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10.24.14 - America's Financial Center the Focus of Disturbing News Reports

Gold prices end higher on safe-haven demand. U.S. stocks end week strong as investors digest positive economic data and upbeat earnings reports. Gold last traded at $1,231 an ounce. Silver at $17.18 an ounce.

The official capital of the United States of America is Washington, DC, but the financial capital of America is New York City.

Yesterday, New York became the focus of the news media due to two unrelated incidents. Neither of these incidents is directly related to the financial markets, but both incidents have potential economic implications that could impact the financial markets.

The first incident was news that a doctor living in New York has contracted the Ebola virus.

So far, just one American has died from the deadly virus that has killed more than 4,800 in West Africa.

The fact that some stocks were down due to the Ebola scare, at least temporarily, speaks to the fragility of this bull market.

The greater concern may be less about Ebola itself, and more about how equipped and competent the government bureaucracy and Obama administration are in response to Ebola scares.

The government’s confidence that this can be contained is reminiscent of former Fed Chairman Ben Bernanke’s comments in early 2007 that the fallout from problems in the subprime market was likely contained.

The other event was an attack on a group of NYPD officers by an axe-wielding Jihadi. Two officers were injured, one seriously, and the attacker was shot dead by the police.

The attack was no where near New York's financial district, but coming in the wake of two very similar attacks in Canada earlier this week, it served as an alarming reminder that the threat of Jihadist terrorism is still very much with us.

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10.23.14 - Citizens in India and Switzerland Support Gold in Different Ways

Gold prices fell on upbeat economic data as investors embrace risk. U.S. stocks ended sharply higher on upbeat eurozone data and better-than-expected earnings. Gold last traded at $1,229 an ounce. Silver at $17.23 an ounce.

Governments and the financial establishment, such as Wall Street, tend to not like gold. But citizens and individual investors have a different view.

Two countries in the news today demonstrate this phenomenon: India and Switzerland.

In India, demand for gold is soaring. Renewed optimism in India's economy has encouraged more buyers there to buy gold during Diwali, a five-day festival of lights whose celebration peaks tonight.

It was a different story last year; when slowing growth, high inflation and a weaker rupee resulted in fewer Indians buying gold during Diwali, a festival that kicks off the nation's wedding season and typically leads to a surge in gold buying, as it's considered an auspicious time to buy the shiny metal.

Gold is getting a boost not only from rising confidence in the Indian economy, but also massive promotions by Indian merchants who are working hard to ensure they don't see a repeat of last year.

In Switzerland, there is an upcoming referendum about whether the country should increase its gold reserves.

A new poll shows a majority of Swiss citizens would vote yes to force the Swiss National Bank to increase and hold on to their gold reserves.

Government bureaucrats in Switzerland are opposed, largely because they don't like being told what to do. The vote is about a month away.

One of the factors that could send gold prices higher down the road is European Central Bank (ECB) monetary policy. The ECB is set to start purchases of corporate bonds in order to inject cash into the economy, similar to the US Quantitative Easing program. The purchases are forecast to exceed $1 billion.

One probable outcome of this will be a drop in the value of the euro, which would push the price of gold in euros higher.

Speaking of the ECB, Europe's biggest banks are facing a day of judgment as the ECB prepares to unveil the results of a yearlong search through the dark corners of their finances.

The ECB review, to be unveiled Sunday, seeks to identify banks too weak to lend to businesses, or make it through another recession, and force them to strengthen their finances. It includes a detailed look at 130 banks' loans, holdings and investments, as well as a so-called stress test that simulates how banks would fare in a deep economic downturn.

Those that fall short in the tests will have to raise more money - and could have to restructure or be sold to stronger partners. Previous tests by a different EU agency in 2010 and 2011 lost credibility after banks that passed needed to be bailed out months later.

The test results could cause some market turbulence for banks in the following days and weeks as lenders that do poorly scramble for money.

Another country that may have to resort to "stimulus" programs is China. The latest manufacturing report from China, the PMI, showed that factory output fell to a five month low. This caused stocks in Asia to retreat as economic weakness in China is seen as a serious problem for the entire world.

Domestically, there are new signs that the real estate market in the US may be headed for trouble once again. Investors are not only no longer selling their own homes but they are not buying other homes for investment either. That has taken much of the air out of home prices. The number of homes for sale is rising. Homes are sitting on the market far longer than they did just six months ago. It is no longer a seller's market.

Real estate weakness aside, one famous observer has another threat in mind when it comes to the US economy. TV personality Suze Orman says the biggest threat to the US economy is student loan debt--and she makes a convincing case.

The US has more than $1.2 trillion of student loan debt. And while 6.7 million borrowers in repayment mode are delinquent, the sad fact is that many lenders aren't exactly incentivized to work with borrowers. Unlike all other forms of debt, student loans can't be discharged in bankruptcy. Moreover, lenders can garnish wages and even Social Security benefits to get repaid.

Total student loan debt has grown more than 150 percent since 2005. Inflation to blame? No. Overall prices rose just 22 percent or so between 2005-2014. The culprit here is more loans being taken out, and more borrowers getting hit with fees and penalties.

According to TransUnion, in 2005 student loans accounted for less than 13 percent of the total debt load for adults age 20-29. Today, student loans account for nearly 37 percent of that group's outstanding debt.

The situation is so bad that the Treasury Department recently acknowledged that the student loan market could "significantly depress demand for mortgage credit and dampen consumption."

Speaking of the Treasury Department, we are all somewhat dependent on government statistics for economic forecasts and decisionmaking.

We have often asked on these pages whether those government statistics can be trusted.

Unfortunately, a fresh report calls that into question, to say the least.

A whistleblower at the Census Bureau told the New York Post that workers in the Los Angeles region have been manipulating economic used by other government agencies to put together economic reports.

Finally, fresh on the heels of yesterday's terror attack in Ottawa, Canada, America's financial center also got a stark reminder of the overarching threat of terrorism.

New York City's Office of Emergency Management ran a training exercise Wednesday that simulated a response to a 10-kiloton nuclear device exploding at 42nd Street and Seventh Avenue in Times Square.

According to the exercise, 100,000 people were instantly killed, a wave of overpressure took down buildings for a half-mile radius and did damage for up to two miles and a radiation cloud swept over the region.

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10.22.14 - Markets Distracted as Jihad Comes To Canada

Gold prices end lower on profit taking and a stronger U.S. dollar. U.S. stocks snap 4-day winning streak as investors consolidated sharp gains from previous sessions. Gold last traded at $1,245 an ounce. Silver at $17.24 an ounce.

The investment markets have been largely distracted by the unfolding drama in Ottawa, Canada where an unknown number of gunmen have carried out attacks in multiple locations in what appears to be a coordinated terrorist attack.

The potential economic and financial implications of this incident will no doubt unfold as details become available in the aftermath of the attack.

In strictly economic news, the US Consumer Price Index Inflation numbers came in today from the Labor Department and they show restrained inflation. This likely means the Federal Reserve can continue to keep interest rates near zero territory, a bullish factor for gold.

Renowned investment manager Richard Russell, editor in chief of the Dow Theory Letters, released a statement today that Fed monetary policy, as well as European Central Bank (ECB) policy, amount to an "avalanche of fiat money creation," which will undermine man-made currencies such as the dollar and the euro over the long-term. Today's news on the CPI from the Labor Department will do nothing to change this outlook.

Fed Chair Janet Yellen has expressed more concern about "income inequality" than about the US dollar and US economy lately. MarketWatch correctly pointed out in an opinion column today that it is Fed policy itself that has created that situation:

"...when the Fed buys financial assets with printed money and — by definition — drives up the price of those assets, it cannot then act mystified why the main owners of financial assets have grown wealthier. Doing so simply insults our intelligence."

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10.21.14 - Gold At Fresh One-Month High; China GDP Comes Up Short

Gold prices hit six-week high on concerns over a global economic slowdown. U.S. stocks jump higher in hopes of more ECB stimulus. Gold last traded at $1,251 an ounce. Silver at $17.54 an ounce.

The price of gold has hit a new 6-week high today thanks in part to disappointing news on China's economic front and continued weakness in the US dollar.

China's economy has clocked its worst quarter in more than five years, raising concerns over Beijing's ability to meet its own annual growth target.

GDP expanded by 7.3% in the third quarter versus the same period last year, the weakest performance since the global financial crisis.

With the Chinese economy showing slower growth, experts are now sounding the alarm over ballooning Chinese corporate debt. A few Chinese companies have defaulted on their debt in recent months, a previously unheard of phenomenon, and no government bailouts are in sight.

Worries have also escalated over the use of unconventional financing. Some firms, for example, have been using copper as collateral to secure loans. Experts are concerned that some companies are even using the same copper stockpiles to take out multiple loans, borrowing far more than they can repay. This amounts to a Ponzi scheme; a ticking time bomb in the Chinese economy that would result in aftershocks around the globe.

In Europe, the European Central Bank is reportedly planning to buy corporate bonds in an effort to battle against a slowing economy. Not surprisingly, the euro fell on this news, meaning gold is rising in both dollar and euro terms.

Gold was also bolstered by buying interest in the physical markets from Asia - the top-consuming region.

India, the second-biggest gold buyer, celebrates the festivals of Dhanteras on Tuesday and Diwali later in the week. Both are considered auspicious for buying gold, which could provide a boost to retail sales and imports.

News that India's central bank will not tighten gold import rules further could also lend some support.

Finally, we have yet another sign of a top in the US stock market: merger and acquisition deals are currently failing at their highest rate since 2008, the onset of the financial crisis.

The value of deals that fail to complete has reached its highest level in six years. A total of $573B worth of deals have been withdrawn, setting this year up to surpass the $640B in deals that went uncompleted in 2008.

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