Commodities | timiacono.com - Part 5

2,000 Tonne Gold Vault Opens In Shanghai

Many once had high hopes for emerging Asia, but count this development as one more piece of evidence that they’re as backward as ever over there, spending time and money foolishly building a vault to store upwards of 2,000 tonnes of gold bullion as detailed in this report at Bloomberg when they could be buying shares of U.S. stocks and making a fortune.

The vault can store over $80 billion worth of gold bars at today’s prices, much of that metal transferred from vaults in London and New York as part of the ongoing flow from West to East, what Warren Buffett would no doubt deem a colossal waste.

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After a dismal April-to-June period, the gold price notched its first quarterly gain in a year during the third quarter that ended last Monday. However, the start of the fourth quarter on Tuesday ushered in one of the worst sell-offs in months. Amid more calls of market manipulation, this came just as the U.S. government began a shutdown that is now in its sixth day and quickly transitioning into a debt ceiling debate and potential crisis.

Gold BarsDespite the turmoil in Washington, American investors continue to shun precious metals based on recent ETF outflows and slowing coin sales.

In China, buyers were notably absent last week but will return from a national holiday on Tuesday and the gold market in India remains as confused as ever, though central banks around the world still hold the metal in very high regard, surprisingly, even here in the U.S.

Precious metals were lent some support by further declines in the U.S. dollar and the greenback could continue to fall given that Federal Reserve officials now seem inclined to taper their massive money printing effort later, rather than sooner. So far, inflation remains a “non-threat” and a decidedly negative factor for precious metals, however, that could change very quickly based on the latest trends in inflation expectations.

For the week, the gold price dropped 2.1 percent, from $1,336.20 an ounce to $1,311.20, and silver fell four cents to $21.74 an ounce…

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Precious metals are staging an impressive rebound today after yesterday’s drubbing that, once again, was initiated by a massive sell order that caused prices to plunge and stop loss orders to be executed, exacerbating the decline.

Gold and SilverThis came at the market open, after the government had shut down at midnight the night before, and was not the response that most gold (GLD) investors expected.

For reasons detailed here a week ago, a government shutdown and a looming debt ceiling crisis should clearly have been bullish for gold, but that was not the case yesterday in the opening minutes of trading.

Frank Tang at Reuters reported that “an unusually large trade in the New York futures market” played a key role in the early morning carnage yesterday as depicted in red in the Kitco graphic below.

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Why The Budget Debate Matters For Gold

It’s no secret that Democrats and Republicans in Washington don’t exactly see eye-to-eye on how to handle the government’s finances and, as was the case back in 2011, this could have a big positive impact on the price of gold (GLD).

Ted CruzEarlier today, Senator Ted Cruz (R-TX) staged a 21-hour floor discussion with the intent of focusing attention on the House Republicans’ effort to remove funding for “Obamacare” from the “continuing resolution” bill, legislation that is necessary to keep the government running come October 1st.

We’ll find out how successful he was later in the week when there will be a showdown between the House and Senate, one that could result in a government shutdown early next week.

Conditioned to expect some last-minute deal to avert a crisis, it seems financial markets are just now starting to pay attention to these developments and, given how assets were bought and sold today, there’s been a marked change. U.S. stocks and the dollar were sold while safe haven assets such as Treasuries and gold were bought.

If this is a sign of things to come, it could be a very interesting week ahead for financial markets and a very good week for precious metals.

But, the events of the next week could just be a warm-up for even bigger fireworks in October when the debt ceiling must be raised in order for the U.S. government to avoid a credit default.

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