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NEWSLETTER ~ October 6 2015
Gold Report ~ Oct 6 2015
Trend
Long Term ~ Bearish- Need a monthly close above 1800 to confirm the bull market final phase underway. Need a monthly close above 1560 to neutralize the trend.
Medium Term ~ Bearish- Need a monthly close above 1255 to remove bearish trend.
Intermediate Term ~ Neutral– Need close above 1172 for bullish TREND.
Short Term ~Neutral - Need weekly close above 1148 for bullish
Initial Resistance 1142-1148 2nd tier 1163-1172
Support 1117-1127 2nd tier 1105-1112
Our last update discussed the all important NFP (non-farm payroll report) and the number was not good for the economy. Gold quickly moved up 30 dollars in the first hour after the report.
The jobs number came in sharply lower than expected. U.S. employers have not been hiring over the last two months and wages fell in September.
The weak jobs number is now raising new doubts on whether the economy is strong enough for the Federal Reserve to raise interest rates by the end of this year
The view of course is that rates are not going to go up as the USA would like. Here’s what Martin Armstrong had to say today.
Market Talk October 5th, 2015
Posted on October 5, 2015 by Martin Armstrong
The market reaction to the US data on Friday has confused many with both stocks and Bonds bouncing into the close. Overnight the Asian equity markets have continued the positive response which has also carried into the European opening but interestingly – only for equities. The reaction in the bond markets is we have seen US 10’s remain just under the psychological 2% but the spread against German Bunds is where the interest is playing-out. The TY/RX spread has tightened this morning by 4bp to +144bp with US 10’s trading unchanged at 1.995% while Bunds are slightly higher at 0.555%.
Talk between dealers after the US employment report is of the possibility of the Fed return to aggressive QE especially as the market re-prices the possibility of the a 2015 hike to around 8%. That talk has been around in Europe for a while so are we now due for the markets to start to re-price this differential. Government bonds at the front-end are already trading with negative yields as we also see in the interbank market but with banks offering either negligible or zero interest rates on saving/checking accounts banks are saying they do not need money.
Within Europe MR. Draghi has already talked of increasing government bond purchases from 25% to 33% of single issue and in the quasi-sovereign market they already own roughly a third in total which has already been priced in.
In peace times the weapon of war is currency and that has already started to play out with the Emerging Markets. Latin America, with the declining Argentinian Peso and Brazilian Real, is suffering significantly and they are looking to now issue even longer and longer term debt. As syndicate desks began to discuss this in the morning, there has been actually an argument to issue 100 and 150 year bond issues.
(end of article)
One of the major problems with raising rates is the dire condition of the global economy and its relation to the debt burden.
IMF Flashes Warning Lights for $18 Trillion in Emerging-Market Corporate Debt
By Ian Talley
Emerging markets should brace for a rise in corporate failures as a debt-bloated firms struggle with souring growth and climbing borrowing costs, the International Monetary Fund warned Tuesday in a new report.
From sugar firms in Brazil to pipe makers in Russia, firms in developing countries bulked up on cheap debt as central banks gassed the easy-money pedal in the wake of the financial crisis.
Then, emerging markets were the drivers of global growth. Developing-country firms quadrupled their borrowing from around $4 trillion in 2004 to well over $18 trillion last year, with China accounting for a major share.
Now, prospects in industrializing economies are weakening fast even as the U.S. Federal Reserve is getting set to raise interest rates for the first time in nearly a decade, a move that will raise borrowing costs around the world. The burden of 26% larger average corporate debt ratios and higher interest rates come as commodity prices plummet, a staple export for many emerging-market economies. Compounding problems, many firms borrowed heavily in dollars. As the greenback surges against the value of local currency revenues, it makes repaying those loans increasingly difficult.
That massive debt build-up means it is “vital” for authorities to be increasingly vigilant, especially to threats to systemically important companies and the firms they have links to, including banks and other financial firms, the IMF said.
“Monitoring vulnerable and systemically important firms, as well as banks and other sectors closely linked to them, is crucial,” said Gaston Gelos, head of the fund’s global financial stability division.
Shocks to the corporate sector could quickly spill over to the financial sector “and generate a vicious cycle as banks curtail lending,” the IMF said.
And emerging markets should also be prepared for the eventuality of corporate failures, it warned: “Where needed, insolvency regimes should be reformed to enable rapid resolution of both failed and salvageable firms.”
The issue, presented in a report prepared ahead of the IMF’s annual meetings next week in Lima, Peru, will likely take center stage at the gathering of the world’s finance ministers and central bankers.
The Institute of International Finance on Tuesday estimated global investors have sold roughly $40 billion worth of emerging-market assets in the third quarter of the year, which would make it the worst quarter of net-capital outflows since late 2008. The IIF represents around 500 of the world’s largest banks, hedge funds and other financial firms.
Besides the petroleum sector, where borrowing didn’t anticipate the nosedive in prices, the construction industry is particularly exposed to the changing business climate, the IMF said.
Worried about the building risks, investors have been selling out of many emerging markets, pushing down equity and exchange-rate prices, and pushing up borrowing costs. That market turmoil is exacerbating their economic woes.
In Latin America’s six largest economies, for example, the average growth rate has fallen from 6% in 2010 to around 1% this year. Brazil’s central bank last week said the country’s recession is far worse than expected.
China’s recent market turmoil and faster-than-expected economic slowdown is in large part fed by worries over the massive rise in China’s borrowing and whether the economy is vulnerable to a host of credit-driven bubbles in real estate, construction and other sectors.
Rapid credit growth has been a harbinger of previous emerging market crises. While economists say many countries have learned from the past by building up currency reserves and allowing flexible exchange rates to buffer against downturns, the mounting risks for many emerging markets are fueling worries across the globe.
Further complicating emerging market problems, the changing structure of financial markets leaves many developing economies exposed to major outflows of capital as investors scramble to exit. That can lead to fire sales and a breakdown in markets.
“In extreme conditions, markets can freeze altogether, and affect the financial system more broadly, as seen during the global financial crisis,” Mr. Gelos said.
To help guard against building risks, the IMF said policy makers should introduce stronger financial regulations such as higher cash buffers for exchange-rate exposures and conduct stress tests to weed out problem firms.
(end of Article)
But what about USA? How well is it really doing?
The charts and commentary by Elliot Wave International below should give you a good idea.
 
Labor Force Participation. The government releases its official unemployment rate each month, and that number today is about 5.1%.
But: They don’t count you as unemployed if you work par-time and want to work full-time. And, they don’t count you unless you've actively looked for work in the past month.
To get a more accurate picture, you need to ask, "What percentage of the working-age population is employed?"
Here’s the answer.
The steep decline began in 2007 and has kept going ever since. The longer term picture here is also more grim. This low is actually the lowest level of participation in 38 years.
Workers’ share of the economy. This tangible comparison shows the long-term decline of worker income. Specifically, wages and salaries as a percentage of GDP. Again, not what a ‘recovery’ should look like.
Food stamps. The dollar amount of food stamps annually has more than doubled since 2007. Here too, the need is nowhere close to returning to pre-recession levels.
Home ownership – is one those under-reported trends. Despite years of low interest rates, the percentage of U.S. families owning a home is in sharp decline. This is more than a 10-year low. The very long-term data show this is the lowest level of homeownership in 48 years.
Federal debt as a percentage of US GDP. The actual dollar amount of this debt is around $18 trillion -- with a “T.” It’s hard to see a ‘recovery’ here. The debt hasn’t begun to return to the pre-recession levels of 2007.
Money-printing. More than just paper dollars, this is how much liquidity the Fed pumps into the economy – mostly as excess reserves for major banks. Which is to say, lenders have a supply of money ($4 trillion from under $1 trillion in 2007) but there’s very little demand from borrowers.
(End of Article)
So where do we stand? War is coming.
Again we turn to commentary by Martin Armstrong…
As CNN pointed out, the bombing continues. Now, hundreds of Iranian troops have arrived in Syria to join a major ground offensive in support of President Bashar al-Assad’s government. Clearly, the civil war in Syria is escalating. We will see this unfold as a proxy war directly between U.S. and Russia with China supporting the Russian side in this game. This conflict is turning regional and global in scope by drawing in the world powers all because the U.S. war machine thinks this is a game.
Russian warplanes have been targeting rebels trained by the U.S. Central Intelligence Agency, placing Moscow and Washington on opposing sides in a Middle East conflict for the first time since the Cold War. This should be of great concern because historically, these things become an important event. As the economy in Russia turns down, the government needs a distraction and this is it. We will see the same trend emerge in the USA when the economy turns down, as war is necessary to distract the people from the non-establishment candidates for 2016, the social defaults, and the need to raise taxes for war.
(end of Article)
What about gold?
If the Fed increases the money supply, it will NOT drive gold higher. Gold will rise when confidence in government declines. That is the issue.
Gold went down from 1980 to 1999 while the money supply rose considerably. Gold rose from 2001 to 2011 because the banking system was coming under duress and the loss of confidence in Government. Gold declined from 2011 once that fear abated, and yet the money supply doubled.
Gold will begin its rise once the confidence of government is lost.
Whether that is in line if QE4 is announced is a matter which remains to be seen.
All in all, we are now in the window of time for a long term low (Oct 2015-June 2016). Whether we have seen the final low in gold is yet to be determined. We still need to see more upside action to proclaim the final low is in place. One thing for sure, we are getting close now to the long term low.
Gold Short term
We discussed Friday on the gold report for subscribers that It came down to whether gold would hold the 1097-1105 area. If it held, we favored a test of 1122. On the signals page, we discussed a trade of buying gold at 1107 (with a stop at 1097) could lead to a move to 1142. We hit 1142 today. If you took that trade move your stop to 1119 or look to take profits now or near 1172.
On the very short term, gold has resistance at 1142-1148 and 1165-1172. We reached 1142 on Monday. Any pullback should find support at 1119-1125. There is minor support near 1131 (the 200 hour moving average). This view has gold NEUTRAL as the blue moving average is still below the green. Tuesday resistance should be 1142-1148.
On an intermediate term basis, we can see that gold is trapped in a triangle formation and under the 2015 downtrend line. A close above 1148 should lead to higher prices (1165-1172) next. Here too the moving averages highlight 1121-1126 as support on pullbacks. A close above 1148 flips the trend bullish.
Gold Medium Term
Long Term Trend ~ Bearish since Oct 2013 @ 1361
Long term Moving averages 1295 – 1386
Medium Term Trend ~bearish – Moving Averages 1163-1182
Gold continues supporting at the 1080 price area and the 50% retracement of the entire bull market. Support remains that white line we bounced off on the lows and the three red lines under price. Until we crack below that level it is possible for gold to continue its quest higher at the moment. On a weekly basis, the 1163-1182 area is the resistance zone with 1222-1258 as key reversal points. The dual yellow downtrend line is also key. As long as we are below that area, the downtrend on a medium term is still intact for now. On the downside, any weekly close below 1072 suggests the downtrend has resumed. Until then, its possible for gold to continue higher.
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