Lower Dollar and Ten-Year Bonds Fail to Support Gold

The Market Gage - Dillon Gage's Precious Metals Newsletter

A lower dollar index and lower Ten year bond yields around the globe should have the price of gold in positive territory this morning. But looking at the screen that’s not the case.

Around four o’clock this morning a very large Gold future trade was executed on the CME. It seems someone sold over 18,000 contracts in less than five minutes crushing the price of gold down twenty dollars. In ounce terms, that’s 1.8 million ounces. Silver also got hit, but nowhere near the size of the gold trade. At the same time gold was falling, someone sold over 5,000 silver CME future contracts.

Trying to find out who executed this trade is very difficult. My phone was very active this morning with people asking me if I can explain what just happened and who was behind it. It took me awhile to get all the sand out of my eyes and call around and unfortunately no one had any answers.

The most logical answer would be central bank liquidation, but that usually happens on the London fix.

Without being able to identify whether it was a central bank or a large fund leaves me scratching my head. The only folks who would know who executed this trade would be the CME folks and you won’t get any info from them. Nonetheless, when the smoke clears I expect the price of gold to recover a bit, but the damage is already done.

Check In With U.S. Banks

Did you were ever wonder how the big banks are doing since the last financial crisis? Are they holding enough capital to keep trading through the next economic meltdown? Well last Thursday in the first round of the Federal Reserve stress tests, the report revealed that the 34 banks tested did do very well in a simulated test of an economic meltdown. So much so that even when taking a hit of 493 billion dollars (the Fed’s formula, according to the report), the banks would emerge still well capitalized and stay above the Fed’s minimum requirements.

Now some investors are calling for a return of more than 100 percent of the annual earnings to their shareholders, but not all investors like the idea. Reason? By returning all that cash it takes away a cushion that banks have built up over the last couple of years giving them some excess cash for a rainy day.

These stress test are considered a good thing and should be continued, but others say some of the idle cash should be returned to investors.

Does anyone want to speculate why the banks probably won’t return this excess cash to investors? Here is my take. Treasury Secretary Steven Mnunchin, one of Wall Street’s own, has the President’s ear and the boys on Wall Street would like nothing better than to be able to prop trade with that excess cash.

You see the reason the banks have all this excess capital is because the Dodd / Frank regulations stopped prop trading after the financial crisis. The folks on Wall Street were not very happy when these regulations were put into effect, because it removed their chance for higher bonuses. These regulations totally changed the Wall Street trading landscape. In the end it handcuffed the folks who loved to roll the dice everyday with house money. It is my hope that these regulations are kept in place, because as much as the Street hated them, it turned out it’s exactly what the country needed to avoid another financial crisis.

If these regulations are reversed, one can be sure that the Fed will want to aggressively raise rates so they have a safety net when the next financial crisis hits.

The Palladium Front

The Palladium market excitement seems to have quieted down and is heading back to normal numbers.

One significant item to share with you is on Friday, the CME announced the initial margin requirements for speculators was increased by 18 percent. This I believe was put in place to try to discourage traders from accumulating large open positions going into a delivery month and make it more costly for anyone trying to squeeze the spot month and stand for delivery on a contract with limited inventory in their authorized depositories. Palladium is still trading lower this morning off the news on Friday.

Have a wonderful Monday.

Disclaimer: This editorial has been prepared by Walter Pehowich of Dillon Gage Metals. This document is for information and thought-provoking purposes only and does not purport to predict or forecast actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein are current opinions as of the date appearing in this editorial only and are subject to change without notice and cannot be attributable to Dillon Gage. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not come to fruition, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. This information is provided with the understanding that with respect to the opinions provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. You may not rely on the statements contained herein. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisers with respect to these areas. By posting this editorial, you acknowledge, understand and accept this disclaimer.