LOG L Is For Liquidity, O Is For Oil, G Is For Gold

July 7, 2015 - 5:18pm

 by Gary Wagner

Less than robust economic health in the United States is nevertheless pulling the world train along. It has to by default.

Liquidity is a key issue in all major economic regions, although for very different reasons.

Europe leads the congestion in liquidity. The tale of the Greeks is a well-worn story in the book by now. It still hangs fire as to whether they and the rest of Europe can reach an accommodation. We worry that the well has been so thoroughly poisoned that more human factors like pride are overshadowing pragmatism.

This in turn is driving down the euro against the U.S. dollar, and against other strong currencies such as the yen and Swiss franc. Until the matter is resolved one way or another, Europe will remain paralyzed and financial markets will be hesitant to move.

The U.S. is facing its own much smaller liquidity problems. This is what is keeping equities in stasis. Until new capital sources are found to finance further bidding up of stocks, the indexes will remain range-bound. Start-ups and M&A’s are also sucking up a lot of cash that would normally flow into established companies.

Although some major technical innovation could move the U.S. economy, for now America is like an old-fashioned football team, grinding out a few yards on the ground on each play. The world watches and understands the importance of a healthy U.S..

Asia news is being driven by the meltdown on the Shanghai index of stocks. We’re not big on doom saying but this smells like a crash or near crash. Suspension of trading of selected stocks has yanked 21% market capitalization out of China markets, which totals about $1.4 trillion. When, or if, those invested in the stocks will be able to access their money has become an enormous question mark.

Meanwhile, the situation casts a long shadow on all mainland China equities, which have been spilling red ink, albeit less dramatically in the last few days.

Crude oil has been taking a hit recently, driven by declining consumption, high inventories and the possibility of a deal with Iran. The last item’s successful conclusion would immediately release 40 million barrels sitting in storage tankers offshore. It would also lift Iran’s much-curtailed export output by 700,000 barrels per day. You can add that to the current daily overproduction of between 1.5 and 2 million bpd. Crude was up minimally today after a 3% plunge.

That addition could spell a bad time, if only temporarily, for U.S. shale output, which in turn would act as a drag on the world’s largest economy.

Gold. Oh my. No… oh my, my, my.

While the yellow precious metal has bounced off its staggeringly low lows on the day in the mid-1140s, it is still crawling about in the mid-1150s, a territory that, should gold finish there, could signal steeper losses.

It will remain one of the larger curiosities throughout the Greek crisis once it ends as to why gold has not functioned in the least as a safe haven. One answer is most likely the looming interest-rate hike by the U.S. Federal Reserve. Investors are uncertain about how gold will react. The last thing you want in a haven play is uncertainty.

On top of the uncertainty, more often than ever people are regarding strong currencies as appetizing safe havens.

Today, for instance, the U.S. dollar is up a little against the euro and up and down against the yen. The Swiss franc jumped against the euro but has since settled back a bit in U.S. trading. The pound is also down a bit under 1.00% against the dollar as currency traders weigh the ripple effect of Greece in the United Kingdom.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

Gold Forecast: Proper Action

We went long @ 1164 we were stopped out @ 1154 (-$10.00)

We are currently flat with no open positions in gold or silver


Trending Markets - Proper Action 

On June 23 we sent out a special trade alert recommending initiating short positions in the euro. The euro was trading approximately at 111.75 at the time of the sell.

Maintain current short euro @111.65. Maintain Stop @ 112.20

For those that are long U.S. dollars we recommend maintaining current long position and maintain stop @ approximately 95.11

Gold Market Forecast

Whether we want to cite a dramatically higher dollar, or oil prices, gold and silver continues to react in a very untraditional way. As far as oil prices go, we saw that market plunge roughly 3% lower before recovering to positive ground by the close of markets today. So I am hard pressed to believe that dramatically lower oil prices had a lot to do with gold dropping like a rock today.

As far as the US dollar is concerned, yes it had an impact on gold prices today, accounting for $5.40 of a negative gold price due to a strong dollar. However, more noteworthy is the fact that normal trading accounted for the other two thirds of today’s dramatic selloff at $9.40. When we put the dollar's net change on gold into perspective we cannot make a case that this most recent selloff was solely dollar driven.

Lastly, when we look at the current crisis in Greece, and the referendum on Sunday clearly signaling that the Greek government will not accept the current austerity proposals, we can see a real disconnect between gold prices and safe haven buying.

When you add all the facts up they don’t really compute. Therefore, there has to be another causal effect that we are simply not accounting for. With this dramatic decline to the lows in gold and silver prices the real question remains whether this market can recoup, or are we headed towards dramatically lower pricing

Trending Markets: Proper Action

On June 23 we sent out a special trade alert recommending initiating short positions in the euro. The euro was trading approximately at 111.75 at the time of the sell.

Maintain current short euro @111.65. Maintain Stop @ 112.20

For those that are long U.S. dollars we recommend maintaining current long position and maintain stop @ approximately 95.11

Trending Markets Forecast

Unlike gold and silver prices, which have been reacting in a non-conforming manner, today we saw a continuation of a stronger dollar and continuation of a weaker euro. This is more in line with the current fundamentals at play.

Although the scenario in Greece changes day by day as new proposals are drawn up and presented to the EU, how reactions to each new scenario play out is anyone’s guess. However, I do believe that the lack of real progress increases the probability that Greece will exit the European monetary system.