Stable But Uncertain

Gold and silver found some support today via bargain hunting and general reconsideration of Janet Yellen's comments yesterday and today before Congress concerning Fed outlook. However, a number of factors combined to dull the blade and the precious metals have fallen back though still in positive territory for the day.

A rising dollar also dented the up-move. Renewed interest in equities curtailed stronger interest in normal precious metals trading. Overall, the whole commodities complex has been struggling to find direction recently.

It's difficult immediately to assess what the chairwoman said in her two days of biennial testimony, but right now the readers of omens and signs seem inclined to believe she is warning of earlier, rather than later, interest rate hikes. Given her history, we believe nothing of the sort from Yellen. Rather, we think low rates are with us for the foreseeable future. Something extraordinary in the realms of employment and inflation would have to go down.

Yes, there are signs of inflation appearing, but we all know that the spike in gasoline prices are a sign that there is a shortage of suitable refining capacity, not a shortage of oil. (Oil is down $6 or 5% from its recent peaks; gasoline has not tumbled with it.)

And yes, there are spotty jumps in the prices of certain foods, but those are due to a couple of factors not related to structural inflation. There is the ongoing drought in much of the most important food-producing regions of the country and there has been a ravaging disease among young pigs, driving the final cost of lean hogs up. As can be expected, the spike in gasoline needed for shipping and delivery of food is passed on to the consumer.

We also think that, while certainly the older end of the labor pool is seeing some attrition due to aging, the dynamics of the Great Recession and its aftermath are keeping many Baby Boomers working longer than they had planned. This is working itself out now for highly skilled workers, who naturally can recover more quickly from economic blows. This will benefit younger, well-educated workers as everyone will move up and they will find themselves more and more welcome.

However, older, unskilled workers may literally never recover and have to work until they no longer are able. That this is pitiable goes without saying. For younger, undereducated, unskilled workers it is disastrous. They literally have nowhere to go. And they are competing against millions of undocumented workers, many of whom are quite willing to work for lower wages and benefits, if any at all.

Additionally, no one really knows what an "ideal" unemployment rate is. We know this much: the Yellen dovish faction at the Fed thinks that it is lower than 6.0%.

One aspect of gold's recent price decline that is curious is the lack of pickup in physical demand in Asia and more specifically in China. We feel it's a combination of factors, one of which is conditions-oriented, one of which is a canary in the coal mine for the Chinese economy.

The big players in China/Hong Kong go at the game as do traders and investors all around the world. But the "Chinese aunties" of legend, who collectively buy an enormous amount of personally held gold, aren't budging. While there are alternate explanations, we believe that there has been a decline in China of disposable income and that is wreaking havoc on this traditional storehouse of value.

Painted another way, do you want a new smartphone or do you want a half an ounce of gold?

As always, wishing you good trading,