Mike Gleason: It is my pleasure to welcome in Dan Norcini to our Money Metals podcast. Dan is a professional off-the-floor commodities trader bringing more than 20 years of experience in the markets. Dan’s editorial contributions and supporting technical analysis cover a range of tradable entities, including the precious metals and foreign exchange markets, as well as the broader commodity world. He is a frequent contributor to both Reuters and Dow Jones, and can be found as a source in the Wall Street Journal’s Commodity section from time to time, as well as CBS MarketWatch, and you can follow his fabulously detailed work at traderdan.com. It’s great to have him on today. Dan, how are you? Thanks for joining us.
Dan Norcini: Hey Mike. Thanks for having me here. It’s really a pleasure to be with you. I appreciate the invite.
Mike Gleason: Well to start out I want to say that we’ve been following your work for quite some time, and have always appreciated your honest take on the markets. I hope to get your thoughts on a number of things today, but I first wanted to hear your comments on the news last week coming out of Switzerland. As our listeners know, the SNB (Swiss National Bank) shocked the world’s currency markets by abandoning the policy of pegging the Swiss franc to the weakening euro. For 3 years the SNB was trying to keep up with the money printing going on in the Eurozone. Why did they change course, and talk about the market reaction, because it sparked a lot of chaos in the currency markets didn’t it?
Dan Norcini: It sure did, and I tell you Mike, today is a great day to be speaking about this topic in general simply because this was a day that was historic from a financial realm perspective because the ECB for the first time in history announced a massive quantitative easing program. Of course we’re all glued around our screens to see what the details of that were going to be, but essentially what happened last week, and now we’re starting to see a general trend in this, is that the Swiss National Bank pretty much gave a tip off in advance that whatever was going to be coming out of the ECB this morning with its announcement on their QE program was going to at least have some decent size to it. The ECB in the past has tended to disappoint when it comes to financial monetary stimulus. They tended to talk a talk, but then when it came down to deliver, they seem to be a little bit hesitant to push the strings too hard, so to speak.
What happened was, when the SNB made that surprise announcement a lot of us read that as saying, “Wow,” because they were not going to make an announcement like that without knowing something that was going on with the conversations in the ECB at large. Most of us thought pretty much that we were going to get something pretty decent in size, and of course that was confirmed today. Really, the details of this are real simple. When the Swiss essentially were putting in their euro to that 1.20 level in the franc, that was requiring them to buy a lot of euros. In other words, they were burning through a lot of reserves that they had, and mainly because there were so many money flows going in to Switzerland for safe haven simply because the interest rate differential was there as well. What happened was, all that money, and let’s call it hot money, Mike. Essentially it was hot money flowing in terms of yield, tending to push the Swiss franc up on the cross against the euro.
Well, the Swiss National Bank obviously, like any other central bank reasonably does not want a strong currency. Then to require them to go ahead and keep that floor pegged at 1.20 was essentially they were burning through a bunch of their reserves, and in the process … This is what’s important, they were acquiring a lot of euros. When you’re looking at what the ECB might be doing here week out, and you’re got the idea that this is going to be a decent sized stimulus program, that meant for the Swiss, they were going to be acquiring a great deal of a currency that was going to be depreciating. You’re loading your reserves up with something that’s going to be going down in value. At that point they made the decision to say, “Look, we can’t do this anymore,” and they abandoned the peg. I personally don’t have any problem with them doing that. I think it was indeed a fruitless task, and I think they were eventually going to be defeated by the market at large anyway.
The quibble I have with them is the manner in which they did it Mike, and this leads me back to central banks in particular. Central banks depend to a great extent out there on their trustworthiness among market participants. If a central bank says they’re going to do such and such, it’s up to them to cultivate that trustworthiness among investors and traders, because if not, they’re not going to get the kind of response that they want when they come out and they make policy announcements in advance anyhow. You know, we call that verbal intervention, but once they forfeit the trust of the market, the market tends to discount anything that they say. Well, it was the Swiss themselves that said, “We’re going to keep this peg at 1.20.” They were very vocal about it. They weren’t shy about mentioning the fact that they were defending that. Essentially trying to keep their currency from appreciating against the euro, and then to pull this without any sort of trial balloon, any sort of warning, they unleashed a huge amount of devastation in the financial markets.
I might make a comment here Mike that I’m not a big fan of central banks in particular. But I must say this, both the Federal Reserve here in the United States, and particularly now recently the ECB, the European Central Bank, I think handled their policy announcements, and their policy program implementations very, very well. Look at the warning we had coming out of the ECB about this quantitative easing program that they were going to embark on. We’ve been talking about this now for a couple of months. It was yesterday even they floated a trial balloon out there. I believe they did that on purpose to prepare the market in advance to take some of the shock out of it. The whole transition went relatively smoothly. Then you contrast that with what the Swiss National Bank did, and you look at the results for that, and it was devastated. They ruined certain brokerage firms, they destroyed individual traders, they took some hedge funds under with them, they upset a lot of businesses that were based in Switzerland that had hedge positions on in the currency markets.
All that went upside down, and again, no warning, no trial balloon, no advance notice. To me that was a perfect case of what you’re not supposed to do. Either way the point was they were reacting to a planned policy announcement about a QE program and that’s exactly why they abandoned the peg. One other quick note along this line too Mike is that we saw something very similar with the Danish Central Bank, the Denmark Bank. They did that surprise rate cute, and they tried to cut the floor out from under their own currency as well, because they again were worried about their currency appreciating against the euro. Then yesterday we saw a shock move by the Bank of Canada which very rarely happens where the Bank of Canada did a 25 basis point cut in their main rate, and now undercut the Canadian dollar, the Cando as we call it. That had a huge move lower. Again that was in response to lower crude oil prices.
What we’re seeing in my mind is a currency war where various nations are all intent on depreciating their currency, and if you want to call it a war, you could say that the US is losing in the war because the dollar is the king right now. All the money is going into the dollar, and the dollar, I think it’s made roughly around a 12 or 13 year high on the US Dollar Index today. It’s amazingly strong.
Mike Gleason: Some of the that money is going into gold and silver. Both metals have fared pretty well since this news last week. Is that an indication that maybe they are reasserting themselves as safe havens in a currency crisis, currency war type of world, you’d think that they would hold up pretty well. Is that fair to say?
Dan Norcini: I do Mike, I really do. I view gold as a quasi commodity quasi currency, and you have to figure out what it wants to be at any particular time in the economic cycle. I guess for the last 3 years or so … two and half, three years after gold peaked out about $1,900, gold has been trading as a commodity. And reason I say that is you look at a general commodity complex, and that’s can be evidenced by what you’re seeing in the commodity indices like the Goldman Sachs Commodity Index, the famed CRB Index, you have the Rogers Commodity Index. There’s lot of these things that are out there, and all of these commodity indices have been moving sharply lower, and the reason that they’ve been doing that is that you had a huge amount of supply come into the market starting about a couple years ago, back you remember when we had all that hot money running into the commodity complex late 2008 into call it 2011.
For about a 3 year period there we had hot money chasing yield on the heels of a weaker dollar, and that jacked the price of commodities up all across the board. Well what happens when you get high prices is you get increased production. That’s what happened. We had big increases in copper production, and of course in the grains, the corn market, the soy bean market, wheat. You had silver production increase as a byproduct of what’s going on in the copper industry. Then you had this huge supply come on the market at the same time the global economy began to slow down, so what happened was the demand fell of a cliff. As it did the entire complex started to move lower, and as that happened you saw gold trading as a commodity. It was following the general commodity complex lower. It was going down, silver was going down. Your base metals copper, platinum, palladium, all those were going down as well.
Now recently we still had this continued down draft in the commodities sector in general, but then you saw gold reverse course and begin to move higher, and that was a divorce from what it had been doing over the last 2 and half, 3 years, and to me that was a tip off that this thing was beginning now to reassert itself as a currency. You really see this when you look at gold when it’s priced in terms of some of these foreign currencies, Mike, particularly the majors like the euro or the yen. On my website today I threw up a chart of euro gold. What that is it’s the price of gold measured in euros. One would be shocked to look at the amazing difference between the price of gold in euros, or in yen for that matter, and the price of gold in US dollars. The charts don’t even look similar.
They’re amazing how strong they are in terms of the euro and the yen, and what’s that’s telling us though as traders and investors is that within those various nations, the Eurozone, or in Japan where you see this experiment in quantitative easing still being engaged in, and essentially the currencies being debased, or weakened, you’re seeing people in those nations, they don’t have a lot of viable alternatives at this point where they were going to put some money. The average person. Now sophisticated investors can do a lot more, but your average “Joe 6-Pack”, let’s use that term, doesn’t have the options at their disposal. A lot of them will move in and buy gold to protect against what they know is currency depreciation. They may not understand all the fundamentals behind it, and all the financial issues, but they know their currencies not buying what it used to. So they go and they move into gold, and you’ll see that again, when gold was priced in euro terms, and gold price in yen terms.
That’s telling us that it’s moving as a currency, particularly the fact that gold was moving higher even as the dollar was moving higher, Mike. Again, that’s something we haven’t seen over the last 2 and half years. Generally as the dollar strengthened … I call gold the anti-dollar, generally it would go the opposite direction. If the dollar was going up, gold was going down. That was a consistent pattern. When that pattern changed, and gold began to follow the dollar higher, which is by the way how it has to do when gold’s going to depreciate in terms of the other foreign currencies, then you know it was trading as currency. That’s what we’re seeing right now in the gold market.
Mike Gleason: Speaking more about gold as a currency, we’ve got a situation similar to Switzerland pegging to the euro. We have a more substantial situation over there in China. That nations has been pegging the yuan to the US dollar. I’m sure I’m not the only one that was thinking about this last week about, gosh, how catastrophic would it be if the Chinese government woke up one day and decided that it wasn’t worth it to keep pegging their currency to ours? Do you see such a move like that happening at some point, and then what kind of market ramifications would there be if that were to happen?
Dan Norcini: I would tell you Mike, if that were to happen it would be huge. I shudder even to think of the gyrations, and convulsions that would be unleashed across the markets. Right now if I were to take a guess at that, I would put the likelihood of that happening as very low, and the reason being is that one of the things for the moment, of course things can change in this volatile environment that we’re in, but one of the reasons that the Swiss, again, did what they did was because in requiring them to amass a tremendous amount of euros in order to main that peg. In other words they had to buy euros at the expense of the franc. That would weaken the franc, and again it would keep euros in their reserves. When they understood that they were going to be holding a depreciating currency as a result of a ECB QE policy announcement, there was no way that it was going to be feasible for them, because their reserves were going to be depreciating.
The thing about China right now is it’s got huge reserves. Huge treasury reserves, and that comes about because of the balance of trade differential which so strongly favors China. They’re holding a massive amount of their reserves in US dollar denominated debt. The thing is the dollar’s not depreciating, it’s going up. From China’s standpoint, their reserves are going up in value, so there really is no particular reason for them to do that right now. In other words, interest rates may be going lower generally around the globe, but the US still has the highest rates in the industrialized countries, so that’s a plus if you’re holding a treasury debt in size that China does. Secondly, you’re getting capital appreciation on those bonds as the price of the bonds goes up as well. There’s not a lot of incentive in my mind for them to undo that peg at this time. The only reason I could see them trying to do it possibly would be for export competitive reasons.
I can’t see them doing it because of those reasons I cited. Think those have to change obviously, but China’s got its own set of problems right now, and the least of which I think is their currency. I think the main problem with China has to do with an overheated economy that was built on too much debt, too much credit, and we’re starting to see now there economies beginning to contract.
China I think is something we are going to have to deal with though down the road, Mike, that being said. You’ve got a lot of excess in that nation, and how that’s going to work itself out is anybody’s guess. If history is any guide, it’s not going to be pleasant.
Mike Gleason: You follow the overall commodities markets very closely of course, and I wanted to get your take on copper and crude oil because those markets have been taking a pretty big hit recently. So what do you make of that as maybe a leading indicator for potential things to come, and then what do you make of the fact that precious metals have held up quite well over the last few weeks despite the declines in those 2 important economic barometers?
Dan Norcini: Yeah, those are good questions Mike. I call them the big Cs. Copper, and crude oil, and I throw another one in there named cotton. Cotton I tend to look at because it’s a textile fabric. It’s a general measure, if the economy’s doing well globally you’ll see a lot of clothing being made, a lot of cotton’s being purchased and turned into goods for people to wear. Cotton prices are in the toilet as well. They’ve been moving lower, so you’ve got the big 3 C all going down. Another one is lumber. Lumber’s a good indicator of global economic growth in general, but particularly in the housing sector. Lumber prices haven’t been going anywhere either. You’ve got these key barometers that are showing us slowing economic growth. Copper in particular had a rough day today, which his surprising to me to be honest with you. You’ve got some of these metals, and by that I mean the platinum, and the palladium complex which they can trade a lot of times as industrial metals, or as precious metals.
They’re sort of that hybrid like silver tends to be, but generally they’ve been following more the industrial trade, so if the base metals have been moving lower, those metals have been moving lower as well. Platinum had some sharp falls lately, so has palladium. Well they went higher today, but copper went lower. It went the exact opposite of what some of us thought might possibly happen when that ECB program was announced. So the copper market is telling us that right now it’s more focused on China, and potential slowing growth in China, because China’s the number one copper consuming nation in the world right now. The EU, the European Zone, and the US compete for number two spot. I would have thought copper would have gotten a little bit of a lift out of this today, but apparently not. That doesn’t bode well as you look ahead. The same for crude oil. People are trying to pick a bottom in here, but I’m not sure about that.
I still think we’ve got more downside in the crude oil market simply because you’ve got to get that price down I think lower yet to really curtail production. If a lot of these producers are hanging on the edge of their seat, if they look at that quote screen, and they see that price start running back up. For instance, if West Texas Intermediate gets above 50, some of those plans to shutter some of those oil wells, they’re going to scrap them. They’re going to go out and keep them pumping. You’ve got to keep the price of that oil down lower enough, and the key is long enough to really curtail a production. Anyhow that being said, those two important commodities you mentioned sending us a signal of deflation and slow growth. As you mentioned, gold and silver have been able to withstand that pressure simply because they’re functioning as safe havens, so as long as we’re in an ultra low interest rate environment Mike, this is the big key in my mind.
The opportunity cost to hold gold as insurance is very, very low. One of the reasons that gold does not do well in my mind during a period in which real interest rates are positive is because you have to pay to hold large amounts of gold. In other words, you don’t buy and leave it out on the back deck somewhere, or leave it in the front room of your office. If you’re buying large quantities in particular like we expect from investment demand, that has to be stored. You’ve got to pay storage fees, vault fees, and then of course you’re going to insure it, so you’ve got insurance costs involved as well. There’s a cost in actually buying gold. When you’ve got an environment in which interest rates are real, there’s positive return on money invested, a lot of people will say, “You know what? Instead of buying gold for a safe haven, I’m going to buy bonds, treasury debt here in the US, or German bonds overseas or whatever, simply because they pay a yield, and there’s no cost involved in holding them, and I can make some money.”
But right now because you’ve got negative interest rates in several of the member states in the Eurozone, and you’re watching interest rates actually move lower across the entire Eurozone today. As a matter of fact, the yield on the 10 year German bond went down today as did the yield on the Italian 10 years, and the Spanish 10 year. Bond prices are going up because money is flowing in to the bonds, it’s front running the purchases of the ECB, and that’s working to push interest rates even lower. As you’ve got this ultra low interest rate environment, the cost to hold gold, to buy gold in that environment really comes down, and so it makes it, from an investing standpoint, makes a lot of sense to own it, particularly if you’re concerned about currency gyrations, and more central bank activity along that front. That’s why we see the metals relatively well supported. I think we’ll see gold in particular well supported on any dips in price.
They may not chase it higher now, because it’s run up pretty good over the last few weeks, but as far as dips in price, you should see them come in and try to buy this metal down on some forays down in chart support zones. I think you’ll see that.
Mike Gleason: Speaking more on the technicals here before we close. What are you looking for on the charts both for gold and silver resistant levels, support levels. What are you looking for on that?
Dan Norcini: Let me start out with silver first Mike. Silver has had a pretty nice run up off the $15 level too. I noted on a chart on my site today details the silver from the weekly chart perspective, and it’s managed to run up from a former support zone. You might remember Mike that silver had been be bopping around between $21 for a while, and it would drop down to about $18, $18.50, and it seemed like it was meandering in a constricting range there for, I guess, the better part of 4 or 5 months where it would oscillate between $20, and let’s call it $18. There was a lot of buying that showed up in silver below the $19 level, and extending down to $18. That was the nature of that market going all the way back to the summer of last year. When the price dropped through the bottom of that range, and I think that happened, if I remember, maybe I’m trying to say September of this past year, we saw the mark had moved down relatively quickly down toward the $15 zone, and that’s where the value based buyers showed up.
What they did was they were able to put a floor in the market. They weren’t able to drive it sharply higher, but they were able to bottom it. Value based buyers they will typically are the ones that will bottom your market after a down draft. That doesn’t mean they can take it higher, but it simply means they can keep it from dropping any lower. Generally, when that happens you’ll see a market begin to move sideways. In other words, you’ve got a floor that people feel comfortable acquiring the metal down at whatever that price might be. In silver’s case it was near $15. In gold we sold $1,180 was a pretty good area after it popped off $1,130, but they don’t have enough clout so to speak. It’s not enough of them to chase the price higher. That requires the kind of buying that can only come from the momentum based crowd, and those are the hedge funds. That’s your big investment entities, your institutions, and such in the West in particular.
We saw them come into silver I guess it was last week in a big way when silver finally took out $17.50 on the top. You had some good follow through. You had really good follow through yesterday as well. What that did was that pushed us up toward the bottom of that former floor support, which was right around $18.40, $18.50, and that’s where silver right now has seemed to run into some selling. Right around $18.50. That typically when you break a support level on a chart, and you fall below it, and then the market rallies back up, typically that support turns into a chart resistance area. In other words, that’s where you’ll sellers emerge. That’s what we saw so far in silver. We’ve got some sellers showing up there now. For silver to extend higher, you’ll have to clear that. In other words, you’ll have to get through that former support floor which was between $18.50, and call it $19. To me, if silver is going to extend higher, I would want to see it pushed through $19, and preferably through $20.
That would tell me that a lot of the guys that stepped in to sell it at that level, their offers were absorbed, and this thing looks like it’s going to go higher. That’s what I’d want to see to generate some higher silver prices as we move ahead. Again, the floor of support now in silver’s going to be down around $17.50. That’s where the break out point was. You might have a tight range in silver again where you’re looking between $18.50 for a while, and maybe $17.50. We’re going to have to wait and see how that market carves that up for us.
Gold is interesting to me because it’s at almost a vertical rise really since the beginning of the year. We were down if you think about it Mike. We were down there near $1,180 at the start of this year, and here we are, we’re over $1,300 which to me was a big deal. With gold, whenever you get a change in the handles were you go from $1,100, and you put a $1,200 handle in front of it, or you put a $1,300 handle in front of it, or a $1,400, that’s a big deal.
The reason I say that is because psychologically has an impact on buyers, particularly on a momentum crowd. Whether we like it or not, the nature of our markets today, they’re momentum based, and if something is going up, the big hedge funds, the hot money crowd they don’t ask why it’s going up, they just chase it. If something’s going down they don’t ask why it’s going down, they chase it lower. They chase motion whichever direction it goes. When you change handles from $1,100 to $1,200 that was a big deal. The fact that this thing ran up to $1,300 … It paused there yesterday. It had some troubles with it, then I went through there today. One thing I’m noticing is that it’s having trouble now. Now that it’s over $1,300 it hasn’t yet been able to extend past yesterdays high. For me as a technician, I’d want to see this thing get through that $1,307 level which would tell me it would have a run at possibly $1,320 to $1,325.
That’s the next area of resistance I see on the gold chart. I would expect that if it does get there, again, you’ll see the same hesitancy to run through there, because sellers are going to emerge at that level Mike. Again, it’ll be up to the bulls to prove that they can absorb the selling at that point. So again, we’ve got resistance at $1307, and then between $1,320 and $1325.
On the bottom we should find some buying support around the $1,275 level, and if $1,275 for some reason were to get taken out, I would expect pretty decent dip buying to show up around $1,250, $1,255. That’s how they look on the technical charts at the moment Mike as we get ready to close out the week.
Mike Gleason: There’s certainly a lot of things heating up. It seems there’s some fireworks emerging potentially. Of course these black swan events could happen at anytime. I think it’s going to be an interesting year. Well, Dan we want to thank you for your wonderful insights. We’re big fans of yours, and I know you’re a busy guy, especially these days given the craziness in the trading world. I really appreciate you giving us some time, and I hope we can do this again.
Dan Norcini: Well Mike, again, thanks for having me on the program. It was a real pleasure to be with Ya, and I wish you well there. Thank you very much.
Mike Gleason: Well that will do it for this week. Thanks again to Dan Norcini. Be sure to check him out at traderdan.com. Check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange. Thanks for listening, and have a great weekend everybody.