demand remains slack, despite gold’s continuing price decline.

U.S. Treasury bonds served as a safe haven. Yield was down 4 basis points on the 10-year, raising face values, and was down 6 basis points on the 30-year paper.

The U.S. dollar served as another haven play today, up nicely against the euro and pound, though only marginally against the yen. The dollar strengthened also because of a higher-than-forecasted rise in personal income. The measurement came out at 0.4% higher rather than the expected 0.3%.

As always, there was a counterpoint. The U.S. manufacturing sector showed weakness in a data report via the Institute for Supply Management (ISM). The sector is still expanding but at an appreciably slower rate.

The main components of the ISM remain mixed: their new orders index rose 0.5 points to 56.5, the highest level of the year, while the employment index fell 2.8 points to 52.7, and the production index rose 2.0 points to 56.0.

ISM said that 11 out of 18 industries reported growth with five reporting contractions. The energy sector dragged the index down most, not surprising since oil continues to tumble.

West Texas Intermediate was down 4% today at the regular closing although in afternoon trading it is slightly off the lowest price. Brent North Sea was down 5%, a level that took it below the psychological barrier of $50 per barrel. 

Oversupply is still an issue in oil, but demand is the bigger problem. The Reuters survey last week showed OPEC’s output in July had reached the highest monthly level in recent history.

Refineries have plenty of stockpiled oil to make their distillates, and the U.S. is exiting its primary auto-driving and gasoline-consuming season. Even more to the point, though, is a manufacturing slowdown in China and to a lesser extent the United States.

The slowdowns in those two large economic powers combined with a slowdown in Brazil served to push down U.S. equities. The energy picture cited above certainly didn’t help either, providing a drag on the Dow in particular, which has many energy companies as components of its index.

Our take on what we have described today? Good credit risks have to be given access to more money. Banks simply have to be forced to loosen up their policies and be made to embark on marketing plans that reach out to borrowers with a positive history and good ideas.

Wishing you as always, good trading,