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Gold, Greece, Crude and Goldilocks
Friday June 12, 2015 18:47

We might as well begin with Greece and try to explain the unexplainable.

The outlook for a positive resolution of the Greek debt fiasco grows gloomier and gloomier. This spooked U.S. and European equities, the DJIA falling hardest with a loss of almost 0.9%. Normally, this would signal a cakewalk for gold.

It seems fairly logical, after all, that some haven demand would come into play. Unfortunately for bulls, that thinking is wrong. The U.S. dollar did its best to help push up the price of the yellow precious metal, but regular trading grabbed that dollar-value gain right back and then piled on, leaving gold down $2.20 in afternoon trading.

The euro rose against the dollar, an indication not of Europe’s continent-wide economic health, but rather a sign that the Greek tragic-comedy will increase borrowing costs for the rest of the union. For the first time, there is serious, official discussion regarding a possible exit by the country that gave us democracy, the Golden Age, Pericles, Sophocles, Euripides and Homer, among others. You would think they might have gained a little bit more wisdom.

Crude oil, acting again as an outside market factor upon gold, fell 1.3% today, that on top of yesterday’s 1% loss. Oil, like gold has been stuck in a range and it seems not much will shake it loose, short of war or other international disaster.

Investors took more profits from the week's gains after Saudi Arabia signaled it was ready to raise production to record highs, reigniting worries about oversupply. Yet, the rig count in the U.S. keeps dropping, a process you think would help bolster prices. If you’re so inclined, keep a close on gasoline within the energy complex. It’s very hot right now, and fundamentals are in place to keep it moving higher (even if price did drop today).

On the U.S. front, there seemed to be little reaction to today’s release of data. U.S. producer prices in May recorded their biggest increase in more than 2-1/2 years as the cost of gasoline and food rose, suggesting a downward drift in prices driven by falling oil prices was nearing an end.

U.S. consumer sentiment rose more than expected, a survey showed. The University of Michigan's preliminary June reading on the overall index on consumer sentiment came in at 94.6, up from the final May reading of 90.7, a significant jump, indeed. Must be all those new hires in the last 60 days, give or take.

Such data reinforces expectations the Federal Reserve will raise interest rates at least once this year, but the market's focus has been more on Greece.

There is a new white paper the Fed is about to circulate, however, that could shake things up significantly. It has been gospel for many years that the “natural” unemployment rate for the United States is 5% to 5.2%. We are currently at 5.5%. This is called the “Goldilocks” rate because it’s not too high, not too low, but just right.

The forthcoming paper says something entirely different. It will state that the aforementioned unemployment rate should be 4.3%. This level accurately reflects Chairwoman Janet Yellen’s economic philosophies. We made almost the same observation last year when her name was first circulated as a replacement for Ben Bernanke in the presiding chair position.

We’re surprised this viewpoint hasn’t surfaced sooner. But if 4.3%, or something substantially lower than 5.2%, becomes the new gospel – the gospel according to St. Janet – we may not see a rate hike for a year. Or we may see a 25-basis points hike and then nothing for months and months after that.

Holding rates would be very good for gold bulls, without doubt.

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Wishing you, as always, good trading,

Gary Wagner