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Gold Rush Halted by Fed Rate Blush

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Gold Rush Halted by Fed Rate Blush

Gold has seen a significant pick up since Britain voted to leave the European Union, as most predicted it would.

Its designation as a haven meant the instability provoked by the election encouraged a flood of demand for it, but now its price has been negatively affected by another factor.

Read on for more.

Blue Monday for Gold

On Monday gold futures finished lower, a move which extended and amplified losses from its previous trading session.

This is mainly due to an increased inkling that the Federal Reserve will go ahead and raise interest rates again later this year.

The chances of this were cut dramatically several times this year due to Brexit, weak jobs reports in the US economy, and general instability.

However, the rhetoric of the Fed has led some to believe it is still in the cards.

The following falls were seen on Monday:

–    Gold for August deliveries on Comex GCQ6: drop of $3.90, settling at $1.319.50 per ounce (loss of 0.3%)

–    September Silver on SIU6: fell $0.042, settling at $19.647 (loss of 0.2%)

An unyielding dollar thanks to weakened Euro and Pound, as well as rising equities, are largely to blame for the dulling of gold’s haven appeal.

gold 1

Bluer Wednesday?

Edward Meir is an independent commodity consultant for INTL FCStyone, and his daily note mentioned that the most important thing to look out for this week is the concluding policy statement of the Federal Reserve that took place on Wednesday.

It included a 2-hour meeting, and many believed it would shed light on the possibility of a rate hike this year.

According to Meir, investors are keeping an eye out for what the Fed says regarding Brexit.

The assessment and language used will be of great importance in estimating the next rate move or hike.

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The interest is such because:

–    High-interest rates lower opportunity costs of having gold

–    This is because the metal provides no yield

–    Investors thus go into riskier assets, such as stocks in commodities

See the graph below for the relationship between the two.

It’s from the 1970’s but is still relevant today.

gold 2

June jobs joy, May mere memory

Another note, this time, posted by David Cheetham, who is a market analyst at XTB, explained why rates are back on the menu.

All this was in stark contrast to dismal data that surfaced in May.

This, combined with the uncertainty around Brexit, meant many saw the situation as too fragile for the Fed to raise rates again.

However, with the new positive economic data for June and the election of a moderate, Remain-supporting Prime Minister to carry out Brexit negotiations, the tables have turned.

The developments have, in Cheetham’s words, made the case for tighter monetary policy for the short-term future.

As opposed to very low rates and cheap money.

Dollar sees a little drop, but still, stands firm

Although we mentioned that the dollar was still high, it was trading slightly lower on Monday, at least in comparison to the five-week consecutive gain it has been seeing.

It was trading at 0.15% less against major rivals (yen, pound, euro).

A dollar that is too strong makes U.S. goods less competitive.

There was also a small decline in the American stock market, though this did not provide support to gold prices as it tends to do.

The Dow Jones average was down 0.42% after its record high last week which had hurt the haven appeal of Gold (gold is a refuge as long as stocks are performing badly).

Metals still prove their metal

Physical demand is still the main driver of gold prices.

When the demand galls, so will the price, and this will be roughly in line with the rise of the U.S. dollar.

A recession could be looming for the UK, according to some economists.

With the effect this would have on the banking crisis in Europe which is already looming in Italy, there will still be plenty of reasons to buy or retain holdings of precious metals, gold, and silver.

Goldforecast.com recently published a note saying they could not find any reason at the moment to sell either commodity.

The performance of other metals was a mixed bag:

–    October Platinum (PLV6): up 0.61%, finishing at $1,088.40 per ounce

–    September Palladium (PAU6): up 0.11%, finishing at $688.75 per ounce

–    September Copper (HGU6): down 0.25%, finishing at $2.217 per pound

 

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Stocks Close In the Red After Massive 900-Point Rally Falls Apart

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Stocks Close In the Red After Massive 900-Point Rally Falls Apart

In what could be an ominous sign of things to come, the stock market couldn’t hold on to a massive rally yesterday. Stocks closed the day in the red.

The Dow Jones Industrial Average climbed as much as 937 points intraday. This was before it gave back all the gains and closed the day down 26 points.

It could turn out to be a turning point that many experienced investors have been predicting.

Their belief is that the rapid 20% rebound in stock prices couldn’t last. They also believe that we may eventually re-test the March 23 lows.

900-Point Rally Fails

Jim Cramer, host of ‘Mad Money’ on CNBC seems to be slowly coming around to the idea.

“Just think about the last 500 Dow points [Monday]. I don’t know. They were done in, what, about 30 minutes. That’s not sustainable. There are people who are just anxious about taking something off the table because they’ve just seen a remarkable two-day bull market, and now they’re ready to find out about … the various stages that we need to get out.”

David Kostin, the chief U.S. equity strategist at Goldman Sachs, believes that stocks are poised to fall again. He mentioned that it’s likely, if you compare it to how the market behaved during the 2008 financial crisis.

“The way I think about this is [there’s an asymmetry] in terms of downside risk towards a level in the S&P 500 of around 2,000, which is about 25%, and an upside of around 10% to a target at the end of the year of around 3,000. [That’s not symmetrical] in terms of timing. I think the risk is a lot further towards the downside,” Kostin said. He then added: “I would just remind you that in [Q4 2008], there were many different rallies, they’re called bear market rallies, some of which were almost 20% a couple of times, but the market did not bottom until March of 2009.”

“I wouldn’t be surprised if we hit 2,000 on the S&P 500 ”said Alex Chalekian, the CEO of Lake Avenue Financial.

He added “We’re going to see opportunities and we’re going to take advantage of them,” he said. “But in the meantime, there’s no rush to jump back into the market right now.”

Economic Strategists React

Peter van der Welle, a multi-asset strategist at Robeco says “From a sentiment angle, recent exceptional bounces suggest that investor sentiment is still in the denial phase, rather than in the phase of capitulation that paves the way for a new bull market.”.

In addition, Albert Edwards, a global strategist at Société Générale, said that investors hoping that monetary and fiscal stimulus can save the market through this rally have made a mistake. “This optimism is the legacy of a long bull market. Investors can’t conceive that the Fed will ‘allow’ the stock market to collapse. Think again. That was the view in 2007 too,” he said.

Finally, Goldman Sachs conducted a poll with more than 1,800 of its institutional clients as respondents. It found out that 50% believe the lows have not yet been set. The survey also revealed that 75% believe equities remain in a bear market.

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With Survival at Stake, Small Business Owners Frustrated by Aid Delays

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With survival at stake, small business owners frustrated by aid delays

Greg Hunnicutt has almost entirely shut down his Houston-based construction business. At his one remaining job site, he’s being careful to minimize the risk of anyone being exposed to the coronavirus. So he keeps fewer workers on the job.

“My electrician is there now doing some work,” he said. “It’s just him and his helper. So what I’m trying to accomplish here is reducing how people interact.”

With his income sharply reduced, Hunnicutt needs more funds, and fast. He reached out to NPR on Friday, when the Small Business Administration’s coronavirus crisis lending program opened. At the time, he was having trouble getting through online to apply for an SBA loan through his bank, Wells Fargo. I asked him this week how it was going.

“Well, it’s not,” he said, laughing. He says he filled out a form on the bank’s website over the weekend, but he hasn’t heard back yet.

But he says he needs that money soon to keep his business alive.

“I paid my guys two weeks,” he said. “Well, that was two weeks ago. Starting today, this week, they haven’t been paid.”

If the process doesn’t move quickly, he said his business will be in serious trouble.

Business problems with banks

Hunnicutt is one of dozens of small business owners that contacted NPR, describing obstacles in applying for loans. The $350 billion SBA initiative, called the Paycheck Protection Program, is designed to keep workers at small companies on the payroll during the crisis.

The Trump administration had said it hoped the program could give some businesses immediate financial assistance. And administration officials have bragged that hundreds of millions of dollars were disbursed through banks on the first day.

Some small business owners, like Hunnicutt, are waiting to hear from their banks. Others have said they haven’t been able to get through to their banks, due to crashing websites.

Several business owners cited restrictions from Bank of America as a major hurdle. On Friday, Bank of America said a deposit account with the bank was not enough to qualify for loans. Applicants would need loan or credit card accounts with the bank. That left out the many businesses without lending relationships with the bank and sparked an online backlash. Bank of America loosened its requirements over the weekend.

The SBA program reflects the difficulties of quickly setting up a massive new emergency lending effort, and running it through myriad banking institutions.

And it comes at a time when businesses desperately need money. A recent survey from the U.S. Chamber of Commerce found that one in four businesses say they are two months or less from closing permanently, and one in 10 say it’s one month or less.

Bigger problems than banks

Small businesses’ difficulties with the new program go beyond their banks, however. New rules written after Congress created the program are tripping up some businesses, according to Stephanie O’Rourk, a partner at accounting firm CohnReznick.

“The problem with the program is that it doesn’t align with the reality of the situation that a lot of businesses are going through right now,” she said.

For example, she says, the new rules now say that the loans must be paid back in two years instead of the 10 that the CARES Act says. In addition, Treasury added a rule saying three-quarters of the money must be used on payrolls in order for it to be forgiven.

For some businesses, non-payroll expenses are just too high to spend that much on employees.

Chelsea Altman, co-owner of five restaurants in New York City, says that rule will be bad for her and other businesses in high-cost cities.

“In New York state or New York City, your rent is very high,” she said. “So there is a chance that even with this 75 percent going to labor and then the other 25 percent is supposed to go to your rent, there’s times when that won’t” cover the rent.

Some banks displeased

Many banks opened the program up only to their own customers. As NPR has reported, that worried some small business advocates because it threatens to leave out smaller, and particularly, minority-owned businesses.

Banks, meanwhile, had their reasons for wanting to limit their applications, according to Aaron Klein, policy director of the Center on Regulation and Markets at the Brookings Institution.

“The Treasury Department made a major unforced error, leaving anti-money laundering rules on autopilot,” he said.

To lend money, banks have to go through a procedure called Know Your Customer to prevent money laundering. It can be a cumbersome process, Klein explained, and stands to be a serious impediment to an effort that seeks to get tens of billions out the door in a matter of days.

Other banks have voiced their own issues, including forms that changed overnight, unclear guidance from the government, and difficulty with the Small Business Administration website.

For now, at least one concern with the program is being answered: that the initial $349 billion appropriated for it is too small to meet business demand. On Tuesday, the Treasury said it was preparing to ask Congress to spend another $200 billion on the program. Senate Majority Leader Mitch McConnell said on Tuesday that he plans to work with Democrats and Treasury to put more money into the program.

Copyright 2020 NPR. To see more, visit https://www.npr.org.

© KNOW Minnesota Public Radio, Copyright © 2020 APM. All rights reserved.

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JPMorgan Predicts ‘Bad Recession’; Former Fed Chair Sees ‘Shocking’ Downturn

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JPMorgan Predicts ‘Bad Recession’; Former Fed Chair Sees ‘Shocking’ Downturn

Jamie Dimon, the head of JPMorgan, says he expects the coronavirus pandemic to include a “bad recession” that could put the country into a situation similar to the 2008 financial crisis.

“We don’t know exactly what the future will hold,” Dimon started. “But at a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008,” he added. “Our bank cannot be immune to the effects of this kind of stress.”

Dimon made the comments in the company’s annual shareholder letter.

The letter went on to say that while the bank came into the crisis well funded, the pandemic continues to progress in “dramatically different” ways compared to anything predicted by the Federal Reserve’s stress test for banks.

The Pandemic and the Economy

Perhaps attempting to ease the shareholders into bad news, Dimon stated that JPMorgan’s earnings “will be down meaningfully in 2020” due to the pandemic. He also warned that in an “extremely adverse” downturn in the U.S. economy, the bank would probably consider suspending its dividend in an effort to preserve capital.

Interestingly, Dimon says regulations placed after the 2008 financial crisis could hinder the bank’s ability to help in future crises.

“As we get closer to the extremely adverse scenario, current regulatory constraints will limit additional actions we can take to help clients,” Dimon said, “in spite of the extraordinary amount of capital and liquidity we could deploy.”

Others at Dimon’s bank are sounding the alarm bells as well.

Mislav Matejka, head of global equity strategy at JPMorgan, warned investors yesterday of a very high likelihood that we experience “a vicious spiral, which is typical of a recession, between weak final demand, weaker labor markets, falling profits, weak credits markets and low oil prices.”

JPMorgan economists are expecting “only a gradual bottoming out in activity” because of this. They predict it to be like the ones that took place after the Great Financial Crisis. These economists also believe that it’s “not a V-shaped one that we see, for example, after natural disasters.”

Recession and Prolonged Recovery

The bank also expects the unemployment rate will climb to 8.5% during the second half of the year. It also predicts that the U.S. GDP will decline by 10%. For comparison, the economy saw a 4% decline during the financial crisis.

“And this is all assuming that the virus is history by June, which might prove significantly optimistic,” Matejka wrote.

“While consensus view still appears to be a quick recovery, recessions tend to linger,” he added. “It took equities on average 18 months to record the final low in the past.”

Echoing JPMorgan’s worries about the potential for a prolonged recovery is former Federal Reserve Chair Janet Yellen.

In a recent CNBC interview, Yellen says the current state of the economy is worse than what the data shows.

She says we are already in an “absolutely shocking” downturn that is not reflected yet in the current data. Additionally, she mentioned that the unemployment rate probably sits closer to 13%.

She also says the economy has contracted “at least 30% and I’ve seen far higher numbers.”

Yellen says she is optimistic the country will experience a “V”-shaped recovery. She, however, acknowledges that the length of time a country remains shut down will dictate the speed of recovery.

“I think a ‘V’ is possible, but I am worried that the outcome will be worse,” she said. “It really depends to my mind on just how much damage is down during the time that the economy is shut down in the way it is now,” Yellen added.

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